Since February 2026, First Merchants has been in a holding pattern, posting a small return of 2% while floating around $41.94. The stock also fell short of the S&P 500’s 10.5% gain during that period.
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Why Is First Merchants Not Exciting?
We’re passing on First Merchants for now. Here are three reasons you should be careful with FRME, plus one stock we’d rather own.
1. Long-Term Revenue Growth Disappoints
In general, banks make money from two primary sources. The first is net interest income, which is interest earned on loans, mortgages, and investments in securities minus interest paid out on deposits. The second source is non-interest income, which can come from bank account, credit card, wealth management, investment banking, and trading fees.
Regrettably, First Merchants’s revenue grew at a tepid 7.5% compounded annual growth rate over the last five years. This was below our standard for the banking sector.
2. Net Interest Income Points to Soft Demand
Net interest income commands greater market attention due to its reliability and consistency, whereas one-time fees are often seen as lower-quality revenue that lacks the same dependable characteristics.
First Merchants’s net interest income has grown at a 7.8% annualized rate over the last five years, worse than the broader banking industry and in line with its total revenue. Its growth was driven by both an increase in its outstanding loans and net interest margin, which represents how much a bank earns in relation to its outstanding loan book.
3. EPS Barely Growing
Analyzing the long-term change in earnings per share (EPS) shows whether a company’s incremental sales were profitable — for example, revenue could be inflated through excessive spending on advertising and promotions.
First Merchants’s EPS grew at a weak 1.7% compounded annual growth rate over the last five years, lower than its 7.5% annualized revenue growth. This tells us the company became less profitable on a per-share basis as it expanded.
Final Judgment
First Merchants isn’t a terrible business, but it isn’t one of our picks. With its shares trailing the market in recent months, the stock trades at 0.9× forward P/B (or $41.94 per share). While this valuation is fair, the upside isn’t great compared to the potential downside. We’re fairly confident there are better investments elsewhere. We’d suggest looking at a top digital advertising platform riding the creator economy.
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