FIRST MERCHANTS CORP (FRME) stock intrinsic value fair value estimate & owner earnings analysis

First Merchants is a community bank holding company based in Muncie, Indiana, with a bank charter dating to 1893 and about 111 banking locations in Indiana, Ohio and Michigan. On February 1, 2026 it closed the purchase of First Savings Financial Group of Jeffersonville, Indiana (about $2.4 billion of assets, $1.9 billion of loans and $1.7 billion of deposits, 16 banking centers in southern Indiana), paid for with 6.1 million new shares. At March 31, 2026 the combined bank had $21.1 billion of assets, $16.5 billion of deposits and 62.5 million shares outstanding. Its earnings come from the spread between what it earns on loans and securities and what it pays for deposits, plus fees from mortgage banking, wealth management and treasury services. How we measure earnings. For a bank, borrowing and deposits are the raw material, so interest is an operating cost and no debt is subtracted from the value. We start from the cash the bank generates, remove timing swings in working capital, subtract stock compensation, and subtract the capital spending needed to stay in business. We also treat the provision for loan losses as a recurring cost rather than adding it back as a non-cash charge, and we charge the cost of the affordable-housing tax-credit program (amortization of $14.3 million in 2025, against $18.0 million of tax credits recognized, with $109 million still committed to fund). The bank does not report premises purchases separately, so we used its investing line for other items as a cautious (probably too high) stand-in for capital spending. On that basis owner earnings per diluted share, after preferred dividends, were $3.18 in 2019, $2.33 in 2020, $3.56 in 2021, $3.68 in 2022, $3.46 in 2023, $3.35 in 2024 and $3.81 in 2025. The 2020 dip is the pandemic loan-loss provision of $58.7 million; 2024 carried a $35.7 million provision and about $49 million of net charge-offs, against a $21.25 million provision and about $18 million of net charge-offs in 2025. The earnings level. We use the median of 2019 through 2025, $3.46 per share. We start in 2019 because the earlier years describe a smaller bank (41 to 49 million diluted shares in 2016 to 2018, against 58 million in 2025), and we keep 2020 in the window so that one genuine credit-stress year is part of the picture. Corroboration is limited: first-quarter 2026 net income was $28.2 million, but the quarter holds only two months of First Savings, so one quarter is not enough to move the level. 2025 owner earnings were 13.9 percent above 2024, in good part because credit costs fell; we assume only 1.5 percent growth in the first year of the base case, below that figure, because we treat 2025 as a favorable year rather than a new run rate. We could not verify First Savings' own earnings from First Merchants' filings, which did not yet include purchase accounting when filed, so we assume the acquired bank earns the same per new share as the existing bank (about 0.9 percent of its assets, below First Merchants' own return). We credit no cost savings or accretion. Base case: $61.12 per share. Owner earnings of $3.46 grow 1.5 percent a year for ten years, funded by retaining roughly 12 percent of earnings as capital to support loan growth. That is below the 3.0 percent a year owner earnings grew from 2019 to 2025 and below the 1.7 percent a year of 2021 to 2025, and it is the continuation of how the bank has grown throughout the ten years of filings we reviewed: retained earnings reinvested in organic lending, with loans rising from $12.0 billion to $13.8 billion between 2022 and 2025 without acquisitions. We include one mild stress year in year five, with earnings 25 percent lower, the size of the 2020 drop ($3.18 to $2.33). After year ten we hold the earning power flat. That rests on the franchise's record since 1893 and its deposit base rather than on any further growth. We left out cost savings from First Savings, any margin expansion and further acquisitions, because none is contracted or a small repeatable step. For a bank there is no debt to subtract: the bank is worth $61.12 per share, and what it owes in deposits and borrowings is already charged inside owner earnings. Bear case: $39.03 per share. This is a repeat of the 2008 to 2010 credit cycle, when US bank loan losses ran at roughly 2.5 percent of loans a year for two to three years. On the $15.3 billion loan book we assume provisions of 2.0, 2.5, 1.6, 0.6 and 0.2 percent of loans in years two through six (6.9 percent cumulatively, roughly $1.05 billion before tax, about $13 per share after tax), against pre-provision earnings trimmed 10 percent. Owner earnings per share run $3.20, then -$0.61, -$1.55, $0.15, $2.17, and settle at $2.90, below the 2019 to 2025 median because competition for deposits and the acquisition's earnings both disappoint. Capital absorbs the losses without a raise, since the cumulative net loss of about $2 per share is small against the roughly $29 per share of tangible equity, but the bank pays nothing out for about three years. This is worth more than the roughly $29 of tangible book value per share (equity of $2.67 billion less $0.78 billion of goodwill and $0.04 billion of other intangibles) but less than the $42.76 of reported book value, because the franchise earned a positive $2.33 per share even in the 2020 shock and the nonaccrual loan balance has been stable ($71.8 million at the end of 2025 against $73.8 million a year earlier, about 0.5 percent of loans). Bull case: $71.97 per share. Starting from the 2025 level of $3.81, owner earnings grow 3.0 percent a year, the demonstrated 2019 to 2025 rate, tapering to 2.0 percent by year ten, with the same retention of capital and one 2020-style stress year in year four. Even the bull case includes a stress year, and we add no acquisition upside. What would make this wrong. If the normal level is $3.20 instead of $3.46, the base value falls to about $56; at $3.00 it falls to about $53. If credit losses arrive faster or deeper than the 2008 to 2010 pattern, the bear case is understated. If First Savings earns less than assumed, the level falls, and if it earns more, it rises. The margin-of-safety price: $26.00. We are moderately sure of the level: seven years of results ranged from $2.33 to $3.81, and the three most recent years sit within $3.35 to $3.81, but the acquisition just closed and we cannot yet see its earnings. The worst plausible outcome is a severe credit cycle combined with deposit competition, which the bear case models; the bank's structure (capital that absorbs the modeled cycle and a loan book spread over ten loan classes) would survive it, though it would pay no dividends for years. If we are wrong about the two things we are most likely to be wrong about, the level ($3.00 to $3.20 rather than $3.46) and the acquisition's contribution, the shares are worth roughly $53 to $56 in the base case and about $39 in the bear case. The price assumes a holding period of about four years. Over that period the bank pays about $1.45 per share a year (roughly $22.8 million a quarter), more than $5 per share over four years. At $26.00 the price is about 7.5 times normal earnings, below the roughly $29 of tangible book value per share, with a yield near 5.6 percent. From that price the 20% target requires only that, by year four, the shares are valued at about 13 times then-normal earnings of about $3.67 (roughly $48), which together with about $6 of dividends compounds to about 20 percent a year. We regard 13 times normal earnings as an undemanding valuation for a bank with this record. Change since the previous analysis: the prior figures were built on a different basis and are not comparable. What has changed in the business is that First Savings closed on February 1, 2026, adding 6.1 million shares and about $2.4 billion of assets, and 2025 credit costs fell sharply from 2024.