First Merchants Analyst Says Bank Has Improved Prospects After MBT Financial Acquisition

First Merchants Corporation FRME entered a definitive agreement to acquire MBT Financial Corp. MBTF in October.

The pending acquisition improves the prospects of the Indiana-based bank, taking it over the $10-billion asset threshold and enabling it to expand into Michigan, according to Raymond James.

The Analyst

David Long initiated coverage of First Merchants with an Outperform rating and $42 price target. 

The Thesis

First Merchants is a high-performing community bank with a solid core deposit base, Long said in the Monday initiation note.

The bank was not only able to improve its efficiency ratio to an industry-leading 51.6 percent in 2018, but also produce superior return of assets of 1.64 percent, return on equity of 11.8 percent and return on tangible common stockholder equity of 18.3 percent, the analyst said. 

Despite headwinds to net interest margin expansion, First Merchants should be able to achieve a modestly higher efficiency ratio in 2019 and 2020 on the back of well-managed expenses, a robust balance sheet and fee revenue growth, he said. 

First Merchants has generated an 8-percent compound annual growth rate in asset growth and 20 percent in revenue growth over the past decade, driven by healthy organic growth and the acquisition of seven banks, Long said. The company should be able to achieve its organic loan growth target of 7-8 percent in 2019, and this can be accelerated via acquisitions, the analyst said. 

Raymond James expects First Merchants' loan-deposit ratio to improve to around 90 percent following the pending MBT acquisition. 

Price Action 

First Merchants shares were down 0.57 percent at $38.57 at the time of publication Tuesday. 

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