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Rising earnings estimates on the back of strong third-quarter results – including a 20.7% earnings surprise – helped First Merchants Corporation (FRME) achieve a Zacks #1 Rank (Strong Buy) on December 26. Moreover, this commercial and retail banking service provider has delivered positive earnings surprises in seven of the last ten quarters with an average beat of 75.8%.   

With a solid year-to-date return of 69.6% and a history of beating quarterly earnings estimates, this stock offers an attractive investment opportunity.

The Rank Driver

Better-than-expected third-quarter earnings, loan growth, strong credit quality and capital ratios are the primary rank drivers for this stock.

First Merchants Corporation reported its third-quarter results on October 25, 2012 with earnings per share of 35 cents beating the Zacks Consensus Estimate of 29 cents by 20.7%. Further, earnings were substantially better than the year-ago loss of 25 cents. Strong results of the quarter were primarily aided by higher non-interest income and net interest income as well as reduced provision for loan losses.

Net interest income increased 11.3% to $39.9 million from $35.9 million in the year-ago quarter.

However, non-interest income increased 7.9% year over year to $14.3 million. Non-interest expense edged up 0.5% from the year-ago period to $34.4 million. Provision for loan losses decreased 17% from the year-ago quarter to $4.6 million.

Credit quality continued to improve. Nonperforming assets were 1.83% of total assets, down 72 bps from 2.55% as of September 30, 2011. Net charge-offs for the quarter were $5.3 million compared with $9.6 million in the year-ago quarter.    

As of September 30, 2012, First Merchants Corporation’s total risk-based capital ratio was 16.62%, Tier 1 risk-based capital ratio was 9.71% and tangible common equity ratio totaled 7.51%.

Earnings Estimate Revisions

The Zacks Consensus Estimate for 2012 increased 6.9% to $1.40 per share as all 5 estimates were revised upwards over the last 60 days. The current estimate implies year-over-year growth of 310.6%.

For 2013, 3 out of 5 estimates were revised higher over the same time frame, lifting the Zacks Consensus Estimate by 2.5% to $1.22 per share.

Attractive Valuation

First Merchants Corporation currently trades at a forward P/E of 10.7x, a 3.5% discount to the peer group average of 11.0x. Also, on a price-to-book basis, the shares are trading at 0.93x, a 15.5% discount to the peer group average of 1.10x.

About the Company

Headquartered in Muncie, Indiana, First Merchants Corporation is a bank holding company. It operates 79 commercial banking offices across 24 Indiana and 2 Ohio counties through its subsidiary, First Merchants Bank, National Association, which offers a wide range of consumer and business banking deposit products and services – including Internet banking and cash management services. The company has a market capitalization of roughly $418.9 million.

Other Zacks #1 Rank bank stocks include First Financial Holdings Inc. (FFCH) and BofI Holding, Inc. (BOFI).

 

 
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FIRST MERCHANTS (FRME): Free Stock Analysis Report
 
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