Robust Lending And Mortgage Performance Will Secure US Banks Resilience

Key Takeaways

• Strong loan growth and increased lending are expected to positively impact future revenue and earnings.
  
• Strategic management of deposits and capital provides resilience and positions the company well for stable growth amid economic uncertainties.
  
• Exposure to market volatility, decreased net interest margin, and significant deposit decline may impact revenue and earnings growth amidst economic uncertainties.

Catalysts

Operates as the financial holding company for First Merchants Bank that provides commercial and consumer banking services.

• The company's focus on maintaining a strong loan growth pipeline and increased commercial and industrial lending, as highlighted by a 7% annualized growth rate, is expected to positively impact future revenue streams.
  
• Disciplined management of deposit costs and focus on building core deposit relationships are likely to improve margins by optimizing the interest margin in the face of market volatility.
  
• The approved $100 million share repurchase program, with $10 million already repurchased, is expected to boost EPS by reducing the number of shares outstanding, which should support future earnings per share.
  
• Continued strong performance in the mortgage unit, with dollar volume up over 30% year-over-year, positions the company well for increased noninterest income, supporting future earnings growth.
  
• Strategic flexibility due to strong capital ratios and ample loan loss reserves offers resilience against economic uncertainties, protecting net earnings and ensuring stable growth.

First Merchants Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming First Merchants's revenue will grow by 10.5% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 33.6% today to 30.2% in 3 years time.
• Analysts expect earnings to reach $250.8 million (and earnings per share of $4.38) by about April 2028, up from $206.9 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 11.9x on those 2028 earnings, up from 10.0x today. This future PE is greater than the current PE for the US Banks industry at 11.0x.
• Analysts expect the number of shares outstanding to decline by 1.32% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.24%, as per the Simply Wall St company report.

First Merchants Future Earnings Per Share Growth

Risks

• The bank's net interest margin has been under pressure, with a decrease of 6 basis points in the quarter, partly due to a decrease in loan portfolio yield, which could impact overall earnings growth.
  
• Despite strong loan growth, there is exposure to market volatility and economic uncertainty, particularly related to tariffs, which could affect credit demand and portfolio quality, potentially impacting revenue and net earnings.
  
• The commercial deposit balance has declined significantly, which may indicate liquidity management issues and could lead to increased funding costs and pressures on net interest income.
  
• Noninterest income was lower in the first quarter, affected by seasonal factors and variability in customer-related fees, which could lead to unpredictable earnings growth if not managed effectively.
  
• Classified loans represent a noticeable percentage of the portfolio, and while current asset quality remains stable, any deterioration could significantly impact credit loss provisions and net income.

Valuation

• The analysts have a consensus price target of $45.167 for First Merchants based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $829.3 million, earnings will come to $250.8 million, and it would be trading on a PE ratio of 11.9x, assuming you use a discount rate of 6.2%.
  
• Given the current share price of $35.91, the analyst price target of $45.17 is 20.5% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.