First Merchants downgraded at Raymond James post First Savings acquisition announcement

First Merchants Corporation has been downgraded by Raymond James after announcing its acquisition of First Savings Financial Group for approximately $241.3 million, which introduces potential benefits but also raises significant concerns.

Analyst Daniel Tamayo highlighted potential challenges related to the acquisition, including diminished opportunities for share buybacks, a strained net interest margin due to falling interest rates, and funding difficulties from newly acquired specialty business lines.

The impact of the acquisition is expected to take several quarters to evaluate, leading Raymond James to revise its recommendation from Outperform to Market Perform and eliminate its previous price target for the stock.

While some analysts maintain a bullish outlook, caution is urged for investors due to the uncertain implications of the merger on First Merchants' financial performance.

Recommendation Rating: Cautious Outlook for First Merchants

First Merchants Corporation (NASDAQ:FRME) has recently been downgraded by Raymond James & Associates following its announcement to acquire First Savings Financial Group (NASDAQ:FSFG).

Yesterday, First Merchants revealed it has entered into a definitive agreement to acquire FSFG in an all-stock transaction valued at approximately $241.3 million.

Despite presenting opportunities such as entry into the Louisville metropolitan area, increased earnings per share forecasts, and a fair market valuation at 1.35 times tangible book value, analyst Daniel Tamayo noted several concerns. The acquisition's use of capital could diminish the chances of share buybacks and significant restructuring of securities in the near future. Additionally, the company’s core net interest margin (NIM) could face challenges due to falling interest rates.

Tamayo also raised points regarding the specialty business lines being acquired from First Savings, which reportedly have limited funding sources. This could create additional funding challenges at a time when there are promising organic lending prospects. Consequently, he expressed that the merger may hinder First Merchants' timeline for achieving core financial enhancements.

The research note indicated that it would take several quarters to fully assess the benefits of the deal. Given the expected NIM challenges, alongside forecasts for continued solid profitability and growth metrics, the analyst concluded there are few immediate catalysts that would allow First Merchants' shares to outperform their peers. As such, he anticipated the group would likely trade in line with industry standards.

As a result, Raymond James has revised its recommendation for First Merchants from Outperform to Market Perform and has eliminated its previous price target of $45.00.

This updated rating corresponds with Quant Ratings’ assessment of the stock as a Hold. While there remains a divide in opinions, with some Seeking Alpha authors and sell-side analysts rating the stock as a Buy, caution is advised for potential investors given the recent developments.