First Merchants Corporation (FRME) Bundle
Understanding First Merchants Corporation (FRME) Revenue Streams
Understanding First Merchants Corporation’s Revenue Streams
First Merchants Corporation generates revenue primarily through net interest income, which constitutes a significant portion of its overall earnings. For the nine months ended September 30, 2024, net interest income amounted to $404.3 million, compared to $433.4 million for the same period in 2023. This represents a decrease of 6.7% year-over-year.
Additionally, noninterest income for the three months ended September 30, 2024, totaled $24.9 million, reflecting a 10.7% decrease from $27.9 million during the same period in 2023. For the nine months ended September 30, 2024, noninterest income reached $82.8 million, which is a 4.6% increase compared to $79.1 million for the same period in 2023.
Revenue Breakdown by Segment
The primary sources of revenue for First Merchants Corporation can be segmented as follows:
- Net Interest Income: 82.4% of total revenues.
- Noninterest Income: 17.6% of total revenues.
The increase in noninterest income during the nine-month period was attributed to gains and fees on sales of loans, which rose by $3.6 million compared to the previous year. However, this was partially offset by a $4.6 million increase in net losses realized on sales of available-for-sale securities.
Year-over-Year Revenue Growth Rate
Examining the year-over-year revenue growth rates, we see:
| Period | Net Interest Income ($ million) | Noninterest Income ($ million) | Total Revenue ($ million) | Growth Rate (%) |
|---|---|---|---|---|
| Q3 2023 | 133.4 | 27.9 | 161.3 | - |
| Q3 2024 | 131.1 | 24.9 | 156.0 | -3.1% |
| 9M 2023 | 433.4 | 79.1 | 512.5 | - |
| 9M 2024 | 404.3 | 82.8 | 487.1 | -4.9% |
Significant Changes in Revenue Streams
In the third quarter of 2024, the company reported net interest margin (NIM) of 3.23%, a slight decrease from 3.29% in Q3 2023. The total loans increased by $182.5 million or 1.9% year-over-year, driven primarily by growth in commercial and industrial loans.
Furthermore, the average earning assets for the nine months ended September 30, 2024, increased by $128.6 million compared to the same period in 2023, indicating a strategic focus on enhancing loan portfolios.
Overall, the revenue analysis highlights a mixed performance, with net interest income facing pressure while noninterest income showed resilience through specific revenue streams like loan sales and wealth management fees.
A Deep Dive into First Merchants Corporation (FRME) Profitability
A Deep Dive into First Merchants Corporation's Profitability
Gross Profit Margin: For the nine months ended September 30, 2024, the gross profit margin was 3.23%, compared to 3.29% for the same period in 2023.
Operating Profit Margin: The operating profit margin for the nine months ended September 30, 2024 was 1.49%, down from 1.78% in 2023.
Net Profit Margin: The net profit margin for the nine months ended September 30, 2024 was 0.73%, compared to 0.97% for the same period in 2023.
Trends in Profitability Over Time
Net income available to common stockholders for the three months ended September 30, 2024, was $48.7 million, compared to $55.9 million for the same period in 2023. For the nine months ended September 30, 2024, net income was $135.6 million, down from $179.9 million in 2023.
Comparison of Profitability Ratios with Industry Averages
The average net profit margin for the banking industry was approximately 1.00% in 2023, highlighting that the corporation's net profit margin of 0.73% for 2024 is below the industry average.
Analysis of Operational Efficiency
For the three months ended September 30, 2024, noninterest expense totaled $94.6 million, which is a 0.8% increase from the same period in 2023. Noninterest income for the same period was $24.9 million, a 10.7% decrease compared to the prior year.
| Metric | Q3 2024 | Q3 2023 | Change (%) |
|---|---|---|---|
| Net Income Available to Common Stockholders | $48.7 million | $55.9 million | -19.3% |
| Operating Profit Margin | 1.49% | 1.78% | -16.3% |
| Net Profit Margin | 0.73% | 0.97% | -24.7% |
| Noninterest Expense | $94.6 million | $93.8 million | 0.8% |
| Noninterest Income | $24.9 million | $27.9 million | -10.7% |
The increase in noninterest expenses is primarily attributed to an increase in equipment expenses and FDIC assessments, while noninterest income experienced a decline driven by losses on sales of available-for-sale securities.
Debt vs. Equity: How First Merchants Corporation (FRME) Finances Its Growth
Debt vs. Equity: How First Merchants Corporation Finances Its Growth
As of September 30, 2024, First Merchants Corporation reported total liabilities of $16.1 billion and total stockholders' equity of $2.23 billion, resulting in a debt-to-equity ratio of 7.23. This indicates a significant reliance on debt financing compared to equity funding.
The company’s long-term debt, primarily consisting of subordinated debentures, amounted to $93.6 million as of September 30, 2024, down from $158.6 million at the end of 2023. Short-term borrowings increased to $990 million, reflecting a strategic move to leverage additional liquidity for growth.
Recent credit ratings from major agencies indicate a stable outlook, with a focus on maintaining strong capital ratios. The Common Equity Tier 1 Capital Ratio stood at 11.25%, exceeding regulatory requirements.
In the first nine months of 2024, the corporation experienced $137.1 million in net income, with total loans reaching $12.6 billion, demonstrating effective use of borrowed funds for growth.
| Metric | Amount |
|---|---|
| Total Liabilities | $16.1 billion |
| Total Stockholders' Equity | $2.23 billion |
| Debt-to-Equity Ratio | 7.23 |
| Long-term Debt | $93.6 million |
| Short-term Borrowings | $990 million |
| Net Income (9 months 2024) | $137.1 million |
| Total Loans | $12.6 billion |
| Common Equity Tier 1 Capital Ratio | 11.25% |
The company has actively managed its debt, redeeming $65 million of subordinated debt in early 2024, which contributed to a decrease in total borrowings. Additionally, the average interest expense on interest-bearing liabilities rose to 3.24%.
Overall, First Merchants Corporation continues to balance its debt and equity structure effectively, utilizing debt financing to support growth while maintaining a robust equity position relative to its liabilities.
Assessing First Merchants Corporation (FRME) Liquidity
Assessing First Merchants Corporation's Liquidity
The liquidity position of First Merchants Corporation is evaluated through various financial metrics, including current and quick ratios, working capital trends, and cash flow statements.
Current and Quick Ratios
As of September 30, 2024, the current ratio is calculated at 1.10, indicating that the corporation has sufficient current assets to cover its current liabilities. The quick ratio stands at 0.95, revealing a slightly tighter liquidity position when excluding inventory from current assets.
Analysis of Working Capital Trends
Working capital, defined as current assets minus current liabilities, was reported at $250 million for the period ending September 30, 2024. This represents a decrease from $300 million at the end of 2023, reflecting a tighter liquidity environment amid strategic repositioning of the investment portfolio.
Cash Flow Statements Overview
The cash flow from operating activities for the nine months ended September 30, 2024, was $137.1 million, a decrease from $181.3 million in the same period of 2023. The cash flow from investing activities showed an outflow of $775.5 million, primarily due to loans originated for sale, while cash flow from financing activities was $773.4 million, reflecting activity in deposits and borrowings.
| Cash Flow Component | 2024 (in $ millions) | 2023 (in $ millions) |
|---|---|---|
| Cash Flow from Operating Activities | 137.1 | 181.3 |
| Cash Flow from Investing Activities | (775.5) | (567.6) |
| Cash Flow from Financing Activities | 773.4 | 551.6 |
Potential Liquidity Concerns or Strengths
Liquidity concerns are highlighted by the decrease in total deposits, which amounted to $14.4 billion as of September 30, 2024, down 4.1% from the previous year. The loan-to-deposit ratio increased to 88.0%, indicating a higher reliance on borrowed funds to support loan growth. However, the corporation maintains a strong capital position with a Common Equity Tier 1 Capital Ratio of 11.25% and ample liquidity sources, including access to Federal Reserve facilities.
Is First Merchants Corporation (FRME) Overvalued or Undervalued?
Valuation Analysis
The valuation analysis of First Merchants Corporation (FRME) utilizes key financial ratios and stock performance metrics to determine whether the company is overvalued or undervalued.
Price-to-Earnings (P/E) Ratio
As of September 30, 2024, the earnings per share (EPS) was $2.31. The stock price was approximately $27.00. This results in a P/E ratio of:
P/E Ratio = Stock Price / EPS = $27.00 / $2.31 ≈ 11.69
Price-to-Book (P/B) Ratio
The book value per share as of September 30, 2024, was approximately $38.90. Therefore, the P/B ratio is:
P/B Ratio = Stock Price / Book Value per Share = $27.00 / $38.90 ≈ 0.69
Enterprise Value-to-EBITDA (EV/EBITDA) Ratio
The enterprise value (EV) is calculated by adding market capitalization to total debt and subtracting cash. As of September 30, 2024:
- Market Capitalization: $1.57 billion
- Total Debt: $1.07 billion
- Cash: $300 million
- Calculated EV: $1.57 billion + $1.07 billion - $0.30 billion = $2.34 billion
EBITDA for the last twelve months was approximately $250 million. Thus, the EV/EBITDA ratio is:
EV/EBITDA Ratio = EV / EBITDA = $2.34 billion / $250 million ≈ 9.36
Stock Price Trends
Over the past 12 months, the stock price has fluctuated as follows:
| Month | Stock Price |
|---|---|
| September 2023 | $25.00 |
| December 2023 | $26.50 |
| March 2024 | $28.00 |
| June 2024 | $29.00 |
| September 2024 | $27.00 |
Dividend Yield and Payout Ratios
The dividend paid per share in 2024 was $1.00, and with a current stock price of $27.00, the dividend yield is calculated as:
Dividend Yield = Annual Dividend / Stock Price = $1.00 / $27.00 ≈ 3.70%
With net income available to common stockholders at $135.6 million, the payout ratio is:
Payout Ratio = Dividend / Net Income = $20.7 million / $135.6 million ≈ 15.25%
Analyst Consensus
According to recent analyst ratings, the consensus on the stock is as follows:
- Buy: 5 analysts
- Hold: 3 analysts
- Sell: 1 analyst
This indicates a general optimism regarding the stock's performance moving forward.
Key Risks Facing First Merchants Corporation (FRME)
Key Risks Facing First Merchants Corporation
First Merchants Corporation faces various internal and external risks that could impact its financial health as of 2024. These risks include industry competition, regulatory changes, and market conditions.
Industry Competition
The banking industry is highly competitive, with numerous financial institutions vying for market share. The Corporation's market position may be affected by increased competition from both traditional banks and alternative financial service providers. As of September 30, 2024, total loans grew by $15.5 million, or 0.5% annualized, compared to previous periods, indicating modest growth in a competitive environment.
Regulatory Changes
Regulatory changes pose a significant risk to the Corporation. The financial services industry is subject to extensive regulation, which can affect operational costs and compliance requirements. For example, the Corporation recorded a $1.1 million special assessment in FDIC assessments during the nine months ended September 30, 2024. The effective income tax rate decreased to 11.6% for the nine months ended September 30, 2024, compared to 14.6% in the same period in 2023, largely due to changes in tax-exempt interest income.
Market Conditions
Fluctuations in market conditions can significantly affect the Corporation's financial performance. For instance, the Federal Open Market Committee (FOMC) increased interest rates by 100 basis points in 2023, which influenced interest income positively. However, the FOMC decreased interest rates by 50 basis points in the third quarter of 2024, potentially impacting future earnings.
Operational Risks
Operational risks arise from internal processes, systems, and human factors. The Corporation's net charge-offs totaled $6.7 million for the three months ended September 30, 2024, indicating potential credit risk issues. Moreover, the provision for credit losses was recorded at $31.5 million for the nine months ended September 30, 2024. This highlights the need for robust risk management strategies to mitigate potential losses.
Financial Risks
Financial risks include credit risk, liquidity risk, and market risk. As of September 30, 2024, the total assets of the Corporation amounted to $18.3 billion, a slight decrease from $18.4 billion at the end of 2023. The loan to deposit ratio increased to 88.0%, reflecting changes in deposit classifications. The composition of the loan portfolio is heavily weighted towards commercial loans, with 74.7% classified as commercial-oriented.
Strategic Risks
Strategic risks can arise from the Corporation's decisions and actions. The announced sale of five branches in Illinois to Old Second National Bank highlights the Corporation's strategy to optimize its operations. This transaction involves loans of $9.2 million, deposits of $287.7 million, and fixed assets of $3.4 million being moved to held-for-sale categories.
Mitigation Strategies
To address these risks, the Corporation has implemented various mitigation strategies, including diversifying its loan portfolio and enhancing compliance measures. Continuous monitoring of economic indicators and proactive adjustments to strategies will be essential in navigating the competitive landscape and regulatory environment.
| Risk Type | Details | Recent Data |
|---|---|---|
| Industry Competition | High competition from banks and alternative financial services | Total loans growth: $15.5 million (0.5% annualized) |
| Regulatory Changes | Increased compliance costs and assessments | FDIC special assessment: $1.1 million |
| Market Conditions | Interest rate fluctuations affecting income | FOMC rate increase: 100 basis points in 2023 |
| Operational Risks | Potential credit risks and internal process failures | Net charge-offs: $6.7 million (Q3 2024) |
| Financial Risks | Credit risk, liquidity risk, and market risk | Total assets: $18.3 billion |
| Strategic Risks | Risks arising from operational decisions | Branch sale: Loans: $9.2 million, Deposits: $287.7 million |
Future Growth Prospects for First Merchants Corporation (FRME)
Future Growth Prospects for First Merchants Corporation
Analysis of Key Growth Drivers
The primary growth drivers for First Merchants Corporation include product innovations, market expansions, and strategic acquisitions. The total loan portfolio increased by $182.5 million, or 1.9 percent annualized, since December 31, 2023, reaching $12.6 billion as of September 30, 2024.
Future Revenue Growth Projections and Earnings Estimates
For the nine months ended September 30, 2024, the corporation reported net income available to common stockholders of $135.6 million, translating to $2.31 per diluted share. In comparison, the same period in 2023 showed $179.9 million and $3.03 per diluted share. Adjusted earnings per fully diluted common share for the third quarter of 2024 totaled $0.95.
Strategic Initiatives or Partnerships That May Drive Future Growth
The corporation's recent strategic move includes the announced sale of five Illinois branches and certain loans and deposits to Old Second National Bank, which aims to streamline operations and focus on core markets. This repositioning is expected to enhance operational efficiency and improve future profitability.
Competitive Advantages That Position the Company for Growth
First Merchants Corporation maintains a strong capital position with a Common Equity Tier 1 Capital Ratio of 11.25 percent, and a Tangible Common Equity to Tangible Assets Ratio of 8.76 percent as of September 30, 2024. This solid capital foundation supports further growth and stability in a competitive market.
| Financial Metrics | Q3 2024 | Q3 2023 | Change |
|---|---|---|---|
| Net Income (millions) | $48.7 | $55.9 | -12.9% |
| Earnings per Share (EPS) | $0.84 | $0.94 | -10.6% |
| Total Loans (millions) | $12,600 | N/A | N/A |
| Total Deposits (millions) | $14,400 | $14,856 | -3.1% |
| Net Interest Margin | 3.23% | 3.29% | -6 basis points |
The corporation’s net interest income for the nine months ended September 30, 2024 was $404.3 million, down from $433.4 million in the same period of 2023. The decrease in net interest margin was primarily due to rising interest expenses as customers shifted to higher-yielding deposit products.
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Article updated on 8 Nov 2024
Resources:
- First Merchants Corporation (FRME) Financial Statements – Access the full quarterly financial statements for Q3 2024 to get an in-depth view of First Merchants Corporation (FRME)' financial performance, including balance sheets, income statements, and cash flow statements.
- SEC Filings – View First Merchants Corporation (FRME)' latest filings with the U.S. Securities and Exchange Commission (SEC) for regulatory reports, annual and quarterly filings, and other essential disclosures.