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D.A. Davidson initiates coverage of First Merchants, Lakeland Financial, 1st Source

Initiations

Kevin Reevey, a D.A. Davidson analyst, initiated coverage ofMuncie, Ind.-based First MerchantsCorp.; Warsaw, Ind.-based LakelandFinancial Corp.; and South Bend, Ind.-based 1st Source Corp.

Reevey initiated First Merchants with a $29 price target and"buy" rating.

His 2016 and 2017 EPS estimates are $1.85 and $2.00, respectively.

Based on the company's current trading price, the analyst believesthat it is trading at an 11% discount to its peers. He highlighted that the company'sprofitability metrics are in line with its peers, so it should trade similarly aswell.

In addition, he believes that the company is well-positionedto increase its market share, considering its positions in some of the region'smost attractive markets, including Indianapolis, Northwest Indiana and the suburbsof Chicago and Lafayette, Ind. He added that these markets are expected to deliver"above average population growth over the next five years, experience growthin business expansions and are home to a number of small- and mid-size businesses."


The analyst initiated Lakeland Financial at "neutral"with a price target of $51.

His 2016 and 2017 EPS estimates are $2.93 and $3.11, respectively.

The analyst highlighted that the company consistently reportsabove-average profitability and strong credit quality, as compared to its peers.He believes that Lakeland Financial merits a premium valuation.

In addition, the analyst noted that the company's existing footprintin Indiana, including Fort Wayne, Warsaw, Elkhart and Indianapolis, will see thefastest population growth over the next five years. Considering the business activityin these areas, Reevey believes that the company is well-positioned to capitalizeon the trends.


Reevey initiated 1st Source with a "neutral" ratingand a price target of $36.

His 2016 and 2017 EPS estimates are $2.22 and $2.38, respectively.

"We believe SRCE should trade at a premium to its peersgiven its above average profitability, superior credit quality, and healthy mix(more than one-third) of revenues derived from diverse sources of fee income,"he noted in his recent note.

In addition, he thinks that as the company's management teamowns more than one-third of its outstanding shares, they have a vested interestin the company, which is closely aligned with that of company shareholders.

Downgrades

Hovde Group analyst Kevin Fitzsimmons downgraded to "marketperform" from "outperform," and also reduced its price target to$14 from $14.25, after the company's earningsrelease.

The analyst also lowered his 2016 and 2017 EPS estimates to 87cents and 93 cents from $1.00, and $1.04, respectively.

Fitzsimmons thinks that environmental factors are hindering thecompany's ability to increase its earnings and core profitability. More importantly,he thinks that prepayments on the company's acquired loan portfolio have increased,given lower rate environment and tighter 2-10 year spread. "[P]articularlythe consumer and residential loans, which implies the double-whammy of having towrite down the FV premium and establish an incremental provision for the new (refinancedor replaced) loan," he added.

As a result, he thinks that the company will not be able to showthe quarterly net positive impact from purchase accounting in the coming quartersas initially expected.


Merion Capital Group analyst Joe Gladue downgraded Lancaster,Pa.-based Fulton Financial Corp.to "underperform" from "neutral" and also lowered the company'sprice target to $13 from $14.

His 2016 and 2017 EPS estimates are 91 cents and 90 cents, respectively.

The analyst noted that the company's recent earnings exceededhis and Street expectations, because of higher fee income and lower outside serviceexpenses. Gladue highlighted that the company's earnings are predictable, however,it has lower expected growth rate than its peers. He believes that this combinationdeserves a "modest valuation discount."

In addition, the company is currently trading roughly 6.5% abovehis target price. The analyst added that his price target suggests a negative toflat return over the next 12 months, even with the 2.9% dividend yield, so he loweredhis rating on the stock.