Yes, This Bank’s Board Member Is Sure About That Acquisition

Firstmerit Corp (NASDAQ:FMER)’s shares are down about 10% from the time that it announced that it was acquiring fellow Midwestern bank Citizens Republic Bancorp, Inc. (NASDAQ:CRBC) earlier this month. The bank plans an all stock deal, which may be seen by the market as a signal that Firstmerit’s management thinks that offering stock is a better deal than offering cash- in other words, that they believe the stock is overvalued. Citizens Republic Bancorp currently trades at $20.33 per share, which represents a P/B ratio of 0.8, so Firstmerit may be getting a good deal on the purchase particularly if it is able to realize synergies from integrating the two companies.

FISHER ASSET MANAGEMENT

Robert Briggs, a Board member at Firstmerit Corp, thought that the market’s treatment of Firstmerit made for a buying opportunity. Briggs purchased 3,300 shares of the bank on September 17th at an average price of $15.19, slightly below where the stock trades at the time of this writing. Briggs had also bought shares of Firstmerit in April of this year at an average price of $16.09, which is above the current price but below where the stock was before the announcement of the Citizens Republic Bancorp acquisition. We like to track insider activity because insider purchases tend to be bullish signs, and we particularly like to see a vote of confidence from an insider following the drop in the bank’s stock price.

Notable investors weren’t very focused on Firstmerit Corp during the second quarter, possibly in part because of its fairly low market capitalization of $1.7 billion. Billionaire Ken Fisher’s Fisher Asset Management had the largest position out of the funds in our 13F database, with 3.4 million shares (find more stocks owned by Fisher Asset Management). Dreman Value Management, a $5.5 billion fund, reported a position of 2 million shares (see more stocks David Dreman likes).

Firstmerit’s business in the second quarter of 2012, measured by net interest income, was about even with the same period last year with other sources of income up slightly. Earnings per share for the quarter were 28 cents, up from 27 cents in the second quarter of 2011, and results for the first quarter of the respective years were about the same. After the fall in the company’s stock price, it trades slightly above the book value of its equity and at 14 times trailing earnings. It is therefore a plausible value play even before considering a 4.2% dividend yield. Without the Citizens Republic deal, the bank could be a buy at its current levels; therefore, as long as the acquisition does not negatively impact the business it could still be a good value at this price.

Wintrust Financial Corp (NASDAQ:WTFC) and Old National Bancorp (NYSE:ONB) are two Midwest-focused banks that are about the same market capitalization as FirstMerit, with Fifth Third Bancorp (NASDAQ:FITB) being a larger peer at a $14 billion market cap. These banks are all in the same neighborhood as Firstmerit in terms of price-to-book ratios: Fifth Third is even at 1.1 while Old National is higher at 1.2 and Wintrust is lower at 0.9. In terms of earnings, the smaller banks are a bit higher valued with Wintrust trading at 18 times trailing earnings and Old National posting a trailing P/E of 15. With lower dividend yields as well (particularly Wintrust’s at only 0.5%), we would consider Firstmerit to be the best buy in that valuation range, especially considering the insider buy. Fifth Third, however, experienced higher earnings growth in its most recent quarter than Firstmerit did and is priced quite cheaply with both its trailing and forward P/E multiples being 10. It may be an even better buy, particularly if investors are worried about potential negative effects of integrating Citizens Republic Bancorp or generally prefer larger-cap investments.

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