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

Meena is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Shares of Firstmerit (NASDAQ: FMER) are down about 10% after the company announced that it was acquiring fellow Midwestern bank Citizens Republic Bancorp (NASDAQ: CRBC) earlier this month. Firstmerit plans to make this an all-stock deal, which means that the company believes its stock is overvalued. Citizens Republic Bancorp currently trades at $20.33 per share, which represents a P/B ratio of 0.8.  This means that Firstmerit may be getting a good deal on the purchase, particularly if it is able to realize synergies from integrating the two companies.

Robert Briggs, a board member at Firstmerit, thought that the market’s treatment of Firstmerit made for a buying opportunity. Briggs purchased 3,300 shares of the bank on September 17 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 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 a drop in a company’s stock price.

Besides Briggs, other notable investors weren’t very focused on Firstmerit 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 $0.28 cents, up from $0.27 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 (NASDAQ: WTFC) and Old National Bancorp (NASDAQ: ONB) are two Midwest-focused banks that have about the same market capitalization as FirstMerit, with Fifth Third Bancorp (NASDAQ: FITB) 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 with Firstmerit 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 purchase. Fifth Third, however, experienced higher earnings growth in its most recent quarter than Firstmerit and is priced quite cheaply, with both its trailing and forward P/E multiples of 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.


This article is written by Matt Doiron and edited by Meena Krishnamsetty. They don't own shares in any of the stocks mentioned in this article. The Motley Fool owns shares of Fifth Third Bancorp and FirstMerit. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

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