BREAKINGVIEWS-American bank mergers will be a messy affair

Fri Sep 14, 2012 2:34am IST

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(The author is a Reuters Breakingviews columnist. The opinions expressed are her own.)(Deletes extraneous character in first paragraph.)

By Agnes T. Crane

NEW YORK, Sept 13 (Reuters Breakingviews) - Mergers among small and medium-sized American banks are a no-brainer in a post-crisis world. There are still 7,000 of them battling cheaply-financed too-big-to-fail behemoths and super-regional juggernauts. So bulking up is something of an existential necessity. But getting hitched is easier than it looks. Just ask Akron, Ohio-based FirstMerit (FMER.O), which on Thursday unveiled a messy $1 bln-plus takeover of rival Citizens Republic CRBC.O.

The tie-up of the two Midwestern banks promises to slice expenses by $59 million, worth about $340 million to shareholders after taxes. That’s not bad considering FirstMerit only paid $23.50 a share for Citizens – a premium of 18 percent, or around $150 million, to Wednesday’s close. But that price doesn’t include Citizen’s legacy costs. The bank still owes the U.S. Treasury $345 million in TARP funds, a tab that FirstMerit will pick up as part of the deal.

Shareholders were understandably miffed. They wiped off more than $200 million from the bank’s market cap on Thursday, hardly the sort of reaction to encourage other mid-market banks to follow suit. That’s a bummer for Wall Street’s financial institutions specialists, who are already enduring a 23 percent slump in activity, Thomson Reuters data show.

Yet smaller banks – and their shareholders – face a brutal competitive landscape in which some mid-market institutions will have a hard time surviving if they go it alone. The burden of the Dodd-Frank Act hits them particularly hard since they’re not small enough to qualify for community bank exemptions and not big enough to absorb the costs easily. Also, bigger banks enjoy funding advantages. For example, the cost of funds is about one-third cheaper if a bank has assets topping $10 billion, according to Federal Deposit Insurance Corp data.

FirstMerit will have a larger footprint stretching from Pennsylvania to Wisconsin as the branches of the two institutions only overlap in Ohio. But it will hardly be a powerhouse. With $24.3 billion in assets, FirstMerit will barely break the top 50 of the largest U.S. banks. It also will be less than one-tenth of U.S. Bancorp (USB.N), the region’s big kahuna. That may mean more acquisitions in the future. Shareholders may want to buckle up for a bumpy ride.

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CONTEXT NEWS

- FirstMerit will acquire Citizens Republic Bancorp in an all-stock transaction valued at $952 million, the banks announced on Sept. 13. As part of the transaction, First Merit will pay the $345 million of TARP money Citizens still owes the U.S. Treasury. FirstMerit promises cost savings from the tie-up of $59 million annually.

- Press release: link.reuters.com/kaq62t

- Reuters: FirstMerit makes surprise bid for Citizens Republic [ ID:nL3E8KD5QC]

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(Editing by Rob Cox and Martin Langfield)

((agnes.crane@thomsonreuters.com)) Keywords: BREAKINGVIEWS CITIZENS/FIRSTMERIT

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