FirstMerit + Citizens Republic: Call it Zombie Love (or Financial Repression)

rcwhalen's picture

Updated (Re NOLs) -- In our last episode, we talked about the IPO of Capital Bank Financial (CBF), a small FL bank holding company which was once known as North American Financial Resources.

But now let’s move onto something really fun – sad really -- namely the acquisition of Citizens Republic Bancorp (CRBC) by FirstMerit Corporation (FMER).  CBRC is the last bank in Flint Michigan, a part of the world that used to be the epicenter of American industry but is now notable for being the lacey fringe on the periphery of Canada.  The acquisition of CRBC by FMER illustrates not only the idiocy of corporate managers, but the pernicious effects on US banks of the Fed’s ongoing financial repression.  

FMER was down 11% on the news of the acquisition, which makes sense when you compare the profiles of the target and acquirer.  FMER is a well-run institution with good nominal financial performance and a balanced economic capital profile.  FMER has been rated “A” by Institutional Risk Analytics for the past three years.  This time frame is important because most banks in the US started to recover around the end of 2009, when the tooth fairy over at the FASB changed accounting rules for illiquid assets.  But I digress…

FMER has a default rate of about 100bp or 1% of total loans, which is dead on the peer average.  Like most banks, the majority of risk is not on the loan book but instead the securities portfolio, as illustrated by the distribution of economic capital:


FMER Economic Capital

Lending $188 million

Trading $166 million

Securities $602 million

Total EC $907 million

Source: The IRA Bank Monitor


Compare the economic capital for FMER to Tier One Risk Based Capital, a ratio of 0.8:1 results, which suggests that the bank is actually under-leveraged in terms of risk.  Divide income by the economic capital and you get a RAROC of 6.7%, which is quite respectable.  Most important, the results of FMER have been remarkably stable for years, suggesting strong management or at least good presentations skills.

Now look at CRBC, a bank that was puking blood, at least in a figurative sense, not even a year ago with a default rate north of 700bp.  This is significant because CRBC is several years behind the rest of the industry in terms of cleaning up the balance sheet.  The location in lovely Flint, MI, may have just a little to do with this horrific credit performance.  

As late as the third quarter of 2001, CRBC was rated “F” by Institutional Risk Analytics and had a default rate of 719bp.  This was not the high, however, which came a quarter before at 1,100bp.  That is a “CCC” equivalent in terms of the Moody’s ratings system.  

Since then CRBC has improved dramatically, but as of Q2 2012 the bank was still sporting a default rate of 220bp vs. just 66bp for the asset peers.  That is almost three standard deviations difference between CRBC and its asset peers.  And keep in mind that current charge offs are leading provisions for future losses by almost 3:1.  

Moreover, the financials of CRBC are quite volatile.  The Q2 2012 data is badly skewed by a number of transactions which make reading the financials a task.  And this deal will not close until the middle of next year.  Part of the skew is caused by clean-up transactions related to the sale, including some potentially valuable NOLs.  At the start of 2012, CRBC had some $300 million in deferred tax assets on its books.

When you look at the economic capital profile for CRBC, the differences with FMER become apparent.  The first thing to notice is that the smaller institution has no trading book, which is good.  But notice that the economic capital numbers for CRBC have one more digit than the numbers for FMER.  

CRBC Economic Capital

Lending $1,073m

Trading $ 0

Investing $1,274m

Total EC $2,374M

Source: The IRA Bank Monitor


Or put another way, the EC model in The IRA Bank Monitor wants twice as much capital to support the risk inside CRBC as for the far larger FMER.  Got your attention now?  The ratio of EC to Tier One Risk Based capital for CRBC is 2.7:1 as of Q2 2012.  The RAROC is a tad over zero.  So what the analytics are telling us is that even today, with a much improved balance sheet, CRBC remains a value destroyer.

So here’s my questions for FMER:

First, what is it about the moribund MI and WI markets that is so attractive?  OH and IN I can understand, but the same economic factors that caused this bank to get torn to pieces during the great recession are still there.  

Second question concerns valuation.  FMER is paying $900 plus million for CRBC and will also redeem $345 million in TARP paper held by Tim Geithner at the US Treasury.  Hello?? Does $1.3 billion in total consideration for a bank that is the outlier in its asset peer group seem a tad rich?  Maybe that is why S&P revised FMER’s outlook to negative from stable yesterday.  

You could take the position that FMER’s repayment of the TARP and the NOLs are a wash, but the NOLs probably go away in the transaction.  Even ignoring the TARP repyament, FMER arguably overpaid for CRBC by as much as 20% by my reckoning.  Yuk.

Regards the Geithner watch, BTW, the latest chisme from Washington is that our hero is headed to NH to become presdient of Dartmouth College, where he can rebuild the personal balance sheet and credibility, and maybe take a seat on the board of Goldman Sachs. More on this soon but, again, I digress…. 

Finally, it needs to be said that the management of FMER may not be the true culprits is this situation.  Banks as well as individual savers are victims of financial repression at the hands of the Ben  Bernanke and the Federal Open Market Committee.  A number of community banks vocally opposed the latest QE by the Fed, in part because purchases of paper by the central bank forces banks to take greater risks.  As net interest margins in the banking industry steadily fall, look for ever more acts of stupidity like this transaction. 

Buying a substandard bank in a poor geographic area does not strike this former FRBNY bank applications analyst as a safe and sound business practice as per 12 CFR.  Other banks are cranking up the lending machine and reducing prudential standards to merely maintain revenues in the face of financial repression by the Fed and other global central banks.  

Indeed, the acquisition of CRBC by FMER provides a stark illustration of the fundamental conflict between the Fed’s “dual mandate” and its legal responsibility to supervise the nation’s banks.  More on that next week.  Good weekend.

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NewWorldOrange's picture

Let's BE TPTB's "zombies" (marching determinedly through the streets.)

The criminals and traitors have taken control of America and are hellbent on destroying it, wittingly or not, and we MUST STOP THEM SOON.

On March 15, 2013, march on your city councils, state capitals, DC. Whatever you can manage. At 8am your time, just grab your family and walk into the streets. Refuse to disband or go home until the city councils oblige, the local police oblige, the state capitals oblige, the national guardsmen and armed forces oblige and follow their oaths, and TPTB in DC, including every Congressman, top administration officials, the DOJ heirarchy, have all been arrested and are awaiting trial. Been stocking up on food, water, etc? Stock up more. You'll need it in the streets. Did you think all that preparation was for survival in the woods? Really?

Let the revolution begin. Demands: TPTB are tried for treason against their Oaths to support and defend the Constitution, for cronyism, rampant bribery and corruption, lies, crimes against humanity, malfeasance, and plenty of other charges that not only makes them unfit to serve, but TRAITORS and CRIMINALS and THUGS.

America marches on the Ides of March. 8am local (your) time -- get in the streets. It's our last, best hope. Make this go viral. American Spring.

Stop! Tweet this. Email it to everyone you know. Post in on Youtube, your Facebook page, anywhere. LET'S MAKE THIS GO VIRAL. It's been done and has toppled governments in just the past few years.

IT'S OUR TURN. HELP IT GO VIRAL. If you're not doing it, you're just another Ikea Boy sheeple all talk pussy. So get busy or STFU and bend over bitch. I'm not "the One", you're not "the One", and Will Smith isn't going to come along and save us. If you want to bring on revolution in America, get to work. The pen is mightier than the sword. Get busy using it. All day. Every day. Spread the world.

American marches on the Ides of March.

shovelhead's picture

My protest is exactly a month later.

The April 15th Tax Day No Way Jose' Tour.

Join or not, no matter to me.

Some of us are smart enough to keep them from grabbing our money before it gets doled out.

The best way to win is NOT TO PLAY.

NewWorldOrange's picture

That doesn't even qualify as a half-measure. The vast majority of taxes you pay are hidden (inflation being just one of many.) For that matter, income taxes are only a fraction of government revenue, and one way or another...even if it means CNTRL-P (the inflation tax, perhaps the worst kind.)

Tax protest...about as helpful as voting. As long as TPTB are still there and confident they can do anything they want to us, including molesting our kids in the airports for fun and profit, they'll get their taxes one way or another. Eventually they'll just jail you and enslave you in a license plate factory. In the meantime, it keeps you running.

The ONLY way to win is to NOT LET THEM PLAY.

...and to send a very, very loud message to those who even think about molesting our kids in airports and lying us into wars and spending our children's incomes: That being doused with gasoline, and burnt alive while hanging from a rope in the town square, is the price for their kind of "play".

America marches on the Ides of March.

Mark your calendar. Spread the word.

MillionDollarBoner_'s picture

"1 out of 12 Americans"

Or 12 out of 12 illegals?

MillionDollarBoner_'s picture

Timmah is going to Goldman? Surely not!


BrigstockBoy's picture

Arranged marriage?

Dr. Richard Head's picture

There goes FirstMerit's Texas ratio.  Shit, no deposits are safe any more.  I guess that is why I just use these zombie institutions for cashing checks and paying the few bills I have.

MorningStar's picture

If only there was an alternative for all of us to not use banks.  Maybe we should just move over to savings&loan establishments.  Anything that will keep the USGovt. out of the banking business and supporting their friends.

bank guy in Brussels's picture

Apparently already 1 out of 12 Americans don't have a bank account at all ... even acknowledged by the lamestream Corporate (or Corrupt) News Network, CNN ... non-bank Americans on the increase: