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Board Issues : M&A

Knowing When It’s Time to Sell

November 14th, 2012 |

nash.pngWhen the board of Citizens Republic Bancorp named Cathy Nash president and chief executive officer in early 2009, shortly after the bank recorded a nearly $400 million annual loss, she knew it would be an uphill battle. The then-$13-billion asset bank holding company based in Flint, Michigan, was grappling with bad loans and the results of a disappointing acquisition of Republic Bancorp in 2006.

Within months, she had to face angry shareholders whose stock had tanked and were demanding to know why she didn’t recover the departing CEO’s millions in pay and pension benefits.

“It was a contract and I was going to lose,’’ she explained during an interview recently. Instead of focusing on the past, she decided to forge ahead with her plan: rebuild pre-tax pre-provision profits so that after Citizens had dealt with its bad loans, it would have a strong core banking business at the other end of the economic cycle. The strategy worked. Citizens returned to profitability six quarters ago.

On the other hand, economic and political forces had other ideas.

By the summer of 2011, Nash had begun to see the writing on the wall. The Federal Reserve had stated publicly that it intended to keep interest rates low until 2013 (the Fed later said it would keep rates low through 2015) and organic loan growth was slim. Plus, the bank was near the $10 billion asset threshold where it would start getting regulated by the new Consumer Financial Protection Bureau and also see interchange fees from debit cards cut in half under provisions of the Durbin Amendment.

Nash and her management team modeled different financial scenarios. The cost of capital was 12 percent, and the bank would need to get a better than 10 percent return for shareholders, Nash says. In the second quarter of 2011, the bank’s return on average equity was 10.5 percent (it has since fallen) and its return on average assets was 1 percent. The net interest margin was 3.56 percent.

The bank had slimmed down during the crisis to $9 billion in assets, but it would need to quickly get to at least $12 billion if it wanted to return a reasonable profit to shareholders. Strategic planning sessions in 2011 with the board analyzed the prospects: could the bank acquire another bank? It could take a year to get regulatory approval as a new acquirer with a new management team, Nash says. Could the bank increase fee income? Could it shrink its branch system and use the savings to reinvest in the bank? The board decided to look around and see if there were any possible combinations with other banks.

By the spring of this year, not much had changed. The bank was trying to figure out how to buy back its $345 million of TARP preferred stock from the government. Raising common equity would dilute shareholders.

Nash says she went to Citizens Chairman James Wolohan and told him she didn’t see a way clear in the current economy.

“We cut this in every way we could to not come to this conclusion that we needed a partner,’’ she says. “But my job is to offer my shareholders the best long-term returns I can give them. You have to fish or cut bait here.”

The bank was in a strong position to sell. It was profitable and well capitalized. It had exited a consent order with regulators. It had dealt with its problem loans and the bank was on strong financial footing.

The deal with Akron, Ohio-based FirstMerit Corp. was announced in September as a stock-for-stock exchange worth $912 million at the time of the announcement, with Citizens’ shareholders receiving 1.37 shares of FirstMerit stock for each share of Citizens. The price to Citizens’ tangible book value at the time of the announcement was 130 percent, according to SNL Financial.

The combined entity would have $24 billion in assets across five Midwestern states, 415 branches and more than 5,000 employees. There was little geographic overlap and FirstMerit had been looking to expand in Michigan and Wisconsin, Wolohan said in an interview.Nash believes that the combination, which is expected to close in the second quarter, will deliver significant value for shareholders, while allowing them to participate in “tremendous” upside potential of a stronger bank with increased scale.

The stock market wasn’t as enthusiastic, and both banks have seen share prices fall since the announcement. Citizens’ stock price has fallen to less than $18 per share from about $20 shortly before the announcement.

Nash says she can’t control the stock market.

Wolohan agrees.

“We feel very good about the opportunity with FirstMerit,’’ he says. “It’s just a terrific organization. Paul Greig is just a terrific CEO. It’s a strong franchise. It’s a top quartile bank in terms of financial performance the last five years. It pushed through the financial crisis with continued profitability and continued to pay a very nice dividend.”

For Nash, she’s likely negotiated her way out of a job. Greig won’t need a second CEO on staff.  And instead of feeling sorry for herself, she noted that many members of her team had made significant sacrifices to strengthen the organization during the last few years.

“Many of them know they are not likely to have a job,’’ she says. “We’ve all been through this before. These are the people who made sure we had value to give to FirstMerit and they’re going to end up without a seat at the table.”

Still, she’s adamant she’s done the right thing.

“I still believe we’ve made the best long-term recommendation for our shareholders,’’ she says.


To hear more from Cathy Nash, check out this video from her keynote presentation from Bank Director's 2012 Bank Executive & Board Compensation Conference.

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Naomi Snyder is the managing editor for Bank Director, an information resource for directors and officers of financial companies. You can follow her on Twitter at twitter.com/naomisnyder or get connected on LinkedIn.

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