September 13, 2012 / 9:10 PM / 5 years ago

TEXT-S&P revises FirstMerit outlook to negative from stable

Sept. 13 - Overview

-- FirstMerit Corp. today announced that it is acquiring Citizens Republic Bancorp Inc. in an all stock transaction valued at $912 million. After the deal is closed, FirstMerit also intends to redeem the $345 million of preferred stock Citizens Republic had issued to the U.S. Treasury.

-- We are revising our outlook on the ratings to negative from stable. At the same time, we are affirming our ‘BBB+’ rating on FirstMerit and our ‘A-/A-2’ rating on its subsidiary, FirstMerit Bank NA.

-- The outlook revision reflects our view of the integration risk and the operational difficulties FirstMerit could face in its acquisition of Citizens Republic and in its entry into the new and unfamiliar Michigan and Wisconsin markets. Rating Action On Sept. 13, 2012, Standard & Poor’s Ratings Services revised its outlook on FirstMerit Corp. to negative from stable. At the same time, we affirmed our ‘BBB+’ long-term issuer credit rating on FirstMerit Corp. and our ‘A-/A-2’ issuer credit ratings on FirstMerit’s operating subsidiary, FirstMerit Bank N.A. Rationale The outlook revision follows the announcement that FirstMerit will acquire Citizens Republic Bancorp Inc., a $9.7 billion bank holding company operating 219 branches in Michigan, Wisconsin, and Ohio. The transaction will result in a $24.3 billion organization with a 415 branch franchise operating across Ohio, Michigan, Illinois, and Wisconsin. FirstMerit will issue $912 million in common stock to fund the transaction and $350 million in a combination of debt and preferred stock to repay Citizen Republic’s TARP preferred stock at the time of the deal’s close, which we expect to occur in the second quarter of 2013. In our view, this acquisition could present integration and risk management difficulties for FirstMerit. This deal represents the largest acquisition in FirstMerit’s history, both in terms of asset size and as a percentage of assets. Moreover, although we recognize the solid progress Citizens Republic’s relatively new management has made in reducing its nonperforming loans and returning to profitability, the entity has only recently rebounded after experiencing severe losses from 2008-2010. Although FirstMerit successfully integrated three acquisitions in Chicago in 2010, these were smaller and concentrated in one market, with loss-sharing agreements limiting the potential risk in two of the deals. Although Michigan and Wisconsin are in many ways similar to FirstMerit’s traditional market of Ohio, they still present new challenges and potentially different competitive dynamics. That said, if FirstMerit successfully integrates Citizens and is able to sustain current performance, we would view the increased diversity of its franchise positively. We expect that, following the completion of the acquisition, FirstMerit’s capital measures will decrease modestly, with the company’s pro forma tangible common equity remaining higher than 7% of assets and its risk-adjusted capital remaining within our 7%-10% “adequate” range (as our criteria describe the term). Although we view the decline in capital ratios as a slight negative, we believe that the company intends to rebuild its tangible common equity ratio to its current 8% in less than two years. The ratings also incorporate the expectation that the company’s marks on Citizens loan portfolio of $378 million, or 6.8% of Citizens June 30 loan balance (to total 19.1% of original book value including life to date charges Citizens has already taken), will be sufficient to protect it from any significant unexpected deterioration in Citizen’s loan portfolio. If, however, losses exceed the marks, we would view that as a negative factor in our assessment of FirstMerit’s risk position. The company’s funding will continue to be robust relative to peers, with a pro forma loan/deposit ratio of about 80%. Outlook The negative outlook reflects our view of the risk management and integration risks of the Citizens Republic acquisition. If management is not able to successfully integrate Citizens, or if unexpected asset quality problems exceeding the marks taken at the time of the acquisition arise, or if risk-adjusted capital falls below 7%, we could lower the ratings. Conversely, in the long term, if FirstMerit effectively establishes itself and grows in these new markets, sustaining consistent profitability and strong credit quality, we could revise the outlook back to stable. We do not foresee raising the ratings in the near to immediate term. Ratings Score Snapshot Issuer Credit Rating A-/Negative/A-2 Bank Holding Company Rating BBB+/Negative/-- SACP a- Anchor bbb+ Business Position Adequate (0) Capital and Earnings Adequate (0) Risk Position Strong (+1) Funding and Liquidity Above average and Adequate (0) Support 0 Additional Factors 0 Related Criteria And Research

-- Banks: Rating Methodology And Assumptions, Nov. 9, 2011

-- Banking Industry Country Risk Assessment Methodology and Assumptions, Nov. 9, 2011 Ratings List Ratings Affirmed; Outlook Action

To From FirstMerit Corp. Counterparty Credit Rating BBB+/Negative/-- BBB+/Stable/-- FirstMerit Bank N.A. Counterparty Credit Rating A-/Negative/A-2 A-/Stable/A-2 Certificate Of Deposit Local Currency A-/A-2 Complete ratings information is available to subscribers of RatingsDirect on the Global Credit Portal at All ratings affected by this rating action can be found on Standard & Poor’s public Web site at Use the Ratings search box located in the left column. Primary Credit Analyst: Catherine C Mattson, New York (1) 212-438-7392; Secondary Contact: Daniel E Teclaw, New York (1) 212-438-8716;

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