Indiana Banks and Banks and Investing and Banking & Finance

Bank merger that looked conflict-free goes off the rails

April 5, 2014

A bank merger that looked like a win for both sides has fallen apart at the 11th hour, and neither side is casting light on what derailed the transaction.

Carmel-based Merchants Bancorp announced in May 2013 that it would merge into Mooresville-based CITBA Financial Corp.—a deal initially so warmly received by CITBA shareholders that the company’s stock shot up 87 percent, swelling the value of the deal to $183 million.

Merchants is the larger institution—with $1.2 billion in assets compared with CITBA’s $378 million—and the combined institution would have taken on the Merchants name. In addition, Merchants’ principal shareholders, Michael Petrie and Randall Rogers, would have owned 80 percent of CITBA.

But this wasn’t a case of Merchants’ being the victor and CITBA being the vanquished. Merchants planned no job cuts, and the proxy statement sent to CITBA shareholders said it planned to keep CITBA CEO Lynn Gordon aboard. The proxy adds that one of the appeals of the deal was CITBA’s “strong and deep management team.”

Reached by phone, CITBA’s Gordon said, “I don’t want to be evasive, but the information in the press release is all we are referring to.”

The release—issued March 19, the day CITBA shareholders had been scheduled to vote—is a bit of a head-scratcher. It quotes Gordon as saying “that continuing delays in obtaining the necessary regulatory approvals pushed the expected closing date beyond the outside date specified in the merger agreement.”

Gordon then emphasized “that these regulatory delays had nothing to do with any regulatory concern relating to the earnings, asset quality, or financial condition of either of the banks, or with the merger transaction itself.”

It’s certainly not unusual in mergers for delays in regulatory approvals to require the parties to extend closing dates. It’s not clear why that didn’t happen in this case.

Merchants CEO Michael Petrie did not return calls, and Merchants’ investment banker, Michael Renninger of Carmel-based Renninger & Associates, said he could not comment.

CITBA, which operates as Citizens Bank, has 10 branches in Morgan, Hendricks and Marion counties, while Merchants, which operates as Merchants Bank of Indiana, has three, in Randolph and Marion counties. Merchants also owns P/R Mortgage & Investment Co., a heavyweight in apartment- and health-care-facility financing.

P/R Mortgage was attractive to CITBA in part because it throws off a robust stream of fee income. U.S. banks for years have sought to expand their non-interest income, frustrated that the prolonged era of low interest rates was squeezing loan margins.

Petrie and Rogers, alums of the former Merchants National Bank, started P/R Mortgage in 1990, a year before that bank was acquired by Cleveland-based National City Corp. They decided to revive the Merchants moniker in 2009 after acquiring Greensfork Township State Bank of Lynn and Symphony Bank of Indianapolis.

Under the deal with the Mooresville bank, Merchants shareholders were to receive 370.79 shares of CITBA stock for each Merchants share—terms CITBA’s financial adviser, Ohio-based Austin Associates LLC, deemed to be fair to CITBA and its shareholders. Austin projected that CITBA would enjoy a huge runup in earnings per share—with that figure in 2014 coming in more than twice as high as it would if CITBA remained independent.

John Reed, a veteran investment banker who was not involved in this transaction, said he was somewhat surprised when the deal was announced because CITBA is “one of the most staunchly independent banks around. … They are fiercely proud of Mooresville and their key role there.”

Indeed, Merchants put a lot of time into winning over CITBA. Renninger alerted CITBA to Merchants’ interest in late 2011, but the Mooresville bank opted against pursuing discussions. It finally agreed to open negotiations in July 2012 after concluding that “thinning net interest margins and anticipated increases in regulatory compliance costs were limiting earnings growth prospects,” the proxy said.

It’s a rarity for Hoosier bank mergers to unravel, but it’s happened from time to time. One reason parties usually work through obstacles, Reed said, is “a seller is going to be awfully reluctant to go back to business as usual because of momentum issues.”

That’s the challenge CITBA now faces. Asked whether CITBA would pursue a deal with another suitor, Gordon declined to comment, then added: “We are just going to be going ahead as Citizens Bank as an independent entity.”•

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