Wintrust Sees Room to Go Big in Chicago

Chicago can be both charming and parochial, a rich cornucopia of some 50 different neighborhoods, many with distinct ethnic identities-and their own banks.

One example is Ukrainian Village, an enclave on the west side of the city where the home language is still heavily used. "We have employees who grew up in the community and speak Ukrainian. Our signage and marketing brochures are in Ukrainian," Feiger says. "If you don't speak Ukrainian, you can't do business there."

Illinois was among the last states to abandon old banking laws that prohibited branching. While the number of banks has been halved over the past two decades, the market still has 175 institutions with deposits of fewer than $400 million-most of them tried-and-true community banks, leveraging relationships and local know-how to scratch out profits.

One banker describes Chicago as the Afghanistan of banking-a market that's easy to enter, but can turn into quicksand for those without a solid plan.

Washington Mutual arrived in 2003 with its quirky advertising, khaki-clad concierges and fancy "Occasio" branches. By 2006, it had 180 outlets, but never gathered more than about 0.5 percent of deposits.

Wamu failed in 2008, its deposits and branches acquired from the FDIC by JP Morgan, which promptly shuttered many of those locations.

"Every year people come into Chicago thinking they have a better plan and are going to become one of the top two or three banks. And every year they fall short," South Central's Grayson says. "They think this is like their home market, but it's not. Banking is not a commodity here."

But the big banks have slowly been making inroads on the retail banking front. While the combined deposit market share of the top 10 is low, it's also jumped 7 percent in the past decade.

The competitive pressures pushed a growing number of community banks to look outside of their micromarkets, with calamitous results. In the heady pre-crisis days, many bankrolled dicey development projects in outlying suburbs like McHenry and Elgin.

Steven Hovde, CEO of Hovde Financial, an investment banking firm in suburban Inverness, Ill., says he knows of banks with construction loans that have been written down to 25 percent of their original value.

"The competitiveness of the market drove a lot of banks to make loans they shouldn't have made, and now the entire market is paying the price."

Since 2008, 40 Chicago-area banks have failed, and the numbers suggest there are more to come. According to SNL Financial, at the end of September Chicago-based banks averaged nonperforming assets of 10.85 percent, compared with 4.12 percent nationally.

In December, 36 institutions had adjusted Texas ratios above 100 percent, SNL's analysis found, indicating severe credit troubles and a risk of failure.

"Everyone talks about California being the source of the housing crisis, but things are much worse here," says Hovde, who also does business on the West coast.

While most bankers remain skeptical about the economy, it doesn't show when they're competing for business. Deposit rates today are more than double what they are in other parts of the country, while good commercial and industrial loans are being priced at Libor-plus-1 percent, and with easier terms.

"We're seeing longer-term credits[and] less emphasis on guarantees," says Michael Scudder, CEO of $8 billion-asset First Midwest. "Everyone is looking to generate additional credits in a tough environment."

Add it all up, and merely being profitable in Chicago is a major achievement. Each of the Big Four has a return on equity below 7 percent, and that's considered relatively good. According to SNL, the average ROE for a Chicagoland bank in 2012 was negative 6 percent, versus a national average of positive 9.47 percent.