Taylor Capital Group Inc. is picking its battles in the Chicago market.
Instead of vying for retail business by building a huge branch network and doing a lot of consumer banking promotions, Taylor has fine-tuned its operations to be more competitive in winning over small businesses.
Over the past year, the $2.9 billion-asset company has tweaked its branch strategy, started a corporate finance division (announced in May), and continued the process of trimming its noncommercial loan portfolio, which began in 2001 when it stopped buying residential mortgages and home equity loans from brokers. Its consumer loan portfolio is 45% smaller than it was three years ago.
Jeffrey W. Taylor, Taylor Capital's chairman, said the idea was to get the company focused on businesses with revenue up to $100 million and their owners and operators.
"Chicago is probably one of the best markets in the country for executing our business model," he said.
The approach appears to be working. Taylor Capital's return on assets was 1.31% at March 31, more than double what it was a year earlier. Its efficiency ratio was 54.82%, against 67.62% on March 31 of last year.
Investors seem pleased with Taylor Capital's intensified business-first mind-set. The stock, more than 60% of which is held by insiders, is up about 42% from a year earlier and was trading at $34.35 late Tuesday. Keefe, Bruyette & Woods Inc. this week increased its earnings estimates on Taylor Capital on Tuesday and upgraded the stock to "outperform."
Taylor Capital is not giving up on retail - it is just playing to its strengths, Mr. Taylor said. It has its work cut out in the business market but perhaps faces even more competition on the retail side, with Chicago-area banks having added hundreds of branches in recent years.
Mr. Taylor said that about 100,000 Chicago-area businesses fit his company's target profile and that Cole Taylor Bank is the primary bank for about 2% of them. The subsidiary works with another 4% of the area's businesses and would like to add 1% to 2% of them to its long-term-client base over the next three to five years.
Mr. Taylor acknowledged that it will not be easy for his company to double its share of the business market.
"Competition is very fierce right now," he said. "Chicago is probably the most competitive market in the country if you look at net interest margin.
Federal Deposit Insurance Corp. statistics show that at the end of 2004 the average net interest margin for the top 50 banks in the Chicago metropolitan statistical area was 2.89%. The national average was 3.53%. Cole Taylor's net interest margin was 3.95%.
Jason Felger, the managing director of the Chicagoland Entrepreneurial Center, said banks see small- and middle-market businesses as the source of economic growth, so they actively pursue them.
Robert C. Giltner, a managing director with Alex Sheshunoff Management Services Inc. in Austin, said small- and middle-market business banking is one area where community banks can beat larger rivals because they are able to offer more personal service, they have usually been in a community longer, and can pay their bankers better.
"The personal relationships are significant enough that community banks can win" in middle-market banking, Mr. Giltner said. "The economies of scale are not as present as they are in credit card lending or mortgage lending."
One drawback to a strategy like Taylor Capital's is that it will succeed on only one or two measures, Mr. Giltner said. It might produce good net interest income, for example, but not do so well in fee income, and the company has to be willing to accept that, he said.
One advantage for niche banks, on the other hand, is in recruiting.
"Because of their narrow focus, they're able to offer richer rewards to the officers and peel away the best officers," Mr. Giltner said.
Joseph A. Stieven, the director of financial institutions research at Stifel, Nicolaus & Co. Inc. in St. Louis, said that given its location, Taylor Capital is smart to concentrate on the business side.
"Chicago is a fabulous market - the third-largest market in the U.S., with an exceptionally vibrant small- and middle-market business climate," Mr. Stieven said. "Why would you want to be focused anywhere else?"
Another example of change at Taylor Capital was the April sale of its land trust business, which Mr. Taylor said was not part of its core business, for $2.25 million.
And in November the company sold its branch in Broadview, Ill., saying the area did not have enough businesses and that the branch was too retail-oriented. This month it plans to open a branch in Orland Park, Ill., which it sees as a more robust business community. (The company is headquartered in Rosemont, Ill.)
"We can access the business owner without necessarily having a banking office nearby," Mr. Taylor said. "We're not going to be the next bank that is announcing we're going to build 30 branches."
The corporate finance unit, announced May 12, handles things like acquisition financing and bond financing for its customers. Mr. Taylor said he wants businesses to turn to Taylor Capital for guidance on all their financial needs.
Mr. Stieven said Taylor Capital knows its real value to customers is not just offering products and services.
"Banking is truly a service business," he said. "You have to make sure you are servicing your clients very well, and I think they understand this."
