First Chicago Bancorp hopes its deal to merge with a subprime automobile lender will supercharge its plan to triple assets within five years.
The First Chicago Bank and Trust parent's merger with the publicly held White River Capital Inc., the Indianapolis holding company for Coastal Credit LLC, would give the $1.2 billion-asset First Chicago more capital, a higher-yielding class of loans, the visibility of a public company and a higher tangible book value.
All these things, it said, would move it closer to its goal of reaching $3 billion to $5 billion by 2013.
"This transaction gives us a great currency to grow and take advantage of opportunity in the Chicago marketplace," William Ruh, First Chicago's chairman and chief executive, said in an interview Wednesday. "Given how precious capital is, this puts us in an extraordinarily unique position of having excess capital that we can deploy opportunistically."
White River and First Chicago are familiar with each another; both count the private-equity firm Castle Creek Capital LLC of Rancho Santa Fe, Calif., as a major investor.
Shareholders of First Chicago would receive one share of White River stock for every two shares of First Chicago they own. The merger is expected to close in the fourth quarter, at which point White River would be renamed First Chicago Bancorp and Coastal Credit would become a subsidiary of First Chicago Bank and Trust.
Subprime auto lending is attractive to First Chicago because it generates high-yielding loans, though the company does not plan to build the business aggressively, said J. Christopher Alstrin, its chief financial officer.
The deal with White River, announced June 30, is the latest in a string of moves First Chicago has made since Castle Creek bought a 40% controlling stake in it in mid-2006, when it was known as Labe Bank. Since then it has changed its name, completed its first acquisition, and moved from the city to Itasca.
Mr. Alstrin said becoming a public company would not only boost First Chicago's tangible book value, but should help put it on the radar screens of banks looking to be acquired. "The deal gives us a readily discernible currency that acquisition targets can see quite clearly," he said. "They can really know what it is worth and see what they are getting, rather than hoping it just works out."
Moreover, merging with an existing public company means First Chicago would avoid the up-front costs associated with an initial public offering, though First Chicago is "soberly realistic about the costs of being a public company," Mr. Alstrin said.
Once the deal is done, subprime auto loans would make up about 10% of the roughly $1 billion loan portfolio, said John Eggemeyer, the chairman and CEO of White River and CEO of Castle Creek. At that size, the subprime business would provide First Chicago with a class of loans that could increase the net interest margin without bogging down the portfolio, Mr. Eggemeyer said.
Castle Creek owns an 18% stake in White River. Mr. Eggemeyer said that before talks began with First Chicago White River searched more than half for a good depository institution candidate to pair with the overcapitalized subprime business. Banks regulated by the Office of Comptroller of the Currency were unlikely candidates because the agency is not keen on any sector of subprime, and other banks that White River could afford had loan portfolios that were too small take on a subprime division, he said.
First Chicago's regulators — the Federal Reserve Board and the Illinois Department of Financial and Professional Regulation — "have a deep knowledge" of Castle Creek and its various holdings, including White River, and "have never expressed any anxiety over it," Mr. Eggemeyer said.
The regulators said they do not comment on specific merger agreements.
It is not unusual for a bank to have a subprime auto arm, said Robert Napoli, an analyst with Piper Jaffray & Co. in Chicago. In fact, most subprime auto lenders are tied to banks, notably Capital One Financial Corp. Those remaining independent lenders rely on the securitizations market for funding, which is "very tight right now," Mr. Napoli said.
