CHICAGO — Is the banking market here ripe for consolidation?
Five deals have been announced so far this year, according to SNL Securities LC, a unit of SNL Financial, compared with one at this time last year — and many in the industry expect the deal pace to hold up.
Driving the activity, they say, is competition. The Chicago area is already the nation's most fragmented banking market, and this, combined with the competitive pressures all banks face these days, is making it difficult to grow organically, said Daniel Cardenas, the director of research at Howe Barnes Hoefer & Arnett.
At the same time, Chicago remains the best banking market in the otherwise sluggish Midwest, so larger community banks there could be prime acquisition targets for regional banks, said Mr. Cardenas, who recently co-wrote a research report in which he predicted brisk merger-and-acquisition activity in Chicago this year.
In his report, Mr. Cardenas named 10 banking companies with $2 billion to $12 billion of assets that he believes are the most attractive targets. They include Midwest Banc Holdings Inc. in Melrose Park, First Midwest Bancorp Inc. in Itasca, Taylor Capital Group in Rosemont, Wintrust Financial Corp. in Lake Forest, and MB Financial Inc. in Chicago.
In an interview he said he also expects to see consolidation among smaller banks aiming to improve their competitive position vis a vis larger companies.
"It is the bigger fish eating the smaller fish, eating the smaller fish kind of scenario," Mr. Cardenas said.
The Chicago metropolitan statistical area has more banks than any other major market in the country, and after several years of torrid branch building, it has more bank offices than any other market except New York. It is so fragmented, Howe Barnes reported, that the top 10 players control only about 59% of the deposit market share, compared with cities where the top 10 typically control about 75%.
Though Howe Barnes has identified the $2.9 billion-asset Midwest Banc Holdings as a potential takeover target, the company is very much a buyer at the moment; it said last month that it would buy the $538 million-asset Northwest Suburban Bancorp in Mount Prospect, Ill., for $139.8 million in cash and stock.
James J. Giancola, Midwest's president and chief executive officer, said that Chicago-area banks looking to achieve meaningful growth need to buy, not build.
"We believe firmly that the market is ridiculously overbranched now and the cost of branches is prohibitive. It is lower-risk to acquire a branch that has $90 million of deposits in it and people to run it," he said.
The $8.4 billion-asset First Midwest was also on Howe Barnes' takeover-target list, because of its size and its No. 12 deposit-share position. But John M. O'Meara, its president and CEO, said First Midwest views itself more as a buyer than a seller.
"We know how to acquire," he said. "We've bought 14 companies in the last 17 years."
Mr. O'Meara said he expects dealmaking to pick up this year as the climate becomes more challenging — especially for smaller banks. Indeed, he has seen a steady stream of offering books from banks that are eight to 10 years old and have $400 million to $600 million of assets.
Several banks in that asset class, if they put themselves on the block, would prompt him to want to "make them part of First Midwest," he said. He declined to name them.
Howe Barnes also wrote that the $3.4 billion-asset Taylor Capital has hit a rough patch and might consider a sale if management decides it would be in shareholders' best interest.
In March, Taylor Capital revised its 2006 results, saying it had more nonperforming assets than originally reported. At yearend it had $33.2 million of nonperforming loans, or 55% more than reported in its Jan. 25 earnings release, but it said the correction's impact was not material to net income.
Bruce W. Taylor, the chairman, president, and CEO, said that Taylor plans to stay independent, though it faces more challenges than in the past.
"There has been no change in our strategy of continuing to build business," he said. "That is our intention, and that is what we are investing in and spending all day doing."
The company recently restructured its management, moving Mr. Taylor's brother, Jeffrey W. Taylor, from the posts of chairman and CEO to executive managing director of market development and new ventures.
Bruce Taylor said that a wave of consolidation did not necessarily mean fewer banks. "There is a potential for some additional consolidation, but every time we say that, there is a new crop of de novos," he said.
One banker unconvinced that the dealmaking pace will persist is Edward J. Wehmer, the president and CEO of the $9.6 billion-asset Wintrust Financial.
Wintrust was an active buyer this decade but has been on the sidelines lately because prices are too high, he said. Banks are now worried about overpaying, he said, because they can see persistent pressures from the yield curve, competitors, and funding costs.
"Everyone still wants top dollar," Mr. Wehmer said, but "buyers are saying, 'I am not paying top dollar because I am looking in the same crystal ball.' "
Pressure on stock prices could also slow activity, Mr. Giancola said. Midwest's stock, for example, is down about 27% this year. "A lot of us on the buy side have had a significant compression in stock price, so our ability to pay is impaired," he said.
A wild card in any potential Chicago consolidation is the fate of LaSalle Bank, which has the No. 2 market share here.
The $73 billion-asset LaSalle has been rumored to be on the block, and if it changes hands, it could either encourage more banks to pair up to deal better with the new competitor or slow down the deal pace as banks instead try to woo LaSalle customers and employees, bankers said.
LaSalle is owned by ABN Amro Holding NV in the Netherlands, which is in talks to merge with Barclays PLC. ABN Amro also said last week that it has received a joint letter from a consortium of Royal Bank of Scotland Group PLC, Banco Santander Central Hispano SA, and Fortis NV asking to talk about a possible deal.
Speculation has arisen that a new owner might sell LaSalle to another U.S. bank because LaSalle is a small part of ABN Amro's global presence and selling it could help finance the deal. Bank of America Corp. in Charlotte has shown interest in buying LaSalle.
And on Tuesday Citigroup Inc. CEO Charles Prince said his company is considering expanding its retail banking network in the Midwest, though he did not specify a market or banks it might be interested in buying.
First Midwest's Mr. O'Meara, for one, likes the idea of LaSalle's being bought by a larger bank.
LaSalle is "probably the most outstanding practitioner of middle- to upper-middle-market banking in Chicago and has been for 10 years," he said. A change of control "would put a lot of their customers in play, I believe."
