James J. Giancola has struck his first acquisition deal since taking over as the president and chief executive officer of Midwest Banc Holdings Inc. 17 months ago, and he said it would be a model for buyouts to come.
The $2.3 billion-asset Midwest, of Melrose Park, Ill., announced Wednesday that it had agreed to buy the $506 million-asset Royal American Corp. of Inverness, Ill., for $130.2 million in cash and stock.
Mr. Giancola said in a conference call that Midwest had pursued Royal American for four months and liked its strong balance sheet, branch network, and that it has a trust business. He also said that Midwest, which has not made a bank acquisition in three years, is not done buying.
"I would not say that this is the end of the line for us," he said. "I think size matters in Chicago."
The onetime Fifth Third Indiana president took the helm of Midwest in September 2004. At the time the company was under an enforcement order to improve its risk management and was still smarting from its failed effort to buy CoVest Bancshares of Des Plaines, Ill., a year earlier. (Regulators refused to approve the deal after Midwest was forced to add $14.7 million to its loan-loss reserves and restate its 2002 earnings.)
Mr. Giancola has restructured the balance sheet by selling off securities and using the proceeds to beef up the loan portfolio. He spun off Midwest Bank of Western Illinois, centralized credit oversight, and installed new managers at 10 of his 17 branches.
The regulatory order was lifted in September, and last month Midwest reported net income of $6.7 million for 2005, after posting a loss of $5.6 million for 2004.
Mr. Giancola said the company decided it could add new lines of business faster and more efficiently through acquisitions than building branches.
He said it would probably avoid banks that are officially for sale, because they are too expensive.
"What you can expect to see from us is acquisitions like this that are strategic in design," he said. "We are going to look for other opportunities to expand the footprint with other strategic partners."
Peyton Green, an analyst with First Horizon National Corp.'s FTN Midwest Research Securities Corp. in Cleveland, agreed that acquisitions are Midwest's best route to growth in the highly competitive Chicago market.
"I think they are right in focusing on teaming up with partners and eliminating the competition" instead of "going out with a de novo campaign and making a fragmented market more fragmented," Mr. Green said.
Midwest said it would pay 51% with stock for Royal American . The deal price is about 2.88 times the seller's book value.
The sale is expected to close at the end of the second quarter.
Jay Fritz, the chairman and CEO of Royal American, founded in 1991, said his company has built its business on lending to entrepreneurs and small manufacturers and providing them with money management services.
Midwest's branches are in the suburbs west and northwest of Chicago and would gain six more in Kane, Dupage, Lake, and Cook counties. Royal American's six branches are in markets that complement Midwest, which would go from No. 27 to No. 20 - 0.63% to 0.8% - in the Chicago area in deposit share.
Perhaps more important, buying Royal American would significantly change Midwest's deposit mix. Nearly 50% of Midwest's deposits are in high-cost retail certificates of deposit and only 41% are in transaction, savings, and money market accounts.
Less than 3% of Royal American's deposits are in retail CDs and more than 61% are lower-cost core deposits.
About 44% of Royal's loans and 37% of Midwest's are in commercial real estate. Mr. Giancola said that unlike Midwest, most of Royal's real estate loans are owner-occupied, so combining the portfolios should not cause any concentration problems with the regulators.
Midwest also liked Royal American's credit quality, Mr. Giancola said. At yearend it had no nonperforming loans on its books.
Mr. Fritz would become Midwest Bank and Trust Co.'s president and chief operating officer Most of Royal American employees, including its 15 commercial lending officers, would also stay on with the merged company, Mr. Giancola said.
