As James J. Giancola, the president and chief executive of Midwest Banc Holdings, sees it, the Chicago area is overbanked and overbranched, and the only way for banks there to grow is through acquisitions.
For the second time in about 13 months, the Melrose Park, Ill., company has struck a deal for a suburban Chicago community bank. Late Thursday, Midwest announced that it would buy the $538 million-asset Northwest Suburban Bancorp in Mount Prospect for $139.8 million in cash and stock.
The deal would boost Midwest's assets to about $3.5 billion and give it five more branches, for a total of 29, in the Chicago suburbs.
In a conference call Friday, Mr. Giancola said he definitely would rather buy than build. Last year Midwest acquired a similar-size banking company, the $506 million-asset Royal American Corp. in Inverness, in a similar market.
"I don't believe there is an opportunity to grow our organization with de novo branches. They are too expensive, there are too many of them, and the payback is way too long," Mr. Giancola said.
At June 30, Midwest had a 0.63% deposit share in the Chicago metropolitan market. The Royal American deal, which closed in July, and the deal for Northwest Suburban, the parent of Mount Prospect National Bank, would boost that figure to 0.93%, according to Federal Deposit Insurance Corp. data.
Perhaps more importantly, though, the deal would further diversify Midwest's loan portfolio.
With the real estate market cooling and regulators tightening their scrutiny of portfolios heavily concentrated in construction and commercial real estate, Midwest has been deemphasizing construction lending and seeking acquisition targets that are more focused on commercial and industrial lending.
"Northwest has a substantial and growing base of commercial and industrial customers," Mr. Giancola said in a press release. "Coupled with the acquisition of Royal American, we have significantly broadened our capabilities in commercial and industrial lending to owner operators."
(About half of Northwest Suburban's portfolio is in commercial real estate, he said, but most of those loans are for owner-occupied commercial real estate, which is less risky and viewed differently by regulators.)
Mr. Giancola said in an interview that he already has reached agreements to retain 13 of Northwest Suburban's top lenders and is negotiating with others.
"You need the talent to grow the revenue base. We're using this acquisition to grow the talent pool, as well as the balance sheet," he said.
Eric J. Grubelich, an analyst with KBW Inc.'s Keefe, Bruyette & Woods, Inc. in New York, said the Northwest Suburban deal is exactly the type of deal Mr. Giancola has discussed since he took over Midwest in September 2004.
"I would expect him to do more in that mold," Mr. Grubelich said.
The price is equal to about 2.82 times Northwest Suburban's book value, a multiple well above what Illinois banking companies have been fetching of late.
There have been 29 deals for Illinois banking companies since the beginning of 2006, and the average price-to-book multiple is 2.53 , according to SNL Securities LC. Factor out the deal in which American Home Mortgage Investment Corp. paid more than 9.6 times book for Flower Bank, and the average falls to 2.19.
Ben Crabtree, an analyst with Stifel, Nicolaus & Co. Inc., called the price "fairly generous," but Mr. Giancola said that Midwest had to make a reasonable offer if it wanted to get the deal done.
