Muted Goals in Midwest: Cross-Sell, Contain Costs

CHICAGO — Investor conferences are generally upbeat affairs, but the mood at the Midwest Super Community Bank Conference here last week could be best described as subdued.

Bankers who in recent years might have highlighted aggressive branch-building or acquisition plans in their presentations instead outlined far less sexy strategies for this year: controlling expenses and cross-selling to current customers.

What has changed, of course, is the operating environment. Margins have been squeezed by a persistently inverted yield curve and fierce competition for loans and deposits, and pressure on banks — especially community ones — is not expected to ease any time soon.

Daniel E. Cardenas, the director of research at Howe Barnes Hoefer & Arnett Inc. in Chicago, said that since bankers cannot control the yield curve or the competition, they have "to keep a watchful eye on the expense side and control that to the greatest degree possible."

Take Wintrust Financial Corp., a 15-bank holding company in Lake Forest, Ill. Since mid-2003 it has bought eight banks and more than doubled its assets, to nearly $10 billion. But its fourth-quarter earnings fell 20% from a year earlier, to $15 million, and its full-year profit declined last year for the first time in its history, falling 0.7%, to $66.5 million.

Edward J. Wehmer, Wintrust's president and chief executive officer, said at the conference that his company always has tried to grow by buying and starting banks — it has opened nine banks since 1991 — but plans to take a breather to focus on organic growth.

"After 15 years of running awfully hard, we can take a year and look inward. Let's fill out what we have right now," Mr. Wehmer said.

Most importantly, though, Wintrust needs to lower overhead, specifically its funding costs, he said.

Wintrust's fourth-quarter cost of funding its earning assets grew 90 basis points from a year earlier, to 3.94%, according to statistics from the Federal Deposit Insurance Corp.

Mr. Wehmer wants to lower funding costs by 25 to 30 basis points, and he said Wintrust could do so by changing its deposit mix. At yearend 61% of its deposits were in certificates of deposit, and he said he wants to get that figure down to 50% "over time" by getting more core deposits from commercial customers.

Another company that is looking to dial back its growth is the $2.5 billion-asset Bank of the Ozarks Inc. The Little Rock company has opened 37 of its 67 branches in the last four years, including 11 last year. George Gleason, its chairman and CEO said at the conference that it plans to open just five this year.

"Our plans for 2007 are much more tame," he said.

Old National Bancorp in Evansville, Ind., has approached expense reduction by closing some branches in stagnant markets and by opening branches in faster-growing ones — and the strategy is starting to pay off.

Robert G. Jones, the $8 billion-asset company's president and CEO, said it has closed seven branches the last six months and opened six in the past two years, including three in Indianapolis. Last year its net interest margin grew 6 basis points, to 3.15%.

Mr. Cardenas said that bankers are not stopping their expansion plans altogether, but that many are being cautious, because they see little room for error.

"The general sense I got is that everyone is after prudent growth," he said. "I don't think anyone wants to grow at the expense of credit quality. You throw that on top of the margin pressure, and that could really hamper earnings per share growth."

Not that he expects much in the way of earnings growth this year — especially among companies he covers in the slow-growing Midwest. "Absent any yield curve relief, I don't see a lot of companies posting meaningful earnings per share growth," he said.

Ben Crabtree, an analyst with Stifel, Nicolaus & Co. Inc. in Baltimore, agreed that there would not be much earnings growth this year.

"Almost all the companies I saw present are going to have real trouble matching their long-term earning growth rates in 2007," he said at the conference.

The biggest challenge for community banks is finding ways to increase revenue while working against an unfavorable yield curve, narrow credit spreads, and intense loan competition from not just other banks, but also from nonbanks such as real estate investment trusts and insurance companies, he said.

Some of the banking companies presenting at the conference said that given the competition for new customers, their best chance for increasing fee income would come in cross-selling current customers.

For example, the $3.4 billion-asset Taylor Capital Group in Chicago is aiming to generate more fee income by pitching wealth management, investment management and cash management services to its corporate borrowers.

"Our opportunity to increase relationship profitability is all about gaining, to use a retail term, more of the share of the wallet — in terms of the business that our business owners and their businesses are doing with us," Bruce W. Taylor, its new chairman and CEO, said at the conference.

Jeffrey W. Taylor, Bruce's brother, stepped down as the chairman and CEO in December to become the executive managing director of market development and new ventures. He is in charge of drumming up business in the fiercely competitive Chicago banking market.

Margolin & Associates Inc., an investor relations firm that specializes in small and midcap banks, organized the conference.

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