Entering PrivateBank's Chicago headquarters is like stepping back in time. Other once-grand bank lobbies that lined South LaSalle Street have disappeared into floors of cubicles as the foreign and out-of-state banks that absorbed old Chicago names renovated for efficiency. But PrivateBank has a multi-storied hall, laced with tall Doric columns and capped by a stained-glass skylight.
The bank early last year moved into several floors of the Art Deco tower best known as the home of its original tenant, American National Bank, and more recently of JPMorgan Chase & Co. until it moved across the street. It's with particular enthusiasm that PrivateBank's chief executive Larry Richman-whose banking career began in this same building more than three decades ago-offers a tour of the imposing space. "It fit our needs perfectly," he says. "We were thrilled that this building became available."
The needs included larger space for scores of ex-LaSalle Bank lenders hired since 2007, as well as an image upgrade for PrivateBank and its holding company, PrivateBancorp. The lobby is a symbol of its ambition to become the primary choice of middle-market companies in Chicago, the go-to institution for growing firms that yearn for the old-style connections and personal touch of a locally operated bank. In other words, what LaSalle used to be before its sale to Bank of America in 2007.
"We think there is a place in this city for a hometown commercial bank, and Chicago really doesn't have one at this point," says Richman. "We think we are becoming that bank."
PrivateBank launched a daring, unprecedented raid on BofA within days after it bought LaSalle. Ralph Mandell, then PrivateBank's CEO, sensed an opportunity to fill a void in the market for lending to middle-market firms and snatched roughly 160 experienced bankers, including Richman, who was LaSalle's CEO at the time of the sale.
It was a sharp turn for a bank founded in 1989 as a lender to the wealthy. As the name suggests, it was modeled after exclusive institutions (think Swiss banks) that Mandell had visited on trips to Europe.
Daniel Arnold, an analyst at Sandler O'Neill & Partners, says the raid was unlike anything he'd seen in commercial banking. While the cost of bringing on teams of lenders was high, the business they brought with them helped to more than triple the bank's assets, to over $12 billion, in just two years.
"PrivateBank's story is about as sexy as it gets," Arnold says.
Yet there have been growing pains. To fuel its expansion PrivateBank relied heavily on brokered deposits, which accounted for a third of deposits at one point in 2008, more than three times the level that regulators define as risky.
Far more troubling was the surprise $31.2 million loss PrivateBancorp reported in last year's third quarter after loan delinquencies nearly doubled in three months. On the October day it announced earnings, its shares, besieged by short sellers who had smelled blood, plunged nearly 40 percent.
Most of its woes arose from commercial real estate loans made before 2007, but enough of the new loans were problems to stoke concerns. Maybe, too, the bank might have managed older problems better if it hadn't been so focused on the growth plan. Even Mandell, the plan's architect and still chairman of the holding company, PrivateBancorp, concedes now that it grew too fast.
"If you knew what was coming, had absolutely known what was coming, would you have gone slower? Yes," Mandell says.
Coming off a year in which it lost $63 million, the company is regrouping. In January, Richman told investors that it is not yet "out of the woods as it relates to stress on our credit portfolio" and that it would take a break from aggressively booking loans and focus on managing its asset quality.
Flush with capital from a recent stock offering, it's also open to acquisitions, including of failed banks, Richman says.
But PrivateBank's plan all along was mainly to grow organically, and despite the recent setbacks, that hasn't changed. Richman says that with the capital and talent it has in place, the company could eventually double or triple its assets.
"Now we're just waiting for the economy" to recover, he says.
Richman shows no signs of stress as he walks sprightly through the bank's lobby. Chicago-born-and-raised, Richman, 57, was a young banker in the same building several decades and bank names ago. He waves to a corner of the banking floor where he started as a young trainee at the old American National under Norman Bobins, then the bank's head of commercial lending.
Bobins and Richman moved a few years later to Exchange National Bank and the pair rose through the ranks after Exchange was bought by LaSalle. Though LaSalle was owned by the Dutch banking giant ABN AMRO, the Chicago bank was allowed to operate independently. Together, Bobins and Richman helped build it into the biggest middle-market lender in the city.
Richman took over as LaSalle's CEO from the retiring Bobins in the spring of 2007. (Bobins has rejoined Richman. He is now the chairman of PrivateBank.) But days before Richman took the helm at LaSalle, storm clouds that had been gathering over ABN AMRO opened in a torrent. A London-based hedge fund called for the breakup of ABN AMRO, whose share price had stagnated for years, and just months after Richman's promotion, LaSalle was sold to BofA.
"It was disappointing, no question," Richman acknowledges, and then pivots to talk about the lessons learned. "I learned under fire what it was to be a leader. We had to work to keep together a large group of people who didn't know what their future held. It took a lot of emotion."
Richman retired after the sale closed, though he never intended to be out of work for long. Soon he was fielding calls from Mandell, the cofounder of the-then $4.5 billion-asset PrivateBancorp, who had already begun poaching LaSalle's commercial bankers. Mandell launched his audacious plan quickly after hearing about the BofA deal, saying it took only 20 minutes for the implications to sink in: "It was a once-in-a-lifetime opportunity," Mandell says. "We decided we were going to go for the gold. We weren't going to settle for bronze."
Richman projects the same calm, even-keeled personality that was his hallmark as long ago as high school, says a boyhood chum. "Larry was no nerd-he was fun with a great sense of humor-but he always seemed more mature than the rest of us," says Russ Strobel, a friend from the Chicago suburbs who now is a CEO himself, of Nicor Inc., a gas-distribution company. "He had a steadiness that has served him well."
Stability has characterized Richman's career (he stayed in place for a quarter of a century) and his personal life (he's married to the girl he dated in high school). It's so disciplined a life that even he can laugh at it, once joking about having flustered a familiar waiter by finally ordering a different lunch. The order was, in fact, a mistake.
But Strobel says he's not surprised Richman jumped into a fast-growth venture. "Larry also has an appetite for a challenge."
Certainly the meltdown of the financial markets has been a big one. At first, PrivateBancorp, which also has a small subsidiary in Milwaukee, appeared to be weathering the crisis fairly well, reporting decent though not spectacular profits in the first half of 2009. But investors were clearly spooked after the company reported in late October that nonperforming loans soared to nearly $400 million in the third quarter. By early November, the stock would bottom out at below $9 a share, or only about a third of where it was trading three weeks earlier.
Even worse for investors, PrivateBancorp at the same time announced it intended to raise $175 million in capital through a stock sale to fund its expansion. With the stock in a free fall, existing shareholders were burned when the new shares sold for much less than what they paid for them.
Investors complained that the company could have announced the loss earlier and gauge market response before proceeding with the stock sale.
"Believe me, I lost a lot of sleep over it," says Jason Tyler, senior vice president at Ariel Investments, one of a number of Chicago firms with investments in PrivateBancorp. Ultimately, though, Ariel stuck with the company, and even bought more shares at the cheaper price, because it believes in the management team.
"We still think they're good people," Tyler says. "It's good that they're an experienced group of bankers who have all worked together before."
Last fall's stumble appears to pain Richman, whose voice drops just a bit when acknowledging the damage the stock sale caused some key backers. "None of us anticipated what would happen to the share price," he says. "We were incredibly disappointed by the third-quarter results."
Yet, while awkwardly timed, the October stock sale capped a three-year period in which PrivateBancorp raised about $850 million in capital. The company now reports a Tier 1 ratio that approaches 12.5 percent. About $250 million of the company's capital is courtesy of the U.S. Treasury's Troubled Asset Relief Program, but Richman says it is welcome money that provides a nice cushion, and he is in no hurry to repay it.
"I've been through a lot of cycles in banking, and not seen one this deep and this long," he says.
The economic storm will pass, Richman says, and until then PrivateBancorp might even pick up some of the flotsam. The capital puts it in a position to not only weather its problems, but to perhaps buy failed Chicago-area banks from the Federal Deposit Insurance Corp.
"Chicago is a hotbed of FDIC-assisted deals," says Anthony Davis, an analyst at Stifel Nicolaus & Co. "It probably will be for the next 12 to 24 months."
PrivateBancorp got a taste of FDIC deals in July when it bought the failed Founders Bank, which had 11 branches in the Southwest suburbs of Chicago and about $850 million in deposits. The deal helped the company lower its dependence on brokered money, a process that was already well underway, to just 6 percent of deposits.
PrivateBancorp will approach other FDIC deals selectively, Richman says. But growth can't wait too long because the company is carrying an expensive staff primed to transform the company into an asset-generating powerhouse. For now, Richman has moved idled lenders to workout groups. It's those employees, and its strong capital base, that can put the bank back on its trajectory, he says.
PrivateBank is not the only Chicago-area institution eager to raise its profile among middle-market companies. MB Financial Inc. has added more than $3 billion of assets over the last two years-it bought four failed banks in 2009-significantly boosting its lending limits. "We do sense the same opportunity" as PrivateBank, says Mitchell Feiger, the CEO at the $11 billion-asset MB Financial.
Yet while MB Financial has a strong capital base, too, it would struggle to match PrivateBank's firepower. Chicago is known to be a city where business is particularly dependent on personal relationships, and PrivateBank now has a small army of well-connected bankers.
Richman himself is the consummate networker who sits on the boards of leading Chicago museums and was on the committee for the city's bid to host the 2016 Olympics. He also makes a point of meeting with two clients a day.
"At PrivateBank, they know their commercial customers as well or better than any other bank I follow," says Stifel's Davis.
PrivateBank's sweet spot is companies with annual sales between $20 million and $2 billion. That's "a fertile market in Chicago that's been virtually deserted by the large banks that once catered to it," Davis says.
BofA disagrees with that assessment, saying it has, in fact, added more middle-market customers since taking over LaSalle. Nationwide, the bank says it has relationships with one-in-three companies in the middle market. Loans are down, but that's because creditworthy companies are borrowing less, says Gene Godbold, the bank's Midwest region executive for global commercial banking. "We're in a great position for when the economy comes back. We'll see our loans increase significantly."
But some former LaSalle customers say that that personal banking turned institutional after the takeover. For 15 years, Oberweis Dairy had dealt with specific officers at LaSalle, says Joe Oberweis, the company's president.
He casts the frustration in terms that can be understood by any consumer: After the merger, Oberweis was handed an 800 number for customer service. "It was nothing but a plain old call center," he says. Instead, he rang up his old bankers who had gone to PrivateBank.
Despite some missteps on its way to becoming the next LaSalle, that connection with customers is why Richman is confident his company can execute the growth plan Mandell mapped out nearly three years ago.
After all, he says, remember LaSalle: "We have done this before."