Taylor Capital Group (TAYC) in Chicago is in talks to sell its mortgage bank in tandem with its own sale to MB Financial (MBFI).

The $5.9 billion-asset Taylor told employees of its Cole Taylor Mortgage unit in an email July 16 that for the past three months "we have talked with a significant number of potential financial partners," including private-equity investors. Those conversations have advanced, according to the email, which was included with a regulatory filing.

"We are currently in more detailed discussions with several private-equity firms," Willie Newman, the mortgage bank's president, wrote in the email. "The nonbank segment of the mortgage banking industry has grown dramatically in the last several years. Therefore, this is a very exciting time to work with private equity to determine how to build a major mortgage market participant."

The talks are a sign of the times. Many banks are struggling to cope with the effects of rising interest rates, while PE firms have been actively consolidating mortgage firms.

Wells Fargo (WFC) and Citigroup (NYSE:C) are laying off hundreds of employees of their mortgage units, Fifth Third Bancorp (FITB) said last week it will seek to cut mortgage-related expenses and JPMorgan Chase (JPM) warned this month that mortgage revenues could drop by 30% to 40% in the second half of 2013 if interest rates remain elevated.

Meanwhile , nonbanks like Ocwen Financial (OCN), Nationstar Mortgage and others have been busy acquiring a wide range of mortgage companies, and investors like Wilbur Ross have profited from buying and selling mortgage-related companies.

Taylor announced it would sell itself to the $9.4 billion-asset MB Financial for $680 million in cash and stock. The deal is priced at 1.8 times Taylor's tangible book value.

The mortgage bank, which was launched in 2010, has propelled Taylor's earnings over the last couple of years. Despite that, Mitchell Feiger, the chief executive of MB, says his interest in Taylor sits squarely on its commercial lending prowess.

"I started out telling you how Taylor's traditional commercial banking business fits with MB's, because that's what we are most interested in in this transaction and we are acquiring Cole Taylor Bank," Feiger said during a conference call to discuss the deal last week. "That's the key driver of our decision."

Feiger complimented the performance of the mortgage bank unit but basically said he could take it or leave it. MB is not a big mortgage player on its own.

"You need to know that our financial and strategic analyses for this transaction assume very, very little future contribution from the mortgage company," Feiger said in the call. "So low in fact that we would have been willing to buy the bank only for just about the same price that we are paying for the bank and the mortgage company."

To that end, Feiger said the deal allows for Taylor to attempt to sell the business. Proceeds in excess of $57 million plus expenses after tax would go to Taylor's shareholders.

Feiger said he doesn't think the mortgage bank will sell, or sell at a price that would give Taylor shareholders additional cash.

"We expect and are assuming that even if Taylor markets the mortgage business for sale, a sale is either unlikely to occur, or if it occurred, would be very unlikely to yield an amount sufficient to generate additional merger consideration for Taylor's shareholders," he said.

Despite his discussions with private-equity players, Newman said he was still trying to change MB's mind about the value of the mortgage business and how it could grow as part of the consolidated company.

"In order to better understand the opportunity with MB Financial, we are initiating more in-depth discussions with executives from MB," Newman said in the email.

Feiger said in the conference call that the speed of the negotiations between MB and Taylor is part of the reason for his reluctance toward the mortgage unit.

"We've been moving at a very fast pace here … we've been talking in depth let's say for four weeks," Feiger said. "That is not enough time for me … to have thought through and investigate thoroughly enough the mortgage business to understand what direction we should take it or would want to take it."

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