A pair of recapitalization deals in suburban Chicago shows that investors are now ready to give struggling banks in the Second City a second chance.
The separate transactions lined up to rescue DG Bancorp in Downers Grove, Ill., and First Suburban Bancorp Corp. in Maywood indicate that, if a damaged bank in this failure-ridden area can prove its condition is unlikely to worsen, it can attract buyers.
"A year ago, no one could do this. No one was willing to try to catch a falling knife," said James Kaplan, a partner in DLA Piper in Chicago, who is representing the buyers of First Suburban. "We are now reaching a point in the cycle where the underlying collateral of the nonperforming assets at some banks is not losing its value at the same rate as before. The knife has hit the table."
Late Monday, the $1.56 billion-asset BankFinancial Corp. in Burr Ridge, Ill., said it would buy the $240 million-asset DG Bancorp, parent of the troubled Downers Grove National Bank.
Meanwhile, an investor group tentatively known as the Zaring Group has tossed a lifeline to the $150 million-asset First Suburban. The group has applied to the Federal Reserve to take a 75% ownership stake in the struggling commercial bank.
The Chicago-area market has been an epicenter of bank failures in recent years. So far this year, 15 Illinois banks have failed, the bulk of them in the Chicago area. That compares with 23 failures in Florida — the No. 1 state for failures in 2010 — and 11 in Georgia.
Yet recently Chicago also has been a hub of rescues, and rescue attempts. In July, the $56 million-asset Family Federal Savings of Illinois narrowly escaped failure through a last-minute deal with GreenChoice Bank.
The same investors, though, backed Urban Partnership Bank, a de novo created to buy ShoreBank from the Federal Deposit Insurance Corp.
More open-bank deals for struggling institutions could be spurred by the growing competition to buy failed banks. Though the buyers in open-bank deals do not get government backstops such as those offered by the FDIC, the prices can be cheap.
BankFinancial is expected to pay $2 million for DG Bancorp. The price could be reduced to as little as $1.3 million or increased to as much as $5.2 million, depending on DG Bancorp's expense management and its credit performance leading up to the closing.
"BankFinancial is getting a screaming deal on three branches that are a good strategic fit with their network," said Justin Barr, the president of Loan Workout Advisers, a Chicago consulting firm. "That is a no-brainer."
In a conference call Tuesday, BankFinancial Chairman and CEO F. Morgan Gasior said his company had considered acquiring the bank before.
"We never felt the time was right or the circumstances were right," he said. "Now the environment is such that we decided to once again explore a transaction."
Gasior did not return calls for comment. In the conference call he said the company conducted due diligence over several weeks and is comfortable with the losses it expects to take as it works through Downers Grove National's portfolio.
Gasior said his company's thrift has customers in the town of Downers Grove, but no branches, so the deal would let BankFinancial improve service to these customers and expand into a suburb it is "difficult to penetrate."
As of June 30, noncurrent loans made up 12.79% of Downers Grove National's portfolio, and the bank was undercapitalized, with a total risk-based capital ratio of 7.57%.
The consultant Barr said the bank's problem loans are virtually all in nonaccrual status, meaning there is not a pipeline of further problems. "Their problems appear to be well identified and very much in process of being addressed," he said. "For BankFinancial, that hopefully means not a lot of surprises."
The same is true of First Suburban, Barr said. As of June 30, 17.47% of its loans were noncurrent. And its total risk-based capital ratio had dwindled to 5.46%, causing it to be undercapitalized.
DLA Piper's Kaplan would not say how much will be invested in First Suburban but said it would be enough to return the bank to well capitalized status. The infusion would be made alongside one from an unidentified investor, who would take a 19.9% stake in First Suburban. The remaining shareholders would be left with about 5%.
Though the bank has a high proportion of nonperforming assets, they are concentrated in commercial real estate such as office buildings, rather than the raw land that has plagued other troubled borrowers in Chicago.
First Suburban is in Maywood, a working-class suburb that was dealt a blow last year with the failure of Park National Bank, a unit of the $19 billion-asset FBOP Corp. Park National was well regarded for its commitment to the community.
"They've lost a lot of their independent banks, and First Suburban is one of the last ones there," Kaplan said. "The investors want to keep at least this bank."
The Zaring Group, whose application the Fed disclosed Sept. 3, includes some Eastern European Jewish investors, who sense an opportunity to offer banking services to this community of recent immigrants to Chicago, Kaplan said. "They see that market as underserved and see that as a niche."