Chicago is often favorably described as the city of neighborhoods, and in banking circles it has a similar reputation for multiplicity – except that's not necessarily a compliment in banking.
Unit banking laws that remained intact into the1960s fostered scads of single-branch community banks. The Windy City landscape is still littered with small, privately held banks as a result. It has always been assumed that many of them could not survive and would have to sell themselves, and to be sure the Chicagoland area has seen its share of M&A in recent years.
But the more obvious deals, the ones that follow the traditional pattern of big fish buys small, have been done, and that reality raises several questions about the nature of M&A in Chicago and other oversupplied markets around the country.
Are there enough classic buyers and sellers left?
The answer is no, not exactly. The number of big fish is shrinking, and so is the size (and appeal) of the targets.
Since 2010, there have been more than 90 deals announced in Illinois, and recently some of the larger community banks in the Chicago area have announced plans to sell.
Canadian Imperial Bank of Commerce recently agreed to buy PrivateBancorp for $3.8 billion, and that deal would leave the city with fewer large players based in the area.
"Every night before I go to bed, I pray for more buyers," said William Burgess, a principal in investment banking at Sandler O'Neill. "Right now it remains a buyer's market because there is just an insufficient number of buyers. I don't think that will change anytime soon."
Besides the CIBC-PrivateBancorp deal, First Midwest Bancorp has agreed to buy the $2.5 billion-asset Standard Bancshares for $365 million, and MB Financial said it would buy the $2.8 billion-asset American Chartered Bank for $449 million.
Once those deals close, there will not be any banks based in the Chicago area with between roughly $3.5 billion of assets and $14 billion of assets, Burgess said.
"A big bank deal in Chicago usually involves a seller with $1 billion of assets," said Christopher McGratty, an analyst with Keefe, Bruyette & Woods. "But there's not too many of them left. The majority of consolidation is under the radar with these smaller banks being rolled up."
Who will drive the deals then?
A few classic candidates remain: the $23.7 billion-asset Wintrust Financial, the $10.6 billion-asset First Midwest and the $15.2 billion-asset MB Financial.
The challenge for prospective sellers is that these banks can afford to be choosy, erring on the side of larger banks that are worth the integration costs that come with any deal.
Wintrust in Rosemont, Ill., is one exception to this and has shown a willingness to buy smaller banks. That trend is likely to continue. It has never purchased a bank that was larger than $1 billion and three of its last four bank deals involved sellers that had less than $200 million of assets.
"They are very good at buying things below value," Burgess said.
Wintrust's chief executive and president, Ed Wehmer, did not return a call seeking comment.
First Midwest in Itasca, Ill., has done a combination of larger and smaller deals. It is interested in doing further deals in Chicago and in adjacent markets, such as northwest Indiana, southwest Michigan and the Quad Cities region in Iowa, said Michael Scudder, First Midwest's president and CEO. The bank does not necessarily have an asset size range when looking for potential deals and instead focuses on the strategic value a seller could add to the organization, he said.
MB Financial in Chicago has shown a preference for doing larger deals, including buying Taylor Capital Group in 2014. MB declined to comment for this story.
So where else can struggling bank turn?
Smaller banks could seek more mergers of equals: in other words, pair off with banks of similar size.
However, such deals typically face roadblocks of their own. For one, investors in privately held banks may be looking for liquidity, and merging with another small nonpublic company won't provide that, Burgess said.
Regulators may also be wary of a small, inexperienced acquirer becoming involved in a deal, said Michael Iannaccone, a senior adviser at Tangent Capital Partners. Buyers need to show that they have the right people, platforms and processes in place to ensure that the transaction goes smoothly.
"The regulatory environment could slow the small side of the market," Iannaccone said. "It's really all based on experience and most small banks, just based on size, don't have that experience."
Investors in some small privately held banks may also see no reason to sell, said Jon Winick, CEO of Clark Street Capital. Some shareholders are fine with their investment having mediocre returns simply because they enjoy owning a bank.
"Every investor isn't a hedge fund manager that is analyzing their investment coldly compared with other alternatives," Winick added. "Maybe they own a small community bank and it does OK but it isn't killing it. There's often no motivation to sell. On some level, it's fun to own a bank."
What impact does the rise of digital banking have on M&A?
That's where some good news lies.
Consumers often complain about their banks but are less inclined to bolt than many think, and some electronic services make it easier for them to stick around even if their bank is sold.
"If you do an acquisition correctly, people are creatures of habit, whether a business or a retail customer," Iannaccone said. "With electronic banking, people get used to all of their bill payments being set up and the bank's other systems and they really don't want to switch. They don't care whether the name on the bank has changed."
If true, that trend could minimize runoff and make smaller acquisitions just a little more attractive than they might have been in the past.
What will happen to all the bank employees?
Regardless of what further Chicago merger activity takes place, there could be a shake-up of talent from the pending deals alone. Competitors may lure talented lenders away.
Banks are especially keen to recruit employees with strong ties to customers in commercial lending and treasury services, said Robert Voth, a leader in the consumer and commercial financial services practice at Russell Reynolds Associates.
However, bankers are often loyal to their current employers, so a competitor looking to pick up talent needs to show it can provide a better opportunity with its platform, products and services or reputation, Voth said.
"Bankers tend to be parochial by nature," Voth added. "They don't want to move but may if their current bank lacks products or there is a truly golden opportunity on the other side."