A year after announcing plans to pair a specialty finance business with a Chicago banking company, Castle Creek Capital LLC is giving up on the deal.
White River Inc., a subprime auto financing provider in Indianapolis, said in a securities filing last week that it has nixed plans to merge with the $1.3 billion-asset First Chicago Bancorp in Itasca, Ill., because the companies could not agree on a new price for the stock deal they announced in June of last year.
Castle Creek, a private-equity firm led by John Eggemeyer, is a big investor in both White River and First Chicago and had initiated their merger negotiations.
First Chicago initially touted the deal — which was structured as a reverse merger — as a way to supercharge asset growth.
J. Mikesell Thomas, First Chicago's chief executive officer, said in an interview Friday that it still aspires to be a regional player in commercial lending, though it is mostly concerned with getting through the recession and has ditched previous growth goals.
"Like all banks, we are dealing with the current environment. So our focus is on managing through this phase and remaining well capitalized," Thomas said. "However, we continue to believe there is an attractive opportunity to grow our business over time."
He would not discuss why the deal fell through.
Observers said the companies would have been a natural fit for each other in a more normal market, but White River's declining stock — an issue with just about any company that engages in subprime lending — likely made the price a sticking point.
"Subprime auto lending has a taint on it, perhaps unfairly so, but the outlook for the industry is not great," said Terry Keating, a managing director at Amherst Partners LLC in Chicago. "The valuation you would associate with White River now compared to last year is undoubtedly different, no matter how good they may be."
It is unclear what role regulators may have played in the deal's unraveling, but Keating said he suspects the companies had a tough time getting approval.
Regulators frown on nontraditional businesses even in good times, he said, and given the current economic environment, the regulators probably have gotten less tolerant of any business line where they lack expertise.
"Regulators tend to be biased against it because they don't know it," Keating said. "But where things are right now, they don't really have time to get to know it."
Rising loan troubles at First Chicago also could have been a factor. Its bank unit swung to a $2.8 million loss in the first quarter, from a $2.4 million profit a year earlier. Noncurrent loans shot up sevenfold, to $69 million, according to data from the Federal Deposit Insurance Corp.
The nonperformers — the largest share of them construction loans — made up 6.53% of the bank's total loans as of March 31.
Keating said he did not find it surprising that Castle Creek could not cinch the deal, despite owning stakes in the two companies.
"They still have to be mindful of the minority shareholders," said Keating, who has worked in the past with Castle Creek but was not involved in the deal.
Castle Creek would not discuss the matter. Calls to White River were not returned.
The original terms of the deal called for every two shares of First Chicago to be exchanged for one White River share. White River would have taken the First Chicago Bancorp name.
The deal was expected to close late last year, and the reasons behind the delay were unclear.
But shares of White River have dropped about 38% since the deal's announcement. They were trading at $9.35 Friday.
Jeff Davis, an analyst at Howe Barnes Hoefer & Arnett Inc., said that First Chicago, which is privately held, likely has suffered a decline in its stock valuation, too.
The stocks for publicly traded banking companies with $1 billion to $5 billion of assets are roughly 30% below their levels a year ago, he said.
Nevertheless, Davis said the deal's collapse was likely triggered by more than just one thing.
"I would imagine that 'all of the above' is why this deal was terminated," he said.
In addition to the negative regulatory environment for bankers venturing into nontraditional businesses, Davis said the overlaps in management and ownership at the companies involved also might have made the deal difficult to consummate.
"It doesn't matter with private companies, but when you have one public company, that can be a negative," he said. "It is subjected to a higher level of scrutiny from regulators and shareholders. When you have related parties in a public transaction, everyone involved has to be very careful to make sure there are no perceived issues."
Last summer Eggemeyer — who is Castle Creek's CEO and White River's chairman and CEO — had said that White River searched for a suitable bank as a partner for more than six months before talks began with First Chicago.
White River was overcapitalized and wanted the benefit of stable deposit funding, he said.
It had ruled out banks regulated by the Office of the Comptroller of the Currency, because the agency views subprime lending so unfavorably. Given Castle Creek's relationships with the Illinois Department of Financial and Professional Regulation and the Federal Reserve Board — First Chicago's regulators — the companies collectively figured that those regulators would be more receptive, he said.
Keating speculated that the companies could revisit the deal down the road. "This is a natural play and conventional wisdom says let's get through the asset quality issues then come back to it in a more friendly and fair environment," he said.
