Ed Wehmer started Wintrust Financial Corp. (WTFC) two decades ago in the wake of the last big banking cycle. "We had no illusions of grandeur," he recalls. "We thought we'd have a couple of banks and live the life of George Bailey."

Back then, a host of local names-First National Bank of Chicago, Continental Bank, Harris Trust & Savings and LaSalle National Bank among them-dominated the Windy City's banking scene. Wehmer's investor clients in suburban Lake Forest appreciated having big, locally run banks nearby, but also wanted a more personal touch.

Today, the giants are gone, having been gobbled up by bigger, out-of-state companies, leaving $17 billion-asset Wintrust, with its 112 branches, $12.5 billion in deposits and 4 percent market share, as Chicagoland's largest independent commercial banking company. (Northern Trust is still there, but it has maintained a wealth management focus.)

For Wintrust, it's an odd twist of fate-the outfit was launched as an antidote to larger institutions. But Wehmer considers the lack of even one homegrown bank to carry the city's flag on the global stage as something of an embarrassment.

As they gathered last summer to celebrate Wintrust's 20th anniversary, he and his board decided to try to do something about it. "We said, 'Chicago is the best city in the world. It deserves to have its own big bank. Why can't we be that bank?'" Wehmer says.

"So we're going to make a run at it. Our plan is to get into all 50 neighborhoods in the city of Chicago, and to be in every suburb," he adds. "We think we can do it."

Last year, Wintrust moved about 25 miles closer to the city, relocating from Lake Forest to Rosemont, Ill., which borders Chicago directly to the northwest.

Befitting the market's competitive nature, Wintrust isn't the only institution in position to pursue the mantle as Chicago's hometown banking giant.

At least three other commercial banks with local roots - PrivateBancorp (PVTB), MB Financial (MBFI) and First Midwest Bancorp (FMBI) - are frequently mentioned as contenders.

Each of Chicagoland's so-called "Big Four" has emerged from the financial crisis bigger, stronger and smarter than when it started. They all have the potential to be buyers in a market that is decidedly overbanked.

Each also could be an attractive target for one of the out-of-state giants angling for a bigger share of what is perhaps the nation's most dynamic banking market. Christopher McGratty, an analyst with Keefe Bruyette & Woods, says Chicago's Big Four are "the most logical candidates" to power a consolidation that he sees as being necessary "just for profitability's sake."

Chicago might deserve its own local flag carrier, but that doesn't mean it will get one. Aside from Wehmer, no banker will publicly acknowledge coveting the status, though the idea appears to have at least crossed their minds.

Shortly after Bank of America (BAC) acquired LaSalle in 2007, PrivateBancorp hired away 300 bankers, including CEO Larry Richman. The company has doubled in size since, to $13.3 billion in assets, fueled by more than 800 "significant business relationships" lifted from the old LaSalle.

"What we found was that it was important to Chicago to have a hometown business relationship bank," Richman says. "There was a real sense of loyalty."

Mitchell Feiger, CEO of $9.5 billion-asset MB Financial, says he researched the value of local crowing rights and came up with a slightly different answer. "Is it an advantage to be known as 'Chicago's bank?' It used to be, but I don't think it is anymore. Money is money. People don't care anymore where a bank is headquartered."

Nevertheless, the coming consolidation predicted for Chicago seems likely to pass through the Big Four. The question is, when will it happen?

The chief holdup is pricing. Acquirers are stepping cautiously, afraid of getting snared by someone else's credit issues. They'd just as soon wait for a troubled bank to fail, and get guarantees from the Federal Deposit Insurance Corp. on the loans.

Wehmer says most Chicago banks looking to sell nowadays aren't worth buying. "We get at least one inbound call a week," he says. "The problem is, there's too much stress in their portfolios. Once we apply our marks, then either the pricing isn't good enough or we don't want them."

In one of Chicago's few recent, non-FDIC deals, Wintrust bought $390 million-asset HPK Financial in the city's Hyde Park neighborhood last September for 1.01 times book value. (Nationally, the average premium for bank deals in 2012 was just 1.13 times book value.)

"If you're a healthy bank, why would you merge now?" asks Todd Grayson, executive vice president of Chicago's $225 million-asset South Central Bank and a member of the Community Bankers Association of Illinois audit committee. "The premiums aren't there."

Still, the case for consolidating Chicago is strong. The metropolitan statistical area boasted $314 billion in deposits at the end of last June, fourth most in the country, according to the FDIC. But its 249 banks were the most of any MSA-including New York, which has four times the deposits.

The market share held by the top10 players, at 68 percent, is the lowest among the 10 largest markets in the country, according to a KBW analysis.

Competition at that level is fierce, and includes many of the industry's biggest names. JPMorgan Chase (JPM), BMO Harris Bank (owned by Canada's BMO Financial Group) and Bank of America, with their extensive local branch and ATM networks, are the top three banks, with a combined 40 percent of the area's deposits.

Competition from the next tier is equally daunting: Citigroup (NYSE:C), Fifth Third Bancorp (FITB), PNC Financial Services Group (PNC), Wells Fargo (WFC) and U.S. Bancorp (USB) each has between 1.5 percent and 4 percent of the market, and each wants more.

"We think we can be one of the top three banks in the market," says Joe Gregoire, chairman of Illinois banking for PNC, which has $11.7 billion in deposits and 152 Chicagoland branches. "Every line of business, whether it's wealth management, retail or corporate banking, is growing."

A cadre of slightly smaller out-of-towners, including Akron, Ohio-based FirstMerit (FMER), Associated Banc-Corp (ASBC) of Green Bay, Wis., and Minneapolis-based TCF Financial (TCB), is here, too.

"If you're a Midwest regional bank and can get just a small piece of Chicago, it can meaningfully change your growth trajectory," says Brad Milsaps, an analyst with Sandler O'Neill & Partners.

"It's not very profitable growth. It's expensive to operate there, and there's tons of competition," Milsaps adds. "But it's a huge market."

Chicagoland plays host to more than 9 million people, 30 Fortune 500 companies and 171,000 small businesses. The median household income, at $57,400, is nearly 15 percent higher than the national average.

While the secrets to success here are much the same as elsewhere-strong core-deposit relationships, prudent capital management, solid underwriting and the like-the sheer number of banks makes everything more intense.

"What works in another market will work here," MB Financial's Feiger says. "But you have to do everything faster, cheaper and better, because there's so much competition."

Chicago can be both charming and parochial, a rich cornucopia of some 50 different neighborhoods, many with distinct ethnic identities-and their own banks.

One example is Ukrainian Village, an enclave on the west side of the city where the home language is still heavily used. "We have employees who grew up in the community and speak Ukrainian. Our signage and marketing brochures are in Ukrainian," Feiger says. "If you don't speak Ukrainian, you can't do business there."

Illinois was among the last states to abandon old banking laws that prohibited branching. While the number of banks has been halved over the past two decades, the market still has 175 institutions with deposits of fewer than $400 million-most of them tried-and-true community banks, leveraging relationships and local know-how to scratch out profits.

One banker describes Chicago as the Afghanistan of banking-a market that's easy to enter, but can turn into quicksand for those without a solid plan.

Washington Mutual arrived in 2003 with its quirky advertising, khaki-clad concierges and fancy "Occasio" branches. By 2006, it had 180 outlets, but never gathered more than about 0.5 percent of deposits.

Wamu failed in 2008, its deposits and branches acquired from the FDIC by JP Morgan, which promptly shuttered many of those locations.

"Every year people come into Chicago thinking they have a better plan and are going to become one of the top two or three banks. And every year they fall short," South Central's Grayson says. "They think this is like their home market, but it's not. Banking is not a commodity here."

But the big banks have slowly been making inroads on the retail banking front. While the combined deposit market share of the top 10 is low, it's also jumped 7 percent in the past decade.

The competitive pressures pushed a growing number of community banks to look outside of their micromarkets, with calamitous results. In the heady pre-crisis days, many bankrolled dicey development projects in outlying suburbs like McHenry and Elgin.

Steven Hovde, CEO of Hovde Financial, an investment banking firm in suburban Inverness, Ill., says he knows of banks with construction loans that have been written down to 25 percent of their original value.

"The competitiveness of the market drove a lot of banks to make loans they shouldn't have made, and now the entire market is paying the price."

Since 2008, 40 Chicago-area banks have failed, and the numbers suggest there are more to come. According to SNL Financial, at the end of September Chicago-based banks averaged nonperforming assets of 10.85 percent, compared with 4.12 percent nationally.

In December, 36 institutions had adjusted Texas ratios above 100 percent, SNL's analysis found, indicating severe credit troubles and a risk of failure.

"Everyone talks about California being the source of the housing crisis, but things are much worse here," says Hovde, who also does business on the West coast.

While most bankers remain skeptical about the economy, it doesn't show when they're competing for business. Deposit rates today are more than double what they are in other parts of the country, while good commercial and industrial loans are being priced at Libor-plus-1 percent, and with easier terms.

"We're seeing longer-term credits[and] less emphasis on guarantees," says Michael Scudder, CEO of $8 billion-asset First Midwest. "Everyone is looking to generate additional credits in a tough environment."

Add it all up, and merely being profitable in Chicago is a major achievement. Each of the Big Four has a return on equity below 7 percent, and that's considered relatively good. According to SNL, the average ROE for a Chicagoland bank in 2012 was negative 6 percent, versus a national average of positive 9.47 percent.

"You've got relatively slow economic growth, low interest rates and greater regulatory pressures, both from a capital and compliance perspective," Scudder says. "Those things are happening everywhere, but in a market this fragmented, it creates additional pressure on the bottom line."

For better or worse, the road to a healthier market will likely involve a reduction of banks, with much of the activity flowing through the Big Four.

Wintrust, MB, Private and First Midwest approach the market in different ways, but all feature straight-shooting, savvy management teams and, significantly, a key business line that has little to do with Chicago and has helped them to survive the worst of the market's competitive pressures.

For Wintrust, it's a big national insurance-premium finance unit. Private, meanwhile, boasts commercial loan offices in cities such as St. Louis, Minneapolis and Atlanta.

First Midwest supplements its suburban Chicago business with agricultural lending in western Illinois and Iowa, and MB has a national leasing business and provides business-banking services to equipment lessors.

"You can't be successful here without having something on the side," says Chicago banking consultant Paul O'Connor of Angkor Strategic Advisors.

The big local players know each other well, and can readily detail key competitors' branch maps and strategies. "We study those guys aggressively. Everything they do, we want to know why," Feiger says. "It's a pretty good chess match."


Lately, there's been plenty to watch. MB picked up six failed banks in 2009 and 2010, including $2 billion in local deposits and 11 well-positioned branches from Chicago-based Corus Bankshares, the big condo lender.

Since then, MB has been holding back, unwilling to cross the $10 billion-asset threshold, with its additional regulatory costs, until the right deal comes along. "We will go over $10 billion," Feiger says. "It's just a matter of choosing the right time."

Perhaps even more dramatically, Private, once a staid commercial real estate lender, shifted its strategy abruptly to become more of a middle-market lender with the LaSalle hires.

While it leveraged those relationships into fast growth at the beginning, the low-hanging fruit is now gone. And operating like a "little LaSalle," with out-of-market loan offices but no deep-pocketed parent, could be difficult.

"When Larry was at LaSalle, he could call ABN Amro and they'd ship him $50 million," says one investment banker. "Now he has to go to private equity guys who demand higher returns on their money. It's a much more difficult strategy to execute."

First Midwest, the only one of the Big Four not to turn a profit in 2012, has picked up about $800 million in deposits through four failed-bank deals, but also has struggled more with asset quality issues. It recently took a $98 million charge after clearing its books of $233 million of nonperforming real estate loans through a bulk loan sale.

"We wanted to take away the distraction and put those assets behind us, as opposed to letting things drag out over the long term," Scudder says.

Wintrust has picked up 11 banks since 2010, nine of them failed institutions acquired through the FDIC, adding about $7 billion in assets and $5 billion in deposits. Wehmer attributes his success to a lending pullback in 2006, when the market was at its frothiest.

"We were very well positioned to take advantage when the competition was on its back, and that's allowed us to double in size," he says.

Wintrust's biggest strength, however, could also prove to be its Achilles heel: a supercommunity banking strategy, with 15 different charters and 50-some nameplates.

Wehmer says the structure makes it easier to grow organically. "I can offer teaser rates at one bank, without cannibalizing what I already have in nearby markets," he explains. But while the banks all operate on the same system, and have a Wintrust subscript on the local brand, the company might not be attractive to a big-bank acquirer.

"Who's going to want to go through the process of collapsing all those charters?" Hovde asks. The structure is so distinctive, "a buyer wouldn't know how many customers they would lose by converting to a big-bank structure."

Wehmer clearly doesn't care. While he talks of his fiduciary obligation to consider offers, he's more concerned about leveraging civic pride to take on the big guys.

"We tell people the 'M' in BMO Harris stands for Montreal, the 'P' in PNC stands for Pittsburgh, Fifth and Third are two streets in Cincinnati," he says. "Our motto is, 'Bring it home, Chicago.' We'll see if it works."



John Engen is a freelancer. He is based in Minneapolis.

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