FirstMerit Seeks Growth In Tough Chicago Market

FirstMerit Corp. of Akron, Ohio, will need sharp elbows as it expands into the city of broad shoulders.

The $12.1 billion-asset bank will have to compete against nearly 200 rivals as it moves into the competitive Chicago market. But that might just work in its favor because more than 30 of those banks are takeover targets — victims of a hypercompetitive market that bred lax lending.

"Because of that overcapacity of banks, there was a fair amount of risk taking, so it is a market with a lot of sick players that will likely be taken over in the next several months," said Anthony Davis, an analyst at Stifel, Nicolaus & Co. Inc. "From that perspective, it becomes pretty compelling."

After spending the middle part of the past decade rebuilding while other banks were expanding, FirstMerit is in the enviable position of having few credit problems and plenty of capital as others are struggling.

And the Chicago market has no shortage of strugglers.

Data from Loan Workout Advisers LLC shows that 32 banks in the market have Texas ratios — an equation that divides problem assets by a bank's capital and reserves — above the threshold that typically indicates a bank's survival is questionable.

Those 32 banks together hold $12.5 billion of deposits and $15 billion of assets.

"The likely carnage will be substantial. After all, the FDIC isn't hiring 500 people to staff their new suburban Chicago office for nothing," said Justin A. Barr, managing principal of Loan Workout Advisors, which is based in Chicago. Earlier this year, the Federal Deposit Insurance Corp. opened a large suburban Chicago office. "FirstMerit is well positioned to take advantage of this sizable opportunity."

FirstMerit has struck three deals to gain a foothold in the Chicago area. On Feb. 19, it bought the failed George Washington Savings Bank in Orland Park from the FDIC. The deal included $395.3 million of deposits, $324.2 million of assets and four branches. That same day, it closed on a 24-branch deal with First Banks Inc. in St. Louis.

In December, it purchased an asset-based lending group in Chicago from First Banks.

Paul G. Greig, the company's chairman and chief executive, declined to comment for this story. During a presentation at KBW Inc.'s Keefe, Bruyette & Woods Inc.'s investor conference last month, Greig made it clear that acquisitions are crucial to the company's strategy.

"There's a number of the medium-sized players who are having financial issues in Chicago," Greig said at the conference. "That window of opportunity will not be open forever, but it is open now, and we're going to certainly attempt to take advantage of as much of that opportunity as we can over the course of 2010."

FirstMerit filed a shelf registration earlier this month that gives its underwriters permission to issue as much as $150 million of its shares.

"I would imagine that they just want to be teed up should they need it," said Jon Winick, the president of Clark Street Capital Management LLC, a marketer of bank real estate debt in Chicago.

Greig said during the company's quarterly call in January that the company is looking to pick up other failed banks or purchase branches and assets as it did in the First Banks deal. He then added that acquiring whole, healthly banks is not likely any time soon.

The second leg of the company's strategy will be targeting the coveted middle-market commercial business in Chicago. Analysts said that will be a tough feat.

Following Bank of America Corp.'s 2007 purchase of LaSalle Bank from ABN Amro, several regional players in the Chicago market hired dozens of former LaSalle bankers to bulk up their balance sheets with commercial and industrial loans.

The most aggressive has been PrivateBancorp Inc., which has increased its asset size by 146% since 2007. Credit problems have since forced Private to tap the brakes on its own growth plans.

"They are going to have to take their gloves off and go to battle every day," said Terry McEvoy, an analyst with Oppenheimer & Co. "They are going to have to prove to their shareholders that this expansion plan was the right decision."

Analysts said FirstMerit's experienced management team and its lack of problem assets will aid its expansion goals in Chicago.

Greig, as well as several other members of the company's executive team, have deep ties to the Chicago market. Before joining FirstMerit in 2006, Greig was the president and chief executive of Charter One Bank-Illinois. Royal Bank of Scotland Group PLC bought Charter One in 2004.

Greig was brought in to help clean up the struggling FirstMerit. Along with fixing the asset problems, he realigned the company's credit discipline. Analysts said that work now positions FirstMerit for growth, especially as many of its peers continue to struggle.

At Dec. 31, FirstMerit had total nonperforming assets of $101 million, or 1.48% of total assets. It had a total risk-based capital ratio of 13.34%.

"Their story is incredibly serendipitous," Davis said. "They are head-and-shoulders above many of their Midwest peers."