New Capital Raises Fuel Big M&A Predictions for Chicago

Some Chicago-area banks are locked and loaded for M&A.

Three equity raises announced this month are set to bring roughly $260 million of fresh capital to the Windy City, and the recipients list acquisitions among their plans.

The new capital should spur deals next year in a market that has seen more bluster than action when it comes to mergers and acquisitions, dealmakers and others say.

"Those raises are hopefully the first signals that the start that everyone has been waiting for is nigh," says Terry Keating, managing director of Amherst Partners in Chicago. "I can't help but look at this as a harbinger. Hopefully once that dam gets busted, we'll see a lot of activity very quickly."

Each of the three companies that raised money — Taylor Capital Group (TAYC), Standard Bancshares and Community Financial Shares (CFIS) — went about it differently.

The $5.1 billion-asset Taylor Capital raised $100 million in preferred equity in a public effort that closed last week. The money could be deployed to further expand its national asset-based lending, leasing or mortgage businesses or make in-market acquisitions to grow its nine-branch network, says Mark Hoppe, the chief executive of Chicago-based Taylor. It is particularly interested in growing in the Chicago suburbs.

"It could be in a number of ways: [FDIC-]assisted transactions, unassisted transactions. And we also think there will be some good chances that branches will be sold in areas where we want to be," Hoppe says. "It is really a matter of finding an opportunity."

The other two capital raises were private placements that require regulatory approval.

Standard Bancshares in Hickory Hills, Ill., which has $2.2 billion of assets, is set to receive $130 million from a consortium of private-equity firms.

Community Financial in Glen Ellyn, Ill., has entered into agreements with 63 investors led by New York private-equity firm Clinton Group to infuse $24 million into the $334-million-asset company; there will be an additional $3 million rights offering.

Both companies need the capital to cure lingering problems from the economic downturn but also mentioned acquisitions as a reason for the raises.

Justin A. Barr, president of BankDATAWORKS and a longtime Chicago bank consultant, says he is optimistic about those deals even though several recapitalization agreements in Chicago have fallen apart during the downturn.

"The key is absolutely going to be getting these marquee deals closed," Barr says. "This market needs that capital, for sure. Look at the landscape. Chicago is one of the most densely populated, large urban banking markets in the country and then look at the dearth of deals that have happened here. It is concerning."

The Chicago area has long been touted as overbanked — and thus ripe for deals -- because it was one of the last to allow branch banking. Yet there have been three whole-bank acquisitions announced in greater Chicago area the last two years, according to data from ParaCap Group, a Cleveland-based capital and advisory firm.

The $16 billion-asset Wintrust Financial (WTFC) was the buyer in two of those deals. Wintrust has also bought nine failed banks from the Federal Deposit Insurance Corp. since 2010.

Meanwhile, 40 banks have failed in the greater Chicago area since 2009. According to data from BankDATAWORKS, there were still 33 banks with Texas ratios -- the comparison of nonperforming assets to capital and allowance for loan losses — of 100% or higher at June 30. Those banks may have a hard time surviving.

"There is no question that acquirers have all been focused on receivership activity," said Greg Gersack, managing principal and co-head of investment banking for FIG Partners. Gersack represented Community Financial in its capital raise. "As we transition to being a healthy market, the buyers should come back to open-bank transactions."

Gersack, however, tempered his enthusiasm by noting that predictions of consolidation were rampant even before the economic downturn.

"The conversations of Chicago being consolidated have gone on for a long time," Gersack says.

At June 30, there were 188 banks in the Chicago market. That compares with 249 five years earlier and 307 in 2002.

Though many experts are geared up for a big 2013, Hoppe was more cautious about the timing.

"I would be surprised if 2013 is a gangbusters year for Chicago," Hoppe says. "There is still a lot uncertainty. I think it will be closer to 2014 when things begin to really heat up."