Regulatory Scrutiny for Taylor Deal Intense, as Expected: MB Chief

MB Financial made a bold move last summer, announcing it would buy long-time rival Taylor Capital in a bid to better compete in the fiercely competitive Chicago commercial market.

The deal was delayed by a regulatory issue tied to a deposit relationship Taylor Capital's bank had with a company that handles financial-aid disbursements to students. The companies completed the merger in mid-August, about six weeks after it was expected to close.

In an interview in Taylor's former headquarters in Rosemont, Ill., Mitchell Feiger, MB Financial's president and chief executive, and Mark A. Hoppe, Taylor's former CEO and the new president and CEO of MB Financial Bank, discussed their motivations for the deal, the regulatory delay, the business of making acquisitions and the state of banking in Chicago.

The following is a transcript of the conversation edited for brevity and clarity.

The merger recently closed. Why did it make sense?

MITCH FEIGER: We want to be the premier middle-market bank in Chicago and Cole Taylor had — and now MB has — an excellent cadre of commercial bankers. This was our way of tremendously accelerating our growth in the middle market. The other thing Cole Taylor had that is a strategic thrust for MB is its diversified revenue stream with its national businesses. All Chicago banks are finding that it is important to have a diversified revenue stream. The third rationale is Mark; I wanted to be on his team and I wanted to have him on mine.

MARK HOPPE: Cole Taylor had grown a lot. We had successfully attracted a lot of asset generators in our local commercial banking, our national asset-based lending business, our national mortgage originator and our leasing operators.

We had a challenge, though. When I got to the bank in the first quarter 2008, we were $3.25 billion in assets. In the first quarter of 2013, we had $6 billion in assets. We had nine branches in 2008 and we had nine branches in 2013.

It is so expensive and uncertain to [expand] de novo. You can pick the wrong corner of a four-corner intersection. It was also hard to buy branches. For us to continue to grow the way we were growing we would need to do something about deposit generation and doing it internally was difficult.

Did Taylor consider buying deposits or branches? For instance, RBS Citizens was long rumored to have an interest in shedding its Chicago operations before selling nearly 100 branches to U.S. Bancorp.

HOPPE: We ran down a lot of paths of opportunity. 

FEIGER: If you have a weakness in your strategy — let's say core funding — acquiring a deposit-rich franchise as a solution is risky because you don't know if you can get one done, at what price, and if it is really going to work. Acquisitions of that type might be helpful strategically, but to depend on them is risky. 

Taylor picked up a lot of former Lasalle Bank lenders after the bank's sale by ABN Amro to Bank of America in 2007. Did MB snag any? 

FEIGER: Yes, but one at a time. It ended up being about 40 people.

HOPPE: I'm guessing we picked up about 200, not including the mortgage business. With the mortgage business, the number would be enormous. There are 800 employees there and many came from the old ABN Amro mortgage group. 

Is it fair to say then that given your coveting of the middle market, the MB-Taylor deal is another ripple of the disruption caused by the LaSalle sale?

FEIGER: Oh yeah. For more than 20 years, that has been our main strategic thrust, but the availability of the teams and clients was very much impacted by the Lasalle disruption. 

Your deal was delayed due to regulatory issues. Some people think regulators are using the moment of "matrimony" as a chance to effect change, which is causing delays. Does your delay fall into that category?

HOPPE: Well, it doesn't fit into the "matrimony" category. It was an issue that had surfaced and, as we talked to Mitch and his team about getting together, they were very aware of that issue. We made them aware of it early.

FEIGER: I don't think we saw [regulators trying to get changes] in the rest of the application approval process, either. We were going from just under $10 billion in assets to well over $10 billion, and it is clear that regulatory expectations change as you cross that threshold. Appropriately so, I'd add. It was communicated to us very clearly that crossing $10 billion was part of how they viewed this transaction.

Before we started talking with Cole Taylor, our regulators had prepared us for these expectations. They were very consistent with that. 

Other than the regulatory delay, it came in about where we thought it would be. It was deep, it was intense, but we weren't surprised. 

Executives at other banks that have crossed the $10 billion threshold recently described the process as "painful" because it is expensive. Some things you can easily quantify, like the effect of the Durbin amendment, but there are other pieces.

FEIGER: We know what the cost is and it is pretty much built in already. I don't think there is going to be a meaningful increase to expenses that our investors haven't already seen. MB may have been in a little bit different. We're in a few business lines — we bank money service businesses, prepaid cards and capital markets — that invite additional regulatory scrutiny. Our regulators did us a favor by holding us to a higher standard in those areas before we hit $10 billion. 

The same bankers said that, at $20 billion in assets, they feel like they're being treated like $50 billion-asset banks.

FEIGER: I think there's a continuum of regulatory expectations and there are different slopes for various sizes. From $10 billion to $50 billion, the slope gets steeper as you move up that. We would expect as we grow that regulatory expectations increase. 

Do you have all the systems you need in place? 

FEIGER: To be $50 billion? No, certainly not. I think we have the core systems in place, but there's a need for continual development and enhancement as we grow from just under $15 billion to $20 billion, to $25 billion, to $30 billion. You can't stand still — there's a continued investment you need to make. The industry has learned that you fall behind at your own peril. 

MB was a prolific acquirer of failed banks. Do you expect to be a part of consolidation going forward? 

FEIGER: If it furthers our strategic plans, if it enhances shareholder value, yes. Acquiring and merging is a core competency, but building a strategic plan that is a dependent on acquisitions is a big mistake, and we need to be able to do this on our own as well. 

What fits your criteria for furthering the plan and enhancing strategic value? 

FEIGER: Without getting too specific, really small banks would be less interesting because they're a lot of work and don't move the needle enough. Beyond that, I think you can just look back at our past M&A activity. 

Chicago is a historically very competitive. What's it like right now? 

HOPPE: It is as robust as I've ever seen it, and I've been in banking in this market, more or less, since 1981. I think it is more competitive than in 2005 to 2007. It was hyper-competitive then and whatever is beyond "hyper-competitive" is how I would describe it today.

Is it irrational? 

HOPPE: Some. Without a doubt.

FEIGER: There are always people on the edge, but it has shifted too more irrational than normal.

The competition here must up the ante for a successful integration. 

FEIGER: If you're merging two banks in a two-bank town it is a lot less risky. Here, people have choices and keeping your people is a critical element of success. I think we've done that.

How have you done it?

HOPPE: One of the early things we did — like the first two weeks after announcement — was to sit down and identify people we were convinced were players and were going to be critical to the success of the company. We reached out. We wanted to make sure they understood where they stood. 

A benefit for both was the transformational change in size. There are some additional skills that you need with the size, and it was enough of a jump that we needed a lot of people. We can't have enough good people in our company. 

FEIGER: I think people understood quite clearly what we were trying to accomplish. They saw the tremendous potential, and that makes it a lot easier to retain people than when you're doing a purely financial transaction. 

HOPPE: It helps that the banks are complementary. Take for instance asset-based lending. It was a big business for Cole Taylor and it was much smaller at MB. Leasing is a big business for MB, with three different businesses. We had a leasing business, but it was different than any of those three. 

Some bankers say it is critical to have conversations with key people before signing the deal. Why did you wait until after?

FEIGER: Too many people. Maybe you can have those conversations before with a smaller transaction, but when you're talking about 200 or 300 or more, you just can't. 

American Banker had a story recently about markets were commercial real estate and construction remain weak. Chicago was on the list. 

FEIGER: Traditionally, Chicago goes into the recession later than elsewhere and comes out last. But one also can't ignore the public policy of the state and the city of Chicago. It is hard to say exactly how much that has hampered growth, but it feels like it has hampered it. Growth is what solves the existing problems. We need job and population growth and the state's policies are not encouraging of either. 

HOPPE: We're still seeing appraisals coming in that are shockingly low. Some areas are bouncing back, but there are a lot that aren't. Chicago has always bounced back and this one is just kind of bumping along.