Old Second Bank is acquiring the parent of Lombard-based West Suburban Bank in a $297 million deal that will forge a dominant player in Chicago’s western suburbs.
The deal, announced this morning, is by far the largest Aurora-based Old Second ever has done and marks a significant turnaround from the aftermath of the financial crisis when teetering Old Second relied on federal bailout funds to survive and later redeemed those preferred shares held by the Treasury Department at about 35 cents on the dollar.
The sale of West Suburban, which at $2.9 billion in assets is the second-largest privately held bank in the Chicago area, will leave just four privately owned local banks with more than $2 billion in assets.
At 1.2 times its tangible book value, the price for West Suburban is well below what similar banks have fetched in past deal-making. Over the past decade, local banks that sold fetched 1.9 times their book value on average, according to an investor presentation by Old Second.
But these days acquisitive banks are shying away from the nosebleed prices they used to pay for scale in the nation’s third-largest banking market. Glenview State Bank sold at 1.1 times its book value earlier this year, although in that case the fact that the owners decided not to auction the bank and instead negotiated only with the Champaign-based parent of Busey Bank likely kept the price lower than it could have been.
By contrast, West Suburban contacted a host of potential buyers. Crain’s reported the bank’s hiring of an investment banker and desire to sell in May.
There’s little doubt the surprise merger announced June 1 of Chicago-based First Midwest Bancorp and the Evansville, Ind.-based parent of Old National Bank had something to do with the relatively low price as well. First Midwest, one of the more aggressive bank buyers in the market over the past several years, was a logical match for West Suburban given First Midwest’s small-scale west suburban presence.
With First Midwest out of the picture, the kind of bidding war that might have resulted in a higher price for West Suburban apparently didn’t emerge.
For Old Second, the deal makes it a far more meaningful player in suburban Chicago. Adding West Suburban nearly doubles Old Second’s size. The two banks combined have $6.2 billion in assets, $5.3 billion in deposits and more than 70 branches. The deal creates the 14th-largest Chicago-area bank by deposits.
Old Second won’t change much in character after the deal. Both banks’ loan portfolios are heavily into commercial real estate. Nearly 40 percent of the combined banks’ $3.4 billion in loans will be in investor-owned commercial real estate, apartment buildings and construction and development projects, according to the investor presentation. About 30 percent will be to business borrowers with another 18 percent tied to the value of property owned and occupied by businesses.
The deal also makes Old Second a dominant franchise in exurban Chicago. The combined banks will be the second largest by deposits in Kane and Kendall counties.
As with most tie-ups between banks in the same market, there will be substantial cost-cutting. Old Second told investors in its presentation that it plans to reduce costs by $20.7 million, equivalent to 37 percent of West Suburban’s non-deposit cost base.
That will mean layoffs, as well as branch closings where the two banks overlap. West Suburban employs about 400, according to bank filings.
The deal calls for Old Second to pay 65 percent of the purchase price in stock and the rest in cash. It will add three West Suburban directors to its 13-member board, creating one of the larger boards among publicly traded local banks.
Old Second CEO James Eccher in a release said, “From our perspective, we do not believe there is another partner who could deliver us the same level of complementary geographic reach, scale on current products and services, upside and long-term shareholder value.”
Old Second hopes to secure regulatory approvals and close the transaction by the end of the year.