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Chicago a banking buyer's market with 'pent-up demand' for M&A among sellers

Chicago remains one of the most fragmented banking marketplaces in the U.S., even though banks have been consolidating there at a rapid pace in recent years.

Illinois was one of the last states to repeal unit banking, which limited banks to operating only one location in one county. The lag in repealing those rules until 1993 has delayed consolidation in Chicago, the third-largest city in America, leaving it with far more independent banks than other major metropolitan statistical areas.

There have been 50 whole-bank deals announced in the greater Chicago area since July 2014. Twelve of those deals were valued at or above $50 million, with more than half of those larger deals announced since 2017.

Even so, there are still 26 banks with under $1 billion in assets headquartered in Chicago. That compares to four in Los Angeles, 12 in Dallas and 14 in New York City, according to S&P Global Market Intelligence data.

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The spate of deals in Chicago has been driven largely by a small number of serial acquirers. Piper Jaffray analyst Nathan Race called Chicago is a buyer's marketplace, with four main publicly traded acquirers headquartered in the city — Wintrust Financial Corp., Byline Bancorp Inc., First Midwest Bancorp Inc. and Old Second Bancorp Inc. — compared to a large number of small, sub-scale banks looking to sell.

The lack of competition has put Wintrust, Byline, First Midwest and Old Second in a position of pricing power, allowing them to be more opportunistic, Race said.

Wintrust has been an active acquirer, announcing 10 deals since 2014. Byline is reportedly in talks to acquire Parkway Bancorp Inc. If announced, that deal could be the largest bank transaction in Chicago so far in 2019.

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There is significant "pent-up demand" for sellers in Chicago, said Gene Katz, managing director at D.A. Davidson & Co. Illinois' slowness in repealing its unit banking laws, which came nine years after Texas was the first state to allow bank acquisitions outside of county and state lines, resulted in a higher number of small banks still operating there.

"It just delayed the consolidation for the whole state of Illinois," Stephens analyst Terry McEvoy said in an interview.

The large number of small banks looking to sell compared to the limited number of acquirers has also encouraged the trend of credit unions acquiring banks in Chicago, said Katz. Credit unions have increasingly become dealmakers across the U.S., with 11 deals announced so far in 2019, surpassing the eight deals announced in the entirety of 2018.

Oshkosh, Wis.-based Verve a CU agreed to acquire Chicago-based South Central Bank NA in June. Also in Illinois, Corporate America Family CU announced it is acquiring Ben Franklin Bank of Illinois.

But this rapid pace of consolidation might slow down, analysts said.

Credit stress and pressure on earnings due to the declining interest rate environment may push more banks to sell, said McEvoy, but the disruption of Fifth Third Financial Corp. acquiring MB Financial Inc. could allow small banks in Chicago to gain some deposit market share and reconsider selling.

"If I am a bank in Chicago that was contemplating selling and there is disruption in my marketplace where I could actually benefit, it might push out my decision to sell," said McEvoy.

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