A year`s experience with interstate banking hasn`t dramatically altered Illinois` financial landscape.
Last July the state enabled banking firms in adjoining states to buy Illinois banks as long as there were reciprocal provisions welcoming Illinois banks. But the pace of acquisitions has been somewhat sluggish.
There have been 53 completed or pending deals in Illinois, only 17 of which have involved out-of-state buyers, according to the Chicago Corp. investment firm.
Moreover, no Illinois bank holding company has ventured outside its home state to purchase another institution in the Midwest.
”Compared with what has happened elsewhere in the nation, the pace
(throughout the Midwest) has been very slow, partly because Illinois banks themselves have done so little,” said Arnold Danielson, a Rockville, Md., bank consultant.
Nor do most observers expect full interstate banking to usher in a frenzy of activity. Gov. James Thompson is expected to sign a bill setting Dec. 1, 1990, as the date when banks from all other states with reciprocal provisions may enter Illinois.
”There will be no gold rush of activity in Illinois,” said Larry Gorrell, head of the Midwest banking practice for the accounting firm of Arthur Andersen & Co.
These trends have allayed the fears of community bankers, who once argued that many local institutions would be gobbled up quickly once barriers were removed. But the lack of activity by
Illinois banks also has prompted con-cerns about Chicago`s status as a banking center.
”We`re going to be sellers to banks not domiciled here,” said a Chicago investment banker.
Detroit`s biggest bank, NBD Bancorp Inc., for example, is poised to become a major force in the Chicago market. Earlier this year it purchased USAmeribancs Inc., with $1.9 billion in assets, and last week it announced plans to buy State National Corp. of Evanston, with $684 million in assets.
The combined operation will be the fifth largest banking company in the state and the biggest in the city`s suburbs.
”When I drive around the suburbs now, it might as well be Detroit,”
said the investment banker.
The slow pace of activity in the Midwest as a whole has also led to concerns about the region`s banking clout and the independence of Midwest banking. Danielson says the Midwest is likely to lose ground to other regions, which are expected to develop more so-called ”superregional” banks that could buy up Illinois banks.
Illinois holds undeniable attractions as a banking state. It has some 1,200 banks, or more than 8 percent of the nation`s total, and about 20 percent of Midwestern bank deposits.
But Illinois` restrictive laws on mergers and branching have limited the number of up-and-coming mid-sized banks, according to analysts. Until 1982, the state limited institutions strictly to ”unit banking,” or owning a single office.
Banks still are allowed only five additional offices and permitted to set up a branch across county lines only if that branch is within 10 miles of its headquarters. Statewide bank acquisitions by Illinois-based bank holding companies were allowed for the first time last year.
The result is that Illinois banks have had little experience in acquiring and running banking networks. Observers say this has limited their ability to make out-of-state purchases and made in-state prospects less appealing for outsiders.
A bill passed Friday by the Illinois Senate would make banking chains more economical by allowing holding companies to merge their banks, regardless of their locations, while retaining the right to maintain five facilities for each bank.
”If you make people in Illinois more modern, it will step up the pace of acquisitions,” said Herbert Baer, a research officer with the Federal Reserve Bank of Chicago.
The measure, which was previously approved by the House, has been pushed by the Illinois Bankers Association but opposed by community banks and New York-based Citicorp, which has described it as ”back-door branch banking.”
Experts say would-be buyers also have been deterred by the high prices demanded by bank sellers.
”They all think they can get Harry Steans` price of triple book, and that`s not the case,” said C. Paul Johnson, chairman of First Colonial Bankshares Corp.
Harrison Steans, chairman of USAmeribancs, a stellar performer with 31 percent return on equity last year, sold the banking firm to NBD for 3.3 times its book value. Other Chicago-area banking companies have recently attracted prices of more than 2 times book value.
In addition, Illinois` interstate banking region–crafted by wary bankers to exclude two of the Midwest`s powerhouses, Ohio and Minnesota–bars many potential suitors.
”We predicted (regional interstate banking in Illinois) wouldn`t be much of an event because the region wasn`t big enough,” said a spokesman for BancOne Corp. of Columbus, Ohio, which wants to establish a foothold in Illinois.
The region`s biggest deals to date were BancOne`s purchase of the $4.3 billion-asset American Fletcher Corp. of Indianapolis and the acquisition of Citizens Fidelity Corp., Louisville, with assets of $4.4 billion, by PNC Financial Corp. of Pittsburgh.
Meanwhile, Chicago`s top two banks haven`t been in shape to be active players out-of-state.
”The big banks in Illinois are dead in the water,” said Loren Smith, chairman of Citicorp Savings of Illinois, a thrift unit of New York`s giant Citicorp.
The second biggest, Continental Illinois Corp., was rescued from failure in 1984 by the Federal Deposit Insurance Corp. and most of its stock still is held by the FDIC. Facing low profitability and a management crisis, Continental often is mentioned as a likely acquisition candidate. Continental officials declined to comment.
First Chicago Corp., the Midwest`s biggest, was widely expected to assert itself as a regional leader by making a substantial out-of-state acquisition. But a relatively low stock price and Third World debt problems common to many money center banks have limited its ability to act, observers say.
”We have been constrained,” said Richard Thomas, First Chicago president. ”Most of the potential deals we might have undertaken involved a very significant dilution (of earnings per share).” The banking firm did stake a claim to the surburban market through its pending acquisition of First United Financial Services Inc. of Arlington Heights, with assets of $1.1 billion.
”It`s important for us to make an interstate acquisition in the next two or three years,” when the doors open to full interstate banking, Thomas said. First Chicago pushed for a late date for that event so it could build itself up.
Bank mergers are expected to continue steadily over the next three to five years, affecting ”well over half” of the approximately 150 independent Illinois banking companies with more than $100 million in assets, said Michael Sammon, senior vice president at Chicago Corp. The majority of those sales will be to banking firms based elsewhere, according to Danielson, the Maryland consultant.
By the end of 1990, ”there will be a limited number of buyers and a limited number of people who will be attractive targets,” said John Rau, president of Chicago`s Exchange National Bank. ”I don`t think full interstate banking will have much meaning for anybody below $1 billion.”
First Colonial`s Johnson sees his $1 billion, nine-bank holding company as one of the most likely acquisition candidates.
”We`re aiming for the national trigger (date),” he said. ”That`s the time the price will be highest. I could sell at 14.5 times earnings now, but there`s a decent chance I could get 20 times if I wait until 1990.”
