Tuesday, January 07, 2014 5:37 PM CT

US Bancorp receives praise for deal in the Windy City

By Nathan Stovall

While U.S. Bancorp's purchase of Charter One's Chicago operations will not move the needle materially for the company, the Street sees the transaction as smart, strategic and reasonable.

U.S. Bancorp confirmed recent rumors early Jan. 7, announcing that its lead bank U.S. Bank NA agreed to acquire the Chicago branch banking operations of Charter One Bank from RBS Citizens Financial Group Inc. for a deposit premium of $315 million, or roughly 6%. The acquisition includes Charter One's Chicago retail branch network, small business operations and select middle market relationships. With the deal, U.S. Bancorp will have more than 180 branches and move into the eighth-place ranking in terms of deposits in the Chicago MSA, with roughly $11.3 billion in deposits.

John Elmore, vice chairman of community banking and branch delivery for U.S. Bank., said the company's distribution had not been optimal for a market the size of the Chicago MSA, but Charter One's Chicago operations will give it a "much more complete" distribution package for existing customers and new prospects in the market.

"It's just really a unique opportunity for us, and we're extremely excited about it," Elmore told SNL.

He said the transaction will give U.S. Bancorp customers and Charter One customers in Chicago greater convenience, while the target's customers will gain a broader set of products to choose from once the deal closes. He further noted that the broader distribution network in Chicago will not only benefit U.S. Bank's retail and small business banking operations, but the increased awareness in the market will support the company's commercial banking and private bank and trust operations as well.

"There's no question that as you have a certain segment of mass in a particular marketplace that you benefit by having that presence, and we think this definitely gets us to a point where we have added benefits just beyond the branch distribution itself," Elmore said.

Analysts reviewing the transaction noted that the deal is small and likely will have a minimal impact on U.S. Bancorp's earnings but said that the deal will significantly build the company's presence in an important market. Robert W. Baird analyst David George said in a Jan. 7 report that he viewed the transaction favorably, since it is large enough to improve the company's competitive position in one of the largest U.S. markets, yet small enough to avoid regulatory scrutiny associated with larger holding company acquisitions.

Sandler O'Neill analyst Scott Siefers offered a similar assessment and said he views the deal favorably even though it is small. The analyst called the 6% deposit premium U.S. Bancorp will pay in the transaction "very reasonable" and said he expects the deal will be easy to integrate and give the company "important heft in Chicago."

map"So all things considered, even though the transaction is not big enough to move the needle meaningfully, we view it as a nice franchise addition for USB," Siefers wrote in a Jan. 7 report.

Observers noted that U.S. Bancorp is acquiring an attractive deposit franchise in the transaction. Roughly 35% of the deposits U.S. Bancorp will acquire are noninterest bearing and NOW accounts, 48% are money market and savings accounts, and 17% are time deposits. U.S. Bancorp is paying a higher deposit premium than witnessed in some other branch acquisitions, with the 6% premium equating to nearly double the 2.94% median premium buyers have paid on branch deals involving deposits greater than $250 million since 2010, according to SNL data. But, observers said the Chicago operations of Charter One merit some value given the scarcity of sizable franchises in the market.

Michael Iannaccone, president and managing partner of metro Chicago-based MDI Investments, said that U.S. Bancorp will gain a "very desirable" deposit franchise in acquiring Charter One's Chicago operations. He said many of the Charter One branches are in well-developed, high-net-worth markets where it would be difficult to build new branches, and even impossible in some suburban towns that placed moratoriums on constructing bank branches close to 10 years ago.

"As far as desirable franchises go in Chicago, I would rate it in the top 10 if not in the top five," Iannaccone said.
U.S. Bancorp has acquired franchises in the area in recent years, picking up FBOP Corp.'s nine banking units, including its sizable banking operations based in Chicago, after the FDIC closed their doors. Iannaccone said some animosity arose toward U.S. Bancorp after it acquired the failed entities — which some Illinois politicians had to tried to save or at least delay closing — but many people in the Chicago market have since come around to U.S. Bancorp and buying Charter One's Chicago operations will help create further goodwill in the marketplace.

U.S. Bank's Elmore said the company does not have a target or plan for how large it would like to be in the Chicago market, but will continue to look to become more efficient and effective at taking care of its customers.

"But Chicago is obviously a very, very large and attractive market and one we've been successful in and are really excited about the opportunity to blend the Charter One operation into our existing operation," Elmore said.
Salman Aleem Khan contributed to this article.