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CIBC once had a much bigger presence in the United States, but decided to retreat back to the safety and familiarity of the Canadian market after a series of missteps in the early 2000s.Fred Lum/The Globe and Mail

By this time next week, should all go as planned, Canadian Imperial Bank of Commerce could be in the final stages of sealing a blockbuster deal that would give it a much-needed beachhead the United States.

But first it must persuade a majority of PrivateBancorp Inc.'s shareholders to bless its $4.9-billion (U.S.) takeover of the Chicago-based lender at a special meeting on May 12. For Canada's fifth-largest bank by assets, this is proving to be easier said than done.

CIBC has tabled at least five offers to PrivateBancorp's board, two of them informally, and racked up frequent flyer miles between Toronto and Chicago since talks became serious in January, 2016, according to regulatory filings. The Canadian bank first floated a deal for $44 a share that winter, with the two companies coming to terms five months later, in June, for a proposed $47 a share.

Since then, "for better or worse, the world changed," said John Rodis, the St. Louis-based senior vice-president of research at FIG Partners, who has followed PrivateBancorp for 15 years. U.S. bank stocks soared after President Donald Trump was elected in November, and more recently, Canadian banks' share prices have dipped, which may be partly due to a crisis of confidence in besieged alternative mortgage lender Home Capital Group Inc.

This diverging trend has forced CIBC to adjust on the fly. The bank has publicly sweetened its offer twice, once in March and again on Thursday, when it bolstered the cash component by $3 a share for an implied price of $60.43 a share. With this latest bid – described as its "final and best offer" – CIBC has tried to draw a line in the sand.

Spokespeople for CIBC and PrivateBancorp declined to comment on the deal. But make no mistake: The proposed takeover will be the signature feature of Victor Dodig's tenure so far as CIBC's president and chief executive officer, whether it succeeds or fails. The bank has been kicking the tires on a major U.S. acquisition since at least 2013, under his predecessor Gerald McCaughey. And after more than a decade spent de-risking in the wake of the financial crisis, CIBC needs a new platform for growth.

The approval of PrivateBancorp's shareholders would all but consummate a proposed marriage whereby CIBC would acquire an all-star executive team to lead its U.S. efforts; a portfolio weighted toward commercial loans, which grow more lucrative in step with interest-rate hikes; and a footprint in the U.S. Midwest that stands to benefit if Mr. Trump's administration can ignite the economy. These are just some of the reasons CIBC views PrivateBancorp as "the right partner," but also why the price tag for this bank has kept rising – and why it is at risk of stretching just beyond CIBC's reach.

"It's a toss-up" whether the deal will win approval, Mr. Rodis said. "To be honest if you asked me, gun to my head, I don't even know."

PrivateBancorp's story

Founded in 1989, PrivateBancorp is a relative adolescent next to 150-year-old CIBC.

The PrivateBank, as it is commonly known, grew up through a period of intense consolidation in Chicago's banking market during the 1980s and 1990s, and now conducts business in 36 offices across 12 states. But it still generates 75 per cent of its sales from the Chicago area. It serves corporate clients that typically earn between $20-million and $500-million in revenue each year, but as much as $2-billion. It also caters to the wealthy owners and executives who run the bank's mid-market commercial clients through its private wealth group, private banking and asset management services.

A pivotal moment in the lender's 28-year history came in 2007, when Larry Richman joined as CEO from LaSalle Bank, a heavy hitter in Chicago's banking landscape that had been swallowed up by Bank of America Corp. A long list of employees and their clients decamped with him.

Mr. Richman is a sharply dressed, well-respected banker with wide-ranging connections in the Midwest – a relationship banker who is said to be most at home meeting with company CEOs and lending money. But when he arrived, at the precipice of the financial crisis, he inherited problems with PrivateBancorp's credit quality, and set about cleaning up the bad assets on its books.

Since then, the makeup of its loan book has evolved. Whereas 65 per cent of the 2007 book was comprised of riskier loans to construction and commercial real estate – some of which turned into troubled assets during the crisis – 64 per cent of loans are now to more reliable commercial and industrial clients, as of March. During that same period, the bank has more than doubled the size of its staff from 597 professionals to 1,329 and quadrupled its total assets from $5-billion to $20-billion.

"It's a completely different bank than the old company was," said Jared Shaw, a managing director at Wells Fargo Securities LLC.

Analysts speculate that Mr. Richman and his team, with their extensive relationships across the United States, may be among the most prized assets CIBC is trying to acquire. If the deal goes through, Mr. Richman will become head of CIBC's U.S. region for a three-year term, and CIBC will pay handsomely to keep his team intact. PrivateBank's five top executives will collect a combined $15.9-million (U.S.) in retention payments, including an $8.2-million deferred award for Mr. Richman.

On its own, the mid-sized PrivateBank has its limitations, however. It doesn't have a stable base of deposits to fund its loan book, and the prospect of gaining access to CIBC's much larger balance sheet is one reason the lender could benefit from tying itself to a larger institution. The PrivateBank has about $28-billion (Canadian) in total assets, compared with CIBC's $513.3-billion.

"I continue to view PrivateBancorp as this big bank that's trapped in a small-bank body," said Terry McEvoy, an analyst at Stephens Inc. "That's kind of their mentality."

In 2016, the PrivateBank's loan syndication division was the lead or co-lead on 118 deals totalling $3.2-billion (U.S.) in commitments to commercial borrowers, up from $2.3-billion the year before. But the bank only kept $1.2-billion on their own balance sheet.

"So they're growing in excess of their capacity," Mr. McEvoy added. "If I'm part of a larger entity, that $3.2-billion, I can keep that on the balance sheet, and that's incremental revenue growth. … The combined company stands to be more profitable."

CIBC says PrivateBancorp will also provide a place to park deposits and manage treasury services to its cross-border Canadian clients and private U.S. wealth manager CIBC Atlantic Trust, acquired in 2014. PrivateBancorp says 75 per cent of its commercial clients have a treasury management relationship with the bank today.

The upshot is that, unlike many deals in the U.S. banking sector that focus intensely on reducing costs, CIBC's interest in PrivateBank appears to be mostly strategic.

"If [CIBC is] looking at this as the long term, over the next generation they want to have a platform for growth in the U.S., they're not going to be able to find a well-run, well-positioned bank for a cheaper price," Mr. Shaw said. "It's not so much just what does Private bring to the table today – it's what type of market positioning does it allow CIBC to have in the U.S. market?"

But CIBC can't escape tough questions about a price tag that started out high last June and has gone higher since.

CIBC's U.S. history

CIBC once had a much bigger presence in the United States, but decided to retreat back to the safety and familiarity of the Canadian market after a series of missteps in the early 2000s. In early 2005, CIBC paid $2.4-billion (U.S.) to settle a class-action lawsuit with Enron investors after becoming entangled in the energy firm's accounting scandal. And after amassing substantial exposure to the U.S. subprime mortgage market, the bank took billions of dollars in writedowns.

As early as 2004, one analyst wryly described CIBC as the bank "most likely to walk into a sharp object."

But that's history, and CIBC is only one of several of Canada's largest banks moving aggressively into the fiercely competitive U.S. market. Forecasting projects only modest growth from their core domestic operations for the foreseeable future. And that makes the U.S. market – where optimism among banks and businesses has surged of late – a tantalizing opportunity to boost profits.

Since 2005, Toronto-Dominion Bank has built an extensive U.S. presence with more branches in the United States than it has in Canada, while Bank of Montreal has a long-standing presence in the U.S. Midwest through BMO Harris Bank. Meanwhile, Royal Bank of Canada re-engineered its U.S. strategy in 2015 with the $5-billion (U.S.) purchase of City National Bank.

In 2015, CIBC had a false start: The bank sold off its 41-per-cent stake in U.S. wealth manager American Century Investments because it saw no path to gain full control.

In hindsight, CIBC's timing on the PrivateBancorp deal could have been better. But a driving force behind the U.S. bank's soaring share price since the deal was first announced rests on interest rates – a factor beyond its control. That's because a whopping 96 per cent of its loans have variable pricing, and about 70 per cent of its loans are tied to Libor, which measures banks' estimated borrowing costs.

PrivateBancorp is one of the most sensitive banks to rate hikes because so many of its assets – loans and investment securities – will reprice immediately. They will adjust much faster than the cost of servicing the bank's deposits, the lion's share of which are in business chequing accounts, and PrivateBancorp stands to cash in as spreads widen.

This week, the U.S. Federal Reserve held its key benchmark rate steady, but it is expected to gradually hike short-term rates this year if economic growth picks up.

Should the deal be voted down, it's not clear either bank has a viable alternative in mind. CIBC could pursue another mid-sized U.S. bank – analysts speculate about Texas Capital Bancshares, Western Alliance Bancorporation and PacWest Bancorp – but it isn't clear the price tags for those banks would be any more achievable.

As for PrivateBancorp, "I don't necessarily think that there's another buyer for PrivateBank out there," said Mr. Shaw from Wells Fargo.

Most analysts agree the PrivateBank would be fine standing alone. But after a year and a half of courtship with numerous twists and turns, the $4.9-billion question is whether shareholders can stomach walking away from their most devoted suitor.

"They've put a lot of effort into this," Mr. Shaw said. "I think this is the best deal for them."

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