After Corus, Serial Buyer Is Now Pausing to 'Digest'

After striking its third and largest deal yet for a failed bank, MB Financial Inc. is taking a breather — but only a temporary one.

The $8.4 billion-asset Chicago company picked up the pieces of Corus Bank after its seizure Friday and now plans to spend the rest of the year integrating what was a sizable hometown acquisition. MB took on nearly $7 billion of deposits, $3 billion of assets and 11 branches in the deal, its second with the Federal Deposit Insurance Corp. in as many weeks and its third this year.

But the company also announced plans Monday to raise $175 million of capital, as it gears up to do even more.

Mitchell Feiger, MB's president and chief executive officer, said in an interview that he would not limit the number of failed banks it could pick up.

"We would like to get all of the ones that would add value to our company, and a bunch of them are going to have value," he said.

Throughout the year MB has been open about its appetite for failed banks; during presentations it often includes a chart showing the number of troubled banks in the Chicago market.

Feiger said MB is targeting only local failures, either in its existing market or contiguous ones.

But it expects to refrain from bidding in coming months. Though the company might peek at other acquisition opportunities coming down the pike, it is unlikely to strike again this year, Feiger said.

Besides Corus, MB recently snatched up InBank in Oak Forest, Ill., to gain three branches. It assumed $150 million of InBank's $199 million of deposits for no premium. It also paid $142 million for InBank's $212 million of assets.

In February it added four branches and $218.6 million of deposits from Heritage Community Bank in Glenwood, Ill., for no premium. It paid $216 million for $230.5 million of Heritage Community's assets, with a loss-sharing agreement to cover $181 million of those assets.

MB's deal for Corus adds a whopping $6.6 billion of deposits, but MB intends to run off all but $1.6 billion of that by yearend as it reprices certificates of deposit. Most of those were sold nationwide and paid a high premium.

Accounting for the runoff, MB said that its loan-to-deposit ratio would drop to 84%, from 104% at June 30.

It took less than half of the $7 billion of assets from Corus, which had been struggling all year as nonperformers piled up from its nationwide condo lending. The $3 billion of assets MB bought are primarily securities and cash; only $47 million are loans. (The FDIC said it expects to dispose of Corus' assets through a private placement in the next 30 days.)

These metrics prompted praise from investors and analysts during the company's conference call, with several congratulating the company on the deal.

"It is being widely viewed as very positive," said Bryce W. Rowe, an analyst at Robert W. Baird Inc. "The structure of the deal carries little risk."

Analysts agreed with Feiger's assessment that the integration of the most recent failures should go smoothly, particularly given MB's cachet in Chicago as one of the stronger banks.

"We have a positive brand image in the market. The feedback we are getting from the Corus staff is that our reception from customers has been very good," Feiger said during the call. "I have not heard one negative comment."

Daniel Cardenas, an analyst at Howe Barnes Hoefer & Arnett Inc., said in a research note after MB's acquisition of InBank that the company is experienced in integrations.

"We view the company as being well positioned to capitalize on consolidation opportunities likely to present themselves over the next two to three years within the Chicago market," Cardenas said. "A sound capital base, adequate reserve levels and a senior management team well versed in structuring and executing acquisitions supports our thesis, as does a market area that will likely experience its share of bank failures."

However, MB is not without its own struggles. At the end of the second quarter, the company reported nonperforming assets of $245 million, up 175% from a year earlier. The nonperformers made up 2.92% of total assets. Like many other banks in the Chicago area, its credit issues stem primarily from construction and development lending.

Analysts said that the company was among the earlier ones to recognize losses and that its loan deterioration appears to have leveled off.

"They didn't sidestep the issues that everyone else is facing," Rowe said. "But they have been more proactive in recognizing that weakness and have provisioned to the point where they are starting to see some stabilization."

Feiger acknowledged that MB is contending with credit issues, but called the level of nonperfomers manageable.

"We have a construction loan portfolio that is a piece of crap," he said. "We aren't perfect, I wish we were."

At the end of the second quarter, the company had a tangible equity ratio of 5.65%. That is starting to get thin, particularly for making deals; analysts generally consider 5% as the level below which they start to get worried.

But the capital raise is expected to boost the ratio by at least 90 basis points, and Rowe said that if all goes well, he expects the ratio to reach 7% by yearend.

The capital raise also underscores the company's intent to return to bidding on failed banks. It plans to add at least $175 million of common equity in an offering that priced at $16 per share Monday. The price is a 6% discount to where the stock closed Friday.

The company could use some of the proceeds to help repay the $196 million it got from the Treasury Department's Troubled Asset Relief Program.