MB Financial's Acquisition of Corus Branches: A Good Deal

| About: MB Financial (MBFI)

We don’t have a position in MB Financial (NASDAQ:MBFI), but the company is getting such a good deal in its acquisition of the branches of the just-seized Corus Bankshares that I can’t help but make a comment.

In conjunction with the deal, MB raised $175 million via a common offering done at $16 per share (which is 7.5% accretive to tangible). I estimate the deal and offering together will be roughly 20% accretive to normalized earnings. Accounting for the excess capital, MB can likely generate adjusted normalized earnings per share in the $2.40 range, which puts the stock at 7.3 times adjusted normalized earnings.

Some highlights:

Pricing attractive: MB paid a deposit premium of just 20 basis points for Corus’s $6.6 billion in deposits. Yes, the bulk of those deposits consist of “hot money” high-rate CDs. But if you assume those run off, the core deposit base should stabilize at $1.6 billion, which implies a pro forma core deposit premium of 85 bps—still an attractive price. Additionally, the company’s assumptions appear conservative, as the target $1.6 billion in core deposits even assumes roughly 40% runoff of local deposits.

In any event, MB expects the deal to generate an IRR of over 30%, based on roughly $60 million to $70 million of tangible common equity allocated to the deal. That’s consistent with normalized earnings per share accretion of roughly 30 to 40 cents.

Core deposit base solid: After the runoff of the non-core deposits, MB will be left with a very strong deposit base that will greatly enhance its liquidity profile. Of the expected $1.6 billion of Corus’s core deposits, $1 billion are in demand deposits, NOW, MMDA, and savings accounts, with an average age of 8.5 years and weighted average rate of 97 bps. The remaining $600 million are local CDs (that currently cost 349 bps) that should stick around after repricing.

MB’s liquidity profile will be greatly enhanced following the deal. The company’s loan-to-deposit ratio figures to improve to 84% from 104%. Its core funding ratio (core funding/total funding) will also improve to 90% from 80%.

Financial impact: As noted, MB raised $175 million via a common offering at $16 per share. The deal/common raise should boost current normalized earnings from $1.80 to roughly $2.15 and TBV to roughly $12.90, from $12.00. However, the company will still have substantial excess capital, with TCE/RWA of roughly 8.8%, post-transaction. Adjusting for the excess capital (assuming MB can leverage the capital at a 15% ROTCE), the adjusted normalized earnings would be roughly $2.40 per share. That puts the stock at roughly 7.3 times adjusted normalized earnings.

The $2.40 adjusted normalized earnings estimate implies a ROTCE on estimated 2010, fourth-quarter tangible book value of roughly 15.5% versus its historical long run average of 14.7%.

Appetite for future deals low: After doing two assisted deals in two weeks (MB acquired $136 million in deposits from the failed InBank on September 4), the company says it plans to hold off for a while. While MB didn’t acquire any nonperforming loans in the Corus deal, it argues that it still needs to integrate the deposit systems. MB says it expects to integrate both Corus and InBank by the end of the year, and at that point it will be in a position to do more deals (the company will certainly have the capital to do it.)