Amid slow growth prospects, MB Financial seeks more acquisitions

a man passing by a MB Financial bank franchise in Chicago

By Yifang (Evonne) Liu

MB Financial Inc. (NASDAQ: MBFI) is expected to continue modest growth in 2017 in spite of a higher rate environment, and management is looking for more acquisitions.

Analysts are conservative about the Chicago-based bank holding company’s 2017 performance after the company reported soft fourth quarter earnings last week that missed analysts’ estimate.

Out of 11 analysts covering MB financial, three rate the stock a buy and eight call it a hold. Their average 12-month target price on MB Financial’s shares compiled by Bloomberg is $48.38. The stock closed Thursday at $44.17, for a P/E ratio of 20.71, in line with 20.94 for the regional bank industry as reported by New York University’s business school. MB Financial’s 52-week low was $28.50 and its high $48.47.

“The miss was tied to a sharper than expected decline in mortgage banking revenue which was partially offset by lower provision expenses in the quarter,” Jason Oetting, analyst at J.P. Morgan wrote in a report. “The increase in interest rates in 4Q proved more impactful on the company’s mortgage business than we had anticipated.”

MB Financial Inc., with a market cap of $3.73 billion, is the holding company for MB Financial Bank, which has $19 billion in assets. It provides financial services to small- and middle-market companies and individuals, including wealth management and investment advisory services and equipment finance and leasing. MB Financial operates a large, multi-channel mortgage platform in 44 states, through third parties and its 50 branches in 15 states.

Analysts’ recent rating changes have gone both ways. Zacks Investment Research raised shares of MB Financial from a hold to a buy rating and set a $53.00 price target on the stock in a research note on Jan. 6. SunTrust Banks Inc. started coverage of MB Financial in a research note on Dec. 20, setting a buy rating and a $54.00 price target on the stock. Keefe, Bruyette & Woods last week downgraded shares of MB Financial from outperform to market perform rating and cut its price target from $47.00 to $46.00.

However, some analysts are optimistic, given the company’s diverse sources of revenue.

“The [mortgage] business is a large revenue contributor, but a small portion of overall profits. Mortgage represented $19 million of net income in 2016 compared to management expectations of $10 to $14 million in 2017. This represents just a $0.03 to $0.06 EPS headwind year over year,” wrote Michael Young, analyst at SunTrust Robinson Humphrey Inc., in a note.

Nathan Race, analyst at Piper Jaffray, said in a phone interview that he thinks the company’s mortgage unit is better positioned than most lenders for lower 2017 volumes.

“Unlike retail dependent peers, we believe MBFI’s mortgage unit, as mostly a third party originator, cost structure and profitability should adjust more rapidly to a lower volume environment,” Race said.

MB Financial completed its merger with American Chartered Bancorp Inc. in August, and its bank subsidiary, American Chartered Bank, has been merged into MB Financial Bank.

The American Chartered merger adds 15 Chicago-area offices, $2.77 billion in assets and $2.36 billion in deposits to MB Financial’s commercial banking business.

“One of the reasons we really like the American Chartered business is, the bank operated and the bankers, most of them, operated at the lower end of the middle market, which we think is a fantastic place to be particularly for gathering deposits,” said Mitchell S. Feiger, CEO of MB Financial in a conference call.

The costs of acquisition weighed on the income statement in the past year. However, analysts aren’t concerned with ACB-related costs in 2017.

“Trends in 4Q tied to the acquisition were disappointing; however, we do not expect additional ACB-related headwinds. Instead, we believe the combined franchise will deliver among the strongest risk-adjusted returns and organic growth relative to Midwest peers in 2017,” Race wrote in his note.

Management expects, like last year, mid-to-high single-digit loan growth in 2017.

Race said the company’s loan growth is stable and better than peers’. Management’s projection “will likely prove conservative as ACB lenders re-enter the market,” Race wrote in the note.

Young, of SunTrust, wrote, “Loan origination efforts will resume with larger hold limits in February. Also, MBFI has completed a significant hiring ramp up in the leasing business in 2016, which should aid loan and fee growth next year. Some of those originations should support loan growth.”

Young went on: “MBFI is a high quality franchise with strong profitability, a better funding mix, and an adept management, which should continue to drive relative outperformance. The focus on mortgage profit declines next year was exacerbated by the hedging impacts in 4Q16, but at just 10% of EPS any headwinds should be minor.”

On the other hand, David J. Long of Raymond James wrote in a note, “While we view MB as a high-quality bank with an attractive deposit base, its shares trade at a premium to peers, and we do not foresee a near-term specific positive catalyst to drive outperformance.”

Race also said in a phone interview that the regulatory environment could benefit banks like MB Financial this year. He said the Federal Reserve Board’s Comprehensive Capital Analysis and Review (CCAR) threshold could be raised for banking companies under $10 billion in assets and potentially banks between $50 billion and $150 billion in assets, providing increased capital return flexibility for them.

MB Financial remains interested in acquiring companies.

“If it’s a depository, it’s highly likely that will be in the Chicago MSA [Metropolitan Statistical Area]. If it’s not a depository, it can be anywhere in the United States,” Feiger said in the conference call. “I continue to think that a non-depository acquisition is probably–-if we make an acquisition–is probably more likely than the depository simply because of the limited number of depository institutions in the Chicago marketplace of sufficient size to be interesting to us. It’s just the number of companies left in Chicago is getting small.”

Photo at top: A pedestrian passes by an MB Financial branch in Chicago. (Yifang (Evonne) Liu/MEDILL)