Keefe, Bruyette & Woods Inc. downgraded Midwest Banc Holdings Inc.'s stock after the Illinois company said it would reposition its balance sheet to hedge against earnings volatility and rising interest rates.
But the reduction, to "underperform" from "market perform," was largely about share price, KBW analyst Eric Grubelich wrote in a research note issued Wednesday. He wrote that the stock has peaked because of the market's view that the Melrose Park company could be an acquisition target.
Midwest shares are priced at 20 times core earnings and "have little remaining upside," Mr. Grubelich wrote. They are up nearly 6% since the beginning of October.
Midwest Banc, which focuses mainly on business lending, said Tuesday that it had sold $133.7 million of U.S. agency notes this quarter, which will result in a $1.6 million loss for the period.
It also said it had prepaid $115 million of Federal Home Loan Bank advances, which would result in "early debt extinguishment fees" of $4.2 million.
Finally, the company executed $280 million in derivative contracts at a cost of $400,000; its entire investment portfolio is about $1 billion. Management expects an additional $2 million to $3 million in restructuring charges by yearend.
Other banks have implemented balance-sheet revisions recently. Fifth Third Bancorp of Cincinnati said on Dec. 2 that it would take a $340 million charge this quarter to hedge against rising interest rates.
Midwest's repositioning will affect its per-share earnings by 13 cents this quarter, but the company said it expects to improve profit by $1.3 million or 7 cents a share next year.
Mr. Grubelich lowered his 2004 estimate for Midwest Banc by 36% Wednesday, to 43 cents a share; the average estimate of analysts surveyed by Thomson First Call is 66 cents. He trimmed 3 cents from his estimate for 2005, to 95 cents, versus the average of $1.18.
But Mr. Grubelich said Midwest's earnings will probably increase under new president and chief executive James J. Giancola. He succeeded Brad A. Luecke, who retired Oct. 6.
Mr. Giancola said in a telephone interview Wednesday that "the repositioning moves are designed to improve future earnings."
The $2.5 billion-asset company has had some challenges.
In the first quarter the Federal Reserve Bank of Chicago and the Illinois Office of Banks and Real Estate ordered it to restate 2002 earnings and raise loan reserves by $11.5 million. The order has not been lifted yet.
In an agreement signed in March with the Chicago Fed and the Illinois Department of Financial and Professional Regulation, Midwest agreed to tighten risk management.
In July, the Securities and Exchange Commission opened an inquiry related to the company's third-quarter 2002 restatement, Midwest Banc said. It lost $31,000 in the third quarter of 2004, compared with a $2.3 million profit last year.
Mr. Giancola, who was formerly the president of Fifth Third Bank Indiana, said Midwest is not for sale and will not pursue any acquisitions of its own for the time being.
Instead, he said, it plans to grow internally and in 2005 will diversify its loan portfolio by reducing its concentration in commercial real estate and expanding into consumer real estate and consumer and commercial lending.
Midwest Banc plans to expand its retail operations, and it is hiring commercial lenders, credit analysts, and risk and operations managers, Mr. Giancola said.
"We need to make money the old-fashioned way. We need to take in money and make loans," he said.
