MB Financial, Inc. Reports 2013 Annual Net Income of $98.5 Million and Return on Assets of 1.05%

CHICAGO--()--MB Financial, Inc. (NASDAQ: MBFI), the holding company for MB Financial Bank, N.A., today announced 2013 fourth quarter net income of $23.9 million and 2013 annual net income of $98.5 million.

"We ended the year on a positive note, with robust commercial loan growth and strong core earnings," stated Mitchell Feiger, President and Chief Executive Officer of the Company. "Our return on assets increased to 1.05% in 2013 compared to 0.95% for the prior year, driven by significant increases in revenues from our fee businesses and low credit costs. We remain focused on executing our business strategy while planning our pending merger with Taylor Capital. We look forward to an exciting 2014."

Net income, net income available to common stockholders and fully diluted earnings per share were as follows (quarterly percentage changes are not annualized throughout the document):

      Change     Change         Change
from from from
3Q13 to 4Q12 to 2012 to
4Q13 3Q13 4Q13 4Q12 4Q13 2013 2012 2013
(dollars in thousands, except per share data)
Net income $ 23,856 $ 24,400 -2.2% $ 24,012 -0.6% $ 98,455 $ 90,374 +8.9%
Net income available to common stockholders 23,856 24,400 -2.2 24,012 -0.6 98,455 87,105 +13.0
Fully diluted earnings per share 0.43 0.44 -2.3 0.44 -2.3 1.79 1.60 +11.9
 

Results for the fourth and third quarters of 2013 reflected $724 thousand and $1.8 million, respectively, in legal and professional costs related to our pending merger with Taylor Capital Group, Inc., totaling $2.5 million for the year.

Key items include:

Overall Fee Income Increase Driven by our Key Fee Initiatives:

      Change     Change         Change
from from from
3Q13 to 4Q12 to 2012 to
4Q13 3Q13 4Q13 4Q12 4Q13 2013 2012 2013
Core non-interest income:
Key fee initiatives:
Capital markets and international banking service fees $ 841 $ 972 -13% $ 2,386 -65% $ 3,560 $ 5,086 -30%
Commercial deposit and treasury management fees 6,545 6,327 +3 6,095 +7 24,867 23,636 +5
Lease financing, net 15,808 14,070 +12 12,419 +27 61,243 36,382 +68
Trust and asset management fees 4,975 4,799 +4 4,623 +8 19,142 17,990 +6
Card fees 2,838   2,745   +3 2,505   +13 11,013   9,368   +18
Total key fee initiatives 31,007 28,913 +7 28,028 +11 119,825 92,462 +30
 
Other non-interest income 7,788   8,334   -7 10,373   -25 33,342   36,307   -8
Total core non-interest income 38,795 37,247 +4 38,401 +1 153,167 128,769 +19
 
Total non-core non-interest income 250   460   -46 (490 ) -151 1,227   424   +189
 
Total non-interest income $ 39,045   $ 37,707   +4 $ 37,911   +3 $ 154,394   $ 129,193   +20
 
  • Revenues from key fee initiatives increased 7% compared to the third quarter of 2013, primarily as a result of an increase in leasing revenues, and increased 11% compared to the fourth quarter of 2012, primarily as a result of an increase in leasing revenues partly offset by the decrease in capital markets and international banking fees.
    • The increase in lease financing was driven by the addition of Celtic Leasing Corp. ("Celtic"), a leasing subsidiary we acquired in December 2012, which contributed $6.9 million in leasing revenues during the fourth quarter of 2013.
    • Commercial deposit and treasury management fees increased primarily as a result of the addition of new treasury management services customers.
    • Trust and asset management fees increased due to strong equity market performance and the addition of new clients.
    • Capital markets and international banking service fees decreased due to lower swap, syndication, and merger and acquisition advisory revenues.
    • Core non-interest income to total revenues ratio was 34.7% in the fourth quarter of 2013 compared to 33.5% in the prior quarter and 34.2% in the fourth quarter of 2012.
  • Revenues from key fee initiatives increased 30% during the year ended December 31, 2013 compared to the prior year.
    • Net lease financing income increased as a result of leasing revenues attributable to the addition of Celtic ($25.9 million).
    • Card fee income increased due to higher revenues on prepaid, debit and credit cards.
    • Commercial deposit and treasury management fees increased primarily as a result of the addition of new treasury management services customers.
    • Trust and asset management fees increased due to strong equity market performance and the addition of new clients.
    • Capital markets and international banking service fees decreased due to lower swap, syndication, and merger and acquisition advisory revenues.
    • Core non-interest income to total revenues ratio was 34.4% for the year ended December 31, 2013 compared to 29.4% for the prior year.

Net Interest Margin Decreased from Prior Quarter:

  • Our fully taxable equivalent net interest margin was 3.50% for the fourth quarter of 2013 compared to 3.66% for the prior quarter and 3.57% for the fourth quarter of 2012. Early in the fourth quarter of 2013, we entered into a $300.0 million short-term advance from the Federal Home Loan Bank of Chicago ("FHLB") at an annual interest rate of 0.17% for 80 days and held cash at the Federal Reserve to increase our balance sheet liquidity in preparation for an adverse market reaction to a potential Federal government shutdown. As a result, our average cash held at the Federal Reserve increased by approximately $254 million. While the increased liquidity did not materially impact net interest income, it did decrease our net interest margin for the quarter by approximately 10 basis points. This advance was repaid shortly after year end.
  • In addition to higher cash balances held during the fourth quarter, the decrease in net interest margin from the third quarter of 2013 was due to a decrease in yield on loans, partially offset by a lower cost of funds.
  • Net interest income decreased compared to the prior quarter as a result of a lower net interest margin. Compared to the fourth quarter of 2012, net interest income declined due to the lower yield on loans, partially offset by higher taxable securities yields and a lower cost of funds.

Loan Growth During the Quarter:

  • Gross loans, excluding covered loans, grew $163.6 million during the fourth quarter and $159.8 million during the year ended December 31, 2013 as follows (dollars in thousands):
  Change from   Change from
9/30/2013 to 12/31/2012 to
12/31/2013 12/31/2013
  Percent   Percent
Balance Growth Balance Growth
Commercial related credits:
Commercial loans $ 112,368 +10% $ 60,905 +5%
Commercial loans collateralized by assignment of lease payments (lease loans) 25,374 +2 191,168 +15
Commercial real estate 9,332 +1 (114,132 ) -6
Construction real estate 5,107   +4 30,992   +28
Total commercial related credits 152,181   +3 168,933   +4
Consumer related 11,415   +1 (9,182 ) -1
Gross loans excluding covered loans 163,596 +3 159,751 +3
Covered loans (37,777 ) -14 (214,130 ) -48
Total loans $ 125,819   +2 $ (54,379 ) -1
 

Non-Performing Assets and Potential Problem Loans Improved During the Quarter and Year; Net Credit Costs Remained Low:

    Change     Change         Change
from from from
3Q13 to 4Q12 to 2012 to
4Q13 3Q13 4Q13 4Q12 4Q13 2013 2012 2013
 
Non-performing loans $ 106,561 $ 102,452 +4.01% $ 116,986 -8.91% $ 106,561 $ 116,986 -8.91%
OREO 23,289 31,356 -25.73 36,977 -37.02 23,289 36,977 -37.02
Non-performing assets 130,690 134,669 -2.95 154,736 -15.54 130,690 154,736 -15.54
Potential problem loans (1) 79,589 96,405 -17.44 111,553 -28.65 79,589 111,553 -28.65
Non-performing loans to total loans 1.87 % 1.83 % +0.04 2.03 % -0.16 1.87 % 2.03 % -0.16
Non-performing assets to total assets 1.36 1.45 -0.09 1.62 -0.26 1.36 1.62 -0.26
Net loan charge-offs (recoveries) to average loans - annualized 0.23 0.18 +0.05 (0.17 ) +0.40 0.16 (0.02 ) +0.18
 
Credit costs:
Provision for credit losses $ (3,000 ) $ (3,304 ) $ 1,000 $ (5,804 ) $ (8,900 )
Net (gain) loss recognized on other real estate owned (634 ) 791   1,626   (1,528 ) 17,594  
Net credit costs $ (3,634 ) $ (2,513 ) $ 2,626   $ (7,332 ) $ 8,694  

(1) We define potential problem loans as loans rated substandard that do not meet the definition of a non-performing loan.

Provision for credit losses was negative during the quarter due to the improvement in potential problem loans, improved loss history and recoveries.

Continued Healthy Return on Assets During the Quarter and for the Year Ended December 31, 2013:

      Change     Change         Change
from from from
3Q13 to 4Q12 to 2012 to
4Q13 3Q13 4Q13 4Q12 4Q13 2013 2012 2013
Annualized return on average assets 0.99 % 1.05 % -0.06% 1.01 % -0.02% 1.05 % 0.95 % +0.10%
Annualized return on average common equity 7.19 7.46 -0.27 7.55 -0.36 7.59 % 7.05 % +0.54
Annualized cash return on average tangible common equity 11.23 11.74 -0.51 11.47 -0.24 11.94 % 10.87 % +1.07
 

Taylor Capital Group, Inc. Pending Merger Update:

  • Regulatory applications have been filed with the Federal Reserve and OCC.
  • Form S-4 registration statement was declared effective by the SEC.
  • Transition and integration planning is progressing as expected.
  • Merger-related costs of approximately $724 thousand and $2.5 million were included in the fourth quarter and year ended December 31, 2013 statements of income primarily related to legal and consulting expenses.

RESULTS OF OPERATIONS

Fourth Quarter and Annual Results

Net Interest Income

Net interest income on a fully tax equivalent basis for the fourth quarter of 2013 decreased $895 thousand from the third quarter of 2013 due to a decrease in our net interest margin. Our net interest margin on a fully tax equivalent basis for the fourth quarter of 2013 decreased 16 basis points compared to the third quarter of 2013, primarily due to higher cash balances held during the fourth quarter of 2013 as well as a decrease in yields on loans, partially offset by a lower cost of funds. Early in the fourth quarter of 2013, we entered into a $300.0 million short-term FHLB advance at a rate of 0.17% and held cash at the Federal Reserve to increase our balance sheet liquidity in preparation for an adverse market reaction to a potential Federal government shutdown. While the increased liquidity did not materially impact net interest income, it did decrease our net interest margin for the quarter by approximately 10 basis points.

Net interest income on a fully tax equivalent basis decreased $958 thousand from the fourth quarter of 2012 due to the lower yield on loans, partially offset by higher taxable securities yields and a lower cost of funds.

Net interest income on a fully tax equivalent basis decreased $18.2 million for the year ended December 31, 2013 compared to the year ended December 31, 2012. The decrease from the year ended December 31, 2012 was due to lower average earning asset balances (primarily as a result of a decrease in covered loans) as well as a decline in net interest margin. Our net interest margin, on a fully tax equivalent basis, declined to 3.59% for the year ended December 31, 2013 compared to 3.73% for the year ended December 31, 2012. The decrease in the margin during 2013 was primarily due to a decrease in yields on loans and investment securities, partially offset by a lower cost of funds.

See the supplemental net interest margin tables for further detail.

Non-interest Income (dollars in thousands):

              Year Ended
December 31,
4Q13 3Q13 2Q13 1Q13 4Q12 2013   2012
Core non-interest income:
Key fee initiatives:
Capital markets and international banking service fees $ 841 $ 972 $ 939 $ 808 $ 2,386 $ 3,560 $ 5,086
Commercial deposit and treasury management fees 6,545 6,327 6,029 5,966 6,095 24,867 23,636
Lease financing, net 15,808 14,070 15,102 16,263 12,419 61,243 36,382
Trust and asset management fees 4,975 4,799 4,874 4,494 4,623 19,142 17,990
Card fees 2,838   2,745   2,735   2,695   2,505   11,013   9,368  
Total key fee initiatives 31,007 28,913 29,679 30,226 28,028 119,825 92,462
 
Loan service fees 1,214 1,427 1,911 1,011 2,436 5,563 5,845
Consumer and other deposit service fees 3,481 3,648 3,593 3,246 3,655 13,968 14,428
Brokerage fees 1,227 1,289 1,234 1,157 1,088 4,907 4,792
Increase in cash surrender value of life insurance 848 851 842 844 893 3,385 3,570
Accretion of FDIC indemnification asset 35 64 100 143 154 342 1,055
Net gain on sale of loans 342 177 506 639 822 1,664 2,325
Other operating income 641   878   1,039   955   1,325   3,513   4,292  
Total core non-interest income 38,795   37,247   38,904   38,221   38,401   153,167   128,769  
 
Non-core non-interest income: (1)
Net (loss) gain on investment securities (15 ) 1 14 (1 ) 311 (1 ) 555
Net loss on sale of other assets (323 ) (905 ) (323 ) (942 )
Increase in market value of assets held in trust for deferred compensation (A) 588   459   21   483   104   1,551   811  
Total non-core non-interest income 250   460   35   482   (490 ) 1,227   424  
 
Total non-interest income $ 39,045   $ 37,707   $ 38,939   $ 38,703   $ 37,911   $ 154,394   $ 129,193  

(1) Letter denotes the corresponding line item where this non-core non-interest income item resides in the consolidated statements of income as follows: A – Other operating income.

Core non-interest income for the fourth quarter of 2013 increased approximately 4% from the third quarter of 2013.

  • Net lease financing revenue increased during the fourth quarter primarily due to an increase in leasing revenue as a result of new lease originations. Leasing revenues can fluctuate from quarter to quarter.
  • Commercial deposit and treasury management fees increased as a result of the addition of new treasury management services customers.
  • Trust and asset management fees increased due to strong equity market performance and the addition of new clients.
  • Capital markets and international banking service fees decreased due to lower swap, syndication, and merger and acquisition advisory revenues.

Core non-interest income for the year ended December 31, 2013 increased approximately 19% compared to the year ended December 31, 2012.

  • Net lease financing income increased as a result of leasing revenues attributable to the addition of Celtic ($25.9 million).
  • Card fee income increased due to higher revenues on prepaid, debit and credit cards.
  • Commercial deposit and treasury management fees increased as a result of the addition of new treasury management services customers.
  • Trust and asset management fees increased due to strong equity market performance and the addition of new clients.
  • Capital markets and international banking service fees decreased due to lower swap, syndication, and merger and acquisition advisory revenues.

Non-interest Expense (dollars in thousands):

              Year Ended
December 31,
4Q13 3Q13 2Q13 1Q13 4Q12 2013   2012
Core non-interest expense:
Salaries and employee benefits $ 44,929 $ 44,459 $ 43,888 $ 43,031 $ 42,934 $ 176,307 $ 164,885
Occupancy and equipment expense 9,269 8,797 9,408 9,404 8,774 36,878 35,806
Computer services and telecommunication expense 5,509 4,870 4,617 3,887 4,160 18,883 15,499
Advertising and marketing expense 2,081 1,917 2,167 2,103 2,335 8,268 8,183
Professional and legal expense 2,340 1,408 1,353 1,295 1,640 6,396 6,110
Other intangible amortization expense 1,489 1,513 1,538 1,544 1,251 6,084 5,010
Other real estate expense, net 175 240 193 139 449 747 2,990
Other operating expenses 10,171   10,052   9,083   9,213   8,027   38,519   32,270
Total core non-interest expense 75,963   73,256   72,247   70,616   69,570   292,082   270,753
 
Non-core non-interest expense: (1)
Merger-related expenses (A) 724 1,759 2,483
Branch impairment charges 1,432 2,190
Net (gain) loss recognized on other real estate owned (B) (831 ) 754 (2,130 ) 319 1,848 (1,888 ) 14,503
Net (gain) loss recognized on other real estate owned related to FDIC transactions (B) 197 37 115 11 (222 ) 360 3,091
Prepayment fees on interest bearing liabilities 12,682
Increase in market value of assets held in trust for deferred compensation (C) 588   459   21   483   104   1,551   811
Total non-core non-interest expense 678   3,009   (1,994 ) 813   3,162   2,506   33,277
 
Total non-interest expense $ 76,641   $ 76,265   $ 70,253   $ 71,429   $ 72,732   $ 294,588   $ 304,030

(1) Letters denote the corresponding line items where these non-core non-interest expense items reside in the consolidated statements of income as follows: A – Professional and legal and other operating expenses, B – Net (gain) loss recognized on other real estate owned, C – Salaries and employee benefits.

Core non-interest expense increased by $2.7 million, or approximately 4%, from the third quarter to the fourth quarter of 2013.

  • Professional and legal expense increased primarily due to increased consulting and legal costs.
  • Computer services and telecommunication expenses increased due primarily to an increase in spending on IT security, data warehouse, investments in our key fee initiatives, as well as higher transaction volumes in leasing, treasury management and card areas.
  • Occupancy and equipment expense increased due to greater computer equipment depreciation, snow removal and real estate tax expenses.

Core non-interest expense increased by $21.3 million, or approximately 8%, from the year ended December 31, 2012 to the year ended December 31, 2013.

  • Salaries and employee benefits increased primarily due to the impact of Celtic (approximately $11 million).
  • Other operating expenses were higher in 2013 as a result of an increase in the clawback liability related to our loss share agreements with the FDIC.
  • Computer services and telecommunication expenses increased due primarily to an increase in spending on IT security, data warehouse, investments in our key fee initiatives, as well as higher transaction volumes in leasing, treasury management and card areas.
  • Other intangible amortization expense increased due to the impact of Celtic.
  • Other real estate expense decreased due to a reduced OREO inventory in 2013.

Non-core non-interest expense for the fourth quarter of 2013 decreased from the preceding quarter primarily due to lower merger-related expenses and net gains recognized on other real estate owned. Non-core non-interest expense for the year ended December 31, 2013 was lower primarily due to net gains recognized on other real estate owned. In addition, non-core non-interest expense for the year ended December 31, 2012 was impacted by $12.7 million in prepayment fees related to the early redemption of interest bearing liabilities.

LOAN PORTFOLIO

The following table sets forth the composition of the loan portfolio (excluding loans held for sale) as of the dates indicated (dollars in thousands):

  12/31/2013   9/30/2013   6/30/2013   3/31/2013   12/31/2012
  % of   % of   % of   % of   % of
Amount Total Amount Total Amount Total Amount Total Amount Total
Commercial related credits:
Commercial loans $ 1,281,377 22 % $ 1,169,009 21 % $ 1,198,862 22 % $ 1,207,638 21 % $ 1,220,472 21 %
Commercial loans collateralized by assignment of lease payments (lease loans) 1,494,188 26 1,468,814 26 1,422,901 25 1,347,666 24 1,303,020 23
Commercial real estate 1,647,700 29 1,638,368 29 1,710,964 30 1,743,329 30 1,761,832 30
Construction real estate 141,253   3   136,146   2   121,420   2   101,581   2   110,261   2  
Total commercial related credits 4,564,518   80   4,412,337   78   4,454,147   79   4,400,214   77   4,395,585   76  
Other loans:
Residential real estate 314,440 5 311,256 6 305,710 5 312,804 5 314,359 5
Indirect vehicle 262,632 5 257,740 5 242,964 5 220,739 4 208,633 4
Home equity 268,289 5 274,484 5 281,334 5 291,190 5 305,186 5
Consumer loans 66,952   1   57,418   1   75,476   1   81,932   2   93,317   2  
Total other loans 912,313   16   900,898   17   905,484   16   906,665   16   921,495   16  
Gross loans excluding covered loans 5,476,831 96 5,313,235 95 5,359,631 95 5,306,879 93 5,317,080 92
Covered loans (1) 235,720   4   273,497   5   308,556   5   400,789   7   449,850   8  
Total loans $ 5,712,551   100 % $ 5,586,732   100 % $ 5,668,187   100 % $ 5,707,668   100 % $ 5,766,930   100 %

(1) Covered loans refer to loans we acquired in FDIC-assisted transactions that are subject to loss-sharing agreements with the FDIC.

Our loan balances, excluding covered loans, grew $163.6 million (+3%) during the fourth quarter of 2013 and $159.8 million (+3%) during the year ended December 31, 2013. Much of the growth in commercial loan balances occurred near the end of the fourth quarter.

ASSET QUALITY

The following table presents a summary of classified assets (excluding loans held for sale, credit-impaired loans and OREO that were acquired as part of our FDIC-assisted transactions) as of the dates indicated (dollars in thousands):

  12/31/2013   9/30/2013   6/30/2013   3/31/2013   12/31/2012
Non-performing loans:
Non-accrual loans (1) $ 106,115 $ 102,042 $ 112,926 $ 108,765 $ 115,387
Loans 90 days or more past due, still accruing interest 446   410   2,322   5,193   1,599  
Total non-performing loans 106,561   102,452   115,248   113,958   116,986  
OREO 23,289 31,356 32,993 31,462 36,977
Repossessed assets 840   861   749   757   773  
Total non-performing assets 130,690   134,669   148,990   146,177   154,736  
Potential problem loans (2) 79,589   96,405   131,746   115,451   111,553  
Total classified assets $ 210,279   $ 231,074   $ 280,736   $ 261,628   $ 266,289  
 
Total allowance for loan losses $ 111,746 $ 118,031 $ 123,685 $ 121,802 $ 124,204
Accruing restructured loans (3) 29,430 29,911 28,270 21,630 21,256
Total non-performing loans to total loans 1.87 % 1.83 % 2.03 % 2.00 % 2.03 %
Total non-performing assets to total assets 1.36 1.45 1.59 1.56 1.62
Allowance for loan losses to non-performing loans 104.87 115.21 107.32 106.88 106.17

(1) Includes $25.0 million, $22.3 million, $20.9 million, $26.3 million and $28.4 million of restructured loans on non-accrual status at December 31, 2013, September 30, 2013, June 30, 2013, March 31, 2013, and December 31, 2012, respectively.

(2) We define potential problem loans as loans rated substandard that do not meet the definition of a non-performing loan. Potential problem loans carry a higher probability of default and require additional attention by management.

(3) Accruing restructured loans consists primarily of residential real estate and home equity loans that have been modified and are performing in accordance with those modified terms as of the dates indicated. The increase in accruing restructured loans in the second quarter of 2013 was primarily a result of non-accrual loans upgraded to accrual status due to continued performance.

The following table presents data related to non-performing loans by category (excluding loans held for sale and credit-impaired loans that were acquired as part of our FDIC-assisted transactions) as of the dates indicated (dollars in thousands):

  12/31/2013   9/30/2013   6/30/2013   3/31/2013   12/31/2012
Commercial and lease $ 22,348 $ 22,293 $ 25,968 $ 22,247 $ 25,517
Commercial real estate 58,292 54,276 62,335 57,604 59,508
Construction real estate 475 496 519 1,025 1,028
Consumer related 25,446   25,387   26,426   33,082   30,933
Total non-performing loans $ 106,561   $ 102,452   $ 115,248   $ 113,958   $ 116,986
 

The following table represents a summary of OREO (excluding OREO related to assets acquired in FDIC-assisted transactions) as of the dates indicated (dollars in thousands):

  12/31/2013   9/30/2013   6/30/2013   3/31/2013   12/31/2012
Balance at the beginning of quarter $ 31,356 $ 32,993 $ 31,462 $ 36,977 $ 42,427
Transfers in at fair value less estimated costs to sell 104 1,846 3,503 711 1,811
Capitalized OREO costs 21 45 8 505
Fair value adjustments (176 ) (741 ) 1,170 (349 ) (1,982 )
Net gains (losses) on sales of OREO 1,007 (13 ) 960 30 134
Cash received upon disposition (9,023 ) (2,774 ) (4,110 ) (5,907 ) (5,918 )
Balance at the end of quarter $ 23,289   $ 31,356   $ 32,993   $ 31,462   $ 36,977  
 

Below is a reconciliation of the activity in our allowance for credit and loan losses for the periods indicated (dollars in thousands):

              Year Ended
December 31,
4Q13 3Q13 2Q13 1Q13 4Q12 2013   2012
Allowance for credit losses, balance at the beginning of period $ 119,725 $ 125,497 $ 124,733 $ 128,279 $ 124,926 $ 128,279 $ 135,975
Provision for credit losses (3,000 ) (3,304 ) 500 1,000 (5,804 ) (8,900 )
Charge-offs:
Commercial loans 676 1,686 433 911 343 3,706 2,408
Commercial loans collateralized by assignment of lease payments (lease loans) 1 1,721
Commercial real estate loans 2,386 1,236 1,978 1,917 2,965 7,517 11,377
Construction real estate 125 26 747 82 56 980 4,007
Residential real estate 722 713 399 962 1,068 2,796 2,944
Home equity 1,145 437 1,323 787 1,394 3,692 4,551
Indirect vehicle 981 572 629 729 623 2,911 2,259
Consumer loans 572   485   451   565   485   2,073   1,349  
Total charge-offs 6,607   5,155   5,960   5,953   6,935   23,675   30,616  
Recoveries:
Commercial loans 1,348 579 777 452 745 3,156 3,475
Commercial loans collateralized by assignment of lease payments (lease loans) 987 144 6,260 1,131 6,720
Commercial real estate loans 672 966 3,647 740 871 6,025 16,987
Construction real estate 789 420 131 276 561 1,616 2,019
Residential real estate 18 48 199 214 271 479 501
Home equity 152 228 100 114 248 594 671
Indirect vehicle 300 372 324 415 261 1,411 1,096
Consumer loans 65   74   59   52   71   250   351  
Total recoveries 3,344   2,687   6,224   2,407   9,288   14,662   31,820  
Total net charge-offs (recoveries) 3,263   2,468   (264 ) 3,546   (2,353 ) 9,013   (1,204 )
Allowance for credit losses, balance at the end of the period 113,462 119,725 125,497 124,733 128,279 113,462 128,279
Allowance for unfunded credit commitments (1,716 ) (1,694 ) (1,812 ) (2,931 ) (4,075 ) (1,716 ) (4,075 )
Allowance for loan losses, balance at the end of the period $ 111,746   $ 118,031   $ 123,685   $ 121,802   $ 124,204   $ 111,746   $ 124,204  
 
Total loans, at end of period, excluding loans held for sale $ 5,712,551 $ 5,586,732 $ 5,668,187 $ 5,707,668 $ 5,766,930 $ 5,712,551 $ 5,766,930
Average loans, excluding loans held for sale 5,575,759 5,555,036 5,628,415 5,668,359 5,604,837 5,605,740 5,687,052
Ratio of allowance for loan losses to total loans at end of period, excluding loans held for sale 1.96 % 2.11 % 2.18 % 2.13 % 2.15 % 1.96 % 2.15 %
Net loan charge-offs (recoveries) to average loans, excluding loans held for sale (annualized) 0.23 0.18 (0.02 ) 0.25 (0.17 ) 0.16 (0.02 )
 

The following table presents the three elements of our allowance for loan losses (dollars in thousands):

  12/31/2013   9/30/2013   6/30/2013   3/31/2013   12/31/2012
Commercial related loans:
General reserve $ 78,270 $ 87,112 $ 87,836 $ 92,433 $ 91,745
Specific reserve 12,834 12,378 16,679 12,137 13,231
Consumer related reserve 20,642   18,541   19,170   17,232   19,228
Total allowance for loan losses $ 111,746   $ 118,031   $ 123,685   $ 121,802   $ 124,204
 

Although management believes that adequate loan loss allowances have been established, actual losses are dependent upon future events and, as such, further additions to the level of loan loss allowances may become necessary.

INVESTMENT SECURITIES

The following table sets forth, by type, the fair value and amortized cost of our investment securities, excluding FHLB and FRB stock, as well as the unrealized gain of our investment securities available for sale (dollars in thousands):

  12/31/2013   9/30/2013   6/30/2013   3/31/2013   12/31/2012
Securities available for sale:
Fair value
Government sponsored agencies and enterprises $ 52,068 $ 52,527 $ 33,935 $ 40,949 $ 41,315
States and political subdivisions 19,143 19,312 684,710 719,761 725,019
Mortgage-backed securities 754,174 744,722 701,201 842,605 993,328
Corporate bonds 283,070 263,021 215,256 197,675 96,674
Equity securities 10,457   10,541   10,570   11,179   11,835  
Total fair value $ 1,118,912   $ 1,090,123   $ 1,645,672   $ 1,812,169   $ 1,868,171  
 
Amortized cost
Government sponsored agencies and enterprises $ 50,486 $ 50,678 $ 32,050 $ 38,478 $ 38,605
States and political subdivisions 19,398 19,461 669,791 680,978 679,991
Mortgage-backed securities 747,306 736,070 690,681 827,384 981,513
Corporate bonds 284,083 265,293 219,362 197,162 97,014
Equity securities 10,649   10,574   10,560   10,820   11,398  
Total amortized cost $ 1,111,922   $ 1,082,076   $ 1,622,444   $ 1,754,822   $ 1,808,521  
 
Unrealized gain
Government sponsored agencies and enterprises $ 1,582 $ 1,849 $ 1,885 $ 2,471 $ 2,710
States and political subdivisions (255 ) (149 ) 14,919 38,783 45,028
Mortgage-backed securities 6,868 8,652 10,520 15,221 11,815
Corporate bonds (1,013 ) (2,272 ) (4,106 ) 513 (340 )
Equity securities (192 ) (33 ) 10   359   437  
Total unrealized gain $ 6,990   $ 8,047   $ 23,228   $ 57,347   $ 59,650  
 
Securities held to maturity, at cost:
States and political subdivisions $ 932,955 $ 941,273 $ 282,655 $ 262,310 $ 237,563
Mortgage-backed securities 249,578   252,271   253,779   255,475   255,858  
Total amortized cost $ 1,182,533   $ 1,193,544   $ 536,434   $ 517,785   $ 493,421  
 

Securities of states and political subdivisions with an approximate fair value of $656.6 million were transferred from available for sale to held to maturity during the third quarter of 2013, which is the new cost basis.

We do not have any meaningful direct or indirect holdings of subprime residential mortgage loans, home equity lines of credit, or any Fannie Mae or Freddie Mac preferred or common equity securities in our investment securities portfolio. Additionally, more than 99% of our mortgage-backed securities are agency guaranteed.

DEPOSIT MIX

The following table shows the composition of deposits as of the dates indicated (dollars in thousands):

  12/31/2013   9/30/2013   6/30/2013   3/31/2013   12/31/2012
  % of   % of   % of   % of   % of
Amount Total Amount Total Amount Total Amount Total Amount Total
Low cost deposits:
Noninterest bearing deposits $ 2,375,863 32 % $ 2,269,367 31 % $ 2,230,384 30 % $ 2,067,310 28 % $ 2,164,547 29 %
Money market and NOW accounts 2,682,419 36 2,680,127 37 2,718,989 37 2,778,916 37 2,747,273 36
Savings accounts 855,394   12   843,671   12   845,742   11   833,251   11   811,333   11  
Total low cost deposits 5,913,676   80   5,793,165   80   5,795,115   78   5,679,477   76   5,723,153   76  
Certificates of deposit:
Certificates of deposit 1,243,433 17 1,266,989 17 1,357,777 18 1,478,039 20 1,525,366 20
Brokered deposit accounts 224,150   3   238,532   3   292,504   4   294,390   4   294,178   4  
Total certificates of deposit 1,467,583   20   1,505,521   20   1,650,281   22   1,772,429   24   1,819,544   24  
 
Total deposits $ 7,381,259   100 % $ 7,298,686   100 % $ 7,445,396   100 % $ 7,451,906   100 % $ 7,542,697   100 %
 

Low cost deposits increased by $120.5 million (+2%) and $190.5 million (+3%) compared to September 30, 2013 and December 31, 2012, respectively, driven by the growth in noninterest bearing deposits. Noninterest bearing deposits grew by $106.5 million (+5%) and $211.3 million (+10%) compared to September 30, 2013 and December 31, 2012, respectively.

CAPITAL

Tangible book value per common share increased to $16.16 at December 31, 2013 compared to $15.21 a year ago primarily due to retained net income. Our regulatory capital ratios remain strong. MB Financial Bank, N.A. was categorized as “well capitalized” at December 31, 2013 under the Prompt Corrective Action (“PCA”) provisions.

FORWARD-LOOKING STATEMENTS

When used in this press release and in reports filed with or furnished to the Securities and Exchange Commission, in other press releases or other public stockholder communications, or in oral statements made with the approval of an authorized executive officer, the words or phrases “believe,” “will,” “should,” “will likely result,” “are expected to,” “will continue” “is anticipated,” “estimate,” “project,” “plans,” or similar expressions are intended to identify “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. You are cautioned not to place undue reliance on any forward-looking statements, which speak only as of the date made. These statements may relate to our future financial performance, strategic plans or objectives, revenues or earnings projections, or other financial items. By their nature, these statements are subject to numerous uncertainties that could cause actual results to differ materially from those anticipated in the statements.

Important factors that could cause actual results to differ materially from the results anticipated or projected include, but are not limited to, the following: (1) expected revenues, cost savings, synergies and other benefits from the pending Taylor Capital merger and our other merger and acquisition activities might not be realized within the anticipated time frames or at all, and costs or difficulties relating to integration matters, including but not limited to, customer and employee retention, might be greater than expected; (2) the possibility that the requisite stockholder and regulatory approvals for the pending Taylor Capital merger might not be obtained; (3) the credit risks of lending activities, including changes in the level and direction of loan delinquencies and write-offs and changes in estimates of the adequacy of the allowance for loan losses, which could necessitate additional provisions for loan losses; (4) results of examinations by the Office of Comptroller of Currency, the Board of Governors of the Federal Reserve System and other regulatory authorities, including the possibility that any such regulatory authority may, among other things, require us to increase our allowance for loan losses or write-down assets; (5) competitive pressures among depository institutions; (6) interest rate movements and their impact on customer behavior and net interest margin; (7) the impact of repricing and competitors’ pricing initiatives on loan and deposit products; (8) fluctuations in real estate values; (9) the ability to adapt successfully to technological changes to meet customers’ needs and developments in the market place; (10) our ability to realize the residual values of our direct finance, leveraged, and operating leases; (11) our ability to access cost-effective funding; (12) changes in financial markets; (13) changes in economic conditions in general and in the Chicago metropolitan area in particular; (14) the costs, effects and outcomes of litigation; (15) new legislation or regulatory changes, including but not limited to, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the "Dodd-Frank Act") and regulations adopted thereunder, changes in capital requirements pursuant to the Dodd-Frank Act and the implementation of the Basel III capital standards, other governmental initiatives affecting the financial services industry and changes in federal and/or state tax laws or interpretations thereof by taxing authorities; (16) changes in accounting principles, policies or guidelines; (17) our future acquisitions of other depository institutions or lines of business; and (18) future goodwill impairment due to changes in our business, changes in market conditions or other factors.

We do not undertake any obligation to update any forward-looking statement to reflect circumstances or events that occur after the date on which the forward-looking statement is made.

ADDITIONAL INFORMATION

In connection with the proposed merger between MB Financial and Taylor Capital, MB Financial has filed a registration statement on Form S-4 with the Securities and Exchange Commission (the “SEC”), which was declared effective by the SEC on January 14, 2014. The registration statement includes a joint proxy statement of MB Financial and Taylor Capital that also constitutes a prospectus of MB Financial, which will be sent to the stockholders of MB Financial and Taylor Capital. Stockholders are advised to read the joint proxy statement/prospectus regarding the proposed merger and any other relevant documents filed with the SEC, as well as any amendments or supplements to those documents, because they contain, or will contain, as the case may be, important information about MB Financial, Taylor Capital and the proposed transaction. Copies of all documents relating to the merger filed by MB Financial and Taylor Capital can be obtained free of charge from the SEC’s website at www.sec.gov. These documents also can be obtained free of charge by accessing MB Financial’s website at www.mbfinancial.com under the tab “Investor Relations” and then under “SEC Filings” or by accessing Taylor Capital’s website at www.taylorcapitalgroup.com under the tab “SEC Filings” and then under “Documents.” Alternatively, these documents can be obtained free of charge from MB Financial upon written request to MB Financial, Inc., Secretary, 6111 North River Road, Rosemont, Illinois 60018 or by calling (847) 653-1992, or from Taylor Capital, upon written request to Taylor Capital Group, Inc., Investor Relations, 9550 West Higgins Road, Rosemont, Illinois 60018 or by calling (847) 653-7978.

MB Financial, Taylor Capital and certain of their respective directors and executive officers may be deemed to be participants in the solicitation of proxies from stockholders in connection with the proposed transaction under the rules of the SEC. Information about these participants may be found in the definitive proxy statement of MB Financial relating to its 2013 Annual Meeting of Stockholders filed with the SEC by MB Financial on April 12, 2013 and the definitive proxy statement of Taylor Capital relating to its 2013 Annual Meeting of Stockholders filed with the SEC on April 24, 2013. These definitive proxy statements can be obtained free of charge from the sources indicated above. Additional information regarding the interests of these participants can be found in the joint proxy statement/prospectus regarding the proposed transaction, copies of which may also be obtained free of charge from the sources indicated above.

TABLES TO FOLLOW

         
MB FINANCIAL, INC. & SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Unaudited)
As of the dates indicated
(Dollars in thousands)
 
12/31/2013 9/30/2013 6/30/2013 3/31/2013 12/31/2012
ASSETS
Cash and due from banks $ 205,193 $ 215,017 $ 152,302 $ 131,146 $ 176,010
Interest earning deposits with banks 268,266   41,700   280,618   108,885   111,533  
Total cash and cash equivalents 473,459 256,717 432,920 240,031 287,543
Federal funds sold 42,950 47,500 7,500
Investment securities:
Securities available for sale, at fair value 1,118,912 1,090,123 1,645,672 1,812,169 1,868,171
Securities held to maturity, at amortized cost 1,182,533 1,193,544 536,434 517,785 493,421
Non-marketable securities - FHLB and FRB Stock 51,417   50,870   50,870   52,434   55,385  
Total investment securities 2,352,862 2,334,537 2,232,976 2,382,388 2,416,977
Loans held for sale 629 1,120 2,528 3,030 7,492
Loans:
Total loans, excluding covered loans 5,476,831 5,313,235 5,359,631 5,306,879 5,317,080
Covered loans 235,720   273,497   308,556   400,789   449,850  
Total loans 5,712,551 5,586,732 5,668,187 5,707,668 5,766,930
Less: Allowance for loan losses 111,746   118,031   123,685   121,802   124,204  
Net loans 5,600,805 5,468,701 5,544,502 5,585,866 5,642,726
Lease investments, net 131,089 112,491 113,958 117,744 129,823
Premises and equipment, net 221,065 220,574 219,783 219,662 221,533
Cash surrender value of life insurance 130,181 129,332 130,565 129,723 128,879
Goodwill 423,369 423,369 423,369 423,369 423,369
Other intangibles 23,428 24,917 26,430 27,968 29,512
Other real estate owned, net 23,289 31,356 32,993 31,462 36,977
Other real estate owned related to FDIC transactions 20,472 24,792 19,014 20,011 22,478
FDIC indemnification asset 11,675 11,074 16,337 29,197 39,345
Other assets 186,154   171,138   166,784   175,379   185,151  
Total assets $ 9,641,427   $ 9,257,618   $ 9,369,659   $ 9,385,830   $ 9,571,805  
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits:
Noninterest bearing $ 2,375,863 $ 2,269,367 $ 2,230,384 $ 2,067,310 $ 2,164,547
Interest bearing 5,005,396   5,029,319   5,215,012   5,384,596   5,378,150  
Total deposits 7,381,259 7,298,686 7,445,396 7,451,906 7,542,697
Short-term borrowings 493,389 240,600 230,547 224,379 220,602
Long-term borrowings 62,159 62,428 62,786 64,019 116,050
Junior subordinated notes issued to capital trusts 152,065 152,065 152,065 152,065 152,065
Accrued expenses and other liabilities 225,873   194,371   182,784   198,658   264,621  
Total liabilities 8,314,745   7,948,150   8,073,578   8,091,027   8,296,035  
Stockholders' Equity
Common stock 551 551 550 550 550
Additional paid-in capital 738,053 736,294 736,281 734,057 732,771
Retained earnings 581,998 564,779 547,116 527,332 507,933
Accumulated other comprehensive income 8,383 9,918 14,231 34,928 36,326
Treasury stock (3,747 ) (3,525 ) (3,558 ) (3,529 ) (3,293 )
Controlling interest stockholders' equity 1,325,238 1,308,017 1,294,620 1,293,338 1,274,287
Noncontrolling interest 1,444   1,451   1,461   1,465   1,483  
Total stockholders' equity 1,326,682   1,309,468   1,296,081   1,294,803   1,275,770  
Total liabilities and stockholders' equity $ 9,641,427   $ 9,257,618   $ 9,369,659   $ 9,385,830   $ 9,571,805  
             
MB FINANCIAL, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share data) (Unaudited)
 
Year Ended
December 31,
4Q13 3Q13 2Q13 1Q13 4Q12 2013   2012
Interest income:
Loans $ 58,053 $ 60,115 $ 59,581 $ 60,793 $ 63,328 $ 238,542 $ 271,708
Investment securities:
Taxable 7,334 6,330 6,280 6,140 6,371 26,084 33,424
Nontaxable 8,166 8,175 8,163 8,060 7,687 32,564 29,311
Federal funds sold 6 7 2 15
Other interest earning accounts 270   193   92   135   228   690   867  
Total interest income 73,829   74,820   74,118   75,128   77,614   297,895   335,310  
Interest expense:
Deposits 3,966 4,433 5,132 5,709 6,066 19,240 30,258
Short-term borrowings 227 112 116 167 294 622 1,204
Long-term borrowings and junior subordinated notes 1,373   1,367   1,390   1,567   1,738   5,697   11,060  
Total interest expense 5,566   5,912   6,638   7,443   8,098   25,559   42,522  
Net interest income 68,263 68,908 67,480 67,685 69,516 272,336 292,788
Provision for credit losses (3,000 ) (3,304 ) 500     1,000   (5,804 ) (8,900 )
Net interest income after provision for credit losses 71,263   72,212   66,980   67,685   68,516   278,140   301,688  
Non-interest income:
Capital markets and international banking service fees 841 972 939 808 2,386 3,560 5,086
Commercial deposit and treasury management fees 6,545 6,327 6,029 5,966 6,095 24,867 23,636
Lease financing, net 15,808 14,070 15,102 16,263 12,419 61,243 36,382
Trust and asset management fees 4,975 4,799 4,874 4,494 4,623 19,142 17,990
Card fees 2,838 2,745 2,735 2,695 2,505 11,013 9,368
Loan service fees 1,214 1,427 1,911 1,011 2,436 5,563 5,845
Consumer and other deposit service fees 3,481 3,648 3,593 3,246 3,655 13,968 14,428
Brokerage fees 1,227 1,289 1,234 1,157 1,088 4,907 4,792
Net (loss) gain on securities available for sale (15 ) 1 14 (1 ) 311 (1 ) 555
Increase in cash surrender value of life insurance 848 851 842 844 893 3,385 3,570
Net loss on sale of other assets (323 ) (905 ) (323 ) (942 )
Accretion of FDIC indemnification asset 35 64 100 143 154 342 1,055
Net gain on sale of loans 342 177 506 639 822 1,664 2,325
Other operating income 1,229   1,337   1,060   1,438   1,429   5,064   5,103  
Total non-interest income 39,045   37,707   38,939   38,703   37,911   154,394   129,193  
Non-interest expense:
Salaries and employee benefits 45,517 44,918 43,909 43,514 43,038 177,858 165,696
Occupancy and equipment expense 9,269 8,797 9,408 9,404 8,774 36,878 35,806
Computer services and telecommunication expense 5,509 4,870 4,617 3,887 4,160 18,883 15,499
Advertising and marketing expense 2,085 1,917 2,167 2,103 2,335 8,272 8,183
Professional and legal expense 3,057 3,102 1,353 1,295 1,640 8,807 6,110
Other intangible amortization expense 1,489 1,513 1,538 1,544 1,251 6,084 5,010
Branch impairment charges 1,432 2,190
Net (gain) loss recognized on other real estate owned (634 ) 791 (2,015 ) 330 1,626 (1,528 ) 17,594
Other real estate expense, net 175 240 193 139 449 747 2,990
Prepayment fees on interest bearing liabilities 12,682
Other operating expenses 10,174   10,117   9,083   9,213   8,027   38,587   32,270  
Total non-interest expense 76,641   76,265   70,253   71,429   72,732   294,588   304,030  
Income before income taxes 33,667 33,654 35,666 34,959 33,695 137,946 126,851
Income tax expense 9,811   9,254   10,373   10,053   9,683   39,491   36,477  
Net income 23,856 24,400 25,293 24,906 24,012 98,455 90,374
Dividends and discount accretion on preferred shares             3,269  
Net income available to common stockholders $ 23,856   $ 24,400   $ 25,293   $ 24,906   $ 24,012   $ 98,455   $ 87,105  
             
Year Ended
December 31,
4Q13 3Q13 2Q13 1Q13 4Q12 2013   2012
Common share data:
Basic earnings per common share $ 0.44 $ 0.45 $ 0.46 $ 0.46 $ 0.44 $ 1.81 $ 1.61
Diluted earnings per common share 0.43 0.44 0.46 0.46 0.44 1.79 1.60
Weighted average common shares outstanding for basic earnings per common share 54,622,584 54,565,089 54,436,043 54,411,806 54,401,504 54,509,612 54,270,297
Weighted average common shares outstanding for diluted earnings per common share 55,237,160 55,130,653 54,868,075 54,736,644 54,597,737 54,993,865 54,505,976
               
Selected Financial Data:
Year Ended
December 31,
4Q13 3Q13 2Q13 1Q13 4Q12 2013 2012
Performance Ratios:
Annualized return on average assets 0.99 % 1.05 % 1.09 % 1.07 % 1.01 % 1.05 % 0.95 %
Annualized return on average common equity 7.19 7.46 7.82 7.89 7.55 7.59 7.05
Annualized cash return on average tangible common equity(1) 11.23 11.74 12.31 12.53 11.47 11.94 10.87
Net interest rate spread 3.37 3.52 3.46 3.44 3.41 3.45 3.55
Cost of funds(2) 0.27 0.30 0.34 0.38 0.40 0.32 0.52
Efficiency ratio(3) 67.12 65.11 64.26 63.10 61.16 64.90 60.99
Annualized net non-interest expense to average assets(4) 1.52 1.52 1.42 1.37 1.29 1.46 1.47
Core non-interest income to revenues (5) 34.68 33.51 35.01 34.56 34.18 34.44 29.44
Net interest margin 3.23 3.37 3.33 3.32 3.31 3.31 3.49
Tax equivalent effect 0.27 0.29 0.28 0.27 0.26 0.28 0.24
Net interest margin - fully tax equivalent basis(6) 3.50 3.66 3.61 3.59 3.57 3.59 3.73
Asset Quality Ratios:
Non-performing loans(7) to total loans 1.87 % 1.83 % 2.03 % 2.00 % 2.03 % 1.87 % 2.03 %
Non-performing assets(7) to total assets 1.36 1.45 1.59 1.56 1.62 1.36 1.62
Allowance for loan losses to non-performing loans(7) 104.87 115.21 107.32 106.88 106.17 104.87 106.17
Allowance for loan losses to total loans 1.96 2.11 2.18 2.13 2.15 1.96 2.15
Net loan charge-offs (recoveries) to average loans (annualized) 0.23 0.18 (0.02 ) 0.25 (0.17 ) 0.16 (0.02 )
Capital Ratios:
Tangible equity to tangible assets(8) 9.65 % 9.87 % 9.58 % 9.54 % 9.13 % 9.65 % 9.13 %
Tangible common equity to risk weighted assets(9) 13.27 13.40 13.23 13.29 13.07 13.27 13.07
Book value per common share(10) $ 24.14 $ 23.82 $ 23.63 $ 23.63 $ 23.29 $ 24.14 $ 23.29
Less: goodwill and other intangible assets, net of benefit, per common share 7.98   7.99   8.03   8.06   8.08   7.98   8.08  
Tangible book value per common share(11) $ 16.16 $ 15.83 $ 15.60 $ 15.57 $ 15.21 $ 16.16 $ 15.21
 
Total capital (to risk-weighted assets) 16.53 % 16.70 % 16.48 % 16.22 % 16.62 % 16.53 % 16.62 %
Tier 1 capital (to risk-weighted assets) 15.28 15.44 15.22 14.96 14.73 15.28 14.73
Tier 1 capital (to average assets) 11.22 11.39 11.19 10.74 10.50 11.22 10.50
Tier 1 common capital (to risk-weighted assets) 13.07 13.17 12.94 12.66 12.42 13.07 12.42

(1) Net cash flow available to common stockholders (net income available to common stockholders, plus other intangibles amortization expense, net of tax benefit) divided by average tangible equity (average equity less average goodwill and average other intangibles, net of tax benefit).

(2) Equals total interest expense divided by the sum of average interest bearing liabilities and noninterest bearing deposits.

(3) Equals total non-interest expense excluding non-core items divided by the sum of net interest income on a fully tax equivalent basis, total non-interest income less non-core items, and tax equivalent adjustment on the increase in cash surrender value of life insurance.

(4) Equals total non-interest expense excluding non-core items less total non-interest income excluding non-core items, and including tax equivalent adjustment on the increase in cash surrender value of life insurance divided by average assets.

(5) Equals total non-interest income excluding non-core items and tax equivalent adjustment on the increase in cash surrender value of life insurance divided by the sum of net interest income on a fully tax equivalent basis, total non-interest income less non-core items, and tax equivalent adjustment on the increase in cash surrender value of life insurance.

(6) Represents net interest income on a fully tax equivalent basis assuming a 35% tax rate, as a percentage of average interest earning assets.

(7) Non-performing loans excludes purchased credit-impaired loans and loans held for sale. Non-performing assets excludes purchased credit-impaired loans, loans held for sale, and other real estate owned related to FDIC transactions.

(8) Equals total ending stockholders’ equity less goodwill and other intangibles, net of tax benefit, divided by total assets less goodwill and other intangibles, net of tax benefit.

(9) Equals total ending common stockholders’ equity less goodwill and other intangibles, net of tax benefit, divided by total risk-weighted assets.

(10) Equals total ending stockholders’ equity divided by common shares outstanding.

(11) Equals total ending stockholders’ equity less goodwill and other intangibles, net of tax benefit, divided by common shares outstanding.

NON-GAAP FINANCIAL INFORMATION

This press release contains certain financial information determined by methods other than in accordance with accounting principles generally accepted in the United States of America (GAAP). These measures include core non-interest income, core non-interest income to revenues (with non-core items excluded from both core non-interest income and revenues), core non-interest expense, non-core non-interest income and non-core non-interest expense, net interest income on a fully tax equivalent basis, net interest margin on a fully tax equivalent basis, efficiency ratio and the ratio of annualized net non-interest expense to average assets with net gains and losses on investment securities, net losses on sale of other assets, and increase in market value of assets held in trust for deferred compensation excluded from the non-interest income components of these ratios, and net gains (losses) on other real estate owned, prepayment fees on interest bearing liabilities, impairment charges, merger-related expenses and increase in market value of assets held in trust for deferred compensation excluded from the non-interest expense components of these ratios, with tax equivalent adjustment for tax-exempt interest income and increase in cash surrender value of life insurance, as applicable; ratios of tangible equity to tangible assets, tangible common equity to risk-weighted assets and Tier 1 common capital to risk-weighted assets; tangible book value per common share; and annualized cash return on average tangible common equity. Our management uses these non-GAAP measures, together with the related GAAP measures, in its analysis of our performance and in making business decisions. Management also uses these measures for peer comparisons.

Management believes that core and non-core non-interest income and non-interest expense are useful in assessing our core operating performance and in understanding the primary drivers of our non-interest income and non-interest expense when comparing periods.

The tax equivalent adjustment to net interest income, net interest margin, tax-exempt interest income and increase in cash surrender value of life insurance recognizes the income tax savings when comparing taxable and tax-exempt assets and assumes a 35% tax rate. Management believes that it is a standard practice in the banking industry to present net interest income and net interest margin on a fully tax equivalent basis, and accordingly believes that providing these measures may be useful for peer comparison purposes. For the same reasons, management believes that the tax equivalent adjustments to tax-exempt interest income and increase in cash surrender value of life insurance are useful.

Management also believes that by excluding net gains and losses on investment securities, net losses on sale of other assets, and increase in market value of assets held in trust for deferred compensation from the non-interest income components, and excluding net gains and losses on other real estate owned, prepayment fees on interest bearing liabilities, impairment changes, merger-related expenses and increase in market value of assets held in trust for deferred compensation from the non-interest expense components, of the efficiency ratio and the ratio of annualized net non-interest expense to average assets, these ratios better reflect our core operating performance, as the excluded items do not pertain to our core business operations and their exclusion makes these ratios more meaningful when comparing our operating results from period to period.

In addition, management believes that presenting the ratio of Tier 1 common equity to risk-weighted assets is useful for assessing our capital strength and for peer comparison purposes. The other measures exclude the acquisition-related goodwill and other intangible assets, net of tax benefit, in determining tangible assets, tangible equity, tangible common equity and average tangible common equity and exclude other intangible amortization expense, net of tax benefit, in determining net cash flow available to common stockholders. Management believes the presentation of these other financial measures, excluding the impact of such items, provides useful supplemental information that is helpful in understanding our financial results, as they provide a method to assess management’s success in utilizing our tangible capital, as well as our capital strength. Management also believes that providing measures that exclude balances of acquisition-related goodwill and other intangible assets, which are subjective components of valuation, facilitates the comparison of our performance with the performance of our peers. In addition, management believes that these are standard financial measures used in the banking industry to evaluate performance.

The non-GAAP disclosures contained herein should not be viewed as substitutes for the results determined to be in accordance with GAAP, nor are they necessarily comparable to non-GAAP performance measures that may be presented by other companies.

A reconciliation of net interest margin on a fully tax equivalent basis to net interest margin is contained in the tables under “Net Interest Margin.” A reconciliation of tangible book value per common share to book value per common share is contained in the “Selected Financial Ratios” table. Reconciliations of core and non-core non-interest income and non-interest expense to non-interest income and non-interest expense are contained in the tables under “Results of Operations—Fourth Quarter and Annual Results.”

The following table presents a reconciliation of tangible equity to equity (dollars in thousands):

  12/31/2013   9/30/2013   6/30/2013   3/31/2013   12/31/2012
Stockholders' equity - as reported $ 1,326,682 $ 1,309,468 $ 1,296,081 $ 1,294,803 $ 1,275,770
Less: goodwill 423,369 423,369 423,369 423,369 423,369
Less: other intangible assets, net of tax benefit 15,228   16,196   17,180   18,179   19,183
Tangible equity $ 888,085   $ 869,903   $ 855,532   $ 853,255   $ 833,218
 

The following table presents a reconciliation of tangible assets to total assets (dollars in thousands):

  12/31/2013   9/30/2013   6/30/2013   3/31/2013   12/31/2012
Total assets - as reported $ 9,641,427 $ 9,257,618 $ 9,369,659 $ 9,385,830 $ 9,571,805
Less: goodwill 423,369 423,369 423,369 423,369 423,369
Less: other intangible assets, net of tax benefit 15,228   16,196   17,180   18,179   19,183
Tangible assets $ 9,202,830   $ 8,818,053   $ 8,929,110   $ 8,944,282   $ 9,129,253
 

The following table presents a reconciliation of average tangible common equity to average common stockholders’ equity (dollars in thousands):

              Year Ended
December 31,
4Q13 3Q13 2Q13 1Q13 4Q12 2013   2012
Average common stockholders' equity - as reported $ 1,315,804 $ 1,297,498 $ 1,297,364 $ 1,280,921 $ 1,264,772 $ 1,297,991 $ 1,235,780
Less: average goodwill 423,369 423,369 423,369 423,369 387,464 423,369 387,069
Less: average other intangible assets, net of tax benefit 15,647   16,620   17,605   18,611   16,238   17,111   17,465
Average tangible common equity $ 876,788   $ 857,509   $ 856,390   $ 838,941   $ 861,070   $ 857,511   $ 831,246
 

The following table presents a reconciliation of net cash flow available to common stockholders to net income available to common stockholders (dollars in thousands):

              Year Ended
December 31,
4Q13 3Q13 2Q13 1Q13 4Q12 2013   2012
Net income available to common stockholders - as reported $ 23,856 $ 24,400 $ 25,293 $ 24,906 $ 24,012 $ 98,455 $ 87,105
Add: other intangible amortization expense, net of tax benefit 968   983   1,000   1,004   813   3,955   3,257
Net cash flow available to common stockholders $ 24,824   $ 25,383   $ 26,293   $ 25,910   $ 24,825   $ 102,410   $ 90,362
 

The following table presents a reconciliation of Tier 1 common capital to Tier 1 capital (dollars in thousands):

  12/31/2013   9/30/2013   6/30/2013   3/31/2013   12/31/2012
Tier 1 capital - as reported $ 1,022,512 $ 1,002,883 $ 983,997 $ 960,803 $ 939,087
Less: qualifying trust preferred securities 147,500   147,500   147,500   147,500   147,500
Tier 1 common capital $ 875,012   $ 855,383   $ 836,497   $ 813,303   $ 791,587
 

Efficiency Ratio Calculation (Dollars in Thousands)

              Year Ended
December 31,
4Q13 3Q13 2Q13 1Q13 4Q12 2013   2012
Non-interest expense $ 76,641 $ 76,265 $ 70,253 $ 71,429 $ 72,732 $ 294,588 $ 304,030
Less net (gain) loss on other real estate owned (634 ) 791 (2,015 ) 330 1,626 (1,528 ) 17,594
Less merger-related expenses 724 1,759 2,483
Less prepayment fees on interest bearing liabilities 12,682
Less impairment charges 1,432 2,190
Less increase in market value of assets held in trust for deferred compensation 588   459   21   483   104   1,551   811  
Non-interest expense - as adjusted $ 75,963   $ 73,256   $ 72,247   $ 70,616   $ 69,570   $ 292,082   $ 270,753  
 
Net interest income $ 68,263 $ 68,908 $ 67,480 $ 67,685 $ 69,516 $ 272,336 $ 292,788
Tax equivalent adjustment 5,655   5,905   5,594   5,555   5,360   22,709   20,429  
Net interest income on a fully tax equivalent basis 73,918 74,813 73,074 73,240 74,876 295,045 313,217
Plus non-interest income 39,045 37,707 38,939 38,703 37,911 154,394 129,193
Plus tax equivalent adjustment on the increase in cash surrender value of life insurance 457 458 454 454 481 1,823 1,922
Less net (loss) gain on investment securities (15 ) 1 14 (1 ) 311 (1 ) 555
Less net (loss) on sale of other assets (323 ) (905 ) (323 ) (942 )
Less increase in market value of assets held in trust for deferred compensation 588   459   21   483   104   1,551   811  
Net interest income plus non-interest income - as adjusted $ 113,170   $ 112,518   $ 112,432   $ 111,915   $ 113,758   $ 450,035   $ 443,908  
 
Efficiency ratio 67.12 % 65.11 % 64.26 % 63.10 % 61.16 % 64.90 % 60.99 %
Efficiency ratio (without adjustments) 71.42 % 71.53 % 66.02 % 67.14 % 67.70 % 69.03 % 72.05 %
 

Annualized Net Non-interest Expense to Average Assets Calculation (Dollars in Thousands)

              Year Ended
December 31,
4Q13 3Q13 2Q13 1Q13 4Q12 2013   2012
Non-interest expense $ 76,641 $ 76,265 $ 70,253 $ 71,429 $ 72,732 $ 294,588 $ 304,030
Less net (gain) loss on other real estate owned (634 ) 791 (2,015 ) 330 1,626 (1,528 ) 17,594
Less merger-related expenses 724 1,759 2,483
Less prepayment fees on interest bearing liabilities 12,682
Less impairment charges 1,432 2,190
Less increase in market value of assets held in trust for deferred compensation 588   459   21   483   104   1,551   811  
Non-interest expense - as adjusted 75,963   73,256   72,247   70,616   69,570   292,082   270,753  
 
Non-interest income 39,045 37,707 38,939 38,703 37,911 154,394 129,193
Less net (loss) gain on investment securities (15 ) 1 14 (1 ) 311 (1 ) 555
Less net (loss) on sale of other assets (323 ) (905 ) (323 ) (942 )
Less increase in market value of assets held in trust for deferred compensation 588   459   21   483   104   1,551   811  
Non-interest income - as adjusted 38,795   37,247   38,904   38,221   38,401   153,167   128,769  
Less tax equivalent adjustment on the increase in cash surrender value of life insurance 457   458   454   454   481   1,823   1,922  
Net non-interest expense $ 36,711   $ 35,551   $ 32,889   $ 31,941   $ 30,688   $ 137,092   $ 140,062  
 
Average assets $ 9,567,388 $ 9,261,291 $ 9,289,382 $ 9,449,588 $ 9,461,895 $ 9,391,877 $ 9,547,985
 
Annualized net non-interest expense to average assets 1.52 % 1.52 % 1.42 % 1.37 % 1.29 % 1.46 % 1.47 %
 
Annualized net non-interest expense to average assets (without adjustments) 1.56 % 1.65 % 1.35 % 1.40 % 1.46 % 1.49 % 1.83 %
 

Core Non-interest Income to Revenues Ratio Calculation (Dollars in Thousands)

              Year Ended
December 31,
4Q13 3Q13 2Q13 1Q13 4Q12 2013   2012
Non-interest income $ 39,045 $ 37,707 $ 38,939 $ 38,703 $ 37,911 $ 154,394 $ 129,193
Plus tax equivalent adjustment on the increase in cash surrender value of life insurance 457 458 454 454 481 1,823 1,922
Less net (loss) gain on investment securities (15 ) 1 14 (1 ) 311 (1 ) 555
Less net (loss) on sale of other assets (323 ) (905 ) (323 ) (942 )
Less increase in market value of assets held in trust for deferred compensation 588   459   21   483   104   1,551   811  
Non-interest income - as adjusted $ 39,252   $ 37,705   $ 39,358   $ 38,675   $ 38,882   $ 154,990   $ 130,691  
 
Net interest income $ 68,263 $ 68,908 $ 67,480 $ 67,685 $ 69,516 $ 272,336 $ 292,788
Tax equivalent adjustment 5,655   5,905   5,594   5,555   5,360   22,709   20,429  
Net interest income on a fully tax equivalent basis 73,918 74,813 73,074 73,240 74,876 295,045 313,217
Plus non-interest income 39,045 37,707 38,939 38,703 37,911 154,394 129,193
Plus tax equivalent adjustment on the increase in cash surrender value of life insurance 457 458 454 454 481 1,823 1,922
Less net (loss) gain on investment securities (15 ) 1 14 (1 ) 311 (1 ) 555
Less net (loss) on sale of other assets (323 ) (905 ) (323 ) (942 )
Less increase in market value of assets held in trust for deferred compensation 588   459   21   483   104   1,551   811  
Total revenue - as adjusted and on a fully tax equivalent basis $ 113,170   $ 112,518   $ 112,432   $ 111,915   $ 113,758   $ 450,035   $ 443,908  
 
Total revenue - unadjusted $ 107,308 $ 106,615 $ 106,419 $ 106,388 $ 107,427 $ 426,730 $ 421,981
 
Core non-interest income to revenues ratio 34.68 % 33.51 % 35.01 % 34.56 % 34.18 % 34.44 % 29.44 %
 
Core non-interest income to revenues ratio (without adjustments) 36.39 % 35.37 % 36.59 % 36.38 % 35.29 % 36.18 % 30.62 %
 

NET INTEREST MARGIN

The following table presents, for the periods indicated, the total dollar amount of interest income from average interest earning assets and the resultant yields, as well as the interest expense on average interest bearing liabilities, and the resultant costs, expressed both in dollars and rates (dollars in thousands):

  4Q13   4Q12     3Q13
Average     Yield/ Average     Yield/ Average     Yield/
Balance Interest Rate Balance Interest Rate Balance Interest Rate
Interest Earning Assets:
Loans (1) (2) (3):
Commercial related credits
Commercial $ 1,167,924 $ 12,080 4.05 % $ 1,117,323 12,711 4.45 % $ 1,166,887 $ 12,263 4.11 %
Commercial loans collateralized by assignment of lease payments 1,468,257 14,087 3.84 1,204,431 12,797 4.25 1,429,169 13,726 3.84
Real estate commercial 1,630,540 17,908 4.30 1,766,332 21,636 4.79 1,654,311 19,995 4.73
Real estate construction 141,041   1,402   3.89 146,717   1,614   4.30 128,115   1,324   4.04
Total commercial related credits 4,407,762   45,477   4.04 4,234,803   48,758   4.51 4,378,482   47,308   4.23
Other loans
Real estate residential 315,303 3,018 3.83 312,189 3,417 4.38 307,555 2,961 3.85
Home equity 271,898 2,925 4.27 308,854 3,336 4.30 277,122 2,993 4.28
Indirect 260,918 3,455 5.25 207,429 3,061 5.87 250,003 3,365 5.34
Consumer loans 60,054   629   4.16 69,554   623   3.56 61,950   599   3.84
Total other loans 908,173   10,027   4.38 898,026   10,437   4.62 896,630   9,918   4.39
Total loans, excluding covered loans 5,315,935 55,504 4.14 5,132,829 59,195 4.59 5,275,112 57,226 4.30
Covered loans 258,094   3,808   5.85 479,011   5,354   4.45 281,896   4,391   6.18
Total loans 5,574,029   59,312   4.22 5,611,840   64,549   4.58 5,557,008   61,617   4.40
Taxable investment securities 1,421,135 7,335 2.06 1,508,774 6,371 1.69 1,292,366 6,330 1.96
Investment securities exempt from federal income taxes (3) 943,298 12,561 5.33 865,653 11,826 5.46 946,396 12,577 5.32
Federal funds sold 8,251 6 0.28 6,793 7 0.40
Other interest earning deposits 436,158   270   0.25 361,371   228   0.25 316,210   193   0.24
Total interest earning assets $ 8,382,871 $ 79,484   3.76 $ 8,347,638 $ 82,974   3.95 $ 8,118,773 $ 80,724   3.94
Non-interest earning assets 1,184,517   1,114,257   1,142,518  
Total assets $ 9,567,388   $ 9,461,895   $ 9,261,291  
Interest Bearing Liabilities:
Core funding:
Money market and NOW accounts $ 2,685,343 $ 861 0.13 % $ 2,726,718 $ 1,007 0.15 % $ 2,695,479 $ 862 0.13 %
Savings accounts 848,734 137 0.06 804,158 144 0.07 844,647 137 0.06
Certificates of deposit 1,250,049 1,256 0.40 1,570,147 2,562 0.67 1,309,539 1,443 0.44
Customer repurchase agreements 216,504   114   0.21 233,532   147   0.25 205,946   113   0.22
Total core funding 5,000,630   2,368   0.19 5,334,555   3,860   0.29 5,055,611   2,555   0.20
Wholesale funding:
Brokered accounts (includes fee expense) 229,635 1,712 2.96 302,565 2,353 3.09 263,448 1,989 3.00
Other borrowings 466,508   1,486   1.25 286,952   1,885   2.57 215,041   1,367   2.49
Total wholesale funding 696,143   3,198   1.68 589,517   4,238   2.49 478,489   3,356   2.47
Total interest bearing liabilities $ 5,696,773 $ 5,566   0.39 $ 5,924,072 $ 8,098   0.54 $ 5,534,100 $ 5,911   0.42
Non-interest bearing deposits 2,352,901 2,119,632 2,258,357
Other non-interest bearing liabilities 201,910 153,419 171,336
Stockholders' equity 1,315,804   1,264,772   1,297,498  
Total liabilities and stockholders' equity $ 9,567,388   $ 9,461,895   $ 9,261,291  
Net interest income/interest rate spread (4) $ 73,918   3.37 % $ 74,876   3.41 % $ 74,813   3.52 %
Taxable equivalent adjustment 5,655   5,360   5,905  
Net interest income, as reported $ 68,263   $ 69,516   $ 68,908  
Net interest margin (5) 3.23 % 3.31 % 3.37 %
Tax equivalent effect 0.27 % 0.26 % 0.29 %
Net interest margin on a fully tax equivalent basis (5) 3.50 % 3.57 % 3.66 %

(1) Non-accrual loans are included in average loans.

(2) Interest income includes amortization of deferred loan origination fees of $956 thousand, $1.0 million, and $839 thousand for the three months ended December 31, 2013, December 31, 2012, and September 30, 2013, respectively.

(3) Non-taxable loan and investment income is presented on a fully tax equivalent basis assuming a 35% tax rate.

(4) Interest rate spread represents the difference between the average yield on interest earning assets and the average cost of interest bearing liabilities and is presented on a fully tax equivalent basis.

(5) Net interest margin represents net interest income as a percentage of average interest earning assets.

The following table presents, for the years indicated, the total dollar amount of interest income from average interest earning assets and the resultant yields, as well as the interest expense on average interest bearing liabilities, and the resultant costs, expressed both in dollars and rates (dollars in thousands):

  Year Ended December 31,
2013   2012
Average     Yield/ Average     Yield/
Balance Interest Rate Balance Interest Rate
Interest Earning Assets:
Loans (1) (2) (3):
Commercial related credits
Commercial $ 1,186,705 $ 49,516 4.12 % $ 1,080,652 51,051 4.65 %
Commercial loans collateralized by assignment of lease payments 1,385,355 53,599 3.87 1,188,022 53,019 4.46
Real estate commercial 1,684,358 78,383 4.59 1,813,421 92,218 5.00
Real estate construction 129,181   5,116   3.91 146,660   6,176   4.14
Total commercial related credits 4,385,599   186,614   4.20 4,228,755   202,464   4.71
Other loans
Real estate residential 310,644 12,306 3.96 311,537 14,033 4.50
Home equity 283,341 12,184 4.30 321,031 14,068 4.38
Indirect 238,828 13,018 5.45 197,423 11,926 6.04
Consumer loans 65,704   2,459   3.74 69,638   2,281   3.28
Total other loans 898,517   39,967   4.45 899,629   42,308   4.70
Total loans, excluding covered loans 5,284,116 226,581 4.29 5,128,384 244,772 4.77
Covered loans 324,382   17,136   5.28 562,914   31,582   5.61
Total loans 5,608,498   243,717   4.35 5,691,298   276,354   4.86
Taxable investment securities 1,393,341 26,084 1.87 1,542,814 33,424 2.17
Investment securities exempt from federal income taxes (3) 933,840 50,098 5.36 815,500 45,094 5.53
Federal funds sold 4,510 15 0.33
Other interest earning deposits 283,854   690   0.24 337,325   867   0.26
Total interest earning assets $ 8,224,043 $ 320,604   3.90 $ 8,386,937 $ 355,739   4.24
Non-interest earning assets 1,167,834   1,161,048  
Total assets $ 9,391,877   $ 9,547,985  
Interest Bearing Liabilities:
Core funding:
Money market and NOW accounts $ 2,698,226 $ 3,483 0.13 % $ 2,646,299 $ 4,285 0.16 %
Savings accounts 839,026 546 0.07 789,595 786 0.10
Certificates of deposit 1,368,835 6,990 0.52 1,725,462 12,532 0.76
Customer repurchase agreements 198,018   426   0.22 210,891   556   0.26
Total core funding 5,104,105   11,445   0.22 5,372,247   18,159   0.34
Wholesale funding:
Brokered accounts (includes fee expense) 270,218 8,221 3.04 406,908 12,655 3.11
Other borrowings 289,629   5,893   2.01 383,236   11,708   3.00
Total wholesale funding 559,847   14,114   2.26 790,144   24,363   2.70
Total interest bearing liabilities $ 5,663,952 $ 25,559   0.45 $ 6,162,391 $ 42,522   0.69
Non-interest bearing deposits 2,234,537 1,973,666
Other non-interest bearing liabilities 195,397 137,302
Stockholders' equity 1,297,991   1,274,626  
Total liabilities and stockholders' equity $ 9,391,877   $ 9,547,985  
Net interest income/interest rate spread (4) $ 295,045   3.45 % $ 313,217   3.55 %
Taxable equivalent adjustment 22,709   20,429  
Net interest income, as reported $ 272,336   $ 292,788  
Net interest margin (5) 3.31 % 3.49 %
Tax equivalent effect 0.28 % 0.24 %
Net interest margin on a fully tax equivalent basis (5) 3.59 % 3.73 %

(1) Non-accrual loans are included in average loans.

(2) Interest income includes amortization of deferred loan origination fees of $3.6 million and $3.5 million for the year ended December 31, 2013 and 2012, respectively.

(3) Non-taxable loan and investment income is presented on a fully tax equivalent basis assuming a 35% tax rate.

(4) Interest rate spread represents the difference between the average yield on interest earning assets and the average cost of interest bearing liabilities and is presented on a fully tax equivalent basis.

(5) Net interest margin represents net interest income as a percentage of average interest earning assets.

Contacts

MB Financial, Inc.
Jill York - Vice President and Chief Financial Officer
E-Mail: jyork@mbfinancial.com
(888) 422-6562

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Contacts

MB Financial, Inc.
Jill York - Vice President and Chief Financial Officer
E-Mail: jyork@mbfinancial.com
(888) 422-6562