MB Financial, Inc. Reports Fourth Quarter 2014 Results

CHICAGO--()--MB Financial, Inc. (NASDAQ: MBFI), the holding company for MB Financial Bank, N.A., today announced 2014 fourth quarter net income available to common stockholders of $34.1 million, or $0.45 per diluted common share, compared to $4.9 million, or $0.08 per diluted common share, last quarter and $23.9 million, or $0.43 per diluted common share, in the fourth quarter a year ago. Annual net income available to common stockholders for 2014 was $82.1 million compared to $98.5 million for 2013. Diluted earnings per common share were $1.31 for 2014 compared to $1.79 for 2013.

In commenting on the Company’s results, Mitchell Feiger, President and Chief Executive Officer of MB Financial, Inc., said, "The fourth quarter of 2014 saw the successful completion of our Taylor Capital integration and the positive effects the merger had on our results. In addition, we saw several areas of core earnings strength, including a higher net interest margin, robust new customer activity in our commercial deposit and treasury management business, good commercial and industrial loan growth, a better balance sheet mix, and improved efficiency and credit. MB Financial is now even better positioned to provide our clients and prospects with the products, services and support they need to help their businesses grow and succeed."

Highlights Include:

Meaningful Operating Earnings Growth

  • Operating earnings, which we define as earnings excluding non-core items, increased to $39.6 million for the fourth quarter of 2014 compared to $35.7 million last quarter (+10.8%) and $24.6 million in the fourth quarter a year ago (+60.7%). Annual operating earnings increased to $120.3 million for 2014 compared to $100.8 million for 2013 (+19.4%). A table reconciling net income, as reported to operating earnings is set forth below and in the “Non-GAAP Financial Information” section.
  • Fourth quarter 2014 operating earnings growth was due to the full quarter impact of the Taylor Capital merger ("the Merger"); increases in our core net interest margin, excluding Taylor Capital loan accretion (+9 basis points); and continued growth in core non-interest income (due to both the Merger and legacy non-interest income growth). These increases were partially offset by higher legacy credit costs and lower mortgage segment profitability.
  • Merger related expenses incurred in the fourth quarter of 2014 were primarily salaries and employee benefits, computer services and telecommunication, and an impairment charge on a facility we are exiting in connection with the Merger.
  • Non-core items during the fourth quarter of 2014 included a $3.5 million gain on sale of other assets resulting from the sale of a branch property and a $3.3 million contribution to the MB Financial Charitable Foundation.

The following table presents operating earnings available to common stockholders:

          Year Ended
December 31,
4Q14 3Q14 4Q13 2014   2013
(Dollars in thousands, except per share data)
Net income, as reported $ 36,125 $ 6,901 $ 23,856 $ 86,101 $ 98,455
Less non-core items:
Net gain (loss) on investment securities 491 (3,246 ) (15 ) (2,525 ) (1 )
Net gain (loss) on sale of other assets 3,476 (7 ) (323 ) 3,452 (323 )
Gain on extinguishment of debt — 1,895 — 1,895 —
Merger related expenses (6,494 ) (27,161 ) (724 ) (34,823 ) (2,483 )
Loss on low to moderate income real estate investment — — — (2,124 ) —
Contingent consideration expense - Celtic acquisition — (10,600 ) — (10,600 ) —
Contribution to MB Financial Charitable Foundation (3,250 ) —   —   (3,250 ) —  
Total non-core items (5,777 ) (39,119 ) (1,062 ) (47,975 ) (2,807 )
Income tax expense on non-core items (2,314 ) (10,295 ) (281 ) (13,730 ) (450 )
Non-core items, net of tax (3,463 ) (28,824 ) (781 ) (34,245 ) (2,357 )
Operating earnings 39,588 35,725 24,637 120,346 100,812
Dividends on preferred shares 2,000   2,000   —   4,000   —  
Operating earnings available to common stockholders $ 37,588   $ 33,725   $ 24,637   $ 116,346   $ 100,812  
Diluted operating earnings per common share $ 0.50 $ 0.52 $ 0.45 $ 1.86 $ 1.83
Weighted average common shares outstanding for diluted earnings per common share 75,130,331 64,457,978 55,237,160 62,573,406 54,993,865
Annualized operating return on average assets 1.09 % 1.16 % 1.02 % 1.05 % 1.07 %
 

Commercial Related Loans and Non-Interest Bearing Deposits Increased

  • Total loans grew 4.7% on an annualized basis in the fourth quarter of 2014, driven by growth in commercial related loans (+8.6% annualized, including +23.4% annualized for the commercial and industrial portfolio) and partially offset by declines in consumer related credits and purchased credit-impaired loans.
  • Total low cost deposit growth in the fourth quarter was driven by strong non-interest bearing deposit growth (+32.4% annualized). As a result, our cost of funds improved to 23 basis points in the fourth quarter 2014 compared to 26 basis points in the third quarter of 2014.

Credit Quality Metrics Improved

  • Non-performing loans decreased by $13.2 million and potential problem loans increased by $4.0 million from September 30, 2014.
  • Non-performing loans to total loans improved to 0.96% at December 31, 2014 from 1.12% at September 30, 2014.
  • Our coverage ratio of allowance for loan and lease losses to non-performing loans improved to 126.34% at December 31, 2014 compared to 102.54% at September 30, 2014.
  • Legacy provision for credit losses in the fourth quarter of 2014 was $2.5 million, driven by commercial loan growth in the quarter, compared to a negative $1.6 million in the third quarter of 2014.
  • Taylor Capital related provision for credit losses was $7.3 million in fourth quarter of 2014 compared to $4.7 million in the third quarter of 2014. These credit costs are a result of Taylor Capital loan renewals and needed reserves on Taylor Capital acquired loans in excess of the purchase loan discount. As expected, these credit costs largely offset the accretion on Taylor Capital performing loans of $10.1 million in the fourth quarter and $5.8 million in the third quarter for non-purchased credit-impaired loans.

RESULTS OF OPERATIONS

Fourth Quarter and Annual Results

Net Interest Income

Net interest income and net interest margin on a fully tax equivalent basis, for the three months and year ended December 31, 2014, were significantly impacted by the Merger. Acquired assets and assumed liabilities were recorded at fair value as required by the acquisition method of accounting. Fair value adjustments (premiums or discounts) are amortized or accreted into net interest income over the remaining terms of the related interest earning assets and interest bearing liabilities. The accretion of the acquisition accounting discount on acquired loans had the most significant impact on net interest margin.

     

Change
from
3Q14 to
4Q14

   

Change
from
4Q13 to
4Q14

    Year Ended  

Change
from
2014 to
2013

December 31,
4Q14 3Q14 4Q13 2014     2013  
(dollars in thousands)
Net interest income - fully tax equivalent $ 126,057 $ 101,699 +24.0 % $ 73,918 +70.5 % $ 374,414 $ 295,045 +26.9 %
Net interest margin - fully tax equivalent 4.01 % 3.78 % +0.23 3.50 % +0.51 3.77 % 3.59 % +0.18
 

Reconciliations of net interest income - fully tax equivalent and net interest margin - fully tax equivalent to net interest income, as reported and net interest margin, respectively, are set forth in the first table in the "Net Interest Margin" section.

Net interest income in the fourth quarter of 2014 included interest income of $10.9 million resulting from accretion of the acquisition accounting discount recorded on loans acquired in the Merger ($10.1 million for non-purchased credit-impaired loans and $833 thousand for purchased credit-impaired loans).

Net interest income in the third quarter of 2014 included interest income of $6.2 million resulting from the accretion of the acquisition accounting discount recorded on the loans acquired in the Merger ($5.8 million for non-purchased credit-impaired loans and $377 thousand for purchased credit-impaired loans).

Excluding acquisition accounting loan discount accretion on Taylor Capital loans, our net interest margin on a fully tax equivalent basis would have been 3.63% in the fourth quarter of 2014 compared to 3.54% in the third quarter of 2014, and 3.59% for the year ended December 31, 2014 as well as the year ended December 31, 2013. The increase in the fourth quarter of 2014 from the third quarter of 2014 was primarily due to an improved balance sheet mix with higher loan balances and lower cash balances held at the Federal Reserve Bank. Higher yields on covered loans also contributed positively to the increase in the net interest margin.

See the supplemental net interest margin tables for further detail.

Non-interest Income (in thousands):

              Year Ended
December 31,
4Q14 3Q14 2Q14 1Q14 4Q13 2014   2013
Core non-interest income:
Key fee initiatives:
Lease financing, net $ 18,542 $ 17,719 $ 14,853 $ 13,196 $ 15,808 $ 64,310 $ 61,243
Mortgage banking revenue 29,080 16,823 187 59 342 46,149 1,664
Commercial deposit and treasury management fees 10,720 9,345 7,106 7,144 6,545 34,315 24,867
Trust and asset management fees 5,515 5,712 5,405 5,207 4,975 21,839 19,142
Card fees 3,900 3,836 3,304 2,701 2,838 13,741 11,013
Capital markets and international banking service fees 1,648   1,472   1,360   978   841   5,458   3,560  
Total key fee initiatives 69,405 54,907 32,215 29,285 31,349 185,812 121,489
 
Consumer and other deposit service fees 3,335 3,362 3,156 2,935 3,481 12,788 13,968
Brokerage fees 1,350 1,145 1,356 1,325 1,227 5,176 4,907
Loan service fees 1,864 1,069 916 965 1,214 4,814 5,563
Increase in cash surrender value of life insurance 865 855 834 827 848 3,381 3,385
Other operating income 2,577   1,145   1,162   799   676   5,683   3,855  
Total core non-interest income 79,396   62,483   39,639   36,136   38,795   217,654   153,167  
 
Non-core non-interest income:
Net gain (loss) on investment securities 491 (3,246 ) (87 ) 317 (15 ) (2,525 ) (1 )
Net gain (loss) on sale of other assets 3,476 (7 ) (24 ) 7 (323 ) 3,452 (323 )
Gain on extinguishment of debt — 1,895 — — — 1,895 —
Increase in market value of assets held in trust for deferred compensation (1) 315   (38 ) 400   152   588   829   1,551  
Total non-core non-interest income 4,282   (1,396 ) 289   476   250   3,651   1,227  
 
Total non-interest income $ 83,678   $ 61,087   $ 39,928   $ 36,612   $ 39,045   $ 221,305   $ 154,394  

(1) Resides in other operating income in the consolidated statements of income.

Core non-interest income for the fourth quarter of 2014 increased 27.1% from the third quarter of 2014.

  • Mortgage banking revenue increased primarily as the result of having mortgage operations acquired through the Merger for a full quarter compared to 44 days in the prior quarter.
  • Commercial deposit and treasury management fees increased due to the Merger as well as organic growth.
  • Other operating income increased due to higher income recognized from our investment in Small Business Investment Companies.

Core non-interest income for the year ended December 31, 2014 increased 42.1% compared to the year ended December 31, 2013.

  • Mortgage banking revenue increased due to the mortgage operations acquired through the Merger.
  • Commercial deposit and treasury management fees increased due to new customer activity as well as the increased customer base as a result of the Merger.
  • Leasing revenues increased due to higher fees and promotional revenue from the sale of third-party equipment maintenance contracts.
  • Card fees increased due to a new payroll prepaid card program as well as higher credit card fees.
  • Trust and asset management fees increased due to the addition of new customers and the impact on asset management fees from higher equity values.
  • Capital markets and international banking services fees increased due to higher M&A advisory, syndication and interest rate swap fees.
  • Other operating income increased due to higher income recognized from our investment in Small Business Investment Companies.
  • Consumer and other deposit service fees decreased due to lower demand deposit service fees and NSF and overdraft charges.

Non-core non-interest income included a $3.5 million gain recognized on the sale of other assets resulting from the sale of a branch property in the fourth quarter of 2014. In addition, non-core non-interest income for the year ended December 31, 2014 was impacted by the net loss on investment securities and the gain on extinguishment of debt as a result of the balance sheet repositioning that occurred in the third quarter of 2014.

Non-interest Expense (in thousands):

              Year Ended
December 31,
4Q14 3Q14 2Q14 1Q14 4Q13 2014   2013
Core non-interest expense: (1)
Salaries and employee benefits $ 83,242 $ 65,271 $ 46,222 $ 44,121 $ 44,929 $ 238,856 $ 176,307
Occupancy and equipment expense 13,757 11,314 9,504 9,592 9,269 44,167 36,878
Computer services and telecommunication expense 8,612 6,194 4,909 5,071 5,509 24,786 18,883
Advertising and marketing expense 2,233 1,973 2,113 1,991 2,081 8,310 8,268
Professional and legal expense 2,184 2,501 1,488 1,369 2,340 7,542 6,396
Other intangible amortization expense 1,617 1,470 1,174 1,240 1,489 5,501 6,084
Net (gain) loss recognized on other real estate owned (A) (120 ) 1,348 204 122 (831 ) 1,554 (4,619 )
Net (gain) loss recognized on other real estate owned related to FDIC transactions (A) (27 ) 421 (13 ) 65 197 446 3,091
Other real estate expense, net (A) 433 409 337 396 175 1,575 747
Other operating expenses 18,514   13,577   11,108   9,220   10,171   52,419   38,519  
Total core non-interest expense 130,445   104,478   77,046   73,187   75,329   385,156   290,554  
 
Non-core non-interest expense: (1)
Merger related expenses (B) 6,494 27,161 488 680 724 34,823 2,483
Loss on low to moderate income real estate investment (C) — — 96 2,028 — 2,124 —
Contingent consideration - Celtic acquisition (C) — 10,600 — — — 10,600 —
Contribution to MB Financial Charitable Foundation (C) 3,250 — — — — 3,250 —
Increase in market value of assets held in trust for deferred compensation (D) 315   (38 ) 400   152   588   829   1,551  
Total non-core non-interest expense 10,059   37,723   984   2,860   1,312   51,626   4,034  
 
Total non-interest expense $ 140,504   $ 142,201   $ 78,030   $ 76,047   $ 76,641   $ 436,782   $ 294,588  

(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 – Net (gain) loss recognized on other real estate owned and other related expense, B – Salaries and employee benefits, occupancy and equipment expense, computer services and telecommunication expense, advertising and marketing expense, professional and legal expense and other operating expenses, C – Other operating expenses, D – Salaries and employee benefits.

Core non-interest expense increased by $26.0 million, or 24.9%, from the third quarter to the fourth quarter of 2014.

  • Salaries and employee benefits increased primarily due to increased staff from the Merger for a full quarter as well as increased performance-based commissions and incentives.
  • Occupancy and equipment expense increased due to having the additional offices acquired in the Merger for a full quarter.
  • Computer services and telecommunication expenses increased primarily due to an increase in spending on IT security, data warehouse and investments in our key fee initiatives, as well as due to the Merger.
  • Other operating expenses increased primarily due to a full quarter of mortgage operating expenses, higher travel and entertainment expenses due to increased staff, higher FDIC assessment due to a larger balance sheet resulting primarily from the Merger and higher other loan expense.
  • Core non-interest expense was also impacted by fewer losses on other real estate owned.

Core non-interest expense increased by $94.6 million, or 32.6%, from the year ended December 31, 2013 to the year ended December 31, 2014.

  • Salaries and employee benefits increased due to annual salary increases, incentive expense, health insurance and temporary staffing needs, and the increased staff from the Merger.
  • Other operating expense increased primarily as a result of an increase in filing and other loan expense, higher FDIC assessments due to our larger balance sheet, higher currency delivery expenses related to new treasury management accounts and mortgage operating expenses.
  • Occupancy and equipment expense increased due to the additional offices acquired in the Merger.
  • 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 the leasing, treasury management and card areas, as well as due to the Merger. The increase was also due to increased telecommunication expense related to transitioning to a new provider.
  • Core non-interest expense was also impacted by higher losses on other real estate owned.

Non-core non-interest expense in the fourth quarter of 2014 included merger related expenses as well as a contribution to the MB Financial Charitable Foundation. In addition, non-core non-interest expense for the year ended December 31, 2014 was impacted by merger related expenses as well as the contingent consideration expense related to our acquisition of Celtic Leasing Corp.

The following table presents the detail of the merger related expenses (in thousands):

              Year Ended
December 31,
4Q14 3Q14 2Q14 1Q14 4Q13 2014     2013
Merger related expenses:  
Salaries and employee benefits $ 1,926 $ 14,259 $ — $ 104 $ — $ 16,289 $ —
Occupancy and equipment expense 301 428 14 — — 743 —
Computer services and telecommunication expense 1,397 5,312 170 13 — 6,892 —
Advertising and marketing expense 84 262 108 90 4 544 4
Professional and legal expense 258 6,363 79 410 717 7,110 2,411
Facilities impairment charges 2,270 — — — — 2,270
Other operating expenses 258   537   117   63   3   975   68
Total merger related expenses $ 6,494   $ 27,161   $ 488   $ 680   $ 724   $ 34,823   $ 2,483
 

We expect to incur additional merger related expenses during the first half of 2015 primarily in occupancy and equipment expense and salaries and employee benefits expense.

Income Tax Expense

Income tax expense was $17.1 million for the fourth quarter of 2014 compared to $4.5 million for the third quarter of 2014. The increase in income tax expense is primarily due to the $41.9 million increase in income before taxes from $11.4 million in the third quarter of 2014 to $53.2 million in the fourth quarter of 2014.

Operating Segments

The Company's operations consist of three reportable operating segments: banking, leasing and mortgage banking. Our banking segment generates its revenues primarily from its lending and deposit gathering activities. Our leasing segment generates its revenues through lease originations and related services offered through the Company's leasing subsidiaries: LaSalle Systems Leasing, Inc., Celtic Leasing Corp. and Cole Taylor Equipment Finance. Our mortgage banking segment originates residential mortgage loans for sale to investors through its retail and third party origination channels. The mortgage banking segment also services residential mortgage loans owned by investors and the Company. The third quarter segment information reflects results of Taylor Capital for 44 days subsequent to the Merger date.

The following table presents summary financial information, adjusted for funds transfer pricing and internal allocations of certain expenses, for the reportable segments (in thousands):

      Mortgage   Non-core  
Banking Leasing Banking Items Consolidated
Three months ended December 31, 2014
Net interest income $ 109,148 $ 4,482 $ 6,181 $ — $ 119,811
Provision for credit losses 9,755   (12 ) —   —   9,743
Net interest income after provision for credit losses 99,393 4,494 6,181 — 110,068
Non-interest income:
Lease financing, net 662 17,880 — — 18,542
Mortgage origination fees — — 18,716 — 18,716
Mortgage servicing fees — — 10,364 — 10,364
Other non-interest income 32,940   (790 ) (61 ) 3,967   36,056
Total non-interest income 33,602 17,090 29,019 3,967 83,678
Non-interest expense:
Salaries and employee benefits 53,658 8,137 21,762 1,926 85,483
Occupancy and equipment expense 11,460 817 1,480 301 14,058
Professional and legal expense 1,106 338 740 258 2,442
Other operating expenses 21,451   2,049   7,762   7,259   38,521
Total non-interest expense 87,675   11,341   31,744   9,744   140,504
Income before income taxes 45,320 10,243 3,456 (5,777 ) 53,242
Income tax expense 14,108   3,941   1,382   (2,314 ) 17,117
Net income $ 31,212   $ 6,302   $ 2,074   $ (3,463 ) $ 36,125
Three months ended September 30, 2014
Net interest income $ 88,793 $ 3,286 $ 3,533 $ — $ 95,612
Provision for credit losses 2,951   163   (5 ) —   3,109
Net interest income after provision for credit losses 85,842 3,123 3,538 — 92,503
Non-interest income:
Lease financing, net 1,186 16,533 — — 17,719
Mortgage origination fees — — 8,780 — 8,780
Mortgage servicing fees — — 8,043 — 8,043
Other non-interest income 28,137   (234 ) —   (1,358 ) 26,545
Total non-interest income 29,323 16,299 16,823 (1,358 ) 61,087
Non-interest expense:
Salaries and employee benefits 47,987 6,886 10,360 14,259 79,492
Occupancy and equipment expense 9,970 689 655 428 11,742
Professional and legal expense 1,908 286 307 6,363 8,864
Other operating expenses 19,686   1,873   3,833   16,711   42,103
Total non-interest expense 79,551   9,734   15,155   37,761   142,201
Income before income taxes 35,614 9,688 5,206 (39,119 ) 11,389
Income tax expense 9,074   3,627   2,082   (10,295 ) 4,488
Net income $ 26,540   $ 6,061   $ 3,124   $ (28,824 ) $ 6,901
 

Net income from our banking segment for the fourth quarter of 2014 increased compared to the prior quarter primarily due to the full quarter impact of the Merger. The provision for credit losses increased in the fourth quarter of 2014 compared to the prior quarter primarily due to the overall growth in MB Financial legacy loans. The provision for credit losses for MB Financial legacy loans increased by $4.1 million in the fourth quarter of 2014 compared to the third quarter of 2014.

Net income from our leasing segment for the fourth quarter of 2014 was comparable to the prior quarter. Lease financing revenues for the fourth quarter of 2014 increased compared to the prior quarter due to higher fees and promotional revenue from the sale of third-party equipment maintenance contracts which was partly offset by the increase in commission expense.

Net income from our mortgage segment for the fourth quarter of 2014 decreased compared to the prior quarter primarily due to lower servicing revenue partially offset by increased origination revenue. In third quarter of 2014, servicing revenue benefited from higher interest rates at quarter end which positively impacted the fair value of our mortgage servicing rights. Conversely, servicing revenue was hurt in the fourth quarter of 2014 due to lower interest rates during the fourth quarter which negatively impacted the fair value of the mortgage servicing rights. Origination revenue increased from the third quarter of 2014 due to increased refinance activity as a result of generally lower interest rates.

The following table presents additional information regarding the mortgage banking segment (dollars in thousands):

  4Q14   3Q14 (1)
Origination volume $ 1,511,909 $ 724,713
Refinance 44 % 35 %
Purchase 56 65
 
Origination volume by channel:
Retail 19 % 18 %
Third party 81 82
 
Mortgage servicing book (unpaid principal balance of loans serviced for others) at period end $ 22,479,008 $ 21,989,278
Mortgage servicing rights, recorded at fair value, at period end 235,402 241,391
Notional value of rate lock commitments, at period end 645,287 610,818

(1) For the 44 day period subsequent to the Merger.

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):

  12/31/2014   9/30/2014   6/30/2014   3/31/2014   12/31/2013
  % of   % of   % of   % of   % of
Amount Total Amount Total Amount Total Amount Total Amount Total
Commercial related credits:
Commercial loans $ 3,245,206 36 % $ 3,064,669 34 % $ 1,272,200 23 % $ 1,267,398 23 % $ 1,281,377 22 %
Commercial loans collateralized by assignment of lease payments (lease loans) 1,692,258 18 1,631,660 18 1,515,446 27 1,472,621 27 1,494,188 26
Commercial real estate 2,544,867 28 2,647,412 29 1,619,322 29 1,623,509 29 1,647,700 29
Construction real estate 247,068   3   222,120   3   116,996   2   132,997   2   141,253   3  
Total commercial related credits 7,729,399   85   7,565,861   84   4,523,964   81   4,496,525   81   4,564,518   80  
Other loans:
Residential real estate 503,287 5 516,834 6 309,234 6 309,137 5 314,440 5
Indirect vehicle 268,840 3 273,038 3 272,841 5 266,044 5 262,632 5
Home equity 251,909 3 262,977 3 245,135 4 258,120 5 268,289 5
Consumer loans 78,137   1   69,028   1   70,584   1   64,812   1   66,952   1  
Total other loans 1,102,173   12   1,121,877   13   897,794   16   898,113   16   912,313   16  
Gross loans excluding purchased credit impaired and covered loans 8,831,572 97 8,687,738 97 5,421,758 97 5,394,638 97 5,476,831 96
Purchased credit impaired and covered loans (1) 251,645   3   288,186   3   134,966   3   173,677   3   235,720   4  
Total loans $ 9,083,217   100 % $ 8,975,924   100 % $ 5,556,724   100 % $ 5,568,315   100 % $ 5,712,551   100 %

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

Our loan balances, excluding purchase credit impaired and covered loans, grew $143.8 million (+1.7%, or +6.6% on an annualized basis) during the fourth quarter of 2014. Much of the growth was in commercial and lease loan balances partly offset by the decrease in commercial real estate.

ASSET QUALITY

The following table presents a summary of criticized assets (excluding loans held for sale, purchased credit-impaired loans and other real estate owned acquired as part of our FDIC-assisted transactions) as of the dates indicated (dollars in thousands):

  12/31/2014   9/30/2014   6/30/2014   3/31/2014   12/31/2013
Non-performing loans:
Non-accrual loans (1) $ 82,733 $ 97,580 $ 108,414 $ 118,023 $ 106,115
Loans 90 days or more past due, still accruing interest 4,354   2,681   2,363   747   446  
Total non-performing loans 87,087   100,261   110,777   118,770   106,561  
Other real estate owned 19,198 18,817 20,306 20,928 23,289
Repossessed assets 93   126   73   772   840  
Total non-performing assets 106,378   119,204   131,156   140,470   130,690  
Potential problem loans (2) 55,651   51,690   63,477   68,785   79,589  
Total classified assets $ 162,029   $ 170,894   $ 194,633   $ 209,255   $ 210,279  
 
Total allowance for loan losses $ 110,026 $ 102,810 $ 100,910 $ 106,752 $ 111,746
Accruing restructured loans (3) 17,003 16,877 26,793 25,797 29,430
Total non-performing loans to total loans 0.96 % 1.12 % 1.99 % 2.13 % 1.87 %
Total non-performing assets to total assets 0.73 0.82 1.34 1.49 1.36
Allowance for loan losses to non-performing loans 126.34 102.54 91.09 89.88 104.87

(1) Includes $25.8 million, $22.4 million, $14.5 million, $15.6 million and $25.0 million of restructured loans on non-accrual status at December 31, 2014, September 30, 2014, June 30, 2014, March 31, 2014, and December 31, 2013, 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 consist 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 following table presents non-performing loans by category (excluding loans held for sale and credit-impaired loans that were acquired as part of our FDIC-assisted transactions and Taylor Capital merger) as of the dates indicated (in thousands):

  12/31/2014   9/30/2014   6/30/2014   3/31/2014   12/31/2013
Commercial and lease $ 20,058 $ 22,985 $ 36,807 $ 42,532 $ 22,348
Commercial real estate 32,663 42,832 48,751 49,541 58,292
Construction real estate 337 337 337 782 475
Consumer related 34,029   34,107   24,882   25,915   25,446
Total non-performing loans $ 87,087   $ 100,261   $ 110,777   $ 118,770   $ 106,561
 

The increase in consumer related non-performing loans in the third quarter of 2014 was primarily due to a group of restructured loans that were less than 90 days past due that were reported as non-performing.

The following table presents a summary of other real estate owned activity (excluding other real estate owned related to assets acquired in FDIC-assisted transactions) as of the dates indicated (in thousands):

  12/31/2014   9/30/2014   6/30/2014   3/31/2014   12/31/2013
Balance at the beginning of quarter $ 18,817 $ 20,306 $ 20,928 $ 23,289 $ 31,356
Transfers in at fair value less estimated costs to sell 1,261 221 112 539 104
Acquired from business combination — 4,720 — — —
Capitalized other real estate owned costs — — — — 21
Fair value adjustments (34 ) (2,083 ) (286 ) (140 ) (176 )
Net gains on sales of other real estate owned 154 735 82 18 1,007
Cash received upon disposition (1,000 ) (5,082 ) (530 ) (2,778 ) (9,023 )
Balance at the end of quarter $ 19,198   $ 18,817   $ 20,306   $ 20,928   $ 23,289  
 

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,
4Q14 3Q14 2Q14 1Q14 4Q13 2014   2013
Allowance for credit losses, balance at the beginning of period $ 106,912 $ 103,905 $ 108,395 $ 113,462 $ 119,725 $ 113,462 $ 128,279
Allowance for unfunded credit commitments acquired through business combination — 1,261 — — — 1,261 —
Utilization of allowance for unfunded credit commitments — (637 ) — — — (637 ) —
Provision for credit losses - MB Financial legacy portfolio 2,472 (1,600 ) (1,950 ) 1,150 (3,000 ) 72 (5,804 )
Provision for credit losses - acquired Taylor Capital loan portfolio renewals 7,271 4,709 — — — 11,980 —
Charge-offs:
Commercial loans 197 606 446 90 676 1,339 3,706
Commercial loans collateralized by assignment of lease payments (lease loans) 546 — 40 — — 586 —
Commercial real estate loans 1,528 1,027 1,727 7,156 2,386 11,438 7,517
Construction real estate 4 5 14 56 125 79 980
Residential real estate 280 740 433 265 722 1,718 2,796
Home equity 1,381 566 817 619 1,145 3,383 3,692
Indirect vehicle 1,189 1,043 583 920 981 3,735 2,911
Consumer loans 885   497   590   495   572   2,467   2,073  
Total charge-offs 6,010   4,484   4,650   9,601   6,607   24,745   23,675  
Recoveries:
Commercial loans 869 564 696 1,628 1,348 3,757 3,156
Commercial loans collateralized by assignment of lease payments (lease loans) 384 425 130 — — 939 1,131
Commercial real estate loans 741 2,227 567 485 672 4,020 6,025
Construction real estate 51 25 77 99 789 252 1,616
Residential real estate 661 4 6 519 18 1,190 479
Home equity 176 46 127 133 152 482 594
Indirect vehicle 453 402 439 442 300 1,736 1,411
Consumer loans 77   65   68   78   65   288   250  
Total recoveries 3,412   3,758   2,110   3,384   3,344   12,664   14,662  
Total net charge-offs 2,598   726   2,540   6,217   3,263   12,081   9,013  
Allowance for credit losses, balance at the end of the period 114,057 106,912 103,905 108,395 113,462 114,057 113,462
Allowance for unfunded credit commitments (4,031 ) (4,102 ) (2,995 ) (1,643 ) (1,716 ) (4,031 ) (1,716 )
Allowance for loan losses, balance at the end of the period $ 110,026   $ 102,810   $ 100,910   $ 106,752   $ 111,746   $ 110,026   $ 111,746  
 
Total loans, at end of period, excluding loans held for sale $ 9,083,217 $ 8,975,924 $ 5,556,724 $ 5,568,315 $ 5,712,551 $ 9,083,217 $ 5,712,551
Average loans, excluding loans held for sale 8,978,139 7,182,084 5,516,735 5,606,877 5,572,759 6,831,183 5,605,740
Ratio of allowance for loan losses to total loans at end of period, excluding loans held for sale 1.21 % 1.15 % 1.82 % 1.92 % 1.96 % 1.21 % 1.96 %
Net loan charge-offs to average loans, excluding loans held for sale (annualized) 0.11 0.04 0.18 0.45 0.23 0.18 0.16
 

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

  12/31/2014   9/30/2014   6/30/2014   3/31/2014   12/31/2013
Commercial related loans:
General reserve $ 85,087 $ 76,604 $ 70,855 $ 75,695 $ 78,270
Specific reserve 5,189 5,802 10,270 11,325 12,834
Consumer related reserve 19,750   20,404   19,785   19,732   20,642
Total allowance for loan losses $ 110,026   $ 102,810   $ 100,910   $ 106,752   $ 111,746
 

The general reserve increased during the third and fourth quarters due to the addition of the Taylor Capital loan portfolio. Specific reserves decreased during the third quarter due to an improvement in the credit quality of impaired loans.

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.

Purchased loans acquired in a business combination are recorded at estimated fair value on their purchase date without a carryover of the related allowance for loan losses. These acquired loans are segregated into three types: pass rated loans with no discount attributable to credit quality, non-impaired loans with a discount attributable at least in part to credit quality and impaired loans with evidence of significant credit deterioration.

  • Pass rated loans (typically performing loans) are accounted for in accordance with ASC 310-20 "Nonrefundable Fees and Other Costs" as these loans do not have evidence of credit deterioration since origination.
  • Non-impaired loans (typically performing substandard loans) are accounted for in accordance with ASC 310-30 if they display at least some level of credit deterioration since origination.
  • Impaired loans (typically substandard loans on non-accrual status) are accounted for in accordance with ASC 310-30 as they display significant credit deterioration since origination.

For pass rated loans (non-purchased credit impaired loans), the difference between the estimated fair value of the loans and the principal outstanding is accreted over the remaining life of the loans. We anticipate recording a provision for the acquired portfolio in future quarters related to renewing Taylor loans which will largely offset the accretion from the pass rated loans.

In accordance with ASC 310-30, for both purchased non-impaired loans and purchased impaired loans ("PCI loans"), the difference between contractually required payments at acquisition and the cash flows expected to be collected is referred to as the non-accretable difference. Further, any excess of cash flows expected at acquisition over the estimated fair value is referred to as the accretable yield and is recognized into interest income over the remaining life of the loan when there is a reasonable expectation about the amount and timing of such cash flows.

Changes in the acquisition accounting discount for loans acquired in the Merger were as follows for the year ended December 31, 2014 (in thousands):

  Non-     Accretable  
Accretable Accretable Discount -
Discount - Discount - Non-PCI
PCI Loans PCI Loans Loans Total
Balance at beginning of period $ — $ — $ — $ —
Purchases 34,219 5,626 77,728 117,573
Charge-offs (3,178 ) — — (3,178 )
Accretion —   (1,137 ) (15,952 ) (17,089 )
Balance at end of period $ 31,041   $ 4,489   $ 61,776   $ 97,306  
 

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 (in thousands):

  12/31/2014   9/30/2014   6/30/2014   3/31/2014   12/31/2013
Securities available for sale:
Fair value
Government sponsored agencies and enterprises $ 65,873 $ 65,829 $ 51,727 $ 51,836 $ 52,068
States and political subdivisions 410,854 409,033 19,498 19,350 19,143
Mortgage-backed securities 908,225 1,006,102 797,783 726,439 754,174
Corporate bonds 259,203 267,239 275,529 273,853 283,070
Equity securities 10,597   10,447   10,421   10,572   10,457  
Total fair value $ 1,654,752   $ 1,758,650   $ 1,154,958   $ 1,082,050   $ 1,118,912  
 
Amortized cost
Government sponsored agencies and enterprises $ 64,612 $ 64,809 $ 50,096 $ 50,291 $ 50,486
States and political subdivisions 390,076 391,900 19,228 19,285 19,398
Mortgage-backed securities 899,523 999,630 786,496 717,548 747,306
Corporate bonds 259,526 265,720 271,351 272,490 284,083
Equity securities 10,531   10,470   10,414   10,703   10,649  
Total amortized cost $ 1,624,268   $ 1,732,529   $ 1,137,585   $ 1,070,317   $ 1,111,922  
 
Unrealized gain
Government sponsored agencies and enterprises $ 1,261 $ 1,020 $ 1,631 $ 1,545 $ 1,582
States and political subdivisions 20,778 17,133 270 65 (255 )
Mortgage-backed securities 8,702 6,472 11,287 8,891 6,868
Corporate bonds (323 ) 1,519 4,178 1,363 (1,013 )
Equity securities 66   (23 ) 7   (131 ) (192 )
Total unrealized gain $ 30,484   $ 26,121   $ 17,373   $ 11,733   $ 6,990  
 
Securities held to maturity, at cost:
States and political subdivisions $ 752,558 $ 760,674 $ 993,937 $ 940,610 $ 932,955
Mortgage-backed securities 240,822   244,675   247,455   248,082   249,578  
Total amortized cost $ 993,380   $ 1,005,349   $ 1,241,392   $ 1,188,692   $ 1,182,533  
 

Securities of states and political subdivisions with an approximate fair value of $291.2 million were transferred from held to maturity to available for sale during the third quarter of 2014.

DEPOSIT MIX

The following table shows the composition of deposits based on period end balances as of the dates indicated (dollars in thousands):

  12/31/2014   9/30/2014   6/30/2014   3/31/2014   12/31/2013
  % of   % of   % of   % of   % of
Amount Total Amount Total Amount Total Amount Total Amount Total
Low cost deposits:
Non-interest bearing deposits $ 4,118,256 37 % $ 3,807,448 34 % $ 2,605,367 34 % $ 2,435,868 32 % $ 2,375,863 32 %
Money market and NOW accounts 3,913,765 36 4,197,166 37 2,932,089 38 2,772,766 37 2,682,419 36
Savings accounts 940,345   9   931,985   8   872,324   11   865,910   12   855,394   12  
Total low cost deposits 8,972,366   82   8,936,599   79   6,409,780   83   6,074,544   81   5,913,676   80  
Certificates of deposit:
Certificates of deposit 1,479,928 13 1,646,000 15 1,137,262 14 1,188,896 16 1,243,433 17
Brokered deposit accounts 538,648   5   655,843   6   216,022   3   222,307   3   224,150   3  
Total certificates of deposit 2,018,576   18   2,301,843   21   1,353,284   17   1,411,203   19   1,467,583   20  
Total deposits $ 10,990,942   100 % $ 11,238,442   100 % $ 7,763,064   100 % $ 7,485,747   100 % $ 7,381,259   100 %
 

Non-interest bearing deposits grew by $310.8 million (+8.2%) during the fourth quarter of 2014. Total low cost deposits increased $35.8 million to $9.0 billion at December 31, 2014 compared to the prior quarter primarily due to strong noninterest bearing deposit flows. Total deposits decreased during the fourth quarter of 2014 primarily due to the $283.3 million decrease in total certificates of deposit.

Shortly after the Merger, rates paid on the Taylor Capital deposit products, primarily money market and NOW accounts, were reduced to align with the Company’s current rate offerings. We expect to see a decline in balances from certain rate sensitive customers over the next few quarters.

CAPITAL

Tangible book value per common share was $15.74 at December 31, 2014 compared to $16.16 a year ago and $15.36 at September 30, 2014.

Our regulatory capital ratios remain strong. MB Financial Bank, N.A. was categorized as “well capitalized” at December 31, 2014 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 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 expected benefits of the other acquisition transactions we previously completed will not be realized; (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, resulting both from loans we originate and loans we acquire from other financial institutions; (4) results of examinations by the Office of Comptroller of Currency, the Federal Reserve Board, the Consumer Financial Protection Bureau 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 possibility that our mortgage banking business may increase volatility in our revenues and earnings and the possibility that the profitability of our mortgage banking business could be significantly reduced if we are unable to originate and sell mortgage loans at profitable margins; (8) the impact of repricing and competitors’ pricing initiatives on loan and deposit products; (9) fluctuations in real estate values; (10) the ability to adapt successfully to technological changes to meet customers’ needs and developments in the market-place; (11) our ability to realize the residual values of our direct finance, leveraged, and operating leases; (12) our ability to access cost-effective funding; (13) changes in financial markets; (14) changes in economic conditions in general and in the Chicago metropolitan area in particular; (15) the costs, effects and outcomes of litigation; (16) 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; (17) changes in accounting principles, policies or guidelines; (18) our future acquisitions of other depository institutions or lines of business; and (19) 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.

TABLES TO FOLLOW

 
MB FINANCIAL, INC. & SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Unaudited)
         
(Dollars in thousands) 12/31/2014 9/30/2014 6/30/2014 3/31/2014 12/31/2013
ASSETS
Cash and due from banks $ 256,804 $ 267,405 $ 294,475 $ 268,803 $ 205,193
Interest earning deposits with banks 55,277   179,391   466,820   244,819   268,266  
Total cash and cash equivalents 312,081 446,796 761,295 513,622 473,459
Federal funds sold — — 10,000 7,500 42,950
Investment securities:
Securities available for sale, at fair value 1,654,752 1,758,650 1,154,958 1,082,050 1,118,912
Securities held to maturity, at amortized cost 993,380 1,005,349 1,241,392 1,188,692 1,182,533
Non-marketable securities - FHLB and FRB Stock 75,569   75,569   51,432   51,432   51,417  
Total investment securities 2,723,701 2,839,568 2,447,782 2,322,174 2,352,862
Loans held for sale 737,209 553,627 1,219 802 629
Loans:
Total loans, excluding purchased credit impaired and covered loans 8,831,572 8,687,738 5,421,758 5,394,638 5,476,831
Purchased credit impaired and covered loans 251,645   288,186   134,966   173,677   235,720  
Total loans 9,083,217 8,975,924 5,556,724 5,568,315 5,712,551
Less: Allowance for loan losses 110,026   102,810   100,910   106,752   111,746  
Net loans 8,973,191 8,873,114 5,455,814 5,461,563 5,600,805
Lease investments, net 162,833 137,120 127,194 122,589 131,089
Premises and equipment, net 238,377 243,814 224,245 221,711 221,065
Cash surrender value of life insurance 133,562 132,697 131,842 131,008 130,181
Goodwill 711,521 711,521 423,369 423,369 423,369
Other intangibles 38,006 39,623 21,014 22,188 23,428
Mortgage servicing rights, at fair value 235,402 241,391 344 378 413
Other real estate owned, net 19,198 18,817 20,306 20,928 23,289
Other real estate owned related to FDIC transactions 19,328 22,028 15,349 22,682 20,472
Other assets 297,690   244,481   178,918   166,789   197,416  
Total assets $ 14,602,099   $ 14,504,597   $ 9,818,691   $ 9,437,303   $ 9,641,427  
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits:
Non-interest bearing $ 4,118,256 $ 3,807,448 $ 2,605,367 $ 2,435,868 $ 2,375,863
Interest bearing 6,872,686   7,430,994   5,157,697   5,049,879   5,005,396  
Total deposits 10,990,942 11,238,442 7,763,064 7,485,747 7,381,259
Short-term borrowings 931,415 667,160 229,809 189,872 493,389
Long-term borrowings 82,916 77,269 71,473 65,664 62,159
Junior subordinated notes issued to capital trusts 185,778 185,681 152,065 152,065 152,065
Accrued expenses and other liabilities 382,762   335,677   236,964   200,175   225,873  
Total liabilities 12,573,813   12,504,229   8,453,375   8,093,523   8,314,745  
Stockholders' Equity
Preferred stock 115,280 115,280 — — —
Common stock 751 751 553 553 551
Additional paid-in capital 1,267,761 1,265,050 742,824 740,245 738,053
Retained earnings 629,677 606,097 611,741 595,301 581,998
Accumulated other comprehensive income 20,356 18,431 13,034 10,362 8,383
Treasury stock (6,974 ) (6,692 ) (4,295 ) (4,132 ) (3,747 )
Controlling interest stockholders' equity 2,026,851 1,998,917 1,363,857 1,342,329 1,325,238
Noncontrolling interest 1,435   1,451   1,459   1,451   1,444  
Total stockholders' equity 2,028,286   2,000,368   1,365,316   1,343,780   1,326,682  
Total liabilities and stockholders' equity $ 14,602,099   $ 14,504,597   $ 9,818,691   $ 9,437,303   $ 9,641,427  

Certain prior period amounts on the balance sheet have been reclassified and restated to conform to current period presentation. As a result of acquisition accounting measurement period adjustments for the Taylor Capital merger, the previously reported September 30, 2014 balances for total loans, premises and equipment, mortgage servicing rights, other intangibles, other real estate owned, non-interest bearing deposits, other liabilities and additional paid in capital decreased, while other assets and goodwill increased.

             
MB FINANCIAL, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
 
Year Ended
December 31,
(Dollars in thousands, except per share data) 4Q14 3Q14 2Q14 1Q14 4Q13 2014   2013
Interest income:
Loans:
Taxable $ 104,531 $ 79,902 $ 53,649 $ 53,946 $ 55,714 $ 292,028 $ 228,931
Nontaxable 2,203 2,265 2,256 2,298 2,339 9,022 9,611
Investment securities:
Taxable 10,651 11,028 8,794 8,146 7,334 38,619 26,084
Nontaxable 9,398 9,041 8,285 8,067 8,166 34,791 32,564
Federal funds sold 2 14 4 5 6 25 15
Other interest earning accounts 62   211   277   113   270   663   690  
Total interest income 126,847   102,461   73,265   72,575   73,829   375,148   297,895  
Interest expense:
Deposits 4,889 4,615 3,754 3,769 3,966 17,027 19,240
Short-term borrowings 354 231 95 100 227 780 622
Long-term borrowings and junior subordinated notes 1,793   2,003   1,344   1,378   1,373   6,518   5,697  
Total interest expense 7,036   6,849   5,193   5,247   5,566   24,325   25,559  
Net interest income 119,811 95,612 68,072 67,328 68,263 350,823 272,336
Provision for credit losses 9,743   3,109   (1,950 ) 1,150   (3,000 ) 12,052   (5,804 )
Net interest income after provision for credit losses 110,068   92,503   70,022   66,178   71,263   338,771   278,140  
Non-interest income:
Lease financing, net 18,542 17,719 14,853 13,196 15,808 64,310 61,243
Mortgage banking revenue 29,080 16,823 187 59 342 46,149 1,664
Commercial deposit and treasury management fees 10,720 9,345 7,106 7,144 6,545 34,315 24,867
Trust and asset management fees 5,515 5,712 5,405 5,207 4,975 21,839 19,142
Card fees 3,900 3,836 3,304 2,701 2,838 13,741 11,013
Capital markets and international banking service fees 1,648 1,472 1,360 978 841 5,458 3,560
Consumer and other deposit service fees 3,335 3,362 3,156 2,935 3,481 12,788 13,968
Brokerage fees 1,350 1,145 1,356 1,325 1,227 5,176 4,907
Loan service fees 1,864 1,069 916 965 1,214 4,814 5,563
Increase in cash surrender value of life insurance 865 855 834 827 848 3,381 3,385
Net gain (loss) on investment securities 491 (3,246 ) (87 ) 317 (15 ) (2,525 ) (1 )
Net gain (loss) on sale of other assets 3,476 (7 ) (24 ) 7 (323 ) 3,452 (323 )
Gain on early extinguishment of debt — 1,895 — — — 1,895 —
Other operating income 2,892   1,107   1,562   951   1,264   6,512   5,406  
Total non-interest income 83,678   61,087   39,928   36,612   39,045   221,305   154,394  
Non-interest expense:
Salaries and employee benefits 85,483 79,492 46,622 44,377 45,517 255,974 177,858
Occupancy and equipment expense 14,058 11,742 9,518 9,592 9,269 44,910 36,878
Computer services and telecommunication expense 10,009 11,506 5,079 5,084 5,509 31,678 18,883
Advertising and marketing expense 2,317 2,235 2,221 2,081 2,085 8,854 8,272
Professional and legal expense 2,442 8,864 1,567 1,779 3,057 14,652 8,807
Other intangible amortization expense 1,617 1,470 1,174 1,240 1,489 5,501 6,084
Facilities impairment charges 2,270 — — — — 2,270 —
Net loss (gain) recognized on other real estate owned and other related expense 286 2,178 528 583 (459 ) 3,575 (781 )
Other operating expenses 22,022   24,714   11,321   11,311   10,174   69,368   38,587  
Total non-interest expense 140,504   142,201   78,030   76,047   76,641   436,782   294,588  
Income before income taxes 53,242 11,389 31,920 26,743 33,667 123,294 137,946
Income tax expense 17,117   4,488   8,814   6,774   9,811   37,193   39,491  
Net income 36,125 6,901 23,106 19,969 23,856 86,101 98,455
Dividends on preferred shares 2,000   2,000   —   —   —   4,000   —  
Net income available to common stockholders $ 34,125   $ 4,901   $ 23,106   $ 19,969   $ 23,856   $ 82,101   $ 98,455  
             
Year Ended
December 31,
4Q14 3Q14 2Q14 1Q14 4Q13 2014   2013
Common share data:
Basic earnings per common share $ 0.46 $ 0.08 $ 0.42 $ 0.37 $ 0.44 $ 1.32 $ 1.81
Diluted earnings per common share 0.45 0.08 0.42 0.36 0.43 1.31 1.79
Weighted average common shares outstanding for basic earnings per common share 74,525,990 63,972,902 54,669,868 54,639,951 54,622,584 62,012,196 54,509,612
Weighted average common shares outstanding for diluted earnings per common share 75,130,331 64,457,978 55,200,054 55,265,188 55,237,160 62,573,406 54,993,865
               
Selected Financial Data:
Year Ended
December 31,
4Q14 3Q14 2Q14 1Q14 4Q13 2014 2013
Performance Ratios:
Annualized return on average assets 0.99 % 0.22 % 0.97 % 0.86 % 0.99 % 0.75 % 1.05 %
Annualized operating return on average assets (1) 1.09 1.16 0.99 0.93 1.02 1.05 1.07
Annualized return on average common equity 7.12 1.21 6.86 6.07 7.19 5.29 7.59
Annualized operating return on average common equity (1) 7.84 8.29 6.98 6.53 7.43 7.50 7.77
Annualized cash return on average tangible common equity (2) 11.98 2.23 10.47 9.39 11.23 8.52 11.94
Annualized cash operating return on average tangible common equity (3) 13.16 13.19 10.66 10.08 11.59 11.92 12.22
Net interest rate spread 3.88 3.66 3.40 3.51 3.37 3.65 3.45
Cost of funds (4) 0.23 0.26 0.26 0.27 0.27 0.25 0.32
Efficiency ratio (5) 63.35 63.46 67.68 66.84 66.56 64.85 64.56
Annualized net non-interest expense to average assets (6) 1.39 1.35 1.55 1.58 1.50 1.45 1.44
Core non-interest income to revenues (7) 38.78 38.23 35.22 33.41 34.68 36.96 34.44
Net interest margin 3.81 3.56 3.26 3.36 3.23 3.54 3.31
Tax equivalent effect 0.20 0.22 0.27 0.28 0.27 0.23 0.28
Net interest margin - fully tax equivalent basis (8) 4.01 3.78 3.53 3.64 3.50 3.77 3.59
Loans to deposits 82.64 79.87 71.58 74.39 77.39 82.64 77.39
Asset Quality Ratios:
Non-performing loans (9) to total loans 0.96 % 1.12 % 1.99 % 2.13 % 1.87 % 0.96 % 1.87 %
Non-performing assets (9) to total assets 0.73 0.82 1.34 1.49 1.36 0.73 1.36
Allowance for loan losses to non-performing loans (9) 126.34 102.54 91.09 89.88 104.87 126.34 104.87
Allowance for loan losses to total loans 1.21 1.15 1.82 1.92 1.96 1.21 1.96
Net loan charge-offs (recoveries) to average loans (annualized) 0.11 0.04 0.18 0.45 0.23 0.18 0.16
Capital Ratios:
Tangible equity to tangible assets (10) 9.32 % 9.17 % 9.89 % 10.07 % 9.65 % 9.32 % 9.65 %
Tangible common equity to tangible assets(11) 8.49 8.34 9.89 10.07 9.65 8.49 9.65
Tangible common equity to risk weighted assets (12) 10.38 10.34 13.97 13.82 13.27 10.38 13.27
Total capital (to risk-weighted assets) 13.62 13.60 17.18 17.09 16.53 13.62 16.53
Tier 1 capital (to risk-weighted assets) 12.61 12.64 15.92 15.84 15.28 12.61 15.28
Tier 1 capital (to average assets) 10.47 12.29 11.61 11.65 11.22 10.47 11.22
Tier 1 common capital (to risk-weighted assets) 9.94 9.91 13.71 13.59 13.07 9.94 13.07
Book Value Per Share Data:
Book value per common share (13) $ 25.58 $ 25.09 $ 24.73 $ 24.37 $ 24.14 $ 25.58 $ 24.14
Less: goodwill and other intangible assets, net of benefit, per common share 9.84   9.73   7.92   7.94   7.98   9.84   7.98  
Tangible book value per common share (14) $ 15.74 $ 15.36 $ 16.81 $ 16.43 $ 16.16 $ 15.74 $ 16.16

(1) Annualized operating return on average assets is computed by dividing annualized operating earnings by average total assets. Annualized operating return on average common equity is computed by dividing annualized operating earnings by average common equity. Operating earnings is defined as net income as reported less non-core items, net of tax.

(2) Annualized cash return on average tangible equity is computed by dividing net cash flow (net income available to common stockholders, plus other intangibles amortization expense, net of tax benefit) by average tangible equity (average common stockholders' equity less average goodwill and average other intangibles, net of tax benefit).

(3) Annualized cash operating return on average tangible common equity is computed by dividing annualized cash operating earnings (operating earnings plus other intangibles amortization expense, net of tax benefit, less dividends on preferred shares) by average tangible common equity. Operating earnings is defined as net income as reported less non-core items, net of tax.

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

(5) 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.

(6) 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.

(7) 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.

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

(9) 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.

(10) 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.

(11) 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.

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

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

(14) 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 operating earnings, 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 gains and losses on sale of other assets, gain on extinguishment of debt and increase in market value of assets held in trust for deferred compensation excluded from the non-interest income components of these ratios, and prepayment fees on interest bearing liabilities, loss on low to moderate income real estate investment, merger related expenses, contingent consideration expense - Celtic acquisition, contribution to MB Financial Charitable Foundation 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; annualized operating return on average assets, annualized operating return on average common equity, annualized cash return on average tangible common equity and annualized cash operating 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 operating earnings, core and non-core non-interest income and core and non-core 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 gains and losses on sale of other assets, gain on extinguishment of debt and increase in market value of assets held in trust for deferred compensation from the non-interest income components, and excluding prepayment fees on interest bearing liabilities, loss on low to moderate income real estate investment, merger related expenses, contingent consideration expense - Celtic acquisition, contribution to MB Financial Charitable Foundation 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 (in thousands):

  12/31/2014   9/30/2014   6/30/2014   3/31/2014   12/31/2013
Stockholders' equity - as reported $ 2,028,286 $ 2,000,368 $ 1,365,316 $ 1,343,780 $ 1,326,682
Less: goodwill 711,521 711,521 423,369 423,369 423,369
Less: other intangible assets, net of tax benefit 24,704   25,755   13,659   14,422   15,228
Tangible equity $ 1,292,061   $ 1,263,092   $ 928,288   $ 905,989   $ 888,085
 

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

  12/31/2014   9/30/2014   6/30/2014   3/31/2014   12/31/2013
Total assets - as reported $ 14,602,099 $ 14,504,597 $ 9,818,691 $ 9,437,303 $ 9,641,427
Less: goodwill 711,521 711,521 423,369 423,369 423,369
Less: other intangible assets, net of tax benefit 24,704   25,755   13,659   14,422   15,228
Tangible assets $ 13,865,874   $ 13,767,321   $ 9,381,663   $ 8,999,512   $ 9,202,830
 

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

  12/31/2014   9/30/2014   6/30/2014   3/31/2014   12/31/2013
Common stockholders' equity - as reported $ 1,913,006 $ 1,885,088 $ 1,365,316 $ 1,343,780 $ 1,326,682
Less: goodwill 711,521 711,521 423,369 423,369 423,369
Less: other intangible assets, net of tax benefit 24,704   25,755   13,659   14,422   15,228
Tangible common equity $ 1,176,781   $ 1,147,812   $ 928,288   $ 905,989   $ 888,085
 

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

              Year Ended
December 31,
4Q14 3Q14 2Q14 1Q14 4Q13 2014   2013
Average common stockholders' equity $ 1,901,830 $ 1,613,375 $ 1,351,604 $ 1,335,223 $ 1,315,804 $ 1,552,232 $ 1,297,991
Less: average goodwill 711,521 550,667 423,369 423,369 423,369 528,088 423,369
Less: average other intangible assets, net of tax benefit 25,149   19,734   13,990   14,758   15,647   18,440   17,111
Average tangible common equity $ 1,165,160   $ 1,042,974   $ 914,245   $ 897,096   $ 876,788   $ 1,005,704   $ 857,511
 

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

              Year Ended
December 31,
4Q14 3Q14 2Q14 1Q14 4Q13 2014   2013
Net income available to common stockholders - as reported $ 34,125 $ 4,901 $ 23,106 $ 19,969 $ 23,856 $ 82,101 $ 98,455
Add: other intangible amortization expense, net of tax benefit 1,051   956   763   806   968   3,576   3,955
Net cash flow available to common stockholders $ 35,176   $ 5,857   $ 23,869   $ 20,775   $ 24,824   $ 85,677   $ 102,410
 

The following table presents a reconciliation of net income to operating earnings (in thousands):

              Year Ended
December 31,
4Q14 3Q14 2Q14 1Q14 4Q13 2014   2013
Net income - as reported $ 36,125 $ 6,901 $ 23,106 $ 19,969 $ 23,856 $ 86,101 $ 98,455
Less non-core items:
Net gain (loss) on investment securities 491 (3,246 ) (87 ) 317 (15 ) (2,525 ) (1 )
Net gain (loss) on sale of other assets 3,476 (7 ) (24 ) 7 (323 ) 3,452 (323 )
Gain on extinguishment of debt — 1,895 — — — 1,895 —
Merger related expenses (6,494 ) (27,161 ) (488 ) (680 ) (724 ) (34,823 ) (2,483 )
Loss on low to moderate income real estate investment — — (96 ) (2,028 ) — (2,124 ) —
Contingent consideration expense - Celtic acquisition — (10,600 ) — — — (10,600 ) —
Contribution to MB Financial Charitable Foundation (3,250 ) —   —   —   —   (3,250 ) —  
Total non-core items (5,777 ) (39,119 ) (695 ) (2,384 ) (1,062 ) (47,975 ) (2,807 )
Income tax expense on non-core items (2,314 ) (10,295 ) (266 ) (855 ) (281 ) (13,730 ) (450 )
Non-core items, net of tax (3,463 ) (28,824 ) (429 ) (1,529 ) (781 ) (34,245 ) (2,357 )
Operating earnings $ 39,588   $ 35,725   $ 23,535   $ 21,498   $ 24,637   $ 120,346   $ 100,812  
 

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

  12/31/2014   9/30/2014   6/30/2014   3/31/2014   12/31/2013
Tier 1 capital - as reported $ 1,430,702 $ 1,403,218 $ 1,058,504 $ 1,038,600 $ 1,022,512
Less: qualifying trust preferred securities 187,500 187,500 147,500 147,500 147,500
Less: preferred stock 115,280   115,280   —   —   —
Tier 1 common capital $ 1,127,922   $ 1,100,438   $ 911,004   $ 891,100   $ 875,012
 

Efficiency Ratio Calculation (Dollars in Thousands)

              Year Ended
December 31,
4Q14 3Q14 2Q14 1Q14 4Q13 2014   2013
Non-interest expense $ 140,504 $ 142,201 $ 78,030 $ 76,047 $ 76,641 $ 436,782 $ 294,588
Less merger related expenses 6,494 27,161 488 680 724 34,823 2,483
Less loss on low to moderate income real estate investment — — 96 2,028 — 2,124 —
Less contingent consideration expense - Celtic acquisition — 10,600 — — — 10,600 —
Less contribution to MB Financial Charitable Foundation 3,250 — — — — 3,250 —
Less increase in market value of assets held in trust for deferred compensation 315   (38 ) 400   152   588   829   1,551  
Non-interest expense - as adjusted $ 130,445   $ 104,478   $ 77,046   $ 73,187   $ 75,329   $ 385,156   $ 290,554  
 
Net interest income $ 119,811 $ 95,612 $ 68,072 $ 67,328 $ 68,263 $ 350,823 $ 272,336
Tax equivalent adjustment 6,246   6,087   5,677   5,581   5,655   23,591   22,709  
Net interest income on a fully tax equivalent basis 126,057 101,699 73,749 72,909 73,918 374,414 295,045
Plus non-interest income 83,678 61,087 39,928 36,612 39,045 221,305 154,394
Plus tax equivalent adjustment on the increase in cash surrender value of life insurance 466 460 449 445 457 1,821 1,823
Less net gain (loss) on investment securities 491 (3,246 ) (87 ) 317 (15 ) (2,525 ) (1 )
Less net gain (loss) on sale of other assets 3,476 (7 ) (24 ) 7 (323 ) 3,452 (323 )
Less gain on early extinguishment of debt — 1,895 — — — 1,895 —
Less increase in market value of assets held in trust for deferred compensation 315   (38 ) 400   152   588   829   1,551  
Net interest income plus non-interest income - as adjusted $ 205,919   $ 164,642   $ 113,837   $ 109,490   $ 113,170   $ 593,889   $ 450,035  
 
Efficiency ratio 63.35 % 63.46 % 67.68 % 66.84 % 66.56 % 64.85 % 64.56 %
Efficiency ratio (without adjustments) 69.05 % 90.75 % 72.25 % 73.16 % 71.42 % 76.34 % 69.03 %
 

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

              Year Ended
December 31,
4Q14 3Q14 2Q14 1Q14 4Q13 2014   2013
Non-interest expense $ 140,504 $ 142,201 $ 78,030 $ 76,047 $ 76,641 $ 436,782 $ 294,588
Less merger-related expenses 6,494 27,161 488 680 724 34,823 2,483
Less loss on low to moderate income real estate investment — — 96 2,028 — 2,124 —
Less contingent consideration expense - Celtic acquisition — 10,600 — — — 10,600 —
Less contribution to MB Financial Charitable Foundation 3,250 — — — — 3,250 —
Less increase in market value of assets held in trust for deferred compensation 315   (38 ) 400   152   588   829   1,551  
Non-interest expense - as adjusted 130,445   104,478   77,046   73,187   75,329   385,156   290,554  
 
Non-interest income 83,678 61,087 39,928 36,612 39,045 221,305 154,394
Less net gain (loss) on investment securities 491 (3,246 ) (87 ) 317 (15 ) (2,525 ) (1 )
Less net gain (loss) on sale of other assets 3,476 (7 ) (24 ) 7 (323 ) 3,452 (323 )
Less gain on early extinguishment of debt — 1,895 — — — 1,895 —
Less increase in market value of assets held in trust for deferred compensation 315   (38 ) 400   152   588   829   1,551  
Non-interest income - as adjusted 79,396   62,483   39,639   36,136   38,795   217,654   153,167  
Less tax equivalent adjustment on the increase in cash surrender value of life insurance 466   460   449   445   457   1,821   1,823  
Net non-interest expense $ 50,583   $ 41,535   $ 36,958   $ 36,606   $ 36,077   $ 165,681   $ 135,564  
 
Average assets $ 14,466,066 $ 12,206,014 $ 9,575,896 $ 9,367,942 $ 9,567,388 $ 11,420,144 $ 9,391,877
 
Annualized net non-interest expense to average assets 1.39 % 1.35 % 1.55 % 1.58 % 1.50 % 1.45 % 1.44 %
 
Annualized net non-interest expense to average assets (without adjustments) 1.56 % 2.64 % 1.60 % 1.71 % 1.56 % 1.89 % 1.49 %
 

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

              Year Ended
December 31,
4Q14 3Q14 2Q14 1Q14 4Q13 2014   2013
Non-interest income $ 83,678 $ 61,087 $ 39,928 $ 36,612 $ 39,045 $ 221,305 $ 154,394
Plus tax equivalent adjustment on the increase in cash surrender value of life insurance 466 460 449 445 457 1,821 1,823
Less net gain (loss) on investment securities 491 (3,246 ) (87 ) 317 (15 ) (2,525 ) (1 )
Less net gain (loss) on sale of other assets 3,476 (7 ) (24 ) 7 (323 ) 3,452 (323 )
Less gain on early extinguishment of debt — 1,895 — — — 1,895 —
Less increase in market value of assets held in trust for deferred compensation 315   (38 ) 400   152   588   829   1,551  
Non-interest income - as adjusted $ 79,862   $ 62,943   $ 40,088   $ 36,581   $ 39,252   $ 219,475   $ 154,990  
 
Net interest income $ 119,811 $ 95,612 $ 68,072 $ 67,328 $ 68,263 $ 350,823 $ 272,336
Tax equivalent adjustment 6,246   6,087   5,677   5,581   5,655   23,591   22,709  
Net interest income on a fully tax equivalent basis 126,057 101,699 73,749 72,909 73,918 374,414 295,045
Plus non-interest income 83,678 61,087 39,928 36,612 39,045 221,305 154,394
Plus tax equivalent adjustment on the increase in cash surrender value of life insurance 466 460 449 445 457 1,821 1,823
Less net gain (loss) on investment securities 491 (3,246 ) (87 ) 317 (15 ) (2,525 ) (1 )
Less net gain (loss) on sale of other assets 3,476 (7 ) (24 ) 7 (323 ) 3,452 (323 )
Less gain on early extinguishment of debt — 1,895 — — — 1,895 —
Less increase in market value of assets held in trust for deferred compensation 315   (38 ) 400   152   588   829   1,551  
Total revenue - as adjusted and on a fully tax equivalent basis $ 205,919   $ 164,642   $ 113,837   $ 109,490   $ 113,170   $ 593,889   $ 450,035  
 
Total revenue - unadjusted $ 203,489 $ 156,699 $ 108,000 $ 103,940 $ 107,308 $ 572,128 $ 426,730
 
Core non-interest income to revenues ratio 38.78 % 38.23 % 35.22 % 33.41 % 34.68 % 36.96 % 34.44 %
 
Core non-interest income to revenues ratio (without adjustments) 41.12 % 38.98 % 36.97 % 35.22 % 36.39 % 38.68 % 36.18 %
 

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):

  4Q14   4Q13     3Q14
Average     Yield/ Average     Yield/ Average     Yield/
Balance Interest Rate Balance Interest Rate Balance Interest Rate
Interest Earning Assets:
Loans held for sale $ 604,196 $ 5,850 3.87 % $ 1,270 — — % $ 313,695 $ 2,826 3.60 %
Loans (1) (2) (3):
Commercial related credits
Commercial 3,110,016 34,609 4.35 1,167,924 12,080 4.05 2,118,864 23,536 4.35
Commercial loans collateralized by assignment of lease payments 1,642,427 15,280 3.72 1,468,257 14,087 3.84 1,561,484 14,669 3.76
Real estate commercial 2,611,410 30,249 4.53 1,629,270 17,908 4.30 2,108,492 24,213 4.49
Real estate construction 232,679   3,996   6.72 141,041   1,402   3.89 170,017   2,565   5.90
Total commercial related credits 7,596,532   84,134   4.33 4,406,492   45,477   4.04 5,958,857   64,983   4.27
Other loans
Real estate residential 503,211 4,897 3.89 315,303 3,018 3.83 405,589 4,581 4.52
Home equity 256,933 2,711 4.19 271,898 2,925 4.27 251,969 2,549 4.01
Indirect 273,063 3,660 5.32 260,918 3,455 5.25 274,841 3,647 5.26
Consumer loans 75,264   785   4.14 60,054   629   4.16 69,699   774   4.41
Total other loans 1,108,471   12,053   4.31 908,173   10,027   4.38 1,002,098   11,551   4.57
Total loans, excluding purchased credit impaired and covered loans 8,705,003 96,187 4.38 5,314,665 55,504 4.14 6,960,955 76,534 4.36
Purchased credit impaired and covered loans 273,136   5,883   8.55 258,094   3,808   5.85 221,129   4,027   7.23
Total loans 8,978,139   102,070   4.51 5,572,759   59,312   4.22 7,182,084   80,561   4.45
Taxable investment securities 1,649,937 10,651 2.58 1,421,135 7,334 2.06 1,726,352 11,028 2.56
Investment securities exempt from federal income taxes (3) 1,144,497 14,458 5.05 943,298 12,562 5.33 1,087,340 13,908 5.12
Federal funds sold 551 2 0.71 8,251 6 0.28 15,460 14 0.38
Other interest earning deposits 105,446   62   0.23 436,158   270   0.25 341,758   211   0.24
Total interest earning assets $ 12,482,766 $ 133,093   4.23 $ 8,382,871 $ 79,484   3.76 $ 10,666,689 $ 108,548   4.04
Non-interest earning assets 1,983,300   1,184,517   1,539,325  
Total assets $ 14,466,066   $ 9,567,388   $ 12,206,014  
Interest Bearing Liabilities:
Core funding:
Money market and NOW accounts $ 4,023,657 $ 1,600 0.16 % $ 2,685,343 $ 861 0.13 % $ 3,518,314 $ 1,469 0.17 %
Savings accounts 936,960 118 0.05 848,734 137 0.06 906,630 128 0.06
Certificates of deposit 1,563,011 1,537 0.39 1,250,049 1,256 0.40 1,411,407 1,375 0.40
Customer repurchase agreements 241,653   119   0.20 216,504   114   0.21 210,543   102   0.19
Total core funding 6,765,281   3,374   0.20 5,000,630   2,368   0.19 6,046,894   3,074   0.20
Wholesale funding:
Brokered accounts (includes fee expense) 606,166 1,634 1.07 229,635 1,712 2.96 417,346 1,643 1.56
Other borrowings 688,418   2,028   1.15 466,508   1,486   1.25 632,163   2,132   1.32
Total wholesale funding 1,294,584   3,662   1.08 696,143   3,198   1.68 1,049,509   3,775   1.33
Total interest bearing liabilities $ 8,059,865 $ 7,036   0.35 $ 5,696,773 $ 5,566   0.39 $ 7,096,403 $ 6,849   0.38
Non-interest bearing deposits 4,072,797 2,352,901 3,175,512
Other non-interest bearing liabilities 316,294 201,910 267,915
Stockholders' equity 2,017,110   1,315,804   1,666,184  
Total liabilities and stockholders' equity $ 14,466,066   $ 9,567,388   $ 12,206,014  
Net interest income/interest rate spread (4) $ 126,057   3.88 % $ 73,918   3.37 % $ 101,699   3.66 %
Taxable equivalent adjustment 6,246   5,655   6,087  
Net interest income, as reported $ 119,811   $ 68,263   $ 95,612  
Net interest margin (5) 3.81 % 3.23 % 3.56 %
Tax equivalent effect 0.20 % 0.27 % 0.22 %
Net interest margin on a fully tax equivalent basis (5) 4.01 % 3.50 % 3.78 %
 

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

(2) Interest income includes amortization of deferred loan origination fees and costs.

(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,
2014   2013
Average     Yield/ Average     Yield/
Balance Interest Rate Balance Interest Rate
Interest Earning Assets:
Loans held for sale $ 231,555 $ 8,676 3.75 % $ 2,758 — — %
Loans (1) (2) (3):
Commercial related credits
Commercial $ 1,928,491 $ 82,369 4.21 % $ 1,186,705 49,516 4.12 %
Commercial loans collateralized by assignment of lease payments 1,540,635 58,961 3.83 1,385,355 53,599 3.87
Real estate commercial 1,995,903 88,802 4.39 1,681,600 78,383 4.59
Real estate construction 169,547   9,113   5.30 129,181   5,116   3.91
Total commercial related credits 5,634,576   239,245   4.19 4,382,841   186,614   4.20
Other loans
Real estate residential 383,117 15,279 3.99 310,644 12,306 3.96
Home equity 256,240 10,650 4.16 283,341 12,184 4.30
Indirect 270,281 14,277 5.28 238,828 13,018 5.45
Consumer loans 68,292   2,960   4.33 65,704   2,459   3.74
Total other loans 977,930   43,166   4.41 898,517   39,967   4.45
Total loans, excluding purchased credit impaired and covered loans 6,612,506 282,411 4.27 5,281,358 226,581 4.29
Purchased credit impaired and covered loans 218,677   14,821   6.78 324,382   17,136   5.28
Total loans 6,831,183   297,232   4.35 5,605,740   243,717   4.35
Taxable investment securities 1,549,954 38,619 2.49 1,393,341 26,084 1.87
Investment securities exempt from federal income taxes (3) 1,034,274 53,524 5.18 933,840 50,098 5.36
Federal funds sold 6,575 25 0.38 4,510 15 0.33
Other interest earning deposits 270,578   663   0.25 283,854   690   0.24
Total interest earning assets $ 9,924,119 $ 398,739   4.02 $ 8,224,043 $ 320,604   3.90
Non-interest earning assets 1,496,025   1,167,834  
Total assets $ 11,420,144   $ 9,391,877  
Interest Bearing Liabilities:
Core funding:
Money market and NOW accounts $ 3,291,808 $ 4,815 0.15 % $ 2,698,226 $ 3,483 0.13 %
Savings accounts 893,861 453 0.05 839,026 546 0.07
Certificates of deposit 1,336,777 5,210 0.40 1,368,835 6,990 0.52
Customer repurchase agreements 206,861   412   0.20 198,018   426   0.22
Total core funding 5,729,307   10,890   0.19 5,104,105   11,445   0.22
Wholesale funding:
Brokered accounts (includes fee expense) 368,144 6,549 1.78 270,218 8,221 3.04
Other borrowings 448,927   6,886   1.51 289,629   5,893   2.01
Total wholesale funding 817,071   13,435   1.53 559,847   14,114   2.26
Total interest bearing liabilities $ 6,546,378 $ 24,325   0.37 $ 5,663,952 $ 25,559   0.45
Non-interest bearing deposits 3,029,464 2,234,537
Other non-interest bearing liabilities 249,702 195,397
Stockholders' equity 1,594,600   1,297,991  
Total liabilities and stockholders' equity $ 11,420,144   $ 9,391,877  
Net interest income/interest rate spread (4) $ 374,414   3.65 % $ 295,045   3.45 %
Taxable equivalent adjustment 23,591   22,709  
Net interest income, as reported $ 350,823   $ 272,336  
Net interest margin (5) 3.54 % 3.31 %
Tax equivalent effect 0.23 % 0.28 %
Net interest margin on a fully tax equivalent basis (5) 3.77 % 3.59 %
 

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

(2) Interest income includes amortization of deferred loan origination fees and costs.

(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 table below reflects the impact the acquisition accounting loan discount accretion on Taylor Capital loans had on the loan yield and net interest margin on a fully tax equivalent basis for the three months ended December 31, and September 30, 2014 and year ended December 31, 2014:

  Three months ended   Three months ended   Year ended
December 31, 2014 September 30, 2014 December 31, 2014
Average     Average     Average    
Balance Interest Yield Balance Interest Yield Balance Interest Yield
Loan yield excluding acquisition accounting discount accretion on Taylor Capital loans:
Total loans, as reported $ 8,978,139 $ 102,070 4.51 % $ 7,182,084 $ 80,561 4.45 % $ 6,831,183 $ 297,232 4.35 %
Less acquisition accounting discount accretion on non-PCI loans (65,975 ) 10,082 (35,285 ) 5,797 (25,523 ) 15,879
Less acquisition accounting discount accretion on PCI loans (37,534 ) 833   (18,579 ) 377   (14,144 ) 1,210  
Total loans, excluding acquisition accounting discount accretion on Taylor Capital loans $ 9,081,648   $ 91,155   3.98 % $ 7,235,948   $ 74,387   4.08 % $ 6,870,850   $ 280,143   4.08 %
 
Net interest margin on a fully tax equivalent basis, excluding acquisition accounting discount accretion on Taylor Capital loans:
Total interest earning assets, as reported $ 12,482,766 $ 126,057 4.01 % $ 10,666,689 $ 101,699 3.78 % $ 9,924,119 $ 374,414 3.77 %
Less acquisition accounting discount accretion on non-PCI loans (65,975 ) 10,082 (35,285 ) 5,797 (25,523 ) 15,879
Less acquisition accounting discount accretion on PCI loans (37,534 ) 833   (18,579 ) 377   (14,144 ) 1,210  
Total interest earning assets, excluding acquisition accounting discount accretion on Taylor Capital loans $ 12,586,275   $ 115,142   3.63 % $ 10,720,553   $ 95,525   3.54 % $ 9,963,786   $ 357,325   3.59 %
 

Provision will be recognized on acquired Taylor Capital loans as they renew and will largely offset the positive impact of the loan discount accretion on non-purchase credit impaired loans. During the third and fourth quarters of 2014, a provision of approximately $4.7 million and $7.3 million, respectively, was recorded related to acquired Taylor Capital loans.

Contacts

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

Contacts

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