MB Financial, Inc. Reports Record Earnings for the Second Quarter 2015, Combined with Solid Loan Growth

CHICAGO--()--MB Financial, Inc. (NASDAQ: MBFI), the holding company for MB Financial Bank, N.A., today announced 2015 second quarter net income available to common stockholders of $39.0 million, or $0.52 per diluted common share, compared to $32.1 million, or $0.43 per diluted common share, last quarter and $23.1 million, or $0.42 per diluted common share, in the second quarter a year ago.

Highlights Include:

Operating Earnings Up from Prior Quarter and One Year Ago

  • Operating earnings, which we define as earnings excluding non-core items, were $41.8 million for the second quarter of 2015 compared to $39.3 million last quarter (+6.2%) and $23.5 million in the second quarter a year ago (+77.4%) . A table reconciling net income, as reported, to operating earnings is set forth below and in the “Non-GAAP Financial Information” section.
  • Annualized operating return on average assets increased to 1.14% for the second quarter of 2015 compared to 1.11% last quarter and 0.99% for the second quarter a year ago.
  • Our net interest margin on a fully tax equivalent basis, excluding the accretion on loans acquired in the Taylor Capital merger ("the Merger") declined five basis points from the prior quarter and was up four basis points from the second quarter of 2014.
  • Our core non-interest income grew from $81.4 million in the prior quarter to $83.0 million (+7.9% annualized) primarily as a result of higher mortgage banking revenue driven by an increase in servicing income. The increase in mortgage banking revenue was partially offset by lower leasing revenue as leasing revenue in the first quarter was exceptionally strong.
  • Our core non-interest expense was well-controlled compared to the prior quarter, remaining at $131.5 million despite an extra day and annual salary increases effective in the second quarter of 2015.
  • Merger related expenses incurred in the second quarter of 2015 of $1.2 million were primarily related to branch exit charges on facilities we closed in connection with the Merger as well as legal fees.

The following table presents the calculation of operating earnings and operating earnings available to common stockholders:

          Six Months Ended
June 30,
2Q15 1Q15 2Q14 2015   2014
(Dollars in thousands, except per share data)
Net income, as reported $ 40,952 $ 34,111 $ 23,106 $ 75,063 $ 43,075
Less non-core items:
Net (loss) gain on investment securities (84 ) (460 ) (87 ) (544 ) 230
Net (loss) gain on sale of other assets (7 ) 4 (24 ) (3 ) (17 )
Merger related expenses (1,234 ) (8,069 ) (488 ) (9,303 ) (1,168 )
Prepayment fees on interest bearing liabilities — (85 ) — (85 ) —
Loss on low to moderate income real estate investment —   —   (96 ) —   (2,124 )
Total non-core items (1,325 ) (8,610 ) (695 ) (9,935 ) (3,079 )
Income tax expense on non-core items (526 ) (3,417 ) (266 ) (3,943 ) (1,121 )
Non-core items, net of tax (799 ) (5,193 ) (429 ) (5,992 ) (1,958 )
Operating earnings 41,751 39,304 23,535 81,055 45,033
Dividends on preferred shares 2,000   2,000   —   4,000   —  
Operating earnings available to common stockholders $ 39,751   $ 37,304   $ 23,535   $ 77,055   $ 45,033  
Diluted operating earnings per common share $ 0.53 $ 0.50 $ 0.43 $ 1.02 $ 0.82
Weighted average common shares outstanding for diluted earnings per common share 75,296,029 75,164,716 55,200,054 75,230,455 55,232,703
Annualized operating return on average assets 1.14 % 1.11 % 0.99 % 1.13 % 0.96 %
 

Loan Growth During the Quarter

  • Loan balances, excluding purchased credit-impaired loans, increased $235.4 million (+2.7%, or +10.9% annualized) during the second quarter of 2015 primarily due to increases in commercial related loans across several business lines.
  Change from 3/31/2015 to 6/30/2015
Amount   Percent
Commercial related credits:
Commercial loans $ 96,237 3.0 %
Commercial loans collateralized by assignment of lease payments (lease loans) 62,835 3.9
Commercial real estate 14,351 0.6
Construction real estate 5,494   3.0
Total commercial related credits 178,917   2.4
Other loans:
Residential real estate 27,560 5.5
Indirect vehicle 30,672 11.2
Home equity (10,600 ) (4.4 )
Consumer loans 8,818   11.4
Total other loans 56,450   5.1
Total loans, excluding purchased credit-impaired 235,367 2.7
Purchased credit-impaired (62,739 ) (27.6 )
Total loans $ 172,628   1.9 %
 

Deposit Balance Changes

  • Non-interest bearing deposits increased $87.5 million (+2.0%, or +8.2% annualized) during the second quarter of 2015 and comprised 40% of total deposits at quarter-end.
  • Low cost deposits decreased $71.7 million (-0.8%, or -3.1% annualized) in the second quarter of 2015 but continued to represent 84% of total deposits at quarter-end.

Credit Quality

  • Provision for credit losses on legacy loans (which excludes loans acquired through the Merger) was negative $600 thousand in the second quarter of 2015 compared to a negative provision of $550 thousand in the first quarter of 2015.
  • Taylor Capital related provision for credit losses was $4.9 million in the second quarter of 2015 compared to $5.5 million in the first quarter of 2015. 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 non-purchased credit-impaired loans of $8.0 million in the second quarter of 2015 and $8.6 million in the first quarter of 2015.
  • We had net loan recoveries during the second quarter of 2015 of $2.6 million compared to net loan charge-offs of $1.8 million in the first quarter of 2015.
  • Non-performing loans increased by $14.8 million and potential problem loans increased by $8.7 million from March 31, 2015. These increases were more than offset by a $62.7 million decline in purchased credit-impaired loans.

Capital Actions

  • We increased the dividend on our common stock from $0.14 to $0.17 in the second quarter of 2015.
  • We also announced in the second quarter of 2015 that our Board of Directors has authorized the repurchase of up to $50 million of our common stock. We repurchased $3.1 million, or approximately 93,700 shares, of our common stock in the second quarter of 2015.

Mortgage Servicing Rights Sale

  • In July 2015, we sold approximately $106 million of mortgage servicing rights at a price (net of transaction costs) that approximated fair value.

RESULTS OF OPERATIONS

Second Quarter Results

Net Interest Income

     

Change
from
1Q15 to
2Q15

   

Change
from
2Q14 to
2Q15

      Six Months Ended  

Change
from
2014 to
2015

 
June 30,
2Q15 1Q15 2Q14   2015   2014  
(Dollars in thousands)
Net interest income - fully tax equivalent $ 121,149 $ 119,473 +1.4 % $ 73,749 +64.3 % $ 240,622 $ 146,658 +64.1 %
Net interest margin - fully tax equivalent 3.84 % 3.93 % -0.09 % 3.53 % +0.31 3.89 % 3.59 % +0.30 %
Net interest margin - fully tax equivalent, excluding acquisition accounting discount accretion on Taylor Capital loans 3.57 % 3.62 % -0.05 % 3.53 % +0.04 3.59 % 3.59 % — %
Acquisition accounting discount accretion on Taylor Capital loans $ 7,952 $ 8,576 -7.3 % $ — NA $ 16,528 $ — NA
 

Reconciliations of net interest income - fully tax equivalent to net interest income, as reported, net interest margin - fully tax equivalent to net interest margin and net interest margin - fully tax equivalent, excluding acquisition accounting discount accretion on Taylor Capital loans to net interest margin are set forth in the tables in the "Net Interest Margin" section.

Net interest income on a fully tax equivalent basis increased in the second quarter of 2015 compared to the prior quarter primarily due to an increase in interest earning assets (loans and investment securities) partly offset by lower loan yields.

While interest earning assets increased during the second quarter of 2015, our net interest margin on a fully tax equivalent basis, excluding accretion of the acquisition accounting discount recorded on loans acquired in the Merger, decreased five basis points to 3.57% for the second quarter of 2015 compared to 3.62% for the prior quarter. This decrease was primarily due to the decrease in average yields earned on loans.

See the supplemental net interest margin tables for further detail.

Non-interest Income (in thousands):

              Six Months Ended
June 30,
2Q15 1Q15 4Q14 3Q14 2Q14 2015   2014
Core non-interest income:
Key fee initiatives:
Lease financing, net $ 15,564 $ 25,080 $ 18,542 $ 17,719 $ 14,853 $ 40,644 $ 28,049
Mortgage banking revenue 35,648 24,544 29,080 16,823 187 60,192 246
Commercial deposit and treasury management fees 11,062 11,038 10,720 9,345 7,106 22,100 14,250
Trust and asset management fees 5,752 5,714 5,515 5,712 5,405 11,466 10,612
Card fees 4,409 3,927 3,900 3,836 3,304 8,336 6,005
Capital markets and international banking service fees 1,508   1,928   1,648   1,472   1,360   3,436   2,338  
Total key fee initiatives 73,943 72,231 69,405 54,907 32,215 146,174 61,500
Consumer and other deposit service fees 3,260 3,083 3,335 3,362 3,156 6,343 6,091
Brokerage fees 1,543 1,678 1,350 1,145 1,356 3,221 2,681
Loan service fees 1,353 1,485 1,864 1,069 916 2,838 1,881
Increase in cash surrender value of life insurance 836 839 865 855 834 1,675 1,661
Other operating income 2,098   2,102   2,577   1,145   1,162   4,200   1,961  
Total core non-interest income 83,033   81,418   79,396   62,483   39,639   164,451   75,775  
Non-core non-interest income:
Net (loss) gain on investment securities (84 ) (460 ) 491 (3,246 ) (87 ) (544 ) 230
Net (loss) gain on sale of other assets (7 ) 4 3,476 (7 ) (24 ) (3 ) (17 )
Gain on extinguishment of debt — — — 1,895 — — —
Increase (decrease) in market value of assets held in trust for deferred compensation (1) 7   306   315   (38 ) 400   313   552  
Total non-core non-interest income (84 ) (150 ) 4,282   (1,396 ) 289   (234 ) 765  
Total non-interest income $ 82,949   $ 81,268   $ 83,678   $ 61,087   $ 39,928   $ 164,217   $ 76,540  

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

Core non-interest income for the second quarter of 2015 increased by $1.6 million, or 2.0%, to $83.0 million from the first quarter of 2015.

  • Mortgage banking revenue increased due to higher servicing income as a result of an increase in the fair value of the mortgage servicing asset, net of related hedges, primarily due to higher interest rates during the second quarter of 2015.
  • Card fees increased due to higher debit card fees.
  • Leasing revenues decreased due to lower fees and promotional revenue from the sale of third-party equipment maintenance contracts. Leasing revenue in the first quarter of 2015 was exceptionally strong.
  • Capital markets and international banking services fees decreased due to lower swap, commercial real estate advisory and syndication fees.

Core non-interest income for the six months ended June 30, 2015 increased by $88.7 million, or 117.0%, to $164.5 million from the six months ended June 30, 2014.

  • Mortgage banking revenue increased due to the mortgage operations acquired through the Merger.
  • Leasing revenues increased due to higher fees and promotional revenue from the sale of third-party equipment maintenance contracts and higher lease residual realization.
  • 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.
  • Other operating income increased due to higher earnings from investments in Small Business Investment Companies.
  • Card fees increased due to a new payroll prepaid card program that started in the second quarter of 2014 as well as higher debit and credit card fees.
  • Capital markets and international banking services fees increased due to higher swap and commercial real estate advisory fees partly offset by a decrease in M&A advisory fees.
  • Trust and asset management fees increased due to the addition of new customers and the impact of higher equity values.

Non-interest Expense (in thousands):

              Six Months Ended
June 30,
2Q15 1Q15 4Q14 3Q14 2Q14 2015   2014
Core non-interest expense:(1)
Salaries and employee benefits $ 86,138 $ 84,447 $ 83,242 $ 65,271 $ 46,222 $ 170,585 $ 90,343
Occupancy and equipment expense 12,081 12,763 13,757 11,314 9,504 24,844 19,096
Computer services and telecommunication expense 8,407 8,634 8,612 6,194 4,909 17,041 9,980
Advertising and marketing expense 2,497 2,446 2,233 1,973 2,113 4,943 4,104
Professional and legal expense 1,902 2,480 2,184 2,501 1,488 4,382 2,857
Other intangible amortization expense 1,509 1,518 1,617 1,470 1,174 3,027 2,414
Net loss (gain) recognized on other real estate owned (A) 662 888 (120 ) 1,348 204 1,550 326
Net (gain) loss recognized on other real estate owned related to FDIC transactions (A) (88 ) (273 ) (27 ) 421 (13 ) (361 ) 52
Other real estate expense, net (A) 150 281 433 409 337 431 733
Other operating expenses 18,238   18,276   18,514   13,577   11,108   36,514   20,328
Total core non-interest expense 131,496   131,460   130,445   104,478   77,046   262,956   150,233
Non-core non-interest expense: (1)
Merger related expenses (B) 1,234 8,069 6,494 27,161 488 9,303 1,168
Prepayment fees on interest bearing liabilities — 85 — — — 85 —
Loss on low to moderate income real estate investment (C) — — — — 96 — 2,124
Contingent consideration - Celtic acquisition (C) — — — 10,600 — — —
Contribution to MB Financial Charitable Foundation (C) — — 3,250 — — — —
Increase (decrease) in market value of assets held in trust for deferred compensation (D) 7   306   315   (38 ) 400   313   552
Total non-core non-interest expense 1,241   8,460   10,059   37,723   984   9,701   3,844
Total non-interest expense $ 132,737   $ 139,920   $ 140,504   $ 142,201   $ 78,030   $ 272,657   $ 154,077

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

Core non-interest expense increased by $36 thousand from the first quarter of 2015 to $131.5 million for the second quarter of 2015.

  • Salaries and employee benefits increased primarily due to higher incentive expense as well as the extra day and annual salary increases effective in the second quarter of 2015.
  • Occupancy and equipment expense decreased due to lower repair and maintenance expense as well as lower rent expense as a result of exiting certain facilities in the first quarter of 2015.
  • Professional and legal expense decreased due to lower legal fees.

Core non-interest expense increased by $112.7 million, or 75.0%, from the six months ended June 30, 2014 to $263.0 million for the six months ended June 30, 2015 primarily due to the Merger. Other explanations for changes are as follows:

  • Other operating expense increased as a result of an increase in filing and other loan expense and higher FDIC assessments due to our larger balance sheet.
  • Computer services and telecommunication expenses increased due to an increase in spending on IT security and our data warehouse.
  • Professional and legal expense increased due to higher consulting expense.

Non-core non-interest expense in the first six months of 2015 was impacted by merger related expense primarily due to branch exit and facilities impairment charges resulting from closing nine banking centers and exiting other office facilities.

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

              Six Months Ended
June 30,
2Q15 1Q15 4Q14 3Q14 2Q14 2015   2014
Merger related expenses:
Salaries and employee benefits $ — $ 33 $ 1,926 $ 14,259 $ — $ 33 $ 104
Occupancy and equipment expense 96 177 301 428 14 273 14
Computer services and telecommunication expense 130 270 1,397 5,312 170 400 183
Advertising and marketing expense — — 84 262 108 — 198
Professional and legal expense 511 190 258 6,363 79 701 489
Branch exit and facilities impairment charges 438 7,391 2,270 — — 7,829 —
Other operating expenses 59   8   258   537   117   67   180
Total merger related expenses $ 1,234   $ 8,069   $ 6,494   $ 27,161   $ 488   $ 9,303   $ 1,168
 

Income Tax Expense

Income tax expense was $19.4 million for the second quarter of 2015 compared to $15.7 million for the first quarter of 2015. The increase in income tax expense was primarily due to the $10.6 million increase in income before taxes from $49.8 million in the first quarter of 2015 to $60.4 million in the second quarter of 2015.

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 MB Equipment Finance (formerly known as Cole Taylor Equipment Finance). Our mortgage banking segment originates residential mortgage loans for sale to investors through its retail and third party origination channels as well as residential mortgage loans held in our loan portfolio. The mortgage banking segment also services residential mortgage loans owned by investors and the Company.

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 June 30, 2015
Net interest income $ 104,352 $ 2,915 $ 7,206 $ — $ 114,473
Provision for credit losses 2,844   1,356   96   —   4,296  
Net interest income after provision for credit losses 101,508 1,559 7,110 — 110,177
Non-interest income:
Lease financing, net 408 15,156 — — 15,564
Mortgage origination fees — — 26,863 — 26,863
Mortgage servicing fees — — 8,785 — 8,785
Other non-interest income 30,791   1,037   —   (91 ) 31,737  
Total non-interest income 31,199 16,193 35,648 (91 ) 82,949
Non-interest expense:
Salaries and employee benefits 54,168 6,986 24,991 — 86,145
Occupancy and equipment expense 9,733 823 1,525 96 12,177
Computer services and telecommunication expense 6,194 274 1,939 130 8,537
Professional and legal expense 1,655 247 — 511 2,413
Other operating expenses 14,654   1,498   6,816   497   23,465  
Total non-interest expense 86,404   9,828   35,271   1,234   132,737  
Income before income taxes 46,303 7,924 7,487 (1,325 ) 60,389
Income tax expense 13,895   3,073   2,995   (526 ) 19,437  
Net income $ 32,408   $ 4,851   $ 4,492   $ (799 ) $ 40,952  
Three months ended March 31, 2015
Net interest income $ 104,126 $ 3,015 $ 6,254 $ — $ 113,395
Provision for credit losses 4,974   —   —   —   4,974  
Net interest income after provision for credit losses 99,152 3,015 6,254 — 108,421
Non-interest income:
Lease financing, net 525 24,555 — — 25,080
Mortgage origination fees — — 26,895 — 26,895
Mortgage servicing fees — — (2,351 ) — (2,351 )
Other non-interest income 31,448   648   4   (456 ) 31,644  
Total non-interest income 31,973 25,203 24,548 (456 ) 81,268
Non-interest expense:
Salaries and employee benefits 52,682 10,789 21,282 33 84,786
Occupancy and equipment expense 10,454 833 1,476 177 12,940
Computer services and telecommunication expense 6,410 295 1,929 270 8,904
Professional and legal expense 1,568 307 605 190 2,670
Other operating expenses 16,066   1,432   5,638   7,484   30,620  
Total non-interest expense 87,180   13,656   30,930   8,154   139,920  
Income before income taxes 43,945 14,562 (128 ) (8,610 ) 49,769
Income tax expense 13,379   5,747   (51 ) (3,417 ) 15,658  
Net income $ 30,566   $ 8,815   $ (77 ) $ (5,193 ) $ 34,111  
 

Net income from our banking segment for the second quarter of 2015 increased compared to the prior quarter. This increase in net income was primarily due to a decrease in provision for credit losses.

Net income from our leasing segment for the second quarter of 2015 decreased compared to the prior quarter. Lease financing revenues decreased due to a decrease in fees and promotional revenue from the sale of third-party equipment maintenance contracts. This decrease in revenues was partially offset by a decrease in expense, primarily salaries and employee benefits, due to lower commissions on lower leasing revenue. Leasing revenue in the first quarter of 2015 was exceptionally strong.

Net income from our mortgage segment for the second quarter of 2015 increased compared to the prior quarter as a result of higher servicing income. This increase in revenues was partially offset by an increase in expense, primarily salaries and employee benefits due to higher incentive compensation.

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

  2Q15   1Q15   4Q14   3Q14 (1)
Origination volume $ 2,010,175 $ 1,688,541 $ 1,511,909 $ 724,713
Refinance 43 % 61 % 44 % 35 %
Purchase 57 39 56 65
 
Origination volume by channel:
Retail 18 % 18 % 19 % 18 %
Third party 82 82 81 82
 
Mortgage servicing book (unpaid principal balance of loans serviced for others) at period end $ 23,539,865 $ 22,927,263 $ 22,479,008 $ 21,989,278
Mortgage servicing rights, recorded at fair value, at period end 261,034 219,254 235,402 241,391
Notional value of rate lock commitments, at period end 992,025 1,069,145 645,287 610,818

(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) based on period end balances as of the dates indicated (dollars in thousands):

  6/30/2015   3/31/2015   12/31/2014   9/30/2014   6/30/2014
  % of   % of   % of   % of   % of
Amount Total Amount Total Amount Total Amount Total Amount Total
Commercial related credits:
Commercial loans $ 3,354,889 37 % $ 3,258,652 37 % $ 3,245,206 36 % $ 3,064,669 34 % $ 1,272,200 23 %
Commercial loans collateralized by assignment of lease payments (lease loans) 1,690,866 18 1,628,031 18 1,692,258 18 1,631,660 18 1,515,446 27
Commercial real estate 2,539,991 28 2,525,640 28 2,544,867 28 2,647,412 29 1,619,322 29
Construction real estate 189,599   2   184,105   2   247,068   3   222,120   3   116,996   2  
Total commercial related credits 7,775,345   85   7,596,428   85   7,729,399   85   7,565,861   84   4,523,964   81  
Other loans:
Residential real estate 533,118 6 505,558 5 503,287 5 516,834 6 309,234 6
Indirect vehicle 303,777 3 273,105 3 268,840 3 273,038 3 272,841 5
Home equity 230,478 3 241,078 3 251,909 3 262,977 3 245,135 4
Consumer loans 86,463   1   77,645   1   78,137   1   69,028   1   70,584   1  
Total other loans 1,153,836   13   1,097,386   12   1,102,173   12   1,121,877   13   897,794   16  
Total loans, excluding purchased credit-impaired loans 8,929,181 98 8,693,814 97 8,831,572 97 8,687,738 97 5,421,758 97
Purchased credit-impaired loans 164,775   2   227,514   3   251,645   3   288,186   3   134,966   3  
Total loans $ 9,093,956   100 % $ 8,921,328   100 % $ 9,083,217   100 % $ 8,975,924   100 % $ 5,556,724   100 %
 

Our loan balances, excluding purchased credit-impaired loans, increased $235.4 million (+2.7%, or +10.9% annualized) during the second quarter of 2015 primarily due to increases in commercial related loans.

The following table sets forth the composition of the loan portfolio (excluding loans held for sale) based on quarterly average balances for the periods indicated (dollars in thousands):

  2Q15   1Q15   4Q14   3Q14   2Q14
  % of   % of   % of   % of   % of
Amount Total Amount Total Amount Total Amount Total Amount Total
Commercial related credits:
Commercial loans $ 3,309,519 37 % $ 3,190,755 36 % $ 3,110,016 35 % $ 2,118,864 30 % $ 1,229,799 22 %
Commercial loans collateralized by assignment of lease payments (lease loans) 1,634,583 18 1,647,761 18 1,642,427 18 1,561,484 22 1,476,618 27
Commercial real estate 2,522,473 28 2,538,995 29 2,611,410 29 2,108,492 29 1,620,658 29
Construction real estate 191,935   2   191,257   2   232,679   3   170,017   2   133,557   2  
Total commercial related credits 7,658,510   85   7,568,768   85   7,596,532   85   5,958,857   83   4,460,632   80  
Other loans:
Residential real estate 512,766 6 493,366 5 503,211 5 405,589 6 309,848 6
Indirect vehicle 286,107 3 267,265 3 273,063 3 251,969 3 269,556 5
Home equity 233,867 3 246,537 3 256,933 3 274,841 4 252,891 5
Consumer loans 76,189   1   72,374   1   75,264   1   69,699   1   65,437   1  
Total other loans 1,108,929   13   1,079,542   12   1,108,471   12   1,002,098   14   897,732   17  
Total loans, excluding purchased credit-impaired loans 8,767,439 98 8,648,310 97 8,705,003 97 6,960,955 97 5,358,364 97
Purchased credit-impaired loans 202,374   2   240,376   3   273,136   3   221,129   3   158,371   3  
Total loans $ 8,969,813   100 % $ 8,888,686   100 % $ 8,978,139   100 % $ 7,182,084   100 % $ 5,516,735   100 %
 

ASSET QUALITY

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

  6/30/2015   3/31/2015   12/31/2014   9/30/2014   6/30/2014
Non-performing loans:
Non-accrual loans (1) $ 91,943 $ 81,571 $ 82,733 $ 97,580 $ 108,414
Loans 90 days or more past due, still accruing interest 6,112   1,707   4,354   2,681   2,363  
Total non-performing loans 98,055   83,278   87,087   100,261   110,777  
Other real estate owned 28,517 21,839 19,198 18,817 20,306
Repossessed assets 78   160   93   126   73  
Total non-performing assets $ 126,650   $ 105,277   $ 106,378   $ 119,204   $ 131,156  
Potential problem loans (2) $ 116,443   $ 107,703   $ 55,651   $ 51,690   $ 63,477  
Purchased credit-impaired loans $ 164,775   $ 227,514   $ 251,645   $ 288,186   $ 134,966  
 
Total allowance for loan and lease losses $ 120,070 $ 113,412 $ 110,026 $ 102,810 $ 100,910
Accruing restructured loans (3) 17,604 16,874 15,603 16,877 26,793
Total non-performing loans to total loans 1.08 % 0.93 % 0.96 % 1.12 % 1.99 %
Total non-performing assets to total assets 0.84 0.73 0.73 0.82 1.34
Allowance for loan and lease losses to non-performing loans 122.45 136.18 126.34 102.54 91.09

(1) Includes $24.5 million, $25.5 million, $25.8 million, $22.4 million and $14.5 million of restructured loans on non-accrual status at June 30, 2015, March 31, 2015, December 31, 2014, September 30, 2014 and June 30, 2014, 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.

Potential problem loans increased in the first quarter of 2015 primarily due to normal rotation in the portfolio.

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

  6/30/2015   3/31/2015   12/31/2014   9/30/2014   6/30/2014
Commercial and lease $ 31,053 $ 18,315 $ 20,058 $ 22,985 $ 36,807
Commercial real estate 32,358 29,645 32,663 42,832 48,751
Construction real estate 337 337 337 337 337
Consumer related 34,307   34,981   34,029   34,107   24,882
Total non-performing loans $ 98,055   $ 83,278   $ 87,087   $ 100,261   $ 110,777
 

The following table represents a summary of other real estate owned (excluding other real estate owned acquired as part of our FDIC-assisted transactions) as of the dates indicated (in thousands):

  6/30/2015   3/31/2015   12/31/2014   9/30/2014   6/30/2014
Balance at the beginning of quarter $ 21,839 $ 19,198 $ 18,817 $ 20,306 $ 20,928
Transfers in at fair value less estimated costs to sell 8,595 4,615 1,261 221 112
Acquired from business combination — — — 4,720 —
Fair value adjustments (920 ) (922 ) (34 ) (2,083 ) (286 )
Net gains on sales of other real estate owned 258 34 154 735 82
Cash received upon disposition (1,255 ) (1,086 ) (1,000 ) (5,082 ) (530 )
Balance at the end of quarter $ 28,517   $ 21,839   $ 19,198   $ 18,817   $ 20,306  
 

The increase in other real estate owned in the second quarter of 2015 was primarily due to a $7.0 million purchased credit-impaired loan that migrated to other real estate owned.

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

              Six Months Ended
June 30,
2Q15 1Q15 4Q14 3Q14 2Q14 2015   2014
Allowance for credit losses, balance at the beginning of period $ 117,189 $ 114,057 $ 106,912 $ 103,905 $ 108,395 $ 114,057 $ 113,462
Allowance for unfunded credit commitments acquired through business combination — — — 1,261 — — —
Utilization of allowance for unfunded credit commitments — — — (637 ) — — —
Provision for credit losses - legacy (600 ) (550 ) 2,472 (1,600 ) (1,950 ) (1,150 ) (800 )
Provision for credit losses - acquired Taylor Capital loan portfolio renewals 4,896 5,524 7,271 4,709 — 10,420 —
Charge-offs:
Commercial loans 57 569 197 606 446 626 536
Commercial loans collateralized by assignment of lease payments (lease loans) 100 — 885 — 40 100 40
Commercial real estate 108 2,034 1,528 1,027 1,727 2,142 8,883
Construction real estate 3 3 4 5 14 6 70
Residential real estate 318 579 280 740 433 897 698
Home equity 276 444 1,381 566 817 720 1,436
Indirect vehicle 627 874 1,189 1,043 583 1,501 1,503
Consumer loans 500   424   546   497   590   924   1,085  
Total charge-offs 1,989   4,927   6,010   4,484   4,650   6,916   14,251  
Recoveries:
Commercial loans 816 242 869 564 696 1,058 2,324
Commercial loans collateralized by assignment of lease payments (lease loans) 340 749 384 425 130 1,089 130
Commercial real estate 2,561 1,375 741 2,227 567 3,936 1,052
Construction real estate 35 2 51 25 77 37 176
Residential real estate 8 72 661 4 6 80 525
Home equity 160 101 176 46 127 261 260
Indirect vehicle 545 475 453 402 439 1,020 881
Consumer loans 169   69   77   65   68   238   146  
Total recoveries 4,634   3,085   3,412   3,758   2,110   7,719   5,494  
Total net (recoveries) charge-offs (2,645 ) 1,842   2,598   726   2,540   (803 ) 8,757  
Allowance for credit losses 124,130 117,189 114,057 106,912 103,905 124,130 103,905
Allowance for unfunded credit commitments (4,060 ) (3,777 ) (4,031 ) (4,102 ) (2,995 ) (4,060 ) (2,995 )
Allowance for loan and lease losses $ 120,070   $ 113,412   $ 110,026   $ 102,810   $ 100,910   $ 120,070   $ 100,910  
Total loans, excluding loans held for sale $ 9,093,956 $ 8,921,328 $ 9,083,217 $ 8,975,924 $ 5,556,724 $ 9,093,956 $ 5,556,724
Average loans, excluding loans held for sale 8,969,813 8,888,686 8,978,139 7,182,084 5,516,735 8,929,474 5,561,559
Ratio of allowance for loan and lease losses to total loans, excluding loans held for sale 1.32 % 1.27 % 1.21 % 1.15 % 1.82 % 1.32 % 1.82 %
Net loan (recoveries) charge-offs to average loans, excluding loans held for sale (annualized) (0.12 ) 0.08 0.11 0.04 0.18 (0.02 ) 0.32
 

The following table presents the three elements of the Company's allowance for loan and lease losses as of the dates indicated (in thousands):

  6/30/2015   3/31/2015   12/31/2014   9/30/2014   6/30/2014
Commercial related loans:
General reserve $ 92,154 $ 88,425 $ 85,087 $ 76,604 $ 70,855
Specific reserve 8,791 5,658 5,189 5,802 10,270
Consumer related reserve 19,125   19,329   19,750   20,404   19,785
Total allowance for loan and lease losses $ 120,070   $ 113,412   $ 110,026   $ 102,810   $ 100,910
 

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 and lease 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 (computed on a loan by loan basis) 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 Capital 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 credit-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 purchase accounting discount for loans acquired in the Merger were as follows for the three months ended June 30, 2015 (in thousands):

  Non-     Accretable  
Accretable Accretable Discount -
Discount - Discount - Non-PCI
PCI Loans PCI Loans Loans Total
Balance at beginning of period $ 30,793 $ 3,861 $ 53,828 $ 88,482
Charge-offs 681 — — 681
Accretion — (960 ) (6,992 ) (7,952 )
Transfer (8,000 ) 8,000   —   —  
Balance at end of period $ 23,474   $ 10,901   $ 46,836   $ 81,211  
 

The $8.0 million purchase accounting discount transfer from non-accretable discount on purchased credit-impaired loans to accretable discount was due to the performance of the purchased credit-impaired loans being better than expected. We have had a number of positive purchased credit-impaired loan resolutions since their acquisition.

Changes in the purchase accounting discount for loans acquired in the Merger were as follows for the three months ended March 31, 2015 (in thousands):

  Non-     Accretable  
Accretable Accretable Discount -
Discount - Discount - Non-PCI
PCI Loans PCI Loans Loans Total
Balance at beginning of period $ 31,041 $ 4,489 $ 61,776 $ 97,306
Charge-offs (248 ) — — (248 )
Accretion —   (628 ) (7,948 ) (8,576 )
Balance at end of period $ 30,793   $ 3,861   $ 53,828   $ 88,482  
 

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, net of our investment securities available for sale as of the dates indicated (in thousands):

  6/30/2015   3/31/2015   12/31/2014   9/30/2014   6/30/2014
Securities available for sale:
Fair value
Government sponsored agencies and enterprises $ 65,485 $ 66,070 $ 65,873 $ 65,829 $ 51,727
States and political subdivisions 395,912 403,628 410,854 409,033 19,498
Mortgage-backed securities 902,017 856,933 908,225 1,006,102 797,783
Corporate bonds 246,468 252,042 259,203 267,239 275,529
Equity securities 10,669   10,751   10,597   10,447   10,421
Total fair value $ 1,620,551   $ 1,589,424   $ 1,654,752   $ 1,758,650   $ 1,154,958
 
Amortized cost
Government sponsored agencies and enterprises $ 64,211 $ 64,411 $ 64,612 $ 64,809 $ 50,096
States and political subdivisions 380,221 381,704 390,076 391,900 19,228
Mortgage-backed securities 890,334 841,727 899,523 999,630 786,496
Corporate bonds 245,506 250,543 259,526 265,720 271,351
Equity securities 10,644   10,587   10,531   10,470   10,414
Total amortized cost $ 1,590,916   $ 1,548,972   $ 1,624,268   $ 1,732,529   $ 1,137,585
 
Unrealized gain, net
Government sponsored agencies and enterprises $ 1,274 $ 1,659 $ 1,261 $ 1,020 $ 1,631
States and political subdivisions 15,691 21,924 20,778 17,133 270
Mortgage-backed securities 11,683 15,206 8,702 6,472 11,287
Corporate bonds 962 1,499 (323 ) 1,519 4,178
Equity securities 25   164   66   (23 ) 7
Total unrealized gain, net $ 29,635   $ 40,452   $ 30,484   $ 26,121   $ 17,373
 
Securities held to maturity, at amortized cost:
States and political subdivisions $ 974,032 $ 764,931 $ 752,558 $ 760,674 $ 993,937
Mortgage-backed securities 229,595   235,928   240,822   244,675   247,455
Total amortized cost $ 1,203,627   $ 1,000,859   $ 993,380   $ 1,005,349   $ 1,241,392
 

DEPOSIT MIX

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

  6/30/2015   3/31/2015   12/31/2014   9/30/2014   6/30/2014
  % of   % of   % of   % of   % of
Amount Total Amount Total Amount Total Amount Total Amount Total
Low cost deposits:
Noninterest bearing deposits $ 4,378,005 40 % $ 4,290,499 39 % $ 4,118,256 37 % $ 3,807,448 34 % $ 2,605,367 34 %
Money market and NOW 3,842,264 35 4,002,818 36 3,913,765 36 4,197,166 37 2,932,089 38
Savings 970,875   9   969,560   9   940,345   9   931,985   8   872,324   11  
Total low cost deposits 9,191,144   84   9,262,877   84     8,972,366   82   8,936,599   79   6,409,780   83  
Certificates of deposit:
Certificates of deposit 1,261,843 12 1,354,633 12 1,479,928 13 1,646,000 15 1,137,262 14
Brokered certificates of deposit 408,827   4   401,991   4   538,648   5   655,843   6   216,022   3  
Total certificates of deposit 1,670,670   16   1,756,624   16   2,018,576   18   2,301,843   21   1,353,284   17  
Total deposits $ 10,861,814   100 % $ 11,019,501   100 % $ 10,990,942   100 % $ 11,238,442   100 % $ 7,763,064   100 %
 

Non-interest bearing deposits grew by $87.5 million (+2.0%, or +8.2% annualized) during the second quarter of 2015 and comprise 40% of total deposits at quarter-end. Total low cost deposits decreased $71.7 million (-0.8%, or -3.1% annualized) to $9.2 billion at June 30, 2015 compared to the prior quarter and represent 84% of total deposits at quarter-end.

The following table shows the composition of deposits based on quarterly average balances for the periods indicated (dollars in thousands):

  2Q15   1Q15   4Q14   3Q14   2Q14
  % of   % of   % of   % of   % of
Amount Total Amount Total Amount Total Amount Total Amount Total
Low cost deposits:
Noninterest bearing deposits $ 4,273,931 39 % $ 4,199,948 38 % $ 4,072,797 36 % $ 3,175,512 34 % $ 2,476,396 33 %
Money market and NOW 3,940,201 36 3,937,707 36 4,023,657 37 3,518,314 37 2,880,910 38
Savings 972,327   9   952,345   9   936,960   8   906,630   10   868,694   11  
Total low cost deposits 9,186,459   84   9,090,000   83     9,033,414   81   7,600,456   81   6,226,000   82  
Certificates of deposit:
Certificates of deposit 1,302,031 12 1,420,320 13 1,563,011 14 1,411,407 15 1,157,805 15
Brokered certificates of deposit 412,517   4   476,245   4   606,166   5   417,346   4   220,396   3  
Total certificates of deposit 1,714,548   16   1,896,565   17   2,169,177   19   1,828,753   19   1,378,201   18  
Total deposits $ 10,901,007   100 % $ 10,986,565   100 % $ 11,202,591   100 % $ 9,429,209   100 % $ 7,604,201   100 %
 

CAPITAL

Tangible book value per common share was $16.36 at June 30, 2015 compared to $16.08 last quarter and $16.81 a year ago.

Our regulatory capital ratios remain strong. MB Financial Bank, N.A. (the "Bank") was categorized as “well capitalized” at June 30, 2015 under the Prompt Corrective Action (“PCA”) provisions. The Company and Bank have implemented the changes required under the Basel III regulatory capital reform. The Bank would be categorized as "well capitalized" under the fully phased in rules.

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 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 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 and lease losses, which could necessitate additional provisions for loan losses, resulting both from loans we originate and loans we acquire from other financial institutions; (3) 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 and lease losses or write-down assets; (4) competitive pressures among depository institutions; (5) interest rate movements and their impact on customer behavior, net interest margin and the value of our mortgage servicing rights; (6) 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 or if changes in interest rates negatively impact the value of our mortgage servicing rights; (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, 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.

TABLES TO FOLLOW

         
MB FINANCIAL, INC. & SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Unaudited)
As of the dates indicated
(In thousands)
 
6/30/2015 3/31/2015 12/31/2014 9/30/2014 6/30/2014
ASSETS
Cash and due from banks $ 290,266 $ 248,840 $ 256,804 $ 267,405 $ 294,475
Interest earning deposits with banks 144,154   52,212   55,277   179,391   466,820  
Total cash and cash equivalents 434,420 301,052 312,081 446,796 761,295
Federal funds sold 5 — — — 10,000
Investment securities:
Securities available for sale, at fair value 1,620,551 1,589,424 1,654,752 1,758,650 1,154,958
Securities held to maturity, at amortized cost 1,203,627 1,000,859 993,380 1,005,349 1,241,392
Non-marketable securities - FHLB and FRB Stock 111,400   87,677   75,569   75,569   51,432  
Total investment securities 2,935,578 2,677,960 2,723,701 2,839,568 2,447,782
Loans held for sale 801,343 686,838 737,209 553,627 1,219
Loans:
Total loans, excluding purchased credit-impaired loans 8,929,181 8,693,814 8,831,572 8,687,738 5,421,758
Purchased credit-impaired loans 164,775   227,514   251,645   288,186   134,966  
Total loans 9,093,956 8,921,328 9,083,217 8,975,924 5,556,724
Less: Allowance for loan and lease losses 120,070   113,412   110,026   102,810   100,910  
Net loans 8,973,886 8,807,916 8,973,191 8,873,114 5,455,814
Lease investments, net 167,966 159,191 162,833 137,120 127,194
Premises and equipment, net 234,651 234,077 238,377 243,814 224,245
Cash surrender value of life insurance 135,237 134,401 133,562 132,697 131,842
Goodwill 711,521 711,521 711,521 711,521 423,369
Other intangibles 34,979 36,488 38,006 39,623 21,014
Mortgage servicing rights, at fair value 261,034 219,254 235,402 241,391 344
Other real estate owned, net 28,517 21,839 19,198 18,817 20,306
Other real estate owned related to FDIC transactions 13,867 17,890 19,328 22,028 15,349
Other assets 285,190   319,883   297,690   244,481   178,918  
Total assets $ 15,018,194   $ 14,328,310   $ 14,602,099   $ 14,504,597   $ 9,818,691  
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits:
Noninterest bearing $ 4,378,005 $ 4,290,499 $ 4,118,256 $ 3,807,448 $ 2,605,367
Interest bearing 6,483,809   6,729,002   6,872,686   7,430,994   5,157,697  
Total deposits 10,861,814 11,019,501 10,990,942 11,238,442 7,763,064
Short-term borrowings 1,382,635 615,231 931,415 667,160 229,809
Long-term borrowings 89,639 85,477 82,916 77,269 71,473
Junior subordinated notes issued to capital trusts 185,971 185,874 185,778 185,681 152,065
Accrued expenses and other liabilities 420,396   363,934   382,762   335,677   236,964  
Total liabilities 12,940,455   12,270,017   12,573,813   12,504,229   8,453,375  
Stockholders' Equity
Preferred stock 115,280 115,280 115,280 115,280 —
Common stock 754 754 751 751 553
Additional paid-in capital 1,273,333 1,268,851 1,267,761 1,265,050 742,824
Retained earnings 677,246 651,178 629,677 606,097 611,741
Accumulated other comprehensive income 18,778 26,101 20,356 18,431 13,034
Treasury stock (9,035 ) (5,277 ) (6,974 ) (6,692 ) (4,295 )
Controlling interest stockholders' equity 2,076,356 2,056,887 2,026,851 1,998,917 1,363,857
Noncontrolling interest 1,383   1,406   1,435   1,451   1,459  
Total stockholders' equity 2,077,739   2,058,293   2,028,286   2,000,368   1,365,316  
Total liabilities and stockholders' equity $ 15,018,194   $ 14,328,310   $ 14,602,099   $ 14,504,597   $ 9,818,691  

             
MB FINANCIAL, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
 
Six Months Ended
June 30,
(Dollars in thousands, except per share data) 2Q15 1Q15 4Q14 3Q14 2Q14 2015   2014
Interest income:
Loans:
Taxable $ 98,768 $ 98,846 $ 104,531 $ 79,902 $ 53,649 $ 197,614 $ 107,595
Nontaxable 2,259 2,174 2,203 2,265 2,256 4,433 4,554
Investment securities:
Taxable 10,002 9,934 10,651 11,028 8,794 19,936 16,940
Nontaxable 10,140 9,113 9,398 9,041 8,285 19,253 16,352
Federal funds sold — — 2 14 4 — 9
Other interest earning accounts 57   62   62   211   277   119   390  
Total interest income 121,226   120,129   126,847   102,461   73,265   241,355   145,840  
Interest expense:
Deposits 4,554 4,645 4,889 4,615 3,754 9,199 7,523
Short-term borrowings 355 277 354 231 95 632 195
Long-term borrowings and junior subordinated notes 1,844   1,812   1,793   2,003   1,344   3,656   2,722  
Total interest expense 6,753   6,734   7,036   6,849   5,193   13,487   10,440  
Net interest income 114,473 113,395 119,811 95,612 68,072 227,868 135,400
Provision for credit losses 4,296   4,974   9,743   3,109   (1,950 ) 9,270   (800 )
Net interest income after provision for credit losses 110,177   108,421   110,068   92,503   70,022   218,598   136,200  
Non-interest income:
Lease financing, net 15,564 25,080 18,542 17,719 14,853 40,644 28,049
Mortgage banking revenue 35,648 24,544 29,080 16,823 187 60,192 246
Commercial deposit and treasury management fees 11,062 11,038 10,720 9,345 7,106 22,100 14,250
Trust and asset management fees 5,752 5,714 5,515 5,712 5,405 11,466 10,612
Card fees 4,409 3,927 3,900 3,836 3,304 8,336 6,005
Capital markets and international banking service fees 1,508 1,928 1,648 1,472 1,360 3,436 2,338
Consumer and other deposit service fees 3,260 3,083 3,335 3,362 3,156 6,343 6,091
Brokerage fees 1,543 1,678 1,350 1,145 1,356 3,221 2,681
Loan service fees 1,353 1,485 1,864 1,069 916 2,838 1,881
Increase in cash surrender value of life insurance 836 839 865 855 834 1,675 1,661
Net (loss) gain on investment securities (84 ) (460 ) 491 (3,246 ) (87 ) (544 ) 230
Net (loss) gain on sale of assets (7 ) 4 3,476 (7 ) (24 ) (3 ) (17 )
Gain on early extinguishment of debt — — — 1,895 — — —
Other operating income 2,105   2,408   2,892   1,107   1,562   4,513   2,513  
Total non-interest income 82,949   81,268   83,678   61,087   39,928   164,217   76,540  
Non-interest expense:
Salaries and employee benefits 86,145 84,786 85,483 79,492 46,622 170,931 90,999
Occupancy and equipment expense 12,177 12,940 14,058 11,742 9,518 25,117 19,110
Computer services and telecommunication expense 8,537 8,904 10,009 11,506 5,079 17,441 10,163
Advertising and marketing expense 2,497 2,446 2,317 2,235 2,221 4,943 4,302
Professional and legal expense 2,413 2,670 2,442 8,864 1,567 5,083 3,346
Other intangible amortization expense 1,509 1,518 1,617 1,470 1,174 3,027 2,414
Branch exit and facilities impairment charges 438 7,391 2,270 — — 7,829 —
Net loss (gain) recognized on other real estate owned and other expense 724 896 286 2,178 528 1,620 1,111
Prepayment fees on interest bearing liabilities — 85 — — — 85 —
Other operating expenses 18,297   18,284   22,022   24,714   11,321   36,581   22,632  
Total non-interest expense 132,737   139,920   140,504   142,201   78,030   272,657   154,077  
Income before income taxes 60,389 49,769 53,242 11,389 31,920 110,158 58,663
Income tax expense 19,437   15,658   17,117   4,488   8,814   35,095   15,588  
Net income 40,952 34,111 36,125 6,901 23,106 75,063 43,075
Dividends on preferred shares 2,000   2,000   2,000   2,000   —   4,000   —  
Net income available to common stockholders $ 38,952   $ 32,111   $ 34,125   $ 4,901   $ 23,106   $ 71,063   $ 43,075  
             
Six Months Ended
June 30,
2Q15 1Q15 4Q14 3Q14 2Q14 2015   2014
Common share data:
Basic earnings per common share $ 0.52 $ 0.43 $ 0.46 $ 0.08 $ 0.42 $ 0.95 $ 0.79
Diluted earnings per common share 0.52 0.43 0.45 0.08 0.42 0.94 0.78
Weighted average common shares outstanding for basic earnings per common share 74,596,925 74,567,104 74,525,990 63,972,902 54,669,868 74,582,097 54,654,992
Weighted average common shares outstanding for diluted earnings per common share 75,296,029 75,164,716 75,130,331 64,457,978 55,200,054 75,230,455 55,232,703
               
Selected Financial Data:
Six Months Ended
June 30,
2Q15 1Q15 4Q14 3Q14 2Q14 2015 2014
Performance Ratios:
Annualized return on average assets 1.12 % 0.96 % 0.99 % 0.22 % 0.97 % 1.04 % 0.92 %
Annualized operating return on average assets (1) 1.14 1.11 1.09 1.16 0.99 1.13 0.96
Annualized return on average common equity 8.02 6.78 7.12 1.21 6.86 7.41 6.47
Annualized operating return on average common equity (1) 8.19 7.87 7.84 8.29 6.98 8.03 6.76
Annualized cash return on average tangible common equity (2) 13.21 11.31 11.98 2.23 10.47 12.28 9.94
Annualized cash operating return on average tangible common equity (3) 13.47 13.09 13.16 13.19 10.66 13.28 10.38
Net interest rate spread 3.72 3.80 3.88 3.66 3.40 3.75 3.46
Cost of funds (4) 0.22 0.23 0.23 0.26 0.26 0.22 0.27
Efficiency ratio (5) 64.26 65.29 63.35 63.46 67.68 64.77 67.27
Annualized net non-interest expense to average assets (6) 1.32 1.40 1.39 1.35 1.55 1.36 1.57
Core non-interest income to revenues (7) 40.80 40.66 38.78 38.23 35.22 40.73 34.33
Net interest margin 3.63 3.73 3.81 3.56 3.26 3.68 3.31
Tax equivalent effect 0.21 0.20 0.20 0.22 0.27 0.21 0.28
Net interest margin - fully tax equivalent basis (8) 3.84 3.93 4.01 3.78 3.53 3.89 3.59
Loans to deposits 83.72 80.96 82.64 79.87 71.58 83.72 71.58
Asset Quality Ratios:
Non-performing loans (9) to total loans 1.08 % 0.93 % 0.96 % 1.12 % 1.99 % 1.08 % 1.99 %
Non-performing assets (9) to total assets 0.84 0.73 0.73 0.82 1.34 0.84 1.34
Allowance for loan and lease losses to non-performing loans (9) 122.45 136.18 126.34 102.54 91.09 122.45 91.09
Allowance for loan and lease losses to total loans 1.32 1.27 1.21 1.15 1.82 1.32 1.82
Net loan (recoveries) charge-offs to average loans (annualized) (0.12 ) 0.08 0.11 0.04 0.18 (0.02 ) 0.32
Capital Ratios:
Tangible equity to tangible assets (10) 9.41 % 9.73 % 9.32 % 9.17 % 9.89 % 9.41 % 9.89 %
Tangible common equity to tangible assets (11) 8.60 8.89 8.49 8.34 9.89 8.60 9.89
Tangible common equity to risk weighted assets (12) 10.02 10.09 10.38 10.34 13.97 10.02 13.97
Total capital (to risk-weighted assets) (13) 13.08 13.22 13.62 13.60 17.18 13.08 17.18 %
Tier 1 capital (to risk-weighted assets) (13) 12.06 12.24 12.61 12.64 15.92 12.06 15.92
Common equity tier 1 capital (to risk-weighted assets) (13) 9.67 9.79 N/A N/A N/A 9.67 N/A
Tier 1 capital (to average assets) (13) 10.69 10.80 10.47 12.29 11.61 10.69 11.61
Book Value Per Share Data:
Book value per common share (14) $ 26.14 $ 25.86 $ 25.58 $ 25.09 $ 24.73 $ 26.14 $ 24.73
Less: goodwill and other intangible assets, net of benefit, per common share 9.78   9.78   9.84   9.73   7.92   9.78   7.92  
Tangible book value per common share (15) $ 16.36 $ 16.08 $ 15.74 $ 15.36 $ 16.81 $ 16.36 $ 16.81

(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 available to common stockholders (net income available to common stockholders, plus other intangibles amortization expense, net of tax benefit) by average tangible common 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 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.

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

(13) Current quarter ratios are estimated. 2015 ratios reflect the new capital regulation changes required under the Basel III regulatory capital reform.

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

(15) Equals total ending common 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; annualized operating return on average assets; 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; net interest margin on a fully tax equivalent basis excluding acquisition discount accretion on Taylor Capital loans; 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 (decrease) in market value of assets held in trust for deferred compensation excluded from the non-interest income components of these ratios, and contingent consideration expense, Merger related expenses, loss on low to moderate income real estate investment, prepayment fees on interest bearing liabilities, contribution to MB Financial Charitable Foundation and increase (decrease) 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 and tangible common equity to tangible assets; tangible book value per common share; 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, annualized operating return on average assets, annualized operating return on average common equity, annualized cash return on average tangible common equity, annualized cash operating return on average tangible common equity, net interest margin on a fully tax equivalent basis excluding acquisition discount accretion on Taylor Capital loans, core and non-core non-interest income and non-interest expense are useful in assessing our core operating performance and, in the case of core and non-core non-interest income and non-interest expense, 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 (decrease) in market value of assets held in trust for deferred compensation from the non-interest income components, and excluding contingent consideration expense, merger related expenses, loss on low to moderate income real estate investment, prepayment fees on interest bearing liabilities, contribution to MB Financial Charitable Foundation and increase (decrease) 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.

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—Second Quarter Results.”

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

  6/30/2015   3/31/2015   12/31/2014   9/30/2014   6/30/2014
Stockholders' equity - as reported $ 2,077,739 $ 2,058,293 $ 2,028,286 $ 2,000,368 $ 1,365,316
Less: goodwill 711,521 711,521 711,521 711,521 423,369
Less: other intangible assets, net of tax benefit 22,736   23,717   24,704   25,755   13,659
Tangible equity $ 1,343,482   $ 1,323,055   $ 1,292,061   $ 1,263,092   $ 928,288
 

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

  6/30/2015   3/31/2015   12/31/2014   9/30/2014   6/30/2014
Total assets - as reported $ 15,018,194 $ 14,328,310 $ 14,602,099 $ 14,504,597 $ 9,818,691
Less: goodwill 711,521 711,521 711,521 711,521 423,369
Less: other intangible assets, net of tax benefit 22,736   23,717   24,704   25,755   13,659
Tangible assets $ 14,283,937   $ 13,593,072   $ 13,865,874   $ 13,767,321   $ 9,381,663
 

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

  6/30/2015   3/31/2015   12/31/2014   9/30/2014   6/30/2014
Common stockholders' equity - as reported $ 1,962,459 $ 1,943,013 $ 1,913,006 $ 1,885,088 $ 1,365,316
Less: goodwill 711,521 711,521 711,521 711,521 423,369
Less: other intangible assets, net of tax benefit 22,736   23,717   24,704   25,755   13,659
Tangible common equity $ 1,228,202   $ 1,207,775   $ 1,176,781   $ 1,147,812   $ 928,288
 

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

              Six Months Ended
June 30,
2Q15 1Q15 4Q14 3Q14 2Q14 2015   2014
Average common stockholders' equity - as reported $ 1,947,231 $ 1,922,151 $ 1,901,830 $ 1,613,375 $ 1,351,604 $ 1,934,760 $ 1,343,458
Less: average goodwill 711,521 711,521 711,521 550,667 423,369 711,521 423,369
Less: average other intangible assets, net of tax benefit 23,092   24,157   25,149   19,734   13,990   23,622   14,372
Average tangible common equity $ 1,212,618   $ 1,186,473   $ 1,165,160   $ 1,042,974   $ 914,245   $ 1,199,617   $ 905,717
 

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

              Six Months Ended
June 30,
2Q15 1Q15 4Q14 3Q14 2Q14 2015   2014
Net income available to common stockholders - as reported $ 38,952 $ 32,111 $ 34,125 $ 4,901 $ 23,106 $ 71,063 $ 43,075
Add: other intangible amortization expense, net of tax benefit 981   987   1,051   956   763   1,968   1,569
Net cash flow available to common stockholders $ 39,933   $ 33,098   $ 35,176   $ 5,857   $ 23,869   $ 73,031   $ 44,644
 

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

              Six Months Ended
June 30,
2Q15 1Q15 4Q14 3Q14 2Q14 2015   2014
Net income - as reported $ 40,952 $ 34,111 $ 36,125 $ 6,901 $ 23,106 $ 75,063 $ 43,075
Less non-core items:
Net (loss) gain on investment securities (84 ) (460 ) 491 (3,246 ) (87 ) (544 ) 230
Net (loss) gain on sale of other assets (7 ) 4 3,476 (7 ) (24 ) (3 ) (17 )
Gain on extinguishment of debt — — — 1,895 — — —
Merger related expenses (1,234 ) (8,069 ) (6,494 ) (27,161 ) (488 ) (9,303 ) (1,168 )
Prepayment fees on interest bearing liabilities — (85 ) — — — (85 ) —
Loss on low-income housing investment — — — — (96 ) — (2,124 )
Contingent consideration expense - Celtic acquisition — — — (10,600 ) — — —
Contribution to MB Financial Charitable Foundation —   —   (3,250 ) —   —   —   —  
Total non-core items (1,325 ) (8,610 ) (5,777 ) (39,119 ) (695 ) (9,935 ) (3,079 )
Income tax expense on non-core items (526 ) (3,417 ) (2,314 ) (10,295 ) (266 ) (3,943 ) (1,121 )
Non-core items, net of tax (799 ) (5,193 ) (3,463 ) (28,824 ) (429 ) (5,992 ) (1,958 )
Operating earnings $ 41,751   $ 39,304   $ 39,588   $ 35,725   $ 23,535   $ 81,055   $ 45,033  
 

Efficiency Ratio Calculation (Dollars in Thousands)

              Six Months Ended
June 30,
2Q15 1Q15 4Q14 3Q14 2Q14 2015   2014
Non-interest expense $ 132,737 $ 139,920 $ 140,504 $ 142,201 $ 78,030 $ 272,657 $ 154,077
Less merger related expenses 1,234 8,069 6,494 27,161 488 9,303 1,168
Less prepayment fees on interest bearing liabilities — 85 — — — 85 —
Less loss on low to moderate income real estate investment — — — — 96 — 2,124
Less contingent consideration expense — — — 10,600 — — —
Less contribution to MB Financial Charitable Foundation — — 3,250 — — — —
Less increase (decrease) in market value of assets held in trust for deferred compensation 7   306   315   (38 ) 400   313   552  
Non-interest expense - as adjusted $ 131,496   $ 131,460   $ 130,445   $ 104,478   $ 77,046   $ 262,956   $ 150,233  
 
Net interest income $ 114,473 $ 113,395 $ 119,811 $ 95,612 $ 68,072 $ 227,868 $ 135,400
Tax equivalent adjustment 6,676   6,078   6,246   6,087   5,677   12,754   11,258  
Net interest income on a fully tax equivalent basis 121,149 119,473 126,057 101,699 73,749 240,622 146,658
Plus non-interest income 82,949 81,268 83,678 61,087 39,928 164,217 76,540
Plus tax equivalent adjustment on the increase in cash surrender value of life insurance 450 452 466 460 449 902 894
Less net (loss) gain on investment securities (84 ) (460 ) 491 (3,246 ) (87 ) (544 ) 230
Less net (loss) gain on sale of other assets (7 ) 4 3,476 (7 ) (24 ) (3 ) (17 )
Less gain on extinguishment of debt — — — 1,895 — — —
Less increase (decrease) in market value of assets held in trust for deferred compensation 7   306   315   (38 ) 400   313   552  
Net interest income plus non-interest income - as adjusted $ 204,632   $ 201,343   $ 205,919   $ 164,642   $ 113,837   $ 405,975   $ 223,327  
Efficiency ratio 64.26 % 65.29 % 63.35 % 63.46 % 67.68 % 64.77 % 67.27 %
Efficiency ratio (without adjustments) 67.24 % 71.88 % 69.05 % 90.75 % 72.25 % 69.54 % 72.70 %
 

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

              Six Months Ended
June 30,
2Q15 1Q15 4Q14 3Q14 2Q14 2015   2014
Non-interest expense $ 132,737 $ 139,920 $ 140,504 $ 142,201 $ 78,030 $ 272,657 $ 154,077
Less merger related expenses 1,234 8,069 6,494 27,161 488 9,303 1,168
Less prepayment fees on interest bearing liabilities — 85 — — — 85 —
Less loss on low to moderate income real estate investment — — — — 96 — 2,124
Less contingent consideration expense — — — 10,600 — — —
Less contribution to MB Financial Charitable Foundation — — 3,250 — — — —
Less increase (decrease) in market value of assets held in trust for deferred compensation 7   306   315   (38 ) 400   313   552  
Non-interest expense - as adjusted 131,496   131,460   130,445   104,478   77,046   262,956   150,233  
 
Non-interest income 82,949 81,268 83,678 61,087 39,928 164,217 76,540
Less net (loss) gain on investment securities (84 ) (460 ) 491 (3,246 ) (87 ) (544 ) 230
Less net (loss) gain on sale of other assets (7 ) 4 3,476 (7 ) (24 ) (3 ) (17 )
Less gain on extinguishment of debt — — — 1,895 — — —
Less increase (decrease) in market value of assets held in trust for deferred compensation 7   306   315   (38 ) 400   313   552  
Non-interest income - as adjusted 83,033   81,418   79,396   62,483   39,639   164,451   75,775  
Less tax equivalent adjustment on the increase in cash surrender value of life insurance 450   452   466   460   449   902   894  
Net non-interest expense $ 48,013   $ 49,590   $ 50,583   $ 41,535   $ 36,958   $ 97,603   $ 73,564  
Average assets $ 14,631,999 $ 14,363,244 $ 14,466,066 $ 12,206,014 $ 9,575,896 $ 14,498,364 $ 9,472,493
Annualized net non-interest expense to average assets 1.32 % 1.40 % 1.39 % 1.35 % 1.55 % 1.36 % 1.57 %
Annualized net non-interest expense to average assets (without adjustments) 1.38 % 1.66 % 1.56 % 2.64 % 1.60 % 1.51 % 1.65 %
 

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

              Six Months Ended
June 30,
2Q15 1Q15 4Q14 3Q14 2Q14 2015   2014
Non-interest income $ 82,949 $ 81,268 $ 83,678 $ 61,087 $ 39,928 $ 164,217 $ 76,540
Plus tax equivalent adjustment on the increase in cash surrender value of life insurance 450 452 466 460 449 902 894
Less net (loss) gain on investment securities (84 ) (460 ) 491 (3,246 ) (87 ) (544 ) 230
Less net (loss) gain on sale of other assets (7 ) 4 3,476 (7 ) (24 ) (3 ) (17 )
Less gain on extinguishment of debt — — — 1,895 — — —
Less increase (decrease) in market value of assets held in trust for deferred compensation 7   306   315   (38 ) 400   313   552  
Non-interest income - as adjusted $ 83,483   $ 81,870   $ 79,862   $ 62,943   $ 40,088   $ 165,353   $ 76,669  
 
Net interest income $ 114,473 $ 113,395 $ 119,811 $ 95,612 $ 68,072 $ 227,868 $ 135,400
Tax equivalent adjustment 6,676   6,078   6,246   6,087   5,677   12,754   11,258  
Net interest income on a fully tax equivalent basis 121,149 119,473 126,057 101,699 73,749 240,622 146,658
Plus non-interest income 82,949 81,268 83,678 61,087 39,928 164,217 76,540
Plus tax equivalent adjustment on the increase in cash surrender value of life insurance 450 452 466 460 449 902 894
Less net (loss) gain on investment securities (84 ) (460 ) 491 (3,246 ) (87 ) (544 ) 230
Less net (loss) gain on sale of other assets (7 ) 4 3,476 (7 ) (24 ) (3 ) (17 )
Less gain on extinguishment of debt — — — 1,895 — — —
Less increase (decrease) in market value of assets held in trust for deferred compensation 7   306   315   (38 ) 400   313   552  
Total revenue - as adjusted and on a fully tax equivalent basis $ 204,632   $ 201,343   $ 205,919   $ 164,642   $ 113,837   $ 405,975   $ 223,327  
 
Total revenue - unadjusted $ 197,422 $ 194,663 $ 203,489 $ 156,699 $ 108,000 $ 392,085 $ 211,940
 
Core non-interest income to revenues ratio 40.80 % 40.66 % 38.78 % 38.23 % 35.22 % 40.73 % 34.33 %
Non-interest income to revenues ratio (without adjustments) 42.02 % 41.75 % 41.12 % 38.98 % 36.97 % 41.88 % 36.11 %
 

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):

  2Q15   2Q14     1Q15
Average     Yield/ Average     Yield/ Average     Yield/
Balance Interest Rate Balance Interest Rate Balance Interest Rate
Interest Earning Assets:
Loans held for sale $ 781,020 $ 6,839 3.50 % $ 497 $ — — % $ 658,169 $ 5,785 3.52 %
Loans (1) (2) (3):
Commercial related credits
Commercial 3,309,519 34,884 4.17 1,229,799 11,912 3.83 3,190,755 32,623 4.09
Commercial loans collateralized by assignment of lease payments 1,634,583 15,235 3.73 1,476,618 14,693 3.98 1,647,761 15,438 3.75
Real estate commercial 2,522,473 27,145 4.26 1,620,658 17,008 4.15 2,538,995 27,548 4.34
Real estate construction 191,935   2,388   4.92 133,557   1,274   3.77 191,257   4,081   8.54
Total commercial related credits 7,658,510   79,652   4.11 4,460,632   44,887   3.98 7,568,768   79,690   4.21
Other loans
Real estate residential 512,766 4,785 3.73 309,848 2,809 3.62 493,366 5,028 4.08
Home equity 233,867 2,301 3.95 252,891 2,678 4.25 246,537 2,468 4.06
Indirect 286,107 3,769 5.28 269,556 3,579 5.33 267,265 3,485 5.29
Consumer loans 76,189   780   4.11 65,437   725   4.44 72,374   797   4.47
Total other loans 1,108,929   11,635   4.21 897,732   9,791   4.37 1,079,542   11,778   4.42
Total loans, excluding purchased credit-impaired loans 8,767,439 91,287 4.18 5,358,364 54,678 4.09 8,648,310 91,468 4.29
Purchased credit-impaired loans 202,374   4,117   8.16 158,371   2,441   6.18 240,376   4,937   8.33
Total loans 8,969,813   95,404   4.27 5,516,735   57,119   4.15 8,888,686   96,405   4.40
Taxable investment securities 1,545,284 10,002 2.59 1,434,300 8,794 2.45 1,556,530 9,934 2.55
Investment securities exempt from federal income taxes (3) 1,261,567 15,600 4.95 966,518 12,748 5.28 1,126,133 14,021 4.98
Federal funds sold 126 — — 4,359 4 0.36 16 — —
Other interest earning deposits 85,935   57   0.27 448,173   277   0.25 102,346   62   0.25
Total interest earning assets $ 12,643,745 $ 127,902   4.06 % $ 8,370,582 $ 78,942   3.78 % $ 12,331,880 $ 126,207   4.15 %
Non-interest earning assets 1,988,254   1,205,314   2,031,364  
Total assets $ 14,631,999   $ 9,575,896   $ 14,363,244  
Interest Bearing Liabilities:
Core funding:
Money market and NOW deposits $ 3,940,201 $ 1,634 0.17 % $ 2,880,910 $ 899 0.13 % $ 3,937,707 $ 1,595 0.16 %
Savings deposits 972,327 135 0.06 868,694 97 0.04 952,345 120 0.05
Certificates of deposit 1,302,031 1,259 0.39 1,157,805 1,124 0.40 1,420,320 1,452 0.42
Customer repurchase agreements 241,942   104   0.17 184,178   95   0.21 245,875   119   0.20
Total core funding 6,456,501   3,132   0.19 5,091,587   2,215   0.17 6,556,247   3,286   0.20
Wholesale funding:
Brokered certificates of deposit (includes fee expense) 412,517 1,526 1.48 220,396 1,634 2.97 476,245 1,478 1.26
Other borrowings 1,078,297   2,095   0.77 236,292   1,344   2.25 731,688   1,970   1.08
Total wholesale funding 1,490,814   3,621   0.96 456,688   2,978   2.33 1,207,933   3,448   1.12
Total interest bearing liabilities $ 7,947,315 $ 6,753   0.34 % $ 5,548,275 $ 5,193   0.38 % $ 7,764,180 $ 6,734   0.35 %
Non-interest bearing deposits 4,273,931 2,476,396 4,199,948
Other non-interest bearing liabilities 348,242 199,621 361,685
Stockholders' equity 2,062,511   1,351,604   2,037,431  
Total liabilities and stockholders' equity $ 14,631,999   $ 9,575,896   $ 14,363,244  
Net interest income/interest rate spread (4) $ 121,149   3.72 % $ 73,749   3.40 % $ 119,473   3.80 %
Taxable equivalent adjustment 6,676   5,677   6,078  
Net interest income, as reported $ 114,473   $ 68,072   $ 113,395  
Net interest margin (5) 3.63 % 3.26 % 3.73 %
Tax equivalent effect 0.21 % 0.27 % 0.20 %
Net interest margin on a fully tax equivalent basis (5) 3.84 % 3.53 % 3.93 %

(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.

 
Six Months Ended June 30,
2015   2014
Average     Yield/ Average     Yield/
Balance Interest Rate Balance Interest Rate
Interest Earning Assets:
Loans held for sale $ 719,934 $ 12,624 3.51 % $ 394 $ — — %
Loans (1) (2) (3):
Commercial related credits
Commercial 3,250,466 67,507 4.13 1,231,171 24,224 3.91
Commercial loans collateralized by assignment of lease payments 1,641,135 30,673 3.74 1,478,299 29,012 3.93
Real estate commercial 2,530,688 54,693 4.30 1,625,821 34,340 4.20
Real estate construction 191,598   6,469   6.72 137,219   2,552   3.70
Total commercial related credits 7,613,887   159,342   4.16 4,472,510   90,128   4.01
Other loans
Real estate residential 503,120 9,813 3.90 310,655 5,801 3.73
Home equity 240,167 4,769 4.00 258,060 5,390 4.21
Indirect 276,738 7,254 5.29 266,549 6,970 5.27
Consumer loans 74,292   1,577   4.28 64,034   1,401   4.41
Total other loans 1,094,317   23,413   4.31 899,298   19,562   4.38
Total loans, excluding purchased credit-impaired loans 8,708,204 182,755 4.23 5,371,808 109,690 4.12
Purchased credit-impaired loans 221,270   9,054   8.25 189,751   4,911   5.22
Total loans 8,929,474   191,809   4.33 5,561,559   114,601   4.16
Taxable investment securities 1,550,876 19,936 2.57 1,409,473 16,940 2.40
Investment securities exempt from federal income taxes (3) 1,194,224 29,621 4.96 951,275 25,158 5.29
Federal funds sold 71 — — 5,120 9 0.35
Other interest earning deposits 94,095   119   0.26 318,332   390   0.25
Total interest earning assets $ 12,488,674 $ 254,109   4.10 % $ 8,246,153 $ 157,098   3.84 %
Non-interest earning assets 2,009,690   1,226,340  
Total assets $ 14,498,364   $ 9,472,493  
Interest Bearing Liabilities:
Core funding:
Money market and NOW accounts $ 3,938,962 $ 3,229 0.17 % $ 2,804,688 $ 1,747 0.13 %
Savings accounts 962,391 255 0.05 865,463 206 0.05
Certificates of deposit 1,360,849 2,711 0.40 1,183,852 2,298 0.40
Customer repurchase agreements 243,897   223   0.18 187,305   191   0.21
Total core funding 6,506,099   6,418   0.20 5,041,308   4,442   0.18
Wholesale funding:
Brokered accounts (includes fee expense) 444,205 3,004 1.36 222,151 3,272 2.97
Other borrowings 905,950   4,065   0.89 234,062   2,726   2.32
Total wholesale funding 1,350,155   7,069   1.03 456,213   5,998   2.36
Total interest bearing liabilities $ 7,856,254 $ 13,487   0.35 % $ 5,497,521 $ 10,440   0.38 %
Non-interest bearing deposits 4,237,144 2,424,917
Other non-interest bearing liabilities 354,926 206,597
Stockholders' equity 2,050,040   1,343,458  
Total liabilities and stockholders' equity $ 14,498,364   $ 9,472,493  
Net interest income/interest rate spread (4) $ 240,622   3.75 % $ 146,658   3.46 %
Taxable equivalent adjustment 12,754   11,258  
Net interest income, as reported $ 227,868   $ 135,400  
Net interest margin (5) 3.68 % 3.31 %
Tax equivalent effect 0.21 % 0.28 %
Net interest margin on a fully tax equivalent basis (5) 3.89 % 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 June 30, 2015 and March 31, 2015 and six months ended June 30, 2015 (dollars in thousands):

  Three months ended   Three months ended   Six months ended
June 30, 2015 March 31, 2015 June 30, 2015
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 $ 8,969,813 $ 95,404 4.27 % $ 8,888,686 $ 96,405 4.40 % $ 8,929,474 $ 191,809 4.33 %
Less acquisition accounting discount accretion on non-PCI loans (50,333 ) 6,992 (57,802 ) 7,948 (54,047 ) 14,940
Less acquisition accounting discount accretion on PCI loans (34,514 ) 960   (35,092 ) 628   (34,802 ) 1,588  
Total loans, excluding acquisition accounting discount accretion on Taylor Capital loans $ 9,054,660   $ 87,452   3.87 % $ 8,981,580   $ 87,829   3.97 % $ 9,018,323   $ 175,281   3.92 %
 
Net interest margin on a fully tax equivalent basis, excluding acquisition accounting discount accretion on Taylor Capital loans:
Total interest earning assets, as reported $ 12,643,745 $ 121,149 3.84 % $ 12,331,880 $ 119,473 3.93 % $ 12,488,674 $ 240,622 3.89 %
Less acquisition accounting discount accretion on non-PCI loans (50,333 ) 6,992 (57,802 ) 7,948 (54,047 ) 14,940
Less acquisition accounting discount accretion on PCI loans (34,514 ) 960   (35,092 ) 628   (34,802 ) 1,588  
Total interest earning assets, excluding acquisition accounting discount accretion on Taylor Capital loans $ 12,728,592   $ 113,197   3.57 % $ 12,424,774   $ 110,897   3.62 % $ 12,577,523   $ 224,094   3.59 %
 

Provision for credit losses 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-purchased credit-impaired loans. During the second and first quarters of 2015, a provision for credit losses of approximately $4.9 million and $5.5 million, respectively, was recorded related to acquired Taylor Capital loans.

The table below reflects the impact that the loan discount accretion and provision for credit losses on Taylor Capital loans had earnings for the three months ended June 30, 2015 and March 31, 2015 (dollars in thousands):

  2Q15   1Q15
Acquisition accounting discount accretion on Taylor Capital loans $ 7,952 $ 8,576
Provision for credit losses on Taylor Capital loans 4,896   5,524
Earnings impact of discount accretion and merger related provision 3,056 3,052
Tax expense 1,213   1,211
Earnings impact of discount accretion and merger related provision, net of tax $ 1,843   $ 1,841

Contacts

MB Financial, Inc.
Berry Allen - Investor Relations
E-Mail: beallen@mbfinancial.com
(888) 422-6562

Contacts

MB Financial, Inc.
Berry Allen - Investor Relations
E-Mail: beallen@mbfinancial.com
(888) 422-6562