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MB Financial, Inc. Reports Earnings for the Third Quarter of 2015

CHICAGO, Oct. 15, 2015 (GLOBE NEWSWIRE) -- MB Financial, Inc. (NASDAQ:MBFI), the holding company for MB Financial Bank, N.A., today announced 2015 third quarter net income available to common stockholders of $38.3 million, or $0.51 per diluted common share, compared to $39.0 million, or $0.52 per diluted common share, last quarter and $4.9 million, or $0.08 per diluted common share, in the third quarter a year ago.

Highlights Include:

Loan Growth During the Quarter

Loan balances, excluding purchased credit-impaired loans, increased $304.3 million (+3.4%, or +13.5% annualized) during the third quarter of 2015 primarily due to increases in commercial-related loans across several categories.

Change from 6/30/2015 to 9/30/2015
(Dollars in thousands) 9/30/2015 6/30/2015 Amount Percent
Commercial-related credits:
Commercial loans $3,440,632 $3,354,889 $85,743 2.6%
Commercial loans collateralized by assignment of lease payments (lease loans) 1,693,540 1,690,866 2,674 0.2
Commercial real estate 2,580,009 2,539,991 40,018 1.6
Construction real estate 255,620 189,599 66,021 34.8
Total commercial-related credits 7,969,801 7,775,345 194,456 2.5
Other loans:
Residential real estate 607,171 533,118 74,053 13.9
Indirect vehicle 345,731 303,777 41,954 13.8
Home equity 223,173 230,478 (7,305) (3.2)
Consumer loans 87,612 86,463 1,149 1.3
Total other loans 1,263,687 1,153,836 109,851 9.5
Total loans, excluding purchased credit-impaired 9,233,488 8,929,181 304,307 3.4
Purchased credit-impaired 155,693 164,775 (9,082) (5.5)
Total loans $9,389,181 $9,093,956 $295,225 3.2%

Deposit Growth During the Quarter

  • Non-interest bearing deposits increased $56.1 million (+1.3%, or +5.1% annualized) during the third quarter of 2015 and comprised 39% of total deposits at quarter-end.
  • Low cost deposits increased $326.1 million (+3.5%, or +14.1% annualized) in the third quarter of 2015 and continued to represent 84% of total deposits at quarter-end.

Change from 6/30/2015 to 9/30/2015
(Dollars in thousands) 9/30/2015 6/30/2015 Amount Percent
Low cost deposits:
Noninterest bearing deposits $4,434,067 $4,378,005 $56,062 1.3%
Money market and NOW 4,129,414 3,842,264 287,150 7.5
Savings 953,746 970,875 (17,129) (1.8)
Total low cost deposits 9,517,227 9,191,144 326,083 3.5
Certificates of deposit:
Certificates of deposit 1,279,842 1,261,843 17,999 1.4
Brokered certificates of deposit 457,509 408,827 48,682 11.9
Total certificates of deposit 1,737,351 1,670,670 66,681 4.0
Total deposits $11,254,578 $10,861,814 $392,764 3.6%

Credit Quality

  • Provision for credit losses on legacy loans (which excludes loans acquired through the Taylor Capital merger (the "Merger")) was $1.2 million in the third quarter of 2015 compared to a negative provision of $600 thousand in the second quarter of 2015.
  • Taylor Capital related provision for credit losses was $4.1 million in the third quarter of 2015 compared to $4.9 million in the second 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 $7.4 million in the third quarter of 2015 and $8.0 million in the second quarter of 2015.
  • Our net loan charge-offs during the third quarter of 2015 were $1.5 million compared to net loan recoveries of $2.6 million in the second quarter of 2015.
  • Non-performing loans decreased by $1.5 million while potential problem loans increased by $6.5 million from June 30, 2015. The increase in potential problem loans was more than offset by a $9.1 million decline in purchased credit-impaired loans.

Key Earnings Components

  • Net interest income on a fully tax equivalent basis increased $1.8 million (1.5%) to $123.0 million in the third 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.
  • Our net interest margin on a fully tax equivalent basis, excluding accretion on loans acquired in the Merger, declined eight basis points from the prior quarter and five basis points from the third quarter of 2014, due to a seven basis point decrease in average yields earned on loans (excluding accretion).
  • Our core non-interest income was $82.8 million compared to $83.0 million in the prior quarter. Lease financing revenues increased due to an increase in fees and promotional revenue from the sale of third-party equipment maintenance contracts. The increase in leasing revenue was partially offset by lower mortgage banking revenue primarily as a result of reduced origination fees due to lower loan origination volumes. Our core non-interest income was also impacted by the Durbin amendment of the Dodd-Frank Act, which decreased card fees by approximately $1.2 million in the quarter.
  • Our core non-interest expense increased 2.5% compared to the prior quarter. Salaries and employee benefits expense was up due to an extra day in the quarter and annual pay increases for hourly employees. Excluding salaries and employee benefits expense, core non-interest expense increased $631 thousand in the third quarter compared to the prior quarter. This increase was primarily due to an increase in the clawback liability of $306 thousand related to our loss share agreements with the FDIC as well as an increase in debit card production cost of $294 thousand from replacing magnetic strip only cards with cards having new chip technology and an increase in advertising and marketing expense.

RESULTS OF OPERATIONS

Third Quarter Results

Net Interest Income

Change
from
2Q15 to 3Q15
Change
from
3Q14 to 3Q15
Nine Months Ended Change from
2014 to 2015
September 30,
3Q15 2Q15 3Q14 2015 2014
(Dollars in thousands)
Net interest income - fully tax equivalent $122,988 $121,149 +1.5% $101,699 +20.9% $363,610 $248,357 +46.4%
Net interest margin - fully tax equivalent 3.73% 3.84% -0.11% 3.78% -0.05 3.83% 3.66% +0.17%
Net interest margin - fully tax equivalent, excluding acquisition accounting discount accretion on Taylor Capital loans 3.49% 3.57% -0.08% 3.54% -0.05 3.56% 3.57% -0.01%

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 third 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 third 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 eight basis points to 3.49% for the third quarter of 2015 compared to 3.57% for the prior quarter. This decrease was primarily due to a seven basis point decrease in average yields earned on loans (excluding accretion) of which three basis points was due to a decrease in fees and interest recoveries.

See the supplemental net interest margin tables for further detail.

Non-interest Income (in thousands):

Nine Months Ended
September 30,
3Q15 2Q15 1Q15 4Q14 3Q14 2015 2014
Core non-interest income:
Key fee initiatives:
Lease financing, net $20,000 $15,564 $25,080 $18,542 $17,719 $60,644 $45,768
Mortgage banking revenue 30,692 35,648 24,544 29,080 16,823 90,884 17,069
Commercial deposit and treasury management fees 11,472 11,062 11,038 10,720 9,345 33,572 23,595
Trust and asset management fees 6,002 5,752 5,714 5,515 5,712 17,468 16,324
Card fees 3,335 4,409 3,927 3,900 3,836 11,671 9,841
Capital markets and international banking service fees 2,357 1,508 1,928 1,648 1,472 5,793 3,810
Total key fee initiatives 73,858 73,943 72,231 69,405 54,907 220,032 116,407
Consumer and other deposit service fees 3,499 3,260 3,083 3,335 3,362 9,842 9,453
Brokerage fees 1,281 1,543 1,678 1,350 1,145 4,502 3,826
Loan service fees 1,531 1,353 1,485 1,864 1,069 4,369 2,950
Increase in cash surrender value of life insurance 852 836 839 865 855 2,527 2,516
Other operating income 1,730 2,098 2,102 2,577 1,145 5,930 3,106
Total core non-interest income 82,751 83,033 81,418 79,396 62,483 247,202 138,258
Non-core non-interest income:
Net gain (loss) on investment securities 371 (84) (460) 491 (3,246) (173) (3,016)
Net gain (loss) on sale of other assets 1 (7) 4 3,476 (7) (2) (24)
Gain on extinguishment of debt 1,895 1,895
(Decrease) increase in market value of assets held in trust for deferred compensation (1) (872) 7 306 315 (38) (559) 514
Total non-core non-interest income (500) (84) (150) 4,282 (1,396) (734) (631)
Total non-interest income $82,251 $82,949 $81,268 $83,678 $61,087 $246,468 $137,627

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

Core non-interest income for the third quarter of 2015 decreased slightly by $282 thousand, or 0.3%, to $82.8 million from the second quarter of 2015.

  • Leasing revenues increased due to an increase in fees and promotional revenue from the sale of third-party equipment maintenance contracts.
  • Capital markets and international banking services fees increased due to higher swap and syndication fees.
  • Commercial deposit and treasury management fees increased primarily due to new business.
  • Trust and asset management fees increased due to the acquisition of the Illinois court-appointed guardianship and special needs trust business of JPMorgan Chase in August 2015. This acquisition added approximately $200 million of assets under management to our existing guardianship business.
  • Mortgage banking revenue decreased due to reduced origination fees due to lower loan origination volumes and reduced mortgage servicing fees as the result of the sale of certain mortgage servicing assets in July 2015.
  • Card fees decreased by $1.1 million primarily as a result of the impact from being subject to the Durbin amendment of the Dodd-Frank Act for the first time, which decreased card fees by approximately $1.2 million in the quarter.

Core non-interest income for the nine months ended September 30, 2015 increased by $108.9 million, or 78.8%, to $247.2 million from the nine months ended September 30, 2014.

  • Mortgage banking revenue increased due to 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.
  • Capital markets and international banking services fees increased due to higher swap and syndication fees partly offset by a decrease in M&A advisory fees.
  • 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.
  • Loan service fees increased due to increased unused line 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):

Nine Months Ended
September 30,
3Q15 2Q15 1Q15 4Q14 3Q14 2015 2014
Core non-interest expense:(1)
Salaries and employee benefits $88,760 $86,138 $84,447 $83,242 $65,271 $259,345 $155,614
Occupancy and equipment expense 12,456 12,081 12,763 13,757 11,314 37,300 30,410
Computer services and telecommunication expense 8,558 8,407 8,634 8,612 6,194 25,599 16,174
Advertising and marketing expense 2,578 2,497 2,446 2,233 1,973 7,521 6,077
Professional and legal expense 1,496 1,902 2,480 2,184 2,501 5,878 5,358
Other intangible amortization expense 1,542 1,509 1,518 1,617 1,470 4,569 3,884
Net loss (gain) recognized on other real estate owned (A) 520 662 888 (120) 1,348 2,070 1,674
Net (gain) loss recognized on other real estate owned related to FDIC transactions (A) 65 (88) (273) (27) 421 (296) 473
Other real estate expense, net (A) (8) 150 281 433 409 423 1,142
Other operating expenses 18,782 18,238 18,276 18,514 13,577 55,296 33,905
Total core non-interest expense 134,749 131,496 131,460 130,445 104,478 397,705 254,711
Non-core non-interest expense: (1)
Merger related expenses (B) 319 1,234 8,069 6,494 27,161 9,622 28,329
Branch impairment charges 70 70
Prepayment fees on interest bearing liabilities 85 85
Loss on low to moderate income real estate investment (C) 2,124
Contingent consideration - Celtic acquisition (C) 10,600 10,600
Contribution to MB Financial Charitable Foundation (C) 3,250
(Decrease) increase in market value of assets held in trust for deferred compensation (D) (872) 7 306 315 (38) (559) 514
Total non-core non-interest expense (483) 1,241 8,460 10,059 37,723 9,218 41,567
Total non-interest expense $134,266 $132,737 $139,920 $140,504 $142,201 $406,923 $296,278

(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 $3.3 million from the second quarter of 2015 to $134.7 million for the third quarter of 2015.

  • Salaries and employee benefits expense was up due to an extra day in the quarter and annual pay increases for hourly employees.
  • Other operating expenses increased due to an increase in the clawback liability related to our loss share agreements with the FDIC of $306 thousand as well as an increase in debit card production cost of $294 thousand from replacing magnetic strip only cards with cards having new chip technology.
  • Occupancy and equipment expense increased due to higher repair and maintenance expense as well as higher rental operating expenses.
  • Professional and legal expense decreased due to lower legal fees.

Core non-interest expense increased by $143.0 million, or 56.1%, from the nine months ended September 30, 2014 to $397.7 million for the nine months ended September 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 other IT projects.
  • Advertising and marketing expense was higher due to increased advertising and sponsorships.
  • Professional and legal expense increased due to higher consulting expense.

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

Nine Months Ended
September 30,
3Q15 2Q15 1Q15 4Q14 3Q14 2015 2014
Merger related expenses:
Salaries and employee benefits $3 $ $33 $1,926 $14,259 $36 $14,363
Occupancy and equipment expense 2 96 177 301 428 275 442
Computer services and telecommunication expense 9 130 270 1,397 5,312 409 5,495
Advertising and marketing expense 84 262 460
Professional and legal expense 305 511 190 258 6,363 1,006 6,852
Branch exit and facilities impairment charges 438 7,391 2,270 7,829
Other operating expenses 59 8 258 537 67 717
Total merger related expenses $319 $1,234 $8,069 $6,494 $27,161 $9,622 $28,329

Income Tax Expense

Income tax expense was $18.3 million for the third quarter of 2015 compared to $19.4 million for the second quarter of 2015. The decrease in income tax expense was primarily due to the $1.8 million decrease in income before taxes from $60.4 million in the second quarter of 2015 to $58.6 million in the third 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, LLC. 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):

Banking Leasing Mortgage Banking Non-core Items Consolidated
Three months ended September 30, 2015
Net interest income$104,714 $2,832 $8,423 $ $115,969
Provision for credit losses4,965 242 151 5,358
Net interest income after provision for credit losses99,749 2,590 8,272 110,611
Non-interest income:
Lease financing, net637 19,363 20,000
Mortgage origination fees 23,449 23,449
Mortgage servicing fees 7,243 7,243
Other non-interest income30,563 624 372 31,559
Total non-interest income31,200 19,987 30,692 372 82,251
Non-interest expense:
Salaries and employee benefits54,547 8,475 24,866 3 87,891
Occupancy and equipment expense9,982 843 1,631 2 12,458
Computer services and telecommunication expense6,179 335 2,044 9 8,567
Professional and legal expense1,206 290 305 1,801
Other operating expenses15,973 1,439 6,067 70 23,549
Total non-interest expense87,887 11,382 34,608 389 134,266
Income before income taxes43,062 11,195 4,356 (17) 58,596
Income tax expense12,184 4,398 1,742 (6) 18,318
Net income$30,878 $6,797 $2,614 $(11) $40,278
Three months ended June 30, 2015
Net interest income$104,352 $2,915 $7,206 $ $114,473
Provision for credit losses2,844 1,356 96 4,296
Net interest income after provision for credit losses101,508 1,559 7,110 110,177
Non-interest income:
Lease financing, net408 15,156 15,564
Mortgage origination fees 26,863 26,863
Mortgage servicing fees 8,785 8,785
Other non-interest income30,791 1,037 (91) 31,737
Total non-interest income31,199 16,193 35,648 (91) 82,949
Non-interest expense:
Salaries and employee benefits54,168 6,986 24,991 86,145
Occupancy and equipment expense9,733 823 1,525 96 12,177
Computer services and telecommunication expense6,194 274 1,939 130 8,537
Professional and legal expense1,655 247 511 2,413
Other operating expenses14,654 1,498 6,816 497 23,465
Total non-interest expense86,404 9,828 35,271 1,234 132,737
Income before income taxes46,303 7,924 7,487 (1,325) 60,389
Income tax expense13,895 3,073 2,995 (526) 19,437
Net income$32,408 $4,851 $4,492 $(799) $40,952

Net income from our banking segment for the third quarter of 2015 decreased compared to the prior quarter. This decrease in net income was primarily due to an increase in provision for credit losses and other operating expenses. Other operating expenses increased due to an increase in the clawback liability of $306 thousand related to our loss share agreements with the FDIC as well as an increase in debit card production cost of $294 thousand from replacing magnetic strip only cards with cards having new chip technology and an increase in advertising and marketing expense. Other non-interest income was also impacted by the Durbin amendment of the Dodd-Frank Act, which decreased card fees by approximately $1.2 million in the quarter.

Net income from our leasing segment for the third quarter of 2015 increased compared to the prior quarter. Lease financing revenues increased due to an increase in fees and promotional revenue from the sale of third-party equipment maintenance contracts.

Net income from our mortgage segment for the third quarter of 2015 decreased compared to the prior quarter primarily as a result of reduced origination fees due to lower loan origination volumes. In July 2015, we sold approximately $106 million of mortgage servicing rights at book value. This sale reduced mortgage servicing fees in the third quarter of 2015. Partially offsetting the decrease in mortgage banking revenue, net interest income increased due to higher average balances and rates on mortgage loans held for sale.

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

3Q15 2Q15 1Q15 4Q14 3Q14 (1)
Origination volume $1,880,960 $2,010,175 $1,688,541 $1,511,909 $724,713
Refinance 34% 43% 61% 44% 35%
Purchase 66 57 39 56 65
Origination volume by channel:
Retail 18% 18% 18% 19% 18%
Third party 82 82 82 81 82
Mortgage servicing book (unpaid principal balance of loans serviced for others) at period end (2) $15,593,630 $23,539,865 $22,927,263 $22,479,008 $21,989,278
Mortgage servicing rights, recorded at fair value, at period end 148,097 261,034 219,254 235,402 241,391
Notional value of rate lock commitments, at period end 800,162 992,025 1,069,145 645,287 610,818

(1) For the 44 day period subsequent to the Merger.
(2) Does not include the unpaid principal balance of serviced loans sold in July 2015 that will continue to be sub-serviced through October 2015.

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):

9/30/2015 6/30/2015 3/31/2015 12/31/2014 9/30/2014
Amount % of Total Amount % of Total Amount % of Total Amount % of Total Amount % of Total
Commercial-related credits:
Commercial loans $3,440,632 37% $3,354,889 37% $3,258,652 37% $3,245,206 36% $3,064,669 34%
Commercial loans collateralized by assignment of lease payments (lease loans) 1,693,540 18 1,690,866 18 1,628,031 18 1,692,258 18 1,631,660 18
Commercial real estate 2,580,009 27 2,539,991 28 2,525,640 28 2,544,867 28 2,647,412 29
Construction real estate 255,620 3 189,599 2 184,105 2 247,068 3 222,120 3
Total commercial-related credits 7,969,801 85 7,775,345 85 7,596,428 85 7,729,399 85 7,565,861 84
Other loans:
Residential real estate 607,171 6 533,118 6 505,558 5 503,287 5 516,834 6
Indirect vehicle 345,731 4 303,777 3 273,105 3 268,840 3 273,038 3
Home equity 223,173 2 230,478 3 241,078 3 251,909 3 262,977 3
Consumer loans 87,612 1 86,463 1 77,645 1 78,137 1 69,028 1
Total other loans 1,263,687 13 1,153,836 13 1,097,386 12 1,102,173 12 1,121,877 13
Total loans, excluding purchased credit-impaired loans 9,233,488 98 8,929,181 98 8,693,814 97 8,831,572 97 8,687,738 97
Purchased credit-impaired loans 155,693 2 164,775 2 227,514 3 251,645 3 288,186 3
Total loans $9,389,181 100% $9,093,956 100% $8,921,328 100% $9,083,217 100% $8,975,924 100%

Our loan balances, excluding purchased credit-impaired loans, increased $304.3 million (+3.4%, or +13.5% annualized) during the third 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):

3Q15 2Q15 1Q15 4Q14 3Q14
Amount % of Total Amount % of Total Amount % of Total Amount % of Total Amount % of Total
Commercial-related credits:
Commercial loans $3,372,279 37% $3,309,519 37% $3,190,755 36% $3,110,016 35% $2,118,864 30%
Commercial loans collateralized by assignment of lease payments (lease loans) 1,674,939 18 1,634,583 18 1,647,761 18 1,642,427 18 1,561,484 22
Commercial real estate 2,568,539 28 2,522,473 28 2,538,995 29 2,611,410 29 2,108,492 29
Construction real estate 210,506 2 191,935 2 191,257 2 232,679 3 170,017 2
Total commercial-related credits 7,826,263 85 7,658,510 85 7,568,768 85 7,596,532 85 5,958,857 83
Other loans:
Residential real estate 566,115 6 512,766 6 493,366 5 503,211 5 405,589 6
Indirect vehicle 325,323 4 286,107 3 267,265 3 273,063 3 251,969 3
Home equity 226,365 2 233,867 3 246,537 3 256,933 3 274,841 4
Consumer loans 85,044 1 76,189 1 72,374 1 75,264 1 69,699 1
Total other loans 1,202,847 13 1,108,929 13 1,079,542 12 1,108,471 12 1,002,098 14
Total loans, excluding purchased credit-impaired loans 9,029,110 98 8,767,439 98 8,648,310 97 8,705,003 97 6,960,955 97
Purchased credit-impaired loans 156,309 2 202,374 2 240,376 3 273,136 3 221,129 3
Total loans $9,185,419 100% $8,969,813 100% $8,888,686 100% $8,978,139 100% $7,182,084 100%

ASSET QUALITY

The following table presents a summary of criticized assets (excluding loans held for sale) as of the dates indicated (dollars in thousands):

9/30/2015 6/30/2015 3/31/2015 12/31/2014 9/30/2014
Non-performing loans:
Non-accrual loans (1) $92,302 $91,943 $81,571 $82,733 $97,580
Loans 90 days or more past due, still accruing interest 4,275 6,112 1,707 4,354 2,681
Total non-performing loans 96,577 98,055 83,278 87,087 100,261
Other real estate owned 29,587 28,517 21,839 19,198 18,817
Repossessed assets 216 78 160 93 126
Total non-performing assets $126,380 $126,650 $105,277 $106,378 $119,204
Potential problem loans (2) $122,966 $116,443 $107,703 $55,651 $51,690
Purchased credit-impaired loans $155,693 $164,775 $227,514 $251,645 $288,186
Total allowance for loan and lease losses $124,626 $120,070 $113,412 $110,026 $102,810
Accruing restructured loans (3) 20,120 16,875 16,874 15,603 16,877
Total non-performing loans to total loans 1.03% 1.08% 0.93% 0.96% 1.12%
Total non-performing assets to total assets 0.85 0.84 0.73 0.73 0.82
Allowance for loan and lease losses to non-performing loans 129.04 122.45 136.18 126.34 102.54

(1) Includes $21.4 million, $24.5 million, $25.5 million, $25.8 million and $22.4 million of restructured loans on non-accrual status at September 30, 2015, June 30, 2015, March 31, 2015, December 31, 2014 and September 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.

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):

9/30/2015 6/30/2015 3/31/2015 12/31/2014 9/30/2014
Commercial and lease $34,465 $31,053 $18,315 $20,058 $22,985
Commercial real estate 25,437 32,358 29,645 32,663 42,832
Construction real estate 337 337 337 337
Consumer related 36,675 34,307 34,981 34,029 34,107
Total non-performing loans $96,577 $98,055 $83,278 $87,087 $100,261

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):

9/30/2015 6/30/2015 3/31/2015 12/31/2014 9/30/2014
Balance at the beginning of quarter $28,517 $21,839 $19,198 $18,817 $20,306
Transfers in at fair value less estimated costs to sell 2,402 8,595 4,615 1,261 221
Acquired from business combination 4,720
Fair value adjustments (565) (920) (922) (34) (2,083)
Net gains on sales of other real estate owned 45 258 34 154 735
Cash received upon disposition (812) (1,255) (1,086) (1,000) (5,082)
Balance at the end of quarter $29,587 $28,517 $21,839 $19,198 $18,817

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

Nine Months Ended
September 30,
3Q15 2Q15 1Q15 4Q14 3Q14 2015 2014
Allowance for credit losses, balance at the beginning of period $124,130 $117,189 $114,057 $106,912 $103,905 $114,057 $113,462
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 - legacy 1,225 (600) (550) 2,472 (1,600) 75 (2,400)
Provision for credit losses - acquired Taylor Capital loan portfolio renewals 4,133 4,896 5,524 7,271 4,709 14,553 4,709
Charge-offs:
Commercial loans 1,657 57 569 197 606 2,283 1,142
Commercial loans collateralized by assignment of lease payments (lease loans) 1,980 100 885 2,080 40
Commercial real estate 170 108 2,034 1,528 1,027 2,312 9,910
Construction real estate 5 3 3 4 5 11 75
Residential real estate 292 318 579 280 740 1,189 1,438
Home equity 358 276 444 1,381 566 1,078 2,002
Indirect vehicle 581 627 874 1,189 1,043 2,082 2,546
Consumer loans 467 500 424 546 497 1,391 1,582
Total charge-offs 5,510 1,989 4,927 6,010 4,484 12,426 18,735
Recoveries:
Commercial loans 456 816 242 869 564 1,514 2,888
Commercial loans collateralized by assignment of lease payments (lease loans) 11 340 749 384 425 1,100 555
Commercial real estate 2,402 2,561 1,375 741 2,227 6,338 3,279
Construction real estate 216 35 2 51 25 253 201
Residential real estate 337 8 72 661 4 417 529
Home equity 186 160 101 176 46 447 306
Indirect vehicle 334 545 475 453 402 1,354 1,283
Consumer loans 118 169 69 77 65 356 211
Total recoveries 4,060 4,634 3,085 3,412 3,758 11,779 9,252
Total net charge-offs (recoveries) 1,450 (2,645) 1,842 2,598 726 647 9,483
Allowance for credit losses 128,038 124,130 117,189 114,057 106,912 128,038 106,912
Allowance for unfunded credit commitments (3,412) (4,060) (3,777) (4,031) (4,102) (3,412) (4,102)
Allowance for loan and lease losses $124,626 $120,070 $113,412 $110,026 $102,810 $124,626 $102,810
Total loans, excluding loans held for sale $9,389,181 $9,093,956 $8,921,328 $9,083,217 $8,975,924 $9,389,181 $8,975,924
Average loans, excluding loans held for sale 9,185,419 8,969,813 8,888,686 8,978,139 7,182,084 9,015,726 6,107,670
Ratio of allowance for loan and lease losses to total loans, excluding loans held for sale 1.33% 1.32% 1.27% 1.21% 1.15% 1.33% 1.15%
Net loan charge-offs (recoveries) to average loans, excluding loans held for sale (annualized) 0.06 (0.12) 0.08 0.11 0.04 0.01 0.21

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

9/30/2015 6/30/2015 3/31/2015 12/31/2014 9/30/2014
Commercial related loans:
General reserve $93,903 $89,642 $88,425 $85,087 $76,604
Specific reserve 13,683 11,303 5,658 5,189 5,802
Consumer related reserve 17,040 19,125 19,329 19,750 20,404
Total allowance for loan and lease losses $124,626 $120,070 $113,412 $110,026 $102,810

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 September 30, 2015 (in thousands):

Non-
Accretable
Discount -
PCI Loans
Accretable
Discount -
PCI Loans
Accretable
Discount -
Non-PCI
Loans
Total
Balance at beginning of period $23,474 $10,901 $46,836 $81,211
Charge-offs (3,727) (3,727)
Accretion (1,533) (5,875) (7,408)
Balance at end of period $19,747 $9,368 $40,961 $70,076

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
Discount -
PCI Loans
Accretable
Discount -
PCI Loans
Accretable
Discount -
Non-PCI
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 better than expected cash flows on two pools of purchased credit-impaired loans.

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):

9/30/2015 6/30/2015 3/31/2015 12/31/2014 9/30/2014
Securities available for sale:
Fair value
Government sponsored agencies and enterprises $65,461 $65,485 $66,070 $65,873 $65,829
States and political subdivisions 399,274 395,912 403,628 410,854 409,033
Mortgage-backed securities 847,426 902,017 856,933 908,225 1,006,102
Corporate bonds 228,251 246,468 252,042 259,203 267,239
Equity securities 10,826 10,669 10,751 10,597 10,447
Total fair value $1,551,238 $1,620,551 $1,589,424 $1,654,752 $1,758,650
Amortized cost
Government sponsored agencies and enterprises $64,008 $64,211 $64,411 $64,612 $64,809
States and political subdivisions 379,015 380,221 381,704 390,076 391,900
Mortgage-backed securities 834,791 890,334 841,727 899,523 999,630
Corporate bonds 228,711 245,506 250,543 259,526 265,720
Equity securities 10,701 10,644 10,587 10,531 10,470
Total amortized cost $1,517,226 $1,590,916 $1,548,972 $1,624,268 $1,732,529
Unrealized gain, net
Government sponsored agencies and enterprises $1,453 $1,274 $1,659 $1,261 $1,020
States and political subdivisions 20,259 15,691 21,924 20,778 17,133
Mortgage-backed securities 12,635 11,683 15,206 8,702 6,472
Corporate bonds (460) 962 1,499 (323) 1,519
Equity securities 125 25 164 66 (23)
Total unrealized gain, net $34,012 $29,635 $40,452 $30,484 $26,121
Securities held to maturity, at amortized cost:
States and political subdivisions $1,002,963 $974,032 $764,931 $752,558 $760,674
Mortgage-backed securities 221,889 229,595 235,928 240,822 244,675
Total amortized cost $1,224,852 $1,203,627 $1,000,859 $993,380 $1,005,349

DEPOSIT MIX

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

9/30/2015 6/30/2015 3/31/2015 12/31/2014 9/30/2014
Amount % of
Total
Amount % of
Total
Amount % of
Total
Amount % of
Total
Amount % of
Total
Low cost deposits:
Noninterest bearing deposits $4,434,067 39% $4,378,005 40% $4,290,499 39% $4,118,256 37% $3,807,448 34%
Money market and NOW 4,129,414 37 3,842,264 35 4,002,818 36 3,913,765 36 4,197,166 37
Savings 953,746 8 970,875 9 969,560 9 940,345 9 931,985 8
Total low cost deposits 9,517,227 84 9,191,144 84 9,262,877 84 8,972,366 82 8,936,599 79
Certificates of deposit:
Certificates of deposit 1,279,842 12 1,261,843 12 1,354,633 12 1,479,928 13 1,646,000 15
Brokered certificates of deposit 457,509 4 408,827 4 401,991 4 538,648 5 655,843 6
Total certificates of deposit 1,737,351 16 1,670,670 16 1,756,624 16 2,018,576 18 2,301,843 21
Total deposits $11,254,578 100% $10,861,814 100% $11,019,501 100% $10,990,942 100% $11,238,442 100%

Non-interest bearing deposits grew by $56.1 million (+1.3%, or +5.1% annualized) during the third quarter of 2015 and comprise 39% of total deposits at quarter-end. Total low cost deposits increased $326.1 million (+3.5%, or +14.1% annualized) to $9.5 billion at September 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):

3Q15 2Q15 1Q15 4Q14 3Q14
Amount % of
Total
Amount % of
Total
Amount % of
Total
Amount % of
Total
Amount % of
Total
Low cost deposits:
Noninterest bearing deposits $4,428,065 39% $4,273,931 39% $4,199,948 38% $4,072,797 36% $3,175,512 34%
Money market and NOW 4,119,625 36 3,940,201 36 3,937,707 36 4,023,657 37 3,518,314 37
Savings 965,060 9 972,327 9 952,345 9 936,960 8 906,630 10
Total low cost deposits 9,512,750 84 9,186,459 84 9,090,000 83 9,033,414 81 7,600,456 81
Certificates of deposit:
Certificates of deposit 1,304,516 12 1,302,031 12 1,420,320 13 1,563,011 14 1,411,407 15
Brokered certificates of deposit 427,649 4 412,517 4 476,245 4 606,166 5 417,346 4
Total certificates of deposit 1,732,165 16 1,714,548 16 1,896,565 17 2,169,177 19 1,828,753 19
Total deposits $11,244,915 100% $10,901,007 100% $10,986,565 100% $11,202,591 100% $9,429,209 100%

CAPITAL

Tangible book value per common share was $16.43 at September 30, 2015 compared to $16.36 last quarter and $15.36 a year ago. In the second quarter of 2015, our Board of Directors authorized the purchase of up to $50 million of our common stock. We purchased $47.2 million, or approximately 1.5 million shares, of our common stock through September 30, 2015.

Our regulatory capital ratios remain strong. MB Financial Bank, N.A. (the "Bank") was categorized as “well capitalized” at September 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; (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) the possibility that our security measures might not be sufficient to mitigate the risk of a cyber attack or cyber theft, and that our security measures might not protect us from systems failures or interruptions; (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, 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)
As of the dates indicated
(In thousands)

9/30/2015 6/30/2015 3/31/2015 12/31/2014 9/30/2014
ASSETS
Cash and due from banks $234,220 $290,266 $248,840 $256,804 $267,405
Interest earning deposits with banks 66,025 144,154 52,212 55,277 179,391
Total cash and cash equivalents 300,245 434,420 301,052 312,081 446,796
Federal funds sold 5
Investment securities:
Securities available for sale, at fair value 1,551,238 1,620,551 1,589,424 1,654,752 1,758,650
Securities held to maturity, at amortized cost 1,224,852 1,203,627 1,000,859 993,380 1,005,349
Non-marketable securities - FHLB and FRB Stock 91,400 111,400 87,677 75,569 75,569
Total investment securities 2,867,490 2,935,578 2,677,960 2,723,701 2,839,568
Loans held for sale 676,020 801,343 686,838 737,209 553,627
Loans:
Total loans, excluding purchased credit-impaired loans 9,233,488 8,929,181 8,693,814 8,831,572 8,687,738
Purchased credit-impaired loans 155,693 164,775 227,514 251,645 288,186
Total loans 9,389,181 9,093,956 8,921,328 9,083,217 8,975,924
Less: Allowance for loan and lease losses 124,626 120,070 113,412 110,026 102,810
Net loans 9,264,555 8,973,886 8,807,916 8,973,191 8,873,114
Lease investments, net 184,223 167,966 159,191 162,833 137,120
Premises and equipment, net 234,115 234,651 234,077 238,377 243,814
Cash surrender value of life insurance 136,089 135,237 134,401 133,562 132,697
Goodwill 711,521 711,521 711,521 711,521 711,521
Other intangibles 37,520 34,979 36,488 38,006 39,623
Mortgage servicing rights, at fair value 148,097 261,034 219,254 235,402 241,391
Other real estate owned, net 29,587 28,517 21,839 19,198 18,817
Other real estate owned related to FDIC transactions 13,825 13,867 17,890 19,328 22,028
Other assets 346,814 285,190 319,883 297,690 244,481
Total assets $14,950,101 $15,018,194 $14,328,310 $14,602,099 $14,504,597
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits:
Noninterest bearing $4,434,067 $4,378,005 $4,290,499 $4,118,256 $3,807,448
Interest bearing 6,820,511 6,483,809 6,729,002 6,872,686 7,430,994
Total deposits 11,254,578 10,861,814 11,019,501 10,990,942 11,238,442
Short-term borrowings 940,529 1,382,635 615,231 931,415 667,160
Long-term borrowings 95,175 89,639 85,477 82,916 77,269
Junior subordinated notes issued to capital trusts 186,068 185,971 185,874 185,778 185,681
Accrued expenses and other liabilities 410,523 420,396 363,934 382,762 335,677
Total liabilities 12,886,873 12,940,455 12,270,017 12,573,813 12,504,229
Stockholders' Equity
Preferred stock 115,280 115,280 115,280 115,280 115,280
Common stock 756 754 754 751 751
Additional paid-in capital 1,277,348 1,273,333 1,268,851 1,267,761 1,265,050
Retained earnings 702,789 677,246 651,178 629,677 606,097
Accumulated other comprehensive income 20,968 18,778 26,101 20,356 18,431
Treasury stock (55,258) (9,035) (5,277) (6,974) (6,692)
Controlling interest stockholders' equity 2,061,883 2,076,356 2,056,887 2,026,851 1,998,917
Noncontrolling interest 1,345 1,383 1,406 1,435 1,451
Total stockholders' equity 2,063,228 2,077,739 2,058,293 2,028,286 2,000,368
Total liabilities and stockholders' equity $14,950,101 $15,018,194 $14,328,310 $14,602,099 $14,504,597

MB FINANCIAL, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

Nine Months Ended
September 30,
(Dollars in thousands, except per share data) 3Q15 2Q15 1Q15 4Q14 3Q14 2015 2014
Interest income:
Loans:
Taxable $100,573 $98,768 $98,846 $104,531 $79,902 $298,187 $187,497
Nontaxable 2,283 2,259 2,174 2,203 2,265 6,716 6,819
Investment securities:
Taxable 9,655 10,002 9,934 10,651 11,028 29,591 27,968
Nontaxable 10,752 10,140 9,113 9,398 9,041 30,005 25,393
Federal funds sold 2 14 23
Other interest earning accounts 89 57 62 62 211 208 601
Total interest income 123,352 121,226 120,129 126,847 102,461 364,707 248,301
Interest expense:
Deposits 5,102 4,554 4,645 4,889 4,615 14,301 12,138
Short-term borrowings 395 355 277 354 231 1,027 426
Long-term borrowings and junior subordinated notes 1,886 1,844 1,812 1,793 2,003 5,542 4,725
Total interest expense 7,383 6,753 6,734 7,036 6,849 20,870 17,289
Net interest income 115,969 114,473 113,395 119,811 95,612 343,837 231,012
Provision for credit losses 5,358 4,296 4,974 9,743 3,109 14,628 2,309
Net interest income after provision for credit losses 110,611 110,177 108,421 110,068 92,503 329,209 228,703
Non-interest income:
Lease financing, net 20,000 15,564 25,080 18,542 17,719 60,644 45,768
Mortgage banking revenue 30,692 35,648 24,544 29,080 16,823 90,884 17,069
Commercial deposit and treasury management fees 11,472 11,062 11,038 10,720 9,345 33,572 23,595
Trust and asset management fees 6,002 5,752 5,714 5,515 5,712 17,468 16,324
Card fees 3,335 4,409 3,927 3,900 3,836 11,671 9,841
Capital markets and international banking service fees 2,357 1,508 1,928 1,648 1,472 5,793 3,810
Consumer and other deposit service fees 3,499 3,260 3,083 3,335 3,362 9,842 9,453
Brokerage fees 1,281 1,543 1,678 1,350 1,145 4,502 3,826
Loan service fees 1,531 1,353 1,485 1,864 1,069 4,369 2,950
Increase in cash surrender value of life insurance 852 836 839 865 855 2,527 2,516
Net gain (loss) on investment securities 371 (84) (460) 491 (3,246) (173) (3,016)
Net gain (loss) on sale of assets 1 (7) 4 3,476 (7) (2) (24)
Gain on early extinguishment of debt 1,895 1,895
Other operating income 858 2,105 2,408 2,892 1,107 5,371 3,620
Total non-interest income 82,251 82,949 81,268 83,678 61,087 246,468 137,627
Non-interest expense:
Salaries and employee benefits 87,891 86,145 84,786 85,483 79,492 258,822 170,491
Occupancy and equipment expense 12,458 12,177 12,940 14,058 11,742 37,575 30,852
Computer services and telecommunication expense 8,567 8,537 8,904 10,009 11,506 26,008 21,669
Advertising and marketing expense 2,578 2,497 2,446 2,317 2,235 7,521 6,537
Professional and legal expense 1,801 2,413 2,670 2,442 8,864 6,884 12,210
Other intangible amortization expense 1,542 1,509 1,518 1,617 1,470 4,569 3,884
Branch exit and facilities impairment charges 70 438 7,391 2,270 7,899
Net loss recognized on other real estate owned and other expense 577 724 896 286 2,178 2,197 3,289
Prepayment fees on interest bearing liabilities 85 85
Other operating expenses 18,782 18,297 18,284 22,022 24,714 55,363 47,346
Total non-interest expense 134,266 132,737 139,920 140,504 142,201 406,923 296,278
Income before income taxes 58,596 60,389 49,769 53,242 11,389 168,754 70,052
Income tax expense 18,318 19,437 15,658 17,117 4,488 53,413 20,076
Net income 40,278 40,952 34,111 36,125 6,901 115,341 49,976
Dividends on preferred shares 2,000 2,000 2,000 2,000 2,000 6,000 2,000
Net income available to common stockholders $38,278 $38,952 $32,111 $34,125 $4,901 $109,341 $47,976


Nine Months Ended
September 30,
3Q15 2Q15 1Q15 4Q14 3Q14 2015 2014
Common share data:
Basic earnings per common share $0.52 $0.52 $0.43 $0.46 $0.08 $1.47 $0.83
Diluted earnings per common share 0.51 0.52 0.43 0.45 0.08 1.45 0.82
Weighted average common shares outstanding for basic earnings per common share 74,297,281 74,596,925 74,567,104 74,525,990 63,972,902 74,478,164 57,795,094
Weighted average common shares outstanding for diluted earnings per common share 75,029,827 75,296,029 75,164,716 75,130,331 64,457,978 75,154,585 58,341,927


Selected Financial Data:
Nine Months Ended
September 30,
3Q15 2Q15 1Q15 4Q14 3Q14 2015 2014
Performance Ratios:
Annualized return on average assets 1.06% 1.12% 0.96% 0.99% 0.22% 1.05% 0.64%
Annualized operating return on average assets (1) 1.06 1.14 1.11 1.09 1.16 1.10 1.04
Annualized return on average common equity 7.75 8.02 6.78 7.12 1.21 7.52 4.47
Annualized operating return on average common equity (1) 7.75 8.19 7.87 7.84 8.29 7.94 7.34
Annualized cash return on average tangible common equity (2) 12.74 13.21 11.31 11.98 2.23 12.43 7.09
Annualized cash operating return on average tangible common equity (3) 12.74 13.47 13.09 13.16 13.19 13.10 11.42
Net interest rate spread 3.60 3.72 3.80 3.88 3.66 3.70 3.54
Cost of funds (4) 0.23 0.22 0.23 0.23 0.26 0.23 0.27
Efficiency ratio (5) 65.35 64.26 65.29 63.35 63.46 64.97 65.65
Annualized net non-interest expense to average assets (6) 1.36 1.32 1.40 1.39 1.35 1.36 1.48
Core non-interest income to revenues (7) 40.35 40.80 40.66 38.78 38.23 40.60 35.99
Net interest margin 3.52 3.63 3.73 3.81 3.56 3.62 3.41
Tax equivalent effect 0.21 0.21 0.20 0.20 0.22 0.21 0.25
Net interest margin - fully tax equivalent basis (8) 3.73 3.84 3.93 4.01 3.78 3.83 3.66
Loans to deposits 83.43 83.72 80.96 82.64 79.87 83.43 79.87
Asset Quality Ratios:
Non-performing loans (9) to total loans 1.03% 1.08% 0.93% 0.96% 1.12% 1.03% 1.12%
Non-performing assets (9) to total assets 0.85 0.84 0.73 0.73 0.82 0.85 0.82
Allowance for loan and lease losses to non-performing loans (9) 129.04 122.45 136.18 126.34 102.54 129.04 102.54
Allowance for loan and lease losses to total loans 1.33 1.32 1.27 1.21 1.15 1.33 1.15
Net loan (recoveries) charge-offs to average loans (annualized) 0.06 (0.12) 0.08 0.11 0.04 0.01 0.21
Capital Ratios:
Tangible equity to tangible assets (10) 9.34% 9.41% 9.73% 9.32% 9.17% 9.34% 9.17%
Tangible common equity to tangible assets (11) 8.53 8.60 8.89 8.49 8.34 8.53 8.34
Tangible common equity to risk weighted assets (12) 9.69 10.02 10.09 10.38 10.34 9.69 10.34
Total capital (to risk-weighted assets) (13) 12.94 13.07 13.22 13.62 13.60 12.94 13.60%
Tier 1 capital (to risk-weighted assets) (13) 11.92 12.06 12.24 12.61 12.64 11.92 12.64
Common equity tier 1 capital (to risk-weighted assets) (13) 9.56 9.66 9.79 N/A N/A 9.56 N/A
Tier 1 capital (to average assets) (13) 10.43 10.69 10.80 10.47 12.29 10.43 12.29
Per Share Data:
Book value per common share (14) $26.40 $26.14 $25.86 $25.58 $25.09 $26.40 $25.09
Less: goodwill and other intangible assets, net of benefit, per common share 9.97 9.78 9.78 9.84 9.73 9.97 9.73
Tangible book value per common share (15) $16.43 $16.36 $16.08 $15.74 $15.36 $16.43 $15.36
Cash dividends per common share $0.17 $0.17 $0.14 $0.14 $0.14 $0.48 $0.38

(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—Third Quarter Results.”

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

9/30/2015 6/30/2015 3/31/2015 12/31/2014 9/30/2014
Stockholders' equity - as reported $2,063,228 $2,077,739 $2,058,293 $2,028,286 $2,000,368
Less: goodwill 711,521 711,521 711,521 711,521 711,521
Less: other intangible assets, net of tax benefit 24,388 22,736 23,717 24,704 25,755
Tangible equity $1,327,319 $1,343,482 $1,323,055 $1,292,061 $1,263,092

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

9/30/2015 6/30/2015 3/31/2015 12/31/2014 9/30/2014
Total assets - as reported $14,950,101 $15,018,194 $14,328,310 $14,602,099 $14,504,597
Less: goodwill 711,521 711,521 711,521 711,521 711,521
Less: other intangible assets, net of tax benefit 24,388 22,736 23,717 24,704 25,755
Tangible assets $14,214,192 $14,283,937 $13,593,072 $13,865,874 $13,767,321

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

9/30/2015 6/30/2015 3/31/2015 12/31/2014 9/30/2014
Common stockholders' equity - as reported $1,947,948 $1,962,459 $1,943,013 $1,913,006 $1,885,088
Less: goodwill 711,521 711,521 711,521 711,521 711,521
Less: other intangible assets, net of tax benefit 24,388 22,736 23,717 24,704 25,755
Tangible common equity $1,212,039 $1,228,202 $1,207,775 $1,176,781 $1,147,812

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

Nine Months Ended
September 30,
3Q15 2Q15 1Q15 4Q14 3Q14 2015 2014
Average common stockholders' equity - as reported $1,958,947 $1,947,231 $1,922,151 $1,901,830 $1,613,375 $1,942,911 $1,434,420
Less: average goodwill 711,521 711,521 711,521 711,521 550,667 711,521 466,271
Less: average other intangible assets, net of tax benefit 23,900 23,092 24,157 25,149 19,734 23,715 16,179
Average tangible common equity $1,223,526 $1,212,618 $1,186,473 $1,165,160 $1,042,974 $1,207,675 $951,970

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

Nine Months Ended
September 30,
3Q15 2Q15 1Q15 4Q14 3Q14 2015 2014
Net income available to common stockholders - as reported $38,278 $38,952 $32,111 $34,125 $4,901 $109,341 $47,976
Add: other intangible amortization expense, net of tax benefit 1,002 981 987 1,051 956 2,970 2,525
Net cash flow available to common stockholders $39,280 $39,933 $33,098 $35,176 $5,857 $112,311 $50,501

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

Nine Months Ended
September 30,
3Q15 2Q15 1Q15 4Q14 3Q14 2015 2014
Net income - as reported $40,278 $40,952 $34,111 $36,125 $6,901 $115,341 $49,976
Less non-core items:
Net (loss) gain on investment securities 371 (84) (460) 491 (3,246) (173) (3,016)
Net (loss) gain on sale of other assets 1 (7) 4 3,476 (7) (2) (24)
Gain on extinguishment of debt 1,895 1,895
Merger related expenses (319) (1,234) (8,069) (6,494) (27,161) (9,622) (28,329)
Branch impairment charges (70) (70)
Prepayment fees on interest bearing liabilities (85) (85)
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)
Total non-core items (17) (1,325) (8,610) (5,777) (39,119) (9,952) (42,198)
Income tax expense on non-core items (6) (526) (3,417) (2,314) (10,295) (3,949) (11,416)
Non-core items, net of tax (11) (799) (5,193) (3,463) (28,824) (6,003) (30,782)
Operating earnings 40,289 41,751 39,304 39,588 35,725 121,344 80,758
Dividends on preferred shares 2,000 2,000 2,000 2,000 2,000 6,000 2,000
Operating earnings available to common stockholders $38,289 $39,751 $37,304 $37,588 $33,725 $115,344 $78,758
Diluted operating earnings per common share $0.51 $0.53 $0.50 $0.50 $0.52 $1.53 $1.35
Weighted average common shares outstanding for diluted operating earnings per common share 75,029,827 75,296,029 75,164,716 75,130,331 64,457,978 75,154,585 58,341,927

Efficiency Ratio Calculation (Dollars in Thousands)

Nine Months Ended
September 30,
3Q15 2Q15 1Q15 4Q14 3Q14 2015 2014
Non-interest expense $134,266 $132,737 $139,920 $140,504 $142,201 $406,923 $296,278
Less merger related expenses 319 1,234 8,069 6,494 27,161 9,622 28,329
Less prepayment fees on interest bearing liabilities 85 85
Less branch impairment charges 70 70
Less loss on low to moderate income real estate investment 2,124
Less contingent consideration expense 10,600 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 (872) 7 306 315 (38) (559) 514
Non-interest expense - as adjusted $134,749 $131,496 $131,460 $130,445 $104,478 $397,705 $254,711
Net interest income $115,969 $114,473 $113,395 $119,811 $95,612 $343,837 $231,012
Tax equivalent adjustment 7,019 6,676 6,078 6,246 6,087 19,773 17,345
Net interest income on a fully tax equivalent basis 122,988 121,149 119,473 126,057 101,699 363,610 248,357
Plus non-interest income 82,251 82,949 81,268 83,678 61,087 246,468 137,627
Plus tax equivalent adjustment on the increase in cash surrender value of life insurance 459 450 452 466 460 1,361 1,355
Less net (loss) gain on investment securities 371 (84) (460) 491 (3,246) (173) (3,016)
Less net (loss) gain on sale of other assets 1 (7) 4 3,476 (7) (2) (24)
Less gain on extinguishment of debt 1,895 1,895
Less increase (decrease) in market value of assets held in trust for deferred compensation (872) 7 306 315 (38) (559) 514
Net interest income plus non-interest income - as adjusted $206,198 $204,632 $201,343 $205,919 $164,642 $612,173 $387,970
Efficiency ratio 65.35% 64.26% 65.29% 63.35% 63.46% 64.97% 65.65%
Efficiency ratio (without adjustments) 67.74% 67.24% 71.88% 69.05% 90.75% 68.93% 80.37%

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

Nine Months Ended
September 30,
3Q15 2Q15 1Q15 4Q14 3Q14 2015 2014
Non-interest expense $134,266 $132,737 $139,920 $140,504 $142,201 $406,923 $296,278
Less merger related expenses 319 1,234 8,069 6,494 27,161 9,622 28,329
Less prepayment fees on interest bearing liabilities 85 85
Less branch impairment charges 70 70
Less loss on low to moderate income real estate investment 2,124
Less contingent consideration expense 10,600 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 (872) 7 306 315 (38) (559) 514
Non-interest expense - as adjusted 134,749 131,496 131,460 130,445 104,478 397,705 254,711
Non-interest income 82,251 82,949 81,268 83,678 61,087 246,468 137,627
Less net (loss) gain on investment securities 371 (84) (460) 491 (3,246) (173) (3,016)
Less net (loss) gain on sale of other assets 1 (7) 4 3,476 (7) (2) (24)
Less gain on extinguishment of debt 1,895 1,895
Less increase (decrease) in market value of assets held in trust for deferred compensation (872) 7 306 315 (38) (559) 514
Non-interest income - as adjusted 82,751 83,033 81,418 79,396 62,483 247,202 138,258
Less tax equivalent adjustment on the increase in cash surrender value of life insurance 459 450 452 466 460 1,361 1,355
Net non-interest expense $51,539 $48,013 $49,590 $50,583 $41,535 $149,142 $115,098
Average assets $15,059,429 $14,631,999 $14,363,244 $14,466,066 $12,206,014 $14,687,441 $10,393,680
Annualized net non-interest expense to average assets 1.36% 1.32% 1.40% 1.39% 1.35% 1.36% 1.48%
Annualized net non-interest expense to average assets (without adjustments) 1.37% 1.38% 1.66% 1.56% 2.64% 1.46% 2.04%


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

Nine Months Ended
September 30,
3Q15 2Q15 1Q15 4Q14 3Q14 2015 2014
Non-interest income $82,251 $82,949 $81,268 $83,678 $61,087 $246,468 $137,627
Plus tax equivalent adjustment on the increase in cash surrender value of life insurance 459 450 452 466 460 1,361 1,355
Less net (loss) gain on investment securities 371 (84) (460) 491 (3,246) (173) (3,016)
Less net (loss) gain on sale of other assets 1 (7) 4 3,476 (7) (2) (24)
Less gain on extinguishment of debt 1,895 1,895
Less increase (decrease) in market value of assets held in trust for deferred compensation (872) 7 306 315 (38) (559) 514
Non-interest income - as adjusted $83,210 $83,483 $81,870 $79,862 $62,943 $248,563 $139,613
Net interest income $115,969 $114,473 $113,395 $119,811 $95,612 $343,837 $231,012
Tax equivalent adjustment 7,019 6,676 6,078 6,246 6,087 19,773 17,345
Net interest income on a fully tax equivalent basis 122,988 121,149 119,473 126,057 101,699 363,610 248,357
Plus non-interest income 82,251 82,949 81,268 83,678 61,087 246,468 137,627
Plus tax equivalent adjustment on the increase in cash surrender value of life insurance 459 450 452 466 460 1,361 1,355
Less net (loss) gain on investment securities 371 (84) (460) 491 (3,246) (173) (3,016)
Less net (loss) gain on sale of other assets 1 (7) 4 3,476 (7) (2) (24)
Less gain on extinguishment of debt 1,895 1,895
Less increase (decrease) in market value of assets held in trust for deferred compensation (872) 7 306 315 (38) (559) 514
Total revenue - as adjusted and on a fully tax equivalent basis $206,198 $204,632 $201,343 $205,919 $164,642 $612,173 $387,970
Total revenue - unadjusted $198,220 $197,422 $194,663 $203,489 $156,699 $590,305 $368,639
Core non-interest income to revenues ratio 40.35% 40.80% 40.66% 38.78% 38.23% 40.60% 35.99%
Non-interest income to revenues ratio (without adjustments) 41.49% 42.02% 41.75% 41.12% 38.98% 41.75% 37.33%

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):

3Q15 3Q14 2Q15
Average
Balance
Interest Yield/
Rate
Average
Balance
Interest Yield/
Rate
Average
Balance
Interest Yield/
Rate
Interest Earning Assets:
Loans held for sale $841,663 $7,904 3.76% $313,695 $2,826 3.60% $781,020 $6,839 3.50%
Loans (1) (2) (3):
Commercial-related credits
Commercial 3,372,279 34,481 4.00 2,118,864 23,536 4.35 3,309,519 34,884 4.17
Commercial loans collateralized by assignment of lease payments 1,674,939 15,647 3.74 1,561,484 14,669 3.76 1,634,583 15,235 3.73
Real estate commercial 2,568,539 27,558 4.20 2,108,492 24,213 4.49 2,522,473 27,145 4.26
Real estate construction 210,506 2,431 4.52 170,017 2,565 5.90 191,935 2,388 4.92
Total commercial-related credits 7,826,263 80,117 4.01 5,958,857 64,983 4.27 7,658,510 79,652 4.11
Other loans
Real estate residential 566,115 5,152 3.64 405,589 4,581 4.52 512,766 4,785 3.73
Home equity 226,365 2,298 4.03 251,969 2,549 4.01 233,867 2,301 3.95
Indirect 325,323 4,017 4.90 274,841 3,647 5.26 286,107 3,769 5.28
Consumer loans 85,044 807 3.76 69,699 774 4.41 76,189 780 4.11
Total other loans 1,202,847 12,274 4.05 1,002,098 11,551 4.57 1,108,929 11,635 4.21
Total loans, excluding purchased credit-impaired loans 9,029,110 92,391 4.06 6,960,955 76,534 4.36 8,767,439 91,287 4.18
Purchased credit-impaired loans 156,309 3,791 9.62 221,129 4,027 7.23 202,374 4,117 8.16
Total loans 9,185,419 96,182 4.15 7,182,084 80,561 4.45 8,969,813 95,404 4.27
Taxable investment securities 1,543,434 9,655 2.50 1,726,352 11,028 2.56 1,545,284 10,002 2.59
Investment securities exempt from federal income taxes (3) 1,356,702 16,541 4.88 1,087,340 13,908 5.12 1,261,567 15,600 4.95
Federal funds sold 38 1.00 15,460 14 0.38 126 1.00
Other interest earning deposits 138,542 89 0.25 341,758 211 0.24 85,935 57 0.27
Total interest earning assets $13,065,798 $130,371 3.96% $10,666,689 $108,548 4.04% $12,643,745 $127,902 4.06%
Non-interest earning assets 1,993,631 1,539,325 1,988,254
Total assets $15,059,429 $12,206,014 $14,631,999
Interest Bearing Liabilities:
Core funding:
Money market and NOW deposits $4,119,625 $1,832 0.18% $3,518,314 $1,469 0.17% $3,940,201 $1,634 0.17%
Savings deposits 965,060 124 0.05 906,630 128 0.06 972,327 135 0.06
Certificates of deposit 1,304,516 1,450 0.44 1,411,407 1,375 0.40 1,302,031 1,259 0.39
Customer repurchase agreements 244,845 114 0.18 210,543 102 0.19 241,942 104 0.17
Total core funding 6,634,046 3,520 0.21 6,046,894 3,074 0.20 6,456,501 3,132 0.19
Wholesale funding:
Brokered certificates of deposit (includes fee expense) 427,649 1,696 1.57 417,346 1,643 1.56 412,517 1,526 1.48
Other borrowings 1,117,166 2,167 0.76 632,163 2,132 1.32 1,078,297 2,095 0.77
Total wholesale funding 1,544,815 3,863 0.99 1,049,509 3,775 1.33 1,490,814 3,621 0.96
Total interest bearing liabilities $8,178,861 $7,383 0.36% $7,096,403 $6,849 0.38% $7,947,315 $6,753 0.34%
Non-interest bearing deposits 4,428,065 3,175,512 4,273,931
Other non-interest bearing liabilities 378,276 267,915 348,242
Stockholders' equity 2,074,227 1,666,184 2,062,511
Total liabilities and stockholders' equity $15,059,429 $12,206,014 $14,631,999
Net interest income/interest rate spread (4) $122,988 3.60% $101,699 3.66% $121,149 3.72%
Taxable equivalent adjustment 7,019 6,087 6,676
Net interest income, as reported $115,969 $95,612 $114,473
Net interest margin (5) 3.52% 3.56% 3.63%
Tax equivalent effect 0.21% 0.22% 0.21%
Net interest margin on a fully tax equivalent basis (5) 3.73% 3.78% 3.84%

(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.

Nine Months Ended September 30,
2015 2014
Average
Balance
Interest Yield/
Rate
Average
Balance
Interest Yield/
Rate
Interest Earning Assets:
Loans held for sale $760,956 $20,528 3.60% $105,977 $2,826 3.56%
Loans (1) (2) (3):
Commercial-related credits
Commercial 3,291,515 101,988 4.09 1,550,383 48,670 4.14
Commercial loans collateralized by assignment of lease payments 1,652,527 46,320 3.74 1,506,332 43,681 3.87
Real estate commercial 2,543,444 82,251 4.26 1,798,581 59,123 4.33
Real estate construction 197,970 8,900 5.93 152,813 5,372 4.64
Total commercial-related credits 7,685,456 239,459 4.11 5,008,109 156,846 4.13
Other loans
Real estate residential 524,349 14,965 3.81 343,718 10,397 4.03
Home equity 235,516 7,067 4.01 256,101 7,945 4.15
Indirect 293,111 11,271 5.14 269,344 10,629 5.28
Consumer loans 77,916 2,384 4.09 65,943 2,175 4.41
Total other loans 1,130,892 35,687 4.22 935,106 31,146 4.50
Total loans, excluding purchased credit-impaired loans 8,816,348 275,146 4.17 5,943,215 187,992 4.23
Purchased credit-impaired loans 199,378 12,845 8.61 164,455 7,169 5.83
Total loans 9,015,726 287,991 4.27 6,107,670 195,161 4.27
Taxable investment securities 1,548,369 29,591 2.55 1,516,260 27,968 2.46
Investment securities exempt from federal income taxes (3) 1,248,978 46,162 4.93 997,128 39,067 5.22
Federal funds sold 60 1.00 8,605 23 0.37
Other interest earning deposits 109,074 208 0.25 326,226 601 0.25
Total interest earning assets $12,683,163 $384,480 4.05% $9,061,866 $265,646 3.92%
Non-interest earning assets 2,004,278 1,331,814
Total assets $14,687,441 $10,393,680
Interest Bearing Liabilities:
Core funding:
Money market and NOW accounts $3,999,844 $5,062 0.17% $3,045,178 $3,216 0.14%
Savings accounts 963,291 379 0.05 879,336 334 0.05
Certificates of deposit 1,341,865 4,160 0.42 1,260,537 3,673 0.40
Customer repurchase agreements 244,217 337 0.18 195,136 293 0.20
Total core funding 6,549,217 9,938 0.20 5,380,187 7,516 0.19
Wholesale funding:
Brokered accounts (includes fee expense) 438,626 4,700 1.43 287,931 4,915 2.28
Other borrowings 977,130 6,232 0.84 368,220 4,858 1.74
Total wholesale funding 1,415,756 10,932 1.01 656,151 9,773 1.82
Total interest bearing liabilities $7,964,973 $20,870 0.35% $6,036,338 $17,289 0.38%
Non-interest bearing deposits 4,301,483 2,677,865
Other non-interest bearing liabilities 362,794 227,261
Stockholders' equity 2,058,191 1,452,216
Total liabilities and stockhlders' equity $14,687,441 $10,393,680
Net interest income/interest rate spread (4) $363,610 3.70% $248,357 3.54%
Taxable equivalent adjustment 19,773 17,345
Net interest income, as reported $343,837 $231,012
Net interest margin (5) 3.62% 3.41%
Tax equivalent effect 0.21% 0.25%
Net interest margin on a fully tax equivalent basis (5) 3.83% 3.66%

(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 September 30, 2015, September 30, 2014 and June 30, 2015 (dollars in thousands):

3Q15 3Q14 2Q15
Average
Balance
Interest Yield Average
Balance
Interest Yield Average
Balance
Interest Yield
Loan yield excluding acquisition accounting discount accretion on Taylor Capital loans:
Total loans, as reported $9,185,419 $96,182 4.15% $7,182,084 $80,561 4.45% $8,969,813 $95,404 4.27%
Less acquisition accounting discount accretion on non-PCI loans (43,899) 5,875 (35,285) 5,797 (50,333) 6,992
Less acquisition accounting discount accretion on PCI loans (31,745) 1,533 (18,579) 377 (34,514) 960
Total loans, excluding acquisition accounting discount accretion on Taylor Capital loans $9,261,063 $88,774 3.80% $7,235,948 $74,387 4.08% $9,054,660 $87,452 3.87%
Net interest margin on a fully tax equivalent basis, excluding acquisition accounting discount accretion on Taylor Capital loans:
Total interest earning assets, as reported $13,065,798 $122,988 3.73% $10,666,689 $101,699 3.78% $12,643,745 $121,149 3.84%
Less acquisition accounting discount accretion on non-PCI loans (43,899) 5,875 (35,285) 5,797 (50,333) 6,992
Less acquisition accounting discount accretion on PCI loans (31,745) 1,533 (18,579) 377 (34,514) 960
Total interest earning assets/net interest margin on a fully tax equivalent basis, excluding acquisition accounting discount accretion on Taylor Capital loans $13,141,442 $115,580 3.49% $10,720,553 $95,525 3.54% $12,728,592 $113,197 3.57%

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 nine months ended September 30, 2015 and 2014 (dollars in thousands):

Nine Months Ended September 30,
2015 2014
Average
Balance
Interest Yield Average
Balance
Interest Yield
Loan yield excluding acquisition accounting discount accretion on Taylor Capital loans:
Total loans, as reported $9,015,726 $287,991 4.27% $6,107,670 $195,161 4.27%
Less acquisition accounting discount accretion on non-PCI loans (50,627) 20,815 (8,894) 5,797
Less acquisition accounting discount accretion on PCI loans (33,772) 3,121 (4,683) 377
Total loans, excluding acquisition accounting discount accretion on Taylor Capital loans $9,100,125 $264,055 3.88% $6,121,247 $188,987 4.13%
Net interest margin on a fully tax equivalent basis, excluding acquisition accounting discount accretion on Taylor Capital loans:
Total interest earning assets, as reported $12,683,163 $363,610 3.83% $9,061,866 $248,357 3.66%
Less acquisition accounting discount accretion on non-PCI loans (50,627) 20,815 (8,894) 5,797
Less acquisition accounting discount accretion on PCI loans (33,772) 3,121 (4,683) 377
Total interest earning assets/net interest margin on a fully tax equivalent basis, excluding acquisition accounting discount accretion on Taylor Capital loans $12,767,562 $339,674 3.56% $9,075,443 $242,183 3.57%

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 third and second quarters of 2015, a provision for credit losses of approximately $4.1 million and $4.9 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 on earnings for the three months ended September 30, 2015 and June 30, 2015 (dollars in thousands):

3Q15 2Q15
Acquisition accounting discount accretion on Taylor Capital loans $7,408 $7,952
Provision for credit losses on Taylor Capital loans 4,133 4,896
Earnings impact of discount accretion and merger related provision 3,275 3,056
Tax expense 1,300 1,213
Earnings impact of discount accretion and merger related provision, net of tax $1,975 $1,843


For Information at MB Financial, Inc. contact: Berry Allen - Investor Relations E-Mail: beallen@mbfinancial.com

Source:MB Financial