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MB Financial, Inc. Reports Earnings for the Third Quarter of 2016

CHICAGO, Oct. 20, 2016 (GLOBE NEWSWIRE) -- MB Financial, Inc. (NASDAQ:MBFI), the holding company for MB Financial Bank, N.A., today announced third quarter 2016 net income available to common stockholders of $42.4 million, or $0.54 per diluted common share, compared to $41.4 million, or $0.56 per diluted common share, last quarter and $38.3 million, or $0.51 per diluted common share, in the third quarter a year ago.

KEY ITEMS

Completion of American Chartered Bancorp, Inc. Merger

We completed our merger with American Chartered Bancorp, Inc. ("American Chartered") on August 24, 2016. Consideration paid was $487.4 million, including $382.8 million in common stock (9.7 million shares), $102.3 million in cash and $2.3 million in preferred stock and stock-based awards assumed. The results of operations of American Chartered have been included in our results of operations for the 37 days between the date of the merger and quarter end. In addition, we have successfully converted American Chartered's clients to MB data processing systems and products. Amounts recognized in the financial statements for this business combination are only provisional at September 30, 2016.

Growth in Operating Earnings for the Quarter

Operating earnings available to common stockholders increased by $7.0 million to $49.9 million, or $0.63 per diluted common share, compared to last quarter, and increased by $11.6 million compared to the third quarter of last year.

The following table presents a reconciliation of net income to operating earnings (in thousands). Non-core items represent the difference between non-core non-interest income and non-core non-interest expense.

Nine Months Ended
September 30,
3Q16 2Q16 3Q15 2016 2015
Net income - as reported $44,419 $43,412 $40,278 $126,945 $115,341
Non-core items 15,363 2,454 17 21,152 9,952
Income tax expense on non-core items 7,867 1,003 6 9,447 3,949
Non-core items, net of tax 7,496 1,451 11 11,705 6,003
Operating earnings 51,915 44,863 40,289 138,650 121,344
Dividends on preferred shares 2,004 2,000 2,000 6,004 6,000
Operating earnings available to common stockholders $49,911 $42,863 $38,289 $132,646 $115,344
Diluted operating earnings per common share $0.63 $0.58 $0.51 $1.75 $1.53
Weighted average common shares outstanding for diluted operating earnings per common share 78,683,170 74,180,374 75,029,827 75,727,580 75,154,585

  • Net interest income on a fully tax equivalent basis increased $8.1 million (+6.2%) to $137.9 million in the third quarter of 2016 compared to the prior quarter due to higher average loan balances as a result of the loans acquired through the American Chartered merger as well as loan growth in our legacy portfolio.
  • Our net interest margin on a fully tax equivalent basis, excluding accretion on loans acquired in the Taylor Capital and American Chartered mergers ("bank mergers"), decreased seven basis points to 3.50% compared to 3.57% last quarter primarily due to lower yields earned on loans.
  • Our core non-interest income increased 18.0% to $107.7 million compared to $91.3 million in the prior quarter primarily due to an increase in mortgage banking and lease financing revenue. The increase in mortgage banking revenue was driven by higher origination fees as a result of higher origination volumes in the third quarter of 2016 and higher gains on sale margins. The increase in lease financing revenue was due to higher fees from the sale of third-party equipment maintenance contracts.
  • Our core non-interest expense increased $9.6 million (+6.6%) compared to the prior quarter primarily due to an increase in salaries and employee benefits expense, which increased mainly due to the increased staff from the American Chartered merger, and commission expense. Commission expense increased as a result of higher mortgage loan origination volumes and lease financing revenue noted above.
  • The Company adopted new authoritative accounting guidance under ASC Topic 718 "Compensation - Stock Compensation" in the third quarter of 2016, resulting in an income tax benefit of $1.8 million associated with stock-based compensation. Operating earnings were adjusted to exclude the $1.8 million income tax benefit in the table above.

Growth in Loan Balances During the Quarter

Loan balances, excluding purchased credit-impaired loans, increased $2.3 billion (+23.0%) during the third quarter primarily due to loans acquired through the American Chartered merger as well as the growth in legacy commercial-related credits. Legacy loan balances, excluding purchased credit-impaired loans, increased $433.8 million (+4.3%, or +17.2% annualized) during the third quarter of 2016.

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

9/30/2016 Change in Legacy Loan
Balances from 6/30/2016

to 9/30/2016
Legacy (1) Acquired (2) Total 6/30/2016 Amount Percent
Commercial-related credits:
Commercial $3,745,486 $640,326 $4,385,812 $3,561,500 $183,986 +5.2%
Commercial loans collateralized by assignment of lease payments (lease loans) 1,873,380 1,873,380 1,794,465 78,915 +4.4%
Commercial real estate 2,849,270 945,531 3,794,801 2,827,720 21,550 +0.8%
Construction real estate 415,171 35,852 451,023 357,807 57,364 +16.0%
Total commercial-related credits 8,883,307 1,621,709 10,505,016 8,541,492 341,815 +4.0%
Other loans:
Residential real estate 823,374 175,453 998,827 753,707 69,667 +9.2%
Indirect vehicle 522,271 522,271 491,480 30,791 +6.3%
Home equity 188,861 86,427 275,288 198,622 (9,761) -4.9%
Consumer 77,013 943 77,956 75,775 1,238 +1.6%
Total other loans 1,611,519 262,823 1,874,342 1,519,584 91,935 +6.1%
Total loans, excluding purchased credit-impaired 10,494,826 1,884,532 12,379,358 10,061,076 433,750 +4.3%
Purchased credit-impaired loans 137,025 24,313 161,338 136,811 214 +0.2%
Total loans $10,631,851 $1,908,845 $12,540,696 $10,197,887 $433,964 +4.3%

(1) Legacy loans include loans previously acquired through the Taylor Capital merger.
(2) Acquired loans refer to the September 30, 2016 balance for loans acquired in the American Chartered merger.

Growth in Deposit Balances During the Quarter

Low cost deposits increased $2.7 billion (+27.7%) primarily due to the deposits assumed in the American Chartered merger as well as strong growth in legacy non-interest bearing deposits during the third quarter. Low cost deposits represented 86% of total deposits at September 30, 2016. Non-interest bearing deposits increased $1.6 billion (+34.2%) during the third quarter and represented 45% of total deposits at September 30, 2016. Period end legacy low cost deposits increased $414.2 million in the quarter (+4.3%, or 17.2% annualized). Average legacy low cost deposits increased approximately $220 million (+2.3%, 9.1% annualized) during the quarter.

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

9/30/2016 Change in Legacy
Deposit Balances from
6/30/2016 to 9/30/2016
Legacy (1) Assumed (2) Total 6/30/2016 Amount Percent
Low cost deposits:
Non-interest bearing deposits $5,055,261 $1,355,073 $6,410,334 $4,775,364 $279,897 +5.9%
Money market, NOW and interest bearing deposits 3,896,438 763,969 4,660,407 3,771,111 125,327 +3.3
Savings deposits 1,030,834 117,066 1,147,900 1,021,845 8,989 +0.9
Total low cost deposits 9,982,533 2,236,108 12,218,641 9,568,320 414,213 +4.3
Certificates of deposit:
Certificates of deposit 1,145,303 152,883 1,298,186 1,220,562 (75,259) -6.2
Brokered certificates of deposit 738,960 23,479 762,439 647,214 91,746 +14.2
Total certificates of deposit 1,884,263 176,362 2,060,625 1,867,776 16,487 +0.9
Total deposits $11,866,796 $2,412,470 $14,279,266 $11,436,096 $430,700 +3.8%

(1) Legacy deposits include deposits previously assumed through the Taylor Capital merger.
(2) Assumed deposits refer to the September 30, 2016 balance for deposits assumed in the American Chartered merger.

Positive Credit Quality Metrics

Credit quality behaved well in the quarter.

  • Non-performing loans and non-performing assets decreased by $20.8 million and $15.4 million, respectively, from June 30, 2016 primarily due to problem loans repaid in the quarter.
  • Potential problem loans increased by $11.8 million in the quarter.
  • Net loan charge-offs during the quarter were $2.5 million, or 0.09% of loans (annualized), compared to net loan charge-offs of $2.2 million, or 0.09% of average loans (annualized), in the second quarter of 2016.
  • Our allowance for loan and lease losses to total loans ratio was 1.11% at September 30, 2016 compared to 1.33% at June 30, 2016. The decrease in this ratio was primarily due to the loans acquired through the American Chartered merger. American Chartered's historical allowance for loan and lease losses does not transfer in purchase accounting, but an acquisition accounting discount on loans was recorded within the loan balances. The total acquisition accounting discount on these acquired loans was $34.1 million as of acquisition date.
  • Provision for credit losses increased to $6.5 million in the third quarter of 2016 compared to $2.8 million in the prior quarter primarily due to loan growth in the quarter.

RESULTS OF OPERATIONS

Third Quarter Results

Net Interest Income

The following table presents net interest income and net interest margin on fully tax equivalent basis (dollars in thousands):

Change
from
2Q16 to 3Q16
Change
from
3Q15 to 3Q16
Nine Months Ended Change from 2015 to 2016
September 30,
3Q16 2Q16 3Q15 2016 2015
Net interest income - fully tax equivalent $137,893 $129,810 +6.2% $122,988 +12.1% $394,202 $363,610 +8.4%
Net interest income - fully tax equivalent, excluding acquisition accounting discount accretion on bank merger loans $131,733 $122,108 +7.9% $115,580 +14.0% $372,986 $339,674 +9.8%
Net interest margin - fully tax equivalent 3.68% 3.81% -0.13% 3.73% -0.05% 3.76% 3.83% -0.07%
Net interest margin - fully tax equivalent, excluding acquisition accounting discount accretion on bank merger loans 3.50% 3.57% -0.07% 3.49% +0.01% 3.54% 3.56% -0.02%

Net interest income on a fully tax equivalent basis increased in the third quarter of 2016 compared to the prior quarter due to higher average loan balances as a result of the loans acquired through the American Chartered merger as well as loan growth in the legacy portfolio during the quarter. Net interest income on a fully tax equivalent basis increased in the third quarter of 2016 compared to the third quarter of 2015 primarily due to an increase in average loans, partially offset by an increase in average borrowings and an increase in the average cost of deposits as a result of the increase in interest rates.

Our net interest margin on a fully tax equivalent basis, excluding accretion on loans acquired in bank mergers, was 3.50% in the third quarter of 2016 compared to 3.57% last quarter and 3.49% in the same quarter of last year. The decrease in our net interest margin on a fully tax equivalent basis, excluding accretion on loans acquired in bank mergers, in the third quarter of 2016 compared to last quarter was primarily due to lower yields earned on loans.

Net interest income on a fully tax equivalent basis increased in the nine months ended September 30, 2016 compared to the nine months ended September 30, 2015 primarily due to an increase in average loans, a result of the loan growth in the legacy portfolio and, to a lesser extent, loans acquired through the American Chartered merger, partially offset by an increase in average borrowings and an increase in the cost of deposits.

See the supplemental net interest margin tables in the "Net Interest Margin" section for further detail. Reconciliations of net interest income on a fully tax equivalent basis to net interest income on a fully tax equivalent basis, excluding acquisition accounting discount accretion on bank merger loans are also set forth in the tables in the "Net Interest Margin" section. In addition, reconciliations of net interest margin on a fully tax equivalent basis to net interest margin on a fully tax equivalent basis, excluding acquisition accounting discount accretion on bank merger loans are included in the same section.

Non-interest Income

The following table presents non-interest income (in thousands):

Nine Months Ended
September 30,
3Q16 2Q16 1Q16 4Q15 3Q15 2016 2015
Core non-interest income:
Key fee initiatives:
Mortgage banking revenue $49,095 $39,615 $27,482 $26,542 $30,692 $116,192 $90,884
Lease financing revenue, net 18,864 15,708 19,046 15,937 20,000 53,618 60,644
Commercial deposit and treasury management fees 12,957 11,548 11,878 11,711 11,472 36,383 33,572
Trust and asset management fees 8,244 8,236 7,950 6,077 6,002 24,430 17,468
Card fees 4,161 4,045 3,525 3,651 3,335 11,731 11,671
Capital markets and international banking service fees 3,313 2,771 3,227 2,355 2,357 9,311 5,793
Total key fee initiatives 96,634 81,923 73,108 66,273 73,858 251,665 220,032
Consumer and other deposit service fees 3,559 3,161 3,025 3,440 3,499 9,745 9,842
Brokerage fees 1,294 1,315 1,158 1,252 1,281 3,767 4,502
Loan service fees 1,792 1,961 1,752 1,890 1,531 5,505 4,369
Increase in cash surrender value of life insurance 1,055 850 854 864 852 2,759 2,527
Other operating income 3,337 2,043 1,836 1,344 1,730 7,216 5,930
Total core non-interest income 107,671 91,253 81,733 75,063 82,751 280,657 247,202
Non-core non-interest income:
Net gain (loss) on investment securities 269 (3) 371 269 (173)
Net gain (loss) on sale of assets 5 (2) (48) 1 (45) (2)
Increase (decrease) in market value of assets held in trust for deferred compensation (1) 711 480 8 565 (872) 1,199 (559)
Total non-core non-interest income 716 747 (40) 562 (500) 1,423 (734)
Total non-interest income $108,387 $92,000 $81,693 $75,625 $82,251 $282,080 $246,468

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

Core non-interest income for the third quarter of 2016 increased by $16.4 million, or 18.0%, to $107.7 million from the second quarter of 2016.

  • Mortgage banking revenue increased due to higher origination volumes as a result of the favorable interest rate environment and higher gains on sale margins.
  • Lease financing revenues increased due to an increase in fees from the sale of third-party equipment maintenance contracts.
  • Commercial deposit and treasury management fees increased primarily due to the increased customer base as a result of the American Chartered merger as well as new customer activity.
  • Capital markets and international banking services fees increased due to higher swap and syndication fees partially offset by lower M&A advisory fees.
  • Consumer and other deposit service fees increased due to the increased customer base as a result of the American Chartered merger as well as an increase in NSF fees.
  • Other operating income increased due to higher earnings from investments in Small Business Investment Companies.

Core non-interest income for the nine months ended September 30, 2016 increased by $33.5 million, or 13.5%, to $280.7 million from the nine months ended September 30, 2015.

  • Mortgage banking revenue increased due to higher mortgage servicing fees and higher gains on sale margins.
  • Lease financing revenues decreased due to lower residual gains and fees from the sale of third-party equipment maintenance contracts.
  • Commercial deposit and treasury management fees increased due to new customer activity as well as the increased customer base as a result of the American Chartered merger.
  • Trust and asset management fees increased due to the addition of new customers as well as the acquisitions of MSA Holdings, LLC ("MSA") on December 31, 2015 and the Illinois court-appointed guardianship and special needs trust business in the third quarter of 2015.
  • Capital markets and international banking services fees increased due to higher swap, syndication and M&A advisory fees partly offset by lower commercial real estate advisory fees.
  • Loan service fees increased due to higher unused line and letter of credit fees.
  • Other operating income increased due to higher earnings from investments in Small Business Investment Companies.

Non-interest Expense

The following table presents non-interest expense (in thousands):

Nine Months Ended
September 30,
3Q16 2Q16 1Q16 4Q15 3Q15 2016 2015
Core non-interest expense: (1)
Salaries and employee benefits expense:
Salaries $55,088 $51,383 $48,809 $48,433 $48,926 $155,280 $141,137
Commissions 12,318 10,822 10,348 9,794 11,513 33,488 35,770
Bonus and stock-based compensation 12,980 12,871 8,657 9,950 10,235 34,508 29,982
Health and accident insurance 6,377 6,079 5,599 4,646 5,640 18,055 16,429
Other salaries and benefits (2) 15,320 13,045 12,089 11,533 12,446 40,454 36,027
Total salaries and employee benefits expense 102,083 94,200 85,502 84,356 88,760 281,785 259,345
Occupancy and equipment expense 14,662 13,407 13,260 12,935 12,456 41,329 37,300
Computer services and telecommunication expense 9,731 9,266 8,750 8,548 8,558 27,747 25,599
Advertising and marketing expense 3,031 2,923 2,855 2,549 2,578 8,809 7,521
Professional and legal expense 2,779 3,220 2,492 2,715 1,496 8,491 5,878
Other intangible amortization expense 1,674 1,617 1,626 1,546 1,542 4,917 4,569
Net (gain) loss recognized on other real estate owned (A) (890) (297) (637) (256) 520 (1,824) 2,070
Net (gain) loss recognized on other real estate owned related to FDIC transactions (A) (18) 312 154 (549) 65 448 (296)
Other real estate expense, net (A) 187 243 137 76 (8) 567 423
Other operating expenses 21,067 19,814 18,366 18,932 18,782 59,247 55,296
Total core non-interest expense 154,306 144,705 132,505 130,852 134,749 431,516 397,705
Non-core non-interest expense: (1)
Merger related and repositioning expenses (B) 11,368 2,566 3,287 (4,186) 389 17,221 9,622
Branch exit and facilities impairment charges 155 155 70
Prepayment fees on interest bearing liabilities 85
Contribution to MB Financial Charitable Foundation (C) 4,000 4,000
Increase (decrease) in market value of assets held in trust for deferred compensation (D) 711 480 8 565 (872) 1,199 (559)
Total non-core non-interest expense 16,079 3,201 3,295 (3,621) (483) 22,575 9,218
Total non-interest expense $170,385 $147,906 $135,800 $127,231 $134,266 $454,091 $406,923

(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 and repositioning expenses table below, C – Other operating expenses, and D – Salaries and employee benefits.
(2) Includes payroll taxes, 401(k) and profit sharing contributions, overtime and temporary help expenses.

Core non-interest expense increased by $9.6 million, or 6.6%, from the second quarter of 2016 to $154.3 million for the third quarter of 2016.

  • Salaries and employee benefits expense increased primarily due to the increased staff from the American Chartered merger. Salaries and employee benefits expense also increased as a result of the following:
    • Commission expense increased due to higher mortgage commission expense resulting from higher mortgage origination volumes and higher leasing commission expense resulting from higher sales of third-party equipment maintenance contracts.
    • Other salaries and benefits expense increased due to increased temporary help in our IT and mortgage areas, increased overtime in our mortgage area and higher 401(k) match and profit sharing contribution expense.
  • Occupancy and equipment expense increased primarily due to the additional offices acquired through the American Chartered merger.
  • Non-interest expense was also impacted by higher gains recognized on other real estate owned properties.
  • Other operating expenses increased primarily due to higher filing and other loan expense as well as higher FDIC assessment fees as a result of a larger balance sheet due to the American Chartered merger.

Core non-interest expense increased by $33.8 million, or 8.5%, from the nine months ended September 30, 2015 to $431.5 million for the nine months ended September 30, 2016.

  • Salaries and employee benefits expense increased due to the following:
    • Salaries increased due to annual pay increases effective in the beginning of the second quarter, new hires and the increased staff from the American Chartered merger.
    • Commission expense decreased due to lower commissions paid in our leasing segment as a result of lower lease financing revenues.
    • Bonus and stock-based compensation increased due to an increase in bonus expense based on company performance through September 2016.
    • Other salaries and benefits expense increased due to increased temporary help in our IT and mortgage areas as well as higher 401(k) match and profit sharing contribution expense.
  • Occupancy and equipment expense increased due to higher depreciation expense and rental operating expenses as a result of the acquisition of MSA and the American Chartered merger, new offices opened at our mortgage banking segment and an office relocation in our leasing segment.
  • Computer services and telecommunication expense increased due to higher processing costs as a result of increased customer activity and investments in systems.
  • Advertising and marketing expense increased due to increased brand awareness advertising.
  • Professional and legal expense increased due to an increase in litigation and consulting fees.
  • Non-interest expense was also impacted by higher gains recognized on other real estate owned properties.
  • Other operating expenses increased due to higher FDIC premiums (as a result of MB Financial Bank, N.A. (the "Bank") exceeding $10 billion in assets), filing and other loan expense and card expenses (higher rewards and product development expense).

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

Nine Months Ended
September 30,
3Q16 2Q16 1Q16 4Q15 3Q15 2016 2015
Merger related and repositioning expenses:
Salaries and employee benefits expense $8,684 $324 $81 $(212) $3 $9,089 $36
Occupancy and equipment expense 104 8 2 112 275
Computer services and telecommunication expense 3,105 511 305 (103) 9 3,921 409
Advertising and marketing expense 53 41 23 2 117
Professional and legal expense 1,681 101 97 1,454 305 1,879 1,006
Branch exit and facilities impairment charges (2,908) 44 616 70 (2,864) 7,829
Contingent consideration expense - Celtic acquisition (1) 2,703 2,703
Other operating expenses 649 1,581 34 (5,943) 2,264 67
Total merger related and repositioning expenses $11,368 $2,566 $3,287 $(4,186) $389 $17,221 $9,622

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

In the third quarter of 2016, merger related and repositioning expenses primarily included costs incurred in connection with the American Chartered merger as well as a reversal of an exit cost due to a favorable lease termination on a branch acquired through the Taylor Capital merger. In the second quarter of 2016, merger related and repositioning expenses included a $1.5 million contract termination fee related to the American Chartered integration (reflected in other operating expenses). In the first quarter of 2016, merger related and repositioning expenses included an increase in our contingent consideration accrual for our acquisition of Celtic Leasing Corp. as a result of stronger lease residual performance than previously estimated. In the fourth quarter of 2015, merger related and repositioning expenses were impacted by the reversal of an accrual for a potential contingent loss we assumed in connection with the Taylor Capital merger (reflected in other operating expenses).

Operating Segments

The Company's operations consist of three reportable operating segments: Banking, Leasing and Mortgage Banking. Our Banking Segment generates revenues primarily from its lending, deposit gathering and fee business activities. Our Leasing Segment generates 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.

Banking Segment

The following tables summarize financial information, adjusted for funds transfer pricing and internal allocations of certain expenses and excluding non-core non-interest income and expense, for the Banking segment for the periods presented (in thousands):

Nine Months Ended
September 30,
3Q16 2Q16 1Q16 4Q15 3Q15 2016 2015
Net interest income$119,685 $112,152 $109,608 $111,691 $104,714 $341,445 $313,192
Provision for credit losses4,394 2,995 7,001 6,654 4,965 14,390 12,783
Net interest income after provision for credit losses115,291 109,157 102,607 105,037 99,749 327,055 300,409
Non-interest income:
Lease financing revenue, net890 789 679 1,180 637 2,358 1,570
Mortgage origination fees
Mortgage servicing fees
Other non-interest income38,927 35,144 34,369 31,772 31,435 108,440 93,361
Total non-interest income39,817 35,933 35,048 32,952 32,072 110,798 94,931
Non-interest expense:
Salaries and employee benefits expense:
Salaries38,575 35,951 34,527 34,840 34,940 109,054 101,065
Commissions1,172 1,424 1,396 1,503 932 3,991 3,429
Bonus and stock-based compensation10,553 10,852 6,476 7,838 8,250 27,881 24,642
Health and accident insurance4,045 3,816 3,461 2,765 3,508 11,322 10,551
Other salaries and benefits (1)9,612 8,171 7,542 7,144 7,789 25,325 22,268
Total salaries and employee benefits expense63,957 60,214 53,402 54,090 55,419 177,573 161,955
Occupancy and equipment expense11,724 10,561 10,430 10,344 9,982 32,715 30,168
Computer services and telecommunication expense7,418 6,945 6,446 6,200 6,179 20,809 18,783
Professional and legal expense1,566 2,385 1,486 1,709 766 5,437 3,074
Other operating expenses16,467 16,587 15,570 15,757 16,413 48,624 48,050
Total non-interest expense101,132 96,692 87,334 88,100 88,759 285,158 262,030
Income before income taxes53,976 48,398 50,321 49,889 43,062 152,695 133,310
Income tax expense16,287 14,353 14,927 14,998 12,184 45,567 39,458
Net income$37,689 $34,045 $35,394 $34,891 $30,878 $107,128 $93,852

(1) Includes payroll taxes, 401(k) and profit sharing contributions, overtime and temporary help expenses.

Net income from our Banking Segment for the third quarter of 2016 increased compared to the prior quarter. This increase in net income was primarily due to an increase in net interest income driven by the loans acquired through the American Chartered merger and loan growth in the legacy portfolio as well as an increase in other non-interest income, partially offset by an increase in provision for credit losses expense and higher salaries and employee benefits expense primarily due to the increased staff from the American Chartered merger.

Net income from our Banking Segment for the nine months ended September 30, 2016 increased compared to the nine months ended September 30, 2015. This increase in net income was primarily due to an increase in net interest income, driven by loan growth in the legacy portfolio and, to a lesser extent, loans acquired through the American Chartered merger, and an increase in other non-interest income. This increase was partly offset by higher salaries and employee benefits expense due to annual pay increases, new hires, increased staff from the American Chartered merger and bonus expense based on company performance as well as an increase in provision for credit losses expense.

Leasing Segment

The following tables summarize financial information, adjusted for funds transfer pricing and internal allocations of certain expenses and excluding non-core non-interest income and expense, for the Leasing segment for the periods presented (in thousands):

Nine Months Ended
September 30,
3Q16 2Q16 1Q16 4Q15 3Q15 2016 2015
Net interest income$2,168 $2,411 $2,423 $2,714 $2,832 $7,002 $8,762
Provision for credit losses1,964 (356) 437 242 2,045 1,598
Net interest income after provision for credit losses204 2,767 1,986 2,714 2,590 4,957 7,164
Non-interest income:
Lease financing revenue, net17,974 14,919 18,367 14,757 19,363 51,260 59,074
Mortgage origination fees
Mortgage servicing fees
Other non-interest income785 786 839 802 624 2,410 2,309
Total non-interest income18,759 15,705 19,206 15,559 19,987 53,670 61,383
Non-interest expense:
Salaries and employee benefits expense:
Salaries3,555 3,344 2,832 2,286 2,917 9,730 7,925
Commissions2,592 2,172 3,936 3,047 3,714 8,701 12,251
Bonus and stock-based compensation950 829 872 1,052 813 2,651 2,683
Health and accident insurance376 376 335 312 331 1,087 975
Other salaries and benefits (1)934 886 1,108 777 700 2,928 2,416
Total salaries and employee benefits expense8,407 7,607 9,083 7,474 8,475 25,097 26,250
Occupancy and equipment expense966 947 895 855 843 2,808 2,500
Computer services and telecommunication expense432 431 363 340 335 1,226 904
Professional and legal expense802 414 409 328 290 1,625 844
Other operating expenses1,997 1,716 1,447 1,501 1,439 5,160 4,368
Total non-interest expense12,604 11,115 12,197 10,498 11,382 35,916 34,866
Income before income taxes6,359 7,357 8,995 7,775 11,195 22,711 33,681
Income tax expense2,484 2,879 3,509 3,037 4,398 8,872 13,218
Net income$3,875 $4,478 $5,486 $4,738 $6,797 $13,839 $20,463

(1) Includes payroll taxes, 401(k) and profit sharing contributions, overtime and temporary help expenses.

Net income from our Leasing Segment for the third quarter of 2016 decreased compared to the prior quarter. This decrease in net income was primarily due to an increase provision for credit losses expense, as result of a potential problem loan, partly offset by an increase in lease financing revenues, as a result of an increase in fees from the sale of third-party equipment maintenance contracts.

Net income from our Leasing Segment for the nine months ended September 30, 2016 decreased compared to the nine months ended September 30, 2015. This decrease in net income was primarily due to a decrease in lease financing revenues, as a result of a decrease in residual gains and fees from the sale of third-party equipment maintenance contracts.

Mortgage Banking Segment

The following tables summarize financial information, adjusted for funds transfer pricing and internal allocations of certain expenses and excluding non-core non-interest income and expense, for the Mortgage Banking segment for the periods presented (in thousands):

Nine Months Ended
September 30,
3Q16 2Q16 1Q16 4Q15 3Q15 2016 2015
Net interest income$8,918 $8,039 $7,273 $7,364 $8,423 $24,230 $21,883
Provision for credit losses191 190 125 104 151 506 247
Net interest income after provision for credit losses8,727 7,849 7,148 7,260 8,272 23,724 21,636
Non-interest income:
Lease financing revenue, net
Mortgage origination fees39,962 31,417 16,894 17,596 23,449 88,273 77,106
Mortgage servicing fees9,133 8,198 10,588 8,946 7,243 27,919 13,778
Other non-interest income (3) 10 (3) 4
Total non-interest income49,095 39,615 27,479 26,552 30,692 116,189 90,888
Non-interest expense:
Salaries and employee benefits expense:
Salaries12,958 12,088 11,450 11,307 11,069 36,496 32,147
Commissions8,554 7,226 5,016 5,244 6,867 20,796 20,090
Bonus and stock-based compensation1,477 1,190 1,309 1,060 1,172 3,976 2,657
Health and accident insurance1,956 1,887 1,803 1,569 1,801 5,646 4,903
Other salaries and benefits (1)4,774 3,988 3,439 3,612 3,957 12,201 11,343
Total salaries and employee benefits expense29,719 26,379 23,017 22,792 24,866 79,115 71,140
Occupancy and equipment expense1,972 1,899 1,935 1,736 1,631 5,806 4,632
Computer services and telecommunication expense1,881 1,890 1,941 2,008 2,044 5,712 5,912
Professional and legal expense411 421 597 678 440 1,429 1,960
Other operating expenses6,587 6,309 5,484 5,040 5,627 18,380 17,165
Total non-interest expense40,570 36,898 32,974 32,254 34,608 110,442 100,809
Income before income taxes17,252 10,566 1,653 1,558 4,356 29,471 11,715
Income tax expense6,901 4,226 661 623 1,742 11,788 4,686
Net income$10,351 $6,340 $992 $935 $2,614 $17,683 $7,029

(1) Includes payroll taxes, 401(k) and profit sharing contributions, overtime and temporary help expenses.

Net income from our Mortgage Banking Segment for the third quarter of 2016 increased compared to the prior quarter. This increase in net income was due to an increase in mortgage origination fees and net interest income, partly offset by higher mortgage commission expense and volume-related other operating expenses. The increase in mortgage origination fees was driven by higher origination volumes in the third quarter of 2016, as a result of the favorable interest rate environment, and higher gains on sale margins.

Net income from our Mortgage Banking Segment for the nine months ended September 30, 2016 increased compared to the nine months ended September 30, 2015. This increase in net income was due to an increase in mortgage origination and servicing fees, partly offset by higher salaries expense due to annual pay increases and new hires and higher bonus expense.

The following table presents additional information regarding the Mortgage Banking Segment (dollars in thousands):

3Q16 2Q16 1Q16 4Q15 3Q15
Origination volume: $1,976,377 $1,709,044 $1,328,804 $1,437,057 $1,880,960
Refinance 48% 42% 49% 42% 34%
Purchase 52 58 51 58 66
Origination volume by channel:
Retail 22% 23% 19% 18% 18%
Third party 78 77 81 82 82
Mortgage servicing book (unpaid principal balance of loans serviced for others) at period end (1) $18,477,648 $17,739,626 $16,911,325 $16,218,613 $15,582,911
Mortgage servicing rights, recorded at fair value, at period end 154,730 134,969 145,800 168,162 148,097
Notional value of rate lock commitments, at period end 1,201,100 981,000 823,000 622,906 800,162

(1) 3Q15 does not include the unpaid principal balance of serviced loans sold in July 2015 that continued 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):

9/30/2016 6/30/2016 3/31/2016 12/31/2015 9/30/2015
Amount % of Total Amount % of Total Amount % of Total Amount % of Total Amount % of Total
Commercial-related credits:
Commercial $4,385,812 35% $3,561,500 35% $3,509,604 36% $3,616,286 37% $3,440,632 37%
Commercial loans collateralized by assignment of lease payments (lease loans) 1,873,380 15 1,794,465 18 1,774,104 18 1,779,072 18 1,693,540 18
Commercial real estate 3,794,801 30 2,827,720 28 2,831,814 28 2,695,676 27 2,580,009 27
Construction real estate 451,023 4 357,807 3 310,278 3 252,060 3 255,620 3
Total commercial-related credits 10,505,016 84 8,541,492 84 8,425,800 85 8,343,094 85 7,969,801 85
Other loans:
Residential real estate 998,827 8 753,707 7 677,791 7 628,169 6 607,171 6
Indirect vehicle 522,271 4 491,480 5 432,915 4 384,095 4 345,731 4
Home equity 275,288 2 198,622 2 207,079 2 216,573 2 223,173 2
Consumer 77,956 1 75,775 1 77,318 1 80,661 1 87,612 1
Total other loans 1,874,342 15 1,519,584 15 1,395,103 14 1,309,498 13 1,263,687 13
Total loans, excluding purchased credit-impaired loans 12,379,358 99 10,061,076 99 9,820,903 99 9,652,592 98 9,233,488 98
Purchased credit-impaired loans 161,338 1 136,811 1 140,445 1 141,406 2 155,693 2
Total loans $12,540,696 100% $10,197,887 100% $9,961,348 100% $9,793,998 100% $9,389,181 100%
Change from prior quarter +23.0% +2.4% +1.7% +4.3% +3.2%

Our loan balances, excluding purchased credit-impaired loans, increased $2.3 billion (+23.0%) during the third quarter of 2016 primarily due to the loans acquired from the American Chartered merger as well as growth in our legacy commercial-related credits. Legacy loan balances, excluding purchased credit-impaired loans, increased $433.8 million (+4.3%, or +17.2% annualized) during the third quarter of 2016.

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):

3Q16 2Q16 1Q16 4Q15 3Q15
Amount % of Total Amount % of Total Amount % of Total Amount % of Total Amount % of Total
Commercial-related credits:
Commercial $3,850,588 35% $3,522,641 35% $3,531,441 36% $3,492,161 37% $3,372,279 37%
Commercial loans collateralized by assignment of lease payments (lease loans) 1,825,505 16 1,777,763 18 1,754,558 18 1,708,404 18 1,674,939 18
Commercial real estate 3,183,131 29 2,821,516 28 2,734,148 28 2,627,004 28 2,568,539 28
Construction real estate 397,480 4 351,079 3 276,797 3 274,188 2 210,506 2
Total commercial-related credits 9,256,704 84 8,472,999 84 8,296,944 85 8,101,757 85 7,826,263 85
Other loans:
Residential real estate 862,393 7 710,384 7 640,231 7 612,275 6 566,115 6
Indirect vehicle 507,772 5 462,053 5 404,473 4 365,744 4 325,323 4
Home equity 231,399 2 202,228 2 210,678 2 219,440 2 226,365 2
Consumer 77,451 1 78,108 1 80,569 1 83,869 1 85,044 1
Total other loans 1,679,015 15 1,452,773 15 1,335,951 14 1,281,328 13 1,202,847 13
Total loans, excluding purchased credit-impaired loans 10,935,719 99 9,925,772 99 9,632,895 99 9,383,085 98 9,029,110 98
Purchased credit-impaired loans 135,548 1 136,415 1 139,451 1 154,562 2 156,309 2
Total loans $11,071,267 100% $10,062,187 100% $9,772,346 100% $9,537,647 100% $9,185,419 100%
Change from prior quarter +10.0% +3.0% +2.5% +3.8% +2.4%

ASSET QUALITY

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

9/30/2016 6/30/2016 3/31/2016 12/31/2015 9/30/2015
Non-performing loans:
Non-accrual loans (1) $52,135 $67,544 $93,602 $98,065 $92,302
Loans 90 days or more past due, still accruing interest 1,774 7,190 1,112 6,596 4,275
Total non-performing loans 53,909 74,734 94,714 104,661 96,577
Other real estate owned 33,105 27,663 28,309 31,553 29,587
Repossessed assets 453 459 187 81 216
Total non-performing assets $87,467 $102,856 $123,210 $136,295 $126,380
Potential problem loans (2) $111,594 $99,782 $110,193 $139,941 $122,966
Purchased credit-impaired loans $161,338 $136,811 $140,445 $141,406 $155,693
Total non-performing, potential problem and purchased credit-impaired loans $326,841 $311,327 $345,352 $386,008 $375,236
Total allowance for loan and lease losses $139,528 $135,614 $134,493 $128,140 $124,626
Accruing restructured loans (3) 28,582 26,715 27,269 26,991 20,120
Total non-performing loans to total loans 0.43% 0.73% 0.95% 1.07% 1.03%
Total non-performing assets to total assets 0.45 0.64 0.79 0.87 0.85
Allowance for loan and lease losses to non-performing loans 258.82 181.46 142.00 122.43 129.04

(1) Includes $23.4 million, $28.9 million, $24.0 million, $23.6 million and $21.4 million of restructured loans on non-accrual status at September 30, 2016, June 30, 2016, March 31, 2016, December 31, 2015 and September 30, 2015, 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 of 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 bank mergers) as of the dates indicated (in thousands):

9/30/2016 6/30/2016 3/31/2016 12/31/2015 9/30/2015
Commercial and lease $14,898 $29,509 $28,590 $37,076 $34,465
Commercial real estate 4,655 7,163 27,786 29,073 25,437
Consumer-related 34,356 38,062 38,338 38,512 36,675
Total non-performing loans $53,909 $74,734 $94,714 $104,661 $96,577

Non-performing commercial and lease loans decreased at September 30, 2016 compared to June 30, 2016 as a result of problem loans repaid during the quarter.

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):

9/30/2016 6/30/2016 3/31/2016 12/31/2015 9/30/2015
Balance at the beginning of quarter $27,663 $28,309 $31,553 $29,587 $28,517
Transfers in at fair value less estimated costs to sell 929 1,367 1,270 5,964 2,402
Acquired from business combination 4,148
Capitalized other real estate owned costs 96
Fair value adjustments 865 70 45 (721) (565)
Net gains on sales of other real estate owned 25 227 592 977 45
Cash received upon disposition (621) (2,310) (5,151) (4,254) (812)
Balance at the end of quarter $33,105 $27,663 $28,309 $31,553 $29,587

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,
3Q16 2Q16 1Q16 4Q15 3Q15 2016 2015
Allowance for credit losses, balance at the beginning of period $138,333 $137,732 $131,508 $128,038 $124,130 $131,508 $114,057
Provision for credit losses 6,549 2,829 7,563 6,758 5,358 16,941 14,628
Charge-offs:
Commercial loans 1,341 72 713 710 1,657 2,126 2,283
Commercial loans collateralized by assignment of lease payments (lease loans) 367 2,347 574 685 1,980 3,288 2,080
Commercial real estate 529 1,720 352 1,251 170 2,601 2,312
Construction real estate 7 144 23 5 151 11
Residential real estate 290 476 368 261 292 1,134 1,189
Home equity 376 619 238 407 358 1,233 1,078
Indirect vehicle 838 651 931 898 581 2,420 2,082
Consumer loans 409 395 412 550 467 1,216 1,391
Total charge-offs 4,157 6,424 3,588 4,785 5,510 14,169 12,426
Recoveries:
Commercial loans 665 952 380 235 456 1,997 1,514
Commercial loans collateralized by assignment of lease payments (lease loans) 3 467 50 12 11 520 1,100
Commercial real estate 324 1,843 594 385 2,402 2,761 6,338
Construction real estate 50 17 27 19 216 94 253
Residential real estate 45 82 24 98 337 151 417
Home equity 65 193 318 132 186 576 447
Indirect vehicle 436 501 463 499 334 1,400 1,354
Consumer loans 86 141 393 117 118 620 356
Total recoveries 1,674 4,196 2,249 1,497 4,060 8,119 11,779
Total net charge-offs 2,483 2,228 1,339 3,288 1,450 6,050 647
Allowance for credit losses 142,399 138,333 137,732 131,508 128,038 142,399 128,038
Allowance for unfunded credit commitments (2,871) (2,719) (3,239) (3,368) (3,412) (2,871) (3,412)
Allowance for loan and lease losses $139,528 $135,614 $134,493 $128,140 $124,626 $139,528 $124,626
Total loans, excluding loans held for sale $12,540,696 $10,197,887 $9,961,348 $9,793,998 $9,389,181 $12,540,696 $9,389,181
Average loans, excluding loans held for sale 11,071,267 10,062,187 9,772,346 9,537,647 9,185,419 10,304,741 9,015,726
Allowance for loan and lease losses to total loans, excluding loans held for sale 1.11% 1.33% 1.35% 1.31% 1.33% 1.11% 1.33%
Net loan charge-offs to average loans, excluding loans held for sale (annualized) 0.09 0.09 0.06 0.14 0.06 0.08 0.01

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

9/30/2016 6/30/2016 3/31/2016 12/31/2015 9/30/2015
Commercial related loans:
General reserve $112,653 $108,972 $98,001 $94,164 $93,903
Specific reserve 9,698 12,205 20,995 16,173 13,683
Consumer related reserve 17,177 14,437 15,497 17,803 17,040
Total allowance for loan and lease losses $139,528 $135,614 $134,493 $128,140 $124,626

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.

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 bank mergers were as follows for the three months ended September 30, 2016 (in thousands):

Non-
Accretable
Discount -
PCI Loans
Accretable
Discount -
PCI Loans
Accretable
Discount -
Non-PCI
Loans
Total
Balance at beginning of period $9,435 $12,677 $24,428 $46,540
Purchases 4,293 805 29,042 34,140
Charge-offs (110) (110)
Accretion (2,046) (4,114) (6,160)
Transfer (2,488) 2,488
Balance at end of period $11,130 $13,924 $49,356 $74,410

Changes in the purchase accounting discount for loans acquired in the bank mergers were as follows for the three months ended June 30, 2016 (in thousands):

Non-
Accretable
Discount -
PCI Loans
Accretable
Discount -
PCI Loans
Accretable
Discount -
Non-PCI
Loans
Total
Balance at beginning of period $10,954 $13,479 $29,818 $54,251
Charge-offs (9) (9)
Accretion (2,312) (5,390) (7,702)
Transfer (1,510) 1,510
Balance at end of period $9,435 $12,677 $24,428 $46,540

The $2.5 million and $1.5 million purchase accounting discount transfer from non-accretable discount on purchased credit-impaired loans to accretable discount for the three months ended September 30, 2016 and June 30, 2016, respectively, was due to better than expected cash flows on several 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):

9/30/2016 6/30/2016 3/31/2016 12/31/2015 9/30/2015
Securities available for sale:
Fair value
Government sponsored agencies and enterprises $53,992 $54,457 $64,762 $64,611 $65,461
States and political subdivisions 410,737 400,948 398,024 396,367 399,274
Mortgage-backed securities 1,173,306 785,367 834,559 893,656 847,426
Corporate bonds 210,193 225,525 224,530 219,628 228,251
Equity securities 11,128 11,098 10,969 10,761 10,826
Total fair value $1,859,356 $1,477,395 $1,532,844 $1,585,023 $1,551,238
Amortized cost
Government sponsored agencies and enterprises $53,480 $53,674 $63,600 $63,805 $64,008
States and political subdivisions 383,041 369,816 371,006 373,285 379,015
Mortgage-backed securities 1,160,772 769,109 820,825 888,325 834,791
Corporate bonds 208,940 224,730 225,657 222,784 228,711
Equity securities 10,932 10,872 10,814 10,757 10,701
Total amortized cost $1,817,165 $1,428,201 $1,491,902 $1,558,956 $1,517,226
Unrealized gain, net
Government sponsored agencies and enterprises $512 $783 $1,162 $806 $1,453
States and political subdivisions 27,696 31,132 27,018 23,082 20,259
Mortgage-backed securities 12,534 16,258 13,734 5,331 12,635
Corporate bonds 1,253 795 (1,127) (3,156) (460)
Equity securities 196 226 155 4 125
Total unrealized gain, net $42,191 $49,194 $40,942 $26,067 $34,012
Securities held to maturity, at amortized cost:
States and political subdivisions $939,491 $960,784 $986,340 $1,016,519 $1,002,963
Mortgage-backed securities 175,771 190,631 205,570 214,291 221,889
Total amortized cost $1,115,262 $1,151,415 $1,191,910 $1,230,810 $1,224,852

Our total investment securities, excluding FHLB and FRB stock, increased by $345.8 million to $3.0 billion at September 30, 2016 compared to $2.6 billion at June 30, 2016 primarily due to securities acquired through the American Chartered merger classified as available for sale.

DEPOSIT MIX

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

9/30/2016 6/30/2016 3/31/2016 12/31/2015 9/30/2015
Amount % of
Total
Amount % of
Total
Amount % of
Total
Amount % of
Total
Amount % of
Total
Low cost deposits:
Non-interest bearing deposits $6,410,334 45% $4,775,364 42% $4,667,410 40% $4,627,184 40% $4,434,067 39%
Money market, NOW and interest bearing deposits 4,660,407 33 3,771,111 33 4,048,054 35 4,144,633 36 4,129,414 37
Savings deposits 1,147,900 8 1,021,845 9 991,300 9 974,555 8 953,746 8
Total low cost deposits 12,218,641 86 9,568,320 84 9,706,764 84 9,746,372 84 9,517,227 84
Certificates of deposit:
Certificates of deposit 1,298,186 9 1,220,562 11 1,255,457 11 1,244,292 11 1,279,842 12
Brokered certificates of deposit 762,439 5 647,214 5 571,605 5 514,551 5 457,509 4
Total certificates of deposit 2,060,625 14 1,867,776 16 1,827,062 16 1,758,843 16 1,737,351 16
Total deposits $14,279,266 100% $11,436,096 100% $11,533,826 100% $11,505,215 100% $11,254,578 100%
Change from prior quarter +24.9% -0.8% +0.2% +2.2% +3.6%

Total low cost deposits increased $2.7 billion (+27.7%) to $12.2 billion at September 30, 2016 compared to June 30, 2016 and represented 86% of total deposits at quarter-end primarily due to the deposits assumed in the American Chartered merger as well as strong growth in our legacy non-interest bearing deposits. Non-interest bearing deposits grew by $1.6 billion (+34.2%) during the third quarter of 2016 and comprised 45% of total deposits at quarter-end. Period end legacy low cost deposits increased $414.2 million (+4.3%, or 17.2% annualized).

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

3Q16 2Q16 1Q16 4Q15 3Q15
Amount % of
Total
Amount % of
Total
Amount % of
Total
Amount % of
Total
Amount % of
Total
Low cost deposits:
Non-interest bearing deposits $5,524,043 43% $4,806,692 42% $4,606,008 40% $4,617,076 40% $4,428,065 39%
Money market, NOW and interest bearing deposits 4,161,913 33 3,836,134 33 4,109,150 36 4,214,099 37 4,119,625 36
Savings deposits 1,080,609 8 1,006,902 9 984,019 9 959,049 8 965,060 9
Total low cost deposits 10,766,565 84 9,649,728 84 9,699,177 85 9,790,224 85 9,512,750 84
Certificates of deposit:
Certificates of deposit 1,257,959 10 1,237,198 11 1,237,971 11 1,245,947 11 1,304,516 12
Brokered certificates of deposit 702,030 6 598,702 5 534,910 4 492,839 4 427,649 4
Total certificates of deposit 1,959,989 16 1,835,900 16 1,772,881 15 1,738,786 15 1,732,165 16
Total deposits $12,726,554 100% $11,485,628 100% $11,472,058 100% $11,529,010 100% $11,244,915 100%
Change from prior quarter +10.8% +0.1% -0.5% +2.5% +3.2%

Average total low cost deposits increased $1.1 billion (+11.6%) to $10.8 billion during the third quarter of 2016 compared to last quarter and represented 84% of average total deposits for the quarter due to the deposits assumed in the American Chartered merger as well as strong growth in our legacy non-interest bearing deposits. Average non-interest bearing deposits grew by $717.4 million (+14.92%) during the third quarter of 2016 and comprised 43% of average total deposits during the third quarter of 2016. Average legacy low cost deposits increased approximately $220 million (+2.3%, 9.1% annualized) during the quarter.

CAPITAL

Tangible book value per common share was $16.88 at September 30, 2016 compared to $17.48 at June 30, 2016 and $16.43 at September 30, 2015.

Our regulatory capital ratios remain strong. The Bank was categorized as “well capitalized” at September 30, 2016 under the Prompt Corrective Action (“PCA”) provisions. The Bank would be categorized as "well capitalized" under the fully phased in rules under the Basel III regulatory capital reform.

FORWARD-LOOKING STATEMENTS

When used in this press release and in reports filed with or furnished to the Securities and Exchange Commission (the "SEC"), 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 MB Financial-American Chartered merger might not be realized within the expected 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 losses, which could necessitate additional provisions for loan losses, resulting both from originated loans and loans acquired from other financial institutions; (3) competitive pressures among depository institutions; (4) interest rate movements and their impact on customer behavior, net interest margin and the value of our mortgage servicing rights; (5) the possibility that our mortgage banking business may experience increased volatility in its 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; (6) the impact of repricing and competitors’ pricing initiatives on loan and deposit products; (7) fluctuations in real estate values; (8) the ability to adapt successfully to technological changes to meet customers’ needs and developments in the market place; (9) the possibility that security measures implemented might not be sufficient to mitigate the risk of a cyber attack or cyber theft, and that such security measures might not protect against systems failures or interruptions; (10) our ability to realize the residual values of its direct finance, leveraged and operating leases; (11) the 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, changes in the interpretation and/or application of laws and regulations by regulatory authorities, 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)

9/30/2016 6/30/2016 3/31/2016 12/31/2015 9/30/2015
ASSETS
Cash and due from banks $351,009 $303,037 $271,732 $307,869 $234,220
Interest earning deposits with banks 125,250 123,086 113,785 73,572 66,025
Total cash and cash equivalents 476,259 426,123 385,517 381,441 300,245
Investment securities:
Securities available for sale, at fair value 1,859,356 1,477,395 1,532,844 1,585,023 1,551,238
Securities held to maturity, at amortized cost 1,115,262 1,151,415 1,191,910 1,230,810 1,224,852
Non-marketable securities - FHLB and FRB Stock 146,209 130,232 121,750 114,233 91,400
Total investment securities 3,120,827 2,759,042 2,846,504 2,930,066 2,867,490
Loans held for sale 899,412 843,379 632,196 744,727 676,020
Loans:
Total loans, excluding purchased credit-impaired loans 12,379,358 10,061,076 9,820,903 9,652,592 9,233,488
Purchased credit-impaired loans 161,338 136,811 140,445 141,406 155,693
Total loans 12,540,696 10,197,887 9,961,348 9,793,998 9,389,181
Less: Allowance for loan and lease losses 139,528 135,614 134,493 128,140 124,626
Net loans 12,401,168 10,062,273 9,826,855 9,665,858 9,264,555
Lease investments, net 277,647 233,320 216,046 211,687 184,223
Premises and equipment, net 283,112 243,319 238,578 236,013 234,115
Cash surrender value of life insurance 199,628 138,657 137,807 136,953 136,089
Goodwill 993,799 725,039 725,068 725,070 711,521
Other intangibles 65,395 41,569 43,186 44,812 37,520
Mortgage servicing rights, at fair value 154,730 134,969 145,800 168,162 148,097
Other real estate owned, net 33,105 27,663 28,309 31,553 29,587
Other real estate owned related to FDIC transactions 5,177 8,356 10,397 10,717 13,825
Other assets 431,623 352,081 339,390 297,948 346,814
Total assets $19,341,882 $15,995,790 $15,575,653 $15,585,007 $14,950,101
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits:
Noninterest bearing $6,410,334 $4,775,364 $4,667,410 $4,627,184 $4,434,067
Interest bearing 7,868,932 6,660,732 6,866,416 6,878,031 6,820,511
Total deposits 14,279,266 11,436,096 11,533,826 11,505,215 11,254,578
Short-term borrowings 1,496,319 1,246,994 884,101 1,005,737 940,529
Long-term borrowings 311,645 518,545 439,615 400,274 95,175
Junior subordinated notes issued to capital trusts 209,159 185,925 185,820 186,164 186,068
Accrued expenses and other liabilities 482,085 451,695 409,406 400,333 410,523
Total liabilities 16,778,474 13,839,255 13,452,768 13,497,723 12,886,873
Stockholders' Equity
Preferred stock 116,507 115,280 115,280 115,280 115,280
Common stock 855 757 756 756 756
Additional paid-in capital 1,674,341 1,288,777 1,284,438 1,280,870 1,277,348
Retained earnings 809,769 783,468 756,272 731,812 702,789
Accumulated other comprehensive income 23,763 28,731 24,687 15,777 20,968
Treasury stock (62,084) (60,732) (59,863) (58,504) (55,258)
Controlling interest stockholders' equity 2,563,151 2,156,281 2,121,570 2,085,991 2,061,883
Noncontrolling interest 257 254 1,315 1,293 1,345
Total stockholders' equity 2,563,408 2,156,535 2,122,885 2,087,284 2,063,228
Total liabilities and stockholders' equity $19,341,882 $15,995,790 $15,575,653 $15,585,007 $14,950,101

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

Nine Months Ended
September 30,
(Dollars in thousands, except per share data) 3Q16 2Q16 1Q16 4Q15 3Q15 2016 2015
Interest income:
Loans:
Taxable $118,675 $110,231 $104,923 $106,137 $100,573 $333,829 $298,187
Nontaxable 2,846 2,741 2,586 2,602 2,283 8,173 6,716
Investment securities:
Taxable 8,844 7,799 9,566 9,708 9,655 26,209 29,591
Nontaxable 10,382 10,644 10,776 10,969 10,752 31,802 30,005
Federal funds sold 1
Other interest earning accounts 164 125 141 110 89 430 208
Total interest income 140,911 131,540 127,992 129,527 123,352 400,443 364,707
Interest expense:
Deposits 6,681 5,952 5,622 5,357 5,102 18,255 14,301
Short-term borrowings 1,092 910 721 385 395 2,723 1,027
Long-term borrowings and junior subordinated notes 2,367 2,076 2,345 2,016 1,886 6,788 5,542
Total interest expense 10,140 8,938 8,688 7,758 7,383 27,766 20,870
Net interest income 130,771 122,602 119,304 121,769 115,969 372,677 343,837
Provision for credit losses 6,549 2,829 7,563 6,758 5,358 16,941 14,628
Net interest income after provision for credit losses 124,222 119,773 111,741 115,011 110,611 355,736 329,209
Non-interest income:
Mortgage banking revenue 49,095 39,615 27,482 26,542 30,692 116,192 90,884
Lease financing revenue, net 18,864 15,708 19,046 15,937 20,000 53,618 60,644
Commercial deposit and treasury management fees 12,957 11,548 11,878 11,711 11,472 36,383 33,572
Trust and asset management fees 8,244 8,236 7,950 6,077 6,002 24,430 17,468
Card fees 4,161 4,045 3,525 3,651 3,335 11,731 11,671
Capital markets and international banking service fees 3,313 2,771 3,227 2,355 2,357 9,311 5,793
Consumer and other deposit service fees 3,559 3,161 3,025 3,440 3,499 9,745 9,842
Brokerage fees 1,294 1,315 1,158 1,252 1,281 3,767 4,502
Loan service fees 1,792 1,961 1,752 1,890 1,531 5,505 4,369
Increase in cash surrender value of life insurance 1,055 850 854 864 852 2,759 2,527
Net gain (loss) on investment securities 269 (3) 371 269 (173)
Net gain (loss) on sale of assets 5 (2) (48) 1 (45) (2)
Other operating income 4,048 2,523 1,844 1,909 858 8,415 5,371
Total non-interest income 108,387 92,000 81,693 75,625 82,251 282,080 246,468
Non-interest expense:
Salaries and employee benefits expense 111,478 95,004 85,591 84,709 87,891 292,073 258,822
Occupancy and equipment expense 14,766 13,415 13,260 12,935 12,458 41,441 37,575
Computer services and telecommunication expense 12,836 9,777 9,055 8,445 8,567 31,668 26,008
Advertising and marketing expense 3,084 2,964 2,878 2,551 2,578 8,926 7,521
Professional and legal expense 4,460 3,321 2,589 4,169 1,801 10,370 6,884
Other intangible amortization expense 1,674 1,617 1,626 1,546 1,542 4,917 4,569
Branch exit and facilities impairment charges (2,908) 155 44 616 70 (2,709) 7,899
Net (gain) loss recognized on other real estate owned and other expense (721) 258 (346) (729) 577 (809) 2,197
Prepayment fees on interest bearing liabilities 85
Other operating expenses 25,716 21,395 21,103 12,989 18,782 68,214 55,363
Total non-interest expense 170,385 147,906 135,800 127,231 134,266 454,091 406,923
Income before income taxes 62,224 63,867 57,634 63,405 58,596 183,725 168,754
Income tax expense 17,805 20,455 18,520 19,798 18,318 56,780 53,413
Net income 44,419 43,412 39,114 43,607 40,278 126,945 115,341
Dividends on preferred shares 2,004 2,000 2,000 2,000 2,000 6,004 6,000
Net income available to common stockholders $42,415 $41,412 $37,114 $41,607 $38,278 $120,941 $109,341
Nine Months Ended
September 30,
3Q16 2Q16 1Q16 4Q15 3Q15 2016 2015
Common share data:
Basic earnings per common share $0.55 $0.56 $0.51 $0.57 $0.52 $1.62 $1.47
Diluted earnings per common share 0.54 0.56 0.50 0.56 0.51 1.60 1.45
Weighted average common shares outstanding for basic earnings per common share 77,506,885 73,475,258 73,330,731 73,296,602 74,297,281 74,780,943 74,478,164
Weighted average common shares outstanding for diluted earnings per common share 78,683,170 74,180,374 73,966,935 73,953,165 75,029,827 75,727,580 75,154,585
Common shares outstanding (at end of period) 83,555,257 73,740,348 73,639,487 73,678,329 73,776,196 83,555,257 73,776,196


Selected Financial Data:
Nine Months Ended
September 30,
3Q16 2Q16 1Q16 4Q15 3Q15 2016 2015
Performance Ratios:
Annualized return on average assets 1.02% 1.11% 1.02% 1.13% 1.06% 1.05% 1.05%
Annualized operating return on average assets (1) 1.20 1.15 1.09 1.06 1.06 1.15 1.10
Annualized return on average common equity 7.67 8.27 7.52 8.48 7.75 7.81 7.52
Annualized operating return on average common equity (1) 9.02 8.56 8.08 7.86 7.75 8.57 7.94
Annualized cash return on average tangible common equity (2) 12.99 13.53 12.47 13.97 12.74 13.00 12.43
Annualized cash operating return on average tangible common equity (3) 15.23 13.99 13.37 12.97 12.74 14.23 13.10
Net interest rate spread 3.50 3.64 3.63 3.72 3.60 3.59 3.70
Cost of funds (4) 0.28 0.27 0.27 0.24 0.23 0.27 0.23
Efficiency ratio (5) 62.69 65.32 63.49 63.95 65.35 63.80 64.97
Annualized net non-interest expense to average assets (6) 1.06 1.35 1.31 1.44 1.36 1.23 1.36
Core non-interest income to revenues (7) 43.98 41.40 39.38 36.91 40.35 41.72 40.60
Net interest margin 3.49 3.60 3.57 3.64 3.52 3.55 3.62
Tax equivalent effect 0.19 0.21 0.22 0.22 0.21 0.21 0.21
Net interest margin - fully tax equivalent basis (8) 3.68 3.81 3.79 3.86 3.73 3.76 3.83
Loans to deposits 87.82 89.17 86.37 85.13 83.43 87.82 83.43
Asset Quality Ratios:
Non-performing loans (9) to total loans 0.43% 0.73% 0.95% 1.07% 1.03% 0.43% 1.03%
Non-performing assets (9) to total assets 0.45 0.64 0.79 0.87 0.85 0.45 0.85
Allowance for loan and lease losses to non-performing loans (9) 258.82 181.46 142.00 122.43 129.04 258.82 129.04
Allowance for loan and lease losses to total loans 1.11 1.33 1.35 1.31 1.33 1.11 1.33
Net loan charge-offs to average loans, excluding loans held for sale (annualized) 0.09 0.09 0.06 0.14 0.06 0.08 0.01
Capital Ratios:
Tangible equity to tangible assets (10) 8.34% 9.21% 9.24% 8.99% 9.34% 8.34% 9.34%
Tangible common equity to tangible assets (11) 7.71 8.46 8.46 8.21 8.53 7.71 8.53
Tangible common equity to risk weighted assets (12) 8.82 9.75 9.54 9.34 9.69 8.82 9.69
Total capital (to risk-weighted assets) (13) 11.65 12.81 12.65 12.54 12.94 11.65 12.94
Tier 1 capital (to risk-weighted assets) (13) 9.39 11.77 11.60 11.54 11.92 9.39 11.92
Common equity tier 1 capital (to risk-weighted assets) (13) 8.70 9.52 9.33 9.27 9.56 8.70 9.56
Tier 1 capital (to average assets) (13) 9.29 10.41 10.38 10.40 10.43 9.29 10.43
Per Share Data:
Book value per common share (14) $29.28 $27.68 $27.26 $26.77 $26.40 $29.28 $26.40
Less: goodwill and other intangible assets, net of tax benefit, per common share 12.40 10.20 10.22 10.24 9.97 12.40 9.97
Tangible book value per common share (15) $16.88 $17.48 $17.04 $16.53 $16.43 $16.88 $16.43
Cash dividends per common share $0.19 $0.19 $0.17 $0.17 $0.17 $0.55 $0.48

(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.
(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, 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 accounting discount accretion on bank mergers 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, 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 prepayment fees on interest bearing liabilities, branch exit and facilities impairment charges, merger related and repositioning expenses, increase (decrease) in market value of assets held in trust for deferred compensation and contribution to MB Financial Charitable Foundation excluded from the non-interest expense components of these ratios, with tax equivalent adjustment for tax-exempt interest income and increase in cash surrender value of life insurance, as applicable; ratios of tangible equity to tangible assets, tangible common equity to tangible assets and tangible common equity to risk-weighted assets; tangible book value per common share; annualized operating return on average assets, annualized operating return on average common equity, annualized cash return on average tangible common equity and annualized cash operating return on average tangible common equity. Our management uses these non-GAAP measures, together with the related GAAP measures, in its analysis of our performance and in making business decisions. Management also uses these measures for peer comparisons.

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

Management believes that operating earnings adjusted for merger related and repositioning expenses is a useful measure because it excludes expenses that can significantly fluctuate from acquisition to acquisition. In addition, management believes that excluding these expenses provides investors and analysts a measure to better understand the Company's primary operations when comparing the periods presented in the earnings release.

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 and increase (decrease) in market value of assets held in trust for deferred compensation from the non-interest income components, and excluding prepayment fees on interest bearing liabilities, branch exit and facilities impairment charges, merger related and repositioning expenses, increase (decrease) in market value of assets held in trust for deferred compensation and contribution to MB Financial Charitable Foundation 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.

Reconciliations of net interest margin on a fully tax equivalent basis to net interest margin and net interest margin on a fully tax equivalent basis excluding acquisition accounting discount accretion on bank merger loans to net interest margin are 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):

9/30/2016 6/30/2016 3/31/2016 12/31/2015 9/30/2015
Stockholders' equity - as reported $2,563,408 $2,156,535 $2,122,885 $2,087,284 $2,063,228
Less: goodwill 993,799 725,039 725,068 725,070 711,521
Less: other intangible assets, net of tax benefit 42,507 27,020 28,071 29,128 24,388
Tangible equity $1,527,102 $1,404,476 $1,369,746 $1,333,086 $1,327,319

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

9/30/2016 6/30/2016 3/31/2016 12/31/2015 9/30/2015
Total assets - as reported $19,341,882 $15,995,790 $15,575,653 $15,585,007 $14,950,101
Less: goodwill 993,799 725,039 725,068 725,070 711,521
Less: other intangible assets, net of tax benefit 42,507 27,020 28,071 29,128 24,388
Tangible assets $18,305,576 $15,243,731 $14,822,514 $14,830,809 $14,214,192

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

9/30/2016 6/30/2016 3/31/2016 12/31/2015 9/30/2015
Common stockholders' equity - as reported $2,446,901 $2,041,255 $2,007,605 $1,972,004 $1,947,948
Less: goodwill 993,799 725,039 725,068 725,070 711,521
Less: other intangible assets, net of tax benefit 42,507 27,020 28,071 29,128 24,388
Tangible common equity $1,410,595 $1,289,196 $1,254,466 $1,217,806 $1,212,039

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

Nine Months Ended
September 30,
3Q16 2Q16 1Q16 4Q15 3Q15 2016 2015
Average common stockholders' equity - as reported $2,201,095 $2,014,822 $1,984,379 $1,945,772 $1,958,947 $2,067,257 $1,942,911
Less: average goodwill 835,894 725,011 725,070 711,669 711,521 762,262 711,521
Less: average other intangible assets, net of tax benefit 32,744 27,437 28,511 23,826 23,900 29,576 23,715
Average tangible common equity $1,332,457 $1,262,374 $1,230,798 $1,210,277 $1,223,526 $1,275,419 $1,207,675

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,
3Q16 2Q16 1Q16 4Q15 3Q15 2016 2015
Net income available to common stockholders - as reported $42,415 $41,412 $37,114 $41,607 $38,278 $120,941 $109,341
Add: other intangible amortization expense, net of tax benefit 1,088 1,051 1,057 1,005 1,002 3,196 2,970
Net cash flow available to common stockholders $43,503 $42,463 $38,171 $42,612 $39,280 $124,137 $112,311

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

Nine Months Ended
September 30,
3Q16 2Q16 1Q16 4Q15 3Q15 2016 2015
Net income - as reported $44,419 $43,412 $39,114 $43,607 $40,278 $126,945 $115,341
Less non-core items:
Net gain (loss) on investment securities 269 (3) 371 269 (173)
Net (loss) gain on sale of other assets 5 (2) (48) 1 (45) (2)
Increase (decrease) in market value of assets held in trust for deferred compensation - other operating income 711 480 8 565 (872) 1,199 (559)
Merger related and repositioning expenses (11,368) (2,566) (3,287) 4,186 (389) (17,221) (9,622)
Branch exit and facilities impairment charges (155) (155) (70)
Prepayment fees on interest bearing liabilities (85)
Contribution to MB Financial Charitable Foundation (4,000) (4,000)
Increase (decrease) in market value of assets held in trust for deferred compensation - other operating expense (711) (480) (8) (565) 872 (1,199) 559
Total non-core items (15,363) (2,454) (3,335) 4,183 (17) (21,152) (9,952)
Income tax expense on non-core items (6,074) (1,003) (577) 1,140 (6) (7,654) (3,949)
Income tax benefit resulting from adoption of new stock-based compensation guidance (1,793) (1,793)
Non-core items, net of tax (7,496) (1,451) (2,758) 3,043 (11) (11,705) (6,003)
Operating earnings 51,915 44,863 41,872 40,564 40,289 138,650 121,344
Dividends on preferred shares 2,004 2,000 2,000 2,000 2,000 6,004 6,000
Operating earnings available to common stockholders $49,911 $42,863 $39,872 $38,564 $38,289 $132,646 $115,344
Diluted operating earnings per common share $0.63 $0.58 $0.54 $0.52 $0.51 $1.75 $1.53
Weighted average common shares outstanding for diluted operating earnings per common share 78,683,170 74,180,374 73,966,935 73,953,165 75,029,827 75,727,580 75,154,585

Efficiency Ratio Calculation (Dollars in Thousands)

Nine Months Ended
September 30,
3Q16 2Q16 1Q16 4Q15 3Q15 2016 2015
Non-interest expense $170,385 $147,906 $135,800 $127,231 $134,266 $454,091 $406,923
Less merger related and repositioning expenses 11,368 2,566 3,287 (4,186) 389 17,221 9,622
Less prepayment fees on interest bearing liabilities 85
Less branch exit and facilities impairment charges 155 155 70
Less contribution to MB Financial Charitable Foundation 4,000 4,000
Less increase (decrease) in market value of assets held in trust for deferred compensation 711 480 8 565 (872) 1,199 (559)
Non-interest expense - as adjusted $154,306 $144,705 $132,505 $130,852 $134,749 $431,516 $397,705
Net interest income $130,771 $122,602 $119,304 $121,769 $115,969 $372,677 $343,837
Tax equivalent adjustment 7,122 7,208 7,195 7,307 7,019 21,525 19,773
Net interest income on a fully tax equivalent basis 137,893 129,810 126,499 129,076 122,988 394,202 363,610
Plus non-interest income 108,387 92,000 81,693 75,625 82,251 282,080 246,468
Plus tax equivalent adjustment on the increase in cash surrender value of life insurance 568 458 460 465 459 1,486 1,361
Less net gain (loss) on investment securities 269 (3) 371 269 (173)
Less net gain (loss) on sale of assets 5 (2) (48) 1 (45) (2)
Less increase (decrease) in market value of assets held in trust for deferred compensation 711 480 8 565 (872) 1,199 (559)
Net interest income plus non-interest income - as adjusted $246,132 $221,521 $208,692 $204,604 $206,198 $676,345 $612,173
Efficiency ratio 62.69% 65.32% 63.49% 63.95% 65.35% 63.80% 64.97%
Efficiency ratio (without adjustments) 71.24% 68.92% 67.56% 64.46% 67.74% 69.35% 68.93%

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

Nine Months Ended
September 30,
3Q16 2Q16 1Q16 4Q15 3Q15 2016 2015
Non-interest expense $170,385 $147,906 $135,800 $127,231 $134,266 $454,091 $406,923
Less merger related and repositioning expenses 11,368 2,566 3,287 (4,186) 389 17,221 9,622
Less prepayment fees on interest bearing liabilities 85
Less branch exit and facilities impairment charges 155 155 70
Less contribution to MB Financial Charitable Foundation 4,000 4,000
Less increase (decrease) in market value of assets held in trust for deferred compensation 711 480 8 565 (872) 1,199 (559)
Non-interest expense - as adjusted 154,306 144,705 132,505 130,852 134,749 431,516 397,705
Non-interest income 108,387 92,000 81,693 75,625 82,251 282,080 246,468
Less net gain (loss) on investment securities 269 (3) 371 269 (173)
Less net gain (loss) on sale of assets 5 (2) (48) 1 (45) (2)
Less increase (decrease) in market value of assets held in trust for deferred compensation 711 480 8 565 (872) 1,199 (559)
Non-interest income - as adjusted 107,671 91,253 81,733 75,063 82,751 280,657 247,202
Less tax equivalent adjustment on the increase in cash surrender value of life insurance 568 458 460 465 459 1,486 1,361
Net non-interest expense $46,067 $52,994 $50,312 $55,324 $51,539 $149,373 $149,142
Average assets $17,248,431 $15,740,658 $15,487,565 $15,244,633 $15,059,429 $16,162,861 $14,687,441
Annualized net non-interest expense to average assets 1.06% 1.35% 1.31% 1.44% 1.36% 1.23% 1.36%
Annualized net non-interest expense to average assets (without adjustments) 1.43% 1.43% 1.41% 1.34% 1.37% 1.42% 1.46%

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

Nine Months Ended
September 30,
3Q16 2Q16 1Q16 4Q15 3Q15 2016 2015
Non-interest income $108,387 $92,000 $81,693 $75,625 $82,251 $282,080 $246,468
Plus tax equivalent adjustment on the increase in cash surrender value of life insurance 568 458 460 465 459 1,486 1,361
Less net gain (loss) on investment securities 269 (3) 371 269 (173)
Less net gain (loss) on sale of assets 5 (2) (48) 1 (45) (2)
Less increase (decrease) in market value of assets held in trust for deferred compensation 711 480 8 565 (872) 1,199 (559)
Non-interest income - as adjusted $108,239 $91,711 $82,193 $75,528 $83,210 $282,143 $248,563
Net interest income $130,771 $122,602 $119,304 $121,769 $115,969 $372,677 $343,837
Tax equivalent adjustment 7,122 7,208 7,195 7,307 7,019 21,525 19,773
Net interest income on a fully tax equivalent basis 137,893 129,810 126,499 129,076 122,988 394,202 363,610
Plus non-interest income 108,387 92,000 81,693 75,625 82,251 282,080 246,468
Plus tax equivalent adjustment on the increase in cash surrender value of life insurance 568 458 460 465 459 1,486 1,361
Less net gain (loss) on investment securities 269 (3) 371 269 (173)
Less net gain (loss) on sale of assets 5 (2) (48) 1 (45) (2)
Less increase (decrease) in market value of assets held in trust for deferred compensation 711 480 8 565 (872) 1,199 (559)
Total revenue - as adjusted and on a fully tax equivalent basis $246,132 $221,521 $208,692 $204,604 $206,198 $676,345 $612,173
Total revenue - unadjusted $239,158 $214,602 $200,997 $197,394 $198,220 $654,757 $590,305
Core non-interest income to revenues ratio 43.98% 41.40% 39.38% 36.91% 40.35% 41.72% 40.60%
Non-interest income to revenues ratio (without adjustments) 45.32% 42.87% 40.64% 38.31% 41.49% 43.08% 41.75%

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):

3Q16 2Q16 3Q15
Average
Balance
Interest Yield/
Rate
Average
Balance
Interest Yield/
Rate
Average
Balance
Interest Yield/
Rate
Interest Earning Assets:
Loans held for sale $835,953 $7,074 3.38% $727,631 $6,311 3.47% $841,663 $7,904 3.76%
Loans (1) (2) (3):
Commercial-related credits:
Commercial 3,850,588 41,095 4.18 3,522,641 39,002 4.38 3,372,279 34,481 4.00
Commercial loans collateralized by assignment of lease payments (lease loans) 1,825,505 16,876 3.70 1,777,763 16,647 3.75 1,674,939 15,647 3.74
Real estate commercial 3,183,131 33,253 4.09 2,821,516 29,948 4.20 2,568,539 27,558 4.20
Real estate construction 397,480 3,921 3.86 351,079 3,436 3.87 210,506 2,431 4.52
Total commercial-related credits 9,256,704 95,145 4.02 8,472,999 89,033 4.16 7,826,263 80,117 4.01
Other loans:
Real estate residential 862,393 7,121 3.30 710,384 6,064 3.41 566,115 5,152 3.64
Home equity 231,399 2,252 3.87 202,228 1,969 3.92 226,365 2,298 4.03
Indirect 507,772 5,838 4.57 462,053 5,333 4.64 325,323 4,017 4.90
Consumer 77,451 821 4.21 78,108 767 3.95 85,044 807 3.76
Total other loans 1,679,015 16,032 3.80 1,452,773 14,133 3.91 1,202,847 12,274 4.05
Total loans, excluding purchased credit-impaired loans 10,935,719 111,177 4.04 9,925,772 103,166 4.18 9,029,110 92,391 4.06
Purchased credit-impaired loans 135,548 4,802 14.09 136,415 4,972 14.66 156,309 3,791 9.62
Total loans 11,071,267 115,979 4.17 10,062,187 108,138 4.32 9,185,419 96,182 4.15
Taxable investment securities 1,592,547 8,844 2.22 1,466,915 7,799 2.13 1,543,434 9,655 2.50
Investment securities exempt from federal income taxes (3) 1,318,855 15,972 4.84 1,339,465 16,375 4.89 1,356,702 16,541 4.88
Federal funds sold 36 0 1.00 35 0 1.00 38 0 1.00
Other interest earning deposits 103,061 164 0.63 100,200 125 0.50 138,542 89 0.25
Total interest earning assets $14,921,719 $148,033 3.95% $13,696,433 $138,748 4.07% $13,065,798 $130,371 3.96%
Non-interest earning assets 2,326,712 2,044,225 1,993,631
Total assets $17,248,431 $15,740,658 $15,059,429
Interest Bearing Liabilities:
Core funding:
Money market, NOW and interest bearing deposits $4,161,913 $2,299 0.22% $3,836,134 $2,049 0.21% $4,119,625 $1,832 0.18%
Savings deposits 1,080,609 231 0.09 1,006,902 174 0.07 965,060 124 0.05
Certificates of deposit 1,257,959 1,633 0.52 1,237,198 1,474 0.48 1,304,516 1,450 0.44
Customer repurchase agreements 210,688 113 0.21 162,038 85 0.21 244,845 114 0.18
Total core funding 6,711,169 4,276 0.25 6,242,272 3,782 0.24 6,634,046 3,520 0.21
Wholesale funding:
Brokered certificates of deposit (includes fee expense) 702,030 2,518 1.43 598,702 2,255 1.51 427,649 1,696 1.57
Other borrowings 1,533,344 3,346 0.85 1,573,083 2,901 0.73 1,117,166 2,167 0.76
Total wholesale funding 2,235,374 5,864 1.04 2,171,785 5,156 0.95 1,544,815 3,863 0.99
Total interest bearing liabilities $8,946,543 $10,140 0.45% $8,414,057 $8,938 0.43% $8,178,861 $7,383 0.36%
Non-interest bearing deposits 5,524,043 4,806,692 4,428,065
Other non-interest bearing liabilities 461,243 389,807 378,276
Stockholders' equity 2,316,602 2,130,102 2,074,227
Total liabilities and stockholders' equity $17,248,431 $15,740,658 $15,059,429
Net interest income/interest rate spread (4) $137,893 3.50% $129,810 3.64% $122,988 3.60%
Taxable equivalent adjustment 7,122 7,208 7,019
Net interest income, as reported $130,771 $122,602 $115,969
Net interest margin (5) 3.49% 3.60% 3.52%
Tax equivalent effect 0.19% 0.21% 0.21%
Net interest margin on a fully tax equivalent basis (5) 3.68% 3.81% 3.73%

(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,
2016 2015
Average
Balance
Interest Yield/
Rate
Average
Balance
Interest Yield/
Rate
Interest Earning Assets:
Loans held for sale $741,880 $19,351 3.48% $760,956 $20,528 3.60%
Loans (1) (2) (3):
Commercial-related credits
Commercial: 3,635,677 117,454 4.24 3,291,515 101,988 4.09
Commercial loans collateralized by assignment of lease payments (lease loans) 1,786,087 50,100 3.74 1,652,527 46,320 3.74
Real estate commercial 2,913,918 91,240 4.11 2,543,444 82,251 4.26
Real estate construction 341,988 10,259 3.94 197,970 8,900 5.93
Total commercial-related credits 8,677,670 269,053 4.07 7,685,456 239,459 4.11
Other loans:
Real estate residential 738,124 18,880 3.41 524,349 14,965 3.81
Home equity 214,829 6,254 3.89 235,516 7,067 4.01
Indirect 458,281 15,929 4.64 293,111 11,271 5.14
Consumer 78,705 2,382 4.04 77,916 2,384 4.09
Total other loans 1,489,939 43,445 3.89 1,130,892 35,687 4.22
Total loans, excluding purchased credit-impaired loans 10,167,609 312,498 4.11 8,816,348 275,146 4.17
Purchased credit-impaired loans 137,132 14,554 14.18 199,378 12,845 8.61
Total loans 10,304,741 327,052 4.24 9,015,726 287,991 4.27
Taxable investment securities 1,528,251 26,209 2.29 1,548,369 29,591 2.55
Investment securities exempt from federal income taxes (3) 1,340,185 48,926 4.87 1,248,978 46,162 4.93
Federal funds sold 38 0 1.00 60 0 1.00
Other interest earning deposits 105,660 430 0.54 109,074 208 0.25
Total interest earning assets $14,020,755 $421,968 4.02% $12,683,163 $384,480 4.05%
Non-interest earning assets 2,142,106 2,004,278
Total assets $16,162,861 $14,687,441
Interest Bearing Liabilities:
Core funding:
Money market, NOW and interest bearing deposits $4,036,193 $6,434 0.21% $3,999,844 $5,062 0.17%
Savings deposits 1,024,050 564 0.07 963,291 379 0.05
Certificates of deposit 1,244,425 4,520 0.49 1,341,865 4,160 0.42
Customer repurchase agreements 187,698 292 0.21 244,217 337 0.18
Total core funding 6,492,366 11,810 0.24 6,549,217 9,938 0.20
Wholesale funding:
Brokered accounts (includes fee expense) 612,210 6,737 1.47 438,626 4,700 1.43
Other borrowings 1,478,102 9,219 0.82 977,130 6,232 0.84
Total wholesale funding 2,090,312 15,956 1.02 1,415,756 10,932 1.01
Total interest bearing liabilities $8,582,678 $27,766 0.43% $7,964,973 $20,870 0.35%
Non-interest bearing deposits 4,980,904 4,301,483
Other non-interest bearing liabilities 416,667 362,794
Stockholders' equity 2,182,612 2,058,191
Total liabilities and stockholders' equity $16,162,861 $14,687,441
Net interest income/interest rate spread (4) $394,202 3.59% $363,610 3.70%
Taxable equivalent adjustment 21,525 19,773
Net interest income, as reported $372,677 $343,837
Net interest margin (5) 3.55% 3.62%
Tax equivalent effect 0.21% 0.21%
Net interest margin on a fully tax equivalent basis (5) 3.76% 3.83%

(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 tables below reflect the impact the acquisition accounting loan discount accretion on acquired loans had on the loan yield and net interest margin on a fully tax equivalent basis for the periods indicated (dollars in thousands):

3Q16 2Q16 3Q15
Average
Balance
Interest Yield Average
Balance
Interest Yield Average
Balance
Interest Yield
Loan yield excluding acquisition accounting discount accretion on bank merger loans:
Total loans, as reported $11,071,267 $115,979 4.17% $10,062,187 $108,138 4.32% $9,185,419 $96,182 4.15%
Less acquisition accounting discount accretion on non-PCI loans (34,315) 4,114 (27,123) 5,390 (43,899) 5,875
Less acquisition accounting discount accretion on PCI loans (23,110) 2,046 (23,272) 2,312 (31,745) 1,533
Total loans, excluding acquisition accounting discount accretion on bank merger loans $11,128,692 $109,819 3.93% $10,112,582 $100,436 3.99% $9,261,063 $88,774 3.80%
Net interest margin on a fully tax equivalent basis, excluding acquisition accounting discount accretion on bank merger loans:
Total interest earning assets, as reported $14,921,719 $137,893 3.68% $13,696,433 $129,810 3.81% $13,065,798 $122,988 3.73%
Less acquisition accounting discount accretion on non-PCI loans (34,315) 4,114 (27,123) 5,390 (43,899) 5,875
Less acquisition accounting discount accretion on PCI loans (23,110) 2,046 (23,272) 2,312 (31,745) 1,533
Total interest earning assets/net interest margin on a fully tax equivalent basis, excluding acquisition accounting discount accretion on bank merger loans $14,979,144 $131,733 3.50% $13,746,828 $122,108 3.57% $13,141,442 $115,580 3.49%

Nine Months Ended September 30,
2016 2015
Average
Balance
Interest Yield Average
Balance
Interest Yield
Loan yield excluding acquisition accounting discount accretion on bank merger loans:
Total loans, as reported $10,304,741 $327,052 4.24% $9,015,726 $287,991 4.27%
Less acquisition accounting discount accretion on non-PCI loans (32,056) 14,455 (50,627) 20,815
Less acquisition accounting discount accretion on PCI loans (24,206) 6,761 (33,772) 3,121
Total loans, excluding acquisition accounting discount accretion on bank merger loans $10,361,003 $305,836 3.94% $9,100,125 $264,055 3.88%
Net interest margin on a fully tax equivalent basis, excluding acquisition accounting discount accretion on bank merger loans:
Total interest earning assets, as reported $14,020,755 $394,202 3.76% $12,683,163 $363,610 3.83%
Less acquisition accounting discount accretion on non-PCI loans (32,056) 14,455 (50,627) 20,815
Less acquisition accounting discount accretion on PCI loans (24,206) 6,761 (33,772) 3,121
Total interest earning assets/net interest margin on a fully tax equivalent basis, excluding acquisition accounting discount accretion on bank merger loans $14,077,017 $372,986 3.54% $12,767,562 $339,674 3.56%

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

Source:MB Financial