MB Financial, Inc. Reports First Quarter Net Income of $20.0 Million

MB Financial, Inc. (NASDAQ: MBFI), the holding company for MB Financial Bank, N.A., today announced 2014 first quarter net income of $20.0 million.

Key items include:

Net Interest Margin Increased:

• Fully taxable equivalent net interest margin was 3.64% for the first quarter of 2014 compared to 3.50% for the prior quarter and 3.59% for the first quarter of 2013.
• The increase from the fourth quarter of 2013 was due to lower cash balances held during the first quarter of 2014 (approximately ten basis points of net interest margin improvement) as well as higher yields on taxable investment securities (approximately five basis points of net interest margin improvement).
• The increase from the first quarter of 2013 was due to a lower cost of funds and improved taxable investment securities yields, partially offset by lower loan yields.

Fee Income Declined and Non-interest Expense Improved from the Prior Quarter:

• Capital markets and international banking fees, treasury management fees and trust and asset management fees all increased from the prior quarter.
• Leasing revenues declined due to lower equipment remarketing gains and lower fees from the sale of third-party equipment maintenance contracts.
• Core non-interest expense improved from the prior quarter due to lower salaries and employee benefits expense, lower computer services expense, lower professional and legal expense and a reduction in expenses related to the clawback liability under loss sharing agreements with the FDIC.

Credit Quality Metrics:

• Our provision for credit losses remained low at approximately $1.2 million for the quarter, but increased from a negative provision of $3.0 million in the prior quarter.
• Non-performing loans increased during the quarter compared to the first and fourth quarters of 2013 due to a $22.7 million relationship being placed on non-accrual status during the first quarter of 2014.
• Potential problem loan balances improved from year end and a year ago by $10.8 million and $46.7 million, respectively.
• Other real estate owned balances improved from year end and a year ago by $2.4 million and $10.5 million, respectively.
• Included in other operating expenses was a $2.0 million write-off of an investment in low-income housing funds that invested in real estate projects. We view this write-off as a credit cost due to the nature of the investment. See below for additional details.

Balance Sheet Activity - Average Loans and Average Deposits Increased, Low Cost Deposit Flows Strong:

• Average loans, excluding covered loans, increased approximately $71 million (+1.3%) from the fourth quarter and approximately $142 million (+2.7%) from the first quarter one year ago. Loans, excluding covered loans, at the end of the quarter increased $88 million (+1.7%) from a year ago but decreased $82 million (-1.5%) from year end.
• Average low cost deposit flows were strong, increasing approximately $76 million (+1.3%) during the first quarter. Low cost deposits at the end of the first quarter increased $161 million (+2.7%) from year end. We typically see low cost deposit outflows during the first quarter. Stable low cost deposits decrease our reliance on wholesale funding sources and allow us to maintain a lower cost of funds.
• We continue to maintain robust capital and liquidity ratios and are positioned well for completion of our pending merger with Taylor Capital Group, Inc. Cash and interest bearing deposits at our holding company totaled approximately $140 million as of March 31, 2014.

Taylor Capital Group, Inc. Pending Merger Update:

The stockholders of both MB Financial and Taylor Capital approved the merger agreement in the first quarter of 2014. The completion of the merger remains subject to regulatory approvals and the satisfaction of customary closing conditions.

As disclosed in Taylor Capital’s Annual Report on Form 10-K for the year ended December 31, 2013, Taylor Capital has been notified by its regulators that its Cole Taylor Bank subsidiary may be cited with a violation of Section 5 of the Federal Trade Commission Act. The potential violation relates to the account opening process associated with a former deposit program relationship with an organization that provides electronic financial disbursements and payment services to the higher education industry. Cole Taylor Bank exited the relationship in August 2013. As part of the regulatory approval process for the merger, an evaluation of this situation is being conducted by Taylor Capital’s regulators. That evaluation is ongoing and the closing of the pending merger could be delayed beyond June 30, 2014.

RESULTS OF OPERATIONS

First Quarter Results

Net Interest Income

Net interest income on a fully tax equivalent basis decreased $1.0 million from the fourth quarter of 2013 due to two fewer days in the quarter. Our net interest margin on a fully tax equivalent basis for the first quarter of 2014 increased 14 basis points compared to the fourth quarter of 2013 primarily due to lower cash balances held during the first quarter of 2014 (approximately ten basis points of net interest margin improvement). Also positively impacting net interest margin were higher yields on taxable investment securities (approximately five basis points of net interest margin improvement). With the exception of covered loans, which declined by 133 basis points, loan yields were consistent with the prior quarter.

Net interest income on a fully tax equivalent basis decreased slightly from the first quarter of 2013. Our net interest margin on a fully tax equivalent basis for the first quarter of 2014 increased five basis points compared to the first quarter of 2013 due to a lower cost of funds and improved taxable investment securities yields, partially offset by lower loan yields.

See the supplemental net interest margin tables for further detail.

Non-interest Income (in thousands):

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

Core non-interest income for the first quarter of 2014 decreased approximately 6.9% from the fourth quarter of 2013.

• Leasing revenues declined due to lower equipment remarketing gains and lower fees from the sale of third-party equipment maintenance contracts.
• Commercial deposit and treasury management fees increased during the first quarter due to robust new customer activity.
• Trust and asset management fees increased due to the growth in investment management fees as a result of new customers added and the impact of higher equity values on assets under management and related fee revenue.

Core non-interest income for the first quarter of 2014 decreased approximately 5.5% from the first quarter of 2013.

• Leasing revenues declined due to lower equipment remarketing gains and lower fees from the sale of third-party equipment maintenance contracts.
• Commercial deposit and treasury management fees increased in the first quarter due to robust new customer activity.
• Trust and asset management fees increased due to the growth in investment management fees as a result of new customers added and the impact of higher equity values on assets under management and related fee revenue.

Non-interest Expense (in thousands):

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

Core non-interest expense decreased by $3.0 million, or 3.9%, from the fourth quarter of 2013 to the first quarter of 2014.

• Professional and legal expense decreased due to lower consulting and legal costs.
• Other operating expense decreased as a result of a decrease in the clawback liability related to our loss share agreements with the FDIC.
• Salaries and employee benefits decreased primarily due to a decrease in leasing commissions as a result of lower leasing revenues.

Core non-interest expense increased by $2.4 million, or 3.4%, from the first quarter of 2013 to the first quarter of 2014.

• Computer services and telecommunication expenses increased due primarily to an increase in spending on IT security, data warehouse, investments in our key fee initiatives, as well as higher transaction volumes in leasing, treasury management and card areas.
• Salaries and employee benefits increased due to annual salary increases, long-term incentive expense, taxes and temporary staffing needs.

Non-core non-interest expense for the first quarter of 2014 increased from the preceding quarter primarily due to a write-off of an investment in low-income housing funds that invested in real estate projects. This investment was made in 2006 as a community development initiative. The extended slow real estate recovery in some low income areas of Chicago negatively impacted this investment.

LOAN PORTFOLIO

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):

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

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

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

ASSET QUALITY

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

(1) Includes $15.6 million, $25.0 million, $22.3 million, $20.9 million and $26.3 million of restructured loans on non-accrual status at March 31, 2014, December 31, 2013, September 30, 2013, June 30, 2013 and March 31, 2013, respectively.

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

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

Non-performing loans increased during the quarter compared to the first and fourth quarters of 2013 due to a $22.7 million relationship being placed on non-accrual status during the first quarter of 2014. We believe the relationship is well collateralized and minimal additional allowance was required when the relationship migrated to non-performing status during the quarter.

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

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

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

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

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

INVESTMENT SECURITIES

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

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

We do not have any meaningful direct or indirect holdings of subprime residential mortgage loans, home equity lines of credit, or any Fannie Mae or Freddie Mac preferred or common equity securities in our investment securities portfolio. Additionally, more than 95% of our mortgage-backed securities are agency guaranteed.

DEPOSIT MIX

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

Average low cost deposits increased by $75.7 million (+1.3%) and $257.9 million (+4.5%) from the fourth and first quarters of 2013, respectively, to the first quarter of 2014, driven by growth in noninterest bearing deposits. Our deposit mix improved over the past twelve months as low cost deposits now comprise 81% of total deposits at March 31, 2014 compared to 76% at March 31, 2013.

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

CAPITAL

Tangible book value per common share increased to $16.43 at March 31, 2014 compared to $15.57 a year ago primarily due to retained net income less dividends. Our regulatory capital ratios remain strong. MB Financial Bank, N.A. was categorized as “well capitalized” at March 31, 2014 under the Prompt Corrective Action (“PCA”) provisions.

FORWARD-LOOKING STATEMENTS

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

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

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

TABLES TO FOLLOW

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

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

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

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

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

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

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

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

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

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

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

NON-GAAP FINANCIAL INFORMATION

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

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

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

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

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

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

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

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

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

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

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

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

Efficiency Ratio Calculation (Dollars in Thousands)