MB Financial, Inc. Reports Second Quarter Net Income of $23.1 Million

MB Financial, Inc. (NASDAQ: MBFI), the holding company for MB Financial Bank, N.A., today announced 2014 second quarter net income of $23.1 million compared to $20.0 million last quarter and $25.3 million in the second quarter a year ago.

Key items for the second quarter include:

Net Interest Income Increased Modestly:

• Net interest income on a fully tax equivalent basis increased $840 thousand from the first quarter of 2014 due to an extra day in the quarter, and increased $675 thousand from the second quarter of 2013 primarily due to higher yields on taxable investment securities partly offset by lower loan yields.
• Fully taxable equivalent net interest margin was 3.53% for the second quarter of 2014 compared to 3.64% for the prior quarter and 3.61% for the second quarter of 2013. Higher cash balances in the second quarter of 2014 resulting from strong deposit inflows had minimal impact on net interest income, but reduced net interest margin by 11 basis points.

Credit Quality Metrics Improved during the Quarter:

• We recorded a negative provision for credit losses of $2.0 million in the second quarter compared to a positive provision for credit losses of $1.2 million in the prior quarter as a result of reduced levels of classified and special mention assets.
• Non-performing loans decreased by $8.0 million from March 31, 2014.
• Potential problem loan balances improved by $5.3 million from March 31, 2014.
• Special mention assets decreased by $24.0 million compared to March 31, 2014.

Fee Income from Key Fee Initiatives Increased $2.8 million, 9.6%, from the Prior Quarter and $2.3 million, 7.9%, from the Second Quarter of 2013:

• Leasing revenues increased due to higher fees from the sale of third-party equipment maintenance contracts compared to the prior quarter, but decreased slightly compared to the second quarter of 2013.
• Capital markets and international banking service fees increased due to higher M&A advisory and syndication fees.
• Card fees increased due to prepaid card program growth.
• Commercial deposit and treasury management fees increased compared to the second quarter of 2013 due to new customer activity, but slightly decreased compared to the prior quarter.

Core Non-interest Expenses Increased $3.9 million, 5.3%, from the Prior Quarter and $4.6 million, 6.4%, from the Second Quarter of 2013:

• Salaries and employee benefits increased compared to the prior quarter primarily due to annual salary increases, an extra day in the quarter, an increase in leasing commissions as a result of higher leasing revenues and higher long-term incentive expense. Compared to the second quarter of 2013, salaries and employee benefits increased due to annual salary increases and higher long-term incentive expense, health insurance costs and temporary staffing costs.
• Other operating expense increased from the prior quarter as a result of an increase of $1.4 million in the clawback liability related to our loss share agreements with the FDIC. The increase was due to better than expected performance of the acquired loan portfolios (faster resolution and lower charge-offs). Compared to the second quarter of 2013, other operating expense increased as a result of an increase in filing and other loan expense, as well as higher FDIC assessments due to our larger balance sheet, increased FDIC clawback liability and higher currency delivery expenses related to new treasury management accounts.

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

• Loans, excluding covered loans, increased approximately $27 million (+0.5%) from March 31, 2014 and approximately $62 million (+1.2%) from June 30, 2013.
• Low cost deposit flows were strong, increasing approximately $335 million (+5.5%) from March 31, 2014 and approximately $615 million (+10.6%) from June 30, 2013.
• Noninterest bearing deposits as a percent of total deposits were 34% at June 30, 2014.
• We continue to maintain robust levels of capital and liquidity and are positioned well to complete our pending merger with Taylor Capital Group, Inc. Cash and interest bearing deposits at our holding company totaled approximately $154 million as of June 30, 2014.

RESULTS OF OPERATIONS

Second Quarter Results

Net Interest Income

Net interest income on a fully tax equivalent basis increased $840 thousand from the first quarter of 2014 primarily due to an extra day in the quarter. Our net interest margin on a fully tax equivalent basis for the second quarter of 2014 decreased 11 basis points compared to the first quarter of 2014 primarily due to higher cash balances held during the second quarter of 2014 as a result of the strong deposit inflows. Higher deposits and cash balances had minimal impact on net interest income.

Net interest income on a fully tax equivalent basis increased $675 thousand from the second quarter of 2013 primarily due to higher yields on taxable investment securities partly offset by lower loan yields. Our net interest margin on a fully tax equivalent basis for the second quarter of 2014 decreased eight basis points compared to the second quarter of 2013 primarily due to higher cash balances.

See the supplemental net interest margin tables for further detail.

Non-interest Income (in thousands):

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

Core non-interest income for the second quarter of 2014 increased approximately 9.7% from the first quarter of 2014.

• Leasing revenues increased due to higher fees from the sale of third-party equipment maintenance contracts.
• Capital markets and international banking service fees increased due to higher M&A advisory and syndication fees.
• Card fees increased due to a new payroll prepaid card program.

Core non-interest income for the first six months of 2014 decreased approximately 1.8% from the first six months of 2013.

• Commercial deposit and treasury management fees increased in the first half of 2014 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.
• Card fees increased due to a new payroll prepaid card program as well as higher ATM and debit card fees.
• Leasing revenues declined due to lower equipment remarketing gains and lower fees from the sale of third-party equipment maintenance contracts.
• Loan service fees decreased due to lower late, prepayment and miscellaneous loan fees collected.
• Consumer and other deposit service fees decreased due to lower demand deposit service and overdraft charges.
• Net gain on sale of loans decreased as a result of less mortgage origination activity.

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 increased by $3.9 million, or 5.3%, from the first quarter of 2014 to the second quarter of 2014.

• Salaries and employee benefits increased primarily due to annual salary increases, an extra day in the quarter, an increase in leasing commissions as a result of higher leasing revenues and higher long-term incentive expense.
• Other operating expense increased primarily as a result of an increase of $1.4 million in the clawback liability related to our loss share agreements with the FDIC.

Core non-interest expense increased by $7.0 million, or 4.9%, from the first six months of 2013 to the first six months of 2014.

• Salaries and employee benefits increased due to annual salary increases, long-term incentive expense, health insurance and temporary staffing needs.
• 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. The increase was also due to increased telecommunication expense related to the transitioning to a new provider.
• Other operating expense increased primarily as a result of an increase in filing and other loan expense as well as higher FDIC assessments due to our larger balance sheet, higher ATM and debit card processing costs and higher currency delivery expenses related to new treasury management accounts.

Non-core non-interest expense decreased from the preceding quarter. Last quarter's results included a write-off of an investment in funds that invested in low to moderate income 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 period end balances 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.

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.

ASSET QUALITY

The following table presents a summary of criticized 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 $14.5 million, $15.6 million, $25.0 million, $22.3 million and $20.9 million of restructured loans on non-accrual status at June 30, 2014, March 31, 2014, December 31, 2013, September 30, 2013 and June 30, 2013, respectively.

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

(3) Accruing restructured loans consist primarily of residential real estate and home equity loans that have been modified and are performing in accordance with those modified terms as of the dates indicated.

The following table presents 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.

DEPOSIT MIX

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

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 $263.3 million (+4.4%) and $531.4 million (+9.3%) from the first quarter of 2014 and second quarter of 2013, respectively, to the second quarter of 2014, driven by growth in noninterest bearing deposits. Our deposit mix improved over the past twelve months as average low cost deposits now comprise 82% of total deposits in the second quarter of 2014 compared to 77% in the second quarter of 2013.

CAPITAL

Tangible book value per common share increased to $16.81 at June 30, 2014 compared to $15.60 a year ago primarily due to net income less dividends. Our regulatory capital ratios remain strong. MB Financial Bank, N.A. was categorized as “well capitalized” at June 30, 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, including without limitation litigation relating to the pending Taylor Capital merger; (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