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MB Financial, Inc. (NASDAQ: MBFI), the holding company for MB Financial Bank, N.A (“the Bank” or “MB Financial Bank”), announced today third quarter results for 2012. The words “MB Financial,” “the Company,” “we,” “our” and “us” refer to MB Financial, Inc. and its consolidated subsidiaries, unless indicated otherwise. We had net income and net income available to common stockholders of $23.1 million for the third quarter of 2012 compared to net income of $19.7 million (+17.4%) and net income available to common stockholders of $17.1 million (+35.3%) for the third quarter of 2011, and net income and net income available to common stockholders of $22.1 million (+17.8% annualized) for the second quarter of 2012.
“Third quarter earnings were driven by strong fee income growth which exceeded the impact of net interest margin compression. While we had some large unusual items in the quarter, including a negative provision and prepayment fees, they were largely offsetting and had minimal impact on our results. I’m very pleased with the progress we have made over the past year in several areas including credit quality, improving our balance sheet mix and executing on our fee income initiatives. Return on assets is approaching normal levels, and from a shareholder perspective, we are ready to return more capital to shareholders in the form of higher quarterly dividends,” stated Mitchell Feiger, President and Chief Executive Officer of the Company.
Key items for the quarter were as follows:Improved Return on Assets and Return on Equity:
Annualized return on average assets increased to 0.97% for the third quarter of 2012 compared to 0.94% for the second quarter of 2012 and 0.80% for the third quarter of 2011.
Annualized return on average common equity improved to 7.38% for the third quarter of 2012 compared to 7.28% for the second quarter of 2012 and 5.86% for the third quarter of 2011.
Annualized cash return on average tangible common equity in the third quarter of 2012 was 11.29% compared to 11.28% for the second quarter of 2012 and 9.52% for the third quarter of 2011.
Strong Fee Income Growth Exceeded the Impact of Margin Compression:
Key fee initiatives propelled the growth in fee income in the quarter:
Leasing revenues increased 31.9% to $9.7 million,
Capital markets and international banking service fees increased 72.3% to $1.3 million, and
Commercial deposit and treasury management fees increased 1.3% to $5.9 million.
On a year-to-date basis, significant growth also occurred:
Leasing revenues increased 25.2% to $24.0 million,
Capital markets and international banking service fees increased 137.7% to $2.6 million, and
Card revenues increased 15.8% to $6.9 million.
Our core other income to revenues ratio rose to 29.5% in the third quarter compared to 27.5% in the prior quarter and 26.7% a year ago.
Net interest margin compression for the quarter, which negatively impacted net interest income, was driven by elevated cash balances at the Federal Reserve and asset repricing outpacing deposit repricing.
Seven basis points of compression were due to elevated cash balances.
Nine basis points of compression were due to asset repricing outpacing deposit repricing.
Liability repositioning, discussed below, which occurred at the end of the quarter, will address the elevated cash balances and is expected to have a seven to eight basis point positive impact on the fourth quarter margin.
Improved Credit Metrics:
Gross recoveries of $14.7 million were recorded in the third quarter of 2012, prompting a negative provision for credit losses of $13.0 million. The allowance for loan and lease losses was relatively unchanged from the prior quarter. We had no provision for credit losses in the second quarter of 2012 and $11.5 million in the third quarter of 2011.
Annualized net charge-offs to average loans for the nine months ended September 30, 2012 improved to 0.03% compared to 3.52% for the same period in 2011.
Losses recognized on other real estate owned (“OREO”), which we view as part of our credit costs, were $3.9 million in the third quarter of 2012 compared to $5.4 million in the second quarter of 2012 and $3.1 million in the third quarter of 2011.
Our non-performing loans improved to $105.3 million or 1.87% of total loans as of September 30, 2012 from $113.5 million or 1.98% of total loans at June 30, 2012, a decrease of $8.2 million (-7.3%), and from $141.0 million or 2.42% of total loans at September 30, 2011, a decrease of $35.7 million (-25.3%).
Our non-performing assets improved to $147.8 million or 1.56% of total assets as of September 30, 2012 from $163.3 million or 1.72% of total assets as of June 30, 2012, a decrease of $15.5 million (-9.5%), and from $228.7 million or 2.30% of total assets as of September 30, 2011, a decrease of $80.9 million (-35.4%).
Our potential problem loans decreased to $134.3 million as of September 30, 2012 from $141.0 million as of June 30, 2012, a decrease of $6.8 million (-4.8%), and from $179.7 million at September 30, 2011, a decrease of $45.4 million (-25.3%).
Our allowance for loan losses to non-performing loans was 115.10% as of September 30, 2012 compared to 107.25% as of June 30, 2012 and 91.23% as of September 30, 2011.
Prepayments to Lower Future Funding Costs:
To lower future funding costs, we prepaid the following interest bearing liabilities near the end of the third quarter of 2012:
A $100 million FHLB advance with a 3.85% interest rate,
Brokered certificates of deposit of $101 million with a 3.16% average interest rate, and
The $6.2 million FOBB Statutory Trust I with a 10.6% interest rate.
We incurred prepayment expenses of $12.7 million as a result of the early retirement of these instruments.
The estimated full quarter interest expense related to these instruments is approximately $1.9 million, based on the above rates.
We expect these prepayments to favorably impact our net interest margin for the fourth quarter of 2012 by seven to eight basis points and to reduce cost of funds by approximately nine basis points.
Balance Sheet Improvements Continue:
Excluding covered loans, our loan balances have been stable over the last year, with improvement in our loan mix. Commercial and lease loans, generally lower risk loans, have increased by 8.7% over the past twelve months while generally higher risk construction and commercial real estate loans have decreased by 6.6%.
Over the past year, we improved the mix of our investment portfolio to include a higher portion of municipal securities which has helped mitigate the impact of mortgage-backed security prepayments in the current interest rate environment. Municipal securities were 38.3% of total investment securities at September 30, 2012 compared to 25.7% of total investment securities a year ago.
Our funding mix also improved over the past twelve months, with low cost deposits increasing $215.5 million (+4.1%) primarily driven by increases in noninterest bearing deposits and customer certificates of deposit decreasing by $368.8 million (-18.4%). In addition, our wholesale funding balances decreased $219.1 million (-19.3%) from a year ago largely due to the liability prepayments discussed above.
During 2012, we repurchased all $196 million of preferred stock and the related warrant issued as part of the Troubled Asset Relief Program (“TARP”) Capital Purchase Program.
Increase in Quarterly Dividend and Authorization for Stock Buyback:
On October 24, 2012, our Board of Directors approved a quarterly cash dividend of $0.10 per share, an increase from $0.01 per share paid in recent prior quarters.
Our Board of Directors also authorized the Company to repurchase up to one million shares of common stock over the next two years.
RESULTS OF OPERATIONSThird Quarter ResultsNet Interest Income
Net interest income on a fully tax equivalent basis decreased $1.8 million from the second quarter of 2012. The decrease from the second quarter of 2012 to the third quarter of 2012 was due primarily to a 16 basis point decline in our net interest margin to 3.67% on a fully tax equivalent basis, as a result of much higher cash balances maintained at the Federal Reserve (approximately seven basis points of the change) and earning asset repricing outpacing deposit repricing (approximately nine basis points of the change).