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MB Financial, Inc. Reports Loan Growth, Strong Fee Income, And Fourth Quarter Net Income Of $24.0 Million

Key items were as follows:

Robust Loan Growth, Mix Improvements Continue:

  • Our loan balances, excluding covered loans, increased $192.1 million (+3.7%) during the fourth quarter of 2012 and our loan mix continued to improve with growth in generally lower risk commercial and lease loans and declines in generally higher risk construction and commercial real estate loans as follows (dollars in thousands):
   
Change in Percent
Loan Balance Growth
Commercial related credits:  
Commercial loans $ 146,491 +13.6 %
Commercial loans collateralized by
assignment of lease payments (lease loans) 87,408 +7.2 %
Commercial real estate (8,429 ) -0.5 %
Construction real estate   (39,611 ) -26.4 %
Total commercial related credits   185,859   +4.4 %
Other loans:
Residential real estate 5,493 +1.8 %
Indirect vehicle 1,660 +0.8 %
Home equity (9,532 ) -3.0 %
Consumer loans   8,666   +10.2 %
Total other loans   6,287   +0.7 %
Gross loans excluding covered loans $ 192,146   +3.7 %
 
  • Over the last year, our commercial related loan balances increased modestly (+0.9%), and our loan mix improved. Commercial and lease loans increased by 8.9%, while commercial real estate and construction loans decreased by 8.1%.

Strong Core Fee Income Growth (+20.5%) During the Quarter:

  • Revenues from key fee initiatives increased 18.7% compared to the third quarter of 2012:
    • Leasing revenues increased 28.4% to $12.4 million,
    • Capital markets and international banking service fees increased 80.6% to $2.6 million, and
    • Commercial deposit and treasury management fees increased 4.0% to $6.1 million.
  • Annual revenues from key fee initiatives increased 21.0% compared to 2011:
    • Leasing revenues increased 35.1% to $36.4 million,
    • Capital markets and international banking service fees increased 192.6% to $5.5 million, and
    • Card revenues increased 33.2% to $9.4 million.
  • Our core fee income to total revenues ratio improved to 34.2% in the fourth quarter compared to 29.5% in the prior quarter and 26.2% a year ago.
  • Fee income growth exceeded the impact of margin compression. As a result, total revenue, as adjusted and on a fully tax equivalent basis, increased by $4.1 million (+3.7%) during the fourth quarter.

Margin Compression Negatively Impacted Net Interest Income:

  • Net interest margin compression of 10 basis points (on a fully tax equivalent basis) for the quarter negatively impacted net interest income (down $2.5 million and 3.2%).
  • The decline in net interest margin was due to a decline in covered loan yields, tightening credit spreads and high levels of prepayments on mortgage-backed securities, partially offset by a lower cost of funds.

Classified Assets Declined, Non-Performing Loans Increased, Recoveries Exceeded Charge-offs During the Quarter:

  • Classified assets, defined as potential problem loans, non-performing loans, other real estate owned (“OREO”) and repossessed assets (excluding credit-impaired loans and OREO that were acquired as part of our FDIC-assisted transactions) declined in the quarter. Non-performing loans were up $11.7 million, while potential problem loans declined $22.7 million.
         
Change from
3Q12 to
  12/31/2012   9/30/2012   4Q12   12/31/2011
(dollars in thousands)
Potential problem loans $ 111,553 $ 134,289 $ (22,736) $ 149,756
Non-performing loans 116,986 105,283 11,703 129,391
OREO 36,977 42,427 (5,450) 78,452
Repossessed assets 773 113 660 156
Total classified assets $ 266,289 $ 282,112 $ (15,823) $ 357,755
 
  • Credit costs remained very low in the quarter, aided by net recoveries.
         
Change from
3Q12 to
4Q12 3Q12 4Q12 4Q11
(dollars in thousands)
Credit costs:
Provision for credit losses $ 1,000 $ (13,000 ) $ 14,000 $ 8,000
Net loss recognized on OREO 1,626   3,938   (2,312 ) 5,478
Total credit costs $ 2,626   $ (9,062 ) $ 11,688   $ 13,478
 
Net (recoveries) charge-offs $ (2,353 ) $ (9,086 ) $ 6,733 $ 13,886
 

Significant Balance Sheet Improvement over the Past Year:

  • As discussed above, over the past year we have improved the risk/return profile of our loan portfolio by significantly reducing our classified loans and changing our loan mix.
  • Over the past year, we changed the mix of our investment portfolio by allocating a larger portion of the investment portfolio to municipal securities. This has helped mitigate the impact of high levels of mortgage-backed security prepayments in the current interest rate environment. Municipal securities were 39.8% of total investment securities at December 31, 2012 compared to 30.9% of total investment securities a year ago.
  • Our funding mix improved over the past twelve months, with low cost deposits increasing $438.5 million (+8.3%) primarily driven by noninterest bearing deposits increasing by $278.9 million (+14.8%). Customer certificates of deposit decreased by $400.2 million (-20.8%) over the same period. In addition, our wholesale funding balances decreased $291.0 million (-33.6%) from a year ago largely due to prepayments in the third quarter of 2012.
  • 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.

Significant Improvement in Return on Assets and Return on Equity over the Past Year:

  • Our annualized return on average assets, annualized return on average common equity and annualized cash return on average tangible common equity improved compared to the third quarter of 2012 and fourth quarter of 2011:
                 
4Q12 3Q12 4Q11 2012 2011
 
Annualized return on average assets 1.01% 0.97% 0.78% 0.95% 0.39%
Annualized return on average common equity 7.55% 7.38% 5.66% 7.05% 2.43%
Annualized cash return on average tangible
common equity 11.47% 11.29% 9.09% 10.87% 4.23%
 

Celtic Leasing Corp. Transaction:

  • On December 28, 2012, MB Financial Bank acquired Celtic Leasing Corp. (“Celtic”), a privately held, mid-ticket equipment leasing company.
  • Celtic specializes in solutions for the health care, legal, technology, and manufacturing industries. In recent years Celtic’s lease originations have ranged from $75 to $100 million on an annual basis.
  • Given the timing of the Celtic transaction, the impact to lease financing revenues was insignificant in the quarter and year.
  • Initial cash consideration paid was $58.7 million. Celtic stockholders will receive additional purchase consideration based on the performance of leases outstanding as of the acquisition date as well as the performance of leases originated during the three-year period immediately following the acquisition date. As a result of the transaction, $36.3 million in goodwill was recorded.

Top Ten Workplaces in Chicago:

  • During the fourth quarter of 2012, our bank was for the second consecutive year named one of Chicago’s Top Workplaces by the Chicago Tribune.
  • We ranked among the top ten in the large employers category.

RESULTS OF OPERATIONS

Fourth Quarter Results

Net Interest Income

Net interest income on a fully tax equivalent basis decreased $2.5 million from the third quarter of 2012. The decrease from the third quarter of 2012 to the fourth quarter of 2012 was due primarily to a 10 basis point decline in our net interest margin to 3.57% on a fully tax equivalent basis, primarily as a result of a decline in covered loan yields (negatively impacted the margin by eight basis points), high mortgage-backed investment securities prepayments (negatively impacted the margin by six basis points) and tighter credit spreads, which was partially offset by a decline in our cost of funds.

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