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

Stocks in this article: MBFI

Net interest income on a fully tax equivalent basis decreased $25.2 million during the year ended December 31, 2012 compared to the year ended December 31, 2011, primarily due to a $285.2 million decrease in average interest earning assets and a 17 basis point decline in our net interest margin on a fully tax equivalent basis. The decline in the margin was primarily due to lower covered loan yields (negatively impacted the margin by 12 basis points), and tighter credit spreads, partially offset by lower costs of funds.

See the supplemental net interest margin tables for further detail.

Fee Income (dollars in thousands):

                   
4Q12 3Q12 2Q12 1Q12 4Q11 2012   2011  
Core fee income:
Key fee initiatives:
Capital markets and international banking
service fees $

2,593

$

1,436

$

912

$

531

$ 762 $

5,472

$ 1,870
Commercial deposit and treasury management fees 6,095 5,860 5,784 5,897 6,113 23,636 23,559
Lease financing, net 12,419 9,671 7,334 6,958 7,801 36,382 26,939
Trust and asset management fees 4,623 4,428 4,535 4,404 4,166 17,990 17,324
Card fees 2,505   2,388   2,429   2,046   1,101   9,368   7,032  
Total key fee initiatives

28,235

23,783

20,994

19,836

19,943

92,848

76,724
 
Loan service fees

2,229

1,039

1,143

1,048

1,069

5,459

6,355
Consumer and other deposit service fees 3,655 3,786 3,534 3,453 3,917 14,428 15,375
Brokerage fees 1,088 1,185 1,264 1,255 1,577 4,792 5,884
Increase in cash surrender value of life insurance 893 890 870 917 944 3,570 4,377
Accretion of FDIC indemnification asset 154 204 222 475 683 1,055 4,838
Net gain on sale of loans 822 575 554 374 366 2,325 817
Other operating income 1,325   405   958   1,604   1,086   4,292   5,676  
Total core fee income 38,401   31,867   29,539   28,962   29,585   128,769   120,046  
 
Non-core fee income: (1)
Net gain (loss) on investment securities 311 281 (34 ) (3 ) 411 555 640
Net (loss) gain on sale of other assets (905 ) (12 ) (8 ) (17 ) (87 ) (942 ) 283
Net gain on sale of loans held for sale (A) - - - - - - 1,790
Net loss recognized on other real estate owned (B) (1,848 ) (4,151 ) (4,156 ) (4,348 ) (3,620 ) (14,503 ) (9,971 )
Net gain (loss) recognized on other real estate
owned related to FDIC transactions (B) 222 213 (1,285 ) (2,241 ) (1,858 ) (3,091 ) (3,642 )
Increase (decrease) in market value of assets held
in trust for deferred compensation (C) 104   355   (149 ) 501   20   811   (40 )
Total non-core fee income (2,116 ) (3,314 ) (5,632 ) (6,108 ) (5,134 ) (17,170 ) (10,940 )
 
Total fee income $ 36,285   $ 28,553   $ 23,907   $ 22,854   $ 24,451   $ 111,599   $ 109,106  
 
(1)   Letter denotes the corresponding line items where these non-core fee income items reside in the consolidated statements of income as follows: A – Net gain on sale of loans, B – Net loss recognized on other real estate owned, C – Other operating income.
 

Core fee income increased by $6.5 million (+20.5%) from the third quarter of 2012 to the fourth quarter of 2012, driven by revenue from our key fee initiatives (+18.7%).

  • Net lease financing income increased as a result of increase in equipment remarketing gains and fees from the sale of equipment maintenance contracts.
  • Capital markets and international banking service fees increased primarily due to an increase in merger and acquisition advisory and interest rate swap fees.
  • Loan service fees increased due to an increase in prepayment fees.
  • Other operating income increased due to higher income from low income housing partnerships.
  • Non-core fee income was primarily impacted by lower losses recognized on OREO, partially offset by higher losses on the sale of other assets as a result of the disposal of fixed assets.

Core fee income increased by $8.7 million (+7.3%) for the year ended December 31, 2012 compared to the year ended December 31, 2011, driven by revenue from our key fee initiatives (+21.0%).

  • Net lease financing income increased as a result of increase in equipment remarketing gain and fees from the sale of equipment maintenance contracts.
  • Capital markets and international banking service fees increased due to an increase in interest rate swap fees, merger and acquisition advisory fees, and international banking activities.
  • Card fee income increased primarily due to fees earned on prepaid and credit cards.

These annual core fee income increases were offset by the decreases in brokerage fees, consumer and other deposit service fees and accretion of FDIC indemnification asset.

  • Brokerage fees declined due to a decrease in third party brokerage revenues.
  • Consumer and other deposit service fees decreased as a result of lower NSF fees.
  • Accretion of FDIC indemnification asset decreased $3.8 million as expected. Accretion is recorded based on the FDIC indemnification asset balance, which has declined as we have received loss-share payments.
  • Non-core fee income was primarily impacted by higher losses recognized on OREO as well as higher losses on the sale of other assets as a result of the disposal of fixed assets.

Other Expense (dollars in thousands):

                 
4Q12 3Q12 2Q12 1Q12 4Q11 2012 2011  
Core other expense:
Salaries and employee benefits $ 42,934 $ 41,728 $ 40,295 $ 39,928 $ 39,826 $ 164,885 $ 153,898
Occupancy and equipment expense 8,774 8,274 9,188 9,570 8,498 35,806 35,467
Computer services and telecommunication expense 4,160 3,777 3,909 3,653 4,382 15,499 14,885
Advertising and marketing expense 2,335 1,936 1,839 2,073 1,831 8,183 7,038
Professional and legal expense 1,640 1,554 1,503 1,413 1,422 6,110 6,147
Other intangible amortization expense 1,251 1,251 1,251 1,257 1,410 5,010 5,665
Other real estate expense, net 449 874 424 1,243 1,464 2,990 4,294
Other operating expenses 8,027 7,976 8,574   7,693 9,986 32,270 40,685  
Total core other expense 69,570 67,370 66,983   66,830 68,819 270,753 268,079  
 
Non-core other expense: (1)
Branch impairment charges 1,432 758 - - 594 2,190 1,594
Prepayment fees on interest bearing liabilities - 12,682 - - - 12,682 -
Increase (decrease) in market value of assets held
in trust for deferred compensation (A) 104 355 (149 ) 501 20 811 (40 )
Total non-core other expense 1,536 13,795 (149 ) 501 614 15,683 1,554  
 
Total other expense $ 71,106 $ 81,165 $ 66,834   $ 67,331 $ 69,433 $ 286,436 $ 269,633  
 
(1)   Letters denote the corresponding line items where these non-core other expense items reside in the consolidated statements of income as follows: A – Salaries and employee benefits.
 

Core other expense increased by $2.2 million (+3.3%) from the third quarter of 2012 to the fourth quarter of 2012.

  • Salaries and employee benefits expense increased primarily due to an increase in incentives and commissions on higher lease revenues.
  • Non-core other expense decreased as we did not incur any prepayment fees in the fourth quarter of 2012, while in the third quarter of 2012 we incurred $12.7 million in prepayment fees, when we prepaid certain brokered certificates of deposits and an FHLB advance.

Core other expense increased by $2.7 million (+1.0%) from the year ended December 31, 2011 to the year ended December 31, 2012.

  • Salaries and employee benefits expense increased primarily due to annual salary increases, an increase in incentives, commissions on higher lease revenues, and higher health insurance claims.
  • Other operating expenses were down partially due to the decrease in FDIC insurance premiums as a result of a change in the assessment computation during the second quarter of 2012 and the impact of improved credit quality on the computation.
  • Other operating expenses were also favorably impacted in the twelve months ended December 31, 2012 by a decrease in the clawback liability related to our loss share agreements with the FDIC recorded during the period.
  • Other real estate expense decreased as a result of fewer properties in other real estate owned throughout 2012 compared to 2011.
  • Non-core other expense was impacted by the $12.7 million in prepayment fees on interest bearing liabilities discussed above.

LOAN PORTFOLIO

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

           
12/31/2012 9/30/2012 6/30/2012 3/31/2012 12/31/2011
  % of   % of   % of   % of   % of
Amount   Total Amount   Total Amount   Total Amount   Total Amount   Total
Commercial related credits:
Commercial loans $ 1,220,472 21 % $ 1,073,981 19 % $ 1,079,436 19 % $ 1,040,340 18 % $ 1,113,123 19 %
Commercial loans collateralized by
assignment of lease payments (lease loans) 1,306,769 23 % 1,219,361 22 % 1,221,199 21 % 1,209,942 21 % 1,208,575 20 %
Commercial real estate 1,761,832 30 % 1,770,261 31 % 1,794,777 31 % 1,877,380 32 % 1,853,788 31 %
Construction real estate 110,261   2 % 149,872   3 % 150,665   3 % 128,040   2 % 183,789   3 %
Total commercial related credits 4,399,334   76 % 4,213,475   75 % 4,246,077   74 % 4,255,702   73 % 4,359,275   73 %
Other loans:
Residential real estate 314,359 5 % 308,866 5 % 313,137 5 % 309,644 5 % 316,787 5 %
Indirect vehicle 208,633 4 % 206,973 3 % 198,848 3 % 186,736 3 % 187,481 3 %
Home equity 305,186 5 % 314,718 6 % 323,234 6 % 327,450 6 % 336,043 6 %
Consumer loans 93,317   2 % 84,651   2 % 89,115   2 % 89,705   2 % 88,865   2 %
Total other loans 921,495   16 % 915,208   16 % 924,334   16 % 913,535   16 % 929,176   16 %
Gross loans excluding covered loans 5,320,829 92 % 5,128,683 91 % 5,170,411 90 % 5,169,237 89 % 5,288,451 89 %
Covered loans (1) 449,850   8 % 496,162   9 % 552,838   10 % 620,528   11 % 662,544   11 %
Total loans $ 5,770,679 100 % $ 5,624,845 100 % $ 5,723,249 100 % $ 5,789,765 100 % $ 5,950,995 100 %
 
(1)   Covered loans refer to loans we acquired in FDIC-assisted transactions that are subject to loss-sharing agreements with the FDIC.
 

Our loan portfolio mix improved over the past twelve months from the standpoint of lowering our real estate-related exposure, as commercial and lease loan balances increased while commercial real estate and construction loan balances decreased. Growth in the fourth quarter was primarily driven by new middle market customer relationships and strong lease loan originations as well as seasonal loan demand.

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