MB Financial, Inc. Reports Fourth Quarter 2011 Net Income Of $19.5 Million, Fourth Quarter Loan Growth, Strong Pre-Tax, Pre-Provision Income And Improving Credit Quality

MB Financial, Inc. (NASDAQ: MBFI), the holding company for MB Financial Bank, N.A (“the Bank” or “MB Financial Bank”), announced today fourth quarter results for 2011. 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 of $19.5 million and net income available to common stockholders of $16.8 million for the fourth quarter of 2011 compared to net income of $3.2 million and net income available to common stockholders of $595 thousand for the fourth quarter of 2010, and net income of $19.7 million and net income available to common stockholders of $17.1 million for the third quarter of 2011.

Key items for the quarter were as follows:

Fourth Quarter Loan Growth:
  • Total loans increased $152.5 million to $6.0 billion at December 31, 2011, or 2.6% sequentially compared to $5.8 billion at September 30, 2011.
  • Total commercial related loans increased $194.4 million to $4.4 billion at December 31, 2011, or 4.7% sequentially compared to $4.2 billion at September 30, 2011. The four loan categories that make up commercial related loans changed as follows during the fourth quarter of 2011 (in millions):
                     
Lease loans $ 141.4
Commercial and industrial loans 70.5
Commercial real estate loans 8.9
Construction   (26.4 )
$ 194.4  
 

Pre-Tax, Pre-Provision Operating Earnings Remain Strong:
  • Pre-tax, pre-provision operating earnings on a fully tax equivalent basis were $46.0 million, or 2.87% of risk-weighted assets, for the fourth quarter of 2011 compared to $47.2 million, or 3.03% of risk-weighted assets, for the third quarter of 2011. Pre-tax, pre-provision operating earnings on a fully tax equivalent basis to average assets was 1.85% for the fourth quarter of 2011 compared to 1.91% for the third quarter of 2011.
  • Net interest income on a fully tax equivalent basis increased $977 thousand compared to the third quarter of 2011.
  • Net interest margin on a fully tax equivalent basis was 3.91% for the fourth quarter of 2011 compared to 3.90% in the third quarter of 2011.
  • Core other income was $29.6 million for the fourth quarter of 2011, relatively consistent with the third quarter of 2011.
  • Core other expense was $68.8 million for the fourth quarter of 2011, an increase of $1.8 million from $67.0 million for the third quarter of 2011.

Continued Improvement in Credit Quality – Lower Credit Losses, Lower Non-Performing Loans and Lower Non-Performing Assets:
  • Our provision for credit losses was $8.0 million for the fourth quarter of 2011, while our net charge-offs were $13.9 million. Our provision for credit losses and net charge-offs for the third quarter of 2011 were $11.5 million and $16.7 million, respectively.
  • Our non-performing loans were $129.4 million or 2.17% of total loans as of December 31, 2011, a decrease of $11.6 million from $141.0 million or 2.42% of total loans at September 30, 2011.
  • Our allowance for loan losses to non-performing loans was 98.00% as of December 31, 2011 compared to 91.23% as of September 30, 2011.
  • Our non-performing assets were $208.0 million or 2.12% of total assets as of December 31, 2011, a decrease of $20.7 million from $228.7 million or 2.30% of total assets as of September 30, 2011.
  • Our allowance for loan losses to total loans was 2.13% as of December 31, 2011 compared to 2.21% as of September 30, 2011.

Top Ten Workplaces in Chicago:
  • During the fourth quarter of 2011, our bank was 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 increased $977 thousand from the third quarter of 2011, but decreased by $2.6 million from the fourth quarter of 2010 to the fourth quarter of 2011. The decrease from the fourth quarter of 2010 was due primarily to a decrease in interest earning assets partially offset by an increase in net interest margin.

Our net interest margin, on a fully tax equivalent basis, was 3.91% for the fourth quarter of 2011 compared to 3.90% for the third quarter of 2011 and 3.83% for the fourth quarter of 2010. The margin increase from 2010 was due to a decrease in our average cost of funds as a result of an improved deposit mix and downward repricing of interest bearing deposits, as well as an improved interest earning asset mix and a lower level of non-performing loans.

Our net interest margin, on a fully tax equivalent basis, was 3.90% for the year ended December 31, 2011 compared to 3.83% for the year ended December 31, 2010. The margin increase from 2010 was due to a decrease in our average cost of funds as a result of an improved deposit mix and downward repricing of interest bearing deposits, as well as a lower level of non-performing loans.

See the supplemental net interest margin tables for further detail.

Other Income (in thousands):
             
Three Months Ended Year Ended
December 31,   September 30, June 30, March 31, December 31, December 31, December 31,
2011   2011   2011   2011   2010   2011   2010
Core other income:
Loan service fees $ 1,601 $ 2,159 $ 2,812 $ 1,126 $ 1,532 $ 7,698 $ 6,517
Deposit service fees 10,085 9,932 9,023 10,030 9,920 39,070 38,934
Lease financing, net 7,801 6,494 6,861 5,783 7,185 26,939 21,853
Brokerage fees 1,577 1,273 1,615 1,419 1,231 5,884 5,012
Trust and asset management fees 4,166 4,272 4,455 4,431 4,243 17,324 15,037

Increase in cash surrender value of life insurance
944 1,014 1,451 968 930 4,377 3,516
Accretion of FDIC indemnification asset 683 985 1,339 1,831 3,009 4,838 9,678
Card fees 1,096 2,071 2,062 1,788 2,287 7,017 7,057
Other operating income   1,632       1,690       1,979       1,598       1,570       6,899       4,947  
Total core other income   29,585       29,890       31,597       28,974       31,907       120,046       112,551  
 
Non-core other income: (1)

Net gain (loss) on sale of investment securities
411 - 232 (3 ) (4 ) 640 18,648
Net (loss) gain on sale of other assets (87 ) - 13 357 419 283 630
Net gain on sale of loans held for sale (A) - - 1,790 - - 1,790 -

Net loss recognized on other real estate owned (B)
(3,620 ) (2,354 ) (3,628 ) (369 ) (1,656 ) (9,971 ) (8,511 )

Net loss recognized on other real estate owned related to FDIC transactions (B)
(1,858 ) (764 ) (1,017 ) (3 ) (468 ) (3,642 ) (773 )
Acquisition related gains - - - - - - 62,649

Increase (decrease) in market value of assets held in trust for deferred compensation (A)
  20       (405 )     158       187       597       (40 )     562  
Total non-core other income   (5,134 )     (3,523 )     (2,452 )     169       (1,112 )     (10,940 )     73,205  
                                       
Total other income $ 24,451     $ 26,367     $ 29,145     $ 29,143     $ 30,795     $ 109,106     $ 185,756  
 
(1)   Letter denotes the corresponding line items where these non-core other income items reside in the consolidated statements of income as follows: A – Other operating income, B – Net loss recognized on other real estate owned.
 

Core other income was relatively consistent from the third quarter of 2011 to the fourth quarter of 2011. Loan service fees decreased due to less prepayment, exit and letters of credit fees during the fourth quarter of 2011. Net lease financing income increased mainly as a result of an increase in the sales of third party equipment maintenance contracts and related income. Accretion of indemnification asset decreased as a result of the corresponding decrease in the indemnification asset balance during the fourth quarter of 2011. Card fees were down due to the impact of the Durbin Amendment to the Dodd-Frank Act on debit card interchange fees. Non-core other income was impacted by higher losses recognized on other real estate owned.

Core other income increased by $7.5 million from the year ended December 31, 2010 to the year ended December 31, 2011. Loan service fees increased due to an increase in prepayment, exit and interest rate swap fees partly offset by a decrease in letters of credit fees. Net lease financing increased primarily due to an increase in the sales of third party equipment maintenance contracts and related income. Trust and asset management fees increased primarily due to the addition of a significant number of accounts during the third quarter of 2010, which impacted the full year in 2011. The increase in cash surrender value of life insurance was higher due to an improvement in overall asset yields. Accretion of indemnification asset decreased as a result of corresponding decrease in the indemnification asset balance during the year ended December 31, 2011. Other operating income increased primarily due to additional income from our international banking line of business and increased income from a Small Business Investment Company (SBIC) investment. Non-core other income decreased in the year ended December 31, 2011 compared to the year ended December 31, 2010 primarily as a result of the acquisition related gains recognized on the Broadway Bank and New Century Bank FDIC-assisted transactions in the second quarter of 2010, lower gains on sales of investment securities in 2011 and higher losses recognized on other real estate owned in 2011.

Other Expense (in thousands):
             
Three Months Ended Year Ended
December 31,   September 30, June 30, March 31, December 31, December 31, December 31,
2011   2011   2011   2011   2010   2011   2010
Core other expense:
Salaries and employee benefits $ 39,826 $ 38,827 $ 37,657 $ 37,588 $ 35,802 $ 153,898 $ 143,787
Occupancy and equipment expense 8,498 9,092 8,483 9,394 7,938 35,467 34,845

Computer services and telecommunication expense
4,382 3,488 3,570 3,445 3,264 14,885 14,615
Advertising and marketing expense 1,831 1,740 1,748 1,719 1,573 7,038 6,465
Professional and legal expense 1,422 1,647 1,853 1,225 1,718 6,147 5,803
Brokerage fee expense 137 363 574 483 448 1,557 1,926
Other intangible amortization expense 1,410 1,414 1,416 1,425 1,632 5,665 6,214
FDIC insurance premiums 2,662 2,272 3,502 3,428 3,930 11,864 15,600
Other real estate expense, net 1,464 1,181 1,251 398 858 4,294 2,694
Other operating expenses   7,187     6,989       6,516     6,572     6,855     27,264       26,265
Total core other expense   68,819     67,013       66,570     65,677     64,018     268,079       258,214
 
Non-core other expense: (1)
Branch impairment charges 594 - - 1,000 - 1,594 -
Increase (decrease) in market value of assets held in trust for deferred compensation (A)   20     (405 )     158     187     597     (40 )     562
Total non-core other expense   614     (405 )     158     1,187     597     1,554       562
                                       
Total other expense $ 69,433   $ 66,608     $ 66,728   $ 66,864   $ 64,615   $ 269,633     $ 258,776
 
(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 $1.8 million in the fourth quarter of 2011 compared with the third quarter of 2011. Salaries and employee benefits increased due to an increase in leasing incentive compensation on higher leasing revenues and an increase in health and benefits expense. We are largely self-insured for health insurance and expense can vary from quarter to quarter. Occupancy and equipment expense was down in the fourth quarter as most major maintenance projects were completed by the end of the third quarter. Computer services and telecommunication expense increased due to product and system enhancements during the fourth quarter of 2011. Non-core other expense was primarily impacted by $594 thousand of fixed asset impairment charges as a result of our decision to close two branches during the fourth quarter.

Core other expense increased by $9.9 million from the year ended December 31, 2010 to the year ended December 31, 2011. Salaries and employee benefits expense increased due to additional employees added in April 2010 in connection with the New Century and Broadway FDIC-assisted acquisitions, problem loan remediation staff added throughout 2010, and increased leasing incentive compensation on higher leasing revenues. FDIC insurance premiums decreased due to lower deposits, a change in the assessment computation during the second quarter of 2011, and the impact of improved credit quality on the computation. Other real estate expense increased as a result of more properties in other real estate owned throughout 2011 compared to 2010. Non-core other expense was primarily impacted by $1.6 million of fixed asset impairment charges due to our decision to close three branches throughout 2011.

Income Taxes

The Company had income tax expense of $7.8 million for the three months ended December 31, 2011 and $5.3 million for the year ended December 31, 2011. The three month and annual tax expenses are calculated based on pre-tax income excluding tax-exempt items. The annual amount also reflects a $2 million increase in deferred tax assets as a result of an increase in the Illinois corporate income tax rate which was enacted and effective in the first quarter of 2011.

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):
               
December 31, September 30, June 30, March 31, December 31,
2011   2011   2011   2011   2010
Amount   % of Total   Amount   % of Total   Amount   % of Total   Amount   % of Total   Amount   % of Total
Commercial related credits:      
Commercial loans $ 1,113,123 19% $ 1,042,583 18% $ 1,108,295 19% $ 1,154,451 18% $ 1,206,984 18%
Commercial loans collateralized by assignment of lease payments (lease loans) 1,208,575 20% 1,067,191 18% 1,031,677 17% 1,038,507 16% 1,053,446 16%
Commercial real estate 1,853,788 31% 1,844,894 32% 1,863,223 32% 2,084,651 33% 2,176,584 33%
Construction real estate 183,789   3% 210,206   4% 246,557   4% 356,579   6% 423,339   6%
Total commercial related credits 4,359,275   73% 4,164,874   72% 4,249,752   72% 4,634,188   73% 4,860,353   73%
Other loans:
Residential real estate 316,787 5% 316,305 5% 317,821 5% 335,423 5% 328,482 5%
Indirect vehicle 187,481 3% 189,033 4% 182,536 3% 175,058 3% 175,664 3%
Home equity 336,043 6% 348,934 6% 357,181 6% 371,108 6% 381,662 6%
Consumer loans 88,865   2% 76,025   1% 75,069   1% 74,585   1% 59,320   1%
Total other loans 929,176   16% 930,297   16% 932,607   15% 956,174   15% 945,128   15%
Gross loans excluding covered loans 5,288,451 89% 5,095,171 88% 5,182,359 87% 5,590,362 88% 5,805,481 88%
Covered loans (1) 677,770   11% 718,566   12% 755,670   13% 777,634   12% 812,330   12%
Total loans $ 5,966,221 100% $ 5,813,737 100% $ 5,938,029 100% $ 6,367,996 100% $ 6,617,811 100%
 
(1)   Covered loans refer to loans we acquired in FDIC-assisted transactions that are subject to loss-sharing agreements with the FDIC.
 

During the second quarter of 2011, we sold certain performing, sub-performing and non-performing loans. The loans sold had an aggregate carrying amount of $281.6 million prior to the transfer to loans held for sale, which was comprised of $160.8 million in commercial real estate loans, $73.7 million in construction real estate loans, $14.5 million in commercial loans and $32.6 million in residential real estate and home equity loans.

ASSET QUALITY

The following table presents a summary of non-performing assets, excluding loans held for sale, credit-impaired loans that were acquired as part of our FDIC-assisted transactions and OREO related to FDIC-assisted transactions, as of the dates indicated (dollar amounts in thousands):
           
December 31, September 30, June 30, March 31, December 31,
2011   2011   2011   2011   2010
Non-performing loans:
Non-accrual loans (1) $ 129,309 $ 140,979 $ 149,905 $ 318,923 $ 362,441
Loans 90 days or more past due, still accruing interest 82 - 1,121 - 1
Total non-performing loans 129,391 140,979 151,026 318,923 362,442
 
OREO 78,452 87,469 88,185 80,107 71,476
Repossessed vehicles 156 249 55 139 82
Total non-performing assets $ 207,999 $ 228,697 $ 239,266 $ 399,169 $ 434,000
 
Total allowance for loan losses (2) $ 126,798 $ 128,610 $ 130,057 $ 178,410 $ 192,217
 
Accruing restructured loans (3) $ 37,996 $ 34,321 $ 35,037 $ 31,819 $ 22,543
 
Total non-performing loans to total loans 2.17% 2.42% 2.54% 5.01% 5.48%
Total non-performing assets to total assets 2.12% 2.30% 2.40% 3.96% 4.21%
Allowance for loan losses to non-performing loans 98.00% 91.23% 86.12% 55.94% 53.03%
 
(1)   Includes $42.5 million, $36.0 million, $22.5 million, $60.9 million, and $47.6 million of restructured loans on non-accrual status at December 31, 2011, September 30, 2011, June 30, 2011, March 31, 2011 and December 31, 2010, respectively.
(2) Includes $12.7 million and $13.6 million for unfunded credit commitments at March 31, 2011 and December 31, 2010, respectively.
(3) Accruing restructured loans consists primarily of commercial, commercial real estate, and residential real estate loans that have been modified and are performing in accordance with those modified terms.
 

The decreases in total non-performing loans and total non-performing assets from March 31, 2011 to June 30, 2011 were primarily due to the sale during the second quarter of 2011 of loans with an aggregate carrying amount of $281.6 million prior to the transfer to loans held for sale, $156.3 million of which were non-performing.

The following table presents a summary of total performing loans greater than 30 days and less than 90 days past due, excluding loans held for sale and credit-impaired loans that were acquired as part of our FDIC-assisted transactions, as of the dates indicated (dollar amounts in thousands):

             
December 31, September 30, June 30, March 31, December 31,
2011   2011   2011   2011   2010
 
30 - 59 Days Past Due $ 9,379 $ 15,564 $ 10,568 $ 23,912 $ 9,386
60 - 89 Days Past Due 5,316 4,307 4,881 4,049 5,073
$ 14,695 $ 19,871 $ 15,449 $ 27,961 $ 14,459
 

Approximately $549 thousand of performing loans past due were included among the loans classified as potential problem loans (defined and discussed below) as of December 31, 2011 compared to $9.2 million as of September 30, 2011.

The following table represents a summary of OREO, excluding OREO related to FDIC-assisted transactions (in thousands):

         
December 31, September 30, June 30, March 31, December 31,
2011   2011   2011   2011   2010
 
Balance at the beginning of quarter $ 87,469 $ 88,185 $ 80,107 $ 71,476 $ 59,114
Transfers in at fair value less estimated costs to sell 4,209 15,658 15,761 25,167 27,170
Fair value adjustments (3,733) (2,524) (3,417) (1,314) (1,562)
Net gains (losses) on sales of OREO 113 170 (212) 945 (94)
Cash received upon disposition (9,606) (14,020) (4,054) (16,167) (13,152)
Balance at the end of quarter $ 78,452 $ 87,469 $ 88,185 $ 80,107 $ 71,476
 

The following table presents data related to non-performing loans, by dollar amount and category at December 31, 2011, excluding loans held for sale and credit-impaired loans that were acquired as part of our FDIC-assisted transactions (dollar amounts in thousands):
               
Construction Real Estate Commercial Real Estate Consumer
    Commercial and Lease Loans   Loans   Loans   Loans   Total Loans
Number of Number of Number of
    Relationships   Amount   Relationships   Amount   Relationships   Amount   Amount   Amount
$10.0 million or more - $ - - $ - - $ - $ - $ -
$5.0 million to $9.9 million 2 14,322 - - 2 15,435 - 29,757
$1.5 million to $4.9 million 5 12,031 - - 13 37,509 - 49,540
Under $1.5 million 42     10,642   3     1,145   61     23,607     14,700     50,094
49   $ 36,995   3   $ 1,145   76   $ 76,551   $ 14,700   $ 129,391
 
Percentage of individual loan category 1.59% 0.62% 4.13% 1.58% 2.17%
 

The following table presents data related to non-performing loans, by dollar amount and category at September 30, 2011, excluding loans held for sale and credit-impaired loans that were acquired as part of our FDIC-assisted transactions (dollar amounts in thousands):
               
Construction Real Estate Commercial Real Estate Consumer Total
    Commercial and Lease Loans   Loans   Loans   Loans   Loans
Number of Number of Number of
    Relationships   Amount   Relationships   Amount   Relationships   Amount   Amount   Amount
$10.0 million or more - $ - - $ - - $ - $ - $ -
$5.0 million to $9.9 million 3 20,136 - - 3 23,938 - 44,074
$1.5 million to $4.9 million 4 8,854 - - 13 37,474 - 46,328
Under $1.5 million 37     8,654   5     2,913   54     25,495     13,515     50,577
44   $ 37,644   5   $ 2,913   70   $ 86,907   $ 13,515   $ 140,979
 
Percentage of individual loan category 1.78% 1.39% 4.71% 1.45% 2.42%
 

We define potential problem loans as performing loans rated substandard that do not meet the definition of a non-performing loan (See “Asset Quality” section above for non-performing loans). Potential problem loans carry a higher probability of default and require additional attention by management. The aggregate principal amount of potential problem loans was $149.8 million, or 2.51% of total loans, as of December 31, 2011, compared to $179.7 million, or 3.09% of total loans, as of September 30, 2011. The decrease was primarily due to loan risk rating upgrades and loan payments, as well as some downward migration to non-performing status.

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

             
Three Months Ended   Year Ended
December 31,   September 30, June 30, March 31, December 31, December 31, December 31,
2011   2011   2011   2011   2010   2011   2010

Allowance for credit losses, balance at the beginning of period
$ 141,861 $ 147,107 $ 178,410 $ 192,217 $ 193,926 $ 192,217 $ 177,072
Provision for credit losses 8,000 11,500 61,250 40,000 49,000 120,750 246,200
Charge-offs:
Commercial loans (2,932 ) (3,497 ) (7,991 ) (3,151 ) (9,141 ) (17,571 ) (58,077 )

Commercial loans collateralized by assignment of lease payments (lease loans)
(1,373 ) - (93 ) - (43 ) (1,466 ) (1,711 )
Commercial real estate loans (3,793 ) (7,815 ) (55,250 ) (29,775 ) (27,360 ) (96,633 ) (79,828 )
Construction real estate (6,989 ) (6,008 ) (18,826 ) (21,094 ) (17,136 ) (52,917 ) (94,533 )
Residential real estate (860 ) (141 ) (8,080 ) (3,562 ) (1,363 ) (12,643 ) (3,326 )
Indirect vehicle (954 ) (611 ) (553 ) (718 ) (968 ) (2,836 ) (3,199 )
Home equity (2,061 ) (1,605 ) (5,493 ) (1,907 ) (1,364 ) (11,066 ) (4,632 )
Consumer loans (285 ) (475 ) (344 ) (544 ) (428 ) (1,648 ) (1,755 )
Total charge-offs (19,247 ) (20,152 ) (96,630 ) (60,751 ) (57,803 ) (196,780 ) (247,061 )
Recoveries:
Commercial loans 634 1,413 758 2,565 3,842 5,370 8,788

Commercial loans collateralized by assignment of lease payments (lease loans)
1 5 153 66 26 225 184
Commercial real estate loans 747 739 312 1,534 800 3,332 2,070
Construction real estate 3,519 681 2,364 2,026 1,672 8,590 3,170
Residential real estate 9 7 26 7 127 49 184
Indirect vehicle 378 327 369 325 286 1,399 1,163
Home equity 6 151 19 48 250 224 351
Consumer loans 67   83   76   373   91   599   96  
Total recoveries 5,361   3,406   4,077   6,944   7,094   19,788   16,006  
             
Total net charge-offs (13,886 ) (16,746 ) (92,553 ) (53,807 ) (50,709 ) (176,992 ) (231,055 )
 
Allowance for credit losses 135,975 141,861 147,107 178,410 192,217 135,975 192,217
 
Allowance for unfunded credit commitments (1) (9,177 ) (13,251 ) (17,050 ) -   -   (9,177 ) -  
 
Allowance for loan losses (2) $ 126,798   $ 128,610   $ 130,057   $ 178,410   $ 192,217   $ 126,798   $ 192,217  
 
Total loans, excluding loans held for sale $ 5,966,221 $ 5,813,737 $ 5,938,029 $ 6,367,996 $ 6,617,811 $ 5,966,221 $ 6,617,811
Average loans, excluding loans held for sale $ 5,818,425 $ 5,827,181 $ 6,299,990 $ 6,460,508 $ 6,723,840 $ 6,097,291 $ 6,758,776
 

Ratio of allowance for loan losses to total loans, excluding loans held for sale
2.13 % 2.21 % 2.19 % 2.80 % 2.90 % 2.13 % 2.90 %

Ratio of allowance for credit losses to total loans, excluding loans held for sale, and unfunded credit commitments
2.25 % 2.40 % 2.43 % 2.75 % 2.85 % 2.25 % 2.85 %

Net loan charge-offs to average loans, excluding loans held for sale (annualized)
0.95 % 1.14 % 5.89 % 3.38 % 2.99 % 2.90 % 3.42 %
 
(1)   The reserve for unfunded credit commitments (primarily letters of credit) was reclassified from the allowance for loan losses to other liabilities as of June 30, 2011.
(2) Includes $12.7 million and $13.6 million for unfunded credit commitments at March 31, 2011 and December 31, 2010, respectively.
 

The activity in the second quarter of 2011 reflects the previously disclosed sale of certain performing, sub-performing and non-performing loans, which resulted in approximately $87 million in charge-offs and an increase in the provision for losses of approximately $50 million.

Our allowance for loan losses is comprised of three elements: a general loss reserve, a specific reserve for impaired loans and a reserve for smaller-balance homogenous loans. The following table presents these three elements of our allowance for loan losses (in thousands):

           
December 31, September 30, June 30, March 31, December 31,
2011   2011   2011   2011   2010
 
General loss reserve $ 102,196 $ 102,752 $ 104,002 $ 126,423 $ 126,435
Specific reserve (1) 10,804 11,416 12,111 38,054 51,826
Smaller-balance homogenous loans reserve 13,798 14,442 13,944 13,933 13,956
Total allowance for loan losses $ 126,798 $ 128,610 $ 130,057 $ 178,410 $ 192,217
(1)   The specific reserve as of March 31, 2011 and December 31, 2010 includes reserves on unfunded credit commitments of approximately $12.7 million and $13.6 million, respectively. Beginning as of June 30, 2011, reserves on unfunded credit commitments are recorded as liabilities.
 

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

INVESTMENT SECURITIES

The following table sets forth the fair value, amortized cost, and total unrealized gain of our investment securities, by type (in thousands):
         
At December 31, At September 30, At June 30, At March 31, At December 31,
2011   2011   2011   2011   2010
 
Securities available for sale:
Fair value
Government sponsored agencies and enterprises $ 42,401 $ 56,007 $ 55,656 $ 56,971 $ 19,434
States and political subdivisions 535,660 394,279 392,670 365,481 364,932
Mortgage-backed securities 1,334,491 1,421,789 1,424,302 1,279,968 1,197,066
Corporate bonds 5,899 5,899 6,019 6,019 6,140
Equity securities 10,846 10,764 10,435 10,215 10,171
Total fair value $ 1,929,297 $ 1,888,738 $ 1,889,082 $ 1,718,654 $ 1,597,743
 
Amortized cost
Government sponsored agencies and enterprises $ 39,640 $ 53,016 $ 54,423 $ 56,452 $ 18,766
States and political subdivisions 500,979 366,651 371,598 350,851 351,274
Mortgage-backed securities 1,308,020 1,399,801 1,401,975 1,258,171 1,175,021
Corporate bonds 5,899 5,899 6,019 6,019 6,140
Equity securities 10,457 10,324 10,246 10,169 10,093
Total amortized cost $ 1,864,995 $ 1,835,691 $ 1,844,261 $ 1,681,662 $ 1,561,294
 
Unrealized gain
Government sponsored agencies and enterprises $ 2,761 $ 2,991 $ 1,233 $ 519 $ 668
States and political subdivisions 34,681 27,628 21,072 14,630 13,658
Mortgage-backed securities 26,471 21,988 22,327 21,797 22,045
Corporate bonds - - - - -
Equity securities 389 440 189 46 78
Total unrealized gain $ 64,302 $ 53,047 $ 44,821 $ 36,992 $ 36,449
 
Securities held to maturity, at cost:
States and political subdivisions $ 240,183 $ 240,839 $ - $ - $ -
Mortgage-backed securities 259,100 258,199 230,154 102,206 -
Total amortized cost $ 499,283 $ 499,038 $ 230,154 $ 102,206 $ -
 

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 99% of our mortgage-backed securities are agency guaranteed.

DEPOSIT MIX

The following table shows the composition of deposits as of the dates indicated (dollars in thousands):
               
December 31, September 30, June 30, March 31, December 31,
2011   2011   2011   2011   2010
  % of   % of % of % of   % of
Amount   Total   Amount   Total   Amount   Total   Amount   Total   Amount   Total
Low cost deposits:
Noninterest bearing deposits $ 1,885,694 25% $ 1,803,141 23% $ 1,776,873 23% $ 1,666,868 22% $ 1,691,599 21%
Money market and NOW accounts 2,645,334 34% 2,722,162 35% 2,645,953 34% 2,712,314 34% 2,776,181 34%
Savings accounts 753,610   10% 751,062   10% 729,222   9% 718,896   9% 697,851   8%
Total low cost deposits 5,284,638   69% 5,276,365   68% 5,152,048   66% 5,098,078   65% 5,165,631   63%
 
Certificates of deposit:
Certificates of deposit 1,925,608 25% 2,001,210 26% 2,124,815 28% 2,326,591 29% 2,519,117 31%
Brokered deposit accounts 437,361   6% 444,332   6% 441,720   6% 467,337   6% 468,210   6%
Total certificates of deposit 2,362,969   31% 2,445,542   32% 2,566,535   34% 2,793,928   35% 2,987,327   37%
 
Total deposits $ 7,647,607   100% $ 7,721,907   100% $ 7,718,583   100% $ 7,892,006   100% $ 8,152,958   100%
 

Our deposit mix improved in the quarter. Approximately 69% of deposits were in lower cost sources at December 31, 2011 compared to 68% at September 30, 2011 and 63% at December 31, 2010. Our ratio of certificates of deposit to total deposits was 31% at December 31, 2011 compared to 32% at September 30, 2011 and 37% at December 31, 2010. Our ratio of noninterest bearing deposits to total deposits was 25% at December 31, 2011 compared to 23% at September 30, 2011 and 21% at December 31, 2010.

FORWARD-LOOKING STATEMENTS

When used in this press release and in reports filed with or furnished to the Securities and Exchange Commission, in 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 our 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 expected benefits of the FDIC-assisted transactions we previously completed will not be realized; (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, resulting both from loans we originate and loans we acquire from other financial institutions; (4) results of examinations by the Office of Comptroller of Currency 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 and regulations adopted thereunder, changes in federal and/or state tax laws or interpretations thereof by taxing authorities, changes in laws, rules or regulations applicable to companies that have participated in the TARP Capital Purchase Program of the U.S. Department of the Treasury and other governmental initiatives affecting the financial services industry; (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
         
MB FINANCIAL, INC. & SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Unaudited)
As of the dates indicated
(Amounts in thousands)
 
December 31, September 30, June 30, March 31, December 31,
2011   2011   2011   2011   2010
ASSETS
Cash and due from banks $ 144,228 $ 133,755 $ 129,942 $ 123,794 $ 106,726
Interest earning deposits with banks   100,337       347,055       513,378       504,765       737,433  

Total cash and cash equivalents
244,565 480,810 643,320 628,559 844,159
Investment securities:
Securities available for sale, at fair value 1,929,297 1,888,738 1,889,082 1,718,654 1,597,743
Securities held to maturity, at cost 499,283 499,038 230,154 102,206 -
Non-marketable securities - FHLB and FRB Stock   80,832       80,815       80,815       80,186       80,186  
Total investment securities 2,509,412 2,468,591 2,200,051 1,901,046 1,677,929
Loans held for sale 4,727 - - 11,533 -
Loans:
Total loans excluding covered loans 5,288,451 5,095,171 5,182,359 5,590,362 5,805,481
Covered loans   677,770       718,566       755,670       777,634       812,330  
Total loans 5,966,221 5,813,737 5,938,029 6,367,996 6,617,811
Less allowance for loan losses   126,798       128,610       130,057       178,410       192,217  
Net loans 5,839,423 5,685,127 5,807,972 6,189,586 6,425,594
Lease investments, net 135,490 133,345 139,391 129,182 126,906
Premises and equipment, net 210,705 211,062 210,901 209,257 210,886
Cash surrender value of life insurance 125,309 124,364 126,938 126,014 125,046
Goodwill, net 387,069 387,069 387,069 387,069 387,069
Other intangibles, net 29,494 30,904 32,318 33,734 35,159
Other real estate owned 78,452 87,469 88,185 80,107 71,476
Other real estate owned related to FDIC transactions 60,363 69,311 69,920 61,461 44,745
FDIC indemnification asset 65,604 94,542 119,837 148,314 215,460
Other assets   142,459       149,767       151,833       165,481       155,935  
Total assets $ 9,833,072     $ 9,922,361     $ 9,977,735     $ 10,071,343     $ 10,320,364  
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits:
Noninterest bearing $ 1,885,694 $ 1,803,141 $ 1,776,873 $ 1,666,868 $ 1,691,599
Interest bearing   5,761,913       5,918,766       5,941,710       6,225,138       6,461,359  
Total deposits 7,647,607 7,721,907 7,718,583 7,892,006 8,152,958
Short-term borrowings 219,954 257,418 235,733 295,180 268,844
Long-term borrowings 266,264 274,378 275,559 275,327 285,073
Junior subordinated notes issued to capital trusts 158,538 158,546 158,554 158,563 158,571
Accrued expenses and other liabilities   147,682       141,490       243,962       100,031       110,132  
Total liabilities   8,440,045       8,553,739       8,632,391       8,721,107       8,975,578  
Stockholders' Equity
Preferred stock 194,719 194,562 194,407 194,255 194,104
Common stock 548 548 546 546 546
Additional paid-in capital 731,248 730,056 728,244 726,604 725,400
Retained earnings 427,956 411,659 396,081 406,594 402,810
Accumulated other comprehensive income 39,150 32,322 27,322 22,566 22,233
Treasury stock   (3,044 )     (3,010 )     (3,771 )     (2,845 )     (2,828 )
Controlling interest stockholders' equity 1,390,577 1,366,137 1,342,829 1,347,720 1,342,265
Noncontrolling interest   2,450       2,485       2,515       2,516       2,521  
Total stockholders' equity   1,393,027       1,368,622       1,345,344       1,350,236       1,344,786  
Total liabilities and stockholders' equity $ 9,833,072     $ 9,922,361     $ 9,977,735     $ 10,071,343     $ 10,320,364  
 
         
MB FINANCIAL, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Amounts in thousands, except per share data) (Unaudited)
 
Three Months Ended   Year Ended
December 31,   September 30, June 30, March 31, December 31, December 31,   December 31,
2011   2011   2011   2011   2010   2011   2010
Interest income:
Loans $ 75,466 $ 78,046 $ 84,114 $ 87,167 $ 92,701 $ 324,793 $ 364,484
Investment securities:
Taxable 11,608 11,699 10,290 7,752 7,001 41,349 50,541
Nontaxable 6,178 4,299 3,443 3,345 3,367 17,265 13,585
Federal funds sold - - - - - - 2
Other interest earning accounts   181       244       258       470       504       1,153       1,028  
Total interest income   93,433       94,288       98,105       98,734       103,573       384,560       429,640  
Interest expense:
Deposits 9,569 10,207 11,746 13,359 15,598 44,881 75,850
Short-term borrowings 189 204 239 217 255 849 1,145

Long-term borrowings and junior subordinated notes
  3,430       3,461       3,713       2,953       3,065       13,557       12,873  
Total interest expense   13,188       13,872       15,698       16,529       18,918       59,287       89,868  
Net interest income 80,245 80,416 82,407 82,205 84,655 325,273 339,772
Provision for credit losses   8,000       11,500       61,250       40,000       49,000       120,750       246,200  

Net interest income after provision for credit losses
  72,245       68,916       21,157       42,205       35,655       204,523       93,572  
Other income:
Loan service fees 1,601 2,159 2,812 1,126 1,532 7,698 6,517
Deposit service fees 10,085 9,932 9,023 10,030 9,920 39,070 38,934
Lease financing, net 7,801 6,494 6,861 5,783 7,185 26,939 21,853
Brokerage fees 1,577 1,273 1,615 1,419 1,231 5,884 5,012
Trust and asset management fees 4,166 4,272 4,455 4,431 4,243 17,324 15,037

Net gain (loss) on sale of investment securities
411 - 232 (3 ) (4 ) 640 18,648

Increase in cash surrender value of life insurance
944 1,014 1,451 968 930 4,377 3,516
Net (loss) gain on sale of other assets (87 ) - 13 357 419 283 630
Acquisition related gains - - - - - - 62,649
Accretion of FDIC indemnification asset 683 985 1,339 1,831 3,009 4,838 9,678
Card fees 1,096 2,071 2,062 1,788 2,287 7,017 7,057

Net loss recognized on other real estate owned
(5,478 ) (3,118 ) (4,645 ) (372 ) (2,124 ) (13,613 ) (9,285 )
Other operating income   1,652       1,285       3,927       1,785       2,167       8,649       5,510  
Total other income   24,451       26,367       29,145       29,143       30,795       109,106       185,756  
Other expense:
Salaries and employee benefits 39,846 38,422 37,815 37,775 36,399 153,858 144,349
Occupancy and equipment expense 8,498 9,092 8,483 9,394 7,938 35,467 34,845

Computer services and telecommunication expense
4,382 3,488 3,570 3,445 3,264 14,885 14,615
Advertising and marketing expense 1,831 1,740 1,748 1,719 1,573 7,038 6,465
Professional and legal expense 1,422 1,647 1,853 1,225 1,718 6,147 5,803
Brokerage fee expense 137 363 574 483 448 1,557 1,926
Other intangible amortization expense 1,410 1,414 1,416 1,425 1,632 5,665 6,214
FDIC insurance premiums 2,662 2,272 3,502 3,428 3,930 11,864 15,600
Branch impairment charges 594 - - 1,000 - 1,594 -
Other real estate expense, net 1,464 1,181 1,251 398 858 4,294 2,694
Other operating expenses   7,187       6,989       6,516       6,572       6,855       27,264       26,265  
Total other expense   69,433       66,608       66,728       66,864       64,615       269,633       258,776  
Income (loss) before income taxes 27,263 28,675 (16,426 ) 4,484 1,835 43,996 20,552
Income taxes   7,810       8,978       (9,060 )     (2,460 )     (1,358 )     5,268       24  
Net income (loss) 19,453 19,697 (7,366 ) 6,944 3,193 38,728 20,528

Preferred stock dividends and discount accretion
  2,606       2,605       2,602       2,601       2,598       10,414       10,382  

Net income (loss) available to common stockholders
$ 16,847     $ 17,092     $ (9,968 )   $ 4,343     $ 595     $ 28,314     $ 10,146  
 
           
Three Months Ended   Year Ended
December 31,   September 30, June 30, March 31, December 31, December 31, December 31,
2011   2011   2011   2011   2010   2011   2010
Common share data:
Net income (loss) per basic common share $ 0.36 $ 0.36 $ (0.14 ) $ 0.13 $ 0.06 $ 0.71 $ 0.39

Impact of preferred stock dividends on basic earnings (loss) per common share
(0.05 ) (0.04 ) (0.04 ) (0.05 ) (0.05 ) (0.19 ) (0.20 )
Basic earnings (loss) per common share 0.31 0.32 (0.18 ) 0.08 0.01 0.52 0.19
 
Net income (loss) per common share 0.36 0.36 (0.14 ) 0.13 0.06 0.71 0.39

Impact of preferred stock dividends on diluted earnings (loss) per common share
(0.05 ) (0.05 ) (0.04 ) (0.05 ) (0.05 ) (0.19 ) (0.20 )
Diluted earnings (loss) per common share 0.31 0.31 (0.18 ) 0.08 0.01 0.52 0.19
 
Weighted average common shares outstanding 54,140,646 54,121,156 54,002,979 53,961,176 53,572,157 54,057,158 52,724,715
Diluted weighted average common shares outstanding 54,360,178 54,323,320 54,002,979 54,254,876 53,790,047 54,337,280 53,035,047
 
           
Three Months Ended   Year Ended
December 31,   September 30, June 30, March 31, December 31, December 31, December 31,
2011   2011   2011   2011   2010   2011   2010
Performance Ratios:
Annualized return on average assets 0.78 % 0.80 % (0.30 ) % 0.28 % 0.12 % 0.39 % 0.20 %
Annualized return on average common equity 5.66 5.86 (3.43 ) 1.53 0.21 2.43 0.89

Annualized cash return on average tangible common equity (1)
9.09 9.52 (4.80 ) 2.88 0.89 4.23 1.96
Net interest rate spread 3.71 3.71 3.71 3.68 3.63 3.71 3.61
Cost of funds (2) 0.63 0.66 0.74 0.77 0.83 0.70 0.99
Efficiency ratio (3) 59.94 58.69 56.63 57.45 53.49 58.17 55.57

Annualized net non-interest expense to average assets (4)
1.56 1.48 1.38 1.44 1.20 1.46 1.37

Pre-tax pre-provision operating earnings to risk-weighted assets (5)
2.87 3.03 3.30 3.00 3.26 3.04 3.05

Pre-tax pre-provision operating earnings to average assets (5)
1.85 1.91 2.05 1.93 2.11 1.94 1.97
Net interest margin 3.71 3.74 3.79 3.76 3.72 3.75 3.72
Tax equivalent effect 0.20 0.16 0.13 0.12 0.11 0.15 0.11
Net interest margin - fully tax equivalent basis (6) 3.91 3.90 3.92 3.88 3.83 3.90 3.83
Asset Quality Ratios:
Non-performing loans (7) to total loans 2.17 % 2.42 % 2.54 % 5.01 % 5.48 % 2.17 % 5.48 %
Non-performing assets (7) to total assets 2.12 2.30 2.40 3.96 4.21 2.12 4.21

Allowance for loan losses to non-performing loans (7)
98.00 91.23 86.12 55.94 53.03 98.00 53.03
Allowance for loan losses to total loans 2.13 2.21 2.19 2.80 2.90 2.13 2.90

Allowance for credit losses to total loans and unfunded credit commitments
2.25 2.40 2.43 2.75 2.85 2.25 2.85
Net loan charge-offs to average loans (annualized) 0.95 1.14 5.89 3.38 2.99 2.90 3.42
Capital Ratios:
Tangible equity to tangible assets (8) 10.47 % 10.10 % 9.79 % 9.74 % 9.43 % 10.47 % 9.43 %
Tangible common equity to risk weighted assets (9) 12.48 12.42 11.97 11.36 10.94 12.48 10.94
Tangible common equity to tangible assets (10) 8.40 8.06 7.76 7.73 7.47 8.40 7.47
Book value per common share (11) $ 21.92 $ 21.48 $ 21.14 $ 21.24 $ 21.14 $ 21.92 $ 21.14

Less: goodwill and other intangible assets, net of benefit, per common share
7.43 7.45 7.49 7.52 7.53 7.43 7.53
Tangible book value per common share (12) 14.49 14.03 13.64 13.73 13.60 14.49 13.60
 
Total capital (to risk-weighted assets) 19.41 % 19.61 % 19.18 % 18.33 % 17.75 % 19.41 % 17.75 %
Tier 1 capital (to risk-weighted assets) 17.36 17.54 17.11 16.31 15.75 17.36 15.75
Tier 1 capital (to average assets) 11.73 11.59 11.16 11.00 10.66 11.73 10.66
Tier 1 common capital (to risk-weighted assets) 11.87 11.90 11.50 11.01 10.61 11.87 10.61
 
(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 common equity (average common 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 other expense excluding non-core items divided by the sum of net interest income on a fully tax equivalent basis, total other income less non-core items, and tax equivalent adjustment on the increase in cash surrender value of life insurance.
(4) Equals total other expense excluding non-core items less total other 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 net income before taxes, on a fully tax equivalent basis, excluding loan loss provision expense, non-core other income items, and non-core other expense items, including tax equivalent adjustment on the increase in cash surrender value of life insurance divided by risk-weighted assets or average assets.
(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 common stockholders’ equity less goodwill and other intangibles, net of tax benefit, divided by total assets less goodwill and other intangibles, net of tax benefit.
(11) Equals total ending common stockholders’ equity divided by common shares outstanding.
(12) Equals total ending common 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 pre-tax, pre-provision operating earnings; core other income, core other expense, non-core other income and non-core other expense; net interest income on a fully tax equivalent basis, net interest margin on a fully tax equivalent basis; efficiency ratio, ratio of annualized net non-interest expense to average assets, ratio of pre-tax, pre-provision operating earnings to risk-weighted assets and ratio of pre-tax, pre-provision operating earnings to average assets, with net gains and losses on securities available for sale, net gains and losses on sale of other assets, net gains and losses on other real estate owned, net gain on sale of loans held for sale, acquisition related gains and increase (decrease) in market value of assets held in trust for deferred compensation excluded from the non-interest income components of these ratios, impairment charges and increase (decrease) in market value of assets held in trust for deferred compensation excluded from the non-interest expense components of these ratios, and the tax equivalent adjustment for tax-exempt interest income and increase in cash surrender value of life insurance included in the net interest income and non-interest income components of these ratios; ratios of tangible equity to tangible assets, tangible common equity to risk weighted assets, tangible common equity to tangible 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 pre-tax, pre-provision operating earnings are a useful measure in assessing our core operating performance, particularly during times of economic stress. In recent periods, our results of operations have been negatively impacted by adverse economic conditions, as seen in our elevated levels of loan charge-offs and provision for credit losses. Management believes that measuring earnings before the impact of the provision for loan losses makes our financial data more comparable between reporting periods so that investors can better understand our operating performance trends. Management also believes that this is a standard figure used in the banking industry to measure performance.

Management believes that core and non-core other income and other expense are useful in assessing our core operating performance and in understanding the primary drivers of our other income and other 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 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 securities available for sale, net gains and losses on sale of other assets, net gains and losses on other real estate owned, net gain on sale of loans held for sale, acquisition-related gains and increase (decrease) in market value of assets held in trust for deferred compensation from the non-interest income components, and excluding impairment changes and increase (decrease) in market value of assets held in trust for deferred compensation from the non-interest expense components, of the efficiency ratio, the ratio of annualized net non-interest expense to average assets, the ratio of pre-tax, pre-provision operating earnings to risk-weighted assets and the ratio of pre-tax, pre-provision operating earnings 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.

The following table presents a reconciliation of tangible equity to equity (in thousands):
           
December 31, September 30, June 30, March 31, December 31,
2011   2011   2011   2011   2010
Stockholders' equity - as reported $ 1,393,027 $ 1,368,622 $ 1,345,344 $ 1,350,236 $ 1,344,786
Less: goodwill 387,069 387,069 387,069 387,069 387,069
Less: other intangible, net of tax benefit 19,171 20,088 21,007 21,927 22,853
Tangible equity $ 986,787 $ 961,465 $ 937,268 $ 941,240 $ 934,864
 

The following table presents a reconciliation of tangible assets to total assets (in thousands):
           
December 31, September 30, June 30, March 31, December 31,
2011   2011   2011   2011   2010
Total assets - as reported $ 9,833,072 $ 9,922,361 $ 9,977,735 $ 10,071,343 $ 10,320,364
Less: goodwill 387,069 387,069 387,069 387,069 387,069
Less: other intangible, net of tax benefit 19,171 20,088 21,007 21,927 22,853
Tangible assets $ 9,426,832 $ 9,515,204 $ 9,569,659 $ 9,662,347 $ 9,910,442
 

The following table presents a reconciliation of tangible common equity to stockholders’ common equity (in thousands):
           
December 31, September 30, June 30, March 31, December 31,
2011   2011   2011   2011   2010
Common stockholders' equity - as reported $ 1,198,308 $ 1,174,060 $ 1,150,937 $ 1,155,981 $ 1,150,682
Less: goodwill 387,069 387,069 387,069 387,069 387,069
Less: other intangible, net of tax benefit 19,171 20,088 21,007 21,927 22,853
Tangible common equity $ 792,068 $ 766,903 $ 742,861 $ 746,985 $ 740,760
 

The following table presents a reconciliation of average tangible common equity to average common stockholders’ equity (in thousands):
             
Three Months Ended   Year Ended
December 31,   September 30, June 30, March 31, December 31, December 31, December 31,
2011   2011   2011   2011   2010   2011   2010
Average common stockholders' equity - as reported $ 1,181,820 $ 1,158,119 $ 1,165,022 $ 1,152,119 $ 1,147,581 $ 1,164,316 $ 1,135,189
Less: average goodwill 387,069 387,069 387,069 387,069 387,069 387,069 387,069
Less: average other intangible assets, net of tax benefit 19,494 20,414 21,331 22,254 23,236 20,865 23,154
Average tangible common equity $ 775,257 $ 750,636 $ 756,622 $ 742,796 $ 737,276 $ 756,382 $ 724,966
 

The following table presents a reconciliation of net cash flow available to common stockholders to net income (loss) available to common stockholders (in thousands):
             
Three Months Ended   Year Ended
December 31,   September 30, June 30, March 31, December 31, December 31, December 31,
2011   2011   2011   2011   2010   2011   2010
 
Net income (loss) available to common stockholders - as reported $ 16,847 $ 17,092 $ (9,968 ) $ 4,343 $ 595 $ 28,314 $ 10,146
Add: other intangible amortization expense, net of tax benefit 917 919 920   926 1,062 3,682 4,039
Net cash flow available to common stockholders $ 17,764 $ 18,011 $ (9,048 ) $ 5,269 $ 1,657 $ 31,996 $ 14,185
 

The following table presents a reconciliation of Tier 1 common capital to Tier 1 capital (in thousands):
           
December 31, September 30, June 30, March 31, December 31,
2011   2011   2011   2011   2010
Tier 1 capital - as reported $ 1,101,538 $ 1,083,020 $ 1,061,482 $ 1,072,537 $ 1,066,538
Less: preferred stock 194,719 194,562 194,407 194,255 194,104
Less: qualifying trust preferred securities 153,787 153,795 153,803 153,812 153,820
Tier 1 common capital $ 753,032 $ 734,663 $ 713,272 $ 724,470 $ 718,614
 

Efficiency Ratio Calculation (Dollars in Thousands)
             
Three Months Ended   Year Ended
December 31,   September 30, June 30, March 31, December 31, December 31, December 31,
2011   2011   2011   2011   2010   2011   2010
Non-interest expense $ 69,433 $ 66,608 $ 66,728 $ 66,864 $ 64,615 $ 269,633 $ 258,776
Adjustment for impairment charges 594 - - 1,000 - 1,594 -

Adjustment for increase (decrease) in market value of assets held in trust for deferred compensation
20   (405 ) 158   187   597   (40 ) 562  
Non-interest expense - as adjusted $ 68,819   $ 67,013   $ 66,570   $ 65,677   $ 64,018   $ 268,079   $ 258,214  
 
Net interest income $ 80,245 $ 80,416 $ 82,407 $ 82,205 $ 84,655 $ 325,273 $ 339,772
Tax equivalent adjustment 4,468   3,320   2,775   2,625   2,609   13,188   10,458  
Net interest income on a fully tax equivalent basis 84,713 83,736 85,182 84,830 87,264 338,461 350,230

Tax equivalent adjustment on the increase in cash surrender value of life insurance
508 546 781 521 501 2,357 1,893
Plus other income 24,451 26,367 29,145 29,143 30,795 109,106 185,756
Less net losses on other real estate owned (5,478 ) (3,118 ) (4,645 ) (372 ) (2,124 ) (13,613 ) (9,284 )
Less net gains (losses) on securities available for sale 411 - 232 (3 ) (4 ) 640 18,648
Less net (losses) gains on sale of other assets (87 ) - 13 357 419 283 630
Less net gain on sale of loans held for sale - - 1,790 - - 1,790 -
Less acquisition related gains - - - - - - 62,649

Less increase (decrease) in market value of assets held in trust for deferred compensation
20   (405 ) 158   187   597   (40 ) 562  
 
Net interest income plus non-interest income - as adjusted $ 114,806   $ 114,172   $ 117,560   $ 114,325   $ 119,672   $ 460,864   $ 464,674  
 
Efficiency ratio 59.94 % 58.69 % 56.63 % 57.45 % 53.49 % 58.17 % 55.57 %
 
Efficiency ratio (without adjustments) 66.32 % 62.38 % 59.82 % 60.05 % 55.97 % 62.07 % 49.24 %
 

Annualized Net Non-interest Expense to Average Assets Calculation (Dollars in Thousands)
             
Three Months Ended   Year Ended
December 31,   September 30, June 30, March 31, December 31, December 31, December 31,
2011   2011   2011   2011   2010   2011   2010
Non-interest expense $ 69,433 $ 66,608 $ 66,728 $ 66,864 $ 64,615 $ 269,633 $ 258,776
Adjustment for impairment charges 594 - - 1,000 - 1,594 -

Adjustment for increase (decrease) in market value of assets held in trust for deferred compensation
20   (405 ) 158   187   597   (40 ) 562  
Non-interest expense - as adjusted 68,819   67,013   66,570   65,677   64,018   268,079   258,214  
 
Other income 24,451 26,367 29,145 29,143 30,795 109,106 185,756
Less net losses on other real estate owned (5,478 ) (3,118 ) (4,645 ) (372 ) (2,124 ) (13,613 ) (9,284 )
Less net gains (losses) on securities available for sale 411 - 232 (3 ) (4 ) 640 18,648
Less net (losses) gains on sale of other assets (87 ) - 13 357 419 283 630
Less net gain on sale of loans held for sale - - 1,790 - - 1,790 -
Less acquisition related gains - - - - - - 62,649

Less increase (decrease) in market value of assets held in trust for deferred compensation
20   (405 ) 158   187   597   (40 ) 562  
Other income - as adjusted 29,585   29,890   31,597   28,974   31,907   120,046   112,551  

Less tax equivalent adjustment on the increase in cash surrender value of life insurance
508   546   781   521   501   2,357   1,893  
 
Net non-interest expense $ 38,726   $ 36,577   $ 34,192   $ 36,182   $ 31,610   $ 145,676   $ 143,770  
 
Average assets $ 9,856,835 $ 9,807,561 $ 9,966,898 $ 10,198,626 $ 10,452,626 $ 9,956,133 $ 10,506,028
 
Annualized net non-interest expense to average assets 1.56 % 1.48 % 1.38 % 1.44 % 1.20 % 1.46 % 1.37 %
 

Annualized net non-interest expense to average assets (without adjustments)
1.81 % 1.63 % 1.51 % 1.50 % 1.28 % 1.61 % 0.70 %
 

Calculation of Pre-Tax, Pre-Provision Operating Earnings (Dollars in Thousands)
             
Three Months Ended   Year Ended
December 31,   September 30, June 30, March 31, December 31, December 31, December 31,
2011   2011   2011   2011   2010   2011   2010
Income (loss) before income taxes $ 27,263 $ 28,675 $ (16,426 ) $ 4,484 $ 1,835 $ 43,996 $ 20,552
Provision for credit losses 8,000   11,500   61,250   40,000   49,000   120,750   246,200  
Pre-tax, pre-provision earnings 35,263   40,175   44,824   44,484   50,835   164,746   266,752  
 
Tax equivalent adjustment on tax-exempt interest income 4,468 3,320 2,775 2,625 2,609 13,188 10,458

Tax equivalent adjustment on the increase in cash surrender value of life insurance
508   546   781   521   501   2,357   1,893  
Pre-tax, pre-provision earnings on a fully tax equivalent basis 40,239   44,041   48,380   47,630   53,945   180,291   279,103  
 
Non-core other income
Net losses on other real estate owned (5,478 ) (3,118 ) (4,645 ) (372 ) (2,124 ) (13,613 ) (9,284 )
Net gains (losses) on securities available for sale 411 - 232 (3 ) (4 ) 640 18,648
Net (losses) gain on sale of other assets (87 ) - 13 357 419 283 630
Net gain on sale of loans held for sale - - 1,790 - - 1,790 -
Acquisition related gains - - - - - - 62,649

Increase (decrease) in market value of assets held in trust for deferred compensation
20   (405 ) 158   187   597   (40 ) 562  
Total non-core other income (5,134 ) (3,523 ) (2,452 ) 169   (1,112 ) (10,940 ) 73,205  
 
Non-core other expense
Impairment charges 594 - - 1,000 - 1,594 -

Increase (decrease) in market value of assets held in trust for deferred compensation
20   (405 ) 158   187   597   (40 ) 562  
Total non-core other expense 614   (405 ) 158   1,187   597   1,554   562  
Pre-tax, pre-provision operating earnings $ 45,987   $ 47,159   $ 50,990   $ 48,648   $ 55,654   $ 192,785   $ 206,460  
 
Risk-weighted assets $ 6,346,201 $ 6,174,508 $ 6,203,587 $ 6,577,477 $ 6,772,761 $ 6,346,201 $ 6,772,761
 
Average assets $ 9,856,835 $ 9,807,561 $ 9,966,898 $ 10,198,626 $ 10,452,626 $ 9,956,133 $ 10,506,028
 
 

Annualized pre-tax, pre-provision operating earnings to risk-weighted assets
2.87 % 3.03 % 3.30 % 3.00 % 3.26 % 3.04 % 3.05 %

Annualized pre-tax, pre-provision operating earnings to risk-weighted assets (without adjustments)
2.20 % 2.58 % 2.90 % 2.74 % 2.98 % 2.60 % 3.94 %
 

Annualized pre-tax, pre-provision operating earnings to average assets
1.85 % 1.91 % 2.05 % 1.93 % 2.11 % 1.94 % 1.97 %
 

Annualized pre-tax, pre-provision operating earnings to average assets (without adjustments)
1.42 % 1.63 % 1.80 % 1.77 % 1.93 % 1.65 % 2.54 %
 

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 other income and other expense to other income and other expense are contained in the tables under “Results of Operations—Fourth Quarter Results.”

NET INTEREST MARGIN

The following table presents, for the periods indicated, the total dollar amount of interest income from average interest earning assets and the resultant yields, as well as the interest expense on average interest bearing liabilities, and the resultant costs, expressed both in dollars and rates (dollars in thousands):
           
Three Months Ended December 31, Three Months Ended September 30,
2011   2010   2011
Average     Yield/   Average Yield/ Average     Yield/
Balance   Interest   Rate   Balance   Interest   Rate   Balance   Interest   Rate
Interest Earning Assets:
Loans (1) (2) (3):
Commercial related credits
Commercial $ 1,051,065 $ 12,989 4.90% $ 1,243,057 15,053 4.80% $ 1,070,852 $ 12,915 4.78%

Commercial loans collateralized by assignment of lease payments
1,102,220 14,167 5.14 1,018,026 14,662 5.76 1,015,925 13,694 5.39
Real estate commercial 1,839,689 25,132 5.35 2,235,328 29,853 5.23 1,845,988 25,230 5.35
Real estate construction 209,098 2,443 4.57 438,622 3,741 3.34 238,396 2,233 3.67
Total commercial related credits 4,202,072 54,731 5.10 4,935,033 63,309 5.02 4,171,161 54,072 5.07
Other loans
Real estate residential 316,087 3,719 4.71 326,785 4,523 5.54 317,050 3,739 4.72
Home equity 342,011 3,701 4.29 385,119 4,234 4.36 354,131 3,828 4.29
Indirect 188,562 3,080 6.48 178,940 3,583 7.94 185,850 2,968 6.34
Consumer loans 62,703 482 3.05 57,709 633 4.35 56,257 439 3.10
Total other loans 909,363 10,982 4.79 948,553 12,973 5.43 913,288 10,974 4.77
Total loans, excluding covered loans 5,111,435 65,713 5.10 5,883,586 76,282 5.14 5,084,449 65,046 5.08
Covered loans 707,039 10,894 6.11 840,254 17,213 8.13 742,732 14,004 7.48
Total loans 5,818,474 76,607 5.22 6,723,840 93,495 5.52 5,827,181 79,050 5.38
 
Taxable investment securities 1,820,680 11,608 2.55 1,172,751 7,002 2.39 1,869,961 11,699 2.50
Investment securities exempt from federal income taxes (3) 676,893 9,505 5.49 351,955 5,181 5.76 456,777 6,614 5.67
Federal funds sold - - 0.00 - - 0.00 - - 0.00
Other interest earning deposits 272,762 181 0.26 784,803 504 0.25 365,723 244 0.26
Total interest earning assets $ 8,588,809 $ 97,901 4.52 $ 9,033,349 $ 106,182 4.66 $ 8,519,642 $ 97,607 4.55
Non-interest earning assets 1,268,026 1,419,277 1,287,919
Total assets $ 9,856,835 $ 10,452,626 $ 9,807,561
 
Interest Bearing Liabilities:
Core funding:
Money market and NOW accounts $ 2,653,486 $ 1,498 0.22% $ 2,823,619 $ 3,410 0.48% $ 2,656,490 $ 1,731 0.26%
Savings accounts 751,766 327 0.17 657,816 505 0.30 742,334 320 0.17
Certificates of deposit 1,971,473 4,294 0.89 2,611,365 7,609 1.17 2,048,556 4,759 0.92
Customer repurchase agreements 235,666 151 0.25 277,782 218 0.31 218,928 146 0.26
Total core funding 5,612,391 6,270 0.44 6,370,582 11,742 0.73 5,666,308 6,956 0.49
Wholesale funding:
Brokered accounts (includes fee expense) 438,123 3,450 3.12 473,090 4,074 3.42 412,714 3,396 3.26
Other borrowings 431,165 3,468 3.15 452,212 3,102 2.68 442,066 3,519 3.11
Total wholesale funding 869,288 6,918 2.88 925,302 7,176 2.88 854,780 6,915 3.08
Total interest bearing liabilities $ 6,481,679 $ 13,188 0.81 $ 7,295,884 $ 18,918 1.03 $ 6,521,088 $ 13,871 0.84
Non-interest bearing deposits 1,878,049 1,694,179 1,810,501
Other non-interest bearing liabilities 120,671 120,974 123,391
Stockholders' equity 1,376,436 1,341,589 1,352,581
Total liabilities and stockholders' equity $ 9,856,835 $ 10,452,626 $ 9,807,561
Net interest income/interest rate spread (4) $ 84,713   3.71% $ 87,264   3.63% $ 83,736   3.71%
Taxable equivalent adjustment 4,468 2,609 3,320
Net interest income, as reported $ 80,245 $ 84,655 $ 80,416
Net interest margin (5) 3.71% 3.72% 3.74%
Tax equivalent effect 0.20% 0.11% 0.16%
Net interest margin on a fully tax equivalent basis (5) 3.91% 3.83% 3.90%
 
(1)   Non-accrual loans are included in average loans.
(2) Interest income includes amortization of deferred loan origination fees of $1.2 million, $972 thousand, and $1.0 million for the three months ended December 31, 2011, September 30, 2011, and December 31, 2010, respectively.
(3) Non-taxable loan and investment income is presented on a fully tax equivalent basis assuming a 35% tax rate.
(4) Interest rate spread represents the difference between the average yield on interest earning assets and the average cost of interest bearing liabilities and is presented on a fully tax equivalent basis.
(5) Net interest margin represents net interest income as a percentage of average interest earning assets.
 

The following table presents, for the periods indicated, the total dollar amount of interest income from average interest earning assets and the resultant yields, as well as the interest expense on average interest bearing liabilities, and the resultant costs, expressed both in dollars and rates (dollars in thousands):
         
Year Ended December 31,
2011   2010
Average     Yield/   Average Yield/
Balance   Interest   Rate   Balance   Interest   Rate
Interest Earning Assets:
Loans (1) (2) (3):
Commercial related credits
Commercial $ 1,108,033 $ 53,813 4.86% $ 1,324,118 $ 66,121 4.99%

Commercial loans collateralized by assignment of lease payments
1,041,033 56,453 5.42 981,384 58,807 5.99
Real estate commercial 1,968,087 105,342 5.28 2,345,202 125,115 5.26
Real estate construction 300,288 11,984 3.94 520,734 17,357 3.29
Total commercial related credits 4,417,441 227,592 5.08 5,171,438 267,400 5.10
Other loans
Real estate residential 326,189 15,914 4.88 314,713 16,878 5.36
Home equity 359,972 15,481 4.30 394,142 17,317 5.39
Indirect 181,988 12,034 6.61 180,337 13,115 7.27
Consumer loans 58,205 1,957 3.36 58,834 2,209 3.75
Total other loans 926,354 45,386 4.90 948,026 49,519 5.22
Total loans, excluding covered loans 5,343,795 272,978 5.11 6,119,464 316,919 5.18
Covered loans 755,242 55,706 7.38 639,312 50,707 7.93
Total loans 6,099,037 328,684 5.39 6,758,776 367,626 5.44
 
Taxable investment securities 1,669,971 41,349 2.48 1,635,544 50,542 3.09
Investment securities exempt from federal income taxes (3) 460,972 26,562 5.68 356,496 20,900 5.78
Federal funds sold - - 0.00 352 2 0.56
Other interest earning deposits 442,190 1,153 0.26 386,521 1,028 0.27
Total interest earning assets $ 8,672,170 $ 397,748 4.59 $ 9,137,689 $ 440,098 4.82
Non-interest earning assets 1,283,963 1,368,339
Total assets $ 9,956,133 $ 10,506,028
 
Interest Bearing Liabilities:
Core funding:
Money market and NOW accounts $ 2,678,049 $ 7,637 0.29% $ 2,767,044 $ 14,965 0.54%
Savings accounts 732,731 1,379 0.19 619,304 1,911 0.31
Certificates of deposit 2,165,541 21,162 0.99 2,846,246 41,085 1.47
Customer repurchase agreements 239,896 639 0.27 260,291 959 0.37
Total core funding 5,816,217 30,817 0.53 6,492,885 58,920 0.91
Wholesale funding:
Brokered accounts (includes fee expense) 444,895 14,703 3.30 489,211 17,889 3.66
Other borrowings 443,752 13,767 3.06 473,347 13,059 2.72
Total wholesale funding 888,647 28,470 3.03 962,558 30,948 2.99
Total interest bearing liabilities $ 6,704,864 $ 59,287 0.88 $ 7,455,443 $ 89,868 1.21
Non-interest bearing deposits 1,771,918 1,594,504
Other non-interest bearing liabilities 120,647 127,099
Stockholders' equity 1,358,704 1,328,982
Total liabilities and stockholders' equity $ 9,956,133 $ 10,506,028
Net interest income/interest rate spread (4) $ 338,461   3.71% $ 350,230   3.61%
Taxable equivalent adjustment 13,188 10,458
Net interest income, as reported $ 325,273 $ 339,772
Net interest margin (5) 3.75% 3.72%
Tax equivalent effect 0.15% 0.11%
Net interest margin on a fully tax equivalent basis (5) 3.90% 3.83%
 
(1)   Non-accrual loans are included in average loans.
(2) Interest income includes amortization of deferred loan origination fees of $4.7 million and $4.6 million for the year ended December 31, 2011, and December 31 2010, respectively.
(3) Non-taxable loan and investment income is presented on a fully tax equivalent basis assuming a 35% tax rate.
(4) Interest rate spread represents the difference between the average yield on interest earning assets and the average cost of interest bearing liabilities and is presented on a fully tax equivalent basis.
(5) Net interest margin represents net interest income as a percentage of average interest earning assets.

Copyright Business Wire 2010