MB Financial, Inc. Reports Third Quarter 2012 Net Income Of $23.1 Million And An Increase Of The Quarterly Dividend To $0.10 Per Share

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 OPERATIONS

Third Quarter Results

Net 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).

Net interest income on a fully tax equivalent basis decreased $15.4 million during the nine months ended September 30, 2012 compared to the nine months ended September 30, 2011 primarily due to a decrease in average interest earning assets of approximately $300 million and an 11 basis point decline in our net interest margin to 3.79% on a fully tax equivalent basis.

See the supplemental net interest margin tables for further detail.

Other Income (in thousands):
      Three Months Ended   Nine Months Ended
September 30,   June 30,   March 31,   December 31,   September 30, September 30,   September 30,
  2012       2012       2012       2011       2011       2012       2011  
Core other income:
Key fee initiatives:
Capital markets and international banking
service fees $ 1,344 $ 780 $ 507 $ 754 $ 605 $ 2,631 $ 1,107
Commercial deposit and treasury management fees 5,860 5,784 5,901 6,113 6,157 17,545 17,643
Lease financing, net 9,671 7,334 6,958 7,801 6,494 23,963 19,138
Trust and asset management fees 4,428 4,535 4,404 4,166 4,272 13,367 13,158
Card fees   2,385       2,429       2,044       1,096       2,071       6,858       5,921  
Total key fee initiatives 23,688 20,862 19,814 19,930 19,599 64,364 56,967
 
Loan service fees 1,125 1,268 1,066 1,069 1,706 3,459 5,286
Retail and other deposit service fees 3,792 3,541 3,457 3,926 4,123 10,790 12,373
Brokerage fees 1,185 1,264 1,255 1,577 1,273 3,704 4,307
Increase in cash surrender value of life insurance 890 870 917 944 1,014 2,677 3,433
Accretion of FDIC indemnification asset 204 222 475 683 985 901 4,155
Net gain on sale of loans 575 554 374 366 190 1,503 451
Other operating income   408       958       1,604       1,090       1,000       2,970       3,489  
Total core other income   31,867       29,539       28,962       29,585       29,890       90,368       90,461  
 
Non-core other income: (1)
Net gain (loss) on investment securities 281 (34 ) (3 ) 411 - 244 229
Net (loss) gain on sale of other assets (12 ) (8 ) (17 ) (87 ) - (37 ) 370
Net gain on sale of loans held for sale (A) - - - - - - 1,790
Net loss recognized on other real estate owned (B) (4,151 ) (4,156 ) (4,348 ) (3,620 ) (2,354 ) (12,655 ) (6,351 )
Net gain (loss) recognized on other real estate
owned related to FDIC transactions (B) 213 (1,285 ) (2,241 ) (1,858 ) (764 ) (3,313 ) (1,784 )
Increase (decrease) in market value of assets held
in trust for deferred compensation (C)   355       (149 )     501       20       (405 )     707       (60 )
Total non-core other income   (3,314 )     (5,632 )     (6,108 )     (5,134 )     (3,523 )     (15,054 )     (5,806 )
 
Total other income $ 28,553     $ 23,907     $ 22,854     $ 24,451     $ 26,367     $ 75,314     $ 84,655  

(1) Letter denotes the corresponding line items where these non-core other 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.

Revenue from our key fee initiatives increased by $2.8 million (+13.5%) from the second quarter of 2012 to the third quarter of 2012 primarily due to the growth in our capital markets and international banking services and leasing revenues. Capital markets and international banking service fees increased due primarily to an increase in interest rate swap fees. Net lease financing income increased as a result of higher promotional and remarketing income, as well as increased sales of equipment maintenance contracts. Retail and other service fees increased as a result of the increase in NSF and overdraft fees. Other operating income decreased due to lower income from low income housing partnerships. Non-core other income was primarily impacted by lower losses recognized on OREO.

Revenue from our key fee initiatives increased by $7.4 million (+13.0%) for the nine months ended September 30, 2012 compared to the nine months ended September 30, 2011. Capital markets and international banking service fees increased due to an increase in interest rate swap fees and an increase in our international banking activities. Net lease financing income increased as a result of higher promotional and remarketing income, as well as increased sales of equipment maintenance contracts. Card fee income increased due primarily to fees earned on prepaid cards and credit cards. These increases were offset by the decreases in loan service fees, retail and deposit service fees and accretion of FDIC indemnification asset. Loan service fees decreased due to a decrease in prepayment and exit fees. Retail and deposit service fees decreased due to a decrease in NSF fees. Accretion of FDIC indemnification asset decreased $3.3 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 other income was primarily impacted by higher losses recognized on OREO.

Other Expense (in thousands):

    Three Months Ended   Nine Months Ended
September 30,   June 30,   March 31,   December 31,   September 30, September 30,   September 30,
  2012     2012       2012     2011     2011       2012     2011  
Core other expense:
Salaries and employee benefits $ 41,728 $ 40,295 $ 39,928 $ 39,826 $ 38,827 $ 121,951 $ 114,072
Occupancy and equipment expense 8,274 9,188 9,570 8,498 9,092 27,032 26,969
Computer services and telecommunication expense 3,777 3,909 3,653 4,382 3,488 11,339 10,503
Advertising and marketing expense 2,025 1,930 2,066 1,831 1,740 6,021 5,207
Professional and legal expense 1,554 1,503 1,413 1,422 1,647 4,470 4,725
Other intangible amortization expense 1,251 1,251 1,257 1,410 1,414 3,759 4,255
FDIC insurance premiums 1,545 2,010 2,643 2,662 2,272 6,198 9,202
Other real estate expense, net 874 424 1,243 1,464 1,181 2,541 2,830
Other operating expenses   6,342     6,473       5,057     7,324     7,352       17,872     21,497  
Total core other expense   67,370     66,983       66,830     68,819     67,013       201,183     199,260  
 
Non-core other expense: (1)
Branch impairment charges 758 - - 594 - 758 1,000
Prepayment fees on interest bearing liabilities 12,682 - - - - 12,682 -
Increase (decrease) in market value of assets held
in trust for deferred compensation (A)   355     (149 )     501     20     (405 )     707     (60 )
Total non-core other expense   13,795     (149 )     501     614     (405 )     14,147     940  
 
Total other expense $ 81,165   $ 66,834     $ 67,331   $ 69,433   $ 66,608     $ 215,330   $ 200,200  

(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 $387 thousand (+0.6%) from the second quarter of 2012 to the third quarter of 2012. Salaries and employee benefits expense increased primarily due to annual salary increases and higher commissions on lease revenues. Occupancy and equipment expense decreased due to a decrease in real estate taxes and equipment maintenance. Non-core other expense was primarily impacted by the $12.7 million in prepayment fees on interest bearing liabilities. We prepaid certain brokered certificates of deposits and an FHLB advance in an effort to lower our future funding costs and improve our funding mix.

Core other expense increased by $1.9 million (+1.0%) from the nine months ended September 30, 2011 to the nine months ended September 30, 2012. Salaries and employee benefits expense increased primarily due to annual salary increases, higher health insurance claims and an increase in incentive compensation. FDIC insurance premiums decreased due to 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 favorably impacted in the nine months ended September 30, 2012 by a decrease in the clawback liability related to our loss share agreements with the FDIC recorded during the period. 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):
    September 30,   June 30,   March 31,   December 31,   September 30,
  2012       2012       2012       2011       2011  
  % of   % of   % of   % of   % of
  Amount   Total     Amount   Total     Amount   Total     Amount   Total     Amount   Total
Commercial related credits:
Commercial loans $ 1,073,981 19 % $ 1,079,436 19 % $ 1,040,340 18 % $ 1,113,123 19 % $ 1,042,583 18 %
Commercial loans collateralized by
assignment of lease payments (lease loans) 1,219,361 22 % 1,221,199 21 % 1,209,942 21 % 1,208,575 20 % 1,067,191 18 %
Commercial real estate 1,770,261 31 % 1,794,777 31 % 1,877,380 32 % 1,853,788 31 % 1,844,894 32 %
Construction real estate 149,872   3 % 150,665   3 % 128,040   2 % 183,789   3 % 210,206   4 %
Total commercial related credits 4,213,475   75 % 4,246,077   74 % 4,255,702   73 % 4,359,275   73 % 4,164,874   72 %
Other loans:
Residential real estate 308,866 5 % 313,137 5 % 309,644 5 % 316,787 5 % 316,305 5 %
Indirect vehicle 206,973 3 % 198,848 3 % 186,736 3 % 187,481 3 % 189,033 4 %
Home equity 314,718 6 % 323,234 6 % 327,450 6 % 336,043 6 % 348,934 6 %
Consumer loans 84,651   2 % 89,115   2 % 89,705   2 % 88,865   2 % 76,025   1 %
Total other loans 915,208   16 % 924,334   16 % 913,535   16 % 929,176   16 % 930,297   16 %
Gross loans excluding covered loans 5,128,683 91 % 5,170,411 90 % 5,169,237 89 % 5,288,451 89 % 5,095,171 88 %
Covered loans (1) 496,162   9 % 552,838   10 % 620,528   11 % 662,544   11 % 718,566   12 %
Total loans $ 5,624,845 100 % $ 5,723,249 100 % $ 5,789,765 100 % $ 5,950,995 100 % $ 5,813,737 100 %

(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 as generally lower risk commercial and lease loan balances increased while generally higher risk commercial real estate and construction loan balances decreased.

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 assets acquired in FDIC-assisted transactions, as of the dates indicated (dollar amounts in thousands):
  September 30,   June 30,   March 31,   December 31,   September 30,
  2012       2012       2012       2011       2011  
Non-performing loans:
Non-accrual loans (1) $ 104,813 $ 113,077 $ 124,011 $ 129,309 $ 140,979
Loans 90 days or more past due, still accruing interest 470   453   679   82   -  
Total non-performing loans 105,283   113,530   124,690   129,391   140,979  
 
OREO 42,427 49,690 63,077 78,452 87,469
Repossessed vehicles 113   60   81   156   249  
Total non-performing assets $ 147,823   $ 163,280   $ 187,848   $ 207,999   $ 228,697  
 
Total allowance for loan losses $ 121,182 $ 121,756 $ 125,431 $ 126,798 $ 128,610
 
Accruing restructured loans (2) $ 17,929 $ 16,536 $ 24,145 $ 37,996 $ 34,321
 
Total non-performing loans to total loans 1.87 % 1.98 % 2.15 % 2.17 % 2.42 %
Total non-performing assets to total assets 1.56 % 1.72 % 1.94 % 2.12 % 2.30 %
Allowance for loan losses to non-performing loans 115.10 % 107.25 % 100.59 % 98.00 % 91.23 %

(1) Includes $27.1 million, $32.7 million, $34.7 million, $42.5 million and $36.0 million of restructured loans on non-accrual status at September 30, 2012, June 30, 2012, March 31, 2012, December 31, 2011 and September 30, 2011, respectively.

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

The following table presents data related to non-performing loans by category, excluding loans held for sale and credit-impaired loans that were acquired as part of our FDIC-assisted transactions (dollar amounts in thousands):
  September 30,   June 30,   March 31,   December 31,   September 30,
  2012     2012     2012     2011     2011
 
Commercial and lease $ 22,648 $ 24,402 $ 34,471 $ 36,995 $ 37,644
Commercial real estate 55,387 62,512 70,939 76,551 86,907
Construction real estate 1,225 1,470 1,553 1,145 2,913
Consumer 26,023 25,146 17,727 14,700 13,515
Total non-performing loans $ 105,283 $ 113,530 $ 124,690 $ 129,391 $ 140,979
 

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 following table presents data related to potential problem loans by category, excluding loans held for sale and credit-impaired loans that were acquired as part of our FDIC-assisted transactions (dollar amounts in thousands):
  September 30,   June 30,   March 31,   December 31,   September 30,
  2012     2012     2012     2011     2011
 
Commercial and lease $ 48,933 $ 46,532 $ 49,197 $ 39,193 $ 55,019
Commercial real estate 73,941 82,596 98,834 99,588 108,557
Construction real estate 11,415 11,938 11,409 10,375 15,528
Consumer - - - 600 603
Total non-performing loans $ 134,289 $ 141,066 $ 159,440 $ 149,756 $ 179,707
 

The following table represents a summary of OREO, excluding OREO related to assets acquired in FDIC-assisted transactions (in thousands):
  September 30,   June 30,   March 31,   December 31,   September 30,
2012   2012   2012   2011   2011  
 
Balance at the beginning of quarter $ 49,690 $ 63,077 $ 78,452 $ 87,469 $ 88,185
Transfers in at fair value less estimated costs to sell 63 910 1,751 3,657 15,014
Capitalized OREO costs 978 967 359 552 644
Fair value adjustments (4,648 ) (4,507 ) (4,764 ) (3,733 ) (2,524 )
Net gains on sales of OREO 497 351 416 113 170
Cash received upon disposition (4,153 ) (11,108 ) (13,137 ) (9,606 ) (14,020 )
Balance at the end of quarter $ 42,427   $ 49,690   $ 63,077   $ 78,452   $ 87,469  
 

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   Nine Months Ended
September 30,   June 30,   March 31,   December 31,   September 30,   September 30,   September 30,
  2012       2012       2012       2011       2011       2012       2011  
 
Allowance for credit losses, balance at the beginning of period $ 128,840 $ 133,255 $ 135,975 $ 141,861 $ 147,107 $ 135,975 $ 192,217
Provision for credit losses (13,000 ) - 3,100 8,000 11,500 (9,900 ) 112,750
Charge-offs:
Commercial loans (75 ) (1,451 ) (539 ) (2,932 ) (3,497 ) (2,065 ) (14,639 )
Commercial loans collateralized by
assignment of lease payments (lease loans) - (1,720 ) - (1,373 ) - (1,720 ) (93 )
Commercial real estate loans (2,994 ) (2,415 ) (3,003 ) (3,793 ) (7,815 ) (8,412 ) (92,840 )
Construction real estate (71 ) (444 ) (3,436 ) (6,989 ) (6,008 ) (3,951 ) (45,928 )
Residential real estate (474 ) (1,108 ) (294 ) (860 ) (141 ) (1,876 ) (11,783 )
Indirect vehicle (433 ) (488 ) (715 ) (954 ) (611 ) (1,636 ) (1,882 )
Home equity (1,209 ) (876 ) (1,072 ) (2,061 ) (1,605 ) (3,157 ) (9,005 )
Consumer loans (332 ) (274 ) (258 ) (285 ) (475 ) (864 ) (1,363 )
Total charge-offs (5,588 ) (8,776 ) (9,317 ) (19,247 ) (20,152 ) (23,681 ) (177,533 )
Recoveries:
Commercial loans 306 386 2,038 634 1,413 2,730 4,736
Commercial loans collateralized by
assignment of lease payments (lease loans) 111 93 256 1 5 460 224
Commercial real estate loans 12,893 3,061 162 747 739 16,116 2,585
Construction real estate 752 141 565 3,519 681 1,458 5,071
Residential real estate 8 188 34 9 7 230 40
Indirect vehicle 224 300 311 378 327 835 1,021
Home equity 303 100 20 6 151 423 218
Consumer loans 77   92   111   67   83   280   532  
Total recoveries 14,674   4,361   3,497   5,361   3,406   22,532   14,427  
 
Total net recoveries (charge-offs) 9,086   (4,415 ) (5,820 ) (13,886 ) (16,746 ) (1,149 ) (163,106 )
 
Allowance for credit losses 124,926 128,840 133,255 135,975 141,861 124,926 141,861
 
Allowance for unfunded credit commitments (3,744 ) (7,084 ) (7,824 ) (9,177 ) (13,251 ) (3,744 ) (13,251 )
 
Allowance for loan losses $ 121,182   $ 121,756   $ 125,431   $ 126,798   $ 128,610   $ 121,182   $ 128,610  
 
Total loans, excluding loans held for sale $ 5,624,845 $ 5,723,249 $ 5,789,765 $ 5,950,995 $ 5,813,737 $ 5,624,845 $ 5,813,737
Average loans, excluding loans held for sale $ 5,630,232 $ 5,712,630 $ 5,802,037 $ 5,818,425 $ 5,827,181 $ 5,714,657 $ 6,191,268
 
Ratio of allowance for loan losses to total loans, excluding loans held for sale 2.15 % 2.13 % 2.17 % 2.13 % 2.21 % 2.15 % 2.21 %
 
Net loan (recoveries) charge-offs to average loans, excluding loans held for sale (annualized) (0.64 )% 0.31 % 0.40 % 0.95 % 1.14 % 0.03 % 3.52 %
 

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):
  September 30,   June 30,   March 31,   December 31,   September 30,
  2012     2012     2012     2011     2011
 
General loss reserve $ 95,586 $ 93,904 $ 98,673 $ 102,196 $ 102,752
Specific reserve 11,300 13,674 13,734 10,804 11,416
Smaller-balance homogenous loans reserve 14,296 14,178 13,024 13,798 14,442
Total allowance for loan losses $ 121,182 $ 121,756 $ 125,431 $ 126,798 $ 128,610
 

Although management believes that adequate general, specific and smaller-balance homogenous loan loss allowances have been established, actual losses are dependent upon future events and, as such, further additions to the level of general, specific and smaller-balance homogenous 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):
  September 30,   June 30,   March 31,   December 31,   September 30,
  2012     2012     2012     2011     2011
 
Securities available for sale:
Fair value
Government sponsored agencies and enterprises $ 42,187 $ 42,175 $ 42,070 $ 42,401 $ 56,007
States and political subdivisions 668,966 629,173 581,720 535,660 394,279
Mortgage-backed securities 1,075,962 1,035,473 1,193,248 1,334,491 1,421,789
Corporate bonds 16,626 5,569 5,686 5,899 5,899
Equity securities 11,231 11,081 10,887 10,846 10,764
Total fair value $ 1,814,972 $ 1,723,471 $ 1,833,611 $ 1,929,297 $ 1,888,738
 
Amortized cost
Government sponsored agencies and enterprises $ 39,233 $ 39,366 $ 39,503 $ 39,640 $ 53,016
States and political subdivisions 620,489 589,654 547,262 500,979 366,651
Mortgage-backed securities 1,060,665 1,014,186 1,168,340 1,308,020 1,399,801
Corporate bonds 16,617 5,569 5,686 5,899 5,899
Equity securities 10,644 10,584 10,520 10,457 10,324
Total amortized cost $ 1,747,648 $ 1,659,359 $ 1,771,311 $ 1,864,995 $ 1,835,691
 
Unrealized gain
Government sponsored agencies and enterprises $ 2,954 $ 2,809 $ 2,567 $ 2,761 $ 2,991
States and political subdivisions 48,477 39,519 34,458 34,681 27,628
Mortgage-backed securities 15,297 21,287 24,908 26,471 21,988
Corporate bonds 9 - - - -
Equity securities 587 497 367 389 440
Total unrealized gain $ 67,324 $ 64,112 $ 62,300 $ 64,302 $ 53,047
 
Securities held to maturity, at cost:
States and political subdivisions $ 238,211 $ 238,869 $ 239,526 $ 240,183 $ 240,839
Mortgage-backed securities 257,640 258,931 259,241 259,100 258,199
Total amortized cost $ 495,851 $ 497,800 $ 498,767 $ 499,283 $ 499,038
 

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):
    September 30,   June 30,   March 31,   December 31,   September 30,
  2012     2012     2012     2011     2011
  % of   % of   % of   % of   % of
  Amount   Total     Amount   Total     Amount   Total     Amount   Total     Amount   Total
Low cost deposits:
Noninterest bearing deposits $ 2,011,542 27 % $ 1,946,468 26 % $ 1,874,028 25 % $ 1,885,694 25 % $ 1,803,141 23 %
Money market and NOW accounts 2,682,608 36 % 2,564,493 34 % 2,702,636 35 % 2,645,334 34 % 2,722,162 35 %
Savings accounts 797,741   10 % 790,350   11 % 786,357   10 % 753,610   10 % 751,062   10 %
Total low cost deposits 5,491,891   73 % 5,301,311   71 % 5,363,021   70 % 5,284,638   69 % 5,276,365   68 %
 
Certificates of deposit:
Certificates of deposit 1,632,370 22 % 1,718,266 23 % 1,820,266 24 % 1,925,608 25 % 2,001,210 26 %
Brokered deposit accounts 355,086   5 % 451,132   6 % 451,415   6 % 437,361   6 % 444,332   6 %
Total certificates of deposit 1,987,456   27 % 2,169,398   29 % 2,271,681   30 % 2,362,969   31 % 2,445,542   32 %
 
Total deposits $ 7,479,347   100 % $ 7,470,709   100 % $ 7,634,702   100 % $ 7,647,607   100 % $ 7,721,907   100 %

Our deposit mix improved over the past twelve months as low cost deposits increased to 73% of total deposits at September 30, 2012 compared to 68% at September 30, 2011 driven by strong noninterest bearing deposit flows (+11.6%).

CAPITAL

Tangible book value per common share grew to $15.64 at September 30, 2012 compared to $14.03 a year ago primarily due to our increase in earnings. At September 30, 2012, the Company’s total risk-based capital ratio was 17.91%; Tier 1 capital to risk-weighted assets ratio was 15.83% and Tier 1 capital to average asset ratio was 10.60%. As of June 30, 2012, the Company’s total risk-based capital ratio was 17.53%; Tier 1 capital to risk-weighted assets ratio was 15.45% and Tier 1 capital to average asset ratio was 10.46%. At September 30, 2012, MB Financial Bank’s total risk-based capital ratio was 17.13%; Tier 1 capital to risk-weighted assets ratio was 15.04% and Tier 1 capital to average asset ratio was 10.07%. MB Financial Bank, N.A. was categorized as “well capitalized” at September 30, 2012 under the Prompt Corrective Action (“PCA”) provisions.

In June 2012, the federal banking agencies issued notices of proposed rulemaking (“NPRs”) on regulatory capital enhancements, which would implement the Basel III capital standards and address certain requirements of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”). The NPRs would revise banking regulatory capital requirements and the risk-weighted asset rules. The NPRs would increase the minimum levels of required capital, narrow the definition of capital, add a new regulatory capital component (common equity Tier 1), increase the required capital for certain categories of assets and expand the number of risk-weighted categories, including higher-risk residential mortgages and higher-risk construction real estate loans. These rules are proposed to go into effect on January 1, 2013 with all of the requirements being phased in by January 1, 2019; however, it is uncertain as to when or if the final regulations will be adopted or become effective or to what extent the final regulations will differ from the proposed regulations. If the fully phased-in capital requirements within the NPRs were adopted as proposed and were effective as of September 30, 2012, the Company has estimated that it would be categorized as “well capitalized” under the PCA provisions with ratios significantly above the “well capitalized” threshold.

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 Act and regulations adopted thereunder, any changes in capital requirements pursuant to the Dodd-Frank Act and the implementation of the Basel III capital standards, other governmental initiatives affecting the financial services industry and changes in federal and/or state tax laws or interpretations thereof by taxing authorities; (16) changes in accounting principles, policies or guidelines; (17) our future acquisitions of other depository institutions or lines of business; and (18) future goodwill impairment due to changes in our business, changes in market conditions, or other factors.

We do not undertake any obligation to update any forward-looking statement to reflect circumstances or events that occur after the date on which the forward-looking statement is made.

TABLES TO FOLLOW
           
MB FINANCIAL, INC. & SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Unaudited)
As of the dates indicated
(Amounts in thousands)
 
September 30, June 30, March 31, December 31, September 30,
  2012       2012       2012       2011       2011  
ASSETS
Cash and due from banks $ 129,326 $ 132,737 $ 128,411 $ 144,228 $ 133,755
Interest earning deposits with banks   327,301       304,075       272,553       100,337       347,055  
Total cash and cash equivalents 456,627 436,812 400,964 244,565 480,810
Investment securities:
Securities available for sale, at fair value 1,814,972 1,723,471 1,833,611 1,929,297 1,888,738
Securities held to maturity, at amortized cost 495,851 497,800 498,767 499,283 499,038
Non-marketable securities - FHLB and FRB Stock 57,653       61,462       65,541       80,832       80,815  
Total investment securities 2,368,476 2,282,733 2,397,919 2,509,412 2,468,591
Loans held for sale 7,221 2,290 3,364 4,727 -
Loans:
Total loans, excluding covered loans 5,128,683 5,170,411 5,169,237 5,288,451 5,095,171
Covered loans   496,162       552,838       620,528       662,544       718,566  
Total loans 5,624,845 5,723,249 5,789,765 5,950,995 5,813,737
Less: Allowance for loan losses   121,182       121,756       125,431       126,798       128,610  
Net loans 5,503,663 5,601,493 5,664,334 5,824,197 5,685,127
Lease investments, net 113,180 111,122 124,748 135,490 133,345
Premises and equipment, net 214,301 214,935 212,589 210,705 211,062
Cash surrender value of life insurance 127,985 127,096 126,226 125,309 124,364
Goodwill, net 387,069 387,069 387,069 387,069 387,069
Other intangibles, net 25,735 26,986 28,237 29,494 30,904
Other real estate owned, net 42,427 49,690 63,077 78,452 87,469
Other real estate owned related to FDIC transactions 32,607 43,807 53,703 60,363 69,311
FDIC indemnification asset 36,311 56,637 72,161 80,830 94,542
Other assets   147,943       148,896       137,209       142,459       149,767  
Total assets $ 9,463,545     $ 9,489,566     $ 9,671,600     $ 9,833,072     $ 9,922,361  
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits:
Noninterest bearing $ 2,011,542 $ 1,946,468 $ 1,874,028 $ 1,885,694 $ 1,803,141
Interest bearing   5,467,805       5,524,241       5,760,674       5,761,913       5,918,766  
Total deposits 7,479,347 7,470,709 7,634,702 7,647,607 7,721,907
Short-term borrowings 289,613 261,729 269,691 219,954 257,418
Long-term borrowings 118,798 221,100 256,456 266,264 274,378
Junior subordinated notes issued to capital trusts 152,065 158,521 158,530 158,538 158,546
Accrued expenses and other liabilities   162,892       139,756       136,791       147,682       141,490  
Total liabilities   8,202,715       8,251,815       8,456,170       8,440,045       8,553,739  
Stockholders' Equity
Preferred stock - - - 194,719 194,562
Common stock 550 549 549 548 548
Additional paid-in capital 731,679 732,297 732,613 731,248 730,056
Retained earnings 489,426 466,812 445,233 427,956 411,659
Accumulated other comprehensive income 40,985 39,035 37,935 39,150 32,322
Treasury stock   (3,304 )     (3,353 )     (3,326 )     (3,044 )     (3,010 )
Controlling interest stockholders' equity 1,259,336 1,235,340 1,213,004 1,390,577 1,366,137
Noncontrolling interest   1,494       2,411       2,426       2,450       2,485  
Total stockholders' equity   1,260,830       1,237,751       1,215,430       1,393,027       1,368,622  
Total liabilities and stockholders' equity $ 9,463,545     $ 9,489,566     $ 9,671,600     $ 9,833,072     $ 9,922,361  
 
           
MB FINANCIAL, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Amounts in thousands, except per share data) (Unaudited)
 
Three Months Ended   Nine Months Ended
September 30,   June 30, March 31, December 31, September 30, September 30,   September 30,
  2012       2012       2012       2011       2011       2012       2011  
Interest income:
Loans $ 67,482 $ 69,250 $ 71,648 $ 75,466 $ 78,046 $ 208,380 $ 249,327
Investment securities:
Taxable 7,287 8,882 10,884 11,608 11,699 27,053 29,741
Nontaxable 7,582 7,303 6,739 6,178 4,299 21,624 11,087
Other interest earning accounts   312       158       169       181       244       639       972  
Total interest income   82,663       85,593       89,440       93,433       94,288       257,696       291,127  
Interest expense:
Deposits 7,374 8,058 8,760 9,569 10,207 24,192 35,312
Short-term borrowings 342 362 206 189 204 910 660
Long-term borrowings and junior subordinated notes   2,872       3,069       3,381       3,430       3,461       9,322       10,127  
Total interest expense   10,588       11,489       12,347       13,188       13,872       34,424       46,099  
Net interest income 72,075 74,104 77,093 80,245 80,416 223,272 245,028
Provision for credit losses   (13,000 )     -       3,100       8,000       11,500       (9,900 )     112,750  
Net interest income after
provision for credit losses   85,075       74,104       73,993       72,245       68,916       233,172       132,278  
Other income:
Capital markets and international banking service fees 1,344 780 507 754 605 2,631 1,107
Commercial deposit and treasury management fees 5,860 5,784 5,901 6,113 6,157 17,545 17,643
Lease financing, net 9,671 7,334 6,958 7,801 6,494 23,963 19,138
Trust and asset management fees 4,428 4,535 4,404 4,166 4,272 13,367 13,158
Card fees 2,385 2,429 2,044 1,096 2,071 6,858 5,921
Loan service fees 1,125 1,268 1,066 1,069 1,706 3,459 5,286
Retail and other deposit service fees 3,792 3,541 3,457 3,926 4,123 10,790 12,373
Brokerage fees 1,185 1,264 1,255 1,577 1,273 3,704 4,307
Net gain (loss) on investment securities 281 (34 ) (3 ) 411 - 244 229
Increase in cash surrender value of life insurance 890 870 917 944 1,014 2,677 3,433
Net (loss) gain on sale of assets (12 ) (8 ) (17 ) (87 ) - (37 ) 370
Accretion of FDIC indemnification asset 204 222 475 683 985 901 4,155
Net loss recognized on other real estate owned (3,938 ) (5,441 ) (6,589 ) (5,478 ) (3,118 ) (15,968 ) (8,135 )
Net gain on sale of loans 575 554 374 366 190 1,503 2,241
Other operating income   763       809       2,105       1,110       595       3,677       3,429  
Total other income   28,553       23,907       22,854       24,451       26,367       75,314       84,655  
Other expenses:
Salaries and employee benefits 42,083 40,146 40,429 39,846 38,422 122,658 114,012
Occupancy and equipment expense 8,274 9,188 9,570 8,498 9,092 27,032 26,969
Computer services and telecommunication expense 3,777 3,909 3,653 4,382 3,488 11,339 10,503
Advertising and marketing expense 2,025 1,930 2,066 1,831 1,740 6,021 5,207
Professional and legal expense 1,554 1,503 1,413 1,422 1,647 4,470 4,725
Other intangible amortization expense 1,251 1,251 1,257 1,410 1,414 3,759 4,255
FDIC insurance premiums 1,545 2,010 2,643 2,662 2,272 6,198 9,202
Branch impairment charges 758 - - 594 - 758 1,000
Other real estate expense, net 874 424 1,243 1,464 1,181 2,541 2,830
Prepayment fees on interest bearing liabilities 12,682 - - - - 12,682 -
Other operating expenses   6,342       6,473       5,057       7,324       7,352       17,872       21,497  
Total other expense   81,165       66,834       67,331       69,433       66,608       215,330       200,200  
Income before income taxes 32,463 31,177 29,516 27,263 28,675 93,156 16,733
Income tax expense (benefit)   9,330       9,034       8,430       7,810       8,978       26,794       (2,542 )
Net income 23,133 22,143 21,086 19,453 19,697 66,362 19,275
Dividends and discount accretion on preferred shares   -       -       3,269       2,606       2,605       3,269       7,808  
Net income available to
common stockholders $ 23,133     $ 22,143     $ 17,817     $ 16,847     $ 17,092     $ 63,093     $ 11,467  
             
Three Months Ended   Nine Months Ended
September 30, June 30, March 31, December 31, September 30, September 30, September 30,
  2012     2012     2012       2011       2011       2012       2011  
Common share data:
Basic earnings allocated to common stock per common share $ 0.43 $ 0.41 $ 0.39 $ 0.36 $ 0.36 $ 1.22 $ 0.36
Impact of preferred stock dividends on basic
earnings per common share - - (0.06 ) (0.05 ) (0.04 ) (0.06 ) (0.15 )
Basic earnings per common share 0.43 0.41 0.33 0.31 0.32 1.16 0.21
 
Diluted earnings allocated to common stock per common share 0.42 0.41 0.39 0.36 0.36 1.22 0.35
Impact of preferred stock dividends on diluted
earnings per common share - - (0.06 ) (0.05 ) (0.05 ) (0.06 ) (0.14 )
Diluted earnings per common share 0.42 0.41 0.33 0.31 0.31 1.16 0.21
 
Weighted average common shares outstanding for
basic earnings per common share 54,346,827 54,174,717 54,155,856 54,140,646 54,121,156 54,226,241 54,029,023
 
Weighted average common shares outstanding for
diluted earnings per common share 54,556,517 54,448,709 54,411,916 54,360,178 54,323,320 54,472,617 54,295,622
   
Selected Financial Data:
Three Months Ended   Nine Months Ended
September 30, June 30, March 31, December 31, September 30, September 30, September 30,
  2012       2012     2012     2011     2011       2012     2011  
Performance Ratios:
Annualized return on average assets 0.97 % 0.94 % 0.87 % 0.78 % 0.80 % 0.93 % 0.26 %
Annualized return on average common equity 7.38 7.28 5.94 5.66 5.86 6.87 1.32
Annualized cash return on average tangible common equity (1) 11.29 11.28 9.36 9.09 9.52 10.66 2.54
Net interest rate spread 3.48 3.65 3.67 3.71 3.71 3.60 3.70
Cost of funds (2) 0.52 0.57 0.60 0.63 0.66 0.56 0.72
Efficiency ratio (3) 61.43 61.36 60.04 59.94 58.69 60.94 57.58
Annualized net non-interest expense to average assets (4) 1.46 1.57 1.54 1.56 1.48 1.53 1.43
Core other income to revenues (5) 29.49 27.49 26.46 26.21 26.66 27.81 26.67
Net interest margin 3.42 3.59 3.64 3.71 3.74 3.55 3.77
Tax equivalent effect 0.25 0.24 0.23 0.20 0.16 0.24 0.13
Net interest margin - fully tax equivalent basis (6) 3.67 3.83 3.87 3.91 3.90 3.79 3.90
Asset Quality Ratios:
Non-performing loans (7) to total loans 1.87 % 1.98 % 2.15 % 2.17 % 2.42 % 1.87 % 2.42 %
Non-performing assets (7) to total assets 1.56 1.72 1.94 2.12 2.30 1.56 2.30
Allowance for loan losses to non-performing loans (7) 115.10 107.25 100.59 98.00 91.23 115.10 91.23
Allowance for loan losses to total loans 2.15 2.13 2.17 2.13 2.21 2.15 2.21
Net loan (recoveries) charge-offs to average loans (annualized) (0.64 ) 0.31 0.40 0.95 1.14 0.03 3.52
Capital Ratios:
Tangible equity to tangible assets (8) 9.46 % 9.17 % 8.74 % 10.47 % 10.10 % 9.46 % 10.10 %
Tangible common equity to risk weighted assets (9) 14.16 13.67 13.17 12.48 12.42 14.16 12.42
Tangible common equity to tangible assets (10) 9.46 9.17 8.74 8.40 8.06 9.46 8.06
Book value per common share (11) $ 23.01 $ 22.64 $ 22.23 $ 21.92 $ 21.48 $ 23.01 $ 21.48
Less: goodwill and other intangible assets,
net of benefit, per common share 7.37 7.40 7.41 7.43 7.45 7.37 7.45
Tangible book value per common share (12) 15.64 15.24 14.81 14.49 14.03 15.64 14.03
 
Total capital (to risk-weighted assets) 17.91 % 17.53 % 17.10 % 19.39 % 19.61 % 17.91 % 19.61 %
Tier 1 capital (to risk-weighted assets) 15.83 15.45 15.02 17.34 17.54 15.83 17.54
Tier 1 capital (to average assets) 10.60 10.46 9.99 11.73 11.59 10.60 11.59
Tier 1 common capital (to risk-weighted assets) 13.39 12.93 12.54 11.87 11.90 13.39 11.90
(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 total other income excluding non-core items and tax equivalent adjustment on the increase in cash surrender value of life insurance 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.
(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 core other income, core other income to revenues (with non-core items excluded from both core other income and revenues), 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 and the ratio of annualized net non-interest expense to average assets with net gains and losses on investment securities, net gains and losses on sale of other assets, net losses on other real estate owned, net gain on sale of loans held for sale and increase (decrease) in market value of assets held in trust for deferred compensation excluded from the non-interest income components of these ratios, prepayment fees on interest bearing liabilities, 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, with tax equivalent adjustment for tax-exempt interest income and increase in cash surrender value of life insurance, as applicable; 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 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 investment securities, net gains and losses on sale of other assets, net losses on other real estate owned, net gain on sale of loans held for sale and increase (decrease) in market value of assets held in trust for deferred compensation from the non-interest income components, and excluding prepayment fees on interest bearing liabilities, 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 and the ratio of annualized net non-interest expense 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.

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—Third Quarter Results.”

The following table presents a reconciliation of tangible equity to equity (in thousands):
  September 30,   June 30,   March 31,   December 31,   September 30,
  2012     2012     2012     2011     2011
Stockholders' equity - as reported $ 1,260,830 $ 1,237,751 $ 1,215,430 $ 1,393,027 $ 1,368,622
Less: goodwill 387,069 387,069 387,069 387,069 387,069
Less: other intangible assets, net of tax benefit 16,728 17,541 18,354 19,171 20,088
Tangible equity $ 857,033 $ 833,141 $ 810,007 $ 986,787 $ 961,465
 

The following table presents a reconciliation of tangible assets to total assets (in thousands):
  September 30,   June 30,   March 31,   December 31,   September 30,
  2012     2012     2012     2011     2011
Total assets - as reported $ 9,463,545 $ 9,489,566 $ 9,671,600 $ 9,833,072 $ 9,922,361
Less: goodwill 387,069 387,069 387,069 387,069 387,069
Less: other intangible assets, net of tax benefit 16,728 17,541 18,354 19,171 20,088
Tangible assets $ 9,059,748 $ 9,084,956 $ 9,266,177 $ 9,426,832 $ 9,515,204
 

The following table presents a reconciliation of tangible common equity to stockholders’ common equity (in thousands):
  September 30,   June 30,   March 31,   December 31,   September 30,
  2012     2012     2012     2011     2011
Common stockholders' equity - as reported $ 1,260,830 $ 1,237,751 $ 1,215,430 $ 1,198,308 $ 1,174,060
Less: goodwill 387,069 387,069 387,069 387,069 387,069
Less: other intangible assets, net of tax benefit 16,728 17,541 18,354 19,171 20,088
Tangible common equity $ 857,033 $ 833,141 $ 810,007 $ 792,068 $ 766,903
 

The following table presents a reconciliation of average tangible common equity to average common stockholders’ equity (in thousands):
  Three Months Ended   Nine Months Ended
September 30,   June 30,   March 31,   December 31,   September 30,   September 30,   September 30,
  2012     2012     2012     2011     2011     2012     2011
Average common stockholders' equity - as reported $ 1,247,846 $ 1,223,667 $ 1,206,364 $ 1,181,820 $ 1,158,119 $ 1,226,046 $ 1,158,417
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 17,018 17,903 18,721 19,494 20,414 17,878 21,326
Average tangible common equity $ 843,759 $ 818,695 $ 800,574 $ 775,257 $ 750,636 $ 821,099 $ 750,022
 

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   Nine Months Ended
September 30,   June 30,   March 31,   December 31,   September 30,   September 30,   September 30,
  2012     2012     2012     2011     2011     2012     2011
 
Net income available to common stockholders - as reported $ 23,133 $ 22,143 $ 17,817 $ 16,847 $ 17,092 $ 63,093 $ 11,467
Add: other intangible amortization expense, net of tax benefit 813 813 817 917 919 2,443 2,766
Net cash flow available to common stockholders $ 23,946 $ 22,956 $ 18,634 $ 17,764 $ 18,011 $ 65,536 $ 14,233
 

The following table presents a reconciliation of Tier 1 common capital to Tier 1 capital (in thousands):
  September 30,   June 30,   March 31,   December 31,   September 30,
  2012     2012     2012     2011     2011
Tier 1 capital - as reported $ 958,123 $ 941,888 $ 925,089 $ 1,101,538 $ 1,083,020
Less: preferred stock - - - 194,719 194,562
Less: qualifying trust preferred securities 147,500 153,500 153,500 153,787 153,795
Tier 1 common capital $ 810,623 $ 788,388 $ 771,589 $ 753,032 $ 734,663
 

Efficiency Ratio Calculation (Dollars in Thousands)
  Three Months Ended   Nine Months Ended
September 30,   June 30,   March 31,   December 31,   September 30,   September 30,   September 30,
  2012       2012       2012       2011       2011       2012       2011  
Non-interest expense $ 81,165 $ 66,834 $ 67,331 $ 69,433 $ 66,608 $ 215,330 $ 200,200
Adjustment for prepayment fees on interest bearing liabilities 12,682 - - - - 12,682 -
Adjustment for impairment charges 758 - - 594 - 758 1,000
Adjustment for increase (decrease) in market value of
assets held in trust for deferred compensation 355   (149 ) 501   20   (405 ) 707   (60 )
Non-interest expense - as adjusted $ 67,370   $ 66,983   $ 66,830   $ 68,819   $ 67,013   $ 201,183   $ 199,260  
 
Net interest income $ 72,075 $ 74,104 $ 77,093 $ 80,245 $ 80,416 $ 223,272 $ 245,028
Tax equivalent adjustment 5,256   5,057   4,756   4,468   3,320   15,069   8,720  
Net interest income on a fully tax equivalent basis 77,331 79,161 81,849 84,713 83,736 238,341 253,748
Tax equivalent adjustment on the increase in cash
surrender value of life insurance 479 468 494 508 546 1,441 1,848
Plus other income 28,553 23,907 22,854 24,451 26,367 75,314 84,655
Less net losses on other real estate owned (3,938 ) (5,441 ) (6,589 ) (5,478 ) (3,118 ) (15,968 ) (8,135 )
Less net gains (losses) on investment securities 281 (34 ) (3 ) 411 - 244 229
Less net (losses) gains on sale of other assets (12 ) (8 ) (17 ) (87 ) - (37 ) 370
Less net gain on sale of loans held for sale - - - - - - 1,790
Less increase (decrease) in market value of
assets held in trust for deferred compensation 355   (149 ) 501   20   (405 ) 707   (60 )
 
Net interest income plus non-interest income - as adjusted $ 109,677   $ 109,168   $ 111,305   $ 114,806   $ 114,172   $ 330,150   $ 346,057  
 
Efficiency ratio 61.43 % 61.36 % 60.04 % 59.94 % 58.69 % 60.94 % 57.58 %
 
Efficiency ratio (without adjustments) 80.66 % 68.19 % 67.37 % 66.32 % 62.38 % 72.12 % 60.72 %
 

Annualized Net Non-interest Expense to Average Assets Calculation (Dollars in Thousands)
    Three Months Ended   Nine Months Ended
September 30,   June 30,   March 31,   December 31,   September 30,   September 30,   September 30,
  2012       2012       2012       2011       2011       2012       2011  
Non-interest expense $ 81,165 $ 66,834 $ 67,331 $ 69,433 $ 66,608 $ 215,330 $ 200,200
Adjustment for prepayment fees on interest bearing liabilities 12,682 - - - - 12,682 -
Adjustment for impairment charges 758 - - 594 - 758 1,000
Adjustment for increase (decrease) in market value of assets
held in trust for deferred compensation 355   (149 ) 501   20   (405 ) 707   (60 )
Non-interest expense - as adjusted 67,370   66,983   66,830   68,819   67,013   201,183   199,260  
 
Other income 28,553 23,907 22,854 24,451 26,367 75,314 84,655
Less net losses on other real estate owned (3,938 ) (5,441 ) (6,589 ) (5,478 ) (3,118 ) (15,968 ) (8,135 )
Less net gains (losses) on investment securities 281 (34 ) (3 ) 411 - 244 229
Less net (losses) gains on sale of other assets (12 ) (8 ) (17 ) (87 ) - (37 ) 370
Less net gain on sale of loans held for sale - - - - - - 1,790
Less increase (decrease) in market value of assets held in -
trust for deferred compensation 355   (149 ) 501   20   (405 ) 707   (60 )
Other income - as adjusted 31,867   29,539   28,962   29,585   29,890   90,368   90,461  
Less tax equivalent adjustment on the increase in cash
surrender value of life insurance 479   468   494   508   546   1,441   1,848  
 
Net non-interest expense $ 35,024   $ 36,976   $ 37,374   $ 38,726   $ 36,577   $ 109,374   $ 106,951  
 
Average assets $ 9,516,159 $ 9,478,480 $ 9,736,702 $ 9,856,835 $ 9,807,561 $ 9,576,892 $ 9,989,596
 
Annualized net non-interest expense to average assets 1.46 % 1.57 % 1.54 % 1.56 % 1.48 % 1.53 % 1.43 %
 
Annualized net non-interest expense to average
assets (without adjustments) 2.20 % 1.82 % 1.84 % 1.81 % 1.63 % 1.95 % 1.55 %
 

Core Other Income to Revenues Ratio Calculation (Dollars in Thousands)
  Three Months Ended   Nine Months Ended
September 30,   June 30,   March 31,   December 31,   September 30,   September 30,   September 30,
  2012       2012       2012       2011       2011       2012       2011  
Other income $ 28,553 $ 23,907 $ 22,854 $ 24,451 $ 26,367 $ 75,314 $ 84,655
Less net losses on other real estate owned (3,938 ) (5,441 ) (6,589 ) (5,478 ) (3,118 ) (15,968 ) (8,135 )
Less net gains (losses) on investment securities 281 (34 ) (3 ) 411 - 244 229
Less net (losses) gains on sale of other assets (12 ) (8 ) (17 ) (87 ) - (37 ) 370
Less net gain on sale of loans held for sale - - - - - - 1,790
Less increase (decrease) in market value of
assets held in trust for deferred compensation 355 (149 ) 501 20 (405 ) 707 (60 )
Plus tax equivalent adjustment on the increase in cash
surrender value of life insurance 479   468   494   508   546   1,441   1,848  
Non-interest income - as adjusted $ 32,346   $ 30,007   $ 29,456   $ 30,093   $ 30,436   $ 91,809   $ 92,309  
 
Net interest income $ 72,075 $ 74,104 $ 77,093 $ 80,245 $ 80,416 $ 223,272 $ 245,028
Tax equivalent adjustment 5,256   5,057   4,756   4,468   3,320   15,069   8,720  
Net interest income on a fully tax equivalent basis 77,331 79,161 81,849 84,713 83,736 238,341 253,748
Tax equivalent adjustment on the increase in cash
surrender value of life insurance 479 468 494 508 546 1,441 1,848
Plus other income 28,553 23,907 22,854 24,451 26,367 75,314 84,655
Less net losses on other real estate owned (3,938 ) (5,441 ) (6,589 ) (5,478 ) (3,118 ) (15,968 ) (8,135 )
Less net gains (losses) on investment securities 281 (34 ) (3 ) 411 - 244 229
Less net (losses) gains on sale of other assets (12 ) (8 ) (17 ) (87 ) - (37 ) 370
Less net gain on sale of loans held for sale - - - - - - 1,790
Less increase (decrease) in market value of
assets held in trust for deferred compensation 355   (149 ) 501   20   (405 ) 707   (60 )
 
Net interest income plus non-interest income - as adjusted $ 109,677   $ 109,168   $ 111,305   $ 114,806   $ 114,172   $ 330,150   $ 346,057  
 
Core other income to revenues ratio 29.49 % 27.49 % 26.46 % 26.21 % 26.66 % 27.81 % 26.67 %
 
Core other income to revenues ratio (without adjustments) 28.37 % 24.39 % 22.87 % 23.35 % 24.69 % 25.22 % 25.68 %
 

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 September 30,   Three Months Ended June 30,
2012   2011   2012
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 $ 1,071,538 $ 12,640 4.62 % $ 1,070,852 12,915 4.78 % $ 1,071,199 $ 12,926 4.77 %
Commercial loans collateralized by
assignment of lease payments 1,193,462 13,119 4.40 1,015,925 13,694 5.39 1,177,052 13,346 4.54
Real estate commercial 1,778,414 22,836 5.02 1,845,988 25,230 5.35 1,845,949 23,840 5.11
Real estate construction 154,622 1,618 4.09 238,396 2,233 3.67 139,487 1,404 3.98
Total commercial related credits 4,198,036 50,213 4.68 4,171,161 54,072 5.07 4,233,687 51,516 4.81
Other loans
Real estate residential 310,374 3,425 4.41 317,050 3,739 4.72 309,989 3,541 4.57
Home equity 317,854 3,488 4.37 354,131 3,828 4.29 324,675 3,574 4.43
Indirect 202,583 2,984 5.86 185,850 2,968 6.34 193,155 2,946 6.13
Consumer loans 69,563 578 3.31 56,257 439 3.10 69,690 551 3.18
Total other loans 900,374 10,475 4.63 913,288 10,974 4.77 897,509 10,612 4.76
Total loans, excluding covered loans 5,098,410 60,688 4.74 5,084,449 65,046 5.08 5,131,196 62,128 4.87
Covered loans 536,697 7,967 5.91 742,732 14,004 7.48 585,014 8,247 5.67
Total loans 5,635,107 68,655 4.85 5,827,181 79,050 5.38 5,716,210 70,375 4.95
Taxable investment securities 1,418,549 7,287 2.05 1,869,961 11,699 2.50 1,542,905 8,882 2.30
Investment securities exempt from
federal income taxes (3) 843,908 11,665 5.53 456,777 6,614 5.67 809,005 11,235 5.55
Other interest earning deposits 483,622 312 0.26 365,723 244 0.26 244,087 158 0.26
Total interest earning assets $ 8,381,186 $ 87,919 4.17 $ 8,519,642 $ 97,607 4.55 $ 8,312,207 $ 90,650 4.39
Non-interest earning assets 1,134,973 1,287,919 1,166,273
Total assets $ 9,516,159 $ 9,807,561 $ 9,478,480
 
Interest Bearing Liabilities:
Core funding:
Money market and NOW accounts $ 2,601,181 $ 1,026 0.16 % $ 2,656,490 $ 1,731 0.26 % $ 2,607,238 $ 1,045 0.16 %
Savings accounts 796,229 181 0.09 742,334 320 0.17 785,427 213 0.11
Certificates of deposit 1,676,047 2,826 0.70 2,048,556 4,759 0.92 1,765,578 3,261 0.77
Customer repurchase agreements 211,966 149 0.28 218,928 146 0.26 194,804 126 0.26
Total core funding 5,285,423 4,182 0.31 5,666,308 6,956 0.49 5,353,047 4,645 0.35
Wholesale funding:
Brokered accounts (includes fee expense) 429,342 3,341 3.10 412,714 3,396 3.26 456,735 3,539 3.12
Other borrowings 392,871 3,065 3.05 442,066 3,519 3.11 424,842 3,305 3.08
Total wholesale funding 822,213 6,406 2.73 854,780 6,915 3.21 881,577 6,844 2.77
Total interest bearing liabilities $ 6,107,636 $ 10,588 0.69 $ 6,521,088 $ 13,871 0.84 $ 6,234,624 $ 11,489 0.74
Non-interest bearing deposits 2,020,762 1,810,501 1,900,937
Other non-interest bearing liabilities 139,915 123,391 119,252
Stockholders' equity 1,247,846 1,352,581 1,223,667
Total liabilities and stockholders' equity $ 9,516,159 $ 9,807,561 $ 9,478,480
Net interest income/interest rate spread (4) $ 77,331 3.48 % $ 83,736 3.71 % $ 79,161 3.65 %
Taxable equivalent adjustment 5,256 3,320 5,057
Net interest income, as reported $ 72,075 $ 80,416 $ 74,104
Net interest margin (5) 3.42 % 3.74 % 3.59 %
Tax equivalent effect 0.25 % 0.16 % 0.24 %
Net interest margin on a fully tax
equivalent basis (5) 3.67 % 3.90 % 3.83 %
(1) Non-accrual loans are included in average loans.
(2) Interest income includes amortization of deferred loan origination fees of $749 thousand, $839 thousand, and $972 thousand for the three months ended September 30, 2012, June 30, 2012, and September 30, 2011, 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.
 

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):
      Nine Months Ended September 30,
2012   2011
Average     Yield/   Average     Yield/
  Balance     Interest   Rate       Balance     Interest   Rate  
Interest Earning Assets:
Loans (1) (2) (3):
Commercial related credits
Commercial $ 1,068,339 $ 38,340 4.72 % $ 1,127,230 40,824 4.84 %
Commercial loans collateralized by
assignment of lease payments 1,182,512 40,222 4.54 1,020,414 42,286 5.53
Real estate commercial 1,829,232 70,582 5.07 2,011,356 80,210 5.26
Real estate construction 146,642 4,562 4.09 331,019 9,541 3.80
Total commercial related credits 4,226,725 153,706 4.78 4,490,019 172,861 5.08
Other loans
Real estate residential 311,318 10,616 4.55 329,594 12,195 4.93
Home equity 325,120 10,732 4.41 366,026 11,780 4.30
Indirect 194,064 8,865 6.10 179,772 8,954 6.66
Consumer loans 69,666 1,658 3.18 56,689 1,475 3.48
Total other loans 900,168 31,871 4.73 932,081 34,404 4.93
Total loans, excluding covered loans 5,126,893 185,577 4.84 5,422,100 207,265 5.11
Covered loans 591,086 26,228 5.93 771,486 44,812 7.77
Total loans 5,717,979 211,805 4.95 6,193,586 252,077 5.44
Taxable investment securities 1,554,243 27,053 2.32 1,619,182 29,741 2.45
Investment securities exempt from
federal income taxes (3) 798,660 33,268 5.55 388,208 17,057 5.79
Other interest earning deposits 329,252 639 0.26 499,286 972 0.26
Total interest earning assets $ 8,400,134 $ 272,765 4.34 $ 8,700,262 $ 299,847 4.61
Non-interest earning assets 1,176,758 1,289,334
Total assets $ 9,576,892 $ 9,989,596
 
Interest Bearing Liabilities:
Core funding:
Money market and NOW accounts $ 2,619,297 $ 3,278 0.17 % $ 2,686,327 $ 6,139 0.31 %
Savings accounts 784,706 642 0.11 726,316 1,052 0.19
Certificates of deposit 1,777,611 9,970 0.78 2,230,941 16,868 1.01
Customer repurchase agreements 203,289 409 0.27 241,322 488 0.27
Total core funding 5,384,903 14,299 0.35 5,884,906 24,547 0.56
Wholesale funding:
Brokered accounts (includes fee expense) 441,943 10,302 3.11 447,178 11,253 3.36
Other borrowings 415,565 9,823 3.11 447,993 10,299 3.03
Total wholesale funding 857,508 20,125 2.75 895,171 21,552 3.22
Total interest bearing liabilities $ 6,242,411 $ 34,424 0.74 $ 6,780,077 $ 46,099 0.91
Non-interest bearing deposits 1,924,656 1,736,152
Other non-interest bearing liabilities 131,890 120,639
Stockholders' equity 1,277,935 1,352,728
Total liabilities and stockholders' equity $ 9,576,892 $ 9,989,596
Net interest income/interest rate spread (4) $ 238,341 3.60 % $ 253,748 3.70 %
Taxable equivalent adjustment 15,069 8,720
Net interest income, as reported $ 223,272 $ 245,028
Net interest margin (5) 3.55 % 3.77 %
Tax equivalent effect 0.24 % 0.13 %
Net interest margin on a fully tax
equivalent basis (5) 3.79 % 3.90 %
(1) Non-accrual loans are included in average loans.
(2) Interest income includes amortization of deferred loan origination fees of $2.5 million and $3.5 million for the nine months ended September 30, 2012 and September 30, 2011, 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

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