Company Website: http://www.mbfinancial.com
CHICAGO -- (Business Wire)

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 2010. The words “MB Financial,” “the Company,” “we,” “our” and “us” refer to MB Financial, Inc. and its consolidated subsidiaries, unless indicated otherwise. We had a net loss of $2.8 million and a net loss available to common shareholders of $5.4 million for the third quarter of 2010 compared to net income of $7.4 million and net income available to common shareholders of $4.9 million for the third quarter of 2009, and net income of $19.2 million and net income available to common shareholders of $16.6 million for the second quarter of 2010. The results for the second quarter of 2010 reflect $62.6 million of bargain purchase gain from the Broadway and New Century Bank FDIC-assisted transactions completed in that quarter, including additional gains of approximately $11.6 million retrospectively recorded for that quarter.

Key items for the quarter were as follows:

Continued Growth in Core Pre-Tax, Pre-Provision Earnings:

• Core pre-tax, pre-provision earnings increased 93.3% to $51.1 million, compared to $26.4 million for the third quarter of 2009. Core pre-tax, pre-provision earnings increased $2.6 million, or 5.4%, compared to the second quarter of 2010.
• Net interest income on a fully tax equivalent basis increased to $90.2 million, or by 42.5%, compared to $63.3 million for the third quarter of 2009. Net interest income on a fully tax equivalent basis increased $900 thousand, or 1.0%, compared to the second quarter of 2010. See discussion below for more information on net interest income for the quarter.
• The net interest margin on a fully tax equivalent basis increased to 3.92% from 2.85% in the third quarter of 2009 and from 3.91% in the second quarter of 2010.
• Core other income increased 48.4% to $30.1 million, compared to $20.3 million for the third quarter of 2009. Core other income increased $2.1 million, or 7.5%, compared to the second quarter of 2010.

Credit Quality – Increased Non-Performing Loans:

• Our provision for loan losses was $65.0 million for the third quarter of 2010, while our net charge-offs were $66.7 million. For the second quarter of 2010, our provision for loan losses and net charge-offs were $85.0 million and $67.2 million, respectively. For the third quarter of 2009, our provision for loan losses and net charge-offs were $45.0 million and $37.1 million, respectively. Our provision for loan losses reflects deterioration in our loan portfolio primarily due to continued weakness in real estate market conditions, which has resulted in increases in our non-performing loans in the commercial real estate category.
• Our non-performing loans were $392.6 million or 5.73% of total loans as of September 30, 2010, compared to $343.8 million or 4.90% as of June 30, 2010 and $271.3 million or 4.16% as of December 31, 2009. The percentage of the allowance for loan losses to non-performing loans was 49.40% as of September 30, 2010, 56.89% as of June 30, 2010 and 65.26% as of December 31, 2009.
• Our non-performing assets were $452.0 or 4.26% of total assets as of September 30, 2010, compared to $388.0 million or 3.65% as of June 30, 2010, and $308.4 million or 2.84% as of December 31, 2009.
• Potential problem loans decreased from $319.8 million to $306.1 million from the second quarter of 2010 to the third quarter of 2010. Potential problem loans at December 31, 2009 were $233.4 million.
• Our allowance for loan losses to total loans was 2.83% as of September 30, 2010, compared to 2.79% as of June 30, 2010 and 2.71% as of December 31, 2009.

For purposes of the second and third bullet points above, non-performing loans exclude loans held for sale and certain purchased credit-impaired loans that MB Financial Bank acquired in FDIC-assisted transactions, a majority of which are subject to loss share arrangements with the FDIC. These purchased credit-impaired loans are accounted for on a pool basis, and the pools are considered to be performing. Additionally, non-performing assets exclude other real estate owned related to assets acquired in FDIC-assisted transactions.

Strong Capital Position:

• MB Financial Bank continues to significantly exceed the “Well-Capitalized” threshold established under the regulations of the Office of the Comptroller of the Currency. At September 30, 2010, MB Financial, Inc.’s total risk-based capital ratio was 17.14%, Tier 1 capital to risk-weighted assets ratio was 15.15%, Tier 1 capital to average asset ratio was 10.38% and Tier 1 common capital to risk-weighted assets was 10.17%, compared with 16.78%, 14.82%, 10.48% and 9.97%, respectively, as of June 30, 2010 and 15.45%, 13.51%, 8.71% and 8.76%, respectively, as of December 31, 2009. As of September 30, 2010, total capital was approximately $497.0 million in excess of the “Well-Capitalized” threshold, compared with $486.3 million as of June 30, 2010.
• Our tangible common equity to tangible assets ratio was 7.17% at September 30, 2010, compared to 7.25% at June 30, 2010, and 6.18% at December 31, 2009. Our tangible common equity to risk-weighted assets ratio was 10.49% at September 30, 2010, compared to 10.34% at June 30, 2010 and 8.83% at December 31, 2009.

Strong Liquidity Position and Improved Deposit Mix:

• Our loan to deposit ratio was 82% as of September 30, 2010, a decrease from 84% as of June 30, 2010 and an increase from 75% as of December 31, 2009. At December 31, 2009, deposit balances included certificates of deposits related to Corus that had not yet been redeemed or repriced.
• Our ratio of core funding to total funding was 89% at September 30, 2010 and June 30, 2010, compared to 87% at December 31, 2009.
• Our ratio of CDs to total deposits was 39% at September 30, 2010, an improvement from 41% at June 30, 2010 and 43% at December 31, 2009.

Transactions Update

• Broadway Bank and New Century Bank FDIC-assisted transactions - During the third quarter of 2010, we updated our initial purchasing accounting estimates of covered loan and indemnification asset fair values as well as the core deposit intangible and goodwill estimates and other related balance sheet accounts. In accordance with Topic 805, previously reported second quarter 2010 results have been adjusted to reflect these changes in estimates. The revisions resulted in an additional $11.6 million pre-tax bargain purchase gain recognized in the quarter ended June 30, 2010. This additional gain was primarily the result of changes to the original estimates related to payment/disposition of assets acquired as we received updated appraisals and learned more about each banks credit quality. Additionally, on the income statement there was a reclassification between interest income on covered loans and accretion of the indemnification asset. The financial statement information as of and for the quarter ended June 30, 2010 presented in these consolidated financial statements reflects these measurement period adjustments. The overall impact to the second quarter of 2010 was an increase in after-tax earnings of $7.1 million, or $0.13 per share.
• Corus and InBank FDIC-assisted transactions - Purchase accounting was finalized on our InBank and Corus FDIC-assisted transactions during the third quarter of 2010.

RESULTS OF OPERATIONS

Third Quarter Results

Net Interest Income

Net interest income on a tax equivalent basis increased $26.9 million from the third quarter of 2009, and $900 thousand from the second quarter of 2010 to the third quarter of 2010. Our net interest margin, on fully tax equivalent basis, was 3.92% for the third quarter of 2010 compared to 3.91% in the second quarter of 2010 and 2.85% in the third quarter of 2009. The margin increase from the third quarter of 2009 was primarily due to a decrease in our average cost of funds caused by downward repricing of certificates of deposit, improved deposit mix and improved credit spreads on renewed loans. Additionally, the increase in the margin from the third quarter of 2009 was impacted by the change in the mix of average assets from other interest bearing deposits to higher yielding loans.

Our non-performing loans negatively impacted our net interest margin during the third quarter of 2010, the second quarter of 2010 and the third quarter of 2009 by approximately 22 basis points, 21 basis points and 17 basis points, respectively.

See the supplemental net interest margin table for further detail.

Core other income increased by $2.1 million from the second quarter of 2010 to the third quarter of 2010. Core deposit service fees increased primarily due to increases in NSF and overdraft fees. The increase in the cash surrender value of life insurance was a result of a death benefit on a bank owned life insurance policy that we recognized during the third quarter of 2010. Accretion of indemnification asset increased as the asset was outstanding for the entire third quarter of 2010, compared to approximately two months in the second quarter of 2010. Non-core other income was primarily impacted by gains recorded on our Broadway Bank and New Century Bank FDIC-assisted transactions in the second quarter of 2010. Additional gains of approximately $11.6 million were retrospectively recorded on the Broadway Bank and New Century Bank FDIC-assisted transactions in the second quarter of 2010. These gains were in addition to gains of $51.0 million originally booked during the second quarter of 2010 based on preliminary estimates. Non-core other income was also impacted by a net gain on sale of investment securities of $9.5 million in the third quarter of 2010 compared to a net gain on sale of investment securities of $2.3 million in the second quarter of 2010. Gains were taken on securities to lock in those gains and shorten the overall duration of our securities portfolio. A net loss was recognized on other real estate owned (“OREO”) of $3.9 million in the third quarter of 2010 compared with a small net gain in the second quarter of 2010. The loss in the third quarter related primarily to one OREO property located in the southwest suburbs of Chicago where lower values on comparable sales in the area and an extended marketing period prompted a reappraisal and subsequent write-down in value. It is our practice to reappraise all OREO at least annually and whenever we think there might be a material change in value.

Core other income increased by $21.8 million for the nine months ended September 30, 2010 compared to the nine months ended September 30, 2009. Core deposit service fees increased primarily due to an increase in commercial deposit fees related to the treasury management business acquired in the Corus FDIC-assisted transaction during the second half of 2009, and an increase in NSF and overdraft fees related to the FDIC-assisted transactions completed in 2009 and 2010. Net lease financing increased primarily due to an increase in the sales of third party equipment maintenance to customers. Core trust and asset management fees increased primarily due to an increase in assets under management, as a result of organic growth and an increase in the market value of assets under management. The Broadway Bank and New Century Bank FDIC-assisted transactions resulted in accretion on the corresponding indemnification asset. Prior year accretion related to the Heritage Bank transaction was not significant. Other income increased primarily due to treasury management income related to our FDIC-assisted transactions completed during the second half of 2009, and due to rental income on OREO properties. As noted above, non-core other income was primarily impacted by gains recorded on the Broadway and New Century FDIC-assisted transactions, based on preliminary estimates. Additionally, non-core other income was impacted to a lesser extent by a net gain on sale of investment securities of $18.7 million for the nine months ended September 30, 2010, compared with a net gain on sale of investment securities of $13.8 million for the nine months ended September 30, 2009, and a net loss recognized on other real estate owned of $7.2 million for the nine months ended September 30, 2010, compared with a net gain recognized on other real estate owned of $303 thousand for the nine months ended September 30, 2009.

Core other expense remained relatively unchanged from the second quarter of 2010 to the third quarter of 2010.

Core other expense increased $40.4 million for the nine months ended September 30, 2010 compared to the nine months ended September 30, 2009. The FDIC-assisted transactions completed in 2009 and 2010 increased total core other expense from the nine months ended September 30, 2009 to the nine months ended September 30, 2010 by approximately $24.0 million. Salaries and employee benefits expense also increased due to an increase in healthcare expense and additional problem loan remediation staff added from September 30, 2009 to September 30, 2010. Core other operating expenses increased due to an increase of approximately $1.9 million in OREO expense.

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):

The increase in covered loans from March 31, 2010 to June 30, 2010 was due to the Broadway Bank and New Century Bank FDIC-assisted transactions.

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 (see definition of “purchased credit-impaired loans” below), and OREO that is related to FDIC-assisted transactions, as of the dates indicated (dollar amounts in thousands):

At September 30, 2010, the composition of other real estate owned was primarily improved lots and single family construction projects.

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 (see definition of “purchased credit-impaired loans” below), as of the dates indicated (dollar amounts in thousands):

Approximately $6.3 million of performing loans past due are classified as potential problem loans (defined below) as of September 30, 2010, compared to $13.6 million as of June 30, 2010.

The following table represents a summary of OREO in thousands:

The following table presents data related to non-performing loans, by dollar amount and category at September 30, 2010 (dollar amounts in thousands):

The following table presents data related to non-performing loans, by dollar amount and category at June 30, 2010 (dollar amounts in thousands):

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). We recognize potential problem loans carry a higher probability of default and require additional attention by management. The aggregate principal amount of potential problem loans was $306.1 million, or 4.47% of total loans, as of September 30, 2010, compared to $319.8 million, or 4.56% of total loans, as of June 30, 2010 and $233.4 million or 3.58% of total loans, as of December 31, 2009.

“Purchased credit-impaired loans” refer to certain loans acquired in the FDIC-assisted transactions, for which deterioration in credit quality occurred before the Company’s acquisition date. Upon acquisition, these loans were recorded at fair value with interest income to be accreted over the estimated life of the loan when cash flows are reasonably estimable, even if the underlying loans are contractually past due. Acquisition fair value incorporates the Company’s estimate, as of the acquisition date, of credit losses over the remaining life of the portfolio. No allowance for loan losses has been recorded for these loans.

The following table sets forth information on commercial real estate loans by risk category and type, excluding covered loans and loans held for sale (dollars in thousands):

The following table sets forth trend information for construction real estate loans by risk category, excluding covered loans and loans held for sale, for the past five quarters (dollars in thousands):

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

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 AVAILABLE FOR SALE

The following table sets forth the fair value, amortized cost, and total unrealized gain (loss) of our investment securities available for sale, by type (in thousands):

(1) Represents bank notes that are guaranteed by the FDIC under the Temporary Liquidity Guarantee Program (TLGP).

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 portfolio. Additionally, more than 99% of our mortgage-backed securities are agency guaranteed.

FUNDING MIX AND LIQUIDITY

The following table shows the composition of our core and wholesale funding resources as of the dates indicated (dollars in thousands):

Core funding as a percentage of total funding remained consistent with prior quarters. Non-interest bearing deposits increased during the quarter primarily due to the benefit of seasonal deposits of government entities. This was offset by a decrease in certificates of deposit, as certificates of deposits for a majority of rate sensitive customers were not renewed. Core funding decreased from September 30, 2009 as at that time we were in the process of redeeming out-of-market certificates of deposit assumed in the Corus FDIC-assisted transaction.

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 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 Broadway Bank, New Century Bank and other FDIC-assisted transactions we previously completed will not be realized, and the possibility that the amount of the gains, if any, we ultimately realize on these transactions will differ materially from any recorded preliminary gains; (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 financial regulatory reform legislation, 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