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

MB Financial, Inc. (NASDAQ: MBFI), the holding company for MB Financial Bank, N.A., today announced 2015 first quarter net income available to common stockholders of $32.1 million, or $0.43 per diluted common share, compared to $34.1 million, or $0.45 per diluted common share, last quarter and $20.0 million, or $0.36 per diluted common share, in the first quarter a year ago.

Highlights Include:

Operating Earnings Comparable to Prior Quarter and Up Significantly from One Year Ago

• Operating earnings, which we define as earnings excluding non-core items, were $39.3 million for the first quarter of 2015 compared to $39.6 million last quarter and $21.5 million in the first quarter a year ago. A table reconciling net income, as reported to operating earnings is set forth below and in the “Non-GAAP Financial Information” section.
• Annualized operating return on average assets increased to 1.11% for the first quarter of 2015 compared to 1.09% last quarter and 0.93% for the first quarter a year ago.
• Our net interest margin on a fully tax equivalent basis, excluding the accretion on loans acquired in the Taylor Capital merger ("the Merger") declined one basis point from the prior quarter and two basis points from the first quarter of 2014.
• Our core non-interest income grew from $79.4 million in the prior quarter to $81.4 million (+10.3% annualized) primarily as a result of higher leasing revenue. This increase was partially offset by lower mortgage revenue driven by a decline in the fair value of our mortgage servicing asset.
• Merger related expenses incurred in the first quarter of 2015 of $8.1 million were primarily related to branch exit charges on facilities we closed in connection with the Merger.

The following table presents the calculation of operating earnings available to common stockholders:

Balance Sheet Changes

• Loan balances, excluding purchased credit-impaired and covered loans, decreased $137.8 million (-1.6%) during the first quarter of 2015 primarily due to seasonality in our customer activity. The first quarter is often the softest quarter from a loan growth perspective. Notably, commercial loan growth has been strong subsequent to the Merger, with balances increasing $194.0 million (+6.3%) from September 30, 2014.
• Low cost deposits increased $290.5 million (+3.2%) during the first quarter of 2015 primarily due to strong non-interest bearing deposit flows. This growth allowed us to maintain our average cost of funds at 23 basis points during the first quarter of 2015 consistent with the prior quarter.

Credit Quality Metrics

• Non-performing loans decreased by $3.8 million and potential problem loans increased by $52.1 million from December 31, 2014. Potential problem loans increased from a very low level due to normal rotation in the portfolio.
• The ratio of non-performing loans to total loans improved to 0.93% at March 31, 2015 from 0.96% at December 31, 2014.
• Our coverage ratio of allowance for loan and lease losses to non-performing loans improved to 136.18% at March 31, 2015 compared to 126.34% at December 31, 2014.
• Provision for credit losses on legacy loans (loans excluding those acquired through the Merger) was a negative $550 thousand in the first quarter of 2015 compared to a provision of $2.5 million in the fourth quarter of 2014.
• Taylor Capital related provision for credit losses was $5.5 million in the first quarter of 2015 compared to $7.3 million in the fourth quarter of 2014. These credit costs are a result of Taylor Capital loan renewals and needed reserves on Taylor Capital acquired loans in excess of the purchase loan discount. As expected, these credit costs largely offset the accretion on Taylor Capital non-purchased credit-impaired loans of $7.9 million in the first quarter of 2015 and $10.1 million in the fourth quarter of 2014.

Reconciliations of net interest income - fully tax equivalent to net interest income, as reported, net interest margin - fully tax equivalent to net interest margin and net interest margin - fully tax equivalent, excluding acquisition accounting discount accretion on Taylor Capital loans to net interest margin are set forth in the tables in the "Net Interest Margin" section.

Net interest income on a fully tax equivalent basis decreased in the first quarter of 2015 compared to the prior quarter primarily due to fewer days in the first quarter and a $2.3 million decrease in accretion of the acquisition accounting discount recorded on loans acquired in the Merger.

Net interest income in the first quarter of 2015 included interest income of $8.6 million resulting from accretion of the acquisition accounting discount recorded on loans acquired in the Merger ($7.9 million for non-purchased credit-impaired loans and $628 thousand for purchased credit-impaired loans).

Net interest income in the fourth quarter of 2014 included interest income of $10.9 million resulting from accretion of the acquisition accounting discount recorded on loans acquired in the Merger ($10.1 million for non-purchased credit-impaired loans and $833 thousand for purchased credit-impaired loans).

See the supplemental net interest margin tables for further detail.

Non-interest Income (in thousands):

⁽¹⁾ Resides in other operating income in the consolidated statements of income.

Core non-interest income for the first quarter of 2015 increased by $2.0 million, or 2.5%, to $81.4 million from the fourth quarter of 2014.

• Leasing revenues increased due to higher fees, promotional revenue from the sale of third-party equipment maintenance contracts and improved lease residual realization.
• Capital markets and international banking services fees increased due to higher swap, commercial real estate advisory and syndication fees.
• Mortgage banking revenue decreased due to lower servicing income as a result of a decline in the fair value of the mortgage servicing asset primarily due to lower and more volatile interest rates during the first quarter of 2015.

Core non-interest income for the first quarter of 2015 increased by $45.3 million, or 125.3%, to $81.4 million from the first quarter of 2014.

• Mortgage banking revenue increased due to the mortgage operations acquired through the Merger.
• Leasing revenues increased due to higher fees and promotional revenue from the sale of third-party equipment maintenance contracts and higher lease residual realization.
• Commercial deposit and treasury management fees increased due to new customer activity as well as the increased customer base as a result of the Merger.
• Other operating income increased due to higher earnings from investments in Small Business Investment Companies.
• Card fees increased due to a new payroll prepaid card program that started in the second quarter of 2014 as well as higher credit card fees.
• Capital markets and international banking services fees increased due to higher swap, commercial real estate advisory and syndication fees.
• Trust and asset management fees increased due to the addition of new customers and the impact of higher equity values.

Non-interest Expense (in thousands):

⁽¹⁾ Letters denote the corresponding line items where these non-core non-interest expense items reside in the consolidated statements of income as follows: A – Net (gain) loss recognized on other real estate owned and other related expense, B – See merger related expenses table below, C – Other operating expenses, D – Salaries and employee benefits.

Core non-interest expense increased by $1.0 million, or 0.8%, from the fourth quarter of 2014 to $131.5 million for the first quarter of 2015.

• Salaries and employee benefits increased primarily due to commissions on higher leasing revenue and long term incentive expense.
• Net loss on other real estate owned increased due to an unfavorable fair value adjustment on one property.
• Occupancy and equipment expense decreased due to lower depreciation and rent expense as a result of exiting certain facilities in the first quarter of 2015.

Core non-interest expense increased by $58.3 million, or 79.6%, from the first quarter of 2014 to $131.5 million for the first quarter of 2015.

• Salaries and employee benefits increased primarily due to the increased staff from the Merger.
• Other operating expense increased primarily as a result of an increase in filing and other loan expense, higher FDIC assessments due to our larger balance sheet, higher currency delivery expenses related to new treasury management accounts for customers and clawback expense related to our loss share agreements with the FDIC.
• Computer services and telecommunication expenses increased due primarily to the Merger as well as an increase in spending on IT security and our data warehouse.
• Professional and legal expense increased due to higher consulting expense.
• Occupancy and equipment expense increased due to the additional offices acquired in the Merger.

Non-core non-interest expense in the first quarter of 2015 was impacted by merger related expense primarily due to branch exit and facilities impairment charges resulting from closing nine banking centers and exiting other office facilities.

The following table presents the detail of the merger related expenses (dollars in thousands):

Income Tax Expense

Income tax expense was $15.7 million for the first quarter of 2015 compared to $17.1 million for the fourth quarter of 2014. The decrease in income tax expense is primarily due to the $3.5 million decrease in income before taxes from $53.2 million in the fourth quarter of 2014 to $49.8 million in the first quarter of 2015.

Operating Segments

The Company's operations consist of three reportable operating segments: banking, leasing and mortgage banking. Our banking segment generates its revenues primarily from its lending and deposit gathering activities. Our leasing segment generates its revenues through lease originations and related services offered through the Company's leasing subsidiaries: LaSalle Systems Leasing, Inc., Celtic Leasing Corp. and Cole Taylor Equipment Finance. Our mortgage banking segment originates residential mortgage loans for sale to investors through its retail and third party origination channels. The mortgage banking segment also services residential mortgage loans owned by investors and the Company.

The following table presents summary financial information, adjusted for funds transfer pricing and internal allocations of certain expenses, for the reportable segments (in thousands):

Net income from our banking segment for the first quarter of 2015 was consistent compared to the prior quarter. Net interest income decreased due to fewer days in the first quarter and a decrease in accretion of the acquisition accounting discount recorded on loans acquired in the Merger. Net income was aided by a decrease in provision for credit losses.

Net income from our leasing segment for the first quarter of 2015 increased compared to the prior quarter. Lease financing revenues increased due to higher fees and promotional revenue from the sale of third-party equipment maintenance contracts and higher lease residual realization. This increase in revenues was partially offset by an increase in expense, primarily salaries and employee benefits, due to commissions on higher leasing revenue.

Net income from our mortgage segment for the first quarter of 2015 decreased compared to the prior quarter due to lower servicing income as a result of a decline in the fair value of the mortgage servicing asset primarily due to lower and more volatile interest rates during the first quarter of 2015 which impacted prepayment speeds.

The following table presents additional information regarding the mortgage banking segment (dollars in thousands):

⁽¹⁾ For the 44 day period subsequent to the Merger.

LOAN PORTFOLIO

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

⁽¹⁾ Covered loans refer to loans we acquired in FDIC-assisted transactions that have been subject to loss-sharing agreements with the FDIC.

Our loan balances, excluding purchased credit-impaired and covered loans, decreased $137.8 million (-1.6%) during the first quarter of 2015 primarily due to seasonality in our customer activity. The first quarter is often the softest quarter from a loan growth perspective.

The following table sets forth the composition of the loan portfolio (excluding loans held for sale) based on quarterly average balances for the periods indicated (dollars in thousands):

⁽¹⁾ Covered loans refer to loans we acquired in FDIC-assisted transactions that have been subject to loss-sharing agreements with the FDIC.

ASSET QUALITY

The following table presents a summary of criticized assets (excluding loans held for sale, purchased credit-impaired loans that were acquired as part of our FDIC-assisted transactions and the Merger and other real estate owned acquired as part of our FDIC-assisted transactions) as of the dates indicated (dollars in thousands):

⁽¹⁾ Includes $25.5 million, $25.8 million, $22.4 million, $14.5 million and $15.6 million of restructured loans on non-accrual status at March 31, 2015, December 31, 2014, September 30, 2014, June 30, 2014 and March 31, 2014, respectively.

⁽²⁾ We define potential problem loans as loans rated substandard that do not meet the definition of a non-performing loan. Potential problem loans carry a higher probability of default and require additional attention by management.

⁽³⁾ Accruing restructured loans consist 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.

Potential problem loans increased in the first quarter of 2015 from a very low level primarily due to normal rotation in the portfolio.

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 and the Merger) as of the dates indicated (in thousands):

The following table represents a summary of other real estate owned (excluding other real estate owned acquired as part of our FDIC-assisted transactions) as of the dates indicated (in thousands):

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

The following table presents the three elements of the Company's allowance for loan losses as of the dates indicated (in thousands):

Purchased loans acquired in a business combination are recorded at estimated fair value on their purchase date without a carryover of the related allowance for loan and lease losses. These acquired loans are segregated into three types: pass rated loans with no discount attributable to credit quality, non-impaired loans with a discount attributable at least in part to credit quality and impaired loans with evidence of significant credit deterioration.

• Pass rated loans (typically performing loans) are accounted for in accordance with ASC 310-20 "Nonrefundable Fees and Other Costs" as these loans do not have evidence of credit deterioration since origination.
• Non-impaired loans (typically performing substandard loans) are accounted for in accordance with ASC 310-30 if they display at least some level of credit deterioration since origination.
• Impaired loans (typically substandard loans on non-accrual status) are accounted for in accordance with ASC 310-30 as they display significant credit deterioration since origination.

For pass rated loans (non-purchased credit-impaired loans), the difference between the estimated fair value of the loans (computed on a loan by loan basis) and the principal outstanding is accreted over the remaining life of the loans. We anticipate recording a provision for the acquired portfolio in future quarters related to renewing Taylor Capital loans which will largely offset the accretion from the pass rated loans.

In accordance with ASC 310-30, for both purchased non-impaired loans and purchased impaired loans ("PCI loans"), the difference between contractually required payments at acquisition and the cash flows expected to be collected is referred to as the non-accretable difference. Further, any excess of cash flows expected at acquisition over the estimated fair value is referred to as the accretable yield and is recognized into interest income over the remaining life of the loan when there is a reasonable expectation about the amount and timing of such cash flows.

Changes in the purchase accounting discount for loans acquired in the Merger were as follows for the three months ended March 31, 2015 (in thousands):

Changes in the purchase accounting discount for loans acquired in the Merger were as follows for the three months ended December 31, 2014 (in thousands):

INVESTMENT SECURITIES

The following table sets forth, by type, the fair value and amortized cost of our investment securities, excluding FHLB and FRB stock, as well as the unrealized gain, net of our investment securities available for sale as of the dates indicated(in thousands):

DEPOSIT MIX

The following table shows the composition of deposits based on period end balances as of the dates indicated (dollars in thousands):

Non-interest bearing deposits grew by $172.2 million (+4.2%) during the first quarter of 2015. Total low cost deposits increased $290.5 million (+3.2%) to $9.3 billion at March 31, 2015 compared to the prior quarter primarily due to strong noninterest bearing deposit flows.

The following table shows the composition of deposits based on quarterly average balances for the periods indicated (dollars in thousands):

CAPITAL

Tangible book value per common share was $16.08 at March 31, 2015 compared to $15.74 last quarter and $16.43 a year ago.

Our regulatory capital ratios remain strong. MB Financial Bank, N.A. (the "Bank") was categorized as “well capitalized” at March 31, 2015 under the Prompt Corrective Action (“PCA”) provisions. The Company and Bank have implemented the changes required under the Basel III regulatory capital reform. The Bank would be categorized as "well capitalized" under the fully phased in rules.

FORWARD-LOOKING STATEMENTS

When used in this press release and in reports filed with or furnished to the Securities and Exchange Commission, in other 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 the Merger and our other 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 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 and lease losses, which could necessitate additional provisions for loan losses, resulting both from loans we originate and loans we acquire from other financial institutions; (3) results of examinations by the Office of Comptroller of Currency, the Federal Reserve Board, the Consumer Financial Protection Bureau and other regulatory authorities, including the possibility that any such regulatory authority may, among other things, require us to increase our allowance for loan and lease losses or write-down assets; (4) competitive pressures among depository institutions; (5) interest rate movements and their impact on customer behavior, net interest margin and the value of our mortgage servicing rights; (6) the possibility that our mortgage banking business may increase volatility in our revenues and earnings and the possibility that the profitability of our mortgage banking business could be significantly reduced if we are unable to originate and sell mortgage loans at profitable margins or if changes in interest rates negatively impact the value of our mortgage servicing rights; (7) the impact of repricing and competitors’ pricing initiatives on loan and deposit products; (8) fluctuations in real estate values; (9) the ability to adapt successfully to technological changes to meet customers’ needs and developments in the market-place; (10) our ability to realize the residual values of our direct finance, leveraged, and operating leases; (11) our ability to access cost-effective funding; (12) changes in financial markets; (13) changes in economic conditions in general and in the Chicago metropolitan area in particular; (14) the costs, effects and outcomes of litigation; (15) new legislation or regulatory changes, including but not limited to the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”) and regulations adopted thereunder, changes in capital requirements pursuant to the Dodd-Frank Act, 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