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MBFI > SEC Filings for MBFI > Form 10-Q on 31-Oct-2013All Recent SEC Filings

Show all filings for MB FINANCIAL INC /MD

Form 10-Q for MB FINANCIAL INC /MD


31-Oct-2013

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations

The following is a discussion and analysis of MB Financial, Inc.'s financial condition and results of operations and should be read in conjunction with the consolidated financial statements and notes thereto appearing elsewhere in this report. The words "the Company," "we," "our" and "us" refer to MB Financial, Inc. and its majority owned subsidiaries, unless we indicate otherwise.

Overview

The profitability of our operations depends primarily on our net interest income after provision for credit losses, which is the difference between interest earned on interest earning assets and interest paid on interest bearing liabilities less provision for credit losses. The provision for credit losses is dependent on changes in our loan portfolio and management's assessment of the collectability of our loan portfolio as well as prevailing economic and market conditions.

Our net income is also affected by non-interest income and non-interest expenses. During the periods under report, non-interest income included revenue from our key fee initiatives: capital markets and international banking fees, commercial deposit and treasury management fees, net lease financing income, trust and asset management fees, and card fees. Non-interest income also included loan service fees, consumer and other deposit service fees, brokerage fees, net gain (loss) on investment securities, increase in cash surrender value of life insurance, net loss on sale of assets, accretion of the FDIC indemnification asset, net gain (loss) recognized on other real estate owned, net gains on sale of loans and other operating income. During the periods under report, non-interest expenses included salaries and employee benefits, occupancy and equipment expense, computer services and telecommunication expense, advertising and marketing expense, professional and legal expense, other intangibles amortization expense, other real estate expenses (net of rental income), prepayment fees on interest bearing liabilities and other operating expenses. Additionally, dividends on preferred shares reduced net income available to common stockholders for the nine months ended September 30, 2012.

Net interest income is affected by changes in the volume and mix of interest earning assets, interest earned on those assets, the volume and mix of interest bearing liabilities and interest paid on those interest bearing liabilities. Non-interest income and non-interest expenses are impacted by growth of operations and growth in the number of loan and deposit accounts through both acquisitions and core banking business growth. Growth in operations affects other expenses primarily as a result of additional employee, branch facility and promotional marketing expense. Growth in the number of loan and deposit accounts affects other income, including service fees as well as other expenses such as computer services, supplies, postage, telecommunications and other miscellaneous expenses. Non-performing asset levels impact salaries and benefits, legal expenses and other real estate owned expenses.

The Company had net income and net income available to common stockholders of $24.4 million for the three months ended September 30, 2013 compared to net income and net income available to common stockholders of $23.1 million for the three months ended September 30, 2012. Fully diluted earnings per common share were $0.44 for the three months ended September 30, 2013 compared to $0.42 per common share for the three months ended September 30, 2012.

The Company had net income and net income available to common stockholders of $74.6 million for the nine months ended September 30, 2013 compared to net income of $66.4 million and net income available to common stockholders of $63.1 million for the nine months ended September 30, 2012. Fully diluted earnings per common share were $1.36 for the nine months ended September 30, 2013 compared to $1.16 per common share for the nine months ended September 30, 2012.


Critical Accounting Policies

Our consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States of America and follow general practices within the industries in which we operate. This preparation requires management to make estimates, assumptions, and judgments that affect the amounts reported in the financial statements and accompanying notes. These estimates, assumptions, and judgments are based on information available as of the date of the financial statements; accordingly, as this information changes, actual results could differ from the estimates, assumptions, and judgments reflected in the financial statements. Certain policies inherently have a greater reliance on the use of estimates, assumptions, and judgments and, as such, have a greater possibility of producing results that could be materially different than originally reported. Management believes the following policies are both important to the portrayal of our financial condition and results of operations and require subjective or complex judgments; therefore, management considers the following to be critical accounting policies. Management has reviewed the application of these polices with the Compliance and Audit Committee of our Board of Directors.

Allowance for Loan Losses. Subject to the use of estimates, assumptions, and judgments, management's evaluation process used to determine the adequacy of the allowance for loan losses combines several factors: management's ongoing review and grading of the loan portfolio, consideration of past loan loss experience, trends in past due and nonperforming loans, risk characteristics of the various classifications of loans, existing economic conditions, the fair value of underlying collateral, and other qualitative and quantitative factors which could affect probable credit losses. Because current economic conditions can change and future events are inherently difficult to predict, the anticipated amount of estimated loan losses, and therefore the adequacy of the allowance, could change significantly. As an integral part of their examination process, various regulatory agencies also review the allowance for loan losses. Such agencies may require that certain loan balances be charged off when their credit evaluations differ from those of management or require that adjustments be made to the allowance for loan losses, based on their judgments about information available to them at the time of their examination. We believe the allowance for loan losses is adequate and properly recorded in the financial statements. See "Allowance for Loan Losses" section below for further analysis.

Residual Value of Our Direct Finance, Leveraged, and Operating Leases. Lease residual value represents the present value of the estimated fair value of the leased equipment at the termination date of the lease. Realization of these residual values depends on many factors, including management's use of estimates, assumptions, and judgment to determine such values. Several other factors outside of management's control may reduce the residual values realized, including general market conditions at the time of expiration of the lease, whether there has been technological or economic obsolescence or unusual wear and tear on, or use of, the equipment and the cost of comparable equipment. If, upon the expiration of a lease, we sell the equipment and the amount realized is less than the recorded value of the residual interest in the equipment, we will recognize a loss reflecting the difference. On a quarterly basis, management reviews the lease residuals for potential impairment. If we fail to realize our aggregate recorded residual values, our financial condition and profitability could be adversely affected. At September 30, 2013, the aggregate residual value of the equipment leased under our direct finance, leveraged, and operating leases totaled $74.0 million. See Note 1 and Note 6 of our December 31, 2012 audited consolidated financial statements contained in our Annual Report Form 10-K for the year ended December 31, 2012 for additional information.

Income Tax Accounting. ASC Topic 740 provides guidance on accounting for income taxes by prescribing the minimum recognition threshold that a tax position must meet to be recognized in the financial statements. ASC Topic 740 also provides guidance on measurement, recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. As of September 30, 2013, the Company had $107 thousand of uncertain tax positions. The Company elects to treat interest and penalties recognized for the underpayment of income taxes as income tax expense. However, interest and penalties imposed by taxing authorities on issues specifically addressed in ASC Topic 740 will be taken out of the tax reserves up to the amount allocated to interest and penalties. The amount of interest and penalties exceeding the amount allocated in the tax reserves will be treated as income tax expense. As of September 30, 2013, the Company had approximately $12 thousand of accrued interest related to tax reserves. The application of income tax law is inherently complex. Laws and regulations in this area are voluminous and are often ambiguous. As such, we are required to make many subjective assumptions and judgments regarding our income tax exposures. Interpretations of, and guidance surrounding income tax laws and regulations change over time. As such, changes in our subjective assumptions and judgments can materially affect amounts recognized in the consolidated balance sheets and statements of income.

Fair Value of Assets and Liabilities. ASC Topic 820 defines fair value as the price that would be received to sell a financial asset or paid to transfer a financial liability in an orderly transaction between market participants at the measurement date.

The degree of management judgment involved in determining the fair value of assets and liabilities is dependent upon the availability of quoted market prices or observable market parameters. For financial instruments that trade actively and have quoted market prices or observable market parameters, there is minimal subjectivity involved in measuring fair value. When observable market prices and parameters are not fully available, management judgment is necessary to estimate fair value. In


addition, changes in market conditions may reduce the availability of quoted prices or observable data. For example, reduced liquidity in the capital markets or changes in secondary market activities could result in observable market inputs becoming unavailable. Therefore, when market data is not available, the Company would use valuation techniques requiring more management judgment to estimate the appropriate fair value measurement.

See Note 13 to the consolidated financial statements for a complete discussion on the Company's use of fair valuation of assets and liabilities and the related measurement techniques.

Goodwill. The excess of the cost of an acquisition over the fair value of the net assets acquired consists of goodwill, and core deposit and client relationship intangibles. See Note 8 of our December 31, 2012 audited consolidated financial statements contained in our Annual Report Form 10-K for the year ended December 31, 2012 for further information regarding core deposit and client relationship intangibles. The Company reviews goodwill to determine potential impairment annually, or more frequently if events and circumstances indicate that goodwill might be impaired, by comparing the carrying value of the reporting unit with the fair value of the reporting unit.

The Company's annual assessment date for goodwill impairment testing is as of December 31. No impairment losses were recognized during the three and nine months ended September 30, 2013 and 2012. We are not aware of any events or circumstances subsequent to our annual goodwill impairment testing date of December 31, 2012 that would indicate impairment of goodwill at September 30, 2013.

Recent Accounting Pronouncements. Refer to Note 2 of our consolidated financial statements for a description of recent accounting pronouncements including the respective dates of adoption and effects on results of operations and financial condition.

Net Interest Income

The following tables present, for the periods indicated, the total dollar amount of interest income from average interest earning assets and the related yields, as well as the interest expense on average interest bearing liabilities, and the related costs, expressed both in dollars and rates (dollars in thousands). The tables below and the discussion that follows contain presentations of net interest income and net interest margin on a tax-equivalent basis, which is adjusted for the tax-favored status of income from certain loans and investments. We believe this measure to be the preferred industry measurement of net interest income, as it provides a relevant comparison between taxable and non-taxable amounts.

Reconciliations of net interest income and net interest margin on a tax-equivalent basis to net interest income and net interest margin in accordance with accounting principles generally accepted in the United States of America are provided in the table.


                                                              Three Months Ended September 30,
(dollars in thousands)                                  2013                                    2012
                                           Average                    Yield/       Average                    Yield/
                                           Balance       Interest      Rate        Balance       Interest      Rate
Interest Earning Assets:
Loans (1) (2) (3)                       $ 5,196,948     $  57,325      4.38 %   $ 5,350,911     $  65,301      4.85 %
Loans exempt from federal income
taxes (4)                                   360,060         4,293      4.67         284,196         3,354      4.62
Taxable investment securities             1,292,366         6,330      1.96       1,418,549         7,287      2.05
Investment securities exempt from
federal income taxes (4)                    946,396        12,577      5.32         843,908        11,665      5.53
Federal funds sold                            6,793             7      0.40               -             -         -
Other interest bearing deposits             316,210           193      0.24         483,622           312      0.26
Total interest earning assets             8,118,773     $  80,725      3.94       8,381,186     $  87,919      4.17
Non-interest earning assets               1,142,518                               1,134,973
Total assets                            $ 9,261,291                             $ 9,516,159
Interest Bearing Liabilities:
Deposits:
NOW and money market deposit            $ 2,695,479     $     862      0.13 %   $ 2,601,181     $   1,026      0.16 %
Savings deposit                             844,647           137      0.06         796,229           181      0.09
Time deposits                             1,572,987         3,434      0.87       2,105,389         6,167      1.17
Short-term borrowings                       205,946           112      0.22         233,780           342      0.58
Long-term borrowings and junior
subordinated notes                          215,041         1,367      2.49         371,057         2,872      3.03
Total interest bearing liabilities        5,534,100     $   5,912      0.42       6,107,636     $  10,588      0.69
Non-interest bearing deposits             2,258,357                               2,020,762
Other non-interest bearing
liabilities                                 171,336                                 139,915
Stockholders' equity                      1,297,498                               1,247,846
Total liabilities and stockholders'
equity                                  $ 9,261,291                             $ 9,516,159
Net interest income/interest rate
spread (5)                                              $  74,813      3.52 %                   $  77,331      3.48 %
Less: taxable equivalent adjustment                         5,905                                   5,256
Net interest income, as reported                        $  68,908                               $  72,075
Net interest margin (6)                                                3.37 %                                  3.42 %
Tax equivalent effect                                                  0.29 %                                  0.25 %
Net interest margin on a fully tax
equivalent basis (6)                                                   3.66 %                                  3.67 %

(1) Non-accrual loans are included in average loans.
(2) Interest income includes amortization of deferred loan origination fees of $839 thousand and $749 thousand for the three months ended September 30, 2013 and 2012, respectively.
(3) Loans held for sale are included in the average loan balance listed. Related interest income is included in loan interest income.
(4) Non-taxable loan and investment income is presented on a fully tax equivalent basis assuming a 35% tax rate.
(5) 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.
(6) Net interest margin represents net interest income as a percentage of average interest earning assets.

Net interest income on a fully tax equivalent basis decreased $2.5 million during the three months ended September 30, 2013 compared to the three months ended September 30, 2012, primarily due to lower average earning asset balances, as a result of a $254.8 million decrease in covered loans. The net interest margin, expressed on a fully tax equivalent basis, was 3.66% for the third quarter of 2013 and 3.67% for the third quarter of 2012.


                                                               Nine Months Ended September 30,
(dollars in thousands)                                  2013                                    2012
                                           Average                    Yield/       Average                    Yield/
                                           Balance       Interest      Rate        Balance       Interest      Rate
Interest Earning Assets:
Loans (1) (2) (3)                       $ 5,292,496     $ 173,217      4.38 %   $ 5,446,682     $ 202,017      4.95 %
Loans exempt from federal income
taxes (4)                                   327,618        11,188      4.50         271,297         9,788      4.74
Taxable investment securities             1,383,975        18,749      1.81       1,554,243        27,053      2.32
Investment securities exempt from
federal income taxes (4)                    930,653        37,537      5.38         798,660        33,268      5.55
Federal funds sold                            3,249             9      0.37               -             -         -
Other interest bearing deposits             232,529           420      0.24         329,252           639      0.26
Total interest earning assets             8,170,520     $ 241,120      3.95       8,400,134     $ 272,765      4.34
Non-interest earning assets               1,162,210                               1,176,758
Total assets                            $ 9,332,730                             $ 9,576,892
Interest Bearing Liabilities:
Deposits:
NOW and money market deposit            $ 2,702,567     $   2,622      0.13 %   $ 2,619,297     $   3,278      0.17 %
Savings deposit                             835,754           409      0.07         784,706           642      0.11
Time deposits                             1,692,760        12,243      0.97       2,219,554        20,272      1.22
Short-term borrowings                       195,677           395      0.27         225,390           910      0.54
Long-term borrowings and junior
subordinated notes                          226,133         4,324      2.52         393,464         9,322      3.11
Total interest bearing liabilities        5,652,891     $  19,993      0.47       6,242,411     $  34,424      0.74
Non-interest bearing deposits             2,194,648                               1,924,656
Other non-interest bearing
liabilities                                 193,203                                 131,890
Stockholders' equity                      1,291,988                               1,277,935
Total liabilities and stockholders'
equity                                  $ 9,332,730                             $ 9,576,892
Net interest income/interest rate
spread (5)                                              $ 221,127      3.48 %                   $ 238,341      3.60 %
Less: taxable equivalent adjustment                        17,054                                  15,069
Net interest income, as reported                        $ 204,073                               $ 223,272
Net interest margin (6)                                                3.34 %                                  3.55 %
Tax equivalent effect                                                  0.28 %                                  0.24 %
Net interest margin on a fully tax
equivalent basis (6)                                                   3.62 %                                  3.79 %

(1) Non-accrual loans are included in average loans.
(2) Interest income includes amortization of deferred loan origination fees of $2.6 million and $2.5 million for the nine months ended September 30, 2013 and 2012, respectively.
(3) Loans held for sale are included in the average loan balance listed. Related interest income is included in loan interest income.
(4) Non-taxable loan and investment income is presented on a fully tax equivalent basis assuming a 35% tax rate.
(5) 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.
(6) Net interest margin represents net interest income as a percentage of average interest earning assets.

Net interest income on a fully tax equivalent basis decreased $17.2 million during the nine months ended September 30, 2013 compared to the nine months ended September 30, 2012, primarily due to lower average earning asset balances (as a result of a $244.4 million decrease in covered loans) as well as the decline in net interest margin. The net interest margin, expressed on a fully tax equivalent basis, was 3.62% for the nine months ended September 30, 2013 and 3.79% for the nine months ended September 30, 2012. The decrease in margin during 2013 was primarily due to a decrease in yields on loans and investment securities, partially offset by a lower cost of funds.


Non-interest Income

                                            Three Months Ended September 30,
                                                                                     Increase/     Percentage
                                                2013                 2012           (Decrease)       Change
Non-interest income (in thousands):
Capital markets and international
banking fees                             $           972       $         1,400     $      (428 )      (30.6 )%
Commercial deposit and treasury
management fees                                    6,327                 5,860             467          8.0  %
Lease financing, net                              14,070                 9,671           4,399         45.5  %
Trust and asset management fees                    4,799                 4,428             371          8.4  %
Card fees                                          2,745                 2,388             357         14.9  %
Loan service fees                                  1,427                 1,075             352         32.7  %
Consumer and other deposit service
fees                                               3,648                 3,786            (138 )       (3.6 )%
Brokerage fees                                     1,289                 1,185             104          8.8  %
Net gain on investment securities                      1                   281            (280 )       99.6  %
Increase in cash surrender value of
life insurance                                       851                   890             (39 )       (4.4 )%
Net loss on sale of assets                             -                   (12 )            12        100.0  %
Accretion of FDIC indemnification
asset                                                 64                   204            (140 )      (68.6 )%
Net loss recognized on other real
estate owned                                        (791 )              (3,938 )         3,147         79.9  %
Net gain on sale of loans                            177                   575            (398 )      (69.2 )%
Other operating income                             1,337                   760             577         75.9  %
Total non-interest income                $        36,916       $        28,553     $     8,363         29.3  %

Non-interest income increased by $8.4 million, or 29.3%, for the three months ended September 30, 2013 compared to the three months ended September 30, 2012.

Net lease financing revenue increased due to the impact of leasing revenues attributed to Celtic (approximately $6 million).

Non-interest income was also impacted by lower losses recognized on other real estate owned in the third quarter of 2013 compared to the third quarter of 2012 due to stabilization in appraised values.


                                          Nine Months Ended September 30,
                                                                               Increase/     Percentage
                                                2013              2012        (Decrease)       Change
Non-interest income (in thousands):
Capital markets and international
banking fees                             $          2,719     $    2,700     $        19          0.7  %
Commercial deposit and treasury
management fees                                    18,322         17,541             781          4.5  %
Lease financing, net                               45,435         23,963          21,472         89.6  %
Trust and asset management fees                    14,167         13,367             800          6.0  %
Card fees                                           8,175          6,863           1,312         19.1  %
Loan service fees                                   4,349          3,409             940         27.6  %
Consumer and other deposit service
fees                                               10,487         10,773            (286 )       (2.7 )%
Brokerage fees                                      3,680          3,704             (24 )       (0.6 )%
Net gain on investment securities                      14            244            (230 )       94.3  %
Increase in cash surrender value of
life insurance                                      2,537          2,677            (140 )       (5.2 )%
Net loss on sale of assets                              -            (37 )            37        100.0  %
Accretion of FDIC indemnification
asset                                                 307            901            (594 )      (65.9 )%
Net gain (loss) recognized on other
. . .
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