Market Overview

MB Financial, Inc. Reports Earnings for the Fourth Quarter of 2016

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CHICAGO, Jan. 26, 2017 (GLOBE NEWSWIRE) -- MB Financial, Inc. (NASDAQ: MBFI), the holding company for MB Financial Bank, N.A., today announced 2016 fourth quarter net income available to common stockholders of $45.2 million, or $0.53 per diluted common share, compared to $42.4 million, or $0.54 per diluted common share, last quarter and $41.6 million, or $0.56 per diluted common share, in the fourth quarter a year ago.  Annual net income available to common stockholders for 2016 was $166.1 million compared to $150.9 million for 2015.  Diluted earnings per common share were $2.13 for 2016 compared to $2.02 for 2015.

"Our company had a very successful 2016.  Operating earnings per share grew by 13.6%.  We realized significant and sustained organic loan, deposit, and fee growth.  Credit performance was excellent.  We were able to maintain our net interest margin despite significant interest rate swings, and our fee businesses continued their growth and development.

In the third quarter of 2016, we successfully acquired and integrated American Chartered Bancorp, Inc., while at the same time increasing the investment we're making in our infrastructure, particularly in technology and risk capabilities.

Legacy bank performance, which excludes the impact of the American Chartered merger, in the fourth quarter was very good.  Loan growth, deposit growth, and fee performance, with the exception of the Mortgage Banking Segment, was strong.  Mortgage net income was under our target run rate for the fourth quarter, but did well given the highly volatile interest rate environment in the quarter.

We look forward to a strong 2017," stated Mitchell Feiger, President and Chief Executive Officer of MB Financial, Inc.

KEY ITEMS

Operating Earnings

The following table presents a reconciliation of net income to operating earnings (in thousands).  Non-core items represent the difference between non-core non-interest income and non-core non-interest expense.  See the "Non-GAAP Financial Information" section for details on non-core items.

                  Year Ended
                  December 31,
    4Q16   3Q16   4Q15     2016   2015
Net income - as reported   $ 47,191     $ 44,419     $ 43,607       $ 174,136     $ 158,948  
                       
Non-core items   7,062     15,363     (4,183 )     28,214     5,769  
Income tax expense on non-core items (1)   2,406     7,867     (1,140 )     11,853     2,809  
Non-core items, net of tax   4,656     7,496     (3,043 )     16,361     2,960  
                       
Operating earnings   51,847     51,915     40,564       190,497     161,908  
Dividends on preferred shares   2,005     2,004     2,000       8,009     8,000  
Operating earnings available to common stockholders   $ 49,842     $ 49,911     $ 38,564       $ 182,488     $ 153,908  
                       
Diluted operating earnings per common share   $ 0.59     $ 0.63     $ 0.52       $ 2.34     $ 2.06  
Weighted average common shares outstanding for diluted operating earnings per common share   84,674,181     78,683,170     73,953,165       77,976,121     74,849,030  
                                 
(1)  Both the third quarter of 2016 and the year ended December 31, 2016 include an adjustment for the $1.8 million income tax benefit resulting from the adoption of new stock-based compensation guidance.  
                                 

Operating earnings available to common stockholders were $49.8 million, or $0.59 per diluted common share, in the fourth quarter of 2016 compared to $49.9 million, or $0.63 per diluted common share, last quarter.  Key drivers of the change in operating earnings from the third to the fourth quarter of 2016 were:

  • Net interest income on a fully tax equivalent basis increased by $14.4 million, or 10.5%, in the fourth quarter of 2016 compared to the prior quarter.  This increase is due to a full quarter of American Chartered Bancorp, Inc. ("American Chartered") being presented as well as organic loan growth.
  • Our net interest margin on a fully tax equivalent basis, excluding accretion on loans acquired in the Taylor Capital Group, Inc. ("Taylor Capital") and American Chartered mergers ("bank mergers"), decreased three basis points from the prior quarter primarily due to higher borrowing costs.
  • Our core non-interest income decreased $14.4 million, or 13.4%, to $93.3 million compared to the prior quarter primarily due to a decrease in mortgage banking revenue which was a result of lower origination and servicing fees.  Mortgage origination fees declined due to fewer rate lock commitments during the quarter as a result of higher interest rates and lower gain on sale margin.  Servicing fees declined due to changes in the fair value of our mortgage servicing rights asset, net of related hedges, driven by interest rate volatility during the quarter.
  • Our core non-interest expense increased $4.8 million, or 3.1%, to $159.1 million compared to the prior quarter primarily due to higher salaries and employee benefits, occupancy and equipment, and computer services and telecommunication expenses driven by the inclusion of a full quarter of American Chartered expenses.

Operating earnings available to common stockholders increased by $28.6 million to $182.5 million, or $2.34 per diluted common share, for the year ended December 31, 2016 compared to $153.9 million, or $2.06 per diluted common share, in the prior year.  Key drivers of the change in operating earnings from the year ended December 31, 2015 to the year ended December 31, 2016 were:

  • Net interest income on a fully tax equivalent basis increased by $53.8 million, or 10.9%, in 2016 compared to the prior year primarily due to organic loan growth as well as the impact of the American Chartered merger.
  • Our net interest margin on a fully tax equivalent basis, excluding accretion on loans acquired in bank mergers, decreased four basis points in 2016 compared to the prior year primarily due to a decrease in average yields earned on investment securities and an increase in cost of deposits and borrowings.
  • Our core non-interest income for 2016 increased by $51.6 million, or 16.0%, to $373.9 million compared to 2015 primarily due to higher mortgage banking revenue and trust and asset management fees.
  • Our core non-interest expense increased by $62.1 million, or 11.7%, from 2015 to $590.6 million for 2016 primarily due to higher salaries and employee benefits, occupancy and equipment, computer services and telecommunication, and other operating expenses.

Loan Balances

Loan balances, excluding purchased credit-impaired loans, increased $226.4 million (+1.8%, or +7.3% annualized) during the fourth quarter of 2016 primarily due to growth in lease, construction real estate and residential real estate loans.  Legacy loan balances (which exclude loans acquired in the American Chartered merger), excluding purchased credit-impaired loans, increased $360.0 million (+3.4%, or +13.6% annualized) from September 30, 2016.

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

    12/31/2016   9/30/2016   Change in Legacy Loan Balances from 9/30/2016 to 12/31/2016
    Legacy   American Chartered (1)   Total   Legacy   American Chartered (1)   Total   Amount   Percent
Commercial-related loans:                                
Commercial   $ 3,752,392     $ 594,114     $ 4,346,506     $ 3,745,486     $ 640,326     $ 4,385,812     $ 6,906     +0.2 %
Commercial loans collateralized by assignment of lease payments (lease loans)   2,002,976         2,002,976     1,873,380         1,873,380     129,596     +6.9 %
Commercial real estate   2,892,692     895,324     3,788,016     2,849,270     945,531     3,794,801     43,422     +1.5 %
Construction real estate   501,060     17,502     518,562     415,171     35,852     451,023     85,889     +20.7 %
Total commercial-related loans   9,149,120     1,506,940     10,656,060     8,883,307     1,621,709     10,505,016     265,813     +3.0 %
Other loans:                                                              
Residential real estate   896,700     164,128     1,060,828     823,374     175,453     998,827     73,326     +8.9 %
Indirect vehicle   541,680         541,680     522,271         522,271     19,409     +3.7 %
Home equity   187,162     79,215     266,377     188,861     86,427     275,288     (1,699 )   -0.9 %
Consumer   80,122     659     80,781     77,013     943     77,956     3,109     +4.0 %
Total other loans   1,705,664     244,002     1,949,666     1,611,519     262,823     1,874,342     94,145     +5.8 %
Total loans, excluding purchased credit-impaired   10,854,784     1,750,942     12,605,726     10,494,826     1,884,532     12,379,358     359,958     +3.4 %
Purchased credit-impaired   122,156     40,921     163,077     137,025     24,313     161,338     (14,869 )   -10.9 %
Total loans   $ 10,976,940     $ 1,791,863     $ 12,768,803     $ 10,631,851     $ 1,908,845     $ 12,540,696     $ 345,089     +3.2 %
                                                               
(1)  American Chartered loans refer to the loans acquired in the American Chartered merger, including those that have been renewed subsequent to the merger.
 


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

    12/31/2016       Change in Legacy Loan
Balances from 12/31/2015 to 12/31/2016
    Legacy   American Chartered (1)   Total   12/31/2015   Amount   Percent
Commercial-related loans:                        
Commercial   $ 3,752,392     $ 594,114     $ 4,346,506     $ 3,616,286     $ 136,106     +3.8 %
Commercial loans collateralized by assignment of lease payments (lease loans)   2,002,976         2,002,976     1,779,072     223,904     +12.6 %
Commercial real estate   2,892,692     895,324     3,788,016     2,695,676     197,016     +7.3 %
Construction real estate   501,060     17,502     518,562     252,060     249,000     +98.8 %
Total commercial-related loans   9,149,120     1,506,940     10,656,060     8,343,094     806,026     +9.7 %
Other loans:                                      
Residential real estate   896,700     164,128     1,060,828     628,169     268,531     +42.7 %
Indirect vehicle   541,680         541,680     384,095     157,585     +41.0 %
Home equity   187,162     79,215     266,377     216,573     (29,411 )   -13.6 %
Consumer   80,122     659     80,781     80,661     (539 )   -0.7 %
Total other loans   1,705,664     244,002     1,949,666     1,309,498     396,166     +30.3 %
Total loans, excluding purchased credit-impaired   10,854,784     1,750,942     12,605,726     9,652,592     1,202,192     +12.5 %
Purchased credit-impaired   122,156     40,921     163,077     141,406     (19,250 )   -13.6 %
Total loans   $ 10,976,940     $ 1,791,863     $ 12,768,803     $ 9,793,998     $ 1,182,942     +12.1 %
                                               
(1)  American Chartered loans refer to the loans acquired in the American Chartered merger, including those that have been renewed subsequent to the merger.
 

Legacy loan balances, excluding purchased credit-impaired loans, increased $1.2 billion (+12.5%) compared to December 31, 2015, driven by the growth in commercial-related loans.

Deposit Balances

Low cost deposits decreased $131.5 million (-1.1%, or -4.3% annualized) in the fourth quarter of 2016 primarily due to a decrease in higher rate NOW accounts and mortgage escrow accounts.  Low cost deposits represented 86% of total deposits at December 31, 2016, with non-interest bearing deposits representing 46% of total deposits.  Legacy low cost deposit balances increased $40.7 million (+0.4%, or 1.6% annualized) from September 30, 2016 driven by good non-interest bearing deposit flows.  Legacy non-interest bearing deposits increased $82.3 million (+1.6%, or 6.5%) in the fourth quarter of 2016.  Legacy deposits exclude deposits assumed in the American Chartered merger.

The following table shows the composition of deposits as of the dates indicated (dollars in thousands):

    12/31/2016   9/30/2016   Change in Legacy Deposit Balances from 9/30/2016 to 12/31/2016
    Legacy   American Chartered (1)   Total   Legacy   American Chartered (1)   Total   Amount   Percent
Low cost deposits:                                
Non-interest bearing deposits   $ 5,137,605     $ 1,270,564     $ 6,408,169     $ 5,055,261     $ 1,355,073     $ 6,410,334     $ 82,344     +1.6 %
Money market, NOW and interest bearing deposits   3,861,222     681,782     4,543,004     3,896,438     763,969     4,660,407     (35,216 )   -0.9 %
Savings deposits   1,024,368     111,624     1,135,992     1,030,834     117,066     1,147,900     (6,466 )   -0.6 %
Total low cost deposits   10,023,195     2,063,970     12,087,165     9,982,533     2,236,108     12,218,641     40,662     +0.4 %
Certificates of deposit:                                  
Certificates of deposit   1,079,405     145,697     1,225,102     1,145,303     152,883     1,298,186     (65,898 )   -5.8 %
Brokered certificates of deposit   774,802     23,379     798,181     738,960     23,479     762,439     35,842     +4.9 %
Total certificates of deposit   1,854,207     169,076     2,023,283     1,884,263     176,362     2,060,625     (30,056 )   -1.6 %
Total deposits   $ 11,877,402     $ 2,233,046     $ 14,110,448     $ 11,866,796     $ 2,412,470     $ 14,279,266     $ 10,606     +0.1 %
                                                               
(1)  American Chartered deposits refer to deposits assumed in the American Chartered merger.


The following table shows the composition of deposits as of the dates indicated (dollars in thousands):

    12/31/2016       Change in Legacy Deposit Balances from
12/31/2015 to 12/31/2016
    Legacy   American Chartered (1)   Total   12/31/2015   Amount   Percent
Low cost deposits:                        
Non-interest bearing deposits   $ 5,137,605     $ 1,270,564     $ 6,408,169     $ 4,627,184     $ 510,421     +11.0 %
Money market, NOW and interest bearing deposits   3,861,222     681,782     4,543,004     4,144,633     (283,411 )   -6.8 %
Savings deposits   1,024,368     111,624     1,135,992     974,555     49,813     +5.1
Total low cost deposits   10,023,195     2,063,970     12,087,165     9,746,372     276,823     +2.8
Certificates of deposit:                        
Certificates of deposit   1,079,405     145,697     1,225,102     1,244,292     (164,887 )   -13.3
Brokered certificates of deposit   774,802     23,379     798,181     514,551     260,251     +50.6
Total certificates of deposit   1,854,207     169,076     2,023,283     1,758,843     95,364     +5.4
Total deposits   $ 11,877,402     $ 2,233,046     $ 14,110,448     $ 11,505,215     $ 372,187     +3.2 %
 
(1)  American Chartered deposits refer to deposits assumed in the American Chartered merger.
 

Legacy low cost deposit balances increased $276.8 million (+2.8%) compared to December 31, 2015, driven by 11.0% growth in non-interest bearing deposits.

Credit Quality Metrics

Overall credit quality was stable compared to the prior quarter and improved compared to the prior year end.

  • Our provision for credit losses decreased by $3.9 million in the fourth quarter of 2016 compared to the third quarter of 2016 and decreased by $1.8 million during the year ended December 31, 2016 compared to the prior year.  The decrease from the prior quarter was primarily due to improvement of a potential problem loan at our leasing segment. 
  • Net loan charge-offs during the quarter were 0.10% of loans (annualized) compared to 0.09% (annualized) in the third quarter of 2016 and were 0.09% for the year ended December 31, 2016 compared to 0.04% for the year ended December 31, 2015.
  • Non-accrual loans and non-performing assets decreased by $3.2 million (-6.1%) and $1.5 million (-1.7%), respectively, from September 30, 2016.  Compared to a year ago, non-accrual loans decreased by $49.1 million (-50.1%) and non-performing assets decreased by $50.3 million (-36.9%).
  • Potential problem loans increased by $33.0 million (+29.5%) from September 30, 2016 and increased by $4.6 million (+3.3%) from December 31, 2015.
  • Our non-performing loans to total loans ratio was 0.46% at December 31, 2016, 0.43% at September 30, 2016 and 1.07% at December 31, 2015.

RESULTS OF OPERATIONS

Fourth Quarter and Annual Results

Net Interest Income

The following table presents net interest income and net interest margin on fully tax equivalent basis (dollars in thousands):

            Change from 3Q16 to 4Q16       Change from 4Q15 to 4Q16     Year Ended   Change from 2015 to 2016
                      December 31,  
    4Q16   3Q16     4Q15       2016   2015  
Net interest income - fully tax equivalent   $ 152,304     $ 137,893     +10.5 %   $ 129,076     +18.0 %     $ 546,507     $ 492,686     +10.9 %
                                             
Net interest income - fully tax equivalent, excluding acquisition accounting discount accretion on bank merger loans   144,741     131,733     +9.9 %   119,373     +21.3 %     517,728     459,047     +12.8 %
                                   
Net interest margin - fully tax equivalent   3.67 %   3.68 %   -0.01 %   3.86 %   -0.19       3.73 %   3.84 %   -0.11 %
                                                 
Net interest margin - fully tax equivalent, excluding acquisition accounting discount accretion on bank merger loans   3.47 %   3.50 %   -0.03 %   3.56 %   -0.09       3.52 %   3.56 %   -0.04 %
                                                   

Net interest income on a fully tax equivalent basis increased $14.4 million in the fourth quarter of 2016 compared to the prior quarter as a result of the interest earning assets and interest bearing liabilities acquired through the American Chartered merger being presented for a full quarter and organic loan growth.  Our net interest margin on a fully tax equivalent basis, excluding accretion on loans acquired in bank mergers, decreased three basis points to 3.47% for the fourth quarter of 2016 compared to 3.50% for the prior quarter primarily due to a higher cost of borrowings.

Net interest income on a fully tax equivalent basis increased in the fourth quarter of 2016 compared to the fourth quarter of 2015 primarily due to growth in our legacy loan portfolio and the impact of the interest earning assets and interest bearing liabilities acquired through the American Chartered merger, partially offset by a decrease in interest earned on purchased credit-impaired loans and an increase in average borrowings.  Our net interest margin on a fully tax equivalent basis, excluding accretion on loans acquired in bank mergers, decreased nine basis points to 3.47% compared to 3.56% for the fourth quarter of 2015 primarily due to a decrease in average yields earned on investment securities and an increase in cost of deposits and borrowings.

Net interest income on a fully tax equivalent basis increased in 2016 compared to the prior year primarily due to growth in our legacy loan portfolio and the impact of the interest earning assets and interest bearing liabilities acquired through the American Chartered merger.  Our net interest margin on a fully tax equivalent basis, excluding accretion on loans acquired in bank mergers, decreased four basis points to 3.52% for 2016 compared to 3.56% for the prior year.  This decrease was primarily due to a decrease in average yields earned on investment securities and an increase in cost of deposits and borrowings.

See the supplemental net interest margin tables in the "Net Interest Margin" section for further detail.  Reconciliations of net interest income on a fully tax equivalent basis to net interest income on a fully tax equivalent basis, excluding acquisition accounting discount accretion on bank merger loans are also set forth in the tables in the "Net Interest Margin" section.  In addition, reconciliations of net interest margin on a fully tax equivalent basis to net interest margin on a fully tax equivalent basis, excluding acquisition accounting discount accretion on bank merger loans are included in the same section.

Non-interest Income

The following table presents non-interest income (in thousands):

                          Year Ended
                          December 31,
    4Q16   3Q16   2Q16   1Q16   4Q15     2016   2015
Core non-interest income:                              
Key fee initiatives:                              
Mortgage banking revenue   $ 32,277     $ 49,095     $ 39,615     $ 27,482     $ 26,542       $ 148,469     $ 117,426  
Lease financing revenue, net   19,868     18,864     15,708     19,046     15,937       73,486     76,581  
Commercial deposit and treasury management fees   14,237     12,957     11,548     11,878     11,711       50,620     45,283  
Trust and asset management fees   8,442     8,244     8,236     7,950     6,077       32,872     23,545  
Card fees   4,340     4,161     4,045     3,525     3,651       16,071     15,322  
Capital markets and international banking service fees   4,021     3,313     2,771     3,227     2,355       13,332     8,148  
Total key fee initiatives   83,185     96,634     81,923     73,108     66,273       334,850     286,305  
Consumer and other deposit service fees   3,563     3,559     3,161     3,025     3,440       13,308     13,282  
Brokerage fees   887     1,294     1,315     1,158     1,252       4,654     5,754  
Loan service fees   1,952     1,792     1,961     1,752     1,890       7,457     6,259  
Increase in cash surrender value of life insurance   1,316     1,055     850     854     864       4,075     3,391  
Other operating income   2,350     3,337     2,043     1,836     1,344       9,566     7,274  
Total core non-interest income   93,253     107,671     91,253     81,733     75,063       373,910     322,265  
Non-core non-interest income:                              
Net gain (loss) on investment securities   178         269         (3 )     447     (176 )
Net (loss) gain on disposal of other assets   (749 )   5     (2 )   (48 )         (794 )   (2 )
Increase in market value of assets held in trust for deferred compensation (1)   141     711     480     8     565       1,340     6  
Total non-core non-interest income   (430 )   716     747     (40 )   562       993     (172 )
Total non-interest income   $ 92,823     $ 108,387     $ 92,000     $ 81,693     $ 75,625       $ 374,903     $ 322,093  
                                                           
(1)  Resides in other operating income in the consolidated statements of operations.
 

Core non-interest income for the fourth quarter of 2016 decreased by $14.4 million, or 13.4%, to $93.3 million from the third quarter of 2016.

  • Mortgage banking revenue decreased as a result of lower origination and servicing fees.  Mortgage origination fees declined due to fewer rate lock commitments during the quarter as a result of higher interest rates and lower gain on sale margin.  Servicing fees declined due to changes in the fair value of our mortgage servicing rights asset, net of related hedges also driven by the volatile interest rate environment in the fourth quarter of 2016. 
  • Lease financing revenue increased primarily due to higher residual gains and an increase in operating lease revenue.
  • Commercial deposit and treasury management fees increased due to the increased customer base as a result of the American Chartered merger.
  • Capital markets and international banking services fees increased due to higher swap and M&A advisory fees partly offset by lower syndication fees.
  • Other operating income decreased due to lower earnings from investments in Small Business Investment Companies.

Core non-interest income for the year ended December 31, 2016 increased by $51.6 million, or 16.0%, to $373.9 million compared to the year ended December 31, 2015.

  • Mortgage banking revenue increased due to higher gain on sale margin and higher mortgage servicing fees.
  • Leasing revenues decreased due to lower residual gains partly offset by higher fees from the sale of third-party equipment maintenance contracts.
  • Commercial deposit and treasury management fees increased due to new customer activity as well as the increased customer base as a result of the American Chartered merger.
  • Trust and asset management fees increased due to the addition of new customers as well as the acquisitions of MSA Holdings, LLC ("MSA") on December 31, 2015 and the Illinois court-appointed guardianship and special needs trust business in the third quarter of 2015.
  • Capital markets and international banking services fees increased due to higher swap, M&A advisory and syndication fees.
  • Other operating income increased due to higher earnings from investments in Small Business Investment Companies.

Non-interest Expense

The following table presents non-interest expense (in thousands):

                          Year Ended
                          December 31,
    4Q16   3Q16   2Q16   1Q16   4Q15     2016   2015
Core non-interest expense: (1)                              
Salaries and employee benefits expense:                              
Salaries   $ 58,823     $ 55,088     $ 51,383     $ 48,809     $ 48,433       $ 214,103     $ 189,570  
Commissions   12,036     12,318     10,822     10,348     9,794       45,524     45,564  
Bonus and stock-based compensation   12,167     12,980     12,871     8,657     9,950       46,675     39,932  
Health and accident insurance   5,951     6,377     6,079     5,599     4,646       24,006     21,075  
Other salaries and benefits (2)   15,072     15,320     13,045     12,089     11,533       55,526     47,560  
Total salaries and employee benefits expense   104,049     102,083     94,200     85,502     84,356       385,834     343,701  
Occupancy and equipment expense   15,594     14,662     13,407     13,260     12,935       56,923     50,235  
Computer services and telecommunication expense   11,019     9,731     9,266     8,750     8,548       38,766     34,147  
Advertising and marketing expense   3,039     3,031     2,923     2,855     2,549       11,848     10,070  
Professional and legal expense   2,351     2,779     3,220     2,492     2,715       10,842     8,593  
Other intangible amortization expense   2,388     1,674     1,617     1,626     1,546       7,305     6,115  
Net loss (gain) recognized on other real estate owned (A)   182     (890 )   (297 )   (637 )   (256 )     (1,642 )   1,814  
Net (gain) loss recognized on other real estate owned related to FDIC transactions (A)   (1,164 )   (18 )   312     154     (549 )     (716 )   (845 )
Other real estate expense, net (A)   192     187     243     137     76       759     499  
Other operating expenses   21,478     21,067     19,814     18,366     18,932       80,725     74,228  
Total core non-interest expense   159,128     154,306     144,705     132,505     130,852       590,644     528,557  
Non-core non-interest expense: (1)                              
Merger related and repositioning expenses (B)   6,491     11,368     2,566     3,287     (4,186 )     23,712     5,506  
Branch exit and facilities impairment charges           155               155      
Prepayment fees on interest bearing liabilities                             85  
Contribution to MB Financial Charitable Foundation (C)       4,000                   4,000      
Increase in market value of assets held in trust for deferred compensation (D)   141     711     480     8     565       1,340     6  
Total non-core non-interest expense   6,632     16,079     3,201     3,295     (3,621 )     29,207     5,597  
Total non-interest expense   $ 165,760     $ 170,385     $ 147,906     $ 135,800     $ 127,231       $ 619,851     $ 534,154  
                                                           
(1)  Letters denote the corresponding line items where these non-core non-interest expense items reside in the consolidated statements of operations as follows: A – Net loss (gain) recognized on other real estate owned and other expense, B – See merger related and repositioning expenses table below, C – Other operating expenses and D – Salaries and employee benefits.
(2)  Includes payroll taxes, 401(k) and profit sharing contributions, overtime and temporary help expenses.
 


Core non-interest expense increased by $4.8 million, or 3.1%, from the third quarter of 2016 to $159.1 million for the fourth quarter of 2016.

  • Salaries and employee benefits expense increased primarily due to the increased staff from the American Chartered merger for a full quarter. 
  • Occupancy and equipment expense increased due to the additional offices acquired through the American Chartered merger for a full quarter.
  • Computer services and telecommunication expense increased due to investments in systems as well as the increase in customer activity as a result of the American Chartered merger.
  • Professional and legal expense decreased due to lower legal expense.
  • Other intangible amortization expense was higher due to the core deposit intangible recorded as a result of the American Chartered merger.

Core non-interest expense increased by $62.1 million, or 11.7%, from the year ended December 31, 2015 to $590.6 million for the year ended December 31, 2016. 

  • Salaries and employee benefits expense increased due to the following:
    -  Salaries increased due to new hires, annual pay increases effective in the beginning of the second quarter and increased staff from the American Chartered merger and the acquisition of MSA.
    -  Bonus and stock-based compensation increased primarily due to an increase in bonus expense based on company performance in 2016 as well as the increase in staff.
    -  Other salaries and benefits expense increased due to increased temporary help in our IT, mortgage and other support areas as well as higher 401(k) match and profit sharing contribution expense and payroll taxes as a result of the increase in staff.
  • Occupancy and equipment expense increased due to higher depreciation, property tax and rental operating expenses as a result of the acquisition of MSA and the American Chartered merger as well as new offices opened at our Mortgage Banking Segment.
  • Computer services and telecommunication expense increased due to higher processing costs as a result of increased customer base and investments in systems.
  • Advertising and marketing expense increased due to increased brand awareness advertising.
  • Professional and legal expense increased due to increased litigation and consulting fees.
  • Other intangible amortization expense was higher due to the customer and core deposit intangibles recorded as a result of the acquisition of MSA and the American Chartered merger, respectively.
  • Non-interest expense was also impacted by higher gains recognized on other real estate owned properties.
  • Other operating expenses increased due to higher FDIC premiums (as a result of MB Financial Bank, N.A. (the "Bank") exceeding $10 billion in assets), filing and other loan expense and card expenses (higher rewards and product development expense).

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

                          Year Ended
                          December 31,
    4Q16   3Q16   2Q16   1Q16   4Q15     2016   2015
Merger related and repositioning expenses:                              
Salaries and employee benefits   $ 4,238     $ 8,684     $ 324     $ 81     $ (212 )     $ 13,327     $ (176 )
Occupancy and equipment expense   95     104     8               207     275  
Computer services and telecommunication expense   781     3,105     511     305     (103 )     4,702     306  
Advertising and marketing expense   6     53     41     23     2       123     2  
Professional and legal expense   158     1,681     101     97     1,454       2,037     2,460  
Branch exit and facilities impairment charges       (2,908 )       44     616       (2,864 )   8,515  
Contingent consideration expense - Celtic acquisition (1)   1,000             2,703           3,703      
Other operating expenses   213     649     1,581     34     (5,943 )     2,477     (5,876 )
Total merger related and repositioning expenses   $ 6,491     $ 11,368     $ 2,566     $ 3,287     $ (4,186 )     $ 23,712     $ 5,506  
                                                           
(1)  Resides in other operating expenses in the consolidated statements of operations.
 

In the fourth quarter of 2016, merger related and repositioning expenses primarily included costs incurred in connection with the American Chartered merger.  In the third quarter of 2016, merger related and repositioning expenses primarily included costs incurred in connection with the American Chartered merger as well as a reversal of an exit cost due to a favorable lease termination on a branch acquired through the Taylor Capital merger.  In the second quarter of 2016, merger related and repositioning expenses included a $1.5 million contract termination fee related to the American Chartered integration (reflected in other operating expenses).  In the first quarter of 2016, merger related and repositioning expenses included an increase in our contingent consideration accrual for our acquisition of Celtic Leasing Corp. as a result of stronger lease residual performance than previously estimated.  In the fourth quarter of 2015, merger related and repositioning expenses were impacted by the reversal of an accrual for a potential contingent loss we assumed in connection with the Taylor Capital merger (reflected in other operating expenses).

Operating Segments

The Company's operations consist of three reportable operating segments: Banking, Leasing and Mortgage Banking.  Our Banking Segment generates revenues primarily from its lending, deposit gathering and fee business activities.  Our Leasing Segment generates revenues through lease originations and related services offered through the Company's leasing subsidiaries: LaSalle Systems Leasing, Inc., Celtic Leasing Corp. and MB Equipment Finance, LLC.  Our Mortgage Banking Segment originates residential mortgage loans for sale to investors through its retail and third party origination channels as well as residential mortgage loans held in our loan portfolio.  The Mortgage Banking Segment also services residential mortgage loans owned by investors and the Company.

Banking Segment

The following table summarizes financial information, adjusted for funds transfer pricing and internal allocations of certain expenses and excluding non-core non-interest income and expense, for the Banking segment for the periods presented (in thousands):

                        Year Ended
                        December 31,
  4Q16   3Q16   2Q16   1Q16   4Q15     2016   2015
                             
Net interest income $ 133,688     $ 119,685     $ 112,152     $ 109,608     $ 111,691       $ 475,133     $ 424,883  
Provision for credit losses 4,193     4,394     2,995     7,001     6,654       18,583     19,436  
Net interest income after provision for credit losses 129,495     115,291     109,157     102,607     105,037       456,550     405,447  
Non-interest income:                            
Mortgage origination fees                            
Mortgage servicing fees                            
Lease financing revenue, net 1,050     890     789     679     1,180       3,408     2,750  
Other non-interest income 40,354     38,927     35,144     34,369     31,772       148,794     125,132  
Total non-interest income 41,404     39,817     35,933     35,048     32,952       152,202     127,882  
Non-interest expense:                            
Salaries and employee benefits expense:                            
Salaries 42,797     38,575     35,951     34,527     34,840       151,850     135,905  
Commissions 1,090     1,172     1,424     1,396     1,503       5,082     4,932  
Bonus and stock-based compensation 9,535     10,553     10,852     6,476     7,838       37,416     32,480  
Health and accident insurance 3,579     4,045     3,816     3,461     2,765       14,901     13,316  
Other salaries and benefits (1) 10,341     9,612     8,171     7,542     7,144       35,666     29,412  
Total salaries and employee benefits expense 67,342     63,957     60,214     53,402     54,090       244,915     216,045  
Occupancy and equipment expense 12,765     11,724     10,561     10,430     10,344       45,480     40,512  
Computer services and telecommunication expense 8,813     7,418     6,945     6,446     6,200       29,622     24,983  
Professional and legal expense 1,281     1,566     2,385     1,486     1,709       6,718     4,784  
Other operating expenses 17,430     16,467     16,587     15,570     15,757       66,054     63,806  
Total non-interest expense 107,631     101,132     96,692     87,334     88,100       392,789     350,130  
Income before income taxes 63,268     53,976     48,398     50,321     49,889       215,963     183,199  
Income tax expense 19,422     16,287     14,353     14,927     14,998       64,989     54,456  
Net income $ 43,846     $ 37,689     $ 34,045     $ 35,394     $ 34,891       $ 150,974     $ 128,743  
                                                         
(1)  Includes payroll taxes, 401(k) and profit sharing contributions, overtime and temporary help expenses.
 

Net income from our Banking Segment for the fourth quarter of 2016 increased by $6.2 million, or 16.3%, compared to the prior quarter.  This increase in net income was primarily due to an increase in net interest income driven by the impact of the interest earning assets and interest bearing liabilities acquired through the American Chartered merger for a full quarter as well as an increase in other non-interest income, partially offset by higher salaries and employee benefits expense primarily due to the increased staff from the American Chartered merger for a full quarter.

Net income from our Banking Segment for the year ended December 31, 2016 increased by $22.2 million, or 17.3%, compared to the year ended December 31, 2015.  This increase in net income was primarily due to an increase in net interest income, driven by growth in our legacy loan portfolio and the impact of the interest earning assets and interest bearing liabilities acquired through the American Chartered merger, and an increase in other non-interest income.  This increase was partly offset by higher salaries and employee benefits expense due to annual pay increases, new hires, increased staff from the American Chartered merger and bonus expense based on company performance and the increase in staff.

Leasing Segment

The following table summarizes financial information, adjusted for funds transfer pricing and internal allocations of certain expenses and excluding non-core non-interest income and expense, for the Leasing segment for the periods presented (in thousands):

                        Year Ended
                        December 31,
  4Q16   3Q16   2Q16   1Q16   4Q15     2016   2015
                             
Net interest income $ 2,413     $ 2,168     $ 2,411     $ 2,423     $ 2,714       $ 9,415     $ 11,475  
Provision for credit losses (1,750 )   1,964     (356 )   437           295     1,598  
Net interest income after provision for credit losses 4,163     204     2,767     1,986     2,714       9,120     9,877  
Non-interest income:                            
Mortgage origination fees                            
Mortgage servicing fees                            
Lease financing revenue, net 19,005     17,974     14,919     18,367     14,757       70,265     73,831  
Other non-interest income 754     785     786     839     802       3,164     3,112  
Total non-interest income 19,759     18,759     15,705     19,206     15,559       73,429     76,943  
Non-interest expense:                            
Salaries and employee benefits expense:                            
Salaries 3,081     3,555     3,344     2,832     2,286       12,812     10,211  
Commissions 2,768     2,592     2,172     3,936     3,047       11,468     15,298  
Bonus and stock-based compensation 1,516     950     829     872     1,052       4,167     3,735  
Health and accident insurance 376     376     376     335     312       1,463     1,287  
Other salaries and benefits (1) 941     934     886     1,108     777       3,869     3,193  
Total salaries and employee benefits expense 8,682     8,407     7,607     9,083     7,474       33,779     33,724  
Occupancy and equipment expense 929     966     947     895     855       3,737     3,355  
Computer services and telecommunication expense 483     432     431     363     340       1,709     1,244  
Professional and legal expense 652     802     414     409     328       2,277     1,172  
Other operating expenses 1,714     1,997     1,716     1,447     1,501       6,874     5,869  
Total non-interest expense 12,460     12,604     11,115     12,197     10,498       48,376     45,364  
Income before income taxes 11,462     6,359     7,357     8,995     7,775       34,173     41,456  
Income tax expense 4,653     2,484     2,879     3,509     3,037       13,525     16,255  
Net income $ 6,809     $ 3,875     $ 4,478     $ 5,486     $ 4,738       $ 20,648     $ 25,201  
                                                         
(1)  Includes payroll taxes, 401(k) and profit sharing contributions, overtime and temporary help expenses.
 

Net income from our Leasing Segment for the fourth quarter of 2016 increased by $2.9 million, or 75.7%, compared to the prior quarter.  This increase in net income was primarily due to a negative provision for credit losses resulting from the improvement of a potential problem loan as well as greater residual gains and an increase in operating lease revenue.

Net income from our Leasing Segment for the year ended December 31, 2016 decreased by $4.6 million, or 18.1%, compared to the year ended December 31, 2015.  This decrease in net income was primarily due to a decrease in lease financing revenues resulting from lower residual gains partly offset by higher fees from the sale of third-party equipment maintenance contracts as well as an increase in legal and other operating expenses.

Mortgage Banking Segment

The following table summarizes financial information, adjusted for funds transfer pricing and internal allocations of certain expenses and excluding non-core non-interest income and expense, for the Mortgage Banking segment for the periods presented (in thousands):

                        Year Ended
                        December 31,
  4Q16   3Q16   2Q16   1Q16   4Q15     2016   2015
                             
Net interest income $ 9,113     $ 8,918     $ 8,039     $ 7,273     $ 7,364       $ 33,343     $ 29,248  
Provision for credit losses 179     191     190     125     104       685     352  
Net interest income after provision for credit losses 8,934     8,727     7,849     7,148     7,260       32,658     28,896  
Non-interest income:                            
Mortgage origination fees 29,317     39,962     31,417     16,894     17,596       117,590     94,703  
Mortgage servicing fees 2,960     9,133     8,198     10,588     8,946       30,879     22,723  
Lease financing revenue, net                            
Other non-interest income             (3 )   10       (3 )   14  
Total non-interest income 32,277     49,095     39,615     27,479     26,552       148,466     117,440  
Non-interest expense:                            
Salaries and employee benefits expense:                            
Salaries 12,945     12,958     12,088     11,450     11,307       49,441     43,454  
Commissions 8,178     8,554     7,226     5,016     5,244       28,974     25,334  
Bonus and stock-based compensation 1,116     1,477     1,190     1,309     1,060       5,092     3,717  
Health and accident insurance 1,996     1,956     1,887     1,803     1,569       7,642     6,472  
Other salaries and benefits (1) 3,790     4,774     3,988     3,439     3,612       15,991     14,955  
Total salaries and employee benefits expense 28,025     29,719     26,379     23,017     22,792       107,140     93,932  
Occupancy and equipment expense 1,900     1,972     1,899     1,935     1,736       7,706     6,368  
Computer services and telecommunication expense 1,910     1,881     1,890     1,941     2,008       7,622     7,920  
Professional and legal expense 418     411     421     597     678       1,847     2,637  
Other operating expenses 6,971     6,587     6,309     5,484     5,040       25,351     22,206  
Total non-interest expense 39,224     40,570     36,898     32,974     32,254       149,666     133,063  
Income before income taxes 1,987     17,252     10,566     1,653     1,558       31,458     13,273  
Income tax expense 795     6,901     4,226     661     623       12,583     5,309  
Net income $ 1,192     $ 10,351     $ 6,340     $ 992     $ 935       $ 18,875     $ 7,964  
                                                         
(1)  Includes payroll taxes, 401(k) and profit sharing contributions, overtime and temporary help expenses.
 

Net income from our Mortgage Banking Segment for the fourth quarter of 2016 decreased by $9.2 million, or 88.5%, compared to the prior quarter primarily due to a decrease in mortgage banking revenue. 

The significant increase in interest rates in the fourth quarter of 2016, coupled with an increase in short-term interest rates by the Federal Reserve, drove fewer interest rate lock commitments.  This decrease in interest rate lock commitment volume had a negative impact on our mortgage origination fees for the quarter.  Lower gain on sale margin during the quarter also had a negative impact on mortgage origination fees.

In addition, high volatility in interest rates caused disproportionate changes in the fair value of our mortgage servicing rights asset and the fair value of the derivatives used to hedge this asset.  As a result, the fair value of our hedge decreased more than the increase in the fair value of our mortgage servicing rights asset, reducing our mortgage servicing fees during the quarter.

By comparison, favorable market conditions in the third quarter drove higher interest rate lock commitment volume at higher gain on sale margins.  This, coupled with improved hedge performance, drove better than expected results in our Mortgage Banking Segment.

Net income from our Mortgage Banking Segment for the year ended December 31, 2016 increased by $10.9 million, or 137.0%, compared to the year ended December 31, 2015.  This increase in net income was due to higher gain on sale margin and an increase in servicing fees, partly offset by higher salaries expense as the result of annual pay increases and new hires, higher commission expense and higher bonus expense.

The following table presents additional information regarding the Mortgage Banking Segment (dollars in thousands):

                          Year Ended
                          December 31,
    4Q16   3Q16   2Q16   1Q16   4Q15     2016   2015
Origination volume   $ 2,054,406     $ 1,976,377     $ 1,709,044     $ 1,328,804     $ 1,437,057       $ 7,068,631     $ 7,016,733  
Refinance   56 %   48 %   42 %   49 %   42 %     49 %   45 %
Purchase   44     52     58     51     58       51     55  
Origination volume by channel:                                                          
Retail   21 %   22 %   23 %   19 %   18 %     21 %   18 %
Third party   79     78     77     81     82       79     82  
Mortgage servicing book (unpaid principal balance of loans serviced for others) at period end   $ 19,683,073     $ 18,477,648     $ 17,739,626     $ 16,911,325     $ 16,218,613       $ 19,683,073     $ 16,218,613  
Mortgage servicing rights, recorded at fair value, at period end   238,011     154,730     134,969     145,800     168,162       238,011     168,162  
Notional value of rate lock commitments, at period end   543,900     1,201,100     981,000     823,000     622,906       543,900     622,906  


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):

    12/31/2016   9/30/2016   6/30/2016   3/31/2016   12/31/2015
    Amount   % of Total   Amount   % of Total   Amount   % of Total   Amount   % of Total   Amount   % of Total
Commercial related loans:                                        
Commercial   $ 4,346,506     34 %   $ 4,385,812     35 %   $ 3,561,500     35 %   $ 3,509,604     36 %   $ 3,616,286     37 %
Commercial loans collateralized by assignment of lease payments (lease loans)   2,002,976     16     1,873,380     15     1,794,465     18     1,774,104     18     1,779,072     18  
Commercial real estate   3,788,016     29     3,794,801     30     2,827,720     28     2,831,814     28     2,695,676     27  
Construction real estate   518,562     4     451,023     4     357,807     3     310,278     3     252,060     3  
Total commercial related loans   10,656,060     83     10,505,016     84     8,541,492     84     8,425,800     85     8,343,094     85  
Other loans:                                        
Residential real estate   1,060,828     8     998,827     8     753,707     7     677,791     7     628,169     6  
Indirect vehicle   541,680     4     522,271     4     491,480     5     432,915     4     384,095     4  
Home equity   266,377     2     275,288     2     198,622     2     207,079     2     216,573     2  
Consumer   80,781     1     77,956     1     75,775     1     77,318     1     80,661     1  
Total other loans   1,949,666     15     1,874,342     15     1,519,584     15     1,395,103     14     1,309,498     13  
Total loans, excluding purchased credit-impaired loans   12,605,726     98     12,379,358     99     10,061,076     99     9,820,903     99     9,652,592     98  
Purchased credit-impaired loans   163,077     2     161,338     1     136,811     1     140,445     1     141,406     2  
Total loans   $ 12,768,803     100 %   $ 12,540,696     100 %   $ 10,197,887     100 %   $ 9,961,348     100 %   $ 9,793,998     100 %
Change from prior quarter   +1.8 %       +23.0 %       +2.4 %       +1.7 %       +4.3 %    
Change from same quarter one year ago   +30.4 %       +33.6 %       +12.1 %       +11.7 %       +7.8 %    

Our loan balances, excluding purchased credit-impaired loans, grew $226.4 million (+1.8%, or +7.3% annualized basis) during the fourth quarter of 2016 primarily due to growth in lease, construction real estate and residential real estate loans.  Compared to December 31, 2015, legacy loan balances, excluding purchased credit-impaired loans, increased $1.2 billion (+12.5%).

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):

    4Q16   3Q16   2Q16   1Q16   4Q15
    Amount   % of Total   Amount   % of Total   Amount   % of Total   Amount   % of Total   Amount   % of Total
Commercial-related loans:                                        
Commercial   $ 4,274,398     35 %   $ 3,850,588     35 %   $ 3,522,641     35 %   $ 3,531,441     36 %   $ 3,492,161     37 %
Commercial loans collateralized by assignment of lease payments (lease loans)   1,896,486     15     1,825,505     16     1,777,763     18     1,754,558     18     1,708,404     18  
Commercial real estate   3,775,599     30     3,183,131     29     2,821,516     28     2,734,148     28     2,627,004     28  
Construction real estate   486,861     4     397,480     4     351,079     3     276,797     3     274,188     2  
Total commercial-related loans   10,433,344     84     9,256,704     84     8,472,999     84     8,296,944     85     8,101,757     85  
Other loans:                                                                      
Residential real estate   1,031,152     8     862,393     7     710,384     7     640,231     7     612,275     6  
Indirect vehicle   532,782     4     507,772     5     462,053     5     404,473     4     365,744     4  
Home equity   273,694     2     231,399     2     202,228     2     210,678     2     219,440     2  
Consumer   80,113     1     77,451     1     78,108     1     80,569     1     83,869     1  
Total other loans   1,917,741     15     1,679,015     15     1,452,773     15     1,335,951     14     1,281,328     13  
Total loans, excluding purchased credit-impaired loans   12,351,085     99     10,935,719     99     9,925,772     99     9,632,895     99     9,383,085     98  
Purchased credit-impaired loans   152,509     1     135,548     1     136,415     1     139,451     1     154,562     2  
Total loans   $ 12,503,594     100 %   $ 11,071,267     100 %   $ 10,062,187     100 %   $ 9,772,346     100 %   $ 9,537,647     100 %
Change from prior quarter   +12.9 %       +10.0 %       +3.0 %       +2.5 %       +3.8 %    
Change from same quarter one year ago   +31.1 %       +20.5 %       +12.2 %       +9.9 %       +6.2 %    

Our quarterly average loan balances, excluding purchased credit-impaired loans, increased $1.4 billion (+12.9%) during the fourth quarter of 2016 primarily due to having a full quarter of loan balances acquired through the American Chartered merger.  Compared to the fourth quarter of 2015, our quarterly average legacy loan balances, excluding purchased credit-impaired loans, for the fourth quarter of 2016 increased by approximately 12%.

ASSET QUALITY

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

    12/31/2016   9/30/2016   6/30/2016   3/31/2016   12/31/2015
Non-performing loans:                    
Non-accrual loans (1)   $ 48,974     $ 52,135     $ 67,544     $ 93,602     $ 98,065  
Loans 90 days or more past due, still accruing interest   10,378     1,774     7,190     1,112     6,596  
Total non-performing loans   59,352     53,909     74,734     94,714     104,661  
Other real estate owned   26,279     33,105     27,663     28,309     31,553  
Repossessed assets   322     453     459     187     81  
Total non-performing assets   $ 85,953     $ 87,467     $ 102,856     $ 123,210     $ 136,295  
Potential problem loans (2)   $ 144,544     $ 111,594     $ 99,782     $ 110,193     $ 139,941  
Purchased credit-impaired loans   $ 163,077     $ 161,338     $ 136,811     $ 140,445     $ 141,406  
Total non-performing, potential problem and purchased credit-impaired loans   $ 366,973     $ 326,841     $ 311,327     $ 345,352     $ 386,008  
                                         
Total allowance for loan and lease losses   $ 139,366     $ 139,528     $ 135,614     $ 134,493     $ 128,140  
Accruing restructured loans (3)   32,687     28,561     26,715     27,269     26,991  
Total non-performing loans to total loans   0.46 %   0.43 %   0.73 %   0.95 %   1.07 %
Total non-performing assets to total assets   0.45     0.45     0.64     0.79     0.87  
Allowance for loan and lease losses to non-performing loans   234.81     258.82     181.46     142.00     122.43  
 
(1)  Includes $27.1 million, $23.4 million, $28.9 million, $24.0 million and $23.6 million of restructured loans on non-accrual status at December 31, 2016, September 30, 2016, June 30, 2016, March 31, 2016 and December 31, 2015, 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 of 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 purchased credit-impaired loans that were acquired as part of our FDIC-assisted transactions and bank mergers) as of the dates indicated (in thousands):

    12/31/2016   9/30/2016   6/30/2016   3/31/2016   12/31/2015
Commercial and lease   $ 15,189     $ 14,898     $ 29,509     $ 28,590     $ 37,076  
Commercial real estate   11,767     4,655     7,163     27,786     29,073  
Consumer related   32,396     34,356     38,062     38,338     38,512  
Total non-performing loans   $ 59,352     $ 53,909     $ 74,734     $ 94,714     $ 104,661  

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):

    12/31/2016   9/30/2016   6/30/2016   3/31/2016   12/31/2015
Balance at the beginning of quarter   $ 33,105     $ 27,663     $ 28,309     $ 31,553     $ 29,587  
Transfers in at fair value less estimated costs to sell   1,191     929     1,367     1,270     5,964  
Acquired from business combination       4,148              
Capitalized other real estate owned costs       96              
Fair value adjustments   (2,834 )   865     70     45     (721 )
Net gains on sales of other real estate owned   2,652     25     227     592     977  
Cash received upon disposition   (7,835 )   (621 )   (2,310 )   (5,151 )   (4,254 )
Balance at the end of quarter   $ 26,279     $ 33,105     $ 27,663     $ 28,309     $ 31,553  

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

                          Year Ended
                          December 31,
    4Q16   3Q16   2Q16   1Q16   4Q15     2016   2015
Allowance for credit losses, balance at the beginning of period   $ 142,399     $ 138,333     $ 137,732     $ 131,508     $ 128,038       $ 131,508     $ 114,057  
Provision for credit losses   2,622     6,549     2,829     7,563     6,758       19,563     21,386  
Charge-offs:                              
Commercial       1,341     72     713     710       2,126     2,993  
Commercial loans collateralized by assignment of lease payments (lease loans)   3,452     367     2,347     574     685       6,740     2,765  
Commercial real estate   250     529     1,720     352     1,251       2,851     3,563  
Construction real estate   442     7     144         23       593     34  
Residential real estate   222     290     476     368     261       1,356     1,450  
Home equity   429     376     619     238     407       1,662     1,485  
Indirect vehicle   1,085     838     651     931     898       3,505     2,980  
Consumer   562     409     395     412     550       1,778     1,941  
Total charge-offs   6,442     4,157     6,424     3,588     4,785       20,611     17,211  
Recoveries:                              
Commercial   437     665     952     380     235       2,434     1,749  
Commercial loans collateralized by assignment of lease payments (lease loans)   30     3     467     50     12       550     1,112  
Commercial real estate   968     324     1,843     594     385       3,729     6,723  
Construction real estate   48     50     17     27     19       142     272  
Residential real estate   1,059     45     82     24     98       1,210     515  
Home equity   180     65     193     318     132       756     579  
Indirect vehicle   437     436     501     463     499       1,837     1,853  
Consumer   104     86     141     393     117       724     473  
Total recoveries   3,263     1,674     4,196     2,249     1,497       11,382     13,276  
Total net charge-offs   3,179     2,483     2,228     1,339     3,288       9,229     3,935  
Allowance for credit losses, balance at the end of the period   141,842     142,399     138,333     137,732     131,508       141,842     131,508  
Allowance for unfunded credit commitments   (2,476 )   (2,871 )   (2,719 )   (3,239 )   (3,368 )     (2,476 )   (3,368 )
Allowance for loan and lease losses, balance at the end of the period   $ 139,366     $ 139,528     $ 135,614     $ 134,493     $ 128,140       $ 139,366     $ 128,140  
Total loans, excluding loans held for sale   $ 12,768,803     $ 12,540,696     $ 10,197,887     $ 9,961,348     $ 9,793,998       $ 12,768,803     $ 9,793,998  
Average loans, excluding loans held for sale   12,503,594     11,071,267     10,062,187     9,772,346     9,537,647       10,857,460     9,147,279  
Allowance for loan and lease losses to total loans, excluding loans held for sale   1.09 %   1.11 %   1.33 %   1.35 %   1.31 %     1.09 %   1.31 %
Net loan charge-offs to average loans, excluding loans held for sale (annualized)   0.10     0.09     0.09     0.06     0.14       0.09     0.04  


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

    12/31/2016   9/30/2016   6/30/2016   3/31/2016   12/31/2015
Commercial related loans:                    
General reserve   $ 120,489     $ 112,653     $ 108,972     $ 98,001     $ 94,164  
Specific reserve   3,243     9,698     12,205     20,995     16,173  
Consumer related reserve   15,634     17,177     14,437     15,497     17,803  
Total allowance for loan and lease losses   $ 139,366     $ 139,528     $ 135,614     $ 134,493     $ 128,140  


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.

In accordance with ASC 310-30, for both purchased non-impaired loans and purchased credit-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 acquisition accounting discount for loans acquired in the bank mergers were as follows for the three months ended December 31, 2016 (in thousands):

    Non-Accretable Discount - PCI Loans   Accretable Discount - PCI Loans   Accretable Discount - Non-PCI Loans   Total
Balance at beginning of period   $ 11,130     $ 13,924     $ 49,356     $ 74,410  
Purchases   15,746     4,281     (7,904 )   12,123  
Recoveries   1,295             1,295  
Accretion       (2,709 )   (4,854 )   (7,563 )
Transfer   (554 )   554          
Balance at end of period   $ 27,617     $ 16,050     $ 36,598     $ 80,265  

The acquisition accounting discount for loans acquired in the American Chartered merger was revised compared to previously reported balances and is only provisional at December 31, 2016 as loan risk ratings continue to be assessed.  The change is reflected in the purchases line in the table above.

Changes in the acquisition accounting discount for loans acquired in the bank mergers were as follows for the three months ended September 30, 2016 (in thousands):

    Non-Accretable Discount - PCI Loans   Accretable Discount - PCI Loans   Accretable Discount - Non-PCI Loans   Total
Balance at beginning of period   $ 9,435     $ 12,677     $ 24,428     $ 46,540  
Purchases   4,293     805     29,042     34,140  
Charge-offs   (110 )           (110 )
Accretion       (2,046 )   (4,114 )   (6,160 )
Transfer   (2,488 )   2,488          
Balance at end of period   $ 11,130     $ 13,924     $ 49,356     $ 74,410  

The $554 thousand and $2.5 million acquisition accounting discount transfer from non-accretable discount to accretable discount on purchased credit-impaired loans for the three months ended December 31, 2016 and September 30, 2016, respectively, was due to better than expected cash flows on several pools of purchased credit-impaired loans.

INVESTMENT SECURITIES

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

    12/31/2016   9/30/2016   6/30/2016   3/31/2016   12/31/2015
Securities available for sale:                    
Fair value                    
Government sponsored agencies and enterprises   $ 23,415     $ 53,968     $ 54,457     $ 64,762     $ 64,611  
States and political subdivisions   391,365     410,737     400,948     398,024     396,367  
Mortgage-backed securities   1,076,692     1,173,330     785,367     834,559     893,656  
Corporate bonds   193,895     210,193     225,525     224,530     219,628  
Equity securities   10,828     11,128     11,098     10,969     10,761  
Total fair value   $ 1,696,195     $ 1,859,356     $ 1,477,395     $ 1,532,844     $ 1,585,023  
                     
Amortized cost                    
Government sponsored agencies and enterprises   $ 23,267     $ 53,456     $ 53,674     $ 63,600     $ 63,805  
States and political subdivisions   376,541     383,041     369,816     371,006     373,285  
Mortgage-backed securities   1,080,693     1,160,796     769,109     820,825     888,325  
Corporate bonds   193,164     208,940     224,730     225,657     222,784  
Equity securities   11,000     10,932     10,872     10,814     10,757  
Total amortized cost   $ 1,684,665     $ 1,817,165     $ 1,428,201     $ 1,491,902     $ 1,558,956  
                     
Unrealized gain (loss)                    
Government sponsored agencies and enterprises   $ 148     $ 512     $ 783     $ 1,162     $ 806  
States and political subdivisions   14,824     27,696     31,132     27,018     23,082  
Mortgage-backed securities   (4,001 )   12,534     16,258     13,734     5,331  
Corporate bonds   731     1,253     795     (1,127 )   (3,156 )
Equity securities   (172 )   196     226     155     4  
Total unrealized gain   $ 11,530     $ 42,191     $ 49,194     $ 40,942     $ 26,067  
                     
Securities held to maturity, at cost:                    
States and political subdivisions   $ 910,608     $ 939,491     $ 960,784     $ 986,340     $ 1,016,519  
Mortgage-backed securities   159,142     175,771     190,631     205,570     214,291  
Total amortized cost   $ 1,069,750     $ 1,115,262     $ 1,151,415     $ 1,191,910     $ 1,230,810  

Total unrealized gain decreased at December 31, 2016 compared to September 30, 2016 as result of the increase in interest rates.

DEPOSIT MIX

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

    12/31/2016   9/30/2016   6/30/2016   3/31/2016   12/31/2015
    Amount   % of
Total
  Amount   % of
Total
  Amount   % of
Total
  Amount   % of
Total
  Amount   % of
Total
Low cost deposits:                                        
Non-interest bearing deposits   $ 6,408,169     46 %   $ 6,410,334     45 %   $ 4,775,364     42 %   $ 4,667,410     40 %   $ 4,627,184     40 %
Money market, NOW and interest bearing deposits   4,543,004     32     4,660,407     33     3,771,111     33     4,048,054     35     4,144,633     36  
Savings deposits   1,135,992     8     1,147,900     8     1,021,845     9     991,300     9     974,555     8  
Total low cost deposits   12,087,165     86     12,218,641     86     9,568,320     84     9,706,764     84     9,746,372     84  
Certificates of deposit:                                        
Certificates of deposit   1,225,102     9     1,298,186     9     1,220,562     11     1,255,457     11     1,244,292     11  
Brokered certificates of deposit   798,181     5     762,439     5     647,214     5     571,605     5     514,551     5  
Total certificates of deposit   2,023,283     14     2,060,625     14     1,867,776     16     1,827,062     16     1,758,843     16  
Total deposits   $ 14,110,448     100 %   $ 14,279,266     100 %   $ 11,436,096     100 %   $ 11,533,826     100 %   $ 11,505,215     100 %
Change from prior quarter   -1.2 %       +24.9 %       -0.8 %       +0.2 %       +2.2 %    
Change from same quarter one year ago   +22.6 %       +26.9 %       +5.3 %       +4.7 %       +4.7 %    

Total low cost deposits decreased $131.5 million to $12.1 billion at December 31, 2016 compared to the prior quarter primarily due to the decrease in higher rate NOW accounts and mortgage escrow accounts.  Non-interest bearing deposits represented 46% of total deposits at December 31, 2016.  Compared to December 31, 2015, legacy low cost deposit balances increased $276.8 million (+2.8%) driven by the 11.0% growth in non-interest bearing deposits.

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

    4Q16   3Q16   2Q16   1Q16   4Q15
    Amount   % of
Total
  Amount   % of
Total
  Amount   % of
Total
  Amount   % of
Total
  Amount   % of
Total
Low cost deposits:                                        
Non-interest bearing deposits   $ 6,454,025     45 %   $ 5,524,043     43 %   $ 4,806,692     42 %   $ 4,606,008     40 %   $ 4,617,076     40 %
Money market, NOW and interest bearing deposits   4,628,698     33     4,161,913     33     3,836,134     33     4,109,150     36     4,214,099     37  
Savings deposits   1,140,926     8     1,080,609     8     1,006,902     9     984,019     9     959,049     8  
Total low cost deposits   12,223,649     86     10,766,565     84     9,649,728     84     9,699,177     85     9,790,224     85  
Certificates of deposit:                                        
Certificates of deposit   1,263,675     9     1,257,959     10     1,237,198     11     1,237,971     11     1,245,947     11  
Brokered certificates of deposit   779,411     5     702,030     6     598,702     5     534,910     4     492,839     4  
Total certificates of deposit   2,043,086     14     1,959,989     16     1,835,900     16     1,772,881     15     1,738,786     15  
Total deposits   $ 14,266,735     100 %   $ 12,726,554     100 %   $ 11,485,628     100 %   $ 11,472,058     100 %   $ 11,529,010     100 %
Change from prior quarter   +12.1 %       +10.8 %       +0.1 %       -0.5 %       +2.5 %    
Change from same quarter one year ago   +23.7 %       +13.2 %       +5.4 %       +4.4 %       +2.9 %    

Total average low cost deposits increased $1.5 billion to $12.2 billion during the fourth quarter of 2016 compared to the prior quarter primarily due to a full quarter of deposit balances assumed through the American Chartered merger.  Similarly, non-interest bearing deposits quarterly average grew by $930.0 million (+16.8%) during the fourth quarter of 2016 compared to the third quarter of 2016.  Our quarterly average legacy low cost deposits for the fourth quarter of 2016 increased by approximately 2% compared to the third quarter of 2016.  Compared to the fourth quarter of 2015, our quarterly average legacy low cost deposits for the fourth quarter of 2016 increased by approximately 3%.

CAPITAL

Tangible book value per common share was $16.98 at December 31, 2016 compared to $16.88 at September 30, 2016 and $16.53 at December 31, 2015.   

Our regulatory capital ratios remain strong.  MB Financial Bank, N.A. (the "Bank") was categorized as "well capitalized" at December 31, 2016 under the Prompt Corrective Action ("PCA") provisions. The Bank would be categorized as "well capitalized" under the fully phased in rules under the Basel III capital reform.

FORWARD-LOOKING STATEMENTS

When used in this press release and in reports filed with or furnished to the Securities and Exchange Commission (the "SEC"), 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 MB Financial-American Chartered merger might not be realized within the expected 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 losses, which could necessitate additional provisions for loan losses, resulting both from originated loans and loans acquired from other financial institutions; (3) competitive pressures among depository institutions; (4) interest rate movements and their impact on customer behavior, net interest margin and the value of our mortgage servicing rights; (5) the possibility that our mortgage banking business may experience increased volatility in its 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; (6) the impact of repricing and competitors' pricing initiatives on loan and deposit products; (7) fluctuations in real estate values; (8) the ability to adapt successfully to technological changes to meet customers' needs and developments in the market place; (9) the possibility that security measures implemented might not be sufficient to mitigate the risk of a cyber attack or cyber theft, and that such security measures might not protect against systems failures or interruptions; (10) our ability to realize the residual values of its direct finance, leveraged and operating leases; (11) the 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, changes in the interpretation and/or application of laws and regulations by regulatory authorities, 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)
 
(Dollars in thousands)   12/31/2016   9/30/2016   6/30/2016   3/31/2016   12/31/2015
ASSETS                    
Cash and due from banks   $ 364,783     $ 351,009     $ 303,037     $ 271,732     $ 307,869  
Interest earning deposits with banks   98,686     125,250     123,086     113,785     73,572  
Total cash and cash equivalents   463,469     476,259     426,123     385,517     381,441  
Investment securities:                    
Securities available for sale, at fair value   1,696,195     1,859,356     1,477,395     1,532,844     1,585,023  
Securities held to maturity, at amortized cost   1,069,750     1,115,262     1,151,415     1,191,910     1,230,810  
Non-marketable securities - FHLB and FRB Stock   143,276     146,209     130,232     121,750     114,233  
Total investment securities   2,909,221     3,120,827     2,759,042     2,846,504     2,930,066  
Loans held for sale   716,883     899,412     843,379     632,196     744,727  
Loans:                    
Total loans, excluding purchased credit-impaired loans   12,605,726     12,379,358     10,061,076     9,820,903     9,652,592  
Purchased credit-impaired loans   163,077     161,338     136,811     140,445     141,406  
Total loans   12,768,803     12,540,696     10,197,887     9,961,348     9,793,998  
Less: Allowance for loan and lease losses   139,366     139,528     135,614     134,493     128,140  
Net loans   12,629,437     12,401,168     10,062,273     9,826,855     9,665,858  
Lease investments, net   311,327     277,647     233,320     216,046     211,687  
Premises and equipment, net   293,910     283,112     243,319     238,578     236,013  
Cash surrender value of life insurance   200,945     199,628     138,657     137,807     136,953  
Goodwill   1,001,038     993,799     725,039     725,068     725,070  
Other intangibles   62,959     65,395     41,569     43,186     44,812  
Mortgage servicing rights, at fair value   238,011     154,730     134,969     145,800     168,162  
Other real estate owned, net   26,279     33,105     27,663     28,309     31,553  
Other real estate owned related to FDIC transactions   5,006     5,177     8,356     10,397     10,717  
Other assets   443,832     431,623     352,081     339,390     297,948  
Total assets   $ 19,302,317     $ 19,341,882     $ 15,995,790     $ 15,575,653     $ 15,585,007  
LIABILITIES AND STOCKHOLDERS' EQUITY                    
Liabilities                    
Deposits:                    
Non-interest bearing   $ 6,408,169     $ 6,410,334     $ 4,775,364     $ 4,667,410     $ 4,627,184  
Interest bearing   7,702,279     7,868,932     6,660,732     6,866,416     6,878,031  
Total deposits   14,110,448     14,279,266     11,436,096     11,533,826     11,505,215  
Short-term borrowings   1,569,288     1,496,319     1,246,994     884,101     1,005,737  
Long-term borrowings   311,790     311,645     518,545     439,615     400,274  
Junior subordinated notes issued to capital trusts   210,668     209,159     185,925     185,820     186,164  
Accrued expenses and other liabilities   520,914     482,085     451,695     409,406     400,333  
Total liabilities   16,723,108     16,778,474     13,839,255     13,452,768     13,497,723  
Stockholders' Equity                    
Preferred stock   115,572     116,507     115,280     115,280     115,280  
Common stock   856     855     757     756     756  
Additional paid-in capital   1,678,826     1,674,341     1,288,777     1,284,438     1,280,870  
Retained earnings   838,892     809,769     783,468     756,272     731,812  
Accumulated other comprehensive income   5,190     23,763     28,731     24,687     15,777  
Treasury stock   (60,384 )   (62,084 )   (60,732 )   (59,863 )   (58,504 )
Controlling interest stockholders' equity   2,578,952     2,563,151     2,156,281     2,121,570     2,085,991  
Noncontrolling interest   257     257     254     1,315     1,293  
Total stockholders' equity   2,579,209     2,563,408     2,156,535     2,122,885     2,087,284  
Total liabilities and stockholders' equity   $ 19,302,317     $ 19,341,882     $ 15,995,790     $ 15,575,653     $ 15,585,007  


MB FINANCIAL, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
 
                          Year Ended
                          December 31,
(Dollars in thousands, except per share data)   4Q16   3Q16   2Q16   1Q16   4Q15     2016   2015
Interest income:                              
Loans:                              
Taxable   $ 134,048     $ 118,675     $ 110,231     $ 104,923     $ 106,137       $ 467,877     $ 404,324  
Nontaxable   2,947     2,846     2,741     2,586     2,602       11,120     9,318  
Investment securities:                              
Taxable   9,362     8,844     7,799     9,566     9,708       35,571     39,299  
Nontaxable   10,220     10,382     10,644     10,776     10,969       42,022     40,974  
Federal funds sold                   1           1  
Other interest earning accounts   157     164     125     141     110       587     318  
Total interest income   156,734     140,911     131,540     127,992     129,527       557,177     494,234  
Interest expense:                              
Deposits   7,324     6,681     5,952     5,622     5,357       25,579     19,658  
Short-term borrowings   1,472     1,092     910     721     385       4,195     1,412  
Long-term borrowings and junior subordinated notes   2,724     2,367     2,076     2,345     2,016       9,512     7,558  
Total interest expense   11,520     10,140     8,938     8,688     7,758       39,286     28,628  
Net interest income   145,214     130,771     122,602     119,304     121,769       517,891     465,606  
Provision for credit losses   2,622     6,549     2,829     7,563     6,758       19,563     21,386  
Net interest income after provision for credit losses   142,592     124,222     119,773     111,741     115,011       498,328     444,220  
Non-interest income:                              
Mortgage banking revenue   32,277     49,095     39,615     27,482     26,542       148,469     117,426  
Lease financing revenue, net   19,868     18,864     15,708     19,046     15,937       73,486     76,581  
Commercial deposit and treasury management fees   14,237     12,957     11,548     11,878     11,711       50,620     45,283  
Trust and asset management fees   8,442     8,244     8,236     7,950     6,077       32,872     23,545  
Card fees   4,340     4,161     4,045     3,525     3,651       16,071     15,322  
Capital markets and international banking service fees   4,021     3,313     2,771     3,227     2,355       13,332     8,148  
Consumer and other deposit service fees   3,563     3,559     3,161     3,025     3,440       13,308     13,282  
Brokerage fees   887     1,294     1,315     1,158     1,252       4,654     5,754  
Loan service fees   1,952     1,792     1,961     1,752     1,890       7,457     6,259  
Increase in cash surrender value of life insurance   1,316     1,055     850     854     864       4,075     3,391  
Net gain (loss) on investment securities   178         269         (3 )     447     (176 )
Net (loss) gain on disposal of other assets   (749 )   5     (2 )   (48 )         (794 )   (2 )
Other operating income   2,491     4,048     2,523     1,844     1,909       10,906     7,280  
Total non-interest income   92,823     108,387     92,000     81,693     75,625       374,903     322,093  
Non-interest expense:                              
Salaries and employee benefits expense   108,428     111,478     95,004     85,591     84,709       400,501     343,531  
Occupancy and equipment expense   15,689     14,766     13,415     13,260     12,935       57,130     50,510  
Computer services and telecommunication expense   11,800     12,836     9,777     9,055     8,445       43,468     34,453  
Advertising and marketing expense   3,045     3,084     2,964     2,878     2,551       11,971     10,072  
Professional and legal expense   2,509     4,460     3,321     2,589     4,169       12,879     11,053  
Other intangible amortization expense   2,388     1,674     1,617     1,626     1,546       7,305     6,115  
Branch exit and facilities impairment charges       (2,908 )   155     44     616       (2,709 )   8,515  
Net (gain) loss recognized on other real estate owned and other related expense   (790 )   (721 )   258     (346 )   (729 )     (1,599 )   1,468  
Prepayment fees on interest bearing liabilities                             85  
Other operating expenses   22,691     25,716     21,395     21,103     12,989       90,905     68,352  
Total non-interest expense   165,760     170,385     147,906     135,800     127,231       619,851     534,154  
Income before income taxes   69,655     62,224     63,867     57,634     63,405       253,380     232,159  
Income tax expense   22,464     17,805     20,455     18,520     19,798       79,244     73,211  
Net income   47,191     44,419     43,412     39,114     43,607       174,136     158,948  
Dividends on preferred shares   2,005     2,004     2,000     2,000     2,000       8,009     8,000  
Net income available to common stockholders   $ 45,186     $ 42,415     $ 41,412     $ 37,114     $ 41,607       $ 166,127     $ 150,948  


                          Year Ended
                          December 31,
    4Q16   3Q16   2Q16   1Q16   4Q15     2016   2015
Common share data:                              
Basic earnings per common share   $ 0.54     $ 0.55     $ 0.56     $ 0.51     $ 0.57       $ 2.16     $ 2.03  
Diluted earnings per common share   0.53     0.54     0.56     0.50     0.56       2.13     2.02  
Weighted average common shares outstanding for basic earnings per common share   83,484,899     77,506,885     73,475,258     73,330,731     73,296,602       76,968,823     74,177,574  
Weighted average common shares outstanding for diluted earnings per common share   84,674,181     78,683,170     74,180,374     73,966,935     73,953,165       77,976,121     74,849,030  
Common shares outstanding (at end of period)   83,725,269     83,555,257     73,740,348     73,639,487     73,678,329       83,725,269     73,678,329  



Selected Financial Data:                              
                          Year Ended
                          December 31,
    4Q16   3Q16   2Q16   1Q16   4Q15     2016   2015
Performance Ratios:                              
Annualized return on average assets   0.98 %   1.02 %   1.11 %   1.02 %   1.13 %     1.03 %   1.07 %
Annualized operating return on average assets (1)   1.07     1.20     1.15     1.09     1.06       1.13     1.09  
Annualized return on average common equity   7.36     7.67     8.27     7.52     8.48       7.69     7.77  
Annualized operating return on average common equity (1)   8.12     9.02     8.56     8.08     7.86       8.44     7.92  
Annualized cash return on average tangible common equity (2)   13.22     12.99     13.53     12.47     13.97       13.06     12.82  
Annualized cash operating return on average tangible common equity (3)   14.54     15.23     13.99     13.37     12.97       14.31     13.07  
Net interest rate spread   3.48     3.50     3.64     3.63     3.72       3.56     3.70  
Cost of funds (4)   0.28     0.28     0.27     0.27     0.24       0.28     0.23  
Efficiency ratio (5)   64.62     62.69     65.32     63.49     63.95       64.02     64.71  
Annualized net non-interest expense to average assets (6)   1.35     1.06     1.35     1.31     1.44       1.27     1.38  
Core non-interest income to revenues (7)   38.15     43.98     41.40     39.38     36.91       40.77     39.68  
Net interest margin   3.50     3.49     3.60     3.57     3.64       3.54     3.63  
Tax equivalent effect   0.17     0.19     0.21     0.22     0.22       0.19     0.21  
Net interest margin - fully tax equivalent basis (8)   3.67     3.68     3.81     3.79     3.86       3.73     3.84  
Loans to deposits   90.49     87.82     89.17     86.37     85.13       90.49     85.13  
Asset Quality Ratios:                              
Non-performing loans (9) to total loans   0.46 %   0.43 %   0.73 %   0.95 %   1.07 %     0.46 %   1.07 %
Non-performing assets (9) to total assets   0.45     0.45     0.64     0.79     0.87       0.45     0.87  
Allowance for loan and lease losses to non-performing loans (9)   234.81     258.82     181.46     142.00     122.43       234.81     122.43  
Allowance for loan and lease losses to total loans   1.09     1.11     1.33     1.35     1.31       1.09     1.31  
Net loan charge-offs to average loans, excluding loans held for sale (annualized)   0.10     0.09     0.09     0.06     0.14       0.09     0.04  
Capital Ratios:                              
Tangible equity to tangible assets (10)   8.42 %   8.34 %   9.21 %   9.24 %   8.99 %     8.42 %   8.99 %
Tangible common equity to tangible assets (11)   7.79     7.71     8.46     8.46     8.21       7.79     8.21  
Tangible common equity to risk weighted assets (12)   8.78     8.83     9.75     9.54     9.34       8.78     9.34  
Total capital (to risk-weighted assets) (13)   11.59     11.66     12.81     12.65     12.54       11.59     12.54  
Tier 1 capital (to risk-weighted assets) (13)   9.37     9.40     11.77     11.60     11.54       9.37     11.54  
Common equity tier 1 capital (to risk-weighted assets) (13)   8.70     8.71     9.52     9.33     9.27       8.70     9.27  
Tier 1 capital (to average assets) (13)   8.38     9.29     10.41     10.38     10.40       8.38     10.40  
Per Share Data:                              
Book value per common share (14)   $ 29.43     $ 29.28     $ 27.68     $ 27.26     $ 26.77       $ 29.43     $ 26.77  
Less: goodwill and other intangible assets, net of benefit, per common share   12.45     12.40     10.20     10.22     10.24       12.45     10.24  
Tangible book value per common share (15)   $ 16.98     $ 16.88     $ 17.48     $ 17.04     $ 16.53       $ 16.98     $ 16.53  
Cash dividends per common share   $ 0.19     $ 0.19     $ 0.19     $ 0.17     $ 0.17       $ 0.74     $ 0.65  

(1) Annualized operating return on average assets is computed by dividing annualized operating earnings by average total assets.  Annualized operating return on average common equity is computed by dividing annualized operating earnings by average common equity.  Operating earnings is defined as net income as reported less non-core items, net of tax.
(2) Annualized cash return on average tangible equity is computed by dividing net cash flow available to common stockholders (net income available to common stockholders, plus other intangibles amortization expense, net of tax benefit) by average tangible common equity (average common stockholders' equity less average goodwill and average other intangibles, net of tax benefit).
(3) Annualized cash operating return on average tangible common equity is computed by dividing annualized cash operating earnings (operating earnings plus other intangibles amortization expense, net of tax benefit, less dividends on preferred shares) by average tangible common equity.  Operating earnings is defined as net income as reported less non-core items, net of tax.
(4) Equals total interest expense divided by the sum of average interest bearing liabilities and non-interest bearing deposits.
(5) Equals total non-interest expense excluding non-core items divided by the sum of net interest income on a fully tax equivalent basis, total non-interest income less non-core items and tax equivalent adjustment on the increase in cash surrender value of life insurance.
(6) Equals total non-interest expense excluding non-core items less total non-interest income excluding non-core items and including tax equivalent adjustment on the increase in cash surrender value of life insurance divided by average assets.
(7) Equals total non-interest 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 non-interest income less non-core items and tax equivalent adjustment on the increase in cash surrender value of life insurance.
(8) Represents net interest income on a fully tax equivalent basis assuming a 35% tax rate, as a percentage of average interest earning assets.
(9) 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.
(10) 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.
(11) 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.
(12) Equals total ending common stockholders' equity less goodwill and other intangibles, net of tax benefit, divided by risk-weighted assets.  Current quarter risk-weighted assets are estimated.
(13) Current quarter ratios are estimated.
(14) Equals total ending common stockholders' equity divided by common shares outstanding.
(15) 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 operating earnings, core non-interest income, core non-interest income to revenues (with non-core items excluded from both core non-interest income and revenues), core non-interest expense, non-core non-interest income and non-core non-interest expense, net interest income on a fully tax equivalent basis, net interest margin on a fully tax equivalent basis, net interest margin on a fully tax equivalent basis excluding acquisition accounting discount accretion on bank mergers loans, 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 and increase in market value of assets held in trust for deferred compensation excluded from the non-interest income components of these ratios and prepayment fees on interest bearing liabilities, branch exit and facilities impairment charges, merger related and repositioning expenses, increase in market value of assets held in trust for deferred compensation and contribution to MB Financial Charitable Foundation 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 tangible assets and tangible common equity to risk-weighted assets; tangible book value per common share; annualized operating return on average assets, annualized operating return on average common equity, annualized cash return on average tangible common equity and annualized cash operating 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 operating earnings, core and non-core non-interest income and core and non-core non-interest expense are useful in assessing our core operating performance and in understanding the primary drivers of our non-interest income and non-interest expense when comparing periods.

Management believes that operating earnings adjusted for merger related and repositioning expenses is a useful measure because it excludes expenses that can significantly fluctuate from acquisition to acquisition.  In addition, management believes that excluding these expenses provides investors and analysts a measure to better understand the Company's primary operations when comparing the periods presented in the earnings release.

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 that 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 and increase 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, branch exit and facilities impairment charges, merger related and repositioning expenses, increase in market value of assets held in trust for deferred compensation and contribution to MB Financial Charitable Foundation 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.

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.

Reconciliations of net interest margin on a fully tax equivalent basis to net interest margin and net interest margin on a fully tax equivalent basis excluding acquisition accounting discount accretion on bank merger loans to net interest margin are 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 Data" table.  Reconciliations of core and non-core non-interest income and non-interest expense to non-interest income and non-interest expense are contained in the tables under "Results of Operations—Fourth Quarter and Annual Results."

The following table presents a reconciliation of tangible equity to stockholders' equity (in thousands):

    12/31/2016   9/30/2016   6/30/2016   3/31/2016   12/31/2015
Stockholders' equity - as reported   $ 2,579,209     $ 2,563,408     $ 2,156,535     $ 2,122,885     $ 2,087,284  
Less: goodwill   1,001,038     993,799     725,039     725,068     725,070  
Less: other intangible assets, net of tax benefit   40,923     42,507     27,020     28,071     29,128  
Tangible equity   $ 1,537,248     $ 1,527,102     $ 1,404,476     $ 1,369,746     $ 1,333,086  

The following table presents a reconciliation of tangible assets to total assets (in thousands):

    12/31/2016   9/30/2016   6/30/2016   3/31/2016   12/31/2015
Total assets - as reported   $ 19,302,317     $ 19,341,882     $ 15,995,790     $ 15,575,653     $ 15,585,007  
Less: goodwill   1,001,038     993,799     725,039     725,068     725,070  
Less: other intangible assets, net of tax benefit   40,923     42,507     27,020     28,071     29,128  
Tangible assets   $ 18,260,356     $ 18,305,576     $ 15,243,731     $ 14,822,514     $ 14,830,809  

The following table presents a reconciliation of tangible common equity to common stockholders' equity (in thousands):

    12/31/2016   9/30/2016   6/30/2016   3/31/2016   12/31/2015
Common stockholders' equity - as reported   $ 2,463,637     $ 2,446,901     $ 2,041,255     $ 2,007,605     $ 1,972,004  
Less: goodwill   1,001,038     993,799     725,039     725,068     725,070  
Less: other intangible assets, net of tax benefit   40,923     42,507     27,020     28,071     29,128  
Tangible common equity   $ 1,421,676     $ 1,410,595     $ 1,289,196     $ 1,254,466     $ 1,217,806  

The following table presents a reconciliation of average tangible common equity to average common stockholders' equity (in thousands):

                          Year Ended
                          December 31,
    4Q16   3Q16   2Q16   1Q16   4Q15     2016   2015
Average common stockholders' equity   $ 2,441,809     $ 2,201,095     $ 2,014,822     $ 1,984,379     $ 1,945,772       $ 2,161,405     $ 1,943,632  
Less: average goodwill   994,053     835,894     725,011     725,070     711,669       820,526     711,559  
Less: average other intangible assets, net of tax benefit   41,471     32,744     27,437     28,511     23,826       32,566     23,743  
Average tangible common equity   $ 1,406,285     $ 1,332,457     $ 1,262,374     $ 1,230,798     $ 1,210,277       $ 1,308,313     $ 1,208,330  

The following table presents a reconciliation of net cash flow available to common stockholders to net income available to common stockholders (in thousands):

                          Year Ended
                          December 31,
    4Q16   3Q16   2Q16   1Q16   4Q15     2016   2015
Net income available to common stockholders - as reported   $ 45,186     $ 42,415     $ 41,412     $ 37,114     $ 41,607       $ 166,127     $ 150,948  
Add: other intangible amortization expense, net of tax benefit   1,552     1,088     1,051     1,057     1,005       4,748     3,975  
Net cash flow available to common stockholders   $ 46,738     $ 43,503     $ 42,463     $ 38,171     $ 42,612       $ 170,875     $ 154,923  

The following table presents a reconciliation of net income to operating earnings (in thousands):

                          Year Ended
                          December 31,
    4Q16   3Q16   2Q16   1Q16   4Q15     2016   2015
Net income - as reported   $ 47,191     $ 44,419     $ 43,412     $ 39,114     $ 43,607       $ 174,136     $ 158,948  
Less non-core items:                              
Net gain (loss) on investment securities   178         269         (3 )     447     (176 )
Net (loss) gain on disposal of other assets   (749 )   5     (2 )   (48 )         (794 )   (2 )
Increase in market value of assets held in trust for deferred compensation - other operating income   141     711     480     8     565       1,340     6  
Merger related and repositioning expenses   (6,491 )   (11,368 )   (2,566 )   (3,287 )   4,186       (23,712 )   (5,506 )
Branch exit and facilities impairment charges           (155 )             (155 )    
Prepayment fees on interest bearing liabilities                             (85 )
Contribution to MB Financial Charitable Foundation       (4,000 )                 (4,000 )    
Increase in market value of assets held in trust for deferred compensation - other operating expense   (141 )   (711 )   (480 )   (8 )   (565 )     (1,340 )   (6 )
Total non-core items   (7,062 )   (15,363 )   (2,454 )   (3,335 )   4,183       (28,214 )   (5,769 )
Income tax expense on non-core items   (2,406 )   (6,074 )   (1,003 )   (577 )   1,140       (10,060 )   (2,809 )
Income tax benefit resulting from adoption of new stock-based compensation guidance       (1,793 )                 (1,793 )    
Non-core items, net of tax   (4,656 )   (7,496 )   (1,451 )   (2,758 )   3,043       (16,361 )   (2,960 )
Operating earnings   51,847     51,915     44,863     41,872     40,564       190,497     161,908  
Dividends on preferred shares   2,005     2,004     2,000     2,000     2,000       8,009     8,000  
Operating earnings available to common stockholders   $ 49,842     $ 49,911     $ 42,863     $ 39,872     $ 38,564       $ 182,488     $ 153,908  
Diluted operating earnings per common share   $ 0.59     $ 0.63     $ 0.58     $ 0.54     $ 0.52       $ 2.34     $ 2.06  
Weighted average common shares outstanding for diluted operating earnings per common share   84,674,181     78,683,170     74,180,374     73,966,935     73,953,165       77,976,121     74,849,030  


Efficiency Ratio Calculation (Dollars in Thousands)
 
                        Year Ended
                        December 31,
  4Q16   3Q16   2Q16   1Q16   4Q15     2016   2015
Non-interest expense $ 165,760     $ 170,385     $ 147,906     $ 135,800     $ 127,231       $ 619,851     $ 534,154  
Less merger related and repositioning expenses 6,491     11,368     2,566     3,287     (4,186 )     23,712     5,506  
Less prepayment fees on interest bearing liabilities                           85  
Less branch exit and facilities impairment charges         155               155      
Less contribution to MB Financial Charitable Foundation     4,000                   4,000      
Less increase in market value of assets held in trust for deferred compensation 141     711     480     8     565       1,340     6  
Non-interest expense - as adjusted $ 159,128     $ 154,306     $ 144,705     $ 132,505     $ 130,852       $ 590,644     $ 528,557  
                             
Net interest income $ 145,214     $ 130,771     $ 122,602     $ 119,304     $ 121,769       $ 517,891     $ 465,606  
Tax equivalent adjustment 7,090     7,122     7,208     7,195     7,307       28,616     27,080  
Net interest income on a fully tax equivalent basis 152,304     137,893     129,810     126,499     129,076       546,507     492,686  
Plus non-interest income 92,823     108,387     92,000     81,693     75,625       374,903     322,093  
Plus tax equivalent adjustment on the increase in cash surrender value of life insurance 709     568     458     460     465       2,194     1,826  
Less net gain (loss) on investment securities 178         269         (3 )     447     (176 )
Less net (loss) gain on disposal of other assets (749 )   5     (2 )   (48 )         (794 )   (2 )
Less increase in market value of assets held in trust for deferred compensation 141     711     480     8     565       1,340     6  
Net interest income plus non-interest income - as adjusted $ 246,266     $ 246,132     $ 221,521     $ 208,692     $ 204,604       $ 922,611     $ 816,777  
                             
Efficiency ratio 64.62 %   62.69 %   65.32 %   63.49 %   63.95 %     64.02 %   64.71 %
Efficiency ratio (without adjustments) 69.64 %   71.24 %   68.92 %   67.56 %   64.46 %     69.43 %   67.81 %


Annualized Net Non-interest Expense to Average Assets Calculation (Dollars in Thousands)