CHICAGO--(BUSINESS WIRE)--Jan. 29, 2013-- MB Financial, Inc. (NASDAQ: MBFI), the holding company for MB Financial Bank, N.A. (“the Bank” or “MB Financial Bank”), announced today fourth quarter and annual results for 2012. The words “MB Financial,” “the Company,” “we,” “our” and “us” refer to MB Financial, Inc. and its consolidated subsidiaries, unless indicated otherwise.

Net income, net income available to common stockholders and fully diluted earnings per share increased in the three months and year ended December 31, 2012 compared to the three months ended September 30, 2012 and the year ended December 31, 2011 as follows (note that all linked quarter change percentages presented here and throughout this release are not annualized):

“I am pleased with our strong finish to 2012. We experienced robust loan growth in the fourth quarter, primarily driven by new customer relationships, strong lease loan growth and seasonal demand. Furthermore, we are seeing good progress in all of our key fee initiatives as evidenced by growth in fee income both on a quarterly and annual basis. We remain committed to building a relationship driven company that produces superior returns on capital, supported by a diversified revenue stream, with high quality loans and significant fee businesses, both growing at attractive rates,” stated Mitchell Feiger, President and Chief Executive Officer of the Company.

Key items were as follows:

Robust Loan Growth, Mix Improvements Continue:

• Our loan balances, excluding covered loans, increased $192.1 million (+3.7%) during the fourth quarter of 2012 and our loan mix continued to improve with growth in generally lower risk commercial and lease loans and declines in generally higher risk construction and commercial real estate loans as follows (dollars in thousands):

• Over the last year, our commercial related loan balances increased modestly (+0.9%), and our loan mix improved. Commercial and lease loans increased by 8.9%, while commercial real estate and construction loans decreased by 8.1%.

Strong Core Fee Income Growth (+20.5%) During the Quarter:

• Revenues from key fee initiatives increased 18.7% compared to the third quarter of 2012:
  • Leasing revenues increased 28.4% to $12.4 million,
  • Capital markets and international banking service fees increased 80.6% to $2.6 million, and
  • Commercial deposit and treasury management fees increased 4.0% to $6.1 million.
• Annual revenues from key fee initiatives increased 21.0% compared to 2011:
  • Leasing revenues increased 35.1% to $36.4 million,
  • Capital markets and international banking service fees increased 192.6% to $5.5 million, and
  • Card revenues increased 33.2% to $9.4 million.
• Our core fee income to total revenues ratio improved to 34.2% in the fourth quarter compared to 29.5% in the prior quarter and 26.2% a year ago.
• Fee income growth exceeded the impact of margin compression. As a result, total revenue, as adjusted and on a fully tax equivalent basis, increased by $4.1 million (+3.7%) during the fourth quarter.

Margin Compression Negatively Impacted Net Interest Income:

• Net interest margin compression of 10 basis points (on a fully tax equivalent basis) for the quarter negatively impacted net interest income (down $2.5 million and 3.2%).
• The decline in net interest margin was due to a decline in covered loan yields, tightening credit spreads and high levels of prepayments on mortgage-backed securities, partially offset by a lower cost of funds.

Classified Assets Declined, Non-Performing Loans Increased, Recoveries Exceeded Charge-offs During the Quarter:

• Classified assets, defined as potential problem loans, non-performing loans, other real estate owned (“OREO”) and repossessed assets (excluding credit-impaired loans and OREO that were acquired as part of our FDIC-assisted transactions) declined in the quarter. Non-performing loans were up $11.7 million, while potential problem loans declined $22.7 million.

• Credit costs remained very low in the quarter, aided by net recoveries.

Significant Balance Sheet Improvement over the Past Year:

• As discussed above, over the past year we have improved the risk/return profile of our loan portfolio by significantly reducing our classified loans and changing our loan mix.
• Over the past year, we changed the mix of our investment portfolio by allocating a larger portion of the investment portfolio to municipal securities. This has helped mitigate the impact of high levels of mortgage-backed security prepayments in the current interest rate environment. Municipal securities were 39.8% of total investment securities at December 31, 2012 compared to 30.9% of total investment securities a year ago.
• Our funding mix improved over the past twelve months, with low cost deposits increasing $438.5 million (+8.3%) primarily driven by noninterest bearing deposits increasing by $278.9 million (+14.8%). Customer certificates of deposit decreased by $400.2 million (-20.8%) over the same period. In addition, our wholesale funding balances decreased $291.0 million (-33.6%) from a year ago largely due to prepayments in the third quarter of 2012.
• During 2012, we repurchased all $196 million of preferred stock and the related warrant issued as part of the Troubled Asset Relief Program (“TARP”) Capital Purchase Program.

Significant Improvement in Return on Assets and Return on Equity over the Past Year:

• Our annualized return on average assets, annualized return on average common equity and annualized cash return on average tangible common equity improved compared to the third quarter of 2012 and fourth quarter of 2011:

Celtic Leasing Corp. Transaction:

• On December 28, 2012, MB Financial Bank acquired Celtic Leasing Corp. (“Celtic”), a privately held, mid-ticket equipment leasing company.
• Celtic specializes in solutions for the health care, legal, technology, and manufacturing industries. In recent years Celtic’s lease originations have ranged from $75 to $100 million on an annual basis.
• Given the timing of the Celtic transaction, the impact to lease financing revenues was insignificant in the quarter and year.
• Initial cash consideration paid was $58.7 million. Celtic stockholders will receive additional purchase consideration based on the performance of leases outstanding as of the acquisition date as well as the performance of leases originated during the three-year period immediately following the acquisition date. As a result of the transaction, $36.3 million in goodwill was recorded.

Top Ten Workplaces in Chicago:

• During the fourth quarter of 2012, our bank was for the second consecutive year named one of Chicago’s Top Workplaces by the Chicago Tribune.
• We ranked among the top ten in the large employers category.

RESULTS OF OPERATIONS

Fourth Quarter Results

Net Interest Income

Net interest income on a fully tax equivalent basis decreased $2.5 million from the third quarter of 2012. The decrease from the third quarter of 2012 to the fourth quarter of 2012 was due primarily to a 10 basis point decline in our net interest margin to 3.57% on a fully tax equivalent basis, primarily as a result of a decline in covered loan yields (negatively impacted the margin by eight basis points), high mortgage-backed investment securities prepayments (negatively impacted the margin by six basis points) and tighter credit spreads, which was partially offset by a decline in our cost of funds.

Net interest income on a fully tax equivalent basis decreased $25.2 million during the year ended December 31, 2012 compared to the year ended December 31, 2011, primarily due to a $285.2 million decrease in average interest earning assets and a 17 basis point decline in our net interest margin on a fully tax equivalent basis. The decline in the margin was primarily due to lower covered loan yields (negatively impacted the margin by 12 basis points), and tighter credit spreads, partially offset by lower costs of funds.

See the supplemental net interest margin tables for further detail.

Fee Income (dollars in thousands):

Core fee income increased by $6.5 million (+20.5%) from the third quarter of 2012 to the fourth quarter of 2012, driven by revenue from our key fee initiatives (+18.7%).

• Net lease financing income increased as a result of increase in equipment remarketing gains and fees from the sale of equipment maintenance contracts.
• Capital markets and international banking service fees increased primarily due to an increase in merger and acquisition advisory and interest rate swap fees.
• Loan service fees increased due to an increase in prepayment fees.
• Other operating income increased due to higher income from low income housing partnerships.
• Non-core fee income was primarily impacted by lower losses recognized on OREO, partially offset by higher losses on the sale of other assets as a result of the disposal of fixed assets.

Core fee income increased by $8.7 million (+7.3%) for the year ended December 31, 2012 compared to the year ended December 31, 2011, driven by revenue from our key fee initiatives (+21.0%).

• Net lease financing income increased as a result of increase in equipment remarketing gain and fees from the sale of equipment maintenance contracts.
• Capital markets and international banking service fees increased due to an increase in interest rate swap fees, merger and acquisition advisory fees, and international banking activities.
• Card fee income increased primarily due to fees earned on prepaid and credit cards.

These annual core fee income increases were offset by the decreases in brokerage fees, consumer and other deposit service fees and accretion of FDIC indemnification asset.

• Brokerage fees declined due to a decrease in third party brokerage revenues.
• Consumer and other deposit service fees decreased as a result of lower NSF fees.
• Accretion of FDIC indemnification asset decreased $3.8 million as expected. Accretion is recorded based on the FDIC indemnification asset balance, which has declined as we have received loss-share payments.
• Non-core fee income was primarily impacted by higher losses recognized on OREO as well as higher losses on the sale of other assets as a result of the disposal of fixed assets.

Other Expense (dollars in thousands):

Core other expense increased by $2.2 million (+3.3%) from the third quarter of 2012 to the fourth quarter of 2012.

• Salaries and employee benefits expense increased primarily due to an increase in incentives and commissions on higher lease revenues.
• Non-core other expense decreased as we did not incur any prepayment fees in the fourth quarter of 2012, while in the third quarter of 2012 we incurred $12.7 million in prepayment fees, when we prepaid certain brokered certificates of deposits and an FHLB advance.

Core other expense increased by $2.7 million (+1.0%) from the year ended December 31, 2011 to the year ended December 31, 2012.

• Salaries and employee benefits expense increased primarily due to annual salary increases, an increase in incentives, commissions on higher lease revenues, and higher health insurance claims.
• Other operating expenses were down partially due to the decrease in FDIC insurance premiums as a result of a change in the assessment computation during the second quarter of 2012 and the impact of improved credit quality on the computation.
• Other operating expenses were also favorably impacted in the twelve months ended December 31, 2012 by a decrease in the clawback liability related to our loss share agreements with the FDIC recorded during the period.
• Other real estate expense decreased as a result of fewer properties in other real estate owned throughout 2012 compared to 2011.
• Non-core other expense was impacted by the $12.7 million in prepayment fees on interest bearing liabilities discussed above.

LOAN PORTFOLIO

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

Our loan portfolio mix improved over the past twelve months from the standpoint of lowering our real estate-related exposure, as commercial and lease loan balances increased while commercial real estate and construction loan balances decreased. Growth in the fourth quarter was primarily driven by new middle market customer relationships and strong lease loan originations as well as seasonal loan demand.

ASSET QUALITY

As discussed earlier, classified assets declined during the quarter and compared to a year ago. The increase in non-performing loans on a linked quarter basis was more than offset by the decline in potential problem loans and OREO.

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

The following table presents data related to non-performing loans by category (excluding loans held for sale and credit-impaired loans that were acquired as part of our FDIC-assisted transactions) as of the dates indicated (dollars in thousands):

Consumer related non-performing loans increased compared to September 30, 2012 as a result of three residential real estate loans being downgraded to non-accrual status during the fourth quarter of 2012. Consumer related non-performing loans increased compared to a year ago primarily due to the increase in home equity and residential non-performing loans.

We define potential problem loans as performing loans rated substandard that do not meet the definition of a non-performing loan (See “Asset Quality” section above for non-performing loans). Potential problem loans carry a higher probability of default and require additional attention by management.

The following table presents data related to potential problem loans by category (excluding loans held for sale and credit-impaired loans that were acquired as part of our FDIC-assisted transactions) as of the dates indicated (dollars in thousands):

The following table represents a summary of OREO (excluding OREO related to assets acquired in FDIC-assisted transactions) as of the dates indicated (dollars in thousands):

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

Our allowance for loan losses is comprised of three elements: a general loss reserve, a specific reserve for impaired loans and a reserve for smaller-balance homogenous loans.

The following table presents these three elements of our allowance for loan losses (dollars in thousands):

Although management believes that adequate general, specific and smaller-balance homogenous loan loss allowances have been established, actual losses are dependent upon future events and, as such, further additions to the level of general, specific and smaller-balance homogenous loan loss allowances may become necessary.

INVESTMENT SECURITIES

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

We do not have any meaningful direct or indirect holdings of subprime residential mortgage loans, home equity lines of credit, or any Fannie Mae or Freddie Mac preferred or common equity securities in our investment securities portfolio. Additionally, more than 99% of our mortgage-backed securities are agency guaranteed.

DEPOSIT MIX

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

Our deposit mix improved over the past twelve months as low cost deposits increased by 8.3% and comprised 76% of total deposits at December 31, 2012 compared to 69% at December 31, 2011 driven by positive noninterest bearing deposit inflows.

CAPITAL

Tangible book value per common share increased to $15.21 at December 31, 2012 compared to $14.49 a year ago primarily due to retained net income. Our regulatory capital ratios remain strong and MB Financial Bank, N.A. was categorized as “well capitalized” at December 31, 2012 under the Prompt Corrective Action (“PCA”) provisions.

In June 2012, the federal banking agencies issued notices of proposed rulemaking (“NPRs”) on regulatory capital enhancements, which would implement the Basel III capital standards and address certain requirements of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”). The NPRs would revise banking regulatory capital requirements and the risk-weighted asset rules. The NPRs would increase the minimum levels of required capital, narrow the definition of capital, add a new regulatory capital component (common equity Tier 1), increase the required capital for certain categories of assets and expand the number of risk-weighted categories, including higher-risk residential mortgages and higher-risk construction real estate loans. These rules were proposed to go into effect on January 1, 2013 with all of the requirements being phased in by January 1, 2019; however, the final regulations have not yet been adopted and it is uncertain as to when the final regulations will be adopted or become effective or to what extent the final regulations will differ from the proposed regulations. If the fully phased-in capital requirements within the NPRs were adopted as proposed and were effective as of December 31, 2012, the Company has estimated that it would be categorized as “well capitalized” under the PCA provisions with ratios significantly above the “well capitalized” threshold.

FORWARD-LOOKING STATEMENTS

When used in this press release and in reports filed with or furnished to the Securities and Exchange Commission, in 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 our merger and acquisition activities might not be realized within the anticipated time frames or at all, and costs or difficulties relating to integration matters, including but not limited to customer and employee retention, might be greater than expected; (2) the possibility that the expected benefits of the FDIC-assisted transactions we previously completed will not be realized; (3) the credit risks of lending activities, including changes in the level and direction of loan delinquencies and write-offs and changes in estimates of the adequacy of the allowance for loan losses, which could necessitate additional provisions for loan losses, resulting both from loans we originate and loans we acquire from other financial institutions; (4) results of examinations by the Office of Comptroller of Currency and other regulatory authorities, including the possibility that any such regulatory authority may, among other things, require us to increase our allowance for loan losses or write-down assets; (5) competitive pressures among depository institutions; (6) interest rate movements and their impact on customer behavior and net interest margin; (7) the impact of repricing and competitors’ pricing initiatives on loan and deposit products; (8) fluctuations in real estate values; (9) the ability to adapt successfully to technological changes to meet customers’ needs and developments in the market place; (10) our ability to realize the residual values of our direct finance, leveraged, and operating leases; (11) our ability to access cost-effective funding; (12) changes in financial markets; (13) changes in economic conditions in general and in the Chicago metropolitan area in particular; (14) the costs, effects and outcomes of litigation; (15) new legislation or regulatory changes, including but not limited to the Dodd-Frank Act and regulations adopted thereunder, any changes in capital requirements pursuant to the Dodd-Frank Act and the implementation of the Basel III capital standards, other governmental initiatives affecting the financial services industry and changes in federal and/or state tax laws or interpretations thereof by taxing authorities; (16) changes in accounting principles, policies or guidelines; (17) our future acquisitions of other depository institutions or lines of business; and (18) future goodwill impairment due to changes in our business, changes in market conditions, or other factors.

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

TABLES TO FOLLOW