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Section 1: 8-K (8-K)

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 8-K

CURRENT REPORT

Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934

Date of Report (Date of earliest event reported): January 25, 2018

 
 
 
 
 
MB FINANCIAL, INC.
(Exact name of registrant as specified in its charter)
 
 
 
 
 
 
 
 
 
 
Maryland
 
001-36599
 
36-4460265
(State or other jurisdiction of incorporation)
 
(Commission File No.)
 
(IRS Employer Identification No.)
 
 
 
 
 
 
 
 
 
 
800 West Madison Street, Chicago, Illinois 60607
(Address of principal executive offices) (Zip Code)
 
 
 
 
 
 
 
 
 
 
Registrant’s telephone number, including area code:  (888) 422-6562
 
 
 
 
 
 
 
 
 
 
N/A
(Former name or former address, if changed since last report)
 
 
 
 
 
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:

[   ] Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
[   ] Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
[   ] Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
[   ] Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17CFR 240.13e-4(c))

Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).

Emerging growth company [   ]

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  [   ] 









Item 2.02 Results of Operations and Financial Condition

On January 25, 2018, MB Financial, Inc. (the "Company") issued a release containing its fourth quarter and annual 2017 results of operations.  A copy of the release, including unaudited financial information contained therein, is attached as Exhibit 99.1 to this Current Report on Form 8-K and incorporated by reference herein.

Item 7.01. Regulation FD Disclosure
Set forth as Exhibit 99.2 to this Current Report on Form 8-K are investor presentation materials of the Company.

Item 9.01 Financial Statements and Exhibits

(d) Exhibits
Exhibit 99.1 Release of MB Financial, Inc.
Exhibit 99.2 Investor Presentation Materials of MB Financial, Inc.









SIGNATURES


Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

 
 
 
 
MB FINANCIAL, INC.
 
 
 
 
 
 
Date:
January 24, 2018
By:
/s/Randall T. Conte
 
 
 
 
Randall T. Conte
 
 
 
 
Vice President and Chief Financial Officer
 
 
 
 
(Principal Financial Officer)
 











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Section 2: EX-99.1 (EXHIBIT 99.1)

Exhibit



EXHIBIT 99.1
391888691_mbfilogoblacka04.jpg
4Q17

MB FINANCIAL, INC. REPORTS FOURTH QUARTER 2017 NET INCOME OF $144.2 MILLION

CHICAGO, January 25, 2018 – MB Financial, Inc. (NASDAQ: MBFI), the holding company for MB Financial Bank, N.A., today announced fourth quarter 2017 net income of $144.2 million compared to $60.8 million last quarter and $47.2 million in the fourth quarter a year ago.  Diluted earnings per common share were $1.67 in the fourth quarter of 2017 compared to $0.69 last quarter and $0.53 in the fourth quarter a year ago. Annual net income for 2017 was $304.0 million compared to $174.1 million for 2016. Diluted earnings per common share were $3.49 for 2017 compared to $2.13 for 2016.

Fourth quarter 2017 operating earnings were $47.4 million compared to $62.8 million last quarter and $51.8 million in the fourth quarter a year ago.  Diluted operating earnings per common share were $0.53 in the fourth quarter of 2017 compared to $0.72 last quarter and $0.59 in the fourth quarter a year ago. Annual operating earnings for 2017 were $211.1 million compared to $190.5 million for 2016. Diluted operating earnings per common share were $2.39 for 2017 compared to $2.34 for 2016.

Capital Raise and Tax Reform Update

In November 2017, we successfully issued $200 million in 6% fixed rate non-cumulative perpetual preferred stock, and our bank subsidiary issued $175 million in 4% fixed-to-floating rate subordinated notes. A portion of the net proceeds of the preferred stock offering will be used to redeem all $100 million of our 8% non-cumulative perpetual preferred stock on February 15, 2018 and $10 million was used to pre-pay our term note in January 2018.

We recognized a $104.2 million tax benefit in the fourth quarter of 2017 due to the enactment of the Tax Cuts and Jobs Act of 2017 ("TCJ Act"). Approximately $6.5 million of the tax benefit was recognized at our Banking Segment, $65.3 million at our Leasing Segment, and $32.4 million at our Mortgage Banking Segment.

Our company's capital position was strengthened by the capital we raised and the TCJ Act tax benefit. Our tangible common equity to tangible assets increased to 8.70% at December 31, 2017 compared to 8.07% at September 30, 2017 and our total capital to risk-weighted assets increased to 14.23% at December 31, 2017 compared to 11.67% at September 30, 2017.

In the fourth quarter, we contributed $7.5 million to the MB Financial Charitable Foundation, raised our minimum wage to $15 per hour effective January 2018, and awarded approximately $2.7 million in one-time bonuses.

We estimate that our effective tax rate in 2018 will be reduced by approximately 10%, due to the TCJ Act, to 24%.

"We had a very busy fourth quarter and 2017.  We raised $375 million of capital; increased our residential mortgage team with members transferred from Busey Bank; and as a result of a Tax Cuts and Jobs Act of 2017 tax benefit, we were able to give back to our employees and communities.  Our capital position meaningfully strengthened. We significantly grew our core banking business.  And, we did so while maintaining high credit quality," said Mitchell Feiger, President and Chief Executive Officer of MB Financial, Inc.  "In 2017, we had solid loan growth of 9.8%, low-cost deposit growth of 3.4%, and key fee growth, excluding mortgage banking revenue, of 15.1%.  I attribute our success to an unwavering focus on the four pillars of our long-term strategy:  high quality low-cost deposits; strong rapidly growing fee businesses; diversification across revenue and profit sources, loans and deposits; and close attention to balance sheet risk, especially credit quality."
Mr. Feiger continued, "Our operating earnings for the quarter were down as funding costs and other expenses increased and our Mortgage Banking segment recorded a loss.  While disappointing, many of the things we accomplished in 2017, particularly in the fourth quarter, set us up well for 2018. We had significant growth in low-cost deposits in the quarter (15.6% annualized) led by growth in noninterest bearing deposits of 18.2% on an annualized basis. Lease finance revenue grew 17.9% in the year as a result of investments we made in Leasing personnel and products. Our Wealth Management Department saw good growth and reorganized to be even more successful. Fourth quarter trust and asset management fees were 6.9% greater than the same period a year earlier. Our Cards and Payments businesses continues to grow at a rapid pace. Fourth quarter cards fees were 15.9% greater than the same period in 2016. MB Business Capital (our asset-based lending unit) and our Commercial Specialty businesses, among others, added significant numbers of new clients in the year. Our investment portfolio again had strong returns. And our growing investments in technology and infrastructure should provide a more reliable, safer, and more nimble operating environment for our company. These investments, new clients, increased revenues, and strong expense control, along with an expected improvement in our net interest margin in the first quarter of 2018 position us well for 2018.”





Operating Earnings (in thousands, except per share data)
 
 
 
 
 
 
 
 
 
 
 
 
 
Year Ended
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31,
 
 
4Q17
 
3Q17
 
2Q17
 
1Q17
 
4Q16
 
 
2017
 
2016
Net income - as reported
 
$
144,194

 
$
60,843

 
$
44,466

 
$
54,537

 
$
47,191

 
 
$
304,040

 
$
174,136

Non-core items, net of tax (1)
 
(96,814
)
 
1,942

 
3,292

 
(1,358
)
 
4,656

 
 
(92,938
)
 
16,361

Operating earnings
 
47,380

 
62,785

 
47,758

 
53,179

 
51,847

 
 
211,102

 
190,497

Dividends on preferred shares
 
2,000

 
2,002

 
2,002

 
2,003

 
2,005

 
 
8,007

 
8,009

Operating earnings available to common stockholders
 
$
45,380

 
$
60,783

 
$
45,756

 
$
51,176

 
$
49,842

 
 
$
203,095

 
$
182,488

Diluted earnings per common share - as reported
 
$
1.67

 
$
0.69

 
$
0.50

 
$
0.62

 
$
0.53

 
 
$
3.49

 
$
2.13

Diluted operating earnings per common share
 
$
0.53

 
$
0.72

 
$
0.54

 
$
0.60

 
$
0.59

 
 
$
2.39

 
$
2.34

(1) 
Non-core items represent the difference between non-core non-interest income and non-core non-interest expense net of tax. See "Non-GAAP Financial Information" section for details on non-core items.

Key Items - Full Year (compared to 2016)
Operating Earnings

Operating earnings increased $20.6 million, or 10.8%, to $211.1 million compared to the prior year.

The Banking Segment contributed $34.1 million to the increase in operating earnings partly offset by a $13.4 million decrease in the Mortgage Banking Segment. Leasing Segment operating earnings were consistent with the prior year.

Banking Segment operating earnings were positively impacted by strong loan growth, improvements in nearly all key fee initiatives, as well as our merger with American Chartered Bancorp Inc. ("American Chartered") completed in third quarter 2016.

Mortgage Banking Segment operating earnings, which declined from $18.9 million to $5.5 million, were impacted by lower origination and servicing fees.

Diluted operating earnings per common share were $2.39 compared to $2.34 in the prior year.
Loans

Loans, excluding purchased credit-impaired loans, increased $1.2 billion (+9.8%). Growth was driven by increases in commercial, commercial real estate, and residential real estate loan balances.

Quarterly average loan balances, excluding purchased credit-impaired loans, increased $1.3 billion.

Our average yield on loans, excluding accretion on loans acquired in bank mergers, was 4.09%, 20 basis points higher than in the prior year. This increase was driven by several Federal Reserve interest rate increases in 2016 and 2017.
Deposits

Low-cost deposits increased $416.9 million (+3.4%) to $12.5 billion. Growth was driven by a $411.8 million increase in money market and NOW accounts.

Quarterly average low-cost deposits increased $244.6 million.

Average cost of total deposits increased eight basis points to 0.28%.
Net interest margin

Our net interest margin on a fully tax equivalent basis, excluding accretion on loans acquired in bank mergers, increased three basis points to 3.52%. This increase was due to a favorable change in the mix of interest earning assets and higher loan yields partly offset by increased funding costs and an unfavorable shift in the mix of liabilities.

Average cost of funds increased 16 basis points to 0.43%.


2




Key Items - Fourth Quarter (compared to third quarter of 2017)
Operating Earnings

Operating earnings decreased $15.4 million, or 24.5%, to $47.4 million compared to the prior quarter. This decrease resulted from the following items, net of income taxes:
a $2.1 million decrease in net interest income due to lower yields on interest earning assets and a higher cost of funds;
a $3.4 million decrease in mortgage banking revenue due to lower origination and servicing fees;
a $3.1 million increase in core non-interest expense due to higher occupancy and equipment expense, computer services and telecommunication, professional and legal, and other operating expenses; and
a $2.1 million increase in state income tax accruals as a result of income allocation to high income tax rate jurisdictions. Prior quarter operating earnings included tax benefits of $4.0 million due to the impact of the Illinois state income tax rate increase and a reduction in tax accruals attributable to compensation.

The $3.1 million after-tax increase in core non-interest expense includes $511 thousand of after-tax expenses from additional mortgage banking operations acquired in December 2017 (see the "Operating Segments - Mortgage Banking Segment" section for further information). In addition, it includes approximately $1.6 million of after-tax expenses that are not expected to repeat in the first quarter of 2018. See the Non-interest Expense section for further information on the run-rate of non-interest expense.

Diluted operating earnings per common share were $0.53 compared to $0.72 in the prior quarter.
Loans

Loans, excluding purchased credit-impaired loans, increased $92.9 million (+0.7%, or +2.7% annualized) to $13.8 billion due to growth in lease loan and commercial real estate loan balances.
 
Average loan balances, excluding purchased credit-impaired loans, increased $177.8 million due to an increase in commercial real estate loans.

Average yield on loans, excluding accretion on loans acquired in bank mergers, was 4.17%, unchanged from the prior quarter.
Deposits

Low-cost deposits increased $472.6 million in the quarter (+3.9%, or +15.6% annualized) to $12.5 billion. Growth was driven by a $280.4 million increase (+4.6%, or +18.2% annualized) in non-interest bearing deposits as well as a $112.7 million increase (+2.3%, or +9.2% annualized) in money market and NOW accounts.

Average low-cost deposits increased $295.4 million.

Average cost of total deposits increased six basis points to 0.36% due to increases in interest rates paid on deposits and an unfavorable shift in the mix of deposits. Average low-cost deposits decreased to 83% of total deposits in the fourth quarter 2017 compared to 84% in the prior quarter.
Net interest margin

Net interest margin on a fully tax equivalent basis, excluding accretion on loans acquired in bank mergers, decreased seven basis points in the quarter to 3.49%. Approximately three basis points of the decrease was due to the Company maintaining higher interest earning cash balances during the quarter in anticipation of redeeming our 8% non-cumulative perpetual preferred stock and pre-paying our term note. Two basis points of the decrease was due to increased deposit costs and an unfavorable shift in the mix of deposits, and two basis points related to the new subordinated debt issued in November 2017.

Average cost of funds increased five basis points to 0.51%.

The TCJ Act corporate tax rate, effective in 2018, is expected to decrease our taxable equivalent net interest margin by approximately six basis points.  The expected decrease is caused by a lower tax benefit on municipal securities and tax exempt loans.

Guidance for 2018 on selected financial items:
We expect:

outstanding loans to grow in the mid to high single digits (percent) for the year.

net interest margin for the first quarter of 2018, excluding accretion on bank merger loans and inclusive of the six basis point decrease due to the TJC Act, to moderately increase from the fourth quarter of 2017, which was 3.49%.

non-interest expense, excluding commissions, to grow in the low single digits (percent) from the fourth quarter 2017 run-rate found on page 23.

annual operating earnings for the Mortgage Banking Segment to be between $8 to $12 million. The first and fourth quarters of the year are typically the slowest for mortgage banking activity.

our effective tax rate in 2018 to be approximately 24%.

3




Operating Segments

The Company has 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. 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. The financial information below was adjusted for funds transfer pricing and internal allocations of certain expenses and excludes non-core non-interest income and expense.
Banking Segment

The following table summarizes certain financial information for the Banking Segment for the periods presented (in thousands):
 
 
 
 
 
 
 
 
 
 
 
 
Year Ended
 
 
 
 
 
 
 
 
 
 
 
 
December 31,
 
4Q17
 
3Q17
 
2Q17
 
1Q17
 
4Q16
 
 
2017
 
2016
Net interest income
$
140,180

 
$
142,888

 
$
135,982

 
$
131,449

 
$
133,688

 
 
$
550,499

 
$
475,133

Provision for credit losses
501

 
3,637

 
8,890

 
3,527

 
4,193

 
 
16,555

 
18,583

Net interest income after provision for credit losses
139,679

 
139,251

 
127,092

 
127,922

 
129,495

 
 
533,944

 
456,550

Non-interest income:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
   Lease financing revenue, net
1,795

 
1,097

 
1,326

 
1,545

 
1,050

 
 
5,763

 
3,408

   Treasury management fees
15,234

 
14,508

 
14,499

 
14,689

 
14,237

 
 
58,930

 
50,620

   Trust and asset management fees
9,024

 
8,702

 
8,498

 
8,520

 
8,442

 
 
34,744

 
32,872

   Card fees
5,032

 
4,585

 
4,413

 
4,566

 
4,340

 
 
18,596

 
16,071

   Capital markets and international banking fees
3,999

 
4,870

 
3,586

 
3,253

 
4,021

 
 
15,708

 
13,332

   Other non-interest income
9,359

 
10,940

 
9,655

 
9,306

 
9,314

 
 
39,260

 
35,899

Total non-interest income
44,443

 
44,702

 
41,977

 
41,879

 
41,404

 
 
173,001

 
152,202

Non-interest expense:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Salaries and employee benefits expense:
 
 


 
 
 
 
 
 
 
 
 
 
 
Salaries
44,782

 
45,096

 
44,019

 
42,120

 
42,797

 
 
176,017

 
151,850

Commissions
1,119

 
877

 
1,121

 
1,107

 
1,090

 
 
4,224

 
5,082

Bonus and stock-based compensation
10,418

 
10,032

 
10,603

 
10,619

 
9,535

 
 
41,672

 
37,416

Other salaries and benefits (1)
14,119

 
14,604

 
12,698

 
13,705

 
13,920

 
 
55,126

 
50,567

Total salaries and employee benefits expense
70,438

 
70,609

 
68,441

 
67,551

 
67,342

 
 
277,039

 
244,915

   Occupancy and equipment expense
13,769

 
12,372

 
12,298

 
12,117

 
12,765

 
 
50,556

 
45,480

   Computer services and telecommunication expense
9,664

 
8,386

 
7,976

 
7,514

 
8,813

 
 
33,540

 
29,622

   Professional and legal expense
1,967

 
1,239

 
1,455

 
1,600

 
1,281

 
 
6,261

 
6,718

   Other operating expenses
18,817

 
16,757

 
18,793

 
18,255

 
17,430

 
 
72,622

 
66,054

Total non-interest expense
114,655

 
109,363

 
108,963

 
107,037

 
107,631

 
 
440,018

 
392,789

Income before income taxes
69,467

 
74,590

 
60,106

 
62,764

 
63,268

 
 
266,927

 
215,963

Income tax expense
25,734

 
20,064

 
18,915

 
17,168

 
19,422

 
 
81,881

 
64,989

Operating earnings
$
43,733

 
$
54,526

 
$
41,191

 
$
45,596

 
$
43,846

 
 
$
185,046

 
$
150,974

Total assets (period end)
$
16,448,960

 
$
16,406,714

 
$
16,320,111

 
$
16,009,339

 
$
16,368,881

 
 
$
16,448,960

 
$
16,368,881


(1) 
Includes health insurance, payroll taxes, 401(k) and profit sharing contributions, overtime, and temporary help expenses.

Banking Segment operating earnings for the fourth quarter of 2017 decreased $10.8 million compared to the prior quarter.

Net interest income decreased due to lower yields on interest earning assets and a higher cost of funds. A $1.8 million decrease in accretion on loans acquired in bank mergers contributed to decreased yields on interest earning assets.

Provision for credit losses decreased as a result of strong credit performance in 2017. Downward loan risk rating migrations in 2017 were below our historical average, and, as a result, reduced our estimated default probabilities.

Non-interest income was relatively flat with lower capital markets and international banking fees (mainly swap fees) and a decrease in earnings from investments in Small Business Investment Companies ("SBICs") offset by increases in treasury management and card fees (prepaid and credit cards).

Non-interest expense increased by $5.3 million compared to the prior quarter. Approximately $2.6 million of these expenses are not expected to repeat in the first quarter of 2018.
Occupancy and equipment expense increased due to higher building expenses and depreciation related to an investment in infrastructure. Prior quarter expense was positively impacted by a favorable $500 thousand increase in subtenant rent.

4




Computer services and telecommunication expense increased due to investments in new technology. Approximately $500 thousand of this expense during the quarter in not expected to repeat next quarter.
Professional and legal expense increased due to greater risk management consulting expense. Approximately $400 thousand of this expense during the quarter in not expected to repeat next quarter.
Other operating expenses increased due to higher travel, postage, and operating losses. Prior quarter expenses were positively impacted by lower advertising and audit expenses of about $800 thousand in the aggregate.

Fourth quarter income tax expense includes a $2.1 million increase in state income tax accruals as a result of income allocation to high income tax rate jurisdictions. The prior quarter includes tax benefits of $4.0 million due to the impact of a State of Illinois income tax rate increase and a reduction in compensation related tax accruals.

Banking Segment operating earnings for the year ended December 31, 2017 increased $34.1 million compared to the prior year and were positively impacted by strong loan growth, improvements in nearly all key fee initiatives, as well as our merger with American Chartered completed in the third quarter of 2016.
Leasing Segment

The following table summarizes certain financial information for the Leasing Segment for the periods presented (in thousands):
 
 
 
 
 
 
 
 
 
 
 
 
Year Ended
 
 
 
 
 
 
 
 
 
 
 
 
December 31,
 
4Q17
 
3Q17
 
2Q17
 
1Q17
 
4Q16
 
 
2017
 
2016
Net interest income
$
2,602

 
$
2,686

 
$
2,345

 
$
2,269

 
$
2,413

 
 
$
9,902

 
$
9,415

Provision for credit losses
3,184

 
399

 
410

 
(135
)
 
(1,750
)
 
 
3,858

 
295

Net interest income after provision for credit losses
(582
)
 
2,287

 
1,935

 
2,404

 
4,163

 
 
6,044

 
9,120

Non-interest income:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
   Lease financing revenue, net
22,576

 
22,534

 
17,474

 
20,253

 
19,005

 
 
82,837

 
70,265

   Other non-interest income
1,168

 
26

 
676

 
1,173

 
754

 
 
3,043

 
3,164

Total non-interest income
23,744

 
22,560

 
18,150

 
21,426

 
19,759

 
 
85,880

 
73,429

Non-interest expense:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Salaries and employee benefits expense:


 
 
 
 
 
 
 
 
 
 
 
 
 
Salaries
5,361

 
5,029

 
4,623

 
4,810

 
4,811

 
 
19,823

 
17,413

Commissions
2,777

 
2,328

 
2,115

 
2,572

 
1,038

 
 
9,792

 
6,867

Bonus and stock-based compensation
1,761

 
1,228

 
1,045

 
955

 
1,516

 
 
4,989

 
4,167

Other salaries and benefits (1)
1,329

 
1,572

 
1,523

 
1,581

 
1,317

 
 
6,005

 
5,332

Total salaries and employee benefits expense
11,228

 
10,157

 
9,306

 
9,918

 
8,682

 
 
40,609

 
33,779

   Occupancy and equipment expense
1,090

 
1,070

 
1,011

 
944

 
929

 
 
4,115

 
3,737

   Computer services and telecommunication expense
595

 
456

 
431

 
458

 
483

 
 
1,940

 
1,709

   Professional and legal expense
457

 
403

 
392

 
399

 
652

 
 
1,651

 
2,277

   Other operating expenses
2,101

 
2,412

 
2,266

 
2,088

 
1,714

 
 
8,867

 
6,874

Total non-interest expense
15,471

 
14,498

 
13,406

 
13,807

 
12,460

 
 
57,182

 
48,376

Income before income taxes
7,691

 
10,349

 
6,679

 
10,023

 
11,462

 
 
34,742

 
34,173

Income tax expense
3,229

 
4,307

 
2,525

 
4,119

 
4,653

 
 
14,180

 
13,525

Operating earnings
$
4,462

 
$
6,042

 
$
4,154

 
$
5,904

 
$
6,809

 
 
$
20,562

 
$
20,648

Total assets (period end)
$
1,403,690

 
$
1,307,459

 
$
1,275,386

 
$
1,173,558

 
$
1,224,169

 
 
$
1,403,690

 
$
1,224,169


(1) 
Includes health insurance, payroll taxes, 401(k) and profit sharing contributions, overtime, and temporary help expenses.

Leasing Segment operating earnings for the fourth quarter of 2017 decreased $1.6 million compared to the prior quarter.

Provision for credit losses increased due to greater loan charge-offs.

Non-interest expense increased due to higher commission and bonus expense.

Total assets increased due to growth in loans and lease investments.

Leasing Segment operating earnings for the year ended December 31, 2017 were about the same as the prior year. The increase in lease financing revenue was mostly offset by an increase in provision for credit losses as well as salaries and benefits expense.

Lease financing revenue increased as a result of higher rental income due to increased operating leases, fees from the sale of third-party equipment maintenance contracts driven by contract renewals, consulting revenue, and promotional income.

Provision for credit losses was higher due to increased loan charge-offs.

Non-interest expense increased due to higher salaries and employee benefits expense (increased salaries related to the investment in sales and other revenue generating staff and increased commissions due to higher lease financing revenues) and an increase in other operating expenses.

5




Mortgage Banking Segment

In December 2017, we closed on an agreement with Champaign, Illinois-based Busey Bank ("Busey") to transfer approximately 165 residential mortgage team members from Busey to our company for approximately $3.6 million. This acquisition adds direct origination capabilities as well as 14 retail mortgage locations across Kansas, Missouri, Nebraska, Iowa and Colorado. The added retail and consumer direct staff supports our strategy to grow those channels and increase our purchase share of originations. Non-interest expenses include approximately $850 thousand during the fourth quarter of 2017 as a result of this acquisition, and additional revenue was negligible as the pipeline was being established.

The following table summarizes certain financial information for the Mortgage Banking Segment for the periods presented (in thousands):
 
 
 
 
 
 
 
 
 
 
 
 
Year Ended
 
 
 
 
 
 
 
 
 
 
 
 
December 31,
 
4Q17
 
3Q17
 
2Q17
 
1Q17
 
4Q16
 
 
2017
 
2016
Net interest income
$
10,611

 
$
11,373

 
$
10,667

 
$
9,325

 
$
9,113

 
 
$
41,976

 
$
33,343

Provision for credit losses
(42
)
 
481

 
399

 
342

 
179

 
 
1,180

 
685

Net interest income after provision for credit losses
10,653

 
10,892

 
10,268

 
8,983

 
8,934

 
 
40,796

 
32,658

Non-interest income:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
   Mortgage origination fees
17,642

 
21,980

 
23,283

 
21,465

 
29,317

 
 
84,370

 
117,590

   Mortgage servicing fees
4,228

 
5,595

 
6,216

 
6,314

 
2,960

 
 
22,353

 
30,879

   Other non-interest income

 
1

 

 

 

 
 
1

 
(3
)
Total non-interest income
21,870

 
27,576

 
29,499

 
27,779

 
32,277

 
 
106,724

 
148,466

Non-interest expense:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Salaries and employee benefits expense:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Salaries
12,322

 
11,867

 
11,247

 
11,881

 
12,945

 
 
47,317

 
49,441

Commissions
4,407

 
6,001

 
6,494

 
4,932

 
8,178

 
 
21,834

 
28,974

Bonus and stock-based compensation
1,153

 
651

 
905

 
716

 
1,116

 
 
3,425

 
5,092

Other salaries and benefits (1)
4,705

 
4,746

 
4,952

 
4,978

 
5,786

 
 
19,381

 
23,633

Total salaries and employee benefits expense
22,587

 
23,265

 
23,598

 
22,507

 
28,025

 
 
91,957

 
107,140

   Occupancy and equipment expense
1,868

 
1,940

 
1,969

 
1,979

 
1,900

 
 
7,756

 
7,706

   Computer services and telecommunication expense
1,779

 
1,734

 
1,701

 
1,663

 
1,910

 
 
6,877

 
7,622

   Professional and legal expense
490

 
467

 
600

 
595

 
418

 
 
2,152

 
1,847

   Other operating expenses
7,169

 
7,376

 
7,886

 
7,238

 
6,971

 
 
29,669

 
25,351

Total non-interest expense
33,893

 
34,782

 
35,754

 
33,982

 
39,224

 
 
138,411

 
149,666

Income before income taxes
(1,370
)
 
3,686

 
4,013

 
2,780

 
1,987

 
 
9,109

 
31,458

Income tax (benefit) expense
(555
)
 
1,469

 
1,600

 
1,101

 
795

 
 
3,615

 
12,583

Operating (loss) earnings
$
(815
)
 
$
2,217

 
$
2,413

 
$
1,679

 
$
1,192

 
 
$
5,494

 
$
18,875

Total assets (period end)
$
2,234,290

 
$
2,402,362

 
$
2,369,560

 
$
1,963,165

 
$
1,709,267

 
 
$
2,234,290

 
$
1,709,267


(1) 
Includes health insurance, payroll taxes, 401(k) and profit sharing contributions, overtime, and temporary help expenses.

Mortgage Banking Segment operating earnings for the fourth quarter of 2017 decreased $3.0 million compared to the prior quarter.

Net interest income decreased due to lower average balances and yields on loans held for sale.

Mortgage origination fees decreased as a result of lower origination volume and lower gain on sale margin.

Mortgage servicing fees declined due to an increase in amortization and prepayments of mortgage servicing rights and a loss on fair value changes of mortgage servicing rights net of the related economic hedge activity. Nearly $800 thousand of this loss was due to an increase in delinquencies in the fourth quarter of 2017 resulting in higher anticipated collection costs and lower mortgage servicing rights asset value.

Salaries and employee benefits expense decreased due to lower commissions (lower origination volume and commission rates) partly offset by higher salaries as a result of the increase in staff from the Busey staff transfer.

Mortgage Banking Segment operating earnings for the year ended December 31, 2017 decreased $13.4 million compared to the prior year.

Net interest income increased due to earnings on higher average balances of loans held for investment.

Mortgage origination revenue decreased due to lower mortgage origination volume and lower gain on sale margin.

Mortgage servicing revenue decreased as mortgage servicing revenue for the year ended December 31, 2016 was positively impacted by fair value changes of mortgage servicing rights net of the related economic hedge activity of $14.7 million.

Non-interest expense decreased due to lower salaries and employee benefits expense as a result of lower commission and overtime expenses attributable to a decrease in origination volume, lower bonus expense, and a decline in the number of employees (excluding the staff transferred from Busey).

6




Additional Mortgage Banking Segment Data

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

 
 
 
 
 
 
 
 
 
 
 
 
 
Year Ended
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31,
 
 
4Q17
 
3Q17
 
2Q17
 
1Q17
 
4Q16
 
 
2017
 
2016
Mortgage origination revenue:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Gain on sale revenue, net (A)
 
$
13,376

 
$
17,098

 
$
18,000

 
$
15,607

 
$
23,576

 
 
$
64,081

 
$
100,097

Origination fees
 
4,266

 
4,882

 
5,283

 
5,858

 
5,741

 
 
20,289

 
17,493

Total mortgage origination revenue
 
$
17,642

 
$
21,980

 
$
23,283

 
$
21,465

 
$
29,317

 
 
$
84,370

 
$
117,590

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage servicing revenue:
 

 
 
 
 
 
 
 
 
 
 
 
 
 
Servicing fees
 
$
14,802

 
$
14,531

 
$
14,065

 
$
13,735

 
$
12,610

 
 
$
57,133

 
$
46,575

Amortization/prepayment of mortgage servicing rights (1)
 
(9,037
)
 
(8,399
)
 
(7,822
)
 
(6,743
)
 
(8,777
)
 
 
(32,001
)
 
(30,431
)
Fair value changes of mortgage servicing rights
 
7,231

 
4,475

 
(6,195
)
 
4,083

 
65,006

 
 
9,594

 
26,646

Economic hedge activity, net
 
(8,768
)
 
(5,012
)
 
6,168

 
(4,761
)
 
(65,879
)
 
 
(12,373
)
 
(11,911
)
Fair value changes of mortgage servicing rights net of economic hedge activity (1)
 
(1,537
)
 
(537
)
 
(27
)
 
(678
)
 
(873
)
 
 
(2,779
)
 
14,735

Total mortgage servicing revenue
 
$
4,228

 
$
5,595

 
$
6,216

 
$
6,314

 
$
2,960

 
 
$
22,353

 
$
30,879

 
 

 
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage servicing rights, at fair value:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
 
$
261,446

 
$
249,688

 
$
251,498

 
$
238,011

 
$
154,730

 
 
$
238,011

 
$
168,162

Originations/purchases
 
16,639

 
15,682

 
12,207

 
16,147

 
27,052

 
 
60,675

 
73,634

Amortization/prepayment (2)
 
(9,037
)
 
(8,399
)
 
(7,822
)
 
(6,743
)
 
(8,777
)
 
 
(32,001
)
 
(30,431
)
Fair value changes
 
7,231

 
4,475

 
(6,195
)
 
4,083

 
65,006

 
 
9,594

 
26,646

Ending balance
 
$
276,279

 
$
261,446

 
$
249,688

 
$
251,498

 
$
238,011

 
 
$
276,279

 
$
238,011

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage servicing book (unpaid principal balance of loans serviced for others)
 
$
21,993,128

 
$
21,380,397

 
$
20,823,016

 
$
20,450,217

 
$
19,683,073

 
 
$
21,993,128

 
$
19,683,073

Mortgage servicing rights valuation
 
1.26
%
 
1.22
%
 
1.20
%
 
1.23
%
 
1.21
%
 
 
1.26
%
 
1.21
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans funded:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
For sale
 
$
1,200,460

 
$
1,307,329

 
$
1,248,544

 
$
1,073,357

 
$
1,933,208

 
 
$
4,829,690

 
$
6,625,971

For investment
 
33,766

 
95,495

 
233,314

 
212,745

 
121,198

 
 
575,320

 
442,657

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans funded by purpose:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Refinance
 
39
%
 
30
%
 
30
%
 
41
%
 
56
%
 
 
35
%
 
49
%
Purchase
 
61

 
70

 
70

 
59

 
44

 
 
65

 
51

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans funded by channel:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Retail
 
24
%
 
26
%
 
27
%
 
23
%
 
21
%
 
 
25
%
 
21
%
Third party
 
76

 
74

 
73

 
77

 
79

 
 
75

 
79

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Originated for sale mortgage volume (3) (B)
 
$
1,074,775

 
$
1,265,240

 
$
1,299,706

 
$
1,061,173

 
$
1,419,871

 
 
$
4,700,894

 
$
6,553,261

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Gain on sale margin (A)/(B)
 
1.24
%
 
1.35
%
 
1.38
%
 
1.47
%
 
1.66
%
 
 
1.36
%
 
1.53
%

(1) 
Approximately $800 thousand of the fourth quarter 2017 fair value change was due to an increase in delinquencies in the fourth quarter of 2017 resulting in higher anticipated collection costs and lower mortgage servicing rights asset value.
(2) 
Changes due to collection or realization of expected cash flows.
(3) 
Includes change in mortgage rate lock commitments expected to close, change in loans held for sale and loans sold to investors during the period.



7




FORWARD-LOOKING STATEMENTS

When used in this document and in reports filed with or furnished to the Securities and Exchange Commission (the "SEC"), in press releases or other public stockholder communications, or in oral statements made with the approval of an authorized executive officer, the words or phrases “believe,” “will,” “should,” “will likely result,” “are expected to,” “will continue,” “is anticipated,” “guidance,” “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) the possibility that the actual reduction in our effective tax rate expected to result from Tax Cut and Jobs Act of 2017 might be different from the estimated reduction set forth in this document; (2) the risk that funds obtained from capital raising activities will not be utilized efficiently or effectively; (3) expected revenues, cost savings, synergies, and other benefits from our merger and acquisition activities (including our merger with American Chartered Bancorp, Inc. in 2016) 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; (4) the credit risks of lending activities, including changes in the level and direction of loan delinquencies and write-offs and changes in estimates of the adequacy of the allowance for loan and lease losses, which could necessitate additional provisions for loan losses, resulting both from originated loans and loans acquired from other financial institutions; (5) the quality and composition of our securities portfolio; (6) competitive pressures among depository institutions; (7) interest rate movements and their impact on customer behavior, net interest margin and the value of our mortgage servicing rights; (8) 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; (9) the impact of repricing and competitors’ pricing initiatives on loan and deposit products; (10) fluctuations in real estate values; (11) results of examinations of us and our bank subsidiary by regulatory authorities and the possibility that any such regulatory authority may, among other things, limit our business activities, require us to change our business mix, increase our allowance for loan and lease losses, write-down asset values or increase our capital levels, or affect our ability to borrow funds or maintain or increase deposits, which could adversely affect our liquidity and earnings; (12) our ability to adapt successfully to technological changes to meet customers’ needs and developments in the market place; (13) 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; (14) our ability to realize the residual values of our direct finance, leveraged and operating leases; (15) our ability to access cost-effective funding; (16) changes in financial markets; (17) changes in economic conditions in general and in the Chicago metropolitan area in particular; (18) the costs, effects and outcomes of litigation; (19) 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, including but not limited to the Tax Cut and Jobs Act of 2017, or interpretations thereof by taxing authorities; (20) changes in accounting principles, policies or guidelines; (21) our future acquisitions of other depository institutions or lines of business; and (22) 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



8




CONSOLIDATED BALANCE SHEETS (Unaudited)

(Dollars in thousands)
 
12/31/2017
 
9/30/2017
 
6/30/2017
 
3/31/2017
 
12/31/2016
ASSETS
 
 

 
 

 
 

 
 

 
 

Cash and due from banks
 
$
397,880

 
$
361,080

 
$
348,550

 
$
368,078

 
$
364,783

Interest earning deposits with banks
 
181,341

 
82,636

 
115,707

 
102,328

 
98,686

Total cash and cash equivalents
 
579,221

 
443,716

 
464,257

 
470,406

 
463,469

Investment securities:
 
 
 
 
 
 
 
 
 
 
Securities available for sale, at fair value
 
1,408,326

 
1,497,543

 
1,567,071

 
1,657,950

 
1,696,195

Securities held to maturity, at amortized cost
 
959,082

 
994,238

 
1,022,912

 
1,056,008

 
1,069,750

Non-marketable securities - FHLB and FRB Stock
 
114,111

 
152,345

 
160,204

 
144,427

 
143,276

Total investment securities
 
2,481,519

 
2,644,126

 
2,750,187

 
2,858,385

 
2,909,221

Loans held for sale
 
548,578

 
722,754

 
718,916

 
493,261

 
716,883

Loans:
 
 
 
 
 
 
 
 
 
 
Total loans, excluding purchased credit-impaired loans
 
13,846,318

 
13,753,459

 
13,465,064

 
12,789,667

 
12,605,726

Purchased credit-impaired loans
 
119,744

 
131,919

 
149,077

 
168,814

 
163,077

Total loans
 
13,966,062

 
13,885,378

 
13,614,141

 
12,958,481

 
12,768,803

Less: Allowance for loan and lease losses
 
157,710

 
159,128

 
154,033

 
144,170

 
139,366

Net loans
 
13,808,352

 
13,726,250

 
13,460,108

 
12,814,311

 
12,629,437

Lease investments, net
 
409,051

 
371,541

 
346,036

 
315,523

 
311,327

Premises and equipment, net
 
286,690

 
286,482

 
288,148

 
290,767

 
293,910

Cash surrender value of life insurance
 
203,602

 
204,855

 
203,534

 
202,233

 
200,945

Goodwill
 
1,003,548

 
999,925

 
999,925

 
999,925

 
1,001,038

Other intangibles
 
54,766

 
56,745

 
58,783

 
60,869

 
62,959

Mortgage servicing rights, at fair value
 
276,279

 
261,446

 
249,688

 
251,498

 
238,011

Other real estate owned, net
 
9,736

 
13,020

 
11,063

 
14,706

 
26,279

Other real estate owned related to FDIC transactions
 
4,788

 
4,817

 
4,849

 
3,864

 
5,006

Other assets
 
420,810

 
380,858

 
409,563

 
370,314

 
443,832

Total assets
 
$
20,086,940

 
$
20,116,535

 
$
19,965,057

 
$
19,146,062

 
$
19,302,317

LIABILITIES AND STOCKHOLDERS' EQUITY
 
 

 
 

 
 

 
 

 
 

Liabilities
 
 

 
 

 
 

 
 

 
 

Deposits:
 
 

 
 

 
 

 
 

 
 

Non-interest bearing
 
$
6,381,512

 
$
6,101,159

 
$
6,388,292

 
$
6,211,173

 
$
6,408,169

Interest bearing
 
8,576,866

 
8,313,985

 
7,873,527

 
7,788,210

 
7,702,279

Total deposits
 
14,958,378

 
14,415,144

 
14,261,819

 
13,999,383

 
14,110,448

Short-term borrowings
 
861,039

 
1,865,415

 
1,993,358

 
1,550,628

 
1,569,288

Long-term borrowings
 
505,158

 
405,715

 
330,160

 
315,618

 
311,790

Junior subordinated notes issued to capital trusts
 
211,494

 
211,289

 
211,085

 
210,769

 
210,668

Accrued expenses and other liabilities
 
541,048

 
526,880

 
520,355

 
453,236

 
520,914

Total liabilities
 
17,077,117

 
17,424,443

 
17,316,777

 
16,529,634

 
16,723,108

Stockholders' Equity
 
 
 
 
 
 
 
 
 
 
Preferred stock
 
309,999

 
115,280

 
115,572

 
115,572

 
115,572

Common stock
 
858

 
858

 
857

 
857

 
856

Additional paid-in capital
 
1,691,007

 
1,685,971

 
1,681,252

 
1,675,956

 
1,678,826

Retained earnings
 
1,065,303

 
940,948

 
899,930

 
875,295

 
838,892

Accumulated other comprehensive income
 
3,584

 
9,772

 
10,520

 
8,415

 
5,190

Treasury stock
 
(60,928
)
 
(60,737
)
 
(59,851
)
 
(59,667
)
 
(60,384
)
Controlling interest stockholders' equity
 
3,009,823

 
2,692,092

 
2,648,280

 
2,616,428

 
2,578,952

Non-controlling interest
 

 

 

 

 
257

Total stockholders' equity
 
3,009,823

 
2,692,092

 
2,648,280

 
2,616,428

 
2,579,209

Total liabilities and stockholders' equity
 
$
20,086,940

 
$
20,116,535

 
$
19,965,057

 
$
19,146,062

 
$
19,302,317




9




CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

 
 
 
 
 
 
 
 
 
 
 
 
 
Year Ended
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31,
(Dollars in thousands, except per share data)
 
4Q17
 
3Q17
 
2Q17
 
1Q17
 
4Q16
 
 
2017
 
2016
Interest income:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
   Taxable
 
$
154,631

 
$
155,440

 
$
143,426

 
$
133,737

 
$
134,048

 
 
$
587,234

 
$
467,877

   Nontaxable
 
2,362

 
2,632

 
2,791

 
2,880

 
2,947

 
 
10,665

 
11,120

Investment securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
   Taxable
 
7,696

 
8,440

 
8,717

 
9,122

 
9,362

 
 
33,975

 
35,571

   Nontaxable
 
9,677

 
9,731

 
9,837

 
9,973

 
10,220

 
 
39,218

 
42,022

Other interest earning accounts and Federal funds sold
 
600

 
327

 
228

 
199

 
157

 
 
1,354

 
587

Total interest income
 
174,966

 
176,570

 
164,999

 
155,911

 
156,734

 
 
672,446

 
557,177

Interest expense:
 

 
 
 
 
 
 
 
 
 
 
 
 
 
   Deposits
 
13,552

 
10,865

 
8,793

 
7,475

 
7,324

 
 
40,685

 
25,579

   Short-term borrowings
 
3,257

 
5,148

 
3,912

 
2,380

 
1,472

 
 
14,697

 
4,195

   Long-term borrowings and junior subordinated notes
 
4,764

 
3,610

 
3,300

 
3,013

 
2,724

 
 
14,687

 
9,512

Total interest expense
 
21,573

 
19,623

 
16,005

 
12,868

 
11,520

 
 
70,069

 
39,286

Net interest income
 
153,393

 
156,947

 
148,994

 
143,043

 
145,214

 
 
602,377

 
517,891

Provision for credit losses
 
3,643

 
4,517

 
9,699

 
3,734

 
2,622

 
 
21,593

 
19,563

Net interest income after provision for credit losses
 
149,750

 
152,430

 
139,295

 
139,309

 
142,592

 
 
580,784

 
498,328

Non-interest income: