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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 22, 2019

 
 
 
 
 
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 22, 2019, MB Financial, Inc. issued a release containing its fourth quarter and annual 2018 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 9.01 Financial Statements and Exhibits

(d) Exhibits
Exhibit 99.1 Release 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 18, 2019
By:
/s/Randall T. Conte
 
 
 
 
Randall T. Conte
 
 
 
 
Vice President and Chief Financial Officer
 
 
 
 
(Principal Financial Officer)
 








(Back To Top)

Section 2: EX-99.1 (EXHIBIT 99.1)

Exhibit


EXHIBIT 99.1
396431713_mbfilogoblacka10.jpg
4Q18


MB FINANCIAL, INC. REPORTS FOURTH QUARTER 2018 NET INCOME


CHICAGO, January 22, 2019 – MB Financial, Inc. (the "Company") (NASDAQ: MBFI), the holding company for MB Financial Bank, N.A., today announced fourth quarter 2018 net income of $75.9 million compared to $42.7 million last quarter and $144.2 million in the fourth quarter a year ago.  Diluted earnings per common share were $0.85 in the fourth quarter of 2018 compared to $0.47 last quarter and $1.67 in the fourth quarter a year ago.

Annual net income for 2018 was $213.9 million compared to $304.0 million for 2017. Diluted earnings per common share were $2.55 for 2018 compared to $3.49 for 2017.

Net income and earnings per common share for the fourth quarter of 2017 and full year 2017 were positively impacted by a $104.2 million, or $1.23 per common share, tax benefit due to the enactment of the Tax Cuts and Jobs Act of 2017 (the "TCJ Act"). Net income and earnings per common share for the fourth and third quarters of 2018 were also positively impacted by TCJ Act tax benefits of $8.2 million, or $0.10 per common share, and $2.2 million, or $0.03 per common share, respectively.

Operating Earnings (in thousands, except per share data)

The table below reconciles net income, as reported, to operating earnings excluding our Mortgage Banking Segment. As previously announced in April 2018, we have discontinued our national mortgage origination business (substantially all originations outside of the Company's consumer banking footprint in the Chicagoland area). Therefore, we believe operating earnings excluding our Mortgage Banking Segment better reflect our primary operations until the wind down of the segment is complete, as we are retaining the mortgage servicing asset and certain residential mortgage loans on our balance sheet and continue to originate residential mortgage loans in the Chicagoland area.
 
 
 
 
 
 
 
 
 
 
 
 
 
Year Ended
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31,
 
 
4Q18
 
3Q18
 
2Q18
 
1Q18
 
4Q17
 
 
2018
 
2017
Net income - as reported
 
$
75,911

 
$
42,714

 
$
38,533

 
$
56,757

 
$
144,194

 
 
$
213,915

 
$
304,040

Non-core items, net of tax (1)
 
(3,696
)
 
12,889

 
18,679

 
614

 
(96,814
)
 
 
28,486

 
(92,938
)
Operating earnings
 
72,215

 
55,603

 
57,212

 
57,371

 
47,380

 
 
242,401

 
211,102

Operating earnings (loss) - Mortgage Banking Segment
 
3,141

 
1,067

 
(3,359
)
 
(295
)
 
(815
)
 
 
554

 
5,494

Operating earnings, excluding Mortgage Banking Segment
 
69,074

 
54,536

 
60,571

 
57,666

 
48,195

 
 
241,847

 
205,608

Dividends on preferred shares
 
3,000

 
3,000

 
3,000

 
3,100

 
2,000

 
 
12,100

 
8,007

Operating earnings available to common stockholders, excluding Mortgage Banking Segment
 
$
66,074

 
$
51,536

 
$
57,571

 
$
54,566

 
$
46,195

 
 
$
229,747

 
$
197,601

Diluted earnings per common share - as reported (2)
 
$
0.85

 
$
0.47

 
$
0.42

 
$
0.81

 
$
1.67

 
 
$
2.55

 
$
3.49

Diluted operating earnings per common share, excluding Mortgage Banking Segment
 
$
0.77

 
$
0.60

 
$
0.68

 
$
0.64

 
$
0.54

 
 
$
2.70

 
$
2.33


(1) 
Non-core items represent the difference between non-core non-interest income and non-core non-interest expense net of tax as well as other non-core tax items. See "Non-GAAP Financial Information" section for details on non-core items starting on page 25.

(2) 
The $0.81 diluted earnings per common share in the first quarter of 2018 were positively impacted by a $15.3 million, or $0.18 per common share, return from preferred stockholders due to the redemption of our 8% Series A non-cumulative perpetual preferred stock. The $15.3 million represents the excess carrying amount over the redemption price of the Series A preferred stock.




Key Items (4Q18 compared to 3Q18)
Pending Merger
On May 20, 2018, we signed a definitive merger agreement with Fifth Third Bancorp ("Fifth Third"). We received the necessary stockholder approvals on September 18, 2018. The merger remains subject to regulatory approvals and other customary closing conditions.
Operating Earnings
Operating earnings, excluding the Mortgage Banking Segment, grew by $14.5 million, or 26.7%, to $69.1 million compared to the prior quarter. These results were attributable to the following items (net of income taxes): a $1.3 million increase in net interest income, a $4.7 million increase in lease financing revenue, a $7.0 million decrease in provision for credit losses, and a $5.2 million decrease in state income tax accruals, partly reduced by a $3.2 million increase in non-interest expenses.
Diluted operating earnings per common share, excluding the Mortgage Banking Segment, were $0.77 compared to $0.60 in the prior quarter.
Loans
Loan balances, excluding purchased credit-impaired loans, increased $107.2 million (+0.8%, or +3.1% annualized) to $14.0 billion due to growth in commercial loan balances partly offset by decreases in construction and commercial real estate loan balances.
Average loan balances, excluding purchased credit-impaired loans, increased $44.5 million (+0.3%, or +1.3% annualized) to $13.8 billion.
Average yield on loans, excluding accretion on loans acquired in bank mergers, increased 14 basis points to 4.82% from 4.68% in the prior quarter as a result of increases in short-term interest rates.
Deposits
Although the mix improved with an increase in non-interest bearing deposits offset by a decrease in money market account balances, low-cost deposits decreased $16.7 million (-0.1%, or -0.5% annualized) to $12.3 billion.
Average low-cost deposits decreased $109.5 million (-0.9%, or -3.4% annualized) to $12.5 billion due to decreases in non-interest bearing and money market account balances.
Average cost of total deposits increased six basis points to 0.60% due to increases in interest rates paid on deposits.
Net interest margin
Net interest margin on a fully tax equivalent basis, excluding accretion on loans acquired in bank mergers, increased 14 basis points in the quarter to 3.84%. This increase was due to higher loan yields as a result of increases in short-term interest rates.
Average cost of funds increased two basis points to 0.74% due to higher rates paid on deposits reduced by a decrease in the average cost of borrowings.
 
Operating Segments (4Q18 compared to 3Q18)
Banking
Operating earnings were $59.1 million, an increase of $11.7 million, or 24.7%, compared to the prior quarter.
This increase was due to a decrease in provision for credit losses and state income tax accruals partly offset by an increase in non-interest expenses.
Leasing
Operating earnings were $10.0 million, an increase of $2.8 million, or 39.8%, compared to the prior quarter.
This increase was mostly due to higher residual gains and fees from the sale of third-party equipment maintenance contracts.
Mortgage Banking
On April 12, 2018, we announced the discontinuation of our national mortgage origination business, which includes substantially all originations outside of the Company's consumer banking footprint in the Chicagoland area.
Operating earnings were $3.1 million compared to $1.1 million in the prior quarter.
The wind down of our national mortgage origination business is proceeding as planned. We project that, excluding any impact of our pending merger with Fifth Third, our remaining mortgage operations will earn quarterly pretax income of approximately $7 million in 2019, consistent with prior projections.
Key Items - Full Year (2018 compared to 2017)
Operating earnings, excluding the Mortgage Banking Segment, increased $36.2 million, or 17.6%, to $241.8 million compared to the year ended December 31, 2017.
The growth in operating earnings, excluding the Mortgage Banking Segment, resulted from the following items (net of income tax): a $30.5 million increase in net interest income; a $14.7 million increase in our key fee initiatives revenue, mainly lease financing revenue; a $4.9 million increase in earnings from investments in Small Business Investment Companies; and an approximate $33 million decrease in income tax expense resulting from a lower effective tax rate. These items were partly offset by a $25.1 million increase in non-interest expense with more than half of the increase in salaries and benefits due to higher health insurance costs, annual salary increases, and higher bonus expense, and a $19.7 million increase in provision for credit losses, mostly due to higher charge-offs related to one loan relationship.
Diluted operating earnings per common share, excluding the Mortgage Banking Segment, were $2.70 compared to $2.33 in the year ended December 31, 2017.
Guidance on Selected Financial Items

In light of our pending merger with Fifth Third, we no longer provide forward-looking financial guidance or update previously provided financial guidance except as otherwise provided in this release with respect to our mortgage operations.

2



Operating Segments

The Company currently 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. As a result of the discontinuation of our national mortgage origination business, we expect to stop operating the mortgage business as a defined segment with separate Mortgage Banking Segment reporting in 2019. 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 and non-core tax items.

Banking Segment

The following table summarizes certain financial information for the Banking Segment for the periods presented (in thousands):
 
 
 
 
 
 
 
 
 
 
 
 
Year Ended
 
 
 
 
 
 
 
 
 
 
 
 
December 31,
 
4Q18
 
3Q18
 
2Q18
 
1Q18
 
4Q17
 
 
2018
 
2017
Net interest income
$
153,426

 
$
152,003

 
$
146,614

 
$
140,471

 
$
140,180

 
 
$
592,514

 
$
550,499

Provision for credit losses
11,340

 
21,439

 
5,746

 
7,579

 
501

 
 
46,104

 
16,555

Net interest income after provision for credit losses
142,086

 
130,564

 
140,868

 
132,892

 
139,679

 
 
546,410

 
533,944

Non-interest income:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
   Lease financing revenue, net
2,400

 
3,420

 
2,165

 
1,535

 
1,795

 
 
9,520

 
5,763

   Treasury management fees
14,287

 
15,226

 
15,066

 
15,156

 
15,234

 
 
59,735

 
58,930

   Wealth management fees
9,204

 
9,089

 
8,969

 
9,121

 
9,024

 
 
36,383

 
34,744

   Card fees
5,851

 
5,362

 
5,654

 
4,787

 
5,032

 
 
21,654

 
18,596

   Capital markets and international banking fees
3,637

 
1,913

 
3,785

 
2,998

 
3,999

 
 
12,333

 
15,708

   Other non-interest income
9,733

 
10,987

 
11,838

 
10,675

 
9,359

 
 
43,233

 
39,260

Total non-interest income
45,112

 
45,997

 
47,477

 
44,272

 
44,443

 
 
182,858

 
173,001

Non-interest expense:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Salaries and employee benefits expense:
 
 


 
 
 
 
 
 
 
 
 
 
 
Salaries
43,598

 
44,933

 
45,103

 
44,821

 
44,782

 
 
178,455

 
176,017

Commissions
790

 
1,097

 
941

 
953

 
1,119

 
 
3,781

 
4,224

Bonus and stock-based compensation
13,487

 
10,774

 
11,533

 
10,610

 
10,418

 
 
46,404

 
41,672

Other salaries and benefits (1)
17,576

 
17,339

 
15,721

 
15,207

 
14,119

 
 
65,843

 
55,126

Total salaries and employee benefits expense
75,451

 
74,143

 
73,298

 
71,591

 
70,438

 
 
294,483

 
277,039

   Occupancy and equipment expense
13,153

 
13,400

 
13,308

 
14,089

 
13,769

 
 
53,950

 
50,556

   Computer services and telecommunication expense
8,814

 
8,324

 
9,384

 
9,741

 
9,664

 
 
36,263

 
33,540

   Professional and legal expense
2,570

 
1,347

 
4,846

 
1,359

 
1,967

 
 
10,122

 
6,261

   Other operating expenses
18,399

 
18,479

 
18,665

 
16,745

 
18,817

 
 
72,288

 
72,622

Total non-interest expense
118,387

 
115,693

 
119,501

 
113,525

 
114,655

 
 
467,106

 
440,018

Income before income taxes
68,811

 
60,868

 
68,844

 
63,639

 
69,467

 
 
262,162

 
266,927

Income tax expense
9,715

 
13,468

 
15,237

 
14,539

 
25,734

 
 
52,959

 
81,881

Operating earnings
$
59,096

 
$
47,400

 
$
53,607

 
$
49,100

 
$
43,733

 
 
$
209,203

 
$
185,046

Total assets (period end)
$
17,070,713

 
$
16,677,552

 
$
16,581,205

 
$
16,582,585

 
$
16,448,960

 
 
$
17,070,713

 
$
16,448,960


(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 2018 increased $11.7 million, or 24.7%, compared to the prior quarter.

Net interest income increased due to higher yields on loans partly offset by a higher cost of deposits.

Provision for credit losses decreased as the prior quarter was unfavorably impacted by higher charge-offs on one loan relationship.

Non-interest income decreased $885 thousand compared to the prior quarter.
Lease financing revenue decreased due to lower earnings from equity investments in leases and lower residual gains.
Treasury management fees declined as a result of an increasing earnings credit rate for our commercial customers and lower average non-interest bearing deposits.
Other non-interest income decreased as a result of lower earnings from investments in Small Business Investment Companies ("SBICs").

3



These decreases were partly offset by an increase in capital markets and international banking fees as a result of higher swap and international banking fees.

Non-interest expense increased $2.7 million compared to the prior quarter.
Salaries and employee benefits increased due to higher temporary help as a result of higher employee turnover and higher bonus expenses due to better than expected performance, reduced by decreases in salaries and health insurance expense as a result of fewer claims.
Professional and legal expenses increased as a result of higher consulting expense related to information technology security.

Fourth quarter income tax expense includes a $5.2 million decrease in state income tax accruals as a result of income allocation to lower income tax rate jurisdictions.

Banking Segment operating earnings for the year ended December 31, 2018 increased $24.2 million, or 13.1%, compared to the prior year.

Net interest income increased due to higher average loan yields and balances partly offset by a higher cost of funds. Our average yield on loans and cost of funds increased as a result of an increase in short-term interest rates.

Provision for credit losses increased as a result of higher charge-offs during the second half of 2018 related to one loan relationship.

Non-interest income increased $9.9 million compared to the prior year.
Lease financing revenue increased due to higher earnings from investments in leasing companies and higher residual gains.
Card fees increased as a result of increased sales and volume in prepaid cards and higher credit card usage.
Other non-interest income increased due to stronger earnings from investments in SBICs.
These increases were partly reduced by a decrease in capital markets and international banking fees due to decreases in swap and syndication fees.

Non-interest expense increased $27.1 million compared to the prior year.
Salaries and employee benefits expense increased due to higher health insurance costs as a result of an increase in claims, higher bonus and stock based compensation expense, annual salary increases, and higher 401(k) and profit sharing contributions expense.
Occupancy and equipment expense increased due to higher building and software depreciation.
Computer services and telecommunication expense increased due to previous investments in new technology.
Professional and legal fees increased as a result of case settlements, other legal fees, and consulting expense related to information technology security.

Income tax expense decreased as a result of a decline in the effective tax rate related to the TCJ Act.
 


4



Leasing Segment

The following table summarizes certain financial information for the Leasing Segment for the periods presented (in thousands):
 
 
 
 
 
 
 
 
 
 
 
 
Year Ended
 
 
 
 
 
 
 
 
 
 
 
 
December 31,
 
4Q18
 
3Q18
 
2Q18
 
1Q18
 
4Q17
 
 
2018
 
2017
Net interest income
$
2,572

 
$
2,160

 
$
2,349

 
$
2,482

 
$
2,602

 
 
$
9,563

 
$
9,902

Provision for credit losses
638

 
90

 
500

 
(24
)
 
3,184

 
 
1,204

 
3,858

Net interest income after provision for credit losses
1,934

 
2,070

 
1,849

 
2,506

 
(582
)
 
 
8,359

 
6,044

Non-interest income:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
   Lease financing revenue, net
29,263

 
21,810

 
21,435

 
23,938

 
22,576

 
 
96,446

 
82,837

   Other non-interest income
328

 
1,304

 
1,160

 
899

 
1,168

 
 
3,691

 
3,043

Total non-interest income
29,591

 
23,114

 
22,595

 
24,837

 
23,744

 
 
100,137

 
85,880

Non-interest expense:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Salaries and employee benefits expense:


 
 
 
 
 
 
 
 
 
 
 
 
 
Salaries
7,112

 
5,926

 
6,021

 
5,917

 
5,361

 
 
24,976

 
19,823

Commissions
2,023

 
2,662

 
1,892

 
2,520

 
2,777

 
 
9,097

 
9,792

Bonus and stock-based compensation
1,661

 
1,207

 
1,205

 
974

 
1,761

 
 
5,047

 
4,989

Other salaries and benefits (1)
1,211

 
1,338

 
1,613

 
1,809

 
1,329

 
 
5,971

 
6,005

Total salaries and employee benefits expense
12,007

 
11,133

 
10,731

 
11,220

 
11,228

 
 
45,091

 
40,609

   Occupancy and equipment expense
1,242

 
1,128

 
1,110

 
1,167

 
1,090

 
 
4,647

 
4,115

   Computer services and telecommunication expense
693

 
474

 
492

 
505

 
595

 
 
2,164

 
1,940

   Professional and legal expense
422

 
353

 
323

 
373

 
457

 
 
1,471

 
1,651

   Other operating expenses
3,306

 
2,480

 
2,500

 
2,212

 
2,101

 
 
10,498

 
8,867

Total non-interest expense
17,670

 
15,568

 
15,156

 
15,477

 
15,471

 
 
63,871

 
57,182

Income before income taxes
13,855

 
9,616

 
9,288

 
11,866

 
7,691

 
 
44,625

 
34,742

Income tax expense
3,877

 
2,480

 
2,324

 
3,300

 
3,229

 
 
11,981

 
14,180

Operating earnings
$
9,978

 
$
7,136

 
$
6,964

 
$
8,566

 
$
4,462

 
 
$
32,644

 
$
20,562

Total assets (period end)
$
1,464,380

 
$
1,340,901

 
$
1,354,940

 
$
1,360,117

 
$
1,403,690

 
 
$
1,464,380

 
$
1,403,690


(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 2018 increased $2.8 million compared to the prior quarter.

Provision for credit losses increased as a result of the increase in loan balances during the quarter.

Lease financing revenue increased due to higher residual gains and fees from the sale of third-party equipment maintenance contracts.

Non-interest expense increased due to higher salaries and employee benefits expense related to the investment in sales and other revenue generating staff partly reduced by a decrease in commissions due to higher deferrals of indirect costs resulting from more deals during the quarter. In addition, non-interest expense increased due to higher marketing expense at promotional events.

Total assets increased mostly due to growth in lease investments.

Leasing Segment operating earnings for the year ended December 31, 2018 increased $12.1 million, or 58.8%, compared to the prior year.

Lease financing revenue increased as a result of higher residual gains, rental income due to an increase in operating leases, and promotional income attributable to our investment in sales and other revenue generating staff.

Provision for credit losses was lower due to decreased loan charge-offs.

Non-interest expense increased due to higher salaries and employee benefits expense as a result of increased salaries related to the investment in sales and other revenue generating staff and an increase in other operating expenses.

5



Mortgage Banking Segment


The following table summarizes certain financial information for the Mortgage Banking Segment for the periods presented (in thousands):
 
 
 
 
 
 
 
 
 
 
 
 
Year Ended
 
 
 
 
 
 
 
 
 
 
 
 
December 31,
 
4Q18
 
3Q18
 
2Q18
 
1Q18
 
4Q17
 
 
2018
 
2017
Net interest income
$
7,507

 
$
7,685

 
$
10,106

 
$
10,428

 
$
10,611

 
 
$
35,726

 
$
41,976

Provision for credit losses
(7
)
 
(26
)
 
(27
)
 
(47
)
 
(42
)
 
 
(107
)
 
1,180

Net interest income after provision for credit losses
7,514

 
7,711

 
10,133

 
10,475

 
10,653

 
 
35,833

 
40,796

Non-interest income:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
   Mortgage origination revenue
1,349

 
1,907

 
13,334

 
17,854

 
18,146

 
 
34,444

 
86,871

   Mortgage servicing revenue
8,277

 
8,009

 
5,592

 
7,193

 
4,228

 
 
29,071

 
22,353

   Other non-interest income

 
13

 
11

 
1

 

 
 
25

 
1

Total non-interest income
9,626

 
9,929

 
18,937

 
25,048

 
22,374

 
 
63,540

 
109,225

Non-interest expense:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Salaries and employee benefits expense:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Salaries
3,888

 
5,375

 
12,033

 
13,849

 
12,322

 
 
35,145

 
47,317

Commissions
753

 
1,189

 
4,790

 
3,962

 
4,407

 
 
10,694

 
21,834

Bonus and stock-based compensation
442

 
392

 
115

 
471

 
1,153

 
 
1,420

 
3,425

Other salaries and benefits (1)
1,739

 
2,149

 
4,539

 
4,924

 
4,705

 
 
13,351

 
19,381

Total salaries and employee benefits expense
6,822

 
9,105

 
21,477

 
23,206

 
22,587

 
 
60,610

 
91,957

   Occupancy and equipment expense
927

 
1,273

 
2,032

 
2,138

 
1,868

 
 
6,370

 
7,756

   Computer services and telecommunication expense
945

 
1,263

 
1,677

 
1,673

 
1,779

 
 
5,558

 
6,877

   Professional and legal expense
632

 
174

 
266

 
162

 
490

 
 
1,234

 
2,152

   Other operating expenses
3,527

 
4,368

 
8,159

 
8,749

 
7,673

 
 
24,803

 
32,170

Total non-interest expense
12,853

 
16,183

 
33,611

 
35,928

 
34,397

 
 
98,575

 
140,912

Income (loss) before income taxes
4,287

 
1,457

 
(4,541
)
 
(405
)
 
(1,370
)
 
 
798

 
9,109

Income tax (benefit) expense
1,146

 
390

 
(1,182
)
 
(110
)
 
(555
)
 
 
244

 
3,615

Operating (loss) earnings
$
3,141

 
$
1,067

 
$
(3,359
)
 
$
(295
)
 
$
(815
)
 
 
$
554

 
$
5,494

Total assets (period end) (2)
$
1,671,933

 
$
1,701,518

 
$
2,030,412

 
$
2,224,821

 
$
2,234,290

 
 
$
1,671,933

 
$
2,234,290


(1) 
Includes health insurance, payroll taxes, 401(k) and profit sharing contributions, overtime, and temporary help expenses.
(2) 
The decrease in total assets subsequent to the first quarter of 2018 was due to the decrease in loans held for sale as a result of the wind down of the national mortgage origination business.

On April 12, 2018, the Company announced that it will be discontinuing its national mortgage origination business, which includes substantially all originations outside of the Company's consumer banking footprint in the Chicagoland area.

As expected with the wind down, total non-interest income declined faster than expenses. The first phase of staff reductions was completed in early July 2018, and staff reductions continued through the remainder of 2018. The wind down is expected to be completed in the first quarter of 2019. We project that, excluding any impact of the pending Fifth Third merger, remaining operations will earn quarterly pre-tax income of approximately $7 million, consistent with prior projections. We also expect one-time exit expenses to be approximately $35 million, which is down from the previously announced range of $37 to $41 million. We recognized approximately $32 million of such expenses in the year ended December 31, 2018.


6



Additional Mortgage Banking Segment Data

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

 
 
 
 
 
 
 
 
 
 
 
 
 
Year Ended
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31,
 
 
4Q18
 
3Q18
 
2Q18
 
1Q18
 
4Q17
 
 
2018
 
2017
Mortgage origination revenue:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Gain on sale revenue, net
 
$
691

 
$
1,303

 
$
9,756

 
$
11,652

 
$
13,376

 
 
$
23,402

 
$
64,081

Origination fees (1)
 
658

 
604

 
3,578

 
6,202

 
4,770

 
 
11,042

 
22,790

Total mortgage origination revenue
 
$
1,349

 
$
1,907

 
$
13,334

 
$
17,854

 
$
18,146

 
 
$
34,444

 
$
86,871

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage servicing revenue:
 

 
 
 
 
 
 
 
 
 
 
 
 
 
Servicing fees
 
$
16,314

 
$
15,953

 
$
15,707

 
$
16,068

 
$
14,802

 
 
$
64,042

 
$
57,133

Amortization/prepayment of mortgage servicing rights (2)
 
(7,377
)
 
(8,418
)
 
(8,894
)
 
(8,015
)
 
(9,037
)
 
 
(32,704
)
 
(32,001
)
Fair value changes of mortgage servicing rights
 
(4,285
)
 
2,521

 
1,193

 
10,890

 
7,231

 
 
10,319

 
9,594

Economic hedge activity, net
 
3,625

 
(2,047
)
 
(2,414
)
 
(11,750
)
 
(8,768
)
 
 
(12,586
)
 
(12,373
)
Fair value changes of mortgage servicing rights net of economic hedge activity (3)
 
(660
)
 
474

 
(1,221
)
 
(860
)
 
(1,537
)
 
 
(2,267
)
 
(2,779
)
Total mortgage servicing revenue
 
$
8,277

 
$
8,009

 
$
5,592

 
$
7,193

 
$
4,228

 
 
$
29,071

 
$
22,353

 
 

 
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage servicing rights, at fair value:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
 
$
295,803

 
$
296,629

 
$
291,561

 
$
276,279

 
$
261,446

 
 
$
276,279

 
$
238,011

Originations/purchases
 
757

 
5,071

 
12,769

 
12,407

 
16,639

 
 
31,004

 
60,675

Amortization/prepayment (2)
 
(7,377
)
 
(8,418
)
 
(8,894
)
 
(8,015
)
 
(9,037
)
 
 
(32,704
)
 
(32,001
)
Fair value changes
 
(4,285
)
 
2,521

 
1,193

 
10,890

 
7,231

 
 
10,319

 
9,594

Ending balance
 
$
284,898

 
$
295,803

 
$
296,629

 
$
291,561

 
$
276,279

 
 
$
284,898

 
$
276,279

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage servicing book (unpaid principal balance of loans serviced for others)
 
$
21,886,440

 
$
22,382,822

 
$
22,643,179

 
$
22,362,896

 
$
21,993,128

 
 
$
21,886,440

 
$
21,993,128

Mortgage servicing rights valuation
 
1.30
%
 
1.32
%
 
1.31
%
 
1.30
%
 
1.26
%
 
 
1.30
%
 
1.26
%

(1) 
2017 amounts were revised as certain costs to originate mortgage loans were reclassified from mortgage origination revenue to other operating expenses.
(2) 
Changes due to collection or realization of expected cash flows.
(3) 
Approximately $500 thousand of the second quarter 2018 fair value change was due to an increase in delinquencies in the quarter resulting in higher than anticipated collection costs and lower mortgage servicing rights asset value. In addition, approximately $300 thousand of the fair value change was due to higher than expected prepayments of mortgage servicing rights in the second quarter of 2018. Approximately $800 thousand of the fourth quarter 2017 fair value change was due to an increase in delinquencies in the quarter.



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 ability to satisfy closing conditions to our pending merger with Fifth Third on the expected terms and schedule; (2) the ability to obtain regulatory approvals required to complete our pending merger with Fifth Third, and the timing and conditions for such approvals; (3) delays in closing our pending merger with Fifth Third; (4) disruptions to our business resulting from our pending merger with Fifth Third; (5) 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; (6) the quality and composition of our securities portfolio; (7) competitive pressures among depository institutions; (8) interest rate movements and their impact on customer behavior, net interest margin and the value of our mortgage servicing rights; (9) if changes in interest rates negatively impact the value of our mortgage servicing rights; (10) the impact of repricing and competitors’ pricing initiatives on loan and deposit products; (11) fluctuations in real estate values; (12) 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; (13) our ability to adapt successfully to technological changes to meet customers’ needs and developments in the market place; (14) 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; (15) our ability to realize the residual values of our direct finance, leveraged, and operating leases; (16) the risk that funds obtained from capital raising activities will not be utilized efficiently or effectively; (17) expected revenues, cost savings, synergies, and other benefits from our other merger and acquisition activities 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; (18) our ability to access cost-effective funding; (19) changes in financial markets; (20) changes in economic conditions in general and in the Chicago metropolitan area in particular; (21) the costs, effects, and outcomes of litigation; (22) 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 TCJ Act, or interpretations thereof by taxing authorities; (23) changes in accounting principles, policies or guidelines; and (24) 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)
 
12/31/2018
 
9/30/2018
 
6/30/2018
 
3/31/2018
 
12/31/2017
ASSETS
 
 

 
 

 
 

 
 

 
 

Cash and due from banks
 
$
503,153

 
$
342,933

 
$
373,448

 
$
332,234

 
$
397,880

Interest earning deposits with banks
 
147,254

 
87,740

 
119,672

 
50,624

 
181,341

Total cash and cash equivalents
 
650,407

 
430,673

 
493,120

 
382,858

 
579,221

Investment securities:
 
 
 
 
 
 
 
 
 
 
Securities available for sale, at fair value
 
1,855,682

 
1,710,636

 
1,647,260

 
1,679,011

 
1,408,326

Securities held to maturity, at amortized cost
 
901,684

 
923,082

 
923,036

 
933,319

 
959,082

Marketable equity securities, at fair value
 
11,075

 
10,901

 
10,922

 
11,124

 

Non-marketable securities - FHLB and FRB Stock
 
113,957

 
107,407

 
115,453

 
118,955

 
114,111

Total investment securities
 
2,882,398

 
2,752,026

 
2,696,671

 
2,742,409

 
2,481,519

Loans held for sale
 
45,550

 
51,834

 
423,367

 
561,549

 
548,578

Loans:
 
 
 
 
 
 
 
 
 
 
Total loans, excluding purchased credit-impaired loans
 
13,951,082

 
13,843,880

 
13,719,244

 
13,824,990

 
13,846,318

Purchased credit-impaired loans
 
84,101

 
91,072

 
101,001

 
109,990

 
119,744

Total loans
 
14,035,183

 
13,934,952

 
13,820,245

 
13,934,980

 
13,966,062

Less: Allowance for loan and lease losses
 
161,578

 
155,411

 
162,790

 
161,712

 
157,710

Net loans
 
13,873,605

 
13,779,541

 
13,657,455

 
13,773,268

 
13,808,352

Lease investments, net
 
487,776

 
429,843

 
433,505

 
408,798

 
409,051

Premises and equipment, net
 
270,614

 
274,006

 
281,458

 
281,791

 
286,690

Cash surrender value of life insurance
 
208,581

 
207,280

 
205,982

 
204,710

 
203,602

Goodwill
 
999,925

 
999,925

 
999,925

 
1,003,548

 
1,003,548

Other intangibles
 
46,914

 
49,114

 
50,968

 
52,864

 
54,766

Mortgage servicing rights, at fair value
 
284,898

 
295,803

 
296,629

 
291,561

 
276,279

Other real estate owned, net
 
9,182

 
10,933

 
10,869

 
10,528

 
9,736

Other real estate owned related to FDIC transactions
 
1,182

 
2,661

 
2,908

 
4,185

 
4,788

Other assets
 
445,994

 
436,332

 
413,700

 
449,454

 
420,810

Total assets
 
$
20,207,026

 
$
19,719,971

 
$
19,966,557

 
$
20,167,523

 
$
20,086,940

LIABILITIES AND STOCKHOLDERS' EQUITY
 
 

 
 

 
 

 
 

 
 

Liabilities
 
 

 
 

 
 

 
 

 
 

Deposits:
 
 

 
 

 
 

 
 

 
 

Non-interest bearing
 
$
6,152,163

 
$
6,036,012

 
$
6,347,208

 
$
6,385,149

 
$
6,381,512

Interest bearing
 
8,502,050

 
8,672,781

 
8,575,455

 
8,585,444

 
8,576,866

Total deposits
 
14,654,213

 
14,708,793

 
14,922,663

 
14,970,593

 
14,958,378

Short-term borrowings
 
1,470,055

 
903,355

 
651,462

 
717,679

 
861,039

Long-term borrowings
 
349,681

 
451,677

 
730,292

 
851,221

 
505,158

Junior subordinated notes issued to capital trusts
 
121,118

 
133,995

 
194,450

 
194,304

 
211,494

Accrued expenses and other liabilities
 
577,111

 
556,822

 
518,997

 
499,379

 
541,048

Total liabilities
 
17,172,178

 
16,754,642

 
17,017,864

 
17,233,176

 
17,077,117

Stockholders' Equity
 
 
 
 
 
 
 
 
 
 
Preferred stock
 
194,719

 
194,719

 
194,719

 
194,719

 
309,999

Common stock
 
862

 
862

 
861

 
860

 
858

Additional paid-in capital
 
1,708,319

 
1,703,404

 
1,698,057

 
1,692,650

 
1,691,007

Retained earnings
 
1,199,485

 
1,147,060

 
1,127,814

 
1,112,323

 
1,065,303

Accumulated other comprehensive (loss) income
 
(4,864
)
 
(17,186
)
 
(9,818
)
 
(3,719
)
 
3,584

Treasury stock
 
(63,673
)
 
(63,530
)
 
(62,940
)
 
(62,486
)
 
(60,928
)
Total stockholders' equity
 
3,034,848

 
2,965,329

 
2,948,693

 
2,934,347

 
3,009,823

Total liabilities and stockholders' equity
 
$
20,207,026

 
$
19,719,971

 
$
19,966,557

 
$
20,167,523

 
$
20,086,940




9



CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

 
 
 
 
 
 
 
 
 
 
 
 
 
Year Ended
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31,
(Dollars in thousands, except per share data)
 
4Q18
 
3Q18
 
2Q18
 
1Q18
 
4Q17
 
 
2018
 
2017
Interest income:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
   Taxable
 
$
170,283

 
$
168,190

 
$
164,401

 
$
157,119

 
$
154,631

 
 
$
659,993

 
$
587,234

   Nontaxable
 
2,508

 
2,146

 
2,330

 
2,271

 
2,362

 
 
9,255

 
10,665

Investment securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
   Taxable
 
11,323

 
10,366

 
10,578

 
7,934

 
7,696

 
 
40,201

 
33,975

   Nontaxable
 
9,474

 
9,387

 
9,439

 
9,476

 
9,677

 
 
37,776

 
39,218

Other interest earning accounts and Federal funds sold
 
356

 
1,650

 
244

 
131

 
600

 
 
2,381

 
1,354

Total interest income
 
193,944

 
191,739

 
186,992

 
176,931

 
174,966

 
 
749,606

 
672,446

Interest expense:
 

 
 
 
 
 
 
 
 
 
 
 
 
 
   Deposits
 
22,367

 
20,485

 
17,386

 
15,032

 
13,552

 
 
75,270

 
40,685

   Short-term borrowings
 
3,337

 
2,317

 
2,769

 
2,516

 
3,257

 
 
10,939

 
14,697

   Long-term borrowings and junior subordinated notes
 
4,735

 
7,089

 
7,768

 
6,002

 
4,764

 
 
25,594

 
14,687

Total interest expense
 
30,439

 
29,891

 
27,923

 
23,550

 
21,573

 
 
111,803

 
70,069

Net interest income
 
163,505

 
161,848

 
159,069

 
153,381

 
153,393

 
 
637,803

 
602,377

Provision for credit losses
 
11,971

 
21,503

 
6,219

 
7,508

 
3,643

 
 
47,201

 
21,593

Net interest income after provision for credit losses
 
151,534

 
140,345

 
152,850

 
145,873

 
149,750

 
 
590,602

 
580,784

Non-interest income:
 


 
 
 
 

 
 

 
 

 
 
 

 
 

Mortgage banking revenue
 
9,626

 
9,916

 
18,926

 
25,047

 
22,374

 
 
63,515

 
109,224

Lease financing revenue, net
 
31,657

 
25,205

 
22,918

 
24,710

 
23,620

 
 
104,490

 
86,587

Treasury management fees
 
14,287

 
15,226

 
15,066

 
15,156

 
15,234

 
 
59,735

 
58,930

Wealth management fees
 
9,204

 
9,089

 
8,969

 
9,121

 
9,024

 
 
36,383

 
34,744

Card fees
 
5,851

 
5,362

 
5,654

 
4,787

 
5,032

 
 
21,654

 
18,596

Capital markets and international banking fees
 
3,637

 
1,913

 
3,785

 
2,998

 
3,999

 
 
12,333

 
15,708

Consumer and other deposit service fees
 
3,031

 
3,051

 
2,929

 
2,912

 
3,261

 
 
11,923

 
13,333

Brokerage fees
 
1,182

 
1,138

 
1,050

 
864

 
942

 
 
4,234

 
4,321

Loan service fees
 
2,252

 
2,103

 
2,148

 
2,245

 
2,197

 
 
8,748

 
8,317

Increase in cash surrender value of life insurance
 
1,301

 
1,298

 
1,272

 
1,108

 
1,511

 
 
4,979

 
5,421

Net gain (loss) on investment securities
 
89

 
(85
)
 
(86
)
 
(174
)
 
111

 
 
(256
)
 
562

Net loss on disposal of other assets
 
(10
)
 
(32
)
 
(397
)
 
(357
)
 
(2,016
)
 
 
(796
)
 
(2,323
)
Other operating income
 
(427
)
 
5,657

 
6,072

 
4,385

 
4,534

 
 
15,687

 
15,954

Total non-interest income
 
81,680

 
79,841

 
88,306

 
92,802

 
89,823

 
 
342,629

 
369,374

Non-interest expense:
 
 
 
 
 
 

 
 

 
 

 
 
 

 
 

Salaries and employee benefits expense
 
95,683

 
101,885

 
123,478

 
106,514

 
109,247

 
 
427,560

 
419,179

Occupancy and equipment expense
 
15,448

 
16,117

 
16,451

 
17,429

 
16,846

 
 
65,445

 
62,556

Computer services and telecommunication expense
 
10,745