EX-99.1 2 exhibit_991earningsrelease.htm EXHIBIT 99.1 Exhibit



EXHIBIT 99.1
                                    
mbfilogoblacka08.jpg
2Q18



MB FINANCIAL, INC. REPORTS SECOND QUARTER 2018 NET INCOME


CHICAGO, July 19, 2018 – MB Financial, Inc. (NASDAQ: MBFI), the holding company for MB Financial Bank, N.A., today announced second quarter 2018 net income of $38.5 million compared to $56.8 million last quarter and $44.5 million in the second quarter a year ago.  Diluted earnings per common share were $0.42 in the second quarter of 2018 compared to $0.81 last quarter and $0.50 in the second quarter a year ago.   
 
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, 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 residential mortgage loans on our balance sheet.
 
 
 
 
 
 
 
 
 
 
 
 
 
Six Months Ended
 
 
 
 
 
 
 
 
 
 
 
 
 
June 30,
 
 
2Q18
 
1Q18
 
4Q17
 
3Q17
 
2Q17
 
 
2018
 
2017
Net income - as reported
 
$
38,533

 
$
56,757

 
$
144,194

 
$
60,843

 
$
44,466

 
 
$
95,290

 
$
99,003

Non-core items, net of tax (1)
 
18,679

 
614

 
(96,814
)
 
1,942

 
3,292

 
 
19,293

 
1,934

Operating earnings
 
57,212

 
57,371

 
47,380

 
62,785

 
47,758

 
 
114,583

 
100,937

Operating (loss) earnings - Mortgage Banking Segment
 
(3,359
)
 
(295
)
 
(815
)
 
2,217

 
2,413

 
 
(3,654
)
 
4,092

Operating earnings, excluding Mortgage Banking Segment
 
60,571

 
57,666

 
48,195

 
60,568

 
45,345

 
 
118,237

 
96,845

Dividends on preferred shares
 
3,000

 
3,100

 
2,000

 
2,002

 
2,002

 
 
6,100

 
4,005

Operating earnings available to common stockholders, excluding Mortgage Banking Segment
 
$
57,571

 
$
54,566

 
$
46,195

 
$
58,566

 
$
43,343

 
 
$
112,137

 
$
92,840

Diluted earnings per common share - as reported (2) (3)
 
$
0.42

 
$
0.81

 
$
1.67

 
$
0.69

 
$
0.50

 
 
$
1.23

 
$
1.12

Diluted operating earnings per common share, excluding Mortgage Banking Segment
 
$
0.68

 
$
0.64

 
$
0.54

 
$
0.69

 
$
0.51

 
 
$
1.32

 
$
1.10


(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 starting on page 25. Non-core items for the second quarter of 2018 include approximately $14 million, net of tax, related to the discontinuation of our national mortgage origination business and approximately $5 million, net of tax, related to the pending merger with Fifth Third Bancorp ("Fifth Third").

(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.

(3) 
The $1.67 diluted earnings per common share in the fourth quarter of 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").





Key Items (compared to 1Q18)
Pending Merger
On May 20, 2018, we signed a definitive merger agreement with Fifth Third.
Operating Earnings
Operating earnings, excluding the Mortgage Banking Segment, increased $2.9 million, or 5.0%, to $60.6 million compared to the prior quarter. This increase resulted mostly from a $4.4 million (net of tax) increase in net interest income and an approximate $900 thousand decrease in income tax expense (due to a lower effective tax rate). These favorable variances were partly offset by a $2.5 million (net of tax) increase in professional and legal fees.
Diluted operating earnings per common share, excluding the Mortgage Banking Segment, were $0.68 compared to $0.64 in the prior quarter.
Loans
Loan balances, excluding purchased credit-impaired loans, decreased $105.7 million (-0.8%, or -3.1%, annualized).
Average loan balances, excluding purchased credit-impaired loans, decreased $58.6 million (-0.4%, or -1.7% annualized) to $13.7 billion due to a decrease in commercial real estate loans.
Average yield on loans, excluding accretion on loans acquired in bank mergers, increased 17 basis points to 4.50% from 4.33% in the prior quarter as a result of increases in short-term interest rates.
Deposits
Low-cost deposit balances ended the quarter essentially at the same level as the prior quarter end.
Average low-cost deposits increased $128.7 million (1.0%, or 4.2% annualized) to $12.5 billion due to a normal seasonal increase in non-interest bearing deposits.
Average cost of total deposits increased six basis points to 0.47%.
Net interest margin
Net interest margin on a fully tax equivalent basis, excluding accretion on loans acquired in bank mergers, increased seven basis points in the quarter to 3.62%. This increase was due to higher loan yields partly offset by increased funding costs.
Average interest earning assets increased $207.6 million mostly due to the purchase of residential mortgage-backed securities in March 2018.
Average cost of funds increased nine basis points to 0.67% due to higher rates paid on interest bearing liabilities.
 
Operating Segments (compared to 1Q18)
Banking
Operating earnings were $53.6 million, an increase of $4.5 million, or 9.2%, compared to the prior quarter.
This increase was due to an increase in net interest income (higher average loan and investment security yields) and card fees partly offset by an increase in professional and legal fees.
Leasing
Operating earnings were $7.0 million, a decrease of $1.6 million, or 18.7%, compared to the prior quarter.
Operating earnings for the quarter decreased as a result of lower promotional income partially offset by higher rental income and residual gains.
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 loss was $3.4 million compared to an operating loss of $295 thousand 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 pre-tax income of approximately $7.4 million beginning in the first quarter of 2019, as outlined in our first quarter 2018 earnings release.
Key Items (compared to six months ended June 30, 2017)
Operating earnings, excluding the Mortgage Banking Segment, increased $21.4 million, or 22.1%, to $118.2 million compared to the six months ended June 30, 2017. This increase resulted from the following items (net of tax): a $14.6 million increase in net interest income, an $8.3 million increase in our key fee initiatives revenue (mainly lease financing revenue), and an approximate $12 million decrease in income tax expense (lower effective tax rate). These increases were partly offset by a $14.9 million increase in non-interest expense with more than half of the increase in salaries and benefits.
Diluted operating earnings per common share, excluding the Mortgage Banking Segment, were $1.32 compared to $1.10 in the six months ended June 30, 2017, an increase of 20.0%.

Guidance on Selected Financial Items

In light of our pending merger with Fifth Third, we will 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 prior to the first quarter of 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.

Banking Segment

The following table summarizes certain financial information for the Banking Segment for the periods presented (in thousands):
 
 
 
 
 
 
 
 
 
 
 
 
Six Months Ended
 
 
 
 
 
 
 
 
 
 
 
 
June 30,
 
2Q18
 
1Q18
 
4Q17
 
3Q17
 
2Q17
 
 
2018
 
2017
Net interest income
$
146,614

 
$
140,471

 
$
140,180

 
$
142,888

 
$
135,982

 
 
$
287,085

 
$
267,431

Provision for credit losses
5,746

 
7,579

 
501

 
3,637

 
8,890

 
 
13,325

 
12,417

Net interest income after provision for credit losses
140,868

 
132,892

 
139,679

 
139,251

 
127,092

 
 
273,760

 
255,014

Non-interest income:
 
 


 
 
 
 
 
 
 
 
 
 
 
   Lease financing revenue, net
2,165

 
1,535

 
1,795

 
1,097

 
1,326

 
 
3,700

 
2,871

Treasury management fees
15,066

 
15,156

 
15,234

 
14,508

 
14,499

 
 
30,222

 
29,188

   Wealth management fees
8,969

 
9,121

 
9,024

 
8,702

 
8,498

 
 
18,090

 
17,018

   Card fees
5,654

 
4,787

 
5,032

 
4,585

 
4,413

 
 
10,441

 
8,979

Capital markets and international banking fees
3,785

 
2,998

 
3,999

 
4,870

 
3,586

 
 
6,783

 
6,839

   Other non-interest income
11,838

 
10,675

 
9,359

 
10,940

 
9,655

 
 
22,513

 
18,961

Total non-interest income
47,477

 
44,272

 
44,443

 
44,702

 
41,977

 
 
91,749

 
83,856

Non-interest expense:


 


 


 
 
 
 
 
 
 
 
 
Salaries and employee benefits expense:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Salaries
45,103

 
44,821

 
44,782

 
45,096

 
44,019

 
 
89,924

 
86,139

Commissions
941

 
953

 
1,119

 
877

 
1,121

 
 
1,894

 
2,228

Bonus and stock-based compensation
11,533

 
10,610

 
10,418

 
10,032

 
10,603

 
 
22,143

 
21,222

Other salaries and benefits (1)
15,721

 
15,207

 
14,119

 
14,604

 
12,698

 
 
30,928

 
26,403

Total salaries and employee benefits expense
73,298

 
71,591

 
70,438

 
70,609

 
68,441

 
 
144,889

 
135,992

   Occupancy and equipment expense
13,308

 
14,089

 
13,769

 
12,372

 
12,298

 
 
27,397

 
24,415

Computer services and telecommunication expense
9,384

 
9,741

 
9,664

 
8,386

 
7,976

 
 
19,125

 
15,490

   Professional and legal expense
4,846

 
1,359

 
1,967

 
1,239

 
1,455

 
 
6,205

 
3,055

   Other operating expenses
18,665

 
16,745

 
18,817

 
16,757

 
18,793

 
 
35,410

 
37,048

Total non-interest expense
119,501

 
113,525

 
114,655

 
109,363

 
108,963

 
 
233,026

 
216,000

Income before income taxes
68,844

 
63,639

 
69,467

 
74,590

 
60,106

 
 
132,483

 
122,870

Income tax expense
15,237

 
14,539

 
25,734

 
20,064

 
18,915

 
 
29,776

 
36,083

Operating earnings
$
53,607

 
$
49,100

 
$
43,733

 
$
54,526

 
$
41,191

 
 
$
102,707

 
$
86,787

Total assets (period end)
$
16,581,205

 
$
16,582,585

 
$
16,448,960

 
$
16,406,714

 
$
16,320,111

 
 
$
16,581,205

 
$
16,320,111


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

Banking Segment operating earnings for the second quarter of 2018 increased $4.5 million compared to the prior quarter.

Net interest income increased due to higher average loan and investment security yields and average investment security balances partly offset by a higher cost of funds. Our average yield on loans increased as a result of an increase in short-term rates. Our average investment security yield and balances increased due to investments made in higher yielding residential mortgage-backed securities in March 2018.

Card fees increased due to higher prepaid and debit card fees as a result of increased sales and volume.

Capital markets and international banking fees increased due to higher syndication fees, swap fees, and foreign currency derivative income.


3




Salaries and benefits expense increased as a result of increased bonus and stock-based compensation expense.

Professional and legal fees increased due to case settlements and other legal and professional fees.

Other operating expenses increased mostly due to losses on other real estate owned properties (compared to gains in the prior quarter), higher FDIC premiums, and increased card expenses.

Banking Segment operating earnings for the six months ended June 30, 2018 increased $15.9 million, or 18.3%, compared to the same period last year.

Net interest income increased due to higher average loan yields and balances partly offset by higher cost of funds.

Non-interest income increased due to higher card fees (increased sales and volume in prepaid cards and higher credit card usage) and stronger earnings from Small Business Investment Companies.

Non-interest expense increased as a result of higher salaries and employee benefits expense, computer services and telecommunication expense (investments in new technology), and professional and legal fees (case settlements and other legal and professional fees). Salaries and employee benefits expense increased due to annual salary increases, new hires, higher health insurance costs, and higher 401(k) and profit sharing contributions expense.

Income tax expense decreased as a result of a decline in the effective tax rate.

4




Leasing Segment

The following table summarizes certain financial information for the Leasing Segment for the periods presented (in thousands):
 
 
 
 
 
 
 
 
 
 
 
 
Six Months Ended
 
 
 
 
 
 
 
 
 
 
 
 
June 30,
 
2Q18
 
1Q18
 
4Q17
 
3Q17
 
2Q17
 
 
2018
 
2017
Net interest income
$
2,349

 
$
2,482

 
$
2,602

 
$
2,686

 
$
2,345

 
 
$
4,831

 
$
4,614

Provision for credit losses
500

 
(24
)
 
3,184

 
399

 
410

 
 
476

 
275

Net interest income after provision for credit losses
1,849

 
2,506

 
(582
)
 
2,287

 
1,935

 
 
4,355

 
4,339

Non-interest income:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
   Lease financing revenue, net
21,435

 
23,938

 
22,576

 
22,534

 
17,474

 
 
45,373

 
37,727

   Other non-interest income
1,160

 
899

 
1,168

 
26

 
676

 
 
2,059

 
1,849

Total non-interest income
22,595

 
24,837

 
23,744

 
22,560

 
18,150

 
 
47,432

 
39,576

Non-interest expense:


 
 
 
 
 
 
 
 
 
 
 
 
 
Salaries and employee benefits expense:


 
 
 
 
 
 
 
 
 
 
 
 
 
Salaries
6,021

 
5,917

 
5,361

 
5,029

 
4,623

 
 
11,938

 
9,433

Commissions
1,892

 
2,520

 
2,777

 
2,328

 
2,115

 
 
4,412

 
4,687

Bonus and stock-based compensation
1,205

 
974

 
1,761

 
1,228

 
1,045

 
 
2,179

 
2,000

Other salaries and benefits (1)
1,613

 
1,809

 
1,329

 
1,572

 
1,523

 
 
3,422

 
3,104

Total salaries and employee benefits expense
10,731

 
11,220

 
11,228

 
10,157

 
9,306

 
 
21,951

 
19,224

   Occupancy and equipment expense
1,110

 
1,167

 
1,090

 
1,070

 
1,011

 
 
2,277

 
1,955

Computer services and telecommunication expense
492

 
505

 
595

 
456

 
431

 
 
997

 
889

   Professional and legal expense
323

 
373

 
457

 
403

 
392

 
 
696

 
791

   Other operating expenses
2,500

 
2,212

 
2,101

 
2,412

 
2,266

 
 
4,712

 
4,354

Total non-interest expense
15,156

 
15,477

 
15,471

 
14,498

 
13,406

 
 
30,633

 
27,213

Income before income taxes
9,288

 
11,866

 
7,691

 
10,349

 
6,679

 
 
21,154

 
16,702

Income tax expense
2,324

 
3,300

 
3,229

 
4,307

 
2,525

 
 
5,624

 
6,644

Operating earnings
$
6,964

 
$
8,566

 
$
4,462

 
$
6,042

 
$
4,154

 
 
$
15,530

 
$
10,058

Total assets (period end)
$
1,354,940

 
$
1,360,117

 
$
1,403,690

 
$
1,307,459

 
$
1,275,386

 
 
$
1,354,940

 
$
1,275,386


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

Leasing Segment operating earnings for the second quarter of 2018 decreased $1.6 million compared to the prior quarter.

Consistent with the second quarter in the previous year, lease financing revenue decreased as a result of lower promotional income. This cyclical decline in promotional income was partially offset by higher rental income and residual gains. Excluding promotional income, lease financing revenue increased by approximately 10%.

Non-interest expense decreased slightly due to a reduction in commissions expense resulting from a decrease in lease financing revenue in the quarter.

Leasing Segment operating earnings for the six months ended June 30, 2018 increased $5.5 million, or 54.4%, compared to the same period last year due largely to an increase in lease financing revenue as a result of higher residual gains and promotional income. Additionally, income tax expense declined as a result of a decrease in the effective tax rate.

5




Mortgage Banking Segment

The following table summarizes certain financial information for the Mortgage Banking Segment for the periods presented (in thousands):
 
 
 
 
 
 
 
 
 
 
 
 
Six Months Ended
 
 
 
 
 
 
 
 
 
 
 
 
June 30,
 
2Q18
 
1Q18
 
4Q17
 
3Q17
 
2Q17
 
 
2018
 
2017
Net interest income
$
10,106

 
$
10,428

 
$
10,611

 
$
11,373

 
$
10,667

 
 
$
20,534

 
$
19,992

Provision for credit losses
(27
)
 
(47
)
 
(42
)
 
481

 
399

 
 
(74
)
 
741

Net interest income after provision for credit losses
10,133

 
10,475

 
10,653

 
10,892

 
10,268

 
 
20,608

 
19,251

Non-interest income:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
   Mortgage origination revenue (1)
13,334

 
17,854

 
18,146

 
22,647

 
23,936

 
 
31,188

 
46,078

   Mortgage servicing revenue
5,592

 
7,193

 
4,228

 
5,595

 
6,216

 
 
12,785

 
12,530

   Other non-interest income
11

 
1

 

 
1

 

 
 
12

 

Total non-interest income
18,937

 
25,048

 
22,374

 
28,243

 
30,152

 
 
43,985

 
58,608

Non-interest expense:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Salaries and employee benefits expense:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Salaries
12,033

 
13,849

 
12,322

 
11,867

 
11,247

 
 
25,882

 
23,128

Commissions
4,790

 
3,962

 
4,407

 
6,001

 
6,494

 
 
8,752

 
11,426

Bonus and stock-based compensation
115

 
471

 
1,153

 
651

 
905

 
 
586

 
1,621

Other salaries and benefits (2)
4,539

 
4,924

 
4,705

 
4,746

 
4,952

 
 
9,463

 
9,930

Total salaries and employee benefits expense
21,477

 
23,206

 
22,587

 
23,265

 
23,598

 
 
44,683

 
46,105

   Occupancy and equipment expense
2,032

 
2,138

 
1,868

 
1,940

 
1,969

 
 
4,170

 
3,948

Computer services and telecommunication expense
1,677

 
1,673

 
1,779

 
1,734

 
1,701

 
 
3,350

 
3,364

   Professional and legal expense
266

 
162

 
490

 
467

 
600

 
 
428

 
1,195

   Other operating expenses (1)
8,159

 
8,749

 
7,673

 
8,043

 
8,539

 
 
16,908

 
16,454

Total non-interest expense
33,611

 
35,928

 
34,397

 
35,449

 
36,407

 
 
69,539

 
71,066

Income (loss) before income taxes
(4,541
)
 
(405
)
 
(1,370
)
 
3,686

 
4,013

 
 
(4,946
)
 
6,793

Income tax (benefit) expense
(1,182
)
 
(110
)
 
(555
)
 
1,469

 
1,600

 
 
(1,292
)
 
2,701

Operating (loss) earnings
$
(3,359
)
 
$
(295
)
 
$
(815
)
 
$
2,217

 
$
2,413

 
 
$
(3,654
)
 
$
4,092

Total assets (period end)
$
2,030,412

 
$
2,224,821

 
$
2,234,290

 
$
2,402,362

 
$
2,369,560

 
 
$
2,030,412

 
$
2,369,560


(1) 
2017 amounts were revised as certain costs to originate mortgage loans were reclassified from mortgage origination revenue to other operating expenses.
(2) 
Includes health insurance, payroll taxes, 401(k) and profit sharing contributions, overtime, and temporary help expenses.

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, total non-interest income declined faster than expenses as a result of the wind down. The first phase of staff reductions was completed in early July. The wind down is expected to be completed in the fourth quarter of 2018. We project that, excluding any impact of the pending Fifth Third merger, remaining operations will earn quarterly pre-tax income of approximately $7.4 million beginning in the first quarter of 2019. We also continue to expect one-time exit expenses to range from $37 to $41 million.


6




Additional Mortgage Banking Segment Data

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

 
 
 
 
 
 
 
 
 
 
 
 
 
Six Months Ended
 
 
 
 
 
 
 
 
 
 
 
 
 
June 30,
 
 
2Q18
 
1Q18
 
4Q17
 
3Q17
 
2Q17
 
 
2018
 
2017
Mortgage origination revenue:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Gain on sale revenue, net
 
$
9,756

 
$
11,652

 
$
13,376

 
$
17,098

 
$
18,000

 
 
$
21,408

 
$
33,607

Origination fees (1)
 
3,578

 
6,202

 
4,770

 
5,549

 
5,936

 
 
9,780

 
12,471

Total mortgage origination revenue
 
$
13,334

 
$
17,854

 
$
18,146

 
$
22,647

 
$
23,936

 
 
$
31,188

 
$
46,078

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage servicing revenue:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Servicing fees
 
$
15,707

 
$
16,068

 
$
14,802

 
$
14,531

 
$
14,065

 
 
$
31,775

 
$
27,800

Amortization/prepayment of mortgage servicing rights (2)
 
(8,894
)
 
(8,015
)
 
(9,037
)
 
(8,399
)
 
(7,822
)
 
 
(16,909
)
 
(14,565
)
Fair value changes of mortgage servicing rights
 
1,193

 
10,890

 
7,231

 
4,475

 
(6,195
)
 
 
12,083

 
(2,112
)
Economic hedge activity, net
 
(2,414
)
 
(11,750
)
 
(8,768
)
 
(5,012
)
 
6,168

 
 
(14,164
)
 
1,407

Fair value changes of mortgage servicing rights net of economic hedge activity (3)
 
(1,221
)
 
(860
)
 
(1,537
)
 
(537
)
 
(27
)
 
 
(2,081
)
 
(705
)
Total mortgage servicing revenue
 
$
5,592

 
$
7,193

 
$
4,228

 
$
5,595

 
$
6,216

 
 
$
12,785

 
$
12,530

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage servicing rights, at fair value:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
 
$
291,561

 
$
276,279

 
$
261,446

 
$
249,688

 
$
251,498

 
 
$
276,279

 
$
238,011

Originations/purchases
 
12,769

 
12,407

 
16,639

 
15,682

 
12,207

 
 
25,176

 
28,354

Amortization/prepayment (2)
 
(8,894
)
 
(8,015
)
 
(9,037
)
 
(8,399
)
 
(7,822
)
 
 
(16,909
)
 
(14,565
)
Fair value changes
 
1,193

 
10,890

 
7,231

 
4,475

 
(6,195
)
 
 
12,083

 
(2,112
)
Ending balance
 
$
296,629

 
$
291,561

 
$
276,279

 
$
261,446

 
$
249,688

 
 
$
296,629

 
$
249,688

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage servicing book (unpaid principal balance of loans serviced for others)
 
$
22,643,179

 
$
22,362,896

 
$
21,993,128

 
$
21,380,397

 
$
20,823,016

 
 
$
22,643,179

 
$
20,823,016

Mortgage servicing rights valuation
 
1.31
%
 
1.30
%
 
1.26
%
 
1.22
%
 
1.20
%
 
 
1.31
%
 
1.20
%

(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 second quarter of 2018 resulting in higher 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 fourth quarter of 2017.

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 our actual results on selected items relating to our mortgage operations for which we have provided projections or estimates in this document will be materially different from such projections or estimates; (2) the ability to satisfy closing conditions to our pending merger with Fifth Third, including the approvals by our stockholders, on the expected terms and schedule; (3) the ability to obtain regulatory approvals required to complete our pending merger with Fifth Third, and the timing and conditions for such approvals; (4) delays in closing our pending merger with Fifth Third; (5) disruptions to our business resulting from our pending merger with Fifth Third; (6) the risk that funds obtained from capital raising activities will not be utilized efficiently or effectively; (7) 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; (8) 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; (9) the quality and composition of our securities portfolio; (10) competitive pressures among depository institutions; (11) interest rate movements and their impact on customer behavior, net interest margin and the value of our mortgage servicing rights; (12) 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, both before and after the discontinuation of our national mortgage origination business, 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; (13) the impact of repricing and competitors’ pricing initiatives on loan and deposit products; (14) fluctuations in real estate values; (15) 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; (16) our ability to adapt successfully to technological changes to meet customers’ needs and developments in the market place; (17) 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; (18) our ability to realize the residual values of our direct finance, leveraged, and operating leases; (19) our ability to access cost-effective funding; (20) changes in financial markets; (21) changes in economic conditions in general and in the Chicago metropolitan area in particular; (22) the costs, effects, and outcomes of litigation; (23) 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; (24) changes in accounting principles, policies or guidelines; and (25) 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)
 
6/30/2018
 
3/31/2018
 
12/31/2017
 
9/30/2017
 
6/30/2017
ASSETS
 
 

 
 

 
 

 
 

 
 

Cash and due from banks
 
$
373,448

 
$
332,234

 
$
397,880

 
$
361,080

 
$
348,550

Interest earning deposits with banks
 
119,672

 
50,624

 
181,341

 
82,636

 
115,707

Total cash and cash equivalents
 
493,120

 
382,858

 
579,221

 
443,716

 
464,257

Investment securities:
 
 
 
 
 
 
 
 
 
 
Securities available for sale, at fair value
 
1,647,260

 
1,679,011

 
1,408,326

 
1,497,543

 
1,567,071

Securities held to maturity, at amortized cost
 
923,036

 
933,319

 
959,082

 
994,238

 
1,022,912

Marketable equity securities, at fair value
 
10,922

 
11,124

 

 

 

Non-marketable securities - FHLB and FRB Stock
 
115,453

 
118,955

 
114,111

 
152,345

 
160,204

Total investment securities
 
2,696,671

 
2,742,409

 
2,481,519

 
2,644,126

 
2,750,187

Loans held for sale
 
423,367

 
561,549

 
548,578

 
722,754

 
718,916

Loans:
 
 
 
 
 
 
 
 
 
 
Total loans, excluding purchased credit-impaired loans
 
13,719,244

 
13,824,990

 
13,846,318

 
13,753,459

 
13,465,064

Purchased credit-impaired loans
 
101,001

 
109,990

 
119,744

 
131,919

 
149,077

Total loans
 
13,820,245

 
13,934,980

 
13,966,062

 
13,885,378

 
13,614,141

Less: Allowance for loan and lease losses
 
162,790

 
161,712

 
157,710

 
159,128

 
154,033

Net loans
 
13,657,455

 
13,773,268

 
13,808,352

 
13,726,250

 
13,460,108

Lease investments, net
 
433,505

 
408,798

 
409,051

 
371,541

 
346,036

Premises and equipment, net
 
281,458

 
281,791

 
286,690

 
286,482

 
288,148

Cash surrender value of life insurance
 
205,982

 
204,710

 
203,602

 
204,855

 
203,534

Goodwill
 
999,925

 
1,003,548

 
1,003,548

 
999,925

 
999,925

Other intangibles
 
50,968

 
52,864

 
54,766

 
56,745

 
58,783

Mortgage servicing rights, at fair value
 
296,629

 
291,561

 
276,279

 
261,446

 
249,688

Other real estate owned, net
 
10,869

 
10,528

 
9,736

 
13,020

 
11,063

Other real estate owned related to FDIC transactions
 
2,908

 
4,185

 
4,788

 
4,817

 
4,849

Other assets
 
413,700

 
449,454

 
420,810

 
380,858

 
409,563

Total assets
 
$
19,966,557

 
$
20,167,523

 
$
20,086,940

 
$
20,116,535

 
$
19,965,057

LIABILITIES AND STOCKHOLDERS' EQUITY
 
 

 
 

 
 

 
 

 
 

Liabilities
 
 

 
 

 
 

 
 

 
 

Deposits:
 
 

 
 

 
 

 
 

 
 

Non-interest bearing
 
$
6,347,208

 
$
6,385,149

 
$
6,381,512

 
$
6,101,159

 
$
6,388,292

Interest bearing
 
8,575,455

 
8,585,444

 
8,576,866

 
8,313,985

 
7,873,527

Total deposits
 
14,922,663

 
14,970,593

 
14,958,378

 
14,415,144

 
14,261,819

Short-term borrowings
 
651,462

 
717,679

 
861,039

 
1,865,415

 
1,993,358

Long-term borrowings
 
730,292

 
851,221

 
505,158

 
405,715

 
330,160

Junior subordinated notes issued to capital trusts
 
194,450

 
194,304

 
211,494

 
211,289

 
211,085

Accrued expenses and other liabilities
 
518,997

 
499,379

 
541,048

 
526,880

 
520,355

Total liabilities
 
17,017,864

 
17,233,176

 
17,077,117

 
17,424,443

 
17,316,777

Stockholders' Equity
 
 
 
 
 
 
 
 
 
 
Preferred stock
 
194,719

 
194,719

 
309,999

 
115,280

 
115,572

Common stock
 
861

 
860

 
858

 
858

 
857

Additional paid-in capital
 
1,698,057

 
1,692,650

 
1,691,007

 
1,685,971

 
1,681,252

Retained earnings
 
1,127,814

 
1,112,323

 
1,065,303

 
940,948

 
899,930

Accumulated other comprehensive (loss) income
 
(9,818
)
 
(3,719
)
 
3,584

 
9,772

 
10,520

Treasury stock
 
(62,940
)
 
(62,486
)
 
(60,928
)
 
(60,737
)
 
(59,851
)
Total stockholders' equity
 
2,948,693

 
2,934,347

 
3,009,823

 
2,692,092

 
2,648,280

Total liabilities and stockholders' equity
 
$
19,966,557

 
$
20,167,523

 
$
20,086,940

 
$
20,116,535

 
$
19,965,057



9




CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

 
 
 
 
 
 
 
 
 
 
 
 
 
Six Months Ended
 
 
 
 
 
 
 
 
 
 
 
 
 
June 30,
(Dollars in thousands, except per share data)
 
2Q18
 
1Q18
 
4Q17
 
3Q17
 
2Q17
 
 
2018
 
2017
Interest income:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
   Taxable
 
$
164,401

 
$
157,119

 
$
154,631

 
$
155,440

 
$
143,426

 
 
$
321,520

 
$
277,163

   Nontaxable
 
2,330

 
2,271

 
2,362

 
2,632

 
2,791

 
 
4,601

 
5,671

Investment securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
   Taxable
 
10,578

 
7,934

 
7,696

 
8,440

 
8,717

 
 
18,512

 
17,839

   Nontaxable
 
9,439

 
9,476

 
9,677

 
9,731

 
9,837

 
 
18,915

 
19,810

Other interest earning accounts and Federal funds sold
 
244

 
131

 
600

 
327

 
228

 
 
375

 
427

Total interest income
 
186,992

 
176,931

 
174,966

 
176,570

 
164,999

 
 
363,923

 
320,910

Interest expense:
 

 
 
 
 
 
 
 
 
 
 
 
 
 
   Deposits
 
17,386

 
15,032

 
13,552

 
10,865

 
8,793

 
 
32,418

 
16,268

   Short-term borrowings
 
2,769

 
2,516

 
3,257

 
5,148

 
3,912

 
 
5,285

 
6,292

   Long-term borrowings and junior subordinated notes
 
7,768

 
6,002

 
4,764

 
3,610

 
3,300

 
 
13,770

 
6,313

Total interest expense
 
27,923

 
23,550

 
21,573

 
19,623

 
16,005

 
 
51,473

 
28,873

Net interest income
 
159,069

 
153,381

 
153,393

 
156,947

 
148,994

 
 
312,450

 
292,037

Provision for credit losses
 
6,219

 
7,508

 
3,643

 
4,517

 
9,699

 
 
13,727

 
13,433

Net interest income after provision for credit losses
 
152,850

 
145,873

 
149,750

 
152,430

 
139,295

 
 
298,723

 
278,604

Non-interest income:
 


 
 
 
 

 
 

 
 

 
 
 

 
 

Mortgage banking revenue
 
18,926

 
25,047

 
22,374

 
28,242

 
30,152

 
 
43,973

 
58,608

Lease financing revenue, net
 
22,918

 
24,710

 
23,620

 
23,148

 
18,401

 
 
47,628

 
39,819

Treasury management fees
 
15,066

 
15,156

 
15,234

 
14,508

 
14,499

 
 
30,222

 
29,188

Wealth management fees
 
8,969

 
9,121

 
9,024

 
8,702

 
8,498

 
 
18,090

 
17,018

Card fees
 
5,654

 
4,787

 
5,032

 
4,585

 
4,413

 
 
10,441

 
8,979

Capital markets and international banking fees
 
3,785

 
2,998

 
3,999

 
4,870

 
3,586

 
 
6,783

 
6,839

Consumer and other deposit service fees
 
2,929

 
2,912

 
3,261

 
3,424

 
3,285

 
 
5,841

 
6,648

Brokerage fees
 
1,050

 
864

 
942

 
1,004

 
1,250

 
 
1,914

 
2,375

Loan service fees
 
2,148

 
2,245

 
2,197

 
2,114

 
2,037

 
 
4,393

 
4,006

Increase in cash surrender value of life insurance
 
1,272

 
1,108

 
1,511

 
1,321

 
1,301

 
 
2,380

 
2,589

Net (loss) gain on investment securities
 
(86
)
 
(174
)
 
111

 
83

 
137

 
 
(260
)
 
368

Net loss on disposal of other assets
 
(397
)
 
(357
)
 
(2,016
)
 
(180
)
 
(4
)
 
 
(754
)
 
(127
)
Other operating income
 
6,072

 
4,385

 
4,534

 
4,110

 
3,615

 
 
10,457

 
7,310

Total non-interest income
 
88,306

 
92,802

 
89,823

 
95,931

 
91,170

 
 
181,108

 
183,620

Non-interest expense:
 
 
 
 
 
 

 
 

 
 

 
 
 

 
 

Salaries and employee benefits expense
 
123,478

 
106,514

 
109,247

 
105,815

 
102,566

 
 
229,992

 
204,117

Occupancy and equipment expense
 
16,451

 
17,429

 
16,846

 
15,382

 
15,284

 
 
33,880

 
30,328

Computer services and telecommunication expense
 
10,871

 
11,156

 
11,304

 
10,062

 
9,785

 
 
22,027

 
19,225

Advertising and marketing expense
 
3,342

 
3,863

 
3,271

 
2,558

 
3,245

 
 
7,205

 
6,406

Professional and legal expense
 
8,887

 
1,898

 
2,957

 
2,109

 
2,450

 
 
10,785

 
5,141

Other intangible amortization expense
 
1,896

 
1,902

 
1,979

 
2,038

 
2,086

 
 
3,798

 
4,176

Branch exit and facilities impairment charges
 
340

 

 
(327
)
 
2,773

 
6,589

 
 
340

 
5,907

Net loss (gain) recognized on other real estate owned and other related expense
 
1,048

 
47

 
(104
)
 
(86
)
 
690

 
 
1,095

 
1,534

Loss on extinguishment of debt
 

 
3,136

 

 

 

 
 
3,136

 

Other operating expenses
 
26,679

 
21,941

 
30,655

 
22,310

 
23,517

 
 
48,620

 
45,720

Total non-interest expense
 
192,992

 
167,886

 
175,828

 
162,961

 
166,212

 
 
360,878

 
322,554

Income before income taxes
 
48,164

 
70,789

 
63,745

 
85,400

 
64,253

 
 
118,953

 
139,670

Income tax expense (benefit)
 
9,631

 
14,032

 
(80,449
)
 
24,557

 
19,787

 
 
23,663

 
40,667

Net income
 
38,533