MB Financial (MBFI)

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MB Financial 10-Q 2012

Documents found in this filing:

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2012

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number 0-24566-01

MB FINANCIAL, INC.

(Exact name of registrant as specified in its charter)

Maryland

(State or other jurisdiction of incorporation or organization)

36-4460265

(I.R.S. Employer Identification No.)

800 West Madison Street, Chicago, Illinois 60607

(Address of principal executive offices)

Registrant’s telephone number, including area code: (888) 422-6562

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer x		Accelerated filer o

Non-accelerated filer o		Smaller reporting company o
(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No x

There were outstanding 54,676,487 shares of the registrant’s common stock as of May 2, 2012.

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MB FINANCIAL, INC. AND SUBSIDIARIES

FORM 10-Q

March 31, 2012

INDEX

PART I.	FINANCIAL INFORMATION

Item 1.	Financial Statements

	Consolidated Balance Sheets at March 31, 2012 (Unaudited) and December 31, 2011	1

	Consolidated Statements of Income for the Three Months Ended March 31, 2012 and 2011 (Unaudited)	2 — 3

	Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 2012 and 2011 (Unaudited)	4

	Consolidated Statements of Changes in Stockhodlers’ Equity for the Three Months Ended March 31, 2012 and 2011 (Unaudited)	5

	Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2012 and 2011 (Unaudited)	6 — 7

	Notes to Consolidated Financial Statements (Unaudited)	8 — 39

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	40 — 56

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	56 — 59

Item 4.	Controls and Procedures	59

PART II.	OTHER INFORMATION

Item 1A.	Risk Factors	60

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	60

Item 6.	Exhibits	60

	Signatures	61

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PART I. - FINANCIAL INFORMATION

Item 1. - Financial Statements

MB FINANCIAL, INC. & SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Amounts in thousands, except share and per share data) (Unaudited)

	March 31,			December 31,
	2012			2011
ASSETS
Cash and due from banks	$	128,411		$	144,228
Interest earning deposits with banks	272,553			100,337
Total cash and cash equivalents	400,964			244,565
Investment securities:
Securities available for sale, at fair value	1,833,611			1,929,297
Securities held to maturity, at amortized cost ($515,644 and $511,022 fair value at March 31, 2012 and December 31, 2011, respectively)	498,767			499,283
Non-marketable securities - FHLB and FRB stock	65,541			80,832
Total investment securities	2,397,919			2,509,412

Loans held for sale	3,364			4,727
Loans:
Total loans, excluding covered loans	5,169,237			5,288,451
Covered loans	620,528			662,544
Total loans	5,789,765			5,950,995
Less: Allowance for loan loss	125,431			126,798
Net loans	5,664,334			5,824,197
Lease investment, net	124,748			135,490
Premises and equipment, net	212,589			210,705
Cash surrender value of life insurance	126,226			125,309
Goodwill, net	387,069			387,069
Other intangibles, net	28,237			29,494
Other real estate owned, net	63,077			78,452
Other real estate owned related to FDIC transactions	53,703			60,363
FDIC indemnification asset	72,161			80,830
Other assets	137,209			142,459
Total assets	$	9,671,600		$	9,833,072
LIABILITIES AND STOCKHOLDERS’ EQUITY
LIABILITIES
Deposits:
Noninterest bearing	$	1,874,028		$	1,885,694
Interest bearing	5,760,674			5,761,913
Total deposits	7,634,702			7,647,607
Short-term borrowings	269,691			219,954
Long-term borrowings	256,456			266,264
Junior subordinated notes issued to capital trusts	158,530			158,538
Accrued expenses and other liabilities	136,791			147,682
Total liabilities	8,456,170			8,440,045
STOCKHOLDERS’ EQUITY
Preferred stock, ($0.01 par value, authorized 1,000,000 shares at March 31, 2012 and December 31, 2011; series A, 5% cumulative perpetual, 196,000 shares issued and outstanding at December 31, 2011, $1,000 liquidation value)	—			194,719
Common stock, ($0.01 par value; authorized 70,000,000 shares at March 31, 2012 and December 31, 2011; issued 54,852,275 shares at March 31, 2012 and 54,824,912 at December 31, 2011)	549			548
Additional paid-in capital	732,613			731,248
Retained earnings	445,233			427,956
Accumulated other comprehensive income	37,935			39,150
Less:175,253 and 160,419 shares of Treasury stock, at cost, at March 31, 2012 and December 31, 2011, respectively	(3,326		)	(3,044		)
Controlling interest stockholders’ equity	1,213,004			1,390,577
Noncontrolling interest	2,426			2,450
Total stockholders’ equity	1,215,430			1,393,027
Total liabilities and stockholders’ equity	$	9,671,600		$	9,833,072

See accompanying Notes to Consolidated Financial Statements.

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MB FINANCIAL, INC. & SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(Amounts in thousands, except common share and per share data) (Unaudited)

	Three months ended
	March 31,			March 31,
	2012			2011
Interest income:
Loans	$	71,648		$	87,167
Investment securities:
Taxable	10,884			7,752
Nontaxable	6,739			3,345
Other interest earning accounts	169			470
Total interest income	89,440			98,734
Interest expense:
Deposits	8,760			13,359
Short-term borrowings	206			217
Long-term borrowings and junior subordinated notes	3,381			2,953
Total interest expense	12,347			16,529
Net interest income	77,093			82,205
Provision for credit losses	3,100			40,000
Net interest income after provision for credit losses	73,993			42,205
Other income:
Loan service fees	1,339			1,126
Deposit service fees	9,408			10,030
Lease financing, net	6,958			5,783
Brokerage fees	1,255			1,419
Trust and asset management fees	4,404			4,431
Net loss on sale of investment securities available for sale	(3		)	(3		)
Increase in cash surrender value of life insurance	917			968
Net (loss) gain on sale of assets	(17		)	357
Accretion of FDIC indemnification asset	475			1,831
Card fees	2,044			1,788
Net loss recognized on other real estate owned	(6,589		)	(372		)
Other operating income	2,663			1,785
Total other income	22,854			29,143
Other expenses:
Salaries and employee benefits	40,429			37,775
Occupancy and equipment expense	9,570			9,394
Computer services and telecommunication expense	3,653			3,445
Advertising and marketing expense	2,066			1,719
Professional and legal expense	1,413			1,225
Other intangibles amortization expense	1,257			1,425
FDIC insurance premiums	2,643			3,428
Branch impairment charges	—			1,000
Other real estate expense, net	1,243			398
Other operating expenses	5,057			7,055
Total other expenses	67,331			66,864
Income before income taxes	29,516			4,484
Income taxes	8,430			(2,460		)
Net income	21,086			6,944
Dividends and discount accretion on preferred shares	3,269			2,601
Net income available to common stockholders	$	17,817		$	4,343

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	Three Months Ended
	March 31,			March 31,
	2012			2011
Common share data:
Basic earnings allocated to common stock per common share	$	0.39		$	0.13
Impact of preferred stock dividends on basic earnings per common share	(0.06		)	(0.05		)
Basic earnings per common share	0.33			0.08

Diluted earnings allocated to common stock per common share	0.39			0.13
Impact of preferred stock dividends on diluted earnings per common share	(0.06		)	(0.05		)
Diluted earnings per common share	0.33			0.08

Weighted average common shares outstanding for basic earnings per common share	54,155,856			53,961,176
Weighted average common shares outstanding for diluted earnings per common share	54,411,916			54,254,876

See Accompanying Notes to Consolidated Financial Statements.

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MB FINANCIAL, INC. & SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Amounts in thousands) (Unaudited)

	Three Months Ended
	March 31,			March 31,
	2012			2011

Net income	$	21,086		$	6,944

Unrealized holding (losses) gains on investment securities, net of tax	(1,217		)	331
Reclassification adjustments for losses included in net income, net of tax	2			2
Other comprehensive (loss) income, net of tax	(1,215		)	333

Comprehensive income	$	19,871		$	7,277

See Accompanying Notes to Consolidated Financial Statements.

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MB FINANCIAL, INC. & SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

Three Months Ended March 31, 2012 and 2011

(Amounts in thousands, except per share data) (Unaudited)

												Accumulated
												Other
						Additional						Comprehensive									Total Stock-
	Preferred			Common		Paid-in			Retained			Income,			Treasury			Noncontrolling			holders’
	Stock			Stock		Capital			Earnings			Net of Tax			Stock			Interest			Equity
Balance at December 31, 2010	$	194,104		$	546	$	725,400		$	402,810		$	22,233		$	(2,828	)	$	2,521		$	1,344,786
Net income									6,944									66			7,010
Other comprehensive income, net of tax												333									333
Cash dividends declared on common shares ($0.01 per share)									(544		)										(544		)
Dividends and discount accretion on preferred shares	151								(2,601		)										(2,450		)
Restricted common stock activity, net of tax						43															43
Stock option activity, net of tax						(109		)	(15		)				103						(21		)
Repurchase of common shares in connection with employee benefit plans															(79		)				(79		)
Repurchase of common shares held in trust for deferred compensation plan						41									(41		)				—
Stock-based compensation expense						1,229															1,229
Distributions to noncontrolling interest																		(71		)	(71		)
Balance at March 31, 2011	$	194,255		$	546	$	726,604		$	406,594		$	22,566		$	(2,845	)	$	2,516		$	1,350,236

Balance at December 31, 2011	$	194,719		$	548	$	731,248		$	427,956		$	39,150		$	(3,044	)	$	2,450		$	1,393,027
Net income									21,086									66			21,152
Other comprehensive loss, net of tax												(1,215		)							(1,215		)
Cash dividends declared on common shares ($0.01 per share)									(548		)										(548		)
Dividends and discount accretion on preferred shares	1,281								(3,269		)										(1,988		)
Repurchase of preferred shares	(196,000		)																		(196,000		)
Restricted common stock activity, net of tax				1		(169		)	8						172						12
Stock option activity, net of tax						103															103
Repurchase of common shares in connection with employee benefit plans															(288		)				(288		)
Repurchase of common shares held in trust for deferred compensation plan						166									(166		)				—
Stock-based compensation expense						1,265															1,265
Distributions to noncontrolling interest																		(90		)	(90		)
Balance at March 31, 2012	$	—		$	549	$	732,613		$	445,233		$	37,935		$	(3,326	)	$	2,426		$	1,215,430

See Accompanying Notes to Consolidated Financial Statements.

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MB FINANCIAL, INC. & SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in thousands) (Unaudited)

	Three months ended
	March 31,			March 31,
	2012			2011
Cash Flows From Operating Activities:
Net income	$	21,086		$	6,944
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation of premises and equipment	3,736			3,154
Depreciation of leased equipment	10,134			10,001
Impairment charges on branch facilities	—			1,000
Compensation expense for restricted stock awards	882			781
Compensation expense for stock option grants	383			456
Gain on sales of premises and equipment and leased equipment	(186		)	(624		)
Amortization of other intangibles	1,257			1,425
Provision for credit losses	3,100			40,000
Deferred income tax expense (benefit)	7,118			(2,259		)
Amortization of premiums and discounts on investment securities, net	10,315			8,937
Accretion of premiums and discounts on loans, net	(61		)	(123		)
Accretion of FDIC indemnification asset	(475		)	(1,831		)
Net loss on sale of investment securities available for sale	3			3
Proceeds from sale of loans held for sale	19,076			11,201
Origination of loans held for sale	(17,328		)	(11,062		)
Net gain on sale of loans held for sale	(373		)	(139		)
Net gain on sales of other real estate owned	(416		)	(945		)
Fair value adjustments on other real estate owned	4,764			1,314
Net loss on sales of other real estate owned related to FDIC-assisted transactions	2,241			3
Increase in cash surrender value of life insurance	(917		)	(968		)
Increase in other assets, net	(12,783		)	(7,832		)
Decrease in other liabilities, net	(23,551		)	(10,426		)
Net cash provided by operating activities	28,005			49,010
Cash Flows From Investing Activities:
Proceeds from sales of investment securities available for sale	6			—
Proceeds from maturities and calls of investment securities available for sale	134,979			102,598
Purchase of investment securities available for sale	(35,537		)	(231,294		)
Purchase of investment securities held to maturity	(908		)	(102,215		)
Redemption of non-marketable securities - FHLB and FRB stock	15,291			—
Net decrease in loans	146,403			138,148
Purchases of premises and equipment	(5,637		)	(3,511		)
Re-writes (purchases) of leased equipment	1,149			(12,606		)
Proceeds from sales of premises and equipment	—			1,343
Proceeds from sales of leased equipment	630			693
Proceeds from sale of other real estate owned	13,137			16,167
Proceeds from sale of other real estate owned related to FDIC-assisted transactions	5,249			4,504
Principal paid on lease investments	(969		)	(98		)
Net proceeds from FDIC related covered assets	27,528			68,977
Net cash provided by (used in) investing activities	301,321			(17,294		)
Cash Flows From Financing Activities:
Net decrease in deposits	(12,905		)	(260,952		)
Net increase in short-term borrowings	49,738			26,336
Proceeds from long-term borrowings	1,160			867
Principal paid on long-term borrowings	(10,968		)	(10,613		)
Treasury stock transactions, net	(274		)	10
Repurchase of preferred stock	(196,000		)	—
Stock options exercised	103			38
Excess tax deficits from share-based payment arrangements	—			(8		)
Dividends paid on preferred stock	(3,239		)	(2,450		)
Dividends paid on common stock	(542		)	(544		)
Net cash used in financing activities	(172,927		)	(247,316		)

Net increase (decrease) in cash and cash equivalents	$	156,399		$	(215,600	)
Cash and cash equivalents:
Beginning of period	244,565			844,159
End of period	$	400,964		$	628,559

(Continued)

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MB FINANCIAL, INC. & SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)

(Amounts in Thousands)

	Three months ended
	March 31,		March 31,
	2012		2011

Supplemental Disclosures of Cash Flow Information:

Cash payments for:
Interest paid to depositors and other borrowed funds	$	12,701	$	17,009
Income tax payments, net	70		233

Supplemental Schedule of Noncash Investing Activities:

Loans transferred to other real estate owned	$	2,110	$	25,167
Loans transferred to other real estate owned related to FDIC-assisted transactions	8,054		21,282
Loans transferred to repossessed vehicles	256		336
Loans transferred to loans held for sale	—		11,533

See Accompanying Notes to Consolidated Financial Statements.

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MB FINANCIAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2012 and 2011

(Unaudited)

NOTE 1. BASIS OF PRESENTATION

These unaudited consolidated financial statements include the accounts of MB Financial, Inc., a Maryland corporation (the “Company”), and its subsidiaries, including its wholly owned national bank subsidiary, MB Financial Bank, N.A. (“MB Financial Bank”), based in Chicago, Illinois. In the opinion of management, all normal recurring adjustments necessary for a fair presentation of the financial position, results of operations and cash flows for the interim periods have been made. The results of operations for the three months months ended March 31, 2012 are not necessarily indicative of the results to be expected for the entire fiscal year.

These unaudited interim financial statements have been prepared in conformity with U.S. GAAP and industry practice. Certain information in footnote disclosure normally included in financial statements prepared in accordance with U.S. GAAP and industry practice has been condensed or omitted pursuant to rules and regulations of the Securities and Exchange Commission. These financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s December 31, 2011 audited financial statements filed on Form 10-K.

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions which affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements, as well as the reported amounts of income and expenses during the reported periods. Actual results could differ from those estimates.

Certain prior period amounts have been reclassified to conform to current period presentation. These reclassifications did not result in any changes to previously reported net income or stockholders’ equity.

NOTE 2. EARNINGS PER COMMON SHARE

Earnings per common share is computed using the two-class method. Basic earnings per common share is computed by dividing net income available to common stockholders by the weighted-average number of common shares outstanding during the applicable period, excluding outstanding participating securities. Participating securities include non-vested restricted stock awards and restricted stock units, though no actual shares of common stock related to restricted stock units have been issued, to the extent holders of these securities receive non-forfeitable dividends or dividend equivalents at the same rate as holders of the Company’s common stock. Diluted earnings per share is computed using the weighted-average number of shares determined for the basic earnings per common share computation plus the dilutive effect of stock compensation using the treasury stock method.

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The following table presents a reconciliation of the number of shares used in the calculation of basic and diluted earnings per common share (amounts in thousands, except common share data).

	Three Months Ended
	March 31,
	2012			2011
Distributed earnings allocated to common stock	$	548		$	543
Undistributed earnings allocated to common stock	20,537			6,387
Net earnings allocated to common stock	21,085			6,930
Less: preferred stock dividends and discount accretion	3,269			2,601
Net earnings allocated to common stock	17,816			4,329
Net earnings allocated to participating securities	1			14
Net earnings allocated to common stock and participating securities	$	17,817		$	4,343

Weighted average shares outstanding for basic earnings per common share	54,155,856			53,961,176
Dilutive effect of stock compensation	256,060			293,700
Weighted average shares outstanding for diluted earnings per common share	54,411,916			54,254,876

Basic earnings allocated to common stock per common share	$	0.39		$	0.13
Impact of preferred stock dividends on basic earnings per common share	(0.06		)	(0.05		)
Basic earnings per common share	0.33			0.08

Diluted earnings allocated to common stock per common share	0.39			0.13
Impact of preferred stock dividends on diluted earnings per common share	(0.06		)	(0.05		)
Diluted earnings per common share	0.33			0.08

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NOTE 3. INVESTMENT SECURITIES

Carrying amounts and fair values of investment securities are summarized as follows (in thousands):

			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value

March 31, 2012:
Available for Sale
U.S. Government sponsored agencies and enterprises	$	39,503	$	2,567	$	—		$	42,070
States and political subdivisions	547,262		34,920		(462		)	581,720
Residential mortgage-backed securities	1,117,065		24,457		(964		)	1,140,558
Commercial mortgage-backed securities	51,275		1,415		—			52,690
Corporate bonds	5,686		—		—			5,686
Equity securities	10,520		368		(1		)	10,887
	1,771,311		63,727		(1,427		)	1,833,611
Held to Maturity
States and political subdivisions	239,526		9,826		—			249,352
Residential mortgage-backed securities	259,241		7,051		—			266,292
	498,767		16,877		—			515,644

Total	$	2,270,078	$	80,604	$	(1,427	)	$	2,349,255

December 31, 2011:
Available for Sale
U.S. Government sponsored agencies and enterprises	$	39,640	$	2,761	$	—		$	42,401
States and political subdivisions	500,979		34,922		(241		)	535,660
Residential mortgage-backed securities	1,256,696		26,483		(1,373		)	1,281,806
Commercial mortgage-backed securities	51,324		1,361		—			52,685
Corporate bonds	5,899		—		—			5,899
Equity securities	10,457		389		—			10,846
	1,864,995		65,916		(1,614		)	1,929,297
Held to Maturity
States and political subdivisions	240,183		7,489		(8		)	247,664
Residential mortgage-backed securities	259,100		5,032		(774		)	263,358
	499,283		12,521		(782		)	511,022

Total	$	2,364,278	$	78,437	$	(2,396	)	$	2,440,319

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Unrealized losses on investment securities and the fair value of the related securities at March 31, 2012 are as follows (in thousands):

	Less Than 12 Months					12 Months or More					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
	Value		Losses			Value		Losses			Value		Losses
Available for Sale
States and political subdivisions	$	28,517	$	(254	)	$	659	$	(208	)	$	29,176	$	(462	)
Residential mortgage-backed securities	101,491		(963		)	284		(1		)	101,775		(964		)
Equity securities	39		(1		)	—		—			39		(1		)
Total	$	130,047	$	(1,218	)	$	943	$	(209	)	$	130,990	$	(1,427	)

The total number of security positions in the investment portfolio in an unrealized loss position at March 31, 2012 was 46. Declines in the fair value of available for sale securities below their cost that are deemed to be other than temporary are reflected in earnings as realized losses to the extent the impairment is related to credit losses. The amount of the impairment related to other factors is recognized in other comprehensive income. In estimating other-than-temporary impairment losses, management considers, among other things, (i) the length of time and the extent to which the fair value has been less than cost, (ii) the financial condition and near-term prospects of the issuer, and (iii) whether or not the Company is more likely than not to sell the security before recovery of its cost basis.

As of March 31, 2012, management does not have the intent to sell any of the securities in the table above and believes that it is more likely than not that the Company will not have to sell any such securities before a recovery of cost. The fair value is expected to recover as the bonds approach their maturity date or repricing date or if market yields for such investments decline. Management does not believe any of the securities are impaired due to reasons of credit quality. Accordingly, as of March 31, 2012, management believes the impairments detailed in the table above are temporary and no impairment loss has been realized in the Company’s consolidated income statement.

Realized net losses on the sale of investment securities available for sale are summarized as follows (in thousands):

	Three Months Ended
	March 31,
	2012			2011
Realized gains	$	—		$	—
Realized losses	(3		)	(3		)
Net losses	$	(3	)	$	(3	)

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The amortized cost and fair value of investment securities as of March 31, 2012 by contractual maturity are shown below. Maturities may differ from contractual maturities in mortgage-backed securities because the mortgages underlying the securities may be called or repaid without any penalties. Therefore, mortgage-backed securities are not included in the maturity categories in the following maturity summary.

	Amortized		Fair
(In thousands)	Cost		Value

Available for sale:
Due in one year or less	$	15,050	$	15,286
Due after one year through five years	200,465		216,167
Due after five years through ten years	142,154		156,360
Due after ten years	234,782		241,663
Equity securities	10,520		10,887
Residential and commercial mortgage-backed securities	1,168,340		1,193,248
	1,771,311		1,833,611
Held to maturity:
Due after five years through ten years	10,422		10,811
Due after ten years	229,104		238,541
Residential mortgage-backed securities	259,241		266,292
	498,767		515,644
Total	$	2,270,078	$	2,349,255

Investment securities available for sale with carrying amounts of $962.8 million and $924.9 million at March 31, 2012 and December 31, 2011, respectively, were pledged as collateral on public deposits and for other purposes as required or permitted by law.

NOTE 4. LOANS

Loans consist of the following at (in thousands):

	March 31,		December 31,
	2012		2011

Commercial loans	$	1,040,340	$	1,113,123
Commercial loans collateralized by assignment of lease payments	1,209,942		1,208,575
Commercial real estate	1,877,380		1,853,788
Residential real estate	309,644		316,787
Construction real estate	128,040		183,789
Indirect vehicle	186,736		187,481
Home equity	327,450		336,043
Consumer loans	89,705		88,865
Gross loans, excluding covered loans	5,169,237		5,288,451
Covered loans	620,528		662,544
Total loans(1)	$	5,789,765	$	5,950,995

(1) Gross loan balances at March 31, 2012 and December 31, 2011 were net of unearned income, including net deferred loan fees of $934 thousand and $1.0 million, respectively.

Loans are made to individuals as well as commercial and tax exempt entities. Specific loan terms vary as to interest rate, repayment, and collateral requirements based on the type of loan requested and the credit worthiness of the prospective borrower. Credit risk tends to be geographically concentrated in that a majority of the loan customers are located in the markets serviced by MB Financial Bank.

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The Company’s extension of credit is governed by its Credit Risk Policy which was established to control the quality of the Company’s loans. These policies and procedures are reviewed and approved by the Board of Directors on a regular basis.

Commercial and Industrial Loans. Commercial credit is extended primarily to middle market customers. Such credits typically comprise working capital loans, loans for physical asset expansion, asset acquisition loans and other business loans. Loans to closely held businesses will generally be guaranteed in full or for a meaningful amount by the businesses’ major owners. Commercial loans are made based primarily on the historical and projected cash flow of the borrower and secondarily on the underlying collateral provided by the borrower. The cash flows of borrowers, however, may not behave as forecasted and collateral securing loans may fluctuate in value due to economic or individual performance factors. Minimum standards and underwriting guidelines have been established for all commercial loan types.

Lease Loans. The Company makes lease loans to both investment grade and non-investment grade companies. Investment grade lessees are companies who are rated in one of the four highest categories by Moody’s Investor Services or Standard & Poor’s Rating Services or, in the event the related lessee has not received any such rating, where the related lessee would be viewed under the underwriting polices of the company as an investment grade company. Whether or not companies fall into this category, each lease loan is considered on its individual merit based on financial information available at the time of underwriting.

Commercial Real Estate Loans. The Company’s goal is to create and maintain a high quality portfolio of commercial real estate loans. Commercial real estate loans are subject to underwriting standards and processes similar to commercial and industrial loans. These loans are viewed primarily as cash flow loans and the repayment of these loans is largely dependent on the successful operation of the property. Loan performance may be adversely affected by factors impacting the general economy or conditions specific to the real estate market such as geographic location and/or property type.

Construction Real Estate Loans. The Company defines construction loans as loans where the loan proceeds are controlled by the Company and used exclusively for the improvement of real estate in which the Company holds a mortgage. Due to the inherent risk in this type of loan, they are subject to other industry specific policy guidelines outlined in the Company’s Credit Risk Policy and are monitored closely.

Consumer Loans. The Company originates direct and indirect consumer loans including principally residential real estate, home equity lines and loans, credit cards, and indirect motorcycle loans using a matrix-based credit analysis as part of the underwriting process. Each loan type has a separate specified matrix which consists of several factors including debt to income, type of collateral and loan to collateral value, credit history and Company relationship with the borrower. Indirect loan and credit card underwriting use risk-based pricing in the underwriting process.

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The following table presents the contractual aging of the recorded investment in past due loans by class of loans as of March 31, 2012 and December 31, 2011 (in thousands):

			30-59 Days		60-89 Days		Loans past due		Total
	Current		Past Due		Past Due		90 days or more		Past Due		Total

March 31, 2012:
Commercial	$	1,031,865	$	4,159	$	281	$	4,035	$	8,475	$	1,040,340
Commercial collateralized by assignment of lease payments	1,196,112		12,380		1,398		52		13,830		1,209,942
Commercial real estate
Healthcare	181,375		—		—		5,431		5,431		186,806
Industrial	469,884		780		—		7,078		7,858		477,742
Multifamily	378,482		1,446		1,668		4,665		7,779		386,261
Retail	409,773		4,137		1,769		3,773		9,679		419,452
Office	181,407		438		—		2,083		2,521		183,928
Other	218,337		677		3,548		629		4,854		223,191
Residential real estate	304,430		365		152		4,697		5,214		309,644
Construction real estate	123,822		1,158		1,329		1,731		4,218		128,040
Indirect vehicle	185,448		702		249		337		1,288		186,736
Home equity	315,695		4,486		2,018		5,251		11,755		327,450
Consumer	89,691		7		—		7		14		89,705
Gross loans, excluding covered loans (1)	5,086,321		30,735		12,412		39,769		82,916		5,169,237
Covered loans	402,249		12,029		17,900		188,350		218,279		620,528
Total loans	$	5,488,570	$	42,764	$	30,312	$	228,119	$	301,195	$	5,789,765

MB Financial (MBFI)

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