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MB Financial 10-Q 2013

Documents found in this filing:

  1. 10-Q
  2. Ex-31.1
  3. Ex-31.2
  4. Ex-32
  5. Ex-32
06.30.13 10Q





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

 
FORM 10-Q
 
(Mark One)
 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended June 30, 2013
 
OR
 
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
 
36-4460265
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. 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
 

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
(Do not check if a smaller reporting company)
 
Smaller reporting company o
 
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 issued and outstanding 54,813,659 shares of the Registrant’s common stock as of July 31, 2013.
 


1





MB FINANCIAL, INC. AND SUBSIDIARIES
 
FORM 10-Q
 
June 30, 2013
 
INDEX
 

 
 
 
Page
PART I.
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
Item 3.
 
Item 4.
 
 
 
 
 
PART II.
 
 
Item 1.
 
Item 1A.
 
Item 2.
 
Item 6.
 
 
 


2



PART I.        FINANCIAL INFORMATION
Item 1.
  Financial Statements

MB FINANCIAL, INC. & SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except common share data)
 
 
(Unaudited)
 
 
 
 
June 30, 2013
 
December 31, 2012
ASSETS
 
 

 
 

Cash and due from banks
 
$
152,302

 
$
176,010

Interest earning deposits with banks
 
280,618

 
111,533

Total cash and cash equivalents
 
432,920

 
287,543

Federal funds sold
 
7,500

 

Investment securities:
 
 

 
 

Securities available for sale, at fair value
 
1,645,672

 
1,868,171

Securities held to maturity, at amortized cost ($554,579 and $535,681 fair value at June 30, 2013 and December 31, 2012, respectively)
 
536,434

 
493,421

Non-marketable securities - FHLB and FRB stock
 
50,870

 
55,385

Total investment securities
 
2,232,976

 
2,416,977

Loans held for sale
 
2,528

 
7,492

Loans:
 
 

 
 

Total loans, excluding covered loans
 
5,359,631

 
5,317,080

Covered loans
 
308,556

 
449,850

Total loans
 
5,668,187

 
5,766,930

Less: Allowance for loan loss
 
123,685

 
124,204

Net loans
 
5,544,502

 
5,642,726

Lease investment, net
 
113,958

 
129,823

Premises and equipment, net
 
219,783

 
221,533

Cash surrender value of life insurance
 
130,565

 
128,879

Goodwill
 
423,369

 
423,369

Other intangibles
 
26,430

 
29,512

Other real estate owned, net
 
32,993

 
36,977

Other real estate owned related to FDIC-assisted transactions
 
19,014

 
22,478

FDIC indemnification asset
 
16,337

 
39,345

Other assets
 
166,784

 
185,151

Total assets
 
$
9,369,659

 
$
9,571,805

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 

 
 

LIABILITIES
 
 

 
 

Deposits:
 
 

 
 

Noninterest bearing
 
$
2,230,384

 
$
2,164,547

Interest bearing
 
5,215,012

 
5,378,150

Total deposits
 
7,445,396

 
7,542,697

Short-term borrowings
 
230,547

 
220,602

Long-term borrowings
 
62,786

 
116,050

Junior subordinated notes issued to capital trusts
 
152,065

 
152,065

Accrued expenses and other liabilities
 
182,784

 
264,621

Total liabilities
 
8,073,578

 
8,296,035

STOCKHOLDERS’ EQUITY
 
 

 
 

Common stock, ($0.01 par value; authorized 70,000,000 shares at June 30, 2013 and December 31, 2012; issued 55,022,609 shares at June 30, 2013 and 54,955,284 shares at December 31, 2012)
 
550

 
550

Additional paid-in capital
 
736,281

 
732,771

Retained earnings
 
547,116

 
507,933

Accumulated other comprehensive income
 
14,231

 
36,326

Less: 182,831 and 170,567 shares of treasury stock, at cost, at June 30, 2013 and December 31, 2012, respectively
 
(3,558
)
 
(3,293
)
Controlling interest stockholders’ equity
 
1,294,620

 
1,274,287

Noncontrolling interest
 
1,461

 
1,483

Total stockholders’ equity
 
1,296,081

 
1,275,770

Total liabilities and stockholders’ equity
 
$
9,369,659

 
$
9,571,805


     See Accompanying Notes to Consolidated Financial Statements.

3



MB FINANCIAL, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands, except share and per share data) (Unaudited)
 
 
Three Months Ended
 
Six Months Ended
 
 
June 30,
 
June 30,
 
 
2013
 
2012
 
2013
 
2012
Interest income:
 
 

 
 

 
 
 
 
Loans
 
$
59,581

 
$
69,250

 
$
120,374

 
$
140,898

Investment securities:
 
 

 
 

 
 

 
 

Taxable
 
6,280

 
8,882

 
12,419

 
19,766

Nontaxable
 
8,163

 
7,303

 
16,224

 
14,042

Federal funds sold
 
2

 

 
2

 

Other interest earning accounts
 
92

 
158

 
227

 
327

Total interest income
 
74,118

 
85,593

 
149,246

 
175,033

Interest expense:
 
 

 
 

 
 
 
 
Deposits
 
5,132

 
8,058

 
10,841

 
16,818

Short-term borrowings
 
116

 
362

 
283

 
568

Long-term borrowings and junior subordinated notes
 
1,390

 
3,069

 
2,957

 
6,450

Total interest expense
 
6,638

 
11,489

 
14,081

 
23,836

Net interest income
 
67,480

 
74,104

 
135,165

 
151,197

Provision for credit losses
 
500

 

 
500

 
3,100

Net interest income after provision for credit losses
 
66,980

 
74,104

 
134,665

 
148,097

Non-interest income:
 
 

 
 

 
 
 
 
Capital markets and international banking fees
 
939

 
788

 
1,747

 
1,300

Commercial deposit and treasury management fees
 
6,029

 
5,784

 
11,995

 
11,682

Lease financing, net
 
15,102

 
7,334

 
31,365

 
14,292

Trust and asset management fees
 
4,874

 
4,535

 
9,368

 
8,939

Card fees
 
2,735

 
2,429

 
5,430

 
4,473

Loan service fees
 
1,911

 
1,267

 
2,922

 
2,334

Consumer and other deposit service fees
 
3,593

 
3,534

 
6,839

 
6,987

Brokerage fees
 
1,234

 
1,264

 
2,391

 
2,519

Net gain (loss) on investment securities
 
14

 
(34
)
 
13

 
(37
)
Increase in cash surrender value of life insurance
 
842

 
870

 
1,686

 
1,787

Net loss on sale of assets
 

 
(8
)
 

 
(25
)
Accretion of FDIC indemnification asset
 
100

 
222

 
243

 
697

Net gain (loss) recognized on other real estate owned
 
2,015

 
(5,441
)
 
1,685

 
(12,030
)
Net gain on sale of loans
 
506

 
554

 
1,145

 
928

Other operating income
 
1,060

 
809

 
2,498

 
2,915

Total non-interest income
 
40,954

 
23,907

 
79,327

 
46,761

Non-interest expenses:
 
 

 
 

 
 
 
 
Salaries and employee benefits
 
43,909

 
40,146

 
87,423

 
80,575

Occupancy and equipment expense
 
9,408

 
9,188

 
18,812

 
18,758

Computer services and telecommunication expense
 
4,617

 
3,909

 
8,504

 
7,562

Advertising and marketing expense
 
2,167

 
1,839

 
4,270

 
3,912

Professional and legal expense
 
1,353

 
1,503

 
2,648

 
2,916

Other intangibles amortization expense
 
1,538

 
1,251

 
3,082

 
2,508

Other real estate expense, net
 
193

 
424

 
332

 
1,667

Other operating expenses
 
9,083

 
8,574

 
18,296

 
16,267

Total non-interest expenses
 
72,268

 
66,834

 
143,367

 
134,165

Income before income taxes
 
35,666

 
31,177

 
70,625

 
60,693

Income tax expense
 
10,373

 
9,034

 
20,426

 
17,464

Net income
 
$
25,293

 
$
22,143

 
$
50,199

 
$
43,229

Dividends and discount accretion on preferred shares
 

 

 

 
3,269

Net income available to common stockholders
 
$
25,293

 
$
22,143

 
$
50,199

 
$
39,960


     See Accompanying Notes to Consolidated Financial Statements.


4




MB FINANCIAL, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS - (Continued)
(Amounts in thousands, except share and per share data) (Unaudited)

 
 
 
Three Months Ended
 
Six Months Ended
 
 
June 30,
 
June 30,
 
 
2013
 
2012
 
2013
 
2012
Common share data:
 
 

 
 

 
 
 
 
Basic earnings per common share
 
$
0.46

 
$
0.41

 
$
0.92

 
$
0.74

Diluted earnings per common share
 
0.46

 
0.41

 
0.92

 
0.73

Weighted average common shares outstanding for basic earnings per common share
 
54,436,043

 
54,174,717

 
54,423,992

 
54,165,286

Diluted weighted average common shares outstanding for diluted earnings per common share
 
54,868,075

 
54,448,709

 
54,802,427

 
54,431,491

 
See Accompanying Notes to Consolidated Financial Statements.



5




MB FINANCIAL, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Amounts in thousands) (Unaudited)

 
 
 
Three Months Ended
 
Six Months Ended
 
 
June 30,
 
June 30,
 
 
2013
 
2012
 
2013
 
2012
 
 
 
 
 
 
 
 
 
Net income
 
$
25,293

 
$
22,143

 
$
50,199

 
$
43,229

Unrealized holding (losses) gains on investment securities, net of tax
 
(20,688
)
 
1,080

 
(22,087
)
 
(137
)
Reclassification adjustments for (gains) losses included in net income, net of tax
 
(9
)
 
20

 
(8
)
 
22

Other comprehensive (loss) income, net of tax
 
(20,697
)
 
1,100

 
(22,095
)
 
(115
)
Comprehensive income
 
$
4,596

 
$
23,243

 
$
28,104

 
$
43,114




See Accompanying Notes to Consolidated Financial Statements.



6





MB FINANCIAL, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
Six Months Ended June 30, 2013 and 2012
(Amounts in thousands, except per share data) (Unaudited)
 
 
Preferred
Stock
Common
Stock
Additional
Paid-in
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Income (Loss),
Net of Tax
Treasury
Stock
Noncontrolling
Interest
Total Stock-
holders’
Equity
Balance at December 31, 2011
$
194,719

$
548

$
731,248

$
427,956

$
39,150

$
(3,044
)
$
2,450

$
1,393,027

Net income



43,229



141

43,370

Other comprehensive loss, net of tax




(115
)


(115
)
Cash dividends declared on common shares ($0.02 per share)



(1,096
)



(1,096
)
Dividends and discount accretion on preferred shares
1,281



(3,269
)



(1,988
)
Repurchase of preferred shares
(196,000
)

(1,518
)




(197,518
)
Restricted common stock activity, net of tax

1

(175
)
8


171


5

Stock option activity, net of tax


(62
)
(16
)

148


70

Repurchase of common shares in connection with
 
 
 
 
 
 
 
 
  employee benefit plans and held in trust for
 
 
 
 
 
 
 
 
  deferred compensation plan


303



(628
)

(325
)
Stock-based compensation expense


2,501





2,501

Distributions to noncontrolling interest






(180
)
(180
)
Balance at June 30, 2012
$

$
549

$
732,297

$
466,812

$
39,035

$
(3,353
)
$
2,411

$
1,237,751

 
 
 
 
 
 
 
 
 
Balance at December 31, 2012
$

$
550

$
732,771

$
507,933

$
36,326

$
(3,293
)
$
1,483

$
1,275,770

Net income



50,199



91

50,290

Other comprehensive loss, net of tax




(22,095
)


(22,095
)
Cash dividends declared on common shares ($0.20 per share)



(11,016
)



(11,016
)
Restricted common stock activity, net of tax


28





28

Stock option activity, net of tax


780



464


1,244

Repurchase of common shares in connection with
 
 
 
 
 
 
 
 
  employee benefit plans and held in trust for
 
 
 
 
 
 
 
 
  deferred compensation plan


230



(729
)

(499
)
Stock-based compensation expense


2,472





2,472

Distributions to noncontrolling interest






(113
)
(113
)
Balance at June 30, 2013
$

$
550

$
736,281

$
547,116

$
14,231

$
(3,558
)
$
1,461

$
1,296,081













See Accompanying Notes to Consolidated Financial Statements.


7




MB FINANCIAL, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in Thousands) (Unaudited)
 
 
 
Six Months Ended
 
 
June 30,
 
 
2013
 
2012
Cash Flows From Operating Activities
 
 

 
 

Net income
 
$
50,199

 
$
43,229

Adjustments to reconcile net income to net cash provided by operating activities:
 
 

 
 

Depreciation of premises and equipment
 
8,539

 
7,538

Depreciation of leased equipment
 
16,477

 
19,549

Compensation expense for restricted stock awards
 
1,935

 
1,756

Compensation expense for stock option grants
 
537

 
745

Loss (gain) on sales of premises and equipment and leased equipment
 
238

 
(1,269
)
Amortization of other intangibles
 
3,082

 
2,508

Provision for credit losses
 
500

 
3,100

Deferred income tax expense
 
3,613

 
13,341

Amortization of premiums and discounts on investment securities, net
 
23,801

 
21,007

Accretion of premiums and discounts on loans, net
 
(2,977
)
 
(9,528
)
Accretion of FDIC indemnification asset
 
(243
)
 
(697
)
Net (gain) loss on sale of investment securities available for sale
 
(13
)
 
37

Proceeds from sale of loans held for sale
 
55,850

 
44,686

Origination of loans held for sale
 
(49,742
)
 
(41,281
)
Net gain on sale of loans held for sale
 
(1,145
)
 
(928
)
Net gain on sales of other real estate owned
 
(990
)
 
(767
)
Fair value adjustments on other real estate owned
 
(821
)
 
9,271

Net loss on sales of other real estate owned related to FDIC-assisted transactions
 
126

 
3,526

Increase in cash surrender value of life insurance
 
(1,686
)
 
(1,787
)
Decrease (increase) in other assets, net
 
29,549

 
(40,986
)
Decrease in other liabilities, net
 
(76,012
)
 
(6,819
)
Net cash provided by operating activities
 
60,817

 
66,231

Cash Flows From Investing Activities
 
 

 
 

Increase in federal funds sold
 
(7,500
)
 

Proceeds from sales of investment securities available for sale
 
949

 
4,637

Proceeds from maturities and calls of investment securities available for sale
 
309,299

 
284,934

Purchase of investment securities available for sale
 
(141,983
)
 
(102,097
)
Proceeds from maturities and calls of investment securities held to maturity
 
1,189

 
83

Purchase of investment securities held to maturity
 
(45,545
)
 
(1,484
)
Redemption of non-marketable securities - FHLB and FRB stock
 
4,515

 
19,394

Net decrease in loans
 
98,155

 
225,119

Purchases of premises and equipment
 
(7,896
)
 
(11,818
)
Purchases of leased equipment
 
(10,170
)
 
(9,838
)
Proceeds from sales of leased equipment
 
3,867

 
7,955

Capital improvements on other real estate owned
 
(8
)
 
(1,326
)
Proceeds from sale of other real estate owned
 
10,017

 
24,245

Proceeds from sale of other real estate owned related to FDIC-assisted transactions
 
7,074

 
11,163

Principal paid on lease investments
 
(191
)
 
(1,483
)
Net proceeds from FDIC related covered assets
 
13,419

 
58,758

Net cash provided by investing activities
 
235,191

 
508,242

Cash Flows From Financing Activities
 
 

 
 

Net decrease in deposits
 
(97,301
)
 
(176,898
)
Net increase in short-term borrowings
 
9,945

 
41,775

Proceeds from long-term borrowings
 
3,265

 
1,735

Principal paid on long-term borrowings
 
(56,529
)
 
(46,899
)
Repurchase of preferred stock
 

 
(197,518
)
Treasury stock transactions, net
 
(35
)
 
(300
)
Stock options exercised
 
1,013

 
202

Excess tax benefits from share-based payment arrangements
 
(98
)
 

Dividends paid on preferred stock
 

 
(3,239
)
Dividends paid on common stock
 
(10,891
)
 
(1,084
)
Net cash used in financing activities
 
(150,631
)
 
(382,226
)
Net increase in cash and cash equivalents
 
$
145,377

 
$
192,247

Cash and cash equivalents:
 
 

 
 

Beginning of period
 
287,543

 
244,565

End of period
 
$
432,920

 
$
436,812



8




MB FINANCIAL, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - (Continued)
(Amounts in Thousands) (Unaudited)

 
 
 
Six Months Ended
 
 
June 30,
 
 
2013
 
2012
Supplemental Disclosures of Cash Flow Information:
 
 

 
 

Cash payments for:
 
 

 
 

Interest paid to depositors and other borrowed funds
 
$
14,524

 
$
24,468

Net income tax payments, net
 
35,024

 
2,401

Supplemental Schedule of Noncash Investing Activities:
 
 

 
 

Investment securities available for sale purchased not settled
 
$
3,026

 
$

Investment securities held to maturity purchased not settled
 
1,606

 

Loans transferred to other real estate owned
 
4,214

 
2,661

Loans transferred to other real estate owned related to FDIC-assisted transactions
 
4,797

 
10,387

Loans transferred to repossessed vehicles
 
313

 
443

Operating leases rewritten as direct finance leases included as loans
 
6,777

 
9,479

 
See Accompanying Notes to Consolidated Financial Statements.


9





MB FINANCIAL, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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 and six months ended June 30, 2013 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. generally accepted accounting principles (“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, 2012 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.
New Authoritative Accounting Guidance

ASC Topic 805 “Business Combinations.” New authoritative accounting guidance under ASC Topic 805, “Business Combinations” amended prior guidance on the subsequent accounting for an indemnification asset recognized at the acquisition date as a result of a government-assisted (Federal Deposit Insurance Corporation) acquisition of a financial institution that includes a loss-sharing agreement. The new authoritative guidance requires that at each subsequent reporting date, an acquirer measure an indemnification asset on the same basis as the indemnified liability or asset, subject to any contractual limitations on its amount, and, for an indemnification asset that is not subsequently measured at fair value, management's assessment of the collectability of the indemnification asset. Any amortization of changes in value should be limited to the contractual term of the indemnification agreement (that is, the lesser of the term of the indemnification agreement and the remaining life of the indemnified assets). The Company adopted this new authoritative guidance on January 1, 2013, and it did not have an impact on the Company's statements of operations and financial condition.

ASC Topic 210 “Disclosures about Offsetting Assets and Liabilities.” New authoritative accounting guidance under ASC Topic 210, “Disclosures about Offsetting Assets and Liabilities” amended prior guidance to require an entity to disclose both gross and net information about both instruments and transactions eligible for offset in the statement of financial position and instruments and transactions subject to an agreement similar to a master netting arrangement. The instruments and transactions would include derivatives, sale and repurchase agreements and reverse sale and repurchase agreements, and securities borrowing and securities lending arrangements. This new authoritative guidance was further amended to clarify the scope of offsetting disclosures. The Company adopted the new authoritative guidance on January 1, 2013, and it did not have an impact on the Company's statements of operations and financial condition. See disclosures in Note 15.

ASC Topic 220 “Comprehensive Income.” New authoritative accounting guidance under ASC Topic 220, “Comprehensive Income” amended prior guidance to improve the reporting of reclassifications out of accumulated other comprehensive income by requiring an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component. In addition, an entity is required to present, either on the face of the statement or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income if the amount reclassified is required under U.S. GAAP. The Company adopted this new authoritative guidance on January 1, 2013, and it did not have an impact on the Company's statements of operations and financial condition.

ASC Topic 815 “Derivatives and Hedging.” New authoritative accounting guidance under ASC Topic 815, “Derivatives and Hedging” amended prior guidance to permit the Fed Funds Effective Swap Rate (OIS) to be used as a U.S. benchmark interest

10




rate for hedge accounting purposes, in addition to U.S. government treasury obligation rates and London Interbank Offered Rate swap rate. The amendments also remove the restriction on using different benchmark rates for similar hedges. The new authoritative guidance will be effective prospectively for new and redesignated hedging relationships entered into on or after July 17, 2013 and is not expected to have an impact on the Company's statements of operations and financial condition.

ASC Topic 710 “Income Taxes.” New authoritative accounting guidance under ASC Topic 710, “Income Taxes” amended prior guidance to include explicit guidance on the financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. An unrecognized tax benefit, or a portion of an unrecognized tax benefit, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, except as follows. To the extent a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction to settle any additional income taxes that would result from the disallowance of a tax position or the tax law of the applicable jurisdiction does not require the entity to use, and the entity does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. The new authoritative guidance will be for reporting periods after January 1, 2014 and is not expected to have an impact on the Company's statements of operations and financial condition.
  


11




Note 3.
  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 are issued until the settlement of such units, 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 common 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.

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
June 30,
 
Six Months Ended
June 30,
 
 
2013
 
2012
 
2013
 
2012
Distributed earnings allocated to common stock
 
$
5,509

 
$
548

 
$
11,016

 
$
1,096

Undistributed earnings
 
19,784

 
21,595

 
39,183

 
42,133

Net income
 
25,293

 
22,143

 
50,199

 
43,229

Less: preferred stock dividends and discount accretion
 

 

 

 
3,269

Net income available to common stockholders
 
25,293

 
22,143

 
50,199

 
39,960

Less: earnings allocated to participating securities
 

 
1

 
1

 
2

Earnings allocated to common stockholders
 
$
25,293

 
$
22,142

 
$
50,198

 
$
39,958

Weighted average shares outstanding for basic earnings per common share
 
54,436,043

 
54,174,717

 
54,423,992

 
54,165,286

Dilutive effect of equity awards
 
432,032

 
273,992

 
378,435

 
266,205

Weighted average shares outstanding for diluted earnings per common share
 
54,868,075

 
54,448,709

 
54,802,427

 
54,431,491

Basic earnings per common share
 
$
0.46

 
$
0.41

 
$
0.92

 
$
0.74

Diluted earnings per common share
 
0.46

 
0.41

 
0.92

 
0.73




 

12




Note 4.
   Business Combinations
 
The following business combination was accounted for under the purchase method of accounting.  Accordingly, the results of operations of the acquired company have been included in the Company’s results of operations since the date of acquisition.  Under this method of accounting, assets and liabilities acquired are recorded at their estimated fair values, net of applicable income tax effects.  The excess cost over fair value of net assets acquired is recorded as goodwill.  In the event that the fair value of net assets acquired exceeds the cost, the Company will record a gain on the acquisition.
 
On December 28, 2012, MB Financial Bank acquired a 100% equity interest in Celtic Leasing Corp. (“Celtic”), a privately held, mid-ticket equipment leasing company. Celtic specializes in solutions for the health care, legal, technology, and manufacturing industries. MB Financial Bank estimated contingent consideration related to the transaction which may be paid out at future dates. This consideration is based on the performance of lease residual values which will be determined in future years over an earn-out period. As the consideration paid for Celtic exceeded the net assets acquired, goodwill was recorded on the acquisition. Goodwill recorded in the transaction is not tax deductible. The purchase accounting entries are preliminary for lease loans, goodwill and other intangibles, as MB Financial Bank continues to analyze the portfolios and the underlying risks and collateral values of the assets. After the purchase accounting is finalized, the impact of any future changes to the amount of contingent consideration will be reflected in the statement of operations.
 
Estimated fair values of the assets acquired and liabilities assumed in the Celtic transaction, as of the closing date of the transaction were as follows (in thousands):
 
Assets Acquired and Liabilities Assumed
(Dollar Amounts in Thousands)

 
 
Celtic
 
 
December 28,
 
 
2012
ASSETS
 
 
Cash and cash equivalents
 
$
31,647

Investment securities available for sale
 
635

Loans and leases
 
32,933

Premises and equipment
 
81

Goodwill
 
36,300

Other intangibles
 
5,028

Other assets
 
27,323

Total assets
 
$
133,947

LIABILITIES
 
 
Accrued expenses and other liabilities
 
$
75,290

Total liabilities
 
$
75,290

Cash paid on acquisition
 
$
58,657

Net gain recorded on acquisition
 
$

 



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Note 5.
          Investment Securities
 
Carrying amounts and fair values of investment securities were as follows (in thousands):
 
 
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
June 30, 2013
 
 

 
 

 
 

 
 

Available for Sale
 
 

 
 

 
 

 
 

U.S. Government sponsored agencies and enterprises
 
$
32,050

 
$
1,885

 
$

 
$
33,935

States and political subdivisions
 
669,791

 
23,807

 
(8,888
)
 
684,710

Residential mortgage-backed securities
 
639,681

 
10,575

 
(2,398
)
 
647,858

Commercial mortgage-backed securities
 
51,000

 
2,343

 

 
53,343

Corporate bonds
 
219,362

 
153

 
(4,259
)
 
215,256

Equity securities
 
10,560

 
14

 
(4
)
 
10,570

 
 
1,622,444

 
38,777

 
(15,549
)
 
1,645,672

Held to Maturity
 
 

 
 

 
 

 
 

States and political subdivisions
 
282,655

 
5,367

 
(2,118
)
 
285,904

Residential mortgage-backed securities
 
253,779

 
14,896

 

 
268,675

 
 
536,434

 
20,263

 
(2,118
)
 
554,579

Total
 
$
2,158,878

 
$
59,040

 
$
(17,667
)
 
$
2,200,251

December 31, 2012
 
 

 
 

 
 

 
 

Available for Sale
 
 

 
 

 
 

 
 

U.S. Government sponsored agencies and enterprises
 
$
38,605

 
$
2,710

 
$

 
$
41,315

States and political subdivisions
 
679,991

 
45,571

 
(543
)
 
725,019

Residential mortgage-backed securities
 
930,413

 
14,038

 
(5,249
)
 
939,202

Commercial mortgage-backed securities
 
51,100

 
3,026

 

 
54,126

Corporate bonds
 
97,014

 
213

 
(553
)
 
96,674

Equity securities
 
11,398

 
447

 
(10
)
 
11,835

 
 
$
1,808,521

 
$
66,005

 
$
(6,355
)
 
$
1,868,171

Held to Maturity
 
 
 
 
 
 
 
 
States and political subdivisions
 
237,563

 
21,039

 

 
258,602

Residential mortgage-backed securities
 
255,858

 
21,221

 

 
277,079

 
 
493,421

 
42,260

 

 
535,681

Total
 
$
2,301,942

 
$
108,265

 
$
(6,355
)
 
$
2,403,852

 
 
 
 
 
 
 
 
 
 
We do not have any meaningful direct or indirect holdings of subprime residential mortgage loans, home equity lines of credit, or any Fannie Mae or Freddie Mac preferred or common equity securities in our investment portfolio. 
 
The Company has no direct exposure to the State of Illinois, but approximately 27% of the state and political subdivisions portfolio consists of securities issued by municipalities located in Illinois as of June 30, 2013. Approximately 89% of such securities were general obligation issues as of June 30, 2013.


14




Unrealized losses on investment securities and the fair value of the related securities at June 30, 2013 were 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
 
$
211,864

 
$
(8,888
)
 
$

 
$

 
$
211,864

 
$
(8,888
)
Residential mortgage-backed securities
 
175,399

 
(2,385
)
 
8,885

 
(13
)
 
184,284

 
(2,398
)
Corporate bonds
 
181,399

 
(4,259
)
 

 

 
181,399

 
(4,259
)
Equity securities
 
379

 
(4
)
 

 

 
379

 
(4
)
 
 
569,041

 
(15,536
)
 
8,885

 
(13
)
 
577,926

 
(15,549
)
Held to maturity