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8-K

 
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MB Financial 10-Q 2016

Documents found in this filing:

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





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 March 31, 2016
 
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 001-36599
 
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.
 
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 Exchange Act).  Yes o No x
 
There were issued and outstanding 73,672,795 shares of the Registrant’s common stock as of May 5, 2016.
 








MB FINANCIAL, INC.
 
FORM 10-Q
 
March 31, 2016
 
INDEX
 



i



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, 2016
 
December 31, 2015
ASSETS
 
 

 
 

Cash and due from banks
 
$
271,732

 
$
307,869

Interest earning deposits with banks
 
113,785

 
73,572

Total cash and cash equivalents
 
385,517

 
381,441

Investment securities:
 
 

 
 

Securities available for sale, at fair value
 
1,532,844

 
1,585,023

Securities held to maturity, at amortized cost ($1,246,656 fair value at March 31, 2016 and $1,274,767 at December 31, 2015)
 
1,191,910

 
1,230,810

Non-marketable securities - FHLB and FRB stock
 
121,750

 
114,233

Total investment securities
 
2,846,504

 
2,930,066

Loans held for sale
 
632,196

 
744,727

Loans:
 
 

 
 

Total loans, excluding purchased credit impaired loans
 
9,820,903

 
9,652,592

Purchased credit impaired loans
 
140,445

 
141,406

Total loans
 
9,961,348

 
9,793,998

Less: Allowance for loan and lease losses
 
134,493

 
128,140

Net loans
 
9,826,855

 
9,665,858

Lease investments, net
 
216,046

 
211,687

Premises and equipment, net
 
238,578

 
236,013

Cash surrender value of life insurance
 
137,807

 
136,953

Goodwill
 
725,068

 
725,070

Other intangibles
 
43,186

 
44,812

Mortgage servicing rights, at fair value
 
145,800

 
168,162

Other real estate owned, net
 
28,309

 
31,553

Other real estate owned related to FDIC-assisted transactions
 
10,397

 
10,717

Other assets
 
339,390

 
297,948

Total assets
 
$
15,575,653

 
$
15,585,007

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 

 
 

LIABILITIES
 
 

 
 

Deposits:
 
 

 
 

Non-interest bearing
 
$
4,667,410

 
$
4,627,184

Interest bearing
 
6,866,416

 
6,878,031

Total deposits
 
11,533,826

 
11,505,215

Short-term borrowings
 
884,101

 
1,005,737

Long-term borrowings
 
439,615

 
400,274

Junior subordinated notes issued to capital trusts
 
185,820

 
186,164

Accrued expenses and other liabilities
 
409,406

 
400,333

Total liabilities
 
13,452,768

 
13,497,723

STOCKHOLDERS’ EQUITY
 
 

 
 

Preferred stock, ($0.01 par value, authorized 10,000,000 shares at March 31, 2016 and December 31, 2015; Series A, 8% perpetual non-cumulative, 4,000,000 shares issued and outstanding at March 31, 2016 and December 31, 2015, $25 liquidation value)
 
115,280

 
115,280

Common stock, ($0.01 par value; authorized 100,000,000 shares at March 31, 2016 and December 31, 2015; issued 75,567,693 shares at March 31, 2016 and 75,566,885 shares at December 31, 2015)
 
756

 
756

Additional paid-in capital
 
1,284,438

 
1,280,870

Retained earnings
 
756,272

 
731,812

Accumulated other comprehensive income
 
24,687

 
15,777

Less: 1,928,206 and 1,888,556 shares of treasury common stock, at cost, at March 31, 2016 and December 31, 2015, respectively
 
(59,863
)
 
(58,504
)
Controlling interest stockholders’ equity
 
2,121,570

 
2,085,991

Noncontrolling interest
 
1,315

 
1,293

Total stockholders’ equity
 
2,122,885

 
2,087,284

Total liabilities and stockholders’ equity
 
$
15,575,653

 
$
15,585,007


     See Accompanying Notes to Consolidated Financial Statements.

1



MB FINANCIAL, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands, except share and per share data) (Unaudited)
 
 
Three Months Ended
 
 
March 31,
 
 
2016
 
2015
Interest income:
 
 

 
 

Loans:
 
 
 
 
Taxable
 
$
104,923

 
$
98,846

Nontaxable
 
2,586

 
2,174

Investment securities:
 
 

 
 

Taxable
 
9,566

 
9,934

Nontaxable
 
10,776

 
9,113

Other interest earning accounts
 
141

 
62

Total interest income
 
127,992

 
120,129

Interest expense:
 
 

 
 

Deposits
 
5,622

 
4,645

Short-term borrowings
 
721

 
277

Long-term borrowings and junior subordinated notes
 
2,345

 
1,812

Total interest expense
 
8,688

 
6,734

Net interest income
 
119,304

 
113,395

Provision for credit losses
 
7,563

 
4,974

Net interest income after provision for credit losses
 
111,741

 
108,421

Non-interest income:
 
 

 
 

Lease financing revenue, net
 
19,046

 
25,080

Mortgage banking revenue
 
27,482

 
24,544

Commercial deposit and treasury management fees
 
11,878

 
11,038

Trust and asset management fees
 
7,950

 
5,714

Card fees
 
3,525

 
3,927

Capital markets and international banking fees
 
3,227

 
1,928

Consumer and other deposit service fees
 
3,025

 
3,083

Brokerage fees
 
1,158

 
1,678

Loan service fees
 
1,752

 
1,485

Increase in cash surrender value of life insurance
 
854

 
839

Net loss on investment securities
 

 
(460
)
Net (loss) gain on sale of assets
 
(48
)
 
4

Other operating income
 
1,844

 
2,408

Total non-interest income
 
81,693

 
81,268

Non-interest expenses:
 
 

 
 

Salaries and employee benefits
 
85,591

 
84,786

Occupancy and equipment
 
13,260

 
12,940

Computer services and telecommunication
 
9,055

 
8,904

Advertising and marketing
 
2,878

 
2,446

Professional and legal
 
2,589

 
2,670

Other intangibles amortization
 
1,626

 
1,518

Branch exit and facilities impairment charges
 
44

 
7,391

Net (gain) loss recognized on other real estate owned and other related expenses
 
(346
)
 
896

Prepayment fees on interest bearing liabilities
 

 
85

Other operating expenses
 
21,103

 
18,284

Total non-interest expenses
 
135,800

 
139,920

Income before income taxes
 
57,634

 
49,769

Income tax expense
 
18,520

 
15,658

Net income
 
39,114

 
34,111

Dividends on preferred shares
 
2,000

 
2,000

Net income available to common stockholders
 
$
37,114

 
$
32,111

     

2



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

 
 
 
Three Months Ended
 
 
March 31,
 
 
2016
 
2015
Common share data:
 
 

 
 

Basic earnings per common share
 
$
0.51

 
$
0.43

Diluted earnings per common share
 
0.50

 
0.43

Weighted average common shares outstanding for basic earnings per common share
 
73,330,731

 
74,567,104

Diluted weighted average common shares outstanding for diluted earnings per common share
 
73,966,935

 
75,164,716

 
See Accompanying Notes to Consolidated Financial Statements.



3



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

 
 
 
Three Months Ended
 
 
March 31,
 
 
2016
 
2015
 
 
 
 
 
Net income
 
$
39,114

 
$
34,111

Unrealized holding gains on investment securities, net of reclassification adjustments
 
15,576

 
9,404

Reclassification adjustment for amortization of unrealized gains on investment securities transferred to held to maturity from available for sale
 
(803
)
 
(402
)
Reclassification adjustments for losses included in net income
 

 
460

Other comprehensive income, before tax
 
14,773

 
9,462

Income tax expense related to items of other comprehensive income
 
(5,863
)
 
(3,717
)
Other comprehensive income, net of tax
 
8,910

 
5,745

Comprehensive income
 
$
48,024

 
$
39,856




See Accompanying Notes to Consolidated Financial Statements.



4




MB FINANCIAL, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
Three Months Ended March 31, 2016 and 2015
(Amounts in thousands, except per share data) (Unaudited)
 
 
Preferred
Stock
Common
Stock
Additional
Paid-in
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Income,
Net of Tax
Treasury
Stock
Noncontrolling
Interest
Total Stock-
holders’
Equity
Balance at December 31, 2014
$
115,280

$
751

$
1,267,761

$
629,677

$
20,356

$
(6,974
)
$
1,435

$
2,028,286

Net income



34,111



71

34,182

Other comprehensive income, net of tax




5,745



5,745

Cash dividends declared on preferred shares



(2,000
)



(2,000
)
Cash dividends declared on common shares ($0.14 per share)



(10,610
)



(10,610
)
Restricted common stock activity, net of tax

3

(2,744
)


2,876


135

Stock option activity, net of tax


35





35

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


194



(1,179
)

(985
)
Stock-based compensation expense


3,605





3,605

Distributions to noncontrolling interest






(100
)
(100
)
Balance at March 31, 2015
$
115,280

$
754

$
1,268,851

$
651,178

$
26,101

$
(5,277
)
$
1,406

$
2,058,293

 
 
 
 
 
 
 
 
 
Balance at December 31, 2015
$
115,280

$
756

$
1,280,870

$
731,812

$
15,777

$
(58,504
)
$
1,293

$
2,087,284

Net income



39,114



97

39,211

Other comprehensive income, net of tax




8,910



8,910

Cash dividends declared on preferred shares



(2,000
)



(2,000
)
Cash dividends declared on common shares ($0.17 per share)



(12,654
)



(12,654
)
Restricted common stock activity, net of tax


(698
)


699


1

Stock option activity, net of tax


17





17

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


198



(2,058
)

(1,860
)
Stock-based compensation expense


4,051





4,051

Distributions to noncontrolling interest






(75
)
(75
)
Balance at March 31, 2016
$
115,280

$
756

$
1,284,438

$
756,272

$
24,687

$
(59,863
)
$
1,315

$
2,122,885













See Accompanying Notes to Consolidated Financial Statements.


5



MB FINANCIAL, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in Thousands) (Unaudited)
 
 
 
Three Months Ended
 
 
March 31,
 
 
2016
 
2015
Cash Flows From Operating Activities
 
 

 
 

Net income
 
$
39,114

 
$
34,111

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

 
 

Depreciation of premises and equipment and leased equipment
 
17,302

 
14,737

Branch exit and facilities impairment charges
 
44

 
7,391

Compensation expense for share-based payment plans
 
4,051

 
3,605

Net loss (gain) on sales of premises and equipment and leased equipment
 
121

 
(167
)
Amortization of other intangibles
 
1,626

 
1,518

Provision for credit losses
 
7,563

 
4,974

Deferred income tax expense
 
11,751

 
8,384

Amortization of premiums and discounts on investment securities, net
 
12,059

 
11,231

Amortization of premiums and discounts on loans, net
 
(7,156
)
 
(9,879
)
Accretion of FDIC indemnification asset
 

 
(24
)
Net loss on investment securities
 

 
460

Proceeds from sale of loans held for sale
 
1,365,630

 
1,741,704

Origination of loans held for sale
 
(1,241,245
)
 
(1,701,005
)
Net gain on sale of loans held for sale
 
(10,176
)
 
(12,574
)
Change in fair value of mortgage servicing rights
 
34,372

 
32,793

Net (gain) loss on other real estate owned
 
(637
)
 
888

Net loss on other real estate owned related to FDIC-assisted transactions
 
154

 
273

Increase in cash surrender value of life insurance
 
(854
)
 
(839
)
Increase in other assets, net
 
(57,188
)
 
(38,984
)
Decrease in other liabilities, net
 
(9,867
)
 
(41,616
)
Net cash provided by operating activities
 
166,664

 
56,981

Cash Flows From Investing Activities
 
 

 
 

Proceeds from sales of investment securities available for sale
 
842

 
28,067

Proceeds from maturities and calls of investment securities available for sale
 
62,891

 
51,922

Purchases of investment securities available for sale
 
(3,857
)
 
(11,570
)
Proceeds from maturities and calls of investment securities held to maturity
 
44,100

 
19,177

Purchases of investment securities held to maturity
 
(9,513
)
 
(24,448
)
Purchases of non-marketable securities - FHLB and FRB stock
 
(7,517
)
 
(12,108
)
Net (increase) decrease in loans
 
(163,704
)
 
190,353

Purchases of mortgage servicing rights
 
(154
)
 
(85
)
Purchases of premises and equipment and leased equipment
 
(21,513
)
 
(11,557
)
Proceeds from sales of premises and equipment and leased equipment
 
1,185

 
1,326

Proceeds from sale of other real estate owned
 
5,151

 
1,086

Proceeds from sale of other real estate owned related to FDIC-assisted transactions
 
1,085

 
2,087

Net proceeds from FDIC related covered assets
 
(1,593
)
 
(3,773
)
Net cash (used in) provided by investing activities
 
(92,597
)
 
230,477

Cash Flows From Financing Activities
 
 

 
 

Net increase in deposits
 
28,611

 
28,559

Net decrease in short-term borrowings
 
(121,636
)
 
(316,184
)
Proceeds from long-term borrowings
 
86,070

 
7,650

Principal paid on long-term borrowings
 
(46,729
)
 
(5,089
)
Treasury stock transactions, net
 
(1,860
)
 
(985
)
Stock options exercised
 
55

 
45

Excess tax expense from share-based payment arrangements
 

 
12

Dividends paid on preferred stock
 
(2,000
)
 
(2,000
)
Dividends paid on common stock
 
(12,502
)
 
(10,495
)
Net cash used in financing activities
 
(69,991
)
 
(298,487
)
Net increase (decrease) in cash and cash equivalents
 
$
4,076

 
$
(11,029
)
Cash and cash equivalents:
 
 

 
 

Beginning of period
 
381,441

 
312,081

End of period
 
$
385,517

 
$
301,052



6



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

 
 
 
Three Months Ended
 
 
March 31,
 
 
2016
 
2015
Supplemental Disclosures of Cash Flow Information:
 
 

 
 

Cash payments for:
 
 

 
 

Interest paid to depositors and other borrowed funds
 
$
8,734

 
$
7,438

Income tax payments, net
 
1,832

 
987

Supplemental Schedule of Noncash Investing Activities:
 
 

 
 

Investment securities held to maturity purchased not settled
 
$
581

 
$
6,416

Loans held for sale transferred to loans held for investment
 

 
20,829

Loans transferred to other real estate owned
 
1,270

 
4,615

Loans transferred to other real estate owned related to FDIC-assisted transactions
 
830

 
1,345

Loans transferred to repossessed vehicles
 
337

 
286

Operating leases rewritten as direct finance leases included as loans
 
137

 
5,590

 
See Accompanying Notes to Consolidated Financial Statements.


7




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 months ended March 31, 2016 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 Annual Report on Form 10-K for the year ended December 31, 2015.
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 810 "Consolidation." New authoritative accounting guidance under ASC Topic 810, "Consolidation" amended prior guidance over the consolidation of certain legal entities. The new authoritative guidance modifies the evaluation of whether limited partnerships and similar legal entities are variable interest entities or voting interest entities, eliminates the presumption that a general partner should consolidate a limited partnership, affects the consolidation analysis of reporting entities that are involved with variable interest entities and provides a scope exception from consolidation guidance for reporting entities with interests in legal entities that are required to comply with or operate in accordance with requirements similar to those for registered money market funds. The Company adopted this new authoritative guidance on January 1, 2016, and it did not have an impact on the Company's statements of operations or financial condition.

ASC Topic 835 "Interest." New authoritative accounting guidance under ASC Topic 835, "Interest" amended prior guidance to simplify the presentation of debt issuance costs. The new authoritative guidance requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The Company adopted this new authoritative guidance on January 1, 2016, and it did not have an impact on the Company's statements of operations or financial condition.

ASC Topic 805 "Business Combinations." New authoritative accounting guidance under ASC Topic 805, "Business Combinations" amended prior guidance to require that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. The new guidance requires that the acquirer record, in the same period’s financial statements, the effect on earnings of changes in depreciation, amortization, or other income effects, if any, as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date. It also requires an entity to present separately on the face of the statement of operations or disclose in the notes the portion of the amount recorded in current-period earnings by line items that would have been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized as of acquisition date. The Company adopted this new authoritative guidance on January 1, 2016, and it did not have an impact on the Company's statements of operations or financial condition.

ASC Topic 606 "Revenue from Contracts with Customers." New authoritative accounting guidance under ASC Topic 606, "Revenue from Contracts with Customers" amended prior guidance to require an entity to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The new authoritative guidance was initially effective for reporting periods after January 1, 2017 but was deferred to January 1, 2018. The Company is evaluating the new guidance but does not expect it to have a significant impact on the Company's statements of operations or financial condition.

8




ASC Topic 825 "Financial Instruments." New authoritative accounting guidance under ASC Topic 825 "Financial Instruments" amended prior guidance to require equity investments (except those accounted for under the equity method of accounting) to be measured at fair value with changes in fair value recognized in net income. An entity may choose to measure equity investments that do not have readily determinable fair values at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or similar investment of the same issuer. The new guidance simplifies the impairment assessment of equity investments without readily determinable fair values, requires public entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes, requires an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from changes in the instrument-specific credit risk when the entity has selected the fair value option for financial instruments and requires separate presentation of financial assets and liabilities by measurement category and form of financial asset. The new authoritative guidance will be effective for reporting periods after January 1, 2018 and is not expected to have a significant impact on the Company's statements of operations or financial condition.

ASC Topic 405 "Liabilities-Extinguishment of Liabilities." New authoritative accounting guidance under ASC Topic 405, "Liabilities-Extinguishment of Liabilities" amended prior guidance to clarify that liabilities related to the sale of prepaid store-value products within the scope of this guidance are financial liabilities and that breakage for those liabilities are to be accounted for consistent with the breakage guidance in ASC Topic 606 "Revenue from Contracts with Customers." The new authoritative guidance will be effective for reporting periods after January 1, 2018. The Company is evaluating the new guidance but does not expect it to have a significant impact on the Company's statements of operations or financial condition.

ASC Topic 842 "Leases." New authoritative accounting guidance under ASC Topic 842 "Leases" amended prior guidance to require lessees to recognize the assets and liabilities arising from all leases on the balance sheet. The new authoritative guidance defines a lease as a contract, or part of a contract, that conveys the right to control the use of identified property, plant, or equipment (an identified asset) for a period of time in exchange for consideration. In addition, the qualifications for a sale and leaseback transaction have been amended. The new authoritative guidance also requires qualitative and quantitative disclosures by lessees and lessors to meet the objective of enabling users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases. In transition, lessees and lessors are required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. The new authoritative guidance will be effective for reporting periods after January 1, 2019. The Company is evaluating the new guidance and its 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 clarify that a change in the counterparty to a derivative instrument that has been designated as the hedging instrument does not, in and of itself, require dedesignation of that hedging relationship provided that all other hedge accounting criteria continue to be met. An entity has an option to apply the amendments in this new authoritative guidance on either a prospective basis or a modified retrospective basis. The new authoritative guidance will be effective for reporting periods after January 1, 2017 and early adoption is permitted. This new authoritative guidance is not expected to have a significant impact on the Company's statements of operations or financial condition.

New authoritative accounting guidance under ASC Topic 815 "Derivatives and Hedging" amended prior guidance to clarify what steps are required when assessing whether the economic characteristics and risks of call (put) options are clearly and closely related to the economic characteristics and risks of their debt hosts, which is one of the criteria for bifurcating an embedded derivative. An entity is required to consider whether (1) the payoff is adjusted based on changes in an index, (2) the payoff is indexed to an underlying other than interest rates or credit risk, (3) the debt involves a substantial premium or discount, and (4) the call (put) option is contingently exercisable. An entity should apply this new authoritative guidance on a modified retrospective basis to existing debt instruments as of the beginning of the fiscal year for which the amendments are effective. The new authoritative guidance will be effective for reporting periods after January 1, 2017 and early adoption is permitted. This new authoritative guidance is not expected to have a significant impact on the Company's statements of operations or financial condition.

ASC Topic 323 "Investment - Equity Method and Joint Ventures." New authoritative accounting guidance under ASC Topic 323 "Investment - Equity Method and Joint Ventures" amended prior guidance to eliminate the requirement to retroactively adopt the equity method of accounting as a result of an increase in the level of ownership interest or degree of influence. The new authoritative guidance required that the equity method investor add the cost of acquiring the additional interest in the investee to the current basis of the investor’s previously held interest and adopt the equity method of accounting as of the date the investment becomes qualified for equity method accounting. The new authoritative guidance will be effective for reporting periods after January 1, 2017 and early adoption is permitted. This new authoritative guidance is not expected to have a significant impact on the Company's statements of operations or financial condition.
 

9



ASC Topic 718 "Compensation - Stock Compensation." New authoritative accounting guidance under ASC Topic 718 "Compensation - Stock Compensation" amended prior guidance on several aspects, including the income tax consequences, classification of awards as either equity or liability, and classification on the statement of cash flows. The new authoritative guidance allows for all excess tax benefits and tax deficiencies to be recognized as income tax expense or benefit in the income statement. The tax effects of exercised or vested awards should be treated as discrete items in the reporting period in which they occur. An entity also should recognize excess tax benefits regardless of whether the benefit reduces taxes payable in the current period. For the statement of cash flows, excess tax benefits should be classified along with other income tax cash flows as an operating activity, and cash paid by an employer when directly withholding shares for tax withholding purposes should be classified as a financing activity. The new authoritative guidance also allows an entity to make an entity-wide accounting policy election to either estimate the number of awards that are expected to vest or account for forfeitures when they occur. In addition, the threshold to qualify for equity classification permits withholding up to the maximum statutory tax rates in the applicable jurisdictions. The new authoritative guidance will be effective for reporting periods after January 1, 2017 and early adoption is permitted. The Company is evaluating the new guidance and its impact on the Company's statements of operations or financial condition.

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 share and per share data).
 
 
 
Three Months Ended
 
 
March 31,
 
 
2016
 
2015
Distributed earnings allocated to common stock
 
$
12,654

 
$
10,610

Undistributed earnings
 
26,460

 
23,501

Net income
 
39,114

 
34,111

Less: preferred stock dividends
 
2,000

 
2,000

Net income available to common stockholders
 
37,114

 
32,111

Less: earnings allocated to participating securities
 
2

 
1

Earnings allocated to common stockholders
 
$
37,112

 
$
32,110

Weighted average shares outstanding for basic earnings per common share
 
73,330,731

 
74,567,104

Dilutive effect of equity awards
 
636,204

 
597,612

Weighted average shares outstanding for diluted earnings per common share
 
73,966,935

 
75,164,716

Basic earnings per common share
 
$
0.51

 
$
0.43

Diluted earnings per common share
 
0.50

 
0.43

 

10



Note 4.
   Business Combinations
  
MSA, Holding, LLC On December 31, 2015, MB Financial Bank acquired a 100% equity interest in MSA Holdings, LLC, ("MSA") the parent company of MainStreet Investment Advisors, LLC and Cambium Asset Management, LLC. Main Street Advisors provides investment management solutions to the bank trust and independent trust company markets.  Through its registered investment advisor, Cambium LLC, MSA provides efficient, cost-effective account management solutions on a discretionary basis for high net worth clients, both individuals and institutions, and small accounts through its BluePrint portfolio solution.

This business combination was accounted for under the acquisition method of accounting. Accordingly, the results of operations of the acquired company were included in the Company’s results of operations starting on January 1, 2016. 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 was recorded as goodwill. The Company recorded $13.5 million in goodwill and $8.8 million in other intangibles as a result of this acquisition. The amounts recognized for the business combination in the financial statements as of March 31, 2016 have been determined only provisionally for the purchase price and goodwill.

American Chartered Bancorp, Inc. On November 20, 2015, the Company and American Chartered Bancorp, Inc. ("American Chartered") entered into an agreement and plan of merger whereby the Company will acquire American Chartered. The merger agreement provides that, upon the terms and subject to the conditions set forth therein, American Chartered will merge with and into the Company, with the Company as the surviving corporation in the merger. Immediately following the merger, American Chartered's wholly owned bank subsidiary, American Chartered Bank, will merge with and into the Company's wholly owned bank subsidiary, MB Financial Bank. American Chartered Bank is a commercial bank that operates 15 banking offices in the Chicago area and, as of March 31, 2016, had approximately $2.8 billion in total assets, $2.0 billion in loans, and $2.4 billion in deposits.

Subject to the terms and conditions of the merger agreement, each share of American Chartered common stock that is outstanding immediately prior to the merger, other than shares held by persons who have perfected dissenters' rights under Illinois law and any shares owned by the Company or American Chartered, will be converted into the right to receive, subject to the election and the proration and allocation procedures set forth in the merger agreement: (1) cash consideration in the amount of $9.30 or (2) stock consideration consisting of 0.2732 shares of the Company's common stock, with cash paid in lieu of fractional Company shares determined by multiplying the fractional Company share amount by the average closing sale price of the Company's common stock for the five full trading days ending on the day preceding the merger closing date. Holders of American Chartered common stock also can elect to receive a combination of the cash consideration and stock consideration for their shares, subject to the proration and allocation procedures.

The holders of American Chartered’s 8% Cumulative Voting Convertible Preferred Stock, Series D (“American Chartered Series D preferred stock”) and American Chartered’s Non-Voting Perpetual Preferred Stock, Series F (“American Chartered Series F preferred stock” and together with the American Chartered Series D preferred stock, the “American Chartered preferred stock”) have the right, pursuant to the terms of the American Chartered preferred stock and the merger agreement, to elect to receive the same consideration in the merger as the holders of American Chartered common stock (including the right to elect to receive the cash consideration, the stock consideration or a combination of both, subject to the proration and allocation provisions of the merger agreement). In the case of American Chartered Series D preferred stock, this right is based on the number of shares of American Chartered common stock into which each share of American Chartered Series D preferred stock would otherwise then be convertible. Any share of American Chartered preferred stock that has not been converted into American Chartered common stock prior to the merger, or that will not be converted into the right to receive the same consideration in the merger as the holders of American Chartered common stock as described above, will be converted into the right to receive one share of a newly designated series of preferred stock of MB Financial with terms that are not materially less favorable to the holder than the applicable series of American Chartered preferred stock.

Concurrent with the execution of the merger agreement, each holder of American Chartered Series F non-voting preferred stock irrevocably elected and agreed to receive the same consideration in the merger as the holders of American Chartered common stock and waived any rights that such holder might otherwise have had to receive shares of preferred stock of the Company in the merger.

The holder of each vested American Chartered stock option that is outstanding immediately prior to the merger will have the right to elect to receive, for the holder's "net option shares," the cash consideration, the stock consideration or a combination of both, subject to the proration and allocation provisions of the merger agreement. The number of "net option shares" per vested option will be determined by dividing (A) (i) the excess, if any, of $9.30 over the per share exercise price of the option, multiplied by (ii) the number of shares subject to the option, by (B) $9.30. Each unvested American Chartered stock option that is outstanding

11



immediately prior to the merger will be assumed by the Company and converted into the right to receive an option to purchase shares of the Company's common stock, with adjustments to the number of shares underlying the option (determined by multiplying the pre-merger number of option shares by 0.2732, and rounding down to the nearest whole number of shares of the Company's common stock) and the per share exercise price of the option (determined by dividing the pre-merger exercise price by 0.2732, and rounding up to the nearest whole cent). Each American Chartered restricted stock award that is outstanding immediately prior to the merger will be assumed by the Company and converted into a Company restricted stock award, with an adjustment to the number of shares subject to the award (determined by multiplying the pre-merger number of shares subject to the award by 0.2732, and rounding up to the nearest whole share of the Company's common stock).

The merger agreement provides that the aggregate cash consideration that will be paid for shares of American Chartered stock and for the net option shares is $100.0 million, with the remaining consideration consisting of shares of Company common stock. If American Chartered shareholders and holders of vested American Chartered stock options elect to receive more of one form of consideration than is available, the available amount will be allocated ratably among the American Chartered shareholders and vested option holders electing to receive that form of consideration, and those shareholders and vested option holders will receive the other form of consideration for the balance of their shares and net option shares, as applicable. The only exception to this is that holders of American Chartered Series D preferred stock who have made a cash election with respect to shares of American Chartered Series D preferred stock will receive the cash consideration for all of such shares (based on the number of shares of American Chartered common stock into which each share of American Chartered Series D preferred stock is then otherwise convertible), regardless of the elections of other shareholders and vested option holders.

The transaction, which has been approved by American Chartered's shareholders and is subject to customary regulatory approvals, is expected to close around June 30, 2016.


12



Note 5.
          Investment Securities
 
Amortized cost and fair value of investment securities were as follows as of the dates indicated (in thousands):
 
 
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
March 31, 2016
 
 

 
 

 
 

 
 

Available for Sale
 
 

 
 

 
 

 
 

U.S. Government sponsored agencies and enterprises
 
$
63,600

 
$
1,162

 
$

 
$
64,762

States and political subdivisions
 
371,006

 
27,019

 
(1
)
 
398,024

Residential mortgage-backed securities
 
709,810

 
11,249

 
(790
)
 
720,269

Commercial mortgage-backed securities
 
111,015

 
3,494

 
(219
)
 
114,290

Corporate bonds
 
225,657

 
1,345

 
(2,472
)
 
224,530

Equity securities
 
10,814

 
155

 

 
10,969

Total Available for Sale
 
1,491,902

 
44,424

 
(3,482
)
 
1,532,844

Held to Maturity
 
 

 
 

 
 

 
 

States and political subdivisions
 
986,340

 
46,659

 
(158
)
 
1,032,841

Residential mortgage-backed securities
 
205,570

 
8,245

 

 
213,815

Total Held to Maturity
 
1,191,910

 
54,904

 
(158
)
 
1,246,656

Total
 
$
2,683,812

 
$
99,328

 
$
(3,640
)
 
$
2,779,500

December 31, 2015
 
 

 
 

 
 

 
 

Available for Sale
 
 

 
 

 
 

 
 

U.S. Government sponsored agencies and enterprises
 
$
63,805

 
$
806

 
$

 
$
64,611

States and political subdivisions
 
373,285

 
23,083

 
(1
)
 
396,367

Residential mortgage-backed securities
 
759,816

 
7,363

 
(3,630
)
 
763,549

Commercial mortgage-backed securities
 
128,509

 
1,839

 
(241
)
 
130,107

Corporate bonds
 
222,784

 
815

 
(3,971
)
 
219,628

Equity securities
 
10,757

 
4

 

 
10,761

Total Available for Sale
 
1,558,956

 
33,910

 
(7,843
)
 
1,585,023

Held to Maturity
 
 
 
 
 
 
 
 

States and political subdivisions
 
1,016,519

 
36,874

 
(638
)
 
1,052,755

Residential mortgage-backed securities
 
214,291

 
7,721

 

 
222,012

Total Held to Maturity
 
1,230,810

 
44,595

 
(638
)
 
1,274,767

Total
 
$
2,789,766

 
$
78,505

 
$
(8,481
)
 
$
2,859,790

 
 
 
 
 
 
 
 
 
 
The Company has no direct exposure to the State of Illinois, but approximately 21% of the state and political subdivisions portfolio consisted of securities issued by municipalities located in Illinois as of March 31, 2016. Approximately 97% of the state and political subdivisions securities were general obligation issues, and 76% were insured as of March 31, 2016.


13



Unrealized losses on investment securities by length of time in a continuous unrealized loss position and the fair value of the related securities at March 31, 2016 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
 
$
328

 
$
(1
)
 
$

 
$

 
$
328

 
$
(1
)
Residential mortgage-backed securities
 
92,516

 
(495
)
 
37,082

 
(295
)
 
129,598

 
(790
)
Commercial mortgage-backed securities
 
2,231

 
(1
)
 
11,756

 
(218
)
 
13,987

 
(219
)
Corporate bonds
 
46,857

 
(383
)
 
22,109

 
(2,089
)
 
68,966

 
(2,472
)
Total Available for Sale
 
141,932

 
(880
)
 
70,947

 
(2,602
)
 
212,879

 
(3,482
)
Held to Maturity
 
 

 
 

 
 

 
 

 
 

 
 

States and political subdivisions
 
16,883

 
(105
)
 
5,960

 
(53
)
 
22,843

 
(158
)
Total
 
$
158,815

 
$
(985
)
 
$
76,907

 
$
(2,655
)
 
$
235,722

 
$
(3,640
)
 
Unrealized losses on investment securities by length of time in a continuous unrealized loss position and the fair value of the related securities at December 31, 2015 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
 
$
219

 
$
(1
)
 
$

 
$

 
$
219

 
$
(1
)
Residential mortgage-backed securities
 
357,877

 
(2,835
)
 
43,566

 
(795
)
 
401,443

 
(3,630
)
Commercial mortgage-backed securities
 
2,324

 
(5
)
 
11,809

 
(236
)
 
14,133

 
(241
)
Corporate bonds
 
73,774

 
(1,164
)
 
18,286

 
(2,807
)
 
92,060

 
(3,971
)
Total Available for Sale
 
434,194

 
(4,005
)
 
73,661

 
(3,838
)
 
507,855

 
(7,843
)
Held to Maturity
 
 

 
 

 
 

 
 

 
 

 
 

States and political subdivisions
 
66,152

 
(519
)
 
6,190

 
(119
)
 
72,342

 
(638
)
Total
 
$
500,346

 
$
(4,524
)
 
$
79,851

 
$
(3,957
)
 
$
580,197

 
$
(8,481
)
 
The total number of security positions in the investment portfolio in an unrealized loss position at March 31, 2016 was 115 compared to 193 at December 31, 2015. This decrease in total number of security positions in a continuous unrealized loss position from December 31, 2015 to March 31, 2016, was mainly attributable to securities issued by states and political subdivisions in the investment securities portfolio.  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 the Company is more likely than not to sell the security before recovery of its cost basis.
 
As of March 31, 2016, management does not have the intent to sell any of the securities in the table above at March 31, 2016 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 securities approach their maturity date or repricing date or if market yields for such investments decline. Accordingly, as of March 31, 2016, management believes the impairments detailed in the table above at March 31, 2016 are temporary.

Changes in market interest rates can significantly influence the fair value of securities, and the fair value of our municipal securities portfolio would decline substantially if interest rates increase materially.


14



Net gains (losses) recognized on investment securities available for sale were as follows (in thousands):
 
 
 
Three Months Ended
 
 
March 31,
 
 
2016
 
2015
Realized gains
 
$
21

 
$
759

Realized losses
 
(21
)
 
(1,219
)
Net gains (losses)
 
$

 
$
(460
)
 
The amortized cost and fair value of investment securities as of March 31, 2016 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
 
$
55,844

 
$
56,375

Due after one year through five years
 
246,328

 
246,516

Due after five years through ten years
 
42,386

 
44,414

Due after ten years
 
315,705

 
340,011

Equity securities
 
10,814

 
10,969

Residential and commercial mortgage-backed securities
 
820,825

 
834,559

 
 
1,491,902

 
1,532,844

Held to maturity:
 
 

 
 

Due in one year or less
 
83,040

 
83,253

Due after one year through five years
 
151,088

 
153,137

Due after five years through ten years
 
116,361

 
123,253

Due after ten years
 
635,851

 
673,198

Residential mortgage-backed securities
 
205,570

 
213,815

 
 
1,191,910

 
1,246,656

Total
 
$
2,683,812

 
$
2,779,500

 
Investment securities with a carrying amount of $1.1 billion at March 31, 2016 and $1.4 billion at December 31, 2015 were pledged as collateral on public deposits and for other purposes as required or permitted by law, while only $784.4 million and