UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
___________
FORM
10-K
(Mark
One)
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ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For
the fiscal year ended December 31,
2008
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OR
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For
the transition period from ____________ to
____________
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Commission
file number 0-24566-01
MB
FINANCIAL, INC.
(Exact
name of registrant as specified in its charter)
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Maryland
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36-4460265
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(State
or other jurisdiction of incorporation or organization)
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(I.R.S.
Employer Identification No.)
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800
West Madison Street, Chicago, Illinois
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60607
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(Address
of Principal Executive Offices)
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(Zip
Code)
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Registrant’s
telephone number, including area code: (888) 422-6562
Securities
registered pursuant to Section 12(b) of the Act:
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Title of Each Class
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Name of Each Exchange on Which
Registered
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Common Stock, par value $0.01 per
share
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The NASDAQ Stock Market
LLC
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Securities
registered pursuant to Section 12(g) of the Act:
None
(Title
of Class)
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.
Yesx Noo
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. Yeso Nox
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. Yesx Noo
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in definitive proxy or information statement
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of
“accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange
Act. (Check one):
Large accelerated filerx Accelerated
filero
Non-accelerated
filer
o(Do not check if a
smaller reporting
company) Smaller
reporting companyo
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act).
Yeso Nox
The
aggregate market value of the voting shares held by non-affiliates of the
Registrant was approximately $722,242,874 as of June 30, 2008, the last
business day of the Registrant’s most recently completed second fiscal
quarter. Solely for the purpose of this computation, it has been
assumed that executive officers and directors of the Registrant are
“affiliates”.
There
were issued and outstanding 34,934,157 shares of the Registrant’s common stock
as of February 27, 2009.
DOCUMENTS
INCORPORATED BY REFERENCE:
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Document
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Part of Form 10-K
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Portions
of the definitive Proxy Statement to
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be
used in conjunction with the Registrant’s
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Part
III
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2009
Annual Meeting of Stockholders.
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MB
FINANCIAL, INC. AND SUBSIDIARIES
FORM
10-K
December
31, 2008
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Page
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Business
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4
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Risk
Factors
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14
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Unresolved
Staff Comments
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19
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Properties
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19
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Legal
Proceedings
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21
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Submission
of Matters to a Vote of Security Holders
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21
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Market
for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
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22
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Selected
Financial Data
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24
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Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
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28
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Quantitative
and Qualitative Disclosures about Market Risk
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49
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Financial
Statements and Supplementary Data
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53
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Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure
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99
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Controls
and Procedures
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99
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Other
Information
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99
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Directors,
Executive Officers, and Corporate Governance
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100
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Executive
Compensation
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100
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Security
Ownership of Certain Beneficial Owners, and Management and
Related Stockholder Matters
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100
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Certain
Relationships, Related Transactions and Director
Independence
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101
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Principal
Accountant Fees and Services
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101
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Exhibits
and Financial Statement Schedules
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102
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103
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3
Item 1. Business
Special
Note Regarding Forward-Looking Statements
When used in this Annual Report on Form
10-K and in other filings with the Securities and Exchange Commission, in press
releases or other public shareholder communications, or in oral statements made
with the approval of an authorized executive officer, the words or phrases
"believe," "will," "should," "will likely result," "are expected to," "will
continue," "is anticipated," "estimate," "project," "plans," or similar
expressions are intended to identify "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995. You are
cautioned not to place undue reliance on any forward-looking statements, which
speak only as of the date made. These statements may relate to MB
Financial, Inc.’s future financial performance, strategic plans or objectives,
revenues or earnings projections, or other financial items. By their
nature, these statements are subject to numerous uncertainties that could cause
actual results to differ materially from those anticipated in the
statements.
Important factors that could cause
actual results to differ materially from the results anticipated or projected
include, but are not limited to, the following (1) the credit risks of lending
activities, including changes in the level and direction of loan delinquencies
and write-offs and changes in estimates of the adequacy of the allowance for
loan losses, which could necessitate additional provisions for loan losses; (2)
competitive pressures among depository institutions; (3) interest rate movements
and their impact on customer behavior and net interest margin; (4) the impact of
repricing and competitors' pricing initiatives on loan and deposit products; (5)
fluctuations in real estate values; (6) the ability to adapt successfully to
technological changes to meet customers' needs and developments in the market
place; (7) our ability to realize the residual values of our direct finance,
leveraged, and operating leases; (8) our ability to access cost-effective
funding; (9) changes and volatility in financial markets; (10) changes in
economic conditions in general and in the Chicago metropolitan area in
particular; (11) the costs, effects and outcomes of litigation; (12) new
legislation or regulatory changes, including but not limited to changes in
federal and/or state tax laws or interpretations thereof by taxing authorities
and other governmental initiatives affecting the financial services industry;
(13) changes in accounting principles, policies or guidelines; (14) our future
acquisitions of other depository institutions or lines of business.
We do not undertake any obligation to
update any forward-looking statement to reflect circumstances or events that
occur after the date on which the forward-looking statement is
made.
General
MB Financial, Inc., headquartered in
Chicago, Illinois, is a financial holding company with 72 banking offices
located primarily in the Chicago area. The words "MB
Financial," "the Company," "we," "our" and "us" refer to MB
Financial, Inc. and its wholly owned subsidiaries, unless we indicate
otherwise. Our primary market is the Chicago metropolitan area, in
which we operate 71 banking offices through our bank subsidiary, MB Financial
Bank, N.A. (MB Financial Bank). MB Financial Bank also has one
banking office in the city of Philadelphia. Through MB Financial
Bank, we offer a broad range of financial services primarily to small and middle
market businesses and individuals in the markets that we serve. Our
primary lines of business include commercial banking, retail banking and wealth
management. As of December 31, 2008, we had total assets of $8.8
billion, deposits of $6.5 billion, stockholders’ equity of $1.1 billion, an
asset management and trust department with approximately $3.3 billion in assets
under management, including approximately $702.1 million that represents our own
investment accounts under management, and a broker/dealer subsidiary, Vision
Investment Services, Inc., with $479.2 million in assets under
administration.
We were incorporated as a Maryland
corporation in 2001 as part of the merger of MB Financial, Inc., a Delaware
corporation (which we sometimes refer to as Old MB Financial) and MidCity
Financial Corporation (MidCity Financial). This all-stock,
merger-of-equals transaction, which we accounted for as pooling-of-interests,
was completed on November 6, 2001 through the merger of Old MB Financial and
MidCity Financial into our newly-formed company to create the presently existing
MB Financial, Inc.
We have continued to grow subsequent to
the Old MB Financial-MidCity Financial merger. In April 2002, we
acquired First National Bank of Lincolnwood, based in Lincolnwood, Illinois, and
its parent, First Lincolnwood Corporation, for approximately $35.0 million in
cash. In August 2002, we acquired Chicago-based LaSalle Systems
Leasing, Inc. and its affiliated company, LaSalle Equipment Limited Partnership
(which we sometimes refer to below collectively as “LaSalle”) for consideration
comprised of $5.0 million of our
common
stock and cash of $30.7 million paid at the time of closing, plus deferred
payments of $3.5 million that were tied to LaSalle’s operating results for the
four-year period subsequent to the acquisition date. In February
2003, we acquired South Holland Trust & Savings Bank, based in South
Holland, Illinois, and its parent, South Holland Bancorp, Inc., for $93.1
million in cash. In May 2004, we acquired First Security Federal
Savings Bank, based in Chicago, Illinois, and its parent, First SecurityFed
Financial, Inc., for $140.2 million. The purchase price was paid
through a combination of cash and our common stock totaling $73.3 million and
$66.9 million, respectively. In August 2006, we acquired Oak Brook
Bank, based in Oak Brook, Illinois, and its parent First Oak Brook Bancshares,
Inc. (FOBB), for $371.0 million. The purchase price was paid through a
combination of cash and our common stock totaling $74.1 million and $296.9
million, respectively. First National Bank of Lincolnwood, South
Holland Trust & Savings Bank, First Security Federal Savings Bank, and Oak
Brook Bank, had assets of approximately $227.5 million, $560.3 million, $576.0
million, and $2.6 billion, respectively, as of their acquisition dates, and all
were merged into MB Financial Bank. In April 2008, we purchased an
80% interest in Cedar Hill Associates, LLC (Cedar Hill), an asset management
firm located in Chicago, Illinois, with approximately $960 million in assets
under management.
In May 2003, we sold Abrams Centre
National Bank (Abrams), based in Dallas, Texas, and its parent Abrams Centre
Bancshares, Inc., for $16.3 million in cash. Abrams, a former
subsidiary of MidCity Financial, had assets of approximately $98.4 million as of
the sale date.
In November 2007, we sold Union Bank
(Union), based in Oklahoma City, Oklahoma, for $76.3 million in
cash. Union, a former subsidiary of MidCity Financial, had assets of
approximately $398.6 million as of the sale date.
MB Financial Bank, our largest
subsidiary, has seven wholly owned subsidiaries with significant operating
activities: MB Financial Center LLC; MB Financial Community Development
Corporation; MBRE Holdings LLC; LaSalle Systems Leasing, Inc.; Vision Investment
Services, Inc.; Cedar Hill Associates, LLC; and Ashland Management
LLC.
MB Financial Center LLC is used to
manage the real estate activities of our operations center located in Rosemont,
Illinois (See Item 2. Properties for additional
information).
MB Financial Community Development
Corporation engages in community lending and makes equity investments to
facilitate the construction and rehabilitation of housing in low-to-moderate
income neighborhoods in MB Financial Bank’s market area.
MBRE Holdings LLC, a Delaware limited
liability company, was established in August 2002 as the holding company of MB
Real Estate Holdings LLC, which is also a Delaware limited liability
company. MB Real Estate Holdings LLC and MBRE Holdings LLC were
established as part of an initiative to enhance our earnings by providing
alternative methods of raising capital and funding. The assets of MB
Real Estate Holdings LLC consist primarily of 100% participation interests in
commercial real estate loans, construction real estate loans, residential real
estate loans, commercial loans and lease loans originated by MB Financial Bank
and mortgage-backed securities. MB Real Estate Holdings LLC has
elected to be taxed as a Real Estate Investment Trust for federal income tax
purposes. The management of MBRE Holdings LLC consists of certain
officers of MB Financial and MB Financial Bank who receive no compensation from
MBRE Holdings LLC or MB Real Estate Holdings LLC.
LaSalle focuses primarily on leasing
technology-related equipment to middle market and large “Fortune 1000”
businesses located throughout the United States. During the second
quarter of 2005, LaSalle, which was the owner of 60% of LaSalle Business
Solutions (LBS), purchased from the minority owners the remaining 40% of
LBS. LBS specializes in selling and administering third party
equipment maintenance contracts as well as technology-related
equipment.
Vision Investment Services, Inc.
(Vision) is registered with the Securities and Exchange Commission as a
broker/dealer, is a member of the National Association of Securities Dealers, is
a member of the Securities Investor Protection Corporation, and is a licensed
insurance agency. Vision has two wholly owned subsidiaries; Vision
Insurance Services, Inc. and Vision Asset Management, Inc. Vision
Insurance Services, Inc. is a licensed insurance agency which functions as a
distribution firm for certain annuity products, whereas Vision Asset Management,
Inc. is a Registered Investment Advisor with the Securities and Exchange
Commission. Vision was acquired in connection with our February 2003
acquisition of South Holland Trust & Savings Bank (South
Holland). Vision provides both institutional and retail clients with
investment and wealth management services. It had $479.2 million in
assets under administration at December 31, 2008.
Cedar Hill is an asset management firm
located in Chicago, Illinois, with approximately $807.1 million in assets under
management at December 31, 2008.
Ashland
Management Agency, Inc. holds and/or manages certain properties purchased by the
Company.
We also own all of the issued and
outstanding common securities of Coal City Capital Trust I, MB Financial Capital
Trust II, MB Financial Capital Trust III, MB Financial Capital Trust IV, MB
Financial Capital Trust V, MB Financial Capital Trust VI, FOBB Capital Trust I,
FOBB Capital Trust III, all statutory business trusts formed for the purpose of
issuing trust preferred securities. See Note 13
of the notes to our audited consolidated financial statements for additional
information.
Recent
Developments
On February 27, 2009, we will pay a
cash dividend, distributing $0.12 per share to shareholders of record as of
February 13, 2009.
Primary
Lines of Business
Our operations are currently managed as
one unit and we have one reportable segment. Our chief operating
decision-makers use consolidated results to make operating and strategic
decisions.
We concentrate on serving small and
middle market businesses, leasing companies, and their respective
owners. We also serve consumers who live or work near our
branches. Through our acquisition program and careful selection of
officers and employees, we have positioned ourselves to take a leading role in
these attractive niches. We have established three primary lines of
business: commercial banking; retail banking; and wealth
management. Each is described below.
Commercial
Banking. Our commercial banking group focuses on serving small
and middle market businesses, primarily located in the Chicago metropolitan
area. We provide a full set of credit, deposit, and treasury
management products to these companies. In general, our credit
products are specifically designed for companies with annual revenues between $5
million and $100 million and credit needs of up to $25 million. We
have a broad range of credit products for our target market, including working
capital loans and lines of credit; accounts receivable; inventory and equipment
financing; industrial revenue bond financing; business acquisition loans; owner
occupied real estate loans; and financial, performance and commercial letters of
credit. Our deposit and treasury management products are designed for
companies with annual revenues up to $500 million and include: internet products
for businesses, investment sweep accounts, zero balance accounts, automated tax
payments, ATM access, merchant credit card processing, telephone banking,
lockbox, automated clearing house transactions, account reconciliation,
controlled disbursement, detail and general information reporting, wire
transfers, a variety of international banking services, and checking
accounts. We also provide a full set of credit, deposit and treasury
management services for real estate operators and investors.
Within commercial banking, we also
target small and medium size equipment leasing companies located throughout the
United States. We have provided lease banking services to these
companies for more than three decades. Competition in serving this
equipment leasing market generally comes from large banks, finance companies,
large industrial companies and some community banks. We compete based
upon rapid decision making and excellent service and by providing flexible
financial solutions to meet our customers’ needs. We provide full
banking services to leasing companies by financing the debt portion of leveraged
equipment leases (referred to as lease loans), providing short and long-term
equity financing and by making working capital and bridge loans. For
lease loans, a lessee’s credit is often rated as investment grade for its public
debt by Moody’s, Standard & Poors or the equivalent. If a lessee
does not have a public debt rating, they are subject to the same internal credit
analysis as any other customer of MB Financial Bank. We also invest
directly in equipment that we lease to other companies located throughout the
United States (referred to as operating leases). Our operating lease
portfolio is made up of various kinds of equipment, generally technology
related, such as computer systems, satellite equipment, and general
manufacturing equipment. We seek leasing transactions where we
believe the equipment leased is integral to the lessee’s business, thereby
increasing the likelihood of renewal at the end of the lease term.
Additionally, LaSalle, a subsidiary of
MB Financial Bank, primarily focuses on leasing technology-related equipment to
middle market and large “Fortune 1000” businesses throughout the United States
and provides us the additional ability to directly originate
leases. LaSalle is a 28-year old organization that banked with MB
Financial Bank since its inception, prior to being acquired by us in
2002. LaSalle’s experienced leasing personnel enhance our ability to
originate leases, and expand the products that we offer our commercial banking
customers.
Retail Banking. The
target market for our retail banking group is individuals who live or work near
our banking offices. We offer a full set of personal banking products
to these individuals, including checking accounts, savings accounts, NOW and
money market accounts, time deposit accounts, secured and unsecured consumer
loans, residential mortgage loans, Internet banking and a variety of fee for
service products, such as money orders and travelers’ checks. As our
customers’ needs change, we adjust our product offerings accordingly, and
develop new products to differentiate ourselves from our
competitors. To offer our customers additional convenience, beginning
in 2005, we expanded our banking hours (including Sundays in some locations),
provided a 7:00 PM cut-off time for deposits to accelerate cash availability for
our customers, and introduced our ATM Freedom product that allows free ATM
transactions anytime and anywhere in the world. In 2008, we opened a
limited number of supermarket branches in the Chicago metropolitan
area.
Wealth
Management. Our Wealth Management Group provides coordinated
and integrated delivery of investment management, trust, brokerage and private
banking services. Our asset management and trust department offers a
wide range of financial services, including personal trust, investment
management, custody, estate settlement, guardianship, tax-deferred exchange and
retirement plan services. Our private banking department provides
qualified clients with personalized, “high touch” banking products and services,
including a private banker as a single point of contact for all their financial
needs. MB Financial Bank subsidiaries Cedar Hill Associates and
Vision Investment Services provide clients with non-FDIC insured investment
alternatives and insurance products.
General. We are
primarily a commercial lender and our loan portfolio consists primarily of loans
to businesses or for business purposes.
Commercial
Lending. We make commercial loans to small and middle market
businesses most often located in the Chicago area. Borrowers tend to
be privately owned and are generally manufacturers, wholesalers, distributors,
long-term health care operators and service providers. Loan products
offered are primarily working capital and term loans and lines of credit that
help our customers finance accounts receivable, inventory and
equipment. We also offer financial, performance and commercial
letters of credit. Commercial loans secured by owner occupied real
estate are classified as commercial real estate loans in the loan portfolio
composition table in “Item 7. Management’s Discussion and Analysis of Financial
Condition and Results of Operations” and Note 6 to the audited consolidated
financial statements in “Item 8. Financial Statements and Supplementary
Data”. Most commercial loans are short-term in nature, being one year
or less, with the maximum term generally being five years. Our
commercial loans typically range in size from $500 thousand to $15
million.
Lines of credit for customers are
typically secured, established for one year or less, and are subject to renewal
upon a satisfactory review of the borrower’s financial statements and credit
history. Secured short-term commercial business loans are usually
collateralized by accounts receivable, inventory, equipment and/or real
estate. Such loans are typically, but not always, guaranteed by the
owners of the business. Collateral securing commercial loans may
depreciate over time, be difficult to appraise and fluctuate in value based on
the success of the business. In addition, in the case of loans
secured by accounts receivable, the availability of funds for the repayment of
these loans may be substantially dependent on the ability of the borrower to
collect the amounts due from its customers. Accordingly, we make our
commercial loans primarily based on the historical and expected cash flow of the
borrower and secondarily on underlying collateral provided by the
borrower.
Commercial Real Estate
Lending. We originate commercial real estate loans that are
generally secured by multi-unit residential property and owner and non-owner
occupied commercial and industrial property. We also make loans to
finance the acquisition and development of land for residential, retail, and
industrial uses. Longer term commercial real estate loans are
generally made at fixed rates, although some have interest rates that change
based on our Reference Rate or LIBOR. Generally, terms of up to
twenty-five years are offered on fully amortizing loans, but most loans are
structured with a balloon payment at the end of five years. For our
fixed rate loans with maturities greater than five years, we may enter into an
interest rate swap agreement with a third party to mitigate interest rate
risk. In deciding whether to make a commercial real estate loan, we
consider, among other things, the experience and qualifications of the borrower
as well as the value and cash flow of the underlying property. Some
factors considered are net operating income of the property before debt service
and depreciation, the debt service coverage ratio (the ratio of the property’s
net cash flow to debt service requirements), the global cash flows of the
borrower, the ratio of the loan amount to the appraised value and the overall
creditworthiness of the prospective borrower. Our commercial real
estate loans typically range in size from $250 thousand to $20
million.
Commercial real estate lending
typically involves higher principal amounts than other types of loans and the
repayment of such a loan is often dependent on the successful operations of the
property securing the loan or the business conducted on the property securing
the loan. These loans may therefore be more adversely affected by
conditions in real
estate
markets or in the economy in general. For example, if the cash flow
from the borrower’s project is reduced due to leases not being obtained, renewed
or modified from their original terms, the borrower’s ability to repay a loan
may be impaired. In addition, many commercial real estate loans are
not fully amortized over the loan period, but have balloon payments due at
maturity. A borrower’s ability to make a balloon payment typically
will depend on their ability to either refinance the loan or complete a timely
sale of the underlying property.
Construction Real
Estate. We provide construction loans for the acquisition and
development of land for further improvement of condominiums, townhomes, and
one-to-four family residences. We also provide acquisition,
development and construction loans for retail and other commercial purposes,
primarily in our market areas. With regard to construction lending,
there were fewer new loans made during 2008 compared to prior years due to the
economic environment. Construction lending can involve a higher level
of risk than other types of lending because funds are advanced partially based
upon the value of the project, which is uncertain prior to the project’s
completion. Because of the uncertainties inherent in estimating
construction costs as well as the market value of a completed project and the
effects of governmental regulation of real property, our estimates with regards
to the total funds required to complete a project and the related loan-to-value
ratio may vary from actual results. As a result, construction loans
often involve the disbursement of substantial funds with repayment dependent, in
part, on the success of the ultimate project and the ability of the borrower to
sell or lease the property or refinance the indebtedness. If our
estimate of the value of a project at completion proves to be overstated, we may
have inadequate security for repayment of the loan and we may incur a
loss.
Lease Loans. We
lend money to small and mid-size independent leasing companies to finance the
debt portion of leases (which we refer to as lease loans). A lease
loan arises when a leasing company discounts the equipment rental revenue stream
owed to the leasing company by a lessee. Lease loans generally are
non-recourse to the leasing company, and, consequently, our recourse is limited
to the lessee and the leased equipment. For this reason, we
underwrite lease loans by examining the creditworthiness of the lessee rather
than the lessor. Generally, lease loans are secured by an assignment
of lease payments and a security interest in the equipment being
leased. As with commercial loans secured by equipment, equipment
securing our lease loans may depreciate over time, may be difficult to appraise
and may fluctuate in value. We rely on the lessee’s continuing
financial stability, rather than the value of the leased equipment, for
repayment of all required amounts under lease loans. In the event of
default, it is unlikely that the proceeds from the sale of leased equipment will
be sufficient to satisfy the outstanding unpaid amounts under terms of the lease
loan.
The lessee acknowledges the bank’s
security interest in the leased equipment and normally agrees to send lease
payments directly to us. Lessees tend to be Fortune 1000 companies
and have an investment grade public debt rating by Moody’s or Standard &
Poors or the equivalent, though, we also provided credit to below investment
grade and non-rated companies as well. If the lessee does not have a
public debt rating, they are subject to the same internal credit analysis as any
other customer. Lease loans almost always are fully amortizing, with
maturities typically ranging from three to five years. Loan interest
rates are fixed.
We also invest directly in equipment
leased to other companies (which we refer to as operating
leases). The profitability of these investments depends, to a great
degree, upon our ability to realize the residual values of this
equipment. See “Item 7. Management’s
Discussion and Analysis of Financial Condition and Results of
Operations-Critical Accounting Policies-Residual Value of Our Direct Finance,
Leveraged and Operating Leases.”
Residential Real
Estate. We also originate fixed and adjustable rate
residential real estate loans secured by one to four family
homes. Terms of first mortgages range from five to thirty
years. Terms for second mortgages range from five to ten
years. In deciding whether to make a residential real estate loan, we
consider the qualifications of the borrower as well as the value of the
underlying property. Our general practice is to sell the majority of
our newly originated fixed-rate residential real estate loans shortly after they
are funded, and to hold in portfolio the majority of adjustable rate residential
real estate loans.
Consumer
Lending. Our consumer loan portfolio is primarily focused on
home equity lines of credit, fixed-rate second mortgage loans, indirect vehicle
loans, and to a lesser extent, direct motorcycle loans and secured and unsecured
consumer loans. Home equity lines of credit are generally extended up
to 80% of the appraised value of the property, less existing
liens. Indirect vehicle loans represent consumer loans made primarily
through a network of Harley Davidson motorcycle dealers in 44 states. To a
lesser extent we originate consumer loans for other motorcycle dealers and a few
local auto dealerships. Consumer loans typically have shorter terms
and lower balances with higher yields as compared to residential real estate
loans, but carry a higher risk of default. Terms for second mortgages
typically range from five to ten years. Consumer loan collections are
dependent on the
borrower’s
continuing financial stability, and thus, are more likely to be affected by
adverse personal circumstances. Furthermore, the application of
various federal and state laws, including bankruptcy and insolvency laws, may
limit the amount which can be recovered on these loans.
Foreign
Operations
MB Financial Bank holds certain
commercial real estate loans, residential real estate loans, other loans and
mortgage-backed investment securities in a real estate investment trust through
its wholly owned subsidiary MBRE Holdings LLC headquartered and domiciled in
Freeport, The Bahamas. MBRE Holdings LLC and its subsidiary, MB Real
Estate Holdings LLC, were established in August 2002 to provide us with
alternative methods for raising capital and funding. We do not engage
in operations in any other foreign countries.
Competition
We face substantial competition in all
phases of our operations, including deposit gathering and loan origination, from
a variety of competitors. Commercial banks, savings institutions,
brokerage firms, credit unions, mutual fund companies, insurance companies and
specialty finance companies all compete with us for new and existing
customers. Several national financial institutions have commenced
aggressive de novo branching plans that have heightened competitive pressures in
our market areas. Our bank competes by providing quality services to
our customers, ease of access to our facilities, convenient hours and
competitive pricing of services (including interest rates paid on deposits,
interest rates charged on loans and fees charged for other non-interest related
services).
Personnel
As of December 31, 2008, we and our
subsidiaries employed a total of 1,342 full-time equivalent
employees. We consider our relationship with our employees to be
good.
We, our subsidiary bank, and its
subsidiaries, are subject to an extensive system of banking and securities laws
and regulations that are intended primarily for the protection of customers and
depositors and not for the protection of security holders. These laws
and regulations govern such areas as capital, permissible activities, allowance
for loan losses, loans and investments, and rates of interest that can be
charged on loans. Described below are elements of selected laws and
regulations. The descriptions are not intended to be complete and are
qualified in their entirety by reference to the full text of the statutes and
regulations described.
Holding Company
Regulation. As a bank holding
company and financial holding company, we are subject to comprehensive
regulation by the Board of Governors of the Federal Reserve System, frequently
referred to as the Federal Reserve Board, under the Bank Holding Company Act of
1956, as amended by the Gramm-Leach-Bliley Act of 1999. We must file
reports with the Federal Reserve Board and such additional information as the
Federal Reserve Board may require, and our holding company and non-banking
affiliates are subject to examination by the Federal Reserve
Board. Under Federal Reserve Board policy, a bank holding company
must serve as a source of strength for its subsidiary banks. Under
this policy, the Federal Reserve Board may require, and has required in the
past, a holding company to contribute additional capital to an undercapitalized
subsidiary bank. The Bank Holding Company Act provides that a bank
holding company must obtain Federal Reserve Board approval before:
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Acquiring,
directly or indirectly, ownership or control of any voting shares of
another bank or bank
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holding
company if, after such acquisition, it would own or control more than 5%
of such shares
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(unless
it already owns or controls the majority of such
shares);
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Acquiring
all or substantially all of the assets of another bank or bank holding
company; or
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Merging
or consolidating with another bank holding
company.
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The Bank Holding Company Act generally
prohibits a bank holding company from acquiring direct or indirect ownership or
control of more than 5% of the voting shares of any company which is not a bank
or bank holding company, or from engaging directly or indirectly in activities
other than those of banking, managing or controlling banks, or providing
services for its subsidiaries. The principal exceptions to these
prohibitions involve certain non-bank activities which, by statute or by Federal
Reserve Board regulation or order, have been identified as activities closely
related to the business of banking or managing or controlling
banks. The list of activities permitted by the Federal Reserve Board
includes, among other things: lending; operating a savings institution, mortgage
company, finance company, credit card company or factoring company; performing
certain data processing operations; providing certain investment and financial
advice; underwriting and acting as an insurance agent for certain types of
credit-related insurance; leasing property on a full-payout, non-
operating
basis; selling money orders, travelers’ checks and United States Savings Bonds;
real estate and personal property appraising; providing tax planning and
preparation services; and, subject to certain limitations, providing securities
brokerage services for customers. These activities may also be
affected by federal legislation.
In November 1999, the
Gramm-Leach-Bliley Act became law. The Gramm-Leach-Bliley Act is
intended to, among other things; facilitate affiliations among banks, securities
firms, insurance firms and other financial companies. To further this
goal, the Gramm-Leach-Bliley Act amended portions of the Bank Holding Company
Act of 1956 to authorize bank holding companies, such as us, directly or through
non-bank subsidiaries to engage in securities, insurance and other activities
that are financial in nature or incidental to a financial
activity. In order to undertake these activities, a bank holding
company must become a "financial holding company" by submitting to the
appropriate Federal Reserve Bank a declaration that the company elects to be a
financial holding company and a certification that all of the depository
institutions controlled by the company are well capitalized and well
managed. We submitted the declaration of our election to become a
financial holding company with the Federal Reserve Bank of Chicago in June 2002,
and our election became effective in July 2002.
Depository Institution
Regulation. Our bank subsidiary is
subject to regulation by the Office of the Comptroller of the Currency and the
Federal Deposit Insurance Corporation. This regulatory structure
includes:
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Real
estate lending standards, which provide guidelines concerning
loan-to-value ratios for various types of real estate
loans;
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Risk-based
capital rules, including accounting for interest rate risk, concentration
of credit risk and the risks posed by non-traditional
activities;
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Rules
requiring depository institutions to develop and implement internal
procedures to evaluate and control credit and settlement exposure to their
correspondent banks;
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Rules
restricting types and amounts of equity investments;
and
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Rules
addressing various safety and soundness issues, including operations and
managerial standards, standards for asset quality, earnings and
compensation standards.
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Capital
Adequacy. The Federal Reserve Board, Office of the
Comptroller of the Currency and Federal Deposit Insurance Corporation have
issued substantially similar risk-based and leverage capital guidelines
applicable to bank holding companies and banks. In addition, these
regulatory agencies may from time to time require that a bank holding company or
bank maintain capital above the minimum levels, based on its financial condition
or actual or anticipated growth.
The Federal Reserve Board's risk-based
guidelines establish a two-tier capital framework. Tier 1 capital
generally consists of common stockholders' equity, retained earnings, a limited
amount of qualifying perpetual preferred stock, qualifying trust preferred
securities and minority interests in the equity accounts of consolidated
subsidiaries, less goodwill and certain intangibles. Tier 2 capital
generally consists of certain hybrid capital instruments and perpetual debt,
mandatory convertible debt securities and a limited amount of subordinated debt,
qualifying preferred stock, loan loss allowance, and unrealized holding gains on
certain equity securities. The sum of Tier 1 and Tier 2 capital
represents qualifying total capital, at least 50% of which must consist of Tier
1 capital.
Risk-based capital ratios are
calculated by dividing Tier 1 and total capital by risk-weighted
assets. Assets and off-balance sheet exposures are assigned to one of
four categories of risk-weights, based primarily on relative credit
risk. The minimum Tier 1 risk-based capital ratio is 4% and the
minimum total risk-based capital ratio is 8%. Our Tier 1 and total
risk-based capital ratios under these guidelines at December 31, 2008 were
12.07% and 14.08%, respectively.
The Federal Reserve Board’s leverage
capital guidelines establish a minimum leverage ratio determined by dividing
Tier 1 capital by adjusted average total assets. The minimum leverage
ratio is 3% for bank holding companies that meet certain specified criteria,
including having the highest regulatory rating. All other bank
holding companies generally are required to maintain a leverage ratio of at
least 4%. At December 31, 2008, we had a leverage ratio of
9.85%.
Prompt
Corrective Action. The Federal Deposit Insurance
Corporation Improvement Act of 1991, among other things, identifies five capital
categories for insured depository institutions (well capitalized, adequately
capitalized, undercapitalized, significantly undercapitalized and critically
undercapitalized) and requires the respective federal regulatory agencies to
implement systems for "prompt corrective action" for insured depository
institutions that do not meet minimum capital requirements within these
categories. This act imposes progressively more restrictive
constraints on operations, management and capital distributions, depending on
the category in which an institution is classified. Failure to meet
the capital guidelines could also subject a banking institution to capital
raising requirements. An "undercapitalized" bank must develop a
capital restoration plan and its parent holding company must guarantee that
bank's compliance with the plan. The liability of the parent holding
company under any such guarantee is limited to the lesser of five percent of the
bank's assets at the time it became "undercapitalized" or the amount needed to
comply with the plan. Furthermore, in the event of the bankruptcy of
the parent holding company, such guarantee would take priority over the parent's
general unsecured creditors. In addition, the Federal Deposit
Insurance Corporation Improvement Act requires the various regulatory agencies
to prescribe certain non-capital standards for safety and soundness relating
generally to operations and management, asset quality and executive compensation
and permits regulatory action against a financial institution that does not meet
these standards.
The various federal regulatory agencies
have adopted substantially similar regulations that define the five capital
categories identified by the Federal Deposit Insurance Corporation Improvement
Act, using the total risk-based capital, Tier 1 risk-based capital and leverage
capital ratios as the relevant capital measures. These regulations
establish various degrees of corrective action to be taken when an institution
is considered undercapitalized. Under the regulations, a "well
capitalized" institution must have a Tier 1 risk-based capital ratio of at least
6%, a total risk-based capital ratio of at least 10% and a leverage ratio of at
least 5% and not be subject to a capital directive or order. An
institution is "adequately capitalized" if it has a Tier 1 risk-based capital
ratio of at least 4%, a total risk-based capital ratio of at least 8% and a
leverage ratio of at least 4% (3% in certain circumstances). An
institution is “undercapitalized” if it has a Tier 1 risk-based capital ratio of
less than 4%, a total risk-based capital ratio of less than 8% or a leverage
ratio of less than 4% (3% in certain circumstances). An institution
is "significantly undercapitalized" if it has a Tier 1 risk-based capital ratio
of less than 3%, a total risk-based capital ratio of less than 6% or a leverage
ratio of less than 3%. An institution is "critically
undercapitalized" if its tangible equity is equal to or less than 2% of total
assets. Generally, an institution may be reclassified in a lower
capitalization category if it is determined that the institution is in an unsafe
or unsound condition or engaged in an unsafe or unsound practice.
As of December 31, 2008, our subsidiary
bank met the requirements to be classified as “well-capitalized.”
Dividends. The Federal Reserve Board's
policy is that a bank holding company should pay cash dividends only to the
extent that its net income for the past year is sufficient to cover both the
cash dividends and a rate of earnings retention that is consistent with the
holding company's capital needs, asset quality and overall financial condition,
and that it is inappropriate for a bank holding company experiencing serious
financial problems to borrow funds to pay dividends. Furthermore, a
bank that is classified under the prompt corrective action regulations as
"undercapitalized" will be prohibited from paying any dividends.
On
December 5, 2008, as part of the Troubled Asset Relief Program (“TARP”) Capital
Purchase Program of the United States Department of the Treasury (“Treasury”),
the Company sold to Treasury 196,000 shares of the Company’s Fixed Rate
Cumulative Perpetual Preferred Stock, Series A (the “Series A Preferred Stock”),
having a liquidation preference amount of $1,000 per share, for a purchase price
of $196.0 million in cash and (ii) issued to Treasury a ten-year warrant to
purchase 1,012,048 shares of the Company’s common stock at an
exercise price of $29.05 per share.
The
securities purchase agreement between us and Treasury provides that prior to the
earlier of (i) December 5, 2011 and (ii) the date on which all of the shares of
the Series A Preferred Stock have been redeemed by us or transferred by Treasury
to third parties, we may not, without the consent of Treasury, (a) pay a
quarterly cash dividend on our common stock of more than $0.18 per share or (b)
subject to limited exceptions, redeem, repurchase or otherwise acquire shares of
our common stock or preferred stock, other than the Series A Preferred Stock, or
trust preferred securities. In addition, under the terms of the
Series A Preferred Stock, we may not pay dividends on our common stock at any
time we are in arrears on the dividends payable on the Series A Preferred
Stock. Dividends on the Series A Preferred Stock are payable
quarterly at a rate of 5% per annum for the first five years and a rate of 9%
per annum thereafter if not redeemed prior to that time.
Our primary source for cash dividends
is the dividends we receive from our subsidiary bank. Our bank is
subject to various regulatory policies and requirements relating to the payment
of dividends, including requirements to maintain capital above regulatory
minimums. A national bank must obtain the approval of the Office of
the Comptroller of the Currency prior to paying a dividend if the total of all
dividends declared by the national bank in any calendar year will exceed the sum
of the bank’s net profits for that year and its retained net profits for the
preceding two calendar years, less any required transfers to
surplus.
Federal Deposit Insurance
Reform. The FDIC currently maintains the Deposit Insurance
Fund (the “DIF”), which was created in 2006 in the merger of the Bank Insurance
Fund and the Savings Association Insurance Fund. The deposit
accounts of our subsidiary bank are insured by the DIF to the maximum amount
provided by law. This insurance is backed by the full faith and
credit of the United States Government.
As insurer, the FDIC is authorized to
conduct examinations of and to require reporting by DIF-insured institutions. It
also may prohibit any DIF-insured institution from engaging in any activity the
FDIC determines by regulation or order to pose a serious threat to the DIF. The
FDIC also has the authority to take enforcement actions against insured
institutions.
The FDIC’s regulations for risk-based
deposit insurance assessments establish four Risk Categories. The FDIC regards
well-capitalized institutions that are financially sound with only a few minor
weaknesses, including MB Financial Bank, as Risk Category I. Risk
Categories II, III and IV present progressively greater risks to the DIF and pay
progressively higher rates. For the first quarter of 2009, Risk
Category I institutions will pay quarterly assessments for deposit insurance at
annual rates of 12 to 14 basis points. With advance notice to insured
institutions, rates are subject to change. Within Risk Category I,
the precise rate for an individual institution with less than $10 billion in
assets is generally determined by a formula using CAMELS ratings, which are
assigned in examinations, and financial ratios. A different method
applies for larger institutions. The rate for an individual
institution is applied to its assessment base, consisting generally of its
deposit liabilities subject to certain adjustments.
In an effort to restore capitalization
levels and to ensure the DIF will adequately cover projected losses from future
bank failures, the FDIC, in October 2008, proposed a rule to alter the way in
which it differentiates for risk in the risk-based assessment system and to
revise deposit insurance assessment rates, including base assessment rates. For
Risk Category I institutions, the FDIC proposes (i) to determine the
initial base assessment rate using a combination of weighted-average CAMELS
component ratings and the financial ratios method assessment rate (as defined),
each equally weighted and (ii) to revise the uniform amount and the pricing
multipliers. The FDIC also proposes to introduce three adjustments that could be
made to an institution’s initial base assessment rate, including (i) a potential
decrease of up to 2 basis points for long-term unsecured debt, including senior
and subordinated debt, (ii) a potential increase for secured liabilities in
excess of 15% of domestic deposits and (iii) for non-Risk Category I
institutions, a potential increase for brokered deposits in excess of 10% of
domestic deposits. The FDIC also proposes, effective April 1, 2009,
initial base assessment rates for Risk Category I institutions of 10 to 14 basis
points. After the effect of potential base-rate adjustments, the annualized
assessment rate for Risk Category I institutions would range from 8 to 21 basis
points. A final rule related to this proposal is expected to be issued during
the first quarter of 2009. The Company cannot provide any assurance as to the
amount of any proposed increase in its deposit insurance premium rate, should
such an increase occur, as such changes are dependent upon a variety of factors
beyond the Company’s control.
FDIC
insurance expense totaled $1.9 million and $664.0 thousand in 2008 and 2007,
respectively. FDIC insurance expense includes deposit insurance assessments and
Financing Corporation (“FICO”) assessments related to outstanding FICO bonds.
The FICO is a mixed-ownership government corporation established by the
Competitive Equality Banking Act of 1987 whose sole purpose was to function as a
financing vehicle for the now defunct Federal Savings & Loan Insurance
Corporation. Under the Federal Deposit Insurance Reform Act of 2005, which
became law in 2006, MB Financial Bank received a one-time assessment credit of
$5.3 million to be applied against future deposit insurance assessments, subject
to certain limitations. This credit was utilized to offset $2.1 million of
deposit insurance assessments during 2007 and $3.1 million of assessments during
2008. The assessment credits were utilized as of December 31, 2008.
Temporary Liquidity Guarantee
Program. On November 21, 2008, the Board of Directors of the
FDIC adopted a final rule relating to the Temporary Liquidity Guarantee Program
(“TLG Program”). The TLG Program was announced by the FDIC on October 14, 2008,
preceded by the determination of systemic risk by the Secretary of the
Department of Treasury (after consultation with the President), as an initiative
to counter the system-wide crisis in the nation’s financial sector. Under the
TLG Program the FDIC will (i) guarantee, through the earlier
of
maturity or June 30, 2012, certain newly issued senior unsecured debt issued by
participating institutions on or after October 14, 2008, and before June 30,
2009 and (ii) provide full FDIC deposit insurance coverage for non-interest
bearing transaction deposit accounts, Negotiable Order of Withdrawal (“NOW”)
accounts paying less than 0.5% interest per annum and Interest on Lawyers Trust
Accounts held at participating FDIC insured institutions through December 31,
2009. Coverage under the TLG Program was available for the first 30 days without
charge. The fee assessment for coverage of senior unsecured debt ranges from 50
basis points to 100 basis points per annum, depending on the initial maturity of
the debt. The fee assessment for the Transaction Account Guarantee Program is 10
basis points per quarter on amounts in covered accounts exceeding
$250,000. On December 5, 2008, the Company elected not to opt-out of
either guarantee program. The FDIC has announced that for an
additional premium, it will extend the TLG Program through October 2009, but no
regulations have been published in proposed or final form.
Transactions with
Affiliates. We and our subsidiary bank are affiliates within
the meaning of the Federal Reserve Act. The Federal Reserve Act
imposes limitations on a bank with respect to extensions of credit to,
investments in, and certain other transactions with, its parent bank holding
company and the holding company’s other subsidiaries. Furthermore,
bank loans and extensions of credit to affiliates also are subject to various
collateral requirements.
Community Reinvestment
Act. Under the Community Reinvestment Act, every Federal
Deposit Insurance Corporation-insured institution is obligated, consistent with
safe and sound banking practices, to help meet the credit needs of its entire
community, including low and moderate income neighborhoods. The
Community Reinvestment Act requires the appropriate federal banking regulator,
in connection with the examination of an insured institution, to assess the
institution’s record of meeting the credit needs of its community and to
consider this record in its evaluation of certain applications, such as a merger
or the establishment of a branch. An unsatisfactory rating may be
used as the basis for the denial of an application and will prevent a bank
holding company of the institution from making an election to become a financial
holding company.
As of its last examination, MB
Financial Bank received a Community Reinvestment Act rating of
“outstanding.”
Interstate Banking and
Branching. The Federal Reserve Board may approve an
application of a bank holding company to acquire control of, or acquire all or
substantially all of the assets of, a bank located in a state other than the
bank holding company's home state, without regard to whether the transaction is
prohibited by the laws of any state. The Federal Reserve Board may
not approve the acquisition of a bank that has not been in existence for the
minimum time period (not exceeding five years) specified by the law of the
target bank’s home state. The Federal Reserve Board also may not
approve an application if the bank holding company (and its bank affiliates)
controls or would control more than ten percent of the insured deposits in the
United States or, generally, 30% or more of the deposits in the target bank's
home state or in any state in which the target bank maintains a
branch. Individual states may waive the 30% statewide concentration
limit. Each state may limit the percentage of total insured deposits
in the state that may be held or controlled by a bank or bank holding company to
the extent the limitation does not discriminate against out-of-state banks or
bank holding companies.
The federal banking agencies are
authorized to approve interstate bank merger transactions without regard to
whether these transactions are prohibited by the law of any state, unless the
home state of one of the banks opted out of interstate mergers prior to June 1,
1997. Interstate acquisitions of branches are permitted only if the
law of the state in which the branch is located permits these
acquisitions. Interstate mergers and branch acquisitions are subject
to the nationwide and statewide-insured deposit concentration limits described
above.
Privacy
Rules. Federal banking regulators, as required under the
Gramm-Leach-Bliley Act, have adopted rules limiting the ability of banks and
other financial institutions to disclose nonpublic information about consumers
to non-affiliated third parties. The rules require disclosure of
privacy policies to consumers and, in some circumstances, allow consumers to
prevent disclosure of certain personal information to non-affiliated third
parties. The privacy provisions of the Gramm-Leach-Bliley Act affect
how consumer information is transmitted through diversified financial services
companies and conveyed to outside vendors.
International Money Laundering
Abatement and Financial Anti-Terrorism Act of 2001. The
President signed the USA Patriot Act of 2001 into law in October 2001. This act
contains the International Money Laundering Abatement and Financial
Anti-Terrorism Act of 2001 (the “IMLAFA”). The IMLAFA substantially broadens
existing anti-money laundering legislation and the extraterritorial jurisdiction
of the United States, imposes new compliance and due diligence obligations,
creates new crimes and penalties, compels the production of documents located
both inside and outside the United States, including those of foreign
institutions that have a correspondent relationship in the United States, and
clarifies the safe harbor from civil liability to customers. The U.S. Treasury
Department has issued a number of regulations implementing the USA Patriot Act
that apply certain of its requirements to
financial
institutions such as our banking and broker-dealer subsidiaries. The regulations
impose obligations on financial institutions to maintain appropriate policies,
procedures and controls to detect, prevent and report money laundering and
terrorist financing. The increased obligations of financial institutions,
including us, to identify their customers, watch for and report suspicious
transactions, respond to requests for information by regulatory authorities and
law enforcement agencies, and share information with other financial
institutions, requires the implementation and maintenance of internal
procedures, practices and controls which have increased, and may continue to
increase, our costs and may subject us to liability.
As noted above, enforcement and
compliance-related activity by government agencies has increased. Money
laundering and anti-terrorism compliance is among the areas receiving a high
level of focus in the present environment.
Future Legislation and Changes in
Regulations. Proposals to change the laws and regulations
governing the banking industry are frequently introduced in Congress, in the
state legislatures and by the various bank regulatory agencies. New
legislation and/or changes in regulations could affect us in substantial and
unpredictable ways, and increase or decrease the cost of doing business, limit
or expand permissible activities or affect the competitive balance among banks
and other financial institutions. The likelihood and timing of any
proposed legislation or changes in regulations and the impact they might have on
us cannot be determined at this time.
Internet
Website
We maintain a website with the address
www.mbfinancial.com. The information contained on our website is not
included as a part of, or incorporated by reference into, this Annual Report on
Form 10-K. Other than an investor's own Internet access charges, we
make available free of charge through our website our Annual Reports on Form
10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, and
amendments to these reports, as soon as reasonably practicable after we have
electronically filed such material with, or furnished such material to, the
Securities and Exchange Commission.
Item 1A. Risk Factors
An investment in our common stock is
subject to risks inherent in our business. Before making an
investment decision, you should carefully consider the risks and uncertainties
described below together with all of the other information included in this
report. In addition to the risks and uncertainties described below,
other risks and uncertainties not currently known to us or that we currently
deem to be immaterial also may materially and adversely affect our business,
financial condition and results of operations. The value or market
price of our common stock could decline due to any of these identified or other
risks, and you could lose all or part of your investment.
Changes
in economic conditions, particularly a further economic slowdown in the Chicago
area, could hurt our business.
Our
business is directly affected by market conditions, trends in industry and
finance, legislative and regulatory changes, and changes in governmental
monetary and fiscal policies and inflation, all of which are beyond our
control. In 2007, the housing and real estate sectors experienced an
economic slowdown that has continued into 2009. Further deterioration
in economic conditions, particularly within the Chicago area, could result in
the following consequences, among others, any of which could hurt our business
materially:
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loan
delinquencies may increase;
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problem
assets and foreclosures may
increase;
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demand
for our products and services may decline;
and
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collateral
for our loans may decline in value, in turn reducing a customer’s
borrowing power and reducing the value of assets and collateral securing
our loans.
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Negative
developments in the financial industry and credit markets may continue to
adversely impact our financial condition and results of operations.
Negative developments
beginning in the latter half of 2007 in the sub-prime mortgage market and the
securitization markets for such loans, together with other factors, have
resulted in uncertainty in the financial markets in general and a related
general economic downturn, which have continued into 2009. In
addition, as a consequence of the recession that the United
States
now finds itself in, business activity across a wide range of industries face
serious difficulties due to the lack of consumer spending and the extreme lack
of liquidity in the global credit markets. Unemployment has also increased
significantly.
As a
result of these economic crises, many lending institutions, including us, have
experienced declines in the performance of their loans, including construction
loans and commercial real estate loans. In addition, the values of
real estate collateral supporting many loans have declined and may continue to
decline. Bank and bank holding company stock prices have been
negatively affected, as has the ability of banks and bank holding companies to
raise capital or borrow in the debt markets compared to recent
years. These conditions may have a material adverse effect on our
financial condition and results of operations. In addition, as a
result of the foregoing factors, there is a potential for new laws and
regulations regarding lending and funding practices and liquidity standards, and
bank regulatory agencies are expected to be very aggressive in responding to
concerns and trends identified in examinations. Negative developments
in the financial industry and the impact of new legislation and regulations in
response to those developments could restrict our business operations, including
our ability to originate loans, and adversely impact our results of operations
and financial condition. Overall, during the past
year, the general business environment has had an adverse effect on our
business, and there can be no assurance that the environment will improve in the
near term. Until conditions improve, we expect our business, financial condition
and results of operations to be adversely affected.
Recent
legislative and regulatory initiatives to address difficult market and economic
conditions may not stabilize the U.S. banking system.
The
recently enacted Emergency Economic Stabilization Act of 2008 (the “EESA”)
authorizes the U.S. Treasury Department (the “Treasury”) to purchase from
financial institutions and their holding companies up to $700 billion in
mortgage loans, mortgage-related securities and certain other financial
instruments, including debt and equity securities issued by financial
institutions and their holding companies, under a Troubled Asset Relief Program
(“TARP”). The purpose of TARP is to restore confidence and stability
to the U.S. banking system and to encourage financial institutions to increase
their lending to customers and to each other. The Treasury has
allocated $250 billion towards the TARP Capital Purchase Program
(“CPP”). Under the CPP, Treasury has purchased preferred equity
securities from participating institutions, including $196.0 million of our
preferred stock. The EESA also increased federal deposit insurance on
most deposit accounts from $100,000 to $250,000. This increase is in
place until the end of 2009.
The EESA
followed, and has been followed by, numerous actions by the Board of Governors
of the Federal Reserve System, the U.S. Congress, Treasury, the FDIC, the SEC
and others to address the current liquidity and credit crisis that has followed
the sub-prime meltdown that commenced in 2007. These measures include
homeowner relief that encourage loan restructuring and modification; the
establishment of significant liquidity and credit facilities for financial
institutions and investment banks; the lowering of the federal funds rate;
emergency action against short selling practices; a temporary guaranty program
for money market funds; the establishment of a commercial paper funding facility
to provide back-stop liquidity to commercial paper issuers; and coordinated
international efforts to address illiquidity and other weaknesses in the banking
sector. In addition, Treasury recently announced its Financial
Stability Plan to attack the current credit crisis, and President Obama has
signed into law the American Recovery and Reinvestment Act (the
“ARRA”). The purpose of these legislative and regulatory actions is
to stabilize the U.S. banking system, improve the flow of credit and foster an
economic recovery. The regulatory and legislative initiatives
described above may not have their desired effects, however. If the
volatility in the markets continues and economic conditions fail to improve or
worsen, our business, financial condition and results of operations could be
materially and adversely affected.
Current
levels of market volatility are unprecedented.
The
capital and credit markets have been experiencing volatility and disruption for
more than a year. In recent months, the volatility and disruption has reached
unprecedented levels. In some cases, the markets have produced downward pressure
on stock prices and credit availability for certain issuers without regard to
those issuers’ underlying financial strength. If current levels of market
disruption and volatility continue or worsen, there can be no assurance that we
will not experience an adverse effect, which may be material, on our ability to
access capital, if needed or desired, and on our business, financial condition
and results of operations.
Our
allowance for loan losses may prove to be insufficient to absorb losses in our
loan portfolio.
Lending
money is a substantial part of our business. Every loan carries a certain risk
that it will not be repaid in accordance with its terms or that any underlying
collateral will not be sufficient to assure repayment. This risk is affected by,
among other things:
• cash
flow of the borrower and/or the project being financed;
• the changes and
uncertainties as to the future value of the collateral, in the case of a
collateralized loan;
• the credit history of a
particular borrower;
• changes in economic and
industry conditions; and
• the duration of the
loan.
We
maintain an allowance for loan losses, which is a reserve established through a
provision for loan losses charged to expense, which we believe is appropriate to
provide for probable losses in our loan portfolio. The amount of this allowance
is determined by our management through a periodic review and consideration of
several factors, including, but not limited to:
• our general reserve, based
on our historical default and loss experience;
• our specific reserve,
based on our evaluation of non-performing loans and their underlying
collerateral; and
• current macroeconomic factors and model
imprecision factors.
The
determination of the appropriate level of the allowance for loan losses
inherently involves a high degree of subjectivity and requires us to make
significant estimates of current credit risks and future trends, all of which
may undergo material changes. Continuing deterioration in economic conditions
affecting borrowers, new information regarding existing loans, identification of
additional problem loans and other factors, both within and outside of our
control, may require an increase in the allowance for loan losses. In addition,
bank regulatory agencies periodically review our allowance for loan losses and
may require an increase in the provision for possible loan losses or the
recognition of further loan charge-offs, based on judgments different than those
of management. In addition, if charge-offs in future periods exceed the
allowance for loan losses, we will need additional provisions to increase the
allowance for loan losses. Any increases in the allowance for loan losses will
result in a decrease in net income and, possibly, capital, and may have a
material adverse effect on our financial condition and results of
operations.
As of
December 31, 2008, approximately 85% of our loan portfolio consisted of
commercial-related credits, consisting of commercial loans, commercial loans
collateralized by the assignment of lease payments, commercial real estate loans
and construction loans. See “Item 1.
Business—Lending Activities.”
Changes
in interest rates may reduce our net interest income.
Like
other financial institutions, our consolidated operating results are largely
dependent on our net interest income. Net interest income is the
difference between interest earned on loans and investments and interest expense
incurred on deposits and other borrowings. Our net interest income is
impacted by changes in market rates of interest, changes in credit spreads,
changes in the shape of the yield curve, the interest rate sensitivity of our
assets and liabilities, and prepayments on our loans and
investments.
Our
interest earning assets and interest bearing liabilities may react in different
degrees to changes in market interest rates. Interest rates on some
types of assets and liabilities may fluctuate prior to changes in broader market
interest rates, while rates on other types may lag behind. The result
of these changes to rates may result in differing spreads on interest earning
assets and interest bearing liabilities. While we take measures
intended to manage the risks from changes in market interest rates, we cannot
control or accurately predict changes in market rates of interest or be sure our
protective measures are adequate.
We
pursue acquisitions to supplement internal growth.
We pursue
a strategy of supplementing internal growth by acquiring other financial
institutions that will help us fulfill our strategic objectives and enhance our
earnings. There are risks associated with this strategy, however,
including the following:
• We may be exposed to
potential asset quality issues or unknown or contingent liabilities of the banks
or businesses we acquire. If these issues or liabilities exceed our
estimates, our earnings and financial condition may be adversely
affected;
• Prices
at which acquisitions can be made fluctuate with market
conditions. We have experienced times during which acquisitions could
not be made in specific markets at prices our management considered acceptable
and expect that we will experience this condition in the future in one or more
markets;
• The acquisition of other
entities generally requires integration of systems, procedures and personnel of
the acquired entity in order to make the transaction economically
feasible. This integration process is complicated and time consuming
and can also be disruptive to the customers of the acquired
business. If the integration process is not conducted successfully
and with minimal effect on the acquired business and its customers, we may not
realize the anticipated economic benefits of particular acquisitions within the
expected time frame, and we may lose customers or employees of the acquired
business;
• We may borrow funds to
finance an acquisition, thereby increasing our leverage and diminishing our
liquidity; and
• We have completed various
acquisitions and opened additional banking offices in the past few years that
enhanced our rate of growth. We may not be able to continue to
sustain our past rate of growth or to grow at all in the future.
Our
growth or future losses may require us to raise additional capital in the
future, but that capital may not be available when it is needed or the cost of
that capital may be very high.
We are required by federal and state
regulatory authorities to maintain adequate levels of capital to support our
operations. We anticipate that our existing capital resources will
satisfy our capital requirements for the foreseeable future. We may
at some point need to raise additional capital to support continued growth or
losses, both internally and through acquisitions.
Our ability to raise additional
capital, if needed, will depend on conditions in the capital markets at that
time, which are outside our control, and on our financial
performance. Accordingly, we cannot make assurances of our ability to
raise additional capital if needed, or if the terms will be acceptable to
us. If we cannot raise additional capital when needed, our ability to
further expand our operations through internal growth and acquisitions could be
materially impaired.
Our
wholesale funding sources may prove insufficient to replace deposits or support
our future growth.
We must maintain sufficient
funds to respond to the needs of depositors and borrowers. As a part
of our liquidity management, we use a number of funding sources in addition to
core deposit growth and repayments and maturities of loans and
investments. As we continue to grow, we may become more dependent on
these sources, which include brokered certificates of deposit, repurchase
agreements, federal funds purchased, Federal Reserve term auction funds and
Federal Home Loan Bank advances. Adverse operating results or changes
in industry conditions could lead to an inability to replace these additional
funding sources at maturity. Our financial flexibility will be
severely constrained if we are unable to maintain our access to funding or if
adequate financing is not available to accommodate future growth at acceptable
interest rates. Finally, if we are required to rely more heavily on
more expensive funding sources to support future growth, our revenues may not
increase proportionately to cover our costs. In this case, our
operating margins and profitability would be adversely affected.
Since
our business is concentrated in the Chicago metropolitan area, a further decline
in the economy of this area may adversely affect our business.
Except for our lease banking activities
which are nationwide, our lending and deposit gathering activities are
concentrated primarily in the Chicago metropolitan area. Our success
depends on the general economic conditions of this metropolitan area and its
surrounding areas.
Many of the loans in our portfolio are
secured by real estate. Most of these loans are secured by properties
located in the Chicago metropolitan area. Continued deterioration in
the real estate markets where collateral for a mortgage loan is located could
adversely affect the borrower's ability to repay the loan and the value of the
collateral securing the loan. Real estate values are affected by
various other factors, including changes in general or regional economic
conditions, governmental rules or policies and natural disasters such as
tornados.
Adverse changes in the regional and
general economy could reduce our growth rate, impair our ability to collect
loans and generally have a negative effect on our financial condition and
results of operations.
We
may experience future goodwill impairment.
If
our estimates of the fair value of our goodwill change as a result of changes in
our business or other factors, we may determine that an impairment charge is
necessary. Estimates of fair value are based on a complex model using, among
other things, cash flows and company comparisons. To the extent our
market capitalization (market value of total common shares outstanding) is less
than the book value of our total stockholders’ equity (which it was not as of
December 31, 2008 but was as of February 27, 2009), this will be considered,
along with other pertinent factors, in determining whether goodwill is
impaired. If our estimates of future cash flows or other components
of our fair value calculations are inaccurate, the fair value of goodwill
reflected in our financial statements could be inaccurate and we could be
required to take asset impairment charges, which could have a material adverse
effect on our results of operations and financial
condition.
Non-compliance
with USA Patriot Act, Bank Secrecy Act, or other laws and regulations could
result in fines or sanctions.
The USA Patriot and Bank Secrecy Acts
require financial institutions to develop programs to prevent financial
institutions from being used for money laundering and terrorist
activities. If such activities are detected, financial institutions
are obligated to file suspicious activity reports with the U.S. Treasury
Department’s Office of Financial Crimes Enforcement Network. These
rules require financial institutions to establish procedures for identifying and
verifying the identity of customers seeking to open new financial
accounts. Failure to comply with these regulations could result in
fines or sanctions. During the last year, several banking
institutions have received large fines for non-compliance with these laws and
regulations. Although we have developed policies and procedures
designed to assist in compliance with these laws and regulations, no assurance
can be given that these policies and procedures will be effective in preventing
violations of these laws and regulations.
New
or changes in existing tax, accounting, and regulatory rules and interpretations
could significantly impact strategic initiatives, results of operations, cash
flows, and financial condition.
The financial services industry is
extensively regulated. Federal and state banking regulations are designed
primarily to protect the deposit insurance funds and consumers, not to benefit a
financial company’s shareholders. These regulations may sometimes
impose significant limitations on operations. The significant federal
and state banking regulations that affect us are described in this report under
the heading “Item 1. Business-Supervision and Regulation.” These
regulations, along with the currently existing tax, accounting, securities,
insurance, and monetary laws, regulations, rules, standards, policies, and
interpretations control the methods by which financial institutions conduct
business, implement strategic initiatives and tax compliance, and govern
financial reporting and disclosures. These laws, regulations, rules,
standards, policies, and interpretations are constantly evolving and may change
significantly over time.
Significant
legal actions could subject us to substantial liabilities.
We are from time to time subject to
claims related to our operations. These claims and legal actions,
including supervisory actions by our regulators, could involve large monetary
claims and significant defense costs. As a result, we may be exposed
to substantial liabilities, which could adversely affect our results of
operations and financial condition.
The
loss of certain key personnel could adversely affect our
operations.
Our success depends in large part on
the retention of a limited number of key management, lending and other banking
personnel. We could undergo a difficult transition period if we were
to lose the services of any of these individuals. Our success also
depends on the experience of our banking facilities' managers and lending
officers and on their relationships with the customers and communities they
serve. The loss of these key persons could negatively impact the
affected banking operations.
Because of our participation in the
CPP under the EESA, we are subject to several restrictions, including
restrictions on compensation paid to our executive officers and other
key
employees.
Our ability to retain
key officers and employees may be further impacted by legislation and regulation
affecting the financial services industry. On February 17, 2009, the American
Recovery and Reinvestment Act of 2009 was signed into law. Section 7001 of the
ARRA amended Section 111 of the EESA in its entirety. While the U.S. Treasury
must promulgate regulations to implement the restrictions and standards set
forth in Section 7001, the ARRA, among other things, significantly expands the
executive compensation restrictions previously imposed by the EESA. Such
restrictions apply to any entity that has received or will receive financial
assistance under the Troubled Asset Recovery Program, and will generally
continue to apply for as long as any obligation arising from financial
assistance provided under TARP, including preferred stock issued under the
Capital Purchase Program, remains outstanding. These ARRA restrictions will
not apply to any Troubled Asset Recovery Program recipient during such time when
the federal government (i) only holds any warrants to purchase common stock of
such recipient or (ii) does not hold any preferred stock or warrants to purchase
common stock of such recipient. As a result of our participation in the Capital
Purchase Program, the restrictions and standards set forth in Section 7001 of
the ARRA shall be applicable to us, subject to regulations promulgated by the
U.S. Treasury. Such restrictions and standards may further impact management's
ability to compete with financial institutions that are not subject to the same
limitations as us under Section 7001 of the ARRA.
Our business,
financial condition or results of operations could be materially adversely
affected by the loss of any of its key employees, or our inability to attract
and retain skilled employees.
Our
future success is dependent on our ability to compete effectively in the highly
competitive banking industry.
We face substantial competition in all
phases of our operations from a variety of different competitors. Our
future growth and success will depend on our ability to compete effectively in
this highly competitive environment. To date, we have grown our
business successfully by focusing on our business lines in our geographic
markets and emphasizing the high level of service and responsiveness desired by
our customers. We compete for loans, deposits and other financial
services with other commercial banks, thrifts, credit unions, brokerage houses,
mutual funds, insurance companies and specialized finance
companies. Many of our competitors offer products and services which
we do not offer, and many have substantially greater resources and lending
limits, name recognition and market presence that benefit them in attracting
business. In addition, larger competitors may be able to price loans
and deposits more aggressively than we do, and smaller newer competitors may
also be more aggressive in terms of pricing loan and deposit products than we
are in order to obtain a share of the market. Some of the financial
institutions and financial services organizations with which we compete are not
subject to the same degree of regulation as is imposed on bank holding
companies, federally insured state-chartered banks and national banks and
federal savings banks. As a result, these nonbank competitors have
certain advantages over us in accessing funding and in providing various
services.
We
are subject to security and operational risks relating to our use of technology
that could damage our reputation and our business.
Security breaches in our internet
banking activities could expose us to possible liability and damage our
reputation. Any compromise of our security also could deter customers
from using our internet banking services that involve the transmission of
confidential information. We rely on standard internet security
systems to provide the security and authentication necessary to effect secure
transmission of data. These precautions may not protect our systems
from compromises or breaches of our security measures that could result in
damage to our reputation and our business. Additionally, we outsource
our data processing to a third party. If our third party provider
encounters difficulties or if we have difficulty in communicating with such
third party, it will significantly affect our ability to adequately process and
account for customer transactions, which would significantly affect our business
operations.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
We conduct our business at 72 retail
banking center locations, with 71 in the Chicago metropolitan area and one in
Philadelphia, Pennsylvania. We own 37 of our banking center
facilities. The other facilities are leased for various
terms. All of our branches have ATMs, and we have 10 additional ATMs
at other locations in the Chicago metropolitan area. We believe that
all of our properties and equipment are well maintained, in good operating
condition and adequate for all of our present and anticipated
needs.
Set forth below is information relating
to each of our offices as of December 31, 2008. The total net book
value of our premises and equipment (including land and land improvements,
buildings, furniture and equipment, and buildings and leasehold improvements) at
December 31, 2008 was $186.5 million.
Principal
Business Office:
800 West
Madison Street, Chicago, Illinois
Banking
Office Locations:
Chicago
(Central)
1200
North Ashland Avenue, Chicago, Illinois (1)
936 North
Western, Chicago, Illinois
820 North
Western, Chicago, Illinois
2 South
LaSalle Street, Chicago, Illinois (1)
303 East
Wacker Drive, Chicago, Illinois (1)
One East
Wacker Drive, Chicago, Illinois (1)
One South
Wacker Drive, Chicago, Illinois (1)
33 W.
Huron St., Chicago, Illinois (1)
557 S.
State St., Chicago, Illinois (1)
1420 West
Madison Street, Chicago, Illinois (2)
Chicago
(North)
2965
North Milwaukee, Chicago, Illinois
5670
North Milwaukee, Chicago, Illinois
6443
North Sheridan Road, Chicago, Illinois (1)
Chicago
(South)
5100
South Damen Avenue, Chicago, Illinois
1618 West
18th Street, Chicago, Illinois
3030 East
92nd Street, Chicago, Illinois
Chicago
(West)
6422 West
Archer Avenue, Chicago, Illinois (2)
8300 West
Belmont, Chicago, Illinois
Chicago
(Suburban)
777 Army
Trail Rd., Addison, Illinois
2992
Indian Trail Rd., Aurora, Illinois
1050
Busse Hwy., Bensenville, Illinois (1)
455 S.
Weber Rd., Bolingbrook, Illinois
1500
Roosevelt Rd., Broadview, Illinois
5750 West
87th Street, Burbank, Illinois
7000
County Line Road, Burr Ridge, Illinois
8300 S.
Madison St., Burr Ridge, Illinois
600 W.
Plainfield Rd., Countryside, Illinois
1100 E.
Exchange Ave., Crete, Illinois (1)
2401
75th St. Darien, Illinois
14121
Chicago Road, Dolton, Illinois
1218
Sheffield Ave., Dyer Indiana (1)
990 North
York Road, Elmhurst, Illinois
685 N.
Lagrange Rd., Frankfort, Illinois (1)
356 Park
Ave., Glencoe, Illinois (1)
2823
Pfingsten Rd., Glenview, Illinois (1)
2200 N.
Waukegan Rd., Glenview, Illinois (1)
581 Elm
Pl., Highland Park, Illinois (1)
2345 West
183rd St., Homewood, Illinois (1)
13900 S.
Bell Rd., Homer Glen, Illinois
326 W.
Burlington Ave., LaGrange Park, Illinois
401 North
LaGrange Road, LaGrange Park, Illinois (1)
1151
State Street, Lemont, Illinois
6401
North Lincoln Avenue, Lincolnwood, Illinois
4010 West
Touhy Avenue, Lincolnwood, Illinois
6444 S.
College Rd., Lisle, Illinois (1)
1145 S.
Main St., Lombard, Illinois (2)
6201 West
Dempster Street, Morton Grove, Illinois
9147
Waukekgan Road, Morton Grove, Illinois
15 East
Prospect Avenue, Mount Prospect, Illinois (1)
380 W.
Diehl Rd., Naperville, Illinois
7557 West
Oakton Street, Niles, Illinois (1)
1161
Church St., Northbrook, Illinois (1)
7222 West
Cermak Road, North Riverside, Illinois (1)
1400
Sixteenth St., Oak Brook, Illinois (1)
3824 York
Rd., Oak Brook, Illinois (1)
9701 S.
Cicero Ave., Oak Lawn, Illinois
6621 West
North Ave., Oak Park, Illinois
2251 Plum
Grove Road, Palatine, Illinois
1014
Busse Highway, Park Ridge, Illinois (1)
6111
North River Road, Rosemont, Illinois (3)
200 West
Higgins Road, Schaumburg, Illinois (1)
475 East
162nd Street, South Holland, Illinois
16340
South Park Avenue, South Holland, Illinois
16145
South State St., South Holland, Illinois (1)
2607
Lincoln Hwy., St. Charles, Illinois
16255
South Harlem Avenue, Tinley Park, Illinois
18299
South Harlem Avenue, Tinley Park, Illinois
16039
South Harlem Avenue, Tinley Park, Illinois (1)
28W571
Batavia Rd., Warrenville, Illinois (1)
212 S.
West St., Wheaton, Illinois
Pennsylvania
7918
Bustleton Avenue, Philadelphia, Pennsylvania
|
(1)
|
Leased
facilities.
|
|
(2)
|
Land
under building site is leased; other land and buildings are
owned.
|
|
(3)
|
The
Company owns the building. However, the first floor is under a
master lease agreement to a third party. The branch leases the
space from the third party.
|
We also have non-bank office locations
in Chicago, Illinois, Paramus, New Jersey, Troy, Michigan, Columbus, Ohio, and
Freeport, The Bahamas. The Chicago office is used as the headquarters
for Cedar Hill. The Paramus location is used as part of our lease
banking services. The Troy and Columbus locations are used only as
part of LaSalle’s business. The Freeport office houses the
headquarters for MBRE Holdings LLC. None of these locations provide
banking services to our customers.
Item 3. Legal Proceedings
We are involved from time to time as
plaintiff or defendant in various legal actions arising in the normal course of
our businesses. While the ultimate outcome of pending proceedings
cannot be predicted with certainty, it is the opinion of management, after
consultation with counsel representing us in such proceedings, that the
resolution of these proceedings should not have a material adverse effect on our
consolidated financial position or results of operation.
Item 4. Submission of Matters to a Vote of Security
Holders
No matter was submitted to a vote of
security holders, through the solicitation of proxies or otherwise, during the
quarter ended December 31, 2008.
Item 5. Market for Registrant’s Common Equity,
Related Stockholder Matters and Issuer Purchases of Equity
Securities
Our common stock is traded on the
NASDAQ Global Select Market under the symbol “MBFI”. There were
approximately 1,650 holders of record of our common stock as of December 31,
2008.
The
following table presents quarterly market price information and cash dividends
paid per share for our common stock for 2008 and 2007:
|
Market
Price Range
|
||||||
|
High
|
Low
|
Dividends
Paid
|
||||
|
2008
|
||||||
|
Quarter
ended December 31, 2008
|
$34.59
|
$20.43
|
$0.18
|
|||
|
Quarter
ended September 30, 2008
|
$44.29
|
$18.76
|
$0.18
|
|||
|
Quarter
ended June 30, 2008
|
$32.59
|
$22.47
|
$0.18
|
|||
|
Quarter
ended March 31, 2008
|
$33.30
|
$25.41
|
$0.18
|
|||
|
2007
|
||||||
|
Quarter
ended December 31, 2007
|
$36.52
|
$29.13
|
$0.18
|
|||
|
Quarter
ended September 30, 2007
|
$37.88
|
$31.15
|
$0.18
|
|||
|
Quarter
ended June 30, 2007
|
$36.53
|
$33.18
|
$0.18
|
|||
|
Quarter
ended March 31, 2007
|
$37.89
|
$34.50
|
$0.18
|
|||
The timing and amount of cash dividends
paid depends on our earnings, capital requirements, financial condition and
other relevant factors. In this regard, we reduced our dividend for
the first quarter of 2009 to $0.12 per share after reviewing these factors and
giving consideration to the current economic environment. The primary
source for dividends paid to stockholders is dividends paid to us from MB
Financial Bank. We have an internal policy which provides that
dividends paid to us by MB Financial Bank cannot exceed an amount that would
cause the bank’s total risk-based capital, Tier 1 risk-based capital and Tier 1
leverage capital ratios to fall below 11%, 8% and 7%,
respectively. The minimum ratios required for a bank to be considered
“well capitalized” for regulatory purposes are 10%, 6% and 5%,
respectively. In addition to adhering to our internal policy, there
are regulatory restrictions on the ability of national banks to pay
dividends. See “Item 1. Business - Supervision
and Regulation - Dividends” above and Note 18 of notes to consolidated financial statements
contained in Item 8 of this report.
The
following table sets forth information for the three months ended December 31,
2008 with respect to repurchases of our outstanding common shares:
|
Total
Number of Shares Purchased (1)
|
Average
Price Paid per Share
|
Number
of Shares Purchased as Part Publicly Announced Plans or
Programs
|
Maximum
Number of Shares that May Yet Be Purchased Under the Plans or
Programs
|
||||
|
October
1, 2008 – October 31, 2008
|
172
|
$29.67
|
-
|
-
|
|||
|
November
1, 2008 – November 30, 2008
|
160
|
29.71
|
-
|
-
|
|||
|
December
1, 2008 – December 31, 2008
|
38,660
|
(2)
|
26.09
|
(2)
|
-
|
-
|
|
|
Total
|
38,992
|
$26.12
|
-
|
|
(1)
|
Represents
shares of stock withheld upon vesting of restricted shares or exercise of
stock options to satisfy tax withholding
obligations.
|
|
(2)
|
Includes
36,817 shares surrendered to the Company in payment of the exercise price
of stock options exercised, and to satisfy tax withholding
obligations.
|
On
December 5, 2008, as part of the Troubled Asset Relief Program (“TARP”) Capital
Purchase Program of the United States Department of the Treasury (“Treasury”),
the Company sold to Treasury 196,000 shares of the Company’s Fixed Rate
Cumulative Perpetual Preferred Stock, Series A (the “Series A Preferred Stock”),
having a liquidation preference
amount of
$1,000 per share, for a purchase price of $196.0 million in cash and (ii) issued
to Treasury a ten-year warrant to purchase 1,012,048 shares of the
Company’s common stock at an exercise price of $29.05 per share.
The
securities purchase agreement between us and Treasury provides that prior to the
earlier of (i) December 5, 2011 and (ii) the date on which all of the shares of
the Series A Preferred Stock have been redeemed by us or transferred by Treasury
to third parties, we may not, without the consent of Treasury, (a) pay a cash
dividend on our common stock of more than $0.18 per share or (b) subject to
limited exceptions, redeem, repurchase or otherwise acquire shares of our common
stock or preferred stock, other than the Series A Preferred Stock, or trust
preferred securities. In addition, under the terms of the Series A
Preferred Stock, we may not pay dividends on our common stock unless we are
current in our dividend payments on the Series A Preferred
Stock. Dividends on the Series A Preferred Stock are payable
quarterly at a rate of 5% per annum for the first five years and a rate of 9%
per annum thereafter if not redeemed prior to that time.
Stock
Performance Presentation
The following line graph shows a
comparison of the cumulative returns for the Company, the NASDAQ Market Bank
Index and an index of peer corporations selected by the Company, for the period
beginning December 31, 2003 and ending December 31, 2008. The
information assumes that $100 was invested at the closing price on December 31,
2003 in the Common Stock and each index, and that all dividends were
reinvested.
|
COMPARISON
OF 5-YEAR CUMULATIVE TOTAL RETURN
AMONG
MB FINANCIAL, INC.,
NASDAQ
BANK INDEX AND PEER GROUP INDEX
|
|
Fiscal
Year Ending
|
||||||
|
COMPANY/INDEX/MARKET
|
12/31/2003
|
12/31/2004
|
12/31/2005
|
12/31/2006
|
12/31/2007
|
12/31/2008
|
|
MB
Financial, Inc.
|
100.00
|
117.37
|
100.01
|
108.23
|
90.56
|
84.23
|
|
NASDAQ
Banks
|
100.00
|
110.99
|
106.18
|
117.87
|
91.85
|
69.88
|
|
Peer
Group
|
100.00
|
121.82
|
123.52
|
129.14
|
96.12
|
58.73
|
|
|
The
Peer Group is made up of the common stocks of the following
companies:
|
AMCORE
FINANCIAL INC
FIRST
MIDWEST BANCORP INC
MIDWEST
BANC HOLDINGS INC
OLD
SECOND BANCORP INC
PRIVATEBANCORP
INC
TAYLOR
CAPITAL GROUP INC
WINTRUST
FINANCIAL CORPORATION
Item 6. Selected Financial Data
Set forth below and on the following
page is our summary consolidated financial information and other financial
data. This information should be read in conjunction with
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations” included herein in response to Item 7 and the consolidated financial
statements and notes thereto included herein in response to Item 8 (in
thousands, except common share data).
On November 28, 2007, the Company sold
its Union Bank subsidiary. In accordance with accounting principles
generally accepted in the United States, the assets, liabilities, earnings, and
cash flows of the business conducted by Union Bank have been shown separately as
discontinued operations in the consolidated balance sheets, consolidated
statements of income, and consolidated statements of cash flows for all periods
presented.
For purposes of the following
discussion, balances, average rate, income and expenses associated with Union
Bank have been excluded from continuing operations. See Note 3 in the notes to consolidated financial statements
contained under Item 8. Financial Statements and Supplementary
Data.
Our summary consolidated financial
information and other financial data contain information determined by methods
other than in accordance with accounting principles generally accepted in the
United States of America (GAAP). These measures include net interest
income on a fully tax equivalent basis, net interest margin on a fully tax
equivalent basis, tangible equity to assets ratio, tangible common equity to
assets ratio, tangible common book value per share, and annualized cash return
on average tangible common equity. Our management uses these non-GAAP
measures in its analysis of our performance. The tax equivalent
adjustment to net interest income recognizes the income tax savings when
comparing taxable and tax-exempt assets and assumes a 35% tax
rate. Management believes that it is a standard practice in the
banking industry to present net interest income and net interest margin on a
fully tax equivalent basis, and accordingly believes that providing these
measures may be useful for peer comparison purposes. The other
measures exclude goodwill and other intangible assets, net of tax benefit, in
determining tangible stockholders’ equity. Management believes the
presentation of these other financial measures excluding the impact of such
items provides useful supplemental information that is helpful in understanding
our financial results, as they provide a method to assess management’s success
in utilizing our tangible capital. These disclosures should not be
viewed as substitutes for the results determined to be in accordance with GAAP,
nor are they necessarily comparable to non-GAAP performance measures that may be
presented by other companies.
Reconciliations
of net interest margin on a fully tax equivalent basis to net interest margin
and tangible common book value per common share to common book value per common
share are contained in the “Selected Financial Data” discussed
below.
Selected
Financial Data:
|
As
of or for the Year Ended December 31,
|
||||||||||
|
2008
|
2007
|
2006
(1)
|
2005
|
2004
(2)
|
||||||
|
Statement
of Income Data:
|
||||||||||
|
Interest
income
|
$413,788
|
$457,266
|
$374,371
|
$274,522
|
$213,788
|
|||||
|
Interest
expense
|
192,900
|
244,960
|
186,192
|
105,689
|
65,083
|
|||||
|
Net
interest income
|
220,888
|
212,306
|
188,179
|
168,833
|
148,705
|
|||||
|
Provision
for loan losses
|
125,721
|
19,313
|
10,100
|
8,150
|
7,800
|
|||||
|
Net
interest income after provision for loan losses
|
95,167
|
192,993
|
178,079
|
160,683
|
140,905
|
|||||
|
Other
income
|
98,466
|
99,904
|
71,321
|
60,080
|
63,288
|
|||||
|
Other
expenses
|
200,787
|
206,836
|
159,075
|
133,511
|
119,518
|
|||||
|
Income
(loss) before income taxes
|
(7,154)
|
86,061
|
90,325
|
87,252
|
84,675
|
|||||
|
Applicable
income tax expense (benefit)
|
(23,318)
|
24,036
|
27,269
|
26,607
|
25,697
|
|||||
|
Income
from continuing operations
|
16,164
|
62,025
|
63,056
|
60,645
|
58,978
|
|||||
|
Discontinued
operations
|
||||||||||
|
Income
from discontinued operations before income taxes
|
-
|
50,475
|
6,213
|
6,281
|
6,091
|
|||||
|
Income
taxes
|
-
|
18,637
|
2,155
|
2,172
|
1,941
|
|||||
|
Income
from discontinued operations
|
-
|
31,838
|
4,058
|
4,109
|
4,150
|
|||||
|
Net
income
|
16,164
|
93,863
|
67,114
|
64,754
|
63,128
|
|||||
|
Dividends
on preferred shares
|
789
|
-
|
-
|
-
|
-
|
|||||
|
Net
income available to common shareholders
|
$
15,375
|
$
93,863
|
$
67,114
|
$
64,754
|
$
63,128
|
|||||
|
Common
Share Data:
|
||||||||||
|
Basic
earnings per common share from continuing operations
|
$ 0.44
|
$
1.73
|
$
2.02
|
$
2.13
|
$
2.11
|
|||||
|
Basic
earnings per common share from discontinued operations
|
$
-
|
$
0.88
|
$
0.13
|
$
0.14
|
$
0.15
|
|||||
|
Basic
earnings per common share
|
$ 0.44
|
$
2.61
|
$
2.15
|
$
2.27
|
$
2.26
|
|||||
|
Diluted
earnings per common share from continuing operations
|
$
0.44
|
$
1.70
|
$
1.99
|
$
2.10
|
$
2.07
|
|||||
|
Diluted
earnings per common share from discontinued operations
|
$
-
|
$
0.88
|
$
0.13
|
$
0.14
|
$
0.14
|
|||||
|
Diluted
earnings per common share
|
$ 0.44
|
$
2.58
|
$
2.12
|
$
2.24
|
$
2.21
|
|||||
|
Common
book value per common share
|
$
25.17
|
$
24.91
|
$
23.10
|
$
17.81
|
$
16.90
|
|||||
|
Less:
goodwill and other tangible assets, net of tax benefit, per common
share
|
$
11.56
|
$
11.43
|
$
10.85
|
$
4.66
|
$
4.63
|
|||||
|
Tangible
common book value per common share
|
$
13.61
|
$
13.48
|
$
12.25
|
$
13.15
|
$
12.27
|
|||||
|
Weighted
average common shares outstanding:
|
||||||||||
|
Basic
|
34,706,092
|
35,919,900
|
31,156,887
|
28,480,909
|
27,886,191
|
|||||
|
Diluted
|
35,061,712
|
36,439,561
|
31,687,220
|
28,895,042
|
28,537,111
|
|||||
|
Dividend
payout ratio
|
163.64%
|
27.59%
|
30.70%
|
24.63%
|
22.09%
|
|||||
|
Cash
dividends per common share
|
$
0.72
|
$
0.72
|
$
0.66
|
$
0.56
|
$
0.50
|
|||||
|
(1)
|
In
2006 we acquired First Oak Brook Bancshares, Inc.
|
|
(2)
|
In
2004 we acquired First SecurityFed Financial,
Inc.
|
Selected Financial Data (continued):
|
As
of or for the Year Ended December 31,
|
||||||||||
|
(Dollars
in thousands)
|
2008
|
2007
|
2006
|
2005
|
2004
|
|||||
|
Balance
Sheet Data:
|
||||||||||
|
Cash
and due from banks
|
$
79,824
|
$141,248
|
$142,207
|
$
82,751
|
$
81,059
|
|||||
|
Investment
securities
|
1,400,376
|
1,241,385
|
1,628,348
|
1,316,149
|
1,256,526
|
|||||
|
Loans,
gross
|
6,228,563
|
5,615,627
|
4,971,494
|
3,480,447
|
3,180,820
|
|||||
|
Allowance
for loan losses
|
144,001
|
65,103
|
58,983
|
42,290
|
42,255
|
|||||
|
Assets
held for sale
|
-
|
-
|
393,608
|
370,103
|
320,190
|
|||||
|
Total
assets
|
8,819,763
|
7,834,703
|
7,978,298
|
5,719,065
|
5,253,975
|
|||||
|
Deposits
|
6,495,571
|
5,513,783
|
5,580,553
|
3,906,212
|
3,698,540
|
|||||
|
Short-term
and long-term borrowings
|
960,085
|
1,186,586
|
934,384
|
771,088
|
633,616
|
|||||
|
Junior
subordinated notes issued to capital trusts
|
158,824
|
159,016
|
179,162
|
123,526
|
87,443
|
|||||
|
Liabilities
held for sale
|
-
|
-
|
361,008
|
341,988
|
293,110
|
|||||
|
Stockholders’
equity
|
1,066,195
|
862,369
|
846,952
|
506,986
|
484,537
|
|||||
|
Plus:
minority interest
|
2,629
|
-
|
-
|
-
|
-
|
|||||
|
Less:
goodwill
|
387,069
|
379,047
|
379,047
|
125,010
|
123,628
|
|||||
|
Less:
other intangible assets, net of tax benefit
|
16,754
|
16,479
|
18,756
|
8,186
|
8,832
|
|||||
|
Tangible
equity
|
665,001
|
466,843
|
449,149
|
373,790
|
352,077
|
|||||
|
Less:
preferred stock
|
193,025
|
-
|
-
|
-
|
-
|
|||||
|
Tangible
common equity
|
$471,976
|
$466,843
|
$449,149
|
$373,790
|
$352,077
|
|||||
|
Performance
Ratios (continuing operations):
|
||||||||||
|
Return
on average assets
|
0.20%
|
0.78%
|
0.96%
|
1.10%
|
1.23%
|
|||||
|
Return
on average common equity
|
1.74%
|
7.29%
|
10.06%
|
12.31%
|
13.55%
|
|||||
|
Net
interest margin (1)
|
3.03%
|
3.20%
|
3.40%
|
3.62%
|
3.67%
|
|||||
|
Tax
equivalent effect
|
0.13%
|
0.12%
|
0.11%
|
0.12%
|
0.10%
|
|||||
|
Net
interest margin – fully tax equivalent basis (1)
|
3.16%
|
3.32%
|
3.51%
|
3.74%
|
3.77%
|
|||||
|
Efficiency
ratio (2)
|
61.19%
|
63.90%
|
59.77%
|
56.53%
|
54.18%
|
|||||
|
Cash
return on average tangible common equity (3)
|
3.65%
|
14.14%
|
16.03%
|
17.02%
|
18.26%
|
|||||
|
Loans
to deposits
|
95.89%
|
101.85%
|
89.09%
|
89.10%
|
86.00%
|
|||||
|
Performance
Ratios (total):
|
||||||||||
|
Return
on average assets
|
0.20%
|
1.19%
|
1.02%
|
1.17%
|
1.31%
|
|||||
|
Return
on average common equity
|
1.74%
|
11.03%
|
10.70%
|
13.15%
|
14.50%
|
|||||
|
Net
interest margin (1)
|
3.03%
|
3.22%
|
3.41%
|
3.63%
|
3.69%
|
|||||
|
Tax
equivalent effect
|
0.13%
|
0.11%
|
0.11%
|
0.11%
|
0.10%
|
|||||
|
Net
interest margin – fully tax equivalent basis (1)
|
3.16%
|
3.33%
|
3.52%
|
3.74%
|
3.79%
|
|||||
|
Efficiency
ratio (2)
|
61.19%
|
55.90%
|
59.61%
|
56.47%
|
55.16%
|
|||||
|
Cash
return on average tangible common equity (3)
|
3.65%
|
21.14%
|
17.04%
|
18.16%
|
19.53%
|
|||||
|
Loans
to deposits
|
95.89%
|
101.85%
|
89.10%
|
89.16%
|
84.44%
|
|||||
|
Asset
Quality Ratios:
|
||||||||||
|
Non-performing
loans to total loans (4)
|
2.34%
|
0.44%
|
0.43%
|
0.58%
|
0.71%
|
|||||
|
Non-performing
assets to total assets (5)
|
1.71%
|
0.33%
|
0.31%
|
0.36%
|
0.44%
|
|||||
|
Allowance
for loan losses to total loans
|
2.31%
|
1.16%
|
1.19%
|
1.22%
|
1.33%
|
|||||
|
Allowance
for loan losses to non-performing loans (4)
|
98.67%
|
266.17%
|
274.75%
|
209.66%
|
187.21%
|
|||||
|
Net
loan charge-offs to average loans
|
0.79%
|
0.25%
|
0.24%
|
0.24%
|
0.23%
|
|||||
|
Liquidity
and Capital Ratios:
|
||||||||||
|
Tier
1 capital to risk weighted assets
|
12.07%
|
9.75%
|
10.49%
|
11.70%
|
11.38%
|
|||||
|
Total
capital to risk weighted assets
|
14.08%
|
11.58%
|
11.80%
|
12.91%
|
12.54%
|
|||||
|
Tier
1 capital to average assets
|
9.85%
|
8.18%
|
8.39%
|
9.08%
|
8.62%
|
|||||
|
Average
equity to average assets
|
10.90%
|
10.76%
|
9.50%
|
8.93%
|
9.07%
|
|||||
|
Tangible
equity to assets (6)
|
7.90%
|
6.28%
|
5.93%
|
6.69%
|
6.87%
|
|||||
|
Tangible
common equity to assets (7)
|
5.61%
|
6.28%
|
5.93%
|
6.69%
|
6.87%
|
|||||
|
Other:
|
||||||||||
|
Banking
facilities
|
72
|
73
|
70
|
45
|
45
|
|||||
|
Full
time equivalent employees (8)
|
1,342
|
1,282
|
1,380
|
1,123
|
1,030
|
|||||
|
(1)
|
Net
interest margin represents net interest income as a percentage of average
interest earning assets.
|
|
(2)
|
Equals
total other expense divided by the sum of net interest income on a fully
tax equivalent basis and total other income less net gains (losses) on
securities available for sale.
|
|
(3)
|
Net
cash flow available to common stockholders (net income plus other
intangibles amortization expense, net of tax benefit) / Average tangible
common equity (average common equity less average goodwill and average
other intangibles, net of tax
benefit).
|
|
(4)
|
Non-performing
loans include loans accounted for on a non-accrual basis, accruing loans
contractually past due 90 days or more as to interest or principal and
loans the terms of which have been renegotiated to provide reduction or
deferral of interest or principal because of a deterioration in the
financial position of the borrower.
|
|
(5)
|
Non-performing
assets include non-performing loans, other real estate owned and other
repossessed assets.
|
|
(6)
|
Equals
total ending shareholders’ equity plus minority interest less goodwill and
other intangibles, net of tax benefit, divided by total assets less
goodwill and other intangibles, net of tax
benefit.
|
|
(7)
|
Equals
total ending shareholders’ equity plus minority interest less preferred
stock, goodwill and other intangibles, net of tax benefit, divided by
total assets less goodwill and other intangibles, net of tax
benefit.
|
|
(8)
|
Includes
Union Bank employees.
|
Selected
Financial Data (continued):
The
following table presents a reconciliation of cash return on average common
tangible equity (in thousands):
|
2008
|
2007
|
2006
|
2005
|
2004
|
||
|
Net
Income available to common shareholders from continuing
|
||||||
|
operations
- as reported
|
$
15,375
|
$
62,025
|
$
63,056
|
$
60,645
|
$
58,978
|
|
|
Plus: Intangible
amortization, net of tax benefit
|
2,310
|
2,278
|
1,281
|
645
|
660
|
|
|
Net
cash flow available to common shareholders from continuing
operations
|
$
17,685
|
$
64,303
|
$
64,337
|
$
61,290
|
$
59,638
|
|
|
Net
Income available to common shareholders
|
$
15,375
|
$
93,863
|
$
67,114
|
$
64,754
|
$
63,128
|
|
|
Plus: Intangible
amortization, net of tax benefit
|
2,310
|
2,278
|
1,281
|
645
|
660
|
|
|
Net
cash flow available to common shareholders
|
$
17,685
|
$
96,141
|
$
68,395
|
$
65,399
|
$
63,788
|
|
|
Average
common stockholder’s equity
|
$884,032
|
$851,324
|
$627,069
|
$492,513
|
$435,419
|
|
|
Plus: Average
minority interest
|
1,516
|
-
|
-
|
-
|
-
|
|
|
Less: Average
goodwill
|
383,737
|
379,047
|
213,874
|
123,879
|
101,314
|
|
|
Less: Average
other intangible assets net of tax benefit
|
16,788
|
17,524
|
11,901
|
8,496
|
7,453
|
|
|
Average
tangible common equity
|
$485,023
|
$454,753
|
$401,294
|
$360,138
|
$326,652
|
The
following table sets forth our selected quarterly financial data (in thousands,
except common share data):
|
Three
Months Ended 2008
|
Three
Months Ended 2007
|
|||||||
|
Statement
of Income Data:
|
December
|
September
|
June
|
March
|
December
|
September
|
June
|
March
|
|
Interest
income
|
$101,535
|
$103,061
|
$101,390
|
$107,802
|
$114,829
|
$117,172
|
$113,397
|
$111,868
|
|
Interest
expense
|
46,789
|
46,455
|
45,317
|
54,339
|
60,857
|
63,089
|
61,043
|
59,971
|
|
Net
interest income
|
54,746
|
56,606
|
56,073
|
53,463
|
53,972
|
54,083
|
52,354
|
51,897
|
|
Provision
for loan losses
|
72,581
|
18,400
|
12,200
|
22,540
|
8,000
|
4,500
|
3,000
|
3,813
|
|
Net
interest income (loss) after provision for loan losses
|
(17,835)
|
38,206
|
43,873
|
30,923
|
45,972
|
49,583
|
49,354
|
48,084
|
|
Other
income
|
21,937
|
26,425
|
25,567
|
24,537
|
22,981
|
23,259
|
30,720
|
22,944
|
|
Other
expenses
|
48,271
|
52,166
|
52,126
|
48,224
|
59,130
|
48,827
|
52,073
|
46,806
|
|
Income
(loss) before income taxes
|
(44,169)
|
12,465
|
17,314
|
7,236
|
9,823
|
24,015
|
28,001
|
24,222
|
|
Income
tax expense (benefit)
|
(19,348)
|
(689)
|
(4,693)
|
1,412
|
1,890
|
6,709
|
8,394
|
7,043
|
|
Income
(loss) from continuing operations
|
(24,821)
|
13,154
|
22,007
|
5,824
|
7,933
|
17,306
|
19,607
|
17,179
|
|
Discontinued
operations
|
||||||||
|
Income
from discontinued operations before income taxes
|
-
|
-
|
-
|
-
|
45,744
|
1,499
|
1,803
|
1,429
|
|
Income
taxes
|
-
|
-
|
-
|
-
|
17,281
|
500
|
369
|
487
|
|
Income
from discontinued operations
|
-
|
-
|
-
|
-
|
28,463
|
999
|
1,434
|
942
|
|
Net
income (loss)
|
$(24,821)
|
$
13,154
|
$
22,007
|
$ 5,824
|
$
36,396
|
$
18,305
|
$
21,041
|
$
18,121
|
|
Dividends
on preferred shares
|
789
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
|
Net
income (loss) available to common shareholders
|
$(25,610)
|
$
13,154
|
$
22,007
|
$
5,824
|
$
36,396
|
$
18,305
|
$
21,041
|
$
18,121
|
|
Net
Interest Margin
|
2.86%
|
3.04%
|
3.11%
|
3.10%
|
3.16%
|
3.22%
|
3.20%
|
3.21%
|
|
Tax
equivalent effect
|
0.14%
|
0.14%
|
0.14%
|
0.12%
|
0.12%
|
0.12%
|
0.11%
|
0.12%
|
|
Net
interest margin on a fully tax equivalent basis
|
3.00%
|
3.18%
|
3.25%
|
3.22%
|
3.28%
|
3.34%
|
3.31%
|
3.33%
|
|
Common
Share Data :
|
||||||||
|
Basic
earnings (loss) per common share from continuing
operations
|
$ (0.74)
|
$
0.38
|
$
0.63
|
$
0.17
|
$
0.23
|
$
0.48
|
$
0.54
|
$
0.47
|
|
Basic
earnings per common share from discontinued operations
|
$
-
|
$
-
|
$
-
|
$
-
|
$
0.81
|
$
0.03
|
$
0.04
|
$
0.02
|
|
Basic
earnings (loss) per common share
|
$
(0.74)
|
$
0.38
|
$
0.63
|
$
0.17
|
$
1.04
|
$
0.51
|
$
0.58
|
$
0.49
|
|
Diluted
earnings (loss) per common share from continuing
operations
|
$
(0.74)
|
$
0.38
|
$
0.63
|
$
0.17
|
$
0.22
|
$
0.48
|
$
0.53
|
$
0.46
|
|
Diluted
earnings per common share from discontinued operations
|
$
-
|
$
-
|
$
-
|
$
-
|
$
0.80
|
$
0.03
|
$
0.04
|
$
0.03
|
|
Diluted
earnings (loss) per common share
|
$
(0.74)
|
$
0.38
|
$
0.63
|
$
0.17
|
$
1.02
|
$
0.51
|
$
0.57
|
$
0.49
|
|
Weighted
average common shares outstanding
|
34,777,651
|
34,732,633
|
34,692,571
|
34,620,435
|
35,095,301
|
35,733,165
|
36,239,731
|
36,630,323
|
|
Diluted
weighted average common shares outstanding
|
35,164,585
|
35,074,297
|
35,047,596
|
34,994,731
|
35,536,449
|
36,213,532
|
36,744,473
|
37,180,928
|
Fourth
Quarter Results
We had a net loss from continuing
operations available to common shareholders of $25.6 million for the fourth
quarter of 2008, compared to net income from continuing operations available to
common shareholders of $7.9 million for the fourth quarter of
2007. The results for the fourth quarter of 2008 generated an
annualized return on average assets of (1.15%), an annualized return on average
common equity of (11.38%) and an annualized cash return on average tangible
common equity of (20.14%), compared to 0.40%, 3.68% and 7.32%, respectively, for
the same period in 2007.
Net
interest income remained stable in the fourth quarter of 2008 compared to the
fourth quarter of 2007. Our average interest earning assets increased
by $837.6 million from the fourth quarter of 2007 to the fourth quarter of
2008. The increase in average interest earning assets was offset by a
28 basis point decrease in our net interest margin, on a fully tax equivalent
basis. Average interest bearing assets increased primarily due to
organic growth. There were three primary reasons for the decline in
our net interest margin. First, much of the decline in the margin was
due to the timing of asset and liability repricing. Our interest
earning assets tend to reprice faster than our interest bearing
liabilities. There was a dramatic decrease in Fed funds and
LIBOR rates during the fourth quarter of 2008. As a result, our
overall loan yields declined significantly more than our funding costs during
the fourth quarter of 2008, as it typically takes more time for our funding
liabilities to adjust. Second, we experienced very strong core
funding growth, and as a result of this growth along with the receipt of $196.0
million from the issuance of preferred securities pursuant to the TARP Capital
Purchase Program, we built significant excess liquidity during the fourth
quarter of 2008. Third, our non-performing loans increased from $24.5
million at December 31, 2007 to $145.9 million at December 31,
2008. See “Management’s Discussion and Analysis of Financial
Condition and Results of Operations-Asset Quality” in
Item 7 below for further analysis of non-performing loans.
The provision for loan losses was $72.6
million in the fourth quarter of 2008 and $8.0 million in the fourth quarter of
2007. The increase in our provision from 2007 to 2008 was
primarily due to increases in non-performing and potential problem loans as a
result of declining real estate values and the continued deterioration in
economic conditions. Net charge-offs were $17.4 million in the
quarter ended December 31, 2008 compared to $4.0 million in the quarter ended
December 31, 2007. See “Management’s Discussion and Analysis of
Financial Condition and Results of Operations-Asset
Quality” in Item 7 below for further analysis of the allowance for loan
losses.
Other income was $21.9 million for the
quarter ended December 31, 2008, a decrease of $1.0 million, or 4.5% compared to
$23.0 million for the quarter ended December 31, 2007. Deposit
service fees increased from $6.6 million in the fourth quarter of 2007 to $7.5
million in the fourth quarter of 2008, primarily due to an increase in
commercial deposit and treasury management fees during 2008, as a result of a
lower earnings credit rate. Trust and asset management fees increased
from $2.1 million in fourth quarter of 2007 to $2.8 million in the fourth
quarter of 2008, primarily due to our Cedar Hill acquisition during the second
quarter of 2008. Net gains recognized on securities sold totaled $24
thousand in the fourth quarter of 2008, compared to a net loss of $1.5 million
on securities sold for the quarter ended December 31, 2007. These
increases were offset by decreases in brokerage fees, net gain on sale of
assets, and other operating income of $878 thousand, $1.6 million, and $1.2
million, respectively. Brokerage fees decreased primarily due to a
$447 thousand gain on the sale of our third party brokerage business recognized
in the fourth quarter of 2007, and lower sales activity during the fourth
quarter of 2008 compared to the fourth quarter of 2007. Net losses
recognized on assets sold totaled $874 thousand in the fourth quarter of 2008,
compared to net gains recognized of $723 thousand during the same period in
2007. Other operating income decreased primarily due to a decrease in
market value of assets held in trust for deferred compensation.
Other expense decreased $10.9 million
or 18.4% to $48.3 million for the quarter ended December 31, 2008 from $59.1
million for the quarter ended December 31, 2007. Salaries and
employee benefits expense decreased by $8.4 million, primarily due to an
executive separation agreement expense of $5.9 million incurred in the fourth
quarter of 2007, and a decrease in employee bonus expense during the fourth
quarter of 2008. Professional and legal expense decreased by $1.7
million, primarily due to $1.9 million of unamortized issuance costs recognized
in the fourth quarter of 2007, as a result of the redemption of trust preferred
securities in October 2007. Charitable contributions decreased $1.5
million, due to a $1.5 million contribution made in the fourth quarter of 2007
to the MB Financial Charitable Foundation, which is dedicated to strengthening
the communities where MB Financial Bank operates. Other operating
expenses increased by $1.1 million, primarily due to an increase in FDIC
insurance premiums, as our FDIC credits were fully utilized during the fourth
quarter of 2008.
Income tax benefit from continuing
operations for the three months ended December 31, 2008 was $19.3 million,
compared to income tax expense from continuing operations of $1.9 million for
the three months ended December 31, 2007. See Note
16 of notes to consolidated financial statements contained in Item 8 of this
report for further analysis of income taxes.
Item 7. Management’s Discussion and Analysis of
Financial Condition and Results of Operations
The
following is a discussion and analysis of our financial position and results of
operations and should be read in conjunction with the information set forth
under “Item 1A Risks Factors,” “General” in Item 7A, Quantitative and
Qualitative Disclosures about Market Risk, and our consolidated financial
statements and notes thereto appearing under Item 8 of this report.
Overview
We had net income from continuing
operations available to common shareholders of $15.4 million for the year ended
December 31, 2008 compared to $62.0 million for the year ended December 31,
2007. Fully diluted earnings per share from continuing operations
available to common shareholders for 2008 were $0.44 compared to $1.70 per share
in 2007.
The profitability of our operations
depends primarily on our net interest income after provision for loan losses,
which is the difference between interest earned on interest earning assets and
interest paid on interest bearing liabilities less provision for loan
losses. The provision for loan losses is dependent on changes in our
loan portfolio and management’s assessment of the collectability of our loan
portfolio as well as prevailing economic and market
conditions. Additionally, our net income is affected by other income
and other expenses. The provision for loan losses reflects the
amount, when added to the existing balance of the allowance for loan losses,
that we believe is adequate to cover potential credit losses in our loan
portfolio. Non-interest income or other income consists of loan
service fees, deposit service fees, net lease financing income, brokerage fees,
asset management and trust fees, net gains on the sale of investment securities
available for sale, increase in cash surrender value of life insurance, net
gains on sale of other assets, merchant card processing fees and other operating
income. Other expenses include salaries and employee benefits,
occupancy and equipment expense, computer services expense, advertising and
marketing expense, professional and legal expense, brokerage fee expense,
telecommunication expense, other intangibles amortization expense, merchant card
processing expense, charitable contributions, and other operating
expenses. Additionally, dividends on preferred shares reduce net
income available to common shareholders.
Net interest income is affected by
changes in the volume and mix of interest earning assets, interest earned on
those assets, the volume and mix of interest bearing liabilities and interest
paid on interest bearing liabilities. Other income and other expenses
are impacted by growth of operations and growth in the number of loan and
deposit accounts through both acquisitions and core banking business
growth. Growth in operations affects other expenses primarily as a
result of additional employees, branch facilities and promotional marketing
expense. Growth in the number of loan and deposit accounts affects
other income, including service fees as well as other expenses such as computer
services, supplies, postage, telecommunications and other miscellaneous
expenses.
As noted under “Item 6. Selected
Financial Data," on November 28, 2007, we completed the sale of our Oklahoma
City-based subsidiary bank, Union Bank for $76.3 million, resulting in an
after-tax gain of $28.8 million. Prior to closing, Union Bank sold to
MB Financial Bank approximately $100 million in performing loans previously
purchased from and originated by MB Financial Bank.
For purposes of the following
discussion, balances, average rate, income and expenses associated with Union
Bank, including the gain recognized on the sale, have been excluded from
continuing operations. See Note 3 of the notes
to our consolidated financial statements for additional information on
discontinued operations.
Recent
Market Developments
In
response to the financial crises affecting the banking system and financial
markets and going concern threats to investment banks and other financial
institutions, on October 3, 2008, the Emergency Economic Stabilization Act
of 2008 (the “EESA”) was signed into law. Pursuant to the EESA, the U.S.
Treasury was given the authority to, among other things, purchase up to
$700 billion of mortgages, mortgage-backed securities and certain other
financial instruments from financial institutions for the purpose of stabilizing
and providing liquidity to the U.S. financial markets.
On
October 14, 2008, the Secretary of the Department of the Treasury announced that
the Department of the Treasury would purchase equity stakes in a wide variety of
banks and thrifts. Under the program, known as the Troubled Asset Relief Program
Capital Purchase Program (the “TARP Capital Purchase Program”), from the $700
billion authorized by the EESA, the Treasury made $250 billion of capital
available to U.S. financial institutions in the form of preferred stock. In
conjunction with the purchase of preferred stock, the Treasury received, from
participating financial institutions, warrants to purchase common stock with an
aggregate market price equal to 15% of the preferred investment. Participating
financial institutions were required to adopt the Treasury’s standards for
executive compensation and corporate governance for the period during which the
Treasury holds equity issued under the TARP Capital Purchase
Program. On December 5, 2008, we received $196.0 million from the
issuance of preferred stock and stock warrants to the Treasury pursuant to the
TARP Capital Purchase Program.
On
November 21, 2008, the Board of Directors of the FDIC adopted a final rule
relating to the Temporary Liquidity Guarantee Program (“TLG Program”). The TLG
Program was announced by the FDIC on October 14, 2008, preceded by the
determination of systemic risk by the Secretary of the Department of Treasury
(after consultation with the President), as an initiative to counter the
system-wide crisis in the nation’s financial sector. Under the TLG Program the
FDIC will (i) guarantee, through the earlier of maturity or June 30, 2012,
certain
newly
issued senior unsecured debt issued by participating institutions on or after
October 14, 2008, and before June 30, 2009 and (ii) provide full FDIC deposit
insurance coverage for non-interest bearing transaction deposit accounts,
Negotiable Order of Withdrawal (“NOW”) accounts paying less than 0.5% interest
per annum and Interest on Lawyers Trust Accounts held at participating FDIC
insured institutions through December 31, 2009. Coverage under the TLG Program
was available for the first 30 days without charge. The fee assessment for
coverage of senior unsecured debt ranges from 50 basis points to 100 basis
points per annum, depending on the initial maturity of the debt. The fee
assessment for the Transaction Account Guarantee Program is 10 basis points per
quarter on amounts in covered accounts exceeding $250,000. On
December 5, 2008, the Company elected not to opt-out of either guarantee
program. As of December 31, 2008, the Company did not have any debt
issued under the TLG Program. The FDIC has announced that for an
additional premium, it will extend the TLG Program through October 2009, but no
regulations have been published in proposed or final form.
Overall,
during 2008, the business environment has been adverse for many households and
businesses in the United States, including the Chicago metropolitan area, and
worldwide. It is expected that the business environment in the
Chicago metropolitan area, the United States and worldwide will continue to
deteriorate for the foreseeable future. There can be no assurance that these
conditions will improve in the near term. These conditions could adversely
affect the Company’s asset quality, results of operations and financial
condition.
At
December 31, 2008, the Company’s market capitalization (based on total shares
outstanding) was greater than our total common stockholders’ equity of $876.6
million. However, as of February 27, 2009, our market capitalization
was less than our stockholders’ common equity. Should this situation
continue to exist during 2009, the Company will consider this and other factors,
including the Company’s anticipated future cash flows, to determine whether
goodwill is impaired. No assurance can be given that the Company will
not record an impairment loss on goodwill in 2009. Because goodwill
is not included in the calculation of regulatory capital, the Company’s
regulatory capital ratios would not be affected by this potential non-cash
expense.
Critical
Accounting Policies
Our consolidated financial statements
are prepared in conformity with accounting principles generally accepted in the
United States of America and follow general practices within the industries in
which we operate. This preparation requires management to make
estimates, assumptions, and judgments that affect the amounts reported in the
financial statements and accompanying notes. These estimates,
assumptions, and judgments are based on information available as of the date of
the financial statements; accordingly, as this information changes, actual
results could differ from the estimates, assumptions, and judgments reflected in
the financial statements. Certain policies inherently have a greater
reliance on the use of estimates, assumptions, and judgments and, as such, have
a greater possibility of producing results that could be materially different
than originally reported. Management believes the following policies
are both important to the portrayal of our financial condition and results of
operations and require subjective or complex judgments; therefore, management
considers the following to be critical accounting
policies. Management has reviewed the application of these polices
with the Audit Committee of our board of directors.
Allowance for Loan
Losses. Subject to the use of estimates, assumptions, and
judgments is management's evaluation process used to determine the adequacy of
the allowance for loan losses, which combines several factors: management's
ongoing review and grading of the loan portfolio, consideration of past loan
loss experience, trends in past due and nonperforming loans, risk
characteristics of the various classifications of loans, existing economic
conditions, the fair value of underlying collateral, and other qualitative and
quantitative factors which could affect probable credit
losses. Because current economic conditions can change and future
events are inherently difficult to predict, the anticipated amount of estimated
loan losses, and therefore the adequacy of the allowance, could change
significantly. As an integral part of their examination process,
various regulatory agencies also review the allowance for loan
losses. Such agencies may require that certain loan balances be
charged off when their credit evaluations differ from those of management or
require that adjustments be made to the allowance for loan losses, based on
their judgments about information available to them at the time of their
examination. We believe the allowance for loan losses is adequate and
properly recorded in the financial statements. See "Allowance for Loan Losses" section below for further
analysis.
Residual Value
of Our Direct Finance, Leveraged, and Operating Leases. Lease
residual value represents the present value of the estimated fair value of the
leased equipment at the termination date of the lease. Realization of
these residual values depends on many factors, including management’s use of
estimates, assumptions, and judgment to determine such
values. Several other factors outside of management’s control may
reduce the residual values realized, including general market conditions at the
time of expiration of the lease, whether there has been technological or
economic obsolescence or unusual wear and tear on, or use of, the equipment and
the cost of comparable equipment. If, upon the expiration of
a lease,
we sell the equipment and the amount realized is less than the recorded value of
the residual interest in the equipment, we will recognize a loss reflecting the
difference. On a quarterly basis, management reviews the lease
residuals for potential impairment. If we fail to realize our
aggregate recorded residual values, our financial condition and profitability
could be adversely affected. At December 31, 2008, the aggregate
residual value of the equipment leased under our direct finance, leveraged, and
operating leases totaled $46.4 million. See Note
1 and Note 7 of our audited consolidated financial
statements for additional information.
Income
Tax Accounting. In
June 2006, the FASB issued FASB interpretation No. 48, "Accounting for
Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109" (FIN
48). FIN 48 clarifies the accounting for income taxes by prescribing the minimum
recognition threshold that a tax position must meet to be recognized in the
financial statements. FIN 48 also provides guidance on measurement,
recognition, classification, interest and penalties, accounting in interim
periods, disclosure and transition. The Company adopted FIN 48 as of
January 1, 2007. As a result of the implementation of FIN 48, the
Company recognized no material adjustment in the liability for uncertain income
tax positions. During the year ended December 31, 2008, the Company
increased the reserve for uncertain tax positions, which was more than offset by
a reduction in the valuation allowances on state net operating loss
carryforwards, resulting in a reduction of tax expense of $5.9
million. The Company reassessed the likelihood of the state net
operating losses being more likely than not utilized as a result of prospective
tax law changes. The potential future usage of these net operating
losses also had a direct impact on the amount of state tax contingency
reserves. The Company elects to treat interest and penalties
recognized for the underpayment of income taxes as income tax
expense. However, interest and penalties imposed by taxing
authorities on issues specifically addressed in FIN 48 will be taken out of the
tax reserves up to the amount allocated to interest and
penalties. The amount of interest and penalties exceeding the amount
allocated in the tax reserves will be treated as income tax
expense. As of December 31, 2008, the Company had $964 thousand of
accrued interest related to tax reserves. The application of income
tax law is inherently complex. Laws and regulations in this area are
voluminous and are often ambiguous. As such, we are required to make
many subjective assumptions and judgments regarding our income tax
exposures. Interpretations of and guidance surrounding income tax
laws and regulations change over time. As such, changes in our
subjective assumptions and judgments can materially affect amounts recognized in
the consolidated balance sheets and statements of income.
Fair Value of Assets and
Liabilities. On January 1, 2008, the Company adopted SFAS 157
which defines fair value as the price that would be received to sell the
financial asset or paid to transfer the financial liability in an orderly
transaction between market participants at the measurement date.
The
degree of management judgment involved in determining the fair value of assets
and liabilities is dependent upon the availability of quoted market prices or
observable market parameters. For financial instruments that trade
actively and have quoted market prices or observable market parameters, there is
minimal subjectivity involved in measuring fair value. When
observable market prices and parameters are not fully available, management
judgment is necessary to estimate fair value. In addition, changes in
market conditions may reduce the availability of quoted prices or observable
data. For example, reduced liquidity in the capital markets or
changes in secondary market activities could result in observable market inputs
becoming unavailable. Therefore, when market data is not available,
the Company would use valuation techniques requiring more management judgment to
estimate the appropriate fair value measurement.
At
December 31, 2008, $1.3 billion of investment securities, or 15.1 percent of
total assets, were recorded at fair value on a recurring basis. All
but one of these financial instruments used valuation methodologies involving
market-based or market-derived information, collectively Level 1 and 2
measurements, to measure fair value. One investment security with a
fair value of $1.6 million at December 31, 2008, used significant unobservable
inputs that are supported by little or no market activity (Level 3) to measure
fair value. At December 31, 2008, $24.2 million, or less than one
percent of total liabilities, consisted of financial instruments recorded at
fair value on a recurring basis.
At
December 31, 2008, $91.3 million of impaired loans, or one percent of total
assets, were recorded at fair value on a nonrecurring basis. These
assets were measured using Level 3 measurements. At December 31,
2008, no liabilities were measured at fair value on a nonrecurring
basis.
See Note 19 to the consolidated financial statements for a
complete discussion on the Company’s use of fair valuation of assets and
liabilities and the related measurement techniques.
Recent Accounting Pronouncements.
Refer to Note 1 of our consolidated financial statements for a
description of recent accounting pronouncements including the respective dates
of adoption and effects on results of operations and financial
condition.
Net
Interest Income
The following table presents, for the
periods indicated, the total dollar amount of interest income from average
interest earning assets and the related yields, as well as the interest expense
on average interest bearing liabilities, and the related costs, expressed both
in dollars and rates (dollars in thousands). The table below and the
discussion that follows contain presentations of net interest income and net
interest margin on a tax-equivalent basis, which is adjusted for the tax-favored
status of income from certain loans and investments. Net interest
margin also is presented on a tax-equivalent basis in “Item 6. Selected
Financial Data.” We believe this measure to be the preferred industry
measurement of net interest income, as it provides a relevant comparison between
taxable and non-taxable amounts.
Reconciliations of net interest income
and net interest margin on a tax-equivalent basis to net interest income and net
interest margin in accordance with accounting principles generally accepted in
the United States of America are provided in the table.
|
Year
Ended December 31,
|
|||||||||||
|
2008
|
2007
|
2006
|
|||||||||
|
Average
|
Yield/
|
Average
|
Yield/
|
Average
|
Yield/
|
||||||
|
Balance
|
Interest
|
Rate
|
Balance
|
Interest
|
Rate
|
Balance
|
Interest
|
Rate
|
|||
|
Interest
Earning Assets:
|
|||||||||||
|
Loans
(1) (2)
|
$5,892,845
|
$354,210
|
6.01%
|
$5,198,249
|
$392,526
|
7.55%
|
$4,082,920
|
$309,951
|
7.59%
|
||
|
Loans
exempt from federal income taxes (3)
|
59,746
|
4,408
|
7.26
|
9,338
|
754
|
7.96
|
5,027
|
373
|
7.32
|
||
|
Taxable
investment securities
|
868,700
|
40,468
|
4.66
|
1,037,129
|
49,675
|
4.79
|
1,115,585
|
51,836
|
4.65
|
||
|
Investment
securities exempt from federal income taxes (3)
|
414,234
|
23,849
|
5.66
|
374,025
|
21,326
|
5.62
|
305,930
|
17,316
|
5.58
|
||
|
Federal
funds sold
|
12,849
|
276
|
2.11
|
8,853
|
449
|
5.00
|
15,148
|
774
|
5.04
|
||
|
Other
interest bearing deposits
|
52,497
|
467
|
0.89
|
7,193
|
264
|
3.67
|
7,952
|
312
|
3.92
|
||
|
Total
interest earning assets
|
7,300,871
|
$423,678
|
5.80
|
6,634,787
|
$464,994
|
7.01
|
5,532,562
|
$380,562
|
6.88
|
||
|
Assets
available for sale
|
-
|
341,734
|
393,003
|
||||||||
|
Non-interest
earning assets
|
939,473
|
934,089
|
676,505
|
||||||||
|
Total
assets
|
$8,240,344
|
$7,910,610
|
$6,602,070
|
||||||||
|
Interest
Bearing Liabilities:
|
|||||||||||
|
Deposits:
|
|||||||||||
|
NOW
and money market deposit
|
$1,292,407
|
$
23,176
|
1.79%
|
$1,213,001
|
$
37,568
|
3.10%
|
$
778,795
|
$
18,475
|
2.37%
|
||
|
Savings
deposit
|
383,534
|
1,239
|
0.32
|
428,087
|
3,051
|
0.71
|
457,723
|
3,334
|
0.73
|
||
|
Time
deposits
|
3,426,332
|
126,955
|
3.71
|
2,986,964
|
145,030
|
4.86
|
2,674,892
|
119,299
|
4.46
|
||
|
Short-term
borrowings
|
681,074
|
17,590
|
2.58
|
812,681
|
37,354
|
4.60
|
631,892
|
27,944
|
4.42
|
||
|
Long-term
borrowings and junior subordinated notes
|
581,026
|
23,940
|
4.05
|
364,441
|
21,957
|
5.94
|
293,310
|
17,140
|
5.76
|
||
|
Total
interest bearing liabilities
|
6,364,373
|
$192,900
|
3.03
|
5,805,174
|
$244,960
|
4.22
|
4,836,612
|
$186,192
|
3.85
|
||
|
Non-interest
bearing deposits
|
891,072
|
860,557
|
708,100
|
||||||||
|
Liabilities
held for sale
|
-
|
313,414
|
365,380
|
||||||||
|
Other
non-interest bearing liabilities
|
86,884
|
80,141
|
64,909
|
||||||||
|
Stockholders’
equity
|
898,015
|
851,324
|
627,069
|
||||||||
|
Total
liabilities and stockholders’ equity
|
$8,240,344
|
$7,910,610
|
$6,602,070
|
||||||||
|
Net
interest income/interest rate spread (4)
|
$230,778
|
2.77%
|
$220,034
|
2.79%
|
$194,370
|
3.03%
|
|||||
|
Taxable
equivalent adjustment
|
(9,890)
|
7,728
|
6,191
|
||||||||
|
Net
interest income, as reported
|
$220,888
|
$212,306
|
$188,179
|
||||||||
|
Net
interest margin (5)
|
3.03%
|
3.20%
|
3.40%
|
||||||||
|
Tax
equivalent effect
|
0.13%
|
0.12%
|
0.11%
|
||||||||
|
Net
interest margin on a fully tax equivalent basis (5)
|
3.16%
|
3.32%
|
3.51%
|
||||||||
|
(1)
|
Non-accrual
loans are included in average
loans.
|
|
(2)
|
Interest
income includes loan origination fees of $7.0 million, $6.7 million and
$6.9 million for the years ended December 31, 2008, 2007 and 2006,
respectively.
|
|
(3)
|
Non-taxable
loan and investment income is presented on a fully tax equivalent basis
assuming a 35% tax rate.
|
|
(4)
|
Interest
rate spread represents the difference between the average yield on
interest earning assets and the average cost of interest bearing
liabilities and is presented on a fully tax equivalent
basis.
|
|
(5)
|
Net
interest margin represents net interest income as a percentage of average
interest earning assets.
|
Net interest income on a tax equivalent
basis was $230.8 million for the year ended December 31, 2008, an increase of
$10.7 million, or 4.9% from $220.0 million for the comparable period in
2007. The growth in net interest income reflects a $666.1 million, or
10.0%, increase in average interest earning assets, and a $559.2 million, or
9.6%, increase in average interest bearing liabilities. This was
partially offset by approximately 16 basis points of margin compression on a
fully tax equivalent basis. The increase in average interest earning
assets and the increase in average interest bearing liabilities was due to
organic growth. The net interest margin, expressed on a fully tax
equivalent basis, was 3.16% for 2008 and 3.32% for
2007. The
decline in the net interest margin was primarily due to an increase in
non-performing loans during 2008, and our interest earning assets repricing
faster than our interest bearing liabilities during 2008 due to the dramatic
decrease in Fed funds and LIBOR rates during the second half of
2008.
Net interest income on a tax equivalent
basis increased $25.7 million, or 13.2%, to $220.0 million for the year ended
December 31, 2007 from $194.4 million for the year ended December 31,
2006. Tax-equivalent interest income increased by $84.4 million,
primarily due to a $1.1 billion, or 19.9%, increase in average interest earning
assets. The yield on average interest earning assets increased 13
basis points to 7.01%. The increase in average interest earning
assets was primarily due to the acquisition of FOBB in the third quarter of
2006, and organic growth. Interest expense increased by $58.8 million
due to a $968.6 million, or 20.0%, increase in average interest bearing
liabilities. The increase in average interest bearing liabilities was
primarily due to the acquisition of FOBB and organic growth. The rate
on average interest bearing liabilities increased 37 basis points to 4.22% due
to the increase in overall short-term interest rates and the acquisition of
FOBB. The net interest margin expressed on a fully tax equivalent
basis for the year ended December 31, 2007, decreased by 19 basis points from
3.51% for the year ended December 31, 2006, due to the acquisition of FOBB, the
inverted yield curve, continued tight credit spreads on loans and fierce
competition for deposits.
Volume
and Rate Analysis of Net Interest Income
The following table presents the extent
to which changes in volume and interest rates of interest earning assets and
interest bearing liabilities have affected our interest income and interest
expense during the periods indicated. Information is provided in each
category with respect to (i) changes attributable to changes in volume (changes
in volume multiplied by prior period rate), (ii) changes attributable to changes
in rates (changes in rates multiplied by prior period volume) and (iii) change
attributable to a combination of changes in rate and volume (change in rates
multiplied by the changes in volume) (in thousands). Changes
attributable to the combined impact of volume and rate have been allocated
proportionately to the changes due to volume and the changes due to
rate.
|
Year
Ended December 31,
|
||||||||||||
|
2008
Compared to 2007
|
2007
Compared to 2006
|
|||||||||||
|
Change
|
Change
|
Change
|
Change
|
|||||||||
|
Due
to
|
Due
to
|
Total
|
Due
to
|
Due
to
|
Total
|
|||||||
|
Volume
|
Rate
|
Change
|
Volume
|
Rate
|
Change
|
|||||||
|
Interest
Earning Assets:
|
||||||||||||
|
Loans
|
$47,821
|
$(86,137)
|
$(38,316)
|
$84,217
|
$
(1,642)
|
$82,575
|
||||||
|
Loans
exempt from federal income taxes (1)
|
3,725
|
(71)
|
3,654
|
345
|
36
|
381
|
||||||
|
Taxable
investment securities
|
(7,878)
|
(1,329)
|
(9,207)
|
(3,724)
|
1,563
|
(2,161)
|
||||||
|
Investment
securities exempt from federal income taxes (1)
|
2,313
|
210
|
2,523
|
3,882
|
128
|
4,010
|
||||||
|
Federal
funds sold
|
152
|
(325)
|
(173)
|
(319)
|
(6)
|
(325)
|
||||||
|
Other
interest bearing deposits
|
538
|
(335)
|
203
|
(29)
|
(19)
|
(48)
|
||||||
|
Total
increase in interest income
|
46,671
|
(87,987)
|
(41,316)
|
84,372
|
60
|
84,432
|
||||||
|
Interest
Bearing Liabilities:
|
||||||||||||
|
Deposits
|
||||||||||||
|
NOW
and money market deposit accounts
|
2,320
|
(16,712)
|
(14,392)
|
12,334
|
6,759
|
19,093
|
||||||
|
Savings
deposits
|
(290)
|
(1,522)
|
(1,812)
|
(212)
|
(71)
|
(283)
|
||||||
|
Time
deposits
|
19,397
|
(37,472)
|
(18,075)
|
14,619
|
11,112
|
25,731
|
||||||
|
Short-term
borrowings
|
(5,334)
|
(14,430)
|
(19,764)
|
8,272
|
1,138
|
9,410
|
||||||
|
Long-term
borrowings and junior subordinated notes
|
10,356
|
(8,373)
|
1,983
|
4,271
|
546
|
4,817
|
||||||
|
Total
increase in interest expense
|
26,449
|
(78,509)
|
(52,060)
|
39,284
|
19,484
|
58,768
|
||||||
|
Total
increase (decrease) in net interest income
|
$20,222
|
$
(9,478)
|
$
10,744
|
$45,088
|
$(19,424)
|
$25,664
|
||||||
|
(1)
|
Non-taxable
loan and investment income is presented on a fully tax equivalent basis
assuming a 35% rate.
|
Other
Income
Other income did not change
significantly from the year ended December 31, 2007 to the year ended December
31, 2008. Net gain on sale of other assets decreased by $11.2
million. During the year ended December 31, 2007, we realized a gain
of $2.4 million on the sale of artwork that was acquired as a result of our
acquisition of FOBB and a gain of $7.4 million on the sale of two real estate
properties. Brokerage fees decreased by $5.3 million, primarily due
to the sale of our third party brokerage business during the second quarter of
2007, and conversion of customer accounts to the purchaser’s platform in third
quarter. This decrease was offset by a corresponding reduction in
brokerage expense. These decreases were partially offset by a $1.1
million gain on the sale investment securities during the year ended December
31, 2008, compared to a $3.7 million loss on the sale of investment securities
for the
comparable period in 2007. Deposit service fees increased by $4.3
million, primarily due to an increase in commercial deposit and treasury
management fees as a result of a lower earnings credit rate. Loan
service fees increased $2.9 million, primarily due to an increase in letter of
credit fees, prepayment fees and swap fees recognized during 2008 compared to
2007. Other income decreased primarily due to a decrease in market
value of assets held in trust for deferred compensation and was offset by the
same amount recorded as other expense.
Other income increased $28.6 million,
or 40.1% to $99.9 million for the year ended December 31, 2007 from $71.3
million for the year ended December 31, 2006. Merchant card
processing income increased by $9.5 million mostly due to the acquisition of
FOBB and an increase in transactions processed during the year ended December
31, 2007 compared to the same period in 2006. Net gain on sale of
other assets increased by $9.2 million. During the year ended
December 31, 2007, we also sold two properties for a total gain of $7.4
million. Also, during the year ended December 31, 2007, we realized a
gain of $2.4 million on the sale of artwork that was acquired as a result of our
acquisition of FOBB. Deposit service fees increased $4.5 million,
primarily due to the acquisition of FOBB, enhancements made to our courtesy
overdraft program, and a fee increase that was implemented during the second
quarter of 2007. Asset management and trust fees increased $3.5
million, primarily due to the acquisition of FOBB, a $909 thousand gain realized
on the sale of our land trust operations during the first quarter of 2007, an
increase in fees generated from new customers, and expansion of our existing
customer relationships during the year ended December 31, 2007 compared to the
same period in 2006. Net lease financing increased $2.5 million,
primarily due to higher residual realizations during the year ended December 31,
2007 compared to the year ended December 31, 2006. During the year
ended December 31, 2007, we sold approximately $563.9 million in investment
securities that resulted in a net loss of $3.7 million. The proceeds
were redeployed to fund loan growth, and new investment
purchases. During the second quarter of 2007 we sold our third party
brokerage business. We recognized a $947 thousand gain on the
sale.
Other
Expenses
Other expense for the year ended
December 31, 2008, decreased $6.0 million, or 2.9%, to $200.8 million, compared
to $206.8 million for the year ended December 31, 2007. Salaries and
employee benefits expense decreased $1.9 million, primarily due to an executive
separation agreement expense incurred in 2007, partially offset by the
additional commercial bankers hired from the end of the third quarter of 2007
through the second quarter of 2008 and the acquisition of Cedar
Hill. Professional and legal expense decreased by $1.4 million,
primarily due to $1.9 million of unamortized issuance costs recognized during
2007, as a result of the redemption of trust preferred securities in October
2007. Charitable contributions decreased by $4.7 million, primarily
due to contributions totaling $4.5 million made during 2007 to the MB Financial
Charitable Foundation, which is dedicated to strengthening the communities where
MB Financial Bank operates. Other operating expenses increased by $2.0 million,
primarily due to an increase in FDIC insurance premiums, as our FDIC credits
were fully utilized during 2008. As noted earlier, the decrease in
our brokerage fee expense from the year ended December 31, 2007 to the
comparable period in 2008 was primarily due to the sale of our third party
brokerage business during the second quarter of 2007.
Other expense increased by $47.8
million, or 30.0% to $206.8 million for the year ended December 31, 2007 from
$159.1 million for the year ended December 31, 2006. Salaries and
employee benefits increased by $22.5 million primarily due to the acquisition of
FOBB and organic growth, and partially due to an executive separation agreement
expense incurred in 2007. Merchant card processing expense increased
by $8.6 million due to the acquisition of FOBB and an increase in transactions
processed during the year ended December 31, 2007, compared to the same period
in 2006. Charitable contributions increased by $4.0 million primarily
due to contributions totaling $4.5 million made during 2007 to the MB Financial
Charitable Foundation, which is dedicated to strengthening the communities where
MB Financial Bank operates. Occupancy and equipment expense increased
by $4.5 million, primarily due to the acquisition of FOBB and organic
growth. On October 2, 2007, we redeemed $61.7 million of trust
preferred securities with a fixed coupon rate of 8.60%. As a result
of redeeming these securities, we recorded $1.9 million of unamortized issuance
costs that was recorded as professional and legal expense.
Income
Taxes
Income tax benefit from continuing
operations for the year ended December 31, 2008 was $23.3 million, compared to
income tax expense from continuing operations of $24.0 million for the year
ended December 31, 2007, primarily due to a decrease in taxable income and a
reduction in the valuation allowances on state net operating loss carryforwards
during 2008. During the fourth quarter of 2008, our taxable income
significantly decreased compared to prior quarters in 2008, primarily due to our
results of operations in the fourth quarter.
Income tax expense for the year ended
December 31, 2007 decreased $3.2 million to $24.0 million compared to
$27.3 million for the same period in 2006. The effective tax rates
were
27.9% and 30.2% for the years ended December 31, 2007 and 2006,
respectively. The decline in the effective tax rate was primarily due
to a higher percentage of pre-tax income generated from tax exempt sources for
the year ended December 31, 2007, compared to the same time period in
2006.
As previously stated in the “Critical
Accounting Policies” section above, income tax expense recorded in the
consolidated income statement involves interpretation and application of certain
accounting pronouncements and federal and state tax codes, and is, therefore,
considered a critical accounting policy. See Note
1 and Note 16 of the notes to our audited consolidated
financial statements for our income tax accounting policy and additional income
tax information.
Balance
Sheet
Total assets increased $985.1 million
or 12.6% to $8.8 billion at December 31, 2008 from December 31,
2007. Net loans increased by $534.0 million or 9.6%, to $6.1 billion
at December 31, 2008 from December 31, 2007. In aggregate, commercial
related credits grew by $587.3 million, or 13.0%. See “Loan Portfolio” section below for further
analysis. Investment securities increased $159.0 million or 12.8%, to
$1.4 billion at December 31, 2008 from December 31, 2007. In 2008, we
securitized $50.9 million of residential real estate loans and held those
securities in our investment portfolio. As noted earlier, we built
significant excess liquidity during the second half of 2008. As a
result, our interest bearing deposits with banks increased by $252.7 million
from December 31, 2007 to December 31, 2008.
Total liabilities increased by $778.6
million or 11.2% to $7.8 billion at December 31, 2008 from December 31,
2007. Total deposits increased by $981.8 million or 17.8% to $6.5
billion at December 31, 2008 from December 31, 2007, primarily due to increases
in certificates of deposit, brokered deposit accounts, and money market and NOW
accounts of $410.8 million, $386.3 million, and $202.4 million,
respectively. Short-term borrowings decreased $489.1
million. This decrease was primarily due to decreases in short-term
Federal Home Loan Bank advances and federal funds purchased of $339.2 million
and $165.0 million, respectively. Long-term borrowings increased
$262.6 million, primarily due to a $247.4 million increase in long-term Federal
Home Loan Bank advances.
Total stockholders’ equity increased
$203.8 million to $1.1 billion at December 31, 2008 compared to $862.4 million
at December 31, 2007. The increase was primarily due to a $192.9
million increase in preferred stock, net of discount, due to the issuance of
preferred stock pursuant to the TARP Capital Purchase Program during
2008.
Investment
Securities
The primary purpose of the investment
portfolio is to provide a source of earnings, for liquidity management purposes,
and to control interest rate risk. In managing the portfolio, we seek
safety of principal, liquidity, diversification and maximized return on
funds. See “Liquidity” and “Capital Resources” in this Item 7 and “Quantitative and
Qualitative Disclosures About Market Risk - Asset
Liability Management” under Item 7A.
The
following table sets forth the amortized cost and fair value of our investment
securities available for sale, by type of security as indicated (in
thousands):
|
Year-ended
December 31,
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
Amortized
|
Fair
|
Amortized
|
Fair
|
Amortized
|
Fair
|
|||||||
|
Cost
|
Value
|
Cost
|
Value
|
Cost
|
Value
|
|||||||
|
U.S.
Treasury securities
|
$
-
|
$ -
|
$
-
|
$
-
|
$
11,287
|
$
11,248
|
||||||
|
Government
sponsored agencies
|
171,385
|
179,373
|
305,768
|
310,538
|
666,855
|
665,435
|
||||||
|
States
and political subdivisions
|
417,608
|
427,999
|
407,973
|
412,302
|
369,204
|
370,036
|
||||||
|
Mortgage-backed
securities
|
682,679
|
690,285
|
435,743
|
438,056
|
505,241
|
495,215
|
||||||
|
Corporate
bonds
|
34,546
|
34,565
|
12,797
|
13,057
|
27,477
|
27,316
|
||||||
|
Equity
securities
|
3,595
|
3,606
|
3,446
|
3,460
|
7,069
|
6,993
|
||||||
|
Debt
securities issued by foreign governments
|
301
|
302
|
299
|
301
|
547
|
547
|
||||||
|
Total
|
$1,310,114
|
$1,336,130
|
$1,166,026
|
$1,177,714
|
$1,587,680
|
$1,576,790
|
||||||
U.S. Treasury securities and securities
of government sponsored agencies generally consist of fixed rate securities with
maturities of three months to three years. States and political
subdivisions investment securities consist of investment grade and local
non-rated issues with maturities of one year to fifteen years. The
average expected life of mortgage-backed securities generally ranges between one
and four years. Corporate bonds typically have terms of five years or
less.
Securities of a single issuer which had
book values in excess of 10.0% of our stockholder’s equity at December 31, 2008,
other than government sponsored agencies and corporations, included
mortgage-backed securities issued by the Federal National Mortgage Association
(FNMA) and the Federal Home Loan Mortgage Corporation (FHLMC). FNMA
issued mortgage-backed securities had an aggregate book value and market value
of $164.3 million and $165.7 million, respectively, at December 31,
2008. FHLMC issued mortgage-backed securities had an aggregate book
value and market value of $445.5 million and $451.5 million, respectively, at
December 31, 2008. 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. Additionally, more than 99% of our
mortgage-backed securities are agency guaranteed.
The following table sets forth certain
information regarding contractual maturities and the weighted average yields of
our investment securities available for sale at December 31, 2008 (dollars in
thousands):
|
Due
after One
|
Due
after Five
|
|||||||||||
|
Due
in One
|
Year
through
|
Years
through
|
Due
after
|
|||||||||
|
Year
or Less
|
Five
Years
|
Ten
Years
|
Ten
Years
|
|||||||||
|
Weighted
|
Weighted
|
Weighted
|
Weighted
|
|||||||||
|
Average
|
Average
|
Average
|
Average
|
|||||||||
|
Balance
|
Yield
|
Balance
|
Yield
|
Balance
|
Yield
|
Balance
|
Yield
|
|||||
|
U.S.
Treasury securities
|
$ -
|
-
|
$ -
|
-
|
$
-
|
-
|
$ -
|
-
|
||||
|
Government
sponsored agencies
|
34,425
|
4.00%
|
124,738
|
3.56%
|
20,210
|
4.61%
|
-
|
-
|
||||
|
States
and political subdivision (1)
|
19,073
|
5.53%
|
79,392
|
5.62%
|
263,279
|
5.79%
|
66,255
|
6.48%
|
||||
|
Mortgage-backed
securities (2)
|
12
|
8.11%
|
22,294
|
4.75%
|
138,241
|
4.92%
|
529,738
|
4.90%
|
||||
|
Corporate
bonds
|
3,023
|
3.00%
|
25,161
|
4.60%
|
-
|
-
|
6,381
|
9.25%
|
||||
|
Equity
securities
|
-
|
-
|
-
|
-
|
-
|
-
|
3,606
|
4.07%
|
||||
|
Debt
securities issued by foreign governments
|
302
|
6.63%
|
-
|
-
|
-
|
-
|
-
|
-
|
||||
|
Total
|
$56,835
|
4.48%
|
$251,585
|
4.42%
|
$421,730
|
5.45%
|
$605,980
|
5.08%
|
||||
|
(1)
|
Yield
is reflected on a fully tax equivalent basis utilizing a 35% tax
rate.
|
|
(2)
|
These
securities are presented based upon contractual
maturities.
|
The
following table sets forth the composition of our loan portfolio (dollars in
thousands):
|
At
December 31,
|
||||||||||||
|
2008
|
2007
|
2006
|
2005
|
2004
|
||||||||
|
%
of
|
%
of
|
%
of
|
%
of
|
%
of
|
||||||||
|
Amount
|
Total
|
Amount
|
Total
|
Amount
|
Total
|
Amount
|
Total
|
Amount
|
Total
|
|||
|
Commercial
related credits:
|
||||||||||||
|
Commercial
loans
|
$1,522,380
|
24%
|
$1,323,455
|
24%
|
$1,020,707
|
21%
|
$
767,392
|
22%
|
$
693,219
|
22%
|
||
|
Commercial
loans collateralized by
|
||||||||||||
|
assignment
of lease payments
|
649,918
|
10%
|
553,138
|
10%
|
392,063
|
8%
|
271,945
|
8%
|
250,595
|
8%
|
||
|
Commercial
real estate
|
2,353,261
|
38%
|
1,974,370
|
36%
|
1,804,103
|
36%
|
1,465,875
|
42%
|
1,313,619
|
42%
|
||
|
Construction
real estate
|
757,900
|
13%
|
845,158
|
14%
|
851,896
|
17%
|
511,379
|
15%
|
395,864
|
12%
|
||
|
Total
commercial related credits
|
5,283,459
|
85%
|
4,696,121
|
84%
|
4,068,769
|
82%
|
3,016,591
|
87%
|
2,653,297
|
83%
|
||
|
Other
loans:
|
||||||||||||
|
Residential
real estate
|
295,336
|
5%
|
354,874
|
6%
|
360,183
|
7%
|
224,006
|
6%
|
269,457
|
8%
|
||
|
Indirect
vehicle
|
189,227
|
3%
|
146,311
|
3%
|
110,573
|
2%
|
56
|
0%
|
215
|
0%
|
||
|
Home
equity
|
401,029
|
6%
|
365,589
|
6%
|
381,612
|
8%
|
222,419
|
6%
|
242,231
|
7%
|
||
|
Consumer
loans
|
59,512
|
1%
|
52,732
|
1%
|
50,357
|
1%
|
17,375
|
1%
|
15,620
|
1%
|
||
|
Total
other loans
|
945,104
|
15%
|
919,506
|
16%
|
902,725
|
18%
|
463,856
|
13%
|
527,523
|
17%
|
||
|
Gross
loans (1)
|
6,228,563
|
100%
|
5,615,627
|
100%
|
4,971,494
|
100%
|
3,480,447
|
100%
|
3,180,820
|
100%
|
||
|
Allowance
for loan losses
|
(144,001)
|
(65,103)
|
(58,983)
|
(42,290)
|
(42,255)
|
|||||||
|
Net
loans
|
$6,084,562
|
$5,550,524
|
$4,912,511
|
$3,438,157
|
$3,138,565
|
|||||||
|
(1)
|
Gross
loan balances at December 31, 2008, 2007, 2006, 2005, and 2004 are net of
unearned income, including net deferred loans fees of $4.5 million, $3.7
million, $3.0 million, $3.2 million, and $4.1 million,
respectively.
|
Total loans and total commercial
related credits increased from 2007 to 2008 by approximately $612.9 million and
$587.3 million, respectively. Commercial related credits grew
primarily due to organic growth in both existing customer and new customer loan
demand resulting from the Company’s focus on marketing and new business
development. As of
December
31, 2008 and 2007, there were $448.9 million and $571.8 million, respectively,
of residential construction loans in our construction real estate
portfolio. The remainder of construction real estate loans consisted
of commercial construction loans.
Total loans and total commercial
related credits increased from 2006 to 2007 by approximately $644.1 million and
$627.4 million, respectively. Commercial related credits grew
primarily due to organic growth in both existing customer and new customer loan
demand resulting from the Company’s focus on marketing and new business
development. Approximately $100.0 million of the increase was due to
the purchase of loans by MB Financial Bank from Union Bank, prior to the closing
of the Union Bank sale, as noted earlier.
Loan
Maturities
The following table sets forth the
scheduled repayment information for our loan portfolio at December 31, 2008 (in
thousands). Loans having no stated schedule of repayments and no
stated maturity, and overdrafts are reported as due in one year or
less.
|
Due
in One Year
|
Due
after One Year
|
Due
after
|
||||||||||||
|
Or
Less
|
Through
Five Years
|
Five
Years
|
||||||||||||
|
Fixed
|
Floating
|
Fixed
|
Floating
|
Fixed
|
Floating
|
|||||||||
|
Rate
|
Rate
|
Rate
|
Rate
|
Rate
|
Rate
|
Total
|
||||||||
|
Commercial
loans
|
$
103,018
|
$1,085,201
|
$
110,115
|
$212,620
|
$11,290
|
$
136
|
$1,522,380
|
|||||||
|
Commercial
loans collateralized by
|
||||||||||||||
|
assignment
of lease payments
|
279,324
|
-
|
368,580
|
-
|
2,014
|
-
|
649,918
|
|||||||
|
Commercial
real estate
|
460,027
|
606,420
|
1,047,037
|
172,867
|
51,845
|
15,065
|
2,353,261
|
|||||||
|
Construction
real estate
|
107,836
|
601,349
|
15,618
|
30,217
|
46
|
2,833
|
757,899
|
|||||||
|
Residential
real estate
|
45,907
|
35,790
|
53,158
|
126,730
|
27,737
|
6,014
|
295,336
|
|||||||
|
Indirect
vehicle
|
76,385
|
-
|
111,877
|
-
|
965
|
-
|
189,227
|
|||||||
|
Home
equity
|
15,280
|
368,739
|
16,306
|
-
|
704
|
-
|
401,029
|
|||||||
|
Consumer
loans
|
12,438
|
23,730
|
3,735
|
17,747
|
12
|
1,851
|
59,513
|
|||||||
|
Gross
loans
|
$1,100,215
|
$2,721,229
|
$1,726,426
|
$560,181
|
$94,613
|
$25,899
|
$6,228,563
|
|||||||
The following table sets forth the
amounts of non-performing loans and non-performing assets at the dates indicated
(dollars in thousands):
|
At
December 31,
|
||||||||||
|
2008
|
2007
|
2006
|
2005
|
2004
|
||||||
|
Non-performing
loans:
|
||||||||||
|
Non-accruing
loans
|
$145,936
|
$24,459
|
$21,164
|
$19,850
|
$22,386
|
|||||
|
Loans
90 days or more past due, still accruing interest
|
-
|
-
|
304
|
321
|
185
|
|||||
|
Total
non-performing loans
|
145,936
|
24,459
|
21,468
|
20,171
|
22,571
|
|||||
|
Other
real estate owned
|
4,366
|
1,120
|
2,844
|
354
|
384
|
|||||
|
Repossessed
vehicles
|
356
|
179
|
192
|
-
|
-
|
|||||
|
Total
non-performing assets
|
$150,658
|
$25,758
|
$24,504
|
$20,525
|
$22,955
|
|||||
|
|
||||||||||
|
Total
non-performing loans to total loans
|
2.34%
|
0.44%
|
0.43%
|
0.58%
|
0.71%
|
|||||
|
Allowance
for loan losses to non-performing loans
|
98.67%
|
266.17%
|
274.75%
|
209.66%
|
187.21%
|
|||||
|
Total
non-performing assets to total assets
|
1.71%
|
0.33%
|
0.31%
|
0.36%
|
0.44%
|
|||||
The
following table presents data related to non-performing loans by dollar amount
and category at December 31, 2008 (dollar amounts in thousands):
|
Commercial
and Lease Loans
|
Construction
Real Estate Loans
|
Commercial
Real Estate Loans
|
Other
Loans
|
Total
Loans
|
|||||||||
|
Dollar
Range
|
Number
of Borrowers
|
Amount
|
Number
of Borrowers
|
Amount
|
Number
of Borrowers
|
Amount
|
Amount
|
Amount
|
|||||
|
$5.0
million or more
|
1
|
$ 10,851
|
6
|
$ 50,959
|
-
|
$ -
|
$ -
|
$ 61,810
|
|||||
|
$3.0
million to $4.9 million
|
-
|
-
|
7
|
23,647
|
3
|
10,572
|
-
|
34,219
|
|||||
|
$1.5
million to $2.9 million
|
-
|
-
|
1
|
2,118
|
4
|
7,345
|
-
|
9,463
|
|||||
|
Under
$1.5 million
|
16
|
9,167
|
16
|
9,323
|
33
|
14,141
|
7,813
|
40,444
|
|||||
|
17
|
$ 20,018
|
30
|
$ 86,047
|
40
|
$ 32,058
|
$ 7,813
|
$ 145,936
|
||||||
|
Percentage
of individual loan category
|
0.92%
|
11.35%
|
1.36%
|
0.83%
|
2.34%
|
||||||||
The
following table presents data related to non-performing loans by dollar amount
and category at December 31, 2007 (dollar amounts in thousands):
|
Commercial
and Lease Loans
|
Construction
Real Estate Loans
|
Commercial
Real Estate Loans
|
Other
Loans
|
Total
Loans
|
|||||||||
|
Dollar
Range
|
Number
of Borrowers
|
Amount
|
Number
of Borrowers
|
Amount
|
Number
of Borrowers
|
Amount
|
Amount
|
Amount
|
|||||
|
$5.0
million or more
|
-
|
$ -
|
-
|
$ -
|
1
|
$ 8,484
|
$ -
|
$ 8,484
|
|||||
|
$3.0
million to $4.9 million
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
|||||
|
$1.5
million to $2.9 million
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
|||||
|
Under
$1.5 million
|
12
|
3,201
|
13
|
5,366
|
1
|
603
|
6,805
|
15,975
|
|||||
|
12
|
$ 3,201
|
13
|
$ 5,366
|
2
|
$ 9,087
|
$ 6,805
|
$ 24,459
|
||||||
|
Percentage
of individual loan category
|
0.17%
|
0.63%
|
0.46%
|
0.74%
|
0.44%
|
||||||||
The
aggregate principal amount of non-performing loans was $145.9 million as of
December 31, 2008, compared to $24.5 million as of December 31,
2007. Most of the increase was attributable to non-performing
construction real estate and commercial real estate
loans. Non-performing construction real estate loans increased by
$80.7 million, as a result of the continued weak residential construction
market. Non-performing commercial real estate loans increased $23.0
million, primarily due to the economic slowdown during
2008. Non-performing commercial and lease loans increased by $16.8
million from December 31, 2007 to December 31, 2008, primarily due to one
commercial credit.
Non-performing
Assets
Non-performing loans include loans
accounted for on a non-accrual basis, accruing loans contractually past due 90
days or more as to interest or principal and loans whose terms have been
restructured to provide reduction or deferral of interest or principal because
of a deterioration in the financial position of the
borrower. Management reviews the loan portfolio for problem loans on
an ongoing basis. During the ordinary course of business, management
becomes aware of borrowers that may not be able to meet the contractual
requirements of loan agreements. These loans are placed under close
supervision with consideration given to placing the loan on non-accrual status,
increasing the allowance for loan losses and (if appropriate) partial or full
charge-off. After a loan is placed on non-accrual status, any
interest previously accrued but not yet collected is reversed against current
income. If interest payments are received on non-accrual loans, these
payments will be applied to principal and not taken into
income. Loans will not be placed back on accrual status unless back
interest and principal payments are made. If interest on non-accrual
loans had been accrued, such income would have amounted to approximately $4.6
million and $1.6 million for the years ended December 31, 2008 and 2007,
respectively. Our general policy is to place loans 90 days past due
on non-accrual status.
Non-performing assets consists of
non-performing loans as well as other repossessed assets and other real estate
owned. Other real estate owned represents properties acquired through
foreclosure or other proceedings and is recorded at the lower of cost or fair
value less the estimated cost of disposal. Other real estate owned is
evaluated regularly to ensure that the recorded amount is supported by its
current fair value. Valuation allowances to reduce the carrying
amount to fair value less estimated costs of disposal are recorded as
necessary. Revenues and expenses from the operations of other real
estate owned and changes in the valuation are included in other income and other
expenses on the income statement. Other repossessed assets primarily
consist of repossessed vehicles. Losses on repossessed vehicles are
charged-off to the allowance when title is taken and the vehicle is
valued.
Once the Bank obtains title, repossessed vehicles are not included in loans, but
are classified as “other assets” on the consolidated balance sheets. The typical
holding period for resale of repossessed automobiles is less than 90 days unless
significant repairs to the vehicle are needed which occasionally results in a
longer holding period. The typical holding period for motorcycles can
be more than 90 days as well, as the average motorcycle re-sale period is longer
than the average automobile re-sale period. The longer average period
for motorcycles is a result of cyclical trends in the motorcycle
market.
Of the $24.5 million of non-performing
loans as of December 31, 2007, only $6.2 million still remained non-performing
at December 31, 2008. As a result, $139.7 million of the $145.9
million of the non-performing loans as of December 31, 2008 were loans that
migrated to non-performing status during 2008. Most of the increase
was attributable to non-performing commercial real estate and construction real
estate loans.
Management believes the allowance for
loan losses accounting policy is critical to the portrayal and understanding of
our financial condition and results of operations. Selection and
application of this “critical accounting policy” involves judgments, estimates,
and uncertainties that are subject to change. In the event that
different assumptions or conditions were to prevail, and depending upon the
severity of such changes, materially different financial condition or results of
operations is a reasonable possibility.
We
maintain our allowance for loan losses at a level that management believes is
appropriate to absorb probable losses on existing loans based on an evaluation
of the collectability of loans, underlying collateral and prior loss
experience.
Our
allowance for loan losses is comprised of three elements: a general loss
reserve; a specific reserve for impaired loans; and a reserve for
smaller-balance homogenous loans. Each element is discussed
below.
General Loss Reserve. We
maintain a general loan loss reserve for the four categories of
commercial-related loans in our portfolio - commercial loans, commercial loans
collateralized by the assignment of lease payments (lease loans), commercial
real estate loans and construction real estate loans. We use a loan
loss reserve model that incorporates the migration of loan risk rating and
historical default data over a multi-year period. Under our loan risk
rating system, each loan, with the exception of those included in large groups
of smaller-balance homogeneous loans, is risk rated between one and nine by the
originating loan officer, Senior Credit Management, Loan Review or any loan
committee. A loan rated one represents those loans least likely to
default and nine represents those most likely to default. The
probability of loans defaulting for each risk rating, sometimes referred to as
default factors, are estimated based on the frequency with which loans migrate
from one risk rating to another and to default status over
time. Estimated loan default factors are multiplied by individual
loan balances in each risk-rating category and again multiplied by an historical
loss given default estimate for each loan type (which incorporates estimated
recoveries) to determine an appropriate level of allowance by loan
type. This approach is applied to the commercial, commercial real
estate and construction real estate components of the
portfolio. Moody’s Corporation migration factors, rather than the
Company’s actual loss and migration experience, are used to develop estimated
default factors for lease loans, since we do not have sufficient loss experience
to develop statistically reliable factors of our own.
The general allowance for loan losses
also includes estimated losses resulting from macroeconomic factors and
imprecision of our loan loss model. Macroeconomic factors adjust the
allowance for loan losses upward or downward based on the current point in the
economic cycle and are applied to the loan loss model through a separate
allowance element for the commercial, commercial real estate, construction real
estate and lease loan components. To determine our macroeconomic
factors, we use specific economic data that has a statistical correlation to
loan losses. We annually review this data to determine that such a
correlation continues to exist.
Model imprecision accounts for the
possibility that our limited loan loss history may result in inaccurate
estimated default and loss given default factors. Factors for
imprecision modify estimated default factors calculated by our migration
analysis and are based on the standard deviation of each estimated default
factor. We do not apply imprecision factors to the lease portfolio,
as we use migration factors that incorporate approximately 30 years of data from
Moody’s Corporation.
At each quarter end, potential problem
loans are reviewed individually, with adjustments made to the general calculated
reserve for each loan as deemed necessary. Specific adjustments are
made depending on expected cash flows and/or the value of the collateral
securing the loan.
The general loss reserve was $87.0 million as of December 31, 2008, and $56.2
million as of December 31, 2007. The increase in the general loss
reserve was primarily due to the migration of performing loans from lower risk
rating to higher risk rating during 2008. This resulted in a higher
default rate for performing loans. Additionally, worsening
macroeconomic factors, loan growth during 2008, and an increase in potential
problem loans contributed to the increase in the general reserve. See
discussion below in “Potential Problem
Loans”.
Specific Reserves. Our
allowance for loan losses also includes specific reserves on impaired
loans. A loan is considered to be impaired when management believes,
after considering collection efforts and other factors, the borrower’s financial
condition is such that the collection of all contractual principal and interest
payments due according to contractual terms is doubtful. The total
specific reserve component of the allowance was $52.1 million as of December 31,
2008 and $6.0 million as of December 31, 2007. The increase in
specific reserve relates to the increase in impaired loans in the portfolio from
December 31, 2007, and deterioration in value of underlying collateral of
construction real estate loans.
Smaller Balance Homogenous
Loans. Pools of homogeneous loans with similar risk and loss
characteristics are also assessed for probable losses. These loan
pools include consumer, residential real estate, home equity and indirect
vehicle loans. Migration probabilities obtained from past due roll
rate analyses are applied to current balances to forecast charge-offs over a one
year time horizon. The reserves for smaller balance homogenous loans
totaled $4.9 million at December 31, 2008, and $2.9 million at December 31,
2007.
Prior to December 31, 2005, we
designated a portion of our allowance for loan losses as unallocated to account
for macroeconomic and precision uncertainties. During 2005, the
methodology used to determine our allowance for loan losses was refined and
macroeconomic and imprecision factors were calculated for each loan
type. As a result, the portion of our reserve previously designated
as unallocated was fully allocated to specific loan categories as of December
31, 2005. This change accounts for a majority of the increase in the
allowance for loan losses for each loan type when comparing year-end 2005 to
prior periods. In the past, unallocated reserves represented model
imprecision and macroeconomic factors for the entire portfolio. The
allocation of unallocated reserves to the various components of the loan
portfolio was done to more accurately present the allowance for loan losses by
ascribing macroeconomic and imprecision factors to each loan category rather
than the loan portfolio as a whole.
Loan quality is monitored closely by
management and is reviewed by MB Financial Bank’s board of directors at its
regularly scheduled meetings. We consistently apply our methodology for
determining the appropriateness of the allowance for loan losses, but may adjust
our methodologies and assumptions based on historical information related to
charge-offs, management's evaluation of the loan portfolio, and macroeconomic
factors.
The
following table presents an analysis of the allowance for loan losses for the
years presented (dollars in thousands):
|
Year
Ended December 31,
|
||||||||||
|
2008
|
2007
|
2006
|
2005
|
2004
|
||||||
|
Balance
at beginning of year
|
$
65,103
|
$
58,983
|
$
42,290
|
$
42,255
|
$
37,730
|
|||||
|
Additions
from acquisitions
|
-
|
-
|
16,425
|
-
|
4,052
|
|||||
|
Allowance
related to bank subsidiary sold
|
-
|
-
|
-
|
-
|
-
|
|||||
|
Provision
for loan losses
|
125,721
|
19,313
|
10,100
|
8,150
|
7,800
|
|||||
|
Charge-offs:
|
||||||||||
|
Commercial
loans
|
(13,653)
|
(7,072)
|
(10,160)
|
(4,007)
|
(5,584)
|
|||||
|
Commercial
loans collateralized by assignment of lease payments
|
(1,258)
|
(515)
|
(246)
|
(826)
|
(1,538)
|
|||||
|
Commercial
real estate
|
(14,872)
|
(3,471)
|
(1,671)
|
(1,052)
|
(1,508)
|
|||||
|
Residential
real estate
|
(550)
|
(1,075)
|
(434)
|
(118)
|
(98)
|
|||||
|
Construction
real estate
|
(14,940)
|
(2,294)
|
-
|
(3,824)
|
(514)
|
|||||
|
Indirect
vehicles
|
(2,109)
|
(1,193)
|
(307)
|
-
|
-
|
|||||
|
Home
equity
|
(1,801)
|
(194)
|
(427)
|
(149)
|
(276)
|
|||||
|
Consumer
loans
|
(642)
|
(492)
|
(555)
|
(199)
|
(459)
|
|||||
|
Total
charge-offs
|
(49,825)
|
(16,306)
|
(13,800)
|
(10,175)
|
(9,977)
|
|||||
|
Recoveries:
|
||||||||||
|
Commercial
loans
|
891
|
1,265
|
2,402
|
954
|
1,488
|
|||||
|
Commercial
loans collateralized by assignment of lease payments
|
67
|
979
|
40
|
329
|
105
|
|||||
|
Commercial
real estate
|
266
|
37
|
378
|
51
|
35
|
|||||
|
Residential
real estate
|
29
|
20
|
26
|
97
|
45
|
|||||
|
Construction
real estate
|
951
|
38
|
490
|
-
|
28
|
|||||
|
Indirect
vehicles
|
625
|
389
|
4
|
-
|
-
|
|||||
|
Home
equity
|
132
|
344
|
481
|
495
|
611
|
|||||
|
Consumer
loans
|
41
|
41
|
147
|
134
|
338
|
|||||
|
Total
recoveries
|
3,002
|
3,113
|
3,968
|
2,060
|
2,650
|
|||||
|
Net
charge-offs
|
(46,823)
|
(13,193)
|
(9,832)
|
(8,115)
|
(7,327)
|
|||||
|
Balance
at December 31,
|
$144,001
|
$65,103
|
$58,983
|
$42,290
|
$42,255
|
|||||
|
Total
loans at December 31,
|
$6,228,563
|
$5,615,627
|
$4,971,494
|
$3,480,447
|
$3,180,820
|
|||||
|
Ratio
of allowance to total loans
|
2.31%
|
1.16%
|
1.19%
|
1.22%
|
1.33%
|
|||||
|
Ratio
of net charge-offs to average loans
|
0.79%
|
0.25%
|
0.24%
|
0.24%
|
0.25%
|
|||||
|
Provision for
loan losses increased by $106.4 million to $125.7 million for the year
ended December 31, 2008 from $19.3 million in the same period of
2007. The increase in our provision for loan losses was
primarily due the migration of performing loans from lower risk rating to
higher risk rating during 2008, worsening macroeconomic factors, and the
increases in non-performing loans and net charge-offs. Also
factoring into our provision was our loan growth during the year ended
December 31, 2008.
|
Additionally,
the underlying value of collateral on impaired loans deteriorated during the
fourth quarter of 2008. Overall, the business environment has been
adverse for many households and businesses in the United States, including the
Chicago metropolitan area. The business environment significantly
declined during the fourth quarter of 2008 as a result of significant job losses
and housing foreclosures. Single family homes, condominiums, retail
property, manufacturing property, and vacant land all experienced a significant
decrease in demand due to the worsening economic environment during the fourth
quarter of 2008. As a result, significant declines in the values of
single family homes and other properties occurred during the fourth
quarter.
The
following table sets forth the allocation of the allowance for loan losses for
the years presented and the percentage of loans in each category to total
loans. The purpose of this allocation is only for internal analysis
of the adequacy of the allowance and is not an indication of expected or
anticipated losses (dollars in thousands):
|
At
December 31,
|
|||||||||||||||
|
2008
|
2007
|
2006
|
2005
|
2004
|
|||||||||||
|
%
of Total
|
%
of Total
|
%
of Total
|
%
of Total
|
%
of Total
|
|||||||||||
|
Amount
|
Loans
|
Amount
|
Loans
|
Amount
|
Loans
|
Amount
|
Loans
|
Amount
|
Loans
|
||||||
|
Commercial
loans
|
$
40,217
|
24%
|
$15,627
|
24%
|
$20,918
|
21%
|
$14,918
|
22%
|
$10,394
|
22%
|
|||||
|
Commercial
loans collateralized by
|
|||||||||||||||
|
assignment
of lease payments
|
10,245
|
10%
|
7,854
|
10%
|
8,897
|
8%
|
6,868
|
8%
|
6,560
|
8%
|
|||||
|
Commercial
real estate
|
31,241
|
38%
|
15,653
|
36%
|
10,458
|
36%
|
11,687
|
42%
|
9,715
|
42%
|
|||||
|
Residential
real estate
|
1,623
|
5%
|
1,430
|
6%
|
1,430
|
7%
|
776
|
6%
|
779
|
8%
|
|||||
|
Construction
real estate
|
57,443
|
13%
|
23,039
|
14%
|
15,780
|
17%
|
7,491
|
15%
|
4,416
|
12%
|
|||||
|
Consumer
loans and other
|
3,232
|
10%
|
1,500
|
10%
|
1,621
|
11%
|
550
|
7%
|
571
|
8%
|
|||||
|
Unallocated
(1)
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
9,820
|
-
|
|||||
|
Total
|
$144,001
|
100%
|
$65,103
|
100%
|
$58,983
|
100%
|
$42,290
|
100%
|
$42,255
|
100%
|
|||||
|
(1) In
2005, the methodology was refined to fully allocate all components of the
loan loss reserve.
|
Additions to the allowance for loan
losses, which are charged to earnings through the provision for loan losses, are
determined based on a variety of factors, including specific reserves, current
loan risk ratings, delinquent loans, historical loss experience and economic
conditions in our market area. In addition, federal regulatory
authorities, as part of the examination process, periodically review our
allowance for loan losses. The regulators may require us to record
adjustments to the allowance level based upon their assessment of the
information available to them at the time of examination. Although
management believes the allowance for loan losses is sufficient to cover
probable losses inherent in the loan portfolio, there can be no assurance that
the allowance will prove sufficient to cover actual loan losses. In
2008, the allocation of the allowance for loan losses increased in commercial,
commercial real estate and construction real estate loans, due to the migration
of performing loans from lower risk rating to higher risk rating during 2008,
worsening macroeconomic factors, and the increases in non-performing loans and
potential problem loans during the year ended December 31, 2008. See
discussion below in “Potential Problem
Loans”.
We utilize an internal asset
classification system as a means of reporting problem and potential problem
assets. At our scheduled meetings of the board of directors of MB
Financial Bank, a watch list is presented, showing significant loan
relationships listed as “Special Mention,” “Substandard,” and
“Doubtful.” Under our risk rating system noted above, Special
Mention, Substandard, and Doubtful loan classifications correspond to risk
ratings six, seven, and eight, respectively. Substandard assets
include those characterized by the distinct possibility that we will sustain
some loss if the deficiencies are not corrected. Assets classified as
Doubtful, or risk rated eight have all the weaknesses inherent in those
classified Substandard with the added characteristic that the weaknesses present
make collection or liquidation in full, on the basis of currently existing
facts, conditions and values, highly questionable and
improbable. Assets classified as Loss, or risk rated nine are those
considered uncollectible and viewed as valueless assets and have been
charged-off. Assets that do not currently expose us to sufficient
risk to warrant classification in one of the aforementioned categories, but
possess weaknesses that deserve management’s close attention are deemed to be
Special Mention, or risk rated six.
Our determination as to the
classification of our assets and the amount of our valuation allowances is
subject to review by the Office of the Comptroller of the Currency, MB Financial
Bank’s primary regulator, which can order the establishment of additional
general or specific loss allowances. There can be no assurance that
regulators, in reviewing our loan portfolio, will not request us to materially
adjust our allowance for loan losses. The Office of the Comptroller
of the Currency, in conjunction with the other federal banking agencies, has
adopted an interagency policy statement on the allowance for loan
losses. The policy statement provides guidance for financial
institutions on both the responsibilities of management for the assessment and
establishment of adequate allowances and guidance for banking agency examiners
to use in determining the adequacy of general valuation
guidelines. Generally, the policy statement recommends that (1)
institutions have effective systems and controls to identify, monitor and
address asset quality problems; (2) management has analyzed all significant
factors that affect the collectability of the portfolio in a reasonable manner;
and (3) management has established acceptable allowance evaluation processes
that meet the objectives set forth in the policy
statement. Management believes it has established an adequate
allowance for probable loan losses. We analyze our process regularly,
with modifications made if needed, and report those results four times per year
at meetings of our Audit Committee. However, there can be no
assurance that regulators, in reviewing our loan portfolio, will not request us
to materially adjust our allowance for loan losses at the time of their
examination.
Although management believes that
adequate specific and general loan loss allowances have been established, actual
losses are dependent upon future events and, as such, further additions to the
level of specific and general loan loss allowances may become
necessary.
We define potential problem loans as
performing loans rated substandard, that do not meet the definition of a
non-performing loan (See “Asset Quality” section above
for non-performing loans). We do not necessarily expect to realize
losses on potential problem loans, but we recognize potential problem loans
carry a higher probability of default and require additional attention by
management. The aggregate principal amounts of potential problem
loans were $100.9 million, or 1.62% of total loans as of December 31, 2008, and
approximately $87.6 million, or 1.56% of total loans as of December 31,
2007.
Sources
of Funds
General. Deposits,
short-term and long-term borrowings, including junior subordinated notes issued
to capital trusts and subordinated debt, loan and investment security repayments
and prepayments, proceeds from the sale of securities, and cash flows generated
from operations are the primary sources of our funds for lending, investing,
leasing and other general purposes. Loan repayments are a relatively
predictable source of funds except during periods of significant interest rate
declines, while deposit flows tend to fluctuate with prevailing interests rates,
money markets conditions, general economic conditions and
competition.
Deposits. We offer
a variety of deposit accounts with a range of interest rates and
terms. Our core deposits consist of checking accounts, NOW accounts,
money market accounts, savings accounts and non-public certificates of
deposit. These deposits, along with public fund deposits, brokered
deposits, and short-term and long-term borrowings are used to support our asset
base. Our deposits are obtained predominantly from the geographic
trade areas surrounding each of our office locations. We rely
primarily on customer service and long-standing relationships with customers to
attract and retain deposits; however, market interest rates and rates offered by
competing financial institutions significantly affect our ability to attract and
retain deposits. We also use brokered deposits as an alternative
funding source which allows us flexibility in managing our overall interest
expense. Total deposits increased by $981.8 million, including an
increase in brokered deposits of $386.3 million, from December 31, 2007 to
December 31, 2008.
The
following table sets forth the maturities of certificates of deposit and other
time deposits $100,000 and over at December 31, 2008 (in
thousands):
|
At
December 31, 2008
|
|||
|
Certificates
of deposit $100,000 and over:
|
|||
|
Maturing
within three months
|
$ 511,980
|
||
|
After
three but within six months
|
532,188
|
||
|
After
six but within twelve months
|
403,516
|
||
|
After
twelve months
|
561,671
|
||
|
Total
certificates of deposit $100,000 and over (1)
|
$2,009,355
|
||
|
Other
time deposits $100,000 and over (2):
|
|||
|
Maturing
within three months
|
$
12,347
|
||
|
After
three but within six months
|
27,603
|
||
|
After
six but within twelve months
|
25,851
|
||
|
After
twelve months
|
15,911
|
||
|
Total
other time deposits $100,000 and over
|
$
81,712
|
||
|
|
|||
|
(1)
Includes brokered deposits of $864.8 million.
|
|||
|
(2)
Consists of time deposits held in individual retirement accounts (IRA’s)
and time certificates that the customer has the option to increase the
principal balance and maintain the original interest
rate.
|
|||
The
following table sets forth the composition of our deposits at the dates
indicated (dollars in thousands):
|
At
December 31,
|
||||||
|
2008
|
2007
|
|||||
|
Amount
|
Percent
|
Amount
|
Percent
|
|||
|
Demand
deposits, noninterest bearing
|
$
960,117
|
14.78%
|
$
875,491
|
15.88%
|
||
|
NOW
and money market accounts
|
1,465,436
|
22.56%
|
1,263,021
|
22.91%
|
||
|
Savings
deposits
|
367,684
|
5.66%
|
390,980
|
7.09%
|
||
|
Time
certificates, $100,000 or more
|
2,091,067
|
32.19%
|
1,686,593
|
30.59%
|
||
|
Other
time certificates
|
1,611,267
|
24.81%
|
1,297,698
|
23.53%
|
||
|
Total
|
$6,495,571
|
100.00%
|
$5,513,783
|
100.00%
|
||
Borrowings. Short-term
borrowings decreased by $489.1 million to $488.6 million at December 31, 2008
compared to $977.7 million at December 31, 2007. We have access to a
variety of borrowing sources and use short-term and long-term borrowings to
support our asset base. Short-term borrowings from time to time
include federal funds purchased, Federal Reserve term auction funds, securities
sold under agreements to repurchase, Federal Home Loan Bank advances, treasury,
tax and loan demand notes, and correspondent bank lines of credit. We
also offer customers a deposit account that sweeps balances in excess of an
agreed upon target amount into overnight repurchase agreements. As
business customers have grown more sophisticated in managing their daily cash
position, demand for the sweep product has increased.
The
following table sets forth certain information regarding our short-term
borrowings at the dates and for the periods indicated (dollars in
thousands):
|
At
or For the Year Ended December 31,
|
|||||||
|
2008
|
2007
|
2006
|
|||||
|
Federal
funds purchased:
|
|||||||
|
Average
balance outstanding
|
$
44,413
|
$
90,928
|
$
57,641
|
||||
|
Maximum
outstanding at any month-end during the period
|
175,000
|
199,100
|
133,100
|
||||
|
Balance
outstanding at end of period
|
5,000
|
170,000
|
133,100
|
||||
|
Weighted
average interest rate during the period
|
3.09%
|
5.16%
|
5.40%
|
||||
|
Weighted
average interest rate at end of the period
|
0.68%
|
3.86%
|
5.38%
|
||||
|
Federal
Reserve term auction funds:
|
|||||||
|
Average
balance outstanding
|
$
91,803
|
$ -
|
$
-
|
||||
|
Maximum
outstanding at any month-end during the period
|
250,000
|
-
|
-
|
||||
|
Balance
outstanding at end of period
|
100,000
|
-
|
-
|
||||
|
Weighted
average interest rate during the period
|
2.59%
|
-
|
-
|
||||
|
Weighted
average interest rate at end of the period
|
0.42%
|
-
|
-
|
||||
|
Securities
sold under agreements to repurchase:
|
|||||||
|
Average
balance outstanding
|
$291,013
|
$323,132
|
$365,786
|
||||
|
Maximum
outstanding at any month-end during the period
|
366,271
|
409,848
|
462,293
|
||||
|
Balance
outstanding at end of period (1)
|
282,832
|
367,702
|
351,378
|
||||
|
Weighted
average interest rate during the period
|
1.49%
|
3.66%
|
3.97%
|
||||
|
Weighted
average interest rate at end of the period
|
0.48%
|
3.02%
|
3.89%
|
||||
|
Federal
Home Loan Bank advances:
|
|||||||
|
Average
balance outstanding
|
$252,452
|
$397,065
|
$205,805
|
||||
|
Maximum
outstanding at any month-end during the period
|
344,011
|
440,019
|
239,679
|
||||
|
Balance
outstanding at end of period
|
100,787
|
440,019
|
204,026
|
||||
|
Weighted
average interest rate during the period
|
3.75%
|
5.23%
|
4.94%
|
||||
|
Weighted
average interest rate at end of the period
|
2.46%
|
5.05%
|
5.30%
|
||||
|
Treasury,
tax and loan demand notes
|
|||||||
|
Average
balance outstanding
|
$
-
|
$
-
|
$
1,545
|
||||
|
Maximum
outstanding at any month-end during the period
|
-
|
-
|
3,959
|
||||
|
Balance
outstanding at end of period
|
-
|
-
|
-
|
||||
|
Weighted
average interest rate during the period
|
-
|
-
|
4.48%
|
||||
|
Weighted
average interest rate at end of the period
|
-
|
-
|
-
|
||||
|
Correspondent
bank lines of credit:
|
|||||||
|
Average
balance outstanding
|
$
1,393
|
$
1,555
|
$
1,115
|
||||
|
Maximum
outstanding at any month-end during the period
|
10,000
|
10,000
|
12,000
|
||||
|
Balance
outstanding at end of period
|
-
|
-
|
-
|
||||
|
Weighted
average interest rate during the period
|
3.23%
|
5.72%
|
6.11%
|
||||
|
Weighted
average interest rate at end of the period
|
-
|
-
|
-
|
||||
|
(1)
|
Balance
includes customer repurchase agreements totaling $282.8 million, $367.7
million and $314.4 million at December 31, 2008, 2007 and 2006,
respectively.
|
Long-term borrowings include notes
payable to other banks to support a portfolio of equipment that we own and lease
to other companies, Federal Home Loan Bank advances, structured repurchase
agreements, and subordinated debt. As of December 31, 2008 and
December 31, 2007, our long-term borrowings were $471.5 million and $208.9
million, respectively.
Junior subordinated notes issued to
capital trusts include debentures sold to Coal City Capital Trust I, FOBB
Capital Trust I, FOBB Capital Trust III, MB Financial Capital Trust II, MB
Financial Capital Trust III, MB Financial Capital Trust IV, MB Financial Capital
Trust V, and MB Financial Capital Trust VI in connection with the issuance of
their preferred securities in 1998, 2000, 2003, 2005, 2006, 2006, 2007, and
2007, respectively. As of December 31, 2008 and December 31, 2007,
our junior subordinated notes issued to capital trusts were $158.8 million and
$159.0 million, respectively. See Notes 1 and 13 to the consolidated financial statements for further
analysis.
Bank Liquidity. Liquidity
management is monitored by an Asset/Liability Management Committee, consisting
of members of management, which reviews historical funding requirements, current
liquidity position, sources and stability of funding, marketability of assets,
options for attracting additional funds, and anticipated future funding needs,
including the level of unfunded commitments.
Our primary sources of funds are retail
and commercial deposits, short-term and long-term borrowings, public funds and
funds generated from operations. Funds from operations include
principal and interest payments received on loans and
securities. While maturities and scheduled amortization of loans and
securities provide an indication of the timing of the receipt of funds, changes
in interest rates, economic conditions and competition strongly influence
mortgage prepayment rates and deposit flows, reducing the predictability of the
timing on sources of funds.
Our subsidiary bank has no required
regulatory liquidity ratios to maintain; however, it adheres to an internal
policy which dictates a ratio of loans to deposits. Our current
policy maintains that we, on a consolidated basis, may not have a ratio of loans
to deposits (including customer repurchase agreements) in excess of
105%. At December 31, 2008, we were in compliance with the foregoing
policy.
At December 31, 2008, our subsidiary
bank had outstanding letters of credit, loan origination commitments and unused
commercial and retail lines of credit of approximately $1.8
billion. Our bank anticipates that it will have sufficient funds
available to meet current origination and other lending
commitments. Certificates of deposit that are scheduled to mature
within one year totaled $2.8 billion at December 31, 2008 including brokered
deposits. Although no assurance can be given, we expect to retain a
substantial majority of these certificates of deposit or acquire additional
brokered deposits.
In the event that additional short-term
liquidity is needed, our banks have established relationships with several large
regional banks to provide short-term borrowings in the form of federal funds
purchases. While, at December 31, 2008, there were no firm lending
commitments in place, management believes that MB Financial Bank could borrow
approximately $400 million for a short time from these banks on a collective
basis. Additionally, MB Financial Bank is a member of the Federal
Home Loan Bank of Chicago, Illinois and as of December 31, 2008, has the ability
to borrow an additional $132.7 million from the Federal Home Loan
Bank. The Company can also use the Federal Reserve Discount Window
and the Federal Reserve Term Auction Funds for short-term
funding. Each auction is for a fixed amount and the rate is
determined by the auction process. These borrowings are primarily
collateralized by commercial and indirect vehicle loans with unpaid principal
balances aggregating no less than 200% of the outstanding advances from the
Federal Reserve Term Auction and 100% of the outstanding advances from the
Federal Reserve Discount Window. As a contingency plan for
significant funding needs, the Asset/Liability Management Committee may also
consider the sale of investment securities, selling securities under agreement
to repurchase, the temporary curtailment of lending activities, or selling
loans.
Corporation Liquidity. Our
main sources of liquidity at the holding company level are dividends from our
subsidiary bank.
MB Financial Bank is subject to various
regulatory capital requirements which affect its ability to pay dividends to
us. Failure to meet minimum capital requirements can initiate certain
mandatory and discretionary actions by regulators that, if undertaken, could
have a direct material effect on our financial
statements. Additionally, our current policy effectively limits the
amount of dividends our subsidiary bank may pay to us by requiring the bank to
maintain total risk-based capital, Tier 1 risk-based capital and Tier 1 leverage
capital ratios of 11%, 8% and 7%, respectively. The minimum ratios
required for a bank to be considered "well capitalized" for regulatory purposes
are 10%, 6% and 5%, respectively. In addition to adhering to our
policy, there are regulatory restrictions on the ability of national banks to
pay dividends. See "Item 1. Business – Supervision and Regulation."
Commitments. As a
financial services provider, we routinely enter into commitments to extend
credit, including loan commitments, standby and commercial letters of
credit. While these contractual obligations represent our future cash
requirements, a significant portion of commitments to extend credit may expire
without being drawn upon. Such commitments are subject to the same
credit policies and approval process accorded to loans made by
us. For additional information, see Note 17
“Commitments and Contingencies” to the consolidated financial
statements.
Derivative Financial
Instruments. Derivatives
have become one of several components of our asset/liability management
activities to manage interest rate risk. In general, the assets and
liabilities generated through the ordinary course of business activities do not
naturally create offsetting positions with respect to repricing, basis or
maturity characteristics. Using derivative instruments, principally
interest rate swaps, our interest rate sensitivity is adjusted to maintain the
desired interest rate risk profile. Interest rate swaps used to
adjust the interest rate sensitivity of certain interest-bearing assets and
liabilities will not need to be replaced at maturity, since the corresponding
asset or liability will mature along with the interest rate swap.
Interest rate swaps designated as an
interest rate related hedge of an existing fixed rate asset or liability are
fair value type hedges. We currently use fair value type hedges, or
interest rate swaps, to mitigate the interest sensitivity of certain qualifying
commercial loans and brokered time certificates of deposit. The
change in fair value of both the interest rate swap and hedged instrument is
recorded in current earnings. If a hedge ceases to qualify for hedge
accounting prior to maturity, previous adjustments to the carrying value of the
hedged item are recognized in earnings to match the earnings recognition pattern
of the hedged item (e.g., level yield amortization if hedging an
interest-bearing instrument that has not been sold or
extinguished). For additional information, including the notional
amount and fair value of our interest rate swaps at December 31, 2008, see Note 21 “Derivative Financial Instruments” to the
consolidated financial statements.
Trust Preferred
Securities. In addition to our commitments and derivative
financial instruments of the types described above, our off balance sheet
arrangements include our combined $4.8 million ownership interests in the common
securities of the statutory trusts we established to issue trust preferred
securities. See “Capital Resources” below in
this Item 7 and Note 13 “Junior Subordinated Notes Issued to
Capital Trusts” to the consolidated financial statements.
Contractual Obligations. In
the ordinary course of operations, we enter into certain contractual
obligations. Such obligations include the funding of operations
through debt issuances, subordinated notes issued to capital trusts, operating
leases for premises and equipment, as well as capital expenditures for new
premises and equipment.
The following table summarizes our
significant contractual obligations and other potential funding needs at
December 31, 2008 (in thousands):
|
Payments
Due by Period
|
|||||||||||
|
Contractual
Obligations
|
Total
|
Less
than 1 Year
|
1 -
3 Years
|
3 -
5 Years
|
More
than 5 Years
|
||||||
|
Time
deposits
|
$
|
3,702,334
|
$
|
2,806,727
|
$
|
709,579
|
$
|
104,150
|
$
|
81,878
|
|
|
Long-term
borrowings
|
471,466
|
45,060
|
189,003
|
44,320
|
193,083
|
||||||
|
Junior
subordinated notes issued to capital trusts (1)
|
158,824
|
-
|
-
|
-
|
158,824
|
||||||
|
Operating
leases
|
27,226
|
3,182
|
4,415
|
3,259
|
16,370
|
||||||
|
Capital
expenditures
|
1,016
|
1,016
|
-
|
-
|
-
|
||||||
|
Total
|
$
|
4,360,866
|
$
|
2,855,989
|
$
|
902,992
|
$
|
151,230
|
$
|
450,655
|
|
|
Letters
of Credit and commitments to extend credit
|
$
|
1,812,903
|
|||||||||
|
(1)
|
Call
dates are set forth in Note 13 to the audited consolidated financial
statements under Item 8. Financial Statements and Supplementary
Data.
|
Our subsidiary bank is subject to the
risk based capital regulations administered by the banking regulatory
agencies. The risk based capital guidelines are designed to make
regulatory capital requirements more sensitive to differences in risk profiles
among banks, to account for off-balance sheet exposure, and to minimize
disincentives for holding liquid assets. Under the regulations,
assets and off-balance sheet items are assigned to broad risk categories, each
with appropriate weights. The resulting capital ratios represent
capital as a percentage of total risk weighted assets and off-balance sheet
items. Under the prompt corrective action regulations, to be
adequately capitalized a bank must maintain minimum ratios of total capital to
risk-weighted assets of 8.00%, Tier 1 capital to risk-weighted assets of 4.00%,
and Tier 1 capital to total assets of 4.00%. Failure to meet these
capital requirements can initiate certain mandatory and possibly additional
discretionary, actions by regulators, which, if undertaken, could have a direct
material effect on the bank’s financial statements. As of December
31, 2008, the most recent notification from the federal banking regulators
categorized our subsidiary bank as well capitalized.
A well capitalized institution must
maintain a minimum ratio of total capital to risk-weighted assets of at least
10.00%, a minimum ratio of Tier 1 capital to risk weighted assets of at least
6.00%, a minimum ratio of Tier 1 capital to total assets of at least 5.00% and
must not be subject to any written order, agreement or directive requiring it to
meet or maintain a specific capital level. There are no conditions or
events since that notification that management believes have changed our
subsidiary bank’s capital classification. On a consolidated basis, we
must maintain a minimum ratio of Tier 1 capital to total assets of 4.00%, a
minimum ratio of Tier 1 capital to risk-weighted assets of 4.00% and a minimum
ratio of total-capital to risk-weighted assets of 8.00%. See “Item 1.
Business – Supervision and Regulation – Capital
Adequacy" and "Prompt Corrective
Action." In addition, our internal policy requires us, on a
consolidated basis, to maintain these ratios at or above 7%, 8% and 11%,
respectively.
As of December 31, 2008, our subsidiary
bank was "well capitalized" under the capital adequacy requirements to which
each of us are subject. The following table sets forth the actual and
required regulatory capital amounts and ratios for our subsidiary bank and us as
of December 31, 2008 (dollars in thousands):
|
To
Be Well
|
|||||||||||
|
Capitalized
Under
|
|||||||||||
|
For
Capital
|
Prompt
Corrective
|
||||||||||
|
Actual
|
Adequacy
Purposes
|
Action
Provisions
|
|||||||||
|
Amount
|
Ratio
|
Amount
|
Ratio
|
Amount
|
Ratio
|
||||||
|
As
of December 31, 2008
|
|||||||||||
|
Total
capital (to risk-weighted assets):
|
|||||||||||
|
Consolidated
|
$936,027
|
14.08%
|
$531,968
|
8.00%
|
N/A
|
N/A
|
|||||
|
MB
Financial Bank
|
759,845
|
11.46%
|
530,595
|
8.00%
|
$663,243
|
10.00%
|
|||||
|
Tier
1 capital (to risk-weighted assets):
|
|||||||||||
|
Consolidated
|
$802,384
|
12.07%
|
$265,984
|
4.00%
|
N/A
|
N/A
|
|||||
|
MB
Financial Bank
|
626,185
|
9.44%
|
265,297
|
4.00%
|
$397,946
|
6.00%
|
|||||
|
Tier
1 capital (to average assets):
|
|||||||||||
|
Consolidated
|
$802,384
|
9.85%
|
$325,872
|
4.00%
|
N/A
|
N/A
|
|||||
|
MB
Financial Bank
|
626,185
|
7.70%
|
325,300
|
4.00%
|
$406,625
|
5.00%
|
|||||
N/A – not
applicable
We established statutory trusts for the
sole purpose of issuing trust preferred securities and related trust common
securities. The trust preferred securities are included in our
consolidated Tier 1 Capital and Total Capital at December 31,
2008. In March 2005, the Board of Governors of the Federal Reserve
System issued a final rule allowing bank holding companies to continue to
include qualifying trust preferred securities in their Tier 1 Capital for
regulatory capital purposes, subject to a 25% limitation to all core (Tier I)
capital elements, net of goodwill less any associated deferred tax
liability. The final rule provides a five-year transition period,
ending March 31, 2009, for application of the aforementioned quantitative
limitation. As of December 31, 2008, 100% of the trust preferred
securities described in Note 13 of our audited consolidated financial statements
qualified as Tier I capital. Under the final rule adopted in March
2005, that will take effect March 31, 2009, 100% of the trust preferred
securities outstanding, as of December 31, 2008, will qualify as Tier I
capital.
As of December 31, 2008, we had
approximately $1.0 million in capital expenditure commitments outstanding which
relate to various projects to build new branches or renovate existing
branches. We expect to pay the outstanding commitments as of December
31, 2008 through the normal cash flows of our business operations.
Statement
of Cash Flows
Operating
Activities. Cash flows from continuing operating activities
primarily include net income, adjusted for items in net income that did not
impact cash. Net cash provided by continuing operating activities
increased by $6.0 million to $147.7 million for the year ended December 31,
2008, from $141.7 million for the year ended December 31, 2007. The
increase was primarily due to an increase in provision for loan losses partially
offset by a decrease in net income.
Net cash provided by continuing
operating activities decreased by $303.2 million to $141.7 million for the year
ended December 31, 2007, from $445.0 million for the year ended December 31,
2006. The decrease was primarily due to a decrease in proceeds from
the sale of loans held for sale, partially offset by higher net income and a net
decrease in other assets for the year ended December 31, 2007. The
decrease in proceeds from the sale of loans held for sale was primarily due to
the sale of $344.8 million of indirect auto loans on September 29, 2006, to
remove low yielding assets. These indirect auto loans were held by
Oak Brook Bank and acquired by us as a result of our acquisition of Oak Brook
Bank on August 25, 2006. Subsequent to the indirect auto loan sale,
we significantly scaled back our indirect auto origination
business.
Investing
Activities. Cash used in continuing investing activities
reflects the impact of loans and investments acquired for the Company’s
interest-earning asset portfolios, as well as cash flows from asset sales and
the impact of acquisitions. For the year ended December 31, 2008, the
Company had net cash flows used in continuing investing activities of $887.8
million, compared to $206.9 million for the year ended December 31,
2007. The change in cash flows from continuing investing activities
was primarily due to a decrease in the proceeds from sales and maturities in our
investment portfolio, and an increase in purchases of investment securities
during the year ended December 31, 2008, compared to the year ended December 31,
2007. Additionally, we received $76.1 million from the sale of Union
Bank in 2007.
Net cash used in investing activities
increased by $112.2 million to $206.9 million for the year ended December 31,
2006 from $94.8 million for the year ended December 31, 2007. The
change in cash flows from continuing investing activities was primarily due to
the funding of our loan growth during the year ended December 31,
2007.
Financing
Activities. Cash flows from continuing financing activities
include transactions and events whereby cash is obtained from depositors,
creditors or investors. For the year ended December 31, 2008, the
Company had net cash flows provided by continuing financing activities of $931.5
million, compared to $68.2 million for the year ended December 31,
2007. The change in cash flows from continuing financing activities
was primarily due to an increase in deposits and the issuance of preferred stock
pursuant to the TARP Capital Purchase Program, partially offset by a net
decrease in borrowings. During 2008 we improved our liquidity
position as a result of an increase in deposits of $981.8 million, and a
reduction in short-term borrowings of $489.1 million. In addition, we
lengthened the maturities on both customer and brokered certificates of
deposits.
For the year ended December 31, 2007,
the Company had net cash flows provided by continuing financing activities of
$68.2 million, compared to net cash used in continuing financing activities of
$303.7 million for the year ended December 31, 2006. The change in
cash flows from continuing financing activities was primarily due to a net
increase in short-term borrowings for the year ended December 31, 2007, compared
to a net decrease in short-term borrowings for the year ended December 31, 2006,
and in increase in treasury stock purchased during 2007. The Company
used the funds generated from the indirect auto loan sale, as discussed above,
to payoff a portion of the Company’s short-term borrowings during the year ended
December 31, 2006.
Item 7A. Quantitative and Qualitative Disclosures
about Market Risk
Market
Risk and Asset Liability Management
Market Risk. Market
risk is the risk that the market value or estimated fair value of our assets,
liabilities, and derivative financial instruments will decline as a result of
changes in interest rates or financial market volatility, or that our net income
will be significantly reduced by interest rate changes. Market risk
is managed operationally in our Treasury Group, and is addressed through a
selection of funding and hedging instruments supporting balance sheet growth, as
well as monitoring our asset investment strategies.
Asset Liability
Management. Management and our Treasury Group continually
monitor our sensitivity to interest rate changes. It is our policy to
maintain an acceptable level of interest rate risk over a range of possible
changes in interest rates while remaining responsive to market demand for loan
and deposit products. The strategy we employ to manage our interest
rate risk is to measure our risk using an asset/liability simulation
model. The model considers several factors to determine our potential
exposure to interest rate risk, including measurement of repricing gaps,
duration, convexity, value at risk, and the market value of portfolio equity
under assumed changes in the level of interest rates, shape of the yield curves,
and general market volatility. Management controls our interest rate
exposure using several strategies, which include adjusting the maturities of
securities in our investment portfolio, and limiting fixed rate loans or fixed
rate deposits with terms of more than five years. We also use
derivative instruments, principally interest rate swaps, to manage
our
interest rate risk. See “Item 7. Management’s Discussion and Analysis
of Financial Condition and Results of Operations – Off-Balance Sheet Arrangements and Aggregate Contractual
Obligations.”
Interest Rate
Risk. Interest rate risk can come in a variety of forms,
including repricing risk, yield curve risk, basis risk, and prepayment
risk. We experience repricing risk when the change in the average
yield of either our interest earning assets or interest bearing liabilities is
more sensitive than the other to changes in market interest
rates. Such a change in sensitivity could reflect a number of
possible mismatches in the repricing opportunities of our assets and
liabilities.
In the event that yields on our assets
and liabilities do adjust to changes in market rates to the same extent, we may
still be exposed to yield curve risk. Yield curve risk reflects the
possibility the changes in the shape of the yield curve could have different
effects on our assets and liabilities.
Variable rate assets and liabilities
that reprice at similar times, have similar maturities or repricing dates, are
based on different indexes still have interest rate risk. Basis risk
reflects the possibility that indexes will not move in a coordinated
manner.
We hold mortgage-related investments,
including mortgage loans and mortgage-backed securities. Prepayment
risk is associated with mortgage-related investments and results from
homeowners’ ability to pay off their mortgage loans prior to
maturity. We limit this risk by restricting the types of
mortgage-backed securities we own to those with limited average life changes
under certain interest-rate shock scenarios, or securities with embedded
prepayment penalties. We also limit the amount of fixed rate mortgage
loans we hold that have maturities greater than five years.
Measuring Interest Rate
Risk. As noted above, interest rate risk can be measured by
analyzing the extent to which the repricing of assets and liabilities are
mismatched to create an interest sensitivity gap. An asset or
liability is said to be interest rate sensitive within a specific period if it
will mature or reprice within that period. The interest rate
sensitivity gap is defined as the difference between the amount of interest
earning assets maturing or repricing within a specific time period and the
amount of interest bearing liabilities maturing or repricing within that same
time period. A gap is considered positive when the amount of interest
rate sensitive assets exceeds the amount of interest rate sensitive
liabilities. A gap is considered negative when the amount of interest
rate sensitive liabilities exceeds the amount of interest rate sensitive
assets. During a period of rising interest rates, therefore, a
negative gap would tend to adversely affect net interest
income. Conversely, during a period of falling interest rates, a
negative gap position would tend to result in an increase in net interest
income.
The following table sets forth the
amounts of interest earning assets and interest bearing liabilities outstanding
at December 31, 2008 that we anticipate, based upon certain assumptions, to
reprice or mature in each of the future time periods shown. Except as
stated below, the amount of assets and liabilities shown which reprice or mature
during a particular period were determined based on the earlier of the term to
repricing or the term to repayment of the asset or liability. The
table is intended to provide an approximation of the projected repricing of
assets and liabilities at December 31, 2008 based on contractual maturities and
scheduled rate adjustments within a three-month period and subsequent selected
time intervals. The loan amounts in the table reflect principal
balances expected to be reinvested and/or repriced because of contractual
amortization and rate adjustments on adjustable-rate loans. Loan and
investment securities’ contractual maturities and amortization reflect expected
prepayment assumptions. While NOW, money market and savings deposit
accounts have adjustable rates, it is assumed that the interest rates on some of
the accounts will not adjust immediately to changes in other interest
rates.
Therefore,
the information in the table is calculated assuming that NOW, money market and
savings deposits will reprice as follows: 6%, 9% and 8%, respectively, in the
first three months, 17%, 23%, and 21%, respectively, in the next nine months,
59%, 57% and 58%, respectively, from one year to five years, and 18%, 11%, and
13%, respectively over five years (dollars in thousands):
|
Time
to Maturity or Repricing
|
||||||||||
|
0
– 90
|
91
- 365
|
1
– 5
|
Over
5
|
|||||||
|
Days
|
Days
|
Years
|
Years
|
Total
|
||||||
|
Interest
Earning Assets:
|
||||||||||
|
Interest
bearing deposits with banks
|
$
260,892
|
$ 190
|
$
752
|
$
-
|
$
261,834
|
|||||
|
Investment
securities available for sale
|
133,998
|
251,193
|
661,663
|
289,276
|
1,336,130
|
|||||
|
Loans
|
2,634,769
|
1,163,948
|
2,309,914
|
119,932
|
6,228,563
|
|||||
|
Total
interest earning assets
|
$3,029,659
|
$1,415,331
|
$2,972,329
|
$
409,208
|
$7,826,527
|
|||||
|
Interest
Bearing Liabilities:
|
||||||||||
|
NOW
and money market deposit accounts
|
$
117,491
|
$ 309,272
|
$
845,547
|
$
193,126
|
$1,465,436
|
|||||
|
Savings
deposits
|
28,627
|
76,483
|
211,711
|
50,863
|
367,684
|
|||||
|
Time
deposits
|
914,565
|
1,953,563
|
810,869
|
23,337
|
3,702,334
|
|||||
|
Short-term
borrowings
|
239,203
|
89,144
|
146,233
|
14,039
|
488,619
|
|||||
|
Long-term
borrowings
|
101,998
|
33,548
|
333,736
|
2,184
|
471,466
|
|||||
|
Junior
subordinated notes issued to capital trusts
|
152,070
|
-
|
6,754
|
-
|
158,824
|
|||||
|
Total
interest bearing liabilities
|
$1,553,954
|
$2,462,010
|
$2,354,850
|
$
283,549
|
$6,654,363
|
|||||
|
Rate
sensitive assets (RSA)
|
$3,029,659
|
$4,444,990
|
$7,417,319
|
$7,826,527
|
$7,826,527
|
|||||
|
Rate
sensitive liabilities (RSL)
|
$1,553,954
|
$4,015,964
|
$6,370,814
|
$6,654,363
|
$6,654,363
|
|||||
|
Cumulative
GAP (GAP=RSA-RSL)
|
$1,475,705
|
$ 429,026
|
$1,046,505
|
$1,172,164
|
$1,172,164
|
|||||
|
RSA/Total
assets
|
34.35%
|
50.40%
|
84.10%
|
88.74%
|
88.74%
|
|||||
|
RSL/Total
assets
|
17.62%
|
45.53%
|
72.23%
|
75.45%
|
75.45%
|
|||||
|
GAP/Total
assets
|
16.73%
|
4.86%
|
11.87%
|
13.29%
|
13.29%
|
|||||
|
GAP/RSA
|
48.71%
|
9.65%
|
14.11%
|
14.98%
|
14.98%
|
|||||
Certain shortcomings are inherent in
the method of analysis presented in the foregoing table. For example,
although certain assets and liabilities may have similar maturities or periods
to repricing, they may react in different degrees to changes in market interest
rates. Also, the interest rates on certain types of assets and
liabilities may fluctuate in advance of changes in market interest rates, while
interest rates on other types of assets may lag behind changes in market
rates. Additionally, in the event of a change in interest rates,
prepayment and early withdrawal levels would likely deviate significantly from
those assumed in calculating the table. Therefore, we do not rely on
a gap analysis to manage our interest rate risk, but rather we use what we
believe to be the more reliable simulation model relating to changes in net
interest income.
Based on
simulation modeling which assumes gradual changes in interest rates over a
one-year period, we believe that our net interest income would change due to
changes in interest rates as follows (dollars in thousands):
|
Gradual
|
Change
in Net Interest Income Over One Year Horizon
|
|||||
|
Changes
in
|
At
December 31, 2008
|
At
December 31, 2007
|
||||
|
Levels
of
|
Dollar
|
Percentage
|
Dollar
|
Percentage
|
||
|
Interest
Rates
|
Change
|
Change
|
Change
|
Change
|
||
|
+2.00%
|
$8,664
|
3.40%
|
$502
|
0.23%
|
||
|
+1.00%
|
3,328
|
1.30%
|
736
|
0.33%
|
||
In the interest rate sensitivity table
above, changes in net interest income between December 31, 2008 and December 31,
2007 reflect changes in the composition of interest earning assets and interest
bearing liabilities, related interest rates, repricing frequencies, and the
fixed or variable characteristics of the interest earning assets and interest
bearing liabilities.
The assumptions used in our interest
rate sensitivity simulation discussed above are inherently uncertain and, as a
result, the simulations cannot precisely measure net interest income or
precisely predict the impact of changes in interest rates on net interest
income. Our model assumes that a portion of our variable rate loans
that have minimum interest rates will remain in our portfolio regardless of
changes in the interest rate environment. Actual results will differ
from simulated results due to timing, magnitude and frequency of interest rate
changes as well as changes in market conditions and management
strategies.
As a
result of the current interest rate environment, the Company does not anticipate
any significant declines in interest rates over the next twelve
months. For this reason, we did not use an interest rate sensitivity
simulation that assumes a gradual decline in the level of interest rates over
the next twelve months.
Item 8. Financial Statements and Supplementary Data
MB
FINANCIAL, INC.
CONSOLIDATED
FINANCIAL STATEMENTS
December
31, 2008, 2007, and 2006
|
Page
|
|
|
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER
FINANCIAL
REPORTING................................................................................................
|
54
|
|
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
ON INTERNAL CONTROL OVER FINANCIAL
REPORTING............................................................................................................................................................................................................................................
|
55
|
|
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
ON THE CONSOLIDATED FINANCIAL
STATEMENTS.........................................................................................................................................................................................................................................
|
56
|
|
FINANCIAL
STATEMENTS
|
|
|
Consolidated Balance
Sheets.........................................................................................................................................................................................................
|
57
|
|
Consolidated Statements of
Income..............................................................................................................................................................................................
|
58
|
|
Consolidated Statements of Changes in Stockholders'
Equity.................................................................................................................................................
|
60
|
|
Consolidated Statements of Cash
Flows......................................................................................................................................................................................
|
62
|
|
Notes to Consolidated Financial
Statements...............................................................................................................................................................................
|
64
|
The
management of MB Financial, Inc. (the Company) is responsible for establishing
and maintaining adequate internal control over financial reporting.
The
Company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with accounting principles generally accepted in the United States of America.
The Company’s internal control over financial reporting includes those policies
and procedures that (i) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the Company; (ii) provide reasonable assurance
that transactions are recorded as necessary to permit preparation of financial
statements in accordance with accounting principles generally accepted in the
United States of America, and that receipts and expenditures of the Company are
being made only in accordance with authorizations of management and directors of
the Company; and (iii) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use, or disposition of the
Company’s assets that could have a material effect on the financial
statements.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. All internal control systems, no matter how
well designed, have inherent limitations, including the possibility of human
error and the circumvention of overriding controls. Accordingly, even
effective internal control over financial reporting can provide only reasonable
assurance with respect to financial statement preparation. Also,
projections of any evaluation of effectiveness to future periods are subject to
the risk that controls may become inadequate because of changes in conditions,
or that the degree of compliance with the policies or procedures may
deteriorate.
Management
assessed the effectiveness of the Company’s internal control over financial
reporting as of December 31, 2008, based on the framework set forth by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control–Integrated
Framework. Based on that assessment, management concluded that, as of
December 31, 2008, the Company’s internal control over financial reporting is
effective based on the criteria established in Internal Control–Integrated
Framework.
Management’s
assessment of the effectiveness of the Company’s internal control over financial
reporting as of December 31, 2008, has been audited by McGladrey & Pullen,
LLP, an independent registered public accounting firm, as stated in their
attestation report, which expresses an unqualified opinion on the effectiveness
of the Company’s internal control over financial reporting as of December 31,
2008. See “Report of Independent Registered
Public Accounting Firm on Internal Control Over Financial
Reporting.”
|
/s/ Mitchell Feiger
|
/s/ Jill E. York
|
||
|
Mitchell
Feiger
|
Jill
E. York
|
||
|
President
and
|
Vice
President and
|
||
|
Chief
Executive Officer
|
Chief
Financial Officer
|
February
27, 2009
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON
INTERNAL CONTROL OVER FINANCIAL REPORTING
To the
Board of Directors and Stockholders
MB
Financial, Inc.
We have
audited MB Financial, Inc.’s internal control over financial reporting as of
December 31, 2008, based on criteria established in Internal Control—Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission. The Company’s management is responsible for maintaining
effective internal control over financial reporting and for its assessment of
the effectiveness of internal control over financial reporting included in the
accompanying Management’s
Report on Internal Control Over Financial Reporting. Our
responsibility is to express an opinion on the company's internal control over
financial reporting based on our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was maintained in all
material respects. Our audit included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness
exists, and testing and evaluating the design and operating effectiveness of
internal control based on the assessed risk. Our audit also included performing
such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis
for our opinion.
A
company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal
control over financial reporting includes those policies and procedures that (1)
pertain to the maintenance of records that, in reasonable detail, accurately and
fairly reflect the transactions and dispositions of the assets of the company;
(2) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial
statements.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation
of effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
In our
opinion, MB Financial, Inc. maintained, in all material respects, effective
internal control over financial reporting as of December 31, 2008, based on
criteria established in Internal Control—Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission.
We have
also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated financial statements as of and
for the year ended December 31, 2008 of MB Financial, Inc. and our report dated
February 26, 2009 expressed an unqualified opinion.
/s/McGladrey
& Pullen, LLP
Schaumburg,
Illinois
February
26, 2009
To the
Board of Directors and Stockholders
MB
Financial, Inc.
We have
audited the consolidated balance sheets of MB Financial, Inc. and Subsidiaries
as of December 31, 2008 and 2007, and the related consolidated statements
of income, changes in stockholders’ equity and cash flows for each of the three
years in the period ended December 31, 2008. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of MB Financial, Inc. and
Subsidiaries as of December 31, 2008 and 2007, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2008, in conformity with U.S. generally accepted accounting
principles.
As
disclosed in Note 19, MB Financial, Inc. and Subsidiaries adopted the provisions
of Statement of Accounting Standards (SFAS) No. 157, Fair Value Measurements, for
assets and liabilities measured and reported at fair value.
We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), MB Financial Inc. and Subsidiaries internal
control over financial reporting as of December 31, 2008, based on the
criteria established in Internal Control—Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission (COSO),
and our report dated February 26, 2009 expressed an unqualified opinion on the
effectiveness of the Company’s internal control over financial
reporting.
/s/McGladrey
& Pullen, LLP
Schaumburg,
Illinois
February
26, 2009
|
MB
FINANCIAL, INC. & SUBSIDIARIES
|
||||
|
December
31, 2008 and 2007
|
||||
|
(Amounts
in thousands, except share and per share data)
|
||||
|
2008
|
2007
|
|||
|
ASSETS
|
||||
|
Cash
and due from banks
|
$
79,824
|
$
141,248
|
||
|
Interest
bearing deposits with banks
|
261,834
|
9,093
|
||
|
Total
cash and cash equivalents
|
341,658
|
150,341
|
||
|
Investment
securities:
|
||||
|
Securities
available for sale, at fair value
|
1,336,130
|
1,177,714
|
||
|
Non-marketable
securities - FHLB and FRB Stock
|
64,246
|
63,671
|
||
|
Total
investment securities
|
1,400,376
|
1,241,385
|
||
|
Loans
(net of allowance for loan losses of $144,001 at December 31, 2008
and
|
||||
|
$65,103
at December 31, 2007)
|
6,084,562
|
5,550,524
|
||
|
Lease
investments, net
|
125,034
|
97,321
|
||
|
Premises
and equipment, net
|
186,474
|
183,722
|
||
|
Cash
surrender value of life insurance
|
119,526
|
116,690
|
||
|
Goodwill,
net
|
387,069
|
379,047
|
||
|
Other
intangibles, net
|
25,776
|
25,352
|
||
|
Other
assets
|
149,288
|
90,321
|
||
|
Total
assets
|
$8,819,763
|
$7,834,703
|
||
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
||||
|
Liabilities
|
||||
|
Deposits:
|
||||
|
Noninterest
bearing
|
$
960,117
|
$
875,491
|
||
|
Interest
bearing
|
5,535,454
|
4,638,292
|
||
|
Total
deposits
|
6,495,571
|
5,513,783
|
||
|
Short-term
borrowings
|
488,619
|
977,721
|
||
|
Long-term
borrowings
|
471,466
|
208,865
|
||
|
Junior
subordinated notes issued to capital trusts
|
158,824
|
159,016
|
||
|
Accrued
expenses and other liabilities
|
136,459
|
112,949
|
||
|
Total
liabilities
|
7,750,939
|
6,972,334
|
||
|
Minority
interest
|
2,629
|
-
|
||
|
Stockholders'
Equity:
|
||||
|
Preferred
stock, ($0.01 par value, authorized 1,000,000 shares at December 31, 2008;
series A, 5% cumulative
|
193,025
|
-
|
||
|
perpetual,
196,000 shares issued and outstanding at December 31, 2008, $1,000.00
liquidation value)
|
||||
|
Common
stock, ($0.01 par value; authorized 50,000,000 shares at December 31, 2008
and 43,000,000 at
|
||||
|
December
31, 2007; issued 37,542,968 shares at December 31, 2008 and 37,401,023 at
December 31, 2007)
|
375
|
374
|
||
|
Additional
paid-in capital
|
445,692
|
441,201
|
||
|
Retained
earnings
|
495,505
|
505,260
|
||
|
Accumulated
other comprehensive income
|
16,910
|
7,597
|
||
|
Less: 2,612,143
and 2,785,573 shares of treasury stock, at cost, at December
31,
|
||||
|
2008
and December 31, 2007, respectively
|
(85,312)
|
(92,063)
|
||
|
Total
stockholders' equity
|
1,066,195
|
862,369
|
||
|
Total
liabilities and stockholders' equity
|
$8,819,763
|
$7,834,703
|
See
Accompanying Notes to Consolidated Financial Statements.
|
MB
FINANCIAL, INC. & SUBSIDIARIES
|
||||||
|
Years
Ended December 31, 2008, 2007 and 2006
|
||||||
|
(Amounts
in thousands, except share and per share data)
|
||||||
|
2008
|
2007
|
2006
|
||||
|
Interest
income:
|
||||||
|
Loans
|
$357,075
|
$393,016
|
$310,194
|
|||
|
Investment
securities available for sale:
|
||||||
|
Taxable
|
40,468
|
49,675
|
51,836
|
|||
|
Nontaxable
|
15,502
|
13,862
|
11,255
|
|||
|
Federal
funds sold
|
276
|
449
|
774
|
|||
|
Other
interest bearing accounts
|
467
|
264
|
312
|
|||
|
Total
interest income
|
413,788
|
457,266
|
374,371
|
|||
|
Interest
expense:
|
||||||
|
Deposits
|
151,370
|
185,649
|
141,108
|
|||
|
Short-term
borrowings
|
17,590
|
37,354
|
27,944
|
|||
|
Long-term
borrowings and junior subordinated notes
|
23,940
|
21,957
|
17,140
|
|||
|
Total
interest expense
|
192,900
|
244,960
|
186,192
|
|||
|
Net
interest income
|
220,888
|
212,306
|
188,179
|
|||
|
Provision
for loan losses
|
125,721
|
19,313
|
10,100
|
|||
|
Net
interest income after provision for loan losses
|
95,167
|
192,993
|
178,079
|
|||
|
Other
income:
|
||||||
|
Loan
service fees
|
9,180
|
6,258
|
5,400
|
|||
|
Deposit
service fees
|
28,228
|
23,918
|
19,445
|
|||
|
Lease
financing, net
|
16,973
|
15,847
|
13,369
|
|||
|
Brokerage
fees
|
4,317
|
9,581
|
9,318
|
|||
|
Asset
management and trust fees
|
11,869
|
10,447
|
6,916
|
|||
|
Net
gain (loss) on sale of securities available for sale
|
1,130
|
(3,744)
|
(445)
|
|||
|
Increase
in cash surrender value of life insurance
|
5,299
|
5,003
|
3,964
|
|||
|
Net
(loss) gain on sale of assets
|
(1,104)
|
10,097
|
860
|
|||
|
Merchant
card processing
|
18,041
|
16,347
|
6,848
|
|||
|
Other
operating income
|
4,533
|
6,150
|
5,646
|
|||
|
98,466
|
99,904
|
71,321
|
||||
|
Other
expenses:
|
||||||
|
Salaries
and employee benefits
|
109,568
|
111,438
|
88,907
|
|||
|
Occupancy
and equipment expense
|
28,922
|
28,915
|
24,462
|
|||
|
Computer
services expense
|
7,392
|
6,699
|
6,281
|
|||
|
Advertising
and marketing expense
|
5,092
|
4,861
|
4,597
|
|||
|
Professional
and legal expense
|
3,110
|
4,543
|
2,027
|
|||
|
Brokerage
fee expense
|
1,929
|
4,802
|
4,986
|
|||
|
Telecommunication
expense
|
2,825
|
2,808
|
2,617
|
|||
|
Other
intangibles amortization expense
|
3,554
|
3,504
|
1,971
|
|||
|
Merchant
card processing
|
16,582
|
14,815
|
6,210
|
|||
|
Charitable
contributions
|
30
|
4,686
|
695
|
|||
|
Other
operating expenses
|
21,783
|
19,765
|
16,322
|
|||
|
200,787
|
206,836
|
159,075
|
||||
|
Income
(loss) before income taxes and discontinued operations
|
(7,154)
|
86,061
|
90,325
|
|||
|
Income
taxes
|
(23,318)
|
24,036
|
27,269
|
|||
|
Income
from continuing operations
|
16,164
|
62,025
|
63,056
|
|||
|
Discontinued
operations
|
||||||
|
Income
from discontinued operations before income taxes
|
-
|
50,475
|
6,213
|
|||
|
Income
taxes
|
-
|
18,637
|
2,155
|
|||
|
Income
from discontinued operations
|
-
|
31,838
|
4,058
|
|||
|
Net
income
|
$
16,164
|
$
93,863
|
$
67,114
|
|||
|
Dividends
on preferred shares
|
789
|
-
|
-
|
|||
|
Net
income available to common shareholders
|
$
15,375
|
$
93,863
|
$
67,114
|
|||
|
MB
FINANCIAL, INC. & SUBSIDIARIES
|
||||||
|
CONSOLIDATED
STATEMENTS OF INCOME
|
||||||
|
Years
Ended December 31, 2008, 2007 and 2006
|
||||||
|
(Amounts
in thousands, except share and per share data)
|
||||||
|
Common
share data:
|
||||||
|
2008
|
2007
|
2006
|
||||
|
Basic
earnings per common share from continuing operations
|
$
0.44
|
$ 1.73
|
$
2.02
|
|||
|
Basic
earnings per common share from discontinued operations
|
$
-
|
$
0.88
|
$
0.13
|
|||
|
Basic
earnings per common share
|
$
0.44
|
$
2.61
|
$
2.15
|
|||
|
Diluted
earnings per common share from continuing operations
|
$ 0.44
|
$
1.70
|
$
1.99
|
|||
|
Diluted
earnings per common share from discontinued operations
|
$
-
|
$
0.88
|
$
0.13
|
|||
|
Diluted
earnings per common share
|
$
0.44
|
$
2.58
|
$
2.12
|
|||
|
Weighted
average common shares outstanding
|
34,706,092
|
35,919,900
|
31,156,887
|
|||
|
Diluted
weighted average common shares outstanding
|
35,061,712
|
36,439,561
|
31,687,220
|
See
Accompanying Notes to Consolidated Financial Statements.
|
MB
FINANCIAL, INC. & SUBSIDIARIES
|
||||||||
|
Years
Ended December 31, 2008, 2007 and 2006
|
||||||||
|
(Amounts
in thousands, except share and per share data)
|
||||||||
|
Accumulated
|
||||||||
|
Other
|
||||||||
|
Additional
|
Comprehensive
|
Total
Stock-
|
||||||
|
Comprehensive
|
Preferred
|
Common
|
Paid-in
|
Retained
|
Income
(Loss),
|
Treasury
|
holders'
|
|
|
Income
|
Stock
|
Stock
|
Capital
|
Earnings
|
Net
of Tax
|
Stock
|
Equity
|
|
|
Balance
at January 1, 2006
|
$
-
|
$289
|
$141,745
|
$390,407
|
$(9,453)
|
$(16,002)
|
$
506,986
|
|
|
Net
income
|
$
67,114
|
67,114
|
67,114
|
|||||
|
Unrealized
holding gains on investment securities,
|
||||||||
|
net
of tax expense of $841
|
1,562
|
|||||||
|
Reclassification
adjustments for losses included in
|
||||||||
|
net
income, net of tax benefit of ($156)
|
289
|
|||||||
|
Other
comprehensive income, net of tax
|
1,851
|
1,851
|
1,851
|
|||||
|
Comprehensive
income
|
$
68,965
|
|||||||
|
Issuance
of 8,374,308 shares of common stock in
|
84
|
296,812
|
296,896
|
|||||
|
business
combination
|
||||||||
|
Issuance
of 45,217 shares of restricted stock, net of
|
||||||||
|
forfeitures
and amortization
|
1,447
|
1,447
|
||||||
|
Purchase
of 390,000 shares of treasury stock
|
(13,833)
|
(13,833)
|
||||||
|
Reissuance
of 161 shares of treasury stock for
|
||||||||
|
employee
stock awards
|
(1)
|
6
|
5
|
|||||
|
Paid-in
capital – stock options
|
1,643
|
1,643
|
||||||
|
Stock
options exercised - Reissuance of 185,582
|
||||||||
|
shares
of treasury stock
|
(3,307)
|
7,434
|
4,127
|
|||||
|
Excess
tax benefits from stock-based payment
|
884
|
884
|
||||||
|
arrangements
|
||||||||
|
Preferred
dividends declared
|
-
|
|||||||
|
Cash
dividends declared ($0.66 per share)
|
(20,168)
|
(20,168)
|
||||||
|
Purchase
of 8,402 shares held in trust for
|
||||||||
|
deferred
compensation plan
|
279
|
(279)
|
-
|
|||||
|
Balance
at December 31, 2006
|
$
-
|
$373
|
$439,502
|
$437,353
|
$(7,602)
|
$(22,674)
|
$
846,952
|
|
|
Net
income
|
$
93,863
|
93,863
|
93,863
|
|||||
|
Unrealized
holding gains on investment securities,
|
||||||||
|
net
of tax expense of $6,715
|
12,470
|
|||||||
|
Reclassification
adjustments for losses included in
|
||||||||
|
net
income, net of tax benefit of ($1,469)
|
2,729
|
|||||||
|
Other
comprehensive income, net of tax
|
15,199
|
15,199
|
15,199
|
|||||
|
Comprehensive
income
|
$109,062
|
|||||||
|
Issuance
of 68,695 shares of restricted stock, net of
|
||||||||
|
forfeitures
and amortization
|
1
|
2,112
|
2,113
|
|||||
|
Purchase
of 2,333,270 shares of treasury stock
|
(77,524)
|
(77,524)
|
||||||
|
Reissuance
of 2,250 shares of treasury stock for
|
||||||||
|
employee
stock awards
|
(70)
|
80
|
10
|
|||||
|
Reissuance
of 40,428 shares of treasury stock for
|
||||||||
|
prior
Company Directors’ fees deferred
|
(819)
|
1,631
|
812
|
|||||
|
Paid-in
capital – stock options
|
2,127
|
2,127
|
||||||
|
Stock
options exercised - Reissuance of 173,415
|
||||||||
|
shares
of treasury stock
|
(2,709)
|
6,498
|
3,789
|
|||||
|
Excess
tax benefits from stock-based payment
|
||||||||
|
arrangements
|
984
|
984
|
||||||
|
Preferred
dividends declared
|
-
|
|||||||
|
Cash
dividends declared ($0.72 per share)
|
(25,956)
|
(25,956)
|
||||||
|
Purchase
of 2,276 shares held in trust for
|
||||||||
|
deferred
compensation plan
|
74
|
(74)
|
-
|
|||||
|
Balance
at December 31, 2007
|
$
-
|
$374
|
$441,201
|
$505,260
|
$
7,597
|
$(92,063)
|
$
862,369
|
|
(Continued)
|
MB
FINANCIAL, INC. & SUBSIDIARIES
|
||||||||
|
CONSOLIDATED
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
|
||||||||
|
Years
Ended December 31, 2008, 2007 and 2006
|
||||||||
|
(Amounts
in thousands, except share and per share data)
|
||||||||
|
Accumulated
|
||||||||
|
Other
|
||||||||
|
Additional
|
Comprehensive
|
Total
Stock-
|
||||||
|
Comprehensive
|
Preferred
|
Common
|
Paid-in
|
Retained
|
Income
(Loss),
|
Treasury
|
holders'
|
|
|
Income
|
Stock
|
Stock
|
Capital
|
Earnings
|
Net
of Tax
|
Stock
|
Equity
|
|
|
Balance
at January 1, 2008
|
$ -
|
$374
|
$441,201
|
$505,260
|
$
7,597
|
$(92,063)
|
$
862,369
|
|
|
Net
income
|
$
16,164
|
16,164
|
16,164
|
|||||
|
Unrealized
holding gains on investment securities,
|
||||||||
|
net
of tax expense of $5,410
|
10,048
|
|||||||
|
Reclassification
adjustments for gains included in
|
||||||||
|
net
income, net of tax expense of ($395)
|
(735)
|
|||||||
|
Other
comprehensive income, net of tax
|
9,313
|
9,313
|
9,313
|
|||||
|
Comprehensive
income
|
$
25,477
|
|||||||
|
Issuance
of 126,078 shares of restricted stock, net of
|
||||||||
|
forfeitures
and amortization
|
1
|
2,227
|
2,228
|
|||||
|
Purchase
of 51,274 shares of treasury stock
|
(1,349)
|
(1,349)
|
||||||
|
Reissuance
of 13,098 shares of treasury stock for
|
||||||||
|
employee
stock awards
|
(465)
|
465
|
-
|
|||||
|
Issuance
of 15,867 shares for employee stock awards
|
-
|
-
|
||||||
|
Paid-in
capital – stock options
|
651
|
651
|
||||||
|
Stock
options exercised - Reissuance of 230,877
|
||||||||
|
shares
of treasury stock
|
(3,590)
|
8,175
|
4,585
|
|||||
|
Excess
tax benefits from stock-based payment
|
||||||||
|
arrangements
|
2,032
|
2,032
|
||||||
|
Issuance
of preferred stock
|
192,944
|
192,944
|
||||||
|
Issuance
of stock warrant
|
3,056
|
3,056
|
||||||
|
Dividends
on preferred shares
|
81
|
(789)
|
(708)
|
|||||
|
Restricted
stock unit dividends
|
40
|
(40)
|
||||||
|
Cash
dividends declared ($0.72 per share)
|
(25,090)
|
(25,090)
|
||||||
|
Purchase
of 19,271 shares held in trust for
|
||||||||
|
deferred
compensation plan
|
540
|
(540)
|
-
|
|||||
|
Balance
at December 31, 2008
|
$193,025
|
$375
|
$445,692
|
$495,505
|
$16,910
|
$(85,312)
|
$1,066,195
|
|
See
Accompanying Notes to Consolidated Financial Statements.
|
MB
FINANCIAL, INC. & SUBSIDIARIES
|
||||||
|
Years
Ended December 31, 2008, 2007 and 2006
|
||||||
|
(Amounts
in Thousands)
|
||||||
|
2008
|
2007
|
2006
|
||||
|
Cash
Flows From Operating Activities
|
||||||
|
Net
income
|
$
16,164
|
$
93,863
|
$ 67,114
|
|||
|
Net
income from discontinued operations
|
-
|
(31,838)
|
(4,058)
|
|||
|
Adjustments
to reconcile net income to net cash provided by continuing
operating activities:
|
||||||
|
Depreciation
on premises and equipment
|
11,743
|
11,179
|
9,599
|
|||
|
Depreciation
on leased equipment
|
31,995
|
26,097
|
27,548
|
|||
|
Amortization
of restricted stock awards
|
2,228
|
2,113
|
1,447
|
|||
|
Compensation
expense for stock option grants
|
651
|
3,110
|
2,527
|
|||
|
(Gain)
loss on sales of premises and equipment and leased
equipment
|
382
|
(11,683)
|
(1,830)
|
|||
|
Amortization
of other intangibles
|
3,554
|
3,504
|
1,971
|
|||
|
Provision
for loan losses
|
125,721
|
19,313
|
10,100
|
|||
|
Deferred
income tax expense (benefit)
|
(22,574)
|
(683)
|
11,000
|
|||
|
Amortization
of premiums and discounts on investment securities, net
|
3,519
|
2,274
|
5,964
|
|||
|
Accretion
of premiums and discounts on loans, net
|
(2,732)
|
(3,272)
|
(2,097)
|
|||
|
Trading
securities transactions, net
|
-
|
-
|
903
|
|||
|
Net
(gain) loss on sale of investment securities
|
(1,130)
|
3,744
|
445
|
|||
|
Proceeds
from sale of loans held for sale
|
44,108
|
61,794
|
385,346
|
|||
|
Origination
of loans held for sale
|
(43,586)
|
(60,994)
|
(39,060)
|
|||
|
Net
gain on sale of loans held for sale
|
(522)
|
(800)
|
(954)
|
|||
|
Increase
in cash surrender value of life insurance
|
(2,836)
|
(2,556)
|
(3,964)
|
|||
|
Gain
on interest only securities pool termination
|
-
|
-
|
(718)
|
|||
|
(Increase)
decrease in other assets
|
(36,484)
|
9,460
|
(19,110)
|
|||
|
Increase
(decrease) in other liabilities, net
|
17,475
|
17,092
|
(7,218)
|
|||
|
Net
cash provided by continuing operating activities
|
147,676
|
141,717
|
444,955
|
|||
|
Cash
Flows From Investing Activities
|
||||||
|
Proceeds
from sales of investment securities available for sale
|
14,806
|
315,837
|
400,710
|
|||
|
Proceeds
from maturities and calls of investment securities available for
sale
|
351,420
|
409,777
|
266,420
|
|||
|
Purchase
of investment securities available for sale
|
(513,396)
|
(317,653)
|
(239,207)
|
|||
|
Net
increase in loans
|
(657,026)
|
(654,054)
|
(411,274)
|
|||
|
Purchases
of premises and equipment
|
(15,440)
|
(17,238)
|
(12,829)
|
|||
|
Purchases
of leased equipment
|
(61,050)
|
(47,397)
|
(45,952)
|
|||
|
Proceeds
from sales of premises and equipment
|
129
|
21,842
|
1,768
|
|||
|
Proceeds
from sales of leased equipment
|
3,164
|
6,597
|
5,302
|
|||
|
Principal
paid on lease investments
|
(1,099)
|
(774)
|
(721)
|
|||
|
Cash
proceeds received from sale of bank subsidiary
|
-
|
76,148
|
-
|
|||
|
Cash
paid, net of cash and cash equivalents in acquisitions
|
(9,333)
|
-
|
(58,979)
|
|||
|
Net
cash used in continuing investing activities
|
(887,825)
|
(206,915)
|
(94,762)
|
|||
|
Cash
Flows From Financing Activities
|
||||||
|
Net
increase (decrease) in deposits
|
981,788
|
(66,770)
|
(208,413)
|
|||
|
Net
(decrease) increase in short-term borrowings
|
(489,102)
|
210,117
|
(71,943)
|
|||
|
Proceeds
from long-term borrowings
|
285,384
|
51,530
|
65,045
|
|||
|
Principal
paid on long-term borrowings
|
(22,783)
|
(9,445)
|
(89,157)
|
|||
|
Proceeds
from junior subordinated notes issued to capital trusts
|
-
|
52,500
|
30,000
|
|||
|
Principal
paid on junior subordinated notes issued to capital trusts
|
-
|
(71,800)
|
-
|
|||
|
Issuance
of preferred stock
|
192,944
|
-
|
-
|
|||
|
Issuance
of common stock warrant
|
3,056
|
-
|
-
|
|||
|
Treasury
stock transactions, net
|
(1,348)
|
(76,703)
|
(14,107)
|
|||
|
Stock
options exercised
|
4,585
|
3,789
|
4,124
|
|||
|
Excess
tax benefits from share-based payment arrangements
|
2,032
|
984
|
884
|
|||
|
Dividends
paid on common stock
|
(25,090)
|
(25,956)
|
(20,168)
|
|||
|
Net
cash provided by (used in) continuing financing
activities
|
931,466
|
68,246
|
(303,735)
|
|||
|
Net
increase in cash and cash equivalents from continuing
operations
|
$
191,317
|
$
3,048
|
$
46,458
|
|||
|
Cash
Flows From Discontinued Operations
|
||||||
|
Net cash
provided by operating activities of discontinued
operations
|
-
|
5,817
|
5,548
|
|||
|
Net cash
used in investing activities of discontinued operations
|
-
|
(21,191)
|
(14,682)
|
|||
|
Net cash
provided by financing activities of discontinued
operations
|
-
|
2,617
|
17,942
|
|||
|
Net
cash provided by (used in) discontinued operations
|
-
|
(12,757)
|
8,808
|
|||
|
Net
increase/(decrease) in cash and cash equivalents
|
$
191,317
|
$ (9,709)
|
$ 55,266
|
|||
|
Cash
and cash equivalents:
|
||||||
|
Beginning
of year (1)
|
150,341
|
160,050
|
104,784
|
|||
|
End
of year (2)
|
$
341,658
|
$
150,341
|
$160,050
|
|||
|
(1)
Includes balances from discontinued operations
|
$
-
|
$
12,757
|
$
3,947
|
|||
|
(2)
Includes balances from discontinued operations
|
$
-
|
$
-
|
$
12,757
|
|
(continued)
|
See
Accompanying Notes to Consolidated Financial Statements.
|
MB
FINANCIAL, INC. & SUBSIDIARIES
|
||||||
|
CONSOLIDATED
STATEMENTS OF CASH FLOWS (continued)
|
||||||
|
Years
Ended December 31, 2008, 2007 and 2006
|
||||||
|
(Amounts
in Thousands)
|
||||||
|
2008
|
2007
|
2006
|
||||
|
Supplemental
Disclosures of Cash Flow Information:
|
||||||
|
Cash
payments for:
|
||||||
|
Interest
paid to depositors and other borrowed funds
|
$190,266
|
$249,292
|
$ 177,867
|
|||
|
Income
taxes paid, net of refunds
|
12,767
|
35,642
|
31,451
|
|||
|
Supplemental
Schedule of Noncash Investing Activities:
|
||||||
|
Loans
transferred to other real estate owned
|
$
6,327
|
$ 1,249
|
$
3,074
|
|||
|
Loans
transferred to repossessed vehicles
|
1,519
|
681
|
-
|
|||
|
Loans
securitized transferred to investment securities available for
sale
|
50,914
|
-
|
-
|
|||
|
Long-term
borrowings reclassified to short-term borrowings
|
-
|
79,100
|
-
|
|||
|
Supplemental
Schedule of Noncash Investing Activities:
|
||||||
|
Acquisitions
|
||||||
|
Noncash
assets acquired:
|
||||||
|
Investment
securities available for sale
|
$
-
|
$
-
|
$
744,292
|
|||
|
Trading
securities
|
-
|
-
|
898
|
|||
|
Loans
held for sale
|
-
|
-
|
1,471
|
|||
|
Loans,
net
|
-
|
-
|
1,075,277
|
|||
|
Loans
held for sale
|
-
|
-
|
343,361
|
|||
|
Premises
and equipment, net
|
72
|
-
|
48,703
|
|||
|
Goodwill,
net
|
8,022
|
-
|
253,783
|
|||
|
Other
intangibles, net
|
3,978
|
-
|
18,233
|
|||
|
Cash
surrender value of life insurance
|
-
|
-
|
26,507
|
|||
|
Other
assets
|
828
|
-
|
21,321
|
|||
|
Total
noncash assets acquired:
|
$
12,900
|
$
-
|
$2,533,846
|
|||
|
Liabilities
assumed:
|
||||||
|
Deposits
|
$
-
|
$
-
|
$1,882,754
|
|||
|
Short-term
borrowings
|
-
|
-
|
46,937
|
|||
|
Long-term
borrowings
|
-
|
-
|
212,414
|
|||
|
Junior
subordinated notes issued to capital trusts
|
-
|
-
|
24,775
|
|||
|
Accrued
expenses and other liabilities
|
1,067
|
-
|
12,559
|
|||
|
Total
liabilities assumed:
|
$ 1,067
|
$
-
|
$2,179,439
|
|||
|
Net
noncash assets acquired:
|
$
11,833
|
$
-
|
$
354,407
|
|||
|
Cash
and cash equivalents acquired
|
$
667
|
$
-
|
$ 16,585
|
|||
|
Minority
interest
|
$
2,500
|
$ -
|
$
-
|
|||
|
Stock
issuance in lieu of cash paid in acquisition
|
$
-
|
$
-
|
$
296,896
|
MB FINANCIAL, INC. AND
SUBSIDIARIES
Note
1. Significant
Accounting Policies
MB
Financial, Inc. (the Company, we, us, our) is a financial holding
company providing a full range of financial services to individuals and
corporate customers through its banking subsidiary, MB Financial Bank,
N.A.
The
Company’s primary market is the Chicago, Illinois metropolitan area, in which
the Company operates 71 banking offices through MB Financial Bank,
N.A. MB Financial Bank, N.A. also has one banking office in
Philadelphia, Pennsylvania.
MB
Financial Bank N.A., our largest subsidiary, has seven wholly owned subsidiaries
with significant operating activities: MB Financial Center LLC; MB Financial
Community Development Corporation; MBRE Holdings LLC; LaSalle Systems Leasing,
Inc.; Vision Investment Services, Inc.; Cedar Hill Associates, LLC; and Ashland
Management LLC.
Basis of Financial Statement
Presentation: The consolidated financial statements include the accounts
of the Company and its subsidiaries. Significant intercompany items
and transactions have been eliminated in consolidation. The
accounting and reporting policies of the Company conform to accounting
principles generally accepted in the United States of America and general
practices within the financial services industry. In accordance with
applicable accounting standards, the Company does not consolidate statutory
trusts established for the sole purpose of issuing trust preferred securities
and related trust common securities. See Note 13
below for more detail. In preparing the financial statements,
management is required to make estimates and assumptions that affect the
reported amounts of assets and liabilities as of the date of the balance sheet
and revenues and expenses for the year. Actual results could differ
from those estimates. Areas involving the use of management's
estimates and assumptions, which are more susceptible to change in the near term
include the allowance for loan losses; residual value of direct finance,
leveraged, and operating leases; income tax accounting; and goodwill impairment
analysis.
We
adopted SFAS No. 157, Fair
Value Measurements (SFAS 157) effective January 1, 2008. SFAS 157 defines
fair value, establishes a framework for measuring fair value and expands
disclosure of fair value measurements. The adoption of SFAS 157 did
not have a material impact on the consolidated financial statements or results
of operations of the Company. In accordance with Financial Accounting
Standards Board Staff Position (FSP) No. 157-2, "Effective Date of FASB
Statement No. 157," the Company will delay application of SFAS 157 for
non-financial assets and non-financial liabilities such as goodwill, other
intangibles, real estate owned, and repossessed assets until January 1,
2009. SFAS 157 applies to all financial instruments that are measured
and reported on a fair value basis. See Note 19
for additional information.
In
conjunction with the adoption of SFAS 157, we also adopted SFAS 159, The Fair
Value Option for Financial Assets and Financial Liabilities – Including an
Amendment of SFAS No. 115 (SFAS 159) as of January 1, 2008. SFAS 159
provides companies the option to report selected financial assets and
liabilities at fair value. This statement also establishes presentation and
disclosure requirements designed to facilitate comparisons between companies
that choose different measurement attributes for similar types of assets and
liabilities. After the initial adoption, the election is made at the acquisition
of a financial asset or financial liability and it may not be
revoked. The Company has not elected the fair value option for any
financial assets or liabilities. See Note 19
for additional information.
On
November 28, 2007, the Company sold Union Bank to Olney Bancshares of Texas,
Inc. This divestiture is accounted for in the accompanying financial
statements as discontinued operations. Please see Note 3 to the notes to the audited consolidated financial
statements for more detail.
Cash and cash
equivalents: For purposes of reporting cash flows, cash and cash
equivalents includes cash on hand, amounts due from banks (including cash items
in process of clearing), interest-bearing deposits with banks, with original
maturities of ninety days or less, and federal funds sold.
Investment securities
available for sale: Securities classified as available for sale are those
securities that the Company intends to hold for an indefinite period of time,
but not necessarily to maturity. Any decision to sell a security
classified as available for sale is based on various factors, including
significant movements in interest rates, changes in the maturity mix of assets
and liabilities, liquidity needs, regulatory capital considerations, and other
factors.
Securities
available for sale are reported at fair value with unrealized gains or losses
reported as accumulated other comprehensive income, net of the related deferred
tax effect. The historical cost of debt securities is adjusted for
amortization of premiums and accretion of discounts over the estimated life of
the security, using the level-yield method. In determining
MB FINANCIAL, INC. AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
the estimated
life of a mortgage-related security, certain judgments are required as to the
timing and amount of future principal prepayments. These judgments
are made based upon the actual performance of the underlying security and the
general market consensus regarding changes in mortgage interest rates and
underlying prepayment estimates. Amortization of premium and
accretion of discount is included in interest income from the related
security. Realized gains or losses, determined on the basis of the
cost of specific securities sold, are included in earnings. The
Company evaluates the portfolio for impairment each quarter. In
estimating other-than-temporary losses, the Company considers the length of time
and the extent to which the fair value has been less than
cost, the financial condition and near-term prospects of the issuer, and the
intent and ability of the Company to retain its investment in the issuer for a
period of time sufficient to allow for any anticipated recovery in fair
value. If a security has been impaired for more than twelve months,
and the impairment is deemed other than temporary and material, a write down
will occur in that quarter. If a loss is deemed to be
other-than-temporary, it is recognized as a realized loss in the income
statement with the security assigned a new cost basis.
Loans
held for sale: Mortgage loans originated and intended for sale in the
secondary market are carried at the lower of cost or estimated market value in
the aggregate. Gains and losses recognized on mortgage loans held for
sale include the value of the mortgage servicing rights if the loan is sold with
servicing retained by the Company. Mortgage servicing rights are
stratified based on the predominant risk characteristics of rates, terms, and
the underlying loan types to measure its fair value. The amount of
impairment recognized is the amount by which the capitalized mortgage servicing
rights for a stratum exceed their fair value.
Loans and leases:
Loans are stated at the amount of unpaid principal reduced by the allowance for
loan losses and unearned income. Direct finance and leveraged leases
are included as lease loans for financial statement purposes. Direct
finance leases are stated as the sum of remaining minimum lease payments from
lessees plus estimated residual values less unearned lease
income. Leveraged leases are stated at the sum of remaining minimum
lease payments from lessees (less nonrecourse debt payments) plus estimated
residual values less unearned lease income. On a monthly basis,
management reviews the lease residuals for potential
impairment. Unearned lease income on direct finance and leveraged
leases is recognized over the lives of the leases using the level-yield
method.
Loan
origination and commitment fees and certain direct loan origination costs are
deferred and the net amount amortized as an adjustment of the related loan's
yield. The Company is amortizing these amounts over the contractual
life of the loan. Commitment fees based upon a percentage of a
customer's unused line of credit and fees related to standby letters of credit
are recognized over the commitment period.
Interest
income is accrued daily on the Company’s outstanding loan
balances. The accrual of interest on loans is discontinued at the
time the loan is 90 days past due unless the credit is well-secured and in
process of renewal or collection. Past due status is based on
contractual terms of the loan. In all cases, loans are placed on
non-accrual or charged-off at an earlier date if collection of principal or
interest is considered doubtful. All interest accrued but not
collected for loans that are placed on non-accrual or charged off is reversed
against interest income.
For
impaired loans, accrual of interest is discontinued on a loan when management
believes, after considering collection efforts and other factors, the borrower's
financial condition is such that collection of interest is
doubtful. Cash collections on impaired loans are credited to the loan
balance, and no interest income is recognized on those loans until the principal
balance has been determined to be collectible. Loans, other than
those included in large groups of smaller-balance homogeneous loans, are
considered impaired when it is probable the Company will be unable to collect
all contractual principal and interest payments due in accordance with the terms
of the loan agreement. Impaired loans are measured based on the
present value of expected future cash flows discounted at the loan's effective
interest rate or, as a practical expedient, at the loan's observable market
price or the fair value of the collateral if the loan is collateral
dependent. The amount of impairment, if any, and any subsequent
changes are charged against the allowance for loan losses.
The
allowance for loan losses is established through a provision for loan losses
charged to expense. Loans are charged against the allowance for loan
losses when management believes that collectibility of the principal is
unlikely. The allowance is an amount that management believes will be
adequate to absorb probable losses on existing loans, based on an evaluation of
the collectibility of loans and prior loss and recovery
experience. The allowance for loan losses is based on management’s
evaluation of the loan portfolio giving consideration to the nature and volume
of the loan portfolio, the value of underlying collateral, overall portfolio
quality, review of specific problem loans, and prevailing economic
MB FINANCIAL, INC. AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
conditions that
may affect the borrower's ability to pay. While management uses the
best information available to make its evaluation, future adjustments to the
allowance may be necessary if there are significant changes in economic
conditions. In addition, regulatory agencies, as an integral part of
their examination process, periodically review MB Financial Bank’s allowance for
loan losses, and may require it to recognize adjustments to its allowance based
on their judgments of information available to them at the time of their
examinations.
Lease
investments: The Company's investment in assets leased to others is
reported as lease investments, net, and accounted for as operating
leases. Rental income on operating leases is recognized as income
over the lease term according to the provisions of the lease, which is generally
on a straight-line basis. The investment in equipment in operating
leases is stated at cost less depreciation using the straight-line method
generally over a life of five years or less.
Premises and
equipment: Premises and equipment are carried at cost less accumulated
depreciation and amortization. Depreciation and amortization is
computed by the straight-line method over the estimated useful lives of the
assets. Useful lives range from five to ten years for furniture and
equipment, and five to thirty-nine years for buildings and building
improvements. Land improvements are amortized over a period of
fifteen years and leasehold improvements are amortized over the term of the
related lease or the estimated useful lives of the improvements, whichever is
shorter. Land is not subject to depreciation. Maintenance
and repairs are charged to expense as incurred, while major improvements are
capitalized and amortized to operating expense over their identified useful
lives. Premises and equipment and other long-lived assets are tested
for impairment whenever events or changes in circumstances indicate the carrying
amount of the assets may not be recoverable from future undiscounted cash
flows. If impaired, the assets are recorded at fair
value.
Other real estate owned
(OREO): OREO includes real estate assets that have been received in
satisfaction of debt and is included in other assets. OREO is
initially recorded and subsequently carried at the lower of cost or fair value
less estimated selling costs. Any valuation adjustments required at
the date of transfer are charged to the allowance for loan
losses. Subsequently, unrealized losses and realized gains and losses
on sale are included in other noninterest income. Operating results
from OREO are recorded in other non-interest expense. The Company had
$4.4 million of OREO recorded at December 31, 2008.
Cash surrender value of life
insurance: The Company has purchased bank-owned life insurance policies
on certain executives. Bank-owned life insurance is recorded at its
cash surrender value. Changes in the cash surrender values are
included in non-interest income.
Goodwill: The excess
of the cost of an acquisition over the fair value of the net assets acquired
consist of goodwill and core deposit intangibles (see “Other intangibles” section below). Under the
provisions of Statement of Financial Accounting Standard (SFAS) No. 142, Goodwill and Other Intangible
Assets, goodwill is subject to at least annual assessments for impairment
by applying a fair value based test. The Company reviews goodwill and
other intangible assets to determine potential impairment annually, or more
frequently if events and circumstances indicate that the asset might be
impaired, by comparing the carrying value of the asset with the anticipated
future cash flows.
The
Company’s stock price has historically traded above its book value and was
trading above its book value as of December 31, 2008. In the
event the Company’s stock price were to trade below its book value and tangible
book value, the Company would perform its usual evaluation of the carrying value
of goodwill as of the reporting date. Such a circumstance would be one
factor in its evaluation that could result in an eventual goodwill impairment
charge. Additionally, should the Company’s future earnings and cash flows
decline and/or discount rates increase, an impairment charge to goodwill and
other intangible assets may also be required.
The
Company’s annual assessment date is as of
December 31. No impairment losses were recognized in 2008,
2007 or 2006. Should we determine in a future period that the
goodwill recorded in connection with our acquisitions has been impaired, then a
charge to our earnings will be recorded in the period such determination is
made.
Other
intangibles: The Company’s other intangible assets consist of core
deposit intangibles obtained through acquisitions. Core deposit
intangibles (the portion of an acquisition purchase price which represents value
assigned to the existing deposit base) have finite lives and are amortized by
the declining balance method over four to fifteen years.
Preferred stock:
Preferred stock callable at the option of the Company is initially recorded at
the amount of proceeds received. Any discount from the liquidation
value is accreted to the expected call date and charged to retained
earnings. This accretion is recorded using the level-yield
method. Preferred dividends paid (declared and accrued) and any
accretion is deducted from net income for computing income available to common
shareholders and earnings per share computations.
MB FINANCIAL, INC. AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
Treasury
stock: Treasury stock is recorded at acquisition cost. Gains and losses
on disposition are recorded as increases or decreases to additional paid-in
capital with losses in excess of previously recorded gains charged directly to
retained earnings.
Derivative
Financial Instruments and Hedging Activities: SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, as amended by SFAS No. 137, 138, 149
and 155 establishes accounting and reporting standards requiring that every
derivative instrument (including certain derivative instruments embedded in
other contracts) be recorded in the balance sheet as either an asset or
liability measured at its fair value. SFAS No. 133 requires that
changes in the derivative's fair value be recognized currently in earnings
unless specific hedge accounting criteria are met. Special accounting
for qualifying hedges allows a derivative's gains and losses to offset related
results on the hedged item in the income statement, and requires that a company
must formally document, designate and assess the effectiveness of transactions
that receive hedge accounting.
All
derivatives are recognized on the consolidated balance sheet at their fair
value. On the date the derivative contract is entered into, the
Company designates the derivative as either a fair value hedge (i.e. a hedge of
the fair value of a recognized asset or liability) or a cash flow hedge (i.e. a
hedge of the variability of cash flows to be received or paid related to a
recognized asset or liability). The Company formally documents all
relationships between hedging instruments and hedging items, as well as its risk
management objective and strategy for undertaking various hedge
transactions. This process includes linking all derivatives that are
designated as fair value hedges or cash flow hedges to specific assets or
liabilities on the balance sheet. The Company also formally assesses,
both at the hedge's inception and on an ongoing basis, whether the derivatives
that are used in hedging transactions are highly effective in offsetting changes
in fair values or cash flows of hedged items. If it is determined
that a derivative is not highly effective as a hedge or that it has ceased to be
a highly effective hedge, the Company discontinues hedge accounting
prospectively.
For a
derivative designated as a fair value hedge, the changes in the fair value of
the derivative and of the hedged item attributable to the hedged risk are
recognized in earnings. If the derivative is designated as a cash
flow hedge, the effective portions of changes in the fair value of the
derivative are recorded in other comprehensive income and are recognized in the
income statement when the hedged item affects earnings. Ineffective
portions of changes in the fair value of cash flow hedges are recognized in
earnings.
The
Company discontinues hedge accounting prospectively when it is determined that
the derivative is no longer effective in offsetting changes in the fair value or
cash flows of the hedged item, the derivative expires or is sold, terminated, or
exercised, the derivative is designated as a hedging instrument, or management
determines that designation of the derivative as a hedging instrument is no
longer appropriate. When hedge accounting is discontinued because it
is determined that the derivative no longer qualifies as an effective fair value
hedge, the Company continues to carry the derivative on the balance sheet at its
fair value, and no longer adjusts the hedged asset or liability for changes in
fair value. The adjustment of the carrying amount of the hedged asset
or liability is accounted for in the same manner as other components of the
carrying amount of that asset or liability.
Transfers of financial
assets: Transfers of financial assets are accounted for as sales, when
control over the assets has been surrendered. Control over
transferred assets is deemed to be surrendered when the assets have been
isolated from the Company, the transferee obtains the right (free of conditions
that constrain it from taking advantage of the right) to pledge or exchange the
transferred assets, and the Company does not maintain effective control over the
transferred assets through an agreement to repurchase them before their
maturity.
Merchant Card
Processing: The Company works with merchants in local markets to help
process credit card transactions for Master Card and Visa. A third
party vendor is used to process the corresponding data. The Company
records merchant card processing revenue and expense on a gross basis as other
operating income and expense.
Sale of Maintenance
Contracts: LaSalle Business Solutions (LBS) sells third party maintenance
to customers. The maintenance is serviced by third party providers,
with LBS maintaining no legal obligation under the contract to perform
additional services. Revenues are recorded net of cost of sales, as
LBS is viewed as an agent under EITF 99-19, Reporting Revenue Gross as a
Principal versus Net as an Agent, accepting minimal credit risk,
maintaining no obligation to perform maintenance under the contracts and having
no control over selection of the maintenance supplier.
MB FINANCIAL, INC. AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
Asset
Management and Trust assets: Assets of the asset management and trust
department, other than trust cash on deposit at MB Financial Bank, are not
included in these consolidated financial statements because they are not assets
of the Bank.
Stock-based
compensation: The Company accounts for its equity awards in accordance
with Statement of Financial Accounting Standards No. 123R, “Share-Based Payment”
(Statement 123R), which the Company adopted in the quarter ended March 31,
2006. Statement 123R requires public companies to recognize
compensation expense related to stock-based equity awards in their income
statements. See Note 20 below for more
information.
Income taxes:
Deferred taxes are provided on a liability method whereby deferred tax assets
are recognized for deductible temporary differences and operating loss
carryforwards, and tax credit carryforwards and deferred tax liabilities are
recognized for taxable temporary differences. Temporary differences
are the differences between the reported amounts of assets and liabilities and
their tax bases. Deferred tax assets are reduced by a valuation
allowance when, in the opinion of management, it is more likely than not that
some portion or all of the deferred tax assets will not be
realized. Deferred tax assets and liabilities are adjusted for the
effects of changes in tax laws and rates on the date of enactment.
Earnings per common
share: Basic earnings per common share represent income available to
common stockholders divided by the weighted-average number of common shares
outstanding during the period. Diluted earnings per share reflect
additional common shares that would have been outstanding if dilutive potential
common shares had been issued, as well as any adjustment to income that would
result from the assumed issuance. Potential common shares that may be
issued by the Company relate solely to outstanding stock options, stock
warrants, restricted stock, restricted stock units and director stock units and
are determined using the treasury stock method.
Earnings
per common share have been computed for the years ended December 31, 2008, 2007
and 2006 based on the following (dollars in thousands except per share
data):
|
2008
|
2007
|
2006
|
||||
|
Basic:
|
||||||
|
Net
income from continuing operations
|
$16,164
|
$62,025
|
$63,056
|
|||
|
Net
income from discontinued operations
|
-
|
31,838
|
4,058
|
|||
|
Net
income
|
16,164
|
93,863
|
67,114
|
|||
|
Dividends
on preferred shares
|
789
|
-
|
-
|
|||
|
Net
income available to common shareholders
|
$15,375
|
$93,863
|
$67,114
|
|||
|
Average
shares outstanding
|
34,706,092
|
35,919,900
|
31,156,887
|
|||
|
Basic
earnings per common share from continuing operations
|
$
0.44
|
$
1.73
|
$
2.02
|
|||
|
Basic
earnings per common share from discontinued operations
|
$
-
|
$
0.88
|
$
0.13
|
|||
|
Basic
earnings per common share
|
$ 0.44
|
$
2.61
|
$
2.15
|
|||
|
Diluted:
|
||||||
|
Net
income from continuing operations
|
$16,164
|
$62,025
|
$63,056
|
|||
|
Net
income from discontinued operations
|
-
|
31,838
|
4,058
|
|||
|
Net
Income
|
$16,164
|
$93,863
|
$67,114
|
|||
|
Dividends
on preferred shares
|
789
|
-
|
-
|
|||
|
Net
income available to common shareholders
|
$15,375
|
$93,863
|
$67,114
|
|||
|
Average
shares outstanding
|
34,706,092
|
35,919,900
|
31,156,887
|
|||
|
Net
effect of dilutive equity-based incentive awards(1) (2)
|
355,620
|
519,661
|
530,333
|
|||
|
Total
|
35,061,712
|
36,439,561
|
31,687,220
|
|||
|
Diluted
earnings per common share from continuing operations
|
$ 0.44
|
$
1.70
|
$
1.99
|
|||
|
Diluted
earnings per common share from discontinued operations
|
$
-
|
$
0.88
|
$
0.13
|
|||
|
Diluted
earnings per common share
|
$
0.44
|
$
2.58
|
$
2.12
|
|||
|
(1)
|
Includes
the common stock equivalents for stock options and restricted share rights
(restricted stock, restricted stock units and director stock units) that
are dilutive.
|
|
(2)
|
Options
and warrants for which the exercise price of the option or warrant is
greater than the average market price of the Company’s common stock are
antidilutive and, therefore, not included in the computation of diluted
earnings per share. Antidilutive shares excluded from diluted earnings per
share totaled 1,981,794 shares for 2008, 1,155,394 shares for 2007, and
715,768 shares for 2006.
|
MB FINANCIAL, INC. AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
Comprehensive
income: Comprehensive income consists of net income and other
comprehensive income. Other comprehensive income includes unrealized
gains and losses on securities available-for-sale, net of deferred taxes, which
are reported as a separate component of stockholders’ equity on the consolidated
balance sheet.
Segment
Reporting: The Company has one reportable segment. The
Company’s chief operating decision-makers use consolidated results to make
operating and strategic decisions.
Recent accounting
pronouncements: The FASB issued FASB
Statement No. 163, Accounting
for Financial Guarantee Insurance Contracts (SFAS 163). This
new standard clarifies how FASB Statement No. 60, Accounting and Reporting by
Insurance Enterprises, applies to financial guarantee insurance contracts
issued by insurance enterprises, including the recognition and measurement of
premium revenue and claim liabilities. It also requires expanded disclosures
about financial guarantee insurance contracts.
SFAS 163
is effective for financial statements issued for fiscal years beginning after
December 15, 2008, and all interim periods within those fiscal years, except for
disclosures about the insurance enterprise’s risk-management activities, which
are effective the first period (including interim periods) beginning after May
23, 2008. Except for the required disclosures, earlier application is not
permitted. Management does not believe that the adoption of SFAS 163 will
have a material impact on the Company’s financial statements.
The FASB
issued FASB Staff Position (FSP) EITF 03-6-1, “Determining Whether Instruments
Granted in Share-Based Payment Transactions Are Participating
Securities.” (FSP EITF 03-6-1). FSP EITF 03-6-1
provides that unvested share-based payment awards that contain nonforfeitable
rights to dividends or dividend equivalents (whether paid or unpaid) are
participating securities and shall be included in the computation of earnings
per share pursuant to the two-class method. FSP EITF 03-6-1 will be
effective on January 1, 2009. All previously reported earnings per share
data will be retrospectively adjusted to conform with the provisions of
FSP EITF 03-6-1. Management is currently evaluating the provisions of
FSP EITF 03-6-1 and its potential effect on its financial
statements.
The FASB
issued FASB Staff Position (FSP) FAS 157-3, Determining the Fair Value of a
Financial Asset When the Market for That Asset Is Not Active (FSP 157-3).
FSP 157-3 clarifies the application of FASB Statement No. 157, Fair Value
Measurements, in a market that is not active.
FSP 157-3
is effective October 10, 2008, and for prior periods for which financial
statements have not been issued. Revisions resulting from a change in the
valuation technique or its application should be accounted for as a change in
accounting estimate following the guidance in FASB Statement No. 154, Accounting Changes and Error
Corrections (SFAS 154). However, the disclosure provisions in SFAS 154
for a change in accounting estimate are not required for revisions resulting
from a change in valuation technique or its application. The adoption
of FSP 157-3 did not have a material impact on the Company’s financial
statements.
The FASB
has issued FASB Statement No. 162, The Hierarchy of Generally Accepted
Accounting Principles (SFAS 162). SFAS 162 is
intended to improve financial reporting by identifying a consistent framework,
or hierarchy, for selecting accounting principles to be used in preparing
financial statements that are presented in conformity with U.S. generally
accepted accounting principles for nongovernmental entities. SFAS 162
is effective 60 days following the SEC's approval of the PCAOB amendments to AU
Section 411, The Meaning of
Present Fairly in Conformity with Generally Accepted Accounting
Principles. Management does not believe that the adoption of
SFAS 162 will have a material impact on the Company’s financial
statements.
On March
19, 2008, the FASB issued FASB Statement No. 161, Disclosures
about Derivative Instruments and Hedging Activities - an Amendment of FASB
Statement 133 (SFAS 161).
SFAS 161 enhances required disclosures regarding derivatives and hedging
activities, including enhanced disclosures regarding how: (a)
an entity uses derivative instruments; (b)
derivative instruments and related hedged items are accounted for under FASB
Statement No. 133, Accounting
for Derivative Instruments and Hedging Activities; and (c)
derivative instruments and related hedged items affect an entity's financial
position, financial performance, and cash flows. Specifically, SFAS 161
requires:
|
·
|
Disclosure
of the objectives for using derivative instruments be disclosed in terms
of underlying risk and accounting
designation;
|
|
·
|
Disclosure
of the fair values of derivative instruments and their gains and losses in
a tabular
format;
|
MB FINANCIAL, INC. AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
|
·
|
Disclosure
of information about credit-risk-related contingent features;
and
|
|
·
|
Cross-reference
from the derivative footnote to other footnotes in which
derivative-related information is
disclosed.
|
Statement
No. 161 is effective for fiscal years and interim periods beginning after
November 15, 2008. Management is currently evaluating the provisions
of SFAS 161 and its potential effect on its financial statements.
On
December 4, 2007, the FASB issued FASB Statement 141R, Business Combinations (SFAS
141R). SFAS
141R will significantly change the accounting for business
combinations. Under Statement 141R, an acquiring entity will be
required to recognize all the assets acquired and liabilities assumed in a
transaction at the acquisition-date fair value with limited
exceptions. SFAS 141R will change the accounting treatment for
certain specific items, including:
|
·
|
acquisition
costs will be generally expensed as
incurred;
|
|
·
|
noncontrolling
interests (formerly known as "minority interests") will be valued at fair
value at the acquisition date;
|
|
·
|
acquired
contingent liabilities will be recorded at fair value at the acquisition
date and subsequently measured at either the higher of such amount or the
amount determined under existing guidance for non-acquired
contingencies;
|
|
·
|
the
acquirer shall not recognize a separate valuation allowance as of the
acquisition date for assets acquired in a business that are measured at
their acquisition-date fair value;
|
|
·
|
restructuring
costs associated with a business combination will be generally expensed
subsequent to the acquisition date;
and
|
|
·
|
changes
in deferred tax asset valuation allowances and income tax uncertainties
after the acquisition date generally will affect income tax
expense.
|
SFAS 141R
also includes a substantial number of new disclosure
requirements. SFAS 141R applies prospectively to business
combinations for which the acquisition date is on or after the beginning of the
first annual reporting period beginning on or after December 15,
2008. Earlier adoption is prohibited. Management is
currently evaluating the provisions of SFAS 141R and its potential effect on its
financial statements.
On
December 4, 2007, the FASB issued FASB Statement No. 160, Noncontrolling Interests in
Consolidated Financial Statements - An Amendment of ARB No. 51(SFAS
160). SFAS
160 establishes new accounting and reporting standards for the noncontrolling
interest in a subsidiary and for the deconsolidation of a
subsidiary. Specifically, this statement requires the recognition of
a noncontrolling interest (minority interest) as equity in the consolidated
financial statements and separate from the parent's equity. The
amount of net income attributable to the noncontrolling interest will be
included in consolidated net income on the face of the income statement. SFAS
160 clarifies that changes in a parent's ownership interest in a subsidiary that
do not result in deconsolidation are equity transactions if the parent retains
its controlling financial interest. In addition, this statement
requires that a parent recognize a gain or loss in net income when a subsidiary
is deconsolidated. Such gain or loss will be measured using the fair
value of the noncontrolling equity investment on the deconsolidation
date. SFAS 160 also includes expanded disclosure requirements
regarding the interests of the parent and its noncontrolling
interest. SFAS 160 is effective for fiscal years, and interim periods
within those fiscal years, beginning on or after December 15,
2008. Earlier adoption is prohibited. Management is
currently evaluating the provisions of SFAS 160 and its potential effect on the
Company’s financial statements.
Reclassifications:
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. Business
Combinations
Business Combinations. The
following business combinations were accounted for under the purchase method of
accounting. Accordingly, the results of operations of the acquired
companies have been included in the Company’s results of operations since the
date of acquisition. Under this method of accounting, the purchase
price is allocated to the respective
MB FINANCIAL, INC. AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
assets
acquired and liabilities assumed based on their estimated fair values, net of
applicable income tax effects. The excess cost over fair value of net
assets acquired is recorded as goodwill.
On August
25, 2006, the Company acquired First Oak Brook Bancshares, Inc. (FOBB), parent
company of Oak Brook Bank, located in Oak Brook, Illinois, for $371.0
million. The purchase price was paid through a combination of cash
and the Company’s common stock totaling $74.1 million and $296.9 million
(approximately 8.4 million shares), respectively. The transaction
generated approximately $253.8 million in goodwill and $18.2 million in
intangible assets subject to amortization. Oak Brook Bank was merged
into MB Financial Bank on November 2, 2006.
Pro
Forma Condensed Combined Financial Information
The
following pro forma condensed combined financial information presents the
results of operations of the Company had the merger been completed as of the
beginning of the period indicated (thousands, except share and per share
data).
|
Year
Ended
|
|
|
December
31,
|
|
|
2006
|
|
|
Net
interest income after provision for loan losses
|
$
208,326
|
|
Noninterest
income
|
88,663
|
|
Noninterest
expense
|
198,126
|
|
Income
before income taxes
|
98,863
|
|
Income
taxes
|
29,674
|
|
Net
income from continuing operations
|
$
69,189
|
|
Discontinued
operations
|
|
|
Income
from discontinued operations before income taxes
|
6,213
|
|
Income
taxes
|
2,155
|
|
Income
from discontinued operations
|
4,058
|
|
Net income available to common
shareholders
|
$
73,247
|
|
Common
share data:
|
|
|
Basic
earnings per common share from continuing operations
|
$
1.89
|
|
Basic
earnings per common share from discontinued operations
|
$
0.11
|
|
Basic
earnings per common share
|
$
2.00
|
|
Diluted
earnings per common share from continuing operations
|
$
1.86
|
|
Diluted
earnings per common share from discontinued operations
|
$
0.11
|
|
Diluted
earnings per common share
|
$
1.97
|
|
Average
common shares issued and outstanding
|
36,583,597
|
|
Average
diluted common shares outstanding
|
37,093,116
|
These
unaudited proforma results have been prepared for comparative purposes only and
include certain adjustments, such as additional amortization expense on revalued
purchased assets and implied interest on additional borrowings to fund the
acquisition and does not include the impact of expected cost
savings. All adjustments were tax affected. They do not
purport to be indicative of the results of operations that actually would have
resulted had the combination occurred on January 1, 2006, or of future results
of operations of the consolidated entities.
On April
18, 2008, we purchased an 80% interest in Cedar Hill Associates, LLC (Cedar
Hill), an asset management firm located in Chicago, Illinois, with approximately
$960 million in assets under management. The purchase of Cedar Hill
complements and expands our wealth management product offerings and
revenues. The transaction generated approximately $8.0 million in
goodwill, $4.0 million in client relationship intangibles, and $2.5 million in
minority interest. In addition, the purchase agreement contains
potential deferred payments related to earn-out provisions over a three year
period. Any future deferred payments related to these earn-out
provisions will be applied to the purchase price. Cedar Hill operates
as a subsidiary of MB Financial Bank.
MB FINANCIAL, INC. AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
Pro forma
results of operation for Cedar Hill for the year ended December 31, 2008 are not
included as Cedar Hill would not have had a material impact on the Company’s
financial statements.
Note
3. Discontinued
Operations
On
November 28, 2007, we completed the sale of our Oklahoma City-based subsidiary
bank, Union Bank, N.A., for $76.3 million, resulting in an after-tax gain of
$28.8 million. Prior to closing, Union Bank sold to MB Financial Bank
approximately $100 million in performing loans previously purchased from and
originated by MB Financial Bank.
The sale
of Union allows us to concentrate our resources on growth and expansion in the
Chicago metropolitan market where we operate 71 offices under MB Financial
Bank.
In
accordance with FASB Statement No. 144, “Accounting for the Impairment or
Disposal of Long-Lived Assets,” the financial position of Union Bank is
reflected on the Company’s balance sheets as “assets held for sale” and
“liabilities held for sale”, and the results of operations of Union Bank are
reflected in the Company’s statements of income as “discontinued
operations.”
The
results of operations for Union Bank were as follows (in
thousands):
|
Years
Ended December 31,
|
||
|
2007
(1)
|
2006
|
|
|
Interest
income
|
$21,946
|
$24,189
|
|
Interest
expense
|
10,216
|
10,957
|
|
Net
interest income
|
11,730
|
13,232
|
|
Provision
for loan losses
|
1,185
|
-
|
|
Net
interest income after provision for loans losses
|
10,545
|
13,232
|
|
Other
income
|
999
|
1,585
|
|
Other
expenses
|
7,554
|
8,604
|
|
Income
before income taxes
|
3,990
|
6,213
|
|
Applicable
income taxes
|
998
|
2,155
|
|
Operating
income from discontinued operations
|
2,992
|
4,058
|
|
Gain
on sale of discontinued operations, net of tax
|
28,846
|
-
|
|
$31,838
|
$
4,058
|
|
|
(1)
|
Represents
results of operations through the date of sale, November 28,
2007.
|
Note
4. Restrictions
on Cash and Due From Banks
MB
Financial Bank is required to maintain reserve balances in cash or on deposit
with the Federal Reserve Bank, based on a percentage of deposits. The
total of those required reserve balances was approximately $51.2 million and
$37.3 million at December 31, 2008 and 2007, respectively.
The
nature of the Company's business requires that it maintain amounts due from
banks and federal funds sold which, at times, may exceed federally insured
limits. Management monitors these correspondent relationships and the
Company has not experienced any losses in such accounts.
MB FINANCIAL, INC. AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
Note
5. Investment
Securities
Carrying
amounts and fair values of investment securities available for sale are
summarized as follows (in thousands):
|
Gross
|
Gross
|
|||||||
|
Amortized
|
Unrealized
|
Unrealized
|
Fair
|
|||||
|
Available
for sale
|
Cost
|
Gains
|
Losses
|
Value
|
||||
|
December
31, 2008:
|
||||||||
|
Government
sponsored agencies
|
$
171,385
|
$
7,988
|
$
-
|
$
179,373
|
||||
|
States
and political subdivisions
|
417,608
|
12,585
|
(2,194)
|
427,999
|
||||
|
Mortgage-backed
securities
|
682,679
|
8,597
|
(991)
|
690,285
|
||||
|
Corporate
bonds
|
34,546
|
34
|
(15)
|
34,565
|
||||
|
Equity
securities
|
3,595
|
11
|
-
|
3,606
|
||||
|
Debt
securities issued by foreign governments
|
301
|
1
|
-
|
302
|
||||
|
Totals
|
$1,310,114
|
$29,216
|
$(3,200)
|
$1,336,130
|
||||
|
December
31, 2007:
|
||||||||
|
Government
sponsored agencies
|
$
305,768
|
$
4,810
|
$
(40)
|
$
310,538
|
||||
|
States
and political subdivisions
|
407,973
|
4,961
|
(632)
|
412,302
|
||||
|
Mortgage-backed
securities
|
435,743
|
3,346
|
(1,033)
|
438,056
|
||||
|
Corporate
bonds
|
12,797
|
271
|
(11)
|
13,057
|
||||
|
Equity
securities
|
3,446
|
14
|
-
|
3,460
|
||||
|
Debt
securities issued by foreign governments
|
299
|
2
|
-
|
301
|
||||
|
Totals
|
$1,166,026
|
$13,404
|
$(1,716)
|
$1,177,714
|
||||
Unrealized
losses on investment securities available for sale and the fair value of the
related securities at December 31, 2008 are summarized 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
|
|||||||
|
States
and political subdivisions
|
$
57,096
|
$(1,970)
|
$4,179
|
$(224)
|
$ 61,275
|
$(2,194)
|
||||||
|
Mortgage-backed
securities
|
141,786
|
(958)
|
5,276
|
(33)
|
147,062
|
(991)
|
||||||
|
Corporate
bonds
|
15,045
|
(15)
|
-
|
-
|
15,045
|
(15)
|
||||||
|
Totals
|
$213,927
|
$(2,943)
|
$9,455
|
$(257)
|
$223,382
|
$(3,200)
|
||||||
MB FINANCIAL, INC. AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
Unrealized
losses on investment securities available for sale and the fair value of the
related securities at December 31, 2007 are summarized 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
|
|||||||
|
Government
sponsored agencies
|
$ -
|
$ -
|
$
24,999
|
$ (40)
|
$ 24,999
|
$ (40)
|
||||||
|
States
and political subdivisions
|
34,485
|
(373)
|
35,362
|
(259)
|
69,847
|
(632)
|
||||||
|
Mortgage-backed
securities
|
52,934
|
(64)
|
136,338
|
(969)
|
189,272
|
(1,033)
|
||||||
|
Corporate
bonds
|
-
|
-
|
4,124
|
(11)
|
4,124
|
(11)
|
||||||
|
Totals
|
$87,419
|
$(437)
|
$200,823
|
$(1,279)
|
$288,242
|
$(1,716)
|
||||||
The total
number of security positions in the investment portfolio in an unrealized loss
position at December 31, 2008 was 244 compared to 256 at December 31,
2007. All securities with unrealized losses are reviewed by
management at least quarterly to determine whether the unrealized losses are
other-than-temporary. All of the securities in an unrealized loss
position for greater than 12 months as of December 31, 2008 were either issued
by U.S. Government-sponsored enterprises, or by issuers with investment grade
ratings. Since the Company has the ability and intent to hold these
securities until market price recovery or maturity, these investment securities
are not considered other-than-temporarily impaired.
The
Company views its investment in the FHLB as a long-term investment.
Accordingly, when evaluating for impairment, the value is determined based on
the ultimate recovery of the par value rather than recognizing temporary
declines in value. The decision of whether impairment exists is a matter
of judgment that should reflect the investor's views on the FHLB Chicago's long
term performance, which includes factors such as its operating performance, the
severity and duration of declines of the market value of its net assets relative
to its capital stock amount, its commitment to make payments required by law or
regulation and the level of such payments in relation to its operating
performance, the impact of legislative and regulation changes on FHLB Chicago
and accordingly, on the members of FHLB Chicago, and its liquidity and funding
position. The FHLB Chicago reported net income during the third quarter of
2008, and reported the highest level of retained earnings compared to the other
11 FHLBs. The Company does not believe that its investment in the FHLB was
impaired as December 31, 2008.
The
unrealized losses on the Company’s investment in mortgage-backed securities were
primarily due to the current interest rate environment, which resulted in an
increased probability of the securities being called or repaid prior to their
estimated maturities. These types of investments are issued by U.S.
Government-sponsored enterprises (e.g. Fannie Mae and Freddie
Mac). Accordingly, the Company believes the credit risk embedded in
these securities to be very remote. The unrealized losses in the
Company’s investment in state and political subdivision securities all relate to
securities with investment grade ratings and were believed by management to have
been caused not by credit risk, but by interest rate increases.
Realized
net gains (losses) on sale of investment securities available for sale are
summarized as follows (in thousands):
|
For
the Years Ended December 31,
|
||||||
|
2008
|
2007
|
2006
|
||||
|
Realized
gains
|
$1,420
|
$
962
|
$
268
|
|||
|
Realized
losses
|
(290)
|
(4,706)
|
(713)
|
|||
|
Net
gains (losses)
|
$1,130
|
$(3,744)
|
$(445)
|
|||
MB FINANCIAL, INC. AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
The
amortized cost and fair value of investment securities available for sale as of
December 31, 2008 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
|
||
|
Due
in one year or less
|
$
56,235
|
$
56,823
|
||
|
Due
after one year through five years
|
221,616
|
229,291
|
||
|
Due
after five years through ten years
|
272,514
|
283,489
|
||
|
Due
after ten years
|
73,475
|
72,636
|
||
|
Equity
securities
|
3,595
|
3,606
|
||
|
Mortgage-backed
securities
|
682,679
|
690,285
|
||
|
Totals
|
$1,310,114
|
$1,336,130
|
||
Investment
securities available for sale with carrying amounts of $765.9 million and $1.1
billion at December 31, 2008 and 2007, respectively, were pledged as collateral
on public deposits and for other purposes as required or permitted by
law.
Note
6. Loans
Loans
consist of the following at (in thousands):
|
December
31,
|
||||
|
2008
|
2007
|
|||
|
Commercial
loans
|
$1,522,380
|
$1,323,455
|
||
|
Commercial
loans collateralized by assignment of lease payments
|
649,918
|
553,138
|
||
|
Commercial
real estate
|
2,353,261
|
1,974,370
|
||
|
Residential
real estate
|
295,336
|
354,874
|
||
|
Construction
real estate
|
757,900
|
845,158
|
||
|
Indirect
vehicle
|
189,227
|
146,311
|
||
|
Home
equity
|
401,029
|
365,589
|
||
|
Consumer
loans
|
59,512
|
52,732
|
||
|
Gross
loans (1)
|
6,228,563
|
5,615,627
|
||
|
Allowance
for loan losses
|
(144,001)
|
(65,103)
|
||
|
Loans,
net
|
$6,084,562
|
$5,550,524
|
||
|
(1)
|
Gross
loan balances at December 31, 2008 and 2007 are net of unearned income,
including net deferred loan fees of $4.5 million, and $3.7 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 the majority of the loan customers are
located in the markets serviced by MB Financial Bank.
Non-accrual
loans and loans past due ninety days or more were $145.9 million and $24.5
million at December 31, 2008 and 2007, respectively. There were no
loans past due ninety days or more still accruing interest as of December 31,
2007 or December 31, 2008. The reduction in interest income
associated with loans on non-accrual status was approximately $4.6 million, $1.6
million, and $1.4 million for the years ended December 31, 2008, 2007 and 2006,
respectively.
MB FINANCIAL, INC. AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
Information
about impaired loans as of and for the years ended December 31, 2008, 2007 and
2006 are as follows (in thousands):
|
December
31,
|
||||||
|
2008
|
2007
|
2006
|
||||
|
Loans
for which there were related allowance for loan losses
|
$143,423
|
$18,398
|
$12,454
|
|||
|
Other
impaired loans
|
-
|
564
|
-
|
|||
|
Total
impaired loans
|
$143,423
|
$18,962
|
$12,454
|
|||
|
Average
monthly balance of impaired loans
|
$
76,942
|
$16,208
|
$13,260
|
|||
|
Related
allowance for loan losses
|
52,112
|
5,960
|
4,343
|
|||
|
Interest
income recognized on a cash basis
|
74
|
429
|
567
|
|||
Activity
in the allowance for loan losses was as follows (in thousands):
|
Year
Ended December 31,
|
|||||||
|
2008
|
2007
|
2006
|
|||||
|
Balance,
beginning of year
|
$
65,103
|
$58,983
|
$42,290
|
||||
|
Additions
from acquisitions
|
-
|
-
|
16,425
|
||||
|
Provision
for loan losses
|
125,721
|
19,313
|
10,100
|
||||
|
Charge-offs
|
(49,825)
|
(16,306)
|
(13,800)
|
||||
|
Recoveries
|
3,002
|
3,113
|
3,968
|
||||
|
Net
charge-offs
|
(46,823)
|
(13,193)
|
(9,832)
|
||||
|
Balance,
end of year
|
$144,001
|
$65,103
|
$58,983
|
||||
Loans
outstanding to executive officers and directors of the Company, including
companies in which they have management control or beneficial ownership, at
December 31, 2008 and 2007, were approximately $10.6 million and $18.6 million,
respectively. In the opinion of management, these loans have similar
terms to other customer loans and do not present more than normal risk of
collection.
An
analysis of the activity related to these loans for the year ended December 31,
2008 is as follows (in thousands):
|
Balance,
beginning of year
|
$18,641
|
|
|
Additions
|
43
|
|
|
Principal
payments and other reductions
|
(8,070)
|
|
|
Balance,
end of year
|
$10,614
|
|
Note
7. Lease
Investments
The lease
portfolio is comprised of various types of equipment, generally technology
related, including computer systems and satellite equipment, material handling
and general manufacturing equipment. Lessees tend to be Fortune 1000
companies and have an investment grade public debt rating by Moody’s or Standard
& Poors or the equivalent, though, we also provided credit to below
investment grade and non-rated companies.
MB FINANCIAL, INC. AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
Lease
investments by categories follow (in thousands):
|
December
31,
|
|||||
|
2008
|
2007
|
||||
|
Direct
finance leases:
|
|||||
|
Minimum
lease payments
|
$
61,239
|
$
52,150
|
|||
|
Estimated
unguaranteed residual values
|
7,093
|
6,029
|
|||
|
Less:
unearned income
|
(7,484)
|
(6,675)
|
|||
|
Direct
finance leases (1)
|
$
60,848
|
$
51,504
|
|||
|
Leveraged
leases:
|
|||||
|
Minimum
lease payments
|
$
30,150
|
$
34,172
|
|||
|
Estimated
unguaranteed residual values
|
4,914
|
4,830
|
|||
|
Less:
unearned income
|
(2,804)
|
(3,547)
|
|||
|
Less:
related non-recourse debt
|
(28,437)
|
(31,755)
|
|||
|
Leveraged
leases (1)
|
$
3,823
|
$
3,700
|
|||
|
Operating
leases:
|
|||||
|
Equipment,
at cost
|
$196,068
|
$151,663
|
|||
|
Less
accumulated depreciation
|
(71,034)
|
(54,342)
|
|||
|
Lease
investments, net
|
$125,034
|
$
97,321
|
|||
|
(1)
|
Direct
finance and leveraged leases are included as commercial loans
collateralized by assignment of lease payments for financial statement
purposes.
|
Leases
that transfer substantially all of the benefits and risk related to the
equipment ownership to the lessee are classified as direct
financing. If these direct finance leases have non-recourse debt
associated with them, they are further classified as leveraged leases, and the
associated debt is netted with the outstanding balance in the consolidated
financial statements. Interest income on direct finance and leveraged
leases is recognized using methods which approximate a level yield over the term
of the lease.
Operating
leases are investments in equipment leased to other companies, where the
residual component makes up more than 10% of the investment. The
Company funds most of the lease equipment purchases internally, but has some
loans at other banks which totaled $27.7 million at December 31, 2008 and $12.5
million at December 31, 2007.
The
minimum lease payments receivable for the various categories of leases are due
as follows (in thousands) for the years ending December 31,
|
Direct
|
||||||||
|
Finance
|
Leveraged
|
Operating
|
||||||
|
Year
|
Leases
|
Leases
|
Leases
|
Total
|
||||
|
2009
|
$27,675
|
$17,014
|
$38,440
|
$ 83,129
|
||||
|
2010
|
19,150
|
10,456
|
27,964
|
57,570
|
||||
|
2011
|
8,562
|
2,098
|
14,742
|
25,402
|
||||
|
2012
|
3,593
|
395
|
6,049
|
10,037
|
||||
|
2013
|
1,910
|
187
|
1,692
|
3,789
|
||||
|
2014
& Thereafter
|
349
|
-
|
745
|
1,094
|
||||
|
$61,239
|
$30,150
|
$89,632
|
$181,021
|
|||||
MB FINANCIAL, INC. AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
Income from
lease investments is composed of (in thousands):
|
Years
Ended December 31,
|
||||||
|
2008
|
2007
|
2006
|
||||
|
Rental
income on operating leases
|
$44,210
|
$35,160
|
$35,840
|
|||
|
LaSalle
Business Solutions revenue
|
32,302
|
46,813
|
27,117
|
|||
|
Gain
on sale of leased equipment
|
1,921
|
4,149
|
3,991
|
|||
|
Income
on lease investments, gross
|
78,433
|
86,122
|
66,948
|
|||
|
Less:
|
||||||
|
Write
down of residual value of equipment
|
(512)
|
(1,617)
|
(1,259)
|
|||
|
LaSalle
Business Solutions cost of sales
|
(28,953)
|
(42,561)
|
(24,772)
|
|||
|
Depreciation
on operating leases
|
(31,995)
|
(26,097)
|
(27,548)
|
|||
|
Income
from lease investments, net
|
$16,973
|
$15,847
|
$13,369
|
|||
LaSalle
Business Solutions (LBS) revenue represents the gross amount of revenue paid to
LBS for maintenance contracts sold to customers. The maintenance
contracts are serviced by third parties, with LBS maintaining no obligations
under the contract. The cost of sales is the amount paid by LBS to
the third party maintenance provider.
Gains on
leased equipment periodically result when a lessee renews a lease or purchases
the equipment at the end of a lease, or the equipment is sold to a third party
at a profit. Individual lease transactions can, however, result in a
loss. This generally happens when, at the end of a lease, the lessee
does not renew the lease or purchase the equipment. To mitigate this
risk of loss, we usually limit individual leased equipment residuals to
approximately $500 thousand per transaction and seek to diversify both the type
of equipment leased and the industries in which the lessees to whom such
equipment is leased participate. Often times, there are several
individual lease schedules under one master lease. There were 2,273
leases at December 31, 2008 compared to 1,969 at December 31,
2007. The average residual value per lease schedule was approximately
$20 thousand at December 31, 2008 and $18 thousand at December 31,
2007. The average residual value per master lease schedule was
approximately $169 thousand at December 31, 2008 and $152 thousand at December
31, 2007.
At
December 31, 2008, the following reflects the residual values for leases by
category in the year the initial lease term ends (in thousands):
|
Residual
Values
|
||||||||
|
End
of initial lease term
|
Direct
|
|||||||
|
Finance
|
Leveraged
|
Operating
|
||||||
|
December
31,
|
Leases
|
Leases
|
Leases
|
Total
|
||||
|
2009
|
$1,634
|
$
735
|
$
6,797
|
$
9,166
|
||||
|
2010
|
1,712
|
2,571
|
6,733
|
11,016
|
||||
|
2011
|
2,519
|
1,340
|
10,600
|
14,459
|
||||
|
2012
|
489
|
130
|
4,703
|
5,322
|
||||
|
2013
|
354
|
138
|
3,086
|
3,578
|
||||
|
2014
& Thereafter
|
385
|
-
|
2,462
|
2,847
|
||||
|
$7,093
|
$4,914
|
$34,381
|
$46,388
|
|||||
The lease
residual value represents the present value of the estimated fair value of the
leased equipment at the termination of the lease. Lease residual
values are reviewed quarterly and any write-downs, or charge-offs deemed
necessary are recorded in the period in which they become known.
MB FINANCIAL, INC. AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
Note
8. Premises
and Equipment
Premises
and equipment consist of (in thousands):
|
December
31,
|
||||
|
2008
|
2007
|
|||
|
Land
and land improvements
|
$
55,941
|
$
55,941
|
||
|
Buildings
|
80,582
|
82,590
|
||
|
Furniture
and equipment
|
62,019
|
58,816
|
||
|
Buildings
and leasehold improvements
|
46,055
|
36,709
|
||
|
244,597
|
234,056
|
|||
|
Accumulated
depreciation
|
(58,123)
|
(50,334)
|
||
|
Premises
and equipment, net
|
$186,474
|
$183,722
|
||
Depreciation
on premises and equipment totaled $11.7 million, $11.1, and $9.4 million for the
years ended December 31, 2008, 2007, and 2006, respectively.
As of
December 31, 2008, the Company had approximately $1.0 million in capital
expenditure commitments outstanding which relate to various projects to build
new branches or renovate existing branches.
Note
9. Goodwill
and Intangibles
Under the
provisions of Statement of Financial Accounting Standards (SFAS) No. 142,
goodwill is no longer subject to amortization, but instead is subject to at
least annual assessments for impairment by applying a fair-value based
test. SFAS No. 142 also requires that an acquired intangible asset be
separately recognized if the benefit of the intangible asset is obtained through
contractual or other legal rights, or if the asset can be sold, transferred,
licensed, rented or exchanged, regardless of the acquirer’s intent to do
so. Our most recent impairment assessment on goodwill and other
intangibles was completed as of December 31, 2008. No impairment
losses on goodwill or other intangibles were incurred in 2008, 2007, and
2006.
The
following table presents the changes in the carrying amount of goodwill (in
thousands):
|
December
31,
|
|||
|
2008
|
2007
|
||
|
Balance
at beginning of period
|
$379,047
|
$379,047
|
|
|
Goodwill
from business combinations (1)
|
$8,022
|
-
|
|
|
Balance
at end of period
|
$387,069
|
$379,047
|
|
|
(1)
|
See
Note 2 for additional
information.
|
MB FINANCIAL, INC. AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
The Company has
other intangible assets consisting of core deposit and client relationship
intangibles that had, as of December 31, 2008, a remaining weighted average
amortization period of approximately five years. The following table
presents the changes in the carrying amount of core deposit and client
relationship intangibles, gross carrying amount, accumulated amortization, and
net book value as of December 31, 2008 and December 31, 2007 (in
thousands):
|
December
31,
|
||
|
2008
|
2007
|
|
|
Balance
at beginning of period
|
$25,352
|
$28,856
|
|
Amortization
expense
|
(3,554)
|
(3,504)
|
|
Other
intangibles from business combinations (1)
|
3,978
|
-
|
|
Balance
at end of period
|
$25,776
|
$25,352
|
|
Gross
carrying amount
|
$51,472
|
$47,494
|
|
Accumulated
amortization
|
(25,696)
|
(22,142)
|
|
Net
book value
|
$25,776
|
$25,352
|
|
(1)
|
See
Note 2 for additional
information.
|
The
following presents the estimated amortization expense of other intangible assets
(in thousands):
|
Year
ending December 31,
|
Amount
|
|
|
2009
|
$
3,503
|
|
|
2010
|
3,292
|
|
|
2011
|
2,962
|
|
|
2012
|
2,753
|
|
|
2013
|
2,605
|
|
|
Thereafter
|
10,661
|
|
|
$25,776
|
Note
10. Deposits
The
composition of deposits is as follows (in thousands):
|
December
31,
|
||||
|
2008
|
2007
|
|||
|
Demand
deposits, noninterest bearing
|
$
960,117
|
$
875,491
|
||
|
NOW
and money market accounts
|
1,465,436
|
1,263,021
|
||
|
Savings
deposits
|
367,684
|
390,980
|
||
|
Time
certificates, $100,000 or more
|
2,091,067
|
1,686,593
|
||
|
Other
time certificates
|
1,611,267
|
1,297,698
|
||
|
Total
|
$6,495,571
|
$5,513,783
|
||
Time
certificates of $100,000 or more included $864.8 million and $478.5 million of
brokered deposits at December 31, 2008 and 2007,
respectively. Brokered deposits typically consist of smaller
individual time certificates that have the same liquidity characteristics and
yields consistent with time certificates of $100,000 or more.
MB FINANCIAL, INC. AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
At
December 31, 2008, the scheduled maturities of time certificates are as follows
(in thousands):
|
2009
|
$2,806,727
|
|
|
2010
|
588,215
|
|
|
2011
|
121,364
|
|
|
2012
|
39,616
|
|
|
2013
|
64,534
|
|
|
Thereafter
|
81,878
|
|
|
$3,702,334
|
Note
11. Short-Term
Borrowings
Short-term
borrowings are summarized as follows as of December 31, 2008 and 2007 (dollars
in thousands):
|
December
31,
|
||||
|
2008
|
2007
|
|||
|
Weighted
Average
|
Amount
|
Weighted
Average
|
Amount
|
|
|
Cost
|
Cost
|
|||
|
Federal
funds purchased
|
0.68%
|
$
5,000
|
3.86%
|
$170,000
|
|
Federal
Reserve term auction funds
|
0.42%
|
100,000
|
-
|
-
|
|
Customer
repurchase agreements
|
0.48%
|
282,832
|
3.02%
|
367,702
|
|
Federal
Home Loan Bank advances
|
2.46%
|
100,787
|
5.05%
|
440,019
|
|
0.88%
|
$488,619
|
4.08%
|
$977,721
|
|
The
Company uses the Federal Reserve Term Auction Funds for short-term
funding. Each auction is for a fixed amount and the rate is
determined by the auction process. These borrowings are primarily
collateralized by commercial and indirect vehicle loans with unpaid principal
balances aggregating no less than 200% of the outstanding advances from the
Federal Reserve Term Auction.
Securities
sold under agreements to repurchase are agreements in which the Company acquires
funds by selling securities or investment grade lease loans to another party
under a simultaneous agreement to repurchase the same securities or lease loans
at a specified price and date. The Company enters into repurchase
agreements and also offers a demand deposit account product to customers that
sweeps their balances in excess of an agreed upon target amount into overnight
repurchase agreements.
The
Company had Federal Home Loan Bank advances with maturity dates less than one
year consisting of $100.8 million in fixed rate advances at December 31, 2008
and $440.0 million in fixed rate advances at December 31, 2007. At
December 31, 2008, fixed rate advances had effective interest rates ranging from
2.44% to 4.88% and are subject to a prepayment fee. At December 31,
2008, the advances had maturities ranging from March 2009 to November
2009.
A
collateral pledge agreement exists whereby at all times, the Company must keep
on hand, free of all other pledges, liens, and encumbrances, first mortgage
loans and home equity loans with unpaid principal balances aggregating no less
than 133% for first mortgage loans and 200% for home equity loans of the
outstanding secured advances from the Federal Home Loan Bank. As of
December 31, 2008 and 2007, the Company had $405.0 million and $426.7 million,
respectively, of loans pledged as collateral for Federal Home Loan Bank
advances. Additionally, as of December 31, 2008 and 2007, the Company
had $181.0 million and $137.5 million, respectively, of investment securities
pledged as collateral for secured advances from the Federal Home Loan
Bank.
As of
December 31, 2008, the Company had a $30 million correspondent bank line of
credit which had certain covenants that required the Company to maintain MB
Financial Bank’s “Well Capitalized” status, to maintain minimum financial ratios
relating to MB Financial Bank’s non-performing assets and loan loss reserve and
the Company’s return on assets. The Company was in compliance with
such covenants as of December 31, 2008, with the exception of the rolling four
quarter return on average assets requirement. The correspondent bank
MB FINANCIAL, INC. AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
line of credit
was used for short-term liquidity purposes. The Company substantially
improved its liquidity position during 2008, and will not retain this line of
credit in 2009. As of December 31, 2008 and 2007, no balances
were outstanding on the correspondent bank line of credit.
Note
12. Long-term
Borrowings
The
Company had Federal Home Loan Bank advances with original contractual maturities
greater than one year of $352.5 million and $105.1 million at December 31, 2008
and December 31, 2007, respectively. As of December 31, 2008, the advances had
fixed terms with effective interest rates, net of discounts, ranging from 3.26%
to 5.87%.
The
Company had notes payable to banks totaling $27.7 million and $12.5 million at
December 31, 2008 and December 31, 2007, respectively, which as of December 31,
2008, were accruing interest at rates ranging from 4.19% to
12.00%. Lease investments includes equipment with an amortized cost
of $34.8 million and $16.1 million at December 31, 2008 and December 31, 2007,
respectively, that is pledged as collateral on these notes.
The
Company had a $40 million ten year structured repurchase agreement which is
non-putable until 2011 as of December 31, 2008. The borrowing agreement floats
at 3-month LIBOR less 37 basis points and reprices quarterly. The
counterparty to the repurchase agreement has a one-time put option in
2011. If the option is not exercised, the repurchase agreement
converts to a fixed rate borrowing at 4.75% for the remaining term, which would
expire in 2016.
MB
Financial Bank has a $50 million subordinated debt facility. Interest
is payable at a rate of 3 month LIBOR + 1.20%. The debt matures on
October 1, 2017. In addition, the Company has a $500 thousand
ten-year term loan from the same lender.
The
principal payments on long-term borrowings are due as follows (in
thousands):
|
Amount
|
|
|
Year
ending December 31,
|
|
|
2009
|
$
45,060
|
|
2010
|
145,756
|
|
2011
|
43,247
|
|
2012
|
34,755
|
|
2013
|
9,565
|
|
Thereafter
|
193,083
|
|
$471,466
|
Note
13. Junior
Subordinated Notes Issued to Capital Trusts
The
Company has established statutory trusts for the sole purpose of issuing trust
preferred securities and related trust common securities. The
proceeds from such issuances were used by the trusts to purchase junior
subordinated notes of the Company, which are the sole assets of each
trust. Concurrently with the issuance of the trust preferred
securities, the Company issued guarantees for the benefit of the holders of the
trust preferred securities. The trust preferred securities are issues
that qualify, and are treated by the Company, as Tier 1 regulatory
capital. The Company owns all of the common securities of each
trust. The trust preferred securities issued by each trust rank
equally with the common securities in right of payment, except that if an event
of default under the indenture governing the notes has occurred and is
continuing, the preferred securities will rank senior to the common securities
in right of payment. FOBB Capital Trusts I and III were established
by FOBB prior to the Company’s acquisition of FOBB, and the junior subordinated
notes issued by FOBB to FOBB Capital Trusts I and III were assumed by the
Company upon completion of the acquisition.
MB FINANCIAL, INC. AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
The table below
summarizes the outstanding junior subordinated notes and the related trust
preferred securities issued by each trust as of December 31, 2008 (in
thousands):
|
Coal City
|
MB
Financial
|
MB
Financial (3)
|
MB
Financial (4)
|
|
|
Capital
Trust I
|
Capital
Trust II
|
Capital
Trust III
|
Capital
Trust IV
|
|
|
Junior
Subordinated Notes:
|
||||
|
Principal
balance
|
$25,774
|
$36,083
|
$10,310
|
$20,619
|
|
Annual
interest rate
|
3-mo
LIBOR + 1.80%
|
3-mo
LIBOR + 1.40%
|
3-mo
LIBOR + 1.50%
|
3-mo
LIBOR + 1.52%
|
|
Stated
maturity date
|
September
1, 2028
|
September
15, 2035
|
September
23, 2036
|
September
15, 2036
|
|
Call
date
|
September
1, 2008
|
September
15, 2010
|
September
23, 2011
|
September
15, 2011
|
|
Trust
Preferred Securities:
|
||||
|
Face
value
|
$25,000
|
$35,000
|
$10,000
|
$20,000
|
|
Annual
distribution rate
|
3-mo
LIBOR + 1.80%
|
3-mo
LIBOR + 1.40%
|
3-mo
LIBOR + 1.50%
|
3-mo
LIBOR + 1.52%
|
|
Issuance
date
|
July
1998
|
August
2005
|
July
2006
|
August
2006
|
|
Distribution
dates (1)
|
Quarterly
|
Quarterly
|
Quarterly
|
Quarterly
|
|
MB
Financial (4)
|
MB
Financial
|
FOBB
(2) (3)
|
FOBB
(2)
|
|
|
Capital
Trust V
|
Capital
Trust VI
|
Capital
Trust I
|
Capital
Trust III
|
|
|
Junior
Subordinated Notes:
|
||||
|
Principal
balance
|
$30,928
|
$23,196
|
$6,186
|
$5,155
|
|
Annual
interest rate
|
3-mo
LIBOR + 1.30%
|
3-mo
LIBOR + 1.30%
|
10.60%
|
3-mo
LIBOR + 2.80%
|
|
Stated
maturity date
|
December
15, 2037
|
October
30, 2037
|
September
7, 2030
|
January
23, 2034
|
|
Call
date
|
March
15, 2008
|
October
30, 2012
|
September
7, 2010
|
January
23, 2009
|
|
Trust
Preferred Securities:
|
||||
|
Face
value
|
$30,000
|
$22,500
|
$6,000
|
$5,000
|
|
Annual
distribution rate
|
3-mo
LIBOR + 1.30%
|
3-mo
LIBOR + 1.30%
|
10.60%
|
3-mo
LIBOR + 2.80%
|
|
Issuance
date
|
September
2007
|
October
2007
|
September
2000
|
December
2003
|
|
Distribution
dates (1)
|
Quarterly
|
Quarterly
|
Semi-annual
|
Quarterly
|
|
(1)
|
All
distributions are cumulative and paid in
cash.
|
|
(2)
|
Amount
does not include purchase accounting adjustments totaling a premium of
$572.5 thousand associated with FOBB Capital Trust I and
III.
|
|
(3)
|
Callable
at a premium through 2020.
|
|
(4)
|
Callable
at a premium through 2011.
|
The trust
preferred securities are subject to mandatory redemption, in whole or in part,
upon repayment of the junior subordinated notes at the stated maturity date or
upon redemption on a date no earlier than the call dates noted in the table
above. Prior to these respective redemption dates, the junior
subordinated notes may be redeemed by the Company (in which case the trust
preferred securities would also be redeemed) after the occurrence of certain
events that would have a negative tax effect on the Company or the trusts, would
cause the trust preferred securities to no longer qualify as Tier 1 capital, or
would result in a trust being treated as an investment company. Each
trust’s ability to pay amounts due on the trust preferred securities is solely
dependent upon the Company making payment on the related junior subordinated
notes. The Company’s obligation under the junior subordinated notes
and other relevant trust agreements, in aggregate, constitute a full and
unconditional guarantee by the Company of each trust’s obligations under the
trust preferred securities issued by each trust. The Company has the
right to defer payment of interest on the notes and, therefore, distributions on
the trust preferred securities, for up to five years, but not beyond the stated
maturity date in the table above. During any such deferral period the
Company may not pay cash dividends on its common stock and generally may not
repurchase its common stock.
MB FINANCIAL, INC. AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
Note
14. Lease
Commitments and Rental Expense
The
Company leases office space for certain branch offices. The future
minimum annual rental commitments for these noncancelable leases and subleases
of such space are as follows (in thousands):
|
Gross
|
Sublease
|
Net
|
||||||
|
Year
|
Rents
|
Rents
|
Rents
|
|||||
|
2009
|
$3,874
|
$692
|
$3,182
|
|||||
|
2010
|
3,125
|
717
|
2,408
|
|||||
|
2011
|
2,750
|
743
|
2,007
|
|||||
|
2012
|
2,450
|
747
|
1,703
|
|||||
|
2013
|
2,105
|
549
|
1,556
|
|||||
|
Thereafter
|
17,184
|
814
|
16,370
|
|||||
|
$31,488
|
$4,262
|
$27,226
|
||||||
Under the
terms of these leases, the Company is required to pay its pro rata share of the
cost of maintenance and real estate taxes. Certain leases also
provide for increased rental payments based on increases in the Consumer Price
Index.
Net
rental expense for the years ended December 31, 2008, 2007 and 2006 amounted to
$3.3 million, $3.6 million and $2.0 million, respectively.
Note
15. Employee
Benefit Plans
The
Company has a defined contribution 401(k) profit sharing plan that covers all
full-time employees who have completed three months of service. Each
participant under the plan may contribute up to 75% of his/her eligible
compensation on a pretax basis. The Company's contributions consist
of a discretionary profit-sharing contribution and a matching contribution of
the amounts contributed by the participants. The board of directors
determines the Company’s contributions on an annual basis.
During
2008, each participant was eligible for a maximum total Company matching
contribution of 3.5% of their compensation. Additionally, the Company
may make annual discretionary profit sharing contributions. The
contributions for profit sharing equaled 3.0% of eligible compensation for the
year ended December 31, 2008, 3.5% for the year ended December 31, 2007, and
3.5% for the year ended December 31, 2006. The Company's total
contributions to the plan, for the years ended December 31, 2008, 2007 and 2006,
were approximately $3.8 million, $3.7 million, $3.2 million,
respectively.
On the
acquisition date of FOBB, the Company assumed FOBB’s 401(k) savings plan, which
allowed eligible FOBB employees to defer a percentage of their
salary. The Company also assumed FOBB’s profit sharing plan on the
date of acquisition. Effective January 1, 2007, these plans were
merged into the Company’s 401(k) profit sharing plan.
The
Company has deferred compensation plans that allow eligible executives, senior
officers and certain other employees and directors to defer payment of up 100%
of their base salary and bonus in the case of employees and board fees in the
case of directors. Discretionary Company contributions to these plans
were approximately $220 thousand, $263 thousand, $146 thousand for the years
ended December 31, 2008, 2007 and 2006, respectively. The amounts
deferred can be invested in MB Financial stock (under the Company’s stock
deferred compensation plan) or other publicly traded mutual funds (under the
Company’s non-stock deferred compensation plan) at the discretion of the
participant. In addition, pursuant to the Company’s agreement entered
into with the Company’s Chief Executive Officer, he is entitled to receive on
each December 31st while he is employed by the Company (starting December
31, 2007) a fully vested employer contribution to his account under the
non-stock deferred compensation plan in amount equal to 20% of his base salary
then in effect. The cost of the MB Financial common stock held by MB
Financial’s deferred compensation plans is reported separately in a manner
similar to treasury stock (that is, changes in fair value are not recognized)
with a corresponding deferred compensation obligation reflected in additional
paid-in capital. The amounts of the assets that are not invested in
MB Financial common stock are recorded at their fair market value in other
assets on the consolidated balance sheet. As of December 31, 2008,
the fair value of the assets held in other publicly traded
MB FINANCIAL, INC. AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
funds
totaled $5.4 million. A liability is established, in other
liabilities, in the consolidated balance sheet, for the fair value of the
obligation to the participants. Any increase or decrease in the fair
market value of plan assets is recorded in other non-interest income on the
consolidated statement of income. Any increase or decrease in the
fair value of the deferred compensation obligation to participants is recorded
as additional compensation expense or a reduction of compensation expense on the
consolidated statement of income. The decrease in fair market value
of the assets and the obligation related to the deferred compensation plan was
$1.7 million for the year ended December 31, 2008.
Note
16. Income
Taxes
The
deferred taxes consist of (in thousands):
|
December
31,
|
||||
|
2008
|
2007
|
|||
|
Deferred
tax assets:
|
||||
|
Allowance
for loan losses
|
$
56,160
|
$
22,786
|
||
|
Deferred
compensation
|
5,552
|
5,231
|
||
|
Merger
and non-compete accrual
|
544
|
796
|
||
|
Securities
|
449
|
1,939
|
||
|
Stock
options, restricted stock, director stock units, and restricted stock
units
|
7,827
|
6,065
|
||
|
Federal
net operating loss carryforwards
|
1,353
|
1,658
|
||
|
State
net operating loss carryforwards
|
17,551
|
10,100
|
||
|
Other
items
|
1,128
|
3,926
|
||
|
Total
deferred tax asset
|
90,564
|
52,501
|
||
|
Valuation
allowance
|
-
|
(10,100)
|
||
|
Total
deferred tax asset, net of valuation allowance
|
90,564
|
42,401
|
||
|
Deferred
tax liabilities:
|
||||
|
Securities
discount accretion
|
(603)
|
(1,110)
|
||
|
Loans
|
(5,486)
|
(562)
|
||
|
Lease
investments
|
(1,175)
|
(256)
|
||
|
Premises
and equipment
|
(42,118)
|
(22,175)
|
||
|
Core
deposit intangible
|
(8,935)
|
(8,873)
|
||
|
Federal
Home Loan Bank stock dividends
|
(4,014)
|
(3,602)
|
||
|
Other
items
|
(103)
|
(267)
|
||
|
Total
deferred tax liabilities
|
(62,434)
|
(36,845)
|
||
|
Net
deferred tax asset
|
28,130
|
5,556
|
||
|
Net
unrealized holding gain on securities available for sale
|
(9,106)
|
(4,091)
|
||
|
Net
deferred tax asset
|
$
19,024
|
$
1,465
|
||
During
the year ended December 31, 2008, the Company increased the reserve for
uncertain tax positions, which was more than offset by a reduction in the
valuation allowances on state net operating loss carryforwards, resulting in a
reduction of tax expense of $5.9 million. The Company reassessed the
likelihood of the state net operating losses being more likely than not utilized
as a result of prospective tax law changes.
The
Company’s state net operating loss carryforwards totaled approximately $365.6
million at December 31, 2008 and begin to expire in 2009 through
2028. The Company’s Federal net operating loss carryforwards totaled
approximately $3.5 million at December 31, 2008 and expire in 2012 through
2019.
MB
FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
Income taxes consist of
(in thousands):
|
Years
Ended December 31,
|
||||||
|
2008
|
2007
|
2006
|
||||
|
Current
expense (benefit):
|
||||||
|
Federal
|
$
(959)
|
$24,519
|
$16,119
|
|||
|
State
|
216
|
200
|
150
|
|||
|
(743)
|
24,719
|
16,269
|
||||
|
Deferred
expense (benefit)
|
(22,575)
|
(683)
|
11,000
|
|||
|
$(23,318)
|
$24,036
|
$27,269
|
||||
The
reconciliation between the statutory federal income tax rate of 35% and the
effective tax rate on income from continuing operations follows (in
thousands):
|
Years
Ended December 31,
|
||||||
|
2008
|
2007
|
2006
|
||||
|
Federal
income tax (benefit) expense at expected statutory rate
|
$
(2,504)
|
$30,121
|
$31,614
|
|||
|
Increase
(decrease) due to:
|
||||||
|
Tax
exempt income, net
|
(5,521)
|
(4,355)
|
(3,313)
|
|||
|
Nonincludable
increase in cash surrender value of life insurance
|
(1,855)
|
(1,740)
|
(1,387)
|
|||
|
Removal
of valuation reserve on state net operating loss
carryforwards
|
(10,100)
|
-
|
-
|
|||
|
Adjustment
of tax contingency reserves
|
4,232
|
-
|
-
|
|||
|
State
tax, net of federal benefit
|
(7,003)
|
130
|
98
|
|||
|
Other
items, net
|
(567)
|
(120)
|
257
|
|||
|
Income
tax expense
|
$(23,318)
|
$24,036
|
$27,269
|
|||
Accounting for Uncertainty in Income
Taxes: Effective January 1, 2007, the Company adopted FIN
48. This Interpretation provides guidance on financial statement
recognition and measurement of tax positions taken, or expected to be taken, in
tax returns. The initial adoption of this Interpretation had no material
impact on the Company’s financial statements.
A
reconciliation of the change in unrecognized tax benefits from January 1, 2008
to December 31, 2008 is as follows (in thousands):
|
Unrecognized
Tax Benefit Without Interest
|
Interest
on unrecognized Tax Benefit
|
Total
Unrecognized Tax Benefit Including Interest
|
|
|
Balance
at January 1, 2008
|
$3,443
|
$339
|
$3,782
|
|
Increases
for tax positions of prior years
|
3,607
|
625
|
4,232
|
|
Balance
at December 31, 2008
|
$7,050
|
$964
|
$8,014
|
The whole
amount of unrecognized tax benefits would affect the tax provision and the
effective income tax rate if recognized in future periods.
The
Company elects to treat interest and penalties recognized for the underpayment
of income taxes as income tax expense, to the extent not included in
unrecognized tax benefits.
The
Company’s federal income tax returns are open and subject to examination from
the 2004 tax return year and forward. One of the Company’s subsidiaries is
currently scheduled to begin federal examination for tax year
2007. The Company’s various state income tax returns are generally
open from the 2002 and later tax return years based on individual state statutes
of limitation. The Company is under examination by Illinois for tax
years 2002 through 2005. The Company is not certain whether these
examinations will be completed within
MB FINANCIAL, INC. AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
the
next twelve months. Developments in these examinations or other
events could cause management to change its judgment about the amount of
unrecognized tax benefits.
Note
17. Commitments
and Contingencies
Commitments: The
Company is a party to credit-related financial instruments with
off-balance-sheet risk in the normal course of business to meet the financing
needs of its customers. These financial instruments include
commitments to extend credit, standby letters of credit and commercial letters
of credit. Such commitments involve, to varying degrees, elements of
credit and interest rate risk in excess of the amount recognized in the
consolidated balance sheets.
The
Company's exposure to credit loss is represented by the contractual amount of
these commitments. The Company follows the same credit policies in
making commitments as it does for on-balance-sheet instruments.
At
December 31, 2008 and 2007, the following financial instruments were
outstanding, the contractual amounts of which represent off-balance sheet credit
risk (in thousands):
|
Contract
Amount
|
||
|
2008
|
2007
|
|
|
Commitments
to extend credit:
|
||
|
Home
equity lines
|
$
376,854
|
$
402,355
|
|
Other
commitments
|
1,261,276
|
1,444,713
|
|
Letters
of credit:
|
||
|
Standby
|
119,504
|
132,843
|
|
Commercial
|
55,269
|
56,136
|
Commitments
to extend credit are agreements to lend to a customer as long as there is no
violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require a payment of a fee. The commitments for equity lines of
credit may expire without being drawn upon.
Therefore,
the total commitment amounts do not necessarily represent future cash
requirements. The amount of collateral obtained, if it is deemed
necessary by the Company, is based on management’s credit evaluation of the
customer.
The
Company, in the normal course of its business, regularly offers standby and
commercial letters of credit to its bank customers. Standby and
commercial letters of credit are a conditional but irrevocable form of
guarantee. Under letters of credit, the Company typically guarantees
payment to a third party beneficiary upon the default of payment or
nonperformance by the bank customer and upon receipt of complying documentation
from that beneficiary.
Both
standby and commercial letters of credit may be issued for any length of time,
but normally do not exceed a period of five years. These letters of
credit may also be extended or amended from time to time depending on the bank
customer's needs. As of December 31, 2008, the maximum remaining term
for any standby letter of credit was December 31, 2014. A fee of up
to two percent of face value may be charged to the bank customer and is
recognized as income over the life of the letter of credit, unless considered
non-rebatable under the terms of a letter of credit application.
At
December 31, 2008, the aggregate contractual amount of these letters of credit,
which represents the maximum potential amount of future payments that the
Company would be obligated to pay, decreased $14.2 million to $174.8 million
from $189.0 million at December 31, 2007. Of the $174.8 million in
commitments outstanding at December 31, 2008, approximately $77.5 million of the
letters of credit have been issued or renewed since December 31,
2007. The Company had a $435 thousand liability recorded as of
December 31, 2008 relating to these commitments.
Letters
of credit issued on behalf of bank customers may be done on either a secured,
partially secured or an unsecured basis. If a letter credit is
secured or partially secured, the collateral can take various forms including
bank accounts, investments, fixed assets, inventory, accounts receivable or real
estate, among other things. The Company takes the same care in making
credit decisions and obtaining collateral when it issues letters of credit on
behalf of its customers, as it does when making other types of
loans.
MB FINANCIAL, INC. AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
Concentrations
of credit risk: The majority of the loans, commitments to extend credit
and standby letters of credit have been granted to customers in the Company's
market area. Investments in securities issued by states and political
subdivisions also involve governmental entities primarily within the Company's
market area. The distribution of commitments to extend credit
approximates the distribution of loans outstanding. Standby letters
of credit are granted primarily to commercial
borrowers.
Contingencies:
In the normal course of business, the Company is involved in various legal
proceedings. In the opinion of management, any liability resulting
from pending proceedings would not be expected to have a material adverse effect
on the Company's consolidated financial statements.
As of
December 31, 2008, the Company had approximately $1.0 million in capital
expenditure commitments outstanding which relate to various projects to build
new branches or renovate existing branches.
Note
18. Regulatory
Matters
The
Company's primary source of cash is dividends from its subsidiary
bank. The subsidiary bank is subject to certain restrictions on the
amount of dividends that it may declare without prior regulatory
approval. In addition, the dividends declared cannot be in excess of
the amount which would cause the subsidiary bank to fall below the minimum
required for capital adequacy purposes.
The
Company and its subsidiary bank are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to
meet minimum capital requirements can initiate certain mandatory – and
additional discretionary – actions by regulators that, if undertaken, could have
a direct material effect on the Company's financial statements. Under
capital adequacy guidelines and the regulatory framework for prompt corrective
action, the Company's and its subsidiary bank’s assets, liabilities, and certain
off-balance-sheet items are calculated under regulatory accounting
practices. The Company's and its subsidiary bank’s capital amounts
and classification are also subject to qualitative judgments by the regulators
about components, risk weightings, and other factors. Prompt
corrective action provisions are not applicable to bank holding
companies.
Quantitative
measures established by regulation to ensure capital adequacy require the
Company and its subsidiary bank to maintain minimum amounts and ratios (set
forth in the table below) of total and Tier 1 capital (as defined in the
regulations) to risk-weighted assets (as defined), and of Tier 1 capital (as
defined) to average assets (as defined). Management believes the
Company and its subsidiary bank met all capital adequacy requirements to which
they are subject as of December 31, 2008 and 2007.
As of
December 31, 2008, the most recent notification from the Federal Deposit
Insurance Corporation categorized the subsidiary bank as “well capitalized”
under the regulatory framework for prompt corrective action. To be
categorized as “well capitalized” the subsidiary bank must maintain the total
risk-based, Tier 1 risk-based, and Tier 1 leverage ratio as set forth in the
well-capitalized column in the table below. There are no conditions
or events since that notification that management believes have changed the
subsidiary bank’s categories.
MB
FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
The required and actual
amounts and ratios for the Company and its subsidiary bank are presented below
(dollars in thousands):
|
To
Be Well
|
|||||||||
|
Capitalized
Under
|
|||||||||
|
For
Capital
|
Prompt
Corrective
|
||||||||
|
Actual
|
Adequacy
Purposes
|
Action
Provisions
|
|||||||
|
Amount
|
Ratio
|
Amount
|
Ratio
|
Amount
|
Ratio
|
||||
|
As
of December 31, 2008
|
|||||||||
|
Total
capital (to risk-weighted assets):
|
|||||||||
|
Consolidated
|
$936,027
|
14.08%
|
$531,968
|
8.00%
|
N/A
|
N/A
|
|||
|
MB
Financial Bank
|
759,845
|
11.46%
|
530,595
|
8.00%
|
$663,243
|
10.00%
|
|||
|
Tier
1 capital (to risk-weighted assets):
|
|||||||||
|
Consolidated
|
802,384
|
12.07%
|
265,984
|
4.00%
|
N/A
|
N/A
|
|||
|
MB
Financial Bank
|
626,185
|
9.44%
|
265,297
|
4.00%
|
397,946
|
6.00%
|
|||
|
Tier
1 capital (to average assets):
|
|||||||||
|
Consolidated
|
802,384
|
9.85%
|
325,872
|
4.00%
|
N/A
|
N/A
|
|||
|
MB
Financial Bank
|
626,185
|
7.70%
|
325,300
|
4.00%
|
406,625
|
5.00%
|
|||
|
As
of December 31, 2007
|
|||||||||
|
Total
capital (to risk-weighted assets):
|
|||||||||
|
Consolidated
|
$730,123
|
11.58%
|
$498,893
|
8.00%
|
N/A
|
N/A
|
|||
|
MB
Financial Bank
|
703,676
|
11.20%
|
497,030
|
8.00%
|
$621,288
|
10.00%
|
|||
|
Tier
1 capital (to risk-weighted assets):
|
|||||||||
|
Consolidated
|
615,020
|
9.75%
|
249,446
|
4.00%
|
N/A
|
N/A
|
|||
|
MB
Financial Bank
|
588,573
|
9.37%
|
248,515
|
4.00%
|
372,773
|
6.00%
|
|||
|
Tier
1 capital (to average assets):
|
|||||||||
|
Consolidated
|
615,020
|
8.18%
|
300,744
|
4.00%
|
N/A
|
N/A
|
|||
|
MB
Financial Bank
|
588,573
|
8.09%
|
291,192
|
4.00%
|
363,990
|
5.00%
|
|||
N/A – not
applicable
Note
19. Fair
Values of Financial Instruments
Effective
January 1, 2008, we adopted the provisions of SFAS No. 157, "Fair Value
Measurements," for financial assets and financial liabilities. SFAS
157 defines fair value, establishes a framework for measuring fair value in
generally accepted accounting principles and expands disclosures about fair
value measurements. The application of SFAS 157 in situations
where the market for a financial asset is not active was clarified by the
issuance of FSP No. SFAS 157-3, “Determining the Fair Value of a
Financial Asset When the Market for That Asset Is Not Active,” (FSP 157-3) in
October 2008. FSP 157-3 became effective immediately and did not
significantly impact the methods by which the Corporation determines the fair
values of its financial assets.
SFAS 157
defines fair value as the price that would be received to sell an asset or paid
to transfer a liability in an orderly transaction between market
participants. A fair value measurement assumes that the transaction
to sell the asset or transfer the liability occurs in the principal market for
the asset or liability or, in the absence of a principal market, the most
advantageous market for the asset or liability. The price in the
principal (or most advantageous) market used to measure the fair value of the
asset or liability shall not be adjusted for transaction costs. An
orderly transaction is a transaction that assumes exposure to the market for a
period prior to the measurement date to allow for marketing activities that are
usual
MB FINANCIAL, INC. AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
and
customary for transactions involving such assets and liabilities; it is not a
forced transaction. Market participants are buyers and sellers in the
principal market that are (i) independent, (ii) knowledgeable, (iii) able to
transact and (iv) willing to transact.
SFAS 157
requires the use of valuation techniques that are consistent with the market
approach, the income approach and/or the cost approach. The market
approach uses prices and other relevant information generated by market
transactions involving identical or comparable assets and
liabilities. The income approach uses valuation techniques to convert
expected future amounts, such as cash flows or earnings, to a single present
value amount on a discounted basis. The cost approach is based on the
amount that currently would be required to replace the service capacity of an
asset (replacement cost). Valuation techniques should be consistently
applied. Inputs to valuation techniques refer to the assumptions that
market participants would use in pricing the asset or
liability. Inputs may be observable, meaning those that reflect the
assumptions market participants would use in pricing the asset or liability
developed based on market data obtained from independent sources, or
unobservable, meaning those that reflect the reporting entity's own assumptions
about the assumptions market participants would use in pricing the asset or
liability developed based on the best information available in the
circumstances. In that regard, SFAS 157 establishes a fair value
hierarchy for valuation inputs that gives the highest priority to quoted prices
in active markets for identical assets or liabilities and the lowest priority to
unobservable inputs. The fair value hierarchy is as
follows:
Level 1:
Quoted prices (unadjusted) for identical assets or liabilities in active markets
that the entity has the ability to access as of the measurement
date.
Level 2:
Significant other observable inputs other than Level 1 prices such as quoted
prices for similar assets or liabilities; quoted prices in markets that are not
active; or other inputs that are observable or can be corroborated by observable
market data.
Level 3:
Significant unobservable inputs that reflect a reporting entity’s own
assumptions about the assumptions that market participants would use in pricing
an asset or liability.
A
description of the valuation methodologies used for instruments measured at fair
value, as well as the general classification of such instruments pursuant to the
valuation hierarchy, is set forth below. These valuation
methodologies were applied to all of the Company's financial assets and
financial liabilities carried at fair value effective January 1,
2008.
In
general, fair value is based upon quoted market prices, where
available. If such quoted market prices are not available, fair value
is based upon internally developed models that primarily use, as inputs,
observable market-based parameters. Valuation adjustments may be made
to ensure that financial instruments are recorded at fair
value. These adjustments may include amounts to reflect counterparty
credit quality, the Company's creditworthiness, among other things, as well as
unobservable parameters. Any such valuation adjustments are applied
consistently over time. Our valuation methodologies may produce a
fair value calculation that may not be indicative of net realizable value or
reflective of future fair values. While management believes the
Corporation's valuation methodologies are appropriate and consistent with other
market participants, the use of different methodologies or assumptions to
determine the fair value of certain financial instruments could result in a
different estimate of fair value at the reporting date.
Securities
Available for Sale. The fair values of
securities available for sale are determined by quoted prices in active markets,
when available. If quoted market prices are not available, the fair
value is determined by a matrix pricing, which is a mathematical technique,
widely used in the industry to value debt securities without relying exclusively
on quoted prices for the specific securities but rather by relying on the
securities’ relationship to other benchmark quoted securities.
Assets Held in
Trust for Deferred Compensation and Associated Liabilities. Assets held in trust
for deferred compensation are recorded at fair value and included in “Other
Assets” on the consolidated balance sheets. These assets are invested
in mutual funds and classified as Level 1. Deferred compensation
liabilities, also classified as Level 1, are carried at the fair value of the
obligation to the employee, which corresponds to the fair value of the invested
assets.
Derivatives. Currently, we use interest
rate swaps to manage our interest rate risk. The valuation of these
instruments is determined using widely accepted valuation techniques including
discounted cash flow analysis on the expected cash flows of each
derivative. This analysis reflects the contractual terms of the
derivatives, including the period to maturity,
MB FINANCIAL, INC. AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
and
uses observable market-based inputs, including LIBOR rate curves. We
also obtain dealer quotations for these derivatives for comparative purposes to
assess the reasonableness of the model valuations.
Financial
Instruments Recorded at Fair Value on a Recurring
Basis
The
following table summarizes financial assets and financial liabilities measured
at fair value on a recurring basis as of December 31, 2008, segregated by the
level of the valuation inputs within the fair value hierarchy utilized to
measure fair value (in thousands):
|
Fair
Value Measurements at December 31, 2008 Using
|
||||||
|
Total
|
Quoted
Prices in Active Markets for Identical Assets (Level 1)
|
Significant
Other Observable Inputs (Level 2)
|
Significant
Unobservable Inputs (Level 3)
|
|||
|
Financial
assets
|
||||||
|
Securities
available for sale
|
$ 1,336,130
|
$ -
|
$ 1,334,500
|
$ 1,630
|
||
|
Assets
held in trust for deferred compensation
|
5,383
|
5,383
|
-
|
-
|
||
|
Derivative
financial instruments
|
25,835
|
-
|
25,835
|
-
|
||
|
Financial
liabilities
|
||||||
|
Other
liabilities (1)
|
5,383
|
5,383
|
-
|
-
|
||
|
Derivative
financial instruments
|
24,169
|
-
|
24,169
|
-
|
||
|
(1)
Liabilities associated with assets held in trust for deferred
compensation.
|
||||||
The
following table presents additional information about financial assets measured
at fair value on a recurring basis for which the Company used significant
unobservable inputs (Level 3):
|
Year Ended
|
||
|
(in
thousands)
|
December
31, 2008
|
|
|
Balance,
beginning of period
|
$ -
|
|
|
Transfer
into Level 3
|
1,911
|
|
|
Net
unrealized losses
|
-
|
|
|
Impairment
charge
|
(281)
|
|
|
$ 1,630
|
||
Financial Instruments
Recorded at Fair Value on a Nonrecurring Basis
Impaired
Loans. Loans for which it is
probable that payment of interest and principal will not be made in accordance
with the contractual terms of the loan agreement are considered
impaired. Once a loan is identified as individually impaired,
management measures impairment in accordance with SFAS 114, “Accounting by
Creditors for Impairment of a Loan,” (SFAS 114). The
fair value of impaired loans is estimated using one of several methods,
including collateral value, market value of similar debt, enterprise value,
liquidation value and discounted cash flows. Those impaired loans not
requiring an allowance represent loans for which the fair value of the expected
repayments or collateral exceed the recorded investments in such
loans. At December 31, 2008, substantially all of the total impaired
loans were evaluated based on the fair value of the collateral. In
accordance with SFAS 157, impaired loans where an allowance is established based
on the fair value of collateral require classification in the fair value
hierarchy. Collateral values are estimated using Level 3 inputs based
on customized discounting criteria.
The
Company may be required, from time to time, to measure certain financial assets
and financial liabilities at fair value on a nonrecurring basis in accordance
with U.S. generally accepted accounting principles. These include
assets that are measured at the lower of cost or market that were recognized at
fair value below cost at the end of the period.
MB
FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
Assets measured at fair
value on a nonrecurring basis are included in the table below (in
thousands):
|
Fair
Value Measurements at December 31, 2008 Using
|
||||||
|
Total
|
Quoted
Prices in Active Markets for Identical Assets (Level 1)
|
Significant
Other Observable Inputs (Level 2)
|
Significant
Unobservable Inputs (Level 3)
|
|||
|
Financial
assets
|
||||||
|
Impaired
loans
|
$ 91,311
|
$ -
|
$ -
|
$ 91,311
|
||
SFAS 107,
“Disclosures about Fair Value of Financial Instruments,” requires disclosure of
the fair value of financial assets and financial liabilities, including those
financial assets and financial liabilities that are not measured and reported at
fair value on a recurring basis or non-recurring basis. The methodologies for
estimating the fair value of financial assets and financial liabilities that are
measured at fair value on a recurring or non-recurring basis are discussed
above. The estimated fair value approximates carrying value for cash and cash
equivalents, accrued interest and the cash surrender value of life insurance
policies. The methodologies for other financial assets and financial liabilities
are discussed below:
The
following methods and assumptions were used by the Company in estimating the
fair values of its financial instruments:
Cash and due from banks and
interest bearing deposits with banks: The carrying amounts reported in
the balance sheet approximate fair value.
Non-marketable securities –
FHLB and FRB Stock: The carrying amounts reported in the balance sheet
approximate fair value.
Loans held for sale:
Fair values are based on Federal Home Loan Mortgage Corporation quoted market
prices.
Loans: Most
commercial loans and some real estate mortgage loans are made on a variable rate
basis. For those variable-rate loans that reprice frequently with no
significant change in credit risk, fair values are based on carrying
values. The fair values for fixed rate and all other loans are
estimated using discounted cash flow analyses, using interest rates currently
being offered for loans with similar terms to borrowers with similar credit
quality.
Accrued interest receivable
and payable: The carrying amounts of accrued interest approximate their
fair values.
Non-interest bearing
deposits: The fair values disclosed are equal to their balance sheet
carrying amounts, which represent the amount payable on demand.
Interest bearing
deposits: The fair values disclosed for deposits with no defined
maturities are equal to their carrying amounts, which represent the amounts
payable on demand. The carrying amounts for variable-rate, fixed-term
money market accounts and certificates of deposit approximate their fair values
at the reporting date. Fair values for fixed-rate certificates of
deposit are estimated using a discounted cash flow calculation that applies
interest rates currently being offered on similar certificates to a schedule of
aggregated expected monthly maturities on time deposits.
Short-term
borrowings: The carrying amounts of federal funds purchased, borrowings
under repurchase agreements and other short-term borrowings with maturities of
90 days or less approximate their fair values. The fair value of
short-term borrowings greater than 90 days is based on the discounted value of
contractual cash flows.
Long-term borrowings:
The fair values of the Company's long-term borrowings (other than deposits) are
estimated using discounted cash flow analyses, based on the Company's current
incremental borrowing rates for similar types of borrowing
arrangements.
Junior subordinated notes
issued to capital trusts: The fair values of the Company’s junior
subordinated notes issued to capital trusts are estimated based on the quoted
market prices, when available, of the related trust preferred security
instruments, or are estimated based on the quoted market prices of comparable
trust preferred securities.
MB FINANCIAL, INC. AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
Off-balance-sheet
instruments: Fair values for the Company's off-balance-sheet lending
commitments (guarantees, letters of credit and commitments to extend credit) are
based on fees currently charged to enter into similar agreements, taking into
account the remaining terms of the agreements.
Effective
January 1, 2008, we adopted the provisions of SFAS No. 159, "The Fair Value
Option for Financial Assets and Financial Liabilities - Including an amendment
of FASB Statement No. 115." SFAS 159 permits the Company to choose to
measure eligible items at fair value at specified election
dates. Unrealized gains and losses on items for which the fair value
measurement option has been elected are reported in earnings at each subsequent
reporting date. The fair value option (i) may be applied instrument
by instrument, with certain exceptions, thus the Company may record identical
financial assets and liabilities at fair value or by another measurement basis
permitted under generally accepted accounting principles, (ii) is irrevocable
(unless a new election date occurs) and (iii) is applied only to entire
instruments and not to portions of instruments. The Company has not
elected the fair value option for any financial assets or
liabilities. Adoption of SFAS 159 on January 1, 2008 did not have a
significant impact on the Company's financial statements.
The
estimated fair values of financial instruments are as follows (in
thousands):
|
December
31,
|
||||||||
|
2008
|
2007
|
|||||||
|
Carrying
|
Carrying
|
|||||||
|
Amount
|
Fair
Value
|
Amount
|
Fair
Value
|
|||||
|
Financial
Assets
|
||||||||
|
Cash
and due from banks
|
$
79,824
|
$
79,824
|
$
141,248
|
$
141,248
|
||||
|
Interest
bearing deposits with banks
|
261,834
|
261,880
|
9,093
|
9,093
|
||||
|
Investment
securities available for sale
|
1,336,130
|
1,336,130
|
1,241,385
|
1,241,385
|
||||
|
Non-marketable
securities - FHLB and FRB stock
|
64,246
|
64,246
|
63,671
|
63,671
|
||||
|
Loans,
net
|
6,084,562
|
6,185,940
|
5,550,524
|
5,590,934
|
||||
|
Accrued
interest receivable
|
34,096
|
34,096
|
35,671
|
35,671
|
||||
|
Interest
rate swap contracts
|
25,835
|
25,835
|
4,340
|
4,340
|
||||
|
Financial
Liabilities
|
||||||||
|
Non-interest
bearing deposits
|
$
960,117
|
$
960,117
|
$
875,491
|
$
875,491
|
||||
|
Interest
bearing deposits
|
5,535,454
|
5,561,809
|
4,638,292
|
4,645,436
|
||||
|
Short-term
borrowings
|
488,619
|
476,899
|
977,721
|
978,692
|
||||
|
Long-term
borrowings
|
471,466
|
484,454
|
208,865
|
213,089
|
||||
|
Junior
subordinated notes issued to capital trusts
|
158,824
|
94,936
|
159,016
|
153,065
|
||||
|
Accrued
interest payable
|
21,289
|
21,289
|
18,655
|
18,655
|
||||
|
Interest
rate swap contracts
|
24,169
|
24,169
|
5,699
|
5,699
|
||||
|
Off-balance-sheet
instruments:
|
||||||||
|
Loan
commitments and standby letters of credit
|
$
-
|
$
3,455
|
$
-
|
$
1,670
|
||||
Note
20. Stock
Incentive Plans
Statement
123R requires that the grant date fair value of equity awards to employees be
recognized as compensation expense over the period during which an employee is
required to provide service in exchange for such award. During 2006,
the Company adopted Statement 123R using “modified retrospective application”,
electing to restate all prior periods.
MB FINANCIAL, INC. AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
The
following table summarizes the impact of the Company’s share-based payment plans
in the financial statements for the periods shown (in thousands):
|
Year
Ended December 31,
|
||||||
|
2008
|
2007
|
2006
|
||||
|
Total
cost of share-based payment plans during the year
|
$4,911
|
$5,223
|
$3,974
|
|||
|
Amount
of related income tax benefit recognized in income
|
$1,663
|
$1,773
|
$1,391
|
|||
The
Company adopted the Omnibus Incentive Plan (the “Omnibus Plan”) in
1997. In April 2007, the Omnibus Plan was modified to add 2,250,000
authorized shares for a total of 6,000,000 shares of common stock for issuance
to directors, officers, and employees of the Company or any of its
subsidiaries. As of December 31, 2008, there are 1,178,894 shares
available for grant. Grants under the Omnibus Plan can be in the form
of options intended to be incentive stock options, non-qualified stock options,
stock appreciation rights, restricted stock, restricted stock units, performance
shares, performance units, other stock-based awards and cash
awards.
Annual
equity-based incentive awards are typically granted to officers and employees in
June. Options are granted with an exercise price equal to no less
than the market price of the Company’s shares at the date of grant; those option
awards generally vest based on four years of continuous service and have 10-year
contractual terms. Options may also be granted at other times
throughout the year in connection with the recruitment of new officers and
employees. Restricted shares granted to officers and employees
typically vest over a two to three year period. Directors currently
may elect, in lieu of cash, to receive up to 70% of their fees in stock options
with a five-year term which are fully vested on the grant date (provided that
the director may not sell the underlying shares for at least six months after
the grant date), and up to 100% of their fees in restricted stock, which vests
one year after the grant date.
The
following table summarizes stock options outstanding for the year ended December
31, 2008:
|
Weighted
|
Remaining
|
Aggregate
|
||||||
|
Average
|
Contractual
|
Intrinsic
|
||||||
|
Number
of
|
Exercise
|
Term
|
Value
|
|||||
|
Options
|
Price
|
(In
Years)
|
(in
thousands)
|
|||||
|
Options
outstanding as of January 1, 2008
|
2,625,051
|
$29.59
|
||||||
|
Granted
|
938,073
|
25.65
|
||||||
|
Exercised
|
(230,877)
|
14.19
|
||||||
|
Expired
or cancelled
|
(35,762)
|
29.40
|
||||||
|
Forfeited
|
(55,207)
|
35.80
|
||||||
|
Options
outstanding as of December 31, 2008
|
3,241,278
|
$29.44
|
6.46
|
7,894
|
||||
|
Options
exercisable as of December 31, 2008
|
1,386,270
|
$26.68
|
3.63
|
5,624
|
MB FINANCIAL, INC. AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
The
fair value of each option award is estimated on the date of grant using the
Black Scholes option-pricing model based on certain
assumptions. Expected volatility is based on historical volatilities
of Company shares. The risk free rate for periods within the
contractual term of the option is based on the U.S. Treasury yield curve in
effect at the time of the grant. The expected life of options is
estimated based on historical employee behavior and represents the period of
time that options granted are expected to be outstanding. These
assumptions are summarized in the following table.
|
For
the Years Ended December 31,
|
|||||
|
2008
|
2007
|
2006
|
|||
|
Risk-free
interest rate
|
3.61%
|
4.80%
|
5.12%
|
||
|
Volatility
of Company's stock
|
18.92%
|
16.84%
|
16.62%
|
||
|
Expected
dividend yield
|
2.95%
|
2.19%
|
1.61%
|
||
|
Expected
life of options
|
6
years
|
6
years
|
6
years
|
||
|
Weighted
average fair value per option of options granted during the
year
|
$3.84
|
$6.27
|
$7.97
|
||
The total
intrinsic value of options exercised during the years ended December 31, 2008,
2007 and 2006 was $3.3 million, $2.8 million and $3.8 million,
respectively.
The
following is a summary of changes in restricted shares for the year ended
December 31, 2008:
|
Number
of Shares
|
Grant
Date Fair Value
|
|||
|
Shares
Outstanding at December 31, 2007
|
134,722
|
$35.74
|
||
|
Granted
|
136,868
|
25.97
|
||
|
Vested
|
(38,567)
|
38.87
|
||
|
Forfeited
|
(10,790)
|
33.42
|
||
|
Shares
Outstanding at December 31, 2008
|
222,233
|
$29.29
|
As of
December 31, 2008, there was $9.7 million of total unrecognized compensation
cost related to nonvested share-based compensation arrangements (including share
option and nonvested share awards) granted under the Omnibus Plan.
Note
21. Derivative
Financial Instruments
In
accordance with SFAS No. 133, “Accounting for Derivative Instruments and Hedging
Activities” (SFAS 133), the Company designates each derivative contract at
inception as either a fair value hedge or a cash flow
hedge. Currently, the Company has only fair value hedges in the
portfolio. For fair value hedges, the interest rate swaps are
structured so that all of the critical terms of the hedged items match the terms
of the appropriate leg of the interest rate swaps at inception of the hedging
relationship. The Company tests hedge effectiveness on a quarterly
basis for all fair value hedges. For prospective and retrospective
hedge effectiveness, we use the dollar offset approach. In
periodically assessing retrospectively the effectiveness of a fair value hedge
in having achieved offsetting changes in fair values under a dollar-offset
approach, the Company uses a cumulative approach on individual fair value
hedges.
The
Company uses interest rate swaps to hedge its interest rate risk. The
Company had fair value commercial loan interest rate swaps and fair value
brokered deposit interest rate swaps with aggregate notional amounts of $13.0
million and $57.2 million, respectively, at December 31, 2008. For
fair value hedges, the changes in fair values of both the hedging derivative and
the hedged item were recorded in current earnings as other income and other
expense. When a fair value hedge no longer qualifies for hedge
accounting, previous adjustments to the carrying value of the hedged item are
reversed immediately to current earnings and the hedge is reclassified to a
trading position.
MB FINANCIAL, INC. AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
We
also offer various derivatives to our customers and offset our exposure from
such contracts by purchasing other financial contracts. The customer
accommodations and any offsetting financial contracts are treated as non-hedging
derivative instruments which do not qualify for hedge accounting.
Interest
rate swap contracts involve the risk of dealing with counterparties and their
ability to meet contractual terms. The net amount payable or
receivable under interest rate swaps is accrued as an adjustment to interest
income. The net amount receivable (payable) for the years ended
December 31, 2008 and 2007 were approximately $596 thousand and $727 thousand,
respectively. The Company's credit exposure on interest rate swaps is
limited to the Company's net favorable value and interest payments of all swaps
to each counterparty. In such cases collateral is required from the
counterparties involved if the net value of the swaps exceeds a nominal
amount. At December 31, 2008, the Company's credit exposure relating
to interest rate swaps was not significant.
The
Company’s derivative financial instruments are summarized below as of December
31, 2008 and 2007 (dollars in thousands):
|
December
31, 2008
|
December
31, 2007
|
|||||||
|
Weighted-Average
|
||||||||
|
Notional
Amount
|
Estimated
Fair Value
|
Years
to Maturity
|
Receive
Rate
|
Pay
|
Notional
Amount
|
Estimated
Fair Value
|
||
|
Rate
|
||||||||
|
Derivative
instruments designated as hedges of fair value:
|
||||||||
|
Pay
fixed/receive variable swaps (1)
|
$13,039
|
$1,022
|
4.4
|
4.02%
|
6.22%
|
$
14,320
|
$
(23)
|
|
|
Receive
fixed/pay variable swaps (2)
|
57,177
|
631
|
6.7
|
4.89%
|
2.21%
|
151,706
|
(1,245)
|
|
|
Non-hedging
derivative instruments (3):
|
||||||||
|
Pay
fixed/receive variable swaps
|
203,040
|
(24,169)
|
6.1
|
3.06%
|
6.18%
|
119,223
|
(4,431)
|
|
|
Pay
variable/receive fixed swaps
|
204,863
|
24,182
|
6.2
|
6.17%
|
3.05%
|
127,517
|
4,340
|
|
|
Total
portfolio swaps
|
$478,119
|
$1,666
|
6.2
|
4.64%
|
4.37%
|
$412,766
|
$(1,359)
|
|
|
(1)
Hedges fixed-rate commercial real estate loans
|
||||||||
|
(2)
Hedges fixed-rate callable brokered deposits
|
||||||||
|
(3)
These portfolio swaps are not designated as hedging instruments under SFAS
No. 133.
|
||||||||
Methods
and assumptions used by the Company in estimating the fair value of its interest
rate swaps are discussed in Note 19 to consolidated financial
statements.
Note
22. Condensed
Parent Company Financial Information
The
condensed financial statements of MB Financial, Inc. (parent company only) are
presented below:
|
Balance
Sheets
|
||||
|
(In
thousands)
|
||||
|
December
31,
|
||||
|
2008
|
2007
|
|||
|
Assets
|
||||
|
Cash
|
$
161,479
|
$
31,777
|
||
|
Investments
in subsidiaries
|
1,044,070
|
990,187
|
||
|
Other
assets
|
27,519
|
25,654
|
||
|
Total
assets
|
$1,233,068
|
$1,047,618
|
||
|
Liabilities
and Stockholders' Equity
|
||||
|
Junior
subordinated notes issued to capital trusts
|
$
158,823
|
$
159,016
|
||
|
Other
liabilities
|
8,049
|
26,233
|
||
|
Stockholders'
equity
|
1,066,196
|
862,369
|
||
|
Total
liabilities and stockholders' equity
|
$1,233,068
|
$1,047,618
|
||
MB FINANCIAL, INC. AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
|
Statements
of Income
|
||||||
|
(In
thousands)
|
||||||
|
Years
Ended December 31,
|
||||||
|
2008
|
2007
|
2006
|
||||
|
Dividends
from continuing subsidiaries
|
$30,000
|
$88,000
|
$65,269
|
|||
|
Dividends
from discontinued subsidiary
|
-
|
6,500
|
-
|
|||
|
Interest
and other income
|
(985)
|
757
|
764
|
|||
|
Interest
and other expense
|
(8,278)
|
(18,201)
|
(13,965)
|
|||
|
Income
before income tax benefit and equity in undistributed net income of
subsidiaries
|
20,737
|
77,056
|
52,068
|
|||
|
Income
tax benefit
|
(3,370)
|
(6,105)
|
(4,621)
|
|||
|
Income
before equity in undistributed net income of subsidiaries
|
24,107
|
83,161
|
56,689
|
|||
|
Equity
in undistributed net income of continuing subsidiaries
|
(7,943)
|
(14,636)
|
6,367
|
|||
|
Equity
in undistributed net income of discontinued subsidiary
|
-
|
25,338
|
4,058
|
|||
|
Net
income
|
16,164
|
93,863
|
67,114
|
|||
|
Dividends
on preferred shares
|
789
|
-
|
-
|
|||
|
Net
income available to common shareholders
|
$15,375
|
$93,863
|
$67,114
|
|||
|
Statements
of Cash Flows
|
||||||
|
(In
thousands)
|
||||||
|
Years
Ended December 31,
|
||||||
|
2008
|
2007
|
2006
|
||||
|
Cash
Flows From Operating Activities
|
||||||
|
Net
income
|
$
16,164
|
$
93,863
|
$
67,114
|
|||
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
||||||
|
Amortization
of restricted stock awards
|
2,228
|
2,113
|
1,447
|
|||
|
Compensation
expense for stock option grants
|
651
|
3,111
|
2,527
|
|||
|
Net
gains on sale of investment securities available for sale
|
-
|
-
|
(5)
|
|||
|
Equity
in undistributed net income of continuing subsidiaries
|
7,943
|
14,636
|
(6,367)
|
|||
|
Equity
in undistributed net income of discontinued subsidiary
|
-
|
(25,338)
|
(4,058)
|
|||
|
Change
in other assets and other liabilities
|
(30,963)
|
(7,845)
|
(7,515)
|
|||
|
Net
cash (used in) provided by operating activities
|
(3,977)
|
80,540
|
53,143
|
|||
|
Cash
Flows From Investing Activities
|
||||||
|
Proceeds
from sales of investment securities available for sale
|
-
|
-
|
278
|
|||
|
Investments
in and advances to subsidiaries
|
(50,000)
|
(5,000)
|
(9,500)
|
|||
|
Proceeds
from the sales of other assets
|
-
|
1,630
|
106
|
|||
|
Net
(increase) decrease in loans
|
7,500
|
(7,500)
|
-
|
|||
|
Cash
proceeds received from sale of subsidiary
|
-
|
76,148
|
-
|
|||
|
Cash
paid for acquisitions, net
|
-
|
-
|
(68,868)
|
|||
|
Net
cash (used in) provided by investing activities
|
(42,500)
|
65,278
|
(77,984)
|
|||
|
Cash
Flows From Financing Activities
|
||||||
|
Treasury
stock transactions, net
|
(1,348)
|
(76,703)
|
(14,107)
|
|||
|
Stock
options exercised
|
4,585
|
3,789
|
4,124
|
|||
|
Excess
tax benefits from share-based payment arrangements
|
2,032
|
1,828
|
884
|
|||
|
Dividends
paid
|
(25,090)
|
(25,956)
|
(20,168)
|
|||
|
Principal
paid on short-term borrowings
|
-
|
-
|
(2,000)
|
|||
|
Proceeds
from long-term debt
|
-
|
-
|
500
|
|||
|
Issuance
of preferred stock
|
192,944
|
-
|
-
|
|||
|
Issuance
of common stock warrant
|
3,056
|
-
|
-
|
|||
|
Proceeds
from junior subordinated notes issued to capital trusts
|
-
|
52,500
|
30,000
|
|||
|
Principal
paid on junior subordinated notes issued to capital trusts
|
-
|
(71,800)
|
-
|
|||
|
Net
cash provided by (used in) financing activities
|
176,179
|
(116,342)
|
(767)
|
|||
|
Net
increase (decrease) in cash
|
129,702
|
29,476
|
(25,608)
|
|||
|
Cash:
|
||||||
|
Beginning
of year
|
31,777
|
2,301
|
27,909
|
|||
|
End
of year
|
$161,479
|
$
31,777
|
$
2,301
|
|||
MB FINANCIAL, INC. AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
Note
23. Preferred Stock
On
December 5, 2008, as part of the Troubled Asset Relief Program (“TARP”) Capital
Purchase Program of the United States Department of the Treasury (“Treasury”),
the Company entered into a Letter Agreement and Securities Purchase Agreement
(collectively, the “Purchase Agreement”) with Treasury, pursuant to which the
Company (i) sold to Treasury 196,000 shares of the Company’s Fixed Rate
Cumulative Perpetual Preferred Stock, Series A (the “Series A Preferred Stock”),
having a liquidation preference amount of $1,000 per share, for a purchase price
of $196.0 million in cash and (ii) issued to Treasury a ten-year warrant (the
“Warrant”) to purchase 1,012,048 shares of the Company’s common stock, par
value $0.01 per share (the “Common Stock”), at an exercise price of $29.05 per
share.
The
Series A Preferred Stock will qualify as Tier 1 capital and will pay cumulative
dividends on the liquidation preference amount on a quarterly basis at a rate of
5% per annum for the first five years, and 9% per annum
thereafter. Subject to the prior approval of the Board of Governors
of the Federal Reserve System, the Series A Preferred Stock is redeemable at the
option of the Company in whole or in part at a redemption price of 100% of the
liquidation preference amount plus any accrued and unpaid dividends, provided
that the Series A Preferred Stock may be redeemed prior to the first dividend
payment date falling after the third anniversary of the issue date (December 5,
2011) only if (i) the Company has raised aggregate gross proceeds in one or more
Qualified Equity Offerings of at least $49.0 million and (ii) the aggregate
redemption price does not exceed the aggregate net proceeds from such Qualified
Equity Offerings. A “Qualified Equity Offering” is defined as the sale for cash
by the Company of preferred stock or common stock that qualifies as Tier 1
capital.
The
exercise price of and number of shares of Common Stock underlying the Warrant
are subject to customary anti-dilution adjustments. Treasury may not
transfer a portion or portions of the Warrant with respect to, and/or exercise
the Warrant for more than one-half of, the 1,012,048 shares of Common Stock
underlying the Warrant until the earlier of (i) the date on which the Company
has received aggregate gross proceeds of at least $196.0 million from one or
more Qualified Equity Offerings and (ii) December 31, 2009. If the Company
completes one or more Qualified Equity Offerings on or prior to December 31,
2009 that result in the Company receiving aggregate gross proceeds of at least
$196.0 million, then the number of the shares of Common Stock underlying the
Warrant will be reduced to 50% of the original number of shares of Common Stock
underlying the Warrant. Treasury has agreed not to exercise voting
power with respect to any shares of Common Stock issued to it upon exercise of
the Warrant.
The
enactment of ARRA on February 17, 2009 permits the Company to repay the
Treasury without penalty and without the need to raise new capital, subject to
the Treasury’s consultation with the recipient’s appropriate regulatory
agency. Additionally, upon repayment the Treasury will liquidate all
outstanding warrants at their current market value.
The
proceeds from the TARP Capital Purchase Program were allocated between the
Series A Preferred Stock and the Warrant based on relative fair value,
which resulted in an initial carrying value of $192.9 million for the
Series A Preferred Shares and $3.1 million for the Warrant. The
resulting discount to the Series A Preferred Shares of $3.1 million
will accrete on a level yield basis over five years ending December 2013 and is
being recognized as additional preferred stock dividends. The fair value
assigned to the Series A Preferred Shares was estimated using a discounted
cash flow model. The discount rate used in the model was based on yields on
comparable publicly traded perpetual preferred stocks. The fair value assigned
to the warrant was based on a Black Scholes
option-pricing model using several inputs, including risk-free rate,
expected stock price volatility and expected dividend yield.
The
Series A Preferred Stock and the Warrant were issued in a private placement
exempt from registration pursuant to Section 4(2) of the Securities Act of 1933,
as amended (the “Securities Act”). In accordance with the Purchase
Agreement, the Company subsequently registered the Series A Preferred Stock, the
Warrant and the shares of Common Stock underlying the Warrant under the
Securities Act.
Item 9. Changes in and Disagreements With
Accountants on Accounting and Financial Disclosure
Not
applicable.
Item 9A. Controls and Procedures
a) Evaluation of Disclosure
Controls and Procedures: An evaluation of our disclosure controls and
procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of
1934 (the “Act”)) was carried out as of December 31, 2008 under the supervision
and with the participation of our Chief Executive Officer, Chief Financial
Officer and several other members of our senior management. Our Chief
Executive Officer and Chief Financial Officer concluded that, as of December 31,
2008, our disclosure controls and procedures were effective in ensuring that the
information we are required to disclose in the reports we file or submit under
the Act is (i) accumulated and communicated to our management (including the
Chief Executive Officer and Chief Financial Officer) to allow timely decisions
regarding required disclosure, and (ii) recorded, processed, summarized and
reported within the time periods specified in the SEC’s rules and
forms.
b). Management’s Annual Report
on Internal Control Over Financial Reporting: The annual report of
management on the effectiveness of our internal control over financial reporting
and the attestation report thereon issued by our independent registered public
accounting firm are set forth under “Management’s Report on Internal Control
Over Financial Reporting” and “Report of Independent Registered Public
Accounting Firm” under “Item 8. Financial Statements and Supplementary
Data”.
c) Changes in Internal Control
Over Financial Reporting: During the quarter ended December 31, 2008, no
change occurred in our internal control over financial reporting that has
materially affected, or is reasonably likely to materially affect, our internal
control over financial reporting.
Item 9B. Other Information
Not
applicable.
Item 10. Directors, Executive Officers and
Corporate Governance
Directors and Executive
Officers. The information concerning our directors and
executive officers required by this item is incorporated herein by reference
from our definitive proxy statement for our 2009 Annual Meeting of Stockholders,
a copy of which will be filed with the Securities and Exchange Commission not
later than 120 days after the end of our fiscal year.
Section 16(a) Beneficial Ownership
Reporting Compliance. The information concerning compliance
with the reporting requirements of Section 16(a) of the Securities Exchange Act
of 1934 by our directors, officers and ten percent stockholders required by this
item is incorporated herein by reference from our definitive proxy statement for
our 2009 Annual Meeting of Stockholders, a copy of which will be filed with the
Securities and Exchange Commission not later than 120 days after the end of our
fiscal year.
Code of Ethics. We
have adopted a code of ethics that applies to our principal executive officer,
principal financial officer, principal accounting officer, and persons
performing similar functions, and to all of our other employees and our
directors. A copy of our code of ethics is available on our Internet
website address, www.mbfinancial.com.
Item 11. Executive Compensation
The information concerning compensation
and other matters required by this item is incorporated herein by reference from
our definitive proxy statement for our 2009 Annual Meeting of Stockholders, a
copy of which will be filed with the Securities and Exchange Commission not
later than 120 days after the end of our fiscal year.
Item 12. Security Ownership of Certain Beneficial
Owners and Management and Related Stockholder Matters
The information concerning security
ownership of certain beneficial owners and management required by this item is
incorporated herein by reference from our definitive proxy statement for our
2009 Annual Meeting of Stockholders, a copy of which will be filed with the
Securities and Exchange Commission no later than 120 days after the end of our
fiscal year.
The
following table sets forth information as of December 31, 2008 with respect to
compensation plans under which shares of our common stock may be
issued:
|
Equity
Compensation Plan Information
|
|||
|
Plan
Category
|
Number
of Shares to be Issued upon Exercise of Outstanding Options,
warrants and rights (1)
|
Weighted
Average Exercise Price of Outstanding Options, warrants and rights
(1)
|
Number
of Shares Remaining Available for Future Issuance Under Equity
Compensation Plans (Excluding Shares Reflected in the first column)
(2)
|
|
|
|
|
|
|
Equity
compensation plans approved by
stockholders............................................................
|
3,241,278
|
$29.44
|
1,178,894
|
|
Equity
compensation plans not approved by
stockholders.....................................................
|
N/A
|
N/A
|
N/A
|
|
Total...................................................................................................................................................
|
3,241,278
|
$29.44
|
1,178,894
|
|
(1)
|
Includes
21,158 shares underlying stock options that we assumed in the First
SecurityFed acquisition, and 135,392 shares underlying stock options,
4,937 shares underlying restricted stock units and 6,604 shares underlying
director stock units that we assumed in the FOBB
acquisition. Since the restricted stock units and the director
stock units do not have an exercise price and are settled only for shares
of our common stock on a one-for-one basis, these units are not relevant
for purposes of computing the weighted average exercise
price.
|
|
(2)
|
Includes
797,187 shares remaining available for future issuance under our Amended
and Restated Omnibus Incentive Plan which could be utilized for
awards to plan participants in the form of restricted stock, restricted
stock units, performance shares, performance units or other stock-based
awards.
|
N/A – not applicable
Not included in the table are shares of
our common stock that may be acquired by directors and officers who participate
in the MB Financial, Inc. Stock Deferred Compensation Plan. This
plan, along with the MB Financial, Inc. Non-Stock Deferred Compensation Plan,
allows directors and eligible officers to defer a portion of their cash
compensation. Neither plan has been approved by our
stockholders. All distributions under the stock plan are made in
shares of our common stock purchased by the plan trustee on the open market,
except for fractional shares, which are paid in cash.
Item 13. Certain Relationships, Related
Transactions and Director Independence
The information concerning certain
relationships and related transactions and director independence required by
this item is incorporated herein by reference from our definitive proxy
statement for our 2009 Annual Meeting of Stockholders, a copy of which will be
filed with the Securities and Exchange Commission not later than 120 days after
the end of our fiscal year.
Item 14. Principal Accountant Fees and
Services
The information concerning principal accountant fees and services is
incorporated herein by reference from our definitive proxy statement for our
2009 Annual Meeting of Stockholders, a copy of which will be filed not later
than 120 days after the end of our fiscal year.
Item 15. Exhibits and Financial Statement
Schedules
|
(a)(1)
|
Financial
Statements: See Part II--Item 8. Financial Statements
and Supplementary Data.
|
|
(a)(2)
|
Financial
Statement Schedules: All financial statement schedules have been omitted
as the information is not required under the related instructions or is
not applicable.
|
|
(a)(3)
|
Exhibits:
See Exhibit Index.
|
|
(b)
|
Exhibits:
See Exhibit
Index.
|
Pursuant
to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned hereunto duly authorized.
MB
FINANCIAL, INC.
(registrant)
By: /s/MITCHELL
FEIGER
Mitchell Feiger
President and Chief Executive
Officer
(Principal Executive
Officer)
Date:
February 27, 2009
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.
|
Signatures
|
Title
|
|||
|
/s/Mitchell Feiger
|
Director,
President and Chief Executive Officer
|
|||
|
Mitchell
Feiger
|
(Principal
Executive Officer), February 27, 2009
|
|||
|
/s/Jill E. York
|
Vice
President and Chief Financial Officer
|
|||
|
Jill
E. York
|
(Principal
Financial Officer and Principal Accounting Officer), February 27,
2009
|
|||
|
/s/Thomas H. Harvey*
|
Director
|
) February
27, 2009
|
||
|
Thomas
H. Harvey
|
||||
|
/s/David P. Bolger*
|
Director
|
) February
27, 2009
|
||
|
David
P. Bolger
|
||||
|
/s/Robert S. Engleman, Jr.*
|
Director
|
) February
27, 2009
|
||
|
Robert
S. Engleman, Jr.
|
||||
|
/s/Charles J. Gries*
|
Director
|
) February
27, 2009
|
||
|
Charles
J. Gries
|
||||
|
/s/James N. Hallene*
|
Director
|
) February
27, 2009
|
||
|
James.
N. Hallene
|
||||
|
/s/Richard J. Holmstrom*
|
Director
|
) February
27, 2009
|
||
|
Richard
J. Holmstrom
|
||||
|
/s/Karen J. May*
|
Director
|
) February
27, 2009
|
||
|
Karen
J. May
|
||||
|
/s/Patrick Henry*
|
Director
|
) February
27, 2009
|
||
|
Patrick
Henry
|
||||
|
/s/Ronald D. Santo*
|
Director
|
) February
27, 2009
|
||
|
Ronald
D. Santo
|
||||
|
*By: /s/Mitchell
Feiger
|
Attorney-in-Fact
|
)
|
|
Exhibit Number
|
Description
|
|
2.1
|
Amended
and Restated Agreement and Plan of Merger, dated as of April 19, 2001, by
and among the Registrant, MB Financial, Inc., a Delaware corporation (“Old
MB Financial”) and MidCity Financial (incorporated herein by reference to
Appendix A to the joint proxy statement-prospectus filed by the Registrant
pursuant to Rule 424(b) under the Securities Act of 1933 with the
Securities and Exchange Commission (the “Commission”) on October 9,
2001)
|
|
2.2
|
Agreement
and Plan of Merger, dated as of November 1, 2002, by and among the
Registrant, MB Financial Acquisition Corp II and South Holland Bancorp,
Inc. (incorporated herein by reference to Exhibit 2 to the Registrant’s
Current Report Form 8-K filed on November 5, 2002 (File No.
0-24566-01))
|
|
2.3
|
Agreement
and Plan of Merger, dated as of January 9, 2004, by and among the
Registrant and First SecurityFed Financial, Inc. (incorporated herein by
reference to Exhibit 2 to the Registrant’s Current Report on Form 8-K
filed on January 14, 2004 (File No.0-24566-01))
|
|
2.4
|
Agreement
and Plan of Merger, dated as of May 1, 2006, by and among the Registrant,
MBFI Acquisition Corp. and First Oak Brook Bancshares, Inc. (“First Oak
Brook”)(incorporated herein by reference to Exhibit 2.1 to the
Registrant’s Current Report on Form 8-K filed on May 2, 2006 (File
No.0-24566-01))
|
|
Charter
of the Registrant, as amended*
|
|
|
3.1A
|
Articles
Supplementary to the Charter of the Registrant for the Registrant’s Fixed
Rate Cumulative Perpetual Preferred Stock, Series A (incorporated herein
by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K
filed on December 8, 2008 (File No.0-24566-01))
|
|
3.2
|
Bylaws
of the Registrant, as amended (incorporated herein by reference to Exhibit
3.1 to the Registrant’s Current Report on Form 8-K filed on December 11,
2007 (File No. 0-24566-01))
|
|
4.1
|
The
Registrant hereby agrees to furnish to the Commission, upon request, the
instruments defining the rights of the holders of each issue of long-term
debt of the Registrant and its consolidated subsidiaries
|
|
4.2
|
Certificate
of Registrant’s Common Stock (incorporated herein by reference to Exhibit
4.1 to Amendment No. One to the Registrant’s Registration Statement on
Form S-4 (No. 333-64584))
|
|
4.3
|
Warrant
to purchase shares of the Registrant’s Common Stock (incorporated herein
by reference to Exhibit 4.1 to the Registrant’s Current Report on Form 8-K
filed on December 8, 2008 (File No.0-24566-01))
|
|
10.1
|
Letter
Agreement, dated as of December 5, 2008, between the Registrant and the
United States Department of the Treasury (incorporated herein
by reference to Exhibit 10.1 to the Registrant’s Current Report on Form
8-K filed on December 8, 2008 (File No.0-24566-01))
|
|
EXHIBIT INDEX
|
|
|
Exhibit Number
|
Description |
|
Amended
and Restated Employment Agreement between the Registrant and Mitchell
Feiger*
|
|
|
10.3
|
Employment
Agreement between MB Financial Bank, N.A. and Burton J. Field
(incorporated herein by reference to Exhibit 10.3 to the Registrant’s
Quarterly Report on Form 10-Q for the quarter ended September 30, 2008
(File No. 0-24566-01))
|
|
Form
of Change and Control Severance Agreement between MB Financial Bank,
National Association and each of Thomas Panos, Jill E.
York, and Thomas P. Fitzgibbon, Jr. *
|
|
|
Form
of Change and Control Severance Agreement between MB Financial Bank,
National Association and each of Burton Field, Larry J. Kallembach, Brian
Wildman, Rosemarie Bouman and Susan Peterson*
|
|
|
Form
of Letter Agreement between the United States Department of the Treasury
and each of Mitchell Feiger, Thomas Panos, Jill E. York, Thomas
P. Fitzgibbon, Jr., Burton Field, Larry J. Kallembach, Brian Wildman,
Rosemarie Bouman, and Susan Peterson*
|
|
|
10.6
|
Coal
City Corporation 1995 Stock Option Plan (incorporated herein by reference
to Exhibit 10.6 to the Registrant’s Registration Statement on Form S-4
(No. 333-64584))
|
|
10.6A
|
Amendment
to Coal City Corporation 1995 Stock Option Plan ((incorporated herein by
reference to Exhibit 10.6A to the Registrant’s Annual Report on Form
10-K/A for the year ended December 31, 2006, filed on March 2, 2007 (File
No. 0-24566-01))
|
|
10.7
|
MB
Financial, Inc. Amended and Restated Omnibus Incentive Plan
(the “Omnibus Incentive Plan”) (incorporated herein by reference to the
Registrant’s definitive proxy statement filed on March 23, 2007 (File No.
0-24566-01))
|
|
MB
Financial Stock Deferred Compensation Plan*
|
|
|
MB
Financial Non-Stock Deferred Compensation Plan*
|
|
|
10.10
|
Avondale
Federal Savings Bank Supplemental Executive Retirement Plan Agreement
(incorporated herein by reference to Exhibit 10.2 to Old MB Financial’s
(then known as Avondale Financial Corp.) Annual Report on Form 10-K for
the year ended December 31, 1996 (File No. 0-24566))
|
|
10.11
|
Reserved
|
|
EXHIBIT INDEX
|
|
|
Exhibit Number
|
Description |
|
10.12
|
Reserved
|
|
10.13
|
Amended
and Restated Employment Agreement between MB Financial Bank, N.A. and
Ronald D. Santo (incorporated herein by reference to Exhibit 10.1 to the
Registrant’s Current Report on Form 8-K filed on December 14, 2004 (File
No. 0-24566-01))
|
|
10.13A
|
Amendment
to Amended and Restated Employment Agreement between MB Financial Bank,
N.A. and Ronald D. Santo ((incorporated herein by reference to Exhibit
10.13A to the Registrant’s Annual Report on Form 10-K/A for the year ended
December 31, 2006, filed on March 2, 2007 (File No.
0-24566-01))
|
|
10.14
|
First
SecurityFed Financial, Inc. 1998 Stock Option and Incentive Plan
(incorporated herein by reference to Exhibit B to the definitive proxy
statement filed by First SecurityFed Financial, Inc. on March 24, 1998
(File No. 0-23063))
|
|
10.14A
|
Amendment
to First SecurityFed Financial, Inc. 1998 Stock Option and Incentive Plan
((incorporated herein by reference to Exhibit 10.14A to the Registrant’s
Annual Report on Form 10-K/A for the year ended December 31, 2006, filed
on March 2, 2007 (File No. 0-24566-01))
|
|
Tax
Gross Up Agreements between the Registrant and each of Mitchell Feiger,
Burton J. Field, Thomas D. Panos, Jill E. York and Thomas P. FitzGibbon,
Jr., Larry J. Kallembach, Brian Wildman, and Susan Peterson *
|
|
|
Tax
Gross Up Agreement between the Registrant and Rosemarie
Bouman*
|
|
|
10.16
|
Form
of Incentive Stock Option Agreement for Executive Officers under the
Omnibus Incentive Plan (incorporated herein by reference to Exhibit 10.16
to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended
June 30, 2007 (File No. 0-24566-01))
|
|
10.17
|
Form
of Non-Qualified Stock Option Agreement for Directors under the Omnibus
Incentive Plan (incorporated herein by reference to Exhibit
10.16 to the Registrant’s Quarterly Report on Form 10-Q for the quarter
ended June 30, 2007 (File No. 0-24566-01))
|
|
10.18
|
Form
of Restricted Stock Agreement for Executive Officers under the Omnibus
Incentive Plan (incorporated herein by reference to Exhibit 10.16 to the
Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30,
2007 (File No. 0-24566-01))
|
|
Amendment
to Form of Incentive Stock Option Agreement and Form of Restricted Stock
Agreement for Executive Officers under the Omnibus Incentive
Plan*
|
|
EXHIBIT INDEX
|
|
|
Exhibit Number
|
Description |
|
10.19
|
Form
of Restricted Stock Agreement for Directors under the Omnibus Incentive
Plan (incorporated herein by reference to Exhibit 10.16 to the
Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30,
2007 (File No. 0-24566-01))
|
|
10.20
|
First
Oak Brook Bancshares, Inc. Incentive Compensation Plan (incorporated
herein by reference to Appendix A to the definitive proxy statement filed
by First Oak Brook on March 30, 2004 (File No. 0-14468))
|
|
10.20A
|
Amendment
to First Oak Brook Bancshares, Inc. Incentive Compensation Plan
((incorporated herein by reference to Exhibit 10.20A to the Registrant’s
Annual Report on Form 10-K/A for the year ended December 31, 2006, filed
on March 2, 2007 (File No. 0-24566-01))
|
|
10.21
|
First
Oak Brook Bancshares, Inc. 2001 Stock Incentive Plan (incorporated herein
by reference to Appendix A to the definitive proxy statement filed by
First Oak Brook on April 2, 2001 (File No. 0-14468))
|
|
10.21A
|
Amendment
to First Oak Brook Bancshares, Inc. 2001 Stock Incentive Plan
((incorporated herein by reference to Exhibit 10.21A to the Registrant’s
Annual Report on Form 10-K/A for the year ended December 31, 2006, filed
on March 2, 2007 (File No. 0-24566-01))
|
|
10.22
|
First
Oak Brook Bancshares, Inc. Directors Stock Plan (incorporated herein by
reference to Exhibit 4.1 to the Registration Statement on Form S-8 filed
by First Oak Brook on October 25, 1999 (File No. 333-89647))
|
|
10.23
|
Reserved.
|
|
10.24
|
Reserved.
|
|
10.25
|
Reserved.
|
|
10.26
|
Reserved.
|
|
10.27
|
First
Oak Brook Bancshares, Inc. Executive Deferred Compensation Plan
(incorporated by reference to Exhibit 10.3 to First Oak Brook’s Annual
Report on Form 10-K for the year ended December 31, 1997 (File No.
0-14468))
|
|
EXHIBIT INDEX
|
|
|
Exhibit
Number
|
Description |
|
10.27A
|
Amendment
to First Oak Brook Bancshares, Inc. Executive Deferred Compensation Plan
(incorporated herein by reference to Exhibit 10.27A to the Registrant’s
Quarterly Report on Form 10-Q/A for the quarter ended March 31, 2007 filed
on May 15, 2007)
|
|
10.28
|
Transitional
Employment Agreement between the Registrant (as successor to First Oak
Brook) and Susan Peterson (incorporated herein by reference
to Exhibit 10.27 to the Registrant’s Quarterly Report on Form
10-Q for the quarter ended September 30, 2006 (File No.
0-24566-01))
|
|
10.29
|
Form
of Transitional Employment Agreement between the Registrant (as successor
to First Oak Brook) and Rosemarie Bouman (incorporated herein by reference
to Exhibit 10.10 to First Oak Brook's Annual Report on Form 10-K for the
year ended December 31, 1998 (File No. 0-14468))
|
|
10.29A
|
First
Amendment to Transitional Employment Agreement between the Registrant (as
successor to First Oak Brook) and Rosemarie Bouman ((incorporated herein
by reference to Exhibit 10.28A to the Registrant's Annual Report on Form
10-K/A for the year ended December 31, 2006, filed March 2, 2007 (File No.
0-24566-01))
|
|
10.29B
|
Second
Amendment to Transitional Employment Agreement between the Registrant (as
successor to First Oak Brook) and Rosemarie
Bouman ((incorporated herein by reference to Exhibit 10.28B to
the Registrant’s Annual Report on Form 10-K/A for the year ended December
31, 2006, filed March 2, 2007 (File No. 0-24566-01))
|
|
Subsidiaries
of the Registrant*
|
|
|
Consent
of McGladrey & Pullen *
|
|
|
Power
of Attorney*
|
|
|
Rule
13a – 14(a)/15d – 14(a) Certification (Chief Executive
Officer)*
|
|
|
Rule
13a – 14(a)/15d – 14(a) Certification (Chief Financial
Officer)*
|
|
|
Section
1350 Certifications*
|
|
* Filed
herewith
|