MB Financial : Reports Fourth Quarter 2018 Earnings Release

4Q18

MB FINANCIAL, INC. REPORTS FOURTH QUARTER 2018 NET INCOME

CHICAGO, January 22, 2019 - MB Financial, Inc. (the "Company") (NASDAQ: MBFI), the holding company for MB Financial Bank, N.A., today announced fourth quarter 2018 net income of $75.9 million compared to $42.7 million last quarter and $144.2 million in the fourth quarter a year ago. Diluted earnings per common share were $0.85 in the fourth quarter of 2018 compared to $0.47 last quarter and $1.67 in the fourth quarter a year ago.

Annual net income for 2018 was $213.9 million compared to $304.0 million for 2017. Diluted earnings per common share were $2.55 for 2018 compared to $3.49 for 2017.

Net income and earnings per common share for the fourth quarter of 2017 and full year 2017 were positively impacted by a $104.2 million, or $1.23 per common share, tax benefit due to the enactment of the Tax Cuts and Jobs Act of 2017 (the "TCJ Act"). Net income and earnings per common share for the fourth and third quarters of 2018 were also positively impacted by TCJ Act tax benefits of $8.2 million, or $0.10 per common share, and $2.2 million, or $0.03 per common share, respectively.

Operating Earnings (in thousands, except per share data)

The table below reconciles net income, as reported, to operating earnings excluding our Mortgage Banking Segment. As previously announced in April 2018, we have discontinued our national mortgage origination business (substantially all originations outside of the Company's consumer banking footprint in the Chicagoland area). Therefore, we believe operating earnings excluding our Mortgage Banking Segment better reflect our primary operations until the wind down of the segment is complete, as we are retaining the mortgage servicing asset and certain residential mortgage loans on our balance sheet and continue to originate residential mortgage loans in the Chicagoland area.

Year Ended December 31,4Q18

3Q18

2Q18

1Q18

4Q17

Net income - as reported Non-core items, net of tax (1)

$

• $ 75,911$

42,714$

38,533$

56,757$

144,194

$

(3,696) 12,889 18,679

• 614 (96,814)

2018 2017 213,91528,486

304,040 (92,938)Operating earnings 55,603 57,212

72,215

Operating earnings (loss) - Mortgage Banking Segment

Operating earnings, excluding Mortgage Banking Segment

Dividends on preferred shares Operating earnings available to common stockholders, excluding Mortgage Banking Segment

3,141 69,074 3,000

1,067 (3,359)

54,536 60,571 3,000 3,000

Diluted earnings per common share - as reported (2)

$ $

66,074

0.85

$ $

51,536

• $ 57,571 $

  0.47

• $ 0.42 $

  Diluted operating earnings per common share, excluding Mortgage Banking Segment

  $

  0.77

  $

  0.60

• $ 0.68 $

57,371	47,380	242,401	211,102
(295)	(815)	554	5,494
57,666	48,195	241,847	205,608
3,100	2,000	12,100	8,007
46,195$	229,747	$	197,601
1.67$	2.55	$	3.49
0.54$	2.70	$	2.33

$

54,566

0.81

$ $

0.64

• (1) Non-core items represent the difference between non-core non-interest income and non-core non-interest expense net of tax as well as other non-core tax items. See "Non-GAAP Financial Information" section for details on non-core items starting on page 25.

• (2) The $0.81 diluted earnings per common share in the first quarter of 2018 were positively impacted by a $15.3 million, or $0.18 per common share, return from preferred stockholders due to the redemption of our 8% Series A non-cumulative perpetual preferred stock. The $15.3 million represents the excess carrying amount over the redemption price of the Series A preferred stock.

Key Items (4Q18 compared to 3Q18)

Pending Merger

On May 20, 2018, we signed a definitive merger agreement with Fifth Third Bancorp ("Fifth Third"). We received the necessary stockholder approvals on September 18, 2018. The merger remains subject to regulatory approvals and other customary closing conditions.

Operating Earnings

• • Operating earnings, excluding the Mortgage Banking Segment, grew by $14.5 million, or 26.7%, to $69.1 million compared to the prior quarter. These results were attributable to the following items (net of income taxes): a $1.3 million increase in net interest income, a $4.7 million increase in lease financing revenue, a $7.0 million decrease in provision for credit losses, and a $5.2 million decrease in state income tax accruals, partly reduced by a $3.2 million increase in non-interest expenses.

• • Diluted operating earnings per common share, excluding the Mortgage Banking Segment, were $0.77 compared to $0.60 in the prior quarter.

Loans

• • Loan balances, excluding purchased credit-impaired loans, increased $107.2 million (+0.8%, or +3.1% annualized) to $14.0 billion due to growth in commercial loan balances partly offset by decreases in construction and commercial real estate loan balances.

• • Average loan balances, excluding purchased credit-impaired loans, increased $44.5 million (+0.3%, or +1.3% annualized) to $13.8 billion.

• • Average yield on loans, excluding accretion on loans acquired in bank mergers, increased 14 basis points to 4.82% from 4.68% in the prior quarter as a result of increases in short-term interest rates.

Deposits

• • Although the mix improved with an increase in non-interest bearing deposits offset by a decrease in money market account balances, low-cost deposits decreased $16.7 million (-0.1%, or -0.5% annualized) to $12.3 billion.

• • Average low-cost deposits decreased $109.5 million (-0.9%, or -3.4% annualized) to $12.5 billion due to decreases in non-interest bearing and money market account balances.

• • Average cost of total deposits increased six basis points to 0.60% due to increases in interest rates paid on deposits.

Net interest margin

• • Net interest margin on a fully tax equivalent basis, excluding accretion on loans acquired in bank mergers, increased 14 basis points in the quarter to 3.84%. This increase was due to higher loan yields as a result of increases in short-term interest rates.

• • Average cost of funds increased two basis points to 0.74% due to higher rates paid on deposits reduced by a decrease in the average cost of borrowings.

Operating Segments (4Q18 compared to 3Q18)

Banking

• • Operating earnings were $59.1 million, an increase of $11.7 million, or 24.7%, compared to the prior quarter.

• • This increase was due to a decrease in provision for credit losses and state income tax accruals partly offset by an increase in non-interest expenses.

Leasing

• • Operating earnings were $10.0 million, an increase of $2.8 million, or 39.8%, compared to the prior quarter.

• • This increase was mostly due to higher residual gains and fees from the sale of third-party equipment maintenance contracts.

Mortgage Banking

• • On April 12, 2018, we announced the discontinuation of our national mortgage origination business, which includes substantially all originations outside of the Company's consumer banking footprint in the Chicagoland area.

• • Operating earnings were $3.1 million compared to $1.1 million in the prior quarter.

• • The wind down of our national mortgage origination business is proceeding as planned. We project that, excluding any impact of our pending merger with Fifth Third, our remaining mortgage operations will earn quarterly pretax income of approximately $7 million in 2019, consistent with prior projections.

Key Items - Full Year (2018 compared to 2017)

• • Operating earnings, excluding the Mortgage Banking Segment, increased $36.2 million, or 17.6%, to $241.8 million compared to the year ended December 31, 2017.

• • The growth in operating earnings, excluding the Mortgage Banking Segment, resulted from the following items (net of income tax): a $30.5 million increase in net interest income; a $14.7 million increase in our key fee initiatives revenue, mainly lease financing revenue; a $4.9 million increase in earnings from investments in Small Business Investment Companies; and an approximate $33 million decrease in income tax expense resulting from a lower effective tax rate. These items were partly offset by a $25.1 million increase in non-interest expense with more than half of the increase in salaries and benefits due to higher health insurance costs, annual salary increases, and higher bonus expense, and a $19.7 million increase in provision for credit losses, mostly due to higher charge-offs related to one loan relationship.

• • Diluted operating earnings per common share, excluding the Mortgage Banking Segment, were $2.70 compared to $2.33 in the year ended December 31, 2017.

Guidance on Selected Financial Items

In light of our pending merger with Fifth Third, we no longer provide forward-looking financial guidance or update previously provided financial guidance except as otherwise provided in this release with respect to our mortgage operations.

Operating Segments

The Company currently has three reportable operating segments: Banking, Leasing, and Mortgage Banking. Our Banking Segment generates revenues primarily from its lending, deposit gathering, and fee business activities. Our Leasing Segment generates revenues through lease originations and related services. As a result of the discontinuation of our national mortgage origination business, we expect to stop operating the mortgage business as a defined segment with separate Mortgage Banking Segment reporting in 2019. The financial information below was adjusted for funds transfer pricing and internal allocations of certain expenses and excludes non-core non-interest income and expense and non-core tax items.

Banking Segment

The following table summarizes certain financial information for the Banking Segment for the periods presented (in thousands):

Year Ended

December 31,

Net interest income	140,180	550,499
Provision for credit losses	11,340	21,439	5,746	7,579	501	46,104	16,555
Net interest income after provision for credit losses	142,086	130,564	140,868	132,892	139,679	546,410	533,944
Non-interest income:
Lease financing revenue, net	2,400	3,420	2,165	1,535	1,795	9,520	5,763
Treasury management fees	14,287	15,226	15,066	15,156	15,234	59,735	58,930
Wealth management fees	9,204	9,089	8,969	9,121	9,024	36,383	34,744
Card fees	5,851	5,362	5,654	4,787	5,032	21,654	18,596
Capital markets and international banking fees	3,637	1,913	3,785	2,998	3,999	12,333	15,708
Other non-interest income	9,733	10,987	11,838	10,675	9,359	43,233	39,260
Total non-interest income	45,112	45,997	47,477	44,272	44,443	182,858	173,001
Non-interest expense:
Salaries and employee benefits expense:
Salaries	43,598	44,933	45,103	44,821	44,782	178,455	176,017
Commissions	790	1,097	941	953	1,119	3,781	4,224
Bonus and stock-based compensation	13,487	10,774	11,533	10,610	10,418	46,404	41,672
Other salaries and benefits (1)	17,576	17,339	15,721	15,207	14,119	65,843	55,126
Total salaries and employee benefits expense	75,451	74,143	73,298	71,591	70,438	294,483	277,039
Occupancy and equipment expense	13,153	13,400	13,308	14,089	13,769	53,950	50,556
Computer services and telecommunication expense	8,814	8,324	9,384	9,741	9,664	36,263	33,540
Professional and legal expense	2,570	1,347	4,846	1,359	1,967	10,122	6,261
Other operating expenses	18,399	18,479	18,665	16,745	18,817	72,288	72,622
Total non-interest expense	118,387	115,693	119,501	113,525	114,655	467,106	440,018
Income before income taxes	68,811	60,868	68,844	63,639	69,467	262,162	266,927
Income tax expense	9,715	13,468	15,237	14,539	25,734	52,959	81,881
Operating earnings	43,733	185,046
Total assets (period end)

2018 2017$

4Q18 3Q18 2Q18 1Q18 4Q17

• $ 152,003$

  • $ 153,426$

    146,614$

    140,471

    • $ 592,514

• $ 47,400$

  • $ 59,096$

  53,607$

  49,100

• $ 17,070,713

$ 16,677,552

$ 16,581,205

$ 16,582,585

$ 16,448,960

• $ 209,203$ 17,070,713

$

$ 16,448,960

(1)

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

Banking Segment operating earnings for the fourth quarter of 2018 increased $11.7 million, or 24.7%, compared to the prior quarter.

• • Net interest income increased due to higher yields on loans partly offset by a higher cost of deposits.

• • Provision for credit losses decreased as the prior quarter was unfavorably impacted by higher charge-offs on one loan relationship.

• • Non-interest income decreased $885 thousand compared to the prior quarter.

  • • Lease financing revenue decreased due to lower earnings from equity investments in leases and lower residual gains.

  • • Treasury management fees declined as a result of an increasing earnings credit rate for our commercial customers and lower average non-interest bearing deposits.

  • • Other non-interest income decreased as a result of lower earnings from investments in Small Business Investment Companies ("SBICs").

• • These decreases were partly offset by an increase in capital markets and international banking fees as a result of higher swap and international banking fees.

• • Non-interest expense increased $2.7 million compared to the prior quarter.

  • • Salaries and employee benefits increased due to higher temporary help as a result of higher employee turnover and higher bonus expenses due to better than expected performance, reduced by decreases in salaries and health insurance expense as a result of fewer claims.

  • • Professional and legal expenses increased as a result of higher consulting expense related to information technology security.

• • Fourth quarter income tax expense includes a $5.2 million decrease in state income tax accruals as a result of income allocation to lower income tax rate jurisdictions.

Banking Segment operating earnings for the year ended December 31, 2018 increased $24.2 million, or 13.1%, compared to the prior year.

• • Net interest income increased due to higher average loan yields and balances partly offset by a higher cost of funds. Our average yield on loans and cost of funds increased as a result of an increase in short-term interest rates.

• • Provision for credit losses increased as a result of higher charge-offs during the second half of 2018 related to one loan relationship.

• • Non-interest income increased $9.9 million compared to the prior year.

  • • Lease financing revenue increased due to higher earnings from investments in leasing companies and higher residual gains.

  • • Card fees increased as a result of increased sales and volume in prepaid cards and higher credit card usage.

  • • Other non-interest income increased due to stronger earnings from investments in SBICs.

  • • These increases were partly reduced by a decrease in capital markets and international banking fees due to decreases in swap and syndication fees.

• • Non-interest expense increased $27.1 million compared to the prior year.

  • • Salaries and employee benefits expense increased due to higher health insurance costs as a result of an increase in claims, higher bonus and stock based compensation expense, annual salary increases, and higher 401(k) and profit sharing contributions expense.

  • • Occupancy and equipment expense increased due to higher building and software depreciation.

  • • Computer services and telecommunication expense increased due to previous investments in new technology.

  • • Professional and legal fees increased as a result of case settlements, other legal fees, and consulting expense related to information technology security.

• • Income tax expense decreased as a result of a decline in the effective tax rate related to the TCJ Act.

Leasing Segment

The following table summarizes certain financial information for the Leasing Segment for the periods presented (in thousands):

Year Ended

December 31,

Net interest income	2,602	9,902
Provision for credit losses	638	90	500	(24)	3,184	1,204	3,858
Net interest income after provision for credit losses	1,934	2,070	1,849	2,506	(582)	8,359	6,044
Non-interest income:
Lease financing revenue, net	29,263	21,810	21,435	23,938	22,576	96,446	82,837
Other non-interest income	328	1,304	1,160	899	1,168	3,691	3,043
Total non-interest income	29,591	23,114	22,595	24,837	23,744	100,137	85,880
Non-interest expense:
Salaries and employee benefits expense:
Salaries	7,112	5,926	6,021	5,917	5,361	24,976	19,823
Commissions	2,023	2,662	1,892	2,520	2,777	9,097	9,792
Bonus and stock-based compensation	1,661	1,207	1,205	974	1,761	5,047	4,989
Other salaries and benefits (1)	1,211	1,338	1,613	1,809	1,329	5,971	6,005
Total salaries and employee benefits expense	12,007	11,133	10,731	11,220	11,228	45,091	40,609
Occupancy and equipment expense	1,242	1,128	1,110	1,167	1,090	4,647	4,115
Computer services and telecommunication expense	693	474	492	505	595	2,164	1,940
Professional and legal expense	422	353	323	373	457	1,471	1,651
Other operating expenses	3,306	2,480	2,500	2,212	2,101	10,498	8,867
Total non-interest expense	17,670	15,568	15,156	15,477	15,471	63,871	57,182
Income before income taxes	13,855	9,616	9,288	11,866	7,691	44,625	34,742
Income tax expense	3,877	2,480	2,324	3,300	3,229	11,981	14,180
Operating earnings	4,462	20,562
Total assets (period end)	1,403,690	1,403,690

2018 2017$

4Q18 3Q18 2Q18 1Q18 4Q17

• $ 2,160$

  • $ 2,572$

    2,349$

    2,482

    • $ 9,563

• $ 7,136$

  • $ 9,978$

  6,964$

  8,566

• $ 1,464,380

$ 1,340,901

$ 1,354,940

$ 1,360,117

$

• $ 32,644$ 1,464,380

$

$

(1)

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

Leasing Segment operating earnings for the fourth quarter of 2018 increased $2.8 million compared to the prior quarter.

• • Provision for credit losses increased as a result of the increase in loan balances during the quarter.

• • Lease financing revenue increased due to higher residual gains and fees from the sale of third-party equipment maintenance contracts.

• • Non-interest expense increased due to higher salaries and employee benefits expense related to the investment in sales and other revenue generating staff partly reduced by a decrease in commissions due to higher deferrals of indirect costs resulting from more deals during the quarter. In addition, non-interest expense increased due to higher marketing expense at promotional events.

• • Total assets increased mostly due to growth in lease investments.

Leasing Segment operating earnings for the year ended December 31, 2018 increased $12.1 million, or 58.8%, compared to the prior year.

• • Lease financing revenue increased as a result of higher residual gains, rental income due to an increase in operating leases, and promotional income attributable to our investment in sales and other revenue generating staff.

• • Provision for credit losses was lower due to decreased loan charge-offs.

• • Non-interest expense increased due to higher salaries and employee benefits expense as a result of increased salaries related to the investment in sales and other revenue generating staff and an increase in other operating expenses.