MB Financial : Reports Third Quarter 2018 Net Income

3Q18

MB FINANCIAL, INC. REPORTS THIRD QUARTER 2018 NET INCOME

CHICAGO, October 23, 2018 - MB Financial, Inc. (NASDAQ: MBFI), the holding company for MB Financial Bank, N.A., today announced third quarter 2018 net income of $42.7 million compared to $38.5 million last quarter and $60.8 million in the third quarter a year ago. Diluted earnings per common share were $0.47 in the third quarter of 2018 compared to $0.42 last quarter and $0.69 in the third quarter a year ago.

The table below reconciles net income, as reported, to operating earnings excluding our Mortgage Banking Segment. As previously announced, 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, residential mortgage loans on our balance sheet, and Chicagoland area originations.

Nine Months Ended

September 30,3Q18

2Q18

1Q18

4Q17

Net income - as reported

$

• $ 42,714$

38,533$

56,757$ 60,843

2018 2017 144,194$ 159,846

3Q17

$ 138,004

Non-core items, net of tax (1) 12,889 18,679

614 (96,814) 1,942

32,182

3,876

Operating earnings 55,603

Operating earnings (loss) - Mortgage Banking Segment

57,212 1,067 (3,359)

Operating earnings, excluding Mortgage

Banking Segment 54,536 60,571

Dividends on preferred shares

3,000 3,000

Operating earnings available to common stockholders, excluding Mortgage Banking Segment

Diluted earnings per common share - as reported (2) (3)

$ $

51,536

• $ 57,571 $

  0.47

• $ 0.42 $

  Diluted operating earnings per common share, excluding Mortgage Banking Segment

  $

  0.60

• $ 0.68 $

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. Non-core items for the third quarter of 2018 include approximately $7 million, net of tax, related to the discontinuation of our national mortgage origination business and approximately $3 million, net of tax, related to the pending merger with Fifth Third Bancorp ("Fifth Third"). Non-core items for the second quarter of 2018 include approximately $14 million, net of tax, related to the discontinuation of our national mortgage origination business and approximately $5 million, net of tax, related to the pending merger with Fifth Third.

• (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.

• (3) The $1.67 diluted earnings per common share in the fourth quarter of 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").

Pending Merger

On May 20, 2018, we signed a definitive merger agreement with 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, decreased $6.0 million, or 10.0%, to $54.5 million compared to the prior quarter. This decrease resulted from a $11.2 million (net of tax) increase in provision for credit losses (due to one loan relationship) partly offset by a $3.8 million (net of tax) increase in net interest income and a $2.5 million (net of tax) decrease in professional and legal fees.

• • Diluted operating earnings per common share, excluding the Mortgage Banking Segment, were $0.60 compared to $0.68 in the prior quarter.

Loans

• • Loan balances, excluding purchased credit-impaired loans, increased $124.6 million (+0.9%, or +3.6%, annualized) from prior quarter end due to growth in commercial loans and a $75.5 million transfer from loans held for sale.

• • Average loan balances, excluding purchased credit-impaired loans, decreased $6.4 million (-0.1%, or -0.2% annualized) to $13.7 billion.

• • Average yield on loans, excluding accretion on loans acquired in bank mergers, increased 18 basis points to 4.68% from 4.50% in the prior quarter as a result of increases in short-term interest rates.

Deposits

• • Low-cost deposits decreased $136.6 million (-1.1%, or -4.3% annualized) from prior quarter end to $12.3 billion due to a decrease in non-interest bearing deposits (temporary decrease) partly offset by an increase in money market and NOW deposits.

• • Average low-cost deposits increased $131.2 million (+1.0%, or +4.2% annualized) to $12.6 billion due to an increase in money market deposits.

• • Average cost of total deposits increased seven basis points to 0.54%.

Net interest margin

• • Net interest margin on a fully tax equivalent basis, excluding accretion on loans acquired in bank mergers, increased eight basis points in the quarter to 3.70%. This increase was due to higher loan yields partly offset by increased funding costs.

• • Average interest earning assets decreased $204.6 million mostly due to the decrease in loans held for sale as a result of the national mortgage origination wind down.

• • Average cost of funds increased five basis points to 0.72% due to higher rates paid on interest bearing liabilities.

Banking

• • Operating earnings were $47.4 million, a decrease of $6.2 million, or 11.6%, compared to the prior quarter.

• • This decrease was due to an increase in provision for credit losses (due to one loan relationship) partly offset by an increase in net interest income (higher average loan yields and lower borrowings) and a decrease in professional and legal fees.

Leasing

• • Operating earnings were $7.1 million, an increase of $172 thousand, or 2.5%, compared to the prior quarter.

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 $1.1 million compared to an operating loss of $3.4 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 $7.4 million in 2019, consistent with prior projections.

Key Items (compared to nine months ended September 30, 2017)

• • Operating earnings, excluding the Mortgage Banking Segment, increased $15.4 million, or 9.8%, to $172.8 million compared to the nine months ended September 30, 2017.

• • The growth in operating earnings resulted from the following items (net of tax): a $20.8 million increase in net interest income, a $9.0 million increase in our key fee initiatives revenue (mainly lease financing revenue), a $4.2 million increase in earnings from investments in Small Business Investment Companies, and an approximate $16 million decrease in income tax expense (lower effective tax rate). These items were partly offset by a $20.7 million increase in non-interest expense with more than half of the increase in salaries and benefits (due to annual salary increases, new hires, and higher health insurance costs) and a $13.6 million increase in provision for credit losses (mostly recognized in the third quarter of 2018).

• • Diluted operating earnings per common share, excluding the Mortgage Banking Segment, were $1.92 compared to $1.79 in the nine months ended September 30, 2017.

In light of our pending merger with Fifth Third, we will 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.

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):

Nine Months Ended

September 30,

3Q18 2Q18 1Q18 4Q17 3Q17

• $ 146,614$

  • $ 152,003$

    140,471$

    140,180

    • $ 439,088

• $ 53,607$

  • $ 47,400$

  49,100$

  43,733

• $ 16,677,552

$ 16,581,205

$ 16,582,585

$ 16,448,960

$ 16,406,714

• $ 150,107$ 16,677,552

$

$ 16,406,714

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

Banking Segment operating earnings for the third quarter of 2018 decreased $6.2 million compared to the prior quarter.

• • Net interest income increased due to higher average loan yields and reduced borrowings 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 rates.

• • Provision for credit losses increased as a result of higher charge offs during the quarter due to one loan relationship.

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

• • Capital markets and international banking fees decreased due to lower swap fees and foreign currency derivative income.

• • Other non-interest income decreased due to lower earnings from investments in Small Business Investment Companies.

• • Salaries and benefits expense increased as a result of higher health insurance costs due to an increase in claims.

• • Professional and legal fees decreased as the prior quarter was impacted by higher case settlements and other legal and professional fees.

Banking Segment operating earnings for the nine months ended September 30, 2018 increased $8.8 million, or 6.2%, compared to the same period last year.

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

• • Provision for credit losses increased as a result of higher charge offs during the third quarter of 2018 due to one loan relationship.

• • Non-interest income increased due to higher card fees (increased sales and volume in prepaid cards and higher credit card usage), higher lease financing revenue, net (higher earnings from investments in leasing companies and residual gains), and stronger earnings from Small Business Investment Companies.

• • Non-interest expense increased as a result of higher salaries and employee benefits expense, occupancy and equipment expense (higher building and software depreciation), computer services and telecommunication expense (previous investments in new technology), and professional and legal fees (case settlements and other legal and professional fees). Salaries and employee benefits expense increased due to annual salary increases, new hires, higher health insurance costs, and higher bonus and stock based compensation expense.

• • Income tax expense decreased as a result of a decline in the effective tax rate.

Leasing Segment

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

Nine Months Ended

September 30,

3Q18 2Q18 1Q18 4Q17 3Q17

• $ 2,349$

  • $ 2,160$

    2,482$

    2,602

    • $ 6,991

• $ 6,964$

  • $ 7,136$

  8,566$

  4,462

• $ 1,340,901

$ 1,354,940

$ 1,360,117

$ 1,403,690

$

• $ 22,666$ 1,340,901

$

$

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

Leasing Segment operating earnings for the third quarter of 2018 increased $172 thousand compared to the prior quarter.

• • Lease financing revenue, net, increased slightly due to higher fees from sales of third-party equipment maintenance contracts, promotional income, and syndication fees partly offset by lower residual gains.

• • Non-interest expense increased slightly due to an increase in commissions expense resulting from increased sales of third-party equipment maintenance contracts in the quarter.

Leasing Segment operating earnings for the nine months ended September 30, 2018 increased $6.6 million, or 40.8%, compared to the same period last year due largely to an increase in lease financing revenue as a result of higher residual gains, promotional income, and syndication fees partly offset by higher salaries (a result of the investment in sales and other revenue generating staff). Additionally, income tax expense declined as a result of a decrease in the effective tax rate.