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MB Financial, Inc. Reports Third Quarter Results; Successfully Completes Taylor Capital Merger

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MB Financial, Inc. (NASDAQ:MBFI) , the holding company for MB Financial Bank, N.A., today announced 2014 third quarter net income of $6.9 million compared to $23.1 million last quarter and $24.4 million in the third quarter a year ago. Net income available to common stockholders was $4.9 million for the third quarter of 2014.

Key items for the third quarter include:

Completion of Taylor Capital Group, Inc. Merger:

  • We completed the Taylor Capital Group, Inc. (“Taylor Capital”) merger on August 18, 2014.
  • Consideration paid was $639.8 million, including $519.3 million in common stock and $120.5 million in cash.
  • We issued 19.6 million shares of common stock as a result of the acquisition.
  • Each share of Taylor Capital’s Perpetual Non-Cumulative Preferred Stock, Series A was converted into one share of our Perpetual Non-Cumulative Preferred Stock, Series A with substantially identical terms.
  • The results of operations of Taylor Capital have been included in our results of operations for the 44 days since the date of acquisition.
  • We have made significant progress toward achieving targeted cost savings.
  • We successfully converted Taylor Capital’s clients to MB data processing systems and products in September 2014.

Operating Earnings:

  • Operating earnings, which we define as earnings excluding non-core items, were $35.7 million for the third quarter of 2014 compared to $23.5 million last quarter and $26.0 million in the third quarter a year ago. A table reconciling net income, as reported to operating earnings is set forth below and in the “Non-GAAP Financial Information” section.
Nine Months Ended
September 30,
3Q14 2Q14 3Q13 2014 2013
(dollars in thousands)
Net income, as reported $ 6,901 $ 23,106 $ 24,400 $ 49,976 $ 74,599
Less non-core items:
Net (loss) gain on investment securities (3,246 ) (87 ) 1 (3,016 ) 14
Net loss on sale of other assets (7 ) (24 ) (24 )
Gain on extinguishment of debt 1,895 1,895
Merger related expenses (27,161 ) (488 ) (1,759 ) (28,329 ) (1,759 )
Loss on low-income housing investment (96 ) (2,124 )
Contingent consideration expense – Celtic acquisition (10,600 ) (10,600 )
Total non-core items (39,119 ) (695 ) (1,758 ) (42,198 ) (1,745 )
Income tax expense on non-core items (10,295 ) (266 ) (174 ) (11,416 ) (168 )
Non-core items, net of tax (28,824 ) (429 ) (1,584 ) (30,782 ) (1,577 )
Operating earnings $ 35,725 $ 23,535 $ 25,984 $ 80,758 $ 76,176

In December 2012, we acquired Celtic Leasing Corp. (“Celtic”). The purchase consideration paid to Celtic’s selling shareholders included the right to receive certain contingent payments based on the realization of residuals owned by Celtic on the transaction closing date. Given Celtic’s stronger than expected lease residual performance subsequent to the acquisition, we have increased the fair value of the residual based contingent consideration by $10.6 million.

Net Interest Income Increased $27.5 million, or 40.5%, from the Prior Quarter and $26.7 million, or 38.8%, from the Third Quarter of 2013:

  • The increase in net interest income is primarily due to the Taylor Capital merger. Net interest income in the third quarter of 2014 included interest income of $6.2 million resulting from the accretion of the purchase accounting discount recorded on the loans acquired in the Taylor Capital merger ($5.9 million for non-purchased credit-impaired loans and $282 thousand for purchase credit-impaired loans).
  • Our fully tax equivalent net interest margin was 3.78% for the third quarter of 2014 compared to 3.53% for the prior quarter and 3.66% for the third quarter of 2013. Excluding the purchase accounting loan discount accretion ($6.2 million)on Taylor Capital loans, the Company’s net interest margin on a fully tax equivalent basis would have been 3.54% for the third quarter of 2014.

Core Non-interest Income Increased $22.8 million, or 57.6%, from the Prior Quarter and $25.2 million, or 67.8%, from the Third Quarter of 2013:

  • Leasing revenues increased 19.3% from $14.9 million in second quarter of 2014 and 25.9% from $14.1 million in the third quarter of 2013 to $17.7 million in the third quarter of 2014 primarily due to higher fees and promotional revenue from the sale of third-party equipment maintenance contracts.
  • Mortgage banking revenue increased by $16.6 million due to the Taylor Capital merger.
  • Commercial deposit and treasury management fees increased 31.5% from $7.1 million in the second quarter of 2014 and 47.7% from $6.3 million in the third quarter of 2013 to $9.3 million in the third quarter of 2014 as a result of the Taylor Capital merger in addition to robust new customer activity prior to the merger.
  • Core non-interest income was 38.23% of revenues in the third quarter of 2014 compared to 35.22% in the prior quarter.

Core Non-interest Expense Increased $27.4 million, or 35.6%, from the Prior Quarter and $30.4 million, or 41.1%, from the Third Quarter of 2013:

  • The increase in the Company’s core non-interest expense from the prior quarter and third quarter of 2013 was primarily driven by the Taylor Capital merger.
  • The efficiency ratio for the third quarter of 2014 decreased to 63.46% from 67.68% in the prior quarter and 65.81% in the third quarter of 2013.
  • Net non-interest expense to average assets decreased to 1.35% in the third quarter of 2014 from 1.55% and 1.56% in the prior quarter and the third quarter of 2013, respectively.

Credit Quality Metrics:

  • We recorded a provision for credit losses of $3.1 million in the third quarter compared to a negative provision for credit losses of $2.0 million in the prior quarter and a negative provision for credit losses of $3.3 million in the third quarter of 2013.
  • The third quarter 2014 provision for credit losses included a negative provision for credit losses of $1.6 million for the legacy MB Financial portfolio and a positive provision of $4.7 million related to the acquired Taylor Capital portfolio for loan renewals subsequent to the acquisition date and the establishment of a corresponding general reserve for Taylor Capital loans in excess of the loan discount. We anticipate recording a provision related to the acquired portfolio in future quarters related to renewing Taylor loans which will largely offset the accretion from non-purchase credit impaired loans.
  • Non-performing loans decreased by $10.5 million from June 30, 2014, and potential problem loans decreased by $11.8 million from June 30, 2014.

RESULTS OF OPERATIONS

Third Quarter Results

Net Interest Income

Net interest income and net interest margin on a fully tax equivalent basis for the three and nine months ended September 30, 2014 were impacted by the Taylor Capital merger. Net interest income on a fully tax equivalent basis increased $28.0 million from the second quarter of 2014 to $101.7 million in the third quarter of 2014. The Company’s net interest margin on a fully tax equivalent basis for the third quarter of 2014 increased 25 basis points to 3.78% compared to the second quarter of 2014.

Net interest income on a fully tax equivalent basis increased $26.9 million from the third quarter of 2013. Our net interest margin on a fully tax equivalent basis for the third quarter of 2014 increased 12 basis points compared to the third quarter of 2013.

Net interest income on a fully tax equivalent basis for the nine months ended September 30, 2014 increased $27.2 million from the nine months ended September 30, 2013. Our net interest margin on a fully tax equivalent basis for the nine months ended September 30, 2014 increased four basis points to 3.66% compared to the nine months ended September 30, 2013.

As noted earlier, on August 18, 2014, we completed the Taylor Capital merger. The acquired assets and assumed liabilities were recorded at fair value as required under the acquisition method of accounting. Fair value adjustments are amortized or accreted into net interest income over the remaining terms of the interest earning assets and interest bearing liabilities. The fair value adjustment on acquired loans had the most significant impact on net interest margin. Excluding the purchase accounting loan discount accretion on Taylor Capital loans, our net interest margin on a fully tax equivalent basis would have been 3.54% and 3.57% for the three and nine months ended September 30, 2014, respectively, compared to 3.66% and 3.62% for the three and nine months ended September 30, 2013.

In September 2014, we repositioned our balance sheet and shortened the duration of our investment securities portfolio to pre-merger levels by selling $468.7 million in investment securities and utilizing the proceeds from the sales to reduce short term FHLB advances. A $3.2 million loss was recognized on investment securities in the third quarter of 2014 as a result of this balance sheet repositioning.

In September 2014, we also redeemed all of the outstanding 9.75% junior subordinated notes relating to the trust preferred securities of TAYC Capital Trust I. These notes were originally issued by Taylor Capital and were assumed by us in connection with the merger. The TAYC Capital Trust I trust preferred securities, which had an aggregate outstanding liquidation amount of $45.4 million, were automatically redeemed as a result of our redemption of the junior subordinated notes. A $1.9 million gain on the early extinguishment of the trust preferred securities was recorded in other operating income in the third quarter of 2014, which represented the difference between the fair market value of these securities on August 18, 2014 and their aggregate liquidation amount at redemption.

Non-interest Income and Expense

We acquired Taylor Capital’s mortgage operations through the merger. As there can be fluctuations in the mortgage operations from quarter to quarter based on the overall level of interest rates, we are presenting non-interest income and expense both including and excluding mortgage banking.

Non-interest Income (in thousands):

Nine Months Ended
September 30,
3Q14 2Q14 3Q13 2014 2013
Excluding Excluding
Mortgage Mortgage Mortgage Mortgage
Banking Banking Total Banking Banking Total
Core non-interest income:
Key fee initiatives:
Lease financing, net $ 17,719 $ $ 17,719 $ 14,853 $ 14,070 $ 45,768 $ $ 45,768 $ 45,435
Mortgage banking revenue 16,823 16,823 187 177 17,069 17,069 1,322
Commercial deposit and treasury management fees 9,345 9,345 7,106 6,327 23,595 23,595 18,322
Trust and asset management fees 5,712 5,712 5,405 4,799 16,324 16,324 14,167
Card fees 3,836 3,836 3,304 2,745 9,841 9,841 8,175
Capital markets and international banking service fees 1,472 1,472 1,360 972 3,810 3,810 2,719
Total key fee initiatives 38,084 16,823 54,907 32,215 29,090 99,338 17,069 116,407 90,140
Consumer and other deposit service fees 3,362 3,362 3,156 3,648 9,453 9,453 10,487
Brokerage fees 1,145 1,145 1,356 1,289 3,826 3,826 3,680
Loan service fees 1,069 1,069 916 1,427 2,950 2,950 4,349
Increase in cash surrender value of life insurance 855 855 834 851 2,516 2,516 2,537
Other operating income 1,145 1,145 1,162 942 3,106 3,106 3,179
Total core non-interest income 45,660 16,823 62,483 39,639 37,247 121,189 17,069 138,258 114,372
Non-core non-interest income:
Net (loss) gain on investment securities (3,246 ) (3,246 ) (87 ) 1 (3,016 ) (3,016 ) 14
Net loss on sale of other assets (7 ) (7 ) (24 ) (24 ) (24 )
Gain on extinguishment of debt 1,895 1,895 1,895 1,895
(Decrease) increase in market value of assets held in trust for deferred compensation (1) (38 ) (38 ) 400 459 514 514 963
Total non-core non-interest income (1,396 ) (1,396 ) 289 460 (631 ) (631 ) 977
Total non-interest income $ 44,264 $ 16,823 $ 61,087 $ 39,928 $ 37,707 $ 120,558 $ 17,069 $ 137,627 $ 115,349

(1) Resides in other operating income in the consolidated statements of income.

Core non-interest income for the third quarter of 2014 increased 57.6% to $62.5 million from the second quarter of 2014. Excluding mortgage banking, core non-interest income increased by 15.2%.

  • Leasing revenues increased due to higher fees and promotional revenue from the sale of third-party equipment maintenance contracts. The Company acquired another leasing subsidiary, Cole Taylor Equipment Finance, through the Taylor Capital merger. Cole Taylor Equipment Finance contributed approximately $404 thousand to leasing revenues in the third quarter of 2014 since the date of acquisition.
  • Commercial deposit and treasury management fees increased due to the increased customer base as a result of the Taylor Capital merger and new customer activity prior to the merger.
  • Card fees increased due to the full quarter impact of a new payroll prepaid card program that started in the second quarter of 2014.
  • Trust and asset management fees increased due to the addition of new customers and the impact of higher equity values.

Core non-interest income for the nine months ended September 30, 2014 increased 20.9% to $138.3 million from the nine months ended September 30, 2013. Excluding mortgage banking, core non-interest income increased by 6.0%.

  • Commercial deposit and treasury management fees increased due to robust new customer activity as well as the increased customer base as a result of the Taylor Capital merger.
  • Trust and asset management fees increased due to the addition of new customers and the impact of higher equity values.
  • Card fees increased due to a new payroll prepaid card program as well as higher credit card fees.
  • Capital markets and international banking services fees increased due to higher M&A advisory and syndication fees.
  • Loan service fees decreased due to lower late, prepayment and miscellaneous loan fees collected.
  • Consumer and other deposit service fees decreased due to lower demand deposit service and NSF and overdraft charges.

Non-core non-interest income for the quarter and nine months ended September 30, 2014 was impacted by the net loss on investment securities and the gain on extinguishment of debt as a result of the balance sheet repositioning that occurred in September 2014.

Non-interest Expense (in thousands):

Nine Months Ended
September 30,
3Q14 2Q14 3Q13 2014 2013
Excluding Excluding
Mortgage Mortgage Mortgage Mortgage
Banking Banking Total Banking Banking Total
Core non-interest expense:(1)
Salaries and employee benefits $ 54,911 $ 10,360 $ 65,271 $ 46,222 $ 44,459 $ 145,254 $ 10,360 $ 155,614 $ 131,378
Occupancy and equipment expense 10,659 655 11,314 9,504 8,797 29,755 655 30,410 27,609
Computer services and telecommunication expense 5,377 817 6,194 4,909 4,870 15,357 817 16,174 13,374
Advertising and marketing expense 1,879 94 1,973 2,113 1,917 5,983 94 6,077 6,187
Professional and legal expense 2,194 307 2,501 1,488 1,408 5,051 307 5,358 4,056
Other intangible amortization expense 1,470 1,470 1,174 1,513 3,884 3,884 4,595
Net loss (gain) recognized on other real estate owned (A) 1,339 9 1,348 204 754 1,665 9 1,674 (1,020 )
Net loss (gain) recognized on other real estate owned related to FDIC transactions (A) 421 421 (13 ) 37 473 473 126
Other real estate expense, net (A) 409 409 337 240 1,142 1,142 572
Other operating expenses 11,512 2,065 13,577 11,108 10,052 31,840 2,065 33,905 28,348
Total core non-interest expense 90,171 14,307 104,478 77,046 74,047 240,404 14,307 254,711 215,225
Non-core non-interest expense: (1)
Merger related expenses (B) 27,161 27,161 488 1,759 28,329 28,329 1,759
Loss on low to moderate income real estate investment (C) 96 2,124 2,124
Contingent consideration – Celtic acquisition (C) 10,600 10,600 10,600 10,600
(Decrease) increase in market value of assets held in trust for deferred compensation (D) (38 ) (38 ) 400 459 514 514 963
Total non-core non-interest expense 37,723 37,723 984 2,218 41,567 41,567 2,722
Total non-interest expense $ 127,894 $ 14,307 $ 142,201 $ 78,030 $ 76,265 $ 281,971 $ 14,307 $ 296,278 $ 217,947

(1) Letters denote the corresponding line items where these non-core non-interest expense items reside in the consolidated statements of income as follows: A – Net (gain) loss recognized on other real estate owned and other expense, B – Salaries and employee benefits, occupancy and equipment expense, computer services and telecommunication expense, advertising and marketing expense, professional and legal expense and other operating expenses, C – Other operating expenses, D – Salaries and employee benefits.

Core non-interest expense increased by $27.4 million, or 35.6%, from the second quarter of 2014 to $104.5 million for the third quarter of 2014. Excluding mortgage banking, core non-interest expense increased by $13.1 million, or 17.0%.

  • Salaries and employee benefits increased primarily due to increased staff from the Taylor Capital merger.
  • Occupancy and equipment expense increased due to the additional offices acquired in the Taylor Capital merger.
  • Computer services and telecommunication expenses increased primarily due to an increase in spending on IT security, data warehouse and investments in our key fee initiatives, as well as due to the Taylor Capital merger.

Core non-interest expense increased by $39.5 million, or 18.3%, from the nine months ended September 30, 2013 to $254.7 million for the nine months ended September 30, 2014. Excluding mortgage banking, core non-interest expense increased by $25.2 million, or 11.7%.

  • Salaries and employee benefits increased due to annual salary increases, long-term incentive expense, health insurance and temporary staffing needs, and the increased staff from the Taylor Capital merger.
  • Other operating expense increased primarily as a result of an increase in filing and other loan expense, higher FDIC assessments due to our larger balance sheet and higher currency delivery expenses related to new treasury management accounts.
  • Computer services and telecommunication expenses increased due primarily to an increase in spending on IT security, data warehouse, investments in our key fee initiatives, as well as higher transaction volumes in the leasing, treasury management and card areas. The increase was also due to increased telecommunication expense related to transitioning to a new provider.

Non-core non-interest expense was primarily impacted by the merger related expenses for the Taylor Capital merger and the contingent consideration expense related to our acquisition of Celtic Leasing Corp.

The following table presents the detail of the merger related expenses (dollars in thousands):

Nine Months Ended
September 30,
3Q14 2Q14 1Q14 4Q13 3Q13 2014 2013
Merger related expenses:
Salaries and employee benefits $ 14,259 $ $ 104 $ $ $ 14,363 $
Occupancy and equipment expense 428 14 442
Computer services and telecommunication expense 5,312 170 13 5,495
Advertising and marketing expense 262 108 90 4 460
Professional and legal expense 6,363 79 410 717 1,694 6,852 1,694
Other operating expenses 537 117 63 3 65 717 65
Total merger related expenses $ 27,161 $ 488 $ 680 $ 724 $ 1,759 $ 28,329 $ 1,759

We expect to incur additional merger related expenses in the next few quarters primarily in the area of occupancy and equipment expense.

Income Tax Expense

Income tax expense was $4.5 million for the third quarter of 2014, compared to $8.8 million for the second quarter of 2014, a decrease of 49.1%. The reduction in income tax expense is primarily due to the 64.3% decrease in income before taxes from $31.9 million in the second quarter of 2014 to $11.4 million in the third quarter of 2014, partially offset by certain costs incurred in the third quarter of 2014 that were not currently deductible for tax purposes. These include the contingent consideration expense related to the Celtic acquisition and certain legal and professional fees associated with the Taylor Capital merger.

Operating Segments

The Company’s operations consist of three reportable operating segments: banking, leasing and mortgage banking. The banking segment generates its revenues primarily from its lending and deposit gathering activities. The leasing segment generates its revenues through lease originations and related services offered through the Company’s leasing subsidiaries: LaSalle Systems Leasing, Inc., Celtic Leasing Corp. and Cole Taylor Equipment Finance. The mortgage banking segment originates residential mortgage loans for sale to investors through its retail and third party channels. The mortgage banking segment also services residential mortgage loans owned by investors and the Company. The segment information incorporates the result of Taylor Capital for 44 days subsequent to the merger date.

The following table presents summary financial information, adjusted for funds transfer pricing and internal allocations of certain expenses, for the reportable segments (in thousands):

Mortgage Non-core
Banking Leasing Banking Items Consolidated
Three months ended September 30, 2014
Net interest income $ 88,863 $ 3,216 $ 3,533 $ $ 95,612
Provision for credit losses 3,172 (58 ) (5 ) 3,109
Non-interest income 29,323 16,299 16,823 (1,358 ) 61,087
Non-interest expense 79,564 9,721 15,155 37,761 142,201
Income tax expense 9,008 3,693 2,082 (10,295 ) 4,488
Net income $ 26,442 $ 6,159 $ 3,124 $ (28,824 ) $ 6,901
Three months ended June 30, 2014
Net interest income $ 65,266 $ 2,806 $ $ $ 68,072
Provision for credit losses (1,764 ) (186 ) (1,950 )
Non-interest income 25,789 14,063 187 (111 ) 39,928
Non-interest expense 67,346 10,100 584 78,030
Income tax expense 6,415 2,665 (266 ) 8,814
Net income $ 19,058 $ 4,290 $ 187 $ (429 ) $ 23,106

The following table presents additional information regarding the mortgage banking segment (dollars in thousands) for the 44 days subsequent to the Taylor Capital Merger:

3Q14
Origination volume $ 724,713
Refinance 35 %
Purchase 65 %
Origination volume by channel:
Retail 18 %
Third party 82 %
Mortgage servicing book (unpaid principal balance of loans serviced for others) at September 30, 2014 $ 21,989,278
Mortgage servicing rights, recorded at fair value, at September 30, 2014 $ 249,376
Notional value of rate lock commitments, at September 30, 2014 $ 610,818

LOAN PORTFOLIO

The following table sets forth the composition of the loan portfolio (excluding loans held for sale) based on period end balances as of the dates indicated (dollars in thousands):

9/30/2014 6/30/2014 9/30/2013
% of % of % of
Legacy

Acquired (1)

Total Total Amount Total Amount Total
Commercial related credits:
Commercial loans $ 1,343,085 $ 1,736,188 $ 3,079,273 34 % $ 1,272,200 23 % $ 1,169,009 21 %
Commercial loans collateralized by assignment of lease payments (lease loans) 1,498,121 133,539 1,631,660 18 1,515,446 27 1,468,814 26
Commercial real estate 1,648,295 1,002,229 2,650,524 30 1,619,322 29 1,638,368 29
Construction real estate 70,428 161,114 231,542 3 116,996 2 136,146 2
Total commercial related credits 4,559,929 3,033,070 7,592,999 85 4,523,964 81 4,412,337 78
Other loans:
Residential real estate 308,982 207,891 516,873 5 309,234 6 311,256 6
Indirect vehicle 273,038 273,038 3 272,841 5 257,740 5
Home equity 237,090 25,887 262,977 3 245,135 4 274,484 5
Consumer loans 68,050 978 69,028 1 70,584 1 57,418 1
Total other loans 887,160 234,756 1,121,916 12 897,794 16 900,898 17
Gross loans excluding purchased credit impaired and covered loans 5,447,089 3,267,826 8,714,915 97 5,421,758 97 5,313,235 95
Purchased credit impaired including covered loans (2) 89,247 178,855 268,102 3 134,966 3 273,497 5
Total loans $ 5,536,336 $ 3,446,681 $ 8,983,017 100 % $ 5,556,724 100 % $ 5,586,732 100 %

(1) Acquired loans refer to the September 30, 2014 balance for loans acquired in the Taylor Capital merger.

(2) Covered loans refer to loans we acquired in FDIC-assisted transactions that have been subject to loss-sharing agreements with the FDIC.

Legacy gross loans excluding covered loans increased $25.3 million from $5.4 billion at June 30, 2014. This increase was primarily due to growth in the commercial loans category.

ASSET QUALITY

The following table presents a summary of criticized assets (excluding loans held for sale, purchased credit-impaired loans and other real estate owned acquired as part of our FDIC-assisted transactions) as of the dates indicated (dollars in thousands):

9/30/2014 6/30/2014 3/31/2014 12/31/2013

9/30/2013

Non-performing loans:
Non-accrual loans (1) $ 97,580 $ 108,414 $ 118,023 $ 106,115 $ 102,042
Loans 90 days or more past due, still accruing interest 2,681 2,363 747 446 410
Total non-performing loans 100,261 110,777 118,770 106,561 102,452
Other real estate owned 19,179 20,306 20,928 23,289 31,356
Repossessed assets 126 73 772 840 861
Total non-performing assets $ 119,566 $ 131,156 $ 140,470 $ 130,690 $ 134,669
Potential problem loans (2) $ 51,690 $ 63,477 $ 68,785 $ 79,589 $ 96,410
Total allowance for loan losses $ 102,810 $ 100,910 $ 106,752 $ 111,746 $ 118,031
Accruing restructured loans (3) 18,277 26,793 25,797 29,430 29,911
Total non-performing loans to total loans 1.12 % 1.99 % 2.13 % 1.87 % 1.83 %
Total non-performing assets to total assets 0.82 1.34 1.49 1.36 1.45
Allowance for loan losses to non-performing loans 102.54 91.09 89.88 104.87 115.21

(1)

Includes $22.4 million, $14.5 million, $15.6 million, $25.0 million and $22.3 million of restructured loans on non-accrual status at September 30, 2014, June 30, 2014, March 31, 2014, December 31, 2013 and September 30, 2013, respectively.
(2)

We define potential problem loans as loans rated substandard that do not meet the definition of a non-performing loan. Potential problem loans carry a higher probability of default and require additional attention by management.

(3) Accruing restructured loans consist primarily of residential real estate and home equity loans that have been modified and are performing in accordance with those modified terms as of the dates indicated.

The following table presents data related to non-performing loans by category (excluding loans held for sale and credit-impaired loans that were acquired as part of our FDIC-assisted transactions and Taylor Capital merger) as of the dates indicated (in thousands):

9/30/2014 6/30/2014 3/31/2014 12/31/2013 9/30/2013
Commercial and lease $ 22,985 $ 36,807 $ 42,532 $ 22,348 $ 22,293
Commercial real estate 42,832 48,751 49,541 58,292 54,276
Construction real estate 337 337 782 475 496
Consumer related 34,107 24,882 25,915 25,446 25,387
Total non-performing loans $ 100,261 $ 110,777 $ 118,770 $ 106,561 $ 102,452

The increase in consumer non-performing loans relates to a group of restructured loans that are less than 90 days past due that are now reported as non-performing.

The following table represents a summary of other real estate owned (excluding other real estate owned related to assets acquired in FDIC-assisted transactions) as of the dates indicated (in thousands):

9/30/2014 6/30/2014 3/31/2014 12/31/2013 9/30/2013
Balance at the beginning of quarter $ 20,306 $ 20,928 $ 23,289 $ 31,356 $ 32,993
Transfers in at fair value less estimated costs to sell 221 112 539 104 1,846
Acquired from business combination 5,082
Capitalized other real estate owned costs 21 45
Fair value adjustments (2,083 ) (286 ) (140 ) (176 ) (741 )
Net gains (losses) on sales of other real estate owned 735 82 18 1,007 (13 )
Cash received upon disposition (5,082 ) (530 ) (2,778 ) (9,023 ) (2,774 )
Balance at the end of quarter $ 19,179 $ 20,306 $ 20,928 $ 23,289 $ 31,356

Below is a reconciliation of the activity in our allowance for credit and loan losses for the periods indicated (dollars in thousands):

Nine Months Ended
September 30,
3Q14 2Q14 1Q14 4Q13 3Q13 2014 2013
Allowance for credit losses, balance at the beginning of period $ 103,905 $ 108,395 $ 113,462 $ 119,725 $ 125,497 $ 113,462 $ 128,279
Allowance for unfunded credit commitments acquired through business combination 1,261 1,261
Utilization of allowance for unfunded credit commitments (637 ) (637 )
Provision for credit losses – legacy (1,600 ) (1,950 ) 1,150 (3,000 ) (3,304 ) (2,400 ) (2,804 )
Provision for credit losses – acquired Taylor Capital loan portfolio renewals 4,709 4,709
Charge-offs:
Commercial loans 606 446 90 676 1,686 1,142 3,030
Commercial loans collateralized by assignment of lease payments (lease loans) 40 40
Commercial real estate 1,027 1,727 7,156 2,386 1,236 9,910 5,131
Construction real estate 5 14 56 125 26 75 855
Residential real estate 740 433 265 722 713 1,438 2,074
Home equity 566 817 619 1,145 437 2,002 2,547
Indirect vehicle 1,043 583 920 981 572 2,546 1,930
Consumer loans 497 590 495 572 485 1,582 1,501
Total charge-offs 4,484 4,650 9,601 6,607 5,155 18,735 17,068
Recoveries:
Commercial loans 564 696 1,628 1,348 579 2,888 1,808
Commercial loans collateralized by assignment of lease payments (lease loans) 425 130 555 1,131
Commercial real estate 2,227 567 485 672 966 3,279 5,353
Construction real estate 25 77 99 789 420 201 827
Residential real estate 4 6 519 18 48 529 461
Home equity 46 127 133 152 228 306 442
Indirect vehicle 402 439 442 300 372 1,283 1,111
Consumer loans 65 68 78 65 74 211 185
Total recoveries 3,758 2,110 3,384 3,344 2,687 9,252 11,318
Total net charge-offs 726 2,540 6,217 3,263 2,468 9,483 5,750
Allowance for credit losses 106,912 103,905 108,395 113,462 119,725 106,912 119,725
Allowance for unfunded credit commitments (4,102 ) (2,995 ) (1,643 ) (1,716 ) (1,694 ) (4,102 ) (1,694 )
Allowance for loan losses $ 102,810 $ 100,910 $ 106,752 $ 111,746 $ 118,031 $ 102,810 $ 118,031
Total loans, excluding loans held for sale $ 8,983,017 $ 5,556,724 $ 5,568,315 $ 5,712,551 $ 5,586,732 $ 8,983,017 $ 5,586,732
Average loans, excluding loans held for sale 7,182,146 5,516,735 5,606,877 5,572,759 5,555,036 6,107,690 5,616,855
Ratio of allowance for loan losses to total loans, excluding loans held for sale 1.14 % 1.82 % 1.92 % 1.96 % 2.11 % 1.14 % 2.11 %
Ratio of allowance for loan losses to total legacy loans plus Taylor renewed loans, excluding loans held for sale (1) 1.83 1.82 1.92 1.96 2.11 1.83 2.11
Net loan charge-offs to average loans, excluding loans held for sale (annualized) 0.04 0.18 0.45 0.23 0.18 0.21 0.14

(1) Taylor renewed loans totaled $92.6 million at September 30, 2014.

The following table presents the three elements of the Company’s allowance for loan losses (in thousands):

9/30/2014 6/30/2014 3/31/2014 12/31/2013 9/30/2013
Commercial related loans:
General reserve $ 76,604 $ 70,855 $ 75,695 $ 78,270 $ 87,112
Specific reserve 5,802 10,270 11,325 12,834 12,378
Consumer related reserve 20,404 19,785 19,732 20,642 18,541
Total allowance for loan losses $ 102,810 $ 100,910 $ 106,752 $ 111,746 $ 118,031

Specific reserves decreased during the quarter due to an improvement in credit quality on impaired loans.

Although management believes that adequate loan loss allowances have been established, actual losses are dependent upon future events and, as such, further additions to the level of loan loss allowances may become necessary.

Purchased loans acquired in a business combination are recorded at estimated fair value on their purchase date without a carryover of the related allowance for loan losses. These acquired loans are segregated into three types: pass rated loans with no discount attributable to credit quality, non-impaired loans with a discount attributable at least in part to credit quality and impaired loans with evidence of significant credit deterioration.

  • Pass rated loans (typically performing loans) are accounted for in accordance with ASC 310-20 “Nonrefundable Fees and Other Costs” as these loans do not have evidence of credit deterioration since origination.
  • Non-impaired loans (typically performing substandard loans) are accounted for in accordance with ASC 310-30 if they display at least some level of credit deterioration since origination.
  • Impaired loans (typically substandard loans on non-accrual status) are accounted for in accordance with ASC 310-30 as they display significant credit deterioration since origination.

For pass rated loans (non-purchased credit impaired loans), the difference between the estimated fair value of the loans and the principal outstanding is accreted over the remaining life of the loans. We anticipate recording a provision for the acquired portfolio in future quarters related to renewing Taylor loans which will largely offset the accretion from the pass rated loans.

In accordance with ASC 310-30, for both purchased non-impaired loans and purchased impaired loans (“PCI loans”), the difference between contractually required payments at acquisition and the cash flows expected to be collected is referred to as the non-accretable difference. Further, any excess of cash flows expected at acquisition over the estimated fair value is referred to as the accretable yield and is recognized into interest income over the remaining life of the loan when there is a reasonable expectation about the amount and timing of such cash flows.

Changes in the purchase accounting discount for loans acquired in the Taylor Capital merger were as follows for the three months ended September 30, 2014 (in thousands):

Non- Accretable
Accretable Accretable

Discount -

Discount - Discount -

Non-PCI

PCI Loans PCI Loans Loans Total
Balance at beginning of period $ $ $ $
Purchases 30,042 3,252 77,186 110,480
Charge-offs (1,062 ) (1,062 )
Accretion (282 ) (5,892 ) (6,174 )
Balance at end of period $ 28,980 $ 2,970 $ 71,294 $ 103,244

INVESTMENT SECURITIES

The following table sets forth, by type, the fair value and amortized cost of our investment securities, excluding FHLB and FRB stock, as well as the unrealized gain of our investment securities available for sale (in thousands):

9/30/2014 6/30/2014 3/31/2014 12/31/2013 9/30/2013
Securities available for sale:
Fair value
Government sponsored agencies and enterprises $ 65,829 $ 51,727 $ 51,836 $ 52,068 $ 52,527
States and political subdivisions 409,033 19,498 19,350 19,143 19,312
Mortgage-backed securities 1,006,102 797,783 726,439 754,174 744,722
Corporate bonds 267,239 275,529 273,853 283,070 263,021
Equity securities 10,447 10,421 10,572 10,457 10,541
Total fair value $ 1,758,650 $ 1,154,958 $ 1,082,050 $ 1,118,912 $ 1,090,123
Amortized cost
Government sponsored agencies and enterprises $ 64,809 $ 50,096 $ 50,291 $ 50,486 $ 50,678
States and political subdivisions 391,900 19,228 19,285 19,398 19,461
Mortgage-backed securities 999,630 786,496 717,548 747,306 736,070
Corporate bonds 265,720 271,351 272,490 284,083 265,293
Equity securities 10,470 10,414 10,703 10,649 10,574
Total amortized cost $ 1,732,529 $ 1,137,585 $ 1,070,317 $ 1,111,922 $ 1,082,076
Unrealized gain, net
Government sponsored agencies and enterprises $ 1,020 $ 1,631 $ 1,545 $ 1,582 $ 1,849
States and political subdivisions 17,133 270 65 (255 ) (149 )
Mortgage-backed securities 6,472 11,287 8,891 6,868 8,652
Corporate bonds 1,519 4,178 1,363 (1,013 ) (2,272 )
Equity securities (23 ) 7 (131 ) (192 ) (33 )
Total unrealized gain, net $ 26,121 $ 17,373 $ 11,733 $ 6,990 $ 8,047
Securities held to maturity, at amortized cost:
States and political subdivisions $ 760,674 $ 993,937 $ 940,610 $ 932,955 $ 941,273
Mortgage-backed securities 244,675 247,455 248,082 249,578 252,271
Total amortized cost $ 1,005,349 $ 1,241,392 $ 1,188,692 $ 1,182,533 $ 1,193,544

During the third quarter of 2014, the Company repositioned its balance sheet subsequent to the Taylor Capital merger and sold certain longer-term and lower-coupon investment securities with an approximate carrying amount of $468.7 million. These investment security sales shortened the overall duration of the investment securities portfolio to pre-merger levels. Also as a part of the balance sheet repositioning, securities of states and political subdivisions with an approximate fair value of $291.2 million were transferred from held to maturity to available for sale during the third quarter of 2014. As a result of the repositioning, we recognized a net loss of $3.2 million.

DEPOSIT MIX

The following table shows the composition of deposits based on period end balances as of the dates indicated (dollars in thousands):

9/30/2014 6/30/2014 9/30/2013
% of % of % of
Legacy

Acquired (1)

Total Total Amount Total Amount Total
Low cost deposits:
Noninterest bearing deposits $ 2,658,102 $ 1,149,452 $ 3,807,554 34 % $ 2,605,367 34 % $ 2,269,367 31 %
Money market and NOW accounts 2,884,296 1,312,870 4,197,166 37 2,932,089 38 2,680,127 37
Savings accounts 892,183 39,802 931,985 8 872,324 11 843,671 12
Total low cost deposits 6,434,581 2,502,124 8,936,705 79 6,409,780 83 5,793,165 80
Certificates of deposit:
Certificates of deposit 1,114,292 531,708 1,646,000 15 1,137,262 14 1,266,989 17
Brokered deposit accounts 189,135 466,708 655,843 6 216,022 3 238,532 3
Total certificates of deposit 1,303,427 998,416 2,301,843 21 1,353,284 17 1,505,521 20
Total deposits $ 7,738,008 $ 3,500,540 $ 11,238,548 100 % $ 7,763,064 100 % $ 7,298,686 100 %

(1) Acquired deposits refer to the September 30, 2014 balance for deposits acquired in the Taylor Capital transaction.

Total legacy deposits decreased $25.1 million from $7.8 billion at June 30, 2014 primarily due to the decrease in certificates of deposit. Legacy low cost deposits increased by $24.8 million from June 30, 2014. Shortly after the acquisition the rates paid on the Taylor Capital deposit products, primarily affecting money markets and certificates of deposit, were reduced to align with the Company’s current rate offerings. We expect to see a decline in balances from rate sensitive customers over the next few quarters.

CAPITAL

Tangible book value per common share decreased to $15.36 at September 30, 2014 compared to $15.83 a year ago and $16.81 last quarter.

Our regulatory capital ratios remain strong. MB Financial Bank, N.A. was categorized as “well capitalized” at September 30, 2014 under the Prompt Corrective Action (“PCA”) provisions.

FORWARD-LOOKING STATEMENTS

When used in this press release and in reports filed with or furnished to the Securities and Exchange Commission, in other press releases or other public stockholder 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 our 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) expected revenues, cost savings, synergies and other benefits from the recently completed MB Financial-Taylor Capital merger and our other merger and acquisition activities might not be realized within the anticipated time frames or at all, and costs or difficulties relating to integration matters, including but not limited to customer and employee retention, might be greater than expected; (2) the possibility that the expected benefits of the other acquisition transactions we previously completed will not be realized; (3) 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, resulting both from loans we originate and loans we acquire from other financial institutions; (4) results of examinations by the Office of Comptroller of Currency, the Federal Reserve Board, the Consumer Financial Protection Bureau and other regulatory authorities, including the possibility that any such regulatory authority may, among other things, require us to increase our allowance for loan losses or write-down assets; (5) competitive pressures among depository institutions; (6) interest rate movements and their impact on customer behavior and net interest margin; (7) the possibility that our mortgage banking business may increase volatility in our revenues and earnings and the possibility that the profitability of our mortgage banking business could be significantly reduced if we are unable to originate and sell mortgage loans at profitable margins; (8) the impact of repricing and competitors’ pricing initiatives on loan and deposit products; (9) fluctuations in real estate values; (10) the ability to adapt successfully to technological changes to meet customers’ needs and developments in the market-place; (11) our ability to realize the residual values of our direct finance, leveraged, and operating leases; (12) our ability to access cost-effective funding; (13) changes in financial markets; (14) changes in economic conditions in general and in the Chicago metropolitan area in particular; (15) the costs, effects and outcomes of litigation; (16) new legislation or regulatory changes, including but not limited to the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”) and regulations adopted thereunder, changes in capital requirements pursuant to the Dodd-Frank Act and the implementation of the Basel III capital standards, other governmental initiatives affecting the financial services industry and changes in federal and/or state tax laws or interpretations thereof by taxing authorities; (17) changes in accounting principles, policies or guidelines; (18) our future acquisitions of other depository institutions or lines of business; and (19) future goodwill impairment due to changes in our business, changes in market conditions, or other factors.

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.

TABLES TO FOLLOW

MB FINANCIAL, INC. & SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Unaudited)
As of the dates indicated
(In thousands)
9/30/2014 6/30/2014 3/31/2014 12/31/2013 9/30/2013
ASSETS
Cash and due from banks $ 267,405 $ 294,475 $ 268,803 $ 205,193 $ 215,017
Interest earning deposits with banks 179,391 466,820 244,819 268,266 41,700
Total cash and cash equivalents 446,796 761,295 513,622 473,459 256,717
Federal funds sold 10,000 7,500 42,950 47,500
Investment securities:
Securities available for sale, at fair value 1,758,650 1,154,958 1,082,050 1,118,912 1,090,123
Securities held to maturity, at amortized cost 1,005,349 1,241,392 1,188,692 1,182,533 1,193,544
Non-marketable securities – FHLB and FRB Stock 75,569 51,432 51,432 51,417 50,870
Total investment securities 2,839,568 2,447,782 2,322,174 2,352,862 2,334,537
Loans held for sale 553,627 1,219 802 629 1,120
Loans:
Total loans, excluding purchased credit impaired and covered loans 8,714,915 5,421,758 5,394,638 5,476,831 5,313,235
Purchased credit impaired including covered loans 268,102 134,966 173,677 235,720 273,497
Total loans 8,983,017 5,556,724 5,568,315 5,712,551 5,586,732
Less: Allowance for loan losses 102,810 100,910 106,752 111,746 118,031
Net loans 8,880,207 5,455,814 5,461,563 5,600,805 5,468,701
Lease investments, net 137,120 127,194 122,589 131,089 112,491
Premises and equipment, net 244,314 224,245 221,711 221,065 220,574
Cash surrender value of life insurance 132,697 131,842 131,008 130,181 129,332
Goodwill 698,946 423,369 423,369 423,369 423,369
Other intangibles 44,544 21,014 22,188 23,428 24,917
Mortgage servicing rights, at fair value 249,376 344 378 413 430
Other real estate owned, net 19,179 20,306 20,928 23,289 31,356
Other real estate owned related to FDIC transactions 22,028 15,349 22,682 20,472 24,792
FDIC indemnification asset 2,205 4,607 8,055 11,675 11,074
Other assets 235,436 174,311 158,734 185,741 170,708
Total assets $ 14,506,043 $ 9,818,691 $ 9,437,303 $ 9,641,427 $ 9,257,618
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities
Deposits:
Noninterest bearing $ 3,807,554 $ 2,605,367 $ 2,435,868 $ 2,375,863 $ 2,269,367
Interest bearing 7,430,994 5,157,697 5,049,879 5,005,396 5,029,319
Total deposits 11,238,548 7,763,064 7,485,747 7,381,259 7,298,686
Short-term borrowings 667,160 229,809 189,872 493,389 240,600
Long-term borrowings 77,269 71,473 65,664 62,159 62,428
Junior subordinated notes issued to capital trusts 185,681 152,065 152,065 152,065 152,065
Accrued expenses and other liabilities 346,017 236,964 200,175 225,873 194,371
Total liabilities 12,514,675 8,453,375 8,093,523 8,314,745 7,948,150
Stockholders’ Equity
Preferred stock 115,280
Common stock 751 553 553 551 551
Additional paid-in capital 1,256,050 742,824 740,245 738,053 736,294
Retained earnings 606,097 611,741 595,301 581,998 564,779
Accumulated other comprehensive income 18,431 13,034 10,362 8,383 9,918
Treasury stock (6,692 ) (4,295 ) (4,132 ) (3,747 ) (3,525 )
Controlling interest stockholders’ equity 1,989,917 1,363,857 1,342,329 1,325,238 1,308,017
Noncontrolling interest 1,451 1,459 1,451 1,444 1,451
Total stockholders’ equity 1,991,368 1,365,316 1,343,780 1,326,682 1,309,468
Total liabilities and stockholders’ equity $ 14,506,043 $ 9,818,691 $ 9,437,303 $ 9,641,427 $ 9,257,618
MB FINANCIAL, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except share and per share data) (Unaudited)
Nine Months Ended
September 30,
3Q14 2Q14 1Q14 4Q13 3Q13 2014 2013
Interest income:
Loans $ 82,167 $ 55,905 $ 56,244 $ 58,053 $ 60,115 $ 194,316 $ 180,489
Investment securities:
Taxable 11,028 8,794 8,146 7,334 6,330 27,968 18,749
Nontaxable 9,041 8,285 8,067 8,166 8,175 25,393 24,399
Federal funds sold and other interest earning accounts 225 281 118 276 200 624 429
Total interest income 102,461 73,265 72,575 73,829 74,820 248,301 224,066
Interest expense:
Deposits 4,615 3,754 3,769 3,966 4,433 12,138 15,274
Borrowings 2,234 1,439 1,478 1,600 1,479 5,151 4,719
Total interest expense 6,849 5,193 5,247 5,566 5,912 17,289 19,993
Net interest income 95,612 68,072 67,328 68,263 68,908 231,012 204,073
Provision for credit losses 3,109 (1,950 ) 1,150 (3,000 ) (3,304 ) 2,309 (2,804 )
Net interest income after provision for credit losses 92,503 70,022 66,178 71,263 72,212 228,703 206,877
Non-interest income:
Lease financing, net 17,719 14,853 13,196 15,808 14,070 45,768 45,435
Mortgage banking revenue 16,823 187 59 342 177 17,069 1,322
Commercial deposit and treasury management fees 9,345 7,106 7,144 6,545 6,327 23,595 18,322
Trust and asset management fees 5,712 5,405 5,207 4,975 4,799 16,324 14,167
Card fees 3,836 3,304 2,701 2,838 2,745 9,841 8,175
Capital markets and international banking service fees 1,472 1,360 978 841 972 3,810 2,719
Consumer and other deposit service fees 3,362 3,156 2,935 3,481 3,648 9,453 10,487
Brokerage fees 1,145 1,356 1,325 1,227 1,289 3,826 3,680
Loan service fees 1,069 916 965 1,214 1,427 2,950 4,349
Increase in cash surrender value of life insurance 855 834 827 848 851 2,516 2,537
Net (loss) gain on investment securities (3,246 ) (87 ) 317 (15 ) 1 (3,016 ) 14
Net (loss) gain on sale of assets (7 ) (24 ) 7 (323 ) (24 )
Gain on early extinguishment of debt 1,895 1,895
Other operating income 1,107 1,562 951 1,264 1,401 3,620 4,142
Total non-interest income 61,087 39,928 36,612 39,045 37,707 137,627 115,349
Non-interest expense:
Salaries and employee benefits 79,492 46,622 44,377 45,517 44,918 170,491 132,341
Occupancy and equipment expense 11,742 9,518 9,592 9,269 8,797 30,852 27,609
Computer services and telecommunication expense 11,506 5,079 5,084 5,509 4,870 21,669 13,374
Advertising and marketing expense 2,235 2,221 2,081 2,085 1,917 6,537 6,187
Professional and legal expense 8,864 1,567 1,779 3,057 3,102 12,210 5,750
Other intangible amortization expense 1,470 1,174 1,240 1,489 1,513 3,884 4,595
Net loss (gain) recognized on other real estate owned and other expense 2,178 528 583 (459 ) 1,031 3,289 (322 )
Other operating expenses 24,714 11,321 11,311 10,174 10,117 47,346 28,413
Total non-interest expense 142,201 78,030 76,047 76,641 76,265 296,278 217,947
Income before income taxes 11,389 31,920 26,743 33,667 33,654 70,052 104,279
Income tax expense 4,488 8,814 6,774 9,811 9,254 20,076 29,680
Net income 6,901 23,106 19,969 23,856 24,400 49,976 74,599
Dividends on preferred shares 2,000 2,000
Net income available to common stockholders $ 4,901 $ 23,106 $ 19,969 $ 23,856 $ 24,400 $ 47,976 $ 74,599
Nine Months Ended
September 30,
3Q14 2Q14 1Q14 4Q13 3Q13 2014 2013
Common share data:
Basic earnings per common share $ 0.08 $ 0.42 $ 0.37 $ 0.44 $ 0.45 $ 0.83 $ 1.37
Diluted earnings per common share 0.08 0.42 0.36 0.43 0.44 0.82 1.36

Weighted average common shares outstanding for
basic earnings per common share

63,972,902 54,669,868 54,639,951 54,622,584 54,565,089 57,795,094 54,471,541

Weighted average common shares outstanding for
diluted earnings per common share

64,457,978 55,200,054 55,265,188 55,237,160 55,130,653 58,341,927 54,912,352
Selected Financial Data:
Nine Months Ended
September 30,
3Q14 2Q14 1Q14 4Q13 3Q13 2014 2013
Performance Ratios:
Annualized return on average assets 0.22 % 0.97 % 0.86 % 0.99 % 1.05 % 0.64 % 1.07 %
Annualized operating return on average assets (1) 1.16 0.99 0.93 1.02 1.11 1.04 1.09
Annualized return on average common equity 1.21 6.86 6.07 7.19 7.46 4.47 7.72
Annualized operating return on average common equity(1) 8.29 6.98 6.53 7.43 7.95 7.34 7.88
Annualized cash return on average tangible common equity(2) 2.23 10.47 9.39 11.23 11.74 7.09 12.19
Annualized cash operating return on average tangible common equity(3) 13.19 10.66 10.08 11.59 12.48 11.42 12.44
Net interest rate spread 3.66 3.40 3.51 3.37 3.52 3.54 3.48
Cost of funds(4) 0.26 0.26 0.27 0.27 0.30 0.27 0.34
Efficiency ratio(5) 63.46 67.68 66.84 66.56 65.81 65.65 63.89
Annualized net non-interest expense to average assets(6) 1.35 1.55 1.58 1.50 1.56 1.48 1.43
Core non-interest income to revenues (7) 38.23 35.22 33.41 34.68 33.51 35.99 34.36
Net interest margin 3.56 3.26 3.36 3.23 3.37 3.41 3.34
Tax equivalent effect 0.22 0.27 0.28 0.27 0.29 0.25 0.28
Net interest margin – fully tax equivalent basis(8) 3.78 3.53 3.64 3.50 3.66 3.66 3.62
Loans to deposits 79.93 71.58 74.39 77.39 76.54 79.93 76.54
Asset Quality Ratios:
Non-performing loans(9) to total loans 1.12 % 1.99 % 2.13 % 1.87 % 1.83 % 1.12 % 1.83 %
Non-performing assets(9) to total assets 0.82 1.34 1.49 1.36 1.45 0.82 1.45
Allowance for loan losses to non-performing loans(9) 102.54 91.09 89.88 104.87 115.21 102.54 115.21
Allowance for loan losses to total loans 1.14 1.82 1.92 1.96 2.11 1.14 2.11
Net loan charge-offs to average loans (annualized) 0.04 0.18 0.45 0.23 0.18 0.21 0.14
Capital Ratios:
Tangible equity to tangible assets(10) 9.17 % 9.89 % 10.07 % 9.65 % 9.87 % 9.17 % 9.87 %
Tangible common equity to tangible assets(11) 8.33 9.89 10.07 9.65 9.87 8.33 9.87
Tangible common equity to risk weighted assets(12) 10.33 13.97 13.82 13.27 13.40 10.33 13.40
Book value per common share(13) $ 25.09 $ 24.73 $ 24.37 $ 24.14 $ 23.82 $ 25.09 $ 23.82
Less: goodwill and other intangible assets, net of benefit, per common share 9.73 7.92 7.94 7.98 7.99 9.73 7.99
Tangible book value per common share(14) $ 15.36 $ 16.81 $ 16.43 $ 16.16 $ 15.83 $ 15.36 $ 15.83
Total capital (to risk-weighted assets) 13.58 % 17.18 % 17.09 % 16.53 % 16.70 % 13.58 % 16.70 %
Tier 1 capital (to risk-weighted assets) 12.62 15.92 15.84 15.28 15.44 12.62 15.44
Tier 1 capital (to average assets) 12.27 11.61 11.65 11.22 11.39 12.27 11.39
Tier 1 common capital (to risk-weighted assets) 9.90 13.71 13.59 13.07 13.17 9.90 13.17

(1)

Annualized operating return on average assets is computed by dividing annualized operating earnings by average total assets. Annualized operating return on average common equity is computed by dividing annualized operating earnings by average common equity. Operating earnings is defined as net income as reported less non-core items, net of tax.

(2)

Net cash flow (net income available to common stockholders, plus other intangibles amortization expense, net of tax benefit) divided by average tangible equity (average common stockholders’ equity less average goodwill and average other intangibles, net of tax benefit).

(3)

Annualized cash operating return on average tangible common equity is computed by dividing annualized cash operating earnings (operating earnings plus other intangibles amortization expense, net of tax benefit, less dividends on preferred shares) by average tangible common equity. Operating earnings is defined as net income as reported less non-core items, net of tax.

(4)

Equals total interest expense divided by the sum of average interest bearing liabilities and noninterest bearing deposits.

(5)

Equals total non-interest expense excluding non-core items divided by the sum of net interest income on a fully tax equivalent basis, total non-interest income less non-core items, and tax equivalent adjustment on the increase in cash surrender value of life insurance.

(6)

Equals total non-interest expense excluding non-core items less total non-interest income excluding non-core items, and including tax equivalent adjustment on the increase in cash surrender value of life insurance divided by average assets.

(7)

Equals total non-interest income excluding non-core items and tax equivalent adjustment on the increase in cash surrender value of life insurance divided by the sum of net interest income on a fully tax equivalent basis, total non-interest income less non-core items, and tax equivalent adjustment on the increase in cash surrender value of life insurance.

(8)

Represents net interest income on a fully tax equivalent basis assuming a 35% tax rate, as a percentage of average interest earning assets.

(9)

Non-performing loans excludes purchased credit-impaired loans and loans held for sale. Non-performing assets excludes purchased credit-impaired loans, loans held for sale, and other real estate owned related to FDIC transactions.

(10)

Equals total ending stockholders’ equity less goodwill and other intangibles, net of tax benefit, divided by total assets less goodwill and other intangibles, net of tax benefit.

(11)

Equals total ending stockholders’ equity less goodwill and other intangibles, net of tax benefit, divided by total assets less goodwill and other intangibles, net of tax benefit.

(12)

Equals total ending common stockholders’ equity less goodwill and other intangibles, net of tax benefit, divided by total assets less goodwill and other intangibles, net of tax benefit.

(13)

Equals total ending stockholders’ equity divided by common shares outstanding.

(14)

Equals total ending stockholders’ equity less goodwill and other intangibles, net of tax benefit, divided by common shares outstanding.

NON-GAAP FINANCIAL INFORMATION

This press release contains certain financial information determined by methods other than in accordance with accounting principles generally accepted in the United States of America (GAAP). These measures include operating earnings, core non-interest income, core non-interest income to revenues (with non-core items excluded from both core non-interest income and revenues), core non-interest expense, non-core non-interest income and non-core non-interest expense, net interest income on a fully tax equivalent basis, net interest margin on a fully tax equivalent basis, efficiency ratio and the ratio of annualized net non-interest expense to average assets with net gains and losses on investment securities, net gains and losses on sale of other assets, gain on extinguishment of debt and increase in market value of assets held in trust for deferred compensation excluded from the non-interest income components of these ratios, and contingent consideration expense, merger related expenses, loss on low to moderate income real estate investment and increase in market value of assets held in trust for deferred compensation excluded from the non-interest expense components of these ratios, with tax equivalent adjustment for tax-exempt interest income and increase in cash surrender value of life insurance, as applicable; ratios of tangible equity to tangible assets, tangible common equity to risk-weighted assets and Tier 1 common capital to risk-weighted assets; tangible book value per common share; and annualized cash return on average tangible common equity. Our management uses these non-GAAP measures, together with the related GAAP measures, in its analysis of our performance and in making business decisions. Management also uses these measures for peer comparisons.

Management believes that operating earnings, core and non-core non-interest income and non-interest expense are useful in assessing our core operating performance and in understanding the primary drivers of our non-interest income and non-interest expense when comparing periods.

The tax equivalent adjustment to net interest income, net interest margin, tax-exempt interest income and increase in cash surrender value of life insurance 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. For the same reasons, management believes that the tax equivalent adjustments to tax-exempt interest income and increase in cash surrender value of life insurance are useful.

Management also believes that by excluding net gains and losses on investment securities, net gains and losses on sale of other assets, gain on extinguishment of debt and increase in market value of assets held in trust for deferred compensation from the non-interest income components, and excluding contingent consideration expense, merger-related expenses, loss on low to moderate income real estate investment and increase in market value of assets held in trust for deferred compensation from the non-interest expense components, of the efficiency ratio and the ratio of annualized net non-interest expense to average assets, these ratios better reflect our core operating performance, as the excluded items do not pertain to our core business operations and their exclusion makes these ratios more meaningful when comparing our operating results from period to period.

In addition, management believes that presenting the ratio of Tier 1 common equity to risk-weighted assets is useful for assessing our capital strength and for peer comparison purposes. The other measures exclude the acquisition-related goodwill and other intangible assets, net of tax benefit, in determining tangible assets, tangible equity, tangible common equity and average tangible common equity and exclude other intangible amortization expense, net of tax benefit, in determining net cash flow available to common stockholders. 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, as well as our capital strength. Management also believes that providing measures that exclude balances of acquisition-related goodwill and other intangible assets, which are subjective components of valuation, facilitates the comparison of our performance with the performance of our peers. In addition, management believes that these are standard financial measures used in the banking industry to evaluate performance.

The non-GAAP disclosures contained herein 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.

A reconciliation of net interest margin on a fully tax equivalent basis to net interest margin is contained in the tables under “Net Interest Margin.” A reconciliation of tangible book value per common share to book value per common share is contained in the “Selected Financial Ratios” table. Reconciliations of core and non-core non-interest income and non-interest expense to non-interest income and non-interest expense are contained in the tables under “Results of Operations-Third Quarter Results.”

The following table presents a reconciliation of tangible equity to stockholders’ equity (in thousands):

9/30/2014 6/30/2014 3/31/2014 12/31/2013 9/30/2013
Stockholders’ equity – as reported $ 1,991,368 $ 1,365,316 $ 1,343,780 $ 1,326,682 $ 1,309,468
Less: goodwill 698,946 423,369 423,369 423,369 423,369
Less: other intangible assets, net of tax benefit 28,954 13,659 14,422 15,228 16,196
Tangible equity $ 1,263,468 $ 928,288 $ 905,989 $ 888,085 $ 869,903

The following table presents a reconciliation of tangible assets to total assets (in thousands):

9/30/2014 6/30/2014 3/31/2014 12/31/2013 9/30/2013
Total assets – as reported $ 14,506,043 $ 9,818,691 $ 9,437,303 $ 9,641,427 $ 9,257,618
Less: goodwill 698,946 423,369 423,369 423,369 423,369
Less: other intangible assets, net of tax benefit 28,954 13,659 14,422 15,228 16,196
Tangible assets $ 13,778,143 $ 9,381,663 $ 8,999,512 $ 9,202,830 $ 8,818,053

The following table presents a reconciliation of tangible common equity to common stockholders’ equity (in thousands):

9/30/2014 6/30/2014 3/31/2014 12/31/2013 9/30/2013
Common stockholders’ equity – as reported $ 1,876,088 $ 1,365,316 $ 1,343,780 $ 1,326,682 $ 1,309,468
Less: goodwill 698,946 423,369 423,369 423,369 423,369
Less: other intangible assets, net of tax benefit 28,954 13,659 14,422 15,228 16,196
Tangible common equity $ 1,148,188 $ 928,288 $ 905,989 $ 888,085 $ 869,903

The following table presents a reconciliation of average tangible equity to average common stockholders’ equity (in thousands):

Nine Months Ended
September 30,
3Q14 2Q14 1Q14 4Q13 3Q13 2014 2013
Average common stockholders’ equity – as reported $ 1,613,277 $ 1,351,604 $ 1,335,223 $ 1,315,804 $ 1,297,498 $ 1,434,387 $ 1,291,988
Less: average goodwill 550,581 423,369 423,369 423,369 423,369 466,239 423,369
Less: average other intangible assets, net of tax benefit 19,769 13,990 14,758 15,647 16,620 16,191 17,605
Average tangible common equity $ 1,042,927 $ 914,245 $ 897,096 $ 876,788 $ 857,509 $ 951,957 $ 851,014

The following table presents a reconciliation of net cash flow available to common stockholders to net income available to common stockholders (in thousands):

Nine Months Ended
September 30,
3Q14 2Q14 1Q14 4Q13 3Q13 2014 2013
Net income available to common stockholders – as reported $ 4,901 $ 23,106 $ 19,969 $ 23,856 $ 24,400 $ 47,976 $ 74,599
Add: other intangible amortization expense, net of tax benefit 956 763 806 968 983 2,525 2,987
Net cash flow available to common stockholders $ 5,857 $ 23,869 $ 20,775 $ 24,824 $ 25,383 $ 50,501 $ 77,586

The following table presents a reconciliation of net income to operating earnings (in thousands):

Nine Months Ended
September 30,
3Q14 2Q14 1Q14 4Q13 3Q13 2014 2013
Net income – as reported $ 6,901 $ 23,106 $ 19,969 $ 23,856 $ 24,400 $ 49,976 $ 74,599
Less non-core items:
Net gain (loss) on investment securities (3,246 ) (87 ) 317 (15 ) 1 (3,016 ) 14
Net (loss) gain on sale of other assets (7 ) (24 ) 7 (323 ) (24 )
Gain on extinguishment of debt 1,895 1,895
Merger related expenses (27,161 ) (488 ) (680 ) (724 ) (1,759 ) (28,329 ) (1,759 )
Loss on low-income housing investment (96 ) (2,028 ) (2,124 )
Contingent consideration expense – Celtic acquisition (10,600 ) (10,600 )
Total non-core items (39,119 ) (695 ) (2,384 ) (1,062 ) (1,758 ) (42,198 ) (1,745 )
Income tax expense on non-core items (10,295 ) (266 ) (855 ) (281 ) (174 ) (11,416 ) (168 )
Non-core items, net of tax (28,824 ) (429 ) (1,529 ) (781 ) (1,584 ) (30,782 ) (1,577 )
Operating earnings $ 35,725 $ 23,535 $ 21,498 $ 24,637 $ 25,984 $ 80,758 $ 76,176

The following table presents a reconciliation of Tier 1 common capital to Tier 1 capital (in thousands):

9/30/2014 6/30/2014 3/31/2014 12/31/2013 9/30/2013
Tier 1 capital – as reported $ 1,402,796 $ 1,058,504 $ 1,038,600 $ 1,022,512 $ 1,002,883
Less: qualifying trust preferred securities 187,500 147,500 147,500 147,500 147,500
Less: preferred stock 115,280
Tier 1 common capital $ 1,100,016 $ 911,004 $ 891,100 $ 875,012 $ 855,383

Efficiency Ratio Calculation (Dollars in Thousands)

Nine Months Ended
September 30,
3Q14 2Q14 1Q14 4Q13 3Q13 2014 2013
Non-interest expense $ 142,201 $ 78,030 $ 76,047 $ 76,641 $ 76,265 $ 296,278 $ 217,947
Less merger related expenses 27,161 488 680 724 1,759 28,329 1,759
Less loss on low to moderate income real estate investment 96 2,028 2,124
Less contingent consideration expense 10,600 10,600
Less (decrease) increase in market value of assets held in trust for deferred compensation (38 ) 400 152 588 459 514 963
Non-interest expense – as adjusted $ 104,478 $ 77,046 $ 73,187 $ 75,329 $ 74,047 $ 254,711 $ 215,225
Net interest income $ 95,612 $ 68,072 $ 67,328 $ 68,263 $ 68,908 $ 231,012 $ 204,073
Tax equivalent adjustment 6,087 5,677 5,581 5,655 5,905 17,345 17,054
Net interest income on a fully tax equivalent basis 101,699 73,749 72,909 73,918 74,813 248,357 221,127
Plus non-interest income 61,087 39,928 36,612 39,045 37,707 137,627 115,349
Plus tax equivalent adjustment on the increase in cash surrender value of life insurance 460 449 445 457 458 1,355 1,366
Less net (loss) gain on investment securities (3,246 ) (87 ) 317 (15 ) 1 (3,016 ) 14
Less net (loss) gain on sale of other assets (7 ) (24 ) 7 (323 ) (24 )
Gain on extinguishment of debt 1,895 1,895
Less (decrease) increase in market value of assets held in trust for deferred compensation (38 ) 400 152 588 459 514 963
Net interest income plus non-interest income – as adjusted $ 164,642 $ 113,837 $ 109,490 $ 113,170 $ 112,518 $ 387,970 $ 336,865
Efficiency ratio 63.46 % 67.68 % 66.84 % 66.56 % 65.81 % 65.65 % 63.89 %
Efficiency ratio (without adjustments) 90.75 % 72.25 % 73.16 % 71.42 % 71.53 % 80.37 % 68.23 %

Annualized Net Non-interest Expense to Average Assets Calculation (Dollars in Thousands)

Nine Months Ended
September 30,
3Q14 2Q14 1Q14 4Q13 3Q13 2014 2013
Non-interest expense $ 142,201 $ 78,030 $ 76,047 $ 76,641 $ 76,265 $ 296,278 $ 217,947
Less merger related expenses 27,161 488 680 724 1,759 28,329 1,759
Less loss on low to moderate income real estate investment 96 2,028 2,124
Less contingent consideration expense 10,600 10,600
Less (decrease) increase in market value of assets held in trust for deferred compensation (38 ) 400 152 588 459 514 963
Non-interest expense – as adjusted 104,478 77,046 73,187 75,329 74,047 254,711 215,225
Non-interest income 61,087 39,928 36,612 39,045 37,707 137,627 115,349
Less net (loss) gain on investment securities (3,246 ) (87 ) 317 (15 ) 1 (3,016 ) 14
Less net (loss) gain on sale of other assets (7 ) (24 ) 7 (323 ) (24 )
Gain on extinguishment of debt 1,895 1,895
Less (decrease) increase in market value of assets held in trust for deferred compensation (38 ) 400 152 588 459 514 963
Non-interest income – as adjusted 62,483 39,639 36,136 38,795 37,247 138,258 114,372
Less tax equivalent adjustment on the increase in cash surrender value of life insurance 460 449 445 457 458 1,355 1,366
Net non-interest expense $ 41,535 $ 36,958 $ 36,606 $ 36,077 $ 36,342 $ 115,098 $ 99,487
Average assets $ 12,206,030 $ 9,575,896 $ 9,367,942 $ 9,567,388 $ 9,261,291 $ 10,393,719 $ 9,332,730
Annualized net non-interest expense to average assets 1.35 % 1.55 % 1.58 % 1.50 % 1.56 % 1.48 % 1.43 %
Annualized net non-interest expense to average assets (without adjustments) 2.64 % 1.60 % 1.71 % 1.56 % 1.65 % 2.04 % 1.47 %

Core Non-interest Income to Revenues Ratio Calculation (Dollars in Thousands)

Nine Months Ended
September 30,
3Q14 2Q14 1Q14 4Q13 3Q13 2014 2013
Non-interest income $ 61,087 $ 39,928 $ 36,612 $ 39,045 $ 37,707 $ 137,627 $ 115,349
Plus tax equivalent adjustment on the increase in cash surrender value of life insurance 460 449 445 457 458 1,355 1,366
Less net (loss) gain on investment securities (3,246 ) (87 ) 317 (15 ) 1 (3,016 ) 14
Less net (loss) gain on sale of other assets (7 ) (24 ) 7 (323 ) (24 )
Gain on extinguishment of debt 1,895 1,895
Less (decrease) increase in market value of assets held in trust for deferred compensation (38 ) 400 152 588 459 514 963
Non-interest income – as adjusted $ 62,943 $ 40,088 $ 36,581 $ 39,252 $ 37,705 $ 139,613 $ 115,738
Net interest income $ 95,612 $ 68,072 $ 67,328 $ 68,263 $ 68,908 $ 231,012 $ 204,073
Tax equivalent adjustment 6,087 5,677 5,581 5,655 5,905 17,345 17,054
Net interest income on a fully tax equivalent basis 101,699 73,749 72,909 73,918 74,813 248,357 221,127
Plus non-interest income 61,087 39,928 36,612 39,045 37,707 137,627 115,349
Plus tax equivalent adjustment on the increase in cash surrender value of life insurance 460 449 445 457 458 1,355 1,366
Less net (loss) gain on investment securities (3,246 ) (87 ) 317 (15 ) 1 (3,016 ) 14
Less net (loss) gain on sale of other assets (7 ) (24 ) 7 (323 ) (24 )
Gain on extinguishment of debt 1,895 1,895
Less (decrease) increase in market value of assets held in trust for deferred compensation (38 ) 400 152 588 459 514 963
Total revenue – as adjusted and on a fully tax equivalent basis $ 164,642 $ 113,837 $ 109,490 $ 113,170 $ 112,518 $ 387,970 $ 336,865
Total revenue – unadjusted $ 156,699 $ 108,000 $ 103,940 $ 107,308 $ 106,615 $ 368,639 $ 319,422
Core non-interest income to revenues ratio 38.23 % 35.22 % 33.41 % 34.68 % 33.51 % 35.99 % 34.36 %
Non-interest income to revenues ratio (without adjustments) 38.98 % 36.97 % 35.22 % 36.39 % 35.37 % 37.33 % 36.11 %

NET INTEREST MARGIN

The following table presents, for the periods indicated, the total dollar amount of interest income from average interest earning assets and the resultant yields, as well as the interest expense on average interest bearing liabilities, and the resultant costs, expressed both in dollars and rates (dollars in thousands):

3Q14 3Q13 2Q14
Average Yield/ Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate Balance Interest Rate
Interest Earning Assets:
Loans held for sale $ 313,695 $ 2,826 3.60 % $ 1,972 $ % $ 497 $ %
Loans (1) (2) (3):
Commercial related credits
Commercial 2,179,924 24,446 4.39 1,166,887 12,263 4.11 1,229,799 11,912 3.83
Commercial loans collateralized by assignment of lease payments 1,561,414 14,669 3.76 1,429,169 13,726 3.84 1,476,618 14,693 3.98
Real estate commercial 2,138,485 24,783 4.53 1,652,339 19,996 4.73 1,620,658 17,008 4.15
Real estate construction 183,535 2,820 6.01 128,115 1,324 4.04 133,557 1,274 3.77
Total commercial related credits 6,063,358 66,718 4.31 4,376,510 47,309 4.23 4,460,632 44,887 3.98
Other loans
Real estate residential 409,119 4,608 4.51 307,555 2,961 3.85 309,848 2,809 3.62
Home equity 252,250 2,556 4.02 277,122 2,993 4.28 252,891 2,678 4.25
Indirect 274,493 3,647 5.27 250,003 3,365 5.34 269,556 3,579 5.33
Consumer loans 68,186 774 4.50 61,950 599 3.84 65,437 725 4.44
Total other loans 1,004,048 11,585 4.58 896,630 9,918 4.39 897,732 9,791 4.37
Total loans, excluding covered loans 7,067,406 78,303 4.40 5,273,140 57,227 4.30 5,358,364 54,678 4.09
Covered loans 114,686 2,258 7.81 281,896 4,391 6.18 158,371 2,441 6.18
Total loans 7,182,092 80,561 4.45 5,555,036 61,618 4.40 5,516,735 57,119 4.15
Taxable investment securities 1,726,352 11,028 2.56 1,292,366 6,330 1.96 1,434,300 8,794 2.45
Investment securities exempt from federal income taxes (3) 1,087,340 13,908 5.12 946,396 12,577 5.32 966,518 12,748 5.28
Federal funds sold 15,460 14 0.38 6,793 7 0.40 4,359 4 0.36
Other interest earning deposits 341,758 211 0.24 316,210 193 0.24 448,173 277 0.25
Total interest earning assets $ 10,666,697 $ 108,548 4.04 % $ 8,118,773 $ 80,725 3.94 % $ 8,370,582 $ 78,942 3.78 %
Non-interest earning assets 1,539,333 1,142,518 1,205,314
Total assets $ 12,206,030 $ 9,261,291 $ 9,575,896
Interest Bearing Liabilities:
Core funding:
Money market and NOW accounts $ 3,518,314 $ 1,469 0.17 % $ 2,695,479 $ 862 0.13 % $ 2,880,910 $ 899 0.13 %
Savings accounts 906,630 128 0.06 844,647 137 0.06 868,694 97 0.04
Certificates of deposit 1,411,407 1,375 0.40 1,309,539 1,444 0.44 1,157,805 1,124 0.40
Customer repurchase agreements 210,543 102 0.19 205,946 113 0.22 184,178 95 0.21
Total core funding 6,046,894 3,074 0.20 5,055,611 2,556 0.20 5,091,587 2,215 0.17
Wholesale funding:
Brokered accounts (includes fee expense) 417,346 1,643 1.56 263,448 1,990 3.00 220,396 1,634 2.97
Other borrowings 632,163 2,132 1.32 215,041 1,366 2.49 236,292 1,344 2.25
Total wholesale funding 1,049,509 3,775 1.33 478,489 3,356 2.47 456,688 2,978 2.33
Total interest bearing liabilities $ 7,096,403 $ 6,849 0.38 % $ 5,534,100 $ 5,912 0.42 % $ 5,548,275 $ 5,193 0.38 %
Non-interest bearing deposits 3,175,513 2,258,357 2,476,396
Other non-interest bearing liabilities 268,028 171,336 199,621
Stockholders’ equity 1,666,086 1,297,498 1,351,604
Total liabilities and stockholders’ equity $ 12,206,030 $ 9,261,291 $ 9,575,896
Net interest income/interest rate spread (4) $ 101,699 3.66 % $ 74,813 3.52 % $ 73,749 3.40 %
Taxable equivalent adjustment 6,087 5,905 5,677
Net interest income, as reported $ 95,612 $ 68,908 $ 68,072
Net interest margin (5) 3.56 % 3.37 % 3.26 %
Tax equivalent effect 0.22 % 0.29 % 0.27 %
Net interest margin on a fully tax equivalent basis (5) 3.78 % 3.66 % 3.53 %
(1) Non-accrual loans are included in average loans.
(2) Interest income includes amortization of deferred loan origination fees and costs.
(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.

The following table presents, for the periods indicated, the total dollar amount of interest income from average interest earning assets and the resultant yields, as well as the interest expense on average interest bearing liabilities, and the resultant costs, expressed both in dollars and rates (dollars in thousands):

Nine Months Ended September 30,
2014 2013
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
Interest Earning Assets:
Loans held for sale $ 105,977 $ 2,826 3.56 % $ 3,259 $ %
Loans (1) (2) (3):
Commercial related credits
Commercial 1,550,916 48,670 4.14 1,193,034 37,436 4.14
Commercial loans collateralized by assignment of lease payments 1,506,309 43,681 3.87 1,357,417 39,512 3.88
Real estate commercial 1,798,587 59,123 4.33 1,699,235 60,475 4.69
Real estate construction 152,827 5,372 4.64 125,184 3,714 3.91
Total commercial related credits 5,008,639 156,846 4.13 4,374,870 141,137 4.25
Other loans
Real estate residential 343,836 10,409 4.04 309,075 9,288 4.01
Home equity 256,101 7,946 4.15 287,198 9,259 4.31
Indirect 269,226 10,617 5.27 231,383 9,563 5.53
Consumer loans 65,433 2,175 4.44 67,608 1,830 3.62
Total other loans 934,596 31,147 4.46 895,264 29,940 4.47
Total loans, excluding covered loans 5,943,235 187,993 4.23 5,270,134 171,077 4.34
Covered loans 164,455 7,169 5.83 346,721 13,328 4.14
Total loans 6,107,690 195,162 4.27 5,616,855 184,405 4.39
Taxable investment securities 1,516,281 27,968 2.46 1,383,975 18,749 1.81
Investment securities exempt from federal income taxes (3) 997,128 39,066 5.22 930,653 37,537 5.38
Federal funds sold 8,605 23 0.37 3,249 9 0.37
Other interest earning deposits 326,226 601 0.25 232,529 420 0.24
Total interest earning assets $ 9,061,907 $ 265,646 3.92 % $ 8,170,520 $ 241,120 3.95 %
Non-interest earning assets 1,331,812 1,162,210
Total assets $ 10,393,719 $ 9,332,730
Interest Bearing Liabilities:
Core funding:
Money market and NOW accounts $ 3,045,178 $ 3,216 0.14 % $ 2,702,567 $ 2,622 0.13 %
Savings accounts 879,336 334 0.05 835,754 409 0.07
Certificates of deposit 1,260,537 3,673 0.40 1,408,866 5,734 0.56
Customer repurchase agreements 195,136 293 0.20 191,789 312 0.22
Total core funding 5,380,187 7,516 0.19 5,138,976 9,077 0.23
Wholesale funding:
Brokered accounts (includes fee expense) 287,931 4,915 2.28 283,894 6,509 3.07
Other borrowings 368,220 4,858 1.74 230,021 4,407 2.53
Total wholesale funding 656,151 9,773 1.82 513,915 10,916 2.51
Total interest bearing liabilities $ 6,036,338 $ 17,289 0.38 % $ 5,652,891 $ 19,993 0.47 %
Non-interest bearing deposits 2,677,865 2,194,648
Other non-interest bearing liabilities 227,333 193,203
Stockholders’ equity 1,452,183 1,291,988
Total liabilities and stockholders’ equity $ 10,393,719 $ 9,332,730
Net interest income/interest rate spread (4) $ 248,357 3.54 % $ 221,127 3.48 %
Taxable equivalent adjustment 17,345 17,054
Net interest income, as reported $ 231,012 $ 204,073
Net interest margin (5) 3.41 % 3.34 %
Tax equivalent effect 0.25 % 0.28 %
Net interest margin on a fully tax equivalent basis (5) 3.66 % 3.62 %
(1) Non-accrual loans are included in average loans.
(2) Interest income includes amortization of deferred loan origination fees and costs.
(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.

The table below reflects the impact the purchase accounting loan discount accretion on Taylor Capital loans had on the loan yield and net interest margin on a fully tax equivalent basis for the three and nine months ended September 30, 2014:

Three months ended Nine months ended
September 30, 2014 September 30, 2014
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
Loan yield excluding purchase accounting discount accretion on Taylor Capital loans:
Total loans, as reported $ 7,182,092 $ 80,561 4.45 % $ 6,107,690 $ 195,162 4.27 %
Less purchase accounting discount accretion on non-PCI loans (34,097 ) 5,892 (11,491 ) 5,892
Less purchase accounting discount accretion on PCI loans (15,281 ) 282 (5,150 ) 282
Total loans, excluding purchase accounting discount accretion on Taylor Capital loans $ 7,231,470 $ 74,387 4.08 % $ 6,124,331 $ 188,988 4.13 %
Net interest margin on a fully tax equivalent basis, excluding purchase accounting discount accretion on Taylor Capital loans:
Total interest earning assets, as reported $ 10,666,697 $ 101,699 3.78 % $ 9,061,907 $ 248,357 3.66 %
Less purchase accounting discount accretion on non-PCI loans (34,097 ) 5,892 (11,491 ) 5,892
Less purchase accounting discount accretion on PCI loans (15,281 ) 282 (5,150 ) 282
Total interest earning assets, excluding purchase accounting discount accretion on Taylor Capital loans $ 10,716,075 $ 95,525 3.54 % $ 9,078,548 $ 242,183 3.57 %

Provision will be recognized on legacy Taylor Capital loans as they renew and will largely offset the positive impact of the loan discount accretion on non-purchase credit impaired loans. During the third quarter of 2014, a provision of approximately $4.7 million was recorded related to legacy Taylor Capital loans.

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