<PAGE>
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
Commission file number 0-24566
MB FINANCIAL, INC.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
36-3895923
(I.R.S. Employer Identification No.)
1200 North Ashland Avenue, Chicago, Illinois 60602
(Address of principal executive offices)
Registrant's telephone number, including area code: (773) 645-7866
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to
such filing requirements for the past 90 days.
YES: XXX NO: ____
---
There were issued and outstanding 7,064,515 shares of the Registrant's
common stock as of May 14, 1999.
================================================================================
<PAGE>
MB FINANCIAL, INC. AND SUBSIDIARIES
FORM 10-Q
MARCH 31, 1999
INDEX
-----
<TABLE>
<CAPTION>
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated balance sheets at March 31, 1999; December 31, 1998 and
March 31, 1998 3
Consolidated statements of income for the three months ended March 31,
1999 and 1998 4
Consolidated statements of cash flows for the three months ended
March 31, 1999 and 1998 5 - 6
Notes to consolidated financial statements 7 - 10
Item 2. Management's discussion and analysis of financial condition and
results of operations 11 - 19
PART II. OTHER INFORMATION
Signatures 20
</TABLE>
2
<PAGE>
PART I. - FINANCIAL INFORMATION
Item 1. - Financial Statements
MB FINANCIAL, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited - March 31, 1999 and 1998)
(Statement Amounts in Thousands)
<TABLE>
<CAPTION>
March 31, December 31, March 31,
1999 1998 1998
-----------------------------------------
<S> <C> <C> <C>
ASSETS
Cash and due from banks $ 34,597 $ 23,669 $ 36,318
Investment securities:
Securities available for sale 369,891 212,020 136,670
Securities held to maturity (fair value of $11,259 at March 31, 1999,
$11,529 at December 31, 1998 and $5,638 at March 31, 1998) 10,932 11,142 5,224
Stock in Federal Home Loan Bank 7,904 2,614 615
Federal funds sold 42,200 20,350 -
Other interest bearing deposits 941 - -
Loans (net of allowance for loan losses of $15,766 at March 31, 1999,
$6,344 at December 31, 1998 and $7,751 at March 31, 1998) 781,766 542,009 519,163
Lease investments, net 20,177 21,931 21,812
Premises and equipment, net 11,973 11,483 11,066
Other assets 28,109 8,380 10,702
Interest only securities 15,940 - -
Intangibles, net 17,675 18,293 21,105
-----------------------------------------
Total assets $1,342,105 $871,891 $762,675
=========================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits:
Noninterest bearing $ 141,224 $128,218 $130,331
Interest bearing 827,193 517,443 504,117
-----------------------------------------
Total deposits 968,417 645,661 634,448
Short-term borrowings 138,008 130,521 29,365
Long-term borrowings 113,143 12,034 20,537
Other liabilities 23,729 11,815 11,937
-----------------------------------------
Total liabilities 1,243,297 800,031 696,287
-----------------------------------------
Minority Interest in Subsidiary - - 1,544
-----------------------------------------
Corporation Obligated Mandatorily Redeemable Capital Securities of
Subsidiary Trust Holding Solely Junior Subordinated Debentures 25,000 25,000 -
-----------------------------------------
Corporation Obligated Mandatorily Redeemable Preferred Securities of
Subsidiary Trust Holding Solely Junior Subordinated Debentures - - 10,000
-----------------------------------------
Stockholders' Equity
Preferred stock, (Class B, $150,000 par value; authorized 100 shares;
issued March 31, 1998 68 shares) - - 10,200
Common stock, (March 31, 1999 $0.01 par value;
authorized 20,000,000 shares; issued 7,064,515 shares;
December 31, 1998 and March 31, 1998 no par value;
$10 stated value; authorized 200,000 shares; issued 48,957 shares) 71 490 490
Additional paid-in capital 50,447 23,794 23,779
Retained earnings 23,676 22,232 20,186
Accumulated other comprehensive income (386) 344 189
-----------------------------------------
Total stockholders' equity 73,808 46,860 54,844
-----------------------------------------
Total liabilities and stockholders' equity $1,342,105 $871,891 $762,675
=========================================
</TABLE>
See Notes to Consolidated Financial Statements.
3
<PAGE>
MB FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Statement Amounts in Thousands Except Common Share Data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
1999 1998
----------------------------
<S> <C> <C>
Interest Income:
Loans $12,802 $11,159
Investment securities:
Taxable 3,639 2,531
Nontaxable 79 82
Federal funds sold 293 118
Other interest bearing accounts 17 --
--------------------------
Total interest income 16,830 13,890
--------------------------
Interest expense:
Deposits 6,304 5,593
Short-term borrowings 1,507 731
Long-term borrowings 1,070 563
--------------------------
Total interest expense 8,881 6,887
--------------------------
Net interest income 7,949 7,003
Provision for loan losses 246 188
--------------------------
Net interest income after provision
for loan losses 7,703 6,815
--------------------------
Other income:
Loan service fees 400 88
Deposit service fees 691 702
Lease financing, net 237 245
Net gains on sale of securities available for sale -- 15
Gain on sale of Coal City National Bank -- 4,099
Other operating income 235 351
--------------------------
1,563 5,500
--------------------------
Other expense:
Salaries and employee benefits 3,817 3,653
Occupancy and equipment expenses 1,275 946
Intangibles amortization expense 618 811
Other operating expenses 1,353 1,430
--------------------------
7,063 6,840
--------------------------
Income before income taxes and minority interest 2,203 5,475
Income taxes 759 1,885
--------------------------
Income before minority interest 1,444 3,590
Minority interest -- (32)
--------------------------
Net income 1,444 3,558
--------------------------
Other comprehensive income:
Unrealized securities losses, net of income taxes (730) (122)
Less: reclassification adjustments for gains
included in net income, net of income taxes -- 10
--------------------------
Other comprehensive income (730) (132)
--------------------------
Comprehensive income $ 714 $3,426
==========================
Net income $ 1,444 $3,558
Preferred stock dividend -- 434
--------------------------
Net income available to common stockholders $ 1,444 $3,124
==========================
Common share data:
Basic earnings per common share $ 0.28 $ 0.76
Diluted earnings per common share $ 0.28 $ 0.76
Weighted average common shares outstanding 5,126,289 4,109,453
</TABLE>
See Notes to Consolidated Financial Statements.
4
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Statement Amounts in Thousands)
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
1999 1998
----------------------------
<S> <C> <C>
Cash Flows From Operating Activities
Net income $ 1,444 $ 3,558
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 2,141 2,177
Loss on disposal of premises and equipment
and leased equipment - 13
(Gain) on sale of Coal City National Bank - (4,099)
Amortization of intangibles 618 811
Provision for loan losses 246 188
(Credit) for deferred income taxes (242) (303)
Bond (accretion), net (999) (484)
Securities (gains), net - (15)
Minority interest in net income - 32
(Increase) decrease in accrued other assets (931) 49
Increase in other liabilities 1,581 222
----------------------------
Net cash provided by operating activities 3,858 2,149
----------------------------
Cash Flows From Investing Activities
Proceeds from sales, maturities and calls of
securities available for sale 33,580 61,758
Proceeds from maturities and calls of securities
held to maturity 226 -
Purchase of securities available for sale (6,175) (77,054)
Federal funds sold, net 23,650 17,900
Other interest bearing deposits, net 531 -
(Increase) in loans, net of principal collections (34,151) (17,747)
Purchases of premises and equipment (785) (1,658)
Proceeds from sales of premises and
equipment and leased equipment - 3
Proceeds from sales of other real estate owned 285 73
Principal collected on lease investments 97 (187)
Purchase of minority interests - (1,508)
Proceeds from sale of Coal City National Bank, net - 5,481
Cash acquired through merger with Avondale Financial Corp. 7,224 -
----------------------------
Net cash provided by (used in) investing activities 24,482 (12,939)
----------------------------
Cash Flows From Financing Activities
Net increase in noninterest bearing deposits 13,006 5,266
Net (decrease) in interest bearing deposits (33,211) (2,826)
Net increase in short-term borrowings 2,487 11,352
Proceeds from long-term borrowings 1,000 5,622
Principal paid on long-term borrowings (694) (7,500)
Purchase and retirement of common stock - (674)
Dividends paid on preferred stock - (434)
----------------------------
Net cash provided by (used in) financing activities (17,412) 10,806
----------------------------
Net increase in cash and cash due from banks $ 10,938 $ 16
Cash and due from banks:
Beginning 23,669 36,302
----------------------------
Ending $ 34,597 $ 36,318
============================
</TABLE>
(continued)
5
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(Unaudited)
(Statement Amounts in Thousands)
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
1999 1998
----------------------------
<S> <C> <C>
Supplemental Disclosures of Cash Flow Information
Cash payments for:
Interest paid to depositors $ 4,688 $ 6,170
Other interest paid 1,028 624
Income taxes paid, net of refunds - -
Supplemental Schedule of Noncash Investing Activities
Merger with Avondale Financial Corp.
Noncash Assets acquired:
Securities available for sale $185,125
Stock in Federal Home Loan Bank 5,290
Federal funds sold 45,500
Other interest bearing deposits 1,472
Loans, net 205,861
Premises and equipment 189
Accrued interest and other and other assets 34,987
--------
478,424
--------
Liabilities assumed:
Interest bearing deposits 342,961
Short-term borrowings 5,000
Long-term borrowings 100,803
Other liabilities 10,575
--------
459,339
--------
Net noncash assets acquired $ 19,085
--------
Cash acquired $ 7,224
========
Sale of Coal City National Bank
Assets sold:
Cash $ 2,319
Securities available for sale 15,418
Securities held to maturity 173
Federal funds sold 19,500
Loans, net 17,573
Premises and equipment 696
Other 317
-------
55,996
-------
Liabilities sold:
Deposits 52,052
Other 243
-------
52,295
-------
Net assets sold $ 3,701
=======
Cash received $ 7,800
=======
Real estate acquired in settlement of losses $ 276
=======
</TABLE>
See Notes to Consolidated Financial Statements.
6
<PAGE>
MB FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The unaudited consolidated financial statements include the accounts of MB
Financial, Inc. and its subsidiaries (the "Company"). In the opinion of
management, all adjustments (consisting only of normal recurring adjustments)
necessary for a fair presentation of the financial position, results of
operation and cash flows for the interim periods have been made. The results of
operations for the three months ended March 31, 1999 are not necessarily
indicative of the results to be expected for the entire fiscal year.
The unaudited interim financial statements have been prepared in conformity
with generally accepted accounting principles and industry practice. Certain
information in footnote disclosure normally included in financial statements
prepared in accordance with generally accepted accounting principles and
industry practice has been condensed or omitted pursuant to rules and
regulations of the Securities and Exchange Commission. The Company believes the
disclosures made in the consolidated financial statements are adequate so that
the financial statements are not misleading. These financial statements should
be read in conjunction with the consolidated financial statements and notes
thereto included in the Company's December 31, 1998 audited financial
statements.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities as of the date of the financial
statements, as well as the reported amounts of income and expenses during the
reported periods. Actual results could differ from those estimates.
2. THE MERGER
On February 26, 1999, Coal City Corporation, the holding company for
Manufacturers Bank, was merged with and into Avondale Financial Corp., the
holding company for Avondale Federal Savings Bank. The resulting entity was
renamed MB Financial, Inc. Simultaneously, Avondale Federal Savings Bank was
merged into Manufacturers Bank.
Since the Coal City stockholders owned more than 50% of the combined
company, the transaction was accounted for as a reverse acquisition using the
purchase method of accounting with Coal City being the accounting acquirer. As a
result, the post-merger historical financial statements of the combined company
are Coal City's as the accounting acquirer, and includes the operating results
of Avondale only for the month of March 1999. Total consideration, based upon
Avondale's shares outstanding at the merger date times the estimated market
value per share at the merger announcement date, was $26.4 million. The amount
of goodwill which was recorded at the merger date was a negative ($267
thousand), which represents the excess of the fair value of net assets acquired
over total consideration. Negative goodwill is being amortized over a fifteen-
year period. Included in the purchase accounting adjustments was an accrual of
$8.0 million for merger related costs. The accrual includes estimated costs for
data conversion, professional fees, severance and personnel related expenses,
lease contracts, premises and equipment and other miscellaneous expenses. At
March 31, 1999, the remaining liability was approximately $7.5 million primarily
for lease contracts, data conversion and severance costs. The majority of the
remaining costs are scheduled to occur in 1999.
Each share of Coal City Common Stock issued and outstanding on February 26,
1999 was converted into 83.5 shares of Avondale Financial Corp. Consequently,
common share data for the first quarter of 1999 and 1998 was converted at an
exchange rate of 83.5.
The unaudited pro forma results of operation, which follow, assume that the
merger had occurred at January 1, 1998. In addition to combining the historical
results of operations of the companies, the pro forma calculations include
purchase accounting adjustments related to the acquisition. The pro forma
calculations do not include any anticipated cost savings as a result of the
merger.
7
<PAGE>
Unaudited pro forma consolidated results of operations for the quarters
ended March 31, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
---------------------
1999 1998
---------------------
<S> <C> <C>
Net interest income $10,354 $11,384
Net income (loss) (791) 3,639
Net income (loss) available to common stockholders (791) 3,205
Basic earnings (loss) per common share $ (0.11) $ 0.43
Diluted earnings (loss) per common share $ (0.11) $ 0.43
</TABLE>
The pro forma results of operations are not necessarily indicative of the
actual results of operations that would have occurred had the merger actually
taken place at the beginning of the respective periods, or of results which may
occur in the future.
3. REGULATORY CAPITAL
The Company and it's subsidiary, Manufacturers Bank (the "Bank") are
subject to certain regulatory capital requirements administered by the federal
banking agencies. Failure to meet minimum capital requirements can initiate
certain mandatory, and additional discretionary, actions by regulators that, if
undertaken, could have a direct material effect on the Company's financial
statements. Under capital adequacy guidelines and the regulatory framework for
prompt corrective action, the Company's and Bank's assets, liabilities, and
certain off-balance-sheet items are calculated using regulatory accounting
practices. The Company's and Bank's capital amounts and classification are also
subject to qualitative judgements by the regulators about components, risk
weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the table
below) of total and Tier 1 capital (as defined in the regulations) to risk-
weighted assets (as defined) and Tier 1 capital to average assets (as defined).
The Company and the Bank were in full compliance with all capital adequacy
requirements to which they are subject at March 31, 1999. As of March 31, 1999,
the most recent notification from the Federal Deposit Insurance Corporation
categorized the Bank as "well capitalized" under the framework of prompt
corrective action. To be categorized as "well capitalized" the Bank must
maintain the total risk-based, Tier I risk-based and Tier I leverage ratios as
set forth in the "well capitalized" column in the table below. There are no
conditions or events since that notification that management believes have
changed the Bank's categorization.
The required and actual amounts and ratios for the Company and
Manufacturers Bank are presented below (dollars in thousands):
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
-----------------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
-----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
As of March 31, 1999 (unaudited)
Total capital (to risk-weighted assets):
MB Financial, Inc. $94,633 10.36 % $73,099 8.00 % N/A N/A
Manufacturers Bank 97,301 10.66 % 73,016 8.00 % $91,270 10.00 %
Tier 1 capital (to risk-weighted assets):
MB Financial, Inc. 82,674 9.05 % 36,550 4.00 % N/A N/A
Manufacturers Bank 85,874 9.41 % 36,508 4.00 % 54,762 6.00 %
Tier 1 capital (to average assets):
MB Financial, Inc. 82,674 8.22 % 40,236 4.00 % N/A N/A
Manufacturers Bank 85,874 8.56 % 40,151 4.00 % 50,819 5.00 %
</TABLE>
8
<PAGE>
4. EARNINGS PER SHARE DATA
The following table sets forth the computation of basic and diluted
earnings per share for the periods indicated (in thousands except per share
data):
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
1999 1998
----------------------------
<S> <C> <C>
Basic:
Net income $ 1,444 $ 3,558
Less preferred dividends - 434
----------------------------
Net income available to common stockholders 1,444 3,124
Average shares outstanding 5,126,289 4,109,453
----------------------------
Basic EPS $ 0.28 $ 0.76
============================
Diluted:
Net income $ 1,444 $ 3,558
Less preferred dividends - 434
----------------------------
Net income available to common stockholders 1,444 3,558
Average shares outstanding 5,126,289 4,109,453
Net effect of dilutive stock options 27,878 1,774
Total 5,154,167 4,111,227
----------------------------
Diluted EPS $ 0.28 $ 0.76
============================
</TABLE>
5. LONG-TERM BORROWINGS
The following table presents long-term borrowings for the periods indicated
(in thousands):
<TABLE>
<CAPTION>
March 31, December 31, March 31,
1999 1998 1998
--------------------------------------------
<S> <C> <C> <C>
Federal Home Loan Bank advances $100,803 $ - $ -
Loans for the purchase of equipment and other loans 7,840 8,534 14,537
LaSalle National Bank lines of credit 4,500 3,500 6,000
--------------------------------------------
$113,143 $12,034 $20,537
============================================
</TABLE>
At March 31, 1999, the Company had $100.8 million in advances from the
Federal Home Loan Bank. The Company acquired these through the merger. The
Company has pledged its stock in the Federal Home Loan Bank as collateral for
the advances. In addition, the Company is required to maintain certain
qualifying first mortgage loans or mortgage backed securities in an amount equal
to at least 170% of the outstanding advances. As of March 31, 1999, $100.0
million of the advances are scheduled to mature in March 2008; however, these
are callable at any time by the Federal Home Loan Bank. This $100.0 million
bears a current interest rate of 4.69%. The remaining $803 thousand matures in
2003 and bears a current interest rate of 2.5%.
At March 31, 1999, December 31, 1998 and March 31, 1998, the Company had
loans for the purchase of equipment and other loans of $7.8 million, $8.5
million and $14.5 million; respectively. These loans have various interest rates
and various scheduled maturity dates to June 2007.
The Company has two lines of credit with LaSalle National Bank including a
secured revolving note payable and unsecured revolving note payable. The secured
note payable had outstanding balances of $4.2 million, $3.2 million and $5.5
million at March 31, 1999, December 31, 1998 and March 31, 1998; respectively.
The note bears interest at a rate equal to the adjusted LIBOR rate, 6.19% at
March 31, 1999. The note requires quarterly payments of interest only on the
outstanding balance through June 1, 1999 at which time the revolving feature of
the note shall cease and the unpaid principal amount shall convert to an
installment note with quarterly payments due, including interest at the adjusted
LIBOR rate through June 1, 2007. The unsecured note payable had outstanding
balances of $250 thousand at March 31, 1999 and December 31, 1998, and $500
thousand at March 31, 1998. The note bears interest at a the bank's prime rate,
7.75% at March 31, and requires quarterly payments of interest only on the
outstanding balance through June 1, 1999 at which time the revolving feature of
the note shall cease and the unpaid principal amount shall convert to an
installment note with quarterly payments due, including interest at the bank's
prime rate through June 1, 2007.
9
<PAGE>
6. RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB adopted SFAS No. 131, Disclosures About Segments of
an Enterprise and Related Information. This Statement supersedes SFAS No. 14,
Financial Reporting for Segments of a Business Enterprise, and utilizes the
"management approach" for segment reporting. The management approach is based on
the way that the chief operating decision maker organizes segments within a
company for making operating decisions and assessing performance. Reportable
segments are based on any manner in which management disaggregates its company
such as by products and services, geography, legal structure and management
structure. SFAS 131 requires disclosure for each segment that are similar to
those required under current standards with the addition of quarterly disclosure
requirements and more specific and detailed geographic disclosures. This
Statement also requires descriptive information about the way the operating
segments were determined. The provisions of SFAS 131 were effective for fiscal
years beginning after December 15, 1997, with earlier application permitted. The
Company adopted SFAS No. 131 at December 31, 1998 and the Company views its
banking business as its only segment.
In June 1998, the FASB adopted SFAS 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS 133 establishes accounting and
reporting standards requiring that every derivative instrument (including
certain derivative instruments embedded in other contracts) be recorded in the
balance sheet as either an asset or liability measured at its fair value. SFAS
133 requires that changes in the derivative's fair value be recognized currently
in earnings unless specific hedge accounting criteria are met. Special
accounting for qualifying hedges allows a derivative's gains and losses to
offset related results on the hedged item in the income statement, and requires
that a company must formally document, designate and assess the effectiveness of
transactions that receive hedge accounting. SFAS 133 is effective for fiscal
years beginning after June 15, 1999. SFAS 133 may be implemented as of the
beginning of any fiscal quarter after June 30, 1998 but cannot be applied
retroactively. SFAS 133 must be applied to (a) derivative instruments and (b)
certain derivative instruments embedded in hybrid contracts that were issued,
acquired, or substantively modified after December 31, 1997. The standard is not
required to be implemented until December 31, 2000 and management has not yet
determined the impact of this standard.
In October 1998, the FASB adopted SFAS 134, Accounting for Mortgage-Backed
Securities Retained after the Securitization of Mortgage Loans Held for Sale by
a Mortgage Banking Enterprise. The Statement amends SFAS 65, Accounting for
Certain Mortgage Banking Activities, and requires that after the securitization
of mortgage loans held for sale, an entity engaged in mortgage banking
activities classify the resulting mortgage-backed securities or other retained
interests based on its ability and intent to sell or hold those investments. The
provisions of SFAS 134 are effective for the first fiscal quarter beginning
after December 15, 1998 and were adopted on January 1, 1999. The adoption of
SFAS 134 did not have a material impact on the Company's financial statements.
10
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operation
The following is a discussion and analysis of MB Financial, Inc.'s
financial position and results of operation and should be read in conjunction
with the consolidated financial statements and notes thereto appearing elsewhere
in this report. On January 28, 1998, the Company sold Coal City National Bank,
its wholly owned subsidiary, for $7.8 million in cash. In addition, on February
26, 1999, Coal City Corporation, the holding company for Manufacturers Bank, was
merged with and into Avondale Financial Corp., the holding company for Avondale
Federal Savings Bank. The resulting entity was rename MB Financial, Inc.
Simultaneously, Avondale Federal Savings Bank was merged into Manufacturers
Bank. These transactions significantly affect the comparative information
discussed below.
General
The profitability of the Company's operations depends primarily on its net
interest income, which is the difference between total interest earned on
interest earning assets and total interest paid on interest bearing liabilities.
The Company's net income is affected by its provision for loan losses as well as
other income and other expenses. The provision for loan losses reflects the
amount thought to be adequate to cover estimated losses in the loan portfolio.
Non-interest income or other income, consists of loan service fees, deposit
service fees, net lease financing income, net gains (losses) on the sale of
securities available for sale, and other operating income. Other expenses
include salaries and employee benefits along with occupancy and equipment
expenses, intangibles amortization and other operating expenses.
The amount of net interest income is affected by changes in the volume and
mix of earning assets, the level of interest rates earned on those assets, the
volume and mix of interest bearing liabilities, and the level of interest rates
paid on those interest bearing liabilities. The provision for loan losses is
dependent on changes in the loan portfolio and Management's assessment of the
collectibility of the loan portfolio, as well as economic and market conditions.
Other income and other expenses are impacted by growth of operations and growth
in the number of accounts through both acquisitions and core banking business
growth. Growth in operations affects other expenses as a result of additional
employees, branch facilities and promotional marketing expense. Growth in the
number of accounts affects other income including service fees as well as other
expenses such as computer services, supplies, postage, telephone and other
miscellaneous expenses.
Results of Operations
The Company had net income of $1.4 million for the first quarter of 1999
compared to $3.6 million for the first quarter of 1998. Net interest income was
$7.9 million for the first quarter of 1999 compared to $7.0 million for the same
period in 1998. The increase in net interest income was primarily due to the
merger.
Other income decreased $3.9 million to $1.6 million for the quarter ended
March 31, 1999 from $5.5 million for the same period in 1998. This decrease was
primarily due to gains resulting from the sale of Coal City National Bank and
the sale of a trust business in the first quarter of 1998, and was slightly
offset by increases in loan service fees, as well as a net gain on the sale of
other real estate owned in the first quarter of 1999.
Other expense increased from $6.8 million in the first quarter of 1998 to
$7.1 million in the first quarter of 1999 resulting from higher operating costs
due to the merger. Intangible amortization decreased $193 thousand in the first
quarter of 1999 as compared to the same period for 1998.
11
<PAGE>
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. Non-taxable
investment income is presented on a fully tax equivalent basis assuming a 34%
tax rate.
TABLE 1 AVERAGE BALANCES, INTEREST RATES AND YIELDS
(Dollars in thousands)
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------------------------------------------
1999 1998
----------------------------------------------------------------
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
----------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest Earning Assets:
Loans (1)(2) $ 631,738 $ 12,802 8.22 % $ 524,452 $ 11,159 8.63 %
Taxable investment securities 278,762 3,639 5.29 % 174,822 2,531 5.87 %
Investment securities exempt from federal
income taxes (3) 5,517 120 8.82 % 4,182 124 12.03 %
Federal funds sold 25,396 293 4.68 % 8,748 118 5.47 %
Other interest bearingdeposits 1,453 17 4.74 % - - - %
--------------------- -------------------
Total interest earning assets 942,866 16,871 7.26 % 712,204 13,932 7.93 %
-------- --------
Non-interest earning assets 84,905 85,096
---------- ---------
Total assets $1,027,771 $ 797,300
========== =========
Interest Bearing Liabilities:
Deposits:
NOW and money market deposit accounts $ 152,649 1,080 2.87 % $ 146,342 1,179 3.27 %
Savings deposits 112,491 687 2.48 % 88,586 540 2.47 %
Time deposits 357,452 4,537 5.15 % 283,439 3,874 5.54 %
Long-term borrowings (4) 71,750 1,070 6.05 % 28,871 563 7.91 %
Short-term borrowings 133,931 1,507 4.56 % 57,564 731 5.15 %
--------------------- -------------------
Total interest bearing liabilities 828,273 8,881 4.35 % 604,802 6,887 4.62 %
-------- --------
Demand deposits- non-interest bearing 128,319 123,400
Other non-interest bearing liabilities 14,374 13,263
Minority interest in subsidiary - 2,482
Stockholders' equity 56,805 53,353
---------- ---------
Total liabilities and stockholders' equity $1,027,771 $ 797,300
========== =========
Net interest income/interestrate spread (5) $ 7,990 2.91 % $ 7,045 3.31 %
======== ========
Net interest margin (6) 3.44 % 4.01 %
</TABLE>
(1) Non-accrual loans are included in average loans.
(2) Interest income includes loan origination fees of $189,000 and
$251,000 for the three months ended March 31, 1999 and 1998,
respectively.
(3) Non-taxable investment income is presented on a fully tax
equivalent basis assuming a 34% tax rate.
(4) Long-term borrowings include corporation obligated mandatorily
redeemable preferred and capital securities.
(5) Interest rate spread represents the difference between the average
yield on interest earning assets and the average cost of interest
bearing liabilities.
(6) Net interest margin represents net interest income as a percentage
of average interest earning assets.
The Company's net interest income increased $946 thousand to $7.9 million
for the quarter ended March 31, 1999 from $7.0 million for the quarter ended
March 31, 1998. The increase in net interest income resulted from an increase in
interest income of $2.9 million, or 21.2%, partially offset by an increase in
interest expense of $2.0 million or 29.0%. Interest income increased due to a
$230.7 million, or 32.4% increase in average interest earning assets while
interest expense rose as a result of a $223.5 million, or 36.9% increase in
average interest bearing liabilities. Approximately $148.0 million of the
increase in average interest earning assets and approximately $142.0 million of
the increase in average interest bearing liabilities was due to the merger. The
remaining increase in average interest earning assets and average interest
bearing liabilities was due to growth in the Company's core banking businesses
and an increase in short-term borrowings used to fund U.S. Treasury investments.
12
<PAGE>
Although net interest income increased in 1999, the net interest margin
decreased from 4.01% for the quarter ended March 31, 1998 to 3.44% for the
quarter ended March 31, 1999. This decrease was due to increased leverage in
the Company's balance sheet as a result of the purchase of approximately $100.0
million additional U.S. Treasury investments and the addition of approximately
$100.0 million repurchase agreements used to fund those investments. Excluding
the effect of the increased leverage in the Company's balance sheet, the net
interest margin for the first quarter of 1999 would be 3.85% compared to 4.01%
for the same period in 1998.
TABLE 2 - RATE/VOLUME ANALYSIS OF NET INTEREST INCOME
(Dollars in thousands)
The following table presents the extent to which changes in interest rates
and changes in volume of interest earning assets and interest bearing
liabilities have affected the Company's interest income and interest expense
during the periods indicated. Information is provided on changes in each
category attributable to (i) changes attributable to changes in volume, (changes
in volume multiplied by prior period rate); (ii) changes attributable to changes
in rate (changes in rate multiplied by current period volume) and (iii) the
total changes.
<TABLE>
<CAPTION>
Three Months Ended March 31, 1999
Compared to March 31, 1998
-----------------------------------
Change Change
Due to Due to Total
Volume Rate Change
-----------------------------------
<S> <C> <C>
Interest Earning Assets:
Loans $ 2,283 $ (640) $ 1,643
Taxable investment securities 1,505 (397) 1,108
Investment securities exempt from federal income taxes (1) 40 (44) (4)
Federal funds sold 225 (50) 175
Other interest bearing deposits 17 - 17
----------------------------------
Total increase (decrease) in interest income 4,070 (1,131) 2,939
----------------------------------
Interest Bearing Liabilities:
Deposits:
NOW and money market deposit accounts 51 (150) (99)
Savings deposits 146 1 147
Time deposits 1,012 (349) 663
Long-term borrowings (2) 836 (329) 507
Short-term borrowings 970 (194) 776
----------------------------------
Total increase (decrease) in interest expense 3,015 (1,021) 1,994
----------------------------------
Increase (decrease) in net interest income $ 1,055 $ (110) $ 945
==================================
</TABLE>
(1) Non-taxable investment income is presented on a fully tax equivalent basis
utilizing a 34% rate.
(2) Long-term borrowings include corporation obligated mandatorily redeemable
preferred and capital securities.
13
<PAGE>
Other Income
Other income decreased $3.9 million to $1.6 million for the quarter ended
March 31, 1999 from $5.5 million for the same period in 1998. The decrease was
primarily due to a $4.1 million gain resulting from the sale of Coal City
National Bank and a $200 thousand gain on the sale of a trust business for the
same period in 1998. Offsets to these decreases include a $312 thousand
increase in loan service fees, as well as a $101 thousand net gain on the sale
of other real estate owned in the first quarter of 1999.
Other Expense
Other expense increased from $6.8 million in the first quarter of 1998 to
$7.1 million in the first quarter of 1999. Approximately $895 thousand of the
increase was due to operating costs primarily associated with the former
Avondale branches and higher personnel costs. Offsetting this increase were a
$314 thousand decrease in operating expenses related to the sale of Coal City
National Bank and a $193 thousand decrease in intangible amortization.
Income Taxes
The Company recorded an income tax expense of $759 thousand for the three
months ended March 31, 1999, compared to $1.9 million for the same period in
1998 reflecting the decrease in the Company's income before taxes in 1999. The
effective tax rate was 34.4% for the three months ended March 31, 1999 and 1998.
Cash Earnings
The purchase method of accounting has been used to record each of the
Company's acquisitions. As a result, the recorded basis of the net assets of
the acquired entities has been adjusted to fair value. Adjustments included
recording core deposit intangibles to reflect the difference between the fair
value and underlying basis of deposits purchased and recording goodwill for the
excess of the acquisition cost over the fair value of net assets acquired. Core
deposit intangibles and goodwill are being amortized as a non-cash expense over
periods of up to eight and 20 years, respectively. Other fair value adjustments
made to assets such as investment securities, loans, and buildings are also
being amortized or depreciated over varying periods, ranging from eight to 35
years. Amortization/depreciation expense reduces net income during the
amortization periods.
If the Company's acquisitions had met certain accounting rules, the pooling
of interest method of accounting may have been used to account for the Company's
acquisitions. Under this method of accounting, no goodwill or core deposit
intangibles would have been recorded or other fair value adjustments made.
Consequently, net income is not reduced for the amortization of core deposit
intangibles, goodwill or other fair value adjustments. Since application of the
two methods can result in dramatically different net income, management, certain
analysts and certain peer financial institutions have been computing cash
earnings in order to compare results. At present, cash earnings is not a
defined term or concept under generally accepted accounting principles.
14
<PAGE>
The following table sets forth the Company's cash earnings, which is
defined by management as net income excluding amortization of purchase
accounting non-cash items and the related deferred income tax effect (dollars in
thousands):
<TABLE>
<CAPTION>
Three Months Ended
-----------------------------------------
March 31, 1999 March 31, 1998
-----------------------------------------
<S> <C> <C>
Net income $1,444 $ 3,558
Goodwill amortization (including negative goodwill) 203 235
Core deposit intangibles amortization (net of tax) 273 380
Other fair value adjustment amortization (net of tax) 43 3
-----------------------------------------
Cash earnings 1,963 4,176
Preferred dividends - (434)
-----------------------------------------
Cash earnings to common stockholders $1,963 $ 3,742
=========================================
Cash earnings per share: (1)(3)
Basic $ 0.38 $ 0.91
Diluted $ 0.38 $ 0.91
Performance ratios:(2)(3)
Cash return on average tangible assets 0.79 % 2.20 %
Cash return on average tangible equity 19.81 % 71.01 %
</TABLE>
(1) Basic earnings per share is calculated by dividing the cash earnings by the
average number of common shares outstanding for the period. Diluted earnings
per share is calculated by dividing the cash earnings by the average number
of common shares outstanding for the period, including additional shares
that would have been outstanding if dilutive potential shares had been
issued.
(2) Cash return on average tangible assets and equity has been annualized for
the three months ended March 31, 1999 and for the three months ended March
31, 1998.
(3) March 31, 1998 ratios include the $4.1 million gain on sale of Coal City
National Bank. Basic and diluted cash earnings per share, excluding the gain
on sale of Coal City National Bank, would have been $0.25 and $0.25
respectively. Cash return on average tangible assets and equity, excluding
the gain on sale of Coal City National Bank, would have been 0.79 % and
19.68 % respectively.
Balance Sheet Review
Total assets increased $470.2 million from $871.9 million at December 31,
1998 and $579.4 million from $762.7 million at March 31, 1998 to $1.3 billion at
March 31, 1999. Approximately $491.0 million of the increase in total assets was
due to the merger. In addition, U.S. Treasury investments at March 31, 1999,
funded by short-term borrowings, increased $1.1 million as compared to December
31, 1998 and $100.0 million as compared to March 31, 1998. Net loans increased
$239.8 million from $542.0 million at December 31, 1998 and $262.6 million from
$519.2 million at March 31, 1998 to $781.8 million at March 31, 1999.
Approximately $205.9 million of increase in net loans was due to the merger
while the remaining increase was due to strong loan demand. Total deposits
increased $334.0 million from $645.7 million at December 31, 1998 and $634.4
million at March 31, 1998 to $968.4 million at March 31, 1999. Increase in
deposits related to the merger was $343.0 million.
Long-term borrowings increased $101.1 million from December 31, 1998 and
$92.6 million from March 31, 1998 primarily attributable to advances from the
Federal Home Loan Bank of $100.8 million acquired through the merger.
Additionally, in July 1998, the Company issued $25.0 million in Corporation
Obligated Mandatorily Redeemable Capital Securities and retired $10.0 million of
Corporation Obligated Mandatorily Redeemable Preferred Securities issued in
1997.
Total stockholders' equity increased $26.9 million from December 31, 1998
and $19.0 million from March 31, 1998 to $73.8 million at March 31, 1999.
Increase in stockholders' equity due to the merger was $26,309. Additionally, in
the fourth quarter of 1998, the Company used a portion of the proceeds from the
issuance of the Capital Securities to redeem the Class B Preferred Stock of the
Company issued in connection with the U.S. Bancorp acquisition. The aggregate
redemption price for the Class B Preferred Stock of the Company was $10.2
million, plus accrued dividends.
As of March 31, 1999, the Company's book value per share was $10.45
compared to $11.46 at December 31, 1998 and $10.92 at March 31, 1998.
15
<PAGE>
Loan Portfolio
The following table sets forth the composition of the loan portfolio
(dollars in thousands):
<TABLE>
<CAPTION>
March 31, December 31, March 31,
1999 1998 1998
---------------------------------------------------------------
Amount Percent Amount Percent Amount Percent
---------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Commercial $128,798 16.15 % $122,094 22.27 % $103,055 19.56 %
Commercial loans collateralized
by assignment of lease payments 127,343 15.97 % 89,301 16.28 % 88,793 16.85 %
Real estate 404,306 50.69 % 281,196 51.28 % 268,683 50.99 %
Real estate construction 29,963 3.76 % 21,059 3.84 % 35,902 6.81 %
Installment 107,122 13.43 % 34,703 6.33 % 30,481 5.79 %
---------------------------------------------------------------
Gross loans 797,532 100.00 % 548,353 100.00 % 526,914 100.00 %
======== ======== ========
Allowance for loan losses (15,766) (6,344) (7,751)
-------- -------- --------
Net loans $781,766 $542,009 $519,163
======== ======== ========
</TABLE>
Net loans increased $239.8 million from $542.0 million at December 31, 1998
and $262.6 million from $519.2 million at March 31, 1998 to $781.8 million at
March 31, 1999. Approximately $205.9 million of increase in net loans was due to
the merger, while the remaining increase was due to strong loan demand. The
composition of the loan portfolio remained relatively constant with the
exception of the installment loan portfolio, which increased with the addition
of home equity lines of credit acquired through the merger.
Asset Quality
The following table presents a summary of non-performing assets as of the
dates indicated (dollars in thousands):
<TABLE>
<CAPTION>
March 31, December 31, March 31,
1999 1998 1998
----------------------------------------------
<S> <C> <C> <C>
Non-accruing loans $ 10,727 $ 4,789 $ 9,364
Loans 90 days or more past due, still accruing interest - 85 -
----------------------------------------------
Total non-performing loans 10,727 4,874 9,364
Other real estate owned 740 442 3,879
----------------------------------------------
Total non-performing assets $ 11,467 $ 5,316 $ 13,243
==============================================
Total non-performing loans to total loans 1.35 % 0.89 % 1.78 %
Allowance for loan losses to non-performing loans 146.97 % 130.16 % 82.77 %
Total non-performing assets to total assets 0.85 % 0.61 % 1.74 %
</TABLE>
In March of 1998 the Company had higher non-performing assets which were
acquired as part of the acquisition of U.S. Bancorp in 1997. The potential
problem loans declined from $13.2 million at March 31, 1998 to $5.3 million at
December 31, 1998 due to the Company's collection efforts. The increase in non-
performing assets from December 31, 1998 to March 31, 1999 was due to the
merger.
16
<PAGE>
Provision for Loan Losses
A reconciliation of the activity in the Company's allowance for loan losses
follows (dollars in thousands):
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
1999 1998
----------------------------
<S> <C> <C>
Balance at beginning of period $ 6,344 $ 7,922
Decreases resulting from sale of subsidiary -- (399)
Additions resulting from merger 9,489 --
Provision for loan losses 246 188
Charge-offs (410) (4)
Recoveries 97 44
-----------------------
Balance at March 31, $ 15,766 $ 7,751
=======================
Total loans at March 31, $797,532 $526,914
Ratio of allowance to total loans 1.98% 1.47%
</TABLE>
For the three months ended March 31, 1999 and 1998, there were net charge-
offs (recoveries) of $313 thousand ($40) thousand, respectively. In March 1999,
$9.5 million was added to the allowance for loan losses with the merger. In
January 1998, Coal City National Bank was sold, reducing the allowance for loan
losses by $399 thousand.
The Company maintains its allowance for loan losses at a level that
management believes will be adequate to absorb estimated losses on existing
loans, based on an evaluation of the collectibility of loans and prior loss
experience. Control of the Company's loan quality is continually monitored by
management and is reviewed by the Board of Directors and loan committee of the
Bank on a monthly basis, subject to oversight by the Company's Board of
Directors through its members who serve on the loan committee. Independent
external review of the loan portfolio is conducted by regulatory authorities and
by independent public accountants in conjunction with their annual audit. The
amount of additions to the allowance for loan losses which are charged to
earnings through the provision for loan losses is determined based on a variety
of factors, including actual charge-offs and anticipated charge-offs, delinquent
loans, historical loss experience and economic conditions in the Bank's market
area. Although management believes the allowance for loan losses is sufficient
to cover potential losses, there can be no assurance that the allowance will
prove sufficient to cover actual loan losses in the future.
Interest Only Securities
Approximately $15.3 million of interest only securities were acquired as a
result of the merger with Avondale. Avondale securitized and sold certain home
equity lines of credit to investors. On a quarterly basis, the Company performs
a review to determine the fair value of its interest-only securities. As part
of its review, the Company reviews its assumptions of prepayment speeds,
discount rates and anticipated credit losses.
The discount rate reflects liquidity and risk premiums required by the
capital markets. Prepayment speeds are adjusted based upon both historical
experience and expectations for the future. Projected loan losses are based on
the Company's non-judgmental credit underwriting models and are further
validated with updated credit scores at least semi-annually.
Following is a table of the four interest only security pools and the
assumptions used for each of the securitized pools:
<TABLE>
<CAPTION>
Interest Only Security Pool
-----------------------------------
96-1 97-1 97-2 98-1
-----------------------------------
<S> <C> <C> <C> <C>
Discount rate 12% 12% 12% 12%
Prepayment speed 38.3% 39.8% 41.5% 28.5%
Remaining over-the-life loan losses 4.66% 4.98% 5.25% 4.81%
</TABLE>
The revision of the foregoing assumptions resulted in a reduction of
comprehensive income by $187 thousand at March 31, 1999. The Company will
continue to review its assumptions quarterly and revise them when circumstances
dictate.
Because of the sensitivity of the value of the interest only securities to
market factors beyond management's control, the actual amounts realized could
differ materially from the carrying value.
17
<PAGE>
Investment Securities
The following table sets forth the amortized cost and fair value of the
Company's investment securities by accounting classification and type of
security:
<TABLE>
<CAPTION>
March 31, December 31, March 31,
1999 1998 1998
--------------------------------------------------------------------------------------
Amortized Fair Amortized Fair Amortized Fair
Cost Value Cost Cost Cost Value
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Securities Available for Sale:
U.S. Treasury securities $118,683 $118,663 $128,630 $128,748 $ 97,179 $ 97,328
U.S. government agencies and
corporations 148,150 147,709 80,089 80,411 33,680 33,691
Mortgage-backed securities 103,364 103,519 2,779 2,861 5,513 5,651
--------------------------------------------------------------------------------------
Total securities $370,197 $369,891 $211,498 212,020 $136,372 $136,670
======================================================================================
Securities Held to Maturity:
States and political subdivisions $ 5,525 $ 5,881 $ 5,524 $ 5,912 $ 4,256 $ 4,669
Mortgage-backed securities 4,444 4,415 4,651 4,648 -- --
Other securities 963 963 967 969 968 969
--------------------------------------------------------------------------------------
Total securities $ 10,932 $ 11,259 $ 11,142 $ 11,529 $ 5,224 $ 5,638
======================================================================================
</TABLE>
Liquidity and Sources of Capital
The Company's cash flows are composed of three classifications: cash flows
from operating activities, cash flows from investing activities, and cash flows
from financing activities. Net cash provided by operating activities was $3.9
million and $2.1 million for the three months ended March 31, 1999 and 1998,
respectively. Net cash provided by (used in) investing activities was $24.5
million for the three months ended March 31, 1999 and ($12.9) million for the
same period in 1998; respectively. The increase in 1999 is attributable to an
increase in net federal funds sold and cash acquired through the merger. Net
cash provided by (used in) financing activities was ($17.4) million for the
three months ended March 31, 1999 and $10.8 million for the same period in 1998;
respectively. The decrease in 1999 is attributable to a decrease in net
interest bearing deposits.
The Company expects to have available cash to meet its liquidity needs.
Liquidity management is monitored by the asset liability committee of
Manufacturers Bank, which takes into account the marketability of assets, the
sources and stability of funding and the level of unfunded commitments. In the
event that additional short-term liquidity is needed, Manufacturers Bank has
established relationships with several large regional banks to provide short-
term borrowings in the form of federal funds purchased. While there are no firm
lending commitments in place, Manufacturers Bank has borrowed, and management
believes that Manufacturers Bank could again borrow, more than $30 million for a
short time from these banks on a collective basis. Additionally, Manufacturers
Bank is a member of the Federal Home Loan Bank (FHLB) and has the ability to
borrow from the FHLB. In addition, MB Financial, Inc. maintains a line of
credit with a large regional correspondent bank in the amount of $15.0 million.
As of March 31, 1999, MB Financial had $11.5 million undrawn and available under
its line of credit.
Year 2000 Compliance
A significant issue has emerged in the banking industry and for the economy
overall regarding how existing computer systems recognize the year 2000. Many
existing computer programs and systems were originally programmed with six digit
dates that provided only two digits to identify the calendar year in the date
field, without considering the upcoming change in the century. If computer
systems are not adequately changed to identify the year 2000, many computer
applications could fail or create erroneous results. As a result, many
calculations that rely on the date field information, such as interest payment
due dates and other operating functions, may generate results that could be
significantly misstated, and the Company could experience a temporary inability
to process transactions, send invoices or engage in similar normal business
activities. In addition, under certain circumstances, failure to adequately
address the Year 2000 issue could adversely affect the creditworthiness of the
Bank's borrowers. Thus, if not adequately addressed, the Year 2000 issue could
result in a significant adverse impact on the products, services and competitive
condition of the Company and the Bank.
18
<PAGE>
On March 20, 1998, the Examination Parity and Year 2000 Readiness for
Financial Institutions Act, P.L. 105-164, became law. In that statute, Congress
emphasized the seriousness with which financial services industry and its
regulators must view the Year 2000 issue by requiring the regulators to conduct
seminars for, and otherwise provide information and model approaches concerning
common problems to, the nation's financial institutions concerning this problem.
The regulators, acting through the FFIEC, have been compiling and disseminating
such information through industry-wide pronouncements which emphasize that
safety and soundness examinations would focus, among other things, on the
institutions' awareness and preparations with respect to the Year 2000 issue.
Failure to appropriately address the Year 2000 issue may result in supervisory
actions, denials of regulatory applications and civil money penalties.
In response to the foregoing regulatory guidance and pronouncements, the
Company and the Bank have been reviewing the Bank's operating procedures for
exposure to potential issues that the Year 2000 might have on its computer
systems and programs. At the direction of the Bank's Board of Directors, the
Year 2000 committee was established and has identified any issues related to
computer hardware, software and operating systems to ensure that they will be
capable of properly recognizing the January 1, 2000 and beyond. In addition,
selected business customers have been contacted and procedures have been put in
place to survey these business customers to understand their progress in regard
to dealing with the Year 2000. The Year 2000 committee reports periodically to
the Bank's Board of Directors.
Management believes that the organization has had an effective corporate
year 2000 compliance program in place and that additional expenditures required
to bring its systems into compliance will not have a materially adverse effect
on the Company's operations, cash flow, or financial condition. Management has
made significant progress in identifying and testing all its systems for year
2000 compliance. Of all systems that have been identified as mission critical,
all but one are deemed year 2000 compliant. This remaining mission critical
system is the outsourced data processing system, and the Company is awaiting the
proxy testing by the outsourced data processor. This system has been reported
to be year 2000 compliant. As part of the Company's process of updating
computer hardware, the Company replaced computer equipment prior to the merger
with Avondale and these costs were incurred by Avondale prior to the merger.
Management expects that any additional expenditures related to the year 2000
problem are immaterial.
Forward Looking Statements
Statements made about the Company's future economic performance, strategic
plans or objectives, revenues or earnings projections, or other financial items
and similar statements are not guarantees of future performance, but are forward
looking statements. By their nature, these statements are subject to numerous
uncertainties that could cause actual results to differ materially from those in
the statements. Important factors that might cause the Company's actual results
to differ materially include, but are not limited to, the following:
. Federal and state legislative and regulatory developments;
. Changes in management's estimate of the adequacy of the allowance for loan
losses;
. Changes in management's valuation of the interest only securities;
. Changes in the level and direction of loan delinquencies and write-offs;
. Interest rate movements and their impact on customer behavior and the
Company's net interest margin;
. The impact of repricing and competitors' pricing initiatives on loan and
deposit products;
. The Company's ability to adapt successfully to technological changes to meet
customers' needs and developments in the market place;
. The Company's ability to access cost effective funding; and
. Changes in financial markets and general economic conditions.
19
<PAGE>
PART II. - OTHER INFORMATION
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, MB
Financial, Inc. has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized, on the 14th day of May 1999.
MB FINANCIAL, INC.
By: /s/ Mitchell Feiger
-------------------
Mitchell Feiger
Chief Executive Officer
(Principal Executive Officer)
By: /s/ Howard A. Jaffe
-------------------
Howard A. Jaffe
Vice President and Chief Financial Officer
(Principal Financial and Principal Accounting Officer)
20
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND> This schedule contains summary financial information extracted from
and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1998
<PERIOD-START> JAN-01-1999 JAN-01-1998
<PERIOD-END> MAR-31-1999 MAR-31-1998
<CASH> 34,597 36,318
<INT-BEARING-DEPOSITS> 941 0
<FED-FUNDS-SOLD> 42,200 0
<TRADING-ASSETS> 0 0
<INVESTMENTS-HELD-FOR-SALE> 369,891 136,670
<INVESTMENTS-CARRYING> 10,932 5,224
<INVESTMENTS-MARKET> 11,259 5,638
<LOANS> 797,532 526,914
<ALLOWANCE> 15,766 7,751
<TOTAL-ASSETS> 1,342,105 762,675
<DEPOSITS> 968,417 634,448
<SHORT-TERM> 138,008 29,365
<LIABILITIES-OTHER> 23,729 11,937
<LONG-TERM> 113,143 20,537
<COMMON> 0 0
0 0
71 490
<OTHER-SE> 0 0
<TOTAL-LIABILITIES-AND-EQUITY> 1,342,105 762,675
<INTEREST-LOAN> 12,802 11,159
<INTEREST-INVEST> 3,718 2,613
<INTEREST-OTHER> 310 118
<INTEREST-TOTAL> 16,830 13,890
<INTEREST-DEPOSIT> 6,304 5,593
<INTEREST-EXPENSE> 8,881 6,887
<INTEREST-INCOME-NET> 7,949 7,003
<LOAN-LOSSES> 246 188
<SECURITIES-GAINS> 0 15
<EXPENSE-OTHER> 7,063 6,840
<INCOME-PRETAX> 2,203 5,475
<INCOME-PRE-EXTRAORDINARY> 2,203 5,475
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 1,444 3,558
<EPS-PRIMARY> 0.28 0.76
<EPS-DILUTED> 0.28 0.76
<YIELD-ACTUAL> 0 0
<LOANS-NON> 10,727 9,364
<LOANS-PAST> 0 0
<LOANS-TROUBLED> 0 0
<LOANS-PROBLEM> 0 0
<ALLOWANCE-OPEN> 6,344 7,922
<CHARGE-OFFS> 410 4
<RECOVERIES> 97 44
<ALLOWANCE-CLOSE> 15,766 7,751
<ALLOWANCE-DOMESTIC> 15,766 7,751
<ALLOWANCE-FOREIGN> 0 0
<ALLOWANCE-UNALLOCATED> 0 0
</TABLE>
