<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 JUNE 30, 2000
COMMISSION FILE NUMBER 0-24566
MB FINANCIAL, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 36-3895923
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1200 NORTH ASHLAND AVENUE, CHICAGO, ILLINOIS 60622
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (773) 278-4040
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 /X/ No / /
There were issued and outstanding 7,064,515 shares of the Registrant's common
stock as of August 14, 2000.
================================================================================
<PAGE>
MB FINANCIAL, INC. AND SUBSIDIARIES
FORM 10-Q
JUNE 30, 2000
INDEX
<TABLE>
<S> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS AT JUNE 30, 2000, DECEMBER 31, 1999 AND JUNE 30, 1999 3
CONSOLIDATED STATEMENTS OF INCOME FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2000 AND 1999 4
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND 1999 5 - 6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 8 - 19
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 20
PART II. OTHER INFORMATION 20
SIGNATURES 21
</TABLE>
2
<PAGE>
PART I. - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MB FINANCIAL, INC.
CONSOLIDATED BALANCE SHEETS
AT JUNE 30, 2000, DECEMBER 31, 1999 AND JUNE 30, 1999
(UNAUDITED)
(STATEMENT AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31, JUNE 30,
2000 1999 1999
-------------------------------------------------
<S> <C> <C> <C>
ASSETS
Cash and due from banks $ 25,537 $ 29,420 $ 30,953
Other interest bearing deposits 1,080 1,487 469
Investment securities:
Securities available for sale 259,740 271,313 254,288
Securities held to maturity (fair value of $10,701 at June 30, - - 10,573
1999)
Stock in Federal Home Loan Bank 7,290 6,290 5,290
Loans 977,445 903,126 826,153
Less: allowance for loan losses 12,638 12,197 14,453
-------------------------------------------------
Net loans 964,807 890,929 811,700
Lease investments, net 40,891 38,034 22,419
Premises and equipment, net 15,038 15,304 14,855
Cash surrender value of life insurance 30,664 - -
Interest only securities 13,035 13,821 14,754
Intangibles, net 15,452 16,265 17,500
Other assets 32,051 26,563 30,905
-------------------------------------------------
TOTAL ASSETS $ 1,405,585 $ 1,309,426 $ 1,213,706
=================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits:
Non-interest bearing $ 153,203 $ 145,059 $ 141,333
Interest bearing 825,708 791,016 797,520
-------------------------------------------------
TOTAL DEPOSITS 978,911 936,075 938,853
Short-term borrowings 290,873 244,569 42,411
Long-term borrowings 32,503 32,698 136,802
Other liabilities 19,914 16,706 20,950
-------------------------------------------------
TOTAL LIABILITIES 1,322,201 1,230,048 1,139,016
-------------------------------------------------
STOCKHOLDERS' EQUITY
Common stock, ($0.01 par value; authorized 20,000,000 shares;
issued 7,064,515 shares) 71 71 71
Additional paid-in capital 50,656 50,656 50,447
Retained earnings 37,707 32,186 26,427
Accumulated other comprehensive (loss) (5,050) (3,535) (2,255)
-------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 83,384 79,378 74,690
-------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,405,585 $ 1,309,426 $ 1,213,706
=================================================
</TABLE>
See Notes to Consolidated Financial Statements.
3
<PAGE>
MB FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(STATEMENT AMOUNTS IN THOUSANDS EXCEPT COMMON SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
----------------------------------------------------------------------
2000 1999 2000 1999
----------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest income:
Loans $ 20,599 $ 16,140 $ 39,609 $ 28,942
Investment securities:
Taxable 4,487 4,836 8,981 8,475
Nontaxable 78 81 157 160
Federal funds sold - 325 - 618
Other interest bearing accounts 19 19 42 36
----------------------------------------------------------------------
TOTAL INTEREST INCOME 25,183 21,401 48,789 38,231
----------------------------------------------------------------------
Interest expense:
Deposits 9,166 8,264 17,630 14,568
Short-term borrowings 4,334 743 7,959 2,250
Long-term borrowings 635 1,834 1,271 2,904
----------------------------------------------------------------------
TOTAL INTEREST EXPENSE 14,135 10,841 26,860 19,722
----------------------------------------------------------------------
NET INTEREST INCOME 11,048 10,560 21,929 18,509
Provision for loan losses 840 288 1,590 534
----------------------------------------------------------------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 10,208 10,272 20,339 17,975
----------------------------------------------------------------------
Other income:
Loan service fees 619 1,077 1,393 1,477
Deposit service fees 840 818 1,672 1,509
Lease financing, net 363 229 666 466
Net gains on sale of securities available for sale - 7 - 7
Increase in cash surrender value of life insurance 502 - 664 -
Other operating income 416 451 1,117 686
----------------------------------------------------------------------
2,740 2,582 5,512 4,145
----------------------------------------------------------------------
Other expense:
Salaries and employee benefits 4,494 4,450 9,284 8,267
Occupancy and equipment expense 1,680 1,512 3,335 2,787
Intangibles amortization expense 485 618 969 1,236
Advertising and marketing expense 387 219 773 401
Other operating expenses 1,912 1,933 3,558 3,164
----------------------------------------------------------------------
8,958 8,792 17,919 15,855
----------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 3,990 4,062 7,932 6,265
Income taxes 1,156 1,311 2,411 2,070
----------------------------------------------------------------------
NET INCOME 2,834 2,751 5,521 4,195
======================================================================
Other comprehensive income:
Unrealized securities (losses), net of income taxes (899) (1,864) (1,515) (2,594)
Less: reclassification adjustments for gains included
in net income, net of income taxes - 5 - 5
----------------------------------------------------------------------
OTHER COMPREHENSIVE INCOME (899) (1,869) (1,515) (2,599)
----------------------------------------------------------------------
COMPREHENSIVE INCOME $ 1,935 $ 882 $ 4,006 $ 1,596
======================================================================
COMMON SHARE DATA:
Basic earnings per common share $ 0.40 $ 0.39 $ 0.78 $ 0.69
Diluted earnings per common share $ 0.40 $ 0.39 $ 0.78 $ 0.69
Weighted average common shares outstanding 7,064,515 7,064,515 7,064,515 6,105,417
</TABLE>
See Notes to Consolidated Financial Statements.
4
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(STATEMENT AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
2000 1999
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash Flows From Operating Activities
Net income $ 5,521 $ 4,195
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation 6,926 4,667
(Gain) on disposal of leased equipment (76) -
Amortization of intangibles 969 1,236
Provision for loan losses 1,590 534
Deferred income taxes (884) (563)
Bond (accretion), net (66) (1,279)
Securities (gains), net - (7)
(Increase) in cash surrender value of life insurance (664) -
(Increase) in other assets (4,015) (2,087)
Increase in other liabilities 4,092 408
-----------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 13,393 7,104
-----------------------------
Cash Flows From Investing Activities
Proceeds from sales of securities available for sale - 19,998
Proceeds from maturities and calls of securities available for sale 12,326 157,083
Proceeds from maturities and calls of securities held to maturity - 606
Purchase of securities available for sale (2,623) (26,070)
Purchase of stock in Federal Home Loan Bank (1,000) -
Federal funds sold, net - 65,850
Other interest bearing deposits, net 407 1,003
(Increase) in loans, net of principal collections (76,124) (76,012)
Purchases of premises and equipment and leased equipment (9,789) (5,782)
Proceeds from sale of lease equipment 155 -
Principal collected on lease investments 193 194
Purchase of minority interests (156) -
Purchase of cash surrender value of life insurance (30,000) -
Cash acquired through merger with Avondale Financial Corp. - 7,224
Proceeds received from excess interest received on interest only securities 390 -
-----------------------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (106,221) 144,094
-----------------------------
Cash Flows From Financing Activities
Net increase in noninterest bearing deposits 8,144 13,115
Net increase (decrease) in interest bearing deposits 34,692 (62,884)
Net increase (decrease) in short-term borrowings 46,304 (93,110)
Proceeds from long-term borrowings 1,571 2,414
Principal paid on long-term borrowings (1,766) (3,449)
-----------------------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 88,945 (143,914)
-----------------------------
NET INCREASE (DECREASE) IN CASH AND DUE FROM BANKS (3,883) 7,284
Cash and due from banks:
Beginning 29,420 23,669
-----------------------------
Ending $ 25,537 $ 30,953
=============================
</TABLE>
(continued)
5
<PAGE>
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30, 2000 AND 1999
(STATEMENT AMOUNTS IN THOUSANDS)
2000 1999
----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Supplemental Disclosures of Cash Flow Information
Cash payments for:
Interest paid to depositors $ 16,759 $ 14,645
Other interest paid 8,774 5,442
Income taxes paid, net of refunds 600 1,199
Supplemental Schedule of Noncash Investing Activities
Merger with Avondale Financial Corp.
Noncash assets acquired:
Securities available for sale $ 183,700
Stock in Federal Home Loan Bank 5,290
Federal funds sold 45,500
Other interest bearing deposits 1,472
Loans, net 203,355
Premises and equipment 2,939
Accrued interest and other assets 20,358
Intangibles, net 443
Interest only securities 14,009
------------
477,066
------------
Liabilities assumed:
Interest bearing deposits 342,961
Short-term borrowings 5,000
Long-term borrowings 100,803
Other liabilities 7,982
------------
456,746
NET NONCASH ASSETS ACQUIRED 20,320
------------
CASH ACQUIRED $ 7,224
============
Real estate acquired in settlement of losses $ 656 $ 94
============== ============
</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 and six months ended June 30, 2000 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, 1999 audited financial
statements.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions which 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. 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 SIX MONTHS ENDED
---------------------------------------------------------------------
JUNE 30, 2000 JUNE 30, 1999 JUNE 30, 2000 JUNE 30, 1999
---------------------------------------------------------------------
<S> <C> <C> <C> <C>
Basic:
Net income $ 2,834 $ 2,751 $ 5,521 $ 4,195
Average shares outstanding 7,064,515 7,064,515 7,064,515 6,105,417
---------------------------------------------------------------------
Basic earnings per share $ 0.40 $ 0.39 $ 0.78 $ 0.69
=====================================================================
Diluted:
Net income $ 2,834 $ 2,751 $ 5,521 $ 4,195
Average shares outstanding 7,064,515 7,064,515 7,064,515 6,105,417
Net effect of dilutive stock options 9,797 17,761 9,797 17,768
---------------------------------------------------------------------
Total 7,074,312 7,082,276 7,074,312 6,123,185
---------------------------------------------------------------------
Diluted earnings per share $ 0.40 $ 0.39 $ 0.78 $ 0.69
=====================================================================
</TABLE>
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATION
THE FOLLOWING IS A DISCUSSION AND ANALYSIS OF THE COMPANY'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 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. THIS TRANSACTION SIGNIFICANTLY AFFECTS 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 credit 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, increase in cash surrender value of life
insurance and other operating income. Other expenses include salaries and
employee benefits along with occupancy and equipment expense, intangibles
amortization expense 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, telecommunications and
other miscellaneous expenses.
RESULTS OF OPERATIONS
The Company had net income of $2.8 million for the three months ended
June 30, 2000 which equaled net income for the three months ended June 30, 1999.
Net interest income was $11.0 million for the second quarter of 2000 compared to
$10.6 million for the second quarter of 1999. Net interest income remained
relatively flat as increases in interest income due to growth in the Company's
commercial and lease banking business and increased lending rates from a higher
prime rate were offset by increases in interest expense on deposits and
borrowings.
Net income was $5.5 million for the six months ended June 30, 2000
compared to $4.2 million for the six months ended June 30, 1999. Net interest
income increased $3.4 million to $21.9 million for the six months ended June 30,
2000 compared to $18.5 million for the six months ended June 30, 1999. The
increase in net interest income was due to growth in the Company's commercial
and lease banking business as well as the Avondale Financial Corporation merger.
The Company's operating results as a merged company commenced with the month of
March for 1999, whereas operating results for 2000 reflected the combined
company for the entire six-month period.
Other income increased $158 thousand to $2.7 million for the quarter
ended June 30, 2000 from $2.6 million for the comparable period in 1999. This
increase was the result of income from increase in cash surrender value of life
insurance and an increase in net lease financing, due to growth in the Company's
lease banking business, offset by a decrease in loan service fees from
anticipated pay downs and reductions in servicing fee percentages related to
home equity loans previously securitized and sold by Avondale.
For the six months ended June 30, 2000, other income increased $1.4
million to $5.5 million from $4.1 million for the six months ended June 30,
1999. The increase was primarily due to income from increase in cash surrender
value of life insurance, an increase in net lease financing, due to growth in
the Company's lease banking business, as well as an increase in other operating
income mainly due to the Avondale merger.
Other expense increased $166 thousand to $9.0 million for the second
quarter of 2000 from $8.8 million for the second quarter of 1999. The increase
was due to increases in occupancy and equipment expense resulting from the
opening of two new commercial banking centers, and other operating expenses
partially offset by a decrease in intangibles amortization expense due to the
Company utilizing an accelerated intangible amortization method which amortizes
a greater amount of purchase premium in early years than in later years.
8
<PAGE>
For the six months ended June 30, 2000, other expense increased $2.0
million to $17.9 million from $15.9 million for the six months ended June 30,
1999. The increase was due to increases in salaries and employee benefits,
occupancy and equipment expense and other operating expenses primarily due to
the Avondale merger. Partially offsetting these increases was a decrease in
intangibles amortization expense as the Company utilizes an accelerated
intangible amortization method which amortizes a greater amount of purchase
premium in early years than in later years.
Income tax expense for the three months ended June 30, 2000 was $1.2
million compared to $1.3 million for the comparable period in 1999. The
effective tax rate decreased to 29.0% for the second quarter of 2000 from 32.3%
for the comparable period in 1999 as the Company continued to review and manage
its income tax expense.
Income tax expense for the six months ended June 30, 2000 was $2.4
million compared to $2.1 million for the comparable period in 1999. The
effective tax rate decreased to 30.4% for the second quarter of 2000 from 33.0%
for the comparable period in 1999 as the Company continued to review and manage
its income tax expense.
9
<PAGE>
NET INTEREST MARGIN
The following tables present, 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 35% tax rate and a 34% tax rate for the three months ended June 30,
2000 and 1999, respectively, and for the six months ended June 30, 2000 and
1999, respectively.
<TABLE>
<CAPTION>
AVERAGE BALANCES, INTEREST RATES AND YIELDS
(DOLLARS IN THOUSANDS)
THREE MONTHS ENDED JUNE 30,
------------------------------------------------------------------------------
2000 1999
------------------------------------------------------------------------------
AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST RATE BALANCE INTEREST RATE
------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
INTEREST EARNING ASSETS:
Loans (1) (2) $ 938,315 $ 20,599 8.83 % $ 814,139 $ 16,140 7.95 %
Taxable investment securities 265,204 4,487 6.80 % 302,289 4,836 6.42 %
Investment securities exempt from federal
income taxes (3) 5,169 120 9.34 % 5,486 123 8.97 %
Federal funds sold - - - 27,937 325 4.67 %
Other interest bearing deposits 1,206 19 6.34 % 1,477 19 5.16 %
-------------------------- -------------------------
Total interest earning assets 1,209,894 25,225 8.39 % 1,151,328 21,443 7.47 %
------------- ------------
Non-interest earning assets 157,205 105,754
------------- -------------
Total assets $ 1,367,099 $ 1,257,082
============= =============
INTEREST BEARING LIABILITIES:
Deposits:
NOW and money market deposit accounts $ 169,413 $ 1,224 2.91 % $ 179,104 $ 1,220 2.73 %
Savings deposits 144,668 849 2.36 % 163,875 1,042 2.55 %
Time deposits 490,835 7,093 5.81 % 473,886 6,002 5.08 %
Short-term borrowings 275,611 4,334 6.32 % 68,074 743 4.38 %
Long-term borrowings 32,595 635 7.84 % 136,688 1,834 5.38 %
-------------------------- -------------------------
Total interest bearing liabilities 1,113,122 14,135 5.11 % 1,021,627 10,841 4.26 %
------------- ------------
Demand deposits- non-interest bearing 151,779 137,891
Other non-interest bearing liabilities 17,843 21,961
Stockholders' equity 84,355 75,603
-------------- --------------
Total liabilities and stockholders' equity $ 1,367,099 $ 1,257,082
============= =============
Net interest income/interest rate spread (4) $ 11,090 3.28 % $ 10,602 3.21 %
============= ============
Net interest margin (5) 3.69 % 3.69 %
</TABLE>
(1) Non-accrual loans are included in average loans.
(2) Interest income includes loan origination fees of $387 thousand and
$246 thousand for the three months ended June 30, 2000 and 1999,
respectively.
(3) Non-taxable investment income is presented on a fully tax equivalent
basis assuming a 35% tax rate and a 34% tax rate for the three months
ended June 30, 2000 and 1999, respectively.
(4) Interest rate spread represents the difference between the average
yield on interest earning assets and the average cost of interest
bearing liabilities.
(5) Net interest margin represents net interest income as a percentage of
average interest earning assets.
10
<PAGE>
The Company's net interest income increased $488 thousand to $11.0
million for the quarter ended June 30, 2000 from $10.6 million for the quarter
ended June 30, 1999. The increase in net interest income resulted from an
increase in interest income of $3.8 million, or 17.7%, partially offset by an
increase in interest expense of $3.3 million, or 30.4%. Interest income
increased due to a $58.6 million, or 5.1%, increase in average interest earning
assets as a result of a $124.2 million increase in average loans offset by a
$37.4 million decrease in average investment securities. In addition to growth
in the Company's loan portfolio, increased lending rates from a higher prime
rate for the second quarter of 2000, as reflected in a 12.3% increase in the
total interest earning assets yield, also attributed to the increase in interest
income. Interest expense rose as a result of a $91.5 million, or 9.0%, increase
in average interest bearing liabilities, due to a $103.4 million increase in
average borrowings mostly from federal funds purchased. Increased deposit and
borrowing rates due to a higher prime rate for the second quarter of 2000, as
reflected in a 20.0% increase in the total interest bearing liabilities yield,
also attributed to the increase in interest expense. The net interest margin on
a fully tax equivalent basis was 3.69% for the second quarter of 2000 and 3.69%
for the comparable period in 1999. Increased leverage in the Company's balance
sheet, however, had some adverse impact on the net interest margin for the six
months ended 2000, due to borrowings used for an investment in a cash surrender
value of life insurance, and for the six months ended 1999, due to repurchase
agreements used to fund investment securities. Excluding these transactions from
the respective periods, the net interest margin on a fully tax equivalent basis
would have increased to 3.85% for the second quarter of 2000 from 3.80% for the
comparable period in 1999.
AVERAGE BALANCES, INTEREST RATES AND YIELDS - CONTINUED
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-------------------------------------------------------------------------------
2000 1999
-------------------------------------------------------------------------------
AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST RATE BALANCE INTEREST RATE
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
INTEREST EARNING ASSETS:
Loans (1) (2) $ 919,934 $ 39,609 8.66 % $ 723,483 $ 28,942 8.07 %
Taxable investment securities 267,639 8,981 6.75 % 290,415 8,475 5.88 %
Investment securities exempt from federal
income taxes (3) 5,162 242 9.41 % 5,500 242 8.89 %
Federal funds sold - - - 26,608 618 4.68 %
Other interest bearing deposits 1,519 42 5.56 % 1,464 36 4.96 %
-------------------------- ------------------------
Total interest earning assets 1,194,254 48,874 8.23 % 1,047,470 38,313 7.38 %
------------ -----------
Non-interest earning assets 144,178 95,439
------------ ------------
Total assets $ 1,338,432 $1,142,909
============ ============
INTEREST BEARING LIABILITIES:
Deposits:
NOW and money market deposit accounts $ 168,854 $ 2,388 2.84 % $ 165,942 2,301 2.80 %
Savings deposits 147,017 1,755 2.40 % 138,315 1,729 2.52 %
Time deposits 483,335 13,487 5.61 % 415,986 10,538 5.11 %
Short-term borrowings 260,936 7,959 6.13 % 100,655 2,250 4.51 %
Long-term borrowings 32,402 1,271 7.89 % 104,395 2,904 5.61 %
-------------------------- -------------------------
Total interest bearing liabilities 1,092,544 26,860 4.94 % 925,293 19,722 4.30 %
------------ -----------
Demand deposits- non-interest bearing 145,294 133,114
Other non-interest bearing liabilities 17,443 18,250
Stockholders' equity 83,151 66,252
------------ ------------
Total liabilities and stockholders' equity $ 1,338,432 $ 1,142,909
============ ============
Net interest income/interest rate spread (4) $ 22,014 3.29 % $ 18,591 3.08 %
=========== ===========
Net interest margin (5) 3.71 % 3.58 %
</TABLE>
(1) Non-accrual loans are included in average loans.
(2) Interest income includes loan origination fees of $774 thousand and
$435 thousand for the six months ended June 30, 2000 and 1999,
respectively.
(3) Non-taxable investment income is presented on a fully tax equivalent
basis assuming a 35% tax rate and a 34% tax rate for the six months
ended June 30, 2000 and 1999, respectively.
(4) Interest rate spread represents the difference between the average
yield on interest earning assets and the average cost of interest
bearing liabilities.
(5) Net interest margin represents net interest income as a percentage of
average interest earning assets.
11
<PAGE>
For the six months ended June 30, 2000, net interest income
increased $3.4 million to $21.9 million from $18.5 million for the six months
ended June 30, 1999. The increase in net interest income resulted from an
increase in interest income of $10.6 million, or 27.6%, partially offset by
an increase in interest expense of $7.1 million, or 36.2%. Interest income
increased due to a $146.8 million, or 14.0%, increase in average interest
earning assets as a result of a $196.5 million increase in average loans
offset by a $23.1 million decrease in average investment securities and a
$26.6 million decrease in average federal funds sold. Also attributing to the
increase in interest income were increased lending rates from a higher prime
rate for the six months ended June 30, 2000 as reflected in a 11.5% increase
in the total interest earning assets yield. Interest expense rose as a result
of a $167.3 million, or 18.1%, increase in average interest bearing
liabilities due to a $67.3 million increase in average time deposits, from
personal time certificates under $100,000, and personal and brokered time
certificates over $100,000, and a $88.3 million increase in average
borrowings primarily from federal funds purchased. Also attributing to the
increase in interest expense were increased deposit and borrowing rates from
a higher prime rate for the six months ended June 30, 2000 as reflected in a
14.9% increase in the total interest bearing liabilities yield. Increased
deposit and borrowing rates due to a higher prime rate for the six months
ended 2000 also attributed to the increase in interest expense. The net
interest margin on a fully tax equivalent basis was 3.71% for the six months
ended June 30, 2000 and 3.58% for the six months ended June 30, 1999.
Increased leverage in the Company's balance sheet, however, had some adverse
impact on the net interest margin for the six months ended 2000, due to
borrowings used for an investment in a cash surrender value of life
insurance, and for the six months ended 1999, due to repurchase agreements
used to fund investment securities. Excluding these transactions from the
respective periods, the net interest margin on a fully tax equivalent basis
would have been 3.82% for the six months ended 2000 and 3.81% for the six
months ended 1999.
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 JUNE 30, 2000 SIX MONTHS ENDED JUNE 30, 2000
COMPARED TO JUNE 30, 1999 COMPARED TO JUNE 30, 1999
--------------------------------- ----------------------------------
CHANGE CHANGE CHANGE CHANGE
DUE TO DUE TO TOTAL DUE TO DUE TO TOTAL
VOLUME RATE CHANGE VOLUME RATE CHANGE
--------------------------------- ----------------------------------
<S> <C> <C> <C> <C> <C> <C>
INTEREST EARNING ASSETS:
Loans $ 2,411 $ 2,048 $ 4,459 $ 7,961 $ 2,706 $ 10,667
Taxable investment securities (605) 256 (349) (643) 1,149 506
Investment securities exempt from federal income taxes (1) (7) 4 (3) (14) 14 -
Federal funds sold (325) - (325) (618) - (618)
Other interest bearing deposits (4) 4 - 1 5 6
-------------------------------- -----------------------------------
Total increase in interest income 1,470 2,312 3,782 6,687 3,874 10,561
-------------------------------- -----------------------------------
INTEREST BEARING LIABILITIES:
NOW and money market deposit accounts (69) 73 4 47 40 87
Savings deposits (125) (68) (193) 114 (88) 26
Time deposits 198 893 1,091 1,740 1,209 2,949
Short-term borrowings 2,257 1,334 3,591 3,599 2,110 5,709
Long-term borrowings (1,398) 199 (1,199) (2,000) 367 (1,633)
-------------------------------- -----------------------------------
Total increase in interest expense 863 2,431 3,294 3,500 3,638 7,138
-------------------------------- -----------------------------------
Increase (decrease) in net interest income $ 607 $ (119) $ 488 $ 3,187 $ 236 $ 3,423
================================ ===================================
</TABLE>
(1) Non-taxable investment income is presented on a fully tax equivalent basis
assuming a 35% tax rate and a 34% tax rate for the three months ended June
30, 2000 and 1999, respectively, and for the six months ended June 30, 2000
and 1999, respectively.
12
<PAGE>
OTHER INCOME
Other income increased $158 thousand to $2.7 million for the quarter
ended June 30, 2000 from $2.6 million for the comparable period in 1999. This
increase was the result of $502 thousand in income from increase in cash
surrender value of life insurance and a $134 thousand increase in net lease
financing, due to growth in the Company's lease banking business, offset by a
$458 thousand decrease in loan service fees from anticipated pay downs and
reductions in servicing fee percentages related to home equity loans previously
securitized and sold by Avondale.
For the six months ended June 30, 2000, other income increased $1.4
million to $5.5 million from $4.1 million for the six months ended June 30,
1999. The increase was primarily due to $664 thousand in income from increase in
cash surrender value of life insurance, a $200 thousand increase in net lease
financing, as well as a $431 thousand increase in other operating income mainly
due to the Avondale merger.
OTHER EXPENSE
Other expense increased $166 thousand to $9.0 million for the second
quarter of 2000 from $8.8 million for the second quarter of 1999. The increase
was due to a $168 thousand increase in occupancy and equipment expense resulting
from the opening of two new commercial banking centers, and a $87 thousand
increase in other operating expenses partially offset by a $133 thousand
decrease in intangibles amortization expense due to the Company utilizing an
accelerated intangible amortization method which amortizes a greater amount of
purchase premium in early years than in later years.
For the six months ended June 30, 2000, other expense increased $2.0
million to $17.9 million from $15.9 million for the six months ended June 30,
1999. The increase was due to a $1.0 million increase in salaries and employee
benefits, a $548 thousand increase in occupancy and equipment expense and a $766
thousand increase in other operating expenses primarily due to the Avondale
merger. Partially offsetting these increases was a $267 thousand decrease in
intangibles amortization expense as the Company utilizes an accelerated
intangible amortization method which amortizes a greater amount of purchase
premium in early years than in later years.
INCOME TAXES
Income tax expense for the three months ended June 30, 2000 was $1.2
million compared to $1.3 million for the comparable period in 1999. The
effective tax rate decreased to 29.0% for the second quarter of 2000 from 32.3%
for the comparable period in 1999. The decrease in the effective tax rate was
primarily due to income from the cash surrender value of life insurance not
being subject to income tax expense.
Income tax expense for the six months ended June 30, 2000 was $2.4
million compared to $2.1 million for the comparable period in 1999. The
effective tax rate decreased to 30.4% for the second quarter of 2000 from 33.0%
for the comparable period in 1999 as noted above.
CASH EARNINGS
The purchase method of accounting has been used to record each of the
Company's acquisitions and Avondale merger. 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.
Amortization 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. Consequently, net income is not
reduced for the amortization of core deposit intangibles or goodwill. 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. Cash earnings is presently
not a defined term or concept under generally accepted accounting principles.
13
<PAGE>
The following table sets forth the Company's cash earnings, which is
defined by management as net income excluding amortization of core deposit
intangibles and goodwill and the related deferred income tax effect (dollars in
thousands except earnings per share data):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
----------------------------------------------------------------------
JUNE 30, 2000 JUNE 30, 1999 JUNE 30, 2000 JUNE 30, 1999
---------------------------------- -----------------------------------
<S> <C> <C> <C> <C>
Net Income $ 2,834 $ 2,751 $ 5,521 $ 4,195
Goodwill amortization 203 203 407 407
Core deposit intangibles amortization (net of tax) 182 274 365 547
----------------------------------------------------------------------
Cash earnings $ 3,219 $ 3,228 $ 6,293 $ 5,149
======================================================================
Average tangible assets $ 1,352,385 $ 1,241,139 $ 1,323,638 $ 1,126,716
Average tangible equity $ 74,256 $ 60,070 $ 72,778 $ 50,178
Cash earnings per share: (1)
Basic $ 0.46 $ 0.46 $ 0.89 $ 0.84
Diluted $ 0.46 $ 0.46 $ 0.89 $ 0.84
Performance ratios: (2)
Cash return on average tangible assets 0.96 % 1.04 % 0.96 % 0.92 %
Cash return on average tangible equity 17.45 % 21.56 % 17.39 % 20.69 %
</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 and six months ended June 30, 2000 and 1999.
BALANCE SHEET REVIEW
Total assets increased $96.2 million to $1.4 billion at June 30, 2000
compared to $1.3 billion at December 31, 1999. The increase was due to a $74.3
million increase in loans, due to growth in commercial and lease banking
business, and a $30.7 million increase in cash surrender value of life
insurance. Offsetting these increases was a $11.6 million decrease in investment
securities.
Total liabilities increased $92.2 million to $1.3 billion at June 30,
2000 compared to $1.2 billion at December 31, 1999. The increase was due to a
$42.8 million increase in total deposits including a $73.6 million increase in
interest bearing brokered deposits and a $8.1 million increase in non-interest
bearing deposits offset by a $38.9 million decrease in other interest bearing
deposits. Also attributing to the increase in liabilities was a $46.3 million
increase in short-term borrowings which included a $27.4 million increase in
federal funds purchased, a $20.0 million increase in Federal Home Loan Bank
advances along with a $2.0 million increase in correspondent bank lines of
credit.
Total assets increased $191.9 million to $1.4 billion at June 30, 2000
compared to $1.2 billion at June 30, 1999. The increase was due to a $151.3
million increase in loans, due to growth in commercial and lease banking
business, a $30.7 million increase in cash surrender value of life insurance,
and a $18.5 million increase in net lease investment. Offsetting these increases
was a $5.1 million decrease in investment securities.
Total liabilities increased $183.2 million to $1.3 billion at June 30,
2000 compared to $1.1 billion at June 30, 1999. The increase was due to a $40.1
million increase in total deposits resulting from a $73.6 increase in interest
bearing brokered deposits and a $11.9 million increase in non-interest bearing
deposits offset by a $45.4 million decrease in other interest bearing deposits.
Liabilities also increased due to a $144.2 million increase in borrowings
resulting from a $78.4 million increase in federal funds purchased, a $40.0
million increase in Federal Home Loan Bank advances, a $27.0 million increase in
bank repurchase agreements used to fund investment securities and a $4.5 million
increase in correspondent bank lines of credit offset by a $5.7 million decrease
in other borrowings including customer repurchase agreements, U.S. Treasury
demand notes and loans to purchase equipment.
14
<PAGE>
LOAN PORTFOLIO
The following table sets forth the composition of the loan portfolio
(dollars in thousands):
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31, JUNE 30
2000 1999 1999
-----------------------------------------------------------------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Manufacturers Bank - core business:
Commercial $ 182,231 18.64 % $ 154,833 17.14 % $ 134,268 16.25 %
Commercial loans collateralized by
lease payments 233,642 23.91 % 186,895 20.70 % 142,167 17.21 %
Commercial real estate 297,944 30.48 % 249,107 27.58 % 228,671 27.68 %
Residential real estate 98,523 10.08 % 129,040 14.29 % 123,968 15.01 %
Construction real estate 49,462 5.06 % 58,447 6.47 % 44,493 5.39 %
Installment and other 42,397 4.34 % 39,603 4.39 % 38,364 4.64 %
-----------------------------------------------------------------------------
Total loans Manufacturers Bank- core business 904,199 92.51 % 817,925 90.57 % 711,931 86.18 %
-----------------------------------------------------------------------------
Acquired from Avondale Federal Savings Bank- non-core business:
Commercial real estate - - - - 668 0.08 %
Residential real estate 13,522 1.38 % 14,593 1.61 % 25,785 3.12 %
Credit scored mortgage loans 50,260 5.14 % 59,716 6.61 % 72,780 8.81 %
Installment and other 9,464 0.97 % 10,892 1.21 % 14,989 1.81 %
-----------------------------------------------------------------------------
Total loans acquired from Avondale Federal
Savings Bank - non-core business 73,246 7.49 % 85,201 9.43 % 114,222 13.82 %
-----------------------------------------------------------------------------
Gross loans 977,445 100.00 % 903,126 100.00 % 826,153 100.00 %
=========== ============ =========
Allowance for loan losses (12,638) (12,197) (14,453)
------------- -------------- ------------
Net loans $ 964,807 $ 890,929 $ 811,700
============= ============== ============
</TABLE>
Net loans increased $73.9 million from $890.9 million at December 31,
1999 and $153.1 million from $811.7 million at June 30, 1999 to $964.8 million
at June 30, 2000 due to growth in commercial and lease banking business. Total
loans Manufacturers Bank - core business represents loan types the Company
intends to originate in the future, while total loans acquired from Avondale
Federal Savings Bank - non-core business represents loan types the Company will
not originate in the future.
15
<PAGE>
ASSET QUALITY
The following table presents a summary of non-performing assets as of
the dates indicated (dollars in thousands):
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31, JUNE 30,
2000 1999 1999
-------------------------------------------------------
<S> <C> <C> <C>
Non-accruing loans:
Manufacturers Bank - core business: $ 5,683 $ 3,670 $ 3,632
Acquired from Avondale Federal Savings Bank - non-core business 4,633 7,031 6,953
-------------------------------------------------------
Total non-accruing loans 10,316 10,701 10,585
Loans 90 days or more past due, still accruing interest:
Manufacturers Bank - core business 257 - 108
Acquired from Avondale Federal Savings Bank - non-core business 67 - -
-------------------------------------------------------
Total loans 90 days or more past due, still accruing interest 324 - 108
-------------------------------------------------------
Total non-performing loans 10,640 10,701 10,693
-------------------------------------------------------
Other real estate owned:
Manufacturers Bank - core business 204 159 103
Acquired from Avondale Federal Savings Bank - non-core business 418 194 310
-------------------------------------------------------
Total other real estate owned 622 353 413
-------------------------------------------------------
Total non-performing assets $ 11,262 $ 11,054 $ 11,106
=======================================================
Total non-performing loans to total loans 1.09 % 1.18 % 1.29 %
Allowance for loan losses to non-performing loans 118.78 % 113.98 % 135.16 %
Total non-performing assets to total assets 0.80 % 0.84 % 0.92 %
</TABLE>
At June 30, 2000, non-performing assets increased $208 thousand from
$11.1 million at December 31, 1999 and increased $156 thousand from June 30,
1999. The increase in non-performing assets at June 30, 2000 compared to
December 31, 1999 was primarily due to a $324 thousand increase in loans 90 days
or more past due, still accruing interest and a $269 thousand increase in other
real estate owned offset by a $385 thousand decrease in non-accruing loans. The
increase in non-performing assets at June 30, 2000 compared to June 30, 1999 was
primarily due to a $216 thousand increase in loans 90 days or more past due,
still accruing interest and a $209 thousand increase in other real estate owned
partially offset by a $269 thousand decrease in non-accruing loans. At June 30,
2000, non-accruing loans for Manufacturers Bank - core business included three
commercial construction loans for one customer totaling $2.9 million and one
commercial real estate loan for $1.5 million. Excluding these two customers,
non-accruing loans for Manufacturers Bank - core business would have decreased
$2.4 million and $2.3 million at June 30, 2000 compared to December 31, 1999
and June 30, 1999, respectively. Overall decreases in non-accruing loans at June
30, 2000 compared to December 31, 1999 and June 30, 1999 were due to the
Company's diligent collection efforts.
16
<PAGE>
ALLOWANCE 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 SIX MONTHS ENDED
---------------------------------------------------------------------
JUNE 30, 2000 JUNE 30, 1999 JUNE 30, 2000 JUNE 30, 1999
---------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at beginning of period $ 12,248 $ 15,766 $ 12,197 $ 6,344
Additions resulting from merger - - - 9,489
Provision for loan losses 840 288 1,590 534
Charge-offs:
Manufacturers Bank - core business - (930) (70) (930)
Acquired from Avondale Federal Savings Bank
- non-core business (564) (949) (1,254) (1,359)
---------------------------------------------------------------------
Total charge-offs (564) (1,879) (1,324) (2,289)
---------------------------------------------------------------------
Recoveries:
Manufacturers Bank - core business 9 4 - 7
Acquired from Avondale Federal Savings Bank
- non-core business 105 274 175 368
---------------------------------------------------------------------
Total recoveries 114 278 175 375
---------------------------------------------------------------------
Net charge-offs (450) (1,601) (1,149) (1,914)
---------------------------------------------------------------------
Balance at June 30, $ 12,638 $ 14,453 $ 12,638 $ 14,453
=====================================================================
Total loans at June 30, $ 977,445 $ 826,153 $ 977,445 $ 826,153
Ratio of allowance for loan losses to total loans 1.29 % 1.75 % 1.29 % 1.75 %
</TABLE>
The provision for loans losses increased $552 thousand for the three
months ended June 30, 2000 compared to the comparable period in 1999 primarily
due to growth in the Company's core commercial and lease banking business. In
addition, net charge-offs have decreased $1.2 million for the quarter ended June
30, 2000 compared to the quarter ended June 30, 1999. The majority of the
decrease in net-charge-offs was due to a $930 thousand decrease in charge-offs
for Manufacturers Bank - core business.
The provision for loan losses increased $1.1 million for the six months
ended June 30, 2000 compared to the comparable period in 1999 primarily due to
growth in the Company's core commercial and lease banking business. In addition,
net charge-offs decreased $765 thousand for the six months ended June 30, 2000
compared to the six months ended June 30, 1999. The decrease in net charge-offs
was primarily due to a $860 thousand decrease in charge-offs for Manufacturers
Bank - core business partially offset by a $200 thousand decrease in recoveries.
At the merger date in 1999, Avondale's allowance for loan losses was $9.5
million. Management reviewed Avondale's calculation, based on credit scoring and
other criteria, and concluded that the allowance for loan losses related to
loans acquired through the merger was adequate. To date, losses associated with
the loan portfolio acquired from Avondale are consistent with losses indicated
by the credit scoring models and other criteria at the merger date.
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 also conducted by regulatory
authorities. 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.
17
<PAGE>
INTEREST ONLY SECURITIES
At June 30, 2000 interest only securities acquired through the merger
were $13.0 million. The value of these interest only securities is subject to
substantial credit, prepayment, and interest rate risk on the transferred
financial assets. On a quarterly basis, the Company performs a review to
determine the fair value of its interest only securities, as these securities
are accounted for as securities available for sale. As part of the review, the
Company reviews its assumptions of prepayment speeds, discount rates and the
remaining anticipated credit losses.
The following table shows the results of the Company's assumptions used
to estimate the fair value at June 30, 2000 (dollars in thousands):
<TABLE>
<CAPTION>
INTEREST ONLY SECURITY POOLS
-------------------------------------------------------------------------
96-1 97-1 97-2 98-1
-------------------------------------------------------------------------
Adjustable (1) Adjustable (1) Adjustable (1) Adjustable (1)
-------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Estimated fair value $ 2,604 $ 2,572 $ 3,909 $ 3,950
Prepayment speed 35.00 % 35.00 % 35.00 % 35.00 %
Weighted-average life (in years) (2) 1.94 2.00 2.04 2.23
Expected credit losses (3) 5.11 % 5.65 % 5.25 % 6.28 %
Residual cash flows discounted at 12.00 % 12.00 % 12.00 % 12.00 %
Loans outstanding at June 30, 2000 18,582 23,161 31,872 54,536
</TABLE>
(1) Rates for these loans are adjusted based on the prime rate as published in
the Wall Street Journal.
(2) The weighted-average life in years of prepayable assets is calculated by
multiplying (a) the principal collections expected in each future year by
(b) the number of years until collection, and then dividing that sum by the
current principal balance. This calculation is not explicitly assumed but
it reflects the overall effect of prepayment assumptions.
(3) Assumed remaining credit losses over the life remaining on the loans
outstanding at June 30, 2000 are $950 thousand, $1.3 million, $1.7 million
and $3.4 million for the 96-1, 97-1, 97-2 and 98-1 interest only security
pools, respectively. The expected credit loss percentage is derived by
dividing the remaining credit losses by the related loan balance
outstanding in the pool.
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 (in thousands):
<TABLE>
<CAPTION>
AT JUNE 30, 2000 AT DECEMBER 31, 1999 AT JUNE 30, 1999
---------------------------------------------------------------------------------
AMORTIZED FAIR AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE COST VALUE
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Securities Available for Sale:
U.S. Treasury securities $ - $ - $ - $ - $ 12,013 $ 12,048
U.S. Government agencies 99,962 97,215 99,891 97,691 100,606 98,794
States and political subdivisions 5,187 5,331 5,164 5,366 - -
Mortgage-backed securities 107,766 107,233 120,114 118,948 93,760 93,543
Corporate bonds 43,090 38,822 43,092 40,564 43,097 41,971
Other securities 958 958 962 958 - -
Investment in equity lines of credit trusts 10,181 10,181 7,786 7,786 7,932 7,932
--------------------------------------------------------------------------------
Total securities available for sale $ 267,144 $ 259,740 $ 277,009 $ 271,313 $ 257,408 $ 254,288
================================================================================
Securities Held to Maturity:
States and political subdivisions $ - $ - $ - $ - $ 5,481 $ 5,773
Mortgage-backed securities - - - - 4,129 3,965
Other securities - - - - 963 963
--------------------------------------------------------------------------------
Total securities held to maturity $ - $ - $ - $ - $ 10,573 $ 10,701
================================================================================
</TABLE>
18
<PAGE>
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
$13.8 million and $7.1 million for the six months ended June 30, 2000 and 1999,
respectively. Net cash provided by (used in) investing activities was ($106.6)
million for the six months ended June 30, 2000 and $144.0 million for the
comparable period in 1999. The decrease in net cash provided by investing
activities was due to a decrease in proceeds from sales, maturities and calls of
securities available for sale, a decrease in net federal funds sold and the
purchase of cash surrender value of life insurance for the six months ended 2000
compared to 1999. Net cash provided by (used in) financing activities was $88.9
million for the six months ended June 30, 2000 and ($144) million for the
comparable period in 1999. The increase in net cash provided by financing
activities was due to net increases in noninterest and interest bearing deposits
as well as short-term borrowings primarily from increases in brokered deposits,
federal funds purchased and advances from Federal Home Loan Bank for the six
months ended 2000 compared to 1999.
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 $105.0
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. MB Financial, Inc. also maintains a line of
credit with a large regional correspondent bank in the amount of $15.0 million.
As of June 30, 2000, MB Financial had $8.0 million undrawn and available under
its line of credit.
The Bank's total risk-based capital ratio was 10.12%, Tier 1 capital to
risk-weighted assets ratio was 9.03% and Tier 1 capital to average asset ratio
was 7.77% at June 30, 2000. The FDIC has categorized the bank subsidiary as
"Well-Capitalized" at June 30, 2000.
As of June 30, 2000, the Company's book value per share was $11.80
compared to $10.57 at June 30, 1999.
YEAR 2000 COMPLIANCE
In anticipation of potential year 2000 issues that result from the use
of two-digit rather than four-digit dates in software, the Company implemented a
program to assess its year 2000 readiness and, where appropriate, to implement
corrective actions. As a result of its efforts, the Company was prepared for the
transition to the year 2000 and did not experience any significant malfunctions
or errors in its operating or business systems when the date changed from 1999
to 2000. The Company is not currently aware of any year 2000 problems that have
materially affected its customers or vendors. Based on operations since January
1, 2000, the Company does not anticipate any material disruption in its
operations as a result of any continuing year 2000 issues. However, it is
possible that latent problems may surface in the future. The Company believes
that any such problems are likely to be minor and correctable. The Company's
costs for its year 2000 activities were not material.
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>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
At June 30, 2000, there has been no material change in market risk from
December 31, 1999.
PART II. - OTHER INFORMATION
None
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, MB
Financial, Inc. has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, on the 14th day of August 2000.
MB FINANCIAL, INC.
BY: /s/ MITCHELL FEIGER
-----------------------------
Mitchell Feiger
Chief Executive Officer
(PRINCIPAL EXECUTIVE OFFICER)
BY: /s/ DONNA ADAM
-----------------------------
Donna Adam
Vice President and Controller
(PRINCIPAL FINANCIAL AND PRINCIPAL ACCOUNTING OFFICER)
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