<PAGE>
===============================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2000
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 60622
(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 12, 2000.
===============================================================================
<PAGE>
MB FINANCIAL, INC. AND SUBSIDIARIES
FORM 10-Q
MARCH 31, 2000
INDEX
<TABLE>
<S> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS AT MARCH 31, 2000, DECEMBER 31, 1999 AND MARCH 31, 1999 3
CONSOLIDATED STATEMENTS OF INCOME FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999 4
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999 5 - 6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 7 - 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 10 - 20
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 20
PART II. OTHER INFORMATION
SIGNATURES 21
</TABLE>
2
<PAGE>
PART I. - FINANCIAL INFORMATION
ITEM 1. - FINANCIAL STATEMENTS
MB FINANCIAL, INC.
CONSOLIDATED BALANCE SHEETS
AT MARCH 31, 2000, DECEMBER 31, 1999 AND MARCH 31, 1999
(UNAUDITED)
(STATEMENT AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
March 31, December 31, March 31,
2000 1999 1999
-------------------------------------------------
<S> <C> <C> <C>
ASSETS
Cash and due from banks $ 21,994 $ 29,420 $ 34,597
Other interest bearing deposits 1,907 1,487 941
Federal funds sold - - 42,200
Investment securities:
Securities available for sale 266,750 271,313 377,893
Securities held to maturity (fair value of $11,259 at March 31, 1999) - - 10,932
Stock in Federal Home Loan Bank 7,290 6,290 7,904
Loans 928,567 903,126 785,909
Less: allowance for loan losses 12,248 12,197 15,766
----------- ----------- -----------
Net loans 916,319 890,929 770,143
Lease investments, net 38,408 38,034 20,177
Premises and equipment, net 15,251 15,304 14,723
Cash surrender value of life insurance 30,162 - -
Interest only securities 13,785 13,821 14,854
Intangibles, net 15,935 16,265 18,118
Other assets 29,621 26,563 29,345
----------- ----------- -----------
TOTAL ASSETS $ 1,357,422 $ 1,309,426 $ 1,341,827
----------- ----------- -----------
----------- ----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits:
Non-interest bearing $ 141,488 $ 145,059 $ 141,224
Interest bearing 815,434 791,016 827,193
----------- ----------- -----------
TOTAL DEPOSITS 956,922 936,075 968,417
Short-term borrowings 267,671 244,569 138,008
Long-term borrowings 32,403 32,698 138,143
Other liabilities 18,977 16,706 23,451
----------- ----------- -----------
TOTAL LIABILITIES 1,275,973 1,230,048 1,268,019
----------- ----------- -----------
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 34,873 32,186 23,676
Accumulated other comprehensive (loss) (4,151) (3,535) (386)
----------- ----------- -----------
TOTAL STOCKHOLDERS' EQUITY 81,449 79,378 73,808
----------- ----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,357,422 $ 1,309,426 $ 1,341,827
----------- ----------- -----------
----------- ----------- -----------
</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,
----------------------------------
2000 1999
----------------------------------
<S> <C> <C>
Interest Income:
Loans $ 19,010 $ 12,705
Investment securities:
Taxable 4,494 3,736
Nontaxable 79 79
Federal funds sold - 293
Other interest bearing accounts 23 17
----------- -----------
TOTAL INTEREST INCOME 23,606 16,830
----------- -----------
Interest expense:
Deposits 8,464 6,304
Short-term borrowings 3,625 1,507
Long-term borrowings 636 1,070
----------- -----------
TOTAL INTEREST EXPENSE 12,725 8,881
----------- -----------
NET INTEREST INCOME 10,881 7,949
Provision for loan losses 750 246
----------- -----------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 10,131 7,703
----------- -----------
Other income:
Loan service fees 774 400
Deposit service fees 832 691
Lease financing, net 303 237
Increase in cash surrender value of life insurance 162 -
Other operating income 701 235
----------- -----------
TOTAL OTHER INCOME 2,772 1,563
----------- -----------
Other expense:
Salaries and employee benefits 4,790 3,817
Occupancy and equipment expenses 1,655 1,275
Intangibles amortization expense 484 618
Other operating expenses 2,032 1,353
----------- -----------
TOTAL OTHER EXPENSE 8,961 7,063
----------- -----------
INCOME BEFORE INCOME TAXES 3,942 2,203
----------- -----------
Income taxes 1,255 759
NET INCOME 2,687 1,444
----------- -----------
----------- -----------
Other comprehensive income:
Unrealized securities (losses), net of income taxes (616) (730)
----------- -----------
----------- -----------
COMPREHENSIVE INCOME $ 2,071 $ 714
----------- -----------
----------- -----------
COMMON SHARE DATA:
Basic earnings per common share $ 0.38 $ 0.28
Diluted earnings per common share $ 0.38 $ 0.28
Weighted average common shares outstanding 7,064,515 5,126,289
</TABLE>
See Notes to Consolidated Financial Statements.
4
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(UNAUDITED) THREE MONTHS ENDED
(STATEMENT AMOUNTS IN THOUSANDS) MARCH 31,
2000 1999
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash Flows From Operating Activities
Net income 2,687 1,444
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 3,334 2,141
Amortization of intangibles 484 619
Provision for loan losses 750 246
(Credit) for deferred income taxes (426) (242)
Bond (accretion), net (38) (999)
(Increase) in cash surrender value of life insurance (162) -
(Increase) decrease in other assets (2,409) 924
Amortization of interest only securities 69 -
Increase in other liabilities 2,697 4,174
------ ------
NET CASH PROVIDED BY OPERATING ACTIVITIES 6,986 8,307
------ ------
Cash Flows From Investing Activities
Proceeds from maturities and calls of securities available for sale 5,675 33,580
Proceeds from maturities and calls of securities held to maturity - 226
Purchase of securities available for sale (2,054) (7,833)
Purchase of stock in Federal Home Loan Bank (1,000) -
Federal funds sold, net - 23,650
Net (increase) decrease in other interest bearing deposits (420) 531
(Increase) in loans, net of principal collections (26,458) (36,657)
Purchases of premises and equipment and leased equipment (3,754) (785)
Principal collected on lease investments 99 97
Purchase of minority interests (154) -
Purchase of cash surrender value of life insurance (30,000) -
Cash acquired through merger with Avondale Financial Corp. - 7,224
------ ------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (58,066) 20,033
------ ------
Cash Flows From Financing Activities
Net increase (decrease) in noninterest bearing deposits (3,571) 13,006
Net increase (decrease) in interest bearing deposits 24,418 (33,211)
Net increase in short-term borrowings 23,102 2,487
Proceeds from long-term borrowings - 1,000
Principal paid on long-term borrowings (295) (694)
------ ------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 43,654 (17,412)
------ ------
NET INCREASE (DECREASE) IN CASH AND DUE FROM BANKS (7,426) 10,928
Cash and due from banks:
Beginning 29,420 23,669
------ ------
Ending 21,994 34,597
------ ------
------ ------
</TABLE>
(continued)
5
<PAGE>
YEARS ENDED MARCH 31, 2000 AND 1999
(STATEMENT AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
2000 1999
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
Supplemental Disclosures of Cash Flow Information
Cash payments for:
Interest paid to depositors $ 8,188 $ 4,688
Other interest paid 2,198 1,028
Income taxes paid, net of refunds - -
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 $ 319 $ 9
============ ============
</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, 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. THE MERGER
On February 26, 1999, Coal City Corporation ("CCC"), the holding
company for Manufacturers Bank ("Bank") was merged with and into Avondale
Financial Corp. ("Avondale"), 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. Total assets
for Avondale were $484.3 million at the merger date, and Avondale operated out
of five locations in the Chicago metropolitan area.
Since the CCC 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 CCC being the accounting acquirer. As a result, the
post-merger historical financial statements of the combined company are CCC's as
the accounting acquirer, and includes the operating results of Avondale since
the merger date. 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 plus $1.1 million of merger expenses
incurred by CCC. Included in the purchase accounting adjustments was an accrual
of $4.4 million for merger related costs. The accrual included estimated costs
for termination of data processing contracts, professional fees, severance and
personnel related expenses and lease contracts. At March 31, 2000, the remaining
liability was approximately $895 thousand primarily for lease contracts and
severance costs. The majority of the remaining costs are scheduled to be payable
by the end of 2000. Unless the context otherwise requires, the term the
"Company" includes MB Financial, Inc., its subsidiaries and predecessor.
7
<PAGE>
3. REGULATORY CAPITAL
The Company and it's subsidiary, Manufacturers Bank, are subject to
various 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 under regulatory accounting
practices. The Company's and Bank's capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk
weightings, and other factors.
Quantitative measures established by regulation to ensure capital
adequacy require the Company and 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 of Tier 1 capital to
average assets (as defined). Management believes the Company and Bank meet all
capital adequacy requirements to which they are subject as of March 31, 2000.
As of March 31, 2000, the most recent notification from the Federal
Deposit Insurance Corporation categorized the Bank as "well capitalized" under
the regulatory framework for prompt corrective action. To be categorized as
"well capitalized" the Bank must maintain the total risk-based, Tier 1
risk-based, and Tier 1 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 categories.
The required and actual amounts and ratios for the Company and the 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, 2000 (unaudited)
Total capital (to risk-weighted assets):
MB Financial, Inc. $ 108,001 9.74% $ 88,734 8.00% N/A N/A
Manufacturers Bank 112,010 10.11% 88,633 8.00% $ 110,791 10.00%
Tier 1 capital (to risk-weighted assets):
MB Financial, Inc. 95,753 8.63% 44,367 4.00% N/A N/A
Manufacturers Bank 99,762 9.00% 44,316 4.00% 66,474 6.00%
Tier 1 capital (to average assets):
MB Financial, Inc. 95,753 7.40% 51,744 4.00% N/A N/A
Manufacturers Bank 99,762 7.72% 51,702 4.00% 64,628 5.00%
</TABLE>
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,
-------------------------------
2000 1999
---------------- --------------
<S> <C> <C>
Basic:
Net income $ 2,687 $ 1,444
Average shares outstanding 7,064,515 5,126,289
---------- ----------
Basic earnings per share $ 0.38 $ 0.28
========== ==========
Diluted:
Net income $ 2,687 $ 1,444
Average shares outstanding 7,064,515 5,126,289
Net effect of dilutive stock options -- 27,878
========== ==========
Total 7,064,515 5,154,167
========== ==========
Diluted earnings per share $ 0.38 $ 0.28
========== ==========
</TABLE>
8
<PAGE>
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,
2000 1999 1999
------------------ ------------------ ----------------
<S> <C> <C> <C>
Preferred Capital Securities $ 25,000 $ 25,000 $ 25,000
Loans for the purchase of equipment and other loans 6,600 6,895 7,840
Federal Home Loan Bank advances 803 803 100,803
Correspondent bank lines of credit - - 4,500
------------------ ------------------ ----------------
$ 32,403 $ 32,698 $ 138,143
================== ================== ================
</TABLE>
At March 31, 2000, December 31, 1999 and March 31, 1999, the Company
had Preferred Capital Securities of $25.0 million which were issued in July
1998. These Preferred Capital Securities were issued with a floating rate
through Coal City Capital Trust I (Trust), a statutory business trust and wholly
owned subsidiary of the Company. The Preferred Capital Securities pay cumulative
cash distributions quarterly at a rate per annum, reset quarterly, equal to the
3-month LIBOR plus 180 basis points. Proceeds from the sale of the Preferred
Capital Securities were invested by the Trust in floating rate (3-month LIBOR
plus 180 basis points) Junior Subordinated Deferrable Interest Debentures
(Debentures) issued by the Company which represents all of the assets of the
Trust. The Preferred Capital Securities are subject to mandatory redemption, in
whole or in part, upon repayment of the Debentures at the stated maturity in the
year 2028 or their earlier redemption, in each case at a redemption price equal
to the aggregate liquidation preference of the Preferred Capital Securities plus
any accumulated and unpaid distributions thereon to the date of redemption.
Prior redemption is permitted under certain circumstances.
At March 31, 2000, December 31, 1999 and March 31, 1999, the Company
had loans for the purchase of equipment and other loans of $6.6 million, $6.9
million and $7.8 million, respectively. At March 31, 2000, these loans had
various interest rates and various scheduled maturity dates through June 2004.
Equipment included in lease investments is pledged as collateral on these notes.
At March 31, 2000, December 31, 1999 and March 31, 1999, the Company
had advances from the Federal Home Loan Bank of $803 thousand, $803 thousand and
$100.8 million, respectively. The Company pledged its stock in the Federal Home
Loan Bank as collateral for these 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. At
March 31, 2000, December 31, 1999 and March 31, 1999, $803 thousand of the
advances bears interest at a rate of 2.50% and are scheduled to mature in 2003.
At March 31, 1999, $100.0 million of the advances bears interest at a rate of
4.69% and are scheduled to mature in 2008; they are callable, however, at any
time by the Federal Home Loan Bank. In 1999, subsequent to March 31, 1999, the
$100.0 million of advances were reclassified from long-term to short-term
borrowings, as these borrowings were called and re-negotiated.
The Company had two lines of credit for a secured note payable and an
unsecured note payable with a correspondent bank at March 31, 1999. The secured
note payable had an outstanding balance of $4.2 million, bearing interest at a
rate equal to the adjusted LIBOR, 6.19%, and required quarterly payments of
interest only on the outstanding balance at March 31, 1999. The unsecured note
payable had an outstanding balance of $250 thousand, bearing interest at a rate
equal to the bank's prime rate, 7.75%, and required quarterly payments of
interest only on the outstanding balance at March 31, 1999. At July 31, 1999,
both notes were converted to short-term borrowings.
6. RECENT ACCOUNTING PRONOUNCEMENTS
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. In June 1999, the FASB adopted SFAS
137 ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES - DEFERRAL OF
THE EFFECTIVE DATE OF FASB STATEMENT NO. 133. SFAS 133, as amended by SFAS 137
is effective for all fiscal quarters of all fiscal years beginning after June
15, 2000. SFAS 133, as amended by SFAS 137, may be implemented as of the
beginning of any fiscal quarter after September 30, 1998 but cannot be applied
retroactively. Management has not yet determined the impact of this standard.
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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 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 $2.7 million for the first quarter of
2000 compared to $1.4 million for the first quarter of 1999. Net interest income
increased $2.9 million to $10.9 million for the first quarter of 2000 compared
to $7.9 million for the same period in 1999. The increase in net interest income
was due to growth in the Company's commercial and lease banking businesses as
well as the merger. First quarter of 1999 included the operating results of
Avondale for the month of March only, while the first quarter of 2000 included
the combined company's operating results for the entire three-month period.
Other income increased $1.2 million to $2.8 million for the quarter
ended March 31, 2000 from $1.6 million for the same period in 1999. This
increase was due to increases in loan service fees, deposit service fees, and
other operating income primarily as a result of the merger. In addition, the
Company had income from increase in cash surrender value of life insurance which
the Company invested in as of March 2, 2000. Also contributing to the increase
in other income was an increase in other operating income resulting from
expanded brokerage fee activities and a net gain on the sale of other real
estate owned.
Other expense increased $1.9 million from $7.1 million for the first
quarter of 1999 to $9.0 million for the first quarter of 2000 mainly from the
merger. The increase in other expense included increases in salaries and
employee benefits, occupancy and equipment expense, and other operating expense
which had increases in advertising and marketing, computer services, stationery
and supplies, and telecommunication costs.
10
<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 35% tax rate for the three months ended March 31, 2000 and a 34% tax
rate for the three months ended March 31, 1999 (dollars in thousands).
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
--------------------------------------------------------------------------------
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) $ 901,616 $ 19,010 8.46% $ 628,975 $ 12,705 8.19%
Taxable investment securities 270,069 4,494 6.67% 281,525 3,736 5.38%
Investment securities exempt from federal
income taxes (3) 5,154 122 9.46% 5,517 120 8.82%
Federal funds sold - - - 25,396 293 4.68%
Other interest bearing deposits 1,827 23 5.05% 1,453 17 4.74%
---------------- ------------- ------------- --------------
Total interest earning assets 1,178,666 23,649 8.05% 942,866 16,871 7.26%
------------- --------------
Non-interest earning assets 130,868 84,905
================ ==============
Total assets $ 1,309,534 $ 1,027,771
================ ==============
INTEREST BEARING LIABILITIES:
Deposits:
NOW and money market deposit accounts $ 168,309 1,165 2.78% $ 152,649 1,080 2.87%
Savings deposits 149,366 907 2.44% 112,491 687 2.48%
Time deposits 475,014 6,392 5.40% 357,452 4,537 5.15%
Short-term borrowings 245,958 3,625 5.91% 133,931 1,507 4.56%
Long-term borrowings 32,204 636 7.92% 71,750 1,070 6.05%
---------------- ------------- ------------- --------------
Total interest bearing liabilities 1,070,851 12,725 4.77% 828,273 8,881 4.35%
------------- --------------
Demand deposits - non-interest bearing 139,685 128,319
Other non-interest bearing liabilities 17,058 14,374
Stockholders' equity 81,940 56,805
---------------- -------------
Total liabilities and stockholders' equity $ 1,309,534 $ 1,027,771
================ ==============
Net interest income/interest rate spread (4) $ 10,924 3.28% $ 7,990 2.91%
============= ==============
Net interest margin (5) 3.72% 3.44%
</TABLE>
(1) Non-accrual loans are included in average loans.
(2) Interest income includes loan origination fees of $387,000 and $189,000
for the three months ended March 31, 2000 and 1999, respectively.
(3) Non-taxable investment income is presented on a fully tax equivalent
basis assuming a 35% tax rate for the three months ended March 31, 2000
and a 34% tax rate for the three months ended March 31, 1999.
(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.
The Company's net interest income increased $2.9 million to $10.9
million for the quarter ended March 31, 2000 from $7.9 million for the quarter
ended March 31, 1999 due to growth in commercial and lease banking businesses
and the merger. Details underlying the increase in net interest income included
an increase in interest income of $6.8 million, or 40.3%, due to a $235.8
million, or 25.0%, increase in average interest earning assets, partially offset
by an increase in interest expense of $3.8 million, or 43.3%, due to a $242.6
million, or 29.3%, increase in average interest bearing liabilities. The net
interest margin increased from 3.44% for the quarter ended March 31, 1999 to
3.72% for the same period in 2000. The net interest margin for the first quarter
of 1999 was lower due to increased leverage in the Company's balance sheet
resulting from approximately $70.2 million of investments funded by repurchase
agreements compared to the same period in 2000. Excluding the effect of the
increased leverage in the Company's balance sheet, the net interest margin for
the first quarter of 1999 would have been 3.85% and 3.80% for the first quarter
of 2000. In addition, the Company purchased $30.0 million in cash surrender
value of life insurance in March of 2000. This transaction has the effect of
reducing the net interest margin by 0.03% in the first quarter of 2000.
11
<PAGE>
RATE VOLUME ANALYSIS OF NET INTEREST INCOME
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 (in thousands).
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, 2000
COMPARED TO MARCH 31, 1999
---------------------------------------
CHANGE CHANGE
DUE TO DUE TO TOTAL
VOLUME RATE CHANGE
------------ ------------ -------------
<S> <C> <C> <C>
INTEREST EARNING ASSETS:
Loans $ 5,710 $ 595 $ 6,305
Taxable investment securities (112) 870 758
Investment securities exempt from federal income
taxes (1) (7) 9 2
Federal funds sold (293) - (293)
Other interest bearing deposits 5 1 6
------------ ------------ -------------
Total increase in interest income 5,303 1,475 6,778
------------ ------------ -------------
INTEREST BEARING LIABILITIES:
Deposits:
NOW and money market deposit accounts 124 (39) 85
Savings deposits 235 (15) 220
Time deposits 1,559 296 1,855
Short-term borrowings 1,291 827 2,118
Long-term borrowings (584) 150 (434)
------------ ------------ -------------
Total increase in interest expense 2,625 1,219 3,844
============ ============ =============
Increase in net interest income $ 2,678 $ 256 $ 2,934
============ ============ =============
</TABLE>
(1) Non-taxable investment income is presented on a fully tax equivalent basis
assuming a 35% rate for the three months ended March 31, 2000 and a 34%
tax rate for the three months ended March 31, 1999.
12
<PAGE>
OTHER INCOME
Other income increased $1.2 million to $2.8 million for the quarter
ended March 31, 2000 from $1.6 million for the same period in 1999. This
increase was the result of a $374 thousand increase in loan service fees and a
$141 thousand increase in deposit service fees mainly due to the merger. In
addition, the Company had a $162 thousand increase in cash surrender value of
life insurance which the Company invested in as of March 2, 2000. Also
contributing to the increase in other income was a $119 thousand increase in
brokerage fees due to the expansion of brokerage servicing fee activities, and a
$85 thousand increase in net gain on the sale of other real estate owned.
OTHER EXPENSE
Other expense increased from $7.1 million for the first quarter of 1999
to $9.0 million for the first quarter of 2000. The increase in other expense was
primarily due to the merger and included a $973 thousand increase in salaries
and employee benefits, a $380 thousand increase in occupancy and equipment
expense which included a $202 thousand increase in office rental and a $80
thousand increase in banking house depreciation, and a $679 thousand increase in
other operating expense. Other operating expense increases resulted from a $204
thousand increase in advertising and marketing, a $112 thousand increase in
computer services, a $92 thousand increase in stationery and supplies, and a $74
thousand increase in telecommunication costs.
INCOME TAXES
The Company recorded an income tax expense of $1.3 million for the
three months ended March 31, 2000, compared to $759 thousand for the same period
in 1999 reflecting the increase in the Company's income before taxes in 2000 due
to the merger. The effective tax rate was 31.8% for the three months ended March
31, 2000 and 34.5% for the same period in 1999.
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. 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
-------------------------------------
MARCH 31, 2000 MARCH 31, 1999
-------------------------------------
<S> <C> <C>
Net income $ 2,687 $ 1,444
Goodwill amortization 204 204
Core deposit intangibles amortization (net of tax) 183 273
-------------------------------------
Cash earnings to common stockholders $ 3,074 $ 1,921
=====================================
Average tangible assets 1,294,656 1,011,326
Average tangible equity 71,293 40,191
Cash earnings per share: (1)
Basic $ 0.44 $ 0.37
Diluted $ 0.44 $ 0.37
Performance ratios: (2)
Cash return on average tangible assets 0.95% 0.77%
Cash return on average tangible equity 17.29% 19.39%
</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, 2000 and March 31, 1999.
BALANCE SHEET REVIEW
Total assets increased $48.0 million to $1.4 billion at March 31, 2000
compared to $1.3 billion at December 31, 1999. The increase was due to a $25.4
million increase in loans and the purchase of $30.0 million in cash surrender
value of life insurance in March of 2000. Offsetting this increase was a $4.6
million decrease in securities available for sale.
Total deposits increased $20.8 million to $956.9 million at March
31, 2000 compared to $936.1 million at December 31, 1999 as the Company
acquired $25.6 million in broker deposits in the first quarter of 2000. These
deposits are long-term and mature between March 2003 and February 2005.
Short-term borrowings increased $23.1 million to $267.7 million at March 31,
2000 compared to $244.6 million at December 31, 1999. The increase was due
primarily to a $20.0 million increase in Federal Home Loan Bank advances.
Long-term borrowings remained relatively flat at $32.4 million at March 31,
2000 compared to $32.7 million at December 31, 1999.
Total assets increased $15.6 million to $1.4 billion at March 31,
2000 compared to $1.3 billion at March 31, 1999. The increase was due to a
$142.7 million increase in loans and a $18.2 million increase in net lease
investments as a result of the Company's strong and continuing growth in its
commercial and lease banking businesses. In addition, the Company purchased
$30.0 million in cash surrender value of life insurance in March of 2000.
Offsetting this increase was a $111.1 million decrease in securities
available for sale, due to a $70.2 million decrease in investments funded by
short-term borrowings, and a $42.2 million decrease in Federal funds sold.
Short-term borrowings increased $129.7 million to $267.7 million at
March 31, 2000 compared to $138.0 million at March 31, 1999. The increase was
due to a $140.0 million increase in Federal Home Loan Bank advances, of which
$100.0 million was reclassified to short-term borrowings from long-term
borrowings, a $61.9 million increase in Federal funds purchased and a $70.2
million decrease in repurchase agreements used to fund U.S. Treasury
investments. Long-term borrowings decreased $105.7 million to $32.4 million at
March 31, 2000 compared to $138.1 million at March 31, 1999. The decrease was
due to a $100.0 million decrease in Federal Home Loan Bank advances
reclassified from long-term borrowings to short-term borrowings.
14
<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,
2000 1999 1999
-------------------------- ---------------------------- ------------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
-------------- ----------- --------------- ------------ ------------- ----------
<S> <C> <C> <C> <C> <C> <C>
Manufacturers Bank - core business:
Commercial $ 161,827 17.43% $ 154,833 17.14% $ 128,798 16.39%
Commercial loans collateralized by
lease payments 195,752 21.08% 186,895 20.70% 127,343 16.20%
Commercial real estate 285,074 30.70% 249,107 27.58% 215,294 27.40%
Residential real estate 106,240 11.44% 129,040 14.29% 141,635 18.02%
Construction real estate 57,126 6.15% 58,447 6.47% 29,963 3.81%
Installment and other 42,565 4.59% 39,603 4.39% 28,021 3.57%
-------------- ----------- --------------- ------------ ------------- ----------
Total Manufacturers Bank - core business 848,584 91.39% 817,925 90.57% 671,054 85.39%
Acquired from Avondale Federal Savings Bank:
Residential real estate 14,161 1.52% 14,593 1.61% 16,171 2.06%
Credit scored mortgage loans 55,486 5.98% 59,716 6.61% 81,893 10.42%
Installment and other 10,336 1.11% 10,892 1.21% 16,791 2.13%
-------------- ----------- --------------- ------------ ------------- ----------
Total loans acquired from Avondale Federal
Savings Bank 79,983 8.61% 85,201 9.43% 114,855 14.61%
-------------- ----------- --------------- ------------ ------------- ----------
Gross loans 928,567 100.00% 903,126 100.00% 785,909 100.00%
=========== ============ ==========
Allowance for loan losses (12,248) (12,197) (15,766)
-------------- --------------- -------------
Net loans $ 916,319 $ 890,929 $ 770,143
============== =============== =============
</TABLE>
Net loans increased $25.4 million from $890.9 million at December 31,
1999 and $146.2 million from $770.1 million at March 31, 1999 to $916.3 million
at March 31, 2000 due to growth in commercial and lease banking businesses.
15
<PAGE>
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,
2000 1999 1999
------------------- ------------------ ----------------
<S> <C> <C> <C>
Non-accruing loans:
Manufacturers Bank - core business $ 4,256 $ 3,670 $ 8,273
Acquired from Avondale Federal Savings Bank - non-core
business 6,342 7,031 2,454
---------------- ---------------- ---------------
Total non-accruing loans 10,598 10,701 10,727
---------------- ---------------- ---------------
Loans 90 days or more past due, still accruing interest:
Manufacturers Bank - core business 119 - -
Acquired from Avondale Federal Savings Bank - non-core
business 95 - -
---------------- ---------------- ---------------
Total loans 90 days or more past due, still accruing interest 214 - -
---------------- ---------------- ---------------
Total non-performing loans 10,812 10,701 10,727
---------------- ---------------- ---------------
Other real estate owned:
Manufacturers Bank - core business - 159 367
Acquired from Avondale Federal Savings Bank - non-core
business 511 194 373
---------------- ---------------- ---------------
Total other real estate owned 511 353 740
---------------- ---------------- ---------------
Total non-performing assets $ 11,323 $ 11,054 $ 11,467
================ ================ ===============
Total non-performing loans to total loans 1.16% 1.20% 1.36%
Allowance for loan losses to non-performing loans 113.28% 113.98% 146.97%
Total non-performing assets to total assets 0.83% 0.84% 0.85%
</TABLE>
At March 31, 2000, non-performing assets increased $269 thousand to
$11.3 million from $11.1 million at December 31, 1999 due to a $111 thousand
increase in non-performing loans and a $158 thousand increase in other real
estate owned. At March 31, 2000, non-performing assets decreased $144 thousand
to 11.3 million from 11.5 million at March 31, 1999 due to a $229 thousand
decrease in other real estate owned offset by a $85 thousand increase in
non-performing loans. The decrease in other real estate owned was due to
Management's on-going efforts to sell these properties.
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
------------------ -----------------
MARCH 31, MARCH 31,
2000 1999
------------------ -----------------
<S> <C> <C>
Balance at beginning of period $ 12,197 $ 6,344
Additions resulting from merger - 9,489
Provision for loan losses 750 246
Charge-offs:
Manufacturers Bank - core business 70 -
Acquired from Avondale Federal Savings Bank - non-core business 690 410
------------------ -----------------
Total charge-offs 760 410
------------------ -----------------
Recoveries:
Manufacturers Bank - core business (9) 3
Acquired from Avondale Federal Savings Bank - non-core business 70 94
------------------ -----------------
Total recoveries 61 97
------------------ -----------------
Net charge-offs 699 313
------------------ -----------------
Balance at March 31, $ 12,248 $ 15,766
================== =================
Total loans at March 31, $ 928,567 $ 785,909
Ratio of allowance to total loans 1.32% 2.01%
</TABLE>
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. In February 1999, $9.5 million was added to the allowance for loan
losses through the merger. Based on credit scoring and other criteria, the
Company estimated the loan losses associated with the loan portfolio acquired
through the merger. At the time of the merger, the estimated losses were fully
reserved with the addition to the allowance for loan losses by Avondale. The
provision for loan losses increased $504 thousand for the first quarter of 2000
compared to the same period for 1999 reflecting the increases in the loan
portfolio and management's estimates of potential charge-offs.
17
<PAGE>
INTEREST ONLY SECURITIES
At March 31, 2000 interest only securities acquired through the merger
were $13.8 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 March 31, 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 $ 2,733 $ 2,735 $ 3,850 $ 4,467
Prepayment speed 35.00% 37.00% 35.00% 32.00%
Weighted-average life (in years) (2) 1.99 1.95 2.09 2.46
Expected credit losses (3) 5.42% 5.71% 5.95% 6.92%
Residual cash flows discounted at 12.00% 12.00% 12.00% 12.00%
Loans outstanding at March 31, 2000 $ 20,438 $ 25,934 $ 35,574 $ 61,250
</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 summing (a) the principal collections expected
in each future year multiplied by (b) the number of years
until collection, and then dividing that sum by the current
principal balance. This 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 March 31, 2000 are $1.1 million, $1.5
million, $2.1 million and $4.2 million for 96-1, 97-1, 97-2
and 98-1, respectively. The estimated 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 MARCH 31, 2000 AT DECEMBER 31, 1999 AT MARCH 31, 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 $ - $ - $ - $ - $ 118,683 $ 118,663
U.S. Government agencies 99,929 97,261 99,891 97,691 105,053 104,722
States and political subdivisions 5,168 5,336 5,164 5,366 - -
Mortgage-backed securities 114,441 113,593 120,114 118,948 103,364 103,519
Corporate bonds 43,090 39,879 43,092 40,564 43,097 42,987
Other securities 958 958 962 958 - -
Investment in equity lines of
credit trusts 9,723 9,723 7,786 7,786 8,002 8,002
============= ============= ============= =============== === =========== ==============
Total securities available for
sale $ 273,309 $ 266,750 $ 277,009 $ 271,313 $ 378,199 $ 377,893
============= ============= ============= =============== === =========== ==============
Securities Held to Maturity:
States and political subdivisions $ - $ - $ - $ - $ 5,525 $ 5,881
Mortgage-backed securities - - - - 4,444 4,415
Other securities - - - - 963 963
------------- ------------- ------------- --------------- --------------- --------------
Total securities held to
maturity $ - $ - $ - $ - $ 10,932 $ 11,259
============= ============= ============= =============== === =========== ==============
</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
$7.0 million and $8.3 million for the three months ended March 31, 2000 and
1999, respectively. Net cash provided by (used in) investing activities was
($58.1) million for the three months ended March 31, 2000 and $20.0 million for
the same period in 1999. The increase in net cash used in investing activities
for the first quarter of 2000 compared to the same period in 1999 was due to a
decrease in proceeds from 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 in March of 2000. Net cash provided by (used in) financing
activities was $43.7 million for the three months ended March 31, 2000 and
($17.4) million for the same period in 1999. The increase in net cash provided
by financing activities for the first quarter of 2000 compared to the same
period in 1999 was due to increases in net interest bearing deposits and net
short-term borrowings.
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 $75.0
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 March 31, 2000, MB Financial had $10.0 million undrawn and available under
its line of credit.
The Bank's total risk-based capital ratio was 10.11%, Tier 1 capital to
risk-weighted assets ratio was 9.00%, and Tier 1 capital to average asset ratio
was 7.72% at March 31, 2000. The FDIC has categorized the bank subsidiary as
"well capitalized" at March 31, 2000.
As of March 31, 2000, the Company's book value per share was $11.53
compared to $10.45 at March 31, 1999. In addition, the Company's tangible book
value per share was $9.43 at March 31, 2000 compared to $8.15 at March 31, 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.
19
<PAGE>
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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
At March 31, 2000, there has been no material change in market risk
from December 31, 1999.
20
<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 12th day of May 2000.
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)
21
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-2000 DEC-31-1999
<PERIOD-START> JAN-01-2000 JAN-01-1999
<PERIOD-END> MAR-31-2000 MAR-31-1999
<CASH> 21,994 34,597
<INT-BEARING-DEPOSITS> 1,907 941
<FED-FUNDS-SOLD> 0 42,200
<TRADING-ASSETS> 0 0
<INVESTMENTS-HELD-FOR-SALE> 266,750 377,893
<INVESTMENTS-CARRYING> 0 10,932
<INVESTMENTS-MARKET> 0 0
<LOANS> 928,567 785,909
<ALLOWANCE> 12,248 15,766
<TOTAL-ASSETS> 1,357,422 1,341,827
<DEPOSITS> 956,922 968,417
<SHORT-TERM> 267,671 138,008
<LIABILITIES-OTHER> 18,977 23,451
<LONG-TERM> 32,403 138,143
0 0
0 0
<COMMON> 71 71
<OTHER-SE> 81,378 73,737
<TOTAL-LIABILITIES-AND-EQUITY> 1,357,422 1,341,827
<INTEREST-LOAN> 19,010 12,705
<INTEREST-INVEST> 4,573 3,815
<INTEREST-OTHER> 23 17
<INTEREST-TOTAL> 23,606 16,830
<INTEREST-DEPOSIT> 8,464 6,304
<INTEREST-EXPENSE> 12,725 8,881
<INTEREST-INCOME-NET> 10,881 7,949
<LOAN-LOSSES> 750 246
<SECURITIES-GAINS> 0 0
<EXPENSE-OTHER> 8,961 7,063
<INCOME-PRETAX> 3,942 2,203
<INCOME-PRE-EXTRAORDINARY> 2,687 1,444
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 2,687 1,444
<EPS-BASIC> .38 .28
<EPS-DILUTED> .38 .28
<YIELD-ACTUAL> 8.05 7.26
<LOANS-NON> 10,598 10,727
<LOANS-PAST> 214 0
<LOANS-TROUBLED> 0 0
<LOANS-PROBLEM> 0 0
<ALLOWANCE-OPEN> 12,197 6,344
<CHARGE-OFFS> 760 410
<RECOVERIES> 61 97
<ALLOWANCE-CLOSE> 12,248 15,766
<ALLOWANCE-DOMESTIC> 12,248 15,766
<ALLOWANCE-FOREIGN> 0 0
<ALLOWANCE-UNALLOCATED> 0 0
</TABLE>
