MB FINANCIAL INC, 10-Q, 2000-11-13

MB FINANCIAL INC
10-Q, 2000-11-13
SAVINGS INSTITUTION, FEDERALLY CHARTERED

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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 September 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 incorporation or organization)		(I.R.S. Employer Identification No.)
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 November 13, 2000.

MB FINANCIAL, INC. AND SUBSIDIARIES
FORM 10-Q
September 30, 2000
INDEX

PART I.	FINANCIAL INFORMATION
Item 1.	Financial Statements
	Consolidated Balance Sheets at September 30, 2000, December 31, 1999 and September 30, 1999	3
	Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2000 and 1999	4
	Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2000 and 1999	5-6
	Notes to Consolidated Financial Statements	7-8
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	9-25
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	25
PART II.	OTHER INFORMATION	25
	Signatures	26

PART I.—FINANCIAL INFORMATION

Item 1. Financial Statements

MB FINANCIAL, INC.

CONSOLIDATED BALANCE SHEETS
At September 30, 2000, December 31, 1999 and September 30, 1999
(Unaudited)
(Statement Amounts in Thousands)

				September 30, 2000			December 31, 1999			September 30, 1999
ASSETS
Cash and due from banks				$	25,072		$	29,420		$	29,441
Other interest bearing deposits					1,378			1,487			532
Federal funds sold					—			—			2,000
Investment securities:
Securities available for sale					253,964			271,313			249,866
Securities held to maturity (fair value of $10,480 at September 30, 1999)					—			—			10,403
Stock in Federal Home Loan Bank					7,290			6,290			5,290
Loans (net of allowance for loan losses of $12,925 at September 30, 2000, $12,197 at December 31, 1999 and $13,203 at September 30, 1999)					1,020,663			890,929			821,008
Lease investments, net					44,355			38,034			30,129
Premises and equipment, net					15,676			15,304			14,834
Cash surrender value of life insurance					31,179			—			—
Interest only receivable					12,225			13,821			14,678
Intangibles, net					14,960			16,265			16,882
Other assets					32,122			26,563			28,051

			Total assets	$	1,458,884		$	1,309,426		$	1,223,114

LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
	Deposits:
		Non-interest bearing		$	147,805		$	145,059		$	134,178
		Interest bearing			867,417			791,016			807,184

			Total deposits		1,015,222			936,075			941,362
Short-term borrowings					303,190			244,569			98,139
Long-term borrowings					32,135			32,698			86,003
Other liabilities					21,052			16,706			20,523

			Total liabilities		1,371,599			1,230,048			1,146,027

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					40,657			32,186			29,304
Accumulated other comprehensive loss					(4,099	)		(3,535	)		(2,735	)

			Total stockholders' equity		87,285			79,378			77,087

			Total liabilities and stockholders' equity	$	1,458,884		$	1,309,426		$	1,223,114

See Notes to Consolidated Financial Statements.

MB FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(Statement Amounts in Thousands except Common Share Data)

				Three Months Ended September 30,						Nine Months Ended September 30,
				2000			1999			2000			1999
Interest Income:
	Loans			$	22,621		$	16,993		$	62,230		$	45,935
	Investment securities:
		Taxable			4,453			4,185			13,434			12,660
		Nontaxable			78			81			235			241
	Federal funds sold				3			144			3			762
	Other interest bearing accounts				19			11			61			47

			Total interest income		27,174			21,414			75,963			59,645

Interest expense:
	Deposits				10,594			8,129			28,224			22,697
	Short-term borrowings				4,850			679			12,809			2,929
	Long-term borrowings				701			1,654			1,972			4,558

			Total interest expense		16,145			10,462			43,005			30,184

Net interest income					11,029			10,952			32,958			29,461
Provision for loan losses					750			363			2,340			897

			Net interest income after provision for loan losses		10,279			10,589			30,618			28,564

Other income:
	Loan service fees, net				(438	)		1,165			955			2,642
	Deposit service fees				867			906			2,539			2,415
	Lease financing, net				647			293			1,313			759
	Net gains (losses) on sale of securities available for sale				—			(6	)		—			1
	Increase in cash surrender value of life insurance				515			—			1,179			—
	Other operating income				1,015			391			2,132			1,077

					2,606			2,749			8,118			6,894

Other expense:
	Salaries and employee benefits				4,671			4,696			13,955			12,963
	Occupancy and equipment expense				1,721			1,573			5,056			4,360
	Intangibles amortization expense				491			618			1,460			1,854
	Advertising and marketing expense				404			239			1,215			673
	Other operating expenses				1,432			1,983			4,952			5,114

					8,719			9,109			26,638			24,964

			Income before income taxes		4,166			4,229			12,098			10,494
Income taxes					1,216			1,352			3,627			3,422

			Net Income		2,950			2,877			8,471			7,072

Other comprehensive income:
	Unrealized securities gains (losses), net of income taxes				951			(484	)		(564	)		(3,078	)
	Less: reclassification adjustments for gains (losses) included in net income, net of income taxes				—			(4	)		—			1

			Other comprehensive income (loss)		951			(480	)		(564	)		(3,079	)

			Comprehensive income	$	3,901		$	2,397		$	7,907		$	3,993

Common share data:
	Basic earnings per common share			$	0.42		$	0.41		$	1.20		$	1.10
	Diluted earnings per common share			$	0.42		$	0.41		$	1.19		$	1.10
	Weighted average common shares outstanding				7,064,515			7,064,515			7,064,515			6,425,539

See Notes to Consolidated Financial Statements.

CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Statement Amounts in Thousands)

			Nine Months Ended September 30,
			2000			1999
Cash Flows From Operating Activities
	Net income		$	8,471		$	7,072
	Adjustments to reconcile net income to net cash provided by operating activities:
	Depreciation			10,711			7,491
	(Gain) loss on disposal of premises and equipment and leased equipment			(865	)		32
	Amortization of intangibles			1,460			1,854
	Provision for loan losses			2,340			897
	Deferred income taxes			(1,311	)		(884	)
	Bond (accretion), net			(98	)		(1,234	)
	Securities (gains), net			—			(1	)
	(Increase) in cash surrender value of life insurance			(1,179	)		—
	Write-down in the value of interest only receivable			975			—
	(Increase) decrease in other assets			(4,540	)		1,006
	Increase in other liabilities			5,657			1,008

		Net cash provided by operating activities		21,621			17,241

Cash Flows From Investing Activities
	Proceeds from sales of securities available for sale			—			32,654
	Proceeds from maturities and calls of securities available for sale			19,452			171,097
	Proceeds from maturities and calls of securities held to maturity			—			798
	Purchase of securities available for sale			(3,408	)		(49,758	)
	Purchase of stock in Federal Home Loan Bank			(1,000	)
	Federal funds sold, net			—			63,850
	Other interest bearing deposits, net			109			940
	(Increase) in loans, net of principal collections			(132,789	)		(85,703	)
	Purchases of premises and equipment and leased equipment			(22,942	)		(16,457	)
	Proceeds from sale of premises and equipment and lease equipment			6,187			71
	Principal collected on lease investments			216			291
	Purchase of minority interests			(155	)		—
	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 receivable			1,156			—

		Net cash provided by (used in) investing activities		(163,174	)		125,007

Cash Flows From Financing Activities
	Net increase in noninterest bearing deposits			2,746			5,960
	Net increase (decrease) in interest bearing deposits			76,401			(53,220	)
	Net increase (decrease) in short-term borrowings			58,621			(87,382	)
	Proceeds from long-term borrowings			1,571			2,414
	Principal paid on long-term borrowings			(2,134	)		(4,248	)

		Net cash provided by (used in) financing activities		137,205			(136,476	)

		Net increase (decrease) in cash and due from banks		(4,348	)		5,772
Cash and due from banks:
	Beginning			29,420			23,669

	Ending		$	25,072		$	29,441

(continued)

Years Ended September 30, 2000 and 1999
(Statement Amounts in Thousands)

					2000		1999
Supplemental Disclosures of Cash Flow Information
	Cash payments for:
		Interest paid to depositors			$	31,030	$	16,716
		Other interest paid				14,169		5,000
		Income taxes paid, net of refunds				600		3,810
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 receivable					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

Transfer of long-term Federal Home Loan Bank advances to short-term classification							$	50

Real estate acquired in settlement of losses					$	715	$	114

See Notes to Consolidated Financial Statements.

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 operations and cash flows for the interim periods have been made. The results of operations for the three and nine months ended September 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. 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):

		Three Months Ended				Nine Months Ended
		September 30, 2000		September 30, 1999		September 30, 2000		September 30, 1999
Basic:
	Net income	$	2,950	$	2,877	$	8,471	$	7,072
	Average shares outstanding		7,064,515		7,064,515		7,064,515		6,425,539
Basic earnings per share		$	0.42	$	0.41	$	1.20	$	1.10
Diluted:
	Net income	$	2,950	$	2,877	$	8,471	$	7,072
	Average shares outstanding		7,064,515		7,064,515		7,064,515		6,425,539
	Net effect of dilutive stock options		41,847		19,314		41,847		19,314

Total			7,106,362		7,083,829		7,106,362		6,444,853

Diluted earnings per share		$	0.42	$	0.41	$	1.19	$	1.10

3. RECENT ACCOUNTING PRONOUNCEMENTS

In September 2000, the FASB adopted SFAS 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, a replacement of SFAS 125, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. SFAS 140 revises the standards for accounting for securitizations and other transfers of financial assets and collateral and requires certain disclosures, but it

carries over most of SFAS 125's provisions without reconsideration. SFAS 140 provides consistent standards for distinguishing transfers of financial assets that are sales from transfers that are secured borrowings. The provisions of SFAS 140 are effective for transfers after March 31, 2001. It is effective for disclosures about securitizations and collateral and for recognition and reclassification of collateral for fiscal years ending after December 15, 2000. Management does not believe implementation of this standard will have a material impact on the Company's financial statements.

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

Third Quarter Results

The Company had net income of $3.0 million for the three months ended September 30, 2000 compared to $2.9 million for the three months ended September 30, 1999. Net interest income is the largest component of net income and has remained relatively flat at $11.0 million for the third quarter of 2000 and 1999. Growth in the Company's commercial and lease banking business and higher lending rates were offset by increases in deposits and borrowings at higher interest costs to fund asset growth. In addition, the expense to fund cash surrender value of life insurance, which was purchased in March 2000, is included in interest expense while the related income is included in other income. Excluding the effect of funding the life insurance investment, net interest income would have been $11.5 million, a $592 thousand increase over 1999. The Company has increased the provision for loan losses to reflect higher loan volumes.

Other income decreased $143 thousand to $2.6 million for the quarter ended September 30, 2000 from $2.7 million for the same period in 1999. This decrease was primarily due to a decrease in loan service fees due to a write-down in the value of interest only receivable and a decrease in loan service fees due to principal paydowns of home equity loans acquired through the merger with Avondale Financial Corp. in February 1999. Offsetting this decrease were increases in income from an increase in cash surrender value of life insurance, increasing revenue from the Bank's equipment lease portfolio, a large gain on the sale of equipment and real estate owned gains.

Other expense decreased $390 thousand to $8.7 million for the third quarter of 2000 from $9.1 million for the third quarter of 1999. The decrease was primarily due to a decrease in other operating expenses, which included decreases in directors fees, as directors elected stock options rather than cash as compensation for services rendered, and professional and legal fees. In addition, there were increases in advertising and marketing expenses and occupancy and equipment expense, resulting from the opening of two new banking centers, offset by a decrease in intangibles amortization expense as the Company utilizes an accelerated intangible amortization method.

Year-To-Date Results

Net income increased $1.4 million to $8.5 million for the nine months ended September 30, 2000 compared to $7.1 million for the nine months ended September 30, 1999. Net interest income increased $3.5 million to $33.0 million for the nine months ended September 30, 2000 compared to $29.5 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 business as well as year-to-date net interest income in 1999 only reflected seven of the nine months of Avondale's net interest income. Offsetting these increases is the interest expense related to funding of the cash surrender value of life insurance, which is included in the margin.

Other income increased $1.2 million to $8.1 million for the nine months ended September 30, 2000 compared to $6.9 million for the same period in 1999. The increase was primarily due to income from an increase in cash surrender value of life insurance, increasing revenue from the Bank's equipment lease portfolio, a large gain on the sale of equipment and other real estate owned. These increases were offset by a decrease in loan service fees primarily due to a write-down in the value of interest only receivable and a decrease in servicing fees due to principal paydowns of home equity loans acquired through the Avondale merger.

For the nine months ended September 30, 2000, other expense increased $1.6 million to $26.6 million from $25.0 million for the same period in 1999. The increase was due to merger related increases in salaries and employee benefits and occupancy and equipment expense, and an increase in advertising and marketing expense. Partially offsetting these increases was a decrease in other operating expenses and a decrease in intangibles amortization expense as the Company utilizes an accelerated intangible amortization method.

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.

AVERAGE BALANCES, INTEREST RATES AND YIELDS
(Dollars in thousands)

			Three Months Ended September 30,
			2000						1999
			Average Balance		Interest		Yield/ Rate		Average Balance		Interest		Yield/ Rate
Interest Earning Assets:
Loans(1)(2)			$	1,005,693	$	22,621	8.95	%	$	825,769	$	16,993	8.16	%
Taxable investment securities				259,140		4,453	6.84	%		261,186		4,185	6.36	%
Investment securities exempt from federal income taxes(3)				5,124		120	9.32	%		5,479		125	9.05	%
Federal funds sold				162		3	7.37	%		11,336		144	5.04	%
Other interest bearing deposits				1,219		19	6.20	%		772		11	5.65	%

	Total interest earning assets			1,271,338		27,216	8.52	%		1,104,542		21,458	7.71	%

	Non-interest earning assets			160,462						108,954

	Total assets		$	1,431,800					$	1,213,496

Interest Bearing Liabilities:
Deposits:
	NOW and money market deposit accounts		$	172,535		1,319	3.04	%	$	182,489		1,241	2.70	%
	Savings deposits			138,182		818	2.36	%		159,988		1,019	2.52	%
	Time deposits			539,790		8,457	6.23	%		458,458		5,869	5.08	%
Short-term borrowings				288,726		4,850	6.68	%		56,773		679	4.74	%
Long-term borrowings				32,326		701	8.63	%		119,700		1,654	5.48	%

		Total interest bearing liabilities		1,171,559		16,145	5.48	%		977,408		10,462	4.25	%

Demand deposits- non-interest bearing				152,305						137,645
Other non-interest bearing liabilities				23,310						21,421
Stockholders' equity				84,626						77,022

	Total liabilities and stockholders' equity		$	1,431,800					$	1,213,496

	Net interest income/interest rate spread(4)				$	11,071	3.04	%			$	10,996	3.46	%

	Net interest margin(5)						3.46	%					3.95	%

(1): Non-accrual loans are included in average loans.
(2): Interest income includes loan origination fees of $386 thousand and $255 thousand for the three months ended September 30, 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 September 30, 2000 and 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.

Net interest income was $11.0 million for the third quarter of 2000 which equaled net interest income for the same period in 1999. Net interest income remained flat as a result of a $5.8 million increase in interest income, due to growth in commercial and lease banking business and lending rates, offset by a $5.7 million increase in interest expense on deposits and borrowings at higher interest costs to fund asset growth. Interest income increased due to a $166.8 million, or 15.1%, increase in average interest earning assets from a $179.9 million increase in average loans offset by a $11.2 million decrease in average federal funds sold. Interest expense rose as a result of a $194.2 million, or 19.9%, increase in average interest bearing liabilities mostly due to $81.3 million increase in average time deposits, including $99.2 million due to brokered time deposit accounts, offset by decreases in other time deposits. In addition, average borrowings increased $144.6 million, mostly due to federal funds purchased and Federal Home Loan Bank advances. Offsetting these increases were decreases in NOW, money market and savings accounts totaling $31.8 million. The net interest margin on a fully tax equivalent basis was 3.46% for the third quarter of 2000 and 3.95% for the third quarter of 1999. Funding the investment in cash surrender value of life insurance affected the net interest margin for the third quarter of 2000 compared to 1999. Excluding this item, the net interest margin on a fully tax equivalent basis would have been 3.62% for the third quarter of 2000.

AVERAGE BALANCES, INTEREST RATES AND YIELDS — Continued
(Dollars in thousands)

		Nine Months Ended September 30,
		2000						1999
		Average Balance		Interest		Yield/ Rate		Average Balance		Interest		Yield/ Rate
Interest Earning Assets:
Loans(1)(2)		$	948,656	$	62,230	8.76	%	$	754,367	$	45,935	8.14	%
Taxable investment securities			264,790		13,434	6.78	%		284,148		12,660	5.96	%
Investment securities exempt from federal Income taxes(3)			5,150		362	9.38	%		5,493		371	9.02	%
Federal funds sold			54		3	7.42	%		21,462		762	4.75	%
Other interest bearing deposits			1,417		61	5.75	%		1,230		47	5.11	%

	Total interest earning assets		1,220,067		76,090	8.33	%		1,066,700		59,775	7.49	%

	Non-interest earning assets		149,636						99,986

	Total assets	$	1,369,703					$	1,166,686

Interest Bearing Liabilities:
Deposits:
	NOW and money market deposit accounts	$	170,070		3,708	2.91	%	$	171,512		3,542	2.76	%
	Savings deposits		144,058		2,573	2.39	%		145,626		2,748	2.52	%
	Time deposits		502,234		21,943	5.84	%		430,274		16,407	5.10	%
Short-term borrowings			270,264		12,809	6.33	%		85,748		2,929	4.57	%
Long-term borrowings			32,376		1,972	8.14	%		109,676		4,558	5.56	%

	Total interest bearing liabilities		1,119,002		43,005	5.13	%		942,836		30,184	4.28	%

Demand deposits — non-interest bearing			147,653						134,650
Other non-interest bearing liabilities			21,010						19,319
Stockholders' equity			82,038						69,881

	Total liabilities and stockholders' equity	$	1,369,703					$	1,166,686

	Net interest income/interest rate spread (4)			$	33,085	3.20	%			$	29,591	3.21	%

	Net interest margin(5)					3.62	%					3.71	%

(1): Non-accrual loans are included in average loans.
(2): Interest income includes loan origination fees of $1.2 million and $690 thousand for the nine months ended September 30, 2000 and 1999, respectively.
(3): Non-taxable investment income is presented on a fully tax equivalent basis assuming a 35% tax rate for the nine months ended September 30, 2000 and 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.

For the nine months ended September 30, 2000, net interest income increased $3.5 million to $33.0 million from $29.5 million for the nine months ended September 30, 1999. The increase in net interest income resulted from an increase in interest income of $16.3 million, or 27.4%, partially offset by an increase in interest expense of $12.8 million, or 42.5%. Interest income increased due to a $153.4 million, or 14.4%, increase in average interest earning assets as a result of a $194.3 million increase in average loans offset by a $19.7 million decrease in average investment securities and a $21.4 million decrease in average federal funds sold. Increased yields on lending based on a higher prime rate for the nine months ended September 30, 2000 also attributed to the increase in interest income. Interest expense rose as a result of a $176.5 million, or 18.7%, increase in average interest bearing liabilities due to a $73.3 million increase in average time deposits of $100 thousand or more, mostly due to brokered accounts, and a $107.2 million increase in average borrowings primarily from federal funds purchased and Federal Home Loan Bank advances. Increased deposit and borrowing rates for the nine months ended September 30, 2000 also attributed to the increase in interest expense. The net interest margin on a fully tax equivalent basis was 3.62% for the nine months ended September 30, 2000 and 3.71% for the same period in 1999. Excluding the effect of funding the investment in life insurance, the net interest margin would have been 3.74% for the nine months ended September 2000.

VOLUME, MIX AND RATE ANALYSIS OF NET INTEREST INCOME
(Dollars in thousands)

The following table presents the extent to which changes in volume, changes in mix and changes in interest rates 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 due to (i) changes attributable to changes in volume, (current period volume, less current mix % multiplied by prior period total volume, multiplied by prior period rate), (ii) changes attributable to changes in mix (current mix % multiplied by total prior period volume, less prior period volume multiplied

by prior period rate) and (iii) changes attributable to changes in rate (changes in rate multiplied by current period volume).

		Three Months Ended September 30, 2000 Compared to September 30, 1999											Nine Months Ended September 30, 2000 Compared to September 30, 1999
		Changes Due to Volume		Change Due to Mix			Change Due to Rate			Total Change			Changes Due to Volume		Change Due to Mix			Change Due to Rate			Total Change
Interest Earning Assets:
Loans		$	2,644	$	806		$	2,178		$	5,628		$	7,097	$	4,074		$	5,124		$	16,295
Taxable investment securities			543		(576	)		301			268			1,484		(2,348	)		1,638			774
Investment securities exempt from federal income taxes(1)			15		(23	)		3			(5	)		44		(67	)		14			(9	)
Federal funds sold			—		(142	)		1			(141	)		—		(760	)		1			(759	)
Other interest bearing deposits			2		4			2			8			7		—			7			14

	Total increase in interest income		3,204		69			2,485			5,758			8,632		899			6,784			16,315

Interest Bearing Liabilities:
	NOW and money market deposit accounts		192		(273	)		159			78			546		(626	)		246			166
	Savings deposits		145		(284	)		(62	)		(201	)		428		(458	)		(145	)		(175	)
	Time deposits		1,233		355			1,000			2,588			3,151		444			1,941			5,536
Short-term borrowings			571		2,196			1,404			4,171			1,455		4,854			3,571			9,880
Long-term borrowings			74		(1,278	)		251			(953	)		212		(3,428	)		630			(2,586	)

	Total increase in interest expense		2,215		716			2,752			5,683			5,792		786			6,243			12,821

	Increase (decrease) in net interest income	$	989	$	(647	)	$	(267	)	$	75		$	2,840	$	113		$	541		$	3,494

(1): Non-taxable investment income is presented on a fully tax equivalent basis assuming a 35% tax rate for the three months ended September 30, 2000 and 1999, and for the nine months ended September 30, 2000 and 1999.

Other Income

Other income decreased $143 thousand, or 5.2%, to $2.6 million for the quarter ended September 30, 2000 from $2.7 million for the same period in 1999. This decrease was primarily due to a $1.6 million decrease in loan service fees due to a $975 thousand write-down in the value of interest only receivable and a $628 thousand decrease in servicing fees from anticipated principal paydowns and reductions in related percentages based on outstanding loan balances of home equity loans previously securitized and sold by Avondale. Offsetting this decrease was a $515 thousand increase of residual income from an increase in cash surrender value of life insurance, a $354 thousand increase in revenues from the Bank's equipment lease portfolio, of which approximately $350 thousand was the result of gains on residual disposition, and a $624 thousand increase in other operating income from a $500 thousand gain on the sale of equipment and a $171 thousand gain on the sale of real estate owned.

For the nine months ended September 30, 2000, other income increased $1.2 million, or 17.8%, to $8.1 million from $6.9 million for the nine months ended September 30, 1999. The increase was primarily due to $1.2 million in income from the increase in cash surrender value of life insurance, a $554 thousand increase in revenues from the Bank's equipment lease portfolio, net lease financing, of which approximately $413 thousand was the result of gains on residual disposition, a $1.1 million increase in

other operating income, from a $500 thousand gain on the sale of equipment, a $171 thousand gain on the sale of real estate owned, and a $168 thousand increase in automatic teller machine fees due to the merger. Offsetting these increases was a $1.7 million decrease in loan service fees primarily due to a $975 thousand write-down in the value of interest only receivable and a $577 thousand decrease in servicing fees due to anticipated principal paydowns and reductions in related fees and income based on outstanding loan balances of home equity loans previously securitized and sold by Avondale.

Other Expense

Other expense decreased $390 thousand, or 4.3%, to $8.7 million for the third quarter of 2000 from $9.1 million for the third quarter of 1999. The decrease was primarily due to a $551 thousand decrease in other operating expenses which included a $266 thousand decrease in directors fees, as directors elected stock options rather than cash as compensation for services rendered, and a $174 thousand decrease in professional and legal fees. In addition, advertising and marketing expense increased $165 thousand, occupancy and equipment expense increased $148 thousand, resulting from the opening of two new banking centers, offset by a $127 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.

For the nine months ended September 30, 2000, other expense increased $1.6 million, or 6.7%, to $26.6 million from $25.0 million for the nine months ended September 30, 1999. The increase was due to a $992 thousand increase in salaries and employee benefits and a $696 thousand increase in occupancy and equipment expenses mainly due to the merger, and a $542 thousand increase in advertising and marketing expense. Partially offsetting these increases was a $162 thousand decrease in other operating expenses and a $394 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 September 30, 2000 was $1.2 million compared to $1.4 million for the same period in 1999. The effective tax rate decreased to 29.2% for the third quarter of 2000 from 32.0% for the same period in 1999, as the income from the cash surrender value of life insurance is not subject to income tax expense.

Income tax expense for the nine months ended September 30, 2000 was $3.6 million compared to $3.4 million for the same period in 1999. The effective tax rate decreased to 30.0% for the nine months ended September 30, 2000 from 32.6% for the same 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 the 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.

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):

		Three Months Ended				Nine Months Ended
		September 30, 2000		September 30, 1999		September 30, 2000		September 30, 1999
Net Income		$	2,950	$	2,877	$	8,471	$	7,072
Goodwill amortization			210		204		617		611
Core deposit intangibles amortization (net of tax)			183		269		548		808

Cash earnings		$	3,343	$	3,350	$	9,636	$	8,491

Average tangible assets		$	1,417,481	$	1,198,067	$	1,355,067	$	1,150,777
Average tangible equity		$	75,269	$	63,755	$	72,006	$	54,807
Performance ratios:(1)
	Cash return on average tangible assets		0.94%		1.11%		0.95%		0.99%
	Cash return on average tangible equity		17.66%		20.85%		17.88%		20.71%

(1): Cash return on average tangible assets and equity has been annualized for the three months and nine months ended September 30, 2000 and 1999.

Balance Sheet Review

Total assets increased $149.5 million, or 11.4%, to $1.5 billion at September 30, 2000 compared to $1.3 billion at December 31, 1999. The increase was due to a $130.5 million increase in loan growth in the commercial and lease banking business, and a $31.2 million increase in cash surrender value of life insurance. Offsetting these increases was a $17.3 million decrease in investment securities.

Total liabilities increased $141.6 million, or 11.5%, to $1.4 billion at September 30, 2000 compared to $1.2 billion at December 31, 1999. The increase was due to a $79.1 million increase in total deposits including a $107.7 million increase in time deposits of $100 thousand or more, with $120.5 million of the increase from brokered time deposit accounts, offset by a $31.3 million decrease in other interest bearing deposits. A $58.6 million increase in short-term borrowings also attributed to the increase in liabilities primarily due to a $21.5 million increase in federal funds purchased, a $20.0 million increase in Federal Home Loan Bank advances, a $11.2 million increase in repurchase agreements used to fund investment securities and a $5.6 million increase in correspondent bank lines of credit.

Total assets increased $235.8 million, or 19.3%, to $1.5 billion at September 30, 2000 compared to $1.2 billion at September 30, 1999. The increase was due to a $199.4 million increase in loan growth in the commercial and lease banking business, a $31.2 million increase in cash surrender value of life insurance, and a $14.2 million increase in net lease investment.

Total liabilities increased $225.6 million, or 19.9%, to $1.4 billion at September 30, 2000 compared to $1.1 billion at September 30, 1999. The increase was due to a $73.9 million increase in total deposits primarily from a $111.8 million increase in time deposits of $100 thousand or more, with $120.5 million of the increase from brokered accounts. A $13.6 million increase in non-interest bearing accounts also contributed to the increase in total deposits offset by a $51.6 million decrease in other interest bearing accounts. Short-term borrowings increased $205.1 million due to a $90.0 million increase in Federal Home Loan Bank advances, a $77.5 million increase in federal funds purchased, a $30.0 million increase in repurchase agreements used to fund investment securities and a $10.6 million increase in correspondent bank lines of credit.

Loan Portfolio

The following table sets forth the composition of the loan portfolio (dollars in thousands):

			September 30, 2000					December 31, 1999					September 30, 1999
			Amount			Percent		Amount			Percent		Amount			Percent
Manufacturers Bank — core business:
	Commercial		$	195,810		18.94	%	$	154,833		17.14	%	$	140,198		16.81	%
	Commercial loans collateralized by
		lease payments		251,369		24.32	%		186,895		20.70	%		138,607		16.61	%
	Commercial real estate			316,856		30.66	%		249,107		27.58	%		243,770		29.22	%
	Residential real estate			100,153		9.69	%		129,040		14.29	%		117,302		14.06	%
	Construction real estate			50,892		4.92	%		58,447		6.47	%		49,683		5.96	%
	Installment and other			52,382		5.07	%		39,603		4.39	%		39,488		4.73	%

Total loans Manufacturers Bank — core business				967,462		93.60	%		817,925		90.57	%		729,048		87.39	%

Acquired from Avondale Federal
	Savings Bank—non-core business:
	Commercial real estate			—		—			—		—			1,424		0.17	%
	Residential real estate			13,042		1.26	%		14,593		1.61	%		23,275		2.79	%
	Credit scored mortgage loans			45,921		4.44	%		59,716		6.61	%		67,401		8.08	%
	Installment and other			7,163		0.70	%		10,892		1.21	%		13,063		1.57	%

Total loans acquired from Avondale Federal
	Savings Bank — non-core business			66,126		6.40	%		85,201		9.43	%		105,163		12.61	%

		Gross loans		1,033,588		100.00	%		903,126		100.00	%		834,211		100.00	%

Allowance for loan losses				(12,925	)				(12,197	)				(13,203	)

		Net loans	$	1,020,663				$	890,929				$	821,008

Net loans increased $129.7 million from $890.9 million at December 31, 1999 and $199.7 million from $821.0 million at September 30, 1999 to $1.02 billion at September 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.

Asset Quality

The following table presents a summary of non-performing assets as of the dates indicated (dollars in thousands):

		September 30, 2000			December 31, 1999			September 30, 1999
Non-accruing loans:
	Manufacturers Bank — core business:	$	4,398		$	3,670		$	3,626
	Acquired from Avondale Federal Savings Bank — non-core business		5,163			7,031			7,174

Total non-accruing loans			9,561			10,701			10,800
Loans 90 days or more past due, still accruing interest:
	Manufacturers Bank — core business		18			—			130
	Acquired from Avondale Federal Savings Bank — non-core business		42			—			—

Total loans 90 days or more past due, still accruing interest			60			—			130

Total non-performing loans			9,621			10,701			10,930

Other real estate owned:
	Manufacturers Bank — core business		85			159			89
	Acquired from Avondale Federal Savings Bank — non-core business		390			194			190

Total other real estate owned			475			353			279

Total non-performing assets		$	10,096		$	11,054		$	11,209

Total non-performing loans to total loans			0.93	%		1.18	%		1.31	%
Allowance for loan losses to non-performing loans			134.34	%		113.98	%		120.80	%
Total non-performing assets to total assets			0.69	%		0.84	%		0.92	%

Non-performing assets decreased $1.1 million, or 9.9%, to $10.1 million at September 30, 2000 from $11.2 million at September 30, 1999. Overall decreases in total non-accruing loans at September 30, 2000 compared to September 30, 1999 were due to the Company's diligent collection efforts.

Allowance for Loan Losses

A reconciliation of the activity in the Company's allowance for loan losses follows (dollars in thousands):

		Three Months Ended						Nine Months Ended
		September 30, 2000			September 30, 1999			September 30, 2000			September 30, 1999
Balance at beginning of period		$	12,638		$	14,453		$	12,197		$	6,344
Additions resulting from merger			—			—			—			9,489
Provision for loan losses			750			363			2,340			897
Charge-offs:
	Manufacturers Bank — core business		(535	)		(589	)		(605	)		(1,949	)
	Acquired from Avondale Federal Savings Bank — non-core business		(405	)		(1,176	)		(1,659	)		(2,105	)

Total charge-offs			(940	)		(1,765	)		(2,264	)		(4,054	)

Recoveries:
	Manufacturers Bank — core business		340			6			340			19
	Acquired from Avondale Federal Savings Bank — non-core business		137			146			312			508

Total recoveries			477			152			652			527

Net charge-offs			(463	)		(1,613	)		(1,612	)		(3,527	)

Balance at September 30,		$	12,925		$	13,203		$	12,925		$	13,203

Total loans at September 30,		$	1,033,588		$	834,211		$	1,033,588		$	834,211
Ratio of allowance for loan losses to total loans			1.25	%		1.58	%		1.25	%		1.58	%

The provision for loan losses increased $1.4 million for the nine months ended September 30, 2000 compared to 1999. Increases in the provision for loan losses reflected management's evaluation of core-business non-performing loans as well as growth in the commercial and lease banking business. Total charge-offs decreased $825 thousand for the third quarter of 2000 and $1.8 million for the nine months ended September 30, 2000 compared to respective periods for 1999, reflecting the Company's collection efforts on early delinquencies. In addition, 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 estimated 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. The Company further uses a risk rating system to evaluate the adequacy of the allowance for loan losses. With this system, each loan is risk rated between one and nine, by the originating loan officer or loan committee, with one being the best case and nine being a loss or the worst case. Loan loss reserve factors are multiplied against the balances in each risk-rating category to determine an appropriate level for the allowance for loan losses. Loans with risk ratings between six and eight are monitored much closer by the officers. 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 Company 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 specific reserves on problem

loans, current loan risk ratings, 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 probable losses inherent in the loan portfolio, there can be no assurance that the allowance will prove sufficient to cover actual loan losses in the future.

Lease Investments

Lease investments by categories follow (dollars in thousands):

		September 30, 2000			December 31, 1999			September 30, 1999
Direct financing leases		$	2,170		$	531		$	539
Operating leases:
	Equipment, at cost		72,055			59,931			49,242
	Less accumulated depreciation		(29,870	)		(22,428	)		(19,652	)

			42,185			37,503			29,590

	Lease investments, net	$	44,355		$	38,034		$	30,129

Lease investments are investments in equipment leased to other companies by the Bank. The Company has steadily grown its lease portfolio over the past five years from virtually nothing to $44.4 million at September 30, 2000. Much of this growth has occurred in the last three years, as the lease portfolio increased $25.0 million from $19.4 million at September 30, 1997 compared to September 30, 2000. The Bank funds most of its lease equipment purchases itself, but has some loans at other banks totaling $6.3 million at September 30, 2000, $6.9 million at December 31, 1999 and $7.7 million at September 30, 1999.

The lease portfolio is made up of various types of equipment, general technology related, such as computer systems, satellite equipment, and general manufacturing equipment. The credit quality of the lessee generally must be in one of the top four rating categories of Moody's or Standard & Poors, or the equivalent. In most cases, during the early years of the lease, the Bank recognizes a loss on its investment due to funding costs, and as a lease ages, a gain. Consequently, as the Bank has built its leased equipment portfolio, current earnings have been reduced. However, gains on leased equipment periodically result when a lessee renews a lease or purchases the equipment at the end of a lease, or the equipment is sold to a third party at a profit. Individual lease transactions can, however, result in a loss. This generally happens when, at the end of a lease, the lessee does not renew the lease or purchase the equipment. To mitigate this risk of loss, the Bank usually limits individual leased equipment residuals (expected lease book values at the end of initial lease terms) to approximately $500 thousand per transaction and seeks to diversify both the type of equipment leased and the industries in which the lessees to whom such equipment is leased participate.

At September 30, 2000, the following schedule represents the residual values of leases in the year initial lease terms are ended (dollars in thousands):

End of Initial Lease Terms December 31,	Residual Values
2000	$	1,734
2001		1,788
2002		2,187
2003		1,552
2004		2,541
2005		3,885

	$	13,687

There were approximately 128 lease schedules at September 30, 2000 compared to 115 at December 31, 1999 and 112 at September 30, 1999. In addition, residual lease values were $13.7 million, $9.3 million, and $7.8 million at September 30, 2000, December 31, 1999 and September 30, 1999, respectively, resulting in an average residual per lease of $107 thousand, $81 thousand and $70 thousand for the respective periods.

Interest Only Receivable

At September 30, 2000 interest only receivable acquired through the merger was $12.2 million. The value of interest only receivable 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 receivable, as this receivable is 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. As a result of revised assumptions, principally pertaining to anticipated credit losses at September 30, 2000, the Company wrote-down the value of interest only security pool 97-2 by $665 thousand and 98-1 by $310 thousand.

The following table shows the results of the Company's assumptions used to estimate the fair value at September 30, 2000 (dollars in thousands):

	Interest Only Security Pools
	96-1		97-1		97-2		98-1
Estimated fair value	$	2,844	$	2,513	$	3,548	$	3,320
Prepayment speed		35.00%		35.00%		35.00%		35.00%
Weighted-average life (in years) (1)		1.14		1.32		1.56		1.99
Expected credit losses (2)		2.99%		4.74%		6.20%		6.47%
Residual cash flows discounted at		12.00%		12.00%		12.00%		12.00%
Loans outstanding at September 30, 2000		17,066		21,238		28,744		49,049
Underlying interest rates on loans (1)		13.32%		13.73%		13.92%		13.94%

(1): 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.
(2): Assumed remaining credit losses over the life remaining on the loans outstanding at September 30, 2000 are $510 thousand, $1.0 million, $1.8 million and $3.2 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.

(3): Rates for these loans are adjusted based on the prime rate as published in the Wall Street Journal.

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):

			At September 30, 2000				At December 31, 1999				At September 30, 1999
			Amortized Cost		Fair Value		Amortized Cost		Fair Value		Amortized Cost		Fair Value
Securities Available for Sale:
	U.S. Treasury securities		$	—	$	—	$	—	$	—	$	—	$	—
	U.S. Government agencies			100,001		98,022		99,891		97,691		99,862		97,698
	States and political subdivisions			4,814		4,964		5,164		5,366		—		—
	Mortgage-backed securities			101,010		100,144		120,114		118,948		103,464		102,844
	Corporate bonds			43,086		39,006		43,092		40,564		43,091		41,452
	Other securities			958		958		962		958		—		—
	Investment in equity lines of credit trusts			10,870		10,870		7,786		7,786		7,872		7,872

		Total securities available for sale	$	260,739	$	253,964	$	277,009	$	271,313	$	254,289	$	249,866

Securities Held to Maturity:
	States and political subdivisions		$	—	$	—	$	—	$	—	$	5,495	$	5,741
	Mortgage-backed securities			—		—		—		—		3,945		3,776
	Other securities			—		—		—		—		963		963

		Total securities held to maturity	$	—	$	—	$	—	$	—	$	10,403	$	10,480

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 $21.6 million and $17.2 million for the nine months ended September 30, 2000 and 1999, respectively. Net cash provided by (used in) investing activities was ($163.2) million for the nine months ended September 30, 2000 and $125.0 million for the comparable period in 1999. The decrease in net cash provided by investing activities was primarily due to the Company's loan growth and purchase of cash surrender value of life insurance as well as decreases in cash flows from sales, maturities and calls of securities available for sale, and net federal funds sold. Net cash provided by (used in) financing activities was $137.2 million for the nine months ended September 30, 2000 and ($136.5) million for the same period in 1999. The increase in net cash provided by financing activities was due to increases in interest bearing deposits, primarily from increases in brokered time deposit accounts, and short-term borrowings, primarily due to increases in federal funds purchased and Federal Home Loan Bank advances, to fund asset growth.

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 September 30, 2000, MB Financial had $4.4 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 9.06% and Tier 1 capital to average asset ratio was 7.90% at September 30, 2000. The FDIC has categorized the Bank subsidiary as "Well-Capitalized" at September 30, 2000.

As of September 30, 2000, the Company's book value per share was $12.36 compared to $10.91 at September 30, 1999.

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 receivable;
•: 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 September 30, 2000, there has been no material change in market risk from December 31, 1999.

PART II. — OTHER INFORMATION

None

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 13^th day of November 2000.

	MB FINANCIAL, INC.
	By:		/s/ Mitchell Feiger Mitchell Feiger Chief Executive Officer (Principal Executive Officer)
	By:		/s/ Jill York Jill York Vice President and Chief Financial Officer (Principal Financial and Principal Accounting Officer)

QuickLinks

MB FINANCIAL, INC. AND SUBSIDIARIES FORM 10-Q September 30, 2000 INDEX
MB FINANCIAL, INC. CONSOLIDATED STATEMENTS OF INCOME (Unaudited) (Statement Amounts in Thousands except Common Share Data)
Consolidated Statements of Cash Flows for the Nine Months Ended September 30 2000 and 1999
Notes to Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operation
Item 3. Quantitative and Qualitative Disclosures about Market Risk
PART II. — OTHER INFORMATION
SIGNATURES