MB Financial 10Q 2001 Q2 Quarterly report

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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 June 30, 2001

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: /x/ NO: / /

There were issued and outstanding 7,061,150 shares of the Registrant's common stock as of August 14, 2001.

MB FINANCIAL, INC. AND SUBSIDIARIES
FORM 10-Q
JUNE 30, 2001
INDEX

		Page
PART I.	FINANCIAL INFORMATION
Item 1.	Financial Statements
	Consolidated Balance Sheets at June 30, 2001, December 31, 2000 and June 30, 2000	3
	Consolidated Statements of Income for the Three and Six Months Ended June 30, 2001 and 2000	4
	Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2001 and 2000	5-6
	Notes to Unaudited Consolidated Financial Statements	7-9
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	10-24
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	24
PART II.	OTHER INFORMATION
	Signatures	25

PART I.—FINANCIAL INFORMATION

Item 1.—Financial Statements

MB FINANCIAL, INC.
CONSOLIDATED BALANCE SHEETS
At June 30, 2001, December 31, 2000 and June 30, 2000
(Unaudited)
(Statement Amounts in Thousands)

				June 30, 2001			December 31, 2000			June 30, 2000
ASSETS
Cash and due from banks				$	29,010		$	31,989		$	25,537
Other interest bearing deposits					4,273			2,300			1,080
Federal funds sold					30,750			—			—
Investment securities available for sale					210,329			233,063			259,740
Stock in Federal Home Loan Bank					6,396			7,290			7,290
Loans (net of allowance for loan losses of $17,190 at June 30, 2001, $13,837 at December 31, 2000 and $12,638 at June 30, 2000					1,247,070			1,043,326			964,807
Lease investments, net					49,868			45,344			40,891
Premises and equipment, net					19,170			15,465			15,038
Cash surrender value of life insurance					32,767			31,703			30,664
Interest only securities					8,663			10,538			13,035
Intangibles, net					20,778			14,466			15,452
Other assets					20,630			22,764			32,051

			Total assets	$	1,679,704		$	1,458,248		$	1,405,585

LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
	Deposits:
		Non-interest bearing		$	161,278		$	157,237		$	153,203
		Interest bearing			1,136,123			912,027			825,708

			Total deposits		1,297,401			1,069,264			978,911
Short-term borrowings					211,582			249,614			290,873
Long-term borrowings					51,683			31,596			32,503
Other liabilities					18,594			16,033			19,914

			Total liabilities		1,579,260			1,366,507			1,322,201

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				50,650			50,656			50,656
	Retained earnings				50,029			43,791			37,707
	Accumulated other comprehensive (loss)				(220	)		(2,777	)		(5,050	)
		Less: Treasury stock (3,365 shares at cost)			(86	)		—			—

			Total stockholders' equity		100,444			91,741			83,384

			Total liabilities and stockholders' equity	$	1,679,704		$	1,458,248		$	1,405,585

See Notes to Unaudited Consolidated Financial Statements.

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

			Three Months Ended June 30,				Six Months Ended June 30,
			2001		2000		2001		2000
Interest Income:
	Loans		$	24,444	$	20,599	$	47,537	$	39,609
	Investment securities:
		Taxable		3,603		4,487		7,736		8,981
		Nontaxable		74		78		145		157
	Federal funds sold			11		—		11		—
	Other interest bearing accounts			25		19		54		42

		Total interest income		28,157		25,183		55,483		48,789

Interest expense:
	Deposits			12,848		9,166		24,430		17,630
	Short-term borrowings			2,975		4,334		7,056		7,959
	Long-term borrowings			587		635		1,226		1,271

		Total interest expense		16,410		14,135		32,712		26,860

Net interest income				11,747		11,048		22,771		21,929
Provision for loan losses				650		840		1,400		1,590

		Net interest income after provision for loan losses		11,097		10,208		21,371		20,339

Other income:
	Loan service fees			901		619		1,567		1,393
	Deposit service fees			970		840		1,861		1,672
	Lease financing, net			620		363		1,133		666
	Net gains on sale of securities available for sale			93		—		93		—
	Increase in cash surrender value of life insurance			541		502		1,064		664
	Other operating income			427		416		864		1,117

				3,552		2,740		6,582		5,512

Other expense:
	Salaries and employee benefits			5,045		4,494		9,784		9,284
	Occupancy and equipment expense			1,720		1,680		3,340		3,335
	Intangibles amortization expense			525		485		958		969
	Advertising and marketing expense			436		405		883		810
	Other operating expenses			1,824		1,894		3,528		3,521

				9,550		8,958		18,493		17,919

		Income before income taxes		5,099		3,990		9,460		7,932
Income taxes				1,836		1,156		3,222		2,411

		Net Income	$	3,263	$	2,834	$	6,238	$	5,521

Common share data:
	Basic earnings per common share		$	0.46	$	0.40	$	0.88	$	0.78
	Diluted earnings per common share		$	0.44	$	0.40	$	0.86	$	0.78
	Weighted average common shares outstanding			7,063,960		7,064,515		7,064,236		7,064,515
	Fully diluted common shares outstanding			7,340,809		7,074,312		7,253,399		7,074,312

See Notes to Unaudited Consolidated Financial Statements.

MB FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Statement Amounts in Thousands)

			Six Months Ended June 30,
			2001			2000
Cash Flows From Operating Activities
	Net income		$	6,238		$	5,521
	Adjustments to reconcile net income to net cash provided by operating activities:
	Depreciation			8,257			6,926
	Gain on disposal of premises and equipment and leased equipment			(92	)		(76	)
	Amortization of intangibles			958			969
	Provision for loan losses			1,400			1,590
	Provision (credit) for deferred income taxes			664			(884	)
	Bond accretion, net			(28	)		(66	)
	Securities gains, net			(93	)		—
	Increase in cash surrender value of life insurance			(1,064	)		(664	)
	Decrease (increase) in other assets			1,785			(4,015	)
	(Decrease) increase in other liabilities			(5,815	)		4,092

		Net cash provided by operating activities		12,210			13,393

Cash Flows From Investing Activities
	Proceeds from sale of securities available for sale			278			—
	Proceeds from maturities and calls of securities available for sale			69,145			12,326
	Purchase of securities available for sale			—			(2,623	)
	Proceeds from redemption of stock in Federal Home Loan Bank			2,750			—
	Purchase of stock in Federal Home Loan Bank			(31	)		(1,000	)
	Federal funds sold, net			(2,600	)		—
	Net(decrease) increase in other interest bearing deposits			(1,973	)		407
	Increase in loans, net of principal collections			(66,674	)		(76,124	)
	Purchases of premises and equipment and leased equipment			(11,995	)		(9,789	)
	Proceeds from sale of lease equipment			161			155
	Principal (paid) collected on lease investments			(197	)		193
	Purchase of minority interests			—			(156	)
	Purchase of life insurance			—			(30,000	)
	Purchase of FSL Holdings, Inc., net of cash acquired			(34,930	)		—
	Proceeds received from interest only receivables			2,852			390

		Net cash used in investing activities		(43,214	)		(106,221	)

Cash Flows From Financing Activities
	Net increase (decrease) in noninterest bearing deposits			4,041			8,144
	Net increase in interest bearing deposits			47,547			34,692
	Net (decrease) increase in short-term borrowings			(38,032	)		46,304
	Proceeds from long-term borrowings			16,000			1,571
	Principal paid on long-term borrowings			(1,439	)		(1,766	)
	Treasury stock transactions, net			(92	)		—

		Net cash provided by financing activities		28,025			88,945

		Net decrease in cash and due from banks	$	(2,979	)	$	(3,883	)
Cash and due from banks:
	Beginning			31,989			29,420

	Ending		$	29,010		$	25,537

MB FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(Unaudited)
(Statement Amounts in Thousands)

				Six Months Ended June 30,
				2001		2000
Supplemental Disclosures of Cash Flow Information
	Cash payments for:
		Interest paid to depositors		$	22,013	$	16,759
		Other interest paid			8,789		8,774
		Income taxes paid, net of refunds			4,500		600
Supplemental Schedule of Noncash Investing Activities
	Acquisition of FSL Holdings, Inc.
		Noncash Assets acquired:
			Securities available for sale	$	43,610
			Stock in Federal Home Loan Bank		1,825
			Federal funds sold		28,150
			Loans, net		139,518
			Premises and equipment		4,424
			Other assets		584
			Core deposit intangibles		326
			Excess of cost over fair value of net assets acquired		6,944

					225,381

	Liabilities assumed:
		Interest bearing deposits			176,549
		Long-term borrowings			5,526
		Other liabilities			8,376

					190,451

		Net cash payment		$	34,930

Real estate acquired in settlement of loans				$	1,048	$	656

See Notes to Unaudited Consolidated Financial Statements.

MB FINANCIAL, INC.

NOTES TO UNAUDITED 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 six months ended June 30, 2001 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 in conformity with accounting principles generally accepted in the United States of America. Certain information in footnote disclosure normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America 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, 2000 audited financial statements.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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. MERGERS AND ACQUISITIONS

On April 20, 2001, the Company and MidCity Financial Corporation ("MidCity Financial") announced that they had agreed to combine in a merger, pursuant to an Agreement and Plan of Merger dated as of April 19, 2001, (the "Merger Agreement"). Pursuant to the Merger Agreement, the Company and MidCity Financial will be merged into a newly formed company, which will assume the name "MB Financial, Inc." Holders of MB Financial common stock before the transaction will receive one share of common stock of the new company for each share held prior to the transaction. Each share of MidCity Financial common stock will be exchanged for 230.32955 shares of common stock of the new company. The transaction is expected to be accounted for as a pooling-of-interests. Consummation of the transaction is subject to a number of conditions, including adoption of the Merger Agreement by the stockholders of the Company and MidCity Financial, receipt of the requisite approvals from bank regulatory authorities, receipt of opinions as to the tax treatment of the transaction and certain other conditions.

On May 15, 2001, the Company acquired FSL Holdings ("FSL") and its subsidiary, First Savings & Loan Association of South Holland ("Association"). Each shareholder of FSL was paid $165 for each share of common stock held by such shareholder (for an aggregate consideration of $41.3 million). The acquisition was funded through a combination of cash acquired through the acquisition and borrowings.

The Unaudited pro forma results of operation, which follow, assume that the merger had occurred at January 1, 2000. In addition to combining the historical results of operations of the companies, the pro forma calculations include purchase accounting adjustments related to the acquisition and borrowing costs. The pro forma calculations do not include any anticipated cost savings as a result of the merger.

Unaudited pro forma consolidated results of operations for the three and six months ended June 30, 2001 and 2000 are as follows (in thousands):

	Three Months Ended				Six Months Ended
	June 30, 2001		June 30, 2000		June 30, 2001		June 30, 2000
Net interest income	$	12,238	$	12,508	$	24,828	$	24,749
Net income		3,264		2,285		5,938		5,104
Net income available to common stockholders		3,264		2,285		5,938		5,104
Basic earnings per common share	$	0.46	$	0.32	$	0.84	$	0.72
Diluted earnings per common share	$	0.44	$	0.32	$	0.82	$	0.72

The pro forma results of operations are not necessarily indicative of the actual results of operations that would have occurred had the merger actually taken place at the beginning of the respective periods, or of results that may occur in the future.

3. COMPREHENSIVE INCOME

Comprehensive income includes the net unrealized gain on securities available for sale. For the three months and six months ended June 30, 2001, total comprehensive income was $4.1 million and $8.8 million and for the three and six months ended June 30, 2000, total comprehensive income was $1.9 million and $4.0 million.

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):

		Three Months Ended				Six Months Ended
		June 30, 2001		June 30, 2000		June 30, 2001		June 30, 2000
Basic:
	Net income	$	3,263	$	2,834	$	6,238	$	5,521
	Average shares outstanding		7,063,960		7,064,515		7,064,236		7,064,515

Basic earnings per share		$	0.46	$	0.40	$	0.88	$	0.78

Diluted:
	Net income	$	3,263	$	2,834	$	6,238	$	5,521
	Average shares outstanding		7,063,960		7,064,515		7,064,236		7,064,515
	Net effect of dilutive stock options		276,849		9,797		189,163		9,797

Total			7,340,809		7,074,312		7,253,399		7,074,312

Diluted earnings per share		$	0.44	$	0.40	$	0.86	$	0.78

5. RECENT ACCOUNTING PRONOUNCEMENTS

Statement of Financial Accounting Standard ("SFAS") No. 133,Accounting for Derivative Instruments and Hedging Activities, as amended by SFAS 137 and 138 establishes accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded in the balance sheet as either an asset or liability measured at its fair value. SFAS 133 requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allows a derivative's gains and losses to offset related results on the hedged item in the income statement, and requires that a company must formally document, designate and assess the effectiveness of transactions that receive hedge accounting. SFAS 133 was effective January 1, 2001. The Company

adopted SFAS 133 and the implementation of this standard did not have a material impact on the Company's financial statements.

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 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. The Company adopted SFAS 140 and the implementation of this standard did not have a material impact on the Company's financial statements.

On June 30, 2001, the Financial Accounting Standards Board finalized Statement of Financial Accounting Standards No. 141,Business Combinations. SFAS 141 requires all business combinations initiated after June 30, 2001 to be accounted for using the purchase method. SFAS 141 will not impact the pending MidCity Financial Corporation merger as the transaction was initiated prior to June 30, 2001.

On June 30, 2001, the Financial Accounting Standards Board finalized Statement of Financial Accounting Standards No. 142,Goodwill and Other Intangible Assets. Under the provisions of SFAS 142, goodwill is no longer subject to amortization over its estimated useful life, but instead will be subject to at least annual assessments for impairment by applying a fair-value based test. SFAS 142 also requires that an acquired intangible asset should be separately recognized if the benefit of the intangible asset is obtained through contractual or other legal rights, or if the asset can be sold, transferred, licensed, rented or exchanged, regardless of the acquirer's intent to do so. The provisions of SFAS 142 are effective for fiscal years beginning after December 31, 2001. The Company is in the process of evaluating its goodwill and intangible assets for impairment under the provisions of SFAS 142.

6. LONG-TERM BORROWINGS

At June 30, 2001 and 2000, long-term borrowings included $25.0 million in floating rate Preferred Capital Securities ("Capital Securities") through Coal City Capital Trust I ("Trust"), a statutory business trust and wholly owned subsidiary of the Company. The Capital Securities pay cumulative cash distributions quarterly at a rate per annum, reset quarterly, equal to the 3-month LIBOR plus 180 basis points. The effective rate at June 30, 2001 was 5.80%. Proceeds from the sale of the Capital Securities were invested by the Trust in floating rate (3-month LIBOR plus 180 basis points, the three month LIBOR rate effective at June 30, 2001 was 4.00%) Junior Subordinated Deferrable Interest Debentures ("Debentures") issued by the Company which represents all of the assets of the Trust. The Capital Securities are subject to mandatory redemption, in whole or in part, upon repayment of the Junior Subordinated 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 Capital Securities plus any accumulated and unpaid distributions thereon to the date of redemption. Prior redemption is permitted under certain circumstances.

At June 30, 2001, long-term borrowings also included $16.0 million in unsecured floating rate subordinated debt used to provide additional funding for the FSL acquisition. Interest accrues at a rate of the 1, 2, or 3-month LIBOR plus 350 basis points and is due quarterly. Terms for this seven-year instrument are interest quarterly for two years, with equal annual amortization over the final five years, with a maturity of May 2008. Prepayment is allowed at any time without penalty.

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 operations and should be read in conjunction with the consolidated financial statements and notes thereto appearing elsewhere in this report. On May 15, 2001 the Company acquired FSL Holdings, Inc. of South Holland. As of the purchase date, FSL Holdings had total assets of $223.5 million. This transaction affects the comparative information presented 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

Second Quarter Results

The Company had net income of $3.3 million for the second quarter of 2001, compared to $2.8 million for the same 2000 period. Net interest income was $11.7 million for the three months ended June 30, 2001 compared to $11.0 million for the three months ended June 30, 2000. Net interest income increased due to growth in the Company's commercial and lease banking businesses as well as volume increases due to the acquisition of FSL Holdings, Inc. (FSL), which was completed in the second quarter of 2001. These increases were partially offset by a decline in the Company's net interest margin.

Other income increased $812 thousand to $3.6 million for the quarter ended June 30, 2001 from $2.7 million for the same period in 2000. Loan service fees increased due to higher volume. In addition, the lease banking division generated higher revenues due to increased volume and residual gains as a result of equipment coming to the end of the lease terms.

Year-To-Date Results

Net income was $6.2 million for the six months ended June 30, 2001 compared to $5.5 million for the six months ended June 30, 2000. Net interest income increased to $22.8 million for the six months ended June 30, 2001 from $21.9 million for the six months ended June 30, 2000. Net interest income increased primarily due to growth in the Company's commercial and lease banking businesses that was partially offset by a decline in the Company's net interest margin.

For the six months ended June 30, 2001, other income increased $1.1 million to $6.6 million from $5.5 million for the six months ended June 30, 2000. The increase was primarily attributable to increases in net lease financing and higher income from the increase in cash surrender value of life insurance.

For the six months ended June 30, 2001, other expense increased $574 thousand to $18.5 million from $17.9 million for the six months ended June 30, 2000. The increase was primarily due to a $500 thousand increase in salaries and other employee benefits.

Net Interest Margin

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

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

		Three Months Ended June 30,
		2001						2000
		Average Balance		Interest		Yield/ Rate		Average Balance		Interest		Yield/ Rate
Interest Earning Assets:
Loans (1) (2)		$	1,236,504	$	24,444	7.93	%	$	938,315	$	20,599	8.83	%
Taxable investment securities			219,844		3,603	6.57			265,204		4,487	6.80
Investment securities exempt from federal income taxes (3)			4,333		114	10.55			5,169		120	9.34
Fed funds sold			1,116		11	3.95			—		—	—
Other interest bearing deposits			2,300		25	4.30			1,206		19	6.34

	Total interest earning assets		1,464,097		28,197	7.72			1,209,894		25,225	8.39

	Non-interest earning assets		159,012						157,205

	Total assets	$	1,623,109					$	1,367,099

Interest Bearing Liabilities:
Deposits:
	NOW and money market deposit accounts	$	189,047		1,313	2.79		$	169,413		1,224	2.91
	Savings deposits		142,503		781	2.20			144,668		849	2.36
	Time deposits		740,916		10,754	5.82			490,835		7,093	5.81
Short-term borrowings			242,009		2,975	4.93			275,611		4,334	6.32
Long-term borrowings			42,033		587	5.60			32,595		635	7.84

	Total interest bearing liabilities		1,356,508		16,410	4.85			1,113,122		14,135	5.11

Demand deposits—non-interest bearing			149,994						151,779
Other non-interest bearing liabilities			18,663						17,843
Stockholders' equity			97,944						84,355

	Total liabilities and stockholders' equity	$	1,623,109					$	1,367,099

	Net interest income/interest rate spread (4)			$	11,787	2.87				$	11,090	3.28

	Net interest margin on a fully tax equivalent basis (5)					3.23	%					3.69	%

	Net interest margin (5)					3.22	%					3.67	%

(1): Non-accrual loans are included in average loans.
(2): Interest income includes loan origination fees of $397 thousand and $387 thousand for the three months ended June 30, 2001 and 2000, respectively.
(3): Non-taxable investment income is presented on a fully tax equivalent basis assuming a 35% tax rate for the three months ended June 30, 2001 and 2000.
(4): Interest rate spread represents the difference between the average yield on interest earning assets and the average cost of interest bearing liabilities and is presented on a fully tax equivalent basis.
(5): Net interest margin represents net interest income as a percentage of average interest earning assets.

Net interest income on a tax equivalent basis was $11.8 million for the quarter ended June 30, 2001 and $11.1 million for the same period in 2000. Interest income increased $3.0 million, or 11.8%, for the second quarter of 2001 to $28.2 million from $25.2 million for the first quarter of 2000. The increase in interest income was due to a $254.2 million, or 21.0%, increase in average interest earning assets consisting primarily of a $298.2 million increase in average loans, as a result of growth in the Company's commercial and lease banking businesses, partially offset by a $46.2 million decrease in average investment securities. Interest expense increased $2.3 million, or 16.1%, for the second quarter of 2001 to $16.4 million from $14.1 million for the second quarter of 2000. The increase in interest expense resulted from a $243.4 million, or 21.9%, increase in average interest bearing liabilities primarily comprised of a $267.6 million increase in average interest bearing deposits. The net interest margin on a tax equivalent basis decreased to 3.23% for the three months ended June 30, 2001 from 3.69% for the three months ended June 30, 2000.

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

		Six Months Ended June 30,
		2001						2000
		Average Balance		Interest		Yield/ Rate		Average Balance		Interest		Yield/ Rate
Interest Earning Assets:
Loans (1) (2)		$	1,160,755	$	47,537	8.26	%	$	919,934	$	39,609	8.66	%
Taxable investment securities			229,234		7,736	6.81			267,639		8,981	6.75
Investment securities exempt from federal income taxes (3)			4,337		223	10.37			5,162		242	9.41
Fed funds sold			557		11	3.98			—		—	—
Other interest bearing deposits			2,121		54	5.06			1,519		42	5.56

	Total interest earning assets		1,397,004		55,561	8.02			1,194,254		48,874	8.23

	Non-interest earning assets		160,742						144,178

	Total assets	$	1,557,746					$	1,338,432

Interest Bearing Liabilities:
Deposits:
	NOW and money market deposit accounts	$	180,172		2,670	2.99		$	168,854		2,388	2.84
	Savings deposits		136,192		2,016	2.99			147,017		1,755	2.40
	Time deposits		677,675		19,744	5.88			483,335		13,487	5.61
Short-term borrowings			263,050		7,056	5.41			260,936		7,959	6.13
Long-term borrowings			36,295		1,226	6.81			32,402		1,271	7.89

	Total interest bearing liabilities		1,293,384		32,712	5.10			1,092,544		26,860	4.94

Demand deposits—non-interest bearing			147,803						145,294
	Other non-interest bearing liabilities		20,316						17,443
Stockholders' equity			96,243						83,151

	Total liabilities and stockholders' equity	$	1,557,746					$	1,338,432

	Net interest income/interest rate spread (4)			$	22,849	2.92				$	22,014	3.29

	Net interest margin on a fully tax equivalent basis (5)					3.30	%					3.71	%

	Net interest margin (5)					3.29	%					3.69	%

(1): Non-accrual loans are included in average loans.
(2): Interest income includes loan origination fees of $792 thousand and $774 thousand for the six months ended June 30, 2001 and 2000, respectively.
(3): Non-taxable investment income is presented on a fully tax equivalent basis assuming a 35% tax for the six months ended June 30, 2001 and 2000, respectively.
(4): Interest rate spread represents the difference between the average yield on interest earning assets and the average cost of interest bearing liabilities.
(5): Net interest margin represents net interest income as a percentage of average interest earning assets.

Net interest income on a tax equivalent basis was $22.8 million for the six months ended June 30, 2001 and $22.0 million for the same period in 2000. Interest income increased $6.7 million, or 13.7%, for the six months ended June 30, 2001 to $55.5 million from $48.8 million for the same period in 2000. The increase in interest income was due to a $202.8 million, or 17.0%, increase in average interest earning assets consisting primarily of a $240.8 million increase in average loans, as a result of growth in the Company's commercial and lease banking businesses, partially offset by a $39.2 million decrease in average investment securities. Interest expense increased $5.9 million, or 21.8%, for the six-month period ending June 30, 2001 to $32.7 million from $26.9 million for the same period in 2000. The increase in interest expense resulted from a $200.8 million, or 18.4%, increase in average interest bearing liabilities primarily comprised of a $194.3 million increase in average time deposits. The net interest margin on a tax equivalent basis decreased to 3.30% for the six months ended June 30, 2001 from 3.71% for the six months ended June 30, 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												Six Months Ended
		June 30, 2001 Compared to June 30, 2000												June 30, 2001 Compared to June 30, 2000
		Change Due to Volume			Change Due to Mix			Change Due to Rate			Total Change			Change Due to Volume		Change Due to Mix			Change Due to Rate			Total Change
Interest Earning Assets:
Loans		$	3,890		$	1,698		$	(1,743	)	$	3,845		$	7,011	$	3,193		$	(2,276	)	$	7,928
Taxable investment securities			594			(1,109	)		(369	)		(884	)		1,113		(2,398	)		40			(1,245	)
Investment securities exempt from federal Income taxes (1)			7			(38	)		25			(6	)		29		(69	)		21			(19	)
Federal funds sold			11			—			—			11			11		—			—			11
Other interest bearing deposits			4			4			(2	)		6			8		8			(4	)		12

	Total increase in interest income		4,506			555			(2,089	)		2,972			8,172		734			(2,219	)		6,687

Interest Bearing Liabilities:
	NOW and money market deposit accounts		238			(156	)		7			89			347		(197	)		132			282
	Savings deposits		(10	)		(360	)		302			(68	)		269		(265	)		257			261
	Time deposits		1,780			1,573			308			3,661			2,621		3,521			115			6,257
Short-term borrowings			797			(761	)		(1,395	)		(1,359	)		1,242		(1,200	)		(945	)		(903	)
Long-term borrowings			130			(53	)		(125	)		(48	)		217		(68	)		(194	)		(45	)

	Total increase in interest expense		2,935			243			(903	)		2,275			4,696		1,791			(635	)		5,852

	Increase (decrease) in net interest income	$	1,571		$	312		$	(1,186	)	$	697		$	3,476	$	(1,057	)	$	(1,584	)	$	835

(1): Non-taxable investment income is presented on a fully tax equivalent basis assuming a 35% rate for the three months and six months ended June 30, 2001 and June 30, 2000.

Other Income

Other income increased $812 thousand to $3.6 million for the quarter ended June 30, 2001 from $2.7 million for the same period in 2000. This increase was the result of $282 thousand increase in loan service fees, a $257 thousand increase in net lease financing income due to the growth of the Company's lease financing business, a $130 thousand increase in deposit service fees and $93 thousand increase in net gains on sale of securities available for sale.

For the six months ended June 30, 2001, other income increased $1.1 million to $6.6 million from $5.5 million for the six months ended June 30, 2000. The increase was primarily due to a $467 thousand increase in net lease financing, a $400 thousand increase in income from the increase in cash surrender value of life insurance, and increased deposit service fees and loan service fees of $189 thousand and $174 thousand, respectively. The foregoing increases were partially offset by a $253 thousand decrease in other operating income as in 2000 other income included a $186 thousand gain on sale of real estate owned compared to $60 thousand in 2001.

Other Expense

Other expense increased $592 thousand to $9.6 million for the second quarter of 2001 from $9.0 million for the second quarter of 2000. The increase was primarily due to a $551 thousand increase in salary expense related to the FSL acquisition, $40 thousand increases in both occupancy and equipment expense and intangible amortization expense, as well as a $31 thousand increase in advertising and marketing expense and offset by a $70 thousand decline in other operating expenses.

For the six months ended June 30, 2001, other expense increased $574 thousand to $18.5 million from $17.9 million for the six months ended June 30, 2000. The increase was due to a $500 thousand increase in salaries and employee benefits due to the FSL acquisition as well as a $73 thousand increase in advertising and marketing expense.

Income Taxes

Income tax expense for the three months ended June 30, 2001 was $1.8 million compared to $1.2 million for the same period in 2000. Income tax expense for the six months ended June 30, 2001 was $3.2 million compared to $2.4 million for the same period in 2000. The effective tax rate for 2001 is 34.1%. The effective rate increased due to an increase in provision for state taxes.

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.

Management defines cash earnings as net income excluding amortization of core deposit intangibles and goodwill and the related deferred income tax effect. Cash earnings should not be considered an alternative to operating or net income as an indicator of the Company's performance or as an alternative to cash flows from operating activities as a measure of liquidity in each case determined in accordance with accounting principles generally accepted in the United States of America.

The following table sets forth the Company's cash earnings (dollars in thousands):

		Three Months Ended						Six Months Ended
		June 30, 2001			June 30, 2000			June 30, 2001			June 30, 2000
Net Income		$	3,263		$	2,834		$	6,238		$	5,521
Goodwill amortization			294			203			510			407
Core deposit intangibles amortization (net of tax)			149			182			291			365

Cash earnings		$	3,706		$	3,219		$	7,039		$	6,293

Average tangible assets (1)		$	1,605,232		$	1,352,385		$	1,542,027		$	1,323,638
Average tangible equity (2)		$	80,998		$	74,256		$	81,835		$	72,778
Cash earnings per share:
	Basic	$	0.52		$	0.46		$	1.00		$	0.89
	Diluted	$	0.50		$	0.46		$	0.97		$	0.89
Performance ratios: (3)
	Cash return on average tangible assets		0.93	%		0.96	%		0.92	%		0.96	%
	Cash return on average tangible equity		18.35	%		17.44	%		17.35	%		17.39	%

(1): Tangible assets represents assets less the Company's intangible assets, which include goodwill and core deposit intangibles. Core deposit intangibles is recognized on a fully tax equivalent basis.
(2): Tangible equity represents common stockholders equity plus retained earnings less the Company's intangible assets which include goodwill and core deposit intangibles. Core deposit intangibles is recognized on a fully tax equivalent basis.
(3): Cash return on average tangible assets and equity has been annualized for the three-month and six-month periods ended June 30, 2001 and June 30, 2000.

Balance Sheet Review

Total assets increased $221.5 million to $1.7 billion at June 30, 2001 compared to $1.5 billion at December 31, 2000. The increase was primarily due to the acquisition of FSL, which had total assets of $223.5 million as of the purchase date. Loans increased $203.7 million as the Company acquired approximately $141.0 million in loans through the FSL acquisition and subsequently sold $46.2 million of that portfolio. The remaining increase in loans was due to growth in the Company's commercial and lease business. Federal funds sold increased by $30.8 million while investment securities available for sale declined by $22.7 million.

Total liabilities increased $212.7 million to $1.6 billion at June 30, 2001 compared to $1.4 billion at December 31, 2000. The growth was due to a $228.1 million increase in total deposits due primarily to the acquisition of FSL. The increase included a $173.7 million increase in certificates of deposit, a $20.4 million increase in other interest bearing deposits and $4.0 million increase in non-interest bearing deposits. Long-term borrowings grew by $20.1 million, with increases in correspondent bank debt and Federal Home Loan Bank advances of $16.0 million and $4.1 million, respectively. Short-term borrowings decreased by $38.0 million, as declines in Federal Home Loan Bank advances and federal funds purchased of $75.0 million and $30.4 million, respectively, were partially offset by increases in securities sold under agreement to repurchase and correspondent bank lines of $51.9 million and $15.4 million, respectively.

Total assets increased $274.1 million to $1.7 billion at June 30, 2001 compared to $1.4 billion at June 30, 2000. The increase was primarily due to the acquisition of FSL, which had total assets of $223.5 million as of the purchase date. Loans increased $282.3 million as the Company acquired

approximately $141.0 million in loans through the FSL acquisition and subsequently sold $46.2 million of that portfolio. The remaining increase in loans was due to growth in the Company's commercial and lease business. Federal funds sold increased $30.8 million, and net lease investments increased $9.0 million. Offsetting these increases were declines in investment securities and other assets of $49.4 million and $11.4 million, respectively.

Total liabilities increased $257.1 million to $1.6 billion at June 30, 2001 compared to $1.3 billion at June 30, 2000. The increase was due to a $318.5 million increase in total deposits partially resulting from a $100.5 million increase in interest bearing brokered deposits and a $209.9 million increase in certificates of deposit and other interest bearing deposits primarily due to deposits acquired in the FSL transaction. Short-term borrowings decreased $79.3 million due to declines in federal funds purchased and Federal Home Loan Bank advances of $83.4 million and $75.0 million, respectively, which were partially offset by increases in securities sold under agreement to repurchase, correspondent bank lines and U.S. Treasury demand notes of $59.1 million, $19.0 million and $1.0 million, respectively. Long-term borrowings increased $19.2 million due to increases in correspondent bank debt and Federal Home Loan Bank advances of $16.0 million and $4.1 million, respectively and a $900 thousand decrease in notes payable.

Loan Portfolio

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

		June 30, 2001					December 31, 2000					June 30, 2000
		Amount			Percent		Amount			Percent		Amount			Percent
Commercial		$	261,068		20.65	%	$	229,239		21.68	%	$	182,231		18.64	%
Commercial loans collateralized by
assignment of lease payments			253,693		20.07	%		245,212		23.20	%		233,642		23.90	%
Commercial real estate			401,763		31.78	%		312,714		29.58	%		297,944		30.48	%
Residential real estate			165,762		13.11	%		137,612		13.02	%		134,289		13.74	%
Construction real estate			72,086		5.70	%		46,664		4.41	%		49,462		5.06	%
Installment and other			109,888		8.69	%		85,722		8.11	%		79,877		8.17	%

	Gross loans		1,264,260		100.00	%		1,057,163		100.00	%		977,445		100.00	%

Allowance for loan losses			(17,190	)				(13,837	)				(12,638	)

	Net loans	$	1,247,070				$	1,043,326				$	964,807

Net loans increased $203.7 million from $1.0 billion at December 31, 2000 and $282.3 million from $964.8 million at June 30, 2000 to $1.2 billion at June 30, 2001. These increases were primarily due the FSL acquisition as the Company acquired approximately $141.0 million in loans of which $46.2 million were subsequently sold and to growth in the commercial and lease banking businesses, as well as the $22.8 million addition of home equity lines of credit acquired through the purchase of 100% interest in the 97-2 securitization trust.

Asset Quality

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

		June 30, 2001			December 31, 2000			June 30, 2000
Non-performing loans:
	Non-accrual loans	$	6,029		$	5,381		$	10,316
	Loans 90 days or more past due, still accruing interest		455			239			324

Total			6,484			5,620			10,640

Other real estate owned			764			—			622
Other repossessed assets			46			101			—

Total non-performing assets		$	7,294		$	5,721		$	11,262

Total non-performing loans to total loans			0.51	%		0.53	%		1.09	%
Allowance for loan losses to non-performing loans			265.11	%		246.21	%		118.78	%
Total non-performing assets to total assets			0.43	%		0.39	%		0.80	%

Total non-performing assets increased $1.6 million, or 27.5%, to $7.3 million at June 30, 2001 from $5.7 million at December 31, 2000. The increase in non-performing assets was primarily due to a $1.9 million commercial real estate loan placed on non-accrual in the first quarter of 2001.

Total non-performing assets decreased $4.0 million, or 35.2%, to $7.3 million at June 30, 2001 from $11.3 million at June 30, 2000. Non-performing assets decreased 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						Six Months Ended
	June 30, 2001			June 30, 2000			June 30, 2001			June 30, 2000
Balance at beginning of period	$	16,129		$	12,248		$	13,837		$	12,197
Additions from acquisition / purchase of loans		1,023			—			3,023			—
Provision for loans losses		650			840			1,400			1,590
Charge-offs		(856	)		(564	)		(1,419	)		(1,324	)
Recoveries		244			114			349			175

Balance at June 30,	$	17,190		$	12,638		$	17,190		$	12,638

Total loans at June 30,	$	1,264,260		$	977,445		$	1,264,260		$	977,445
Ratio of allowance for loan losses to total loans		1.36	%		1.29	%		1.36	%		1.29	%

In the first quarter of 2001, the Company added $22.8 million of pooled home equity lines of credit through the purchase of 100% interest in the 97-2 securitization trust and added $2.0 million to the allowance for loan losses for these loans. In the second quarter of 2001, $1.0 million was added with the acquisition of FSL.

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 Company consistently applies its methodology for determining the adequacy of the allowance for loan losses, but may make adjustments to its system based on historical information related to charge-offs and management's evaluation of the current loan portfolio. When adjustments are made, they are carefully reviewed by the loan committee before they are implemented.

Potential Problem Loans

Manufacturers Bank utilizes an internal asset classification system as a means of reporting problem and potential problem assets. At each scheduled Board of Directors meeting, a watch list is presented, showing all loans listed as "Special Mention,""Substandard," "Doubtful" and "Loss." An asset is classified Substandard if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Substandard assets include those characterized by the distinct possibility that Manufacturers Bank will sustain some loss if the deficiencies are not corrected. Assets classified as Doubtful have all the weaknesses inherent in those classified Substandard with the added characteristic that the weaknesses present make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable. Assets classified as Loss are those considered uncollectible and viewed as non-bankable assets, worthy of charge-off. Assets which do not currently expose Manufacturers Bank to sufficient risk to warrant classification in one of

the aforementioned categories, but possess weaknesses which may or may not be out of the control of the customer, are deemed to be Special Mention.

Manufacturers Bank's determination as to the classification of its assets and the amount of its valuation allowances is subject to review by Manufacturers Bank's primary regulators, which can order the establishment of additional general or specific loss allowances. The FDIC, in conjunction with the other federal banking agencies, has adopted an interagency policy statement on the allowance for loan losses. The policy statement provides guidance for financial institutions on both the responsibilities of management for the assessment and establishment of adequate allowances and guidance for banking agency examiners to use in determining the adequacy of general valuation guidelines. Generally, the policy statement recommends that (i) institutions have effective systems and controls to identify, monitor and address asset quality problems; (ii) management has analyzed all significant factors that affect the collectibility of the portfolio in a reasonable manner; and (iii) management has established acceptable allowance evaluation processes that meet the objectives set forth in the policy statement. Management believes it has established an adequate allowance for possible loan losses. Manufacturers Bank analyzes its process regularly, with modifications made if needed, and reports those results four times per year at Board of Directors meetings. However, there can be no assurance that the regulators, in reviewing Manufacturers Bank's loan portfolio, will not request Manufacturers Bank to materially increase its allowance for loan losses at the time. Although management believes that adequate specific and general loan loss allowances have been established, actual losses are dependent upon future events and, as such, further additions to the level of specific and general loan loss allowances may become necessary.

The aggregate principal amounts of potential problem loans as of June 30, 2001 and 2000 were approximately $16.5 million and $13.7 million, respectively. Included in these potential problem loan totals are non-accrual, Special Mention, Substandard and Doubtful classifications, which represent the watch list presented to the Board of Directors. All loans classified as Loss have been charged-off. Loans in this category generally include loans that were classified for regulatory purposes.

Lease Investments

Lease investments by categories follow (in thousands):

		June 30, 2001			December 31, 2000			June 30, 2000
Direct financing leases		$	1,758		$	1,847		$	358
Operating leases:
	Equipment, at cost		85,690			74,491			68,342
	Less accumulated depreciation		(37,580	)		(30,994	)		(27,809	)

			48,110			43,497			40,533

	Lease investments, net	$	49,868		$	45,344		$	40,891

Lease investments are investments in equipment leased to other companies by Manufacturers Bank. The Company has steadily grown its lease portfolio over the past five years from virtually nothing to $49.9 million at June 30, 2001. Manufacturers Bank funds most of its lease equipment purchases, but has some loans at other banks totaling $5.8 million at June 30, 2001, $5.8 million at December 31, 2000 and $6.7 million at June 30, 2000.

The operating lease portfolio is made up of various types of equipment, generally 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, Manufacturers

Bank recognizes a loss on its investment due to funding costs, and as a lease ages, a gain. Consequently, as Manufacturers 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, Manufacturers 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 June 30, 2001, the following schedule represents the residual values for operating leases in the year initial lease terms are ended (in thousands):

End of Initial Lease Terms December 31,	Residual Values
2001 and prior	$	2,915
2002		2,556
2003		1,295
2004		3,200
2005		1,643
2006		110

	$	11,719

There were approximately 160 lease schedules at June 30, 2001 compared to 136 at December 31, 2000 and 133 at June 30, 2000. In addition, residual lease values were $11.7 million, $11.0 million, and $11.3 million at June 30, 2001, December 31, 2000 and June 30, 2000, respectively, resulting in an average residual per lease of $73 thousand, $81 thousand and $85 thousand for the respective periods.

Interest Only Receivables

In 1996, 1997 and 1998, Avondale Federal Savings Bank securitized certain home equity lines of credit to investors with limited recourse, retaining the right to service the underlying loans. The securitizations were done using qualified special purpose entities (securitization trusts). Avondale Federal Savings Bank received annual servicing fees and rights to future cash flows (interest only receivables) arising after the investors in the securitization trusts received the return for which they had contracted. In addition, Avondale Federal Savings Bank retained a participation interest in the securitization trusts, reflecting the excess of the total amount of loans transferred to the trusts over the portion represented by certificates sold to investors. Through the Avondale merger the Company acquired servicing rights related to these loans, the retained participation interest in the securitization trusts and interest only receivables. The annual servicing fees received by the Company approximate 1.00% of the outstanding loan balance. The investors and their securitization trusts have no recourse to the Company's other assets for failure of debtors to pay when due. Most of the Company's retained interest in the securitization trusts are generally restricted until investors have been fully paid and is subordinate to investor's interest. The retained interest is included with securities available for sale and is reflected as investments in equity lines of credit trusts.

At June 30, 2001, interest only receivables were $8.7 million. The value of interest only receivables are 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 receivables. As part of the review, the Company reviews its assumptions of prepayment speeds, discount rates and the remaining anticipated credit losses.

The following table shows the results of the Company's assumptions used to estimate the fair value at June 30, 2001 (dollars in thousands):

	Interest Only Receivables Pools
	96-1			97-1			98-1
	Adjustable (1)			Adjustable (1)			Adjustable (1)
Estimated fair value	$	3,150		$	2,987		$	2,526
Prepayment speed		35.00	%		35.00	%		35.00	%
Weighted-average life (in years) (2)		0.72			0.89			1.84
Expected credit losses (3)		1.35	%		3.05	%		7.05	%
Residual cash flows discounted at		12.00	%		12.00	%		12.00	%
Loans outstanding at June 30, 2001		12,783			15,065			34,833
Retained interest in equity lines of credit trust		4,872			3,904			1,863

(1): Rates for these loans are adjusted based on the prime rate as published in the Wall Street Journal.
(2): The remaining 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 initial 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 June 30, 2001 are $172 thousand, $460 thousand, and $2.5 million for 96-1, 97-1, 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. Credit losses are estimated using loss migration analysis for each pool.

In February 2001, the Company acquired in the market 100% of the securities outstanding in the 97-2 securitization trust held by investors. After the acquisition, the securitization trust and its activities was consolidated into the Company's financial statements.

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 June 30, 2001				At December 31, 2000				At June 30, 2000
			Amortized Cost		Fair Value		Amortized Cost		Fair Value		Amortized Cost		Fair Value
Securities Available for Sale:
	U.S. Treasury securities		$	6,150	$	6,157	$	—	$	—	$	—	$	—
	U.S. Government agencies			68,129		68,245		85,044		84,221		99,962		97,215
	States and political subdivisions			4,569		4,711		4,505		4,650		5,187		5,331
	Mortgage-backed securities			83,833		84,364		93,248		92,456		107,766		107,233
	Corporate bonds			38,081		35,237		43,085		39,250		43,090		38,822
	Other securities			874		976		1,088		1,280		958		958
	Retained interest in equity lines of credit trusts			10,639		10,639		11,206		11,206		10,181		10,181

		Total securities available for sale	$	212,275	$	210,329	$	238,176	$	233,063	$	267,144	$	259,740

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 $12.2 million and $13.4 million for the six months ended June 30, 2001 and 2000, respectively. Net cash used in investing activities declined by $63.0 million, to $43.2 million for the six months ended June 30, 2001 from $106.2 million for the same period in 2000. The Company's investing activities for the first six months of 2001 compared to 2000 included additional cash flows of $56.8 million provided by proceeds from maturities and calls of available for sale investment securities, partially offset by additional outflows of $41.9 million due to the FSL acquisition, whereas the first quarter of 2000 included a $30.0 million purchase of life insurance. Net cash provided by financing activities was $28.0 million for the six months ended June 30, 2001 while $88.9 million was provided in the first six months of 2000. The $60.9 million decrease in net cash provided by financing activities was primarily due to a net decrease in short term borrowings of $38.0 million during the 2001 period and an increase in short term borrowings of $46.3 million during the 2000 period. This was partially offset by greater increases during the first six months of 2001 in proceeds from long-term borrowings and increases in interest bearing deposits of $13.0 million and $12.9 million, respectively.

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 $130.0 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.

Manufacturers Bank's total risk-based capital ratio was 11.82%, Tier 1 capital to risk-weighted assets ratio was 9.43%, and Tier 1 capital to average asset ratio was 8.17% at June 30, 2001. The FDIC has categorized the bank subsidiary as "well capitalized" at June 30, 2001.

As of June 30, 2001, the Company's book value per share was $14.22 compared to $11.80 at June 30, 2000. In addition, the Company's tangible book value per share (calculated on a fully tax equivalent basis) was $11.39 at June 30, 2001 compared to $9.76 June 30, 2000.

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 receivables;
•: 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 June 30, 2001, there has been no material change in market risk from December 31, 2000.

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 14th day of August 2001.

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

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MB FINANCIAL, INC. AND SUBSIDIARIES FORM 10-Q JUNE 30, 2001 INDEX
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
AVERAGE BALANCES, INTEREST RATES AND YIELDS (Continued) (Dollars in thousands)
VOLUME, MIX AND RATE ANALYSIS OF NET INTEREST INCOME (Dollars in thousands)
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MB Financial Inactive 10-Q2001 Q2 Quarterly report

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