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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
/x/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM __________ TO __________
COMMISSION FILE NUMBER 0-24566
MB FINANCIAL, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 36-3895923
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION
1200 NORTH ASHLAND AVENUE, CHICAGO, ILLINOIS 60622
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (773) 278-4040
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON
WHICH REGISTERED
_____________________________________ _____________________________
_____________________________________ _____________________________
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
- -------------------------------------------------------------------------------
(TITLE OF CLASS)
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(TITLE OF CLASS)
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 / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statement
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. /x/
The aggregate market value of the voting shares held by nonaffiliates of
the Registrant was $56,402,000 as of March 27, 2000. Solely for the purpose of
this computation, it has been assumed that executive officers and directors of
the Registrant are "affiliates".
There were issued and outstanding 7,064,515 shares of the Registrant's
common stock as of March 27, 2000.
DOCUMENTS INCORPORATED BY REFERENCE:
DOCUMENT PART OF FORM 10-K
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Proxy Statement for the Annual Meeting of
Stockholders to be held on May 30, 2000 Part III
(to be filed on or before April 30, 2000)
Index to Exhibits is in Item 14(c)(1) on
pages 76 through 77. This report
consists of 89 pages.
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2
MB FINANCIAL, INC. AND SUBSIDIARIES
FORM 10-K
DECEMBER 31, 1999
INDEX
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PAGE
PART I
Item 1 Business ...................................................................................... 4
Item 2 Properties .................................................................................... 12
Item 3 Legal Proceedings ............................................................................. 13
Item 4 Submission of Matters to a Vote of Security Holders ........................................... 13
PART II
Item 5 Market for Registrant's Common Equity and Related Stockholder Matters ......................... 13
Item 6 Selected Financial Data ....................................................................... 14
Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations ......... 17
Item 7A Quantitative and Qualitative Disclosures about Market Risk .................................... 38
Item 8 Financial Statements and Supplementary Data ................................................... 41
Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure .......... 75
PART III
Item 10 Directors and Executive Officers of the Registrant ............................................ 76
Item 11 Executive Compensation ........................................................................ 76
Item 12 Security Ownership of Certain Beneficial Owners and Management ................................ 76
Item 13 Certain Relationships and Related Transactions ................................................ 76
PART IV
Item 14 Exhibits, Financial Statement Schedules, and Reports on Form 10-K ................................ 77
Signatures ....................................................................................... 79
3
PART 1
ITEM 1. BUSINESS
GENERAL
MB Financial, Inc. (the "Company") was incorporated in Delaware in 1995
and is a bank holding company under the BHCA and the Illinois Bank Holding
Company Act (Illinois BHCA).
On February 26, 1999, Coal City Corporation, the holding company for
Manufacturers Bank ("CCC") was merged with and into Avondale Financial Corp.
("Avondale"), the holding company for Avondale Federal Savings Bank. The
resulting entity was renamed MB Financial, Inc. Simultaneously, Avondale Federal
Savings Bank was merged into Manufacturers Bank. Total assets for Avondale were
$484.3 million at the merger date, and Avondale operated out of five locations
in the Chicago metropolitan area.
Since the CCC stockholders owned more than 50% of the combined company,
the transaction was accounted for as a reverse acquisition using the purchase
method of accounting with CCC being the accounting acquirer. As a result, the
post-merger historical financial statements of the combined company are CCC's as
the accounting acquirer, and includes the operating results of Avondale since
the merger date. Total consideration, based upon Avondale's shares outstanding
at the merger date times the estimated market value per share at the merger
announcement date, was $26.4 million plus $1.1 million of merger expenses
incurred by CCC. Included in the purchase accounting adjustments was an accrual
of $4.4 million for merger related costs. The accrual included estimated costs
for termination of data processing contracts, professional fees, severance and
personnel related expenses and lease contracts. At December 31, 1999, the
remaining liability was approximately $975 thousand primarily for lease
contracts and severance costs. The majority of the remaining costs are scheduled
to be payable by the end of 2000.
After the merger, each share of CCC Common Stock issued and outstanding
on February 26, 1999 was converted into 83.5 shares of Avondale. Consequently,
common share data for the years ended prior to and including December 31, 1998
were converted at an exchange ratio of 83.5 to 1. Unless the context otherwise
requires, the term the "Company" includes MB Financial, Inc., its subsidiaries
and predecessor.
MB Financial, Inc. owns all of the issued and outstanding shares of
common stock of Manufacturers National Corporation, which is also a bank holding
company organized under the BHCA and the Illinois BHCA. Manufacturers National
Corporation owns all of the issued and outstanding shares of common stock of
Manufacturers Bank. At December 31, 1999, the Company had approximately 1,400
stockholders of record, 7,064,515 shares of common stock outstanding, total
consolidated assets of $1.3 billion and operated from a total of 12 offices
throughout metropolitan Chicago, including the principal business office at 1200
North Ashland Avenue, Chicago, Illinois.
Manufacturers Bank ("Bank") owns all of the issued and outstanding
shares of common stock of six special purpose Illinois corporations, Ashland
Management Agency, Inc. ("Ashland"), MB1200 Corporation ("MB1200"),
Manufacturers Deferred Exchange Corporation ("MDEC"), Avondale Financial
Services, Inc. ("AFS"), Manufacturers Community Development Corporation, and
Manufacturers Funding Corporation, all of which have their principal business
offices at the principal business office of the Company at 1200 North Ashland
Avenue, Chicago, Illinois. The principal purpose of Ashland is to act as manager
of certain real estate owned by Manufacturers Bank; the principal purpose of
MB1200 is to hold title to any property that Manufacturers Bank may receive
pursuant to a foreclosure or other resolution of a non-performing loan; the
principal purpose of MDEC is to hold escrowed funds relating to certain tax
advantaged property exchanges entered into by the customers of Manufacturers
Bank; the principal purpose of AFS is to offer investment and insurance products
to customers of Manufacturers Bank; the principal purpose of Manufacturers
Community Development Corporation is to engage in community lending and equity
investments to facilitate the construction and rehabilitation of housing in low
and moderate neighborhoods in the Bank's market area; and Manufacturers Funding
Corporation is inactive. The Company also owns all of the issued and outstanding
Common Securities of Coal City Capital Trust I, a statutory Delaware business
trust, making such trust a subsidiary of the Company for financial reporting
purposes. In July 1998, Coal City Capital Trust I issued $25 million in
Preferred Capital Securities and the Company's former subsidiary, Coal City
Capital Trust 1997-A (which has been dissolved), retired $10 million of
Preferred Trust Securities that were issued in 1997.
4
In 1995, the Company acquired 100% of the outstanding stock of Peterson
Bank, located on Chicago's far north side. At the date of acquisition, Peterson
Bank had assets of $172.1 million and operated out of a main office and a single
branch facility. Peterson Bank specialized in the banking needs of real estate
investors and operators, long-term health care companies and Chicago's Korean
community.
In May of 1997, Manufacturers National Corporation acquired 100% of
U.S. Bancorp, the single-bank holding company for U.S. Bank. At the time of this
acquisition, U.S. Bancorp had assets of $205 million and operated out of a main
office and four branch facilities, all located either on Chicago's south side or
in the southern Chicago suburbs of Tinley Park, Lansing and South Holland,
Illinois. U.S. Bank specialized in serving home developers whose projects were
located throughout the Chicago metropolitan area and northwest Indiana.
In 1997, the Company caused Peterson Bank to be merged into
Manufacturers Bank, and Manufacturers Bank to be merged into U.S. Bank, with the
latter entity changing its name to "Manufacturers Bank." The Company also caused
U.S. Bancorp, which was then a mid-tier bank holding company wholly owned by
Manufacturers National Corporation, to be merged into Manufacturers Bank in
order to eliminate the costs associated with an unnecessary third holding
company layer.
In January 1998, the Company sold 100% of the outstanding common stock
of Coal City National Bank to Kankakee Bancorp, Inc., the parent holding company
of Kankakee Federal Savings Bank, which is headquartered in Kankakee, Illinois.
Coal City National Bank is located in Coal City, Illinois, more than 50 miles
from downtown Chicago, in a community where the Company's Management believed
business lending opportunities were limited. Management decided that the Company
could no longer benefit from a presence in the Coal City, Illinois marketplace,
and that continued ownership of Coal City National Bank, although profitable,
would divert the Company, its management and staff from their principal focus of
growing the business of Manufacturers Bank. It was also decided that the capital
required to operate Coal City National Bank would be better utilized in the
operation of Manufacturers Bank.
BUSINESS AREAS
Manufacturers Bank concentrates its business efforts on servicing small
and middle market businesses, such as manufacturers, wholesalers, distributors,
long-term health care operators, real estate operators and investors, and home
developers located throughout the entire Chicago metropolitan area. The Company,
through its acquisition program and through careful selection of officers and
employees, has moved to position Manufacturers Bank to take a leading role in
filling this attractive niche in the market. In order to further the ability of
Manufacturers Bank to play such a leading role, management has also caused
Manufacturers Bank to divide its business into four distinctly recognizable
areas, referred to as Commercial Banking, Convenient Retail Banking, Lease
Banking and Korean Banking.
COMMERCIAL BANKING. The Commercial Banking Group focuses on serving
privately-owned companies run by entrepreneurs. The kinds of companies served
are manufacturers, wholesalers, distributors, home developers, long-term health
care operators, real estate operators and investors, and selected types of
service companies. Manufacturers Bank provides a full set of credit, deposit,
cash management and investment products to these companies. These products are
specifically designed for companies with sales between $1 million and $50
million. The products developed for this target market include:
CREDIT PRODUCTS:
- Working capital loans and lines of credit, including accounts
receivable and inventory financing
- Equipment loans and leasing
- Business acquisition loans
- Owner occupied real estate loans
- Financial, performance and commercial letters of credit
5
DEPOSIT AND CASH MANAGEMENT PRODUCTS:
- Corporate InterConnect - an internet cash management product for
businesses
- Zero balance accounts
- Automated tax payments
- ATM access
- Merchant credit card program
- Telephone banking
- Lockbox
- Direct deposit (ACH)
- Account reconciliation
- Controlled disbursement
- Detail and general information reporting
- Wire transfers
- A variety of international banking services
- Checking accounts
- Investment services
For real estate operators and investors, Manufacturers Bank also offers
a full set of products including, and in addition to those listed above, the
following:
- Commercial mortgages
- Residential, commercial, retail and industrial construction loans
- Land acquisition and development loans
- Industrial revenue bond financing
LEASE BANKING. The target market for the Lease Banking group consists
of small and medium size equipment leasing companies located throughout the
United States. Manufacturers Bank has provided Lease Banking services to these
companies for more than 25 years. Competition in servicing this equipment
leasing market generally comes from large banks, financing companies, large
industrial companies and some community banks in certain segments of the
business. Manufacturers Bank provides rapid service and decision making, and
flexible financial solutions, to meet its customers' needs in this market.
Manufacturers Bank provides full banking services for these leasing companies by
financing the debt portion of leveraged leases ("Lease Loans"), providing
short-term and long-term equity financing, making working capital and bridge
loans, and investing directly into leased equipment. The volume of Lease Loans
is closely managed, in order to control Manufacturers Bank's level of total risk
adjusted assets.
Manufacturers Bank also invests in equipment leased to other companies.
In this case, Manufacturers Bank owns the equipment leased to the user. 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. Over the last four
years, Manufacturers Bank has increased its investment in leased equipment from
virtually nothing to $38 million at December 31, 1999. In most cases, during the
early years of the lease, Manufacturers Bank recognizes a loss on its
investment, and as the lease ages, a gain. Consequently, as Manufacturers Bank
has built its leased equipment portfolio, current earnings have been reduced.
Gains, if any, on leased equipment 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 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.
KOREAN BANKING. The Korean Banking group focuses on the expanding
Korean community located principally on the north side of Chicago and in
Chicago's northwestern suburbs. Manufacturers Bank serves ethnic Korean
consumers and Korean-owned businesses by providing complete banking services
using the Korean language. Korean commercial customers tend to be small
owner-operated, cash businesses, such as dry cleaners, gift shops and
restaurants. While continuing to serve these customers, Manufacturers Bank is
also targeting those Korean-owned businesses with annual sales between $2
million and $20 million. Personnel in the Korean Banking group, as well as a
number of other individuals in key service positions at Manufacturers Bank speak
and conduct business in Korean.
6
Manufacturers Bank's automated telephone account access services are provided in
the Korean language as well. Competition in this growing market segment is quite
limited because of the need to provide all banking services in Korean.
CONVENIENT RETAIL BANKING. The target market for the Convenient Retail
Banking consists of consumers who live or work near Manufacturers Bank offices.
Manufacturers Bank offers a full set of consumer products to these individuals,
including checking accounts, savings accounts, money market accounts, time
deposit accounts, secured and unsecured consumer loans, residential mortgage
loans, and a variety of fee for service products, such as money orders and
travelers checks. The Company also offers brokerage services which includes the
sale of non-FDIC insured investment products to the Bank's client base.
Manufacturers Bank refers to this area of its business as "Convenient Retail
Banking," because it targets only those consumers for whom Manufacturers Bank's
offices are a convenient place to perform the customers' financial transactions.
LENDING ACTIVITIES
GENERAL. Manufacturers Bank is primarily a business lender and the loan
portfolio consists primarily of loans to businesses or for business purposes.
COMMERCIAL LENDING. Manufacturers Bank makes commercial loans to small
and middle market businesses. The borrowers tend to be privately-owned and are
generally manufacturers, wholesalers, distributors, long-term health care
operators, and selected types of service providers. The loan products offered
are primarily working capital loans and lines of credit. These general product
classifications include accounts receivable and inventory financing, equipment
loans and business acquisition loans. Manufacturers Bank also offers financial,
performance and commercial letters of credit. Most commercial loans are
short-term in nature, being one year or less, although the maximum allowable
term is five years.
Manufacturers Bank's lines of credit are typically secured, established
for one year or less, and are subject to renewal upon satisfactory review of the
borrower's financial statements and credit history. Secured short-term
commercial business loans are usually collateralized by accounts receivable,
equipment or real estate. Such loans are typically guaranteed by the owners of
the business. Interest rates tend to be at or above the prime-lending rate,
although there has been considerable recent market pressure to make loans at a
spread above LIBOR. At December 31, 1999, there were $154.8 million in
commercial loans representing 17.1% of the total loan portfolio outstanding.
COMMERCIAL REAL ESTATE LENDING. Manufacturers Bank originates
commercial real estate mortgage loans that are generally secured by one or more
of the following kinds of properties: multi-unit residential property, owner and
non-owner occupied commercial and industrial property, and residential property
for development. Loans are also made to acquire and develop land. At December
31, 1999, there were $249.1 million in commercial real estate loans representing
27.6% of the total loan portfolio outstanding.
LEASE LOANS. Manufacturers Bank lends money to small and mid-sized
leasing company customers to finance the debt portion of leveraged leases (i.e.,
Lease Loans). A Lease Loan arises when a leasing company discounts with
Manufacturers Bank the equipment rental revenue stream owed to the leasing
company by a lessee. Lease Loans are generally non-recourse to the leasing
company, and, consequently, Manufacturers Bank underwrites Lease Loans by
examining the creditworthiness of the lessee rather than the lessor. Lease Loans
are secured by the equipment being leased. The lessee acknowledges Manufacturers
Bank's security interest in the leased equipment and agrees to make lease
payments to Manufacturers Bank. Lessees tend to be Fortune 500 or Fortune 1000
companies and must have a public debt rating in one of the top four rating
categories by Moody's or Standard & Poors, or the equivalent. If the lessee does
not have a public debt rating, then Manufacturers Bank lends when its own credit
analysis indicates that if the lessee did have a debt rating it would be in one
of the top four categories. Lease Loans are fully amortizing, with maturities
ranging from two to five years. Loan rates are fixed at a spread of 1% to 2%
over the U.S. Treasury curve. Manufacturers Bank uses Lease Loans to manage its
risk adjusted asset totals. Since these loans are very high quality and made to
well-known public companies, the loans are marketable in the capital markets.
Manufacturers Bank also has sold loans to correspondents that range from a large
regional bank to several small community banks. At December 31, 1999, there were
$186.9 million in commercial loans collateralized by lease payments representing
20.6% of the total loan portfolio outstanding.
7
FOREIGN OPERATIONS
The Company does not engage in any operations in foreign countries.
COMPETITION
Vigorous competition exists in the major areas in which Manufacturers
Bank is presently engaged in business. Competition includes not only commercial
banks but also other financial institutions, including savings and loan
associations, money market and other mutual funds, mortgage companies, leasing
and finance companies and a variety of financial services and advisory
companies. Manufacturers Bank competes by providing quality services to its
customers, ease of access to facilities and competitive pricing of services
(including interest rates paid on deposits, interest rates charged on loans and
fees charged for other non-loan or non-deposit services).
PERSONNEL
As of December 31, 1999, The Company had 299 full time employees and 66
part-time employees. The employees are not represented by a collective
bargaining unit, and the Company considers its relationship with its employees
to be good.
SUPERVISION AND REGULATION
BANK HOLDING COMPANY REGULATION. Bank holding companies are subject to
comprehensive regulation by the Federal Reserve Bank ("FRB") under the Bank
Holding Company Act ("BHCA"). As a bank holding company, the Company is required
to file reports with the FRB and such additional information as the FRB may
require, and the Company and its nonbanking affiliates will be subject to
examination by the FRB. The FRB also has extensive enforcement authority over
bank holding companies. Under FRB policy, a bank holding company must serve as a
source of strength for its subsidiary banks. Under this policy the FRB may
require, and has required in the past, a holding company to contribute
additional capital to an undercapitalized subsidiary bank. Under the BHCA, a
bank holding company must obtain FRB approval before: (i) acquiring, directly or
indirectly, ownership or control of any voting shares of another bank or bank
holding company if, after such acquisition, it would own or control more than 5%
of such shares (unless it already owns or controls the majority of such shares);
(ii) acquiring all or substantially all of the assets of another bank or bank
holding company; or (iii) merging or consolidating with another bank holding
company.
The Company is subject to the activity limitations imposed on bank
holding companies. The BHCA prohibits a bank holding company, with certain
exceptions, from acquiring direct or indirect ownership or control of more than
5% of the voting shares of any company which is not a bank or bank holding
company, or from engaging directly or indirectly in activities other than those
of banking, managing or controlling banks, or providing services for its
subsidiaries. The principal exceptions to these prohibitions involve certain
non-bank activities which, by statute or by FRB regulation or order, have been
identified as activities closely related to the business of banking or managing
or controlling banks. The list of activities permitted by the FRB includes,
among other things, operating a savings institution, mortgage company, finance
company, credit card company or factoring company; performing certain data
processing operations; providing certain investment and financial advice;
underwriting and acting as an insurance agent for certain types of
credit-related insurance; leasing property on a full-payout, non-operating
basis; selling money orders, travelers' checks and United States Savings Bonds;
real estate and personal property appraising; providing tax planning and
preparation services; and, subject to certain limitations, providing securities
brokerage services for customers. The scope of permissible activities may be
expanded from time to time by the FRB. Such activities may also be affected by
federal legislation.
The Company is also a bank holding company under the Illinois BHCA, and
subject to regulation and examination by the Illinois Commissioner.
8
DEPOSITORY INSTITUTION REGULATION. Manufacturers Bank is subject to
regulation by the Illinois Commissioner and the FDIC. The federal regulatory
structure includes: (i) real estate lending standards, which provide guidelines
concerning loan-to-value ratios for various types of real estate loans; (ii)
risk-based capital rules including accounting for interest rate risk,
concentration of credit risk and the risks posed by "non-traditional"
activities; (iii) rules requiring depository institutions to develop and
implement internal procedures to evaluate and control credit and settlement
exposure to their correspondent banks; (iv) rules prohibiting, with certain
exceptions, equity investments of types and in amounts not permissible for
national banks; and (v) rules addressing various "safety and soundness" issues,
including operations and managerial standards, standards for asset quality,
earnings and stock valuations, and compensation standards.
The Company and its subsidiaries are affiliates within the meaning of
the Federal Reserve Act (FRA) so that its insured depository institution
subsidiaries are subject to certain restrictions on transactions with their
affiliates or involving securities issued by an affiliate, such as any
extensions of credit to the Company and its other subsidiaries, investments in
the stock or other securities of the Company and its other subsidiaries and the
acceptance of the stock or other securities of the Company or its other
subsidiaries as collateral for loans. Certain limitations and reporting
requirements will be placed on extensions of credit by Manufacturers Bank to
principal stockholders of the Company and its other subsidiaries, to directors
and certain executive officers of the Company and its other subsidiaries, and to
"related interests" of such principal stockholders, directors and officers.
Under the Federal Deposit Insurance Act (FDIA), an insured depository
institution which is commonly controlled with another insured depository
institution shall generally be liable for any loss incurred, or reasonably
anticipated to be incurred, by the FDIC in connection with the default (i.e.,
the appointment of a conservator or receiver) of such commonly controlled
institution, or for any assistance provided by the FDIC to such commonly
controlled institution, which is in danger of default. Thus, one of the
Company's depository institution subsidiaries could incur liability to the FDIC
in the event of a loss suffered by the FDIC in connection with another
depository institution subsidiary.
Under the FDIC's risk-based insurance assessment system, each insured
bank or thrift is placed in one of nine risk categories based on its level of
capital and other relevant information. Each insured bank's insurance assessment
rate is then determined by the risk category in which it has been classified by
the FDIC. There is currently a 27 basis point spread between the highest and
lowest assessment rates, so that institutions classified as strongest by the
FDIC are subject in 1999 to 0% assessment, and those classified as weakest by
the FDIC are subject to an assessment rate of 0.27%. In 1999, each insured bank
was subject to an additional assessment of approximately 1.00 basis point, and
each insured thrift an additional assessment of approximately 6.00 basis points.
These additional assessments were used to fund debt service or obligations
issued in connection with the resolution of the thrift crisis in the 1980's. In
the year 2000, each commercial bank and thrift will be subject to an additional
assessment of approximately 2.12 basis points.
INTERSTATE BANKING AND BRANCHING. The FRB may approve an application of
an adequately capitalized and adequately managed bank holding company to acquire
control of, or acquire all or substantially all of the assets of, a bank located
in a state other than such holding company's home state, without regard to
whether the transaction is prohibited by the laws of any state. The FRB may not
approve the acquisition of a bank that has not been in existence for the minimum
time period (not exceeding five years) specified by the statutory law of the
host state and may not approve an application if the applicant (and its
depository institution affiliates) controls or would control more than 10% of
the insured deposits in the United States or 30% or more of the deposits in the
target bank's home state or in any state in which the target bank maintains a
branch. Individual states may also waive the 30% statewide concentration limit.
Each state may limit the percentage of total insured deposits in the state which
may be held or controlled by a bank or bank holding company to the extent such
limitation does not discriminate against out-of-state banks or bank holding
companies.
The federal banking agencies are authorized to approve interstate
merger transactions without regard to whether such transactions are prohibited
by the law of any state, unless the home state of one of the banks opted out of
interstate mergers prior to June 1, 1997. Interstate acquisitions of branches
are permitted only if the law of the state in which the branch is located
permits such acquisitions. Interstate mergers and branch acquisitions are
subject to the nationwide and statewide insured deposit concentration amounts
described above.
9
The FDIC may approve interstate branching de novo by state banks only
in states which specifically allow for such branching. Illinois banks are
permitted to branch into other states. Interstate branching authority may not be
used primarily for the purpose of deposit production.
DIVIDENDS. The FRB's policy is that a bank holding company should pay
cash dividends only to the extent that its net income for the past year is
sufficient to cover both the cash dividends and a rate of earning retention that
is consistent with the holding company's capital needs, asset quality and
overall financial condition and that it is inappropriate for a company
experiencing serious financial problems to borrow funds to pay dividends.
Furthermore, under the prompt corrective action regulations adopted by the FRB,
the FRB may prohibit a bank holding company from paying any dividends if the
holding company's bank subsidiary is classified as "undercapitalized."
Bank holding companies are required to give the FRB prior written
notice of any purchase or redemption of its outstanding equity securities if the
gross consideration for the purchase or redemption, when combined with the net
consideration paid for all such purchases or redemptions during the preceding 12
months, is equal to 10% or more of their consolidated net worth. The FRB may
disapprove such a purchase or redemption if it determines that the proposal
would constitute an unsafe or unsound practice or would violate any law,
regulation, FRB order, or any condition imposed by, or written agreement with,
the FRB. This notification requirement does not apply to any company that meets
the well-capitalized standard for commercial banks, is well managed and is not
subject to any unresolved supervisory issues.
Manufacturers Bank is permitted, under the Illinois Banking Act, to
declare and pay dividends in amounts up to the amount of its accumulated net
profits, provided that it shall retain in its surplus at least one-tenth of its
net profits since the date of the declaration of its most recent previous
dividend until said additions to surplus, in the aggregate, equal at least the
paid-in-capital of such bank. In no event may such bank, while it continues its
banking business, pay dividends in excess of its net profits then on hand (after
deductions for losses and bad debts).
CAPITAL REQUIREMENTS. The FRB has established capital requirements for
bank holding companies that generally parallel the capital requirements for
banks and thrift institutions. The Company will be subject to capital
requirements on a consolidated basis and its depository institution subsidiaries
individually will be subject to applicable capital requirements.
The FRB expects bank holding companies to maintain Tier 1 capital
commensurate with the level and nature of risks to which they are exposed. The
minimum ratio of Tier 1 capital to total assets is 4% or 3% in the case of a
company (i) with a safety and soundness examination rating of "1" or (ii) that
has implemented the risk-based capital measure for market risk (applicable only
when the sum of trading assets and liabilities is 10% or more of total assets or
$1 billion or more). In addition, a bank holding company is expected to maintain
at least an 8% minimum ratio of total capital (at least half of which must be
Tier 1 capital) to risk-weighted assets.
The federal banking regulators must take prompt corrective action with
respect to FDIC-insured depository institutions that do not meet minimum capital
requirements. There are five capital tiers: "well capitalized," "adequately
capitalized," "undercapitalized," "significantly undercapitalized" and
"critically undercapitalized." Under FDIC and OTS regulations, an insured
institution is well capitalized if it maintains a leverage ratio (I.E., ratio of
Tier 1 capital to total assets) of at least 5%, a total risk-based capital ratio
(I.E., a ratio of total qualifying capital to risk-weighted assets) of at least
10% and a Tier 1 risk-based capital ratio (I.E., a ratio of Tier 1 capital to
risk-weighted assets) of at least 6% and is not subject to an agreement, order
or directive to maintain a specified capital level. An institution is generally
considered to be adequately capitalized if it is not well capitalized but has a
Leverage Ratio of 4% or greater (or a leverage ratio of 3% if it has a safety
and soundness examination rating of "1"), a total risk-based capital ratio of 8%
or greater and a Tier 1 risk-based capital ratio of 4% or greater. An
institution will be considered undercapitalized if it fails to meet any minimum
requirement to be adequately capitalized, significantly undercapitalized if it
is significantly below such requirement and critically undercapitalized if it
maintains a level of tangible equity capital equal to or less than 2% of total
assets. An institution may be reclassified in a lower capitalization category if
it receives a less than satisfactory examination rating by its examiners with
respect to its assets, management, earnings or liquidity that has not been
corrected, or it is determined that the institution is in an unsafe or unsound
condition or engaged in an unsafe or unsound practice. Tier 1 capital generally
includes common stockholders equity capital, certain noncumulative perpetual
preferred stock and minority interests in consolidated subsidiaries, minus
certain intangible assets. Total qualifying capital includes certain elements in
addition to Tier 1 capital.
10
Undercapitalized depository institutions are subject to various
restrictions and are required to submit or implement a capital restoration plan.
If a depository institution fails to submit an acceptable plan, it is treated as
if it is significantly undercapitalized. Under capitalization (under certain
circumstances) and critical under capitalization are grounds for the appointment
of the FDIC as receiver or conservator of a depository institution.
COMMUNITY INVESTMENT AND CONSUMER PROTECTION LAWS. In connection with
lending activities, Manufacturers Bank is subject to a variety of federal laws
designed to protect borrowers and promote lending to various sectors of the
economy and population. Included among these are the Federal Home Mortgage
Disclosure Act, the Real Estate Settlement Procedures Act, the Truth-in-Lending
Act, the Equal Credit Opportunity Act (ECOA), the Fair Credit Reporting Act and
the CRA. Manufacturers Bank is also subject to similar Illinois laws applicable
to, among other things, usury, credit discrimination and general business
practices.
As an Illinois banking corporation controlled by a bank holding
company, Manufacturers Bank is not only subject to the rules regarding change of
control contained in the FRA and the FDIA and the regulations promulgated there
under by the FRB and the FDIC, but it is also subject to the rules regarding
change in control of Illinois banks contained in the Illinois Banking Act (IBA).
The Company is subject to these rules by virtue of control of Manufacturers
Bank. Generally, the IBA provides that no person or entity or group of
affiliated persons or entities may, without the Illinois Commissioner's consent,
directly or indirectly, acquire control of an Illinois bank. Such control is
presumed if any person owns or controls 20% or more of the outstanding stock of
an Illinois bank or such lesser amount as would enable the holder or holders, by
applying cumulative voting, to elect one director of the bank.
RECENT LEGISLATION. Effective November 12, 1999, the federal
Gramm-Leach-Bliley Act (the "GLB Act") became law. The GLB Act repeals certain
portions of the Glass-Steagall Act, a Depression-era statute aimed at reducing
risky activities previously undertaken by the nation's banks. The GLB Act is
intended, among other things, to facilitate affiliations among banks, securities
firms, insurance firms and other financial companies. To further this goal, the
GLB Act amended portions of the BHC Act to authorize bank holding companies,
such as the Company, through non-bank subsidiaries to engage in securities,
insurance and other activities that are financial in nature or incidental to a
financial activity. In order to undertake such activities, a bank holding
company must become a "financial holding company" by submitting to the Board a
declaration that the company elects to be a financial holding company and a
certification that all of the depository institutions controlled by the company
are well capitalized and well managed. The GLB Act also provides that a bank
holding company's election to become a financial holding company will not be
effective if the Board finds that, as of the date the company submits its
election to the Board, not all of the insured depository institutions controlled
by the company have achieved at least a "satisfactory" rating at the date of
their most recent CRA examination. The activities of bank holding companies that
are not financial holding companies will continue to be limited to activities
currently authorized under the BHC Act, such as activities that the Board has
previously determined in regulations and orders issued under the BHC Act to be
closely related to banking and permissible for bank holding companies.
In order to implement the provisions of the GLB Act, the Board by
adopting an interim rule effective as of March 11, 2000, amended its Regulation
Y by adding a new subpart that defines the term "financial holding company" and
establishes procedures by which a bank holding company may elect to become a
financial holding company. The interim rule also enumerates the criteria a bank
holding company must meet in order for the Board to determine that an election
is effective, and describing the period within which the Board will act on an
election, and sets forth the consequences if any depository institution
controlled by a financial holding company fails to maintain at least a
satisfactory CRA rating. For the time being, the Company has decided not to make
an election to convert to a financial holding company.
The GLB Act also prohibits a financial institution from disclosing
non-public information about a consumer to nonaffiliated third parties unless
the institution satisfies various disclosure and opt-out requirements and the
consumer has not elected to opt out of the disclosure. Under the GLB Act, a
financial institution must provide its customers with a notice of its privacy
policies and practices, and the Board, the FDIC and other financial regulatory
agencies are authorized to issue regulations to implement notice requirements
and restrictions on a financial institution's ability to disclose non-public
personal information about consumers to nonaffiliated third parties.
Accordingly, in February, 2000, these agencies proposed an extensive joint rule
to implement the foregoing provisions of the GLB Act. Although the formal
rulemaking process will not be completed until later in the year 2000, if the
final rule adopted remains substantially similar to the proposed rule, an
additional regulatory burden on the Company and the Bank will be imposed in
regard to notifying customers of the Bank's privacy policies and practices.
However, because the Company
11
and the Bank are not now engaged in selling or transferring non-public customer
information to nonaffiliated third parties, it is anticipated that adoption of
the final rule by the regulatory agencies will not result in material economic
cost to the Company or the Bank.
Another new piece of legislation with the potential to have an impact
on the Bank is the "Banking on Illinois Act" (the "Act"), which became effective
in mid-1999 and amended the IBA to provide a potential wide range of new
activities for the Bank. The stated purpose of this Act is to reduce the number
of bank headquarters lost to other states through interstate mergers by
promoting Illinois as a progressive place for banks to do business. Accordingly,
this Act directs the courts and regulators to liberally construe the provisions
of the IBA in order to create a favorable business climate for banks in
Illinois. The main features of this Act are to expand bank powers through a new
"wild card" provision authorizing Illinois chartered banks to offer virtually
any product or service that any bank or thrift may offer anywhere in the
country, subject to certain safety and soundness considerations. This Act also
gives Illinois chartered banks more options with respect to corporate
governance, and gives the banks new liability protections, especially with
respect to fees. Management of the Bank remains aware of the favorable
environment created by this Act and will consider the advantages that may become
available to the Bank as a result of such legislation.
ITEM 2. PROPERTIES
The Company conducts its business at its corporate office and 11 other
retail branch locations in its primary market area. All of the branches have
ATM's and the Company has 11 ATM's at other locations.
The following table sets forth information relating to each of the
Company's offices as of December 31, 1999. The total net book value of the
Company's premises and equipment (including land, building and leasehold
improvements and furniture, fixtures and equipment) at December 31, 1999 was
$15.3 million.
PRINCIPAL BUSINESS OFFICE:
1200 North Ashland Avenue, Chicago, Illinois
BRANCH OFFICES:
CENTRAL REGION
2965 North Milwaukee, Chicago, Illinois
20 North Clark Street, Chicago, Illinois (relocating to 2 South LaSalle
Street effective May, 2000)
2 South LaSalle Street, Chicago, Illinois (effective May, 2000)
NORTH REGION
7557 West Oakton Street, Niles, Illinois
6443 North Sheridan Road, Chicago, Illinois
6101 North Lincoln Avenue, Chicago, Illinois
3232 West Peterson Avenue, Chicago, Illinois
8300 West Belmont, Chicago, Illinois
SOUTH REGION
3030 East 92nd Street, Chicago, Illinois
901 East Sibley Boulevard, South Holland, Illinois
16255 South Harlem Avenue, Tinley Park, Illinois
17130 South Torrence Avenue, Lansing, Illinois
WEST REGION
2215 York Road, Suite 306, Oak Brook, Illinois (effective April, 2000)
Manufacturers owns the Principal Business Office at 1200 North Ashland
Avenue in Chicago, and six of its branch facilities. The other facilities are
leased for various terms. Manufacturers Bank also owns a residence within
walking distance of its facility on Peterson Avenue, which it leases to a third
party. The Company believes that all of its properties and equipment are well
maintained, in good operating condition and adequate for all present and
anticipated needs of the Company.
12
ITEM 3. LEGAL PROCEEDINGS
The Company, the Bank and its subsidiaries are involved from time to
time as plaintiff or defendant in various legal actions arising in the normal
course of their businesses. While the ultimate outcome of pending proceedings
cannot be predicted with certainty, it is the opinion of management, after
consultation with counsel representing the Company, the Bank or its subsidiaries
in the proceeding, that the resolution of these proceedings should not have a
material effect on the Company's consolidated financial position or results of
operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders, through the
solicitation of proxies or otherwise, during the quarter ended December 31,
1999.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock is traded on the Nasdaq National Market
under the symbol "MBFI". The approximate number of stockholders of record of
common stock as of December 31, 1999 was 1,400. Certain shares of the Company
are held in "nominee" or "street" name and accordingly, the number of beneficial
owners of such shares are not known or included in the foregoing number. Such
shares are not separated to count actual beneficial owners. As of December 31,
1999 there were 7,064,515 shares of common stock outstanding. The following
table presents quarterly market information for the Company's common stock for
the year ended 1999:
DIVIDENDS BOOK MARKET PRICE RANGE
--------------------------
PAID VALUE HIGH LOW
----------------------------------------------------------
1999
----
Quarter ended December 31, 1999 $ - $ 11.24 $ 13.50 $ 12.50
Quarter ended September 30, 1999 - 10.91 14.50 12.38
Quarter ended June 30, 1999 - 10.56 14.63 12.38
Quarter ended March 31, 1999 - 10.45 16.00 13.38
1998
----
Quarter ended December 31, 1998 $ - $ - $ 16.00 $ 8.38
Quarter ended September 30, 1998 - - 17.88 11.13
Quarter ended June 30, 1998 - - 18.19 15.75
Quarter ended March 31, 1998 - - 16.75 14.88
Prior to 1999, the figures are those of Avondale, and the market prices
reflected are that of Avondale under the symbol "AVND" for those periods.
13
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth certain consolidated financial and other
data of the Company at the dates and for the periods indicated. The information
is derived in part from and should be read in conjunction with the Company's
consolidated financial statements and notes thereto (dollars in thousands,
except common share data):
YEAR ENDED DECEMBER 31,
------------- -------------- ------------ ------------ ------------
1999 1998 1997 1996 1995
------------- -------------- ------------ ------------ ------------
STATEMENT OF INCOME DATA:
Interest income $ 82,291 $ 57,632 $ 51,686 $ 39,530 $ 36,572
Interest expense 41,767 29,826 25,172 18,180 16,836
------------------------------------------------------------------
Net interest income 40,524 27,806 26,514 21,350 19,736
Provision for loan losses 1,260 750 971 572 240
------------------------------------------------------------------
Net interest income after provision for loan 39,264 27,056 25,543 20,778 19,496
losses
Other income (1) 9,062 9,940 4,935 2,939 1,899
Other expense 33,560 27,037 24,195 16,868 17,010
------------------------------------------------------------------
Income before income taxes and minority interest 14,766 9,959 6,283 6,849 4,385
Applicable income taxes 4,812 3,605 2,402 2,576 1,504
------------------------------------------------------------------
Income before minority interest 9,954 6,354 3,881 4,273 2,881
Minority interest - (99) (432) (636) (444)
------------------------------------------------------------------
Net income 9,954 6,255 3,449 3,637 2,437
Preferred stock dividend - 1,085 276 - 267
------------------------------------------------------------------
Net income available to common stockholders $ 9,954 $ 5,170 $ 3,173 $ 3,637 $ 2,170
==================================================================
COMMON SHARE DATA:
Basic earnings per common share $ 1.51 $ 1.26 $ 0.76 $ 0.88 $ 0.52
Diluted earnings per common share 1.51 1.25 0.76 0.88 0.52
Book value per common share 11.24 11.46 10.20 9.41 8.69
Weighted average common shares outstanding (2) 6,586,596 4,093,254 4,151,036 4,143,938 4,187,525
Dividend payout ratio 0.00% 0.00% 0.00% 0.00% 0.00%
Cash dividends per common share - - - - -
(1) For the year ended December 31, 1998, other income includes a
$4.1 million gain on the sale of Coal City National Bank.
(2) Converted using an exchange ratio of 83.5 to 1 for the years
ended December 31, 1998, 1997, 1996, and 1995.
14
AT OR FOR THE YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------
1999 1998 1997 1996 1995
-------------------------------------------------------------------------
BALANCE SHEET DATA:
Cash and due from banks $ 29,420 $ 23,669 $ 36,302 $ 31,465 $ 27,013
Federal funds sold - 20,350 37,400 20,800 11,199
Investment securities 271,313 223,162 141,927 109,981 171,118
Loans, gross 903,126 548,353 527,321 388,302 339,326
Allowance for loan losses 12,197 6,344 7,922 4,692 4,134
Total assets 1,309,426 871,891 802,696 587,798 579,946
Deposits 936,075 645,661 684,060 509,717 513,470
Short-term and long-term borrowings 277,267 167,555 50,428 25,399 17,000
Stockholders' equity 79,378 46,860 52,526 39,126 36,626
PERFORMANCE RATIOS:
Return on average assets 0.84% 0.76% 0.54% 0.75% 0.55%
Return on average equity 13.79% 11.16% 7.08% 9.74% 6.49%
Net interest margin 3.75% 3.68% 4.12% 4.23% 4.22%
Loans to deposits 96.5% 84.9% 77.09% 76.18% 66.08%
ASSET QUALITY RATIOS:
Non-performing loans to total loans 1.18% 0.89% 1.87% 0.35% 0.34%
Non-performing assets to total assets 0.84% 0.61% 1.70% 0.23% 0.24%
Allowance for loan losses to total loans 1.35% 1.16% 1.50% 1.21% 1.22%
Non-performing loans to allowance for loan losses 87.73% 76.83% 124.73% 28.92% 27.75%
Net loan charge-offs to average loans 0.63% 0.36% 0.07% 0.00% 0.02%
CAPITAL RATIOS (1)
Tier 1 capital (to risk-weighted assets) 8.85% 7.38% 7.09% 8.00% 7.84%
Total capital (to risk-weighted assets) 10.01% 10.00% 10.00% 10.14% 10.02%
Tier 1 capital (to average assets) 7.47% 5.25% 5.15% 6.16% 5.19%
Average equity to average assets 6.06% 6.67% 6.72% 6.57% 7.12%
OTHER:
Banking facilities 12 8 11 6 5
Full-time equivalent employees 312 243 287 199 191
(1) Ratios presented are for the Company on a consolidated basis.
See "Management's Discussion and Analysis of Financial
Condition and Results of Operations of MB Financial, Inc. -
Capital Resources."
15
The following table sets forth selected quarterly financial data (in
thousands, except common share data):
THREE MONTHS ENDED 1999 THREE MONTHS ENDED 1998
------------------------------------------------------------------------------------------------
DECEMBER SEPTEMBER JUNE MARCH DECEMBER SEPTEMBER JUNE MARCH
------------------------------------------------------------------------------------------------
STATEMENT OF INCOME DATA:
Interest Income $ 22,646 $ 21,414 $ 21,401 $ 16,830 $ 14,767 $ 14,944 $ 14,031 $ 13,890
Interest expense 11,583 10,462 10,841 8,881 7,853 7,882 7,204 6,887
------------------------------------------------------------------------------------------------
Net interest income 11,063 10,952 10,560 7,949 6,914 7,062 6,827 7,003
Provision for loan losses 363 363 288 246 187 188 187 188
------------------------------------------------------------------------------------------------
Net interest income after
provision for loan los 10,700 10,589 10,272 7,703 6,727 6,874 6,640 6,815
Other income (1) 2,168 2,749 2,582 1,563 1,381 1,293 1,766 5,500
Other expense 8,596 9,109 8,792 7,063 7,442 6,389 6,366 6,840
------------------------------------------------------------------------------------------------
Income before income taxes
and minority interest 4,272 4,229 4,062 2,203 666 1,778 2,040 5,475
Applicable income taxes 1,390 1,352 1,311 759 210 695 815 1,885
------------------------------------------------------------------------------------------------
Income before minority interest 2,882 2,877 2,751 1,444 456 1,083 1,225 3,590
Minority interest - - - - (17) (27) (23) (32)
------------------------------------------------------------------------------------------------
Net income 2,882 2,877 2,751 1,444 439 1,056 1,202 3,558
Preferred stock dividend - - - - 218 433 - 434
------------------------------------------------------------------------------------------------
Net income available to
common stockholders $ 2,882 $ 2,877 $ 2,751 $ 1,444 $ 221 $ 623 $ 1,202 $ 3,124
================================================================================================
Common Share Data:
Basic earnings per common share $ 0.41 $ 0.41 $ 0.39 $ 0.28 $ 0.05 $ 0.15 $ 0.29 $ 0.76
Weighted average common shares
outstanding (2) 7,064,515 7,064,515 7,064,515 5,126,289 4,087,910 4,087,910 4,087,910 4,109,453
(1) For the three months ended March 31, 1998, other income
includes a $4.1 million gain on the sale of Coal City National
Bank.
(2) Converted at an exchange ratio of 83.5 to 1 for the three
months ended December, September, June and March 1998.
16
ITEM 7. 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
INFORMATION SET FORTH UNDER "GENERAL" IN ITEM 1 AND THE CONSOLIDATED FINANCIAL
STATEMENTS AND NOTES THERETO APPEARING ELSEWHERE IN THIS REPORT
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, and other operating income. Other expenses
include salaries and employee benefits along with occupancy and equipment
expenses, intangibles amortization and other operating expenses.
The amount of net interest income is affected by changes in the volume
and mix of earning assets, the level of interest rates earned on those assets,
the volume and mix of interest bearing liabilities, and the level of interest
rates paid on those interest bearing liabilities. The provision for loan losses
is dependent on changes in the loan portfolio and Management's assessment of the
collectibility of the loan portfolio, as well as economic and market conditions.
Other income and other expenses are impacted by growth of operations and growth
in the number of accounts through both acquisitions and core banking business
growth. Growth in operations affects other expenses as a result of additional
employees, branch facilities and promotional marketing expense. Growth in the
number of accounts affects other income including service fees as well as other
expenses such as computer services, supplies, postage, telephone and other
miscellaneous expenses.
17
NET INTEREST INCOME
The following table presents, for the periods indicated, the total
dollar amount of interest income from average interest earning assets and the
resultant yields, as well as the interest expense on average interest bearing
liabilities, and the resultant costs, expressed both in dollars and rates.
Non-taxable investment income is presented on a fully tax equivalent basis
assuming a 35% tax rate for the year ended December 31, 1999 and a 34% tax rate
for the years ended December 1998 and 1997 (dollars in thousands):
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------
1999 1998
------------------------------------- ----------------------------------
AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST RATE BALANCE INTEREST RATE
------------------------------------------------------------------------
INTEREST EARNING ASSETS:
Loans (1) (2) $ 781,718 $ 63,887 8.17% $ 534,141 $ 44,929 8.41%
Taxable investment securities 280,940 17,228 6.13 210,826 11,787 5.59
Investment securities exempt
from federal income taxes(3) 5,460 492 9.02 4,448 462 10.39
Federal funds sold 16,712 796 4.76 11,335 611 5.39
Other interest bearing deposits 1,167 60 5.14 - - -
------------- ------------ ----------- ------------
Total interest earning 1,085,997 82,463 7.59 760,750 57,789 7.60
assets
------------ ------------
Non-interest earning assets 104,687 79,753
------------- -----------
Total assets $ 1,190,684 $ 840,503
============= ===========
INTEREST BEARING LIABILITIES:
Deposits:
NOW and money market deposit
Accounts $ 171,749 4,714 2.74 $ 141,628 4,517 3.19
Savings deposit 147,597 3,718 2.52 84,092 2,077 2.47
Time deposits 440,982 22,627 5.13 286,718 15,725 5.48
Short-term borrowings 109,375 5,381 4.92 100,391 5,118 5.10
Long-term borrowings 92,270 5,327 5.77 29,923 2,389 7.98
------------- ------------ ----------- ------------
Total interest bearing 961,973 41,767 4.34 642,752 29,826 4.64
liabilities
------------ ------------
Demand deposits - non-interest
Bearing 136,662 127,013
Other non-interest bearing 19,842 13,451
liabilities
Minority interest in subsidiary - 1,236
Stockholders' equity 72,207 56,051
------------- -----------
Total liabilities and
stockholders Equity $ 1,190,684 $ 840,503
== ========== == ========
Net interest
income/interest rate
spread (4) $ 40,696 3.25 $ 27,963 2.96
============ ========== ============ =========
Net interest margin (5) 3.75% 3.68%
========== =========
-----------------------------------
1997
-----------------------------------
AVERAGE YIELD/
BALANCE INTEREST RATE
-----------------------------------
INTEREST EARNING ASSETS:
Loans (1) (2) 482,049 $ 41,313 8.57%
Taxable investment securities 138,037 8,527 6.18
Investment securities exempt
from federal income taxes 7,720 656 8.50
(3)
Federal funds sold 21,299 1,413 6.63
Other interest bearing deposits - - -
---------- --------
Total interest earning 649,105 51,909 8.00
assets
--------
Non-interest earning assets 75,979
----------
Total assets $ 725,084
INTEREST BEARING LIABILITIES:
Deposits:
NOW and money market deposit
Accounts $ 151,544 4,873 3.22
Savings deposit 86,445 2,187 2.53
Time deposits 265,477 14,557 5.48
Short-term borrowings 20,066 1,353 6.74
Long-term borrowings 23,632 2,202 9.32
---------- --------
Total interest bearing 547,164 25,172 4.60
liabilities
--------
Demand deposits - non-interest
Bearing 113,355
Other non-interest bearing 10,965
liabilities
Minority interest in subsidiary 4,890
Stockholders' equity 48,710
----------
Total liabilities and
stockholders Equity $ 725,084
==========
Net interest
income/interest rate
spread (4) $ 26,737 3.40
====================
Net interest margin (5) 4.12%
=======
(1) Non-accrual loans are included in average loans.
(2) Interest income includes loan origination fees of $1.0
million, $769 thousand, $501 thousand for the years ended
December 31, 1999, 1998 and 1997, respectively.
(3) Non-taxable investment income is presented on a fully tax
equivalent basis assuming a 35% tax rate for the year ended
December 31, 1999 and a 34% tax rate for the years ended 1998
and 1997.
(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.
18
For the year ended December 31, 1999, net interest income increased
$12.7 million to $40.5 million from $27.8 million for the year ended December
31, 1998. The increase in net interest income resulted from an increase in
interest income of $24.7 million, or 42.8%, partially offset by an increase in
interest expense of $11.9 million, or 40.0%. Approximately $9.8 million of the
increase related to loans acquired through the merger with Avondale (the
"merger") while approximately $2.9 million was from the Company's continued
growth in its commercial and lease banking businesses. Interest income increased
due to a $325.2 million, or 42.8%, increase in average interest earning assets,
while interest expense rose as a result of a $319.2 million, or 49.7%, increase
in average interest bearing liabilities. Approximately $295.0 million of the
increase in average interest earning assets and approximately $257.0 million of
the increase in average interest bearing liabilities was due to the merger. The
remaining increase in average interest earning assets and average interest
bearing liabilities was due to growth in the Company's commercial and lease
banking businesses. The net interest margin increased from 3.68% for the year
ended December 31, 1998 to 3.75% for the year ended December 31, 1999.
For the year ended December 31, 1998, net interest income increased
$1.3 million to $27.8 million from $26.5 million for the year ended December 31,
1997. The increase in net interest income resulted from an increase in interest
income of $5.9 million, or 11.5%, partially offset by an increase in interest
expense of $4.7 million, or 18.5%. Interest income increased due to a $111.6
million, or 17.2%, increase in average interest earning assets while interest
expense rose as a result of a $95.6 million, or 17.5%, increase in average
interest bearing liabilities. Much of the increase was due to the purchase of
U.S. Bancorp, Inc. in May 1997 with averages and related income included from
the purchase date forward offset by the effect of the sale of Coal City National
Bank. The remaining increase is due to growth in the Company's core banking
businesses. Although the net interest income increased in 1998, the net interest
margin decreased from 4.12% for the year ended December 31, 1997 to 3.68% for
the year ended December 31, 1998. This decrease was due to increased leverage in
the Company's balance sheet as a result of the purchase of certain additional
U.S. Treasury investments and the addition of certain repurchase agreements used
to fund those investments.
RATE VOLUME ANALYSIS OF NET INTEREST INCOME
The following table sets forth the extent to which changes in interest
rates and changes in volumes of interest earning assets and interest bearing
liabilities have historically affected the Company's interest income and
interest expense for the periods presented. Information is provided on changes
in each category attributable to (i) changes due to volume (changes in volume
multiplied by prior period rate); (ii) changes due to rate (changes in rate
multiplied by current period volume); and (iii) total changes (in thousands):
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------------------
1999 COMPARED TO 1998 1998 COMPARED TO 1997
--------------------------------------- ---------------------------------------
CHANGE CHANGE CHANGE CHANGE
DUE TO DUE TO TOTAL DUE TO DUE TO TOTAL
VOLUME RATE CHANGE VOLUME RATE CHANGE
------------- ------------ ------------ ------------- ------------- -----------
INTEREST EARNING ASSETS:
Loans $ 20,825 $ (1,867) $ 18,958 $ 4,464 $ (848) $ 3,616
Taxable investment securities 3,920 1,521 5,441 4,496 (1,236) 3,260
Investment securities exempt
from federal income taxes (1) 105 (75) 30 (278) 84 (194)
Federal funds sold 290 (105) 185 (661) (141) (802)
Other interest bearing deposits 60 - 60 - - -
------------------------------------- ----------------------------------------
Total increase (decrease) in
interest income 25,200 (526) 24,674 8,021 (2,141) 5,880
------------------------------------- ----------------------------------------
INTEREST BEARING LIABILITIES:
NOW and money market deposit
accounts 961 (764) 197 (319) (37) (356)
Savings deposits 1,569 72 1,641 (60) (50) (110)
Time deposits 8,461 (1,559) 6,902 1,165 3 1,168
Short-term borrowings 458 (195) 263 5,416 (1,651) 3,765
Long-term borrowings 4,978 (2,040) 2,938 586 (399) 187
-------------------------------------- ---------------------------------------
Total increase (decrease) in
interest expense 16,427 (4,486) 11,941 6,788 (2,134) 4,654
======================================= =====================================
Increase (decrease) in net
interest income $ 8,773 $ 3,960 $ 12,733 $ 1,233 $ (7) $ 1,226
======================================= =====================================
(1) Non-taxable investment income is presented on a fully tax
equivalent basis assuming a 35% tax rate for the year ended
December 31, 1999 and a 34% rate for the years ended December
31, 1998 and 1997.
19
OTHER INCOME
For the year ended December 31, 1999, other income decreased $878
thousand to $9.1 million from $9.9 million for the year ended December 31, 1998.
1998 included a $4.1 gain resulting from the sale of Coal City National Bank and
a $200 thousand gain on the sale of a trust business in the first quarter of
1998. Without these special items in 1998, other income would have been $5.6
million. Loan service fees increased $3.2 million for the year ended December
31, 1999 due to the acquisition of loan servicing activities acquired through
the merger. Other operating income increased $793 thousand due to a $631
thousand increase in brokerage fees and a $278 thousand increase in automated
teller machine fees resulting from the expansion of brokerage servicing fee
activities and additional branch facilities acquired through the merger.
Offsetting these increases were a $694 thousand decrease in net lease financing
due to a $336 thousand write down in the residual value of specific lease
equipment as well as some gains for equipment sold at the end of the lease terms
during 1998.
For the year ended December 31, 1998, other income increased $5.0
million to $9.9 million from $4.9 million for the year ended December 31, 1997.
The increase was due to a $4.1 million gain resulting from the sale of Coal City
National Bank, a $200 thousand gain on the sale of a trust business, a $463
thousand increase in service fees, primarily due to higher fees charged, and a
$246 thousand increase in lease financing business resulting from some gains for
equipment sold at the end of the lease terms.
OTHER EXPENSE
For the year ended December 31, 1999 other expense increased $6.5
million to $33.6 million from $27.0 million for the year ended December 31,
1998. The increase was primarily due to operating costs associated with the five
additional branches and personnel acquired through the merger. Salaries and
employee benefits increased $4.3 million, occupancy and equipment expenses
increased $1.7 million and other operating expenses increased $1.4 million for
the year ended December 31, 1999 compared to the year ended December 31, 1998.
The increase in other operating expenses included a $362 thousand increase in
computer services due to improvements made to the Company's computer systems, a
$312 thousand increase in loan collection expenses, a $177 thousand increase in
advertising and marketing, $125 thousand increase in automated teller machine
(ATM) expense, the result of distributing new ATM's in the Company's network,
$167 thousand increase in FDIC premiums as well as $157 thousand increase in
stationery, printing and supplies expense. In addition, intangible amortization
expense decreased $782 thousand for the year ended December 31,1999 compared to
the year ended December 31, 1998. The decrease in intangible amortization
represents a decrease in goodwill amortization of $137 thousand and a decrease
in core deposit intangible amortization of $645 thousand. The Company utilizes
an accelerated amortization method which amortizes more of the purchase premium
related to acquisitions in early years than in later years.
For the year ended December 31, 1998, other expense increased $2.8
million to $27.0 million from $24.2 million for the year ended December 31,
1997. This increase was due to eight months of additional expenses due to the
purchase of U.S. Bancorp in May 1997.
INCOME TAXES
For the year ended December 31, 1999, the Company recorded income tax
expense of $4.8 million compared to $3.6 million for the same period for 1998.
Income before taxes and minority interest for the year ended December 31, 1999
increased $4.8 million compared to the same period for 1998. The effective tax
rate decreased to 32.6% for the year ended December 31, 1999 from 36.2% for the
year ended December 31, 1998 as the Company continued to review and manage its
income tax expense.
For the year ended December 31, 1998, the Company recorded income tax
expense of $3.6 million compared to $2.4 million for the year ended December 31,
1997. Income before taxes and minority interest for the year ended December 31,
1998 increased $3.7 million compared to the same period for 1997. The effective
tax rate decreased to 36.2% for the year ended December 31, 1998 from 38.2% for
the year ended December 31, 1997 as the Company continued to review and manage
its income tax expense.
20
INVESTMENT SECURITIES
The primary purpose of the investment portfolio is to provide a source
of earnings for liquidity management purposes, and to control interest rate
risk. In managing the portfolio, the Company seeks to obtain the objectives of
safety of principal, liquidity, diversification and maximized return on funds.
See "Asset Liability Management" and "Liquidity and Sources of Capital."
The following table sets forth the amortized cost and fair value of the
Company's securities by accounting classification category and by type of
security as indicated (in thousands):
AT DECEMBER 31, 1999 AT DECEMBER 31, 1998 AT DECEMBER 31, 1997
------------------------------- ------------------------------- -----------------------------
AMORTIZED FAIR AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE COST VALUE
--------------- --------------- --------------- --------------- --------------- -------------
Securities Available for Sale:
U.S. Treasury securities $ - $ - $ 128,630 $ 128,748 $ 119,160 $ 119,380
U.S. Government agencies 99,891 97,691 80,089 80,411 9,971 10,116
States and political
subdivisions 5,164 5,366 - - - -
Mortgage-backed securities 120,114 118,948 2,779 2,861 7,022 7,189
Corporate bonds 43,092 40,564 - - - -
Other securities 962 958 - - - -
Investment in equity
lines of
Credit trusts 7,786 7,786 - - - -
------------- ------------ ------------- ------------- ------------- ------------
Total securities
available for sale $ 277,009 $ 271,313 $ 211,498 $ 212,020 $ 136,153 $ 136,685
============= ============= ============= ============= ============= ============
Securities Held to Maturity:
States and political
subdivisions $ - $ - $ 5,524 $ 5,912 $ 4,423 $ 4,860
Mortgage-backed securities - - 4,651 4,648 - -
Other securities - - 967 969 819 819
--------------- --------------- --------------- --------------- --------------- -------------
Total securities
held to maturity $ - $ - $ 11,142 $ 11,529 $ 5,242 $ 5,679
============= ============= ============= ============= ============= ============
U.S. Treasury securities and securities of U.S. Government agencies
generally consist of fixed rate securities with maturities of three months to
three years. State and political subdivision investment securities consist of
investment grade and local non-rated issues with maturities of less than six
years. The average term of mortgage-backed securities generally ranges between
five and ten years; however, certain mortgage-backed securities acquired through
the merger include maturities greater than ten years. Corporate bonds were
acquired through the merger and included some maturities ranging from five years
through ten years and after ten years. In addition, at December 31, 1999
securities held to maturity with a fair value of $9.9 million were transferred
to securities available for sale.
There were no securities of any single issuer, other than U.S.
Government agencies and mortgage backed securities, which had a book value in
excess of 10.0% of the Company's stockholders' equity at December 31, 1999.
21
The following table sets forth certain information regarding
contractual maturities and the weighted average yields of the Company's
portfolio at December 31, 1999 (dollars in thousands):
DUE AFTER ONE DUE AFTER FIVE
DUE IN ONE YEAR THROUGH YEARS THROUGH
YEAR OR LESS FIVE YEARS TEN YEARS
----------------------- ------------------------ ------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
BALANCE YIELD BALANCE YIELD BALANCE YIELD
---------- ------------ ------------ ----------- ------------ -----------
SECURITIES AVAILABLE FOR SALE
U.S. Government agencies $ 14,825 4.84% $ 61,132 5.51% $ 20,749 6.04%
States and political 733 6.18% 4,210 10.46% 167 7.58%
subdivision (1)
Mortgage-backed
securities (2) 1,809 5.13% 346 6.98% 6,483 6.21%
Corporate bonds - - 4,894 7.13% 2,760 13.37%
Other securities 65 6.48% 369 6.94% 524 4.78%
Investments in equity
lines of
credit trusts - - 7,786 11.20% - -
----------- - ---------- ------------
Total $ 17,432 $ 78,737 $ 30,683
=========== =========== ===========
DUE AFTER
TEN YEARS
-------------------------
WEIGHTED
AVERAGE
BALANCE YIELD
------------- -----------
SECURITIES AVAILABLE FOR SALE
U.S. Government agencies $ 985 7.00%
States and political 256 5.32%
subdivision (1)
Mortgage-backed
securities (2) 110,310 6.48%
Corporate bonds 32,910 8.06%
Other securities - -
Investments in equity
lines of
credit trusts - -
---------
Total $ 144,461
===========
(1) Yield is reflected on a fully tax equivalent basis utilizing a
35% tax rate.
(2) These securities are presented based upon contractual
maturities.
22
LOAN PORTFOLIO
The following table sets forth the composition of the loan portfolio
(dollars in thousands):
AT DECEMBER 31,
--------------------------------------------------------------------------------------------
1999 1998 1997 1996
--------------------------------------------------------------------------------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
--------------------------------------------------------------------------------------------
Originated by
Manufacturers Bank:
Commercial $ 154,833 17.14% $ 122,094 22.27% $ 112,010 21.24% $ 94,066 24.22%
Commercial loans
collateralized by
lease payments 186,895 20.70% 89,301 16.28% 85,658 16.25% 113,960 29.35%
Commercial real 247,668 27.42% 226,455 41.30% 162,487 30.81% 91,251 23.50%
estate
Residential real 77,127 8.54% 54,741 9.98% 94,587 17.94% 67,541 17.39%
estate
Construction real 58,447 6.47% 21,059 3.84% 37,079 7.03% 7,057 1.82%
estate
Installment and other 39,605 4.39% 34,703 6.33% 35,500 6.73% 14,427 3.72%
Total loans originated by
---------------------------------------------------------------------------------------------
Manufacturers Bank 764,575 84.66% 548,353 100.00% 527,321 100.00% 388,302 100.00%
---------------------------------------------------------------------------------------------
Acquired from
Avondale Federal
Savings Bank:
Commercial real 1,439 0.16% - - - - - -
estate
Residential real 66,504 7.37% - - - - - -
estate
Credit scored
mortgage
Loans 59,716 6.61% - - - - - -
Installment and other 10,892 1.20% - - - - - -
---------------------------------------------------------------------------------------------
Total loans acquired
from Avondale
Federal Savings Bank 138,551 15.34% - - - - - -
---------------------------------------------------------------------------------------------
Gross loans 903,126 100.00% 548,353 100.00% 527,321 100.00% 388,302 100.00%
========= ========= ========= =========
Allowance for loan losses (12,197) (6,344) (7,922) (4,692)
----------- ------------- ------------ -------------
Net loans $ 890,929 $ 542,009 $ 519,399 $ 383,610
=========== ============ ============= =============
-------------------------
1995
-------------------------
AMOUNT PERCENT
-------------------------
Originated by
Manufacturers Bank:
Commercial $ 70,255 20.71%
Commercial loans
collateralized by
lease payments 108,223 31.89%
Commercial real 101,355 29.87%
estate
Residential real 46,655 13.75%
estate
Construction real 6,890 2.03%
estate
Installment and other 5,948 1.75%
Total loans originated by
-------------------------
Manufacturers Bank 339,326 100.00%
-------------------------
Acquired from
Avondale Federal
Savings Bank:
Commercial real - -
estate
Residential real - -
estate
Credit scored
mortgage
Loans - -
Installment and other - -
-------------------------
Total loans acquired
from Avondale
Federal Savings Bank - -
-------------------------
Gross loans 339,326 100.00%
= =========
Allowance for loan losses (4,134)
-------------
Net loans $ 335,192
=============
At December 31, 1999 net loans of $890.9 million included $764.6
million in core business loans originated by Manufacturers Bank and $138.5
million in loans acquired from Avondale. Commercial loans originated by
Manufacturers Bank have grown 120.4% from $70.3 million at December 31, 1995 to
$154.8 million at December 31, 1999. This increase was primarily due to internal
loan growth as well as the acquisition of U.S. Bancorp. Real estate and
construction real estate loans originated by Manufacturers Bank increased 147.4%
from $154.9 million at December 31, 1995 to $383.2 million at December 31, 1999
primarily due attributable to the acquisition of U.S. Bancorp which had total
real estate and construction real estate loans of $116.4 million at the
acquisition date. In addition, commercial loans collateralized by lease payments
increased 72.7% from 108.2 million at December 31, 1995 compared to $186.9
million at December 31, 1999 due entirely to continued growth of the lease
banking business.
LOAN MATURITIES
The following table sets forth the maturities of commercial and
construction real estate loans outstanding at December 31, 1999. Also set forth
are amounts of such loans classified according to sensitivity to changes in
interest rate (in thousands):
DUE IN ONE YEAR DUE AFTER ONE YEAR DUE AFTER
OR LESS THROUGH FIVE YEARS FIVE YEARS
---------------------------------------------------------------------------------
FLOATING FLOATING FLOATING
FIXED RATE FIXED RATE FIXED RATE TOTAL
---------------------------------------------------------------------------------------------
Commercial loans, commercial
loans
Collateralized by
lease payments and
construction real estate
loans $ 94,232 $ 186,989 $ 113,994 $ - $ 4,960 $ - $ 400,175
23
ASSET QUALITY
The following table sets forth the amounts of non-performing loans and
non-performing assets at the dates indicated (dollars in thousands):
AT DECEMBER 31,
-----------------------------------------------------------------------
1999 1998 1997 1996 1995
-----------------------------------------------------------------------
Non-accruing loans:
Originated by Manufacturers Bank $ 3,670 $ 4,789 $ 9,879 $ 454 $ 173
Acquired from Avondale Federal Savings Bank 7,031 - - - -
---------------------------------------------------------------------
Total non-accruing loans 10,701 4,789 9,879 454 173
---------------------------------------------------------------------
Loans 90 days or more past due, still accruing interest:
Originated by Manufacturers Bank - 85 2 903 974
Acquired from Avondale Federal Savings Bank - - - - -
---------------------------------------------------------------------
Total loans 90 days or more past due, still accruing - 85 2 903 974
interes
---------------------------------------------------------------------
Total non-performing loans 10,701 4,874 9,881 1,357 1,147
---------------------------------------------------------------------
Other real estate owned:
Originated by Manufacturers Bank 159 442 3,726 - 216
Acquired from Avondale Federal Savings Bank 194 - - - -
---------------------------------------------------------------------
Total other real estate owned 353 442 3,726 - 216
---------------------------------------------------------------------
Total non-performing assets $ 11,054 $ 5,316 $ 13,607 $ 1,357 $ 1,363
=====================================================================
Total non-performing loans to total loans 1.18% 0.89% 1.87% 0.35% 0.34%
Allowance for loan losses to non-performing loans 113.98% 130.16% 80.17% 345.76% 360.42%
Total non-performing assets to total assets 0.84% 0.61% 1.70% 0.23% 0.24%
NON-PERFORMING LOANS. Non-performing loans include (i) loans accounted
for on a non-accrual basis, (ii) accruing loans contractually past due 90 days
or more as to interest and principal; and (iii) loans whose terms have been
renegotiated to provide reduction or deferral of interest or principal because
of a deterioration in the financial position of the borrower. Management reviews
the loan portfolio for problem loans on an ongoing basis. During the ordinary
course of business, Management becomes aware of borrowers that may not be able
to meet the contractual requirements of loan agreements. Such loans are placed
under close supervision with consideration given to placing the loan on a
non-accrual status, increasing the allowance for loan losses, and (if
appropriate) partial or full charge-off. Those loans with respect to which
Management does not expect to collect interest in the normal course of business
are placed on a non-accrual status. After a loan is placed on non-accrual
status, any current year interest previously accrued but not yet collected is
reversed against current income. If interest payments are received on
non-accrual loans, such payments will be applied to principal and not taken into
income. Loans will not be placed back on accrual status unless all back interest
and principal payments are made. If interest on non-accrual loans had been
accrued, such income would have amounted to $876 thousand and $490 thousand for
the years ended December 31, 1999 and 1998, respectively.
Non-performing assets also consist of OREO, which represents properties
acquired through foreclosure or other proceedings and is recorded at the lower
of cost or fair value less the estimated cost of disposal. OREO is evaluated
regularly to ensure that the recorded amount is supported by its current fair
value. Valuation allowances to reduce the carrying amount to fair value less
estimated costs of disposal are recorded as necessary. Revenues and expenses
from the operations of OREO and changes in the valuation are included in other
income and other expenses on the income statement.
24
At December 31, 1999, non-performing assets increased $5.7 million to
$11.1 million from $5.3 million at December 31, 1998 due to a $5.9 million
increase in non-performing loans. Non-performing loans increased due to a $7.0
million increase in non-accruing loans acquired from Avondale offset by a $1.1
million decrease in non-accruing loans originated by Manufacturers Bank at
December 31, 1999 compared to December 31, 1998. Non-accruing loans originated
by Manufacturers Bank decreased, as certain non-accruing loans were deemed
uncollectible and charged-off. At December 31, 1999, other real estate owned
decreased to $353 thousand from $442 thousand at December 31, 1998. Other real
estate owned originated by Manufacturers Bank decreased $283 thousand due to
Management's on-going efforts to sell these properties. Other real estate owned
acquired from Avondale was $194 thousand.
ALLOWANCE FOR LOAN LOSSES. The allowance for loan losses is an amount
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. This evaluation also takes into consideration such factors as
changes in the nature and volume of the loan portfolio, overall portfolio
quality, review of specific problem loans, and current economic conditions that
may affect the borrower's ability to pay. While management uses the best
information available to make its evaluation, future adjustments to the
allowance may be necessary if there are significant changes in economic
conditions. In addition, regulatory agencies, as an integral part of their
examination process, periodically review the Company's allowance for loan
losses, and may require the Company to make additions to the allowance based on
their judgment about information available to them at the time of their
examinations.
25
The following table presents an analysis of the allowance for loan
losses for the periods presented (dollars in thousands):
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------
1999 1998 1997 1996 1995
----------------------------------------------------------------------
Balance at beginning of period $ 6,344 $ 7,922 $ 4,692 $ 4,134 $ 2,646
Decreases resulting from sale of subsidiary - (399) - - -
Additions resulting from acquisitions - - 2,574 - 1,317
Additions resulting from merger 9,489 - - - -
Provision for loan losses 1,260 750 971 572 240
Charge-offs:
Originated by Manufacturers Bank:
Commercial 126 846 178 - 70
Commercial loans collateralized by
lease payments 377 - - - -
Commercial real estate 139 - - - -
Residential real estate 259 1,224 97 - -
Construction real estate 972 - - - -
Installment and other 25 20 68 29 4
----------------------------------------------------------------------
Total charge-offs originated by Manufacturers Bank 1,898 2,090 343 29 74
----------------------------------------------------------------------
Acquired from Avondale Federal Savings Bank:
Commercial real estate 4 - - - -
Residential real estate - - - - -
Credit scored mortgage loans 3,039 - - - -
Installment and other 557 - - - -
----------------------------------------------------------------------
Total charge-offs acquired from Avondal
Federal Savings Bank 3,600 - - - -
----------------------------------------------------------------------
Total charge-offs 5,498 2,090 343 29 74
----------------------------------------------------------------------
Recoveries:
Originated by Manufacturers Bank:
Commercial - 35 - 15 5
Commercial loans collateralized by
lease payments - - - - -
Commercial real estate 33 - - - -
Residential real estate 5 89 - - -
Construction real estate - - 10 - -
Installment and other 7 37 18 - -
----------------------------------------------------------------------
Total recoveries originated by Manufacturers Bank 45 161 28 15 5
----------------------------------------------------------------------
Acquired from Avondale Federal Savings Bank:
Residential real estate 2 - - - -
Credit scored mortgage loans 549 - - - -
Installment and other 6 - - - -
----------------------------------------------------------------------
Total recoveries acquired from Avondale
Federal Savings Bank 557 - - - -
----------------------------------------------------------------------
Total recoveries 602 161 28 15 5
----------------------------------------------------------------------
Net charge-offs 4,896 1,929 315 14 69
----------------------------------------------------------------------
Balance at December 31, $ 12,197 $ 6,344 $ 7,922 $ 4,692 $ 4,134
=======================================================================
Total loans at December 31, $ 903,126 $ 548,353 $ 527,321 $ 388,302 $ 339,326
Ratio of allowance to total loans 1.35% 1.16% 1.50% 1.21% 1.22%
26
For the year ended December 31, 1999 and 1998, there were net
charge-offs of $4.9 million and $1.9 million, respectively. For the year ended
December 31, 1999, net charge-offs on loans originated by Manufacturers Bank
decreased $237 thousand compared to the same period for 1998. Net charge-offs on
loans acquired from Avondale were $3.0 million for the year ended December 31,
1999. At the merger date, Avondale's allowance for loan losses was $9.5 million.
Management reviewed Avondale's calculation, based on credit scoring models and
other criteria, and concluded that the allowance for loan losses related to
loans acquired through the merger was adequate. To date, losses associated with
the loan portfolio acquired from Avondale are consistent with losses indicated
by the credit scoring models and other criteria at the merger date.
The following table sets forth the allocation of the allowance for loan
losses for the periods presented and the percentage of loans in each category to
total loans. An allocation for a loan classification is only for internal
analysis of the adequacy of the allowance and is not an indication of expected
or anticipated losses. The allowance is available for all loan losses.
AT DECEMBER 31,
----------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
------ ------- ------- ------- ------ ------- ------ ------- ------ -------
(DOLLARS IN THOUSANDS)
Commercial $1,141 17.14% $1,018 22.27% $1,430 21.24% $1,030 24.22% $ 537 20.71%
Commercial loans collateralized by
assignment of lease 746 20.69 281 16.28 215 16.25 285 29.35 271 31.89
payments
Real estate 6,806 54.35 1,968 51.28 2,695 48.75 554 40.89 193 43.62
Real estate construction 395 6.47 -- 3.84 -- 7.03 -- 1.82 -- 2.03
Installment 503 1.35 278 6.33 73 6.73 55 3.72 38 1.75
Unallocated 2,606 2,799 3,509 -- 2,768 -- 3,095 --
------- ------- ------ ------ ------ ------ ------ ------ ------ -----
Total $12,197 100.00% $6,344 100.00% $7,922 100.00% $4,692 100.00% $4,134 100.00%
======= ======= ====== ====== ====== ====== ====== ====== ====== ======
The Company maintains its allowance for loan losses at a level that
management believes will be adequate to absorb estimated losses on existing
loans, based on an evaluation of the collectibility of loans and prior loss
experience. Control of the Company's loan quality is continually monitored by
Management and is reviewed by the Board of Directors and loan committee of the
Bank on a monthly basis, subject to oversight by the Company's Board of
Directors through its members who serve on the loan committee. Independent
external review of the loan portfolio is conducted by regulatory authorities and
by independent public accountants in conjunction with their annual audit. In
addition, the Company utilizes an independent third party loan review. The
amount of additions to the allowance for loan losses which are charged to
earnings through the provision for loan losses is determined based on a variety
of factors, including actual charge-offs and anticipated charge-offs, delinquent
loans, historical loss experience and economic conditions in the Bank's market
area. Although Management believes the allowance for loan losses is sufficient
to cover potential losses, there can be no assurance that the allowance will
prove sufficient to cover actual loan losses in the future.
27
CORE DEPOSIT INTANGIBLES AND GOODWILL
In acquiring its subsidiary banks, the Company recorded a portion of
the purchase price as core deposit intangibles, which represented value assigned
to the existing deposit base for which the annual interest and servicing costs
are below market rates. In addition, the excess cost over fair value of net
assets acquired is recorded as goodwill.
The following table sets forth for each acquisition the core deposit
intangible and goodwill amortization expense for the last five years and the
expected expense for 2000 to 2004 (in thousands):
PLANNED AMORTIZATION
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------
2004 2003 2002 2001 2000
-------------------------------------------------------------
Manufacturers National Corporation (1992) $ 70 $ 70 $ 70 $ 70 $ 70
Peterson Bank (1995) 313 368 531 730 770
U.S. Bancorp, Inc. (1997) 605 711 724 827 1,042
Avondale Financial Corp. (1999) 55 55 55 55 55
-------------------------------------------------------------
Total intangible amortization expense $ 1,043 $ 1,204 $ 1,380 $ 1,682 $ 1,937
=============================================================
ACTUAL AMORTIZATION
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------
1999 1998 1997 1996 1995
-------------------------------------------------------------
Coal City National Bank (1984) $ - $ - $ 9 $ 9 $ 9
Manufacturers National Corporation (1992) 124 267 382 497 562
Peterson Bank (1995) 1,259 1,026 1,196 1,515 1,596
U.S. Bancorp, Inc. (1997) 1,089 1,961 1,734 - -
Avondale Financial Corp. (1999) - - - - -
-------------------------------------------------------------
Total intangible amortization expense $ 2,472 $ 3,254 $ 3,321 $ 2,021 $ 2,167
=============================================================
28
INTEREST ONLY SECURITIES
In 1996, 1997 and 1998, Avondale securitized and sold certain home
equity lines of credit to investors with limited recourse, retaining the
servicing rights to the underlying loans. Avondale receives annual servicing
fees and rights to future cash flows (interest only securities) arising after
the investors in the securitization trusts received the return for which they
contracted. In addition, Avondale retained a participation interest in the
investor 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 merger the Company acquired servicing rights related to these loans,
the retained participation interest in the investor trusts and the interest only
securities. The annual servicing fees received by the Company approximate 0.75%
of the outstanding loan balance and approximate the Company's cost to service
the loans. 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 investor 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 December 31, 1999, interest only securities acquired were $13.8
million. The value of these interest only securities is subject to substantial
credit, prepayment, and interest rate risk on the transferred financial assets.
On a quarterly basis, the Company performs a review to determine the fair value
of its interest only securities, as these securities are accounted for as
securities available for sale. As part of the review, the Company reviews its
assumptions of prepayment speeds, discount rates and the remaining anticipated
credit losses.
The following table shows the results of the Company's assumptions used
to estimate the fair value at December 31, 1999 (dollars in thousands):
INTEREST ONLY SECURITY POOLS
-------------------------------------------------------------------------
96-1 97-1 97-2 98-1
-------------------------------------------------------------------------
Adjustable (1) Adjustable (1) Adjustable (1) Adjustable (1)
-------------------------------------------------------------------------
Estimated fair value $ 2,636 $ 2,578 $ 4,059 $ 4,548
Prepayment speed 35.00% 37.00% 35.00% 32.00%
Weighted-average life (in years) (2) 2.03 1.98 2.12 2.47
Expected credit losses (3) 5.08% 6.08% 6.30% 7.26%
Residual cash flows discounted at 12.00% 12.00% 12.00% 12.00%
Loans outstanding at December 31, 1999 $ 23,068 $ 28,272 $ 39,631 $ 68,451
(1) Rates for these loans are adjusted based on the prime rate as
published in the Wall Street Journal.
(2) The weighted-average life in years of prepayable assets is
calculated by summing (a) the principal collections expected
in each future year multiplied by (b) the number of years
until collection, and then dividing that sum by the 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 December 31, 1999 are $1.2 million, $1.7
million, $2.5 million and $5.0 million for 96-1, 97-1, 97-2
and 98-1, respectively. The estimated credit loss percentage
is derived by dividing the remaining credit losses by the
related loan balance outstanding in the pool.
29
The following presents the sensitivity of current fair values of
residual cash flows to immediate 10% and 20% adverse and favorable changes in
assumptions used in measuring the Company's retained interest in the investor
trusts (dollars in thousands):
INTEREST ONLY SECURITY POOLS
-----------------------------------------------------------------------------
96-1 97-1 97-2 98-1 TOTAL
-----------------------------------------------------------------------------
Estimated fair value $ 2,636 $ 2,578 $ 4,059 $ 4,548 $ 13,821
Prepayment speed assumption (annual rate) 35.00% 37.00% 35.00% 32.00% -
Impact on fair value of 10% adverse change $ (123) $ (166) $ (272) $ (581) $ (1,142)
Impact on fair value of 20% adverse change (237) (319) (524) (1,112) (2,192)
Impact on fair value of 10% favorable change 132 180 295 636 1,243
Impact on fair value of 20% favorable change 274 375 613 1,332 2,594
Expected credit losses (annual rate) 5.08% 6.08% 6.30% 7.26% -
Impact on fair value of 10% adverse change $ (81) $ (116) $ (202) $ (394) $ (793)
Impact on fair value of 20% adverse change (161) (232) (404) (788) (1,585)
Impact on fair value of 10% favorable change 81 116 203 394 794
Impact on fair value of 20% favorable change 162 232 407 788 1,589
Residual cash flows discount rate (annual) 12.00% 12.00% 12.00% 12.00% -
Impact on fair value of 10% adverse change $ (134) $ (141) $ (194) $ (149) $ (618)
Impact on fair value of 20% adverse change (262) (275) (378) (289) (1,204)
Impact on fair value of 10% favorable change 142 150 206 158 656
Impact on fair value of 20% favorable change 292 308 423 326 1,349
These sensitivities are hypothetical and should be used with caution.
As the figures indicate, any change in fair value based on a 10% or 20%
variation in assumptions cannot be extrapolated because the relationship of the
change in assumption to the change in fair value is not linear. Also, in this
table, the effect of a variation in a particular assumption on the fair value of
the retained interest is calculated independent from any change in another
assumption; in reality, changes in one factor may result in changes in another,
which might magnify or counteract the sensitivities. Specifically, increased or
accelerated credit losses may increase prepayment speeds.
30
SOURCES OF FUNDS
GENERAL. Deposits, short-term and long-term borrowings, loan and
investment security repayments and prepayments, proceeds from the sale of
securities, and cash flows generated from operations are the primary sources of
the Company's funds for lending, investing, leasing and other general purposes.
Loan repayments are a relatively predictable source of funds except during
periods of significant interest rate declines, while deposit flows tend to
fluctuate with prevailing interests rates, money markets conditions, general
economic conditions and competition.
DEPOSITS. The Company offers a variety of deposit accounts with a range
of interest rates and terms. Manufacturers Bank's core deposits consist of
regular (passbook) savings accounts, statement savings accounts, checking
accounts, NOW accounts, money market accounts and non-public certificates of
deposit. These deposits, along with public fund deposits and short-term and
long-term borrowings are used to support the Company's asset base. The Company's
deposits are obtained predominantly from the geographic trade areas surrounding
each of the Company's office locations. The Company relies primarily on customer
service and long-standing relationships with customers to attract and retain
deposits; however, market interest rates and rates offered by competing
financial institutions significantly affect the Company's ability to attract and
retain deposits.
The Company also has deposits of $32.8 million from a single public
entity located in Illinois. These deposits have been with the Company for more
than 14 years and while the Company does not consider these deposits to be core
deposits, it does believe that they are stable. Management of the Company is
careful to consider the impact of the possible withdrawal of these deposits on
the Company's liquidity and overall funding needs.
The following table sets forth the maturities of certificates of
deposits and other time deposits at December 31,1999 and December 31, 1998 (in
thousands):
AT AT
DECEMBER 31, 1999 DECEMBER 31, 1998
------------------------------------------
Maturing within three months $ 246,334 $ 152,279
After three but within six months 111,866 67,455
After six but within twelve months 78,039 43,556
After twelve months 37,639 29,012
-------------- --------------
$ 473,878 $ 292,302
============== ==============
BORROWINGS. The Company has access to a variety of borrowing sources
and uses short-term and long-term borrowings to support its asset base.
Short-term borrowings include federal funds purchased, securities sold under
agreements to repurchase, U.S. Treasury demand notes, Federal Home Loan advances
and correspondent bank lines of credit. From time to time, the company enters
into short-term low-risk arbitrage transactions pursuant to which it purchases
U.S. Treasury securities as well as mortgage backed securities, and a few days
later permanently funds the purchase by entering into a reverse repurchase
agreement with a securities dealer. These transactions have the effect of
inflating short-term borrowings. The Company also offers a deposit account that
sweeps balances in excess of an agreed upon target amount into overnight
repurchase agreements. As business customers have grown more sophisticated in
managing their daily cash position, demand for the sweep product has increased.
Short-term borrowings increased from $130.5 million at December 31, 1998, to
$244.6 million at December 31, 1999. This increase included $125.0 million of
Federal Home Loan Bank advances, of which $100.0 million were acquired through
the merger, $56.0 million of Federal funds purchased and a $5.0 million
correspondent bank line of credit. Offsetting these increases was a $69.3
million decrease in U.S. Treasury securities sold under agreements to
repurchase.
31
The following table sets forth certain information regarding the
short-term borrowings of the Company for the periods indicated (dollars in
thousands):
AT DECEMBER 31,
------------------------------------------------------------
1999 1998 1997 1996
-------------------------------------------------------------
Federal funds purchased:
Average balance outstanding $ 5,968 $ 2,286 $ 5,650 $ 4,280
Maximum outstanding at any month-end during the period 56,000 13,400 1,600 20,200
Balance outstanding at end of period 56,000 - - -
Weighted average interest rate during the period 5.78% 5.77% 8.81% 8.32%
Weighted average interest rate at end of the period 5.79% - - -
Securities sold under agreements to repurchase:
Average balance outstanding $ 68,270 $ 91,180 $ 11,929 $ 3,680
Maximum outstanding at any month-end during the period 131,244 179,023 53,681 14,477
Balance outstanding at end of period 55,681 127,288 12,385 2,194
Weighted average interest rate during the period 4.57% 5.09% 6.15% 5.68%
Weighted average interest rate at end of the period 5.31% 4.64% 4.90% 4.32%
U.S. Treasury demand notes:
Average balance outstanding $ 2,272 $ 3,056 $ 2,487 $ 2,052
Maximum outstanding at any month-end during the period 6,103 6,150 6,863 7,167
Balance outstanding at end of period 2,888 3,233 5,628 7,167
Weighted average interest rate during the period 4.58% 5.04% 4.87% 5.07%
Weighted average interest rate at end of the period 4.55% 4.77% 5.33% 4.78%
Federal Home Loan Bank advances:
Average balance outstanding $ 31,123 $ - $ - $ -
Maximum outstanding at any month-end during the period 125,000 - - -
Balance outstanding at end of period 125,000 - - -
Weighted average interest rate during the period 5.54 - - -
Weighted average interest rate at end of the period 5.82 - - -
Correspondent bank lines of credit:
Average balance outstanding 1,742 - - -
Maximum outstanding at any month-end during the period 5,000 - - -
Balance outstanding at end of period 5,000 - - -
Weighted average interest rate during the period 6.47% - - -
Weighted average interest rate at end of the period 7.43% - - -
Other short-term borrowings:
Average balance outstanding $ - $ 3,869 $ - $ -
Maximum outstanding at any month-end during the period - 5,937 - -
Balance outstanding at end of period - - - -
Weighted average interest rate during the period - 4.99% - -
Weighted average interest rate at end of the period - - - -
Total short-term borrowings
Average balance outstanding $ 109,375 $ 100,391 $ 20,066 $ 10,012
Maximum outstanding at any month-end during the period 323,347 204,510 62,144 41,844
Balance outstanding at end of period 244,569 130,521 18,013 9,361
Weighted average interest rate during the period 4.87% 5.10% 6.74% 6.68%
Weighted average interest rate at end of the period 5.70% 4.65% 4.95% 4.54%
Long-term borrowings include notes payable to other banks to support a
portfolio of equipment that the Company owns and leases to other companies as
well as general debt incurred to fund recent corporate acquisitions. Long-term
borrowings decreased to $32.7 million at December 31, 1999 from $37.0 million at
December 31, 1998. This decrease was due to converting correspondent bank debt,
arising from a line of credit, from long-term to short-term classification in
1999 compared to 1998. Offsetting this decrease was an $803 thousand increase in
Federal Home Loan Bank advances acquired through the merger.
32
LIQUIDITY
BANK LIQUIDITY. Manufacturers Bank's primary sources of funds are
retail and commercial deposits, short-term and long-term borrowings, and funds
generated from operations. Funds from operations include principal and interest
payments received on loans and securities and proceeds from the sale of
securities and loans. While maturities and scheduled amortization of loans and
securities provide an indication of the timing of the receipt of funds, changes
in interest rates, economic conditions and competition strongly influence
mortgage prepayment rates and deposit flows, reducing the predictability of the
timing on sources of funds.
Manufacturers Bank has no required regulatory liquidity ratios to
maintain; however, it adheres to a Liquidity Policy, approved by its Board of
Directors, which sets certain guidelines for liquidity purposes. This policy
requires that Manufacturers Bank maintain the following liquidity ratios:
1. Liquidity ratio (defined as cash, short-term investments,
marketable securities and investment grade scheduled lease loan
payments due in one year or less divided by deposits plus
short-term liabilities) greater than 20%.
2. Loans to deposit ratio minus public funds ratio less than 100%.
3. Loans minus investment grade leases to deposits minus public funds
less than 95%.
At December 31, 1999, Manufacturers Bank was in substantial compliance
with the foregoing policy. Generally, when Manufacturers Bank's loan to deposit
ratios become higher than policy guidelines, Manufacturers Bank sells Lease
Loans to reduce the volume of total loans and to provide a source of funds. In
1999, Manufacturers Bank sold approximately $8.0 million of Lease Loans to
remain in compliance with the Liquidity Policy. 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.
At December 31, 1999, Manufacturers Bank had outstanding origination
loan commitments and unused commercial and retail lines of credit of $243.0
million. Manufacturers Bank anticipates that it will have sufficient funds
available to meet its current origination and other lending commitments.
Certificates of deposit that are scheduled to mature within one year totaled
$436.2 million at December 31, 1999. Manufacturers Bank expects a substantial
majority of these certificates of deposit to remain with Manufacturers Bank.
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 purchases.
While there are no firm lending commitments in place, Manufacturers Bank has
borrowed, and Management believes that Manufacturers Bank could again borrow,
more than $75.0 million for a short time from these banks on a collective basis.
Additionally, Manufacturers Bank is a member of the Federal Home Loan Bank
(FHLB) and has the ability to borrow from the FHLB.
CORPORATION LIQUIDITY. The Company's main sources of liquidity at the
holding company level are dividends from Manufacturers Bank passed on to the
Company through Manufacturers National Corporation and a line of credit
maintained with a large regional correspondent bank in the amount of $15.0
million. As of December 31, 1999, the Company had $10.0 million undrawn and
available under its line of credit.
Manufacturers Bank is subject to various regulatory capital
requirements administered by federal and state banking agencies, which affect
Manufacturers Bank's ability to pay dividends to MB Financial Inc. Failure to
meet minimum capital requirements can initiate certain mandatory and
discretionary actions by regulators that, if undertaken, could have a direct
material effect on the Company's financial statements. Additionally, Bank policy
requires that dividends cannot be declared in an amount that would cause
Manufacturers Bank's capital to fall below the minimum amount required for
Manufacturers Bank to be considered "well capitalized" for regulatory purposes.
At December 31, 1999, Manufacturers Bank could pay $24.5 million of dividends
and comply with such minimum regulatory capital requirements.
33
CAPITAL RESOURCES
Manufacturers Bank is subject to the risk based capital regulations
administered by the banking regulatory agencies. The risk based capital
guidelines are designed to make regulatory capital requirements more sensitive
to differences in risk profiles among banks to account for off-balance sheet
exposure and to minimize disincentives for holding liquid assets. Under the
regulations, assets and off-balance sheet items are assigned to broad risk
categories, each with appropriate weights. The resulting capital ratios
represent capital as a percentage of total risk weighted assets and off-balance
sheet items. Under the prompt corrective action regulations, to be adequately
capitalized a bank must maintain minimum ratios of total capital to
risk-weighted assets of 8.00%, Tier 1 capital to risk-weighted assets of 4.00%,
and Tier 1 capital to total assets of 4.00%. Failure to meet these capital
requirements can initiate certain mandatory, and possibly additional
discretionary actions by regulators, that, if undertaken, could have a direct
material effect on Manufacturers Bank's financial statements. As of December 31,
1999, the most recent notification from the federal banking regulators
categorized Manufacturers Bank as well capitalized. A well capitalized
institution must maintain a minimum ratio of total capital to risk-weighted
assets of at least 10.00%, a minimum ratio of Tier 1 capital to risk weighted
assets of at least 6.00%, a minimum ratio of Tier 1 capital to total assets of
at least 5.00% and must not be subject to any written order, agreement or
directive requiring it to meet or maintain a specific capital level. There are
no conditions or events since that notification that Management believes have
changed Manufacturers Bank's capital classification. The Company, on a
consolidated basis, must maintain a minimum ratio of Tier 1 capital to total
assets of 4.00%, and a minimum ratio of total capital to risk-weighted assets of
8.00%.
The Company and Manufacturers Bank were in full compliance with all
capital adequacy requirements to which they are subject as of December 31, 1999.
The required and actual amounts and ratios for the Company and Manufacturers
Bank as of December 31, 1999 are presented below (dollars in thousands):
TO BE WELL
CAPITALIZED UNDER
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
------------------------------------------------------------------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------------------------------------------------------------------------------
As of December 31, 1999
Total capital (to risk-weighted assets):
MB Financial, Inc. $ 105,291 10.01% $ 84,134 8.00% N/A N/A
Manufacturers Bank 108,506 10.34% 83,978 8.00% $ 104,972 10.00%
Tier 1 capital (to risk-weighted assets):
MB Financial, Inc. 93,094 8.85% 42,067 4.00% N/A N/A
Manufacturers Bank 96,309 9.17% 41,989 4.00% 62,983 6.00%
Tier 1 capital (to average assets):
MB Financial, Inc. 93,094 7.47% 49,841 4.00% N/A N/A
Manufacturers Bank 96,309 7.74% 49,797 4.00% 62,246 5.00%
As of December 31, 1998
Total capital (to risk-weighted assets):
MB Financial, Inc. 61,382 10.00% 49,084 8.00% N/A N/A
Manufacturers Bank 62,917 10.26% 49,078 8.00% 61,347 10.00%
Tier 1 capital (to risk-weighted assets):
MB Financial, Inc. 45,293 7.38% 24,547 4.00% N/A N/A
Manufacturers Bank 56,574 9.22% 24,539 4.00% 36,808 6.00%
Tier 1 capital (to average assets):
MB Financial, Inc. 45,293 5.25% 34,509 4.00% N/A N/A
Manufacturers Bank 56,574 6.57% 34,454 4.00% 43,068 5.00%
34
CASH EARNINGS
The purchase method of accounting has been used to record each of the
Company's acquisitions. As a result, the recorded basis of the net assets of the
acquired entities has been adjusted to fair value. Adjustments included
recording core deposit intangibles to reflect the difference between the fair
value and underlying basis of deposits purchased and recording goodwill for the
excess of the acquisition cost over the fair value of net assets acquired. Core
deposit intangibles and goodwill are being amortized as a non-cash expense over
periods of up to eight and 20 years, respectively. Amortization expense reduces
net income during the amortization periods.
If the Company's acquisitions had met certain accounting rules, the
pooling of interest method of accounting may have been used to account for the
Company's acquisitions. Under this method of accounting, no goodwill or core
deposit intangibles would have been recorded. Consequently, net income is not
reduced for the amortization of core deposit intangibles or goodwill. Since
application of the two methods can result in dramatically different net income,
management, certain analysts and certain peer financial institutions have been
computing cash earnings in order to compare results. At present, cash earnings
is 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 except earnings per share data):
YEAR ENDED DECEMBER 31,
---------------------------------------------------
1999 1998 1997
---------------------------------------------------
Net Income $ 9,954 $ 6,255 $ 3,449
Goodwill amortization 815 952 801
Core deposit intangibles amortization (net of tax) 1,077 1,519 1,663
--------------------------------------------------
Cash earnings 11,846 8,726 5,913
Preferred dividends - (1,085) (276)
--------------------------------------------------
Cash earnings to common stockholders $ 11,846 $ 7,641 $ 5,637
==================================================
Average tangible assets $ 1,175,002 $ 822,294 $ 671,111
Average tangible equity $ 57,939 $ 37,842 $ 22,477
Cash earnings per share: (1) (3)
Basic $ 1.80 $ 1.87 $ 1.36
Diluted $ 1.80 $ 1.86 $ 1.36
Performance ratios: (2) (3)
Cash return on average tangible assets 1.01% 0.93% 0.84%
Cash return on average tangible equity 20.45% 20.19% 25.08%
(1) Basic earnings per share is calculated by dividing the cash
earnings by the average number of common shares outstanding
for the period. Diluted earnings per share is calculated by
dividing the cash earnings by the average number of common
shares outstanding for the period, including additional shares
that would have been outstanding if dilutive potential shares
had been issued.
(2) The ratios for the year ended December 31, 1998 include the
$4.1 million pre-tax gain on sale of Coal City National Bank.
Basic and diluted cash earnings per share, excluding the gain
on sale of Coal City National Bank, would have been $1.21.
(3) Cash return on average tangible assets and equity, excluding
the gain on sale of Coal City National Bank, would have been
0.61% and 13.06%, respectively.
35
STATEMENT OF CASH FLOWS
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
$22.8 million, $12.7 million and $13.2 million for the years ended December 31,
1999, 1998 and 1997, respectively. Net cash provided by (used in) investing
activities was $31.6 million, ($144.1) million and ($37.9) million for the years
ended December 31, 1999, 1998 and 1997. The increase in net cash provided by
investing activities for the year ended December 31, 1999 compared to the same
period for 1998 was attributable to net proceeds from federal funds sold as well
as decreases in loans, net of principal collections, purchase of securities
available for sale, purchases of premises and equipment and lease equipment and
cash acquired through the merger. Net cash (used in) provided by financing
activities was ($48.6) million for the year ended December 31, 1999 and $118.8
million for the same period for 1998 and $29.6 million for the year ended
December 31, 1997. The decrease in net cash used in financing activities for the
year ended December 31, 1999 compared to the same period for 1998 was
attributable to principal paid on long-term borrowings and a net decrease in
interest bearing deposits. The increase in cash provided by financing activities
for the year ended December 31, 1998 compared to the same period in 1997 was
attributable to an increase in short term borrowings.
YEAR 2000 COMPLIANCE
A significant issue has emerged in the banking industry and for the
economy overall regarding how existing computer systems recognize the Year 2000.
Many existing computer programs and systems were originally programmed with nine
digit dates that provided only two digits to identify the calendar year in the
date field, without considering the upcoming change in the century. If computer
systems are not adequately changed to identify the Year 2000, many computer
applications could fail or create erroneous results. As a result, many
calculations that rely on the date field information, such as interest payment
due dates and other operating functions, may generate results that could be
significantly misstated, and the Company could experience a temporary inability
to process transactions, send invoices or engage in similar normal business
activities. In addition, under certain circumstances, failure to adequately
address the Year 2000 issue could adversely affect the creditworthiness of the
Bank's borrowers. Thus, if not adequately addressed, the Year 2000 issue could
result in a significant adverse impact on the products, services and competitive
condition of the Company and the Bank.
On March 20, 1998, the Examination Parity and Year 2000 Readiness for
Financial Institutions Act, P.L. 105-164, became law. In that statute, Congress
emphasized the seriousness with which financial services industry and its
regulators must view the Year 2000 issue by requiring the regulators to conduct
seminars for, and otherwise provide information and model approaches concerning
common problems to, the nation's financial institutions concerning this problem.
The regulators, acting through the FFIEC, have been compiling and disseminating
such information through industry-wide pronouncements which emphasize that
safety and soundness examinations would focus, among other things, on the
institutions' awareness and preparations with respect to the Year 2000 issue.
Failure to appropriately address the Year 2000 issue may result in supervisory
actions, denials of regulatory applications and civil money penalties.
We have tested our products and believe that they are year 2000
compliant. We have also inquired of significant vendors of our internal systems
as to their year 2000 readiness, and we have also tested our material internal
systems. We believe that, based on these tests and assurances of our vendors, we
will not incur material costs to resolve year 2000 issues for our products and
internal systems. Furthermore, to date we have not experienced any year 2000
problems and our customers or vendors have not informed us of any material year
2000 problems. If it comes to our attention that there are any year 2000
problems with our products or that some of our third-party hardware and software
used in our internal systems are not year 2000 compliant, then we will endeavor
to make modifications to our products and internal systems, or purchase new
internal systems, to quickly respond to the problem. The costs already incurred
by us to date related to year 2000 compliance are not material, and we do not
anticipate incurring additional material costs related to year 2000 compliance.
36
FORWARD LOOKING STATEMENTS
Statements made about the Company's future economic performance,
strategic plans or objectives, revenues or earnings projections, or other
financial items and similar statements are not guarantees of future performance,
but are forward looking statements. By their nature, these statements are
subject to numerous uncertainties that could cause actual results to differ
materially from those in the statements. Important factors that might cause the
Company's actual results to differ materially include, but are not limited to,
the following:
- Federal and state legislative and regulatory developments;
- Changes in management's estimate of the adequacy of the
allowance for loan losses;
- Changes in management's valuation of the interest only
securities;
- Changes in the level and direction of loan delinquencies and
write-offs;
- Interest rate movements and their impact on customer behavior
and the
Company's net interest margin;
- The impact of repricing and competitors' pricing initiatives
on loan and deposit products;
- The Company's ability to adapt successfully to technological
changes to meet customers' needs and developments in the
market place;
- The Company's ability to access cost effective funding; and o
Changes in financial markets and general economic conditions.
37
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ASSET LIABILITY MANAGEMENT
The Company's net interest income is subject to "interest rate risk" to
the extent that it can vary based on changes in the general level of interest
rates. It is the Company's policy to maintain an acceptable level of interest
rate risk over a range of possible changes in interest rates while remaining
responsive to market demand for loan and deposit products. The strategy employed
by the Company to manage its interest rate risk is to measure its risk using an
asset/liability simulation model and adjust the maturity of securities in its
investment portfolio to manage that risk. Also, to limit risk, the Company
generally does not make fixed rate loans or accept fixed rate deposits with
terms of more than five years.
Interest rate risk can also be measured by analyzing the extent to
which the repricing of assets and liabilities are mismatched to create an
interest sensitivity "gap." An asset or liability is said to be interest rate
sensitive within a specific time period if it will mature or reprice within that
time period. The interest rate sensitivity gap is defined as the difference
between the amount of interest earning assets maturing or repricing within a
specific time period and the amount of interest bearing liabilities maturing or
repricing within that same time period. A gap is considered positive when the
amount of interest rate sensitive assets exceeds the amount of interest rate
sensitive liabilities. A gap is considered negative when the amount of interest
rate sensitive liabilities exceeds the amount of interest rate sensitive assets.
During a period of rising interest rates, therefore, a negative gap would tend
to adversely affect net interest income. Conversely, during a period of falling
interest rates, a negative gap position would tend to result in an increase in
net interest income.
38
The following table sets forth the amounts of interest earning assets
and interest bearing liabilities outstanding at December 31, 1999, which are
anticipated by the Company, based upon certain assumptions, to reprice or mature
in each of the future time periods shown. Except as stated below, the amount of
assets and liabilities shown which reprice or mature during a particular period
were determined based on the earlier of the term to repricing or the term to
repayment of the asset or liability. The table is intended to provide an
approximation of the projected repricing of assets and liabilities at December
31, 1999 on the basis of contractual maturities and scheduled rate adjustments
within a three-month period and subsequent selected time intervals. The loan
amounts in the table reflect principal balances expected to be reinvested and/or
repriced as a result of contractual amortization and rate adjustments on
adjustable-rate loans. Loan and investment security prepayments are not
considered significant; therefore, contractual maturities or repricing are not
adjusted for possible prepayments. While NOW, money market and savings deposit
accounts have adjustable rates, it is assumed that the interest rates on these
accounts will not adjust immediately to changes in other interest rates.
Therefore, the table is calculated assuming that these accounts will reprice as
follows: 25% in the first three months, 25% in the next nine months, and 50%
after one year (dollars in thousands):
TIME TO MATURITY OR REPRICING
-----------------------------------------------------------------------------------------
0 - 90 91 - 365 1 - 5 OVER 5
DAYS DAYS YEARS YEARS TOTAL
----------------------------------------------------------------------------------------
INTEREST EARNING ASSETS:
Net loans (1) $ 411,029 $ 102,726 $ 301,241 $ 77,430 $ 892,426
Investment securities - 17,432 78,635 175,246 271,313
---------------------------------------------------------------------------------------
Total interest earning assets $ 411,029 $ 120,158 $ 379,876 $ 252,676 $ 1,163,739
=======================================================================================
INTEREST BEARING LIABILITIES:
NOW and money market deposit accounts $ 41,754 $ 41,754 $ 83,504 $ - 167,012
Savings deposits 37,531 37,531 75,064 - 150,126
Time deposits 246,334 189,905 37,639 - 473,878
Short-term borrowings 244,569 - - - 244,569
Long-term borrowings - 4,431 3,267 25,000 32,698
---------------------------------------------------------------------------------------
Total interest bearing
liabilities $ 570,188 $ 273,621 $ 199,474 $ 25,000 $ 1,068,283
=======================================================================================
Rate sensitive assets (RSA) $ 411,029 $ 531,187 $ 911,063 $ 1,163,739 $ 1,163,739
Rate sensitive liabilities (RSL) 570,188 843,809 1,043,283 1,068,283 1,068,283
Cumulative GAP (159,159) (312,622) (132,220) 95,456 95,456
(GAP=RSA-RSL)
RSA/Total assets 31.39% 40.57% 69.58% 88.87% 88.87%
RSL/Total assets 43.54% 64.44% 79.67% 81.58% 81.58%
GAP/Total assets (12.15%) (23.87%) (10.10%) 7.29% 7.29%
GAP/RSA (38.72%) (58.85%) (14.51%) 8.20% 8.20%
(1) Less non-accrual loans totaling $10.7 million.
Certain shortcomings are inherent in the method of analysis
presented in the foregoing table. For example, although certain assets
and liabilities may have similar maturities or periods to repricing,
they may react in different degrees to changes in market interest
rates. Also, the interest rates on certain types of assets and
liabilities may fluctuate in advance of changes in market interest
rates, while interest rates on other types of assets may lag behind
changes in market rates. Additionally, in the event of a change in
interest rates, prepayment and early withdrawal levels would likely
deviate significantly from those assumed in calculating the table.
Therefore, the Company does not rely solely on a gap analysis to manage
its interest rate risk, but rather it uses what it believes to be the
more reliable simulation model relating to changes in net interest
income presented earlier.
39
Based on simulation modeling as of December 31, 1999, the Company's net
interest income would change over a one-year time period due to changes in
interest rates as follows (dollars in thousands):
CHANGE IN
NET INTEREST INCOME
OVER ONE-YEAR HORIZON
CHANGES IN AS OF DECEMBER 31, 1999
-----------------------
LEVEL OF DOLLAR PERCENTAGE
------- ----------
INTEREST RATES CHANGE CHANGE
-------------- ------- --------
+2.00% $ (2,190) (4.57)
+1.00 (1,131) (2.36)
(1.00) 1,047 2.18
(2.00) 2,131 4.44
Simulations used by the Company assume the following:
1. Changes in interest rates are immediate.
2. With the exception of NOW, money market and savings accounts, all
interest rates change by the same amount at the same time.
3. NOW, money market and savings accounts rates change by 0.25% for every
1.00% change in interest rates and by 0.50% for every 2.00% change in
interest rates. Management believes, and experience has shown, that
these deposit accounts take longer to change rates when economic
conditions change and do not change rates as much as other general
interest rates, such as prime or federal funds. It is Manufacturers
Bank's policy that interest rate exposure due to a 2.00% interest rate
rise or fall be limited to 7.50% of Manufacturers Bank's annual net
interest income as forecasted by the simulation model. As demonstrated
by the table above, Manufacturers Bank's interest rate risk exposure
was within this policy at December 31, 1999.
40
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
MB FINANCIAL, INC.
1999 CONSOLIDATED FINANCIAL STATEMENTS
41
MB FINANCIAL, INC. AND SUBSIDIARIES
1999 FINANCIAL STATEMENTS
INDEX
INDEPENDENT AUDITOR'S REPORT ................................................... 43
STATEMENT OF MANAGEMENT RESPONSIBILITY ......................................... 44
FINANCIAL STATEMENTS
Consolidated balance sheets ................................................. 45
Consolidated statements of income ........................................... 46
Consolidated statements of changes in stockholders' equity .................. 47
Consolidated statements of cash flows ....................................... 48
Notes to consolidated financial statements .................................. 51
42
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders
MB Financial, Inc. and Subsidiaries
Chicago, Illinois
We have audited the accompanying consolidated balance sheets of MB Financial,
Inc. and Subsidiaries, as of December 31, 1999 and 1998, and the related
consolidated statements of income, changes in stockholders' equity, and cash
flows for each of the years in the three year period ended December 31, 1999.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of MB Financial, Inc.
and Subsidiaries, as of December 31, 1999 and 1998, and the results of their
operations and their cash flows for each of the years in the three year period
ended December 31, 1999 in conformity with generally accepted accounting
principles.
Mokena, Illinois
March 20, 2000
43
MB FINANCIAL
[GRAPHIC OMITTED]
STATEMENT OF MANAGEMENT RESPONSIBILITY
MB Financial, Inc.'s management is responsible for the preparation,
integrity and fair presentation of its published financial statements. The
consolidated financial statements have been prepared in accordance with
generally accepted accounting principles and, as such, include amounts based on
judgments and estimates made by management. Management also prepared other
information included in the annual report and is responsible for its accuracy
and consistency with the consolidated financial statements.
The consolidate financial statements have been audited by an
independent accounting firm, McGladrey & Pullen, LLP, which has been given
unrestricted access to all financial records and related data, including minutes
of all meetings of shareholders, the Board of Directors and committees of the
Board. Management believes that representations made to the independent auditors
during their audit were valid and appropriate.
Management maintains a system of internal controls over the preparation
of its published financial statements, which is intended to provide reasonable
assurance to the Company's Board of Directors and officers regarding preparation
of financial statements presented fairly in conformity with generally accepted
accounting principles.
Management has long recognized its responsibility for conducting the
Company's affairs in a manner, which is responsive to the interest of employees,
stockholders, investors and society in general. This responsibility is included
in the statement of policy on ethical standards which provides that the Company
will fully comply with laws, rules and regulations of every community in which
it operates and adhere to the highest ethical standards. Officers, employees and
agents of the Company are expected and directed to manage the business of the
Company with complete honesty, candor and integrity.
Internal auditors monitor the operation of the internal control system,
and actions are taken by management to respond to deficiencies as they are
identified. The Board, operating through its audit committee, which is composed
entirely of directors who are not officers or employees of the Company, provides
oversight to the financial reporting process.
Even effective internal controls, no matter how well designed, have
inherent limitations, such as the possibility of human error or of circumvention
or overriding of controls, and the consideration of cost in relation to benefit
of a control. Further, the effectiveness of an internal control can change with
circumstances.
MB Financial, Inc.'s management periodically assesses the internal
controls for inadequacy. Based upon these assessments, MB Financial, Inc.'s
management believes that, in all material respects, its internal controls
relating to preparation of consolidated financial statements as of December 31,
1999 functioned effectively during the year ended December 31, 1999.
/s/Mitchell Feiger /s/Howard A. Jaffe
Mitchell Feiger Howard A. Jaffe
PRESIDENT AND VICE PRESIDENT AND
CHIEF EXECUTIVE OFFICER CHIEF FINANCIAL OFFICER
44
MB FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
(AMOUNTS IN THOUSANDS)
1999 1998
- ------------------------------------------------------------------------------------------
ASSETS
Cash and due from banks $ 29,420 $ 23,669
Other interest bearing deposits 1,487 -
Federal funds sold 20,350
Investment securities:
Securities available for sale 271,313 212,020
Securities held to maturity
(fair value of $11,529 at December 31, 1998) - 11,142
Stock in Federal Home Loan Bank 6,290 2,614
Loans 903,126 548,353
Less: allowance for loan losses 12,197 6,344
-------------------------
Net loans 890,929 542,009
Lease investments, net 38,034 21,931
Premises and equipment, net 15,304 11,483
Other assets 26,563 8,380
Interest only securities 13,821 -
Intangibles, net 16,265 18,293
-----------------------------
TOTAL ASSETS $ 1,309,426 $ 871,891
=============================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits:
Noninterest bearing $ 145,059 $ 128,218
Interest bearing 791,016 517,443
-----------------------------
TOTAL DEPOSITS 936,075
Short-term borrowings 244,569 130,521
Long-term borrowings 32,698 37,034
Other liabilities 16,706 11,815
-----------------------------
TOTAL LIABILITIES 1,230,048 825,031
-----------------------------
Stockholders' Equity
Common stock (December 31, 1999 $.01 par value;
authorized 20,000,000 shares;
issued 7,064,515 shares; December 31, 1998
no par value; $10 stated value;
authorized 200,000 shares; issued 48,957 shares) 71 490
Additional paid-in capital 50,656 23,794
Retained earnings 32,186 22,232
Accumulated comprehensive income (loss) (3,535) 344
-----------------------------
TOTAL STOCKHOLDERS' EQUITY 79,378 49,860
-----------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,309,426 $ 871,891
=============================
See Notes to the Consolidated Financial Statements.
45
MB FINANCIAL, INC. AND SUBSIDARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(AMOUNTS IN THOUSANDS EXCEPT COMMON SHARE DATA)
1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------------
Interest income:
Loans $ 63,887 $ 44,929 $ 41,313
Investment securities:
Taxable 17,228 11,787 8,527
Nontaxable 320 305 433
Federal funds sold 796 611 1,413
Other interest bearing deposits 60 - -
---------------------------------------------
TOTAL INTEREST INCOME 82,291 57,632 51,686
---------------------------------------------
Interest expense:
Deposits 31,059 22,319 21,617
Short-term borrowings 5,381 5,118 1,353
Long-term borrowings 5,327 2,389 2,202
---------------------------------------------
TOTAL INTEREST EXPENSE 41,767 29,826 25,172
---------------------------------------------
NET INTEREST INCOME 40,524 27,806 26,514
Provision for loan losses 1,260 750 971
---------------------------------------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 39,264 27,056 25,543
---------------------------------------------
Other income:
Loan service fees 3,532 374 521
Deposit service fees 3,304 3,174 2,564
Lease financing, net 724 1,418 1,172
Net gains on sale of securities available for sale 1 167 138
Gain on sale of Coal City National Bank - 4,099 -
Other operating income 1,501 708 540
---------------------------------------------
9,062 9,940 4,935
---------------------------------------------
Other expenses:
Salaries and employee benefits 17,214 12,954 11,556
Occupancy and equipment expense 6,085 4,402 3,500
Intangibles amortization expense 2,472 3,254 3,321
Other operating expenses 7,789 6,427 5,818
---------------------------------------------
33,560 27,037 24,195
---------------------------------------------
INCOME BEFORE INCOME TAXES AND MINORITY INTEREST 14,766 9,959 6,283
Income taxes 4,812 3,605 2,402
---------------------------------------------
INCOME BEFORE MINORITY INTEREST 9,954 6,354 3,881
Minority interest - (99) (432)
---------------------------------------------
NET INCOME 9,954 6,255 3,449
Preferred stock dividend - 1,085 276
---------------------------------------------
NET INCOME AVAILABLE TO COMMON STOCKHOLDERS $ 9,954 $ 5,170 $ 3,173
=============================================
Basic earnings per common share $ 1.51 $ 1.26 $ 0.76
=============================================
Diluted earnings per common share $ 1.51 $ 1.25 $ 0.76
=============================================
Weighted average common shares outstanding 6,586,596 4,093,254 4,151,036
=============================================
Weighted average common shares outstanding including dilutive shares 6,598,058 4,130,996 4,151,036
=============================================
See Notes to Consolidated Financial Statements.
46
MB FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(AMOUNTS IN THOUSANDS EXCEPT COMMON AND PREFERRED SHARE DATA)
ADDITIONAL ACCUMULATED
PREFERRED COMMON PAID-IN RETAINED COMPREHENSIVE
STOCK STOCK CAPITAL EARNINGS INCOME (LOSS) TOTAL
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1996 $ - $ 498 $ 24,524 $ 13,789 $ 315 $ 39,126
-------------
Issuance of 140 shares of common stock - 1 114 - - 115
-------------
Issuance of 68 shares of preferred stock 10,200 - - - - 10,200
-------------
Purchase and retirement of 232 shares of common - (2) (192) - - (194)
stock
-------------
Minority interest effect of premium
received over book value for
interest in Peterson Bank - - - 100 - 100
-------------
Dividends paid on preferred stock - - - (276) - (276)
-------------
Comprehensive income:
Net income - - - 3,449 - 3,449
Other comprehensive income:
Unrealized securities gains arising during
the year, net of tax of $50 - - - - 97 97
Reclassification adjustments for gains on
sale of
investments included in net income,
net of tax of $47 - - - - (91) (91)
-------------
Comprehensive income 3,455
-------------------------------------------------------------------------------
Balance, December 31, 1997 10,200 497 24,446 17,062 321 52,526
-------------
Purchase and retirement of 68 shares of preferred (10,200) - - - - (10,200)
stock
-------------
Purchase and retirement of 750 shares of common - (7) (652) - - (659)
stock
-------------
Dividends paid on preferred stock - - - (1,085) - (1,085)
-------------
Comprehensive income:
Net income - - - 6,255 - 6,255
Other comprehensive income:
Unrealized securities gains arising during
the year, net of tax of $77 - - - - 133 133
Reclassification adjustments for gains on sale of
investments included in net income, net of - - - - (110) (110)
tax of $57
-------------
Comprehensive income 6,278
-------------------------------------------------------------------------------
Balance, December 31, 1998 - 490 23,794 22,232 344 46,860
-------------
Purchase and retirement of 89 shares of common - - (1) - - (1)
stock
-------------
Merger with Avondale Financial Corp. - (419) 26,863 - - 26,444
-------------
Comprehensive income:
Net income - - - 9,954 - 9,954
Other comprehensive income (loss):
Unrealized securities losses arising during
the year, net of tax of $2,172 - - - - (4,045) (4,045)
Unrealized interest only securities gains
arising
during the year, net of tax of $90 - - - - 167 167
Reclassification adjustments for gains on sale of
investments included in net income, net of - - - - (1) (1)
tax
-------------
Comprehensive income 6,075
-------------------------------------------------------------------------------
Balance, December 31, 1999 $ - $ 71 $ 50,656 $ 32,186 $ (3,535) $ 79,378
===============================================================================
See Notes to Consolidated Financial Statements.
47
MB FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(AMOUNTS IN THOUSANDS)
1999 1998 1997
- --------------------------------------------------------------------------------------------------------------------------------
Cash Flows From Operating Activities
Net income $ 9,954 $ 6,255 $ 3,449
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 10,742 8,916 7,142
(Gain) loss on disposal of premises and equipment and leased equipment 9 (356) 166
(Gain) on sale of Coal City National Bank - (4,099) -
Amortization of intangibles 2,472 3,254 3,320
Provision for loan losses 1,260 750 971
Provision (credit) for deferred income taxes 2,692 158 (1,085)
Bond (accretion), net (1,244) (3,721) (325)
Securities (gains), net (1) (167) (131)
(Gain) on sale of loans - (139) -
Proceeds from sale of loans - 8,855 -
Loans originated for sale - (8,716) -
Minority interest in net income - 99 432
Decrease in other assets 3,743 2,389 1,329
Amortization of interest only securities 445 - -
(Decrease) in other liabilities (5,873) (801) (2,116)
--------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 24,178 12,677 13,152
--------------------------------------------
Cash Flows From Investing Activities
Proceeds from sales of securities available for sale 30,040 255,006 110,772
Proceeds from maturities and calls of securities available for sale 178,058 - -
Proceeds from maturities and calls of securities held to maturity 1,482 1,549 5,834
Purchase of securities available for sale (71,218) (341,905) (94,382)
Purchase of securities held to maturity - (7,553) (395)
Purchase of stock in Federal Home Loan Bank (1,000) (1,999) -
Proceeds from redemption of stock in Federal Home Loan Bank 2,614 - -
Federal funds sold, net 65,850 (2,450) (16,600)
Other interest bearing deposits, net (15) - -
Increase in loans, net of principal collections (155,108) (41,209) (13,518)
Purchases of premises and equipment and leased equipment (28,182) (13,025) (11,640)
Proceeds from sales of premises and equipment and leased equipment 79 3,628 737
Principal collected on lease investments 388 659 (264)
Purchase of minority interests - (2,328) (2,649)
Proceeds from sale of Coal City National Bank, net of cash retained
by Coal City National Bank - 5,481 -
Purchase of U.S. Bancorp, Inc., net of cash acquired - - (15,800)
Cash acquired through merger with Avondale Financial Corp. 7,224 - -
--------------------------------------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 30,212 (144,146) (37,905)
--------------------------------------------
Cash Flows From Financing Activities
Net increase in noninterest bearing deposits 16,841 3,153 5,981
Net increase (decrease) in interest bearing deposits (69,388) 10,500 (1,065)
Net increase in short-term borrowings 108,998 112,508 8,652
Proceeds from long-term borrowings 2,414 32,667 25,179
Principal paid on long-term borrowings (107,503) (28,048) (8,802)
Issuance of common stock - - 115
Purchase and retirement of common stock (1) (659) (194)
Purchase and retirement of preferred stock - (10,200) -
Dividends paid on preferred stock - (1,085) (276)
--------------------------------------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (48,639) 118,836 29,590
--------------------------------------------
NET INCREASE (DECREASE) IN CASH AND DUE FROM BANKS $ 5,751 $ (12,633) $ 4,837
Cash and due from banks:
Beginning 23,669 36,302 31,465
--------------------------------------------
Ending $ 29,420 $ 23,669 $ 36,302
============================================
(continued)
48
MB FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(AMOUNTS IN THOUSANDS)
1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------------
Supplemental Disclosures of Cash Flow Information
Cash payments for:
Interest paid to depositors $ 31,344 $ 22,363 $ 21,179
Other interest paid 10,778 6,917 3,567
Income taxes paid, net of refunds 4,799 4,310 2,037
Supplemental Schedule of Noncash Investing Activities
Merger with Avondale Financial Corp.
Noncash assets acquired:
Securities available for sale $ 183,700
Stock in Federal Home Loan Bank 5,290
Federal funds sold 45,500
Other interest bearing deposits 1,472
Loans, net 203,355
Premises and equipment 2,939
Accrued interest and other assets 20,358
Intangibles, net 443
Interest only securities 14,009
--------------
477,066
--------------
Liabilities assumed:
Interest bearing deposits 342,961
Short-term borrowings 5,000
Long-term borrowings 100,803
Other liabilities 7,982
--------------
456,746
NET NONCASH ASSETS ACQUIRED 20,320
--------------
CASH ACQUIRED $ 7,224
==============
Acquisition of U.S. Bancorp, Inc.
Assets acquired:
Securities available for sale $ 52,261
Securities held to maturity 1,099
Stock in Federal Home Loan Bank 615
Loans, net 124,248
Premises and equipment 5,020
Accrued interest and other assets 6,155
Core deposit intangibles 5,654
Excess of cost over fair value of net assets acquired 8,637
--------------
203,689
--------------
Liabilities Assumed:
Noninterest bearing deposits 28,405
Interest bearing deposits 141,022
Other liabilities 8,262
--------------
177,689
--------------
Net assets acquired 26,000
Issuance of preferred stock (10,200)
--------------
NET CASH PAYMENT $ 15,800
==============
(continued)
49
MB FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(AMOUNTS IN THOUSANDS)
1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------------
Sale of Coal City National Bank
Assets sold:
Cash $ 2,319
Securities available for sale 15,418
Securities held to maturity 173
Federal funds sold 19,500
Loans, net 17,573
Premises and equipment, net 696
Other 317
-------------
55,996
-------------
Liabilities sold:
Deposits 52,052
Other 243
-------------
52,295
-------------
NET ASSETS SOLD $ 3,701
=============
CASH RECEIVED $ 7,800
=============
Transfer of long-term Federal Home Loan Bank advances to short-term classification $ 50
==============
Real estate acquired in settlement of losses $ 497 $ 276 $ 1,006
=========================================
See Notes to Consolidated Financial Statements.
50
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES
MB Financial, Inc. (formerly Coal City Corporation) (the "Company") is a bank
holding company providing financial and other banking services to customers
primarily located in Chicago, Illinois including Chicago's north side, Chicago's
south side and Chicago's southern suburbs.
PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include the
accounts of the Company and the following subsidiaries:
Coal City National Bank - 100% owned subsidiary,
sold January 28, 1998
Manufacturers National Corporation - 100% owned subsidiary
of MB Financial, Inc.
Avondale Financial Services, Inc. - 100% owned subsidiary
of Manufacturers Bank
Manufacturers Community Development
Corporation - 100% owned subsidiary
of Manufacturers Bank
Manufacturers Funding Corporation 100% owned subsidiary
of Manufacturers Bank
Manufacturers Bank - 100% owned subsidiary
of Manufacturers
National Corporation
Ashland Management Agency, Inc. - 100% owned subsidiary
of Manufacturers Bank
MB 1200 Corporation - 100% owned subsidiary
of Manufacturers Bank
Manufacturers Deferred Exchange
Corporation - 100% owned subsidiary
of Manufacturers Bank
Coal City Capital Trust I 100% owned subsidiary
of MB Financial, Inc.
All material intercompany items and transactions have been eliminated in
consolidation.
On February 26, 1999, Coal City Corporation, the holding company for
Manufacturers Bank ("CCC") was merged with and into Avondale Financial Corp.
("Avondale"), the holding company for Avondale Federal Savings Bank. The
resulting entity was renamed MB Financial, Inc. Simultaneously, Avondale Federal
Savings Bank was merged into Manufacturers Bank.
Since the CCC stockholders owned more than 50% of the combined company, the
transaction was accounted for as a reverse acquisition using the purchase method
of accounting with CCC being the accounting acquirer. As a result, the
post-merger historical financial statements of the combined company are CCC's as
the accounting acquirer, and includes the operating results of Avondale since
the merger date.
51
MB FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(TABLE AMOUNTS IN THOUSANDS EXCEPT COMMON SHARE DATA)
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
BASIS OF FINANCIAL STATEMENT PRESENTATION: The accounting and reporting policies
of the Company conform to generally accepted accounting principles and general
practices within the financial services industry. In preparing the financial
statements, management is required to make estimates and assumptions that affect
the reported amounts of assets and liabilities as of the date of the balance
sheet and revenues and expenses for the year. Actual results could differ from
those estimates. Areas involving the use of management's estimates and
assumptions, and which are more susceptible to change in the near term include
the allowance for loan losses and fair value of interest only securities.
CASH AND CASH EQUIVALENTS: For purposes of reporting cash flows, cash and due
from banks includes cash on hand and amounts due from banks (including cash
items in process of clearing). Cash flows from loans originated by the Company,
deposits, and federal funds purchased and sold and short-term borrowings are
reported net.
SECURITIES AVAILABLE FOR SALE: Securities classified as available for sale are
those debt securities that the Company intends to hold for an indefinite period
of time, but not necessarily to maturity. Any decision to sell a security
classified as available for sale would be based on various factors, including
significant movements in interest rates, changes in the maturity mix of the
Bank's assets and liabilities, liquidity needs, regulatory capital
considerations, and other similar factors.
Securities available for sale are reported at fair value with unrealized gains
or losses reported as accumulated comprehensive income, net of the related
deferred tax effect. The amortization of premiums and accretion of discounts,
computed by the interest method over their contractual lives, are recognized in
interest income. Realized gains or losses, determined on the basis of the cost
of specific securities sold, are included in earnings.
SECURITIES HELD TO MATURITY: Debt securities for which the Company has both the
positive intent and ability to hold to maturity are classified as held to
maturity and reported at amortized cost. Amortization of premiums and accretion
of discounts, computed by the interest method over their contractual lives, is
included in interest income.
LOANS HELD FOR SALE: Loans held for sale are those loans the Company intends to
sell in the foreseeable future. They are carried at the lower of aggregate cost
or market value. Gains and losses on sales of loans are recognized at settlement
dates and are determined by the difference between the sales proceeds plus the
value of the mortgage servicing rights compared to the carrying value of the
loans. All sales are made without recourse. There were no loans held for sale at
December 31, 1999 and 1998.
LOANS: Loans are stated at the amount of unpaid principal reduced by the
allowance for loan losses.
Loan origination and commitment fees and certain direct loan origination costs
are deferred and the net amount amortized as an adjustment of the related loan's
yield. The Company is amortizing these amounts over the contractual life of the
loan. Commitment fees based upon a percentage of a customer's unused line of
credit and fees related to standby letters of credit are recognized over the
commitment period.
52
MB FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(TABLE AMOUNTS IN THOUSANDS EXCEPT COMMON SHARE DATA)
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Interest is accrued daily on the outstanding balances. For impaired loans,
accrual of interest is discontinued on a loan when management believes, after
considering collection efforts and other factors, that the borrower's financial
condition is such that collection of interest is doubtful. Cash collections on
impaired loans are credited to the loan balance, and no interest income is
recognized on those loans until the principal balance has been determined to be
collectible.
A loan is impaired when it is probable the Company will be unable to collect all
contractual principal and interest payments due in accordance with the terms of
the loan agreement. Impaired loans are measured based on the present value of
expected future cash flows discounted at the loan's effective interest rate or,
as a practical expedient, at the loan's observable market price or the fair
value of the collateral if the loan is collateral dependent. The amount of
impairment, if any, and any subsequent changes are included in the allowance for
loan losses.
The allowance for loan losses is established through a provision for loan losses
charged to expense. Loans are charged against the allowance for loan losses when
management believes that collectibility of the principal is unlikely. The
allowance is an amount 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. This evaluation also takes into
consideration such factors as changes in the nature and volume of the loan
portfolio, overall portfolio quality, review of specific problem loans, and
current economic conditions that may affect the borrower's ability to pay. While
management uses the best information available to make its evaluation, future
adjustments to the allowance may be necessary if there are significant changes
in economic conditions. In addition, regulatory agencies, as an integral part of
their examination process, periodically review the Bank's allowance for loan
losses, and may require the Bank to make additions to the allowance based on
their judgment about information available to them at the time of their
examinations.
LEASE INVESTMENTS: The Company's investment in assets leased to others is
reported as lease investments, net, using the direct finance and operating
methods of accounting. Direct financing leases are stated at the sum of
remaining minimum lease payments from lessees plus estimated residual values
less unearned lease income. On a quarterly basis, management reviews the lease
residuals for potential impairment. Unearned lease income on direct financing
leases is recognized over the lives of the leases using the level-yield method.
The investment in equipment in operating leases is stated at cost less
depreciation using the straight-line method over a five-year life.
PREMISES AND EQUIPMENT: Premises and equipment are stated at cost less
accumulated depreciation. Depreciation is computed primarily by the
straight-line method for buildings and computer equipment, and primarily by the
200% declining balance method for all other assets over the following estimated
useful lives:
YEARS
------------
Land improvements 20
Buildings 15-39
Leasehold and other improvements 5-20
Furniture and equipment 3-15
53
MB FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(TABLE AMOUNTS IN THOUSANDS EXCEPT COMMON SHARE DATA)
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INTEREST ONLY SECURITIES: Interest only securities represent the present value
of future cash flows based on the "excess spread" between the yield of
underlying loans sold and the securities issued and reflect estimates of
prepayments, servicing fees, operating expenses, credit losses and other
factors. The interest only securities were acquired through the Avondale merger.
The interest only securities are amortized as cash flows are received. The fair
value of the interest only securities is evaluated on a quarterly basis for
impairment. The Company classifies its interest only securities as
available-for-sale and any adjustments to the fair value of the securities are
included in the comprehensive income unless such adjustment is considered by
management to be other than temporary.
INTANGIBLES: In acquiring its subsidiaries, the portion of the purchase price
which represents value assigned to the existing deposit base for which the
annual interest and servicing costs are below market rates (core deposit
intangibles) is being amortized by the declining balance method over three to
nine years. The excess of cost over fair value of net assets acquired (goodwill)
is being amortized on the straight-line method over fifteen to twenty years. The
Company reviews its intangible assets annually to determine potential impairment
by comparing the carrying value of the intangibles with the anticipated future
cash flows.
INCOME TAXES: The Company and its subsidiaries file consolidated income tax
returns.
Deferred taxes are provided on a liability method whereby deferred tax assets
are recognized for deductible temporary differences and operating loss carry
forwards, tax credit carryforwards and deferred tax liabilities are recognized
for taxable temporary differences. Temporary differences are the differences
between the reported amounts of assets and liabilities and their tax bases.
Deferred tax assets are reduced by a valuation allowance when, in the opinion of
management, it is more likely than not that some portion or all of the deferred
tax assets will not be realized. Deferred tax assets and liabilities are
adjusted for the effects of changes in tax laws and rates on the date of
enactment.
EARNINGS PER COMMON SHARE: Basic earnings per share represents income available
to common stockholders divided by the weighted-average number of common shares
outstanding during the period. Diluted earnings per share reflects additional
common shares that would have been outstanding if dilutive potential common
shares had been issued, as well as any adjustment to income that would result
from the assumed issuance. Potential common shares that may be issued by the
Company relates solely to outstanding stock options, and are determined using
the treasury stock method.
Earnings per common share have been computed for the years ended December 31,
1999, 1998 and 1997 based on the following (in thousands except common share
data):
1999 1998 1997
----------------------------------------------------
Net income $ 9,954 $ 6,255 $ 3,449
Less: Preferred stock dividends - 1,085 276
----------------------------------------------------
Net income applicable to common stock $ 9,954 $ 5,170 $ 3,173
====================================================
Weighted average common shares outstanding 6,586,596 4,093,254 4,151,036
Effect of dilutive options 11,462 37,742 -
----------------------------------------------------
Weighted average common shares outstanding used to calculate
diluted earnings per common share 6,598,058 4,130,996 4,151,036
====================================================
Each share of Coal City Common Stock issued and outstanding on February 26, 1999
was converted into 83.5 shares of Avondale Financial Corp. Therefore, common
share data for the year ended December 31, 1998 was converted using an exchange
ratio of 83.5 to 1.
54
MB FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(TABLE AMOUNTS IN THOUSANDS EXCEPT COMMON SHARE DATA)
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
COMPREHENSIVE INCOME: The Company adopted SFAS 130, REPORTING COMPREHENSIVE
INCOME, as of January 1, 1998. Accounting principles generally require that
recognized revenue, expenses, gains and losses be included in net income.
Although certain changes in assets and liabilities, such as unrealized gains and
losses on available-for-sale securities, are reported as a separate component of
the equity section of the balance sheet, such items, along with net income, are
components of comprehensive income. The adoption of SFAS 130 had no effect on
the Company's net income or stockholders' equity.
RECENT ACCOUNTING PRONOUNCEMENTS: In June 1997, the FASB adopted SFAS No. 131,
DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION. This
Statement supersedes SFAS No. 14, FINANCIAL REPORTING FOR SEGMENTS OF A BUSINESS
ENTERPRISE, and utilizes the "management approach" for segment reporting. The
management approach is based on the way that the chief operating decision maker
organizes segments within a company for making operating decisions and assessing
performance. Reportable segments are based on any manner in which management
disaggregates its company such as by products and services, geography, legal
structure and management structure. SFAS 131 requires disclosure for each
segment that are similar to those required under current standards with the
addition of quarterly disclosure requirements and more specific and detailed
geographic disclosures. This Statement also requires descriptive information
about the way the operating segments were determined. The provisions of SFAS 131
were effective for fiscal years beginning after December 15, 1997, with earlier
application permitted. The Company adopted SFAS No. 131 at December 31, 1998 and
the Company views its banking business as its only segment. For purposes of SFAS
No. 131, management evaluates financial performance and manages operations on a
company-wide basis. Accordingly, all of the Company's banking operations are
considered by management to be aggregated in one reportable operating segment.
In June 1998, the FASB adopted SFAS 133, ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES. SFAS 133 establishes accounting and
reporting standards requiring that every derivative instrument (including
certain derivative instruments embedded in other contracts) be recorded in
the balance sheet as either an asset or liability measured at its fair value.
SFAS 133 requires that changes in the derivative's fair value be recognized
currently in earnings unless specific hedge accounting criteria are met.
Special accounting for qualifying hedges allows a derivative's gains and
losses to offset related results on the hedged item in the income statement,
and requires that a company must formally document, designate and assess the
effectiveness of transactions that receive hedge accounting. In June 1999,
the FASB adopted SFAS 137 ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING
ACTIVITIES DEFERRAL OF THE EFFECTIVE DATE OF FASB STATEMENT NO. 133. SFAS
133, as amended by SFAS 137 is effective for all fiscal quarters of all
fiscal years beginning after June 15, 2000. SFAS 133, as amended by SFAS 137,
may be implemented as of the beginning of any fiscal quarter after September
30, 1998 but cannot be applied retroactively. Management has not yet
determined the impact of this standard.
In October 1998, the FASB adopted SFAS 134, ACCOUNTING FOR MORTGAGE-BACKED
SECURITIES RETAINED AFTER THE SECURITIZATION OF MORTGAGE LOANS HELD FOR SALE BY
A MORTGAGE BANKING ENTERPRISE. The Statement amends SFAS 65, ACCOUNTING FOR
CERTAIN MORTGAGE BANKING ACTIVITIES, and requires that after the securitization
of mortgage loans held for sale, an entity engaged in mortgage banking
activities classify the resulting mortgage-backed securities or other retained
interests based on its ability and intent to sell or hold those investments. The
provisions of SFAS 134 are effective for the first fiscal quarter beginning
after December 15, 1998 and were adopted on January 1, 1999. The adoption of
SFAS 134 did not have a material impact on the Company's financial statements.
RECLASSIFICATIONS: Certain prior year amounts have been reclassified to conform
with the current year's presentation.
55
MB FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(TABLE AMOUNTS IN THOUSANDS EXCEPT COMMON SHARE DATA)
NOTE 2. BUSINESS ACQUISITIONS AND DIVESTITURES
On February 26, 1999, Coal City Corporation (Coal City), the holding company for
Manufacturers Bank (the "Bank"), was merged with and into Avondale Financial
Corp. (Avondale), the holding company for Avondale Federal Savings Bank. The
resulting entity was renamed MB Financial, Inc. Simultaneously, Avondale Federal
Savings Bank was merged into Manufacturers Bank.
Since the Coal City stockholders owned more than 50% of the combined company,
the transaction was accounted for as a reverse acquisition using the purchase
method of accounting with Coal City being the accounting acquirer. As a result,
the post-merger historical financial statements of the combined company are Coal
City's as the accounting acquirer, and includes the operating results of
Avondale since the merger date. Total consideration based upon Avondale's shares
outstanding at the merger date times the estimated market value per share at the
merger announcement date, was $26.4 million plus $1.1 million of merger expenses
incurred by Coal City. Included in the purchase accounting adjustments was an
accrual of $4.4 million for merger related costs. The accrual includes estimated
costs for termination of data processing contracts, professional fees, severance
and personnel related expenses and lease contracts. At December 31, 1999, the
remaining liability was approximately $975,000 primarily for lease contracts and
severance costs. The majority of the remaining costs are scheduled to occur by
the end of 2000.
The unaudited pro forma results of operation, which follow, assume that the
merger had occurred at January 1, 1998. In addition to combining the historical
results of operations of the companies, the pro forma calculations include
purchase accounting adjustments related to the acquisition. The pro forma
calculations do not include any anticipated cost savings as a result of the
merger.
Unaudited pro forma consolidated results of operations for the years ended
December 31, 1999 and 1998 are as follows (in thousands except earnings per
share data):
1999 1998
------------------------------------
Net interest income $ 43,057 $ 44,614
====================================
Net income 8,222 1,115
====================================
Net income available to common stockholders 8,222 30
====================================
Basic earnings per common share $ 1.17 $ 0.00
====================================
Diluted earnings per common share $ 1.17 $ 0.00
====================================
The pro forma results of operations are not necessarily indicative of the actual
results of operations that would have occurred had the merger actually taken
place at the beginning of the respective periods, or of results which may occur
in the future.
56
MB FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(TABLE AMOUNTS IN THOUSANDS EXCEPT COMMON SHARE DATA)
On May 7, 1997, the Company, through its subsidiary, Manufacturers National
Corporation, completed the purchase of 100% of U.S. Bancorp, Inc. for
$40,210,000. The purchase price was paid through a series of transactions
involving cash of $15,800,000, preferred stock of $10,200,000 and cash held by
U.S. Bancorp, Inc. of $14,210,000. The acquisition was accounted for as a
purchase with the results of operations of U.S. Bancorp, Inc. and Subsidiary
subsequent to the effective date of the agreement, April 30, 1997, included in
the consolidated financial statements. The excess of cost over the fair value of
net assets acquired (goodwill) was $8,637,000. Goodwill is being amortized over
a twenty-year period.
On January 28, 1998, the Company sold all of the issued and outstanding shares
of Coal City National Bank common stock for cash of $7,800,000. The net assets
of Coal City National Bank at January 28, 1998 were approximately $3,701,000.
NOTE 3. RESTRICTIONS ON CASH AND DUE FROM BANKS
The Bank is required to maintain reserve balances in cash or on deposit with the
Federal Reserve Bank, based on a percentage of deposits. The total of those
reserve balances was approximately $1,391,000 and $1,147,000 at December 31,
1999 and 1998, respectively.
NOTE 4. INVESTMENT SECURITIES
Carrying amounts and fair values of securities available for sale are summarized
as follows:
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
AVAILABLE FOR SALE COST GAINS LOSSES VALUE
- -----------------------------------------------------------------------------------------------------------------------
December 31, 1999:
U.S. government agencies $ 99,891 $ - $ (2,200) $ 97,691
States and political subdivisions 5,164 202 - 5,366
Mortgage-backed securities 120,114 - (1,166) 118,948
Corporate bonds 43,092 - (2,528) 40,564
Other securities 962 - (4) 958
Investments in equity lines of credit trusts 7,786 - - 7,786
------------------------------------------------------------------
TOTALS $ 277,009 $ 202 $ (5,898) $ 271,313
==================================================================
December 31, 1998:
U.S. Treasury securities $ 128,630 $ 182 $ (64) $ 128,748
U.S. government agencies 80,089 473 (151) 80,411
Mortgage-backed securities 2,779 82 2,861
------------------------------------------------------------------
TOTALS $ 211,498 $ 737 $ (215) $ 212,020
==================================================================
57
MB FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(TABLE AMOUNTS IN THOUSANDS EXCEPT COMMON SHARE DATA)
Gross realized gains and losses from the sale of securities available for sale
are as follows:
FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------------------------
1999 1998 1997
-----------------------------------------------------
Realized gains $ 18 $ 169 $ 138
Realized (losses) (17) (2)
-----------------------------------------------------
NET GAINS $ 1 $ 167 $ 138
=====================================================
NOTE 4. INVESTMENT SECURITIES (CONTINUED)
The Company transferred held to maturity securities with an amortized cost of
$9,743,000 to available for sale securities and recorded as a component of
equity, unrealized gain of $24,700 net of $13,300 deferred taxes. Carrying
amounts and fair values of securities held to maturity at December 31, 1998 are
summarized as follows:
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
HELD TO MATURITY COST GAINS LOSSES VALUE
- ----------------------------------------------------------------------------------------------------------------------
December 31, 1998:
States and political subdivisions $ 5,524 $ 391 $ (3) $ 5,912
Mortgage-backed securities 4,651 4 (7) 4,648
Other securities 967 2 969
-
---------------------------------------------------------------------
TOTALS $ 11,142 $ 397 $ (10) $ 11,529
=====================================================================
The amortized cost and fair value of securities, as of December 31, 1999, by
contractual maturity are shown below. Maturities may differ from contractual
maturities in mortgage-backed securities because the mortgages underlying the
securities may be called or repaid without any penalties. Therefore, these
securities are not included in the maturity categories in the following maturity
summary.
----------------------------------
AVAILABLE FOR SALE
----------------------------------
AMORTIZED FAIR
COST VALUE
----------------------------------
Due in one year or less $ 15,815 $ 15,623
Due after one year through five years 71,215 70,605
Due after five years through ten years 32,656 31,986
Due after ten years 37,209 34,151
Mortgage-backed securities 120,114 118,948
----------------------------------
TOTALS $ 277,009 $ 271,313
==================================
In addition, securities with carrying amounts of $134,817,000 and $65,404,000 at
December 31, 1999 and 1998, respectively were pledged as collateral on public
deposits and for other purposes as required or permitted by law:
The Company, as a member of the Federal Home Loan Bank System, is required to
maintain an investment in capital stock of the Federal Home Loan Bank in an
amount equal to 1% of its certain home loans. No ready market exists for the
stock, and it has no quoted market value. The stock is redeemable at par,
therefore, market value equals cost.
58
MB FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(TABLE AMOUNTS IN THOUSANDS EXCEPT COMMON SHARE DATA)
NOTE 5. LOANS
Loans consist of:
DECEMBER 31,
-----------------------------------
1999 1998
-----------------------------------
Originated by Manufacturers Bank:
Commercial $ 341,728 $ 211,395
Commercial real estate 247,668 226,455
Residential real estate 77,127 54,741
Construction real estate 58,447 21,059
Installment and other 39,605 34,703
-----------------------------------
Total loans originated by Manufacturers Bank 764,575 548,353
Acquired from Avondale Federal Savings Bank:
Commercial real estate 1,439 -
Residential real estate 66,504 -
Credit scored mortgage loans 59,716 -
Installment and other 10,892 -
-----------------------------------
Total loans acquired from Avondale Federal Savings Bank 138,551 -
-----------------------------------
Gross loans 903,126 548,353
Allowance for loan losses (12,197) (6,344)
-----------------------------------
LOANS, NET $ 890,929 $ 542,009
===================================
Loans are made to individuals as well as commercial and tax exempt entities.
Specific loan terms vary as to interest rate, repayment and collateral
requirements based on the type of loan requested and the credit worthiness of
the prospective borrower. Credit risk tends to be geographically concentrated in
that the majority of the loan customers are located in the market serviced by
the Bank. At December 31, 1999 and 1998, commercial loans included $186,895,000
and $89,301,000, respectively, of loans which were collateralized by assignment
of leases for various types of equipment.
59
MB FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(TABLE AMOUNTS IN THOUSANDS EXCEPT COMMON SHARE DATA)
NOTE 5. LOANS (CONTINUED)
Information about impaired loans as of and for the years ended December 31, 1999
and 1998 are as follows:
DECEMBER 31,
-----------------------------------
1999 1998
-----------------------------------
Loans for which there is a related allowance for credit losses $ 1,503 $ 2,263
Other impaired loans 41
-----------------------------------
TOTAL IMPAIRED LOANS $ 1,544 $ 2,263
===================================
Average monthly balance of impaired loans $ 2,088 $ 290
Related allowance for credit losses $ 222 $ 350
Interest income recognized on impaired loans $ 299 $ 114
There were no impaired loans during the year ended December 31, 1997.
Activity in the allowance for loan losses was as follows:
YEARS ENDED DECEMBER 31,
--------------------------------------------
1999 1998 1997
--------------------------------------------
Balance, beginning $ 6,344 $ 7,922 $ 4,692
Decreases resulting from sale
Of subsidiary - (399)
Addition resulting from merger of Avondale
Financial Corporation 9,489 -
Addition resulting from purchase
Of U.S. Bancorp, Inc. - - 2,574
-
Provision charged to operations 1,260 750 971
Charge-offs:
Originated by Manufacturers Bank 1,898 2,090 343
Acquired from Avondale Federal Savings Bank 3,600 - -
--------------------------------------------
Total charge-offs 5,498 2,090 343
--------------------------------------------
Recoveries:
Originated by Manufacturers Bank 45 161 28
Acquired from Avondale Federal Savings Bank 557 - -
--------------------------------------------
Total recoveries 602 161 28
--------------------------------------------
Net charge-offs 4,896 1,929 315
--------------------------------------------
Balance, ending $ 12,197 $ 6,344 $ 7,922
============================================
Loans outstanding to bank executive officers and directors, including companies
in which they have management control or beneficial ownership, at December 31,
1999 and 1998, were approximately $2,297,000 and $5,483,000, respectively. In
the opinion of management, these loans have similar terms to other customer
loans. An analysis of the activity related to these loans for the year ended
December 31, 1999 is as follows:
Balance, beginning $ 5,483
Additions 758
Principal payments and other reductions (3,944)
-------------------
-------------------
Balance, ending $ 2,297
===================
60
MB FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(TABLE AMOUNTS IN THOUSANDS EXCEPT COMMON SHARE DATA)
NOTE 6. LEASE INVESTMENTS
Lease investments by categories follow:
DECEMBER 31,
-------------------------------------
1999 1998
-------------------------------------
Direct financing leases:
Minimum lease payments receivable $ 250 $ 627
Estimated residual value 288 338
Less unearned lease income (7) (40)
-------------------------------------
531 925
-------------------------------------
Operating leases:
Equipment, at cost 59,931 35,070
Less accumulated depreciation (22,428) (14,064)
-------------------------------------
37,503 21,006
-------------------------------------
Lease investments, net $ 38,034 $ 21,931
=====================================
The minimum lease payments receivable for direct financing leases and operating
leases are due as follows for the years ending December 31:
YEAR DIRECT FINANCING OPERATING
- ------- -----------------------------------
2000 $ 250 $ 11,624
2001 - 8,970
2002 - 5,505
2003 - 2,932
2004 - 2,250
-----------------------------------
$ 250 $ 31,281
===================================
Income from lease investments is composed of:
YEARS ENDED DECEMBER 31,
----------------------------------------------------
1999 1998 1997
----------------------------------------------------
Rental income on operating leases $ 9,255 $ 8,051 $ 6,916
Income from lease payments on direct financing leases 35 77 46
Gain on sale of leased equipment 6 389
----------------------------------------------------
Income on lease investments, gross 9,296 8,517 6,962
Less:
Write down of residual value of equipment (336) - -
Depreciation on operating leases (8,236) (7,099) (5,790)
----------------------------------------------------
Income from lease investments, net $ 724 $ 1,418 $ 1,172
====================================================
Lease investments are investments in equipment leased to others by Manufacturers
Bank. The portfolio is made up of various types of equipment including satellite
communications systems, computer retrieval systems, computer hardware and other
equipment that management believes will retain its value throughout the lease
term and beyond.
At December 31, 1999, there were approximately 115 schedules with net book
values ranging from a few hundred dollars, to the largest valued $5.5 million.
The net book value for the entire portfolio was $38.0 million. The bank funds
most purchases, but has some loans at other banks totaling $6.9 million at
December 31, 1999. The Company has steadily grown its leasing portfolio over the
last five years.
61
MB FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(TABLE AMOUNTS IN THOUSANDS EXCEPT COMMON SHARE DATA)
NOTE 7. SECURITIZATIONS
In 1996, 1997 and 1998, Avondale securitized and sold certain home equity lines
of credit to investors with limited recourse, retaining the servicing rights to
the underlying loans. Avondale received annual servicing fees and rights to
future cash flows (interest only securities) arising after the investors in the
securitization trusts received the return for which they are contracted. In
addition, Avondale retained a participation interest in the investor 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
merger the Company acquired servicing rights related to these loans, the
retained participation interest in the investor trusts and interest only
securities. The annual servicing fees received by the Company approximate 0.75%
of the outstanding loan balance and approximate the Company's cost to service
the loans. 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 investor trusts are generally restricted once
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 December 31, 1999, interest only securities were $13.8 million. The value of
these interest only securities is subject to substantial credit, prepayment, and
interest rate risk on the transferred financial assets. On a quarterly basis,
the Company performs a review to determine the fair value of its interest only
securities, as these securities are accounted for as securities available for
sale. As part of the review, the Company reviews its assumptions of prepayment
speeds, discount rates and anticipated credit losses.
The following table shows the results of the Company's assumptions used in
measuring its retained interest in the investor trust:
INTEREST ONLY SECURITY POOLS
-------------------------------------------------------------------------
96-1 97-1 97-2 98-1
-------------------------------------------------------------------------
Adjustable (1) Adjustable (1) Adjustable (1) Adjustable (1)
-------------------------------------------------------------------------
Estimated fair value $2,636 $2,578 $4,059 $4,548
Prepayment speed 35.00% 37.00% 35.00% 32.00%
Weighted-average life (in years) (2) 2.03 1.98 2.12 2.47
Expected credit losses (3) 5.08% 6.08% 6.30% 7.26%
Residual cash flows discounted at 12.00% 12.00% 12.00% 12.00%
(1) Rates for these loans are adjusted based on the prime rate as
published in the Wall Street Journal.
(2) The weighted-average life in years of prepayable assets is
calculated by summing (a) the principal collections expected
in each future year multiplied by (b) the number of years
until collection, and then dividing that sum by the initial
principal balance. This is not explicitly assumed but it
reflects the overall effect of prepayment assumptions.
(3) Remaining credit losses over the life remaining on the loans
are $1.2 million, $1.7 million, $2.5 million and $5.0 million
for Trusts 96-1, 97-1, 97-2 and 98-1, respectively. The
estimated credit loss percentage is derived by dividing the
remaining credit losses by the related loan balance
outstanding in the pool.
62
MB FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(TABLE AMOUNTS IN THOUSANDS EXCEPT COMMON SHARE DATA)
NOTE 8. PREMISES AND EQUIPMENT
Premises and equipment consist of:
DECEMBER 31,
-------------------------------------
1999 1998
-------------------------------------
Land and land improvements $ 3,425 $ 2,800
Buildings and improvements 9,516 6,531
Furniture and equipment 8,186 5,830
-------------------------------------
21,127 15,161
Accumulated depreciation (5,823) (3,678)
-------------------------------------
Premises and equipment, net $ 15,304 $ 11,483
=====================================
Depreciation on premises and equipment totaled $2,170,000, $1,817,000 and
$1,352,000 for the years ended December 31, 1999 and 1998.
NOTE 9. INTANGIBLES
Intangibles consist of the following as of December 31:
1999
-------------------------------------------------------
CORE DEPOSIT GOODWILL TOTAL
- -------------------------------------------------------------------------------------------------------------------
Cost $ 13,862 $ 17,039 $ 30,901
Accumulated amortization 10,474 4,162 14,636
-------------------------------------------------------
$ 3,388 $ 12,877 $ 16,265
=======================================================
1998
-------------------------------------------------------
CORE DEPOSIT GOODWILL TOTAL
- -------------------------------------------------------------------------------------------------------------------
Cost $ 13,418 $ 17,039 $ 30,457
Accumulated amortization 8,816 3,348 12,164
-------------------------------------------------------
$ 4,602 $ 13,691 $ 18,293
=======================================================
The amount of goodwill recognized decreased by $993,000 during the year ended
December 31, 1998 due to negative goodwill of $818,000 being recognized on the
purchase of the minority interests in Manufacturers National Corporation and a
reduction of goodwill of $175,000 related to Coal City National Bank which was
sold January 28, 1998.
The amount included in deferred tax liabilities which pertains to the core
deposit intangible is approximately $1,186,000 and $1,611,000 at December 31,
1999 and 1998, respectively.
63
MB FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(TABLE AMOUNTS IN THOUSANDS EXCEPT COMMON SHARE DATA)
NOTE 10. DEPOSITS
The composition of deposits is as follows:
DECEMBER 31,
-------------------------------------
1999 1998
-------------------------------------
Demand deposits, noninterest bearing $ 145,059 $ 128,218
NOW and money market accounts 167,012 142,703
Savings deposits 150,126 82,438
Time certificates, $100,000 or more 192,132 116,332
Other time certificates 281,746 175,970
-------------------------------------
TOTAL $ 936,075 $ 645,661
=====================================
At December 31, 1999, the scheduled maturities of time certificates are as
follows:
2000 $ 436,239
2001 22,582
2002 14,033
2003 1,024
-------------------
$ 473,878
===================
NOTE 11. SHORT-TERM BORROWINGS
Short-term borrowings consisted of:
DECEMBER 31,
-------------------------------------
1999 1998
-------------------------------------
Federal funds purchased $ 56,000 $ -
Securities sold under agreement to repurchase 55,681 127,288
U.S. Treasury demand notes 2,888 3,233
Federal Home Loan Bank advances due January 31, 2000, variable rate 5,000 -
Federal Home Loan Bank advances due April 26, 2000, variable rate 50,000 -
Federal Home Loan Bank advances due June 13, 2000, 5.95% fixed rate 20,000 -
Federal Home Loan Bank advances due August 28, 2000, variable rate 50,000 -
Correspondent bank line of credit of $15.0 million 5,000 -
-------------------------------------
$ 244,569 $ 130,521
=====================================
64
MB FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(TABLE AMOUNTS IN THOUSANDS EXCEPT COMMON SHARE DATA)
NOTE 12. LONG-TERM BORROWINGS
The Company had notes payable to banks totaling $6,895,000 and $8,534,000 at
December 31, 1999 and 1998 which accrue interest at rates ranging from 6.35% to
9.64% and require aggregate monthly payments of $306,000, including interest at
various dates through April 1, 2004. Equipment included in lease investments,
with a December 31, 1999 and 1998 depreciated cost of $8,813,000 and
$10,248,000, is pledged as collateral on these notes.
In July 1998, the Company issued $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.
Proceeds from the sale of the Capital Securities were invested by the Trust in
floating rate (3-month LIBOR plus 180 basis points) Junior Subordinated
Deferrable Interest Debentures (Debentures) issued by the Company which
represents all of the assets of the Trust. The 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 December 31, 1999 and 1998 $25.0 million were
outstanding.
At December 31, 1999, the Company had advances from the Federal Home Loan Bank
of $803,000. The advances mature on June 8, 2003 and interest on the advances is
stated at 2.50%. Certain securities with a carrying amount of approximately
$303,825 were pledged as collateral for the Federal Home Loan Bank advances, at
December 31, 1999.
At December 31, 1998, the Company had a secured revolving note payable to
LaSalle National Bank with an outstanding balance of $3,250,000. The note bears
interest at a rate equal to the adjusted LIBOR rate, 7.06% at December 31, 1998.
The note required quarterly payments of interest only on the outstanding
balance. At July 31, 1999, the secured revolving note payable was converted to
short-term borrowings.
At December 31, 1998, the Company had an unsecured revolving note payable to
LaSalle National Bank with an outstanding balance of $250,000. The note bears
interest at the bank's prime rate, 7.75% at December 31, 1998, and required
payments of interest only on the outstanding balance. At July 31, 1999 the
unsecured revolving note payable was converted to the secured revolving note
payable and classified as short-term borrowings.
The principal payments are due as follows during the years ending December 31,:
AMOUNT
----------------------
2000 $ 4,431
2001 1,200
2002 873
2003 1,158
2004 36
Thereafter 25,000
----------------------
$ 32,698
======================
65
MB FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(TABLE AMOUNTS IN THOUSANDS EXCEPT COMMON SHARE DATA)
NOTE 13. LEASE COMMITMENTS AND RENTAL EXPENSE
The Company leases office space for certain branch offices. The future minimum
annual rental commitments for these noncancelable leases and subleases of such
space are as follows:
GROSS SUBLEASE
RENTS RENTS NET
------------------------------------------------------
2000 $ 2,554 $ 666 $ 1,888
2001 1,112 163 949
2002 623 - 623
2003 549 549
2004 523 523
Thereafter 2,016 2,016
------------------------------------------------------
$ 7,377 $ 829 $ 6,548
======================================================
Under the terms of these leases, the Company is required to pay its pro rata
share of the cost of maintenance and real estate taxes. Certain of these leases
also provide for increased rental payments based on increases in the Consumer
Price Index.
Net rental expense for the years ended December 31, 1999, 1998 and 1997 amounted
to $1.8 million, $483,000 and $317,000, respectively.
NOTE 14. EMPLOYEE BENEFIT PLANS
The Company has a defined contribution 401(k) plan which covers all full-time
employees of Manufacturers Bank who have completed three months of service prior
to the first day of each month. In addition, as a result of the merger, the
Company also has a defined contribution 401(k) plan which covers all full-time
employees of Avondale Federal Savings Bank who had completed three months of
service at the merger date. Effective January 1, 2000, Avondale Federal Savings
Bank 401(k) plan will be merged with the Manufacturers Bank 401(k) plan. The
Company's contributions consist of a discretionary profit-sharing contribution
and a discretionary matching contribution of the amounts contributed by the
participants. The Company's contributions are determined by the Board of
Directors on an annual basis.
During 1999, the Company contributed on behalf of each participant under the
Manufacturers Bank plan a matching contribution equal to 50% of each
participant's contribution up to a maximum of 4% of their compensation along
with a profit sharing contribution of 4% of total compensation. Each participant
under the Manufacturers Bank plan may also contribute up to fifteen percent of
his/her compensation on a pretax basis. The Company's contributions to the
Manufacturers Bank plan, for the years ended December 31, 1999, 1998 and 1997,
were $320,200, $635,000 and $441,000, respectively. In addition, during 1999,
the Company contributed on behalf of each participant under the Avondale Federal
Savings Bank plan a matching contribution equal to 50% for the first 2% of the
participant's contribution and 25% for the next 4% of the participant's
contribution up to a maximum of $500. Each participant under the Avondale
Federal Savings Bank plan may also contribute 15% of his/her compensation on a
pretax basis. The Company's contribution to the Avondale Federal Savings Bank
plan for the year ended December 31, 1999 was $109,500.
A supplemental/nonqualified retirement plan covers employees who hold the
position of vice president or higher. Contributions to the plan were $75,000,
$60,000 and $64,000 for the years ended December 31, 1999, 1998 and 1997,
respectively.
A noncontributory profit sharing plan covered substantially all full-time
employees of U.S. Bancorp, Inc., which was merged with Manufacturers Bank in
1997. The employer contribution was determined by the Board of Directors. The
expense related to the plan, for the year ended December 31, 1997, was $150,000.
66
MB FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(TABLE AMOUNTS IN THOUSANDS EXCEPT COMMON SHARE DATA)
NOTE 15. INCOME TAXES
The deferred taxes consist of:
DECEMBER 31,
-------------------------------------
1999 1998
-------------------------------------
Deferred tax assets:
Securities available for sale $ 1,994 $ -
Allowance for loan losses 4,155 1,760
Interest only securities 1,203 -
Deferred compensation 998 109
Accrued expenses 1,078 105
Net operating loss carryforwards 2,957 -
Other items 244 62
-------------------------------------
12,629 2,036
-------------------------------------
Deferred tax liabilities:
Securities discount accretion (492) (692)
Securities available for sale - (178)
Loans (360) (175)
Lease investments (2,588) (2,229)
Premises and equipment (143) (1,398)
Core deposit intangible (1,186) (1,611)
Interest only securities (90) -
Other items (284) (34)
-------------------------------------
(5,143) (6,317)
-------------------------------------
NET DEFERRED TAX ASSET (LIABILITY) $ 7,486 $ (4,281)
=====================================
Net operating loss carryforwards were acquired through the Avondale merger and
expire in 2012.
Income taxes consist of:
YEARS ENDED DECEMBER 31,
-----------------------------------------------------
1999 1998 1997
-----------------------------------------------------
Current expense:
Federal $ 2,114 $ 3,351 $ 3,141
State 6 96 346
-----------------------------------------------------
2,120 3,447 3,487
Deferred expense (benefit) 2,692 158 (1085)
-----------------------------------------------------
$ 4,812 $ 3,605 $ 2,402
=====================================================
The reconciliation between the statutory federal income tax rate and the
effective tax rate on consolidated income follows:
YEARS ENDED DECEMBER 31,
----------------------------------------------
1999 1998 1997
------------- ------------- -------------
Income tax at statutory rate 35.0 % 35.0 % 35.0 %
Increase (decrease) due to:
Graduated tax rates (0.7) (0.9) (1.0)
Tax exempt income (0.5) (0.6) (2.4)
Nondeductible interest expense - 0.1 0.3
State tax on income, net of federal income tax benefit - 0.6 3.6
Nondeductible amortization 1.9 3.5 4.3
Nondeductible acquisition expense - - 1.1
Reversal of prior year overaccrual (3.2) - -
Other items, net 1 (1.5) (2.7)
------------- ------------- -------------
Effective income tax rate 32.6 % 36.2 % 38.2 %
============= ============= =============
67
MB FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(TABLE AMOUNTS IN THOUSANDS EXCEPT COMMON SHARE DATA)
NOTE 16. COMMITMENTS AND CONTINGENT LIABILITIES
CREDIT-RELATED FINANCIAL INSTRUMENTS: The Company is a party to credit-related
financial instruments with off-balance-sheet risk in the normal course of
business to meet the financing needs of its customers. These financial
instruments include commitments to extend credit, standby letters of credit and
commercial letters of credit. Such commitments involve, to varying degrees,
elements of credit and interest rate risk in excess of the amount recognized in
the consolidated balance sheets.
The Company's exposure to credit loss is represented by the contractual amount
of these commitments. The Company follows the same credit policies in making
commitments as it does for on-balance-sheet instruments.
At December 31, 1999 and 1998, the following financial instruments were
outstanding whose contract amounts represent credit risk:
CONTRACT AMOUNT
-------------------------------------
1999 1998
-------------------------------------
Commitments to grant loans $ 189,898 $ 103,812
Unfunded commitments under lines of credit 39,140 22,520
Commercial and standby letters of credit 13,949 10,263
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require a payment of a fee. The commitments for equity lines of credit may
expire without being drawn upon. Therefore, the total commitment amounts do not
necessarily represent future cash requirements. The amount of collateral
obtained, if it is deemed necessary by the Company, is based on Management's
credit evaluation of the customer.
Unfunded commitments under commercial lines-of-credit, revolving credit lines
and overdraft protection agreements are commitments for possible future
extensions of credit to existing customers. These lines-of-credit are
uncollateralized and unusually do not contain a specified maturity date and may
not be drawn upon to the total extent to which the Company is committed.
Commercial and standby letters of credit are conditional commitments issued by
the Company to guarantee the performance of a customer to a third party. Those
letters-of-credit are primarily issued to support public and private borrowing
arrangements. Essentially all letters of credit issued have expiration dates
within one year. The credit risk involved in issuing letters-of-credit is
essentially the same as that involved in extending loan facilities to customers.
The Company generally holds collateral supporting those commitments if deemed
necessary.
CONCENTRATIONS OF CREDIT RISK: The majority of the loans, commitments to extend
credit, and standby letters of credit have been granted to customers in the
Company's market area. Investments in securities issued by state and political
subdivisions also involve governmental entities within the Company's market
area. The distribution of commitments to extend credit approximates the
distribution of loans outstanding. Standby letters of credit were granted
primarily to commercial borrowers.
CONTINGENCIES: In the normal course of business, the Company is involved in
various legal proceedings. In the opinion of management, any liability resulting
from such proceedings would not have a material adverse effect on the Company's
consolidated financial statements.
68
MB FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(TABLE AMOUNTS IN THOUSANDS EXCEPT COMMON SHARE DATA)
NOTE 17. REGULATORY RESTRICTIONS
The Company's primary source of cash is dividends from the Bank.
The Bank is subject to certain restrictions on the amount of dividends that it
may declare without prior regulatory approval. The dividends declared cannot be
in excess of the amount which would cause the Bank to fall below the minimum
required for capital adequacy purposes. The Bank also has an internal policy
that dividends declared will not be in excess of the amounts which would cause
the Bank to fall below the minimum required to be categorized as well
capitalized.
The Company and the Bank are subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory - and additional discretionary -
actions by regulators that, if undertaken, could have a direct material effect
on the Company's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Company's and Bank's
assets, liabilities, and certain off-balance-sheet items are calculated under
regulatory accounting practices. The Company's and Bank's capital amounts and
classification are also subject to qualitative judgments by the regulators about
components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and Bank to maintain minimum amounts and ratios (set forth
in the table below) of total and Tier 1 capital (as defined in the regulations)
to risk-weighted assets (as defined), and of Tier 1 capital (as defined) to
average assets (as defined). Management believes the Company and Bank meet all
capital adequacy requirements to which they are subject as of December 31, 1999.
As of December 31, 1999, the most recent notification from the Federal Deposit
Insurance Corporation categorized the Bank as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as well
capitalized the Bank must maintain the total risk-based, Tier 1 risk-based, and
Tier 1 leverage ratios as set forth in the well capitalized column in the table
below. There are no conditions or events since that notification that management
believes have changed the Bank's categories.
The required and actual amounts and ratios for the Company and Manufacturers
Bank are presented below:
TO BE WELL
CAPITALIZED UNDER
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
-------------------------------------------------------------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
-------------------------------------------------------------------------
As of December 31, 1999
Total capital (to risk-weighted assets):
Consolidated $ 105,291 10.01 % $ 84,134 8.00 % N/A N/A
Manufacturers Bank 108,506 10.34 83,978 8.00 $ 104,972 10.00 %
Tier 1 capital (to risk-weighted assets):
Consolidated 93,094 8.85 42,067 4.00 N/A N/A
Manufacturers Bank 96,309 9.17 41,989 4.00 62,983 6.00
Tier 1 capital (to average assets):
Consolidated 93,094 7.47 49,841 4.00 N/A N/A
Manufacturers Bank 96,309 7.74 49,797 4.00 62,246 5.00
As of December 31, 1998
Total capital (to risk-weighted assets):
Consolidated 61,382 10.00 49,094 8.00 N/A N/A
Manufacturers Bank 62,917 10.26 49,078 8.00 61,347 10.00
Tier 1 capital (to risk-weighted assets):
Consolidated 45,293 7.38 24,547 4.00 N/A N/A
Manufacturers Bank 56,574 9.22 24,539 4.00 36,808 6.00
Tier 1 capital (to average assets):
Consolidated 45,293 5.25 34,509 4.00 N/A N/A
Manufacturers Bank 56,574 6.57 34,454 4.00 43,068 5.00
N/A - not applicable
69
MB FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(TABLE AMOUNTS IN THOUSANDS EXCEPT COMMON SHARE DATA)
NOTE 18. FAIR VALUE INFORMATION AND INTEREST RATE RISK
Fair values of financial instruments are management's estimate of the values at
which the instruments could be exchanged in a transaction between willing
parties. These estimates are subjective and may vary significantly from amounts
that would be realized in actual transactions. In addition, other significant
assets are not considered financial assets including deferred tax assets,
premises and equipment and intangibles. Further, the tax ramifications related
to the realization of the unrealized gains and losses can have a significant
effect on the fair value estimates and have not been considered in any of the
estimates.
The following methods and assumptions were used by the Company in estimating the
fair value of its financial instruments:
CASH AND SHORT-TERM INVESTMENTS: The carrying amounts reported in the
balance sheet for cash and due from banks, other interest bearing deposits
and federal funds sold approximate their fair values.
SECURITIES HELD TO MATURITY AND AVAILABLE FOR SALE: Fair values for
securities are based on quoted market prices, where available. If quoted
prices are not available, fair values are based on quoted market prices of
comparable instruments.
STOCK IN FEDERAL HOME LOAN BANK: No ready market exists for the stock, and
it has no quoted market value. The stock is redeemable at par therefore;
fair value equals cost.
LOANS: Most commercial loans, and some real estate mortgage loans, are
made on a variable rate basis. For those variable-rate loans that reprice
frequently, and with no significant change in credit risk, fair values are
based on carrying values. The fair values for fixed rate and all other
loans are estimated using discounted cash flow analyses, using interest
rates currently being offered for loans with similar terms to borrowers
with similar credit quality.
INTEREST ONLY SECURITIES: For interest-only securities, cash flows are
projected over the life of the securitized loans using prepayment,
delinquency, default and interest rate assumptions that market
participants would use for similar financial instruments subject to
prepayment, credit and interest rate risk. These cash flows are then
discounted using an interest rate that a purchaser unrelated to the seller
of such financial instruments would demand.
DEPOSIT LIABILITIES: The fair values disclosed for deposits with no
defined maturities are equal to their carrying amounts, which represent
the amount payable on demand. The carrying amounts for variable-rate,
fixed-term money market accounts and certificates of deposit approximate
their fair value at the reporting date. Fair values for fixed-rate
certificates of deposit are estimated using a discounted cash flow
calculation that applies interest rates currently being offered on
certificates to a schedule of aggregated expected monthly maturities on
time deposits.
SHORT-TERM BORROWINGS: The carrying amounts of federal funds purchased,
borrowings under repurchase agreements and other short-term borrowings
approximate their fair values.
LONG-TERM BORROWINGS: The fair values of the Company's long-term
borrowings (other than deposits) are estimated using discounted cash flow
analyses, based on the Company's current incremental borrowing rates for
similar types of borrowing arrangements.
ACCRUED INTEREST PAYABLE AND RECEIVABLE: The carrying amounts of accrued
interest approximate their fair values.
OFF-BALANCE-SHEET INSTRUMENTS: Fair values for the Company's
off-balance-sheet lending commitments (guarantees, letters of credit and
commitments to extend credit) are based on fees currently charged to enter
into similar agreements, taking into account the remaining terms of the
agreements and the counter parties' credit standing.
70
MB FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(TABLE AMOUNTS IN THOUSANDS EXCEPT COMMON SHARE DATA)
NOTE 18. FAIR VALUE INFORMATION AND INTEREST RATE RISK (CONTINUED)
The estimated fair value of financial instruments is as follows:
DECEMBER 31,
----------------------------------------------------------------------
1999 1998
----------------------------------------------------------------------
CARRYING CARRYING
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
- ----------------------------------------------------------------------------------------------------------------------
Financial Assets
Cash and due from banks $ 29,420 $ 29,420 $ 23,669 $ 23,669
Other interest bearing deposits 1,487 1,487 - -
Federal funds sold - - 20,350 20,350
Securities available for sale 271,313 271,313 212,020 212,020
Securities held to maturity - - 11,142 11,529
Stock in Federal Home
Loan Bank 6,290 6,290 2,614 2,614
Loans 890,929 889,869 542,009 549,737
Accrued interest receivable 8,146 8,146 4,872 4,872
Interest only securities 13,821 13,821
Financial Liabilities
Deposits 936,075 931,016 645,661 646,201
Short-term borrowings 244,569 244,569 130,521 130,521
Long-term borrowings 32,698 32,649 37,034 37,034
Accrued interest payable 2,461 2,461 2,652 2,652
Off-balance-sheet instruments, loan
commitments and standby
letters of credit - -
The Company assumes interest rate risk (the risk that general interest rate
levels will change) as a result of its normal operations. As a result, the fair
values of the Company's financial instruments will change when interest rate
levels change and that change may be either favorable or unfavorable to the
Company. Management attempts to match maturities of assets and liabilities to
the extent believed necessary to minimize interest rate risk. However, borrowers
with fixed rate obligations are more likely to prepay in a falling rate
environment and less likely to prepay in a rising rate environment. Conversely,
depositors who are receiving fixed rates are more likely to withdraw funds
before maturity in a rising rate environment and less likely to do so in a
falling rate environment. Management monitors rates and maturities of assets and
liabilities and attempts to minimize interest rate risk by adjusting terms of
new loans and deposits and by investing in securities with terms that mitigate
the Company's overall interest rate risk.
NOTE 19. STOCK OPTION PLAN
Through the Avondale merger, the Company adopted the Omnibus Incentive Plan
which was established in 1997 and modified February 10, 1999. Options
outstanding under the Company's previous plan adopted in 1995 were
transferred to the 1997 plan with the number of options and exercise prices
being converted using a ratio of 83.5 to 1. The Plan reserves 1,000,000
shares of common stock for issuance to key employees of the Company or any of
its subsidiaries under a stock option plan approved by the Board of Directors
and stockholders. A grant under the Plan may be options intended to be
incentive stock options (ISO), non-qualified stock options (NQSO), stock
appreciation rights or restricted stock. The Committee, appointed by the
Board of Directors, administers the Plan.
71
MB FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(TABLE AMOUNTS IN THOUSANDS EXCEPT COMMON SHARE DATA)
NOTE 19. STOCK OPTION PLAN (CONTINUED)
Options granted under the Plan may be exercised at such times and be subject to
such restrictions and conditions as the Committee shall in each instance
approve, which not be the same for each grant. Each option granted shall expire
at such time as the Committee shall determine at the time of grant; provided
however, that no option shall be exercisable later than the fifteenth
anniversary date of its grant. The option price for each grant of an option
shall be determined by the Committee, provided that the option price shall not
be less than 100% of the fair market value of a share on the date the option is
granted. In the event any holder of 10% or more of the shares is granted an
incentive stock option, the option price shall not be less than 110% of the fair
market value of a share on the date of grant. Once an option has been granted,
the option price with respect thereto may not be changed. At December 31, 1999,
there were 748,434 outstanding options under the Plan. There are no stock
appreciation rights or restricted shares outstanding as of December 31, 1999.
Other pertinent information related to the Plan options is as follows:
DECEMBER 31,
--------------------------------------------------------------------------
1999 1998
--------------------------------------------------------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
SHARES PRICE SHARES (1) PRICE (1)
--------------------------------------------------------------------------
Outstanding at beginning of year 133,016 $ 11.46 80,912 $ 10.68
Granted 207,990 13.60 54,860 12.49
Exercised - - - -
Forfeited 15,600 13.60 2,756 11.14
Options acquired through merger 423,028 16.15 - -
==========================================================================
Outstanding at end of year 748,434 $ 14.66 133,016 $ 11.46
==========================================================================
Exercisable at end of year 564,656 $ 14.98 13,193 $ 11.03
==========================================================================
Weighted average fair value per
option of options granted
during the year $ 7.70 $ 6.07
=================== ==================
(1) Converted using an exchange ratio of 83.5 to 1 for the year
ended December 31, 1998.
72
MB FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(TABLE AMOUNTS IN THOUSANDS EXCEPT COMMON SHARE DATA)
NOTE 19. STOCK OPTION PLAN (CONTINUED)
The following table presents certain information with respect to stock options
granted: .
OPTIONS OUTSTANDING AND EXERCISABLE
--------------------------------------------------------------
WEIGHTED AVERAGE WEIGHTED AVERAGE
NUMBER REMAINING EXERCISE
Range of Exercise Prices OUTSTANDING CONTRACTUAL LIFE PRICE
- ------------------------------------------------------------------------------------------------------------------
$10.36 - $12.93 $ 128,843 7.10 $ 11.37
$13.00 - $13.50 157,275 9.30 13.47
$14.04 - $14.38 293,750 6.50 14.32
$15.75 - $17.38 80,204 3.90 17.08
$19.35 - $22.28 88,362 4.20 20.51
As permitted under generally accepted accounting principles, grants under the
plan are accounted for following the provisions of APB Opinion No. 25 and its
related interpretations. Accordingly, no compensation cost has been recognized
for grants made to date. Had compensation cost been determined based on the fair
value method prescribed in FASB Statement No. 123, reported net income and
earnings per common share would have been reduced to the pro forma amounts shown
below:
DECEMBER 31,
-----------------------------------------------------
1999 1998 1997
-----------------------------------------------------
Net income
As reported $ 9,954 $ 6,255 $ 3,449
Pro forma 9,270 6,105 3,373
Basic earnings per common share
As reported $ 1.51 $ 1.26 $ 0.76
Pro forma 1.41 1.23 0.75
Diluted earnings per common share
As reported $ 1.51 $ 1.25 $ 0.76
Pro forma 1.41 1.22 0.75
In determining the pro forma amounts above, the value of each grant is estimated
at the grant date using the binomial method, with the following weighted-average
assumptions for each year presented: dividend rate of 0%, risk-free interest
rate of 6.2%, expected life of 10 years and expected price volatility of 37%.
73
MB FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(TABLE AMOUNTS IN THOUSANDS EXCEPT COMMON SHARE DATA)
NOTE 20. CONDENSED PARENT COMPANY FINANCIAL INFORMATION
The condensed financial statements of MB Financial, Inc. (parent company only)
are presented below:
BALANCE SHEETS
DECEMBER 31,
------------------------------------
1999 1998
- -----------------------------------------------------------------------------------------------------------------------
ASSETS
Cash $ 1,274 $ 179
Investments in subsidiaries 106,553 65,942
Note receivable, subsidiary - 7,500
Other assets 1,863 1,788
------------------------------------
TOTAL ASSETS $ 109,690 $ 75,409
====================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Short-term borrowings $ 5,000 $ -
Long-term borrowings 25,000 28,500
Liabilities, other 312 49
Stockholders' Equity 79,378 46,860
------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 109,690 $ 75,409
====================================
STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31,
-------------------------------------------------
1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
Dividends from subsidiaries $ 1,000 $ 2,888 $ 2,283
Interest and other income - 4,660 370
Interest and other expense (2,411) (1,902) (1,804)
-------------------------------------------------
INCOME (LOSS) BEFORE INCOME TAX EXPENSE (CREDITS) AND
EQUITY IN UNDISTRIBUTED NET INCOME OF SUBSIDIARIES (1,411) 5,646 849
Income tax expense (credits) 921 870 (596)
-------------------------------------------------
INCOME (LOSS) BEFORE EQUITY IN UNDISTRIBUTED NET
INCOME OF SUBSIDIARIES (490) 4,776 1,445
Equity in undistributed net income of subsidiaries 10,444 1,479 2,004
-------------------------------------------------
NET INCOME $ 9,954 $ 6,255 $ 3,449
=================================================
74
MB FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(TABLE AMOUNTS IN THOUSANDS EXCEPT COMMON SHARE DATA)
NOTE 20. CONDENSED PARENT COMPANY FINANCIAL INFORMATION (CONTINUED)
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------------
Cash Flows From Operating Activities
Net income $ 9,954 $ 6,255 $ 3,449
Adjustments to reconcile net income to net cash provided by
By operating activities:
Depreciation and amortization (214) 1 (110)
Equity in undistributed net income of subsidiaries (10,444) (1,479) (2,004)
Gain on sale of Coal City National Bank - (4,099)
Change in other assets and other liabilities (59) (1,358) (490)
-----------------------------------------------
NET CASH (USED IN) OPERATING ACTIVITIES (763) (680) (845)
-----------------------------------------------
Cash Flows From Investing Activities
Purchase of subsidiary preferred stock - - (19,000)
Purchase of interest in grantor trust - - (309)
Sale of interest in grantor trust - 309
Cash received from subsidiary for preferred stock redemption - 2,000 2,000
Purchase of minority interests - (2,328) (2,649)
Proceeds from sale of Coal City National Bank - 7,800
Sale of interest in Peterson Bank - - 901
Issuance of note receivable from subsidiary - - (7,500)
Cash received from Merger 359 - -
-----------------------------------------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 359 7,781 (26,557)
-----------------------------------------------
Cash Flows From Financing Activities
Purchase and retirement of common stock (1) (659) (194)
Issuance of common stock - - 115
Issuance of preferred stock - - 10,200
Purchase and retirement of preferred stock - (10,200)
Dividends paid - (1,085) (276)
Proceeds from short-term borrowings 5,000 - -
Proceeds from long-term borrowings 1,000 28,700 23,809
Principal paid on long-term borrowings (4,500) (24,009) (7,750)
-----------------------------------------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 1,499 (7,253) 25,904
-----------------------------------------------
NET INCREASE (DECREASE) IN CASH 1,095 (152) 192
Cash:
Beginning 179 331 139
-----------------------------------------------
Ending $ 1,274 $ 179 $ 331
===============================================
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
75
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS - The information with respect to Directors set forth under
"Directors and Executive Management" up to the subcaption "Executive Officers"
in the Company's proxy statement for its 2000 Annual Meeting of Stockholders
("Proxy Statement") is incorporated herein by reference.
EXECUTIVE OFFICERS - The information with respect to Executive Officers set
forth under the subcaption "Executive Officers" under "Directors and Executive
Officers" in the Proxy Statement is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information set forth under "Directors and Executive Officers in the
Proxy Statement following the subcaption "Meetings and Committees of the Board
of Directors" up to the subcaption "Certain Transactions" is incorporated herein
by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information set forth under the caption "Voting Securities and Certain
Holders Thereof" in the Proxy Statement is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information set forth under the subcaption "Certain Transactions" in
the Proxy Statement is incorporated herein by reference.
76
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(A)(1) FINANCIAL STATEMENTS: See Part II--Item 8. Financial Statements and
Supplementary Data
(A)(2) EXHIBITS: See Item 14(c)
(B) REPORTS ON FORM 8-K: None
(C) EXHIBITS:
EXHIBIT NUMBER DESCRIPTION
2 Agreement and Plan of Merger, dated as of October 12,
1998, by and between Avondale Financial Corp.
("Avondale") and Coal City Corporation (incorporated
by reference to Exhibit 2 to Current Report on Form
8-K of Avondale filed with the Securities and
Exchange Commission on October 16, 1998)
3.1 Certificate of Incorporation (incorporated by
reference to Exhibit 3.1 to Registration Statement on
Form S-1 of Avondale (No. 33-80774))
3.2 Certificate of Merger (incorporated by reference to
Exhibit 3(i) to the Current Report of MB Financial,
Inc. (the "Company") dated February 26, 1999)
3.3 Certificate of Amendment of Certificate of
Incorporation (incorporated by reference to Exhibit
3(ii) to the Current Report on Form 8-K of the
Company dated February 26, 1999)
3.4 Bylaws (incorporated by reference to Exhibit 3.2 to
Registration Statement on Form S-1 of Avondale (No.
33-80774))
3.5 Amendment to the Bylaws (incorporated by reference to
Exhibit 3(iii) to the Current Report on Form 8-K of
the Company dated February 26, 1999)
4.1 The Company hereby agrees to furnish to the
Commission, upon request, the instruments defining
the rights of the holders of each issue of long-term
debt of the Company and its consolidated
subsidiaries.
10.1 Employment Agreement between the Company and Robert
S. Engelman, Jr. (incorporated by reference to
Exhibit 10.2 to the Registration Statement on Form
S-4 of Avondale (No. 333-70017))
10.2 Form of Change of Control Severance Agreement between
Manufacturers Bank and Thomas Panos and Others
(incorporated by reference to pages A-24 to A-27 of
the Company's Definitive Proxy Statement for its 1999
Annual Meeting of Stockholders).
10.3 Form of Change in Control Severance Agreement between
Manufacturers Bank and Howard A. Jaffe (incorporated
by reference to Exhibit 10.4 to the Registration
Statement on Form S-4 of Avondale (No. 333-70017))
77
10.4 Form of Employment Agreement between the Company and
Mitchell Feiger (incorporated by reference to Exhibit
10.5 to the Registration Statement on Form S-4 of
Avondale (No. 333-70017)
10.5 Form of Employment Agreement between the Company and
Burton Field
10.6 Stock Option and Incentive Plan (incorporated by
reference to Exhibit 4.3 to Avondale's Registration
Statement on Form S-8 (No. 33-98860))
10.7 Recognition and Retention Plan (incorporated by
reference to Exhibit 4.3 to Avondale's Registration
Statement on Form S-8 (No. 33-98862))
10.8 Unfunded Deferred Compensation Plan for Directors and
Executive Officers (incorporated by reference to
Exhibit 4.3 to Avondale's Registration Statement on
Form S-8 (No. 333-4592))
10.9 Omnibus Plan (incorporated by reference to Exhibit
10.1 to Avondale's Annual Report on Form 10-K for the
year ended December 31, 1996)
10.10 Supplemental Executive Retirement Plan Agreement
(incorporated by reference to Exhibit 10.2 to
Avondale's Annual Report on Form 10-K for the year
ended December 31, 1996)
21 Subsidiaries
27 Financial Data Schedule
78
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON
ITS BEHALF BY THE UNDERSIGNED HEREUNTO DULY AUTHORIZED, ON THIS 30TH DAY OF
MARCH, 2000.
MB FINANCIAL, INC.
(registrant)
By: /s/ MITCHELL FEIGER
--------------------------
MITCHELL FEIGER
PRESIDENT AND CHIEF EXECUTIVE OFFICER
(PRINCIPAL EXECUTIVE OFFICER)
By: /s/ HOWARD A. JAFFE
--------------------------
HOWARD A. JAFFE
VICE PRESIDENT
AND CHIEF FINANCIAL OFFICER
(PRINCIPAL FINANCIAL OFFICER AND
PRINCIPAL ACCOUNTING OFFICER)
79
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED. EACH DIRECTOR OF
THE REGISTRANT, WHOSE SIGNATURE APPEARS BELOW, HEREBY APPOINTS MITCHELL FEIGER
AND HOWARD A. JAFFE AND EACH OF THEM SEVERALLY, AS HIS ATTORNEY-IN-FACT, TO SIGN
IN HIS NAME AND ON HIS BEHALF, AS A DIRECTOR OF THE REGISTRANT, AND TO FILE WITH
THE COMMISSION ANY AND ALL AMENDMENTS TO THIS REPORT ON FORM 10-K, ON THIS THE
30TH DAY OF MARCH 1999.
SIGNATURE TITLE
/s/ Robert S. Engelman, Jr. Director
- ------------------------------------------------------
ROBERT S. ENGELMAN, JR.
/s/ Thomas F. Carey Director
- ------------------------------------------------------
THOMAS F. CAREY
/s/ R. Thomas Eiff Director
- ------------------------------------------------------
R. THOMAS EIFF
/s/ Alfred Feiger Director
- ------------------------------------------------------
ALFRED FEIGER
/s/ Mitchell Feiger Director
- ------------------------------------------------------
MITCHELL FEIGER
/s/ Burton J. Field Director
- ------------------------------------------------------
BURTON J. FIELD
/s/ Lawrence E. Gilford Director
- ------------------------------------------------------
LAWRENCE E. GILFORD
/s/ Richard I. Gilford Director
- ------------------------------------------------------
RICHARD I. GILFORD
/s/ David L. Husman Director
- ------------------------------------------------------
DAVID L. HUSMAN
/s/ Arthur L. Knight, Jr. Director
- ------------------------------------------------------
ARTHUR L. KNIGHT, JR.
/s/ Peter G. Krivkovich Director
- ------------------------------------------------------
PETER G. KRIVKOVICH
/s/ Clarence Mann Director
- ------------------------------------------------------
CLARENCE MANN
/s/ Hipolito Roldan Director
- ------------------------------------------------------
HIPOLITO ROLDAN
/s/ Robert A. Wislow Director
- ------------------------------------------------------
ROBERT A. WISLOW
80
MB FINANCIAL, INC. AND SUBSIDIARIES
FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 1999
EXHIBIT INDEX
EXHIBITS PAGE
10.5 Form of Employment Agreement with Burton Field 82
21 Subsidiaries of the Company 89
27 Financial Data Schedule
81