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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
Commission file number 0-24566
MB FINANCIAL, INC.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
36-3895923
(I.R.S. Employer Identification No.)
1200 North Ashland Avenue, Chicago, Illinois 60602
(Address of principal executive offices)
Registrant's telephone number, including area code: (773) 645-7866
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to
such filing requirements for the past 90 days.
YES: XXX NO: ____
---
There were issued and outstanding 7,064,515 shares of the Registrant's
common stock as of August 10, 1999.
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MB FINANCIAL, INC. AND SUBSIDIARIES
FORM 10-Q
June 30, 1999
INDEX
-----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated balance sheets at June 30, 1999, December 31, 1998 and June 30, 1998 3
Consolidated statements of income for the three and six months ended
June 30, 1999 and 1998 4
Consolidated statements of cash flows for the six months ended June 30, 1999 and 1998 5 - 6
Notes to consolidated financial statements 7 - 11
Item 2. Management's discussion and analysis of financial condition and results of operations 11 - 21
Item 3. Quantitative and Qualitative Disclosures about Market Risk 22
PART II. OTHER INFORMATION
Signatures 22
2
PART I.- FINANCIAL INFORMATION
Item 1. Financial Statements
MB FINANCIAL, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited - June 30, 1999 and 1998)
(Statement Amounts in Thousands)
June 30, December 31, June 30,
1999 1998 1998
-----------------------------------------
ASSETS
Cash and due from banks $ 30,953 $ 23,669 $ 27,968
Investment securities:
Securities available for sale 254,288 212,020 224,837
Securities held to maturity (fair value of $10,701 at
June 30, 1999, $11,529 at December 31, 1998 and
$10,495 at June 30, 1998) 10,573 11,142 10,161
Stock in Federal Home Loan Bank 5,290 2,614 2,239
Federal funds sold - 20,350 21,000
Other interest bearing deposits 469 - -
Loans (net of allowance for loan losses of $14,453 at June 30, 1999,
$6,344 at December 31, 1998 and $7,014 at June 30, 1998) 815,321 542,009 523,206
Lease investments, net 22,419 21,931 21,841
Premises and equipment, net 12,105 11,483 11,474
Interest only securities 15,150 - -
Intangibles, net 17,057 18,293 20,249
Other assets 30,359 8,380 7,392
-----------------------------------------
Total assets $1,213,984 $871,891 $870,367
=========================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits:
Non-interest bearing $ 141,333 $128,218 $138,372
Interest bearing 797,520 517,443 505,739
-----------------------------------------
Total deposits 938,853 645,661 644,111
Short-term borrowings 42,411 130,521 131,909
Long-term borrowings 136,802 37,034 26,168
Other liabilities 21,228 11,815 10,809
-----------------------------------------
Total liabilities 1,139,294 825,031 812,997
-----------------------------------------
Minority Interest in Subsidiary - - 1,315
-----------------------------------------
Stockholders' Equity
Preferred stock, (Class B, $150,000 par value; authorized 100 shares;
issued June 30, 1998 68 shares) - - 10,200
Common stock, (June 30, 1999 $0.01 par value;
authorized 20,000,000 shares; issued 7,064,515 shares;
December 31, 1998 and June 30, 1998 no par value;
$10 stated value; authorized 200,000 shares; issued 48,957 shares) 71 490 490
Additional paid-in capital 50,447 23,794 23,779
Retained earnings 26,427 22,232 21,390
Accumulated other comprehensive income (2,255) 344 196
-----------------------------------------
Total stockholders' equity 74,690 46,860 56,055
-----------------------------------------
Total liabilities and stockholders' equity $1,213,984 $871,891 $870,367
=========================================
See Notes to Consolidated Financial Statements.
3
MB FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Statement Amounts in Thousands except Common Share Data)
(Unaudited)
Three Months Ended June 30, Six Months Ended June 30,
-----------------------------------------------------------------
1999 1998 1999 1998
-----------------------------------------------------------------
Interest Income:
Loans $ 16,140 $ 11,092 $ 28,942 $ 22,251
Investment securities:
Taxable 4,836 2,777 8,475 5,308
Nontaxable 81 71 160 153
Federal funds sold 325 91 618 209
Other interest bearing accounts 19 - 36 -
-----------------------------------------------------------------
Total interest income 21,401 14,031 38,231 27,921
-----------------------------------------------------------------
Interest expense:
Deposits 8,264 5,610 14,568 11,203
Short-term borrowings 743 1,080 2,250 1,811
Long-term borrowings 1,834 514 2,904 1,077
-----------------------------------------------------------------
Total interest expense 10,841 7,204 19,722 14,091
-----------------------------------------------------------------
Net interest income 10,560 6,827 18,509 13,830
Provision for loan losses 288 187 534 375
-----------------------------------------------------------------
Net interest income after provision for loan losses 10,272 6,640 17,975 13,455
-----------------------------------------------------------------
Other income:
Loan service fees 1,077 78 1,477 166
Deposit service fees 818 902 1,509 1,604
Lease financing, net 229 659 466 904
Net gains on sale of securities available for sale 7 - 7 15
Gain on sale of Coal City National Bank - - - 4,099
Other operating income 451 127 686 478
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Total other income 2,582 1,766 4,145 7,266
-----------------------------------------------------------------
Other expense:
Salaries and employee benefits 4,450 3,078 8,267 6,731
Occupancy and equipment expenses 1,512 933 2,787 1,879
Intangibles amortization expense 618 810 1,236 1,621
Other operating expenses 2,212 1,545 3,565 2,975
-----------------------------------------------------------------
Total other expense 8,792 6,366 15,855 13,206
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Income before income taxes and minority interest 4,062 2,040 6,265 7,515
Income taxes 1,311 815 2,070 2,700
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Income before minority interest 2,751 1,225 4,195 4,815
Minority interest - (23) - (55)
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Net income 2,751 1,202 4,195 4,760
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Other comprehensive income:
Unrealized securities (losses) gains, net of income taxes (1,864) 7 (2,594) (115)
Less: reclassification adjustments for gains included
in net income, net of income taxes 5 - 5 10
------------------------------------------------------------------
Other comprehensive income (1,869) 7 (2,599) (125)
-----------------------------------------------------------------
Comprehensive income $ 882 $ 1,209 $ 1,596 $ 4,635
=================================================================
Net income $ 2,751 $ 1,202 $ 4,195 $ 4,760
Preferred stock dividend - - - 434
-----------------------------------------------------------------
Net income available to common stockholders $ 2,751 $ 1,202 $ 4,195 $ 4,326
=================================================================
Common share data:
Basic earnings per common share $ 0.39 $ 0.29 $ 0.69 $ 1.06
Diluted earnings per common share $ 0.39 $ 0.29 $ 0.69 $ 1.05
Weighted average common shares outstanding 7,064,515 4,087,910 6,105,417 4,098,635
See Notes to Consolidated Financial Statements.
4
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Statement Amounts in Thousands)
Six Months Ended June 30,
--------------------------
1999 1998
--------------------------
Cash Flows From Operating Activities
Net income $ 4,195 $ 4,760
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation 4,667 4,280
Gain on disposal of premises and equipment and leased equipment - (267)
Gain on sale of Coal City National Bank - (4,099)
Amortization of intangibles 1,236 1,621
Provision for loan losses 534 375
Credit for deferred income taxes (563) (303)
Bond accretion, net (1,279) (1,268)
Securities gains, net (7) (15)
Minority interest in net income - 55
Increase in accrued other assets (2,757) (180)
Increase (decrease) in other liabilities 408 (906)
--------------------------
Net cash provided by operating activities 6,434 4,053
--------------------------
Cash Flows From Investing Activities
Proceeds from sales of securities available for sale 19,998 14,004
Proceeds from maturities and calls of securities available for sale 157,083 57,534
Proceeds from maturities and calls of securities held to maturity 606 447
Purchase of securities available for sale (26,070) (175,618)
Purchase of securities held to maturity - (5,485)
Federal funds sold, net 65,850 (3,100)
Other interest bearing deposits, net 1,003 -
Increase in loans, net of principal collections (76,012) (21,977)
Purchases of premises and equipment and leased equipment (5,782) (7,972)
Proceeds from sales of premises and equipment and leased equipment - 3,852
Proceeds from sales of other real estate owned 670 3,518
Principal collected on lease investments 194 -
Purchase of minority interests - (1,715)
Proceeds from sale of Coal City National Bank, net - 5,481
Cash acquired through merger with Avondale Financial Corp. 7,224 -
--------------------------
Net cash provided by (used in) investing activities 144,764 (131,031)
--------------------------
Cash Flows From Financing Activities
Net increase in noninterest bearing deposits 13,115 13,307
Net decrease in interest bearing deposits (62,884) (1,204)
Net increase (decrease) in short-term borrowings (93,110) 113,896
Proceeds from long-term borrowings 2,414 2,815
Principal paid on long-term borrowings (3,449) (9,062)
Purchase and retirement of common stock - (674)
Dividends paid on preferred stock - (434)
--------------------------
Net cash provided by (used in) financing activities (143,914) 118,644
--------------------------
Net increase (decrease) in cash and cash due from banks $ 7,284 $ (8,334)
Cash and due from banks:
Beginning 23,669 36,302
--------------------------
Ending $ 30,953 $ 27,968
==========================
(continued)
5
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(Unaudited)
(Statement Amounts in Thousands)
Six Months Ended June 30,
------------------------------------------
1999 1998
------------------------------------------
Supplemental Disclosures of Cash Flow Information
Cash payments for:
Interest paid to depositors $ 14,645 $ 11,156
Other interest paid 5,442 2,273
Income taxes paid, net of refunds 1,199 2,710
Supplemental Schedule of Noncash Investing Activities
Merger with Avondale Financial Corp.
Noncash Assets acquired:
Securities available for sale $ 185,125
Stock in Federal Home Loan Bank 5,290
Federal funds sold 45,500
Other interest bearing deposits 1,472
Loans, net 205,861
Premises and equipment 189
Accrued interest and other and other assets 21,229
Interest only securities 13,758
------------------
478,424
------------------
Liabilities assumed:
Interest bearing deposits 342,961
Short-term borrowings 5,000
Long-term borrowings 100,803
Other liabilities 10,575
------------------
459,339
------------------
Net noncash assets acquired $ 19,085
------------------
Cash acquired $ 7,224
==================
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 696
Other 317
------------------
55,996
------------------
Liabilities sold:
Deposits 52,052
Other 243
------------------
52,295
------------------
Net assets sold $ 3,701
==================
Cash received $ 7,800
==================
Real estate acquired in settlement of losses $ 94 $ 222
==========================================
See Notes to Consolidated Financial Statements.
6
MB FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The unaudited consolidated financial statements include the accounts of MB
Financial, Inc. and its subsidiaries (the "Company"). In the opinion of
management, all adjustments (consisting only of normal recurring adjustments)
necessary for a fair presentation of the financial position, results of
operation and cash flows for the interim periods have been made. The results of
operations for the three and six months ended June 30, 1999 are not necessarily
indicative of the results expected for the entire fiscal year.
The unaudited interim financial statements have been prepared in conformity
with generally accepted accounting principles and industry practice. Certain
information in footnote disclosure normally included in financial statements
prepared in accordance with generally accepted accounting principles and
industry practice has been condensed or omitted pursuant to rules and
regulations of the Securities and Exchange Commission. The Company believes the
disclosures made in the consolidated financial statements are adequate so that
the financial statements are not misleading. These financial statements should
be read in conjunction with consolidated financial statements and notes thereto
included in Coal City Corporation's December 31, 1998 audited financial
statements filed with Form 8-K.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions which affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities as of the date of the financial
statements, as well as the reported amounts of income and expenses during the
reported periods. Actual results could differ from those estimates.
2. THE MERGER
On February 26, 1999, Coal City Corporation, the holding company for
Manufacturers Bank (the "Bank"), was merged with and into Avondale Financial
Corp., the holding company for Avondale Federal Savings Bank. The resulting
entity was renamed MB Financial, Inc. Simultaneously, Avondale Federal Savings
Bank was merged into Manufacturers Bank.
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. The amount
of goodwill that was recorded at the merger date was a negative $267 thousand,
which represents the excess of the fair value of net assets acquired over total
consideration. Negative goodwill is being amortized over a ten-year period.
Included in the purchase accounting adjustments was an accrual of $8.0 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 June 30, 1999, the remaining liability was
approximately $7.1 million primarily for lease contracts, termination of data
processing contracts and severance costs. The majority of the remaining costs
are scheduled to occur in 1999.
Each share of Coal City Common Stock issued and outstanding on February 26,
1999 was converted into 83.5 shares of Avondale Financial Corp. Consequently,
common share data for the three and six months end 1999 and 1998 was converted
at an exchange rate of 83.5.
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.
7
Unaudited pro forma consolidated results of operations for the three and
six months ended June 30, 1999 and 1998 are as follows (in thousands):
Three Months Ended Six Months Ended
------------------------------------------------------------
June 30, 1999 June 30, 1998 June 30, 1999 June 30, 1998
------------------------------------------------------------
Net interest income $ 10,560 $ 10,753 $ 20,914 $ 22,326
Net income 2,751 2,968 1,960 6,732
Net income available to common stockholders 2,751 2,968 1,960 6,298
Basic earnings per common share $ 0.39 $ 0.41 $ 0.28 $ 0.86
Diluted earnings per common share $ 0.39 $ 0.41 $ 0.28 $ 0.86
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.
3. REGULATORY CAPITAL
The Company and it's subsidiary, the Bank, are subject to certain
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 using regulatory accounting practices. The Company's and
Bank's capital amounts and classification are also subject to qualitative
judgements by the regulators about components, risk weightings, and other
factors.
Quantitative measures established by regulation to ensure capital adequacy
require the 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 Tier 1 capital to average assets (as defined).
The Company and the Bank were in full compliance with all capital adequacy
requirements to which they are subject at June 30, 1999. As of June 30, 1999,
the most recent notification from the Federal Deposit Insurance Corporation
categorized the Bank as "well capitalized" under the framework of prompt
corrective action. To be categorized as "well capitalized" the Bank must
maintain the total risk-based, Tier I risk-based and Tier I 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 categorization.
The required and actual amounts and ratios for the Company and the Bank 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 June 30, 1999 (unaudited)
Total capital (to risk-weighted
assets):
MB Financial, Inc. $ 98,472 10.18 % $ 77,387 8.00 % N/A N/A
Manufacturers Bank 98,615 10.21 % 77,301 8.00 % $ 96,627 10.00 %
Tier 1 capital (to
risk-weighted assets):
MB Financial, Inc. 86,132 8.90 % 38,694 4.00 % N/A N/A
Manufacturers Bank 86,539 8.96 % 38,651 4.00 % 57,976 6.00 %
Tier 1 capital (to average
assets):
MB Financial, Inc. 86,132 6.95 % 49,601 4.00 % N/A N/A
Manufacturers Bank 86,539 6.99 % 49,549 4.00 % 61,936 5.00 %
8
4. EARNINGS PER SHARE DATA
The following table sets forth the computation of basic and diluted earnings
per share for the periods indicated (in thousands except per share data):
Three Months Ended Six Months Ended
------------------------------------------------------------
June 30, 1999 June 30, 1998 June 30, 1999 June 30, 1998
------------------------------------------------------------
Basic:
Net income $ 2,751 $ 1,202 $ 4,195 $ 4,760
Less preferred dividends - - - 434
------------------------------------------------------------
Net income available to common stockholders 2,751 1,202 4,195 4,326
Average shares outstanding 7,064,515 4,087,910 6,105,417 4,098,635
------------------------------------------------------------
Basic earnings per share $ 0.39 $ 0.29 $ 0.69 $ 1.06
============================================================
Diluted:
Net income $ 2,751 $ 1,202 $ 4,195 $ 4,760
Less preferred dividends - - - 434
------------------------------------------------------------
Net income available to common stockholders 2,751 1,202 4,195 4,326
Average shares outstanding 7,064,515 4,087,910 6,105,417 4,098,635
Net effect of dilutive stock options 17,761 3,344 17,768 3,344
------------------------------------------------------------
Total 7,082,276 4,091,254 6,123,185 4,101,979
------------------------------------------------------------
Diluted earnings per share $ 0.39 $ 0.29 $ 0.69 $ 1.05
============================================================
5. LONG-TERM BORROWINGS
The following table presents long-term borrowings for the periods indicated
(in thousands):
June 30, December 31, June 30,
1999 1998 1998
----------------------------------------
Federal Home Loan Bank advances $ 100,803 $ - $ -
Preferred Capital Securities 25,000 25,000
Preferred Trust Securities 10,000
Loans for the purchase of equipment and other loans 8,499 8,534 9,468
Correspondent bank lines of credit 2,500 3,500 6,700
---------------------------------------
$ 136,802 $ 37,034 $ 26,168
=======================================
At June 30, 1999, the Company had $100.8 million in advances from the
Federal Home Loan Bank which were acquired through the merger. The Company
pledged its stock in the Federal Home Loan Bank as collateral for these
advances. In addition, the Company is required to maintain certain qualifying
first mortgage loans or mortgage backed securities in an amount equal to at
least 170% of the outstanding advances. $100.0 million of the advances bear
interest at a rate of 4.69% and are scheduled to mature in 2008; they are
callable, however, at any time by the Federal Home Loan Bank. The remaining $803
thousand of the advances mature in 2003 and bear interest at a rate of 2.50%.
At June 30, 1999 and December 31, 1998, the Company had Preferred Capital
Securities of $25.0 million which were issued in July 1998. These Preferred
Capital Securities were issued with a floating rate through Coal City Capital
Trust I (Trust), a statutory business trust and wholly owned subsidiary of the
Company. The Preferred Capital Securities pay cumulative cash distributions
quarterly at a rate per annum, reset quarterly, equal to the 3-month LIBOR plus
180 basis points. Proceeds from the sale of the Preferred Capital Securities
were invested by the Trust in floating rate (3-month LIBOR plus 180 basis
points) Junior Subordinated Deferrable Interest Debentures (Debentures) issued
by the Company which represents all of the assets of the Trust. The Preferred
Capital Securities are subject to mandatory redemption, in whole or in part,
upon repayment of the Debentures at the stated maturity in the year 2028 or
their earlier redemption, in each case at a redemption price equal to the
aggregate liquidation preference of the Preferred Capital Securities plus any
accumulated and unpaid distributions thereon to the date of redemption. Prior
redemption is permitted under certain circumstances. At June 30, 1998, the
Company had Preferred Trust Securities of $10.0 million. The Preferred Trust
Securities required quarterly payments of interest only at a rate of 9.25% per
annum. These Preferred Trust Securities were retired at July 1998 with the
proceeds from the $25.0 million issuance of the Preferred Capital Securities.
9
At June 30, 1999, December 31, 1998 and June 30, 1998, the Company had
loans for the purchase of equipment and other loans of $8.5 million, $8.5
million and $9.5 million, respectively. At June 30, 1999, these loans had
various interest rates and various scheduled maturity dates through June 2007.
The Company had two lines of credit with a correspondent bank at June 30,
1999, a secured revolving note payable and an unsecured revolving note payable.
The secured note payable had outstanding balances of $2.3 million, $3.2 million
and $6.2 million at June 30, 1999, December 31, 1998 and June 30, 1998,
respectively. The secured note bears interest at a rate computed at a 1-month
LIBOR rate plus 125 basis points at June 30, 1999. In addition, the secured
note requires quarterly payments of interest only on the outstanding balance
through July 1, 1999 at which time the revolving feature of the secured note
shall cease. At that time, the unpaid principal amount on the secured note shall
convert to an installment note, with quarterly payments including interest
computed at a 1-month LIBOR rate plus 125 basis points, and a scheduled maturity
date of June 1, 2007. The unsecured note payable had outstanding balances of
$250 thousand at June 30, 1999 and December 31, 1998, and $500 thousand at June
30, 1998. The unsecured note bears interest at the correspondent bank's prime
rate, 7.75%, at June 30, 1999 and requires quarterly payments of interest only
on the outstanding balance through July 1, 1999 at which time the revolving
feature of the unsecured note shall cease. At that time, the unpaid principal
amount of the unsecured note shall convert to an installment note with quarterly
payments, including interest at the correspondent bank's prime rate, and a
scheduled maturity date of June 1, 2007.
6. 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 June 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.
10
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operation
The following is a discussion and analysis of MB Financial, Inc.'s
financial position and results of operation and should be read in conjunction
with the consolidated financial statements and notes thereto appearing elsewhere
in this report. On January 28, 1998, the Company sold Coal City National Bank,
its wholly owned subsidiary, for $7.8 million in cash. In addition, on February
26, 1999, Coal City Corporation, the holding company for Manufacturers Bank, was
merged with and into Avondale Financial Corp., the holding company for Avondale
Federal Savings Bank. The resulting entity was renamed MB Financial, Inc.
Simultaneously, Avondale Federal Savings Bank was merged into Manufacturers
Bank. These transactions significantly affect the comparative information
discussed below.
Results of Operations
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 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.
The Company had net income of $2.8 million for the three months ended June
30, 1999 compared to $1.2 million for the three months ended June 30, 1998, an
increase of 128.9%. Net interest income was $10.6 million for the second
quarter of 1999 compared to $6.8 million for the same period in 1998. The
increase in net interest income was due to the merger and the Company's
continued growth in its core commercial banking business.
Net income was $4.2 million for the six months ended June 30, 1999 compared
to $4.8 million for the six months ended June 30, 1998. Net income for the six
months ended 1998 included a $2.7 million net of tax gain from the sale of Coal
City National Bank in the first quarter of 1998. Net interest income was $18.5
million for the six months ended June 30, 1999 compared to $13.8 million for the
same period for 1998. The increase in net interest income was due to the merger
and the Company's continued growth in its core commercial banking business.
Other income increased $816 thousand to $2.6 million for the quarter ended
June 30, 1999 from $1.8 million for the quarter ended June 30, 1998. This
increase was primarily due to increases in loan servicing fees and other
operating income. The Company is servicing the home equity lines of credit that
were originated and securitized by Avondale. The Company receives a 1.00% fee
for this type of servicing. The increase in other operating income was
primarily due to an increase in brokerage fees. Offsetting these increases in
fees was a decrease in net lease financing income for the second quarter of 1999
compared to the same period for 1998, as 1998 included some gains for equipment
sold at the end of the lease terms.
For the six months ended June 30, 1999, other income decreased $3.2 million
to $4.1 million from $7.3 million for the six months ended June 30, 1998. The
decreased was primarily due to a gain resulting from the sale of Coal City
National Bank and a gain on the sale of a land trust business both in the first
quarter of 1998. Loan servicing fees increased due to the acquisition of loan
servicing activities acquired through the merger for the six months ended June
30, 1999 compared to the same period for 1998. An additional increase was due to
a net gain on the sale of other real estate owned while net lease financing
income decreased for the six months ended June 30, 1999 compared to the six
months ended June 30, 1998. Net lease financing income decreased due to some
gains for equipment sold at the end of the lease terms for the same period in
1998.
11
Other expense increased from $6.4 million for the second quarter of 1998 to
$8.8 million for the second quarter of 1999 reflecting post-merger operating
costs. These higher costs included increases in salaries and employee benefits,
occupancy and equipment expenses as well as other operating expenses.
Additionally, intangible amortization decreased for the second quarter of 1999
compared to the second quarter for 1998 as the Company utilizes an accelerated
amortization method which amortizes more of the core deposit intangible premium
in early years than in later years.
For the six months ended June 30, 1999, other expense increased $2.7
million to $15.9 million from $13.2 million for the six months ended June 30,
1998. The increase was due to additional operating costs primarily associated
with additional branches and personnel acquired through the merger. Offsetting
this increase was a decrease in operating expenses related to the sale of Coal
City National Bank and a decrease in intangible amortization.
Net Interest Margin
The following tables present, for the periods indicated, the total dollar
amount of interest income from average interest earning assets and the resultant
yields, as well as the interest expense on average interest bearing liabilities,
and the resultant costs, expressed both in dollars and rates. Non-taxable
investment income is presented on a fully tax equivalent basis assuming a 34%
tax rate.
AVERAGE BALANCES, INTEREST RATES AND YIELDS
(Dollars in thousands)
Three Months Ended June 30,
-------------------------------------------------------------------------
1999 1998
-------------------------------------------------------------------------
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
-------------------------------------------------------------------------
Interest Earning Assets:
Loans (1) (2) $ 814,139 $16,140 7.95% $531,257 $11,092 8.37%
Taxable investment securities 302,289 4,836 6.42% 193,390 2,777 5.76%
Investment securities exempt from federal
income taxes (3) 5,486 123 8.97% 4,123 108 10.47%
Federal funds sold 27,937 325 4.67% 6,764 91 5.40%
Other interest bearing deposits 1,477 19 5.16% - - -%
----------------------- ------------------
Total interest earning assets 1,151,328 21,443 7.47% 735,534 14,068 7.67%
------- -------
Non-interest earning assets 105,754 81,078
---------- --------
Total assets $1,257,082 $816,612
========== ========
Interest Bearing Liabilities:
Deposits:
NOW and money market deposit accounts $ 179,104 1,220 2.73% $141,824 1,152 3.26%
Savings deposits 163,875 1,042 2.55% 84,145 499 2.38%
Time deposits 473,886 6,002 5.08% 286,031 3,864 5.42%
Long-term borrowings (4) 136,688 1,834 5.38% 28,688 609 8.51%
Short-term borrowings 68,074 743 4.38% 79,318 1,080 5.46%
----------------------- ------------------
Total interest bearing liabilities 1,021,628 10,841 4.26% 620,006 7,204 4.66%
------- -------
Demand deposits - non-interest bearing 137,891 127,523
Other non-interest bearing liabilities 21,960 11,756
Minority interest in subsidiary - 1,307
Stockholders' equity 75,603 56,020
---------- --------
Total liabilities and stockholders' equity $1,257,082 $816,612
========== ========
Net interest income/interest rate spread (5) $10,602 3.21% $ 6,864 3.01%
======= =======
Net interest margin (6) 3.69% 3.74%
(1) Non-accrual loans are included in average loans.
(2) Interest income includes loan origination fees of $246 thousand and
$55 thousand for the three months ended June 30, 1999 and 1998,
respectively.
(3) Non-taxable investment income is presented on a fully tax equivalent
basis assuming a 34% tax rate.
(4) Long-term borrowings include preferred capital and preferred trust
securities.
(5) Interest rate spread represents the difference between the average
yield on interest earning assets and the average cost of interest
bearing liabilities.
(6) Net interest margin represents net interest income as a percentage of
average interest earning assets.
12
The Company's net interest income increased $3.7 million to $10.6 million
for the quarter ended June 30, 1999 from $6.9 million for the quarter ended June
30, 1998. The increase in net interest income resulted from an increase in
interest income of $7.4 million, or 52.4%, partially offset by an increase in
interest expense of $3.6 million or, 50.5%. Interest income increased due to a
$415.8 million, or 56.5%, increase in average interest earning assets, while
interest expense rose as a result of a $401.6 million, or 64.8%, increase in
average interest bearing liabilities. Approximately $354.0 million of the
increase in average interest earning assets and approximately $309.0 million of
the increase in average interest bearing liabilities was due to the merger. At
June 30, 1999, long-term borrowings included $100.8 million in Federal Home Loan
Bank advances which were acquired through the merger. $100.0 million of the
advances bear interest at a rate of 4.69% while $803 thousand of the advances
bear interest at a rate of 2.5%. As a result, long-term borrowings yield/rate
decreased to 5.38% for the three months ended June 30, 1999 from 8.51% for the
three months ended June 30, 1998. The remaining increase in average interest
earning assets and average interest bearing liabilities was due to growth in the
Company's commercial banking businesses. The net interest margin decreased
slightly from 3.74% for the quarter ended June 30, 1998 to 3.69% for the
quarter ended June 30, 1999.
AVERAGE BALANCES, INTEREST RATES AND YIELDS - Continued
(Dollars in thousands)
Six Months Ended June 30,
-------------------------------------------------------------------------
1999 1998
-------------------------------------------------------------------------
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
-------------------------------------------------------------------------
Interest Earning Assets:
Loans (1) (2) $ 723,483 $ 28,942 8.07% $ 527,189 $22,251 8.51%
Taxable investment securities 290,415 8,475 5.88% 184,444 5,308 5.80%
Investment securities exempt from federal
income taxes (3) 5,500 242 8.89% 4,003 232 11.68%
Federal funds sold 26,608 618 4.68% 7,786 209 5.41%
Other interest bearing deposits 1,464 36 4.96% - - -%
----------------------- --------------------
Total interest earning assets 1,047,470 38,313 7.38% 723,422 28,000 7.81%
-------- -------
Non-interest earning assets 95,439 83,636
---------- ---------
Total assets $1,142,909 $ 807,058
========== =========
Interest Bearing Liabilities:
Deposits:
NOW and money market deposit accounts $ 165,942 2,301 2.80% $ 144,075 2,330 3.26%
Savings deposits 138,315 1,729 2.52% 86,361 1,056 2.47%
Time deposits 415,986 10,538 5.11% 284,745 7,817 5.54%
Long-term borrowings (4) 104,395 2,904 5.61% 26,221 1,077 8.28%
Short-term borrowings 100,655 2,250 4.51% 70,559 1,811 5.18%
----------------------- --------------------
Total interest bearing liabilities 925,293 19,722 4.30% 611,961 14,091 4.64%
-------- -------
Demand deposits- non-interest bearing 133,114 125,297
Other non-interest bearing liabilities 18,250 12,789
Minority interest in subsidiary - 1,665
Stockholders' equity 66,252 55,346
---------- ---------
Total liabilities and stockholders' equity $1,142,909 $ 807,058
========== =========
Net interest income/interest rate spread (5) $ 18,591 3.08% $13,909 3.16%
======== =======
Net interest margin (6) 3.58% 3.88%
(1) Non-accrual loans are included in average loans.
(2) Interest income includes loan origination fees of $435 thousand and
$306 thousand for the six months ended June 30, 1999 and 1998,
respectively.
(3) Non-taxable investment income is presented on a fully tax equivalent
basis assuming a 34% tax rate.
(4) Long-term borrowings include preferred capital and preferred trust
securities.
(5) Interest rate spread represents the difference between the average
yield on interest earning assets and the average cost of interest
bearing liabilities.
(6) Net interest margin represents net interest income as a percentage
of average interest earning assets.
13
For the six months ended June 30, 1999, net interest income increased $4.7
million to $18.6 million from $13.9 million for the six months ended June 30,
1998. The increase in net interest income resulted from an increase in interest
income of $10.3 million, or 36.8%, partially offset by an increase in interest
expense of $5.6 million or, 40.0%. Interest income increased due to a $324.0
million, or 44.8%, increase in average interest earning assets, while interest
expense rose as a result of a $313.3 million, or 51.2%, increase in average
interest bearing liabilities. Approximately $239.0 million of the increase in
average interest earning assets and approximately $206.0 million of the increase
in average interest bearing liabilities were due to the merger. At June 30,
1999, long-term borrowings included $100.8 million in Federal Home Loan Bank
advances which were acquired through the merger. $100.0 million of the advances
bear interest at a rate of 4.69% while $803 thousand of the advances bear
interest at a rate of 2.5%. As a result, long-term borrowings yield/rate
decreased to 5.61% for the six months ended June 30, 1999 from 8.28% for the six
months ended June 30, 1998. The remaining increase in average interest earning
assets and average interest bearing liabilities was due to growth in the
Company's commercial banking businesses. The net interest margin decreased from
3.88% for the six months ended June 30, 1998 to 3.58% for the six months ended
June 30, 1999.
RATE/VOLUME ANALYSIS OF NET INTEREST INCOME
(Dollars in thousands)
The following table presents the extent to which changes in interest rates
and changes in volume of interest earning assets and interest bearing
liabilities have affected the Company's interest income and interest expense
during the periods indicated. Information is provided on changes in each
category attributable to (i) changes attributable to changes in volume, (changes
in volume multiplied by prior period rate); (ii) changes attributable to changes
in rate (changes in rate multiplied by current period volume) and (iii) the
total changes.
Three Months Ended June 30, 1999 Six Months Ended June 30, 1999
Compared to June 30, 1998 Compared to June 30, 1998
------------------------------------ ----------------------------------
Change Change Change Change
Due to Due to Total Due to Due to Total
Volume Rate Change Volume Rate Change
------------------------------------ ---------------------------------
Interest Earning Assets:
Loans $ 5,906 $ (858) $ 5,048 $ 8,285 $ (1,594) $ 6,691
Taxable investment securities 1,564 495 2,059 3,049 117 3,166
Investment securities exempt from federal
income taxes (1) 36 (21) 15 87 (76) 11
Federal funds sold 285 (51) 234 505 (96) 409
Other interest bearing deposits 19 - 19 36 - 36
------------------------------------ -----------------------------------
Total increase (decrease) in interest
income 7,810 (435) 7,375 11,962 (1,649) 10,313
------------------------------------ -----------------------------------
Interest Bearing Liabilities:
NOW and money market deposit accounts 303 (235) 68 354 (383) (29)
Savings deposits 473 70 543 635 38 673
Time deposits 2,538 (400) 2,138 3,603 (882) 2,721
Long-term borrowings (2) 2,293 (1,068) 1,225 3,211 (1,384) 1,827
Short-term borrowings (153) (184) (337) 772 (333) 439
------------------------------------ -----------------------------------
Total increase (decrease) in interest
expense 5,454 (1,817) 3,637 8,575 (2,944) 5,631
------------------------------------ -----------------------------------
Increase (decrease) in net interest income $ 2,356 $ 1,382 $ 3,738 $ 3,387 $ 1,295 $ 4,682
==================================== ===================================
(1) Non-taxable investment income is presented on a fully tax equivalent basis
utilizing a 34% rate.
(2) Long-term borrowings include preferred capital and preferred trust
securities.
Other Income
Other income increased $816 thousand to $2.6 million for the quarter ended
June 30, 1999 from $1.8 million for the quarter ended June 30, 1998. This
increase was primarily due to a $999 thousand increase in loan servicing fees
relating to the home equity loans previously securitized and sold by Avondale,
and a $324 thousand increase in other operating income which included a $256
thousand increase in brokerage fees. Offsetting these increases was a $430
thousand decrease in net lease financing income for the second quarter of 1999
compared to the same period for 1998, as 1998 included some gains for equipment
sold at the end of the lease terms.
14
For the six months ended June 30, 1999, other income decreased $3.2 million
to $4.1 million from $7.3 million for the six months ended June 30, 1998. The
decrease was primarily due to a $4.1 million gain resulting from the sale of
Coal City National Bank, and a $200 thousand gain on the sale of a land trust
business both in the first quarter of 1998. Loan servicing fees increased $1.3
million due to the acquisition of loan servicing activities acquired through the
merger for the six months ended June 30, 1999 compared to the same period for
1998. An additional $101 thousand increase was due to a net gain on the sale of
other real estate owned while net lease financing income decreased $438 thousand
for the six months ended June 30, 1999 compared to the six months ended June 30,
1998. Net lease financing income decreased due to some gains for equipment sold
at the end of the lease terms for the same period in 1998.
Other Expense
Other expense increased from $6.4 million for the second quarter of 1998 to
$8.8 million for the second quarter of 1999 resulting from higher operating
costs of a larger company as a result of the merger. These higher costs
included a $1.4 million increase in salaries and employee benefits, $579
thousand increase in occupancy and equipment expenses and a $667 thousand
increase in other operating expenses for the second quarter of 1999 compared to
the same period for 1998. Additionally, intangible amortization decreased $192
thousand for the second quarter of 1999 compared to the second quarter for 1998.
The decrease in intangibles amortization represents a decrease in goodwill
amortization of $30 thousand and a decrease in core deposit intangible
amortization of $162 thousand. The Company utilizes an accelerated amortization
method which amortizes more of the core deposit intangible premium in early
years than in later years.
For the six months ended June 30, 1999, other expense increased $2.7
million to $15.9 million from $13.2 million for the six months ended June 30,
1998. Approximately $3.1 million of the increase was due to operating costs
primarily associated with five additional branches and additional personnel
acquired through the merger. Offsetting this increase was a $314 thousand
decrease in operating expenses related to the sale of Coal City National Bank,
and a $385 thousand decrease in intangible amortization. The decrease in
intangible amortization represents a decrease in goodwill amortization of $62
thousand and a decrease in core deposit intangible amortization of $323
thousand.
Income Taxes
The Company recorded an income tax expense of $1.3 million for the three
months ended June 30, 1999, compared to $815 thousand for the same period in
1998 as a result of the $2.0 million increase in the Company's income before
taxes for the second quarter of 1999.
For the six months ended June 30, 1999, the Company recorded an income tax
expense of $2.1 million compared to $2.7 million for the same period in 1998 as
a result of the $1.3 million decrease in the Company's income before taxes for
the six months ended June 30, 1999.
Cash Earnings
The purchase method of accounting has been used to record each of the
Company's acquisitions. As a result, the recorded basis of the net assets of
the acquired entities has been adjusted to fair value. Adjustments included
recording core deposit intangibles to reflect the difference between the fair
value and underlying basis of deposits purchased and recording goodwill for the
excess of the acquisition cost over the fair value of net assets acquired. Core
deposit intangibles and goodwill are being amortized as a non-cash expense over
periods of up to eight and 20 years, respectively. Other fair value adjustments
made to assets such as investment securities, loans, and buildings are also
being amortized or depreciated over varying periods, ranging from eight to 35
years. Amortization/depreciation 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 or other fair value adjustments made.
Consequently, net income is not reduced for the amortization of core deposit
intangibles, goodwill or other fair value adjustments. 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.
15
The following table sets forth the Company's cash earnings, which is
defined by management as net income excluding amortization of purchase
accounting non-cash items and the related deferred income tax effect (dollars in
thousands):
Three Months Ended Six Months Ended
------------------------------------------------------------
June 30, 1999 June 30, 1998 June 30, 1999 June 30, 1998
-------------------------------------------------------------
Net Income $ 2,751 $ 1,202 $ 4,195 $ 4,760
Goodwill amortization (including negative goodwill) 204 234 407 469
Core deposit intangibles amortization (net of tax) 274 380 547 760
Other fair value adjustment amortization (net of tax) 129 1 172 3
------------------------------------------------------------
Cash earnings 3,358 1,817 5,321 5,992
Preferred dividends - - - 434
------------------------------------------------------------
Cash earnings to common stockholders $ 3,358 $ 1,817 $ 5,321 $ 5,558
============================================================
Average tangible assets $ 1,241,139 $ 798,134 $ 1,126,716 $ 788,167
Average tangible equity $ 60,070 $ 27,182 $ 50,178 $ 26,110
Cash earnings per share: (1) (3)
Basic $ 0.48 $ 0.44 $ 0.87 $ 1.36
Diluted $ 0.47 $ 0.44 $ 0.87 $ 1.35
Performance ratios: (2) (3)
Cash return on average tangible assets 1.08% 0.92% 0.95% 1.44%
Cash return on average tangible equity 22.42% 26.81% 21.38% 42.94%
(1) Basic earnings per share is calculated by dividing the cash earnings by the
average number of common shares outstanding for the period. Diluted
earnings per share is calculated by dividing the cash earnings by the
average number of common shares outstanding for the period, including
additional shares that would have been outstanding if dilutive potential
shares had been issued.
(2) Cash return on average tangible assets and equity has been annualized for
the three months and six months ended June 30, 1999 and 1998.
(3) The ratios for the six months ended June 30, 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 $0.70. Cash return on average tangible assets and equity,
excluding the gain on sale of Coal City National Bank, would have been
0.74% and 22.05%, respectively.
Balance Sheet Review
Total assets increased $342.1 million to $1.2 billion at June 30, 1999 from
$871.9 million at December 31, 1998. Total assets increased $491.0 million due
to the merger. Offsetting this increase was a $98.6 million decrease in U.S.
Treasury investments, funded by short-term borrowings. Net loans increased
$273.3 million to $815.3 million at June 30, 1999 from $542.0 million at
December 31, 1998. Approximately $205.9 million of this increase was due to the
merger while the remainder of the increase was due to strong loan demand. The
increase in loans from June 30, 1998 to December 31, 1998 was due entirely to
strong loan demand. Total deposits were $938.9 million at June 30, 1999 compared
to $645.7 million at December 31, 1998. Total deposits increased approximately
$343.0 million in the first quarter of 1999 due to the merger.
Short-term borrowings decreased $88.1 million from $130.5 million at
December 31,1998 to $42.4 million at June 30, 1999 due to decreases in U.S.
Treasury investments. Long-term borrowings increased $99.8 million at June 30,
1999 from December 31, 1998 primarily attributable to advances from the Federal
Home Loan Bank of $100.8 million acquired through the merger.
Total assets increased $343.6 million to $1.2 billion at June 30, 1999
compared to $870.4 million at June 30, 1998. Total assets increased $491.0
million due to the merger. Offsetting this increase was a $98.3 million decrease
in U.S. Treasury investments, funded by short-term borrowings. Net loans
increased $292.1 million from $523.2 million at June 30, 1998 to $815.3 million
at June 30, 1999. Approximately $205.9 million of this increase was due to the
merger while the remainder of the increase was due to strong loan demand. Total
deposits were $938.9 million at June 30, 1999 compared to $644.1 million at June
30, 1998. Total deposits increased approximately $343.0 million in the first
quarter of 1999 due to the merger.
16
Short-term borrowings decreased $89.5 million from $131.9 million at June
30, 1998 to $42.4 million at June 30, 1999 due to decreases in U.S. Treasury
investments. Long-term borrowings increased $110.6 million from $26.2 million at
June 30, 1998 to $136.8 million at June 30, 1999. The increase in long-term
borrowings was primarily attributable to advances from the Federal Home Loan
Bank of $100.8 million acquired through the merger. Also attributing to this
increase was the July 1998 issuance of $25 million of Preferred Capital
Securities and the retirement of $10 million of Preferred Trust Securities
issued in 1997.
In the fourth quarter of 1998, $10.2 million of preferred stock was further
redeemed with a portion of the proceeds from the $25.0 million issuance of
Preferred Capital Securities.
Loan Portfolio
The following table sets forth the composition of the loan portfolio
(dollars in thousands):
June 30, December 31, June 30,
1999 1998 1998
-------------------------------------------------------------------------------
Amount Percent Amount Percent Amount Percent
-------------------------------------------------------------------------------
Originated by Manufacturers Bank:
Commercial $ 134,268 16.18% $ 122,094 22.26% $ 108,912 20.54%
Commercial loans collateralized by
lease payments 142,167 17.13% 89,301 16.29% 92,613 17.47%
Real estate commercial 228,671 27.56% 225,596 41.14% 212,826 40.14%
Real estate residential 66,724 8.04% 55,600 10.14% 56,488 10.65%
Real estate construction 44,493 5.36% 21,059 3.84% 26,344 4.97%
Installment 38,364 4.63% 34,703 6.33% 33,037 6.23%
-----------------------------------------------------------------------------
Total loans originated by Manufacturers 654,687 78.90% 548,353 100.00% 530,220 100.00%
Bank
Acquired from Avondale Federal Savings
Bank:
Real estate commercial 668 .08% - -% - -%
Real estate residential 83,029 10.01% - -% - -%
Credit scored mortgage loans 76,401 9.21% - -% - -%
Installment 14,989 1.81% - -% - -%
-----------------------------------------------------------------------------
Total loans acquired from Avondale
Federal Savings Bank 175,087 21.10% - -% - -%
-----------------------------------------------------------------------------
Gross loans 829,774 100.00% 548,353 100.00% 530,220 100.00%
====== ====== ======
Allowance for loan losses (14,453) (6,344) (7,014)
----------- ----------- -----------
Net loans $ 815,321 $ 542,009 $ 523,206
=========== =========== ===========
At June 30, 1999 net loans included $654.7 million in core business loans
originated by Manufacturers Bank and $175.1 million in loans acquired from
Avondale. Loans acquired from Avondale included $83.0 million in real estate
residential loans consisting primarily of closed end loans on 1-4 family
dwellings, $76.4 million in credit scored mortgage loans consisting of closed
end loans on 1-4 family dwellings and home equity lines of credit, and $15.0
million in installment loans consisting primarily of home equity lines of
credit.
17
Asset Quality
The following table presents a summary of non-performing assets as of the
dates indicated (dollars in thousands):
June 30, December 31, June 30,
1999 1998 1998
-----------------------------------
Non-accruing loans:
Originated by Manufacturers Bank $ 3,632 $ 4,789 $ 3,474
Acquired from Avondale Federal Savings Bank 6,953 - -
-----------------------------------
Total non-accruing loans 10,585 4,789 3,474
Loans 90 days or more past due, still accruing interest:
Originated by Manufacturers Bank 108 85 -
Acquired from Avondale Federal Savings Bank - - -
-----------------------------------
Total loans 90 days or more past due, still accruing interest 108 85 -
-----------------------------------
Total non-performing loans 10,693 4,874 3,474
-----------------------------------
Other real estate owned:
Originated by Manufacturers Bank 103 442 430
Acquired from Avondale Federal Savings Bank 310 - -
-----------------------------------
Total other real estate owned 413 442 430
-----------------------------------
Total non-performing assets $ 11,106 $ 5,316 $ 3,904
===================================
Total non-performing loans to total loans 1.29% 0.89% 0.66%
Allowance for loan losses to non-performing loans 135.16% 130.16% 201.90%
Total non-performing assets to total assets 0.91% 0.61% 0.45%
At June 30, 1999, non-performing assets increased $5.8 million to $11.1
million from $5.3 million at December 31, 1998 and increased $7.2 million at
June 30, 1999 from $3.9 million at June 30, 1998. The increase in non-performing
assets at June 30, 1999 compared to December 31, 1998 and June 30, 1998 was
primarily due to a $7.0 million increase in non-accruing loans acquired from
Avondale. Slightly offsetting the additional non-accruing loans acquired from
Avondale was a $1.2 million decrease in non-accruing loans originated by
Manufacturers Bank at June 30, 1999 compared to December 31, 1998 as non-accrual
loans deemed uncollectable were charged-off. At June 30, 1999, other real estate
owned originated by Manufacturers Bank decreased to $103 thousand from $442
thousand at December 31, 1998 and $430 thousand at June 30, 1998. At June 30,
1999, other real estate owned acquired from Avondale was $310 thousand.
Provision for Loan Losses
A reconciliation of the activity in the Company's allowance for loan losses
follows (dollars in thousands):
Three Months Ended Six Months Ended
------------------------------------------------------------
June 30, 1999 June 30, 1998 June 30, 1999 June 30, 1998
------------------------------------------------------------
Balance at beginning of period $ 15,766 $ 7,751 $ 6,344 $ 7,922
Decreases resulting from sale of subsidiary - - - (399)
Additions resulting from merger - - 9,489 -
Provision for loan losses 288 187 534 375
Charge-offs:
Originated by Manufacturers Bank (850) (990) (1,026) (994)
Acquired from Avondale Federal Savings Bank (1,029) - (1,263) -
---------------------------------------------------------
Total charge-offs (1,879) (990) (2,289) (994)
---------------------------------------------------------
Recoveries:
Originated by Manufacturers Bank 4 66 7 110
Acquired from Avondale Federal Savings Bank 274 - 368 -
---------------------------------------------------------
Total recoveries 278 66 375 110
---------------------------------------------------------
Balance at June 30, $ 14,453 $ 7,014 $ 14,453 $ 7,014
=========================================================
Total loans at June 30, $ 829,774 $ 530,220 $ 829,774 $ 530,220
Ratio of allowance to total loans 1.74% 1.32% 1.74% 1.32%
18
For the three months ended June 30, 1999 and 1998, there were net charge-
offs of $1.6 million and $924 thousand, respectively. For the three months ended
June 30, 1999, net charge-offs on loans originated by Manufacturers Bank
decreased $78 thousand compared to the same period for 1998. Net charge-offs on
loans acquired from Avondale were $755 thousand at June 30, 1999.
For the six months ended June 30, 1999 and 1998, there were net charge-offs
of $1.9 million and $884 thousand, respectively. For the six months ended June
30, 1999, net charge-offs on loans originated by Manufacturers Bank increased
$135 thousand compared to the same period for 1998. Net charge-offs on loans
acquired from Avondale were $895 thousand at June 30, 1999. At the merger date,
Avondale's allowance for loan losses was $9.5 million. Management reviewed
Avondale's calculation, which was based on credit scoring and other criteria,
and concluded that the allowance for loan losses related to loans acquired
through the merger was adequate. To date, losses associated with the loan
portfolio acquired from Avondale are consistent with losses indicated by the
credit scoring models and other criteria at the merger date. In January 1998,
Coal City National Bank was sold, reducing the allowance for loan losses by $399
thousand.
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. 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.
Interest Only Securities
At June 30, 1999, interest only securities acquired through the merger were
$15.2 million. Avondale securitized and sold certain home equity lines of
credit to investors. 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 available for sale securities. As part of its review, the
Company reviews its assumptions of prepayment speeds, discount rates and
anticipated credit losses.
The discount rate reflects liquidity and risk premiums required by the
capital markets. Prepayment speeds are adjusted based upon both historical
experience and expectations for the future. Projected loan losses are based on
the Company's non-judgmental credit underwriting models and are further
validated with updated credit scores at least semi-annually.
Following is a table of the four interest only security pools and the
assumptions used for each of the securitized pool (dollars in thousands):
Interest Only Security Pool
-------------------------------------------------
96-1 97-1 97-2 98-1
-------------------------------------------------
Loan balances $28,482 $35,344 $49,316 $83,790
Discount rate 12.00% 12.00% 12.00% 12.00%
Prepayment speed 37.29% 39.25% 39.91% 28.73%
Remaining over-the-life loan losses 4.19% 4.61% 4.95% 4.38%
The revision of the foregoing assumptions resulted in a reduction of
comprehensive income of $39 thousand for the three months ended June 30, 1999
and $226 thousand for the six months ended June 30, 1999. The Company will
continue to review its assumptions quarterly and revise them when circumstances
dictate.
Because of the sensitivity of the value of the interest only securities to
market factors beyond management's control, the actual amounts realized could
differ materially from the carrying value.
19
Investment Securities
The following table sets forth the amortized cost and fair value of the
Company's investment securities by accounting classification and type of
security:
June 30, December 31, June 30,
1999 1998 1998
-----------------------------------------------------------------------
Amortized Fair Amortized Fair Amortized Fair
Cost Value Cost Value Cost Value
-----------------------------------------------------------------------
Securities Available for Sale:
U.S. Treasury securities $ 12,013 $ 12,048 $ 128,630 $ 128,748 $ 192,480 $ 192,634
U.S. government agencies
and Corporations 143,703 140,765 80,089 80,411 27,709 27,749
Mortgage-backed securities 93,760 93,543 2,779 2,861 4,340 4,454
Investment in equity lines
of credit trusts 7,932 7,932 - - - -
-----------------------------------------------------------------------
Total securities $ 257,408 $ 254,288 $ 211,498 $ 212,020 $ 224,529 $ 224,837
=======================================================================
Securities Held to Maturity:
States and political $ 5,481 $ 5,773 $ 5,524 $ 5,912 $ 4,177 $ 4,567
subdivisions
Mortgage-backed securities 4,129 3,965 4,651 4,648 5,016 4,959
Other securities 963 963 967 969 968 969
-----------------------------------------------------------------------
Total securities $ 10,573 $ 10,701 $ 11,142 $ 11,529 $ 10,161 $ 10,495
=======================================================================
Liquidity and Sources of Capital
The Company's cash flows are composed of three classifications: cash flows
from operating activities, cash flows from investing activities, and cash flows
from financing activities. Net cash provided by operating activities was $6.4
million and $4.1 million for the six months ended June 30, 1999 and 1998,
respectively. Net cash provided by (used in) investing activities was $144.8
million for the six months ended June 30, 1999 and ($131.0) million for the same
period in 1998. The increase in net cash provided by investing activities for
the six months ended June 30, 1999 compared to the same period in 1998 is
attributable to proceeds from sales, maturities and calls of securities
available for sale, net federal funds sold and cash acquired through the merger,
offset by an increase in loans, net of principal collections. Net cash (used
in) provided by financing activities was ($143.9) million for the six months
ended June 30, 1999 and $118.6 million for the same period in 1998. The
increase in net cash used in financing activities for the six months ended June
30, 1999 compared to the same period in 1998 is attributable to decreases in net
interest bearing deposits and net short-term borrowings.
The Company expects to have available cash to meet its liquidity needs.
Liquidity management is monitored by the asset liability committee of
Manufacturers Bank, which takes into account the marketability of assets, the
sources and stability of funding and the level of unfunded commitments. In the
event that additional short-term liquidity is needed, Manufacturers Bank has
established relationships with several large regional banks to provide short-
term borrowings in the form of federal funds purchased. While there are no firm
lending commitments in place, Manufacturers Bank has borrowed, and management
believes that Manufacturers Bank could again borrow, more than $30.0 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. In addition, MB Financial, Inc. maintains a
line of credit with a large regional correspondent bank in the amount of $15.0
million. As of June 30, 1999, MB Financial, Inc. had $12.5 million undrawn and
available under its line of credit.
The Company's total risk-based capital ratio was 10.18%, Tier 1 capital to
risk-weighted assets ratio was 8.90%, and Tier 1 capital to average asset ratio
was 6.95% at June 30, 1999. The FDIC has categorized the bank subsidiary as
"Well-Capitalized" at June 30, 1999.
As of June 30, 1999, the Company's book value per share was $10.56 compared
to $11.22 at June 30, 1998. The 1998 book value was calculated using an
exchange rate of 83.5.
20
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 six 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.
In response to the foregoing regulatory guidance and pronouncements, the
Company and the Bank have been reviewing the Bank's operating procedures for
exposure to potential issues that the Year 2000 might have on its computer
systems and programs. At the direction of the Bank's Board of Directors, the
Year 2000 committee was established and has identified any issues related to
computer hardware, software and operating systems to ensure that they will be
capable of properly recognizing the January 1, 2000 and beyond. In addition,
selected business customers have been contacted and procedures have been put in
place to survey these business customers to understand their progress in regard
to dealing with the Year 2000. The Year 2000 committee reports periodically to
the Bank's Board of Directors.
Management believes that the organization has had an effective corporate
year 2000 compliance program in place and that additional expenditures required
to bring its systems into compliance will not have a materially adverse effect
on the Company's operations, cash flow, or financial condition. Management has
made significant progress in identifying and testing all its systems for year
2000 compliance. Of all systems that have been identified as mission critical,
all are deemed year 2000 compliant. As part of the Company's process of
updating computer hardware, computer equipment owned by Avondale and not year
2000 compliant was replaced prior to the merger and these costs were incurred by
Avondale prior to the merger. Management expects that any additional
expenditures related to the year 2000 problem are immaterial.
Forward Looking Statements
Statements made about the Company's future economic performance, strategic
plans or objectives, revenues or earnings projections, or other financial items
and similar statements are not guarantees of future performance, but are forward
looking statements. By their nature, these statements are subject to numerous
uncertainties that could cause actual results to differ materially from those in
the statements. Important factors that might cause the Company's actual results
to differ materially include, but are not limited to, the following:
. Federal and state legislative and regulatory developments;
. Changes in management's estimate of the adequacy of the allowance for loan
losses;
. Changes in management's valuation of the interest only securities;
. Changes in the level and direction of loan delinquencies and write-offs;
. Interest rate movements and their impact on customer behavior and the
Company's net interest margin;
. The impact of repricing and competitors' pricing initiatives on loan and
deposit products;
. The Company's ability to adapt successfully to technological changes to meet
customers' needs and developments in the market place;
. The Company's ability to access cost effective funding; and
. Changes in financial markets and general economic conditions.
21
Item 3. Quantitative and Qualitative Disclosures about Market Risk
At June 30, 1999, there has been no material change in market risk from
December 31, 1998.
PART II. OTHER INFORMATION
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, MB
Financial, Inc. has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized, on the 10th day of August 1999.
MB FINANCIAL, INC.
By: /s/ Mitchell Feiger
-------------------
Mitchell Feiger
Chief Executive Officer
(Principal Executive Officer)
By: /s/ Howard A. Jaffe
-------------------
Howard A. Jaffe
Vice President and Chief Financial Officer
(Principal Financial and Principal Accounting Officer)
22