UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

FORM 10-Q

 

ý        QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2003

 

Commission file number 0-24566-01

 

MB FINANCIAL, INC.

(Exact name of registrant as specified in its charter)

 

Maryland
(State or other jurisdiction of incorporation or organization)
36-4460265
(I.R.S. Employer Identification No.)
801 West Madison Street, Chicago, Illinois 60607
(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:  ý  NO:  o

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

 

YES:  ý  NO:  o

 

There were outstanding 17,725,848 shares of the registrant’s common stock as of May 15, 2003.

 

 

MB FINANCIAL, INC. AND SUBSIDIARIES

 

FORM 10-Q

 

March 31, 2003

 

INDEX

 

PART I.	FINANCIAL INFORMATION
Item 1.	Financial Statements
	Consolidated Balance Sheets at March 31, 2003 and December 31, 2002 (Unaudited)
	Consolidated Statements of Income for the Three Months ended March 31, 2003 and 2002 (Unaudited)
	Consolidated Statements of Cash Flows for the Three Months ended March 31, 2003 and 2002 (Unaudited)
	Notes to Consolidated Financial Statements (Unaudited)
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3.	Quantitative and Qualitative Disclosures about Market Risk
Item 4.	Controls and Procedures
PART II.	OTHER INFORMATION
Item 6.	Exhibits and Reports on Form 8-K
	Signatures
	Certifications

 

2

 

PART I. – FINANCIAL INFORMATION

 

Item 1. – Financial Statements

 

MB FINANCIAL, INC. & SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

March 31, 2003 and December 31, 2002

(Amounts in thousands, except share data)

(Unaudited)

 

		March 31, 2003			December 31, 2002
ASSETS
Cash and due from banks		$	103,756		$	90,522
Interest bearing deposits with banks		7,969			1,954
Federal funds sold		41,600			16,100
Investment securities available for sale		1,015,327			893,553
Loans held for sale		9,468			8,380
Loans (net of allowance for loan losses of $38,973 at March 31, 2003 and $33,890 at December 31, 2002)		2,736,934			2,470,824
Lease investments, net		66,908			68,487
Interest only securities		1,900			5,356
Premises and equipment, net		55,910			50,348
Cash surrender value of life insurance		73,940			73,022
Goodwill, net		74,486			45,851
Other intangibles, net		8,448			2,797
Other assets		46,513			32,387
Total assets		$	4,243,159		$	3,759,581
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities
Deposits:
Noninterest bearing		$	564,716		$	497,264
Interest bearing		2,886,872			2,522,301
Total deposits		3,451,588			3,019,565
Short-term borrowings		251,625			222,697
Long-term borrowings		46,054			45,998
Company-obligated mandatorily redeemable preferred securities		84,800			84,800
Accrued expenses and other liabilities		57,351			43,334
Total liabilities		3,891,418			3,416,394
Stockholders’ Equity
Common stock, ($0.01 par value; authorized 40,000,000 shares; issued 17,741,535 shares at March 31, 2003 and December 31, 2002)		177			177
Additional paid-in capital		69,426			69,531
Retained earnings		264,986			255,241
Accumulated other comprehensive income		18,194			18,783
Less: 30,687 and 15,865 shares of treasury stock, at cost, at March 31, 2003 and December 31, 2002, respectively		(1,042		)	(545		)
Total stockholders’ equity		351,741			343,187
Total liabilities and stockholders’ equity		$	4,243,159		$	3,759,581

 

See Accompanying Notes to Consolidated Financial Statements.

 

3

 

MB FINANCIAL, INC. & SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(Amounts in thousands, except common share data)

(Unaudited)

 

		Three Months Ended March 31,
		2003			2002
Interest income:
Loans		$	41,536		$	38,585
Investment securities:
Taxable		9,145			10,606
Nontaxable		943			843
Federal funds sold		88			88
Other interest bearing accounts		16			18
Total interest income		51,728			50,140
Interest expense:
Deposits		14,856			17,071
Short-term borrowings		918			1,128
Long-term borrowings and redeemable preferred securities		2,139			740
Total interest expense		17,913			18,939
Net interest income		33,815			31,201
Provision for loan losses		2,736			3,400
Net interest income after provision for loan losses		31,079			27,801
Other income:
Loan service fees		1,696			1,152
Deposit service fees		3,883			2,408
Lease financing, net		3,257			763
Trust and brokerage fees		2,553			1,350
Net gains on sale of securities available for sale		81			580
Increase in cash surrender value of life insurance		918			1,027
Other operating income		2,071			1,055
		14,459			8,335
Other expense:
Salaries and employee benefits		14,683			11,222
Occupancy and equipment expense		4,591			3,753
Computer services expense		1,132			674
Other intangibles amortization expense		272			186
Advertising and marketing expense		969			809
Professional and legal expense		1,073			1,385
Other operating expenses		4,582			3,071
		27,302			21,100
Income before income taxes		18,236			15,036
Income taxes		5,831			4,687
Net Income		$	12,405		$	10,349
Common share data:
Basic earnings per common share		$	0.70		$	0.59
Diluted earnings per common share		$	0.68		$	0.58
Weighted average common shares outstanding		17,714,400			17,531,402
Diluted weighted average common shares outstanding		18,116,189			17,884,036

 

See Accompanying Notes to Consolidated Financial Statements.

 

4

 

MB FINANCIAL, INC. & SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in thousands)

(Unaudited)

 

		Three Months Ended March 31,
		2003			2002
Cash Flows From Operating Activities
Net income		$	12,405		$	10,349
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		8,149			4,453
Gain on disposal of premises and equipment and leased equipment		(235		)	(571		)
Amortization of other intangibles		272			186
Provision for loan losses		2,736			3,400
Deferred income tax expense		417			70
Amortization of premiums and discounts on investment securities, net		3,549			615
Net gains on sale of investment securities available for sale		(81		)	(580		)
Proceeds from sale of loans held for sale		25,869			—
Origination of loans held for sale		(26,505		)	—
Net gains on sale of loans held for sale		(452		)	—
Increase in cash surrender value of life insurance		(918		)	(1,027		)
Interest only securities accretion		(90		)	(257		)
Increase (decrease) in other assets		(7,731		)	1,399
Decrease in other liabilities		(93		)	(12,113		)
Net cash provided by operating activities		17,292			5,924
Cash Flows From Investing Activities
Proceeds from sales of investment securities available for sale		7,562			5,557
Proceeds from maturities and calls of investment securities available for sale		128,371			87,677
Purchase of investment securities available for sale		(80,233		)	(52,445		)
Net (increase) decrease in loans		(4,297		)	2,595
Purchases of premises and equipment and leased equipment		(6,850		)	(5,034		)
Proceeds from sales of premises and equipment and leased equipment		981			2,998
Principal collected on lease investments		443			1,258
Purchase of bank owned life insurance		—			(35,000		)
Cash paid, net of cash and cash equivalents acquired in acquisitions		(23,404		)	—
Proceeds received from interest only securities		279			505
Net cash provided by investing activities		22,852			8,111
Cash Flows From Financing Activities
Net (decrease) increase in deposits		(21,117		)	34,655
Net increase (decrease) in short-term borrowings		28,928			(69,943		)
Proceeds from long-term borrowings		2,860			5,389
Principal paid on long-term borrowings		(2,804		)	(776		)
Treasury stock transactions, net		(666		)	(59		)
Stock options exercised		64			1,089
Dividends paid on common stock		(2,660		)	(2,623		)
Net cash provided by (used in) financing activities		4,605			(32,268		)
Net increase (decrease) in cash and cash equivalents		$	44,749		$	(18,233	)
Cash and cash equivalents:
Beginning of period		108,576			130,480
End of period		$	153,325		$	112,247

 

See Accompanying Notes to Consolidated Financial Statements.

 

5

 

MB FINANCIAL, INC. & SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in thousands)

(Unaudited)

 

		Three Months Ended March 31,
		2003			2002
Supplemental Disclosures of Cash Flow Information:
Cash payments for:
Interest paid to depositors and other borrowed funds		$	19,127		$	20,242
Income taxes refunded, net of taxes paid		(1,921		)	(325		)
Supplemental Schedule of Noncash Investing Activities:
Acquisitions
Noncash assets acquired:
Investment securities available for sale		$	179,041		$	—
Loans, net		262,814			—
Premises and equipment, net		6,482			—
Goodwill, net		28,635			—
Other Intangibles, net		5,923			—
Other assets		7,660			—
Total non cash assets acquired		490,555			—
Liabilities assumed:
Deposits		453,140			—
Accrued expenses and other liabilities		14,011			—
Total liabilities assumed		467,151			—
Net non cash assets acquired		$	23,404		$	—
Cash and cash equivalents acquired		$	69,696		$	—
Real estate acquired in settlement of loans		$	788		$	—

 

See Accompanying Notes to Consolidated Financial Statements.

 

6

 

MB FINANCIAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2003 and 2002

(Unaudited)

 

NOTE 1.                BASIS OF PRESENTATION

 

The unaudited consolidated financial statements include the accounts of MB Financial, Inc., a Maryland corporation (the Company) and its subsidiaries, including its three wholly owned national bank subsidiaries (collectively, the Banks): MB Financial Bank, N.A. (MB Financial Bank), Union Bank, N.A., and Abrams Centre National Bank.  In the opinion of management, all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of the financial position, results of operations and cash flows for the interim periods have been made.  The results of operations for the three months ended March 31, 2003 are not necessarily indicative of the results to be expected for the entire fiscal year.

 

The unaudited interim financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America and industry practice. Certain information in footnote disclosure normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America and industry practice has been condensed or omitted pursuant to rules and regulations of the Securities and Exchange Commission.  These financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s December 31, 2002 audited financial statements filed on Form 10-K.

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions which affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements, as well as the reported amounts of income and expenses during the reported periods.  Actual results could differ from those estimates.

 

NOTE 2.                MERGERS, ACQUISITIONS AND DISPOSALS

 

On February 7, 2003, the Company acquired South Holland Bancorp, Inc., (South Holland) parent company of South Holland Trust & Savings Bank, for $93.1 million in cash.  This purchase price generated approximately $28.6 million in goodwill.  As of the acquisition date, South Holland had approximately $560.3 million in assets.  It is expected that South Holland Trust & Savings Bank will be operated as a separate subsidiary of the Company until integration of its computer systems with those of MB Financial Bank, which is expected to be completed in the second quarter of 2003.  After this integration has been completed, it is expected that South Holland Trust & Savings Bank will be merged into MB Financial Bank.

 

Pro forma results of operation for South Holland for the three month period ended March 31, 2003 and 2002 are not included as South Holland would not have had a material impact on the Company’s financial statements.

 

On February 3, 2003, the Company entered into an agreement to sell Abrams Centre Bancshares, Inc. and its subsidiary, Abrams Centre National Bank (Abrams) to Prosperity Bancshares, Inc. for $16.3 million in cash.  As of March 31, 2003, Abrams had $96.5 million in assets.  The sale transaction was completed on May 6, 2003, and resulted in a $3.1 million gain for the Company in the second quarter of 2003.

 

On August 12, 2002, the Company acquired LaSalle Systems Leasing, Inc. and its affiliated company, LaSalle Equipment Limited Partnership (LaSalle), based in the Chicago metropolitan area, for $39.7 million.  Of this amount, $5.0 million was paid in the form of common stock, with the balance paid in cash.  The purchase price includes a $4.0 million deferred payment tied to LaSalle’s future results.  The transaction generated approximately $1.7 million in goodwill, which may be adjusted, if the $4.0 million deferred payment is made.  LaSalle operates as a subsidiary of MB Financial Bank.

 

Pro forma results of operation for LaSalle for the three month period ended March 31, 2002 are not included as LaSalle would not have had a material impact on the Company’s financial statements.

 

7

 

On April 8, 2002, the Company completed its acquisition of First National Bank of Lincolnwood (Lincolnwood), based in Lincolnwood, Illinois, and Lincolnwood’s parent, First Lincolnwood Corporation, for an aggregate purchase price of approximately $35.0 million in cash.  The transaction generated approximately $12.1 million in goodwill.  The Company merged the three-office, $227.5 million asset Lincolnwood into the Company’s Illinois-based subsidiary bank, MB Financial Bank.

 

Pro forma results of operation for Lincolnwood for the three month period ended March 31, 2002 are not included as Lincolnwood would not have had a material impact on the Company’s financial statements.

 

NOTE 3.                COMPREHENSIVE INCOME

 

Comprehensive income includes net income, as well as the change in net unrealized gain on investment securities available for sale and interest only receivables arising during the quarter, net of tax.  Comprehensive income was $11.8 million and $7.5 million for the three month periods ended March 31, 2003 and 2002, respectively.

 

NOTE 4.                EARNINGS PER SHARE DATA

 

The following table sets forth the computation of basic and diluted earnings per share for the periods indicated (dollars in thousands, except share and per share data):

 

 

NOTE 5.                GOODWILL AND INTANGIBLES

 

On January 1, 2002, the Company implemented Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets.  Under the provisions of SFAS No. 142, goodwill is no longer subject to amortization over its estimated useful life, but instead is subject to at least annual assessments for impairment by applying a fair-value based test.  SFAS No. 142 also requires that an acquired intangible asset be separately recognized if the benefit of the intangible asset is obtained through contractual or other legal rights, or if the asset can be sold, transferred, licensed, rented or exchanged, regardless of the acquirer’s intent to do so.  The Company determined that no transitional impairment loss was required at January 1, 2002.

 

Intangible asset disclosures are as follows (in thousands):

 

		March 31, 2003						December 31, 2002
		Gross Carrying Amount			Accumulated Amortization			Gross Carrying Amount			Accumulated Amortization
Amortized intangible assets:
Core deposit intangibles		$	22,551		$	(14,103	)	$	16,628		$	(13,831	)
Aggregate intangible amortization expense:
For the three months ended March 31, 2003		$	272
Estimated intangible amortization expense:
For the year ending December 31, 2003		$	1,160
For the year ending December 31, 2004		1,124
For the year ending December 31, 2005		921
For the year ending December 31, 2006		657
For the year ending December 31, 2007		446

 

8

 

The following tables present the changes in the carrying amount of goodwill and other intangibles during the three months ended March 31, 2003 and the year ended December 31, 2002 (in thousands):

 

 

 

NOTE 6.                RECENT ACCOUNTING PRONOUNCEMENTS

 

In June 2002, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 146, Accounting for Costs Associated with Exit or Disposal Activities.  SFAS No. 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring).   SFAS No. 146 requires that a liability for costs associated with an exit or disposal activity be recognized when the liability is incurred rather than when a company commits to such an activity and also establishes fair value as the objective for initial measurement of the liability.  The Company adopted SFAS No. 146 for exit or disposal activities initiated after December 31, 2002.

 

In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-based Compensation – Transition and Disclosure, an amendment of SFAS No. 123, Accounting for Stock-Based Compensation.  This Statement amends SFAS No. 123 to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation.  In addition, this Statement amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results.  Certain of the disclosure modifications are required for fiscal years ending after December 15, 2002 and are included in the notes to these consolidated financial statements.  The Company’s adoption of this Statement did not materially impact the Company’s consolidated financial statements.

 

In November 2002, the FASB issued Interpretation No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness to Others, an interpretation of FASB Statements No. 5, 57 and 107 and a rescission of FASB Interpretation No. 34.  This Interpretation elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under guarantees issued.  The Interpretation also clarifies that a guarantor is required to recognize, at inception of a guarantee, a liability for the fair value of the obligation undertaken.  The initial recognition and measurement provisions of the Interpretation are applicable to guarantees issued or modified after December 31, 2002.  The disclosure requirements are effective for financial statements of interim or annual periods ending after December 15, 2002.  The Company’s adoption of this Statement did not materially impact the Company’s consolidated financial statements.

 

In January 2003, the FASB issued Interpretation No. 46, Consolidation of Variable Interest Entities, an interpretation of ARB No. 51.  This Interpretation addresses the consolidation by business enterprises of variable interest entities as defined in the Interpretation.  The Interpretation applies immediately to variable interests in variable interest entities created after January 31, 2003, and to variable interests in variable interest entities obtained after January 31, 2003.  For public enterprises, such as the Company, with a variable interest in a variable interest entity created before February 1, 2003, the Interpretation is applied to the enterprise as of the beginning of the first interim reporting period beginning after June 15, 2003.  The application of this Interpretation is not expected to have a material effect on the Company’s financial statements.

 

9

 

NOTE 7.                PRO FORMA IMPACT OF STOCK-BASED COMPENSATION PLANS

 

As allowed under SFAS No. 123, Accounting for Stock-Based Compensation, the Company measures stock-based compensation cost in accordance with the methods prescribed in Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees.  As stock options are granted at fair value, there are no charges to earnings associated with stock options granted.  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 (dollars in thousands, except earnings per share data):

 

 

NOTE 8.                LONG TERM BORROWINGS

 

At March 31, 2003 and December 31, 2002, long-term borrowings included $20.0 million in unsecured floating rate subordinated debt.  The subordinated debt is subject to a revolving loan agreement that allows borrowings up to $40.0 million and requires at least $20.0 million outstanding to keep the credit facility available for a period of one year.  On January 30, 2003, the outstanding principal balance of such debt became fixed at $20.0 million.  The Company has the option to select an interest rate equal to 1-month, 3-month, or 6-month LIBOR, or other LIBOR rate agreed upon by the Agent, plus 2.60%.  Interest accrued at a rate equal to 3-month LIBOR plus 2.60% through January 30, 2003 and 2-month LIBOR plus 2.60% through March 31, 2003, and was due monthly.  Terms for this seven-year instrument are interest payments only for two years, with equal quarterly principal amortization over the final five years, with a maturity of January 2009.  Prepayment is allowed at any time without penalty.

 

The Company had Federal Home Loan Bank advances with maturities greater than one year of $8.7 million at March 31, 2003 and December 31, 2002.  As of March 31, 2003, the advances had fixed interest rates ranging from 3.87% to 5.90%.  Advances totaling of $3.0 million are callable on a quarterly basis and are due in 2008.

 

The Company had notes payable to banks totaling $17.4 million and $17.3 million at March 31, 2003 and December 31, 2002, respectively, which accrue interest at rates ranging from 5.20% to 9.50%.  Lease investments includes equipment with an amortized cost of $20.1 million and $20.5 million at March 31, 2003 and December 31, 2002, respectively, that is pledged as collateral on these notes.

 

NOTE 9.                COMPANY-OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES

 

The Company established Delaware statutory business trusts in 2002 and 1998 for the sole purpose of issuing trust preferred securities and related trust common securities.  The proceeds from such issuances were used by the trusts to purchase junior subordinated debentures of the Company, which are the sole assets of each trust.  Concurrently with the issuance of the trust preferred securities, the Company issued guarantees for the benefit of the holders of the trust preferred securities.  The trust preferred securities are issues that qualify, and are treated by the Company, as Tier 1 regulatory capital.  The Company wholly owns all of the common securities of each trust.  The trust preferred securities issued by each trust rank equally with the common securities in right of payment, except that if an event of default under the indenture governing the debentures has occurred and is continuing, the preferred securities will

 

10

 

rank senior to the common securities in right of payment.  The common securities and junior subordinated debentures, along with the related income effects, are eliminated within the consolidated financial statements of the Company.

 

The table below summarizes the outstanding trust preferred securities issued by each trust and the junior subordinated debentures issued by the Company to each trust as of March 31, 2003 (dollars in thousands):

 

Trust Preferred Securities and Junior Subordinated Debt Owned by Trust

Trust Name

Issuance Date

Amount

Maturity Date

Annual Rate

Interest Payable/ Distribution Dates (1)

MB Financial Capital Trust I

August 2002

$

59,800

September 30, 2032

8.60

%

Quarterly- March 31, June 30, September 30, and  December 31

Coal City Capital Trust I

July 1998

25,000

September 1, 2028

3-mo LIBOR +1.80

%

Quarterly- March 1, June 1, September 1, and December 1

Total

$

84,800

 

(1)          All cash distributions are cumulative.

 

The trust preferred securities are subject to mandatory redemption, in whole or in part, upon repayment of the junior subordinated debentures at the stated maturity date, or upon redemption on a date no earlier than September 30, 2007 for MB Financial Capital Trust I and September 1, 2008 for Coal City Capital Trust I.  Prior to the respective redemption dates, the trust preferred securities may be redeemed at the option of the Company after the occurrence of certain events that would have a negative tax effect on the Company or the trusts, would cause the trust preferred securities to no longer qualify as Tier 1 capital, or would result in a trust being treated as an investment company.  Each trust’s ability to pay amounts due on the trust preferred securities is solely dependent upon the Company making payment on the related junior subordinated debentures.  The Company’s obligation under the junior subordinated securities and other relevant trust agreements, in aggregate, constitute a full and unconditional guarantee by the Company of each trust’s obligations under the trust preferred securities issued by each trust.  The Company has the right to defer payment of interest on the debentures and, therefore, distributions on the trust preferred securities for up to five years, but not beyond the stated maturity date in the table above.

 

NOTE 10.              DERIVATIVE FINANCIAL INSTRUMENTS

 

The Company uses interest rate swaps to hedge its interest rate risk. The Company had three fair value commercial loan interest rate swaps with a notional amount of $5.0 million at March 31, 2003.  For fair value hedges, the changes in fair values of both the hedging derivative and the hedged item were recorded in current earnings as other income or other expense.  When a fair value hedge no longer qualifies for hedge accounting, previous adjustments to the carrying value of the hedged item are reversed immediately to current earnings and the hedge is reclassified to a trading position recorded at fair value.

 

Interest rate swap contracts involve the risk of dealing with counterparties and their ability to meet contractual terms.  Each counterparty to a swap transaction is approved by the Company’s Asset/ Liability Management Committee and has a credit rating that is investment grade.  The net amount payable or receivable under interest rate swaps/floors is accrued as an adjustment to interest income and was not material during the three month period ended March 31, 2003.  The Company’s credit exposure on interest rate swaps is limited to the Company’s net favorable value and interest payments of all swaps to each counterparty.  In such cases collateral is required from the counterparties involved if the net value of the swaps exceeds a nominal amount considered to be immaterial.  At March 31, 2003, the Company’s credit exposure relating to interest rate swaps was immaterial.

 

11

 

Activity in the notional amounts of end-user derivatives for the three months ended March 31, 2003, is summarized as follows (in thousands):

 

		Amortizing Interest Rate Swaps			Non-Amortizing Interest Rate Swaps			Total Derivatives
Balance at December 31, 2002		$	4,994		$	—		$	4,994
Additions		—			—			—
Amortization		(30		)	—			(30		)
Balance at March 31, 2002		$	4,964		$	—		$	4,964

 

The following table summarizes the weighted average receive and pay rates for the interest rate swaps at March 31, 2003 (dollars in thousands):

 

								Weighted Average
		Notional Amount			Estimated Fair Value			Receive Rate		Pay Rate
Interest Rate Swaps:
Receive variable/pay fixed		$	4,964		$	(176	)	3.75	%	6.72	%

 

NOTE 11.              COMMITMENTS AND CONTINGENCIES

 

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 March 31, 2003 and December 31, 2002, the following financial instruments were outstanding whose contract amounts represent credit risk (in thousands):

 

		Contract Amount
		March 31, 2003			December 31, 2002
Commitments to grant loans		$	617,299		$	510,453
Unfunded commitments under lines of credit		158,848			121,523
Commercial and standby letters of credit		69,983			23,367

 

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.

 

12

 

The Company, in the normal course of its business, regularly offers standby and commercial letters of credit to its bank customers.  Standby and commercial letters of credit are a conditional but irrevocable form of guarantee.  Under letters of credit, the Company typically guarantees payment to a third party beneficiary upon the default of payment or nonperformance by the bank customer and upon receipt of complying documentation from that beneficiary.

 

Both standby and commercial letters of credit may be issued for any length of time, but normally do not exceed a period of five years.  These letters of credit may also be extended or amended from time to time depending on the bank customer’s needs.  As of March 31, 2003, the maximum remaining term for any standby letter of credit was August 31, 2008.  A fee of up to two percent of face value may be charged to the bank customer and is recognized as income over the life of the letter of credit, unless considered non-rebatable under the terms of a letter of credit application.

 

At March 31, 2003, the contractual amount of these letters of credit, which represents the maximum potential amount of future payments that the Company would be obligated to pay increased $46.6 million to $70.0 million from $23.4 million at December 31, 2002.  The increase was primarily due to the acquisition of South Holland, which had $38.6 million in standby letters of credit at March 31, 2003.

 

Letters of credit issued on behalf of bank customers may be done on either a secured, partially secured or an unsecured basis.  If a letter credit is secured or partially secured, the collateral can take various forms including bank accounts, investments, fixed assets, inventory, accounts receivable or real estate, among other things.  The Company takes the same care in making credit decisions and obtaining collateral when it issues letters of credit on behalf of its customers, as it does when making other types of loan.

 

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 states 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.

 

13

 

Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

The following is a discussion and analysis of MB Financial, Inc.’s financial condition and results of operations and should be read in conjunction with the consolidated financial statements and notes thereto appearing elsewhere in this report.  The words “we,” “our” and “us” refer to MB Financial, Inc. and its wholly owned subsidiaries, unless we indicate otherwise.

 

General

 

The profitability of our operations depends primarily on our net interest income, which is the difference between total interest earned on interest earning assets and total interest paid on interest bearing liabilities.  Our net income is affected by our provision for loan losses as well as other income and other expenses.  The provision for loan losses reflects the amount that we believe is adequate to cover probable credit losses in the loan portfolio.  Non-interest income or other income consists of loan service fees, deposit service fees, net lease financing income, trust and brokerage fees, net gains (losses) on the sale of securities available for sale, increase in cash surrender value of life insurance and other operating income.  Other expenses include salaries and employee benefits along with occupancy and equipment expense, computer services expense, advertising and marketing expense, professional and legal, intangibles amortization expense and other operating expenses.

 

Net interest income is affected by changes in the volume and mix of interest earning assets, the level of interest rates earned on those assets, the volume and mix of interest bearing liabilities and the level of interest rates paid on those interest bearing liabilities.  The provision for loan losses is dependent on changes in the loan portfolio and management’s assessment of the collectibility of the loan portfolio, as well as economic and market conditions.  Other income and other expenses are impacted by growth of operations and growth in the number of accounts through both acquisitions and core banking business growth.  Growth in operations affects other expenses as a result of additional employees, branch facilities and promotional marketing expense.  Growth in the number of accounts affects other income, including service fees as well as other expenses such as computer services, supplies, postage, telecommunications and other miscellaneous expenses.

 

Results of Operations

 

First Quarter Results

 

Net income was $12.4 million for the first quarter of 2003 compared to $10.3 million for the first quarter of 2002.  Net interest income, the largest component of net income, was $33.8 million for the three months ended March 31, 2003, an increase of $2.6 million, or 8.4% from $31.2 million for the first quarter of 2002.  Net interest income grew primarily due to a $514.1 million, or 16.3% increase in average interest earning assets, which offset a 28 basis point decline in the net interest margin, expressed on a fully tax equivalent basis, to 3.79%.  The increase in average earning assets was primarily due to the acquisition of the First National Bank of Lincolnwood (Lincolnwood) in the second quarter of 2002, South Holland in the first quarter of 2003, and growth of our commercial lending business.  The provision for loan losses totaled $2.7 million and $3.4 million for the three months ended March 31, 2003 and 2002, respectively.

 

Other income increased $6.2 million, or 73.5% to $14.5 million for the quarter ended March 31, 2003 from $8.3 million for the first quarter of 2002.  Net lease financing increased by $2.5 million, primarily due to $1.8 million in additional revenues resulting from the acquisition of LaSalle Systems Leasing, Inc. (LaSalle) in the third quarter of 2002.  Deposit service fees, trust and brokerage fees, and other operating income grew $1.5 million, $1.2 million, $1.0 million, respectively.

 

Other expense increased by $6.2 million, or 29.4% to $27.3 million for the three months ended March 31, 2003 from $21.1 million for the three months ended March 31, 2002.  Salaries and employee benefits increased by $3.5 million due to the South Holland, Lincolnwood and LaSalle acquisitions and our continued investment in personnel.  Other operating expenses, occupancy and equipment expense, and computer services expense increased by $1.5 million, $838 thousand, and $458 thousand, respectively.

 

14

 

Net Interest Margin

 

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

 

		Three Months Ended March 31,
		2003								2002
		Average Balance			Interest			Yield/ Rate		Average Balance			Interest			Yield/ Rate
Interest Earning Assets:
Loans (1) (2)		$	2,672,493		$	41,493		6.30	%	$	2,298,001		$	38,481		6.79	%
Loans exempt from federal income taxes (3)		3,803			66			7.05		10,057			162			6.51
Taxable investment securities		867,564			9,145			4.27		746,822			10,606			5.76
Investment securities exempt from federal income taxes (3)		93,190			1,451			6.31		77,905			1,297			6.75
Federal funds sold		31,466			88			1.13		21,591			88			1.65
Other interest bearing deposits		4,649			16			1.40		4,715			18			1.55
Total interest earning assets		3,673,165			52,259			5.77		3,159,091			50,652			6.50
Non-interest earning assets		344,170								301,306
Total assets		$	4,017,335							$	3,460,397
Interest Bearing Liabilities:
Deposits:
NOW and money market deposit accounts		$	631,806		$	1,588		1.02	%	$	571,194		$	1,819		1.29	%
Savings deposits		432,847			906			0.85		337,889			824			0.99
Time deposits		1,669,185			12,362			3.00		1,496,442			14,428			3.91
Short-term borrowings		224,930			918			1.66		196,880			1,128			2.32
Long-term borrowings and redeemable preferred securities		130,049			2,139			6.67		62,399			740			4.81
Total interest bearing liabilities		3,088,817			17,913			2.35		2,664,804			18,939			2.88
Non-interest bearing deposits		529,651								452,760
Other non-interest bearing liabilities		51,109								43,750
Stockholders’ equity		347,758								299,083
Total liabilities and stockholders’ equity		$	4,017,335							$	3,460,397
Net interest income/interest rate spread (4)					$	34,346		3.42	%				$	31,713		3.62	%
Net interest margin on a fully tax equivalent basis (5)								3.79	%							4.07	%
Net interest margin (5)								3.73	%							4.01	%

 

(1)                  Non-accrual loans are included in average loans.

(2)                  Interest income includes loan origination fees of $1.2 million and $727 thousand for the three months ended March 31, 2003 and 2002, respectively.

(3)                  Non-taxable loan and investment income is presented on a fully tax equivalent basis assuming a 35% tax rate.

(4)                  Interest rate spread represents the difference between the average yield on interest earning assets and the average cost of interest bearing liabilities and is presented on a fully tax equivalent basis.

(5)                  Net interest margin represents net interest income as a percentage of average interest earning assets.

 

Net interest income increased $2.6 million, or 8.4% to $33.8 million for the quarter ended March 31, 2003 from $31.2 million for the first quarter of 2002.  Interest income increased $1.6 million due to a $514.1 million, or 16.3% increase in average interest earning assets, comprised of a $368.2 million, or 16.0% increase in average loans, a $136.0 million, or 16.5% increase in average investment securities and a $9.9 million, or 45.7% increase in average federal funds sold.  The increase in average interest earning assets was partially offset by a 73 basis point decline in their yield to 5.77%.  Interest expense declined by $1.0 million due to a 53 basis point decrease in the cost of funds to 2.35%, which was partially offset by a $424.0 million, or 15.9% increase in average interest bearing liabilities.  The increase in average interest earning assets and average interest bearing liabilities is primarily due to the acquisition of Lincolnwood in the second quarter of 2002, South Holland in the first quarter of 2003, and growth of our commercial lending business.  Decreases in the yield on interest earning assets and the cost of funds are due to the continued decline in market interest rates.  The net interest margin expressed on a fully tax equivalent basis declined 28 basis points to 3.79% in the first quarter of 2003 from 4.07% in the comparable 2002 period.  Of this decline in the net interest margin, approximately 14 basis points is due to an additional $59.8 million in trust preferred securities issued in August 2002.  The remaining decrease is primarily due to interest margin compression caused by the continuing decline in market rates.

 

15

 

The net interest margin expressed on a fully tax equivalent basis declined by 8 basis points to 3.79% in the first quarter of 2003 from 3.87% in the fourth quarter of 2002 primarily due to higher than expected mortgage-backed security prepayments, which resulted in an increase in premium amortization expense during the 2003 period.

 

Volume and Rate Analysis of Net Interest Income

 

The following table presents the extent to which changes in volume and interest rates of interest earning assets and interest bearing liabilities have affected our interest income and interest expense during the periods indicated.  Information is provided in each category with respect to (i) changes attributable to changes in volume (changes in volume multiplied by prior period rate), (ii) changes attributable to changes in rates (changes in rates multiplied by prior period volume) and (iii) change attributable to a combination of changes in rate and volume (change in rates multiplied by the changes in volume) (in thousands).  Changes attributable to the combined impact of volume and rate have been allocated proportionately to the changes due to volume and the changes due to rate.

 

 

(1)          Non-taxable loan and investment income is presented on a fully tax equivalent basis assuming a 35% tax rate.

 

Other Income

 

Other income increased $6.2 million, or 73.5% to $14.5 million for the quarter ended March 31, 2003 from $8.3 million for the first quarter of 2002.  Net lease financing increased by $2.5 million to $3.3 million for the three months ended March 31, 2003 from $763 thousand for the three months ended March 31, 2002.  The increase was primarily due to $1.8 million in additional revenues generated as a result of the LaSalle acquisition.  Deposit service fees increased by $1.5 million, or 61.3%, due to increases in NSF and overdraft fees and monthly service charges of $923 thousand and $496 thousand, respectively, resulting from volume increases associated with the Lincolnwood and South Holland acquisitions, as well as the introduction of a new courtesy overdraft program and free checking product.  Trust and brokerage fees increased by $1.2 million primarily due to $953 thousand in additional revenues generated by South Holland’s wholly owned full service broker/dealer, Vision Investment Services, Inc. (Vision), and $427 thousand generated by South Holland’s trust department.  Other operating income increased by $1.0 million due to increases in miscellaneous customer service fees, gains on sale of loans and ATM fees of $596 thousand, $452 thousand and $325 thousand, respectively, which were partially offset by a $423 thousand decline in gain on sale of other real estate.

 

16

 

Other Expense

 

Other expense increased by $6.2 million, or 29.4%, to $27.3 million for the three months ended March 31, 2003 from $21.1 million for the three months ended March 31, 2002.  Salaries and employee benefits increased by $3.5 million due to the South Holland, Lincolnwood and LaSalle acquisitions and our continued investment in personnel.  Other operating expenses increased by $1.5 million, due primarily to $530 thousand in cost of investment sales excluding salaries and employee benefits incurred by Vision and a $357 thousand loss on sale of fixed assets in the 2003 quarter, as well as increases in telephone expense, ATM expense and insurance expense of $228 thousand, $184 thousand and $120 thousand, respectively.  Occupancy and equipment expense and computer services expense increased by $838 thousand and $458 thousand, respectively, due to additional locations and customer accounts acquired in the South Holland, Lincolnwood and LaSalle acquisitions.

 

Income Taxes

 

Income tax expense for the three months ended March 31, 2003 increased $1.1 million to  $5.8 million compared to $4.7 million for the same period in 2002.  The effective tax rate was 32.1% and 31.2% for the three months ended March 31, 2003 and 2002, respectively.

 

Income tax expense recorded in the consolidated income statement involves interpretation and application of certain accounting pronouncements and federal and state tax codes, and is, therefore, considered a critical accounting policy.  We undergo examination by various regulatory taxing authorities.  Such agencies may require that changes in the amount of tax expense or valuation allowance be recognized when their interpretations differ from those of management, based on their judgments about information available to them at the time of their examinations.  There can be no assurance that future events, such as court decisions or positions of federal and state taxing authorities, will not differ from management’s current assessment of tax liabilities, the impact of which could be significant to the consolidated results of operations and reported earnings.  We believe the tax liabilities are adequate and properly recorded in the consolidated financial statements.

 

Balance Sheet

 

Total assets increased $483.6 million, or 12.9% to $4.2 billion at March 31, 2003 from $3.8 billion at December 31, 2002.  Net loans increased by $266.1 million, or 10.8% largely due to the acquisition of South Holland, which had net loans of $262.8 million at the date of acquisition.  Investment securities available for sale increased by $121.8 million, or 13.6% primarily due to the acquisition of South Holland, which had investment securities available for sale of $179.0 million at the acquisition date.  Goodwill increased by $28.6 million due to goodwill generated in the South Holland acquisition.

 

Total liabilities increased by $475.0 million, or 13.9% to $3.9 billion at March 31, 2003 from $3.4 billion at December 31, 2002.  Total deposits grew by $432.0 million, or 14.3% largely due to $453.1 million in deposits acquired through the acquisition of South Holland.  Short-term borrowings increased by $28.9 million, or 13.0% due to increases in FHLB advances, revolving line of credit, and securities sold under agreement to repurchase of $50.0 million, $20.0 million and $18.8 million, which were partially offset by a $59.9 million decline in federal funds purchased.

 

Total stockholders’ equity increased $8.5 million, or 2.5% to $351.7 million at March 31, 2003 compared to $343.2 million at December 31, 2002.  The first quarter growth was due to net income of $12.4 million and partially offset by $2.7 million, or $0.15 per share cash dividends and a $589 thousand decline in accumulated other comprehensive income.

 

17

 

Loan Portfolio

 

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

 

		March 31, 2003					December 31, 2002					March 31, 2002
		Amount			Percent		Amount			Percent		Amount			Percent
Commercial		$	644,783		23.23	%	$	558,208		22.29	%	$	492,088		21.34	%
Commercial loans collateralized by assignment of lease payments		263,274			9.48	%	274,290			10.95	%	290,512			12.60	%
Commercial real estate		1,002,745			36.12	%	902,755			36.04	%	856,140			37.13	%
Residential real estate		401,566			14.47	%	373,181			14.90	%	347,718			15.08	%
Construction real estate		239,882			8.64	%	204,728			8.17	%	153,907			6.67	%
Installment and other		223,657			8.06	%	191,552			7.65	%	165,533			7.18	%
Gross loans (1)		2,775,907			100.00	%	2,504,714			100.00	%	2,305,898			100.00	%
Allowance for loan losses		(38,973		)			(33,890		)			(27,506		)
Net loans		$	2,736,934				$	2,470,824				$	2,278,392

 

(1)          Gross loan balances at March 31, 2003, December 31, 2002, and March 31, 2002 are net of unearned income, including net deferred loan fees of $4.4 million, $4.2 million, and $3.7 million, respectively.

 

Net loans increased by $266.1 million, or 10.8% to $2.7 billion at March 31, 2003 from $2.5 billion at December 31, 2002.  The increase was largely due to the acquisition of South Holland, which had net loans of $262.8 million at the acquisition date, as well as continued growth within our loan portfolio.

 

Net loans increased by $458.5 million, or 20.1% to $2.7 billion at March 31, 2003 from $2.3 billion at March 31, 2002.  The increase was largely due to the South Holland acquisition and the acquisition of Lincolnwood, which had net loans of $101.4 million at the April 2002 acquisition date, as well as continued growth within our loan portfolio.

 

Asset Quality

 

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

 

		March 31, 2003			December 31, 2002			March 31, 2002
Non-performing loans:
Non-accrual loans		$	21,493		$	21,359		$	18,814
Loans 90 days or more past due, still accruing interest		941			624			243
Total non-performing loans		22,434			21,983			19,057
Other real estate owned		1,106			549			342
Other repossessed assets		21			10			62
Total non-performing assets		$	23,561		$	22,542		$	19,461
Total non-performing loans to total loans		0.81		%	0.88		%	0.83		%
Allowance for loan losses to non-performing loans		173.72		%	154.16		%	144.34		%
Total non-performing assets to total assets		0.56		%	0.60		%	0.57		%

 

Total non-performing assets increased $1.0 million, or 4.5%, to $23.6 million at March 31, 2003 from $22.6 million at December 31, 2002 due to a $557 thousand increase in other real estate owned and a $451 thousand increase in non-performing loans.

 

Total non-performing assets increased $4.1 million, or 21.1%, to $23.6 million at March 31, 2003 from $19.5 million at March 31, 2002 due to $3.5 million in non-accrual loans acquired in the South Holland acquisition and a $764 thousand increase in other real estate owned.  The increase in non-performing loans was primarily due to continued weakness in the overall economic environment.

 

18

 

Allowance for Loan Losses

 

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

 

		Three Months Ended
		March 31, 2003			March 31, 2002
Balance at beginning of period		$	33,890		$	27,500
Additions from acquisition		3,563			—
Provision for loan losses		2,736			3,400
Charge-offs		(2,622		)	(3,633		)
Recoveries		1,406			239
Balance at March 31,		$	38,973		$	27,506
Total loans at March 31,		$	2,775,907		$	2,305,898
Ratio of allowance for loan losses to total loans		1.40		%	1.19		%

 

Net charge-offs declined by $2.2 million in the quarter ended March 31, 2003 compared to the comparable 2002 period due to a $1.2 million increase in recoveries due to our loan collection efforts and a $1.0 million decline in charge-offs in the 2003 first quarter.  The provision for loan losses declined by $664 thousand to $2.7 million in the quarter ended March 31, 2003 from $3.4 million in the quarter ended March 31, 2002.

 

Management believes the allowance for loan losses accounting policy is critical to the portrayal and understanding of our financial condition and results of operations.  As such, selection and application of this “critical accounting policy” involves judgements, estimates, and uncertainties that are susceptible to change.  In the event that different assumptions or conditions were to prevail, and depending upon the severity of such changes, the possibility of materially different financial condition or results of operations is a reasonable likelihood.

 

We maintain our allowance for loan losses at a level that management believes will be adequate to absorb probable losses on existing loans based on an evaluation of the collectibility of loans, underlying collateral and prior loss experience.  We use a risk rating system to evaluate the adequacy of the allowance for loan losses.  With this system, each loan, with the exception of those included in large groups of smaller-balance homogeneous loans, is risk rated between one and nine, by the originating loan officer, Senior Credit Management, loan review or any loan committee, with one being the best case and nine being a loss or the worst case.  Loan loss reserve factors are multiplied against the balances in each risk-rating category to determine an appropriate level for the allowance for loan losses.  Loans with risk ratings between five and eight are monitored more closely by the officers.  Control of our loan quality is continually monitored by management and is reviewed by our board of directors when they meet from time to time.  We consistently apply our methodology for determining the adequacy of the allowance for loan losses, but may adjust our methodologies and assumptions based on historical information related to charge-offs and management’s evaluation of the current loan portfolio.

 

Potential Problem Loans

 

We utilize an internal asset classification system as a means of reporting problem and potential problem assets.  At each scheduled meeting of the boards of directors of our subsidiary banks, a watch list is presented, showing significant loan relationships listed as “Special Mention,” “Substandard,” and “Doubtful.”  An asset is classified Substandard if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any.  Substandard assets include those characterized by the distinct possibility that we will sustain some loss if the deficiencies are not corrected.  Assets classified as Doubtful have all the weaknesses inherent in those classified Substandard with the added characteristic that the weaknesses present make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable.  Assets classified as Loss are those considered uncollectible and viewed as non-bankable assets and have been charged-off.  Assets that do not currently expose us to sufficient risk to warrant classification in one of the aforementioned categories, but possess weaknesses that may or may not be within the control of the customer are deemed to be Special Mention.

 

19

 

Our determination as to the classification of our assets and the amount of our valuation allowances is subject to review by the subsidiary banks’ primary regulators, which can order the establishment of additional general or specific loss allowances.  There can be no assurance that regulators, in reviewing our loan portfolio, will not request us to materially increase our allowance for loan losses.  The Office of the Comptroller of the Currency, in conjunction with the other federal banking agencies, has adopted an interagency policy statement on the allowance for loan losses.  The policy statement provides guidance for financial institutions on both the responsibilities of management for the assessment and establishment of adequate allowances and guidance for banking agency examiners to use in determining the adequacy of general valuation guidelines.  Generally, the policy statement recommends that (1) institutions have effective systems and controls to identify, monitor and address asset quality problems; (2) management has analyzed all significant factors that affect the collectibility of the portfolio in a reasonable manner; and (3) management has established acceptable allowance evaluation processes that meet the objectives set forth in the policy statement.  Management believes it has established an adequate allowance for probable loan losses.  We analyze our process regularly, with modifications made if needed, and report those results four times per year at meetings of our board of directors.  However, there can be no assurance that regulators, in reviewing our loan portfolio, will not request us to materially increase our allowance for loan losses at the time.  Although management believes that adequate specific and general loan loss allowances have been established, actual losses are dependent upon future events and, as such, further additions to the level of specific and general loan loss allowances may become necessary.

 

Potential problem loans are loans included on the watch list presented to the boards of directors that do not meet the definition of a non-performing loan, but where known information about possible credit problems of borrowers causes management to have serious doubts as to the ability of such borrowers to comply with present loan repayment terms.  The aggregate principal amounts of potential problem loans as of March 31, 2003, December 31, 2002 and March 31, 2002 were approximately $41.6 million $41.1 million and $31.2 million, respectively.  The increase from March 31, 2002 is primarily due to continued weakness in the overall economic environment.

 

As of March 31, 2003, we had approximately $7.6 million in performing lease loans (collectively, the Kmart loans) under which Kmart Corporation was the lessee.  Approximately $4.7 million of these loans were direct financing leases included in our lease loan portfolio.  Kmart Corporation filed for bankruptcy protection on January 22, 2002.  The Kmart loans are secured by revenue producing equipment with an original cost of $10.2 million that was purchased and installed during the second half of 2001.  Subsequent to filing for bankruptcy protection, Kmart Corporation closed a number of its retail store locations, including some in which this equipment was located.  At that time, Kmart had informed us that all of our equipment located in closed stores had been moved to stores that would remain open.

 

In connection with Kmart’s efforts to emerge from Chapter 11, Kmart filed its First Amended Joint Plan of Reorganization (the Plan) on February 25, 2003.  In the Plan, Kmart assumed all of our Kmart loans.  By assuming these lease loans, Kmart, as the entity emerging from bankruptcy, has obligated itself to continue to perform its obligations under these lease loans.  On May 6, 2003, Kmart announced that it has emerged from the Chapter 11 reorganization process after completing all required actions and satisfying all remaining conditions to the Plan, which was confirmed by the U.S. Bankruptcy Court for the Northern District of Illinois by order dated April 23, 2003.

 

While the Kmart loans are currently performing in accordance with their terms, no assurance can be given that this will continue to be the case.  No assurances can be made that a loss related to these loans will not be incurred.

 

20

 

Lease Investments

 

The lease portfolio is comprised of various types of equipment, general technology related, such as computer systems, satellite equipment, and general manufacturing equipment.  The credit quality of the lessee generally is in one of the top four rating categories of Moody’s or Standard & Poors, or the equivalent as determined by us.

 

Lease investments by categories follow (in thousands):

 

 

(1)          Direct finance and leveraged leases are included as lease loans for financial statement purposes.

 

Leases that transfer substantially all of the benefits and risk related to the equipment ownership to the lessee are classified as direct financing.  If these direct finance leases have non-recourse debt associated with them, they are further classified as leveraged leases, and the associated debt is netted with the outstanding balance in the consolidated financial statements.  Interest income on direct finance and leveraged leases is recognized using methods, which approximate a level yield over the term of the lease.  Direct finance leases have grown from $7.3 million at March 31, 2002 to $23.0 million at March 31, 2003 largely due to the acquisition of LaSalle, which had direct finance leases of approximately $10.6 million at the purchase date.

 

Operating leases are investments in equipment we lease to other companies, where the residual component makes up more than 10% of the investment.  Operating leases have grown from $46.6 million at March 31, 2002 to $66.9 million at March 31, 2003 due to the acquisition of LaSalle, which had lease investments of approximately $26.0 million at the purchase date.  We fund most of our lease equipment purchases, but have some loans at other banks totaling $17.4 million at March 31, 2003, $17.3 million at December 31, 2002 and $8.5 million at March 31, 2002.

 

At March 31, 2003, the following schedule represents the residual values for leases in the year initial lease terms are ended (in thousands):

 

 

21

 

Interest Only Securities

 

In 1996, 1997 and 1998, Avondale Federal Savings Bank (which we purchased in 1999) securitized certain home equity lines of credit to investors with limited recourse, retaining the servicing rights to the underlying loans.  The securitizations were done using qualified special purpose entities (securitization trusts).  We receive annual servicing fees and the rights to future cash flows (interest only receivables) arising after the investors in the securitization trusts receive their contractual return.  In addition, Avondale Federal Savings Bank retained a security 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 Avondale merger, we acquired servicing rights related to these loans, the retained security interest in the securitization trusts and interest only receivables.  The annual servicing fee we receive approximates 1.00% of the outstanding loan balance.  The investors and their securitization trusts have no recourse to our other assets for failure of debtors to pay when due.  Most of our retained interest in the securitization trusts is 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.  We estimate fair value of these securities by using prices paid for similar securities.

 

At March 31, 2003 and December 31, 2002, interest only receivables were $1.9 million and $5.4 million, respectively.  The value of interest only receivables is subject to substantial credit, prepayment, and interest rate risk on the transferred financial assets.  On a quarterly basis, we perform a review to determine the fair value of its interest only receivables, as these receivables were accounted for as investment securities available for sale.  As part of the review, we review our assumptions of prepayment speeds, discount rates and anticipated credit losses.

 

The following table shows the results of our assumptions used to estimate the fair value at March 31, 2003 (dollars in thousands):

 

 

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

(2)          Unrealized holding gains at March 31, 2003 totaled approximately $1.8 million.

(3)          The remaining weighted-average life in years of prepayable assets is calculated by summing (a) the principal collections expected in each future year multiplied by (b) the number of years until collection, and then dividing that sum by the initial principal balance.  This is not explicitly assumed but it reflects the overall effect of prepayment assumptions.

(4)          Assumed remaining credit losses over the life remaining on the loans outstanding at March 31, 2003 are $910 thousand.  The estimated credit loss percentage is derived by dividing the remaining expected credit losses by the related loan balance outstanding in the pool.

 

In February 2003, we terminated the 97-1 securitization trust through a clean up call.  The termination resulted in a deferred gain of $936 thousand, which we are amortizing over twenty months, the estimated life of the remaining loans.

 

22

 

Investment Securities Available for Sale

 

The following table sets forth the amortized cost and fair value for the major components of investment securities available for sale carried at fair value (in thousands).  There were no investment securities classified as held to maturity as of the dates presented below.

 

		At March 31, 2003						At December 31, 2002						At March 31, 2002
		Amortized Cost			Fair Value			Amortized Cost			Fair Value			Amortized Cost			Fair Value
U.S. Treasury securities		$	22,532		$	24,104		$	23,661		$	25,269		$	22,716		$	22,605
U.S. Government agencies		294,826			311,391			262,092			279,469			322,036			328,497
States and political subdivisions		118,296			122,328			67,530			70,388			81,804			83,424
Mortgage-backed securities		476,499			480,609			443,044			448,018			277,195			280,701
Corporate bonds		53,635			53,348			45,937			45,241			53,906			51,669
Equity securities		20,863			21,084			18,185			18,351			18,038			18,666
Debt securities issued by foreign governments		665			665			690			690			790			792
Investments in equity lines of credit trusts		1,798			1,798			6,127			6,127			11,649			11,649
Total		$	989,114		$	1,015,327		$	867,266		$	893,553		$	788,134		$	798,003

 

Liquidity and Sources of Capital

 

Our 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 $17.3 million and $5.9 million for the three months ended March 31, 2003 and 2002, respectively, an increase of $11.4 million.  The increase in cash provided was due to a $25.9 million increase in proceeds from the sale of loans and $12.0 million additional funds provided by other liabilities due to a smaller decline in 2003.  These items were partially offset by a $26.5 million increase in loans originated for sale.  Net cash provided by investing activities increased by $14.8 million, to $22.9 million for the three months ended March 31, 2003 from $8.1 million in the comparable period in 2002.  The increase in cash provided was comprised of an increase in proceeds from sales, maturities, and calls of investment securities available for sale of $42.7 million, as well as a $35.0 million decline in cash used for the purchase of bank owned life insurance.  The above increases in cash provided were partially offset by increases in purchase of investment securities available for sale and cash paid, net of cash and cash equivalents acquired in acquisition of  $27.8 million and $23.4 million, respectively, as well as a $6.9 million greater increase in loans in 2003.  Net cash provided by financing activities increased by $36.9 million, adding $4.6 million in 2003 after using $32.3 million in 2002.  Within the category, short-term borrowings added $98.8 million due to a $28.9 million increase in 2003 versus a $69.9 million decline in 2002.  The above was partially offset by declines in deposits and proceeds from long term borrowings of  $55.8 million and $2.5 million, respectively.

 

We expect to have available cash to meet our liquidity needs.  Liquidity management is monitored by the Asset/Liability committee of the our subsidiary banks, 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, our banks have established relationships with several large regional banks to provide short-term borrowings in the form of federal funds purchases.  While, at March 31, 2003, there were no firm lending commitments in place, our banks have borrowed, and management believes that they could again borrow, $177.5 million for a short time from these banks on a collective basis.  Additionally, MB Financial Bank is a member of the Federal Home Loan Bank of Chicago, Illinois and Union Bank, N.A. is a member of the Federal Home Loan Bank of Topeka, Kansas and both banks have the ability to borrow from their respective Federal Home Loan Banks.  As a contingency plan for significant funding needs, the Asset/Liability Management committee may also consider the sale of investment securities, selling securities under agreement to repurchase or the temporary curtailment of lending activities.

 

23

 

The following table summarizes our significant contractual obligations and other potential funding needs at March 31, 2003 (in thousands):

 

		Time deposits			Long-term debt (1)			Operating leases			Total
2003		$	1,151,303		$	1,217		$	1,779		$	1,154,299
2004		259,625			6,506			2,332			268,463
2005		134,395			13,471			2,063			149,929
2006		58,340			7,397			1,719			67,456
2007		108,592			4,291			1,769			114,652
Thereafter		16,108			97,972			4,953			119,033
Total		$	1,728,363		$	130,854		$	14,615		$	1,873,832
Commitments to extend credit											$	846,130

 

(1) Long-term debt includes company-obligated mandatorily redeemable preferred securities.

 

At March 31, 2003 and December 31, 2002, our total risk-based capital ratio was 12.39% and 14.99%, Tier 1 capital to risk-weighted assets ratio was 10.59% and 13.05%, and Tier 1 capital to average asset ratio was 8.59% and 9.74%, respectively.  As of March 31, 2003, we and each of our subsidiary banks were “well capitalized” under the capital adequacy requirements to which each of us are subject.

 

At March 31, 2003, our book value per share was $19.86.

 

Forward Looking Statements

 

When used in this Quarterly Report on Form 10-Q and in other filings with the Securities and Exchange Commission, in press releases or other public shareholder communications, or in oral statements made with the approval of an authorized executive officer, the words or phrases “believe,” “will likely result,” “are expected to,” “will continue,” “is anticipated,” “estimate,” “project,” “plans,” or similar expressions are intended to identify “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. You are cautioned not to place undue reliance on any forward-looking statements, which speak only as of the date made.  These statements may relate to our future financial performance, strategic plans or objectives, revenues or earnings projections, or other financial items.  By their nature, these statements are subject to numerous uncertainties that could cause actual results to differ materially from those anticipated in the statements.

 

Important factors that could cause actual results to differ materially from the results anticipated or projected include, but are not limited to, the following: (1) expected cost savings and synergies from our merger and acquisition activities, including our recently completed acquisition of South Holland Bancorp, might not be realized within the expected time frames; (2) the credit risks of lending activities, including changes in the level and direction of loan delinquencies and write-offs; (3) changes in management’s estimate of the adequacy of the allowance for loan losses; (4) competitive pressures among depository institutions; (5) interest rate movements and their impact on customer behavior and our net interest margin; (6) the impact of repricing and competitors’ pricing initiatives on loan and deposit products; (7) our ability to adapt successfully to technological changes to meet customers’ needs and developments in the market place; (8) our ability to realize the residual values of its direct finance, leveraged, and operating leases; (9) our ability to access cost-effective funding; (10) changes in financial markets; (11) changes in economic conditions in general and in the Chicago metropolitan area in particular; (12) new legislation or regulatory changes, including but not limited to changes in federal and/or state tax laws or interpretations thereof by taxing authorities; (13) changes in accounting principles, policies or guidelines; and (14) future acquisitions of other depository institutions or lines of business.

 

We do not undertake any obligation to update any forward-looking statement to reflect circumstances or events that occur after the date on which the forward-looking statement is made.

 

24

 

Item 3.  Quantitative and Qualitative Disclosures about Market Risk

 

Asset/Liability Management

 

Our 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 our 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 we employ to manage our interest rate risk is to measure our risk using an asset/liability simulation model and adjust the maturity of securities in our investment portfolio to manage that risk.  Also, to limit risk, we generally do 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 period if it will mature or reprice within that 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.

 

The following table sets forth the amounts of interest earning assets and interest bearing liabilities outstanding at March 31, 2003 that we anticipate, 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 March 31, 2003 based on 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 because of contractual amortization and rate adjustments on adjustable-rate loans.  Loan and investment securities contractual maturities and amortization reflect modest prepayment assumptions.  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.

 

25

 

Therefore, the information in the table is calculated assuming that NOW, money market and savings deposits will reprice as follows: 30%, 85% and 24%, respectively, in the first three months, 10%, 2%, and 12%, respectively, in the next nine months, and 60%, 13% and 64%, respectively, after one year (dollars in thousands):

 

		Time to Maturity or Repricing
		0 – 90 Days			91 - 365 Days			1 - 5 Years			Over 5 Years			Total
Interest Earning Assets:
Interest bearing deposits with banks		$	7,969		$	—		$	—		$	—		$	7,969
Federal funds sold		41,600			—			—			—			41,600
Investment securities available for sale		164,700			210,845			552,905			86,877			1,015,327
Loans held for sale		9,468			—			—			—			9,468
Loans		1,606,794			347,832			775,598			45,683			2,775,907
Total interest earning assets		$	1,830,531		$	558,677		$	1,328,503		$	132,560		$	3,850,271
Interest Bearing Liabilities:
NOW and money market deposit accounts		$	427,460		$	34,996		$	214,060		$	—		$	676,516
Savings deposits		115,678			57,839			308,476			—			481,993
Time deposits		565,760			704,772			455,749			2,082			1,728,363
Short-term borrowings		190,115			61,510			—			—			251,625
Long-term borrowings		22,617			5,883			15,255			2,299			46,054
Company-obligated mandatorily redeemable preferred securities		25,000			—			—			59,800			84,800
Total interest bearing liabilities		$	1,346,630		$	865,000		$	993,540		$	64,181		$	3,269,351
Rate sensitive assets (RSA)		$	1,830,531		$	2,389,208		$	3,717,711		$	3,850,271		$	3,850,271
Rate sensitive liabilities (RSL)		1,346,630			2,211,630			3,205,170			3,269,351			3,269,351
Cumulative GAP		483,901			177,578			512,541			580,920			580,920
(GAP=RSA-RSL)
RSA/Total assets		43.14		%	56.31		%	87.62		%	90.74		%	90.74		%
RSL/Total assets		31.74		%	52.12		%	75.54		%	77.05		%	77.05		%
GAP/Total assets		11.40		%	4.19		%	12.08		%	13.69		%	13.69		%
GAP/RSA		26.44		%	7.43		%	13.79		%	15.09		%	15.09		%

 

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, we do 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.

 

26

 

Based on simulation modeling at March 31, 2003 and December 31, 2002, our 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
		At March 31, 2003				At December 31, 2002
Changes in Levels of Interest Rates		Dollar Change		Percentage Change		Dollar Change			Percentage Change
+ 2.00%		5,531		3.61	%	$	5,176		3.71	%
+ 1.00		(562	)	(0.37	)	3,876			2.78
(1.00)		(3,115	)	(2.03	)	(1,864		)	(1.34	)

 

Our simulations assume the following:

 

1.              Changes in interest rates are immediate.

 

2.              Changes in net interest income between March 31, 2003 and December 31, 2002 reflect changes in the composition of interest earning assets and interest bearing liabilities, related interest rates, repricing frequencies, and the fixed or variable characteristics of the interest earning assets and interest bearing liabilities.

 

Because of the low level of current market interest rates, the table above does not show an analysis of decreases more than 100 basis points.

 

Item 4.  Controls and Procedures

 

(a)          Evaluation of Disclosure Controls and Procedures: An evaluation of our disclosure controls and procedures (as defined in Rule 13a-14(c) under the Securities Exchange Act of 1934 (the “Act”)) was carried out under the supervision and with the participation of our Chief Executive Officer, Chief Financial Officer and several other members of our senior management within the 90-day period preceding the filing date of this quarterly report.  Our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures as currently in effect are effective in ensuring that the information we are required to disclose in the reports we file or submit under the Act is (i) accumulated and communicated to our management (including the Chief Executive Officer and Chief Financial Officer) in a timely manner, and (ii) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

 

(b)       Changes in Internal Controls: There were no significant changes in our internal controls or in other factors that could significantly affect these controls subsequent to the date of their most recent evaluation.

 

PART II. – OTHER INFORMATION

 

Item 6.  Exhibits and Reports on Form 8-K

 

(a)          See Exhibit Index.

 

(b)         During the quarter ended March 31, 2003, we filed one Current Report on Form 8-K (reporting under Item 9) on March 12, 2003 (filing materials prepared for presentation to investors).

 

27

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, MB Financial, Inc. has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on the 15 day of May 2003.

 

MB FINANCIAL, INC.

 

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

 

 

 

28

 

CERTIFICATIONS

 

I, Mitchell Feiger, certify that:

 

1. I have reviewed this quarterly report on Form 10-Q of MB Financial, Inc.;

 

2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

 

3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

 

4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

 

a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

 

b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

 

c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

 

5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

 

a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

 

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

 

6. The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

 

Date:	May 15, 2003
/s/ Mitchell Feiger
Mitchell Feiger
President and Chief Executive Officer

 

29

 

I, Jill E. York, certify that:

 

1. I have reviewed this quarterly report on Form 10-Q of MB Financial, Inc.;

 

2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

 

3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

 

4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

 

a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

 

b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

 

c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

 

5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

 

a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

 

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

 

6. The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

 

Date:	May 15, 2003
/s/ Jill E. York
Vice President and Chief Financial Officer

 

30

 

EXHIBIT INDEX

 

Exhibit Number		Description
2.1		Agreement and Plan of Merger, dated as of November 1, 2002, by and among the Registrant, MB Financial Acquisition Corp II and South Holland Bancorp, Inc. (incorporated herein by reference to Exhibit 2 to the Registrant’s Current Report Form 8-K filed on November 5, 2002 (File No. 0-24566-01))
3.1		Charter of the Registrant, as amended (incorporated herein by reference to Exhibit 3.1 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2001 (File No. 0-24566-01))
3.2		Bylaws of the Registrant, as amended (incorporated herein by reference to Exhibit 3.2 to Amendment No. One to the Registration Statement on Form S-1 of the Registrant and MB Financial Capital Trust I filed on August 7, 2002 (File Nos. 333-97007 and 333-97007-01))
4.1		The Registrant 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 Registrant and its consolidated subsidiaries
4.2		Certificate of Registrant’s Common Stock (incorporated herein by reference to Exhibit 4.1 to Amendment No. One to the Registrant’s Registration Statement on Form S-4 (No. 333-64584))
10.1		Employment Agreement between the Registrant (as successor to MB Financial, Inc., a Delaware corporation (“Old MB Financial”)) and Robert S. Engelman, Jr. (incorporated herein by reference to Exhibit 10.2 to the Registration Statement on Form S-4 of Old MB Financial (then known as Avondale Financial Corp.) (No. 333-70017))
10.2		Employment Agreement between the Registrant and Mitchell Feiger (incorporated herein by reference to Exhibit 10.2 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2002 (File No. 0-24566-01))
10.3		Form of Employment Agreement between the Registrant and Burton Field (incorporated herein by reference to Exhibit 10.5 to Old MB Financial’s Annual Report on Form 10-K for the fiscal year ended December 31, 1999 (File No. 0-24566))
10.4		Form of Change of Control Severance Agreement between MB Financial Bank, National Association and each of William F. McCarty III, Thomas Panos, Jill E. York, Thomas P. Fitzgibbon, Jr., Jeffrey L. Husserl and others (incorporated herein by reference to Exhibit 10.4 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2001 (File No. 0-24566-01))
10.5		Avondale Financial Corp. 1995 Stock Option and Incentive Plan (incorporated herein by reference to Exhibit 4.3 to the Registration Statement on Form S-8 of Old MB Financial (then known as Avondale Financial Corp.) (No. 33-98860))
10.6		Coal City Corporation 1995 Stock Option Plan (incorporated herein by reference to Exhibit 10.6 to the Registrant’s Registration Statement on Form S-4 (No. 333-64584))
10.7		1997 MB Financial, Inc. Omnibus Incentive Plan (incorporated herein by reference to Exhibit 10.7 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2002 (File No. 0-24566-01))
10.8		MB Financial Stock Deferred Compensation Plan (incorporated herein by reference to Exhibit 10.8(a) to Amendment No. One to the Registrant’s Registration Statement on Form S-4 (No. 333-64584))

 

31

 

Exhibit Number		Description
10.9		MB Financial Non-Stock Deferred Compensation Plan (incorporated herein by reference to Exhibit 10.8(b) to Amendment No. One to the Registrant’s Registration Statement on Form S-4 (No. 333-64584))
10.10		Avondale Federal Savings Bank Supplemental Executive Retirement Plan Agreement (incorporated herein by reference to Exhibit 10.2 to Old MB Financial’s (then known as Avondale Financial Corp.) Annual Report on Form 10-K for the year ended December 31, 1996 (File No. 0-24566))
10.11		Non-Competition Agreement between the Registrant and E.M. Bakwin (incorporated herein by reference to Exhibit 10.11 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2001 (File No. 0-24566-01))
10.12		Non-Competition Agreement between the Registrant and Kenneth A. Skopec (incorporated herein by reference to Exhibit 10.12 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2001 (File No. 0-24566-01))
10.13		Employment Agreement between MB Financial Bank, N.A. and Ronald D. Santo (incorporated herein by reference to Exhibit 10.14 to the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2002 (File No. 0-24566-01))
99		Certification pursuant to Section 906 of Sarbanes-Oxley Act of 2002*

 

* Filed Herewith.

 

32