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, 2004

 

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 26,807,144 shares of the registrant’s common stock as of May 7, 2004.

 

 

MB FINANCIAL, INC. AND SUBSIDIARIES

 

FORM 10-Q

 

March 31, 2004

 

INDEX

 

PART I.	FINANCIAL INFORMATION
Item 1.	Financial Statements
	Consolidated Balance Sheets at March 31, 2004 and December 31, 2003 (Unaudited)
	Consolidated Statements of Income for the Three Months ended March 31, 2004 and 2003 (Unaudited)
	Consolidated Statements of Cash Flows for the Three Months ended March 31, 2004 and 2003 (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 2.	Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities
Item 6.	Exhibits and Reports on Form 8-K
	Signatures

 

2

 

PART I. – FINANCIAL INFORMATION

 

Item 1. – Financial Statements

 

MB FINANCIAL, INC. & SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

March 31, 2004 and December 31, 2003

(Amounts in thousands, except common share data)

(Unaudited)

 

		March 31, 2004			December 31, 2003
ASSETS
Cash and due from banks		$	71,297		$	91,283
Interest bearing deposits with banks		7,068			6,647
Investment securities available for sale		1,161,657			1,112,110
Loans held for sale		681			3,830
Loans (net of allowance for loan losses of $40,298 at March 31, 2004 and $39,572 at December 31, 2003)		2,834,596			2,786,222
Lease investments, net		68,198			73,440
Premises and equipment, net		82,669			80,410
Cash surrender value of life insurance		83,446			82,547
Goodwill, net		70,293			70,293
Other intangibles, net		7,270			7,560
Other assets		45,805			40,751
Total assets		$	4,432,980		$	4,355,093
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities
Deposits:
Noninterest bearing		$	569,355		$	598,961
Interest bearing		2,881,684			2,833,074
Total deposits		3,451,039			3,432,035
Short-term borrowings		412,324			391,600
Long-term borrowings		46,380			21,464
Junior subordinated notes issued to capital trusts		87,443			87,443
Accrued expenses and other liabilities		42,742			47,058
Total liabilities		4,039,928			3,979,600
Stockholders’ Equity
Common stock, ($0.01 par value; authorized 40,000,000 shares; issued 26,816,126 shares at March 31, 2004 and 26,807,430 at December 31, 2003)		268			268
Additional paid-in capital		71,161			71,837
Retained earnings		308,280			296,906
Unearned compensation		(385		)	(198		)
Accumulated other comprehensive income		14,137			8,531
Less: 12,769 and 57,300 shares of treasury stock, at cost, at March 31, 2004 and December 31, 2003, respectively		(409		)	(1,851		)
Total stockholders’ equity		393,052			375,493
Total liabilities and stockholders’ equity		$	4,432,980		$	4,355,093

 

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,
		2004			2003
Interest income:
Loans		$	39,194		$	41,536
Investment securities:
Taxable		10,204			9,145
Nontaxable		1,685			943
Federal funds sold		16			88
Other interest bearing accounts		18			16
Total interest income		51,117			51,728
Interest expense:
Deposits		11,942			14,856
Short-term borrowings		1,274			918
Long-term borrowings and junior subordinated notes		1,860			2,139
Total interest expense		15,076			17,913
Net interest income		36,041			33,815
Provision for loan losses		2,000			2,736
Net interest income after provision for loan losses		34,041			31,079
Other income:
Loan service fees		1,065			1,696
Deposit service fees		4,295			3,883
Lease financing, net		3,948			3,308
Trust, asset management and brokerage fees		3,862			2,553
Net gain on sale of securities available for sale		691			81
Increase in cash surrender value of life insurance		899			918
Other operating income		1,508			2,071
		16,268			14,510
Other expense:
Salaries and employee benefits		16,123			14,683
Occupancy and equipment expense		4,461			4,591
Computer services expense		1,072			1,132
Advertising and marketing expense		1,193			969
Professional and legal expense		716			1,073
Brokerage fee expense		1,211			530
Telecommunication expense		669			561
Other intangibles amortization expense		290			272
Other operating expenses		3,615			3,542
		29,350			27,353
Income before income taxes		20,959			18,236
Income taxes		6,371			5,831
Net Income		$	14,588		$	12,405
Common share data:
Basic earnings per common share		$	0.55		$	0.47
Diluted earnings per common share		$	0.53		$	0.46
Weighted average common shares outstanding		26,766,696			26,571,600
Diluted weighted average common shares outstanding		27,502,434			27,174,284

 

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,
		2004			2003
Cash Flows From Operating Activities
Net income		$	14,588		$	12,405
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		8,103			8,149
Gain on sales of premises and equipment and leased equipment		(219		)	(235		)
Amortization of other intangibles		290			272
Provision for loan losses		2,000			2,736
Deferred income tax (benefit) expense		(1,229		)	417
Amortization of premiums and discounts on investment securities, net		3,263			3,549
Net gain on sale of investment securities available for sale		(691		)	(81		)
Proceeds from sale of loans held for sale		7,368			25,869
Origination of loans held for sale		(4,118		)	(26,505		)
Net gains on sale of loans held for sale		(101		)	(452		)
Increase in cash surrender value of life insurance		(899		)	(918		)
Interest only securities accretion		(56		)	(90		)
Deferred gain amortization on interest only securities pool termination		(148		)	(99		)
Increase in other assets		(3,750		)	(7,731		)
Decrease in other liabilities, net		(7,236		)	6
Net cash provided by operating activities		17,165			17,292
Cash Flows From Investing Activities:
Proceeds from sales of investment securities available for sale		18,393			7,562
Proceeds from maturities and calls of investment securities available for sale		41,841			128,371
Purchase of investment securities available for sale		(104,004		)	(80,233		)
Net increase in loans		(50,288		)	(4,297		)
Purchases of premises and equipment and leased equipment		(5,597		)	(6,850		)
Proceeds from sales of premises and equipment and leased equipment		1,361			981
Principal (paid) collected on lease investments		(676		)	443
Cash paid, net of cash and cash equivalents in acquisitions		—			(23,404		)
Proceeds received from interest only receivables		231			279
Net cash (used in) provided by investing activities		(98,739		)	22,852
Cash Flows From Financing Activities:
Net increase (decrease) in deposits		19,004			(21,117		)
Net increase in short-term borrowings		20,724			28,928
Proceeds from long-term borrowings		34,520			2,860
Principal paid on long-term borrowings		(9,604		)	(2,804		)
Restricted stock awards, net		71			—
Treasury stock transactions, net		419			(666		)
Stock options exercised		89			64
Dividends paid on common stock		(3,214		)	(2,660		)
Net cash provided by financing activities		62,009			4,605
Net (decrease) increase in cash and cash equivalents		$	(19,565	)	$	44,749
Cash and cash equivalents:
Beginning of period		97,930			108,576
End of period		$	78,365		$	153,325

 

See Accompanying Notes to Consolidated Financial Statements.

 

5

 

		Three Months Ended March 31,
		2004			2003
Supplemental Disclosures of Cash Flow Information:
Cash payments for:
Interest paid to depositors and other borrowed funds		$	15,410		$	19,127
Income taxes paid (refunded), net		851			(1,921		)
Real estate acquired in settlement of loans		$	63		$	788
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 noncash assets acquired:		—			490,555
Liabilities assumed:
Deposits		—			453,140
Accrued expenses and other liabilities		—			14,011
Total liabilities assumed:		—			467,151
Net noncash assets acquired:		$	—		$	23,404
Cash and cash equivalents acquired		$	—		$	69,696

 

See Accompanying Notes to Consolidated Financial Statements.

 

6

 

MB FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2004 and 2003
(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 two wholly owned national bank subsidiaries: MB Financial Bank, N.A. (MB Financial Bank) and Union Bank, N.A. (Union 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, 2004 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, 2003 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.

 

The Company split its common shares three-for-two by paying a 50% dividend in December 2003.  All common shares and per common share data presented in the unaudited consolidated financial statements and the accompanying notes below, has been adjusted to reflect the dividend.

 

NOTE 2.  MERGERS AND ACQUISITIONS

 

On January 12, 2004, the Company jointly announced with First SecurityFed Financial, Inc. (First SecurityFed), parent of First Security Federal Savings Bank, an agreement to merge.  The Company will be the surviving corporation in the transaction valued at approximately $139.2 million (subject to increase for any First SecurityFed options exercised prior to merger), which will be paid through a combination of the Company’s common stock and cash, with First SecurityFed stockholders having the right to chose the form of consideration they will receive, subject to the allocation provisions of the transaction agreement.  First SecurityFed stockholders receiving cash will receive a cash payment equal to $35.25 for their shares, while First SecurityFed stockholders receiving stock will receive a number of shares of the Company’s common stock valued at $35.25 per share based upon the Company’s average closing price over a ten trading day period ending on the second trading day prior to the effective date of the transaction.  The transaction is subject to restructuring as an all-cash transaction at $35.25 per share if the aggregate value of the Company’s stock to be issued is less than 40% of the value of the aggregate transaction consideration and the Company elects not to increase the number of shares issuable in the transaction.  The total number of common shares that will be issued by the Company in the merger has been fixed at approximately 2.0 million shares, subject to increase for any First SecurityFed stock option exercises prior to merger.  The transaction is expected to generate approximately $52.0 million of goodwill.  First SecurityFed reported assets of $494.4 million as of December 31, 2003.  Completion of the transaction is expected in the second quarter of 2004, pending First SecurityFed shareholder, regulatory and other necessary approvals.

 

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 and $5.9 million in intangible assets subject to amortization.  As of the acquisition date, South Holland had approximately $560.3 million in assets.  South Holland Trust & Savings Bank operated as a separate subsidiary of the Company until integration of its computer systems with those of MB Financial Bank on May 15,

 

7

 

2003.  After this integration was completed, South Holland Trust & Savings Bank merged into MB Financial Bank.

 

Pro forma results of operation for South Holland for the three months ended March 31, 2003 are not included as South Holland 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 periods, net of tax.  The following table sets forth comprehensive income for the periods indicated (in thousands):

 

 

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):

 

 

(1)          The Company split its common shares three-for-two by paying a 50% stock dividend in December 2003.  All common share data has been adjusted to reflect the dividend.

(2)          Includes the common stock equivalents for stock options and restricted share rights that are dilutive.

 

8

 

NOTE 5.  GOODWILL AND INTANGIBLES

 

Under the provisions of Statement of Financial Accounting Standards (SFAS) No. 142, goodwill is no longer subject to amortization, 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.  No impairment losses on goodwill or other intangibles were incurred in the three months ended March 31, 2004 or the year ended December 31, 2003.

 

The following table presents the changes in the carrying amount of goodwill during the three months ended March 31, 2004 and the year ended December 31, 2003 (in thousands):

 

 

The Company has other intangible assets consisting of core deposit intangibles that have a weighted average amortization period of approximately eleven years.  The following tables present the changes in the carrying amount of core deposit intangibles, gross carrying amount, accumulated amortization, and net book value during the three months ended March 31, 2004 and the year ended December 31, 2003 (in thousands):

 

 

The following presents the estimated amortization expense of other intangible assets (in thousands):

 

 

9

 

NOTE 6.  RECENT ACCOUNTING PRONOUNCEMENTS

 

In January 2003, the Financial Accounting Standards Board (FASB) issued Interpretation No. 46, Consolidation of Variable Interest Entities, an interpretation of Accounting Research Bulletin (ARB) No. 51, Consolidated Financial Statements.  This Interpretation clarified the application of ARB No. 51 to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties.  Qualifying special purpose entities as defined by SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, are excluded from the scope of Interpretation No. 46.  The Interpretation applied immediately to all variable interest entities created after January 31, 2003 and was originally effective for fiscal periods beginning after July 1, 2003 for existing variable interest entities.  In October 2003, the FASB postponed the effective date of the Interpretation to December 31, 2003.

 

In December 2003, a revised version of Interpretation No. 46 (Revised Interpretation No. 46) was issued by the FASB.  The revisions clarified some requirements, eased some implementation problems, added new scope exceptions, and added applicability judgments.  Revised Interpretation No. 46 was required to be adopted by most public companies no later than March 31, 2004.  The Company adopted Revised Interpretation No. 46 as of December 31, 2003.  Upon adoption, we deconsolidated all of the previously established capital trust entities that issued common stock to the Company and preferred securities to third parties.  These trusts invested the proceeds of those offerings in junior subordinated notes of the Company.  As a result of the deconsolidation of those trusts, at December 31, 2003, we reported $87.4 million of previously issued junior subordinated notes on our balance sheet in lieu of the trust preferred securities issued by the capital trusts which totaled $84.8 million.  The increase in reported liabilities of $2.6 million at December 31, 2003 was offset by a corresponding investment in those trusts.  The adoption of Revised Interpretation No. 46 did not have a material impact on the Company’s financial statements.

 

In December 2003, the American Institute of Certified Public Accountants released Statement of Position 03-3, Accounting for Certain Loans or Debt Securities Acquired in a Transfer (SOP 03-3).  SOP 03-3 addresses accounting for differences between contractual cash flows and cash flows expected to be collected from an investor’s initial investment in loans or debt securities acquired in a transfer if those differences are attributable to credit quality.  SOP 03-3 is effective for loans acquired in fiscal years beginning after December 15, 2004.  The adoption of SOP 03-3 is not expected to have a material impact on the Company’s financial statements.

 

In March 2004, the FASB released EITF 03-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments (EITF 03-1).  EITF 03-1 provides guidance for determining when an investment is impaired and whether the impairment is other than temporary as well as guidance for quantifying the impairment.  EITF 03-1 is effective for reporting periods beginning after June 15, 2004.  The adoption of EITF 03-1 is not expected to have a material impact on the Company’s financial statements.

 

In March 2004, the Securities and Exchange Commission released Staff Accounting Bulletin No. 105, Application of Accounting Principles to Loan Commitments (SAB 105).  SAB 105 provides general guidance that must be applied when an entity determines the fair value of a loan commitment accounted for as a derivative.  SAB 105 is effective for commitments to originate mortgage loans to be held for sale that are entered into after March 31, 2004.  The adoption of SAB 105 is not expected to have a material impact on the Company’s financial statements.

 

10

 

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

 

As allowed under SFAS No. 123, Accounting for Stock-Based Compensation, and SFAS No. 148, Accounting for Stock-Based Compensation – Transition and Disclosure – an amendment of SFAS 123, 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 SFAS No. 123, reported net income and earnings per common share would have been reduced to the pro forma amounts shown below (in thousands, except for common share data):

 

 

(1)          The Company split its common shares three-for-two by paying a 50% stock dividend in December 2003.  All common share data has been adjusted to reflect the dividend.

(2)          Represents amortized compensation expense for restricted shares.

 

NOTE 8.  LONG TERM BORROWINGS

 

The Company had notes payable to banks totaling $19.0 million and $19.1 million at March 31, 2004 and December 31, 2003, respectively, which accrue interest at rates ranging from 3.90% to 9.50%.  Lease investments includes equipment with an amortized cost of $22.5 million and $22.1 million at March 31, 2004 and December 31, 2003, respectively, that is pledged as collateral on these notes.

 

The Company had Federal Home Loan Bank advances with maturities greater than one year of $27.4 million and $2.4 million at March 31, 2004 and December 31, 2003, respectively.  As of March 31, 2004, the advances had fixed interest rates ranging from 1.75% to 5.34%.

 

11

 

NOTE 9.  JUNIOR SUBORDINATED NOTES ISSUED TO CAPITAL TRUSTS

 

The Company established Delaware statutory trusts in prior years 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 notes 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 notes has occurred and is continuing, the preferred securities will rank senior to the common securities in right of payment.

 

The table below summarizes the outstanding junior subordinated notes and the related trust preferred securities issued by each trust as of March 31, 2004 (in thousands):

 

 

(1)          All cash distributions are cumulative.

 

As of December 31, 2003, the Company adopted FASB Interpretation No. 46, Consolidation of Variable Interest Entities, as revised in December 2003.  Upon adoption, the Company deconsolidated both capital trust entities above.  As a result of the deconsolidation of those trusts, the Company is reporting the previously issued junior subordinated notes on its balance sheet rather than the preferred securities issued by the capital trusts.

 

The trust preferred securities are subject to mandatory redemption, in whole or in part, upon repayment of the junior subordinated notes 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 these respective redemption dates, the junior subordinated notes may be redeemed by the Company (in which case the trust preferred securities would also be redeemed) 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 notes.  The Company’s obligation under the junior subordinated notes 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 notes and, therefore, distributions on the trust preferred securities, for up to five years, but not beyond the stated maturity date in the table above.

 

As a result of the issuance of revised Interpretation No. 46, the Federal Reserve Board proposed a rule on May 6, 2004 relating to the qualification of trust preferred securities as Tier 1 Capital.  While no assurance can be given as to what the final rule will provide or as to when or whether the final rule will be adopted, under the proposed rule, trust preferred securities would generally continue to qualify as Tier 1 Capital.

 

12

 

NOTE 10.  DERIVATIVE FINANCIAL INSTRUMENTS

 

The Company uses interest rate swaps to hedge its interest rate risk.  The Company had seven fair value commercial loan interest rate swaps with a notional amount of $21.5 million at March 31, 2004.  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.

 

Interest rate swap contracts involve the risk of dealing with counterparties and their ability to meet contractual terms.  The net amount payable or receivable under interest rate swaps is accrued as an adjustment to interest income.  The net amount payable for the three months ended March 31, 2004 and March 31, 2003 was approximately $42 thousand and $12 thousand, respectively.  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.  At March 31, 2004, the Company’s credit exposure relating to interest rate swaps was not significant.

 

Activity in the notional amounts of end-user derivatives for the three months ended March 31, 2004, is summarized as follows (in thousands):

 

		Amortizing Interest Rate Swaps			Non-Amortizing Interest Rate Swaps			Total Derivatives
Balance at December 31, 2003		$	21,656		$	—		$	21,656
Additions		—			—			—
Amortization		(159		)	—			(159		)
Balance at March 31, 2004		$	21,497		$	—		$	21,497

 

The following table summarizes the weighted average receive and pay rates for the interest rate swaps at March 31, 2004 (dollars in thousands):

 

		Notional			Estimated			Weighted Average
		Amount			Fair Value			Receive Rate		Pay Rate
Interest Rate Swaps:
Receive variable/pay fixed		$	21,497		$	(397	)	3.17	%	5.59	%

 

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.

 

13

 

At March 31, 2004 and December 31, 2003, the following financial instruments were outstanding whose contract amounts represent off-balance sheet credit risk (in thousands):

 

		Contract Amount
		March 31, 2004			December 31, 2003
Commitments to extend credit:
Home equity lines		$	157,391		$	159,961
Other commitments		676,475			675,332
Letters of credit:
Standby		62,698			66,313
Commercial		9,052			7,407

 

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.

 

In November 2002, the Financial Accounting Standards Board issued Interpretation No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, which requires additional disclosures by a guarantor about its obligations under certain guarantees that it has issued.  Interpretation No. 45 also clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee.  The most significant instruments impacted for the Company are standby and commercial letters of credit.

 

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, 2004, the maximum remaining term for any standby letter of credit was December 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, 2004, the aggregate contractual amount of these letters of credit, which represents the maximum potential amount of future payments that the Company would be obligated to pay, decreased $1.9 million to $71.8 million from $73.7 million at December 31, 2003.  Of the $71.8 million in commitments outstanding at March 31, 2004, $34.9 million of the letters of credit have been issued or renewed since December 31, 2003.  The Company had no liability recorded as of March 31, 2004 relating to these commitments.

 

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 loans.

 

14

 

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 are 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 be expected to have a material adverse effect on the Company’s consolidated financial statements.

 

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.

 

Overview

 

Set forth below are significant items that occurred during the first quarter of 2004:

 

•                  Diluted EPS of $0.53, up 15.2% from the first quarter of 2003.

 

•                  Net income of $14.6 million for the quarter, up 17.6% from a year ago.

 

•                  Return on average equity of 15.26%, up from 14.47% in the first quarter of 2003.

 

•                  Return on average assets of 1.34%, up from 1.25% in the first quarter of 2003.

 

•                  Trust, asset management and brokerage fees increased $1.3 million, or 51.3% to $3.9 million from the first quarter of 2003 due to stronger investment sales activity in 2004 and an additional month of income from our wholly owned full service broker/dealer, Vision Investment Services, Inc. (Vision), acquired in the merger with South Holland in February 2003.

 

•                  Net gains on sale of securities available for sale increased $610 thousand to $691 thousand from the first quarter of 2003.

 

•                  Entered into an agreement to merge with First SecurityFed (See Note 2 of Notes to Consolidated Financial Statements).

 

See “Results of Operations” section below for details regarding our 2004 first quarter performance.

 

General

 

The profitability of our operations depends primarily on our net interest income after provision for loan losses, which is the difference between total interest earned on interest earning assets and total interest paid on interest bearing liabilities less provision for loan losses.  Additionally, our net income is affected by 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, asset management 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, occupancy and equipment expense, computer services expense, advertising and marketing expense, professional and legal expense, brokerage fee expense, telecommunication expense, intangibles amortization expense and other operating expenses.

 

15

 

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.

 

Critical Accounting Policies

 

Our consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States of America and follow general practices within the industries in which we operate.  This preparation requires management to make estimates, assumptions, and judgments that affect the amounts reported in the financial statements and accompanying notes.  These estimates, assumptions, and judgments are based on information available as of the date of the financial statements; accordingly, as this information changes, actual results could differ from the estimates, assumptions, and judgments reflected in the financial statements.  Certain policies inherently have a greater reliance on the use of estimates, assumptions, and judgments and, as such, have a greater possibility of producing results that could be materially different than originally reported.  Management believes the following policies are both important to the portrayal of our financial condition and results of operations and require subjective or complex judgments; therefore, management considers the following to be critical accounting policies.  Management has reviewed the application of these polices with the Audit Committee of our Board of Directors.

 

Allowance for Loan Losses.  Subject to the use of estimates, assumptions, and judgments is management’s evaluation process used to determine the adequacy of the allowance for loan losses which combines several factors: management’s ongoing review and grading of the loan portfolio, consideration of past loan loss experience, trends in past due and nonperforming loans, risk characteristics of the various classifications of loans, existing economic conditions, the fair value of underlying collateral, and other qualitative and quantitative factors which could affect probable credit losses.  Because current economic conditions can change and future events are inherently difficult to predict, the anticipated amount of estimated loan losses, and therefore the adequacy of the allowance, could change significantly.  As an integral part of their examination process, various regulatory agencies also review the allowance for loan losses.  Such agencies may require that certain loan balances be charged off when their credit evaluations differ from those of management or require that additions be made to the allowance for loan losses, based on their judgments about information available to them at the time of their examination.  We believe the allowance for loan losses is adequate and properly recorded in the financial statements.  See “Allowance for Loan Losses” section below for further analysis.

 

Residual Value of Our Direct Finance, Leveraged, and Operating Leases.  Lease residual value represents the estimated fair value of the leased equipment at the termination date of the lease.  Realization of these residual values depends on many factors, including  management’s use of estimates, assumptions, and judgments to determine such values.  Several other factors outside of management’s control may reduce the residual values realized, including general market conditions at the time of expiration of the lease, whether there has been technological or economic obsolescence or unusual wear and tear on, or use of, the equipment and the cost of comparable equipment.  If, upon the expiration of a lease, we sell the equipment and the amount realized is less than the recorded value of the residual interest in the equipment, we will recognize a loss reflecting the difference.  On a monthly basis, management reviews the lease residuals for potential impairment.  If we fail to realize our aggregate recorded residual values, our financial condition and profitability could be adversely affected.  At March 31, 2004, the aggregate residual value of the equipment leased under our direct finance, leveraged, and operating leases totaled $25.0 million.  See “Lease Investments” section below for additional information.

 

Income Tax Accounting.  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

 

16

 

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 adequately and properly recorded in the consolidated financial statements.

 

Results of Operations

 

First Quarter Results

 

Net income was $14.6 million for the first quarter of 2004, compared to $12.4 million for the first quarter of 2003.  Net interest income was $36.0 million for the three months ended March 31, 2004, an increase of $2.2 million, or 6.6% from $33.8 million for the comparable period in 2003.  Net interest income grew primarily due to a $318.5 million, or 8.7% increase in average interest earning assets, which offset a 7 basis point decline in the net interest margin, expressed on a fully tax equivalent basis, to 3.72% from 3.79% in the comparable 2003 period.  The increase in average interest earning assets was primarily due to the acquisition of South Holland in February 2003 and growth of our commercial real estate and construction real estate loan portfolios.  See “Net Interest Margin” section below for further discussion of our net interest income.

 

The provision for loan losses decreased $736 thousand to $2.0 million in the first quarter of 2004 from $2.7 million in the comparable 2003 period.  See “Asset Quality” section below for further analysis of the allowance for loan losses.

 

Other income increased $1.8 million, or 12.1% to $16.3 million for the quarter ended March 31, 2004 from $14.5 million for the first quarter of 2003.  Trust, asset management and brokerage fees increased by $1.3 million due to a $1.2 million increase in brokerage fees and a $179 thousand increase in income from trust and asset management activities.  Brokerage fees increased primarily due to higher investment sales activity at Vision, as well as an additional month of income from Vision as compared to the same period in 2003.  The $179 thousand increase in trust and asset management income was primarily due to an additional month of South Holland’s trust revenues in the first quarter of 2004 compared to the first quarter of 2003.  Net lease financing increased by $640 thousand due to improved residual realizations within the lease investment portfolio.  Net gain on sale of securities available for sale increased by $610 thousand due to net gains of $691 thousand in the first quarter of 2004.  Generally, these gains arose from management’s decision to sell certain securities based on their remaining duration and relative position on the current yield curve.  Deposit service fees increased by $412 thousand due to a $346 thousand increase in NSF and overdraft fees resulting from the additional month of South Holland revenues in 2004.  Loan service fees declined by $631 thousand due to a $394 thousand decrease in prepayment fees attributable to a decline in loan prepayments and a $354 thousand decline in miscellaneous loan fees attributable to lower mortgage banking fees.  Other operating income declined by $563 thousand primarily due to a $351 thousand decline in gain on sale of mortgage loans.  Mortgage loans sold decreased $17.0 million to $7.0 million for the three months ended March 31, 2004 compared to $24.0 million during the same period of 2003.  The decline in mortgage loans sold was due to lower mortgage loan origination activity in the 2004 first quarter.

 

Other expense increased by $2.0 million, or 7.3% to $29.4 million for the quarter ended March 31, 2004 from $27.4 million for the quarter ended March 31, 2003.  Salaries and employee benefits increased by $1.4 million due to our continued growth and investment in personnel as well as an additional month of South Holland expense in the 2004 first quarter.  Brokerage fee expense increased by $681 thousand primarily due to higher investment sales activity at Vision during 2004, and an additional month of expense for Vision as compared to the same period in 2003.  Advertising and marketing expense and telecommunication expense increased by $224 thousand and $108 thousand, respectively, while professional and legal expense as well as occupancy and equipment expense declined by $357 thousand and $130 thousand, respectively.

 

Income tax expense for the three months ended March 31, 2004 increased $540 thousand to $6.4 million compared to $5.8 million for the comparable period in 2003.  The effective tax rate was 30.4% and 32.0% for the three months ended March 31, 2004 and 2003, respectively.  The decline in the effective tax rate was primarily due to a $742 thousand increase in nontaxable investment securities income during the first quarter of 2004 compared to the same period in 2003.

 

17

 

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,
		2004								2003
		Average Balance			Interest			Yield/ Rate		Average Balance			Interest			Yield/ Rate
Interest Earning Assets:
Loans (1) (2)		$	2,843,613		$	39,160		5.54	%	$	2,672,493		$	41,493		6.30	%
Loans exempt from federal income taxes (3)		3,227			52			6.37		3,803			66			7.05
Taxable investment securities		948,677			10,204			4.30		867,564			9,145			4.27
Investment securities exempt from federal income taxes (3)		181,460			2,592			5.65		93,190			1,451			6.31
Federal funds sold		6,557			16			0.97		31,466			88			1.13
Other interest bearing deposits		8,118			18			0.89		4,649			16			1.40
Total interest earning assets		3,991,652			52,042			5.24		3,673,165			52,259			5.77
Non-interest earning assets		396,587								344,170
Total assets		$	4,388,239							$	4,017,335
Interest Bearing Liabilities:
Deposits:
NOW and money market deposit accounts		$	701,556		$	1,242		0.71	%	$	631,806		$	1,588		1.02	%
Savings deposits		457,926			605			0.53		432,847			906			0.85
Time deposits		1,690,533			10,095			2.40		1,669,185			12,362			3.00
Short-term borrowings		416,556			1,274			1.23		224,930			918			1.66
Long-term borrowings and junior subordinated notes		117,535			1,860			6.26		130,049			2,139			6.67
Total interest bearing liabilities		3,384,106			15,076			1.79		3,088,817			17,913			2.35
Non-interest bearing deposits		574,069								529,651
Other non-interest bearing liabilities		45,455								51,109
Stockholders’ equity		384,609								347,758
Total liabilities and stockholders’ equity		$	4,388,239							$	4,017,335
Net interest income/interest rate spread (4)					$	36,966		3.45	%				$	34,346		3.42	%
Taxable equivalent adjustment					925								531
Net interest income, as reported					$	36,041							$	33,815
Net interest margin on a fully tax equivalent basis (5)								3.72	%							3.79	%
Net interest margin (5)								3.63	%							3.73	%

 

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

(2)                  Interest income includes amortization of deferred loan origination fees of $1.2 million for the three months ended March 31, 2004 and 2003.

(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 on a tax equivalent basis increased $2.7 million, or 7.6% to $37.0 million for the three months ended March 31, 2004 from $34.3 million for the three months ended March 31, 2003.  Tax-equivalent interest income declined by $217 thousand due to a 53 basis point decline in tax-equivalent yield on interest-earning assets.  The decline in yield was partially offset by a $318.5 million, or 8.7% increase in average interest earning assets, comprised of a $170.5 million, or 6.4% increase in average loans and a $169.4 million, or 17.6% increase in average investment securities, offset by a $24.9 million decline in federal funds sold.  Interest expense declined by $2.8 million due to a 56 basis point decline in the cost of interest bearing liabilities, which was partially offset by a $295.3 million 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 South Holland in the first quarter of 2003 and growth of our commercial real estate and construction real estate loan portfolios.  The net interest margin expressed on a fully tax equivalent basis decreased 7 basis points to 3.72% in the first quarter of 2004 from 3.79% in the first quarter of 2003 as there was a higher percentage of interest bearing liabilities to interest earning assets in the 2004 period.

 

The net interest margin expressed on a fully tax equivalent basis decreased by 12 basis point to 3.72% in the first quarter of 2004 from 3.84% in the fourth quarter of 2003 as loans continued to reprice at current market rates.

 

18

 

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.

 

Balance Sheet

 

Total assets increased $77.9 million or 1.8% from December 31, 2003 to $4.4 billion at March 31, 2004.  Net loans increased by $48.4 million, or 1.7% to $2.8 billion at March 31, 2004 (See “Loan Portfolio” section below).  Investment securities available for sale increased by $49.5 million, or 4.5% to $1.2 billion at March 31, 2004 primarily due to increases in deposits and other funding sources as discussed below.

 

Total liabilities increased by $60.3 million, or 1.5% to $4.0 billion at March 31, 2004.  Total deposits grew by $19.0 million, or 0.6% to $3.5 billion at March 31, 2004.  Short-term borrowings increased by $20.7 million, or 5.3% due to a $55.0 million increase in short-term Federal Home Loan Bank advances, which was partially offset by a $33.5 million decline in federal funds purchased.  Long-term borrowings increased by $24.9 million, or 116.1% primarily due to a $25.0 million increase in long-term Federal Home Loan Bank advances.

 

Total stockholders’ equity increased $17.6 million, or 4.7% to $393.1 million at March 31, 2004 compared to $375.5 million at December 31, 2003.  The growth was due to net income of $14.6 million and a $5.6 million increase in accumulated other comprehensive income due to net unrealized gains on available for sale securities.  The above items were partially offset by $3.2 million, or $0.12 per share cash dividends.

 

19

 

Loan Portfolio

 

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

 

		March 31, 2004					December 31, 2003					March 31, 2003
		Amount			% of Total		Amount			% of Total		Amount			% of Total
Commercial		$	654,176		23	%	$	647,365		23	%	$	644,783		23	%
Commercial loans collateralized by assignment of lease payments		221,757			8	%	234,724			8	%	263,274			9	%
Commercial real estate		1,123,250			39	%	1,090,498			39	%	1,002,745			36	%
Residential real estate		358,960			12	%	361,110			13	%	401,566			15	%
Construction real estate		296,804			10	%	268,523			9	%	239,882			9	%
Installment and other		219,947			8	%	223,574			8	%	223,657			8	%
Gross loans (1)		2,874,894			100	%	2,825,794			100	%	2,775,907			100	%
Allowance for loan losses		(40,298		)			(39,572		)			(38,973		)
Loans, net		$	2,834,596				$	2,786,222				$	2,736,934

 

(1)          Gross loan balances at March 31, 2004, December 31, 2003, and March 31, 2003 are net of unearned income, including deferred loan fees of $4.0 million, $4.2 million, and $4.4 million, respectively.

 

Net loans increased by $48.4 million in the first quarter of 2004 from $2.8 billion at December 31, 2003.  Commercial real estate, construction real estate and commercial grew by $32.8 million, $28.3 million and $6.8 million, respectively, while commercial loans collateralized by assignment of lease payments, installment and other loans and residential real estate decreased by $13.0 million, $3.6 million and $2.2 million, respectively.  The increases were due to growth in both existing customer and new customer loan demand resulting primarily from our continued focus on marketing and new business development.  Commercial loans collateralized by assignment of lease payments continued to decline as many companies opted to purchase capital assets rather than lease in the 2004 rate environment.

 

Net loans increased by $97.7 million, or 3.6% to $2.8 billion at March 31, 2004 from $2.7 billion at March 31, 2003.  The increase was due to growth in both existing customer and new customer loan demand resulting primarily from our continued focus on marketing and new business development.

 

Asset Quality

 

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

 

		March 31, 2004			December 31, 2003			March 31, 2003
Non-performing loans:
Non-accrual loans (1)		$	26,212		$	20,795		$	21,493
Loans 90 days or more past due, still accruing interest		97			317			941
Total non-performing loans		26,309			21,112			22,434
Other real estate owned		180			472			1,106
Other repossessed assets		—			—			21
Total non-performing assets		$	26,489		$	21,584		$	23,561
Total non-performing loans to total loans		0.92		%	0.75		%	0.81		%
Allowance for loan losses to non-performing loans		153.17		%	187.44		%	173.72		%
Total non-performing assets to total assets		0.60		%	0.50		%	0.56		%

 

(1)          Includes restructured loans totaling $573 thousand and $667 thousand at March 31, 2004 and December 31, 2003, respectively.  There were no restructured loans at March 31, 2003.

 

20

 

Total non-performing assets were $26.5 million, $21.6 million, and $23.6 million as of March 31, 2004, December 31, 2003, and March 31, 2003, respectively.  The increase in the first quarter of 2004 was primarily due to a $4.2 million commercial loan transferred to non-accrual loans.

 

Allowance for Loan Losses

 

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 (see “Critical Accounting Policies” section above).  In the event that different assumptions or conditions were to prevail, and depending upon the severity of such changes, materially different financial condition or results of operations is a reasonable possibility.

 

We maintain our allowance for loan losses at a level that management believes is 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 default factors are multiplied against loan balances in each risk-rating category and then multiplied by one minus a historical recovery rate by loan type 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 at its regularly scheduled meetings.  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.

 

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

 

 

Net charge-offs increased by $58 thousand in the quarter ended March 31, 2004 compared to the quarter ended March 31, 2003.  Charge-offs declined by $912 thousand as the 2003 first quarter included charge-offs of one construction real estate loan and one commercial real estate loan totaling $640 thousand and $420 thousand, respectively.  Recoveries declined by $970 thousand in 2004 as the first quarter of 2003 included recoveries of two commercial loans totaling $971 thousand.  The provision for loan losses declined by $736 thousand to $2.0 million in the quarter ended March 31, 2004 from $2.7 million in the quarter ended March 31, 2003 based on the results of our quarterly analysis of the loan portfolio as of March 31, 2004.

 

21

 

The following table sets forth the allocation of the allowance for loan losses and the percentage of loans in each category to total loans.  An allocation for a loan classification is only for internal analysis of the adequacy of the allowance and is not an indication of expected or anticipated losses (dollars in thousands):

 

		March 31, 2004					December 31, 2003					March 31, 2003
		Amount			% of Total		Amount			% of Total		Amount			% of Total
Commercial		$	11,187		23	%	$	10,327		23	%	$	11,016		23	%
Commercial loans collateralized by assignment of lease payments		2,471			8	%	4,301			8	%	3,325			9	%
Commercial real estate		8,491			39	%	7,327			39	%	9,441			36	%
Residential real estate		1,845			12	%	1,625			13	%	1,043			15	%
Construction real estate		4,005			10	%	2,655			9	%	2,265			9	%
Installment and other		4,569			8	%	4,896			8	%	3,934			8	%
Unallocated		7,730			—		8,441			—		7,949			—
Total allowance for loan losses		$	40,298		100	%	$	39,572		100	%	$	38,973		100	%

 

Additions to the allowance for loan losses, which are charged to earnings through the provision for loan losses, are determined based on a variety of factors, including specific reserves on problem loans, current loan risk ratings, delinquent loans, historical loss experience and economic conditions in our market area.  In addition, federal regulatory authorities, as part of the examination process, periodically review our allowance for loan losses.  The regulators may require us to record additions to the allowance level based upon their assessment of the information available to them at the time of examination.  Although management believes the allowance for loan losses is sufficient to cover probable losses inherent in the loan portfolio, there can be no assurance that the allowance will prove sufficient to cover actual loan losses.

 

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.”  Under our risk rating system noted above, Special Mention, Substandard, and Doubtful loan classifications correspond to risk ratings six, seven, and eight, respectively.  An asset is classified Substandard, or risk rated seven if it is inadequately protected by the current net worth and paying capacity of the obligor or 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, or risk rated eight 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, or risk rated nine are those considered uncollectible and viewed as valueless 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, or risk rated six.

 

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 regulator, 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.

 

22

 

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.  Our decision to include performing loans in potential problem loans does not necessarily mean that we expect losses to occur, but that we recognize a higher degree of risk associated with these loans.  The aggregate principal amounts of potential problem loans as of March 31, 2004, December 31, 2003 and March 31, 2003 were approximately $82.5 million, $65.4 million and $41.6 million, respectively.  Potential problem loans increased $17.1 million from December 31, 2003 primarily due to six additional loan relationships classified as substandard, including four commercial loan relationships that total $10.2 million and two commercial real estate loans that total $8.0 million.  Potential problem loans increased $40.9 million from March 31, 2003 primarily due to the aforementioned substandard loan relationships, and a $25.1 million increase in loans classified as special mention.

 

Lease Investments

 

The lease portfolio is comprised of various types of equipment, generally technology related, such as computer systems, satellite equipment, and general manufacturing equipment.  The credit quality of the lessee generally 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 commercial loans collateralized by assignment of lease payments 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.  Generally, 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.

 

23

 

Operating leases are investments in equipment leased to other companies, where the residual component makes up more than 10% of the investment.  Most of our lease equipment purchases are funded internally, but some of these purchases  are financed through loans from other banks, which totaled $19.0 million at March 31, 2004, $19.1 million at December 31, 2003 and $17.4 million at March 31, 2003.

 

The lease residual value represents the estimated fair value of the leased equipment at the termination of the lease.  Lease residual values are reviewed monthly and any write-downs, or charge-offs deemed necessary are recorded in the period in which they become known.  Gains on leased equipment periodically result when a lessee renews a lease or purchases the equipment at the end of a lease, or the equipment is sold to a third party at a profit.  Individual lease transactions can, however, result in a loss.  This generally happens when, at the end of a lease, the lessee does not renew the lease or purchase the equipment.  To mitigate this risk of loss, we usually limit individual leased equipment residuals (expected lease book values at the end of initial lease terms) to approximately $500 thousand per transaction and seek to diversify both the type of equipment leased and the industries in which the lessees to whom such equipment is leased participate.  There were 1,268 leases at March 31, 2004 compared to 1,416 at December 31, 2003 and 1,480 at March 31, 2003.  The average residual value per lease was approximately $17 thousand at March 31, 2004, $19 thousand at December 31, 2003 and $13 thousand at March 31, 2003.

 

At March 31, 2004, the following reflects the residual values for leases by category in the year the initial lease term ends (in thousands):

 

 

Investment Securities Available for Sale

 

The following table sets forth the amortized cost and fair value of our investment securities available for sale, by type of security as indicated (in thousands):

 

		At March 31, 2004						At December 31, 2003						At March 31, 2003
		Amortized Cost			Fair Value			Amortized Cost			Fair Value			Amortized Cost			Fair Value
U.S. Treasury securities		$	22,033		$	23,433		$	22,157		$	23,435		$	22,532		$	24,104
U.S. Government agencies		242,888			254,023			233,472			243,402			294,826			311,391
States and political subdivisions		190,341			195,886			177,731			180,092			118,296			122,328
Mortgage-backed securities		598,062			596,064			574,456			570,140			476,499			480,609
Corporate bonds		39,235			42,141			44,074			45,074			53,635			53,348
Equity securities		47,538			47,780			47,004			47,632			20,863			21,084
Debt securities issued by foreign governments		560			560			560			560			665			665
Investments in equity lines of credit trusts		1,770			1,770			1,775			1,775			1,798			1,798
Total		$	1,142,427		$	1,161,657		$	1,101,229		$	1,112,110		$	989,114		$	1,015,327

 

24

 

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 $17.2 million for the quarter ended March 31, 2004 and $17.3 million for the quarter ended March 31, 2003.  Investing activities used $98.7 million in the quarter ended March 31, 2004 and provided $22.9 million in the first quarter of 2003.  The $121.6 million increase in cash used was primarily due to a $99.5 million increase in net cash used by investment securities available for sale activity and a $46.0 million greater increase in net loans, offset by a $23.4 million decline in net cash paid in acquisitions.  Net cash provided by financing activities increased by $57.4 million to $62.0 million for the quarter ended March 31, 2004 from $4.6 million for the quarter ended March 31, 2003, due primarily to an increase of $40.1 million in funds provided by deposits and a $24.9 million increase in net proceeds from long-term borrowings.  The above items were offset by an $8.2 million decline in funds provided by short-term borrowings.

 

We expect to have available cash to meet our liquidity needs.  Liquidity management is monitored by an Asset/Liability Management Committee, consisting of members of management, and the board of directors of each of our subsidiary banks, which review historical funding requirements, current liquidity position, sources and stability of funding, marketability of assets, options for attracting additional funds, and anticipated future funding needs, including 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, 2004, there were no firm lending commitments in place, management believes that our banks could borrow approximately $160.6 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.

 

The following table summarizes our significant contractual obligations and other potential funding needs at March 31, 2004 (in thousands):

 

		Payments Due by Period
Contractual Obligations		Total			Less than 1 Year			1 - 3 Years			3 - 5 Years			More than 5 Years
Time deposits		$	1,721,389		$	1,248,684		$	322,655		$	147,738		$	2,312
Long-term debt		46,380			10,335			31,177			2,581			2,287
Junior subordinated notes issued to capital trusts		87,443			—			—			—			87,443
Operating leases		99,651			2,185			5,119			4,068			88,279
Total		$	1,954,863		$	1,261,204		$	358,951		$	154,387		$	180,321
Commitments to extend credit		$	905,616

 

At March 31, 2004 and December 31, 2003, our total risk-based capital ratio was 13.12% and 12.86%, Tier 1 capital to risk-weighted assets ratio was 11.89% and 11.64%, and Tier 1 capital to average asset ratio was 9.03% and 8.97%, respectively.  As of March 31, 2004, we and each of our subsidiary banks were “well capitalized” under the capital adequacy requirements to which each of us are subject.

 

 

25

 

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 the proposed merger with First SecurityFed, might not be realized within the expected time frames, and costs or difficulties related to integration matters might be greater than expected; (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 our 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) the costs, effects and outcomes of litigation; (13) new legislation or regulatory changes, including but not limited to changes in federal and/or state tax laws or interpretations thereof by taxing authorities; (14) changes in accounting principles, policies or guidelines; and (15) 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.

 

26

 

Item 3.  Quantitative and Qualitative Disclosures about Market Risk

 

Market Risk and Asset Liability Management

 

Market Risk.  Market risk is the risk that the market value or estimated fair value of our assets, liabilities, and derivative financial instruments will decline as a result of changes in interest rates or financial market volatility, or that our net income will be significantly reduced by interest rate changes.  Market risk is managed operationally in our Treasury Group at MB Financial Bank, and is addressed through a selection of funding and hedging instruments supporting balance sheet assets, as well as monitoring our asset investment strategies.

 

Asset Liability Management.  Management and our Treasury Group continually monitor our sensitivity to interest rate changes.  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.  The model considers several factors to determine our potential exposure to interest rate risk, including measurement of repricing gaps, duration, convexity, value at risk, and the market value of portfolio equity under assumed changes in the level of interest rates, shape of the yield curves, and general market volatility.  Management controls our interest rate exposure using several strategies, which include adjusting maturity of securities in our investment portfolio, and limiting fixed rate loans or accepting fixed rate deposits with terms of more than five years.  We also use derivative instruments, principally interest rate swaps, to manage our interest rate risk.

 

Interest Rate Risk.  Interest rate risk can come in a variety of forms, including repricing risk, yield curve risk, basis risk, and prepayment risk.  We experience repricing risk when the change in the average yield of either our interest earning assets or interest bearing liabilities is more sensitive than the other to market changes in market interest rates.  Such a change in sensitivity could reflect a number of possible mismatches in the repricing opportunities of our assets and liabilities.

 

In the event that yields on our assets and liabilities do adjust to changes in market rates to the same extent, we may still be exposed to yield curve risk.  Yield curve risk reflects the possibility the changes in the shape of the yield curve could have different effects on our assets and liabilities.

 

Variable, or floating rate, assets and liabilities that reprice at similar times and have base rates of similar maturity may still be involved in interest rate risk.  If financial instruments have different base rates, we are subject to basis risk reflecting the possibility that the spread from those base rates will deviate.

 

We hold mortgage-related investments, including mortgage loans and mortgage-backed securities.  Prepayment risk is associated with mortgage-related investments and results from homeowners’ ability to pay off their mortgage loans prior to maturity.  We limit this risk by restricting the types of mortgage-backed securities we may own to those with limited average life changes under certain interest-rate shock scenarios, or securities with embedded prepayment penalties.  We also limit the fixed rate mortgage loans held with maturities greater than five years.

 

Measuring Interest Rate Risk.  As noted above, interest rate risk can 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.

 

27

 

The following table sets forth the amounts of interest earning assets and interest bearing liabilities outstanding at March 31, 2004 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, 2004 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.

 

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		$	7,068		$	—		$	—		$	—		$	7,068
Investment securities available for sale		129,988			157,328			684,839			189,502			1,161,657
Loans held for sale		681			—			—			—			681
Loans		1,790,234			343,901			710,328			30,431			2,874,894
Total interest earning assets		$	1,927,971		$	501,229		$	1,395,167		$	219,933		$	4,044,300
Interest Bearing Liabilities:
NOW and money market deposit accounts		$	404,709		$	42,388		$	257,846		$	—		$	704,943
Savings deposits		109,284			54,643			291,425			—			455,352
Time deposits		623,333			639,358			456,610			2,088			1,721,389
Short-term borrowings		336,817			75,507			—			—			412,324
Long-term borrowings		2,680			7,655			33,758			2,287			46,380
Junior subordinated notes issued to capital trusts		25,774			—			—			61,669			87,443
Total interest bearing liabilities		$	1,502,597		$	819,551		$	1,039,639		$	66,044		$	3,427,831
Rate sensitive assets (RSA)		$	1,927,971		$	2,429,200		$	3,824,367		$	4,044,300		$	4,044,300
Rate sensitive liabilities (RSL)		1,502,597			2,322,148			3,361,787			3,427,831			3,427,831
Cumulative GAP		425,374			107,052			462,580			616,469			616,469
(GAP=RSA–RSL)
RSA/Total assets		43.49		%	54.80		%	86.27		%	91.23		%	91.23		%
RSL/Total assets		33.90		%	52.38		%	75.84		%	77.33		%	77.33		%
GAP/Total assets		9.60		%	2.41		%	10.43		%	13.91		%	13.91		%
GAP/RSA		22.06		%	4.41		%	12.10		%	15.24		%	15.24		%

 

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 our interest rate risk, but rather we use what we believe to be the more reliable simulation model relating to changes in net interest income.

 

28

 

Based on simulation modeling at March 31, 2004 and December 31, 2003, our net interest income would change over a one-year time period due to changes in interest rates as follows (dollars in thousands):

 

 

Our simulations assume the following:

 

1.              Changes in interest rates are immediate.

 

2.              Changes in net interest income between March 31, 2004 and December 31, 2003 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.

 

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

 

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-15(e) under the Securities Exchange Act of 1934 (the “Act”)) was carried out as of March 31, 2004 under the supervision and with the participation of our Chief Executive Officer, Chief Financial Officer and several other members of our senior management.  Our Chief Executive Officer and Chief Financial Officer concluded that, as of March 31, 2004, our disclosure controls and procedures 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 Control Over Financial Reporting: During the quarter ended March 31, 2004, no change occurred in our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

29

 

PART II. – OTHER INFORMATION

 

Item 2.  Changes in Securities, Use of Proceeds and Issuers Purchases of Equity Securities

 

(e)          The following table sets forth information for the three months ended March 31, 2004 with respect to our repurchases of our outstanding common shares:

 

Period		Total Number of Shares Purchased		Average Price Paid per Share			Number of Shares Purchased as Part Publicly Announced Plans or Programs		Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs (1)
Jan 1, 2004 - Jan 31, 2004		—		$	—		—		392,700
Feb 1, 2004 - Feb 29, 2004		—		—			—		392,700
Mar 1, 2004 - Mar 31, 2004		—		—			—		392,700
Total		—		$	—		—

 

(1)          On July 23, 2003, we announced our intention to repurchase up to 450,000 of our outstanding shares in the open market or in privately negotiated transactions.  These shares may be purchased from time to time over a twelve-month period from the date of announcement depending upon market conditions and other factors.  No other repurchase plans or programs expired or terminated during the period.

 

Item 6.  Exhibits and Reports on Form 8-K

 

(a)          See Exhibit Index.

 

(b)         Reports on Form 8-K:  We filed a Current Report on Form 8-K on January 12, 2004 reporting under Item 5 the announcement of our agreement to merge with First SecurityFed Financial, Inc.  We furnished Current Reports on Form 8-K on January 30, 2004 reporting under Item 12 the press release for our 2003 fourth quarter and annual earnings, and on February 23, 2004 reporting under Item 9 material prepared for presentation at an industry conference.

 

30

 

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 7th day of May 2004.

 

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)

 

31

 

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))
2.2		Agreement and Plan of Merger, dated as of January 9, 2004, by and among the Registrant and First SecurityFed Financial, Inc. (incorporated herein by reference to Appendix A to the proxy statement – prospectus filed by the Registrant pursuant to Rule 424(b)(3) under the Securities Act of 1933 (File No. 333-114252))
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))
10.3A		Amendment No. One to Employment Agreement between MB Financial Bank, N.A. and Burton Field (incorporated herein by reference to Exhibit 10.3A to the Registrant’s Registration Statement on Form S-4 filed on April 6, 2004 (File No. 333-114252))
10.4		Form of Change of Control Severance Agreement between MB Financial Bank, National Association and each of 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))

 

32

 

Exhibit Number		Description
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, 2003 (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))
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))
31.1		Rule 13a – 14(a)/15d – 14(a) Certification (Chief Executive Officer)*
31.2		Rule 13a – 14(a)/15d – 14(a) Certification (Chief Financial Officer)*
32		Section 1350 Certifications*

 

* Filed Herewith.

 

33