UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended June 30, 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 28,680,168 shares of the registrant’s common stock as of August 6, 2004.

MB FINANCIAL, INC. AND SUBSIDIARIES

FORM 10-Q

June 30, 2004

INDEX

PART I.	FINANCIAL INFORMATION

Item 1.	Financial Statements

	Consolidated Balance Sheets at June 30, 2004 and December 31, 2003 (Unaudited)

	Consolidated Statements of Income for the Three and Six Months ended June 30, 2004 and 2003 (Unaudited)

	Consolidated Statements of Cash Flows for the Six Months ended June 30, 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

PART I. – FINANCIAL INFORMATION

Item 1. – Financial Statements

MB FINANCIAL, INC. & SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

June 30, 2004 and December 31, 2003

(Amounts in thousands, except common share data)

(Unaudited)

	June 30, 2004			December 31, 2003

ASSETS
Cash and due from banks	$	108,136		$	91,283
Interest bearing deposits with banks	11,965			6,647
Federal funds sold	800			—
Investment securities available for sale	1,286,304			1,112,110
Loans held for sale	816			3,830
Loans (net of allowance for loan losses of $44,236 at June 30, 2004 and $39,572 at December 31, 2003)	3,149,003			2,786,222
Lease investments, net	65,131			73,440
Premises and equipment, net	96,529			80,410
Cash surrender value of life insurance	84,388			82,547
Goodwill, net	123,644			70,293
Other intangibles, net	14,046			7,560
Other assets	54,941			40,751

Total assets	$	4,995,703		$	4,355,093

LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities
Deposits:
Noninterest bearing	$	646,352		$	598,961
Interest bearing	3,112,485			2,833,074
Total deposits	3,758,837			3,432,035
Short-term borrowings	530,968			391,600
Long-term borrowings	125,603			21,464
Junior subordinated notes issued to capital trusts	87,443			87,443
Accrued expenses and other liabilities	42,983			47,058
Total liabilities	4,545,834			3,979,600

Stockholders’ Equity
Common stock, ($0.01 par value; authorized 40,000,000 shares; issued 28,841,321 shares at June 30, 2004 and 26,807,430 at December 31, 2003)	288			268
Additional paid-in capital	137,999			71,837
Retained earnings	320,531			296,906
Unearned compensation	(342		)	(198		)
Accumulated other comprehensive income (loss)	(3,414		)	8,531
Less: 150,000 and 57,300 shares of treasury stock, at cost, at June 30, 2004 and December 31, 2003, respectively	(5,193		)	(1,851		)
Total stockholders’ equity	449,869			375,493

Total liabilities and stockholders’ equity	$	4,995,703		$	4,355,093

See Accompanying Notes to Consolidated Financial Statements.

MB FINANCIAL, INC. & SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(Amounts in thousands, except common share data)

(Unaudited)

	Three Months Ended June 30,					Six Months Ended June 30,
	2004		2003			2004		2003

Interest income:
Loans	$	41,712	$	41,916		$	80,906	$	83,452
Investment securities:
Taxable	10,058		8,895			20,262		18,040
Nontaxable	1,946		1,110			3,631		2,053
Federal funds sold	28		98			44		186
Other interest bearing accounts	17		20			35		36
Total interest income	53,761		52,039			104,878		103,767

Interest expense:
Deposits	12,465		14,344			24,407		29,200
Short-term borrowings	1,333		895			2,607		1,813
Long-term borrowings and junior subordinated notes	2,157		2,066			4,017		4,205
Total interest expense	15,955		17,305			31,031		35,218
Net interest income	37,806		34,734			73,847		68,549

Provision for loan losses	1,800		2,078			3,800		4,814

Net interest income after provision for loan losses	36,006		32,656			70,047		63,735

Other income:
Loan service fees	1,119		1,265			2,184		2,961
Deposit service fees	4,633		4,314			8,928		8,197
Lease financing, net	4,330		2,930			8,278		6,453
Trust, asset management and brokerage fees	4,131		3,929			7,993		6,482
Net gain (loss) on sale of securities available for sale	391		(379		)	1,082		(298		)
Increase in cash surrender value of life insurance	942		900			1,841		1,818
Gain on sale of bank subsidiary	—		3,083			—		3,083
Other operating income	1,360		1,856			2,868		3,712
	16,906		17,898			33,174		32,408

Other expense:
Salaries and employee benefits	16,947		16,096			33,070		30,779
Occupancy and equipment expense	4,698		4,186			9,161		9,135
Computer services expense	1,250		1,000			2,322		2,132
Advertising and marketing expense	1,220		996			2,413		1,965
Professional and legal expense	715		2,509			1,431		3,582
Brokerage fee expense	1,216		1,079			2,427		1,609
Telecommunication expense	665		589			1,334		1,150
Other intangibles amortization expense	266		299			556		571
Prepayment fee on Federal Home Loan Bank advances	—		1,146			—		1,146
Other operating expenses	3,693		3,542			7,306		6,726
	30,670		31,442			60,020		58,795

Income before income taxes	22,242		19,112			43,201		37,348

Income taxes	6,772		6,023			13,143		11,854

Net Income	$	15,470	$	13,089		30,058		25,494

Common share data:
Basic earnings per common share	$	0.56	$	0.49		$	1.11	$	0.96
Diluted earnings per common share	$	0.55	$	0.48		$	1.08	$	0.94
Weighted average common shares outstanding	27,491,517		26,602,920			27,129,106		26,587,346
Diluted weighted average common shares outstanding	28,216,504		27,248,883			27,874,151		27,199,988

See Accompanying Notes to Consolidated Financial Statements.

MB FINANCIAL, INC. & SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in thousands)

(Unaudited)

	Six Months Ended June 30,
	2004			2003

Cash Flows From Operating Activities:
Net income	$	30,058		$	25,494
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation	16,011			16,187
(Gain) loss on sales of premises and equipment and leased equipment	(713		)	221
Amortization of other intangibles	556			571
Provision for loan losses	3,800			4,814
Deferred income tax expense (benefit)	2,656			(881		)
Amortization of premiums and discounts on investment securities, net	7,347			7,039
Net (gain) loss on sale of investment securities available for sale	(1,082		)	298
Proceeds from sale of loans held for sale	16,429			56,962
Origination of loans held for sale	(13,265		)	(59,707		)
Net gains on sale of loans held for sale	(150		)	(1,269		)
Increase in cash surrender value of life insurance	(1,841		)	(1,818		)
Interest only securities accretion	(114		)	(147		)
Deferred gain amortization on interest only securities pool termination	(296		)	(246		)
Gain on sale of bank subsidiary	—			(3,083		)
Increase in other assets	(9,125		)	(10,596		)
(Decrease) increase in other liabilities, net	(18,475		)	5,978
Net cash provided by operating activities	31,796			39,817

Cash Flows From Investing Activities:
Proceeds from sales of investment securities available for sale	105,489			54,177
Proceeds from maturities and calls of investment securities available for sale	102,745			243,947
Purchase of investment securities available for sale	(246,049		)	(351,761		)
Net increase in loans	(70,548		)	(18,781		)
Purchases of premises and equipment and leased equipment	(15,430		)	(14,811		)
Proceeds from sales of premises and equipment and leased equipment	3,086			1,705
Principal (paid) collected on lease investments	(538		)	1,892
Cash paid, net of cash and cash equivalents in acquisitions	(30,267		)	(23,404		)
Proceeds from sale of subsidiary bank, net of cash retained by bank	—			(22,158		)
Proceeds received from interest only receivables	424			494
Net cash used in investing activities	(151,088		)	(128,700		)

Cash Flows From Financing Activities:
Net increase (decrease) in deposits	6,895			(13,059		)
Net increase in short-term borrowings	122,960			117,732
Proceeds from long-term borrowings	41,918			7,234
Principal paid on long-term borrowings	(18,735		)	(13,874		)
Restricted stock awards, net	114			—
Treasury stock transactions, net	(5,193		)	(1,232		)
Stock options exercised	737			1,439
Dividends paid on common stock	(6,433		)	(5,320		)
Net cash provided by financing activities	142,263			92,920

Net increase in cash and cash equivalents	$	22,971		$	4,037

Cash and cash equivalents:
Beginning of period	97,930			108,576

End of period	$	120,901		$	112,613

See Accompanying Notes to Consolidated Financial Statements.

	Six Months Ended June 30,
	2004		2003

Supplemental Disclosures of Cash Flow Information:

Cash payments for:
Interest paid to depositors and other borrowed funds	$	31,610	$	35,970
Income taxes paid, net	8,033		6,279

Real estate acquired in settlement of loans	$	63	$	1,058

Supplemental Schedule of Noncash Investing Activities:

Acquisitions

Noncash assets acquired:
Investment securities available for sale	$	162,077	$	178,832
Loans, net	295,799		262,439
Premises and equipment, net	10,305		6,482
Goodwill, net	53,351		28,597
Other intangibles, net	7,042		5,923
Other assets	4,555		7,806
Total noncash assets acquired:	533,129		490,079

Liabilities assumed:
Deposits	319,907		453,140
Short-term borrowings	16,408		—
Long-term borrowings	80,956		—
Accrued expenses and other liabilities	18,553		13,535
Total liabilities assumed:	435,824		466,675
Net noncash assets acquired:	$	97,305	$	23,404

Cash and cash equivalents acquired	$	42,856	$	69,696

Stock issuance in lieu of cash paid in acquisition	$	67,038	$	—

Sale of bank subsidiary

Noncash assets sold:
Investment securities available for sale	$	—	$	26,512
Loans, net	—		27,249
Premises and equipment, net	—		439
Goodwill, net	—		4,155
Other assets	—		1,034
Total non cash assets sold	—		59,389

Liabilities sold:
Deposits	—		66,720
Short-term borrowings	—		17,338
Accrued expenses and other liabilities	—		572
Total liabilities sold	—		84,630
Net non cash liabilities sold	$	—	$	25,241

Cash and cash equivalents sold	$	—	$	38,458
Cash proceeds from sale of bank subsidiary	—		16,300
Cash and cash equivalents sold in sale of bank subsidiary, net	$	—	$	22,158

See Accompanying Notes to Consolidated Financial Statements.

MB FINANCIAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 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), as well as First Security Federal Savings Bank, which, as indicated in Note 2, was merged into MB Financial Bank on July 22, 2004. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of the financial position, results of operations and cash flows for the interim periods have been made. The results of operations for the three and six months ended June 30, 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. BUSINESS COMBINATIONS AND DISPOSITIONS

Business Combinations. The following business combinations were accounted for under the purchase method of accounting. Accordingly, the results of operations of the acquired companies have been included in the Company’s results of operations since the date of acquisition. Under this method of accounting, the purchase price is allocated to the respective assets acquired and liabilities assumed based on their estimated fair values, net of applicable income tax effects. The excess cost over fair value of net assets acquired is recorded as goodwill.

On May 28, 2004, the Company acquired First SecurityFed Financial, Inc. (First SecurityFed), parent company of First Security Federal Savings Bank, for $140.2 million. The purchase price was paid through a combination of cash and the Company’s common stock totaling $73.1 million and $67.1 million, respectively. The Company paid an additional $5.0 million in cash to First SecurityFed option holders who elected to cash out their options. The transaction generated approximately $53.4 million in goodwill and $7.0 million in intangible assets subject to amortization. As of the acquisition date, First SecurityFed had approximately $566.9 million in total assets. First Security Federal Savings Bank was merged into MB Financial Bank on July 22, 2004.

Pro forma results of operation for First SecurityFed for the three and six months ended June 30, 2004 and 2003 are not included as First SecurityFed would not have had a material impact on the Company’s financial statements.

On February 7, 2003, the Company acquired South Holland Bancorp, Inc., 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 Bancorp, Inc. had approximately $560.3 million in assets. South Holland Trust & Savings Bank was merged into MB Financial Bank on May 15, 2003.

Pro forma results of operation for South Holland Bancorp, Inc. for the six months ended June 30, 2003 are not included as South Holland Bancorp, Inc. would not have had a material impact on the Company’s financial statements.

Disposition. On May 6, 2003, the Company completed its sale of Abrams Centre Bancshares, Inc. and its subsidiary, Abrams Centre National Bank (Abrams) for $16.3 million in cash. The sale resulted in a $3.1 million gain for the Company in the second quarter of 2003. As of the sale date, Abrams had approximately $98.4 million in assets.

NOTE 3. COMPREHENSIVE INCOME (LOSS)

Comprehensive income (loss) includes net income, as well as the change in net unrealized gain (loss) on investment securities available for sale and interest only receivables arising during the periods, net of tax. The following table sets forth comprehensive income (loss) for the periods indicated (in thousands):

	Three Months Ended June 30,						Six Months Ended June 30,
	2004			2003			2004			2003

Net income	$	15,470		$	13,089		$	30,058		$	25,494
Unrealized holding losses on investment securities, net of tax	(17,457		)	(48		)	(11,582		)	(164		)
Unrealized interest only securities gains (losses) arising during the year, net of tax	160			82			340			(274		)
Reclassification adjustments for (gains) losses included in net income, net of tax	(254		)	310			(703		)	193
Other comprehensive income (loss) gain, net of tax	(17,551		)	344			(11,945		)	(245		)
Comprehensive income (loss)	$	(2,081	)	$	13,433		$	18,113		$	25,249

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):

	Three Months Ended June 30,				Six Months Ended June 30,
	2004		2003		2004		2003

Basic (1):
Net income	$	15,470	$	13,089	$	30,058	$	25,494
Average shares outstanding	27,491,517		26,602,920		27,129,106		26,587,346
Basic earnings per share	$	0.56	$	0.49	$	1.11	$	0.96

Diluted (1):
Net income	$	15,470	$	13,089	$	30,058	$	25,494
Average shares outstanding	27,491,517		26,602,920		27,129,106		26,587,346
Net effect of dilutive stock options (2)	724,987		645,963		745,045		612,642
Total	28,216,504		27,248,883		27,874,151		27,199,988
Diluted earnings per share	$	0.55	$	0.48	$	1.08	$	0.94

(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.

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 six months ended June 30, 2004 or the year ended December 31, 2003.

The following table presents the changes in the carrying amount of goodwill during the six months ended June 30, 2004 and the year ended December 31, 2003 (in thousands):

	June 30, 2004		December 31, 2003

Balance at beginning of period	$	70,293	$	45,851
Goodwill from business combinations	53,351		28,597
Goodwill related to bank subsidiary sold	—		(4,155		)
Balance at end of period	$	123,644	$	70,293

The Company has other intangible assets consisting of core deposit intangibles that have a weighted average amortization period of approximately fifteen 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 six months ended June 30, 2004 and the year ended December 31, 2003 (in thousands):

	June 30, 2004			December 31, 2003

Balance at beginning of period	$	7,560		$	2,797
Amortization expense	(556		)	(1,160		)
Other intangibles from business combinations	7,042			5,923
Balance at end of period	$	14,046		$	7,560

Gross carrying amount	$	29,261		$	22,219
Accumulated amortization	(15,215		)	(14,659		)
Net book value	$	14,046		$	7,560

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

	Amount
Year ending December 31,
2004	$	1,015
2005	993
2006	939
2007	749
2008	945
Thereafter	9,405
	$	14,046

NOTE 6. RECENT ACCOUNTING PRONOUNCEMENTS

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 did not have a material impact on the Company’s financial statements.

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):

	Three Months Ended June 30,						Six Months Ended June 30,
	2004			2003			2004			2003

Net income, as reported	$	15,470		$	13,089		$	30,058		$	25,494
Add: Stock-based employee compensation expense included in reported net income, net of related tax effects (2)	67			—			145			—
Less: Total stock-based compensation expense determined under fair value based methods for all awards, net of related tax effects	(399		)	(226		)	(747		)	(381		)
Net income, as adjusted	$	15,138		$	12,863		$	29,456		$	25,113

Basic earnings per share, as reported	$	0.56		$	0.49		$	1.11		$	0.96
Add: Stock-based employee compensation expense included in reported net income, net of related tax effects (2)	—			—			0.01			—
Less: Total stock-based compensation expense determined under fair value based methods for all awards, net of related tax effects	(0.01		)	(0.01		)	(0.03		)	(0.02		)
Basic earnings per share, as adjusted (1)	$	0.55		$	0.48		$	1.09		$	0.94

Diluted earnings per share, as reported	$	0.55		$	0.48		$	1.08		$	0.94
Add: Stock-based employee compensation expense included in reported net income, net of related tax effects (2)	—			—			0.01			—
Less: Total stock-based compensation expense determined under fair value based methods for all awards, net of related tax effects	(0.01		)	(0.01		)	(0.03		)	(0.02		)
Diluted earnings per share, as adjusted (1)	$	0.54		$	0.47		$	1.06		$	0.92

(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. SHORT-TERM BORROWINGS

Short-term borrowings are summarized as follows as of June 30, 2004 and December 31, 2003 (dollars in thousands):

	June 30, 2004				December 31, 2003
	Weighted Average Interest Rate		Amount		Weighted Average Interest Rate		Amount

Federal funds purchased	1.35	%	$	63,000	1.26	%	$	47,525
Securities sold under agreements to repurchase:
Customer repurchase agreements	0.99		148,913		1.14		163,345
Company repurchase agreements	1.17		96,745		1.33		55,730
Federal Home Loan Bank advances	1.27		196,310		1.35		125,000
Correspondent bank line of credit of $26.0 million	3.41		26,000		—		—

	1.23%		$	530,968	1.23	%	$	391,600

Securities sold under agreements to repurchase are agreements in which a party acquires funds by selling securities to another party under a simultaneous agreement to repurchase the same securities at a specified price and date. The Company enters into repurchase agreements and also offers a demand deposit account product to customers that sweeps their balances in excess of an agreed upon target amount into overnight repurchase agreements. Securities sold under agreements to repurchase totaled $245.7 million and $219.1 million at June 30, 2004 and December 31, 2003, respectively.

Federal Home Loan Bank advances with maturities less than one year totaled $196.3 million and $125.0 million at June 30, 2004 and December 31, 2003, respectively. At June 30, 2004, the advances had maturities ranging from July 2004 to April 2005. The advances are fixed rate and are subject to a prepayment fee.

A collateral pledge agreement exists whereby at all times, the Company must keep on hand, free of all other pledges, liens, and encumbrances, first mortgage loans with unpaid principal balances aggregating no less than 167% of the outstanding secured advances from the Federal Home Loan Bank.

The Company has a $26 million correspondent bank line of credit which has certain debt covenants that require the Company to maintain “Well Capitalized” capital ratios, to have no other debt except in the usual course of business, and requires the Company to maintain minimum financial ratios on return on assets and earnings as well as maintain minimum financial ratios related to the loan loss allowance. The Company was in compliance with such debt covenants as of June 30, 2004. The correspondent bank line of credit is secured by the stock of MB Financial Bank, and its terms are renewed annually. As of June 30, 2004, $26.0 million was outstanding on the correspondent bank line of credit. No balance was outstanding on the correspondent bank line of credit at December 31, 2003.

NOTE 9. LONG TERM BORROWINGS

The Company had Federal Home Loan Bank advances with maturities greater than one year of $108.0 million and $2.4 million at June 30, 2004 and December 31, 2003, respectively. As of June 30, 2004, the advances had fixed interest rates ranging from 1.75% to 6.13%. First SecurityFed had Federal Home Loan Bank advances with maturities greater than one year of $81.0 million at the acquisition date on May 28, 2004.

The Company had notes payable to banks totaling $17.6 million and $19.1 million at June 30, 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 $20.9 million and $22.1 million at June 30, 2004 and December 31, 2003, respectively, that is pledged as collateral on these notes.

The principal payments on long-term borrowings are due as follows (in thousands):

	Amount
Year ending December 31,
2004	$	4,937
2005	41,578
2006	29,039
2007	16,993
2008	19,186
Thereafter	13,870
	$	125,603

NOTE 10. 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 June 30, 2004 (in thousands):

	MB Financial Capital Trust I			Coal City Capital Trust I

Junior Subordinated Notes:
Principal balance	$	61,669		$	25,774
Stated maturity date	September 30, 2032			September 1, 2028

Trust Preferred Securities:
Face value	$	59,800		$	25,000
Annual rate	8.60		%	3-mo LIBOR + 1.80		%
Issuance date	August 2002			July 1998
Distribution dates (1)	Quarterly			Quarterly

(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.

NOTE 11. DERIVATIVE FINANCIAL INSTRUMENTS

The Company uses interest rate swaps to hedge its interest rate risk. The Company had eight fair value commercial loan interest rate swaps with a notional amount of $22.3 million at June 30, 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.

We also offer various derivatives to our customers and offset our exposure from such contracts by purchasing other financial contracts. The customer accommodations and any offsetting financial contracts are treated as non-hedging derivative instruments which do not qualify for hedge accounting.

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 six months ended June 30, 2004 and June 30, 2003 was approximately $44 thousand and $22 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 June 30, 2004, the Company’s credit exposure relating to interest rate swaps was not significant.

The Company’s derivative financial instruments are summarized below as of June 30, 2004 and December 31, 2003 (dollars in thousands):

	June 30, 2004										December 31, 2003
						Weighted-Average
	Notional Amount		Estimated Fair Value			Years to Maturity	Receive Rate		Pay Rate		Notional Amount		Estimated Fair Value

Derivative instruments designated as hedges of fair value:
Pay fixed/receive variable swaps (1)	$	22,292	$	494		6.2	3.19	%	5.63	%	$	21,656	$	38

Non-hedging derivative instruments (2):
Pay fixed/receive variable swaps	3,648		22			9.3	3.18	%	6.77	%	—		—
Pay variable/receive fixed swaps	3,648		(22		)	9.3	6.77	%	3.18	%	—		—
Total portfolio swaps	$	29,588	$	494		6.9	3.63	%	5.47	%	$	21,656	$	38

(1) Hedges fixed-rate commercial real estate loans

(2) These portfolio swaps are not designated as hedging instruments under SFAS No. 133.

NOTE 12. COMMITMENTS AND CONTINGENCIES

Commitments: The Company is a party to credit-related financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit, standby letters of credit and commercial letters of credit. Such commitments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheets.

The Company’s exposure to credit loss is represented by the contractual amount of these commitments. The Company follows the same credit policies in making commitments as it does for on-balance-sheet instruments.

At June 30, 2004 and December 31, 2003, the following financial instruments were outstanding whose contract amounts represent off-balance sheet credit risk (in thousands):

	Contract Amount
	June 30, 2004		December 31, 2003
Commitments to extend credit:
Home equity lines	$	165,197	$	159,961
Other commitments	710,320		675,332

Letters of credit:
Standby	67,324		66,313
Commercial	11,593		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 June 30, 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 June 30, 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, increased $5.2 million to $78.9 million from $73.7 million at December 31, 2003. Of the $78.9 million in commitments outstanding at June 30, 2004, approximately $22.0 million of the letters of credit have been issued or renewed since December 31, 2003. The Company had a $200 thousand liability recorded as of June 30, 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.

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.

As of June 30, 2004, the Company had approximately $24.0 million in capital expenditure commitments outstanding which relate to a new operations center and a new headquarters building. Cash paid for work completed on these projects totaled $4.0 million for the six months ended June 30, 2004.

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 some of the significant items that occurred during the second quarter of 2004:

• Diluted EPS of $0.55, up 14.6% from the second quarter of 2003.

• Net income of $15.5 million for the quarter, up 18.2% from a year ago.

• Return on average equity of 15.33%, up from 14.70% in the second quarter of 2003.

• Return on average assets of 1.34%, up from 1.26% in the second quarter of 2003.

• Completion of our $140.2 million merger with First Security Fed on May 28, 2004.

See “Results of Operations” section below for details regarding our 2004 second 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, gain on sale of bank subsidiary 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, other intangibles amortization expense, prepayment fee on Federal Home Loan Bank advances and other operating expenses.

Net interest income is affected by changes in the volume and mix of interest earning assets, the level of interest rates earned on those assets, the volume and mix of interest bearing liabilities and the level of interest rates paid on those interest bearing liabilities. The provision for loan losses is dependent on changes in the loan portfolio and management’s assessment of the collectibility of the loan portfolio, as well as economic and market conditions. Other income and other expenses are impacted by growth of operations and growth in the number of loan and deposit 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 loan and deposit 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 discussion.

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 June 30, 2004, the aggregate residual value of the equipment leased under our direct finance, leveraged, and operating leases totaled $26.5 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 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

Second Quarter Results

Net income was $15.5 million for the second quarter of 2004, compared to $13.1 million for the second quarter of 2003. Fully diluted earnings per share for the second quarter of 2004 increased 14.6% to $0.55 compared to $0.48 for the second quarter of 2003. The results for the second quarter of 2004 generated an annualized return on average assets of 1.34% and an annualized return on average equity of 15.33%, compared to 1.26% and 14.70%, respectively, for the same period in 2003.

Net interest income was $37.8 million for the three months ended June 30, 2004, an increase of $3.1 million, or 8.8% from $34.7 million for the comparable period in 2003. Net interest income grew primarily due to a $396.1 million, or 10.4% increase in average interest earning assets. The net interest margin, expressed on a fully tax equivalent basis, was 3.72% for the second quarter of 2004 and 2003. The increase in average interest earning assets and average interest bearing liabilities is primarily due to our continued internal growth as well as our acquisition of First SecurityFed in the second quarter of 2004.

The provision for loan losses decreased $278 thousand to $1.8 million in the second quarter of 2004 from $2.1 million in the comparable 2003 period. See “Asset Quality” section below for further analysis of the allowance for loan losses.

Other income decreased $1.0 million, or 5.5% to $16.9 million for the quarter ended June 30, 2004 from $17.9 million for the second quarter of 2003. The decrease was primarily due to a $3.1 million gain on sale of bank subsidiary in the second quarter of 2003. This gain reflects the sale of Abrams, our former banking subsidiary located in Dallas, Texas. This decline was offset by a $1.4 million increase in net lease financing due to higher residual realization within the lease investment portfolio and a $770 thousand increase in net gain on sale of securities available for sale due to net gains of $391 thousand in the second quarter of 2004 compared to net losses of $379 in the 2003 quarter. Deposit service fees and trust, asset management and brokerage fees increased by $319 thousand and $202 thousand, respectively. Other operating income declined by $496 thousand, primarily due to a $728 thousand decline in gain on the sale of loans. Mortgage loans sold decreased $27.0 million to $4.7 million for the three months ended June 30, 2004 compared to $31.7 million during the same period of 2003. The decline in mortgage loans sold was due to lower mortgage loan origination activity in the 2004 quarter.

Other expense decreased by $772 thousand, or 2.5% to $30.7 million for the quarter ended June 30, 2004 from $31.4 million for the quarter ended June 30, 2003. Professional and legal expense decreased by $1.8 million. The decrease was due to non-routine expenses incurred in the second quarter of 2003, including the write-off of $1.0 million in costs associated with planning construction of a new corporate headquarters prior to management’s decision to pursue the more cost-effective option of purchasing an existing structure, approximately $400 thousand in legal expense as the plaintiff in litigation defending our corporate trademark, and the settlement of litigation costing approximately $300 thousand in conjunction with the sale of Abrams. Prepayment fee on Federal Home Loan Bank advances decreased by $1.1 million due to a fee incurred in the 2003 quarter on the payoff of $8.1 million in long-term advances. The above declines were offset by increases in salaries and employee benefits and occupancy and equipment expense of $851 thousand and $512 thousand, respectively, due to our continued internal growth and the acquisition of First SecurityFed.

Income tax expense for the three months ended June 30, 2004 increased $749 thousand to $6.8 million compared to $6.0 million for the comparable period in 2003. The effective tax rate was 30.4% and 31.5% for the three months ended June 30, 2004 and 2003, respectively. The decline in the effective tax rate was primarily due to a $836 thousand increase in nontaxable investment securities income during the second quarter of 2004 compared to the same period in 2003.

Year-To-Date Results

Net income was $30.1 million for the first six months of 2004, compared to $25.5 million for the first six months of 2003, an increase of 17.9%. Fully diluted earnings per share for the six months ended June 30, 2004 increased 14.9% to $1.08 compared to $0.94 for the same period in 2003. Year-to-date 2004 results generated an annualized return on average assets of 1.34% and an annualized return on average equity of 15.29%, compared to 1.25% and 14.58%, respectively, for the same period in 2003.

Net interest income was $73.8 million for the first six months ended June 30, 2004, an increase of $5.3 million, or 7.7% from $68.5 million for the first six months of 2003. Net interest income grew primarily due to a $355.3 million, or 9.5% increase in average interest earning assets, which offset a 4 basis point decline in the net interest margin, expressed on a fully tax equivalent basis, to 3.72% from 3.76% in the comparable 2003 period. The increase in average interest earning assets and average interest bearing liabilities is primarily due to our continued internal growth, as well as the acquisition of First SecurityFed in the second quarter of 2004.

The provision for loan losses decreased $1.0 million to $3.8 million in the first six months of 2004 from $4.8 million in the comparable 2003 period. See “Asset Quality” section below for further analysis of the allowance for loan losses.

Other income increased $766 thousand, or 2.4% to $33.2 million for the six months ended June 30, 2004 from $32.4 million for the comparable 2003 period. Net lease financing increased by $1.8 million due to higher residual realization within the lease investment portfolio. Trust, asset management and brokerage fees increased by $1.5 million due to a $1.3 million increase in brokerage fees and a $254 thousand increase in income from trust and asset management activities. Brokerage fees increased primarily due to higher investment sales activity at our wholly owned full service broker/dealer, Vision Investment Services, Inc. (Vision). Net gain on sale of securities available for sale increased by $1.4 million due to net gains of $1.1 million in 2004 compared to $298 thousand in net losses in 2003. Deposit service fees increased by $731 thousand due to increased in NSF and overdraft fees and monthly service charges of $605 thousand and $107 thousand, respectively. Gain on sale of bank subsidiary declined by $3.1 million, reflecting the sale of Abrams in the second quarter of 2003. Other operating income declined by $844 thousand, primarily due to a $1.1 million decline in gain on the sale of loans. Mortgage loans sold decreased $44.0 million to $11.7 million for the six months ended June 30, 2004 compared to $55.7 million during the same period of 2003. The decline in mortgage loans sold was due to lower mortgage loan origination activity in 2004. Loan service fees declined by $777 thousand due to a $517 thousand decline in miscellaneous loan fees attributable to lower mortgage banking fees and a $351 thousand decline in loan prepayment fees.

Other expense increased by $1.2 million, or 2.1% to $60.0 million for the six months ended June 30, 2004 from $58.8 million for the six months ended June 30, 2003. Salaries and employee benefits increased by $2.3 million due to our continued growth and investment in personnel and the acquisition of First SecurityFed. Brokerage fee expense increased by $818 thousand primarily due to higher investment sales activity at Vision during 2004. Other operating expenses and advertising and marketing expense increased by $580 thousand and $448 thousand, respectively, due to our continued internal growth and the acquisition of First SecurityFed. Professional and legal expense decreased by $2.2 million. The decrease was due to non-routine expenses incurred in the first six months of 2003, primarily the write-off of $1.0 million in costs associated with planning construction of a new corporate headquarters prior to management’s decision to pursue the more cost-effective option of purchasing an existing structure, approximately $400 thousand in legal expense as the plaintiff in litigation defending our corporate trademark, and the settlement of litigation costing approximately $300 thousand in conjunction with the sale of Abrams. Prepayment fee on Federal Home Loan Bank advances decreased by $1.1 million due to a fee incurred in the 2003 period on the payoff of $8.1 million in long-term advances.

Income tax expense for the six months ended June 30, 2004 increased $1.2 million to $13.1 million compared to $11.9 million for the first six months of 2003. The effective tax rate was 30.4% and 31.7% for the six months ended June 30, 2004 and 2003, respectively. The decline in the effective tax rate was primarily due to a $1.6 million increase in nontaxable investment securities income during the first six months of 2004 compared to the same period in 2003.

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 June 30,
	2004						2003
	Average Balance		Interest		Yield/ Rate		Average Balance		Interest		Yield/ Rate
Interest Earning Assets:
Loans (1) (2)	$	2,975,268	$	41,676	5.63	%	$	2,769,325	$	41,876	6.07	%
Loans exempt from federal income taxes (3)	3,190		55		6.82		3,773		62		6.50
Taxable investment securities	994,739		10,058		4.04		862,053		8,895		4.13
Investment securities exempt from federal income taxes (3)	210,370		2,995		5.63		130,743		1,708		5.17
Federal funds sold	12,797		28		0.87		34,709		98		1.12
Other interest bearing deposits	8,228		17		0.83		7,903		20		1.02
Total interest earning assets	4,204,592		54,829		5.24		3,808,506		52,659		5.55
Non-interest earning assets	428,479						371,502
Total assets	$	4,633,071					$	4,180,008

Interest Bearing Liabilities:
Deposits:
NOW and money market deposit accounts	$	716,319	$	1,269	0.71	%	$	690,173	$	1,853	1.08	%
Savings deposits	491,879		696		0.57		475,967		914		0.77
Time deposits	1,743,961		10,500		2.42		1,684,550		11,577		2.76
Short-term borrowings	451,559		1,333		1.19		233,863		895		1.51
Long-term borrowings and junior subordinated notes	159,498		2,157		5.35		130,360		2,066		6.27
Total interest bearing liabilities	3,563,216		15,955		1.80		3,214,913		17,305		2.16
Non-interest bearing deposits	605,055						547,291
Other non-interest bearing liabilities	58,880						60,780
Stockholders’ equity	405,920						357,024
Total liabilities and stockholders’ equity	$	4,633,071					$	4,180,008
Net interest income/interest rate spread (4)			$	38,874	3.44	%			$	35,354	3.39	%
Taxable equivalent adjustment			1,068						620
Net interest income, as reported			$	37,806					$	34,734

Net interest margin on a fully tax equivalent basis (5)					3.72	%					3.72	%
Net interest margin (5)					3.62	%					3.66	%

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

(2) Interest income includes amortization of deferred loan origination fees of $1.6 million and $790 thousand for the three months ended June 30, 2004 and 2003, respectively.

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

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

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

Net interest income on a tax equivalent basis increased $3.5 million, or 10.0% to $38.9 million for the three months ended June 30, 2004 from $35.4 million for the three months ended June 30, 2003. Tax-equivalent interest income increased by $2.2 million due to a $396.1 million, or 10.4% increase in average interest earning assets. The increase was comprised of a $212.3 million, or 21.4% increase in average investment securities, a $205.4 million, or 7.4% increase in average loans, offset by a $21.9 million decline in federal funds sold. The increase in average interest earning assets was partially offset by a 31 basis point decline in their yield to 5.24%. Interest expense declined by $1.4 million due to a 36 basis point decline in the cost of interest bearing liabilities, which was partially offset by a $348.3 million increase in average interest bearing liabilities. The increase in average interest earning assets and average interest bearing liabilities is primarily due to our continued internal growth, as well as the acquisition of First SecurityFed in the second quarter of 2004. The net interest margin expressed on a fully tax equivalent basis for the second quarter of 2004 did not change from the first quarter of 2004.

	Six Months Ended June 30,
	2004						2003
	Average Balance		Interest		Yield/ Rate		Average Balance		Interest		Yield/ Rate
Interest Earning Assets:
Loans (1) (2)	$	2,909,443	$	80,836	5.59	%	$	2,720,064	$	83,369	6.18	%
Loans exempt from federal income taxes (3)	3,209		107		6.60		3,788		128		6.72
Taxable investment securities	971,708		20,262		4.17		865,783		18,040		4.17
Investment securities exempt from federal income taxes (3)	195,915		5,586		5.64		112,182		3,158		5.60
Federal funds sold	9,677		44		0.90		33,458		186		1.11
Other interest bearing deposits	8,173		35		0.86		7,587		36		0.96
Total interest earning assets	4,098,125		106,870		5.24		3,742,862		104,917		5.65
Non-interest earning assets	412,325						359,019
Total assets	$	4,510,450					$	4,101,881

Interest Bearing Liabilities:
Deposits:
NOW and money market deposit accounts	$	708,938	$	2,511	0.71	%	$	661,798	$	3,443	1.05	%
Savings deposits	474,902		1,301		0.55		455,141		1,789		0.79
Time deposits	1,717,247		20,595		2.41		1,677,690		23,968		2.88
Short-term borrowings	434,058		2,607		1.21		229,421		1,813		1.57
Long-term borrowings and junior subordinated notes	138,517		4,017		5.74		130,375		4,205		6.41
Total interest bearing liabilities	3,473,662		31,031		1.80		3,154,425		35,218		2.25
Non-interest bearing deposits	589,562						539,275
Other non-interest bearing liabilities	51,952						55,509
Stockholders’ equity	395,274						352,672
Total liabilities and stockholders’ equity	$	4,510,450					$	4,101,881
Net interest income/interest rate spread (4)			$	75,839	3.44	%			$	69,699	3.40	%
Taxable equivalent adjustment			1,992						1,150
Net interest income, as reported			$	73,847					$	68,549

Net interest margin on a fully tax equivalent basis (5)					3.72	%					3.76	%
Net interest margin (5)					3.62	%					3.69	%

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

(2) Interest income includes amortization of deferred loan origination fees of $2.7 million and $2.0 million for the six months ended June 30, 2004 and 2003, respectively.

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

(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 $6.1 million, or 8.8% to $75.8 million for the six months ended June 30, 2004 from $69.7 million for the six months ended June 30, 2003. Tax-equivalent interest income increased by $2.0 million due to a $355.3 million, or 9.5% increase in average interest earning assets. The increase was comprised of a $189.7 million, or 19.4% increase in average investment securities, a $188.8 million, or 6.9% increase in average loans, offset by a $23.8 million decline in federal funds sold. The increase in average interest earning assets was partially offset by a 41 basis point decline in their yield to 5.24%. Interest expense declined by $4.2 million due to a 45 basis point decline in the cost of interest bearing liabilities, which was partially offset by a $319.2 million increase in average interest bearing liabilities. The increase in average interest earning assets and average interest bearing liabilities is primarily due to our continued internal growth, as well as the acquisition of First SecurityFed in the second quarter of 2004. The net interest margin expressed on a fully tax equivalent basis decreased 4 basis points to 3.72% in the first six months of 2004 from 3.76% in the first six months of 2003, as there was a higher percentage of interest bearing liabilities to interest earning assets in the 2004 period.

Volume and Rate Analysis of Net Interest Income

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

	Three Months Ended June 30, 2004 Compared to June 30, 2003									Six Months Ended June 30, 2004 Compared to June 30, 2003
	Change Due to Volume			Change Due to Rate			Total Change			Change Due to Volume			Change Due to Rate			Total Change

Interest Earning Assets:
Loans	$	2,936		$	(3,136	)	$	(200	)	$	5,686		$	(8,219	)	$	(2,533	)
Loans exempt from federal income taxes (1)	(10		)	3			(7		)	(19		)	(2		)	(21		)
Taxable investment securities	1,322			(159		)	1,163			2,258			(36		)	2,222
Investment securities exempt from federal
Income taxes (1)	1,117			170			1,287			2,396			32			2,428
Federal funds sold	(52		)	(18		)	(70		)	(113		)	(29		)	(142		)
Other interest bearing deposits	1			(4		)	(3		)	3			(4		)	(1		)
Total increase in interest income	5,314			(3,144		)	2,170			10,211			(8,258		)	1,953

Interest Bearing Liabilities:
NOW and money market deposit accounts	67			(651		)	(584		)	233			(1,165		)	(932		)
Savings deposits	29			(247		)	(218		)	76			(564		)	(488		)
Time deposits	389			(1,466		)	(1,077		)	563			(3,936		)	(3,373		)
Short-term borrowings	677			(239		)	438			1,317			(523		)	794
Long-term borrowings and junior subordinated notes	416			(325		)	91			257			(445		)	(188		)
Total increase in interest expense	1,578			(2,928		)	(1,350		)	2,446			(6,633		)	(4,187		)
Increase (decrease) in net interest income	$	3,736		$	(216	)	$	3,520		$	7,765		$	(1,625	)	$	6,140

(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 $640.6 million or 14.7% to $5.0 billion at June 30, 2004 from $4.4 billion at December 31, 2003. Net loans increased by $362.8 million, or 13.0% to $3.1 billion at June 30, 2004 (See “Loan Portfolio” section below). Investment securities available for sale increased by $174.2 million, or 15.7% to $1.3 billion at June 30, 2004. The above increases were primarily due to continued internal growth and our acquisition of First SecurityFed, which had total assets, net loans and investment securities available for sale of $566.9 million, $295.8 million and $162.1 million, respectively, at the May 28, 2004 acquisition date.

Total liabilities increased by $566.2 million, or 14.2% to $4.5 billion at June 30, 2004 from $4.0 billion at December 31, 2003. Total deposits grew by $326.8 million, or 9.5% to $3.8 billion at June 30, 2004, primarily due to our acquisition of First SecurityFed, which had total deposits of $319.9 million at the date of acquisition. Short-term borrowings increased by $139.4 million, or 35.6% due to a $71.3 million increase in short-term Federal Home Loan Bank advances ($16.4 million assumed from First SecurityFed), and increases in securities sold under agreement to repurchase, correspondent bank line of credit and federal funds purchased of $26.6 million, $26.0 million and $15.5 million, respectively. Long-term borrowings increased by $104.1 million primarily due to a $102.2 million increase in long-term Federal Home Loan Bank advances, of which $77.5 million were assumed in the First SecurityFed acquisition.

Total stockholders’ equity increased $74.4 million, or 19.8% to $449.9 million at June 30, 2004 compared to $375.5 million at December 31, 2003. Additional paid-in capital increased by $66.2 million due to shares issued in conjunction with the First SecurityFed acquisition. Retained earnings increased by $23.6 million due to net income of $30.1 million partially offset by $6.5 million, or $0.24 per share, in cash dividends. The above increases were offset by a $11.9 million decline in other comprehensive income and a $3.3 million increase in treasury stock.

Loan Portfolio

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

	June 30, 2004					December 31, 2003					June 30, 2003
	Amount			% of Total		Amount			% of Total		Amount			% of Total

Commercial	$	675,442		21	%	$	647,365		23	%	$	616,558		23	%
Commercial loans collateralized by assignment of lease payments	243,706			8	%	234,724			8	%	258,330			9	%
Commercial real estate	1,218,256			38	%	1,090,498			39	%	1,017,469			37	%
Residential real estate	502,971			16	%	361,110			13	%	372,175			14	%
Construction real estate	332,598			10	%	268,523			9	%	239,807			9	%
Installment and other	220,266			7	%	223,574			8	%	224,601			8	%
Gross loans (1)	3,193,239			100	%	2,825,794			100	%	2,728,940			100	%
Allowance for loan losses	(44,236		)			(39,572		)			(37,599		)
Net loans	$	3,149,003				$	2,786,222				$	2,691,341

(1) Gross loan balances at June 30, 2004, December 31, 2003, and June 30, 2003 are net of unearned income, including net deferred loan fees of $6.0 million, $4.2 million, and $4.3 million, respectively.

Net loans increased by $362.8 million, or 13.0%, from $2.8 billion at December 31, 2003 to $3.1 billion at June 30, 2004. Residential real estate, commercial real estate, construction real estate, commercial and commercial loans collateralized by assignment of lease payments grew by $141.9 million, $127.8 million, $64.1 million, $28.1 million and $9.0 million, respectively, while, installment and other loans decreased by $3.3 million. The increases were primarily due to our acquisition of First SecurityFed, which had net loans of $295.8 million at the acquisition date and growth in both existing customer and new customer loan demand resulting primarily from the Company’s continued focus on marketing and new business development.

Net loans increased by $457.7 million, or 17.0% to $3.1 billion at June 30, 2004 from $2.7 billion at June 30, 2003. The increase was primarily due to our acquisition of First SecurityFed, which had net loans of $295.8 million at the acquisition date and growth in both existing customer and new customer loan demand resulting primarily from the Company’s 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):

	June 30, 2004			December 31, 2003			June 30, 2003
Non-performing loans:
Non-accrual loans (1)	$	25,688		$	20,795		$	20,860
Loans 90 days or more past due, still accruing interest	3,189			317			713
Total non-performing loans	28,877			21,112			21,573

Other real estate owned	—			472			609
Other repossessed assets	—			—			21
Total non-performing assets	$	28,877		$	21,584		$	22,203

Total non-performing loans to total loans	0.90		%	0.75		%	0.79		%
Allowance for loan losses to non-performing loans	153.19		%	187.44		%	174.29		%
Total non-performing assets to total assets	0.58		%	0.50		%	0.52		%

(1) Includes restructured loans totaling $589 thousand and $667 thousand at June 30, 2004 and December 31, 2003, respectively. There were no restructured loans at June 30, 2003.

Total non-performing assets were $28.9 million, $21.6 million, and $22.2 million as of June 30, 2004, December 31, 2003, and June 30, 2003, respectively. The increases from December 31, 2003 to June 30, 2004 and from June 30, 2003 to June 30, 2004 were primarily due to $3.0 million of non-accrual loans and $3.0 million of loans 90 days or more past due, still accruing interest at First Security Federal Savings Bank.

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. Estimated loan default factors, on one through five risk rated loans, 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 six and eight are monitored more closely by the officers and Senior Credit Management, and may result in specific reserves. Control of our loan quality is continually monitored by management and is reviewed by our bank subsidiaries boards 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 the Company’s allowance for loan losses follows (dollar amounts in thousands):

	Three Months Ended June 30,						Six Months Ended June 30,
	2004			2003			2004			2003

Balance at beginning of period	$	40,298		$	38,973		$	39,572		$	33,890
Additions from acquisition	4,052			—			4,052			3,563
Allowance related to bank subsidiary sold	—			(528		)	—			(528		)
Provision for loan losses	1,800			2,078			3,800			4,814
Charge-offs	(2,366		)	(3,279		)	(4,076		)	(5,901		)
Recoveries	452			355			888			1,761
Balance at June 30,	$	44,236		$	37,599		$	44,236		$	37,599

Total loans at June 30,	$	3,193,239		$	2,728,940		$	3,193,239		$	2,728,940

Ratio of allowance for loan losses to total loans	1.39		%	1.38		%	1.39		%	1.38		%

The Company maintains its 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, prior loss experience and the value of underlying collateral.

Net charge-offs decreased by $1.0 million in the quarter ended June 30, 2004 compared to the quarter ended June 30, 2003. Charge-offs declined by $913 thousand as the 2003 second quarter included charge-offs of two commercial real estate loans totaling $1.6 million. The provision for loan losses declined by $278 thousand to $1.8 million in the quarter ended June 30, 2004 from $2.1 million in the quarter ended June 30, 2003 based on the results of our quarterly analysis of the loan portfolio as of June 30, 2004, and a decline in charge-offs.

Net charge-offs decreased by $952 thousand in the six months ended June 30, 2004 compared to the six months ended June 30, 2003. Charge-offs declined by $1.8 million as the 2003 period included charge-offs of three commercial real estate loans and one construction real estate loan totaling $2.0 million and $640 thousand, respectively. The provision for loan losses declined by $1.0 million to $3.8 million in the six months ended June 30, 2004 from $4.8 million in the six months ended June 30, 2003 based on the results of our quarterly analysis of the loan portfolio as of June 30, 2004, and lower charge-offs.

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):

	June 30, 2004				December 31, 2003				June 30, 2003
	Amount		% of Total		Amount		% of Total		Amount		% of Total

Commercial	$	10,711	21	%	$	10,327	23	%	$	10,096	23	%
Commercial loans collateralized by assignment of lease payments	2,845		8	%	4,301		8	%	1,692		9	%
Commercial real estate	9,595		38	%	7,327		39	%	10,625		37	%
Residential real estate	2,819		16	%	1,625		13	%	779		14	%
Construction real estate	4,988		10	%	2,655		9	%	2,296		9	%
Installment and other	4,102		7	%	4,896		8	%	4,905		8	%
Unallocated	9,176		—		8,441		—		7,206		—
Total allowance for loan losses	$	44,236	100	%	$	39,572	100	%	$	37,599	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 areas. 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.

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 deserve management's close attention 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 of their examination.

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 rated substandard or doubtful included on the watch list presented to our bank subsidiaries 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 potential problems loans carry a higher probability of default. The aggregate principal amounts of potential problem loans as of June 30, 2004, December 31, 2003 and June 30, 2003 were approximately $44.2 million, $24.8 million and $30.5 million, respectively. Potential problem loans increased $19.4 million from December 31, 2003 primarily due to one $8.9 million commercial real estate loan relationship classified as substandard. Potential problem loans increased $13.7 million from June 30, 2003 primarily due to the aforementioned substandard loan relationship.

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):

	June 30, 2004			December 31, 2003			June 30, 2003

Direct finance leases:
Minimum lease payments	$	30,477		$	29,281		$	22,510
Estimated unguaranteed residual values	3,122			2,852			2,425
Less: unearned income	(3,129		)	(3,248		)	(3,059		)
Direct finance leases (1)	$	30,470		$	28,885		$	21,876

Leveraged leases:
Minimum lease payments	$	35,870		$	28,835		$	29,816
Estimated unguaranteed residual values	2,931			2,720			3,186
Less: unearned income	(2,760		)	(2,222		)	(2,527		)
Less: related non-recourse debt	(33,756		)	(27,073		)	(27,302		)
Leveraged leases (1)	$	2,285		$	2,260		$	3,173

Operating leases:
Equipment, at cost	$	121,101		$	128,416		$	102,402
Less accumulated depreciation	(55,970		)	(54,976		)	(38,696		)
Lease investments, net	$	65,131		$	73,440		$	63,706

(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.

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 $17.6 million at June 30, 2004, $19.1 million at December 31, 2003 and $18.8 million at June 30, 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 1,349 leases at June 30, 2004 compared to 1,416 at December 31, 2003 and 1,463 at June 30, 2003. The average residual value per lease was approximately $19 thousand at June 30, 2004, $19 thousand at December 31, 2003 and $17 thousand at June 30, 2003.

At June 30, 2004, the following reflects the residual values for leases by category in the year the initial lease term ends (in thousands):

	Residual Values
End of initial lease term December 31,	Direct Finance Leases		Leveraged Leases		Operating Leases		Total
2004	$	408	$	459	$	4,478	$	5,345
2005	349		605		4,572		5,526
2006	855		731		6,188		7,774
2007	1,015		774		3,270		5,059
2008	456		212		1,378		2,046
2009	39		150		519		708
	$	3,122	$	2,931	$	20,405	$	26,458

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 June 30, 2004				At December 31, 2003				At June 30, 2003
	Amortized Cost		Fair Value		Amortized Cost		Fair Value		Amortized Cost		Fair Value

U.S. Treasury securities	$	22,378	$	23,088	$	22,157	$	23,435	$	22,408	$	24,314
U.S. Government agencies	320,702		323,842		233,472		243,402		264,017		280,129
States and political subdivisions	235,076		231,700		177,731		180,092		153,717		159,051
Mortgage-backed securities	601,127		591,199		574,456		570,140		561,688		563,808
Corporate bonds	37,875		39,194		44,074		45,074		50,165		50,945
Equity securities	74,842		74,967		47,004		47,632		46,136		46,399
Debt securities issued by foreign governments	550		550		560		560		660		660
Investments in equity lines of credit trusts	1,764		1,764		1,775		1,775		1,787		1,787
Total	$	1,294,314	$	1,286,304	$	1,101,229	$	1,112,110	$	1,100,578	$	1,127,093

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 $31.8 million for the six months ended June 30, 2004 and $39.8 million for the six months ended June 30, 2003. Net cash used in investing activities increased $22.4 million to $151.1 million in the six months ended June 30, 2004 from $128.7 million in the comparable period in 2003. The $22.4 million increase in cash used was primarily due to a $51.8 million increase in net loans, offset by a $22.2 million decline in proceeds from sale of subsidiary bank, net of cash retained by bank. Net cash provided by financing activities increased by $49.4 million to $142.3 million for the six months ended June 30, 2004 from $92.9 million for the six months ended June 30, 2003, due primarily to a $34.7 million increase in net proceeds from long-term borrowings and an increase of $20.0 million in deposits.

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 June 30, 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 June 30, 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	$	1,828,480	$	1,277,126	$	415,090	$	134,172	$	2,092
Long-term debt	125,603		10,913		72,657		28,542		13,491
Junior subordinated notes issued to capital trusts	87,443		—		—		—		87,443
Operating leases	99,210		2,431		4,432		3,446		88,901
Total	$	2,140,736	$	1,290,470	$	492,179	$	166,160	$	191,927
Commitments to extend credit	$	954,434

At June 30, 2004 and December 31, 2003, our total risk-based capital ratio was 12.61% and 12.86%, Tier 1 capital to risk-weighted assets ratio was 11.36% and 11.64%, and Tier 1 capital to average asset ratio was 8.98% and 8.97%, respectively. As of June 30, 2004, we and each of our subsidiary banks were “well capitalized” under the capital adequacy requirements to which each of us are subject.

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 recently completed 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.

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.

The following table sets forth the amounts of interest earning assets and interest bearing liabilities outstanding at June 30, 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 June 30, 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	$	11,965		$	—		$	—		$	—		$	11,965
Federal funds sold	800			—			—			—			800
Investment securities available for sale	123,907			130,534			712,260			319,603			1,286,304
Loans held for sale	816			—			—			—			816
Loans	1,903,263			409,918			822,856			57,202			3,193,239
Total interest earning assets	$	2,040,751		$	540,452		$	1,535,116		$	376,805		$	4,493,124

Interest Bearing Liabilities:
NOW and money market deposit accounts	$	402,010		$	45,873		$	278,584		$	—		$	726,467
Savings deposits	133,809			66,905			356,824			—			557,538
Time deposits	555,172			782,541			488,563			2,204			1,828,480
Short-term borrowings	476,962			54,006			—			—			530,968
Long-term borrowings	2,728			8,185			101,199			13,491			125,603
Junior subordinated notes issued to capital trusts	25,774			—			—			61,669			87,443
Total interest bearing liabilities	$	1,596,455		$	957,510		$	1,225,170		$	77,364		$	3,856,499

Rate sensitive assets (RSA)	$	2,040,751		$	2,581,203		$	4,116,319		$	4,493,124		$	4,493,124
Rate sensitive liabilities (RSL)	1,596,455			2,553,965			3,779,135			3,856,499			3,856,499
Cumulative GAP (GAP=RSA-RSL)	444,296			27,238			337,184			636,625			636,625
RSA/Total assets	40.85		%	51.67		%	82.40		%	89.94		%	89.94		%
RSL/Total assets	31.96		%	51.12		%	75.65		%	77.20		%	77.20		%
GAP/Total assets	8.89		%	0.55		%	6.75		%	12.74		%	12.74		%
GAP/RSA	21.77		%	1.06		%	8.19		%	14.17		%	14.17		%

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.

Based on simulation modeling at June 30, 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):

		Change in Net Interest Income Over One Year Horizon
Changes in		At June 30, 2004					At December 31, 2003
Levels of Interest Rates		Dollar Change			Percentage Change		Dollar Change			Percentage Change

+ 2.00	%	$	8,150		4.84	%	$	13,481		8.78	%
+ 1.00		4,670			2.78		8,161			5.31
(1.00	)	(6,415		)	(3.81	)	(11,853		)	(7.72	)

Our simulations assume the following:

1. Changes in interest rates are immediate.

2. Changes in net interest income between June 30, 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 June 30, 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 June 30, 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 June 30, 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.

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 six months ended June 30, 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
Apr 1, 2004 - Apr 30, 2004	—	—		—	392,700
May 1, 2004 - May 31, 2004	—	—		—	392,700
Jun 1, 2004 - Jun 30, 2004	150,000	34.62		150,000	242,700
Total	150,000	$	34.62	150,000

(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 furnished Current Reports on Form 8-K on April 21, 2004 reporting under Item 12 the press release for our 2004 first quarter earnings, on June 1, 2004 reporting under Item 9 material prepared for presentation at an industry conference, and on June 7, 2004 reporting under Item 9 the completion of our merger with First SecurityFed.

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 6th day of August 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)

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))

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 June 30, 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.