MB FINANCIAL INC /MD - 10-Q Quarterly Report

MB FINANCIAL, INC. & SUBSIDIARIES

March 31, 2005 and December 31, 2004

(Amounts in thousands, except common share data)

(Unaudited)

	March 31,					December 31,
	2005					2004
ASSETS
Cash and due from banks	$			82,493		$			88,231
Interest bearing deposits with banks	12,491					17,206
Investment securities available for sale	1,414,468					1,391,444
Loans held for sale	368					372
Loans (net of allowance for loan losses of $43,820 at March 31, 2005 and $44,266 at December 31, 2004)	3,377,894					3,301,291
Lease investments, net	61,203					69,351
Premises and equipment, net	121,346					113,590
Cash surrender value of life insurance	87,258					86,304
Goodwill, net	123,628					123,628
Other intangibles, net	13,320					13,587
Other assets	53,605					48,971

Total assets	$	5,348,074				$				5,253,975

LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities
Deposits:
Noninterest bearing	$	645,105				$		673,752
Interest bearing	3,354,214					3,288,260
Total deposits	3,999,319					3,962,012
Short-term borrowings	653,262					571,155
Long-term borrowings	81,958					91,093
Junior subordinated notes issued to capital trusts	87,443					87,443
Accrued expenses and other liabilities	57,178					60,606
Total liabilities	4,879,160					4,772,309

Stockholders’ Equity
Common stock, ($0.01 par value; authorized 40,000,000 shares; issued 28,883,404 shares at March 31, 2005 and 28,867,963 at December 31, 2004)	289					289
Additional paid-in capital	136,346					137,879
Retained earnings	360,896					347,450
Unearned compensation	(1,533				)	(1,068					)
Accumulated other comprehensive income (loss)	(5,382				)	4,421
Less: 548,087 and 201,429 shares of treasury stock, at cost, at March 31, 2005 and December 31, 2004, respectively	(21,702				)	(7,305					)
Total stockholders’ equity	468,914					481,666

Total liabilities and stockholders’ equity	$		5,348,074			$	5,253,975

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 March 31,
	2005			2004
Interest income:
Loans	$		51,415	$	39,194
Investment securities available for sale:
Taxable	12,039			10,204
Nontaxable	2,422			1,685
Federal funds sold	1			16
Other interest bearing accounts	82			18
Total interest income	65,959			51,117

Interest expense:
Deposits	16,245			11,942
Short-term borrowings	3,671			1,274
Long-term borrowings and junior subordinated notes	2,358			1,860
Total interest expense	22,274			15,076
Net interest income	43,685			36,041

Provision for loan losses	2,400			2,000

Net interest income after provision for loan losses	41,285			34,041

Other income:
Loan service fees	1,156			1,065
Deposit service fees	4,672			4,295
Lease financing, net	3,605			3,948
Trust, asset management and brokerage fees	3,502			3,862
Net gain on sale of investment securities available for sale	61			691
Increase in cash surrender value of life insurance	953			899
Other operating income	1,271			1,506
	15,220			16,266
Other expense:
Salaries and employee benefits	17,831			16,123
Occupancy and equipment expense	5,305			4,461
Computer services expense	1,233			1,072
Advertising and marketing expense	719			1,193
Professional and legal expense	691			716
Brokerage fee expense	999			1,211
Telecommunication expense	675			669
Other intangibles amortization expense	267			290
Other operating expenses	3,858			3,613
	31,578			29,348

Income before income taxes	24,927			20,959

Income taxes	7,750			6,371
Net Income	$	17,177		$		14,588

Common share data:
Basic earnings per common share	$	0.60		$		0.55
Diluted earnings per common share	$	0.59		$		0.53
Weighted average common shares outstanding	28,538,032			26,766,696
Diluted weighted average common shares outstanding	29,275,210			27,502,434

See Accompanying Notes to Consolidated Financial Statements.

MB FINANCIAL, INC. & SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in thousands)

(Unaudited)

	Three Months Ended March 31,
	2005			2004
Cash Flows From Operating Activities:
Net income	$	17,177		$	14,588
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation	8,375			8,103
Amortization of restricted stock awards	119			71
Gain on sales of premises and equipment and leased equipment	(97		)	(219		)
Amortization of other intangibles	267			290
Provision for loan losses	2,400			2,000
Deferred income tax benefit	(22		)	(1,229		)
Amortization of premiums and discounts on investment securities, net	3,466			3,263
Net gain on sale of investment securities available for sale	(61		)	(691		)
Proceeds from sale of loans held for sale	2,229			7,368
Origination of loans held for sale	(2,166		)	(4,118		)
Net gains on sale of loans held for sale	(59		)	(101		)
Increase in cash surrender value of life insurance	(953		)	(899		)
Interest only securities accretion	—			(56		)
Deferred gain amortization on interest only securities pool termination	(431		)	(148		)
Increase in other assets	(1,833		)	(3,750		)
Decrease in other liabilities, net	(4,347		)	(7,236		)
Net cash provided by operating activities	24,064			17,236

Cash Flows From Investing Activities:
Proceeds from sales of investment securities available for sale	14,498			18,393
Proceeds from maturities and calls of investment securities available for sale	48,034			41,841
Purchase of investment securities available for sale	(104,043		)	(104,004		)
Net increase in loans	(79,003		)	(50,288		)
Purchases of premises and equipment and leased equipment	(8,578		)	(5,597		)
Proceeds from sales of premises and equipment and leased equipment	1,443			1,361
Principal paid on lease investments	(751		)	(676		)
Proceeds received from interest only receivables	—			231
Net cash used in investing activities	(128,400		)	(98,739		)

Cash Flows From Financing Activities:
Net increase in deposits	37,307			19,004
Net increase in short-term borrowings	82,107			20,724
Proceeds from long-term borrowings	769			34,520
Principal paid on long-term borrowings	(9,904		)	(9,604		)
Treasury stock transactions, net	(14,397		)	419
Stock options exercised	1,731			89
Dividends paid on common stock	(3,730		)	(3,214		)
Net cash provided by financing activities	93,883			61,938

Net decrease in cash and cash equivalents	$	(10,453	)	$	(19,565	)

Cash and cash equivalents:
Beginning of period	105,437			97,930

End of period	$	94,984		$	78,365

Supplemental Disclosures of Cash Flow Information:

Cash payments for:
Interest paid to depositors and other borrowed funds	22,520			15,410
Income tax (refunds) paid, net	(126		)	851

Supplemental Schedule of Noncash Investing Activities:

Loans transferred to other real estate owned	342			63

See Accompanying Notes to Consolidated Financial Statements.

NOTE 3. COMPREHENSIVE INCOME

Comprehensive income 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 for the periods indicated (in thousands):

	Three Months Ended March 31,
	2005			2004
Net income	$	17,177		$	14,588
Unrealized holding gains (losses) on investment securities, net of tax	(9,763		)	5,875
Unrealized interest only securities gains arising during the year, net of tax	—			180
Reclassification adjustments for gains included in net income, net of tax	(40		)	(449		)
Other comprehensive income (loss), net of tax	(9,803		)	5,606
Comprehensive income	$	7,374		$	20,194

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 March 31,
	2005		2004
Basic:
Net income	$	17,177	$	14,588
Average shares outstanding	28,538,032		26,766,696
Basic earnings per share	$	0.60	$	0.55
Diluted:
Net income	$	17,177	$	14,588
Average shares outstanding	28,538,032		26,766,696
Net effect of dilutive stock options (1)	737,178		735,738
Total	29,275,210		$	27,502,434
Diluted earnings per share	$	0.59	$	0.53

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

NOTE 5. GOODWILL AND INTANGIBLES

Goodwill is subject to at least annual assessments for impairment by applying a fair-value based test. An acquired intangible asset must be separately recognized if the benefit of the intangible asset is obtained through contractual or other legal rights, or if the asset can be sold, transferred, licensed, rented or exchanged, regardless of the acquirer’s intent to do so. No impairment losses on goodwill or other intangibles were incurred in the three months ended March 31, 2005 or the year ended December 31, 2004.

The following table presents the changes in the carrying amount of goodwill during the three months ended March 31, 2005 and the year ended December 31, 2004 (in thousands):

	March 31,		December 31,
	2005		2004
Balance at beginning of period	$	123,628	$	70,293
Goodwill from business combinations	—		53,335
Balance at end of period	$	123,628	$	123,628

The Company has other intangible assets consisting of core deposit intangibles that have a weighted average original 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 three months ended March 31, 2005 and the year ended December 31, 2004 (in thousands):

	March 31,			December 31,
	2005			2004
Balance at beginning of period	$	13,587		$	7,560
Amortization expense	(267		)	(1,015		)
Other intangibles from business combinations	—			7,042
Balance at end of period	$	13,320		$	13,587

Gross carrying amount	$	29,261		$	29,261
Accumulated amortization	(15,941		)	(15,674		)
Net book value	$	13,320		$	13,587

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

	Amount
Year ending December 31,
2005	$	726
2006	939
2007	749
2008	945
2009	1,181
Thereafter	8,780
	$	13,320

NOTE 6. RECENT ACCOUNTING PRONOUNCEMENTS

In September 2004, the FASB issued FASB Staff Position (FSP) Emerging Issues Task Force (EITF) Issue No. 03-1-1 delaying the effective date of paragraphs 10-20 of EITF 03-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments, which provides guidance for determining the meaning of “other-than-temporarily impaired” and its application to certain debt and equity securities within the scope of SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities, and investments accounted for under the cost method. The guidance requires that investments which have declined in value due to credit concerns or solely due to changes in interest rates must be recorded as other-than-temporarily impaired unless the Company can assert and demonstrate its intention to hold the security for a period of time sufficient to allow for a recovery of fair value up to or beyond the cost of the investment which might mean maturity. The delay of the effective date of EITF 03-1 will be superseded concurrent with the final issuance of proposed FSP Issue 03-1-a. Proposed FSP Issue 03-1-a is intended to provide implementation guidance with respect to all securities analyzed for impairment under paragraphs 10-20 of EITF 03-1. Management continues to closely monitor and evaluate how the provisions of EITF 03-1 and proposed FSP Issue 03-1-a will affect the Company.

In December 2004, the FASB issued SFAS No. 123R, Share-Based Payment, which is an Amendment of FASB Statement Nos. 123 and 95. SFAS No. 123R changes, among other things, the manner in which share-based compensation, such as stock options, will be accounted for by both public and non-public companies. For public companies, the cost of employee services received in exchange for equity instruments including options and restricted stock awards generally will be measured at fair value at the grant date. The grant date fair value will be estimated using option-pricing models adjusted for the unique characteristics of those options and instruments, unless observable market prices for the same or similar options are available. The cost will be recognized over the requisite service period, often the vesting period, and will be remeasured at each reporting date through settlement date.

The changes in accounting will replace existing requirements under SFAS No. 123, Accounting for Stock-Based Compensation, and will eliminate the ability to account for share-based compensation transactions using APB Opinion No. 25, Accounting for Stock Issued to Employees, which does not require companies to expense options if the exercise price is equal to the trading price at the date of grant. The accounting for similar transactions involving parties other than employees or the accounting for employee stock ownership plans that are subject to AICPA Statement of Position 93-6, Employers’ Accounting for Employee Stock Ownership Plans, would remain unchanged. See Note 7 below for the Company’s current application of SFAS No. 123.

On April 14, 2005, the Securities and Exchange Commission (SEC) announced the adoption of a new rule that amends the compliance dates for SFAS No. 123R. Under SFAS No. 123R, the Company would have been required to implement the standard as of the beginning of the first interim period that begins after June 15, 2005. The SEC’s new rule allows companies to implement SFAS No. 123R at the beginning of their next fiscal year, instead of the next reporting period, that begins after June 15, 2005. The SEC’s new rule does not change the accounting required by SFAS No. 123R; it changes only the dates for compliance with the standard.

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

As currently 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, except with respect to restricted stock awards. Had compensation cost been determined for stock option grants 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 in the table below (in thousands, except for common share data):

	Three Months Ended March 31,
	2005			2004
Net income, as reported	$	17,177		$	14,588
Add: Stock-based employee compensation expense included in reported net income, net of related tax effects (1)	159			78
Less: Total stock-based compensation expense determined under fair value based methods for all awards, net of related tax effects	(496		)	(348		)
Net income, as adjusted	$	16,840		$	14,318

Basic earnings per share, as reported	$	0.60		$	0.55
Add: Stock-based employee compensation expense included in reported net income, net of related tax effects (1)	0.01			—
Less: Total stock-based compensation expense determined under fair value based methods for all awards, net of related tax effects	(0.02		)	(0.02		)
Basic earnings per share, as adjusted	$	0.59		$	0.53

Diluted earnings per share, as reported	$	0.59		$	0.53
Add: Stock-based employee compensation expense included in reported net income, net of related tax effects (1)	0.01			—
Less: Total stock-based compensation expense determined under fair value based methods for all awards, net of related tax effects	(0.02		)	(0.01		)
Diluted earnings per share, as adjusted	$	0.58		$	0.52

(1) Represents amortized compensation expense for restricted shares, net of tax.

NOTE 8. SHORT-TERM BORROWINGS

Short-term borrowings are summarized as follows as of March 31, 2005 and December 31, 2004 (dollars in thousands):

	March 31,				December 31,
	2005				2004
	Weighted Average Interest Rate		Amount		Weighted Average Interest Rate		Amount
Federal funds purchased	3.04	%	$	18,000	—	%	$		—
Securities sold under agreements to repurchase:
Customer repurchase agreements	1.64		173,846		1.35		161,561
Company repurchase agreements	2.84		208,674		2.39		172,375
Federal Home Loan Bank advances	2.77		242,742		2.20		237,219
Correspondent bank line of credit of $26.0 million	4.23		10,000		—		—

	2.53	%	$	653,262	2.02	%	$	571,155

Securities sold under agreements to repurchase are agreements in which the Company acquires funds by selling securities or investment grade lease loans to another party under a simultaneous agreement to repurchase the same securities or lease loans 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 $382.5 million and $333.9 million at March 31, 2005 and December 31, 2004, respectively.

The Company had Federal Home Loan Bank advances with maturity dates less than one year consisting of $222.7 million in fixed rate advances and a $20.0 million overnight advance at March 31, 2005, and $217.2 million in fixed rate advances and a $20.0 million overnight advance at December 31, 2004. At March 31, 2005, fixed rate advances had effective interest rates, net of premiums, ranging from 1.43% to 3.27% and are subject to a prepayment fee. The $20.0 million overnight advance has a variable interest rate that reprices daily based on Federal Home Loan Bank’s open line rate. At March 31, 2005, the advances had maturities ranging from April 2005 to March 2006.

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 March 31, 2005. The correspondent bank line of credit, which is used for short-term liquidity purposes, is secured by the stock of MB Financial Bank, and its terms are renewed annually. As of March 31, 2005, $10 million was outstanding on the correspondent bank line of credit. Subsequent to March 31, 2005, $4.0 million was paid on the correspondent bank line of credit, reducing the balance outstanding to $6.0 million. As of December 31, 2004, no balance was outstanding on the correspondent bank line of credit.

NOTE 9. LONG TERM BORROWINGS

The Company had Federal Home Loan Bank advances with maturities greater than one year of $69.3 million and $76.6 million at March 31, 2005 and December 31, 2004, respectively. As of March 31, 2005, the advances had fixed terms with effective interest rates, net of premiums, ranging from 2.11% to 5.34%.

The Company had notes payable to banks totaling $12.7 million and $14.5 million at March 31, 2005 and December 31, 2004, respectively, which as of March 31, 2005, were accruing interest at rates ranging from 3.90% to 9.50%. Lease investments includes equipment with an amortized cost of $16.1 million and $18.0 million at March 31, 2005 and December 31, 2004, 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,
2005	$	7,439
2006	23,264
2007	17,395
2008	19,084
2009	698
Thereafter	14,078
	$	81,958

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 March 31, 2005 and December 31, 2004 (in thousands):

	MB Financial Capital Trust I		Coal City Capital Trust I
Junior Subordinated Notes:
Principal balance	$61,669		$25,774
Annual interest rate	8.60	%	3-mo LIBOR + 1.80	%
Stated maturity date	September 30, 2032		September 1, 2028
Call date	September 30, 2007		September 1, 2008

Trust Preferred Securities:
Face value	$59,800		$25,000
Annual distribution 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.

In March 2005, the Board of Governors of the Federal Reserve System issued a final rule allowing bank holding companies to continue to include qualifying trust preferred securities in their Tier 1 Capital for regulatory capital purposes, subject to a 25% limitation to all core (Tier I) capital elements, net of goodwill less any associated deferred tax liability. The final rule provides a five-year transition period, ending March 31, 2009, for application of the aforementioned quantitative limitation. As of March 31, 2005, 100% of the trust preferred securities noted in the table above qualified as Tier I capital under the final rule adopted in March 2005.

NOTE 11. DERIVATIVE FINANCIAL INSTRUMENTS

The Company uses interest rate swaps to hedge its interest rate risk. The Company had fair value commercial loan interest rate swaps and fair value brokered deposit interest rate swaps with aggregate notional amounts of $28.9 million and $155.0 million, respectively, at March 31, 2005. 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 receivable (payable) for the three months ended March 31, 2005 and 2004 was approximately $742 thousand and $(42) thousand, respectively. The Company’s credit exposure on interest rate swaps is limited to the Company’s net favorable value and interest payments of all swaps to each counterparty. In such cases collateral is required from the counterparties involved if the net value of the swaps exceeds a nominal amount. At March 31, 2005, the Company’s credit exposure relating to interest rate swaps was not significant.

The Company’s derivative financial instruments are summarized below as of March 31, 2005 and December 31, 2004 (dollars in thousands):

	March 31, 2005										December 31, 2004
						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)	$	28,864	$	674		5.8	4.82	%	5.63	%	$	28,965	$	108
Pay variable/receive fixed swaps (2)	154,962		(2,054		)	6.4	4.51	%	2.84	%	75,000		(400		)

Non-hedging derivative instruments (3):
Pay fixed/receive variable swaps	4,959		138			7.0	5.09	%	6.61	%	3,541		102
Pay variable/receive fixed swaps	4,997		(139		)	7.0	6.59	%	5.07	%	3,541		(102		)
Total portfolio swaps	$	193,782	$	(1,381	)	6.4	4.62	%	3.41	%	$	111,047	$	(292	)

(1) Hedges fixed-rate commercial real estate loans

(2) Hedges fixed-rate callable brokered deposits

(3) 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 March 31, 2005 and December 31, 2004, the following financial instruments were outstanding whose contract amounts represent off-balance sheet credit risk (in thousands):

	Contract Amount
	March 31, 2005		December 31, 2004
Commitments to extend credit:
Home equity lines	$	180,168	$	178,758
Other commitments	815,360		790,159

Letters of credit:
Standby	73,056		71,427
Commercial	5,152		6,518

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.

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

Both standby and commercial letters of credit may be issued for any length of time, but normally do not exceed a period of five years. These letters of credit may also be extended or amended from time to time depending on the bank customer’s needs. As of March 31, 2005, the maximum remaining term for any standby letter of credit was December 31, 2008. A fee of up to two percent of face value may be charged to the bank customer and is recognized as income over the life of the letter of credit, unless considered non-rebatable under the terms of a letter of credit application.

At March 31, 2005, 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 $263 thousand to $78.2 million from $77.9 million at December 31, 2004. Of the $78.2 million in commitments outstanding at March 31, 2005, approximately $5.7 million of the letters of credit have been issued or renewed since December 31, 2004. The Company had a $476 thousand liability recorded as of March 31, 2005 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 pending proceedings would not be expected to have a material adverse effect on the Company’s consolidated financial statements.

As of March 31, 2005, the Company had approximately $4.4 million in capital expenditure commitments outstanding which relate to a new headquarters building in Chicago, Illinois. Cash paid to date for work completed on the project totaled approximately $9.9 million at March 31, 2005.

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

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 on the sale of investment securities available for sale, increase in cash surrender value of life insurance, and other operating income. Other expenses include salaries and employee benefits, occupancy and equipment expense, computer services expense, advertising and marketing expense, professional and legal expense, brokerage fee expense, telecommunication expense, other intangibles amortization expense, and other operating expenses.

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

Our net income was $17.2 million for the first quarter of 2005, compared to $14.6 million for the first quarter of 2004. Our 2005 first quarter results generated an annualized return on average assets of 1.31% and an annualized return on average equity of 14.48%, compared to 1.34% and 15.26%, respectively, for the same period in 2004. Fully diluted earnings per share for the first quarter of 2005 increased to $0.59 compared to $0.53 per share in the 2004 first quarter.

Compared to the first quarter of 2004, the first quarter of 2005 reflected an increase in net interest income, partially offset by a decline in net gains on sale of investment securities available for sale and an increase in salaries and employee benefits expense. Net interest income increased in the first quarter of 2005 due to a 20.3% increase in average interest earning assets resulting from our acquisition of First SecurityFed in the second quarter of 2004 and organic growth, as well as an 8 basis point increase in the net interest margin on a fully tax equivalent basis. Salaries and employee benefits expense increased due to the acquisition of First SecurityFed and organic growth.

We expect to see an increase in other expense, including salaries and employee benefits and marketing expense, during the second half of 2005 as we plan to expand retail branch services and business hours for our customers. These expanded services are expected to increase other expense by approximately $1.4 million, on a pre-tax basis, for the year-ended December 31, 2005. Offsetting part of this increase, telecommunication expense is expected to decline in the second half of 2005 as a result of final implementation of our new data and telecommunication systems.

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 adjustments be made to the allowance for loan losses, based on their judgments about information available to them at the time of their examination. We believe the allowance for loan losses is adequate and properly recorded in the financial statements. See “Allowance for Loan Losses” section below for further analysis.

Residual Value of Our Direct Finance, Leveraged, and Operating Leases. Lease residual value represents the estimated fair value of the leased equipment at the termination date of the lease. Realization of these residual values depends on many factors, including management’s use of estimates, assumptions, and judgment 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 quarterly basis, management reviews the lease residuals for potential impairment. If we fail to realize our aggregate recorded residual values, our financial condition and profitability could be adversely affected. At March 31, 2005, the aggregate residual value of the equipment leased under our direct finance, leveraged, and operating leases totaled $26.9 million. See Note 1 and Note 6 of the notes to our audited consolidated financial statements 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

First Quarter Results

Net income was $17.2 million for the first quarter of 2005, compared to $14.6 million for the first quarter of 2004. The results for the first quarter of 2005 generated an annualized return on average assets of 1.31% and an annualized return on average equity of 14.48%, compared to 1.34% and 15.26%, respectively, for the same period in 2004.

Net interest income was $43.7 million for the three months ended March 31, 2005, an increase of $7.6 million, or 21.2% from $36.0 million for the comparable period in 2004. Net interest income grew primarily due to an $811.8 million, or 20.3% increase in average interest earning assets. Approximately $384 million of the increase in average interest earning assets was due to our acquisition of First Security Federal Savings Bank (First SecurityFed) in the second quarter of 2004, with the remainder resulting from organic growth. The net interest margin, expressed on a fully tax equivalent basis, was 3.80% for the first quarter of 2005 and 3.72% for the first quarter of 2004.

Provision for loan losses was at $2.4 million in the first quarter of 2005 as compared to $2.0 million in first quarter of 2004. Net charge-offs were $2.8 million in the quarter ended March 31, 2005 compared to $1.3 million in the quarter ended March 31, 2004. See “Asset Quality” section below for further analysis of the allowance for loan losses.

Other income decreased $1.1 million, or 6.4% to $15.2 million for the quarter ended March 31, 2005 from $16.3 million for the first quarter of 2004. Net gain on sale of investment securities available for sale decreased by $630 thousand as net gains of $61 thousand were realized in the first quarter of 2005 compared to $691 thousand in the 2004 quarter. Investment security sales are periodically made as part of our ongoing strategy to maintain good long-term investment portfolio returns. Trust, asset management and brokerage fees declined by $360 thousand due to a $485 thousand decline in brokerage fees, partially offset by a $117 thousand increase in trust and asset management fees. Brokerage fees decreased primarily due to lower fixed annuity sales during the 2005 quarter as a result of rising short-term interest rates. Net lease financing declined by $343 thousand due to higher levels of income realized in the first quarter of 2004 on leased equipment in which we own a residual interest. Offsetting these decreases, deposit service fees increased by $377 thousand primarily due to increases in NSF and overdraft fees and monthly service charges of $295 thousand and $43 thousand, respectively. These increases were attributable to a 15.0% increase in average deposits in the first quarter of 2005 compared to the first quarter of 2004, primarily due to the First SecurityFed acquisition and organic growth.

Other expense increased by $2.3 million, or 7.6% to $31.6 million for the quarter ended March 31, 2005 from $29.3 million for the quarter ended March 31, 2004. Salaries and employee benefits, other operating expenses, and computer service expense increased by $1.7 million, $245 thousand and $161 thousand, respectively, due to the acquisition of First SecurityFed and organic growth. Occupancy and equipment expense increased by $844 thousand primarily due to a $520 thousand decline in building rental income, as well as a $347 thousand increase in depreciation expense. Rental income declined due to the departure of tenants at the MB Financial Center operations facility located in Rosemont, Illinois in anticipation of our occupancy of the space in the fourth quarter of 2004. Depreciation expense increased due to equipment purchased in the second half of 2004 and placed in service at MB Financial Center. The above were offset by declines in advertising and marketing expense and brokerage fee expense of $474 thousand and $212 thousand, respectively.

As noted in the “Overview” section above, we expect to see an increase in other expense, including salaries and employee benefits and marketing expense, during the second half of 2005 as we plan to expand retail branch services and business hours for our customers. These expanded services are expected to increase other expense by approximately $1.4 million, on a pre-tax basis, for the year-ended December 31, 2005. Offsetting part of this increase, telecommunication expense is expected to decline in the second half of 2005 as a result of final implementation of our new data and telecommunication systems.

Income tax expense for the three months ended March 31, 2005 increased $1.4 million to $7.8 million compared to $6.4 million for the same period in 2004. The effective tax rate was 31.1% and 30.4% for the quarter ended March 31, 2005 and 2004, respectively. The increase in the effective tax rate was primarily due to additional state income tax, net of federal benefit, in Oklahoma related to our Union Bank subsidiary for the first quarter of 2005 compared to the same period in 2004.

Net Interest Margin

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

	Three Months Ended March 31,
	2005						2004
	Average Balance		Interest		Yield/ Rate		Average Balance		Interest		Yield/ Rate
Interest Earning Assets:
Loans (1) (2)	$	3,383,028	$	51,384	6.16	%	$	2,843,613	$	39,160	5.54	%
Loans exempt from federal income taxes (3)	3,010		48		6.38		3,227		52		6.37
Taxable investment securities	1,137,527		12,039		4.23		948,677		10,204		4.30
Investment securities exempt from federal income taxes (3)	263,542		3,726		5.66		181,460		2,592		5.65
Federal funds sold	144		1		2.24		6,557		16		0.97
Other interest bearing deposits	16,163		82		2.06		8,118		18		0.89
Total interest earning assets	4,803,414		67,280		5.68		3,991,652		52,042		5.24
Non-interest earning assets	502,093						396,587
Total assets	$	5,305,507					$	4,388,239

Interest Bearing Liabilities:
Deposits:
NOW and money market deposit accounts	$	798,848	$	2,169	1.10	%	$	701,556	$	1,242	0.71	%
Savings deposits	527,628		804		0.62		457,926		605		0.53
Time deposits	1,962,517		13,272		2.74		1,690,533		10,095		2.40
Short-term borrowings	654,855		3,671		2.27		416,556		1,274		1.23
Long-term borrowings and junior subordinated notes	173,492		2,358		5.44		117,535		1,860		6.26
Total interest bearing liabilities	4,117,340		22,274		2.19		3,384,106		15,076		1.79
Non-interest bearing deposits	650,351						574,069
Other non-interest bearing liabilities	56,878						45,455
Stockholders’ equity	480,938						384,609
Total liabilities and stockholders’ equity	$	5,305,507					$	4,388,239
Net interest income/interest rate spread (4)			$	45,006	3.49	%			$	36,966	3.45	%
Taxable equivalent adjustment			1,321						925
Net interest income, as reported			$	43,685					$	36,041
Net interest margin on a fully tax equivalent basis (5)					3.80	%					3.72	%
Net interest margin (5)					3.69	%					3.63	%

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

(2) Interest income includes amortization of deferred loan origination fees of $1.7 million and $1.2 million for the three months ended March 31, 2005 and 2004, 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 $8.0 million, or 21.7% to $45.0 million for the three months ended March 31, 2005 from $37.0 million for the three months ended March 31, 2004. Tax-equivalent interest income increased by $15.2 million primarily due to an $811.8 million, or 20.3% increase in average interest earning assets. The increase was comprised of a $539.2 million, or 18.9% increase in average loans, a $270.9 million, or 24.0% increase in average investment securities, and an $8.1 million increase in average interest bearing deposits, offset by a $6.4 million decline in federal funds sold. Also contributing to the increase in tax equivalent interest income was a 44 basis point increase in yield on average interest earning assets to 5.68%, due to the increase in market interest rates. Interest expense increased by $7.2 million as average interest bearing liabilities increased by $733.2 million, while their cost increased by 40 basis points to 2.19% also due to the increase in market interest rates. Approximately $384 million of the increase in average interest earning assets and $399 million of the increase in average interest bearing liabilities was due to our acquisition of First SecurityFed in the second quarter of 2004, with the remainder resulting from organic growth.

The net interest margin expressed on a fully tax equivalent basis for the first quarter of 2005 decreased by 7 basis points from 3.87% in the fourth quarter of 2004 primarily due to an $827 thousand decline in amortization of net deferred loan fees.

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 March 31, 2005 Compared to March 31, 2004
	Change			Change
	Due to			Due to				Total
	Volume			Rate				Change
Interest Earning Assets:
Loans	$	7,683		$		4,541		$	12,224
Loans exempt from federal income taxes (1)	(4		)	—				(4			)
Taxable investment securities	1,918			(83			)	1,835
Investment securities exempt from federal Income taxes (1)	1,139			(5			)	1,134
Federal funds sold	(26		)	11				(15			)
Other interest bearing deposits	28			36				64
Total increase (decrease) in interest income	10,738			4,500				15,238

Interest Bearing Liabilities:
NOW and money market deposit accounts	188			739				927
Savings deposits	96			103				199
Time deposits	1,688			1,489				3,177
Short-term borrowings	965			1,432				2,397
Long-term borrowings and junior subordinated notes	774			(276			)	498
Total increase (decrease) in interest expense	3,711			3,487				7,198
Increase (decrease) in net interest income	$	7,027		$	1,013			$		8,040

(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 $94.1 million or 1.8% from December 31, 2004 to $5.3 billion at March 31, 2005. Net loans increased by $76.6 million, or 2.3% to $3.4 billion at March 31, 2005. In aggregate, commercial, commercial real estate and construction real estate loans grew by $104.1 million, or 18% on a combined annualized basis, while commercial loans collateralized by assignment of lease payments, residential real estate, and consumer loans declined, in aggregate, by $27.9 million, or 2.9%. See “Loan Portfolio” section below for further analysis. Investment securities available for sale increased by $23.0 million, or 1.7% to $1.4 billion at March 31, 2005.

Total liabilities increased by $106.9 million, or 2.2% to $4.9 billion at March 31, 2005 from $4.8 billion at December 31, 2004. Total deposits grew by $37.3 million or 0.9% to $4.0 billion at March 31, 2005. Total deposits remained relatively flat, as they historically have, during the first quarter, while industry trends show deposit growth declining due to rising short-term interest rates and pricing competition amongst banks and other financial institutions, money market and mutual funds. As part of our strategy to manage market pressures on attracting and retaining deposits, we will expand retail services and business hours provided to customers in the second half of 2005. Short-term borrowings increased by $82.1 million, or 14.4%, primarily due to a $48.6 million increase in securities sold under agreement to repurchase. Federal funds purchased, correspondent bank line of credit and short-term Federal Home Loan Bank advances also increased by $18.0 million, $10.0 million and $5.5 million, respectively.

Total stockholders’ equity decreased $12.8 million, or 2.6% to $468.9 million at March 31, 2005 compared to $481.7 million at December 31, 2004. The decline was primarily due to a $14.4 million increase in treasury stock resulting from the repurchase of 486,286 outstanding shares and a $9.8 million decline in accumulated other comprehensive income due to an unrealized change in market value on investment securities available for sale. Retained earnings increased by $13.4 million due to net income of $17.2 million partially offset by $3.7 million, or $0.13 per share, in cash dividends.

Loan Portfolio

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

	March 31,					December 31,					March 31,
	2005					2004					2004
	Amount			% of Total		Amount			% of Total		Amount			% of Total
Commercial loans	$	738,826		22	%	$	725,823		22	%	$	654,176		23	%
Commercial loans collateralized by assignment of lease payments	245,152			7	%	251,025			7	%	221,757			8	%
Commercial real estate	1,307,481			38	%	1,263,910			38	%	1,123,250			39	%
Residential real estate	423,301			12	%	436,122			13	%	358,960			12	%
Construction real estate	450,259			13	%	402,765			12	%	296,804			10	%
Consumer loans	256,695			8	%	265,912			8	%	219,947			8	%
Gross loans (1)	3,421,714			100	%	3,345,557			100	%	2,874,894			100	%
Allowance for loan losses	(43,820		)			(44,266		)			(40,298		)
Net loans	$	3,377,894				$	3,301,291				$	2,834,596

(1) Gross loan balances at March 31, 2005, December 31, 2004, and March 31, 2004 are net of unearned income, including net deferred loan fees of $3.8 million, $4.2 million, and $4.0 million, respectively.

Net loans increased by $76.6 million, or 2.3%, to $3.4 billion at March 31, 2005 from $3.3 billion at December 31, 2004. Construction real estate, commercial real estate and commercial grew by $47.5 million, $43.6 million, and $13.0 million, respectively. In aggregate, these loan categories grew by approximately 18% on an annualized basis. The increases were primarily due to growth in both existing customer and new customer loan demand resulting from our focus on marketing and new business development. The above increases were partially offset by decreases in residential real estate, consumer loans, and commercial loans collateralized by assignment of lease payments of $12.8 million, $9.2 million, and $5.9 million, respectively.

Net loans increased by $543.3 million, or 19.2%, to $3.4 billion at March 31, 2005 from $2.8 billion at March 31, 2004. Commercial real estate, construction real estate, commercial, residential real estate, consumer loans, and commercial loans collateralized by assignment of lease payments grew by $184.2 million, $153.5 million, $84.7 million, $64.3 million, $36.7 million, and $23.4 million, respectively. The increases were primarily due to growth in both existing customer and new customer loan demand resulting from our focus on marketing and new business development as well as our acquisition of First SecurityFed, which had net loans of $295.8 million at the acquisition date. Of the $295.8 million in net loans acquired from First SecurityFed, $88.2 million in residential real estate loans were securitized and transferred to investment securities available for sale in the third quarter of 2004 for additional flexibility and favorable capital treatment on our balance sheet.

Asset Quality

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

	March 31, 2005			December 31, 2004				March 31, 2004
Non-performing loans:
Non-accrual loans (1)	$	25,250		$	23,495			$		26,212
Loans 90 days or more past due, still accruing interest	850			189				97
Total non-performing loans	26,100			23,684				26,309
Other real estate owned	726			384				180
Total non-performing assets	$	26,826		$		24,068		$	26,489
Total non-performing loans to total loans	0.76		%	0.71			%	0.92			%
Allowance for loan losses to non-performing loans	167.89		%	186.90			%	153.17			%
Total non-performing assets to total assets	0.50		%	0.46			%	0.60			%

(1) Includes restructured loans totaling $552 thousand, $568 thousand and $573 thousand at March 31, 2005, December 31, 2004, and March 31, 2004, respectively.

Total non-performing assets increased by $2.7 million to $26.8 million at March 31, 2005 from $24.1 million at December 31, 2004. Non-accrual loans increased by $1.8 million primarily due to two commercial loans totaling $1.7 million. Loans 90 days or more past due, still accruing interest increased by $661 thousand due to one commercial loan totaling $850 thousand.

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. Selection and application of this “critical accounting policy” involves judgements, estimates, and uncertainties that are susceptible to change. In the event that different assumptions or conditions were to prevail, and depending upon the severity of such changes, 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 are multiplied against loan balances in each risk-rating category and then multiplied by an historical loss given default rate by loan type to determine an appropriate level for the allowance for loan losses. A specific reserve may be needed on a loan by loan basis. 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 their 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 allowance for loan losses follows (dollar amounts in thousands):

	Three Months Ended March 31,
	2005			2004
Balance at beginning of period	$	44,266		$	39,572
Provision for loan losses	2,400			2,000
Charge-offs	(3,501		)	(1,710		)
Recoveries	655			436
Balance at March 31,	$	43,820		$	40,298
Total loans at March 31,	$	3,421,714		$	2,874,894
Ratio of allowance for loan losses to total loans	1.28		%	1.40		%

Net charge-offs increased by $1.5 million to $2.8 million in the quarter ended March 31, 2005 from $1.3 million in the quarter ended March 31, 2004. A substantial portion of the Company’s $3.5 million charge-off activity in the first quarter of 2005 was due to the charge-off of one construction real estate loan. The construction real estate loan charge-off’s outstanding balance was classified as substandard and was reported as a potential problem loan in the Company’s Annual Report on Form 10-K for the year-ended December 31, 2004. This loan was sold during the first quarter of 2005.

Provision for loan losses increased by $400 thousand to $2.4 million in the three months ended March 31, 2005 from $2.0 million in the same period of 2004 based on the results of our quarterly analyses of the loan portfolio.

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

	March 31,				December 31,				March 31,
	2005				2004				2004
	Amount		% of Total Loans		Amount		% of Total Loans		Amount		% of Total Loans
Commercial	$	12,438	22	%	$	10,913	22	%	$	11,187	23	%
Commercial loans collateralized by assignment of lease payments	5,702		7	%	6,563		7	%	2,471		8	%
Commercial real estate	10,647		38	%	10,340		38	%	8,491		39	%
Residential real estate	850		12	%	868		13	%	1,845		12	%
Construction real estate	4,180		13	%	4,451		12	%	4,005		10	%
Installment and other	712		8	%	925		8	%	4,569		8	%
Unallocated	9,291		—		10,206		—		7,730		—
Total allowance for loan losses	$	43,820	100	%	$	44,266	100	%	$	40,298	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, current loan risk ratings, delinquent loans, historical loss experience and economic conditions in our market area. In addition, federal regulatory authorities, as part of the examination process, periodically review our allowance for loan losses. The regulators may require us to record adjustments 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,

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 is often in one of the top four rating categories of Moody’s or Standard & Poors, or the equivalent as determined by us, and occasionally in the fifth highest rating category.

Lease investments by categories follow (in thousands):

	March 31,			December 31,			March 31,
	2005			2004			2004
Direct finance leases:
Minimum lease payments	$	35,495		$	34,330		$	29,639
Estimated unguaranteed residual values	3,998			3,744			3,049
Less: unearned income	(3,087		)	(3,175		)	(3,104		)
Direct finance leases (1)	$	36,406		$	34,899		$	29,584

Leveraged leases:
Minimum lease payments	$	40,771		$	39,570		$	27,454
Estimated unguaranteed residual values	3,301			3,037			2,356
Less: unearned income	(3,591		)	(2,962		)	(2,098		)
Less: related non-recourse debt	(38,140		)	(37,300		)	(25,760		)
Leveraged leases (1)	$	2,341		$	2,345		$	1,952

Operating leases:
Equipment, at cost	$	125,888		$	133,918		$	118,972
Less accumulated depreciation	(64,685		)	(64,567		)	(50,774		)
Lease investments, net	$	61,203		$	69,351		$	68,198

(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. 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.

The Company funds most of the lease equipment purchases internally, but has some loans at other banks which totaled $12.7 million at March 31, 2005, $14.5 million at December 31, 2004 and $19.0 million at March 31, 2004.

The lease residual value represents the estimated fair value of the leased equipment at the termination of the lease. Lease residual values are reviewed quarterly 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 1,422 leases at March 31, 2005 compared to 1,442 at December 31, 2004 and 1,268 leases at March 31, 2004. The average residual value per lease was approximately $19 thousand at March 31, 2005, $18 thousand at December 31, 2004 and $17 thousand at March 31, 2004.

At March 31, 2005, 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
2005	$	343	$	358	$	5,695	$	6,396
2006	928		857		6,077		7,862
2007	1,860		1,323		4,063		7,246
2008	738		540		2,156		3,434
2009	124		223		1,336		1,683
2010	5		—		270		275
	$	3,998	$	3,301	$	19,597	$	26,896

Investment Securities Available for Sale

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

	At March 31, 2005				At December 31, 2004				At March 31, 2004
	Amortized Cost		Fair Value		Amortized Cost		Fair Value		Amortized Cost		Fair Value
U.S. Treasury securities	$	23,090	$	23,294	$	23,212	$	23,738	$	22,033	$	23,433
U.S. Government agencies	332,945		331,293		319,708		323,803		242,888		254,023
States and political subdivisions	278,832		278,879		251,846		255,009		190,341		195,886
Mortgage-backed securities	667,560		659,505		670,867		667,326		598,062		596,064
Corporate bonds	42,045		43,105		41,082		43,413		39,235		42,141
Equity securities	78,251		78,367		77,403		77,630		47,538		47,780
Debt securities issued by foreign governments	25		25		525		525		560		560
Investments in equity lines of credit trusts	—		—		—		—		1,770		1,770
Total	$	1,422,748	$	1,414,468	$	1,384,643	$	1,391,444	$	1,142,427	$	1,161,657

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.

Cash flows from operating activities primarily include net income for the quarter, adjusted for items in net income that did not impact cash. Net cash provided by operating activities increased by $6.9 million to $24.1 million for the quarter ended March 31, 2005 from $17.2 million for the quarter ended March 31, 2004. Notable items in the 2005 include a $2.6 million increase in net income, and a $2.9 million lower net decrease in other liabilities.

Cash used in investing activities reflects the impact of loans and investments acquired for the Company’s interest-earning asset portfolios, as well as cash flows from asset sales and the impact of acquisitions. Net cash used in investing activities increased by $29.7 million to $128.4 million for the quarter ended March 31, 2005 from $98.7 million

for the quarter ended March 31, 2004. The increase was primarily due to a $28.7 million higher net increase in loans due to greater loan demand resulting from our focus on marketing and new business development.

Cash flows from financing activities include transactions and events whereby cash is obtained from depositors, creditors or investors. Net cash provided by financing activities increased by $32.0 million to $93.9 million for the quarter ended March 31, 2005 from $61.9 million for the quarter ended March 31, 2004, due primarily to a $61.4 million higher net increase in short-term borrowings, offset by a $33.8 million decrease in proceeds from long-term borrowings.

We expect to have available cash to meet our liquidity needs. Liquidity management is monitored by an Asset/Liability Management Committee, consisting of members of management, and the board of directors of both of our subsidiary banks, which review historical funding requirements, current liquidity position, sources and stability of funding, marketability of assets, options for attracting additional funds, and anticipated future funding needs, including the level of unfunded commitments. In the event that additional short-term liquidity is needed, our banks have established relationships with several large regional banks to provide short-term borrowings in the form of federal funds purchases. While, at March 31, 2005, there were no firm lending commitments in place, management believes that our banks could borrow approximately $219.0 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 is a member of the Federal Home Loan Bank of Topeka, Kansas and both banks have the ability to borrow from their respective Federal Home Loan Banks. As a contingency plan for significant funding needs, the Asset/Liability Management Committee may also consider the sale of investment securities, selling securities under agreement to repurchase, or the temporary curtailment of lending activities.

The following table summarizes our significant contractual obligations and other potential funding needs at March 31, 2005 (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	$	2,036,570	$	1,202,798	$	626,522	$	112,241	$	95,009
Long-term borrowings	81,958		9,598		46,198		12,197		13,965
Junior subordinated notes issued to capital trusts	87,443		—		—		—		87,443
Operating leases	94,918		3,092		5,878		4,037		81,911
Capital expenditures	4,406		4,406		—		—		—
Total	$	2,305,295	$	1,219,894	$	678,598	$	128,475	$	278,328
Commitments to extend credit	$	1,073,736

At March 31, 2005, the Company’s total risk-based capital ratio was 12.05%; Tier 1 capital to risk-weighted assets ratio was 10.93% and Tier 1 capital to average asset ratio was 8.25%. MB Financial Bank, N.A. and Union Bank, N.A. were each categorized as “Well-Capitalized” under Federal Deposit Insurance Corporation regulations at March 31, 2005.

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 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 and changes in estimates of the adequacy of the allowance for loan losses; (3) competitive pressures among depository institutions; (4) interest rate movements and their impact on customer behavior and net interest margin; (5) the impact of repricing and competitors’ pricing initiatives on loan and deposit products; (6) the ability to adapt successfully to technological changes to meet customers’ needs and developments in the market place; (7) our ability to realize the residual values of its direct finance, leveraged, and operating leases; (8) our ability to access cost-effective funding; (9) changes in financial markets; (10) changes in economic conditions in general and in the Chicago metropolitan area in particular; (11) the costs, effects and outcomes of litigation; (12) new legislation or regulatory changes, including but not limited to changes in federal and/or state tax laws or interpretations thereof by taxing authorities; (13) changes in accounting principles, policies or guidelines; and (14) our 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, 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 the maturities of securities in our investment portfolio, and limiting fixed rate loans or 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. See Note 11 to the Consolidated Financial Statements.

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 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 subject to 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.

We remained in an asset sensitive position during the three months ended March 31, 2005. As described below, measuring interest rate risk is subject to a variety of assumptions and is therefore subject to significant uncertainty. However, based upon our calculations we believe that our continued asset-sensitivity stems from the fact that a majority of our assets reprice based on short-term rates, while a significant portion of liabilities are either permanently fixed (non-interest bearing deposits are fixed at zero percent) or do not reprice simultaneously with changes in short-term rates (administered-rate deposits, such as NOW, money markets, and time deposits). Additionally, shareholders’ equity is effectively fixed, for accounting purposes, at zero percent. As such, we expect that an increase in short-term interest rates will result in an increase of our net interest margin and, conversely, a decrease in short-term interest rates will result in a decrease in our net interest margin. However, our residential real estate loans and mortgage-backed securities are less likely to prepay in a rising interest rate environment, reducing the opportunity for us to fully take advantage of higher interest rates in the near term. See tables below representing our gap position and our sensitivity to changes in interest rates for further analysis.

The following table sets forth the amounts of interest earning assets and interest bearing liabilities outstanding at March 31, 2005 that we anticipate, based upon certain assumptions, to reprice or mature in each of the future time periods shown. Except as stated below, the amount of assets and liabilities shown which reprice or mature during a particular period were determined based on the earlier of the term to repricing or the term to repayment of the asset or liability. The table is intended to provide an approximation of the projected repricing of assets and liabilities at March 31, 2005 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 expected 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 three months, and 60%, 13% and 64%, respectively, after one year (dollars in thousands):

	Time to Maturity or Repricing
	0 — 90			91 - 365			1 - 5			Over 5
	Days			Days			Years			Years			Total
Interest Earning Assets:
Interest bearing deposits with banks	$	11,886		$	465		$	140		$	—		$	12,491
Investment securities available for sale	120,836			176,042			708,171			409,419			1,414,468
Loans held for sale	368			—			—			—			368
Loans	2,212,963			353,810			820,179			34,762			3,421,714
Total interest earning assets	$	2,346,053		$	530,317		$	1,528,490		$	444,181		$	4,849,041
Interest Bearing Liabilities:
NOW and money market deposit accounts	$	425,764		$	52,408		$	317,844		$	—		$	796,016
Savings deposits	125,191			62,596			333,841			—			521,628
Time deposits	695,985			870,962			468,998			625			2,036,570
Short-term borrowings	586,128			66,646			488			—			653,262
Long-term borrowings	2,644			6,954			58,395			13,965			81,958
Junior subordinated notes issued to capital trusts	25,774			—			—			61,669			87,443
Total interest bearing liabilities	$	1,861,486		$	1,059,566		$	1,179,566		$	76,259		$	4,176,877
Rate sensitive assets (RSA)	$	2,346,053		$	2,876,370		$	4,404,860		$	4,849,041		$	4,849,041
Rate sensitive liabilities (RSL)	1,861,486			2,921,052			4,100,618			4,176,877			4,176,877
Cumulative GAP	484,567			(44,682		)	304,242			672,164			672,164
(GAP=RSA—RSL)
RSA/Total assets	43.87		%	53.78		%	82.36		%	90.67		%	90.67		%
RSL/Total assets	34.81		%	54.62		%	76.67		%	78.10		%	78.10		%
GAP/Total assets	9.06		%	(0.84		)%	5.69		%	12.57		%	12.57		%
GAP/RSA	20.65		%	(1.55		)%	6.91		%	13.86		%	13.86		%

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 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 which assumes immediate changes in interest rates at March 31, 2005 and December 31, 2004, we believe that our net interest income would change over a one-year period due to changes in interest rates as follows (dollars in thousands):

Immediate		Change in Net Interest Income Over One Year Horizon
Changes in		At March 31, 2005					At December 31, 2004
Levels of		Dollar			Percentage		Dollar			Percentage
Interest Rates		Change			Change		Change			Change
+ 2.00	%	$	5,338		2.94	%	$	9,221		5.21	%
+ 1.00		3,376			1.86		5,119			2.89
(1.00)		(6,660		)	(3.67	)	(8,837		)	(4.99	)

In addition to the simulation assuming an immediate change in interest rates above, management models many scenarios including simulations with gradual changes in interest rates over a one-year period to evaluate our interest rate sensitivity. Based on simulation modeling which assumes gradual changes in interest rates, we believe that our net interest income would change over a one-year period due to changes in interest rates as follows (dollars in thousands):

Gradual		Change in Net Interest Income Over One Year Horizon
Changes in		At March 31, 2005					At December 31, 2004
Levels of		Dollar			Percentage		Dollar			Percentage
Interest Rates		Change			Change		Change			Change
+ 2.00	%	$	4,141		2.28	%	$	6,146		3.47	%
+ 1.00		2,551			1.41		3,343			1.89
(1.00)		(4,454		)	(2.46	)	(6,529		)	(3.69	)

In both the immediate and gradual interest rate sensitivity tables above, changes in net interest income between March 31, 2005 and December 31, 2004 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 tables above do not show an analysis of decreases of more than 100 basis points due to the low level of current market interest rates.

Management also reviews our interest rate sensitivity under certain scenarios in which the general shape of the yield curve changes. Two such scenarios are short-term and long-term interest rate flattening. Short-term interest rate flattening assumes that interest rates for all terms rise up to the level of long-term interest rates at 5.3% resulting in a flat yield curve. Long-term interest rate flattening assumes interest rates for all terms fall to levels equal to the short-term interest rates at 3.1% resulting in a flat yield curve. Under the short-term interest rate flattening scenario, our net interest income is projected to increase by $5.2 million, or 2.8%, over a one-year period subsequent to March 31, 2005. Under the long-term interest rate flattening scenario, our net interest is projected to decrease by $6.4 million, or 3.5%, over a one-year period subsequent to March 31, 2005.

The assumptions used in our interest rate sensitivity simulations discussed above are inherently uncertain and, as a result, the simulations cannot precisely measure net interest income or precisely predict the impact of changes in interest rates on net interest income. Actual results will differ from simulated results due to timing, magnitude and frequency of interest rate changes as well as changes in market conditions and management strategies.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures: An evaluation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the “Act”)) was carried out as of March 31, 2005 under the supervision and with the participation of our Chief Executive Officer, Chief Financial Officer and several other members of our senior management. Our Chief Executive Officer and Chief Financial Officer concluded that, as of March 31, 2005, our disclosure controls and procedures were 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.

Changes in Internal Control Over Financial Reporting: During the quarter ended March 31, 2005, 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.

We do not expect that our disclosure controls and procedures and internal control over financial reporting will prevent all error and all fraud. A control procedure, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control procedure are met. Because of the inherent limitations in all control procedures, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns in controls or procedures can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any control procedure also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control procedure, misstatements due to error or fraud may occur and not be detected.

PART II. — OTHER INFORMATION

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

(c) The following table sets forth information for the three months ended March 31, 2005 with respect to our repurchases of our outstanding common shares:

	Total Number of Shares Purchased (1)	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
January 1, 2005 — January 31, 2005	—	$		—	—	475,000
February 1, 2005 — February 28, 2005	184,286	40.63			184,000	291,000
March 1, 2005 — March 31, 2005	302,000	40.33			291,000	—
Total	486,286	$	40.44		475,000

(1) On March 1, 2005, 11,286 shares were purchased for $40.35 per share in open-market transactions that were not pursuant to a publicly announced plan or program.

Item 6. Exhibits

See Exhibit Index.

EXHIBIT INDEX

Exhibit Number		Description

2.1		Amended and Restated Agreement and Plan of Merger, dated as of April 19, 2001, by and among the Registrant, MB Financial, Inc., a Delaware corporation ("Old MB Financial'') and MidCity Financial (incorporated herein by reference to Appendix A to the joint proxy statement-prospectus filed by the Registrant pursuant to Rule 424(b) under the Securities Act of 1933 with the Securities and Exchange Commission (the "Commission'') on October 9, 2001)

2.2		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))

2.3		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 Exhibit 2 to the Registrant's Current Report on Form 8-K filed on January 14, 2004 (File No.0-24566-01))

3.1		Charter of the Registrant, as amended (incorporated herein by reference to Exhibit 3.1 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 2001 (File No. 0-24566-01))

3.2		Bylaws of the Registrant, as amended (incorporated herein by reference to Exhibit 3.2 to Amendment No. One to the Registration Statement on Form S-1 of the Registrant and MB Financial Capital Trust I filed on August 7, 2002 (File Nos. 333-97007 and 333-97007-01))

4.1		The Registrant hereby agrees to furnish to the Commission, upon request, the instruments defining the rights of the holders of each issue of long-term debt of the Registrant and its consolidated subsidiaries

4.2		Certificate of Registrant's Common Stock (incorporated herein by reference to Exhibit 4.1 to Amendment No. One to the Registrant's Registration Statement on Form S-4 (No. 333-64584))

10.1		Employment Agreement between the Registrant (as successor to 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-end 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))

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		MB Financial, Inc. 1997 Omnibus Incentive Plan (the "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		Amended and Restated MB Financial Stock Deferred Compensation Plan (incorporated herein by reference to Exhibit 10.8 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 2004 (File No. 0-24566-01))

10.9		Amended and Restated MB Financial Non-Stock Deferred Compensation Plan (incorporated herein by reference to Exhibit 10.9 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 2004 (File No. 0-24566-01))

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		Amended and Restated Employment Agreement between MB Financial Bank, N.A. and Ronald D. Santo (incorporated herein by reference to Exhibit 10.1 to the Registrant's Current Report on Form 8-K filed on December 14, 2004 (File No. 0-24566-01))

10.14		First SecurityFed Financial, Inc. 1998 Stock Option and Incentive Plan (incorporated herein by reference to Exhibit B to the definitive proxy statement filed by First SecurityFed Financial, Inc. on March 24, 1998 (File No. 0-23063))

10.15		Tax Gross Up Agreements between the Registrant and each of Mitchell Feiger, Burton J. Field, Ronald D. Santo, Thomas D. Panos, Jill E. York, Thomas P. FitzGibbon, Jr., and Jeffrey L. Husserl (incorporated herein by reference to Exhibits 10.1 — 10.7 to the Registrant's Current Report on Form 8-K filed on November 5, 2004 (File No. 0-24566-01))


PART I.	FINANCIAL INFORMATION

Item 1.	Financial Statements

	Consolidated Balance Sheets at March 31, 2005 and December 31, 2004 (Unaudited)

	Consolidated Statements of Income for the Three Months ended March 31, 2005 and 2004 (Unaudited)

	Consolidated Statements of Cash Flows for the Three Months ended March 31, 2005 and 2004 (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

	Signatures

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)

10.16		Form of Incentive Stock Option Agreement for Executive Officers under the Omnibus Incentive Plan (incorporated herein by reference to Exhibit 10.1 to the Registrant's Current Report on Form 8-K/A filed on March 2, 2005 (File No. 0-24566-01))

10.17		Form of Non-Qualified Stock Option Agreement for Directors under the Omnibus Incentive Plan (incorporated herein by reference to Exhibit 10.2 to the Registrant's Current Report on Form 8-K/A filed on March 2, 2005 (File No. 0-24566-01))

10.18		Form of Restricted Stock Agreement for Executive Officers under the Omnibus Incentive Plan (incorporated herein by reference to Exhibit 10.3 to the Registrant's Current Report on Form 8-K/A filed on March 2, 2005 (File No. 0-24566-01))

10.19		Form of Restricted Stock Agreement for Directors under the Omnibus Incentive Plan (incorporated herein by reference to Exhibit 10.4 to the Registrant's Current Report on Form 8-K/A filed on March 2, 2005 (File No. 0-24566-01))

16		KPMG LLP letter re change in certifying accountant (incorporated herein by reference to Exhibit 16 to the Registrant's Current Report on Form 8-K/A filed on July 13, 2004 (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*