MBFI 10Q 09302006



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended September 30, 2006

Commission file number 0-24566-01

MB FINANCIAL, INC.
(Exact name of registrant as specified in its charter)

Maryland
(State or other jurisdiction of
Incorporation or organization)

36-4460265
(I.R.S. Employer Identification No.)


800 West Madison Street, Chicago, Illinois 60607
(Address of principal executive offices)

Registrant’s telephone number, including area code: (888) 422-6562 


Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.

YES: x NO: o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer  x       Accelerated filer o     Non-accelerated filer o
 
    Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).


YES: oNO: x  
 
There were outstanding 36,564,478 shares of the registrant’s common stock as of November 9, 2006.


1

MB FINANCIAL, INC. AND SUBSIDIARIES

FORM 10-Q

September 30, 2006

INDEX


     
PART I.
FINANCIAL INFORMATION
  
     
Item 1.
Financial Statements
  
     
 
Consolidated Balance Sheets at September 30, 2006 (Unaudited) and December 31, 2005
3 
     
 
Consolidated Statements of Income for the Three and Nine Months ended September 30, 2006 and 2005 (Unaudited)
4 
     
 
Consolidated Statements of Cash Flows for the Nine Months ended September 30, 2006
and 2005 (Unaudited)
5 - 6 
     
 
Notes to Consolidated Financial Statements (Unaudited)
7 - 18 
     
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
19 - 34 
     
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
35 - 37 
     
Item 4.
Controls and Procedures
37 - 38 
     
PART II.
OTHER INFORMATION
  
     
Item 1A.
Risk Factors
38 
     
Item 2.
Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities
38 
     
Item 4.
Submission of Matters to a Vote of Security Holders
38 
     
Item 6.
Exhibits
39 
     
 
Signatures
40 
     

2

PART I. - FINANCIAL INFORMATION

Item 1. - Financial Statements

MB FINANCIAL, INC. & SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, 2006 and December 31, 2005 (2005 restated for SFAS 123R) 
(Amounts in thousands, except common share data)
(Unaudited)

   
September 30,
  
December 31,
  
   
2006
  
2005
  
           
ASSETS
          
Cash and due from banks
  
$
136,938
  
$
92,001
  
Interest bearing deposits with banks
    
8,666
   
12,783
 
Federal funds sold
    
36,071
    
-
 
Investment securities available for sale
    
1,762,943
   
1,405,844
 
Trading securities
    
899
    
-
  
Loans held for sale
    
4,850
   
500
 
Loans (net of allowance for loan losses of $61,128 at September 30, 2006 and
         
 
$44,979 at December 31, 2005)
   
5,090,214
   
3,701,203
 
Lease investments, net
    
65,646
   
65,696
 
Premises and equipment, net
    
195,091
   
147,701
 
Cash surrender value of life insurance
    
119,657
   
90,194
 
Goodwill, net
    
379,867
   
125,010
 
Other intangibles, net
    
29,828
   
12,594
 
Other assets
    
130,454
   
65,539
 
               
Total assets
  
$
7,961,124
 
$
5,719,065
  
               
LIABILITIES AND STOCKHOLDERS' EQUITY
              
Liabilities
              
Deposits:
              
Noninterest bearing
  
$
906,667
 
$
694,548
  
Interest bearing
    
5,157,576
   
3,507,152
 
Total deposits
    
6,064,243
   
4,201,700
 
Short-term borrowings
    
511,005
   
745,647
 
Long-term borrowings
    
298,890
   
71,216
 
Junior subordinated notes issued to capital trusts
    
179,230
   
123,526
 
Accrued expenses and other liabilities
    
76,289
   
69,990
 
Total liabilities
    
7,129,657
   
5,212,079
 
               
Stockholders' Equity
              
Common stock, ($0.01 par value; authorized 40,000,000 shares; issued
              
37,330,205 and 28,912,803 shares at September 30,2006 and
              
December 31, 2005)
    
373
   
289
 
Additional paid-in capital
    
439,906
   
141,745
 
Retained earnings
    
425,867
   
390,407
 
Accumulated other comprehensive loss
    
(8,699
)
  
(9,453
)
Less: 747,612 and 453,461 shares of treasury stock, at cost,
             
at September 30, 2006 and December 31, 2005
    
(25,980
)
  
(16,002
)
Total stockholders' equity
    
831,467
   
506,986
  
               
Total liabilities and stockholders' equity
  
$
7,961,124
  
$
5,719,065
  

See Accompanying Notes to Consolidated Financial Statements.


3
MB FINANCIAL, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(2005 restated for SFAS 123R)
(Amounts in thousands, except common share data)
(Unaudited)
       
Three Months Ended
September 30,
Nine Months Ended
September 30,
       
2006
2005
2006
2005
Interest income:
        
 
Loans
$
87,959 
$
62,156
$
231,020
$
170,764
 
Investment securities:
        
 
 
Taxable
14,134 
11,563
38,427
35,903
   
Nontaxable
3,054 
2,536
8,492
7,457
 
Federal funds sold
46 
24
139
25
 
Other interest bearing accounts
123 
98
352
255
   
Total interest income
105,316 
76,377
278,430
214,404
             
Interest expense:
        
 
Deposits
41,161 
22,212
100,435
57,584
 
Short-term borrowings
7,818 
5,346
22,320
13,901
 
Long-term borrowings and junior subordinated notes
4,583 
2,632
11,441
7,360
   
Total interest expense
53,562 
30,190
134,196
78,845
 Net interest income
51,754 
46,187
144,234
135,559
             
Provision for loan losses
4,000 
1,750
6,600
7,150
             
   
Net interest income after provision for loan losses
47,754 
44,437
137,634
128,409
             
Other income:
        
 
Loan service fees
1,110 
1,413
4,153
3,965
 
Deposit service fees
5,157 
5,065
14,817
14,603
 
Lease financing, net
2,832 
3,557
9,474
10,387
 
Brokerage fees
2,568 
1,973
7,305
6,115
 
Trust and asset management fees
1,736 
1,705
4,590
4,368
 
Net gain (loss) on sale of securities available for sale
(121)
85 
(527)
2,213
 
Increase in cash surrender value of life insurance
1,070 
1,016
2,956
2,949
 
Net gain (loss) on sale of other assets
(296)
-
805
1
 
Merchant card processing
1,820 
630
3,414
1,579
 
Other operating income
1,739 
1,279
4,194
3,865
       
17,615 
16,723
51,181
50,045
             
Other expense:
        
 
Salaries and employee benefits
24,628 
20,037
65,597
57,329
 
Occupancy and equipment expense
6,528 
5,947
18,513
17,077
 
Computer services expense
1,801 
1,430
5,053
4,147
 
Advertising and marketing expense
1,343 
2,032
3,781
4,207
 
Professional and legal expense
784 
733
1,848
2,090
 
Brokerage fee expense
1,405 
957
3,899
2,970
 
Telecommunication expense
683 
1,080
2,002
2,640
 
Other intangibles amortization expense
523 
240
999
757
 
Merchant card processing
1,689 
549
3,165
1,427
 
Other operating expenses
4,642 
4,064
13,334
11,824
       
44,026 
37,069
118,191
104,468
               
   
Income before income taxes
21,343 
24,091
70,624
73,986
             
Income taxes
6,602 
7,445
21,598
22,938
               
   
Net Income
$
14,741 
$
16,646
$
49,026
$
51,048
             
     
Common share data:
    
  Basic earnings per common share
$
0.47 
$
0.58
$
1.67 
$
1.79
 
Diluted earnings per common share
$
0.46 
$
0.57
$
1.64 
$
1.77
  Cash dividends declared per common share
$
0.18 
 $ 0.15
$
0.48 
$
0.41
 
Weighted average common shares outstanding
31,529,245 
28,506,656
29,328,102 
28,467,292
 
Diluted weighted average common shares outstanding
32,055,721 
28,955,455
29,842,456 
28,912,076
See Accompanying Notes to Consolidated Financial Statements.

4

MB FINANCIAL, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(2005 restated for SFAS 123R)
(Amounts in thousands)
(Unaudited)
   
Nine months Ended
September 30,
  
   
2006
 
2005
  
           
Cash Flows From Operating Activities:
          
Net income
  
$
49,026
  
$
51,048
  
Adjustments to reconcile net income to net cash provided by operating activities:
              
Depreciation
    
27,831
   
26,237
 
Amortization of restricted stock awards
    
988
   
635
 
Compensation expense for stock option grants
    
1,849
    
1,777
  
Gain on sales of premises and equipment and leased equipment
    
(920
)
  
(520
)
Amortization of other intangibles
    
999
   
757
 
Provision for loan losses
    
6,600
   
7,150
 
Deferred income tax benefit
    
2,023
    
(1,168
)
Amortization of premiums and discounts on investment securities, net
    
6,117
   
9,416
 
Accretion of premiums and discounts on loans, net
    
(943
)
      
Trading securities transactions, net
    
18
    
-
  
Net (gain) loss on sale of investment securities
    
527
    
(2,213
)
Proceeds from sale of loans
   
360,870
    
16,220
 
Origination of loans held for sale
    
(19,772
)
  
(15,832
)
Net gains on sale of loans
    
(617
)
  
(233
)
Increase in cash surrender value of life insurance
    
(2,956
)
  
(2,949
)
Deferred gain amortization on interest only securities pool termination
    
(718
)
  
(431
)
Increase in other assets
    
(40,317
)
  
(7,127
)
Decrease in other liabilities, net
    
(9,364
)
  
(8,766
)
Net cash provided by operating activities
    
381,241
   
74,001
 
               
Cash Flows From Investing Activities:
              
Proceeds from sales of investment securities available for sale
    
372,792
   
226,721
 
Proceeds from maturities and calls of investment securities available for sale
    
171,992
   
131,778
 
Purchase of investment securities available for sale
    
(163,079
)
  
(381,141
)
Net increase in loans
    
(321,277
)
  
(360,027
)
Purchases of premises and equipment and leased equipment
    
(30,372
)
  
(53,696
)
Proceeds from sales of premises and equipment and leased equipment
    
5,752
   
2,536
 
Cash paid, net of cash and cash equivalents in acquisitions
    
(58,978
)
  
-
  
Principal paid on lease investments
    
(555
)
  
(583
)
Net cash used in investing activities
    
(23,725
)
  
(434,412
)
               
Cash Flows From Financing Activities:
              
Net increase (decrease) in deposits
    
(20,211
)
  
292,176
 
Net increase (decrease) in short-term borrowings
    
(281,173
)
  
95,900
 
Proceeds from long-term borrowings
    
65,045
   
10,017
 
Principal paid on long-term borrowings
    
(49,785
)
  
(23,790
)
Proceeds from junior subordinated notes issued to capital trusts
    
30,000
   
35,000
 
Treasury stock transactions, net
   
(13,943
)
  
(4,004
)
Stock options exercised
    
2,361
   
3,973
 
Excess tax benefits from share-based payment arrangements
    
647
    
622
  
Dividends paid on common stock
   
(13,566
)
  
(11,714
)
Net cash (used in) provided by financing activities
    
(280,625
)
  
398,180
 
               
Net increase in cash and cash equivalents
  
$
76,891
  
$
37,769
  
               
Cash and cash equivalents:
              
Beginning of period
    
104,784
   
105,437
 
               
End of period
  
$
181,675
  
$
143,206
 
               
Supplemental Disclosures of Cash Flow Information:
              
               
Cash payments for:
              
Interest paid to depositors and other borrowed funds
  
$
132,689
  
$
75,133
 
Income tax paid, net
   
31,336
   
13,582
 
               
Supplemental Schedule of Noncash Investing Activities:
              
               
Loans transferred to other real estate owned
  
$
-
  
$
529
  
Loans securitized transferred to investment securities available for sale
  
$
-
  
$
12,088
  
See Accompanying Notes to Consolidated Financial Statements.
 

 
5
MB FINANCIAL, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
          
(Amounts in thousands)
          
(Unaudited)
    
 
     
Nine Months
Ended
September 30,
2006
  
Nine Months
Ended
September 30,
2005
  
                 
Supplemental Schedule of Noncash Investing Activities:
                
                 
Acquisitions
                
                 
Noncash assets acquired:
                
Investment securities available for sale
    
$
744,292
  
$
-
  
Trading securities
      
898
    
-
 
Loans held for sale
      
1,471
    
-
 
Loans, net
      
1,418,638
    
-
 
Premises and equipment, net
      
48,703
    
-
  
Goodwill, net
      
253,390
    
-
  
Other intangibles, net
      
18,233
    
-
  
Cash surrender value of life insurance
      
26,507
    
-
  
Other assets
      
21,321
    
-
  
Total noncash assets acquired:
      
2,533,453
  
$
-
  
             
 
  
Liabilities assumed:
            
 
  
Deposits
      
1,882,754
    
-
 
Short-term borrowings
      
46,532
    
-
 
Long-term borrowings
      
212,414
    
-
  
Junior subordinated notes issued to capital trusts
      
24,775
    
-
 
Accrued expenses and other liabilities
      
12,571
    
-
 
Total liabilities assumed:
      
2,179,046
    
-
 
Net noncash assets acquired:
    
$
354,407
  
$
-
 
             
 
  
Cash and cash equivalents acquired
    
$
16,585
  
$
-
 
                 
Stock issuance in lieu of cash paid in acquisition
    
$
296,896
 
$
-
 
                 

See Accompanying Notes to Consolidated Financial Statements.


6

MB FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2006 and 2005
(Unaudited)

NOTE 1.    BASIS OF PRESENTATION

These unaudited consolidated financial statements include the accounts of MB Financial, Inc., a Maryland corporation (the Company) and its subsidiaries, including its two wholly owned bank subsidiaries, MB Financial Bank, N.A. (MB Financial Bank), and Union Bank, N.A. (Union Bank), as well as Oak Brook Bank, a wholly owned subsidiary of the Company as of September 30, 2006 that was merged into MB Financial Bank on November 2, 2006. In the opinion of management, all normal recurring adjustments necessary for a fair presentation of the financial position, results of operations and cash flows for the interim periods have been made. The results of operations for the three and nine months ended September 30, 2006 are not necessarily indicative of the results to be expected for the entire fiscal year.

These unaudited interim financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America and industry practice. Certain information in footnote disclosure normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America and industry practice has been condensed or omitted pursuant to rules and regulations of the Securities and Exchange Commission. These financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s December 31, 2005 audited financial statements filed on Form 10-K.

In December 2004, the Financial Accounting Standards Board issued SFAS No.123R, Share-Based Payment (“SFAS No. 123R” or the “Statement”). This Statement is a revision of SFAS No. 123, Accounting for Stock Based Compensation (“SFAS No. 123”), and supersedes Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (“APB No. 25”), and its related implementation guidance.

The Company adopted SFAS No. 123R in the first quarter of 2006, using modified retrospective application. SFAS No. 123R requires entities to recognize compensation expense for awards of equity instruments to employees based on the grant date fair value of those awards. SFAS No. 123R also requires excess tax benefits related to stock option exercises to be reported as a financing cash flow. The Company now estimates future forfeitures as required by the Statement, rather than recording actual forfeitures as they occur. As a result of adopting the Statement using the modified retrospective application, all prior period information has been restated. As a result of this restatement, as of December 31, 2005, retained earnings decreased $7.4 million, additional paid in capital increased $11.0 million and deferred tax assets increased $3.6 million. These changes reflect the compensation expense for prior stock option grants to employees and the related tax benefits. See Note 7 below.

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

Certain prior period amounts have been reclassified to conform to the current period’s presentation.


7

NOTE 2.    BUSINESS COMBINATION

On August 25, 2006, the Company acquired First Oak Brook Bancshares, Inc. (FOBB), parent company of Oak Brook Bank, located in Oak Brook, Illinois for $371.0 million. The purchase price was paid through a combination of cash and the Company’s common stock totaling $74.1 million and $296.9 million (approximately 8.4 million shares), respectively. The transaction generated approximately $253.4 million in goodwill and $18.2 million in intangible assets subject to amortization. Oak Brook Bank was merged into MB Financial Bank on November 2, 2006.

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

Purchase Price of First Oak Brook (in thousands):
 
 
Market value (market value per share of $35.45) of MB Financial common stock to be issued
 $
296,896
Cash to be paid
 
74,095
Transaction costs, net of tax of $5,172
 
11,294
 
$
382,285

Allocation of the purchase price 
 
 
Historical net assets of First Oak Brook as of August 25, 2006
 $
 135,493
Fair market value adjustments as of August 25, 2006
 
 
Loans
 $
(32,952)
Premises and Equipment
 
6,379
Goodwill
 
253,390
Core deposit intangibles
 
18,233
Junior subordinated debt issued to capital trusts
 
(1,379)
Other borrowings
  
(547)
Deferred taxes on purchase accounting adjustments
 
3,668
 
 $
382,285
 
 
 
Deferred taxes on purchase accounting adjustments netted with the deferred taxes on transaction costs
 $
8,840


The purchase accounting for the transaction is preliminary and may be subject to subsequent adjustments. Under purchase accounting rules, goodwill may fluctuate based on finalizing asset and liability fair value calculations and merger expense estimates. Subsequent to the issuance of the Company’s 2006 third quarter earnings release, further analysis of the purchase accounting adjustments resulted in a reduction in the fair value of total loans receivable and a corresponding increase in goodwill and deferred tax assets.
 

8
Unaudited Pro Forma Condensed Combined Financial Information

The following unaudited pro forma condensed combined financial information presents the results of operations of the Company had the merger been completed as of the beginning of the period indicated.

   
Three Months Ended September 30,
  
Nine Months Ended September 30,
  
                   
   
2006
  
2005
  
2006
  
2005
  
                   
Net interest income after provision for loan losses
  
$
48,639
  
$
59,821
  
$
166,269
  
$
173,816
  
Noninterest income
    
21,006
   
22,072
   
68,525
    
65,358
  
Noninterest expense
    
54,147
    
49,926
    
156,571
    
141,948
  
Income before income taxes
    
15,498
    
31,967
    
78,223
    
97,226
  
Income taxes
    
4,465
    
9,918
    
23,674
    
30,340
  
Net income
  
$
11,033
  
$
22,049
    
54,549
    
66,886
  
                           
Per common share information
                          
Earnings
  
$
0.30
  
$
0.60
  
$
1.49
  
$
1.82
  
Diluted earnings
  
$
0.30
  
$
0.59
  
$
1.47
  
$
1.79
  
                           
Average common shares issued and outstanding
    
36,626,650
    
36,880,964
    
36,598,106
    
36,841,600
  
Average diluted common shares outstanding
    
37,153,126
    
37,329,763
    
37,112,460
    
37,286,384
  
                           

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 arising during the periods, net of tax. The following table sets forth comprehensive income for the periods indicated (in thousands):

   
Three Months Ended
September 30,
  
Nine months Ended
September 30,
  
   
2006
  
2005
  
2006
  
2005
  
                   
Net income
  
$
14,741
  
$
16,646
  
$
49,026
  
$
51,048
  
Unrealized holding gains (losses) on investment securities, net of tax
   
11,330
    
(7,295
)
  
411
    
(11,742
)
Reclassification adjustments for (gains) losses included in net income, net of tax
   
79
    
(56
)
  
343
    
(1,439
)
Other comprehensive income (loss), net of tax
    
11,409
    
(7,351
)
  
754
    
( 13,181
)
Comprehensive income
  
$
26,150
  
$
9,295
  
$
49,780
  
$
37,867
  



9
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
September 30,
  
Nine months Ended
September 30,
  
Basic:
  
2006
  
2005
  
2006
  
2005
  
Net income
  
$
14,741
  
$
16,646
  
$
49,026
  
$
51,048
  
Average shares outstanding
    
31,529,245
    
28,506,656
    
29,328,102
    
28,467,292
  
Basic earnings per share
  
$
0.47
  
$
0.58
  
$
1.67
  
$
1.79
  
Diluted:
                          
Net income
  
$
14,741
  
$
16,646
  
$
49,026
  
$
51,048
  
Average shares outstanding
    
31,529,245
    
28,506,656
    
29,328,102
    
28,467,292
  
Net effect of dilutive stock options (1)
    
526,476
    
448,799
    
514,354
    
444,784
  
Total
    
32,055,721
    
28,955,455
  
$
29,842,456
  
$
28,912,076
  
Diluted earnings per share
  
$
0.46
  
$
0.57
  
$
1.64
  
$
1.77
  

(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 nine months ended September 30, 2006 or the year ended December 31, 2005.

The following table presents the changes in the carrying amount of goodwill during the nine months ended September 30, 2006 and the year ended December 31, 2005 (in thousands):

   
September 30,
  
December 31,
  
   
2006
  
2005
  
           
Balance at beginning of period
  
$
125,010
  
$
123,628
  
Goodwill from business combinations (1)
    
254,857
    
1,382
  
Balance at end of period
  
$
379,867
  
$
125,010
  

(1)  
The purchase price paid for the Company’s acquisition of LaSalle Systems Leasing, Inc. in August of 2002 included a $4.0 million deferred payment tied to LaSalle’s operating results for a four year period subsequent to the acquisition date. The transaction generated approximately $5.6 million in goodwill which includes a $1.5 million adjustment made in the first nine months of 2006 and a $1.4 million adjustment made in 2005 for deferred payments.
 
The Company has other intangible assets consisting of core deposit intangibles that have a weighted average original amortization period of approximately thirteen 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 nine months ended September 30, 2006 and the year ended December 31, 2005 (in thousands):

10
   
September 30,
  
December 31,
  
   
2006
  
2005
  
           
Balance at beginning of period
  
$
12,594
  
$
13,587
  
Amortization expense
    
(999
)
  
(993
)
Other intangibles from business combinations
    
18,233
    
-
  
Balance at end of period
  
$
29,828
  
$
12,594
  
               
Gross carrying amount
  
$
47,494
  
$
29,261
  
Accumulated amortization
    
(17,666
)
  
(16,667
)
Net book value
  
$
29,828
  
$
12,594
  

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

     
Amount
    
 
Year ending December 31,
        
 
2006
  
$
971
    
 
2007
    
3,504
    
 
2008
    
3,255
    
 
2009
    
3,116
    
 
2010
    
2,927
    
 
Thereafter
    
16,055
    
     
$
29,828
    


NOTE 6.    RECENT ACCOUNTING PRONOUNCEMENTS

In February 2006, the FASB issued SFAS No. 155, Accounting for Certain Hybrid Financial Instruments, which is an Amendment of FASB Statement Nos. 133 and 140. This Statement resolves issues addressed in Statement 133 Implementation of Issue No. D1, “Application of Statement 133 to Beneficial Interests in Securitized Financial Assets.” This Statement is effective for all financial instruments acquired or issued after the beginning of an entity’s first fiscal year that begins after September 15, 2006. Management does not believe that the adoption of SFAS No. 155 will have a material impact on the Company’s financial statements.

In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements." SFAS 157, among other things, defines fair value, establishes a framework for measuring fair value and enhances disclosures about fair value measurements required under other accounting pronouncements, but does not change existing guidance as to whether or not an instrument is carried at fair value. SFAS 157 is effective for the Company on January 1, 2008. Management is currently evaluating the provisions of SFAS 157 and its potential effect on its financial statements.

In June 2006, the FASB issued FASB interpretation No. 48, "Accounting for Uncertainty in Income Taxes-an interpretation of FASB Statement No. 109." FIN 48 clarifies the accounting for income taxes by prescribing the minimum recognition threshold that a tax position must meet to be recognized in the financial statements. FIN 48 also provides guidance on measurement, derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. The Company must adopt FIN 48 on January 1 2007. Management is currently evaluating FIN 48 and its potential effect on its financial statements.

In September 2006, the SEC issued Staff Accounting Bulletin No. 108 ("SAB 108"), "Considering the Effects of Prior Year Misstatements When Quantifying Misstatements in Current Year Financial Statements", providing guidance on quantifying financial statement misstatement and implementation (e.g., restatement or cumulative effect to assets, liabilities and retained earnings) when first applying this guidance. SAB 108 is effective for the Company in 2007. Management does not believe the guidance provided by SAB 108 will have a material effect on the Company's financial statements.


11
NOTE 7.     STOCK-BASED COMPENSATION

Statement 123R requires that the grant date fair value of equity awards to employees be recognized as compensation expense over the period during which an employee is required to provide service in exchange for such award. The Company adopted Statement 123R using “modified retrospective application”, electing to restate all prior periods.

Prior to the adoption of SFAS No. 123R, the Company followed the intrinsic value method in accordance with APB No. 25 to account for its employee stock options. Under the intrinsic value method, no compensation expense was recognized if the exercise price of the Company’s employee’s stock options equaled the market price of the underlying stock on the date of the grant. Compensation expense was only recognized in connection with the issuance of restricted stock. As the modified retrospective application was used to apply SFAS 123R, prior periods were restated to reflect the compensation cost related to stock options granted. The following table summarizes the impact of modified retrospective application on the previously reported results for the periods shown:

   
Three months
  
Nine months
   
ended
  
ended
   
September 30, 2005
  
September 30, 2005
       
(In thousands, except per
share data)
   
(In thousands, except per
share data)
  
           
Income before income taxes, originally reported
$
24,695 
  
$
75,763 
Stock-based compensation expense under the fair value method
 
(604)
 
 
(1,777)
Income before income taxes, restated
$
24,091
 
$
73,986
           
Net Income, originally reported
$
17,039 
  
$
52,203 
Stock-based compensation expense under the fair value method,
      
net of tax
 
(393)
  
 
(1,155)
Net Income, restated
$
16,646
  
$
51,048
           
Net income per share (basic), originally reported
$
0.60
  
$
1.83
Net income per share (basic), restated
  
0.58
    
1.79
   
 
      
Net income per share (diluted), originally reported
$
0.59
 
$
1.80
Net income per share (diluted), restated
  
0.57
    
1.77

Total option related expense for the three months ended September 30, 2006 of $796 thousand ($517 thousand after tax), or $0.02 for basic and diluted earnings per share, is attributable to the Company’s adoption of SFAS 123R. Total option related expense for the nine months ended September 30, 2006 of $1.8 million ($1.2 million after tax), or $0.04 for basic and diluted earnings per share, is attributable to the Company’s adoption of SFAS 123R.

The Company adopted the Omnibus Incentive Plan (the “Omnibus Plan”) which was established in 1997 and was subsequently modified. The Omnibus Plan reserves 3,750,000 shares of common stock for issuance to directors, officers, and employees of the Company or any of its subsidiaries. A grant under the Omnibus Plan may be options intended to be incentive stock options, non-qualified stock options, stock appreciation rights or restricted stock. Options are typically granted to officers and employees annually in July, with an exercise price equal to the market price of the Company’s shares at the date of grant; those option awards generally vest based on four years of continuous service and have 10-year contractual terms (under the Omnibus Plan, no options shall be exercisable later than the fifteenth anniversary date of the grant, ten if it is an incentive stock option). Restricted shares granted to officers and employees typically vest over a one to three year period. Directors currently may elect, in lieu of cash, to receive up to 70% of their fees in stock options with a five-year term granted under the Omnibus Plan, which vest in full on the grant date (provided that the director may not sell the underlying shares for at least nine months after the grant date), and up to 100% of their fees in restricted stock granted under the Omnibus Plan, which vests one year after the grant date.

During the third quarter of 2006, the Company acquired First Oak Brook Bancshares. As a result of this merger, and reflecting adjustments based on the exchange ratio for the stock portion of the merger consideration paid to FOBB stockholders, approximately 250,000 stock options, 47,000 director stock units and 35,000 restricted stock units were assumed by the Company. These options and units are unrelated to the Omnibus Plan described above.

12
The following table provides information about options outstanding for the nine months ended September 30, 2006:

             
Weighted
    
             
Average
    
         
Weighted
 
Remaining
  
Aggregate
         
Average
  
Contractual
  
Intrinsic
     
Number of
  
Exercise
  
Term
  
Value
     
Options
  
Price
  
(In Years)
  
(in millions)
                   
Options outstanding as of December 31, 2005
  
1,870,353
 
$25.29
        
 
Granted
  
438,989
 
$36.46
        
 
Assumed in purchase
  
251,312
 
$23.30
        
 
Exercised
  
(99,994)
  
$17.32
        
 
Expired or cancelled
  
-
 
$  0.00
        
 
Forfeited
  
(42,705)
  
$32.07
        
Options outstanding as of September 30, 2006
  
2,417,955
 
$27.32
  
6.14
  
$ 23.1
                   
Options exercisable as of September 30, 2006
  
1,246,692
 
$19.94
  
4.01
  
$ 21.1

The fair value of each option award is estimated on the date of grant using the Black Scholes option pricing model based on certain assumptions. Expected volatility is based on historical volatilities of Company shares, and expected future fluctuations. The risk free rate for periods within the contractual term of the option is based on the U.S. Treasury yield curve in effect at the time of the grant. The expected life of options is estimated based on historical employee behavior and represents the period of time that options granted are expected to remain outstanding. The following assumptions were used for options granted during the three and nine month periods ended September 30 (options granted during the third quarter of each period):

       
 
   
September 30, 2006
  
September 30, 2005
Expected volatility
 
16.62%
22.00%
Risk free interest rate
  
 
5.12%
4.30%
Dividend yield
 
 
1.61%
1.20%
Expected life
 
 
6 years
6 years


The total intrinsic value of options exercised during the nine months ended September 30, 2006 and 2005 was $1.8 million and $6.7 million, respectively.

The following is a summary of changes in nonvested restricted shares under the Omnibus Plan for the nine months ended September 30, 2006:

       
Weighted Average
 
   
Number of Shares
  
Grant Date Fair Value
  
Shares Outstanding at December 31, 2005
80,018
  
$37.68
  
 
Granted
46,877
 
35.78
  
 
Vested
(9,104)
  
35.39
  
 
Cancelled
(3,783)
  
38.61
  
Shares Outstanding at September 30, 2006
114,008
  
$38.22
  
         
As of September 30, 2006, there was $8.4 million of total unrecognized compensation cost related to nonvested share-based compensation arrangements (including share option and nonvested share awards) granted under the Omnibus Plan. Additionally, as of September 30, 2006, approximately $520 thousand of total unrecognized compensation expense related to nonvested share-based arrangements assumed in the acquisition of First Oak Brook Bancshares.

13
NOTE 8.    SHORT-TERM BORROWINGS

Short-term borrowings are summarized as follows as of September 30, 2006 and December 31, 2005 (dollars in thousands):

   
September 30,
  
December 31,
 
   
2006
  
2005
  
   
Weighted Average
Interest Rate
  
Amount
  
Weighted Average
Interest Rate
  
Amount
  
                   
Federal funds purchased
    
-
%
$
-
    
4.46
%
$
30,600
  
Assets sold under agreements to repurchase:
                          
Customer repurchase agreements
    
3.54
    
238,520
    
2.47
    
196,024
  
Company repurchase agreements
    
5.30
    
48,020
    
4.35
    
281,305
  
Federal Home Loan Bank advances
    
5.23
    
209,193
    
4.43
    
237,718
  
Treasury, tax and loan demand notes
    
5.34
    
3,272
          
-
  
Correspondent bank line of credit of $30 million
    
6.07
    
12,000
          
-
  
                           
     
4.47
%
$
511,005
    
3.89
%
$
745,647
  


Assets sold under agreements to repurchase are agreements in which the Company acquires funds by selling securities or 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. Assets sold under agreements to repurchase totaled $286.5 million and $477.3 million at September 30, 2006 and December 31, 2005, respectively.

The Company had Federal Home Loan Bank advances with maturity dates less than one year consisting of $209.2 million in fixed rate advances at September 30, 2006, and $192.7 million in fixed rate advances and a $45.0 million overnight advance at December 31, 2005. At September 30, 2006, fixed rate advances had effective interest rates, net of premiums, ranging from 2.06% to 5.57% and were subject to a prepayment fee. At September 30, 2006, the advances had maturities ranging from October 2006 to September 2007.

A collateral pledge agreement exists whereby at all times, the Company must keep on hand, free of all other pledges, liens, and encumbrances, securities and first mortgage loans with unpaid principal balances aggregating no less than 133% of the outstanding secured advances from the Federal Home Loan Bank.

The treasury, tax and loan demand notes are generally repaid within 90 days from the transaction date and are secured by municipal securities and commercial loans.

The Company has a $30 million correspondent bank line of credit which has certain covenants that require the Company to maintain MB Financial Bank’s “Well Capitalized” status, to generally incur no other debt except in the usual course of business, and to maintain minimum financial ratios relating to MB Financial Bank’s non-performing assets and loan loss reserve and the Company’s return on assets. The Company was in compliance with such covenants as of September 30, 2006. 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 September 30, 2006, $12 million was outstanding on the correspondent bank line of credit, and there was no balance outstanding as of December 31, 2005.


14
NOTE 9.    LONG-TERM BORROWINGS

The Company had Federal Home Loan Bank advances with maturities greater than one year of $231.2 million and $53.6 million at September 30, 2006 and December 31, 2005, respectively. As of September 30, 2006, the advances had fixed terms with effective interest rates, net of premiums, ranging from 2.84% to 5.87%.

The Company had notes payable to banks totaling $9.4 million and $10.6 million at September 30, 2006 and December 31, 2005, respectively, which as of September 30, 2006, were accruing interest at rates ranging from 1.20% to 9.38%. Lease investments includes equipment with an amortized cost of $12.7 million and $14.7 million at September 30, 2006 and December 31, 2005, respectively, that is pledged as collateral on these notes.

During the first quarter of 2006, prior to its acquisition by the Company, Oak Brook Bank entered into a $40 million ten year structured repurchase agreement which is non-putable for five years. The borrowing agreement floats at 3-month LIBOR less 37 basis points and reprices quarterly. The counterparty to the repurchase agreement has a one-time put option after five years. If the option is not exercised, the repurchase agreement converts to a fixed rate borrowing at 4.75% for the remaining five year term. There were no term repurchase agreements at December 31, 2005.

On September 29, 2006, the Company’s Oak Brook Bank subsidiary entered into a seven year subordinated debt facility under which up to $25 million can be borrowed The debt can be prepaid at any time without penalty. During the third quarter of 2006, $10 million was borrowed under the facility. Interest is payable at a rate of 3 month LIBOR + 1.25% The debt matures on October 1, 2013. In addition, the Company has a $500 thousand seven-year term loan from the same lender. Interest is payable at a rate of 3 month LIBOR + 0.70%. As long as the subordinated debt is outstanding, the Company is required to keep the $500 thousand debt outstanding.

On June 30, 2005, the Company’s Union Bank subsidiary issued $7 million of 10 year floating rate subordinated debt. Interest is payable at a rate of 3 month LIBOR + 1.55%, on the 23rd day of each February, May, August and November, beginning August 23, 2005. The first optional call date is August 23, 2010 at par, or at a premium to par at any time prior to that date upon the occurrence of a specified adverse tax event.

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

   
Amount
  
Year ending December 31,
      
2006
  
$
1,886
  
2007
   
6,002
  
2008
   
80,419
  
2009
    
2,061
  
2010
    
439
  
Thereafter
    
208,083
  
   
$
298,890
  

NOTE 10.    JUNIOR SUBORDINATED NOTES ISSUED TO CAPITAL TRUSTS

The Company has established 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.


15
The table below summarizes the outstanding junior subordinated notes and the related trust preferred securities issued by each trust as of September 30, 2006 (in thousands):

 
MB Financial (2)
Capital Trust III
MB Financial
Capital Trust II
MB Financial
Capital Trust I
Coal City
Capital Trust I
         
Junior Subordinated Notes:
        
Principal balance
$ 10,310
$ 36,083
$ 61,669
$ 25,774
Annual interest rate
3-mo LIBOR + 1.50%
3-mo LIBOR + 1.40%
8.60%
3-mo LIBOR + 1.80%
Stated maturity date
September 23, 2036
September 15, 2035
September 30, 2032
September 1, 2028
Call date
September 23, 2011
September 15, 2010
September 30, 2007
September 1, 2008
         
Trust Preferred Securities:
        
Face value
$ 10,000
$ 35,000
$ 59,800
$ 25,000
Annual distribution rate
3-mo LIBOR + 1.50%
3-mo LIBOR + 1.40%
8.60%
3-mo LIBOR + 1.80%
Issuance date
July 2006
August 2005
August 2002
July 1998
Distribution dates (1)
Quarterly
Quarterly
Quarterly
Quarterly
         
 
MB Financial (2)
Capital Trust IV
FOBB (3)
Capital Trust III
FOBB (3)
Capital Trust II
FOBB (3)
Capital Trust I
         
Junior Subordinated Notes:
        
Principal balance
$ 20,619
$ 5,155
$ 12,372
$ 6,186
Annual interest rate
3-mo LIBOR + 1.52%
3-mo LIBOR + 2.80%
3-mo LIBOR + 3.45%
10.60%
Stated maturity date
September 15, 2036
January 23, 2034
June 26, 2032
September 7, 2030
Call date
September 15, 2011
January 23, 2009
June 26, 2007
September 7, 2010
         
Trust Preferred Securities:
        
Face value
$ 20,000
$ 5,000
$ 12,000
$ 6,000
Annual distribution rate
3-mo LIBOR + 1.52%
3-mo LIBOR + 2.80%
3-mo LIBOR + 3.45%
10.60%
Issuance date
August 2006
December 2003
June 2002
September 2000
Distribution dates (1)
Quarterly
Quarterly
Quarterly
Semi-annual
(1)  
All cash distributions are cumulative.
(2)  
The company issued MB Financial Capital Trust III & IV during the third quarter of 2006.
(3)  
As the merger with FOBB was treated as a purchase, FOBB’s trust preferred securities were not outstanding for the Company as of December 31, 2005

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 the capital trust entities above established prior to that date (MB Financial Capital Trust I and Coal City Capital Trust I). 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 those 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 the call dates noted in the table above. 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. During any such deferral period the Company may not pay cash dividends on its common stock and generally may not repurchase its common stock.

16
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 September 30, 2006, 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 $17.7 million and $205.4 million, respectively, at September 30, 2006. 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 for the nine months ended September 30, 2006 and 2005 was approximately $1.0 million and $1.3 million, 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 September 30, 2006, the Company's credit exposure relating to interest rate swaps was not significant.

The Company’s derivative financial instruments are summarized below as of September 30, 2006 and December 31, 2005 (dollars in thousands):
   
September 30, 2006
  
December 31, 2005
  
           
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)
  
$
17,693
  
$
641
    
5.7
    
7.47
%
  
6.05
%
$
28,553
  
$
837
  
Pay variable/receive fixed swaps (2)
    
205,405
   
(5,472
)
  
5.7
    
4.64
%
  
5.34
%
  
218,851
   
(5,454
)
                                             
Non-hedging derivative instruments (3):
                                            
Pay fixed/receive variable swaps
    
53,550
   
423
   
7.2
    
7.23
%
  
6.58
%
  
33,932
   
(603
)
Pay variable/receive fixed swaps
    
58,145
    
(576
)
  
7.2
    
6.44
%
  
7.08
%
  
35,081
    
568
 
Total portfolio swaps
  
$
334,793
  
$
(4,984
)
  
6.2
    
5.52
%
  
5.88
%
$
316,417
  
$
(4,652
)
(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.

17
At September 30, 2006 and December 31, 2005, the following financial instruments were outstanding whose contract amounts represent off-balance sheet credit risk (in thousands):

   
Contract Amount
  
   
September 30,
2006
  
 December 31,
2005
  
Commitments to extend credit:
          
Home equity lines
  
$
469,346
  
$
194,579
  
Other commitments
   
1,395,721
    
913,142
  
               
Letters of credit:
              
Standby
    
110,103
    
76,651
  
Commercial
   
53,242
    
32,781
  


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 September 30, 2006, the maximum remaining term for any standby letter of credit was June 19, 2011. 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 September 30, 2006, 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 $53.9 million to $163.3 million from $109.4 million at December 31, 2005. Of the $163.3 million in commitments outstanding at September 30, 2006, approximately $119.3 million of the letters of credit have been issued or renewed since December 31, 2005. The Company had a $1.3 million liability recorded as of September 30, 2006 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.

18
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, brokerage fees, trust and asset management fees, net gains on the sale of investment securities available for sale, increase in cash surrender value of life insurance, net gains on sale of other assets, merchant card processing fees 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, merchant card processing 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 $14.7 million for the third quarter of 2006, compared to $16.6 million for the third quarter of 2005. Our 2006 third quarter results generated an annualized return on average assets of 0.85% and an annualized return on average equity of 9.10%, compared to 1.18% and 13.28%, respectively, for the same period in 2005. Fully diluted earnings per share for the third quarter of 2006 decreased to $0.46 compared to $0.57 per share in the 2005 third quarter.

The Company completed its merger with First Oak Brook Bancshares, Inc. (FOBB), parent of Oak Brook Bank, on August 25, 2006. As a result of the merger the quarter reflects the following items:

·  
We incurred merger related expenses (severance, contract termination costs, moving expenses, etc.) of approximately $800 thousand. These were expenses incurred at MB Financial that were required to be expensed and not included in the purchase accounting.
·  
We sold $345 million of indirect auto loans held by Oak Brook Bank on September 29, 2006 to remove low yielding assets. Furthermore, we have significantly scaled back our indirect auto origination business. These loans were marked to fair value on the merger date. Due to movement in interest rates from the merger date to sale date, the sale resulted in a gain of $338 thousand. The yield on the loans sold was approximately 6.34%.
·  
We sold of $335 million in investment securities held by Oak Brook Bank, the majority of which were callable, to remove negative convexity from our balance sheet. These securities were marked to fair value on the merger date. Due to movement in interest rates from the merger date to the sale dates, a loss of $66 thousand was recorded on the sale.

19
 
·  
On July 27, 2006 we issued $10 million of trust preferred securities at a rate of 3 month LIBOR plus 1.50%, and on August 23, 2006 we issued $20 million in trust preferred securities at a rate of 3 month LIBOR plus 1.52%, to fund part of the cash portion of the merger consideration paid to FOBB stockholders. On September 29, 2006, through Oak Brook Bank, we issued $10 million of subordinated debt at a rate of 3 month LIBOR plus 1.25%.
·  
Oak Brook Bank’s results were included for 36 days in the quarter. Net income related to Oak Brook Bank for those 36 days was $2.0 million, including the carrying cost of cash consideration paid to former FOBB stockholders. Oak Brook Bank’s net income does not reflect cost savings which we expect to realize after the conversion of Oak Brook Bank’s systems to MB Financial Bank’s systems and the merger of Oak Brook Bank into MB Financial Bank, both of which occurred on November 2, 2006. We believe that we will meet our previously announced cost savings target of $12.6 million (pre-tax) and may exceed that target. We issued approximately 8.4 million shares of common stock and paid approximately $74.1 million in cash to FOBB shareholders in connection with the merger.


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 materially 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. FOBB’s loans were reviewed and risk rated in accordance with the Company’s policies and procedures at the time of the acquisition. 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 present value of 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 September 30, 2006, the aggregate residual value of the equipment leased under our direct finance, leveraged, and operating leases totaled $30.9 million. See Note 1 and Note 6 of the notes to our December 31, 2005 audited consolidated financial statements for additional information.

20
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 allowances 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

Third quarter Results

Net income was $14.7 million for the third quarter of 2006, compared to $16.6 million for the third quarter of 2005. The results for the third quarter of 2006 generated an annualized return on average assets of 0.85% and an annualized return on average equity of 9.10%, compared to 1.18% and 13.28%, respectively, for the same period in 2005.

Net interest income was $51.8 million for the three months ended September 30, 2006, an increase of $5.6 million, or 12.1% from $46.2 million for the comparable period in 2005. Net interest income grew primarily due to a $1.1 billion, or 20.7%, increase in average interest earning assets, partially offset by a $994.7 million, or 22.7%, increase in average interest bearing liabilities. Approximately $876.1 million of the increase in average interest earning assets and approximately $757.8 million of the increase in interest bearing liabilities was due to the acquisition of FOBB, with the remainder resulting from organic growth. The net interest margin, expressed on a fully tax equivalent basis, was 3.45% for the third quarter of 2006 and 3.71% for the third quarter of 2005. Twelve basis points of the decline in the net interest margin, on a fully tax equivalent basis, was due to the merger with FOBB. Oak Brook Bank’s net interest margin, on a fully tax equivalent basis, for the 36 days in the quarter was 2.93%. The remainder of the decline in the net interest margin was due to the inverted yield curve and continued tight credit spreads on loans.

The provision for loan losses was $4.0 million in the third quarter of 2006 and $1.8 million in the third quarter of 2005. Net charge-offs were $5.0 million in the quarter ended September 30, 2006 compared to $1.8 million in the quarter ended September 30, 2005. See “Asset Quality” section below for further analysis of the allowance for loan losses.

Other income was $17.6 million for the quarter ended September 30, 2006, an increase of $892 thousand, or 5.3% compared to $16.7 million for the quarter ended September 30, 2005. Merchant card processing income increased by $1.2 million primarily due to the acquisition of FOBB. Brokerage fee income increased by $595 thousand due to increased investment representative production in 2006. Partially offsetting these increases, net lease financing declined by $725 thousand primarily due to a residual write-down of $525 thousand. Loan servicing fees decreased by $303 thousand primarily due to a deferred gain being fully amortized in the second quarter of 2006. The amortization was $144 thousand per month. There were asset write-offs of $296 thousand related to the merger with FOBB.

Other expense increased $7.0 million or 18.8% to $44.0 million for the quarter ended September 30, 2006 from $37.1 million for the quarter ended September 30, 2005. Salaries and employee benefits increased by $4.6 million primarily due to the acquisition of FOBB. Oak Brook Bank related salaries and employee benefits expense for the 36 days in the quarter was approximately $3.0 million. Occupancy and equipment expense, merchant card processing expense and other operating expenses increased by $581 thousand, $1.1 million and $578 thousand, respectively. These increases were primarily due to the acquisition of FOBB. Brokerage fee expense increased by $448 thousand, which is directly related to the increase in brokerage income. Merger related expenses (severance, contract termination costs, moving expenses, disposal of assets, etc.) were approximately $800 thousand. Approximately $300 thousand of these expenses are included as loss on sale of other assets in other income. These increases were partially offset by a decrease in advertising and marketing expense of $689 thousand compared to the third quarter of 2005. There was additional advertising for the deposit gathering strategy implemented in the third quarter of 2005. Additionally, telecommunications expense decreased by $397 thousand in the third quarter of 2006 due to conversion related costs incurred in 2005 as a result of implementing a new phone system.

Income tax expense for the three months ended September 30, 2006 decreased $843 thousand to $6.6 million compared to $7.4 million for the same period in 2005. The effective tax rate was 30.9% for the quarters ended September 30, 2006 and 2005.

21
In the first quarter of 2006, MB Financial adopted Statement of Financial Accounting Standards No. 123R, “Share-Based Payment” (Statement 123R), using the modified retrospective application. Statement 123R requires the recognition of compensation expense for stock options and, under the modified retrospective application, prior period results are restated. As a result, previously reported diluted net income per share for the three months ended September 30, 2005 was reduced by $0.02. The impact on the three months ended September 30, 2006 due to the adoption of Statement 123R was also $0.02.


Year-To-Date Results

Net income was $49.0 million for the first nine months of 2006, compared to $51.0 million for the first nine months of 2005. The results for the first nine months of 2006 generated an annualized return on average assets of 1.06% and an annualized return on average equity of 11.81%, compared to 1.25% and 13.96%, respectively, for the first nine months of 2005.

Net interest income was $144.2 million for the nine months ended September 30, 2006, an increase of $8.7 million, or 6.4% from $135.6 million for the comparable period in 2005. Net interest income grew primarily due to a $598.0 million, or 12.1% increase in average interest earning assets. Approximately $295.2 million of the increase in average interest earning assets was due to our acquisition of FOBB, with the remainder resulting from organic growth. The net interest margin, expressed on a fully tax equivalent basis, was 3.58% for the first nine months of 2006, compared to 3.76% for the first nine months of 2005. The decline in the net interest margin is primarily due to the inverted yield curve, continued tight credit spreads, and the acquisition of FOBB.

The provision for loan losses was $6.6 million in the first nine months of 2006 compared to $7.2 million in the first nine months of 2005. Net charge-offs were $6.9 million in the nine months ended September 30, 2006 compared to $6.6 million in the nine months ended September 30, 2005. See “Asset Quality” section below for further analysis of the allowance for loan losses.

Other income increased $1.1 million, or 2.3% to $51.2 million for the nine months ended September 30, 2006 from $50.0 million for the nine months ended September 30, 2005. Net gain on sale of other assets increased by $804 thousand primarily due to the sale of excess real estate. Brokerage fee income increased $1.2 million during the first nine months of 2006 due to increased investment representative production in 2006. Merchant card processing income increased by $1.8 million due to an increase in transactions processed during the first nine months of 2006 compared to the first nine months of 2005 and the acquisition of Oak Brook Bank. Approximately $907 thousand in merchant card processing income was due to Oak Brook Bank. Offsetting the increases above, net gains on sale of investment securities decreased by $2.7 million as a net loss of $527 thousand was realized in the first nine months of 2006 compared to net gains of $2.2 million in the first nine months of 2005. Additionally, net lease financing declined by $913 thousand primarily due to a residual write-down of $525 thousand in the third quarter of 2006.

Other expense increased by $13.7 million, or 13.1% to $118.2 million for the nine months ended September 30, 2006 from $104.5 million for the nine months ended September 30, 2005. Salaries and employee benefits increased by $8.3 million. Approximately $3.0 million of the increase in salaries and benefits was due to the acquisition of FOBB. The remaining increase was primarily due to organic growth and the new deposit gathering strategy, initiated in the third quarter of 2005. The increase due to the new deposit gathering strategy was approximately $700 thousand. Other operating expenses increased by $1.5 million partially due to increases in filing and other loan expense and stationary, printing and supplies expense of $209 thousand and $518 thousand, respectively. Printing expense increased from 2005 as a result of outsourcing processes that were previously done in-house. Occupancy and equipment expense increased by $1.4 million. Approximately $505 thousand of the increase in occupancy and equipment expense was due to the acquisition of FOBB. The remaining increase was primarily due to additional branch office locations. Brokerage fee expense increased by $929 thousand, which is directly related to the increase in brokerage income. Merchant card processing expense increased by $1.7 million primarily due to the acquisition of FOBB and an increase in transactions processed during the first nine months of 2006 compared to the first nine months of 2005. Approximately $890 thousand of the increase in merchant card processing expense was due to the acquisition of FOBB. Computer services expense increased by $906 thousand, primarily due to system upgrades during first nine months of 2006. These increases were partially offset by a decrease in advertising and marketing expense of $426 thousand. There was additional advertising for the deposit gathering strategy implemented in the third quarter of 2005. Additionally, telecommunications expense decreased by $638 thousand due to conversion related costs incurred in 2005 as a result of implementing a new phone system.

22
In the first quarter of 2006, MB Financial adopted Statement of Financial Accounting Standards No. 123R, “Share-Based Payment” (Statement 123R), using the modified retrospective application. Statement 123R requires the recognition of compensation expense for stock options and, under the modified retrospective application, prior period results are restated. As a result, previously reported diluted net income per share for the nine months ended September 30, 2005 was reduced by $0.03. The impact on the nine months ended September 30, 2006 due to the adoption of Statement 123R was also $0.04.

Income tax expense for the nine months ended September 30, 2006 decreased $1.3 million to $21.6 million compared to $22.9 million for the same period in 2005. The effective tax rate was 30.6% and 31.0% for the nine months ended September 30, 2006 and 2005, respectively.

23
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 September 30,
 
2006
2005
 
Average Balance
 
Interest
Yield/ Rate
 
 
Average Balance
 
Interest
Yield/ Rate
 
                     
 
 
Interest Earning Assets:
                      
 
Loans (1) (2)
$
4,583,830
$
87,913
7.61
%
$
3,670,401
$
62,125
6.72
%
Loans exempt from federal income taxes (3)
  
4,056
  
72
6.95
    
2,923
  
48
6.43
 
Taxable investment securities
  
1,205,210
  
14,134
4.69
    
1,119,324
  
11,563
4.13
 
Investment securities exempt from federal income taxes (3)
  
330,526
  
4,698
5.56
    
278,281
  
3,901
5.49
 
Federal funds sold
  
3,449
  
46
5.22
    
2,686
  
24
3.50
 
Other interest bearing deposits
 
10,239
 
123
4.77
  
 
12,105
 
98
3.21
 
Total interest earning assets
  
6,137,310
 
106,986
6.92
    
5,085,720
 
77,759
6.07
 
Non-interest earning assets
 
710,183
        
 
527,251
      
 
Total assets
$
6,847,493
        
$
5,612,971
      
 
                       
 
Interest Bearing Liabilities:
                      
 
Deposits:
                      
 
NOW and money market deposit accounts
$
898,455
$
5,546
2.45
%
$
745,373
$
2,585
1.38
%
Savings deposits
  
464,353
  
802
0.69
    
503,375
  
787
0.62
 
Time deposits
  
3,018,685
  
34,813
4.58
    
2,264,255
  
18,840
3.30
 
Short-term borrowings
  
659,964
  
7,818
4.70
    
679,256
  
5,346
3.12
 
Long-term borrowings and junior subordinated notes
 
327,866
 
4,583
5.47
  
 
182,393
 
2,632
5.65
 
Total interest bearing liabilities
  
5,369,323
 
53,562
3.96
    
4,374,652
 
30,190
2.74
 
Non-interest bearing deposits
  
767,925
          
682,955
      
 
Other non-interest bearing liabilities
  
67,594
          
58,132
      
 
Stockholders’ equity
 
642,651
        
 
497,232
      
 
Total liabilities and stockholders’ equity
$
6,847,493
        
$
5,612,971
      
 
Net interest income/interest rate spread (4)
    
$
53,424
2.96
%
    
$
47,569
3.33
%
Taxable equivalent adjustment
    
 
1,670
        
 
1,382
  
 
Net interest income, as reported
    
$
51,754
        
$
46,187
  
 
Net interest margin (5)
        
3.35
%
        
3.60
%
Tax equivalent effect
        
0.10
%
        
0.11
%
Net interest margin on a fully tax equivalent basis (5)
        
3.45
%
        
3.71
%

(1)  
Non-accrual loans are included in average loans.
(2)  
Interest income includes amortization of deferred loan origination fees of $1.5 million and $1.7 million for the three months ended September 30, 2006 and 2005, 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.


24
 
Net interest income on a tax equivalent basis increased $5.9 million, or 12.3% to $53.4 million for the three months ended September 30, 2006 from $47.6 million for the three months ended September 30, 2005. Tax-equivalent interest income increased by $29.2 million due to a $1.1 billion, or 20.7% increase in average interest earning assets. The increase was primarily due to a $914.6 million, or 24.9% increase in average loans and a $138.1 million, or 9.9% increase in average investment securities. The acquisition of FOBB increased the average loan balance and the average investment securities balance by approximately $582.2 million and $226.3 million, respectively. The remaining increase in average earning assets was due to continued organic growth. The yield on average interest earning assets increased 85 basis points to 6.92% due to the increase in market interest rates. Interest expense increased by $23.4 million due to a $994.7 million, or 22.7% increase in overall interest bearing liabilities. The increase was primarily due to increases in time deposits, NOW and money market deposit accounts and long-term borrowings of $754 million, $153.1 million and $145.5 million, respectively. The acquisition of FOBB increased the average balances of time deposits, NOW and money market deposit accounts and long-term borrowings by approximately $442.1 million, $177.6 million and $81.8 million, respectively. The Company issued $30 million in trust preferred securities to fund part of the cash portion of the FOBB merger consideration and also issued $10 million in subordinated debt in the quarter. The yield on average interest bearing liabilities increased 122 basis points to 3.96% due to the increase in overall interest rates, the issuance of $30 million in trust preferred securities, and a shift in the funding mix to higher cost deposits.
 
The net interest margin expressed on a fully tax equivalent basis declined 26 basis points from the third quarter of 2005 to the third quarter of 2006. The net interest margin expressed on a fully tax equivalent basis for the third quarter of 2006 decreased by 21 basis points compared to the second quarter of 2006. Twelve basis points of the decline, on a fully tax equivalent basis, in the third quarter of 2006 was due to the inclusion of Oak Brook Bank for 36 days in the quarter (Oak Brook Bank’s net interest margin was 2.93%, on a fully tax equivalent basis) and the impact of the cash portion of the merger consideration, a portion of which was funded by trust preferred securities. Thirty million dollars of trust preferred securities were issued at a blended rate of 3 month LIBOR plus 1.51%. The Company also borrowed $10 million under the $25 million Oak Brook Bank subordinated debt facility entered into in September 2006 at a rate of 3 month LIBOR plus 1.25%. The remainder of the decline was due to margin compression as a result of the inverted yield curve and continued tight credit spreads.
 
25
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):

   
Nine Months Ended September 30,
  
   
2006
  
2005
  
   
Average Balance
  
Interest
  
Yield/ Rate
  
Average Balance
  
Interest
  
Yield/ Rate
  
Interest Earning Assets:
                          
Loans (1) (2)
  
$
4,107,618
  
$
230,897
    
7.52
%
$
3,530,563
  
$
170,671
    
6.46
%
Loans exempt from federal income taxes (3)
    
3,675
    
189
    
6.78
   
2,969
    
144
    
6.40
 
Taxable investment securities
    
1,121,903
    
38,427
    
4.57
   
1,139,989
    
35,903
    
4.20
 
Investment securities exempt from federal income taxes (3)
    
309,430
    
13,065
    
5.57
   
271,774
    
11,472
    
5.57
 
Federal funds sold
    
3,760
    
139
    
4.87
   
953
    
25
    
3.46
 
Other interest bearing deposits
    
11,540
    
352
    
4.08
   
13,680
    
255
    
2.49
 
Total interest earning assets
    
5,557,926
    
283,069
    
6.81
   
4,959,928
    
218,470
    
5.89
 
Non-interest earning assets
    
605,707
                
513,314
              
Total assets
  
$
6,163,633
              
$
5,473,242
              
                                       
Interest Bearing Liabilities:
                                      
Deposits:
                                      
NOW and money market deposit accounts
  
$
778,579
  
$
12,456
    
2.14
%
$
772,133
  
$
7,186
    
1.24
%
Savings deposits
    
462,727
    
2,449
    
0.71
   
515,685
    
2,390
    
0.62
 
Time deposits
    
2,658,392
    
85,530
    
4.30
   
2,121,306
    
48,008
    
3.03
 
Short-term borrowings
    
680,847
    
22,320
    
4.38
   
678,704
    
13,901
    
2.74
 
Long-term borrowings and junior subordinated notes
    
261,234
    
11,441
    
5.78
   
174,748
    
7,360
    
5.55
 
Total interest bearing liabilities
    
4,841,779
    
134,196
    
3.71
   
4,262,576
    
78,845
    
2.47
 
Non-interest bearing deposits
    
703,463
                
666,284
              
Other non-interest bearing liabilities
    
63,535
                
55,500
              
Stockholders’ equity
    
554,856
                
488,882
              
Total liabilities and stockholders’ equity
  
$
6,163,633
              
$
5,473,242
              
Net interest income/interest rate spread (4)
        
$
148,873
    
3.10
%
      
$
139,625
    
3.42
%
Taxable equivalent adjustment
          
4,639
                
4,066
        
Net interest income, as reported
        
$
144,234
              
$
135,559
        
Net interest margin (5)
                
3.47
%
              
3.65
%
Tax equivalent effect
                
0.11
%
              
0.11
%
Net interest margin on a fully tax equivalent basis (5)
                
3.58
%
              
3.76
%

(1)  
Non-accrual loans are included in average loans.
(2)  
Interest income includes amortization of deferred loan origination fees of $5.1 million and $5.5 million for the nine months ended September 30, 2006 and 2005, 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 $9.2 million, or 6.6% to $148.9 million for the nine months ended September 30, 2006 from $139.6 million for the nine months ended September 30, 2005. Tax-equivalent interest income increased by $64.6 million due to a $598.0 million, or 12.1% increase in average interest earning assets. The increase was comprised of a $577.8 million, or 16.4% increase in average loans and a $19.6 million, or 1.4% increase in average investment securities. The acquisition of FOBB increased the average loan balance and the average investment securities balance by approximately $196.2 million and $76.3 million, respectively. The yield on average interest earning assets increased 92 basis points to 6.81% due to the increase in market interest rates. Interest expense increased by $55.4 million as average interest bearing liabilities increased by $579.2 million, while their cost increased by 124 basis points to 3.71%, also due to the increase in market interest rates. Approximately $255.4 million of the increase of the increase in average interest bearing liabilities was due to our acquisition of Oak Brook Bank, with the remainder resulting from organic growth.
 

The net interest margin expressed on a fully tax equivalent basis for the nine months ended September 30, 2006 decreased by 18 basis points from 3.76% for the nine months ended September 30, 2005 primarily due to the inverted yield curve and continued tight credit spreads on loans and the FOBB merger. Four basis points of the decline, on a fully tax equivalent basis, for the nine months ended September 30, 2006, was due to the inclusion of Oak Brook Bank for 36 days in the nine months ended September 30, 2006.
 
26
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
September 30, 2006
    
Nine months Ended
September 30, 2006
  
   
 Compared to September 30, 2005
  
 Compared to September 30, 2005
  
   
Change
  
Change
      
Change
  
Change
     
   
Due to
  
Due to
  
Total
  
Due to
  
Due to
  
Total
  
   
Volume
  
Rate
  
Change
  
Volume
  
Rate
  
Change
  
                           
Interest Earning Assets:
                          
Loans
  
$
16,666
  
$
9,122
  
$
25,788
  
$
30,171
  
$
30,055
  
$
60,226
  
Loans exempt from federal income taxes (1)
    
21
    
3
    
24
    
35
    
10
    
45
  
Taxable investment securities
    
917
    
1,654
   
2,571
    
(579
)
  
3,103
   
2,524
  
Investment securities exempt from federal Income taxes (1)
    
731
   
66
    
797
   
1,591
   
2
    
1,593
 
Federal funds sold
    
8
    
14
    
22
    
101
    
13
   
114
  
Other interest bearing deposits
    
(17
)
  
42
   
25
   
(44
)
  
141
   
97
 
Total increase (decrease) in interest income
    
18,326
   
10,901
   
29,227
   
31,275
   
33,324
    
64,599
  
                                       
Interest Bearing Liabilities:
                                      
NOW and money market deposit accounts
    
614
    
2,347
   
2,961
   
60
    
5,210
   
5,270
 
Savings deposits
    
(65
)
  
80
   
15
    
(260
)
  
319
   
59
  
Time deposits
    
7,360
   
8,613
    
15,973
   
14,078
   
23,444
   
37,522
 
Short-term borrowings
   
(156
)
  
2,628
    
2,472
   
44
   
8,375
   
8,419
 
Long-term borrowings and junior subordinated notes
    
2,028
   
(77
)
  
1,951
   
3,777
   
304
    
4,081
 
Total increase (decrease) in interest expense
    
9,781
   
13,591
    
23,372
   
17,699
    
37,652
   
55,351
 
Increase (decrease) in net interest income
  
$
8,545
  
$
(2,690
)
$
5,855
  
$
13,576
  
$
(4,328
)
$
9,248
  

(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 $2.2 billion or 39.2% to $8.0 billion at September 30, 2006 from $5.7 billion at December 31, 2005. Net loans increased by $1.4 billion, or 37.5% to $5.1 billion at September 30, 2006. In aggregate, commercial related credits grew by $952.6 million, or 30.6%. See “Loan Portfolio” section below for further analysis. Investment securities available for sale increased by $357.1 million, or 25.4% to $1.8 billion at September 30, 2006. Due to the acquisition of FOBB net loans and investment securities available for sale increased by $1.1 billion and $470.9 million, respectively. Goodwill and other intangibles increased by $254.9 million and $17.2 million, respectively, primarily due to the acquisition of FOBB. Additionally, the increases in cash surrender value of life insurance, premise and equipment, and other assets were primarily due to the acquisition of FOBB.

Total liabilities increased by $1.9 billion, or 36.8% to $7.1 billion at September 30, 2006 from $5.2 billion at December 31, 2005. Total deposits grew by $1.9 billion or 44.3% to $6.1 billion during that same period. Nearly all of the deposit increase was due to the acquisition of FOBB. Short-term borrowings decreased by $234.6 million, or 31.5%, primarily due to a decrease in securities sold under agreement to repurchase of $190.8 million. This decrease was partially offset by an addition to short-term borrowings of approximately $48.8 million due to the FOBB acquisition. Long-term borrowings increased by $227.7 million. Approximately $207.4 million of the increase was due to the acquisition of FOBB. Junior subordinated notes issued to capital trusts increased by $55.7 million primarily due to issuance of an additional $30.0 million in trust preferred securities during the third quarter of 2006 to fund part of the cash portion of the FOBB merger consideration. Approximately $24.8 million of the increase was due to the junior subordinated notes issued to capital trusts that FOBB had outstanding prior to the acquisition.

Total stockholders’ equity increased $324.5 million to $831.5 million at September 30, 2006 compared to $507.0 million at December 31, 2005. Approximately $296.9 million of the increase was due to the acquisition of FOBB. Retained earnings increased by $35.5 million due to net income of $49.0 million, partially offset by $13.6 million or $0.48 per share, in cash dividends. Treasury stock increased by $10.0 million resulting primarily from the repurchase of 393,681 outstanding shares.
 
27
At September 30, 2006, the Company’s total risk-based capital ratio was 11.72%; Tier 1 capital to risk-weighted assets ratio was 10.39% and Tier 1 capital to average asset ratio was 9.51%. MB Financial Bank, N.A., Oak Brook Bank, and Union Bank, N.A. were each categorized as “Well-Capitalized” under Federal Deposit Insurance Corporation regulations at September 30, 2006.

Loan Portfolio

The following table sets forth the composition of the loan portfolio as of the dates indicated (dollars in thousands):
   
September 30,
  
December 31,
 
September 30,
  
   
2006
  
2005
  
2005
  
   
Amount
  
% of Total
  
Amount
  
% of Total
  
Amount
  
% of Total
  
                           
Commercial related credits
                          
Commercial loans
  
$
1,054,426
    
20
%
$
833,046
    
22
%
$
832,304
    
23
%
Commercial loans collateralized by assignment of lease payments
    
439,123
   
9
%
  
299,053
   
8
%
  
283,171
   
7
%
Commercial real estate
    
1,740,988
   
34
%
  
1,456,585
   
39
%
  
1,438,333
   
39
%
Construction real estate
    
828,157
   
16
%
  
521,434
   
14
%
  
485,762
   
13
%
Total commercial related credits
    
4,062,694
    
79
%
  
3,110,118
    
83
%
  
3,039,570
    
82
%
Other loans
                                      
Residential real estate
    
545,244
   
10
%
  
387,167
   
10
%
  
408,273
   
11
%
Indirect vehicle
    
99,788
    
2
%
  
-
    
-
    
-
    
-
  
Consumer loans
    
443,616
   
9
%
  
248,897
   
7
%
  
251,104
   
7
%
Gross loans (1)
    
5,151,342
   
100
%
  
3,746,182
   
100
%
  
3,698,947
   
100
%
Allowance for loan losses
    
(61,128
)
        
(44,979
)
        
(44,779
)
      
Net loans
  
$
5,090,214
        
$
3,701,203
        
$
3,654,168
        

(1)  
Gross loan balances at September 30, 2006, December 31, 2005, and September 30, 2005 are net of unearned income, including net deferred loan fees of $3.9 million, $3.6 million, and $3.5 million, respectively.


Net loans increased by $1.4 billion, or 37.5%, to $5.1 billion at September 30, 2006 from $3.7 billion at December 31, 2005. Approximately $702.3 million of the increases in commercial related credits were due to the acquisition of FOBB. The remaining increases in commercial related credits were primarily due to growth in both existing customer and new customer loan demand resulting from the Company’s focus on marketing and new business development. Commercial related credits grew 10.8% on an annualized basis due to organic growth. The increases in residential real estate loans and consumer loans were primarily due to the acquisition of FOBB. On September 29, 2006, approximately $345 million of the Oak Brook Bank indirect auto loan portfolio was sold, leaving $99.8 million of indirect auto loans at September 30, 2006.

Net loans increased by $1.4 billion, or 39.3%, to $5.1 billion at September 30, 2006 from $3.7 billion at September 30, 2005. Approximately $702.3 million of the increases in commercial related credits were due to the acquisition of FOBB. The remaining increases in commercial related credits were primarily due to growth in both existing customer and new customer loan demand resulting from the Company’s focus on marketing and new business development. On September 29, 2006 approximately $345 million of the Oak Brook Bank indirect auto loan portfolio was sold.

28
Asset Quality

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

   
September 30,
2006
  
December 31,
2005
  
September 30,
2005
  
Non-performing loans:
              
Non-accrual loans
 
$
20,440
  
$
20,841
  
$
18,753
  
Loans 90 days or more past due, still accruing interest
    
435
    
321
    
514
  
Total non-performing loans
    
20,875
    
21,162
    
19,267
  
Other real estate owned
    
37
    
354
    
266
  
Repossessed vehicles
   
259
    
-
    
-
  
Total non-performing assets
  
$
21,171
  
$
21,516
  
$
19,533
  
Total non-performing loans to total loans
    
0.41
%
  
0.56
%
  
0.52
%
Allowance for loan losses to non-performing loans
    
292.83
%
  
212.55
%
  
232.41
%
Total non-performing assets to total assets
    
0.27
%
  
0.38
%
  
0.34
%


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 judgments, 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 determined 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.

29

A reconciliation of the activity in the allowance for loan losses follows (dollar amounts in thousands):

   
Three Months Ended
  
Nine Months Ended
  
           
   
September 30,
2006
  
September 30,
2005
  
September 30,
2006
  
September 30,
2005
  
                   
Balance at beginning of period
  
$
45,716
  
$
44,790
  
$
44,979
  
$
44,266
  
Additions from acquisition
    
16,426
   
-
   
16,426
   
-
 
Provision for loan losses
    
4,000
   
1,750
   
6,600
   
7,150
 
Charge-offs
    
(6,439
)
  
(2,687
)
  
(9,885
)
  
(8,662
)
Recoveries
    
1,425
   
926
   
3,008
   
2,025
 
Balance at September 30,
  
$
61,128
  
$
44,779
  
$
61,128
  
$
44,779
  
Total loans at September 30,
  
$
5,151,342
  
$
3,698,947
  
$
5,151,342
  
$
3,698,947
  
Ratio of allowance for loan losses to total loans
    
1.19
%
  
1.21
%
  
1.19
%
  
1.21
%
Net loan charge-offs to average loans (annualized)
    
0.43
%
  
0.19
%
  
0.22
%
  
0.25
%


Net charge-offs increased by $3.3 million to $5.0 million in the quarter ended September 30, 2006 from $1.8 million in the quarter ended September 30, 2005. A substantial portion of the Company’s $5.0 million of net charge-off activity in the quarter was due to the charge-off of one commercial credit totaling $3.7 million.

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, respectively. An asset is classified Substandard, or risk rated seven if it is inadequately protected by the current net worth and paying capacity of the obligor or the collateral pledged, if any. Substandard assets include those characterized by the distinct possibility that we will sustain some loss if the deficiencies are not corrected. Assets classified as Doubtful, or risk rated eight have all the weaknesses inherent in those classified Substandard with the added characteristic that the weaknesses present make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable. Assets classified as Loss, or risk rated nine are those considered uncollectible and viewed as valueless assets and have been charged-off. Assets that do not currently expose us to sufficient risk to warrant classification in one of the aforementioned categories, but possess weaknesses that deserve management’s close attention are deemed to be Special Mention, or risk rated six.

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

30
Although management believes that adequate specific and general loan loss allowances have been established, actual losses are dependent upon future events and, as such, further additions to the level of specific and general loan loss allowances may become necessary.

We define potential problem loans as loans rated substandard or doubtful which are included on the watch list presented to our bank subsidiaries’ boards of directors that do not meet the definition of a non-performing loan (See “Asset Quality” section above for non-performing loans), but where known information about possible credit problems of borrowers causes management to have serious doubts as to the ability of such borrowers to comply with present loan repayment terms. Our decision to include performing loans in potential problem loans does not necessarily mean that we expect losses to occur, but that we recognize potential problem loans carry a higher probability of default. The aggregate principal amounts of potential problem loans were $24.5 million, or 0.47% of total loans as of September 30, 2006, and approximately $25.2 million, or 0.67% of total loans as of December 31, 2005 and $27.2 million, or 0.74% of total loans as of September 30, 2005.

Lease Investments

The lease portfolio is comprised of various types of equipment, generally technology related, including computer systems and satellite equipment, material handling and general manufacturing equipment. The credit quality of the lessee is often an investment grade public debt rating by Moody’s or Standard & Poors, or the equivalent as determined by us, and occasionally below investment grade.

Lease investments by categories follow (in thousands):

   
September 30,
  
December 31,
  
September 30,
  
   
2006
  
2005
  
2005
  
               
Direct finance leases:
              
Minimum lease payments
  
$
42,322
  
$
40,264
  
$
36,872
  
Estimated unguaranteed residual values
    
5,626
   
4,801
   
4,398
 
Less: unearned income
    
(4,136
)
  
(3,540
)
  
(3,055
)
Direct finance leases (1)
  
$
43,812
  
$
41,525
  
$
38,215
  
                     
Leveraged leases:
                    
Minimum lease payments
  
$
26,466
  
$
36,109
  
$
38,170
  
Estimated unguaranteed residual values
    
3,579
   
4,051
   
3,763
 
Less: unearned income
    
(2,079
)
  
(2,649
)
  
(2,836
)
Less: related non-recourse debt
    
(24,815
)
  
(34,018
)
  
(35,872
)
Leveraged leases (1)
  
$
3,151
  
$
3,493
  
$
3,225
  
                     
Operating leases:
                    
Equipment, at cost
  
$
128,991
  
$
127,815
  
$
130,554
  
Less accumulated depreciation
    
(63,345
)
  
(62,119
)
  
(67,706
)
Lease investments, net
  
$
65,646
  
$
65,696
  
$
62,848
  

(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.

31
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 $9.4 million at September 30, 2006, $10.6 million at December 31, 2005 and $10.5 million at September 30, 2005.

The lease residual value represents the present value of 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. Often times, there are several individual lease schedules under one master lease. There were 1,591 leases at September 30, 2006 compared to 1,459 leases at December 31, 2005 and 1,503 leases at September 30, 2005. The average residual value per lease schedule was approximately $19 thousand at September 30, 2006 and December 31, 2005 and $18 thousand at September 30, 2005. The average residual value per master lease schedule was approximately $179 thousand at September 30, 2006, and $172 thousand at December 31, 2005.

At September 30, 2006, 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
  
2006
  
$
509
  
$
84
  
$
2,848
  
$
3,441
  
2007
    
1,901
   
1,182
   
4,916
   
7,999
 
2008
    
1,721
   
1,281
   
4,626
   
7,628
 
2009
    
1,001
   
586
   
3,383
   
4,970
 
2010
    
146
   
446
   
2,125
   
2,717
 
2011
    
348
   
-
   
3,843
   
4,191
 
   
$
5,626
  
$
3,579
  
$
21,741
  
$
30,946
  

Investment Securities

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 September 30, 2006
  
At December 31, 2005
  
At September 30, 2005
  
   
Amortized
  
Fair
  
Amortized
  
Fair
  
Amortized
  
Fair
  
   
Cost
  
Value
  
Cost
  
Value
  
Cost
  
Value
  
                           
U.S. Treasury securities (1)
  
$
14,289
  
$
14,233
  
$
13,597
  
$
13,550
  
$
13,668
  
$
13,673
  
U.S. Government agencies
    
722,468
    
719,939
    
335,032
    
332,270
    
326,301
    
321,629
  
States and political subdivisions
    
360,320
    
360,328
    
295,033
    
293,706
    
280,357
    
281,954
  
Mortgage-backed securities
    
552,415
    
541,698
    
652,428
    
642,576
    
655,917
    
645,751
  
Corporate bonds
    
58,500
    
58,486
    
60,046
    
59,443
    
60,226
    
59,895
  
Equity securities
    
68,680
    
68,612
    
64,253
    
64,299
    
63,588
    
63,678
  
Debt securities issued by foreign governments
    
546
    
546
    
-
    
-
    
25
    
25
  
Total
 
$
1,777,218
  
$
1,763,842
  
$
1,420,389
  
$
1,405,844
  
$
1,400,082
  
$
1,386,605
  
 
(1) Includes trading securities of $899 thousand at September 30, 2006 

32
Liquidity and Sources of Capital

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 boards of directors 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.

The Company has numerous sources of liquidity including readily marketable investment securities, shorter-term loans within the loan portfolio, principal and interest cash flows from investments and loans, the ability to attract retail and public fund time deposits and to purchase brokered time deposits.
 
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 September 30, 2006, there were no firm lending commitments in place, management believes that our banks could borrow approximately $304 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 all of the banks have the ability to borrow from their respective Federal Home Loan Banks. We also have a $30 million correspondent bank line of credit at the holding company level, under which the Company had approximately $18 million of additional borrowing availability at September 30, 2006, and a $25 million subordinated debt facility at the MB Financial Bank level (assumed from Oak Brook Bank), under which there was $15 million of additional borrowing availability at September 30, 2006. 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 September 30, 2006 (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
$
3,528,003
$
2,982,696
$
356,419
$
63,638
$
125,250
Long-term borrowings
298,890
5,610
89,597
38,909
164,774
Junior subordinated notes issued to capital trusts
179,230
-
-
-
179,230
Operating leases
22,008
2,967
4,115
2,114
12,812
Capital expenditures
5,591
5,591
-
-
-
Total
$
4,033,722
$
2,996,864
$
450,131
$
104,661
$
482,066
Commitments to extend credit and letters of credit
$
2,028,412
                


Brokered time deposits maturing in 5 years or more are callable at the Company’s discretion semiannually.

At September 30, 2006, the Company’s total risk-based capital ratio was 11.72%; Tier 1 capital to risk-weighted assets ratio was 10.39% and Tier 1 capital to average asset ratio was 9.51%. MB Financial Bank, N.A., Oak Brook Bank, and Union Bank, N.A. were each categorized as “Well-Capitalized” under Federal Deposit Insurance Corporation regulations at September 30, 2006.

33
Non-GAAP Financial Information

This report contains certain financial information determined by methods other than in accordance with accounting principles generally accepted in the United States of America (GAAP). These measures include net interest income on a fully tax equivalent basis and net interest margin on a fully tax equivalent basis. Our management uses these non-GAAP measures in its analysis of our performance. The tax equivalent adjustment to net interest income recognizes the income tax savings when comparing taxable and tax-exempt assets and assumes a 35% tax rate. Management believes that it is a standard practice in the banking industry to present net interest income and net interest margin on a fully tax equivalent basis, and accordingly believes that providing these measures may be useful for peer comparison purposes. These disclosures should not be viewed as substitutes for the results determined to be in accordance with GAAP, nor are they necessarily comparable to non-GAAP performance measures that may be presented by other companies. Reconciliations of net interest income on a fully tax equivalent basis to net interest income and net interest margin on a fully tax equivalent basis to net interest margin are contained in the tables under “Net Interest Margin.”

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," "should," "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 MB Financial Inc.’s 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. Statements about the effects of our merger with First Oak Brook Bancshares, Inc. and all other statements in this report other than historical facts constitute forward-looking 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 with First Oak Brook Bancshares, Inc. might not be realized within the expected time frames, and costs or difficulties related to integration matters might be greater than expected; (2) further adjustments to the purchase accounting for the Merger that may be required if preliminary estimates of asset and liability fair values and merger expenses are materially different than the actual final numbers; (3) 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; (4) competitive pressures among depository institutions; (5) interest rate movements and their impact on customer behavior and net interest margin; (6) the impact of repricing and competitors’ pricing initiatives on loan and deposit products; (7) the ability to adapt successfully to technological changes to meet customers’ needs and developments in the market place; (8) our ability to realize the residual values of our direct finance, leveraged, and operating leases; (9) our ability to access cost-effective funding; (10) changes in financial markets; (11) changes in economic conditions in general and in the Chicago metropolitan area in particular; (12) the costs, effects and outcomes of litigation; (13) new legislation or regulatory changes, including but not limited to changes in federal and/or state tax laws or interpretations thereof by taxing authorities; (14) changes in accounting principles, policies or guidelines; (15) our future acquisitions of other depository institutions or lines of business; (16) our deposit growth and deposit mix resulting from our new deposit gathering strategy may be less favorable than expected; and (17) the impact of the guidance recently prepared by the Office of the Comptroller of the Currency regarding concentrations in real estate lending.

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.

34
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.

The following table sets forth the amounts of interest earning assets and interest bearing liabilities outstanding at September 30, 2006 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 September 30, 2006 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 some of the accounts will not adjust immediately to changes in other interest rates.

35
Therefore, the information in the table is calculated assuming that NOW, money market and savings deposits will reprice as follows: 7%, 10% and 10%, respectively, in the first three months, 21%, 31%, and 29%, respectively, in the next nine months, 41%, 46% and 43%, respectively, from one year to five years, and 31%, 13%, and 18%, respectively over five years (dollars in thousands):

   
Time to Maturity or Repricing
  
   
0 - 92
  
92 - 365
  
1 - 5
  
Over 5
      
   
Days
  
Days
  
Years
  
Years
  
Total
  
Interest Earning Assets:
                      
Interest bearing deposits with banks
  
$
7,235
  
$
351
  
$
1,080
  
$
-
  
$
8,666
  
Federal funds sold
    
36,071
    
-
   
-
    
-
   
36,071
 
Investment securities available for sale
    
171,009
   
328,043
   
641,836
   
622,055
   
1,762,943
 
Loans held for sale
    
4,850
   
-
   
-
   
-
   
4,850
 
Loans
    
2,997,667
   
659,874
   
1,396,262
   
97,539
   
5,151,342
 
Total interest earning assets
  
$
3,216,832
  
$
988,268
  
$
2,039,178
  
$
719,594
  
$
6,963,872
  
Interest Bearing Liabilities:
                                
NOW and money market deposit
                               
accounts
  
$
101,065
  
$
303,648
  
$
498,652
  
$
227,051
  
$
1,130,416
  
Savings deposits
    
47,915
   
142,271
   
216,238
   
92,733
    
499,157
 
Time deposits
    
1,386,766
   
1,774,623
   
364,083
   
2,531
   
3,528,003
 
Short-term borrowings
    
302,628
    
207,889
   
488
    
-
   
511,005
 
Long-term borrowings
    
95,175
   
7,829
   
93,503
   
102,383
   
298,890
 
Junior subordinated notes issued
                                
to capital trusts
    
110,486
   
-
   
-
   
68,744
   
179,230
 
Total interest bearing liabilities
  
$
2,044,035
  
$
2,436,260
  
$
1,172,964
  
$
493,442
  
$
6,146,701
  
Rate sensitive assets (RSA)
  
$
3,216,832
  
$
4,205,100
  
$
6,244,278
  
$
6,963,872
  
$
6,963,872
  
Rate sensitive liabilities (RSL)
    
2,044,035
   
4,480,295
   
5,653,259
   
6,146,701
   
6,146,701
 
Cumulative GAP
    
1,172,797
   
(275,195
)
  
591,019
   
817,171
   
817,171
 
(GAP=RSA-RSL)
                                
RSA/Total assets
    
40.41
%
  
52.82
%
  
78.43
%
  
87.47
%
  
87.47
%
RSL/Total assets
    
25.68
%
  
56.28
%
  
71.01
%
  
77.21
%
  
77.21
%
GAP/Total assets
    
14.73
%
  
(3.46)
%
  
7.42
%
  
10.26
%
  
10.26
%
GAP/RSA
    
36.46
%
  
(6.54)
%
  
9.46
%
  
11.73
%
  
11.73
%


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.

36
Based on simulation modeling which assumes immediate changes in interest rates at September 30, 2006 and December 31, 2005, 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 September 30, 2006
  
At December 31, 2005
  
 
Levels of
  
Dollar
Percentage
  
Dollar
Percentage
  
 
Interest Rates
  
Change
Change
  
Change
Change
  
 
+ 2.00 %
  
$
10,175 
  4.36 %
  
$
6,770 
3.56 %
  
 
+ 1.00    
  
5,848 
2.51   
  
4,376 
2.30    
  
 
(1.00)   
  
(5,565)
(2.38)
  
(6,006)
(3.16)   
  
 
(2.00)   
  
(15,476)
(6.63)
  
(14,893)
(7.83)   
  

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 September 30, 2006
  
At December 31, 2005
  
 
Levels of
  
Dollar
Percentage
  
Dollar
Percentage
  
 
Interest Rates
  
Change
Change
  
Change
Change
  
 
+ 2.00 %
  
$
8,907 
3.82 %
  
$
5,517 
2.90 %
  
 
+ 1.00    
  
4,821 
2.07    
  
3,674 
1.93    
  
 
(1.00)   
  
(2,522)
(1.08)   
  
(4,002)
(2.11)   
  
 
(2.00)   
  
(7,191)
(3.08)   
  
(9,084)
(4.78)   
  

In both the immediate and gradual interest rate sensitivity tables above, changes in net interest income between September 30, 2006 and December 31, 2005 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.

Management also reviews our interest rate sensitivity under certain scenarios in which the general shape of the yield curve changes. One such scenario is a gradual reversion to a normal yield curve, based on the mean value for the appropriate periods on the yield curve. Gradual reversion to a normal yield curve assumes a gradual decrease in short-term interest rates for 3 month rates and 1 year rates of 5.37% to 4.05% and 5.30% to 4.32%, respectively, and a gradual rise in long-term interest rates for 20 year rates and 30 year rates of 5.29% to 6.00 % and 5.30% to 6.04%, respectively. Under this scenario, our net interest income is projected to increase by $8.1 million over a one year period.

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 September 30, 2006 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 September 30, 2006, 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) to allow timely decisions regarding required disclosure, and (ii) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

37
Changes in Internal Control Over Financial Reporting: During the quarter ended September 30, 2006, 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 1A. Risk Factors

There have been no material changes to the factors disclosed in Item 1A. Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2005, except for the following:

MB Financial may fail to realize all of the anticipated benefits of the merger.
 
The success of our merger with First Oak Brook depends on, among other things, our ability to realize anticipated cost savings and to combine the businesses of MB Financial and First Oak Brook in a manner that does not materially disrupt the existing customer relationships of our companies or result in decreased revenues from our respective customers. If we are not able to successfully achieve these objectives, the anticipated benefits of the merger may not be realized fully or at all or may take longer to realize than expected.
 
MB Financial and First Oak Brook have operated independently of one another before the merger. Although the conversion of Oak Brook Bank’s systems to MB Financial Bank’s systems and the merger of Oak Brook Bank into MB Financial Bank have been completed, it remains possible that the integration process could result in the loss of key employees, the disruption of each institution’s ongoing businesses or inconsistencies in standards, controls, procedures and policies that adversely affect our ability to maintain relationships with clients, customers, depositors and employees or to achieve the anticipated benefits of the merger. The integration process continues to divert management attention and resources.


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

The Company did not repurchase any outstanding shares during the three months ended September 30, 2006. There was no outstanding publicly announced stock repurchase program during the three months ended September 30, 2006.

Item 4. Submission of Matters to a Vote of Security Holders

On August 1, 2006, a special meeting of the Company’s stockholders was held for the purpose of voting on a proposal to approve the issuance of shares of the Company’s common stock in connection with the merger of First Oak Brook Bancshares, Inc. Set forth below are the results of that vote:

38
Votes For  Votes Against  Abstentions  Broker Non-Votes
22,678,710  95,185   25,499    0

Item 6. Exhibits

See Exhibit Index.

39

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

MB FINANCIAL, INC.

Date: November 9, 2006                                 By: /s/ Mitchell Feiger
Mitchell Feiger
President and Chief Executive Officer
(Principal Executive Officer)

Date: November 9, 2006                                 By: /s/ Jill E. York
Jill E. York
Vice President and Chief Financial Officer
(Principal Financial and Principal Accounting Officer)


40


 
 
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))
 
 
2.4
 
 
Agreement and Plan of Merger, dated as of May 1, 2006, by and among the Registrant, MBFI Acquisition Corp. and First Oak Brook Bancshares, Inc. (incorporated herein by reference to Exhibit 2.1 to the Registrant’s Current Report on Form 8-K filed on May 2, 2006 (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
 
 
Reserved
 
 
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))
 
 
41
   
EXHIBIT INDEX
 
 
Exhibit Number
 
 
 Description
 
10.3B
 
 
Amendment No. Two to Employment Agreement between MB Financial Bank, N.A. and Burton Field (incorporated herein by reference to Exhibit 10.3B to the Registrant’s Annual Report on Form 10-K for the year-end December 31, 2005 (File No. 0-24566-01)
 
 
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, 2005 (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, 2005 (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))
 
 
42
   
EXHIBIT INDEX
 
 
Exhibit Number
 
 Description
 
 
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))
 
 
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))
 
 
10.20
 
 
First Oak Brook Bancshares, Inc. Incentive Compensation Plan (incorporated herein by reference to Appendix A to the definitive proxy statement filed by First Oak Brook Bancshares, Inc. (“First Oak Brook”) on March 30, 2004 (File No. 0-14468))
 
 
10.21
 
 
First Oak Brook Bancshares, Inc. 2001 Stock Incentive Plan (incorporated herein by reference to Appendix A to the definitive proxy statement filed by First Oak Brook on April 2, 2001 (File No. 0-14468))
 
 
10.22
 
 
First Oak Brook Bancshares, Inc. Directors Stock Plan (incorporated herein by reference to Exhibit 4.1 to the Registration Statement on Form S-8 filed by First Oak Brook on October 25, 1999 (File No. 333-89647))
 
 
 
 
 
 
 
 
 
 
10.25
 
 
Form of Supplemental Pension Benefit Agreement for Richard M. Rieser, Jr. (incorporated herein by reference to Exhibit 10.13 to First Oak Brook’s Annual Report on Form 10-K for the year ended December 31, 1994 (File No. 0-14468))
 
 
10.26
 
 
Form of Agreement Regarding Post-Employment Restrictive Covenants between the Registrant (as successor to First Oak Brook) and Richard M. Rieser, Jr. (incorporated herein by reference to Exhibit 10.13 to First Oak Brook’s Annual Report on Form 10-K for the year ended December 31, 1994 (File No. 0-14468))
 
 
10.27
 
 
First Oak Brook Bancshares, Inc. Executive Deferred Compensation Plan (incorporated by reference to Exhibit 10.3 to First Oak Brook’s Annual Report on Form 10-K for the year ended December 31, 1997 (File No. 0-14468)) 
 
 
43
   
EXHIBIT INDEX
 
 
Exhibit Number
  
 Description
 
 
 
 
 
 
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))
 
 
 
 
 
 
 
 
 
 
 
 
 
* Filed herewith.

 
44