Item 1. Business
Overview
MB Financial, Inc., headquartered in Chicago, Illinois, is a financial holding company with 41 banking offices in the Chicago and Oklahoma City metropolitan areas. The words “we,” “our” and “us” refer to MB Financial, Inc. and its wholly owned subsidiaries, unless we indicate otherwise. Our primary market is the Chicago metropolitan area, in which we operate 36 banking offices through our lead bank subsidiary, MB Financial Bank, N.A. We also operate five banking offices in the Oklahoma City metropolitan area through our other bank subsidiary, Union Bank, N.A. Through our bank subsidiaries, we offer a broad range of financial services primarily to small and middle market businesses and individuals in the markets that we serve. Our primary lines of business include commercial banking, retail banking and wealth management. As of December 31, 2003, we had total assets of $4.4 billion, deposits of $3.4 billion, stockholders’ equity of $375.5 million and a trust and asset management department with approximately $1.4 billion in assets under management, including approximately $300 million that represents our own employee benefit and investment accounts under management.
We were incorporated as a Maryland corporation in 2001 as part of the merger of MB Financial, Inc., a Delaware corporation (which we sometimes refer to in the following discussion as Old MB Financial) and MidCity Financial Corporation. This all-stock, merger-of-equals transaction, which we accounted for as a pooling-of-interests, was completed on November 6, 2001 through the merger of each of Old MB Financial and MidCity Financial into our newly-formed company to create the presently existing MB Financial. After completion of the merger, Old MB Financial’s subsidiary bank, Manufacturers Bank, and MidCity Financial’s subsidiary banks based in Illinois, The Mid-City National Bank of Chicago, First National Bank of Elmhurst and First National Bank of Morton Grove, were merged. The Mid-City National Bank of Chicago was the surviving institution, and was renamed and now operates as MB Financial Bank, N.A. We continue to own and operate Union Bank, N.A., based in Oklahoma City, a former MidCity Financial subsidiary. During the second quarter of 2003, we sold Abrams Centre National Bank, N.A. (Abrams), based in Dallas, Texas, another former MidCity Financial subsidiary.
We have continued to grow subsequent to the Old MB Financial-MidCity Financial merger. In April 2002, we acquired First National Bank of Lincolnwood, based in Lincolnwood, Illinois, and its parent, First Lincolnwood Corporation, for approximately $35.0 million in cash. In August 2002, we acquired Chicago-based LaSalle Systems Leasing, Inc. and its affiliated company, LaSalle Equipment Limited Partnership (which we sometimes refer to below collectively as “LaSalle”), for $39.7 million. Of this amount, $5.0 million was paid in the form of our common stock, with the balance paid in cash (including a $4.0 million deferred payment tied to LaSalle’s future results). On February 7, 2003, we acquired South Holland Trust & Savings Bank, based in South Holland, Illinois, and its parent, South Holland Bancorp, Inc., for $93.1 million in cash. First National Bank of Lincolnwood and South Holland Trust & Savings Bank had assets of $227.5 million and $560.3 million, respectively, as of acquisition, and both were merged with MB Financial Bank. LaSalle continues operate as a separate subsidiary of MB Financial Bank.
MB Financial Bank, our largest subsidiary, has eight active wholly owned subsidiaries: Ashland Management Agency, Inc.; MB1200 Corporation; MB Deferred Exchange Corporation; MB Financial Community Development Corporation; MB Financial Insurance, Inc.; MB Center LLC; LaSalle Systems Leasing, Inc.; Vision Investment Services, Inc.; and MBRE Holdings LLC. Ashland Management Agency, Inc. acts as manager of certain real estate owned by MB Financial Bank. MB1200 Corporation holds title to property that MB Financial Bank may receive pursuant to a foreclosure or other resolution of a non-performing loan. MB Deferred Exchange Corporation may hold escrowed funds relating to certain tax advantaged property exchanges entered into by the customers of MB Financial Bank. MB Financial Community Development Corporation engages in community lending and equity investments to facilitate the construction and rehabilitation of housing in low and moderate neighborhoods in MB Financial Bank’s market area. MB Center LLC is used to record the real estate activities of our new operations center located in Rosemont, Illinois (See Item 2.
Item 2. Properties
We conduct our business at 41 retail banking center locations in the Chicago and Oklahoma City metropolitan areas. We own 30 of our banking center facilities. The other facilities are leased for various terms. All of the branches have ATMs, and we have 18 additional ATMs at other locations. We believe that all of our properties and equipment are well maintained, in good operating condition and adequate for all of our present and anticipated needs.
Set forth below is information relating to each of our offices. The total net book value of our premises and equipment (including land, building and leasehold improvements and furniture, fixtures and equipment) at December 31, 2003 was $80.4 million.
Principal Business Office:
801 West Madison Street, Chicago, Illinois (2)
Banking Office Locations:
Chicago (Central)
1200 North Ashland Avenue, Chicago, Illinois
2 South LaSalle Street, Chicago, Illinois (1)
303 East Wacker Drive, Chicago, Illinois (1)
One East Wacker Drive, Chicago, Illinois (1)
One South Wacker Drive, Chicago, Illinois (1)
Chicago (North)
2965 North Milwaukee, Chicago, Illinois
6443 North Sheridan Road, Chicago, Illinois (1)
6201 North Lincoln Avenue, Chicago, Illinois
3232 West Peterson Avenue, Chicago, Illinois
Chicago (West)
6422 West Archer Avenue, Chicago, Illinois
8300 West Belmont, Chicago, Illinois
1420 West Madison Street, Chicago, Illinois (1)
Chicago (South)
5100 South Damen Avenue, Chicago, Illinois
1618 West 18th Street, Chicago, Illinois
3030 East 92nd Street, Chicago, Illinois
Chicago (Suburban)
5750 West 87th Street, Burbank, Illinois
7000 County Line Road, Burr Ridge, Illinois
14122 Chicago Road, Dolton, Illinois
990 North York Road, Elmhurst, Illinois
401 North LaGrange Road, LaGrange Park, Illinois (1)
1151 State Street, Lemont, Illinois
7000 North McCormick Road, Lincolnwood, Illinois
6401 North Lincoln Avenue, Lincolnwood, Illinois
4010 West Touhy Avenue, Lincolnwood, Illinois
6201 West Dempster Street, Morton Grove, Illinois
9147 Waukekgan Road, Morton Grove, Illinois
15 East Prospect Avenue, Mount Prospect, Illinois (1)
7557 West Oakton Street, Niles, Illinois (1)
7222 West Cermak Road, North Riverside, Illinois (1)
7501 West Cermak Road, North Riverside, Illinois (1)
200 West Higgins Road, Schaumburg, Illinois
475 East 162nd Street, South Holland, Illinois
16340 South Park Avenue, South Holland, Illinois
16255 South Harlem Avenue, Tinley Park, Illinois
18299 South Harlem Avenue, Tinley Park, Illinois
Oklahoma
4921 North May Ave, Oklahoma City, Oklahoma
125 East First, Edmond, Oklahoma
1201 West Memorial Road, Oklahoma City, Oklahoma
7300 South Penn Avenue, Oklahoma City, Oklahoma
312 West Commerce, Oklahoma City, Oklahoma
ATM Only
451 Rolls Drive, Algonquin, Illinois
1611 South Morrissey Drive, Bloomington, Illinois
601 Burr Ridge Parkway, Burr Ridge, Illinois
2002 West Springfield, Champaign, Illinois
223 West Jackson Boulevard, Chicago, Illinois
843 West Randolph Street, Chicago, Illinois (3)
177 North State Street, Chicago, Illinois
11203 South Corliss Avenue, Chicago, Illinois
13148 Rivercrest Drive, Crestwood, Illinois
388 Eastgate Drive, Danville, Illinois
2450 Jefferson Street, Joliet, Illinois
230 South Lincolnway, North Aurora, Illinois
17 W 648 22nd Street, Oakbrook Terrace, Illinois
16333 South LaGrange Road, Orland Park, Illinois
900 East Higgins Road, Schaumburg, Illinois
5300 Old Orchard Road, Skokie, Illinois
16179 South Park Avenue, South Holland, Illinois
28141 Diehl Road, Warrenville, Illinois
(1) Leased facilities.
(2) Land under building site is leased; other land and building are owned.
(3) Space for ATM location leased.
We also have office locations in Oak Brook, Illinois, Northbrook, Illinois, Troy, Michigan, Long Beach, California, and Freeport, The Bahamas. The Oak Brook location is the headquarters for Vision Investment Services, Inc., a wholly-owned subsidiary of MB Financial Bank acquired in February 2003. The Northbrook, Troy, and Long Beach locations are used strictly for LaSalle’s lease business operations. The Freeport office houses the headquarters for MBRE Holdings LLC. None of these locations provide banking services to our customers.
During the third quarter of 2003, we acquired an office building in Rosemont, Illinois for $19.3 million. It is our intent to relocate certain MB Financial Bank, LaSalle, and Vision operations to this office starting in the third quarter of 2004. Currently, we have no employees or banking facilities at the Rosemont location.
Item 3.
Item 3. Legal Proceedings
We are involved from time to time as plaintiff or defendant in various legal actions arising in the normal course of our businesses. While the ultimate outcome of pending proceedings cannot be predicted with certainty, it is the opinion of management, after consultation with counsel representing us in such proceedings, that the resolution of these proceedings should not have a material effect on our consolidated financial position or results of operation.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted to a vote of security holders, through the solicitation of proxies or otherwise, during
the quarter ended December 31, 2003.
PART II
Item 5.
Item 5. Market for Registrant’s Common Equity and Related Stockholder Matters
Our common stock is traded on the NASDAQ National Market under the symbol “MBFI”. There were 695 holders of record of our common stock as of December 31, 2003. The following table presents quarterly market information and cash dividends paid per share for our common stock for 2003 and 2002:
(1) Amounts have been adjusted to reflect a three-for-two stock split in December 2003.
Our bylaws currently provide that our annual dividend payout ratio, meaning the percentage of net income (excluding extraordinary or non-recurring gains) paid out as cash dividends, generally must be at least 25% unless our board of directors, by vote of two-thirds of the entire board, approves otherwise. For purposes of this provision, when calculating our dividend payout ratio with respect to dividends paid during a particular year, we use the prior year’s net income. The dividend payout provision is one among several special corporate governance bylaw provisions relating to the merger of equals transaction of our predecessors, Old MB Financial and MidCity Financial, completed in November 2001 (see Item 1. Business-Overview”). The dividend payout provision, along with all of the other special corporate governance bylaw provisions, will expire at the time of our upcoming annual meeting of stockholders, to be held on April 27, 2004. While we have no current plans to reduce our annual dividend payout ratio below 25% following expiration of the special payout provision, no assurance can be given that we will not do so.
The timing and amount of cash dividends paid depends on our earnings, capital requirements, financial condition and other relevant factors. The primary source for dividends paid to stockholders is dividends paid to us from our subsidiary banks. We have an internal policy which provides that dividends paid to us by a subsidiary bank cannot exceed an amount that would cause the bank’s total risk-based capital, Tier 1 risk-based capital and Tier 1 leverage capital ratios to fall below 11%, 8% and 7%, respectively. The minimum ratios required for a bank to be considered “well capitalized” for regulatory purposes are 10%, 6% and 5%, respectively. At December 31, 2003, our subsidiary banks could pay a combined $52.1 million in dividends and comply with our internal policy regarding minimum regulatory capital ratios. In addition to adhering to our internal policy, there are regulatory restrictions on the ability of national banks to pay dividends. See “Item 1. Business - Supervision and Regulation - Dividends” above.
Item 6.
Item 6. Selected Financial Data
Set forth below and on the following page is our summary consolidated financial information and other financial data. This information should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included herein in response to Item 7
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following is a discussion and analysis of our financial position and results of operations and should be read in conjunction with the information set forth under “General” in Item 7A, Quantitative and Qualitative Disclosures about Market Risk, and our consolidated financial statements and notes thereto appearing under Item 8 of this report.
General
We had net income of $53.4 million for the year ended December 31, 2003 compared to $46.4 million for year ended December 31, 2002, an increase of $7.0 million, or 15.1%. Fully diluted earnings per share for 2003 increased 14.0% to $1.96 compared to $1.72 per share in 2002.
The profitability of our operations depends primarily on our net interest income, which is the difference between total interest earned on interest earning assets and total interest paid on interest bearing liabilities. Our net income is affected by our provision for loan losses as well as other income and other expenses. The provision for loan losses reflects the amount that we believe is adequate to cover probable credit losses in the loan portfolio. Non-interest income or other income consists of loan service fees, deposit service fees, net lease financing income, trust, asset management and brokerage fees, net gains (losses) on the sale of securities available for sale, increase in cash surrender value of life insurance and other operating income. Other expenses include salaries and employee benefits along with occupancy and equipment expense, computer services expense, advertising and marketing expense, professional and legal expense, brokerage fee expense, telecommunication expense, intangibles amortization expense and other operating expenses including merger expenses.
Net interest income is affected by changes in the volume and mix of interest earning assets, the level of interest rates earned on those assets, the volume and mix of interest bearing liabilities and the level of interest rates paid on those interest bearing liabilities. The provision for loan losses is dependent on changes in the loan portfolio and management’s assessment of the collectibility of the loan portfolio, as well as economic and market conditions. Other income and other expenses are impacted by growth of operations and growth in the number of accounts through both acquisitions and core banking business growth. Growth in operations affects other expenses as a result of additional employees, branch facilities and promotional marketing expense. Growth in the number of accounts affects other income, including service fees as well as other expenses such as computer services, supplies, postage, telecommunications and other miscellaneous expenses.
Critical Accounting Policies
Our consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States of America and follow general practices within the industries in which we operate. This preparation requires management to make estimates, assumptions, and judgments that affect the amounts reported in the financial statements and accompanying notes. These estimates, assumptions, and judgments are based on information available as of the date of the financial statements; accordingly, as this information changes, actual results could differ from the estimates, assumptions, and judgments reflected in the financial statements. Certain policies inherently have a greater reliance on the use of estimates, assumptions, and judgments and, as such, have a greater possibility of producing results that could be materially different than originally reported. Management believes the following policies are both important to the portrayal of our financial condition and results of operations and require subjective or complex judgments; therefore, management considers the following to be critical accounting policies. Management has reviewed the application of these polices with the Audit Committee of our Board of Directors.
Allowance for Loan Losses. Subject to the use of estimates, assumptions, and judgments is management’s evaluation process used to determine the adequacy of the allowance for loan losses which combines several factors: management’s ongoing review and grading of the loan portfolio, consideration of past loan loss experience, trends in past due and nonperforming loans, risk characteristics of the various classifications of loans, existing economic conditions, the fair value of underlying collateral, and other qualitative and quantitative factors which could affect probable credit losses. Because current economic conditions can change and future events are inherently difficult to predict, the anticipated amount of estimated loan losses, and therefore the adequacy of the allowance, could change significantly. As an integral part of their examination process, various regulatory agencies also review the allowance for loan losses. Such agencies may require that certain loan balances be charged off when their credit evaluations differ from those of management or require that additions be made to the allowance for loan losses, based on their judgments about information available to them at the time of their examination. We believe the allowance for loan losses is adequate and properly recorded in the financial statements. See “Allowance for Loan Losses” section below for further analysis.
Residual Value of Our Direct Finance, Leveraged, and Operating Leases. Lease residual value represents the estimated fair value of the leased equipment at the termination date of the lease. Realization of these residual values depends on many factors, including management’s use of estimates, assumptions, and 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 monthly basis, management reviews the lease residuals for potential impairment. If we fail to realize our aggregate recorded residual values, our financial condition and profitability could be adversely affected. At December 31, 2003, the aggregate residual value of the equipment leased under our direct finance, leveraged, and operating leases totaled $26.6 million. See Note 1 and Note 6 of the notes to our audited consolidated financial statements for additional information.
Income Tax Accounting. Income tax expense recorded in the consolidated income statement involves interpretation and application of certain accounting pronouncements and federal and state tax codes, and is, therefore, considered a critical accounting policy. We undergo examination by various regulatory taxing authorities. Such agencies may require that changes in the amount of tax expense or valuation allowance be recognized when their interpretations differ from those of management, based on their judgments about information available to them at the time of their examinations. There can be no assurance that future events, such as court decisions or positions of federal and state taxing authorities, will not differ from management’s current assessment of tax liabilities, the impact of which could be significant to the consolidated results of operations and reported earnings. We believe the tax liabilities are adequately and properly recorded in the consolidated financial statements. See “Income Taxes” section below for further discussion.
Net Interest Income
The following table presents, for the periods indicated, the total dollar amount of interest income from average interest earning assets and the related yields, as well as the interest expense on average interest bearing liabilities, and the related costs, expressed both in dollars and rates (dollars in thousands):
(1) Non-accrual loans are included in average loans.
(2) Interest income includes loan origination fees of $4.6 million, $3.5 million and $2.7 million for the years ended December 31, 2003, 2002 and 2001, 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.
Our net interest income on a tax equivalent basis increased $9.7 million, or 7.2% to $144.4 million for the year ended December 31, 2003 from $134.7 million for the year ended December 31, 2002. Tax-equivalent interest income declined by $1.1 million due to a 78 basis point decline in tax-equivalent yield. The decline in yield was partially offset by a $456.6 million, or 13.6% increase in average interest earning assets, comprised of a $328.2 million, or 13.6% increase in average loans and a $126.6 million, or 14.1% increase in average investment securities. Interest expense declined by $10.8 million due to a 66 basis point decline in the cost of interest bearing liabilities which was partially offset by a $382.2 million increase in average interest bearing liabilities. The increase in average interest earning assets
and average interest bearing liabilities is primarily due to the acquisition of South Holland in the first quarter of 2003 and growth of our commercial lending business. The net interest margin expressed on a fully tax equivalent basis decreased 23 basis points to 3.80% in 2003 from 4.03% in 2002. Of this decline in the net interest margin, approximately 7 basis points is due to the addition of $59.8 million in junior subordinated notes issued to capital trusts in August 2002. Premium amortization expense on mortgage-backed securities caused a further decline of 12 basis points due to higher than expected prepayments during the 2003 period. The remaining decrease is primarily due to interest margin compression caused by the decline in market rates during 2003.
For the year ended December 31, 2002, net interest income on a fully tax equivalent basis increased $16.8 million, or 14.2% to $134.7 million from $117.9 million for the year ended December 31, 2001. Interest income on a fully tax equivalent basis decreased $18.9 million due to a 96 basis point decline in yield on average interest earning assets to 6.30%. The decrease in yield was partially offset by a $181.4 million, or 5.7% increase in average earning assets, comprised of a $213.3 million, or 9.7% increase in average loans, a $17.6 million, or 45.2% decline in federal funds sold and a $9.9 million, or 1.1% decline in average investment securities. Interest expense declined by $35.7 million due to a 144 basis point decrease in the cost of funds to 2.70%, which was partially offset by a $119.3 million, or 4.4% increase in average interest bearing liabilities. The net interest margin expressed on a fully tax equivalent basis rose 30 basis points to 4.03% in the year ended December 31, 2002 from 3.73% in 2001 due to better pricing obtained by us on loans and deposits in a declining rate environment during 2002.
Volume and Rate Analysis of Net Interest Income
The following table presents the extent to which changes in volume and interest rates of interest earning assets and interest bearing liabilities have affected our interest income and interest expense during the periods indicated. Information is provided in each category with respect to (i) changes attributable to changes in volume (changes in volume multiplied by prior period rate), (ii) changes attributable to changes in rates (changes in rates multiplied by prior period volume) and (iii) change attributable to a combination of changes in rate and volume (change in rates multiplied by the changes in volume) (in thousands). Changes attributable to the combined impact of volume and rate have been allocated proportionately to the changes due to volume and the changes due to rate.
(1) Non-taxable loan and investment income is presented on a fully tax equivalent basis assuming a 35% rate for the year ended December 31, 2003, 2002 and 2001, respectively.
Other Income
Other income increased $26.0 million, or 66.4% to $65.1 million in 2003 from $39.1 million in the 2002 period. Trust, asset management and brokerage fees increased by $8.6 million due to a $6.2 million increase in brokerage fees and a $2.4 million increase in income from trust and asset management activities. Brokerage fees increased due to the acquisition of Vision. The $2.4 million increase in trust and asset management income was primarily due to an additional $2.1 million in revenues generated by South Holland’s trust business. Net lease financing increased by $8.4 million primarily due to the acquisition of LaSalle Systems Leasing in the third quarter of 2002, which added $6.3 million in additional revenues, and improved residual value performance within the lease investment portfolio. Deposit service fees increased by $6.2 million primarily due to a $5.2 million increase in NSF and overdraft fees, which grew due to the introduction of a new overdraft protection product and other deposit service pricing methods that went into effect in January 2003, as well as the acquisition of South Holland. Our sale of Abrams in the second quarter of 2003 resulted in a $3.1 million gain. Loan service fees increased by $795 thousand primarily due to a $537 thousand increase in prepayment fees. Other operating income increased by $516 thousand due to an $804 thousand increase in gain on sale of loans. Gain on sale of loans includes $1.8 million in gains on sale of real estate loans which were offset by an $800 thousand lower of cost or market adjustment on mobile home loans transferred to loans held for sale in the third quarter of 2003 and subsequently sold in the fourth quarter of 2003. Net gain on sale of securities available for sale and increase in cash surrender value of life insurance declined by $979 thousand and $607 thousand, respectively.
Other income increased $12.9 million, or 49.3% to $39.1 million for the year ended December 31, 2002 from $26.2 million in 2001. Net lease financing increased by $4.5 million, primarily due to $2.8 million in additional revenues generated as a result of the LaSalle acquisition and a $576 thousand increase in net lease gains for the year ended December 31, 2002 compared to 2001. Deposit service fees increased by $2.1 million, primarily due to increases in monthly service charges and NSF and overdraft fees of $1.4 million and $859 thousand, respectively. Other operating income grew by $2.2 million, largely due to $834 thousand in gains on the origination and sale of residential mortgage loans in 2002 and increases in gain on sale of other real estate and ATM fees of $564 thousand and $325 thousand, respectively. Increase in cash surrender value of life insurance grew by $1.9 million due to the additional $35.0 million invested in January 2002. Trust, asset management and brokerage fees increased by $1.2 million due to increases in income from trust services and investment services income of $1.0 million and $134 thousand, respectively.
Other Expenses
Other expenses increased by $25.5 million, or 28.0% to $116.3 million for the year ended December 31, 2003 from $90.8 million for the year ended December 31, 2002. Salaries and employee benefits increased by $12.4 million due to the South Holland and LaSalle acquisitions, the acquisition of First National Bank of Lincolnwood (Lincolnwood) in the second quarter of 2002, and our continued investment in personnel. Brokerage fee expense increased by $3.9 million due to the acquisition of Vision. Other operating expense increased by $2.8 million due to the South Holland, LaSalle and Lincolnwood acquisitions. Professional and legal expense increased by $1.8 million. This increase was primarily due to the write off of $1.2 million in costs associated with planning construction of a new operations center prior to management’s decision to pursue the more cost-effective option of purchasing an existing building in Rosemont, Illinois during the third quarter of 2003. In conjunction with the sale of Abrams, we settled litigation in the amount of approximately $300 thousand. Prepayment fee on Federal Home Loan Bank advances increased by $1.1 million due to a prepayment fee incurred in the 2003 period on the payoff of $8.1 million in long-term advances. Occupancy and equipment expense, telecommunication expense, computer services expense and advertising and marketing expense increased by $1.5 million, $828 thousand, $806 thousand and $677 thousand, respectively, due to the LaSalle, South Holland and Lincolnwood acquisitions. Merger expenses during 2003 reflect a $720 thousand reversal of expense reserve no longer needed relating to the merger-of-equals between Old MB Financial and MidCity Financial in 2001.
Other expenses decreased by $18.3 million, to $90.8 million for the year ended December 31, 2002 compared to $109.1 million for the year ended December 31, 2001 due to $22.7 million in merger expenses incurred in the 2001 period relating to the merger-of-equals between Old MB Financial and MidCity Financial. Excluding merger expenses recorded in 2001, other expense increased by $4.4 million, or 5.1%. Within the category, salaries and employee benefits increased by $4.1 million due to the Lincolnwood and LaSalle acquisitions and our continued growth and
investment in personnel. Computer services increased by $1.5 million due to the outsourcing of processing activities and the addition of Lincolnwood. Professional and legal expense increased by $1.1 million, largely due to a $1.2 million accrual in 2002 for an unfavorable appellate court ruling related to rent payments claimed to be owed by us pursuant to a land lease agreement under which we are lessee. Goodwill amortization expense declined by $2.5 million, or $0.10 basic and fully diluted earnings per share, due to the adoption of Statement of Financial Accounting Standards No. 142. Occupancy and equipment expenses declined by $1.0 million due to a reduction in depreciation expense partially resulting from the outsourcing of the data processing activities during December 2001.
Income Taxes
Income tax expense for the year ended December 31, 2003 increased $2.8 million to $24.2 million compared to $21.4 million for 2002. The effective tax rate was 31.2% and 31.5% for the years ended December 31, 2003 and 2002, respectively.
Income tax expense for the year ended December 31, 2002 was $21.4 million compared to $13.2 million for 2001. The effective tax rate decreased to 31.5% for the year ended December 31, 2002 compared to 51.7% in 2001 due to the non-deductibility of certain merger costs and the valuation reserve established in the fourth quarter of 2001 for state net operating loss carryforwards.
As previously stated in the “Critical Accounting Policies” section above, 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. See Note 1 and Note 15 of the notes to our audited consolidated financial statements for our income tax accounting policy and additional income tax information.
Balance Sheet
Total assets increased $595.5 million or 15.8% to $4.4 billion at December 31, 2003 from $3.8 billion at December 31, 2002. During this period, South Holland was purchased, which had $560.3 million in assets at the acquisition date, and Abrams was sold, which had assets totaling $98.4 million at the sale date. Net loans increased by $315.4 million, or 12.8% to $2.8 billion at December 31, 2003 from $2.5 billion at December 31, 2002 (See “Loan Portfolio” section below). Investment securities available for sale increased by $218.6 million, or 24.5%, primarily due to the acquisition of South Holland, which had investment securities available for sale of $178.8 million at the acquisition date. Goodwill increased by $24.4 million primarily due to goodwill in the South Holland acquisition, partially offset by a reduction of goodwill in the amount of $4.2 million due to the sale of Abrams. Premises and equipment increased by $29.4 million primarily due to the third quarter acquisition of the new operations center in Rosemont, Illinois for $19.3 million and the South Holland merger.
Total liabilities increased by $563.2 million, or 16.5% to $4.0 billion at December 31, 2003 from $3.4 billion at December 31, 2002. Total deposits grew by $412.5 million, or 13.7%. The increase in deposits was largely due to $453.1 million in deposits acquired through the acquisition of South Holland, offset by $66.7 million in deposits sold in conjunction with the sale of Abrams and approximately $40.0 million in money market accounts moved to securities sold under agreement to repurchase. Short-term borrowings increased by $168.9 million, or 75.8% due to increases in short-term Federal Home Loan Bank advances and securities sold under agreement to repurchase of $123.0 million and $61.6 million, respectively, which were partially offset by a $15.7 million decline in federal funds purchased. Long-term borrowings decreased by $24.5 million, or 53.3% primarily due to the payoff of $20 million in subordinated debt and a $6.6 million decline in long-term Federal Home Loan Bank advances primarily due to the prepayment of advances during the second quarter of 2003.
Total stockholders’ equity increased $32.3 million, or 9.4% to $375.5 million at December 31, 2003 compared to $343.2 million at December 31, 2002. The growth was due to net income of $53.4 million, partially offset by $11.7 million, or $0.44 per share cash dividends and a $10.3 million decline in accumulated other comprehensive income due to reduced net unrealized gains on available for sale securities.
Investment Securities
The primary purpose of the investment portfolio is to provide a source of earnings for liquidity management purposes, and to control interest rate risk. In managing the portfolio, we seek safety of principal, liquidity, diversification and maximized return on funds. See Liquidity and Capital Resources in this Item 7 and “Quantitative and Qualitative Disclosures About Market Risk - Asset Liability Management” under Item 7A.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Market Risk and Asset Liability Management
Market Risk. Market risk is the risk that the market value or estimated fair value of our assets, liabilities, and derivative financial instruments will decline as a result of changes in interest rates or financial market volatility, or that our net income will be significantly reduced by interest rate changes. Market risk is managed operationally in our Treasury Group at MB Financial Bank, and is addressed through a selection of funding and hedging instruments supporting balance sheet assets, as well as monitoring our asset investment strategies.
Asset Liability Management. Management and our Treasury Group continually monitor our sensitivity to interest rate changes. It is our policy to maintain an acceptable level of interest rate risk over a range of possible changes in interest rates while remaining responsive to market demand for loan and deposit products. The strategy we employ to manage our interest rate risk is to measure our risk using an asset/liability simulation model. The model considers several factors to determine our potential exposure to interest rate risk, including measurement of repricing gaps, duration, convexity, value at risk, and the market value of portfolio equity under assumed changes in the level of interest rates, shape of the yield curves, and general market volatility. Management controls our interest rate exposure using several strategies, which include adjusting maturity of securities in our investment portfolio, and limiting fixed rate loans or accepting fixed rate deposits with terms of more than five years. We also use derivative instruments, principally interest rate swaps, to manage our interest rate risk. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Off-Balance Sheet Arrangements and Aggregate Contractual Obligations.”
Interest Rate Risk. Interest rate risk can come in a variety of forms, including repricing risk, yield curve risk, basis risk, and prepayment risk. We experience repricing risk when the change in the average yield of either our interest earning assets or interest bearing liabilities is more sensitive than the other to market changes in market interest rates. Such a change in sensitivity could reflect a number of possible mismatches in the repricing opportunities of our assets and liabilities.
In the event that yields on our assets and liabilities do adjust to changes in market rates to the same extent, we may still be exposed to yield curve risk. Yield curve risk reflects the possibility the changes in the shape of the yield curve could have different effects on our assets and liabilities.
Variable, or floating rate, assets and liabilities that reprice at similar times and have base rates of similar maturity may still be involved in interest rate risk. If financial instruments have different base rates, we are subject to basis risk reflecting the possibility that the spread from those base rates will deviate.
We hold mortgage-related investments, including mortgage loans and mortgage-backed securities. Prepayment risk is associated with mortgage-related investments and results from homeowners’ ability to pay off their mortgage loans prior to maturity. We limit this risk by restricting the types of mortgage-backed securities we may own to those with limited average life changes under certain interest-rate shock scenarios, or securities with embedded prepayment penalties. We also limit the fixed rate mortgage loans held with maturities greater than five years.
Measuring Interest Rate Risk. As noted above, interest rate risk can be measured by analyzing the extent to which the repricing of assets and liabilities are mismatched to create an interest sensitivity gap. An asset or liability is said to be interest rate sensitive within a specific period if it will mature or reprice within that period. The interest rate sensitivity gap is defined as the difference between the amount of interest earning assets maturing or repricing within a specific time period and the amount of interest bearing liabilities maturing or repricing within that same time period. A gap is considered positive when the amount of interest rate sensitive assets exceeds the amount of interest rate sensitive liabilities. A gap is considered negative when the amount of interest rate sensitive liabilities exceeds the amount of interest rate sensitive assets. During a period of rising interest rates, therefore, a negative gap would tend to adversely affect net interest income. Conversely, during a period of falling interest rates, a negative gap position would tend to result in an increase in net interest income.
The following table sets forth the amounts of interest earning assets and interest bearing liabilities outstanding at December 31, 2003 that we anticipate, based upon certain assumptions, to reprice or mature in each of the future time periods shown. Except as stated below, the amount of assets and liabilities shown which reprice or mature during a particular period were determined based on the earlier of the term to repricing or the term to repayment of the asset or liability. The table is intended to provide an approximation of the projected repricing of assets and liabilities at December 31, 2003 based on contractual maturities and scheduled rate adjustments within a three-month period and subsequent selected time intervals. The loan amounts in the table reflect principal balances expected to be reinvested
and/or repriced because of contractual amortization and rate adjustments on adjustable-rate loans. Loan and investment securities contractual maturities and amortization reflect modest prepayment assumptions. While NOW, money market and savings deposit accounts have adjustable rates, it is assumed that the interest rates on these accounts will not adjust immediately to changes in other interest rates.
Therefore, the information in the table is calculated assuming that NOW, money market and savings deposits will reprice as follows: 30%, 85% and 24%, respectively, in the first three months, 10%, 2%, and 12%, respectively, in the next nine months, and 60%, 13% and 64%, respectively, after one year (dollars in thousands):
Certain shortcomings are inherent in the method of analysis presented in the foregoing table. For example, although certain assets and liabilities may have similar maturities or periods to repricing, they may react in different degrees to changes in market interest rates. Also, the interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types of assets may lag behind changes in market rates. Additionally, in the event of a change in interest rates, prepayment and early withdrawal levels would likely deviate significantly from those assumed in calculating the table. Therefore, we do not rely solely on a gap analysis to manage our interest rate risk, but rather we use what we believe to be the more reliable simulation model relating to changes in net interest income.
Based on simulation modeling at December 31, 2003 and 2002, our net interest income would change over a one-year time period due to changes in interest rates as follows (dollars in thousands):
Our simulations assume the following:
1. Changes in interest rates are immediate.
2. Changes in net interest income between December 31, 2003 and December 31, 2002 reflect changes in the composition of interest earning assets and interest bearing liabilities, related interest rates, repricing frequencies, and the fixed or variable characteristics of the interest earning assets and interest bearing liabilities.
The table above does not show an analysis of decreases of more than 100 basis points due to the low level of current market interest rates.
Item 8.
Item 8. Financial Statements and Supplementary Data
MB FINANCIAL, INC.
CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002, and 2001
MB FINANCIAL, INC. AND SUBSIDIARIES
FINANCIAL STATEMENTS
December 31, 2003, 2002, and 2001
INDEX
STATEMENT OF MANAGEMENT RESPONSIBILITY
INDEPENDENT AUDITORS’ REPORT
FINANCIAL STATEMENTS
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statements of Changes in Stockholders’ Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
STATEMENT OF MANAGEMENT RESPONSIBILITY
MB Financial, Inc.’s management is responsible for the preparation, integrity and fair presentation of its published financial statements. The consolidated financial statements have been prepared in accordance with generally accepted accounting principles and, as such, include amounts based on judgments and estimates made by management. Management also prepared other information included in the annual report and is responsible for its accuracy and consistency with the consolidated financial statements.
The consolidated financial statements have been audited by an independent accounting firm, KPMG LLP, which has been given unrestricted access to all financial records and related data, including minutes of all meetings of stockholders, the Board of Directors and committees of the Board. Management believes that representations made to the independent auditors during their audit were valid and appropriate.
Management maintains a system of internal controls over the preparation of its published financial statements, which is intended to provide reasonable assurance to the Company’s Board of Directors and officers regarding preparation of consolidated financial statements presented fairly in conformity with generally accepted accounting principles.
Management has long recognized its responsibility for conducting the Company’s affairs in a manner, which is responsive to the interest of employees, stockholders, investors and society in general. This responsibility is included in the statement of policy on ethical standards, which provides that the Company will fully comply with laws, rules and regulations of every community in which it operates and adhere to the highest ethical standards. Officers, employees and agents of the Company are expected and directed to manage the business of the Company with complete honesty, candor and integrity.
Internal auditors monitor the operation of the internal control system, and actions are taken by management to respond to deficiencies as they are identified. The Board, operating through its audit committee, which is composed entirely of directors who are not officers or employees of the Company, provides oversight to the financial reporting process.
Even effective internal controls, no matter how well designed, have inherent limitations, such as the possibility of human error or of circumvention or overriding of controls, and the consideration of cost in relation to benefit of a control. Further, the effectiveness of an internal control can change with circumstances.
MB Financial, Inc.’s management periodically assesses the internal controls for inadequacy. Based upon these assessments, MB Financial, Inc.’s management believes that, in all material respects, its internal controls relating to preparation of consolidated financial statements as of December 31, 2003 functioned effectively during the year ended December 31, 2003.
INDEPENDENT AUDITORS’ REPORT
The Board of Directors
MB Financial, Inc.:
We have audited the accompanying consolidated balance sheets of MB Financial, Inc. and subsidiaries as of December 31, 2003 and 2002, and the related consolidated statements of income, changes in stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2003. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes, examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of MB Financial, Inc. and subsidiaries as of December 31, 2003 and 2002, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2003 in conformity with accounting principles generally accepted in the United States of America.
As discussed in Note 1 to the consolidated financial statements, the Company changed its method of accounting for goodwill in 2002.
MB FINANCIAL, INC. & SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 2003 and 2002
(Amounts in thousands, except share and per share data)
See Accompanying Notes to Consolidated Financial Statements.
MB FINANCIAL, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, 2003, 2002 and 2001
(Amounts in thousands, except share and per share data)
See Accompanying Notes to Consolidated Financial Statements.
MB FINANCIAL, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
Years Ended December 31, 2003, 2002 and 2001
(Amounts in thousands, except share and per share data)
See Accompanying Notes to Consolidated Financial Statements.
MB FINANCIAL, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2003, 2002 and 2001
(Amounts in Thousands)
See Accompanying Notes to Consolidated Financial Statements.
MB FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Significant Accounting Policies
MB Financial, Inc. (the Company) is a bank holding company providing a full range of financial services to individuals and corporate customers through its banking subsidiaries principally in metropolitan Chicago, Illinois and Oklahoma City, Oklahoma. See Note 2 for a discussion of the merger of equals transaction between the Company and MidCity Financial Corporation (MidCity Financial) in 2001, with the resulting entity being renamed MB Financial, Inc.
The Company split its common shares three-for-two by paying a 50% dividend in December 2003. All common share and per common share data presented in the consolidated financial statements, and the accompanying notes below, has been adjusted to reflect the dividend.
Basis of Financial Statement Presentation: The consolidated financial statements include the accounts of the Company and its subsidiaries. Significant intercompany items and transactions have been eliminated in consolidation. The accounting and reporting policies of the Company conform to accounting principles generally accepted in the United States of America and general practices within the financial services industry. In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and revenues and expenses for the year. Actual results could differ from those estimates. Areas involving the use of management’s estimates and assumptions, which are more susceptible to change in the near term include the allowance for loan losses.
Cash and cash equivalents: For purposes of reporting cash flows, cash and cash equivalents includes cash on hand, amounts due from banks (including cash items in process of clearing), interest-bearing deposits with banks and federal funds sold.
Investment securities available for sale: Securities classified as available for sale are those securities that the Company intends to hold for an indefinite period of time, but not necessarily to maturity. Any decision to sell a security classified as available for sale is based on various factors, including significant movements in interest rates, changes in the maturity mix of assets and liabilities, liquidity needs, regulatory capital considerations, and other similar factors.
Securities available for sale are reported at fair value with unrealized gains or losses reported as accumulated other comprehensive income, net of the related deferred tax effect. The amortization of premiums and accretion of discounts, computed by the interest method over their contractual lives, are recognized in interest income. Realized gains or losses, determined on the basis of the cost of specific securities sold, are included in earnings. The Company periodically reviews securities for other-than-temporary impairment. If a loss is deemed to be other-than-temporary, it is recognized as a realized loss in the income statement with the security assigned a new cost basis.
Loans held for sale: Loans held for sale are those loans the Company intends to sell. They are carried at the lower of aggregate cost or market value. Gains and losses on sales of loans are recognized at settlement dates. All sales are made without recourse.
Loans: Loans are stated at the amount of unpaid principal reduced by the allowance for loan losses and unearned income. Direct finance and leveraged leases are included as lease loans for financial statement purposes. Direct finance leases are stated as the sum of remaining minimum lease payments from lessees plus estimated residual values less unearned lease income. Leveraged leases are stated at the sum of remaining minimum lease payments from lessees (less nonrecourse debt payments) plus estimated residual values less unearned lease income. On a monthly basis, management reviews the lease residuals for potential impairment. Unearned lease income on direct finance and leveraged leases is recognized over the lives of the leases using the level-yield method.
Loan origination and commitment fees and certain direct loan origination costs are deferred and the net amount amortized as an adjustment of the related loan’s yield. The Company is amortizing these amounts over the contractual life of the loan. Commitment fees based upon a percentage of a customer’s unused line of credit and fees related to standby letters of credit are recognized over the commitment period.
Interest is accrued daily on the Company’s outstanding loan balances. For impaired loans, accrual of interest is discontinued on a loan when management believes, after considering collection efforts and other factors, that the borrower’s financial condition is such that collection of interest is doubtful. Cash collections on impaired loans are credited to the loan balance, and no interest income is recognized on those loans until the principal balance has been determined to be collectible.
Loans, other than those included in large groups of smaller-balance homogeneous loans, are considered impaired when it is probable the Company will be unable to collect all contractual principal and interest payments due in accordance with the terms of the loan agreement. Impaired loans are measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate or, as a practical expedient, at the loan’s observable market price or the fair value of the collateral if the loan is collateral dependent. The amount of impairment, if any, and any subsequent changes is charged against the allowance for loan losses.
The allowance for loan losses is established through a provision for loan losses charged to expense. Loans are charged against the allowance for loan losses when management believes that collectibility of the principal is unlikely. The allowance is an amount that management believes will be adequate to absorb probable losses on existing loans, based on an evaluation of the collectibility of loans and prior loss experience. The allowance for loan losses is based on management’s evaluation of the loan portfolio giving consideration to the nature and volume of the loan portfolio, the value of underlying collateral, overall portfolio quality, review of specific problem loans, and prevailing economic conditions that may affect the borrower’s ability to pay. While management uses the best information available to make its evaluation, future adjustments to the allowance may be necessary if there are significant changes in economic conditions. In addition, regulatory agencies, as an integral part of their examination process, periodically review the subsidiary banks’ allowances for loan losses, and may require a subsidiary bank to recognize additions to its allowance based on their judgments of information available to them at the time of their examinations.
Lease investments: The Company’s investment in assets leased to others is reported as lease investments, net, and accounted for as operating leases. Rental income on operating leases is recognized as income over the lease term according to the provisions of the lease, which is generally on a straight-line basis. The investment in equipment in operating leases is stated at cost less depreciation using the straight-line method generally over a five-year life.
Premises and equipment: Premises and equipment are carried at cost less accumulated depreciation and amortization. Depreciation and amortization is computed by the straight-line method for buildings and computer equipment, and by an accelerated method for other assets over their estimated useful lives. Leasehold improvements are amortized over the term of the related lease or the estimated useful lives of the improvements, whichever is shorter. For owned and capitalized leases, estimated useful lives range from three to 30 years. Maintenance and repairs are charged to expense as incurred, while major improvements are capitalized and amortized to operating expense over their identified useful life.
Other real estate owned (OREO): OREO includes real estate assets that have been received in satisfaction of debt and is included in other assets. OREO is initially recorded and subsequently carried at the lower of cost or fair value less estimated selling costs. Any valuation adjustments required at the date of transfer are charged to the allowance for loan losses. Subsequently, unrealized losses and realized gains and losses on sale are included in other noninterest income. Operating results from OREO are recorded in other non-interest expense.
Goodwill and other intangibles: In connection with the Company’s acquisitions, the portion of the purchase price which represents value assigned to the existing deposit base (core deposit intangibles) is being amortized by the declining balance method over three to nine years. For 2001 and prior years, the excess of cost over fair value of net assets acquired (goodwill) was previously amortized on the straight-line method over fifteen to twenty years. Under the provisions of Statement of Financial Accounting Standard (SFAS) No. 142, Goodwill and Other Intangible Assets,
effective for fiscal years beginning after December 31, 2001, goodwill is no longer subject to amortization over its useful life, but instead is now subject to at least annual assessments for impairment by applying a fair value based test. The Company reviews goodwill and intangible assets annually to determine potential impairment by comparing the carrying value of the asset with the anticipated future cash flows.
Derivative Financial Instruments and Hedging Activities: SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended by SFAS No. 137, 138 and 149 establishes accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded in the balance sheet as either an asset or liability measured at its fair value. SFAS No. 133 requires that changes in the derivative’s fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allows a derivative’s gains and losses to offset related results on the hedged item in the income statement, and requires that a company must formally document, designate and assess the effectiveness of transactions that receive hedge accounting. The Company adopted SFAS No. 133 on January 1, 2001 and the implementation of this standard did not have a material impact on the Company’s consolidated financial statements.
All derivatives are recognized on the consolidated balance sheet at their fair value. On the date the derivative contract is entered into, the Company designates the derivative as either a fair value hedge (i.e. a hedge of the fair value of a recognized asset or liability) or a cash flow hedge (i.e. a hedge of the variability of cash flows to be received or paid related to a recognized asset or liability). The Company formally documents all relationships between hedging instruments and hedging items, as well as its risk management objective and strategy for undertaking various hedge transactions. This process includes linking all derivatives that are designated as fair value hedges or cash flow hedges to specific assets or liabilities on the balance sheet. The Company also formally assesses, both at the hedge’s inception and on an ongoing basis, whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in fair values or cash flows of hedged items. If it is determined that a derivative is not highly effective as a hedge or that it has ceased to be a highly effective hedge, the Company discontinues hedge accounting prospectively.
For a derivative designated as a fair value hedge, the changes in the fair value of the derivative and of the hedged item attributable to the hedged risk are recognized in earnings. If the derivative is designated as a cash flow hedge, the effective portions of changes in the fair value of the derivative are recorded in other comprehensive income and are recognized in the income statement when the hedged item affects earnings. Ineffective portions of changes in the fair value of cash flow hedges are recognized in earnings.
The Company discontinues hedge accounting prospectively when it is determined that the derivative is no longer effective in offsetting changes in the fair value or cash flows of the hedged item, the derivative expires or is sold, terminated, or exercised, the derivative is designated as a hedging instrument, or management determines that designation of the derivative as a hedging instrument is no longer appropriate. When hedge accounting is discontinued because it is determined that the derivative no longer qualifies as an effective fair value hedge, the Company continues to carry the derivative on the balance sheet at its fair value, and no longer adjusts the hedged asset or liability for changes in fair value. The adjustment of the carrying amount of the hedged asset or liability is accounted for in the same manner as other components of the carrying amount of that asset or liability.
Stock-based compensation: As allowed under SFAS No. 123, Accounting for Stock-Based Compensation, and SFAS No. 148, Accounting for Stock-Based Compensation - Transition and Disclosure - an amendment of SFAS 123, the Company measures stock-based compensation cost in accordance with the methods prescribed in Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees. As stock options are granted at fair value, there are no charges to earnings associated with stock options granted. Accordingly, no compensation cost has been recognized for grants made to date. Had compensation cost been determined based on the fair value method prescribed in SFAS No. 123, reported net income and earnings per common share would have been reduced to the pro forma amounts shown below (in thousands, except for common share data):
(1) The Company split its common shares three-for-two by paying a 50% stock dividend in December 2003. All common share data has been adjusted to reflect the dividend.
In determining the pro forma amounts above, the value of each grant is estimated at the grant date using the Black-Scholes option-pricing model, with the following weighted-average assumptions for December 31, 2003, December 31, 2002 and December 31, 2001, respectively; risk-free interest rate of 3.6%, 4.7% and 5.1% and an expected price volatility of 34%, 25% and 30%. Weighted average assumptions were 1.8% for the dividend rate in 2003, 2.0% in 2002 and 2.4% for 2001. Weighted average assumption for expected life was 7 years in 2003, 2002 and 2001.
Income taxes: Deferred taxes are provided on a liability method whereby deferred tax assets are recognized for deductible temporary differences and operating loss carryforwards, and tax credit carryforwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.
Earnings per common share: Basic earnings per share represents income available to common stockholders divided by the weighted-average number of common shares outstanding during the period. Diluted earnings per share reflects additional common shares that would have been outstanding if dilutive potential common shares had been issued, as well as any adjustment to income that would result from the assumed issuance. Potential common shares that may be issued by the Company relate solely to outstanding stock options, and are determined using the treasury stock method.
Earnings per common share have been computed for the years ended December 31, 2003, 2002 and 2001 based on the following (dollars in thousands):
(1) The Company split its common shares three-for-two by paying a 50% stock dividend in December 2003. All common share data has been adjusted to reflect the dividend.
Comprehensive income: Accounting principles generally require that recognized revenue, expenses, gains and losses be included in net income. Although certain changes in assets and liabilities, such as unrealized gains and losses on available-for-sale securities, are reported as a separate component of stockholders’ equity on the consolidated balance sheet, such items, along with net income, are components of comprehensive income.
Segment Reporting: The Company is managed as one unit and does not have separate operating segments. The Company’s chief operating decision-makers use consolidated results to make operating and strategic decisions.
Recent accounting pronouncements: In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities. This Statement amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. This Statement is effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003. Adoption of this Statement did not materially impact the Company’s consolidated financial statements.
In May 2003, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. SFAS No. 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). Many of those instruments, including mandatorily redeemable preferred securities, were previously classified by some issuers as equity or as mezzanine debt. The Company adopted SFAS No. 150 effective July 1, 2003 and the adoption of the standard did not materially impact the Company’s financial statements.
In January 2003, the FASB issued Interpretation No. 46, Consolidation of Variable Interest Entities, an interpretation of Accounting Research Bulletin (ARB) No. 51, Consolidated Financial Statements. This Interpretation clarified the application of ARB No. 51 to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. Qualifying special purpose entities as defined by SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, are excluded from the scope of Interpretation No. 46. The Interpretation applied immediately to all variable interest entities created after January 31, 2003 and was originally effective for fiscal periods beginning after July 1, 2003 for existing variable interest entities. In October 2003, the FASB postponed the effective date of the Interpretation to December 31, 2003.
In December 2003, a revised version of Interpretation No. 46 (Revised Interpretation No. 46) was issued by the FASB. The revisions clarify some requirements, ease some implementation problems, add new scope exceptions, and add applicability judgments. Revised Interpretation No. 46 is required to be adopted by most public companies no later than March 31, 2004. The Company adopted Revised Interpretation No. 46 as of December 31, 2003. Upon adoption, we deconsolidated all of the previously established capital trust entities that issued common stock to the Company and preferred securities to third parties. These trusts invested the proceeds of those offerings in junior subordinated notes of the Company. As a result of the deconsolidation of those trusts, at December 31, 2003, we have reported $87.4 million of previously issued junior subordinated notes on our balance sheet in lieu of the trust preferred securities issued by the capital trusts which totaled $84.8 million. The increase in reported liabilities of $2.6 million was offset by a corresponding investment in those trusts. The adoption of Revised Interpretation No. 46 did not have a material impact on the Company’s financial statements.
In December 2003, the American Institute of Certified Public Accountants released Statement of Position 03-3, Accounting for Certain Loans or Debt Securities Acquired in a Transfer (SOP 03-3). SOP 03-3 addresses accounting for differences between contractual cash flows and cash flows expected to be collected from an investor’s initial investment in loans or debt securities acquired in a transfer if those differences are attributable to credit quality. SOP 03-3 is effective for loans acquired in fiscal years beginning after December 15, 2004. The adoption of SOP 03-3 is not expected to have a material impact on the Company’s financial statements.
Reclassifications: Certain prior year amounts have been reclassified to conform to the current year’s presentation.
Note 2. Business Combinations and Dispositions
Merger-of-Equals. On November 6, 2001, MB Financial, Inc., a Delaware corporation (Old MB Financial) and MidCity Financial each merged with and into the Company, with the Company as the surviving entity. The Company, named MB-MidCity, Inc. prior to the merger, was renamed MB Financial, Inc., upon completion of the merger.
The holders of Old MB Financial common stock were issued one share of common stock of the Company for each share held prior to the transaction. Each share of MidCity Financial common stock was exchanged for 230.32955 shares of common stock of the newly formed Company. The merger was accounted for under the pooling-of-interests method of accounting and, accordingly, the information included in the consolidated financial statements presents the combined results as if the merger had been in effect for all periods presented at historical cost.
After completion of the merger, Old MB Financial’s subsidiary bank, Manufacturers Bank, and MidCity Financial’s Illinois-based subsidiary banks, The Mid-City National Bank of Chicago, First National Bank of Elmhurst and First National Bank of Morton Grove, were merged. The Mid-City National Bank of Chicago was the surviving institution and was renamed and now operates as MB Financial Bank, N.A. (MB Financial Bank). Union Bank, N.A., a former subsidiary bank of MidCity Financial based in Oklahoma City, Oklahoma, is now held as a separate subsidiary of the Company. Abrams Centre National Bank, another former subsidiary bank of MidCity Financial based in Dallas, Texas, was sold in April 2003 (see Disposition section below).
The following table is a summary by category of the expenses recorded relating to the merger in 2001 (in thousands):
Approximately $875 thousand, $2.2 million and $14.1 million of such merger expenses were not paid, but accrued for at December 31, 2003, 2002 and 2001, respectively. During 2003, the Company reversed $720 thousand of the merger reserve that was no longer needed.
The following information reconciles net interest income and net income of Old MB Financial as previously reported in Old MB Financial’s Quarterly Report on Form 10-Q for the nine months ended September 30, 2001 to those included in the accompanying consolidated financial statements (in thousands):
Other Business Combinations. The following business combinations were, or will be accounted for under the purchase method of accounting. Accordingly, the results of operations of the acquired companies have been included in the Company’s results of operations since the date of acquisition. Under this method of accounting, the purchase price is allocated to the respective assets acquired and liabilities assumed based on their estimated fair values, net of applicable income tax effects. The excess cost over fair value of net assets acquired is recorded as goodwill.
On February 7, 2003, the Company acquired South Holland Bancorp, Inc., (South Holland) parent company of South Holland Trust & Savings Bank, for $93.1 million in cash. This purchase price generated approximately $28.6 million in goodwill and $5.9 million in intangible assets subject to amortization. As of the acquisition date, South Holland had approximately $560.3 million in assets. South Holland Trust & Savings Bank operated as a separate subsidiary of the Company until integration of its computer systems with those of MB Financial Bank on May 15, 2003. After this integration was completed, South Holland Trust & Savings Bank merged into MB Financial Bank.
Pro forma results of operation for South Holland for the years ended December 31, 2003, 2002, and 2001, respectively, are not included, as South Holland would not have had a material impact on the Company’s financial statements.
On August 12, 2002, the Company acquired LaSalle Systems Leasing, Inc. and its affiliated company, LaSalle Equipment Limited Partnership (LaSalle), based in the Chicago metropolitan area, for $39.7 million. Of this amount, $5.0 million was paid in the form of common stock, with the balance paid in cash. The purchase price includes a $4.0 million deferred payment tied to LaSalle’s operating results for a four-year period subsequent to the acquisition date. No related payments were made in 2003 and 2002. The transaction generated approximately $1.7 million in goodwill, which may be adjusted, if the $4.0 million deferred payment is made at a later date. LaSalle operates as a subsidiary of MB Financial Bank.
On April 8, 2002, the Company completed its acquisition of First National Bank of Lincolnwood (Lincolnwood), based in Lincolnwood, Illinois, and Lincolnwood’s parent, First Lincolnwood Corporation, for an aggregate purchase price of approximately $35.0 million in cash. The transaction generated approximately $12.1 million in goodwill. The Company merged Lincolnwood, with its three office locations and $227.5 million assets into MB Financial Bank.
Pro forma results of operation for LaSalle and Lincolnwood for the years ended December 31, 2002 and 2001 are not included, as LaSalle and Lincolnwood would not have had a material impact on the Company’s financial statements.
On April 21, 2001, the Company acquired FSL Holdings (FSL) and its subsidiary, First Savings & Loan Association of South Holland, with assets of $221.8 million. First Savings and Loan of South Holland was subsequently merged into MB Financial Bank. Each shareholder of FSL was paid $165 for each share of common stock held by such shareholder (for an aggregate consideration of $41.3 million). The transaction was accounted for as a purchase and generated $6.9 million in goodwill.
Pro forma results of operation for FSL for the year ended December 31, 2001 are not included, as FSL would not have had a material impact on the Company’s financial statements.
Pending Merger. On January 12, 2004, the Company jointly announced with First SecurityFed Financial, Inc. (First SecurityFed), parent of First Security Federal Savings Bank, an agreement to merge. The Company will be the surviving corporation in the transaction valued at $139.2 million, which will be paid through a combination of the Company’s common stock and cash, with First SecurityFed stockholders having the right to chose the form of consideration they will receive, subject to the allocation provisions of the transaction agreement. First SecurityFed stockholders receiving cash will receive a cash payment equal to $35.25 for their shares, while First SecurityFed stockholders receiving stock will receive a number of shares of the Company’s common stock valued at $35.25 per share based upon the Company’s average closing price over a ten trading day period ending on the second trading day prior to the effective date of the transaction. The transaction is subject to restructuring as an all-cash transaction at $35.25 per share if the aggregate value of the Company’s stock to be issued is less than 40% of the value of the aggregate transaction consideration and the Company elects not to increase the number of shares issuable in the transaction. The total number of common shares that will be issued by the Company in the merger has been fixed at approximately 2.0 million shares, subject to increase for any First SecurityFed stock options exercises prior to merger. The transaction is expected to generate approximately $52.0 million of goodwill. First SecurityFed reported assets of $490.8 million as of September 30, 2003. Completion of the transaction is expected in the second quarter of 2004, pending First SecurityFed shareholder, regulatory and other necessary approvals.
Disposition. On May 6, 2003, the Company completed its sale of Abrams Centre Bancshares, Inc. and its subsidiary, Abrams Centre National Bank (Abrams) for $16.3 million in cash. The sale resulted in a $3.1 million gain for the Company in the second quarter of 2003. As of the sale date, Abrams had approximately $98.4 million in assets.
Note 3. Restrictions on Cash and Due From Banks
The subsidiary banks are required to maintain reserve balances in cash or on deposit with the Federal Reserve Bank, based on a percentage of deposits. The total of those reserve balances was approximately $7.5 million and $14.0 million at December 31, 2003 and 2002, respectively.
Note 4. Investment Securities
Carrying amounts and fair values of investment securities available for sale are summarized as follows (in thousands):
Unrealized losses on investment securities available for sale and the fair value of the related securities at December 31, 2003 are summarized as follows (in thousands):
The total number of security positions in the investment portfolio that were in an unrealized loss position at December 31, 2003 is 194. All securities with unrealized losses are reviewed by management at least quarterly to determine whether the unrealized losses are other-than-temporary. Unrealized losses in the portfolio at December 31, 2003 resulted from increases in market interest rates and not from deterioration in the creditworthiness of the issuer. Since the Company has the ability to hold these securities until market price recovery or maturity, these investment securities are not considered other-than-temporarily impaired.
Realized net gains (losses) on sale of investment securities available for sale are summarized as follows (in thousands):
The amortized cost and fair value of investment securities available for sale as of December 31, 2003 by contractual maturity are shown below. Maturities may differ from contractual maturities in mortgage-backed securities because the mortgages underlying the securities may be called or repaid without any penalties. Therefore, these securities are not included in the maturity categories in the following maturity summary.
Investment securities available for sale with carrying amounts of $457.3 million and $310.7 million at December 31, 2003 and 2002, respectively, were pledged as collateral on public deposits and for other purposes as required or permitted by law.
Note 5. Loans
Loans consist of the following at (in thousands):
(1) Gross loan balances at December 31, 2003 and 2002 are net of unearned income, including net deferred loan fees of $4.2 million for each period.
Loans are made to individuals as well as commercial and tax exempt entities. Specific loan terms vary as to interest rate, repayment and collateral requirements based on the type of loan requested and the credit worthiness of the prospective borrower. Credit risk tends to be geographically concentrated in that the majority of the loan customers are located in the markets serviced by the subsidiary banks.
Non-accrual loans and loans past due ninety days or more were $21.1 million and $22.0 million at December 31, 2003 and 2002, respectively. The reduction in interest income associated with loans on non-accrual status was approximately $1.3 million, $1.2 million, and $1.3 million for the years ended December 31, 2003, 2002 and 2001, respectively.
Information about impaired loans as of and for the years ended December 31, 2003, 2002 and 2001 are as follows (in thousands):
Activity in the allowance for loan losses was as follows (in thousands):
Loans outstanding to executive officers and directors of the Company, including companies in which they have management control or beneficial ownership, at December 31, 2003 and 2002, were approximately $41.0 million and $21.8 million, respectively. In the opinion of management, these loans have similar terms to other customer loans and do not present more than normal risk of collection. An analysis of the activity related to these loans for the year ended December 31, 2003 is as follows (in thousands):
Note 6. Lease Investments
The lease portfolio is comprised of various types of equipment, generally technology related, such as computer systems, satellite equipment, and general manufacturing equipment. The credit quality of the lessee generally is in one of the top four rating categories of Moody’s or Standard & Poors, or the equivalent as determined by us.
Lease investments by categories follow (in thousands):
(1) Direct finance and leveraged leases are included as commercial loans collateralized by assignment of lease payments for financial statement purposes.
Leases that transfer substantially all of the benefits and risk related to the equipment ownership to the lessee are classified as direct financing. If these direct finance leases have non-recourse debt associated with them, they are further classified as leveraged leases, and the associated debt is netted with the outstanding balance in the consolidated financial statements. Interest income on direct finance and leveraged leases is recognized using methods which approximate a level yield over the term of the lease.
Operating leases are investments in equipment leased to other companies, where the residual component makes up more than 10% of the investment. Most of our lease equipment purchases are funded internally, but some of these purchases are financed through loans from other banks, which totaled $19.1 million at December 31, 2003 and $17.3 million at December 31, 2002.
The minimum lease payments receivable for the various categories of leases are due as follows (in thousands) for the years ending December 31,
Income from lease investments is composed of (in thousands):
The lease residual value represents the estimated fair value of the leased equipment at the termination of the lease. Lease residual values are reviewed monthly and any write-downs, or charge-offs deemed necessary are recorded in the period in which they become known. Gains on leased equipment periodically result when a lessee renews a lease or purchases the equipment at the end of a lease, or the equipment is sold to a third party at a profit. Individual lease transactions can, however, result in a loss. This generally happens when, at the end of a lease, the lessee does not renew the lease or purchase the equipment. To mitigate this risk of loss, we usually limit individual leased equipment residuals (expected lease book values at the end of initial lease terms) to approximately $500 thousand per transaction and seek to diversify both the type of equipment leased and the industries in which the lessees to whom such equipment is leased participate. There were 1,416 leases at December 31, 2003 compared to 1,517 at December 31, 2002. The average residual value per lease was approximately $19 thousand at December 31, 2003 and $16 thousand at December 31, 2002.
At December 31, 2003, the following reflects the residual values for leases by category in the year the initial lease term ends (in thousands):
Note 7. Premises and Equipment
Premises and equipment consist of (in thousands):
Depreciation on premises and equipment totaled $6.0 million, $5.5 million and $6.9 million for the years ended December 31, 2003, 2002 and 2001, respectively.
During the third quarter of 2003, the Company acquired a new operations center in Rosemont, Illinois for $19.3 million. The Company plans to occupy the new location starting in the third quarter of 2004.
Note 8. Goodwill and Intangibles
On January 1, 2002, the Company implemented Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets. Under the provisions of SFAS No. 142, goodwill is no longer subject to amortization over its estimated useful life, but instead is subject to at least annual assessments for impairment by applying a fair-value based test. SFAS No. 142 also requires that an acquired intangible asset be separately recognized if the benefit of the intangible asset is obtained through contractual or other legal rights, or if the asset can be sold, transferred, licensed, rented or exchanged, regardless of the acquirer’s intent to do so. No impairment losses on goodwill or other intangibles were incurred in 2003 and 2002.
The following table presents the changes in the carrying amount of goodwill as of December 31, 2003 and December 31, 2002 (in thousands):
The Company has other intangible assets consisting of core deposit intangibles that have a weighted average amortization period of approximately eleven years. The following tables present the changes in the carrying amount of core deposit intangibles, gross carrying amount, accumulated amortization, and net book value as of December 31, 2003 and December 31, 2002 (in thousands):
The following presents the estimated amortization expense of other intangible assets (in thousands):
The following table presents pro forma net income and earnings per share in all periods presented excluding goodwill amortization expense (in thousands, except for common share data):
Note 9. Deposits
The composition of deposits is as follows (in thousands):
Time certificates of $100,000 or more included $160.3 million and $166.0 million of brokered deposits at December 31, 2003 and 2002, respectively.
At December 31, 2003, the scheduled maturities of time certificates are as follows (in thousands):
Note 10. Short-Term Borrowings
Short-term borrowings are summarized as follows as of December 31, 2003 and 2002 (dollars in thousands):
Securities sold under agreements to repurchase are agreements in which a party acquires funds by selling securities to another party under a simultaneous agreement to repurchase the same securities at a specified price and date. The Company enters into repurchase agreements and also offers a demand deposit account product to customers that sweeps their balances in excess of an agreed upon target amount into overnight repurchase agreements. Customer repurchase agreements totaled $163.3 million and $91.5 million at December 31, 2003 and 2002, respectively. Company repurchase agreements totaled $55.8 million and $66.0 million at December 31, 2003 and 2002, respectively.
Federal Home Loan Bank advances with maturities less than one year totaled $125.0 million and $2.0 million at December 31, 2003 and 2002, respectively. At December 31, 2003, the advances had maturities ranging from January 2004 to September 2004. The advances are fixed rate and are subject to a prepayment fee.
A collateral pledge agreement exists whereby at all times, the Company must keep on hand, free of all other pledges, liens, and encumbrances, first mortgages with unpaid principal balances aggregating no less than 167% of the outstanding secured advances from the Federal Home Loan Bank.
The Company has a $26 million correspondent bank line of credit which has certain debt covenants that require the Company to maintain “Well Capitalized” capital ratios, to have no other debt except in the usual course of business, and requires the Company to maintain minimum financial ratios on return on assets and earnings as well as maintain minimum financial ratios related to the loan loss allowance. The Company was in compliance with such debt covenants as of December 31, 2003. The correspondent bank line of credit is secured by the stock of MB Financial Bank, and its terms are renewed annually. No balances were outstanding on the correspondent bank line of credit at December 31, 2003 and 2002.
Note 11. Long-Term Borrowings
The Company had notes payable to banks totaling $19.1 million and $17.3 million at December 31, 2003 and December 31, 2002, respectively, which accrue interest at rates ranging from 3.90% to 9.50%. Lease investments includes equipment with an amortized cost of $22.1 million and $20.5 million at December 31, 2003 and December 31, 2002, respectively, that is pledged as collateral on these notes.
The Company had Federal Home Loan Bank advances with maturities greater than one year of $2.4 million and $8.7 million at December 31, 2003 and 2002, respectively. As of December 31, 2003, the advances had fixed interest rates ranging from 3.87% to 5.34%.
During 2003, the Company incurred a $1.1 million prepayment fee on Federal Home Loan Bank advances due to the early payoff of $8.1 million in long-term advances.
At December 31, 2002, long-term borrowings included $20.0 million in unsecured floating rate subordinated debt. The Company had the option to select an interest rate equal to 1-month, 3-month, 6-month LIBOR, or other LIBOR rate agreed upon by the agent plus 2.60%, and interest was paid monthly. The Company prepaid this seven-year instrument in December 2003, without penalty.
The principal payments on long-term borrowings are due as follows during the years ending December 31,
Note 12. Junior Subordinated Notes Issued to Capital Trusts
The Company established Delaware statutory trusts in prior years for the sole purpose of issuing trust preferred securities and related trust common securities. The proceeds from such issuances were used by the trusts to purchase junior subordinated notes of the Company, which are the sole assets of each trust. Concurrently with the issuance of the trust preferred securities, the Company issued guarantees for the benefit of the holders of the trust preferred securities. The trust preferred securities are issues that qualify, and are treated by the Company, as Tier 1 regulatory capital. The Company wholly owns all of the common securities of each trust. The trust preferred securities issued by each trust rank equally with the common securities in right of payment, except that if an event of default under the indenture governing the notes has occurred and is continuing, the preferred securities will rank senior to the common securities in right of payment.
The table below summarizes the outstanding junior subordinated notes and the related trust preferred securities issued by each trust as of December 31, 2003 (in thousands):
(1) All cash distributions are cumulative.
As of December 31, 2003, the Company adopted FASB Interpretation No. 46, Consolidation of Variable Interest Entities, as revised in December 2003. Upon adoption, the Company deconsolidated both capital trust entities above. As a result of the deconsolidation of those trusts, the Company is reporting the previously issued junior subordinated notes on its balance sheet rather than the preferred securities issued by the capital trusts.
The trust preferred securities are subject to mandatory redemption, in whole or in part, upon repayment of the junior subordinated notes at the stated maturity date, or upon redemption on a date no earlier than September 30, 2007 for MB Financial Capital Trust I and September 1, 2008 for Coal City Capital Trust I. Prior to these respective redemption dates, the junior subordinated notes may be redeemed by the Company (in which case the trust preferred securities would also be redeemed) after the occurrence of certain events that would have a negative tax effect on the Company or the trusts, would cause the trust preferred securities to no longer qualify as Tier 1 capital, or would result in a trust being treated as an investment company. Each trust’s ability to pay amounts due on the trust preferred securities is solely dependent upon the Company making payment on the related junior subordinated notes. The Company’s obligation under the junior subordinated notes and other relevant trust agreements, in aggregate, constitute a full and unconditional guarantee by the Company of each trust’s obligations under the trust preferred securities issued by each trust. The Company has the right to defer payment of interest on the notes and, therefore, distributions on the trust preferred securities for up to five years, but not beyond the stated maturity date in the table above.
The Federal Reserve Board is currently evaluating whether the deconsolidation of capital trust entities required by revised Interpretation No. 46 will affect the qualification of trust preferred securities as Tier 1 Capital. If the Federal Reserve Board determines to no longer allow trust preferred securities to be treated as Tier 1 Capital, the Company would, as noted above, have the option to redeem the junior subordinated notes.
Note 13. Lease Commitments and Rental Expense
The Company leases office space for certain branch offices. In 1998, the Company sold its North Riverside building for $7.4 million and leased back a portion of the building under an operating lease. The gain of $1.4 million realized on that transaction was deferred and is being amortized over the remaining term of the ten-year lease. The future minimum annual rental commitments for these noncancelable leases and subleases of such space excluding the deferred gain are as follows (in thousands):
Under the terms of these leases, the Company is required to pay its pro rata share of the cost of maintenance and real estate taxes. Certain leases also provide for increased rental payments based on increases in the Consumer Price Index.
The Company entered into a long-term land lease with the purchase of its new operations center in Rosemont, Illinois during the third quarter of 2003. Substantially all future rental commitments beyond 2008 relate to this land lease.
Net rental expense for the years ended December 31, 2003, 2002 and 2001 amounted to $1.9 million, $2.3 million and $2.2 million, respectively.
Note 14. Employee Benefit Plans
The Company has a defined contribution 401(k) plan that covers all full-time employees who have completed three months of service prior to the first day of each month. Each participant under the plan may contribute up to 15% of his/her compensation on a pretax basis. The Company’s contributions consist of a discretionary profit-sharing contribution and a matching contribution of the amounts contributed by the participants. The Board of Directors determines the Company’s contributions on an annual basis.
Each participant is eligible for a Company matching contribution equal to 100% of their contributions up to 2% of their compensation plus 50% of each additional contribution up to 2% of their compensation, resulting in a maximum total Company matching contribution of 3%. Additionally, the Company made a discretionary profit sharing contribution equal to 4% of total compensation. The Company’s total contributions to the plan, for the years ended December 31, 2003, 2002 and 2001, were approximately $2.5 million, $2.0 million and $755 thousand, respectively.
During 2001, the Company maintained the MidCity Financial Corporation profit sharing plan and contributed on behalf of each participant. The MidCity Financial Corporation profit sharing plan allowed for voluntary contributions by employees, subject to certain limitations. Employer contributions to the plan were based solely on the performance of MidCity Financial. Employer contributions to the plan were approximately $1.3 million for the year ended December 31, 2001. As of the year end December 31, 2001, the MidCity Financial Corporation plan was merged into the Company’s plan and a new plan document was created to accommodate the merger and administrative changes.
Supplemental/nonqualified retirement plans cover key employees. Contributions to the plan were approximately $151 thousand, $157 thousand and $74 thousand for the years ended December 31, 2003, 2002 and 2001, respectively. During 2001, the Company also continued to maintain the MidCity Financial Corporation supplemental profit sharing plan which covered key employees. Contributions to the MidCity Financial Corporation supplemental profit sharing plan were approximately $106 thousand for the year ended December 31, 2001.
Note 15. Income Taxes
The deferred taxes consist of (in thousands):
Management has evaluated the probability of deferred tax assets not being realized, and determined that state taxable income in future years may not be adequate to utilize the net operating loss carryforwards due primarily to certain tax strategies implemented by the Company. Accordingly, the Company has established a valuation allowance of $1.7 million at December 31, 2003.
The Company’s state net operating loss carryforwards totaled approximately $36.6 million at December 31, 2003 and expire beginning in 2007 through 2021. The Company’s Federal net operating loss carryforwards totaled approximately $9.8 million at December 31, 2003 and expire beginning in 2012 through 2019.
Income taxes consist of (in thousands):
The reconciliation between the statutory federal income tax rate of 35% and the effective tax rate on consolidated income follows (in thousands):
Note 16. Commitments and Contingencies
Credit-related financial instruments: The Company is a party to credit-related financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit, standby letters of credit and commercial letters of credit. Such commitments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheets.
The Company’s exposure to credit loss is represented by the contractual amount of these commitments. The Company follows the same credit policies in making commitments as it does for on-balance-sheet instruments.
At December 31, 2003 and December 31, 2002, the following financial instruments were outstanding whose contract amounts represent off-balance sheet credit risk (in thousands):
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require a payment of a fee. The commitments for equity lines of credit may expire without being drawn upon. Therefore, the total commitment amounts do not necessarily represent future cash requirements. The amount of collateral obtained, if it is deemed necessary by the Company, is based on management’s credit evaluation of the customer.
In November 2002, the Financial Accounting Standards Board issued Interpretation No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, which requires additional disclosures by a guarantor about its obligations under certain guarantees that it has issued. Interpretation No. 45 also clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The most significant instruments impacted for the Company are standby and commercial letters of credit.
The Company, in the normal course of its business, regularly offers standby and commercial letters of credit to its bank customers. Standby and commercial letters of credit are a conditional but irrevocable form of guarantee. Under letters of credit, the Company typically guarantees payment to a third party beneficiary upon the default of payment or nonperformance by the bank customer and upon receipt of complying documentation from that beneficiary.
Both standby and commercial letters of credit may be issued for any length of time, but normally do not exceed a period of five years. These letters of credit may also be extended or amended from time to time depending on the bank customer’s needs. As of December 31, 2003, the maximum remaining term for any standby letter of credit was August 31, 2008. A fee of up to two percent of face value may be charged to the bank customer and is recognized as income over the life of the letter of credit, unless considered non-rebatable under the terms of a letter of credit application.
At December 31, 2003, the contractual amount of these letters of credit, which represents the maximum potential amount of future payments that the Company would be obligated to pay, increased $50.3 million to $73.7 million from $23.4 million at December 31, 2002. The increase was largely due to the acquisition of South Holland, which had approximately $37.0 million in standby letters of credit at its acquisition date. Of the $73.7 million in commitments outstanding at December 31, 2003, $26.3 million of the letters of credit have been issued or renewed since December 31, 2002. The Company had no liability recorded as of December 31, 2003 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 areas. Investments in securities issued by states and political subdivisions also involve governmental entities within the Company’s market area. The distribution of commitments to extend credit approximates the distribution of loans outstanding. Standby letters of credit are granted primarily to commercial borrowers.
Contingencies: In the normal course of business, the Company is involved in various legal proceedings. In the opinion of management, any liability resulting from such proceedings would not have a material adverse effect on the Company’s consolidated financial statements.
Note 17. Regulatory Matters
The Company’s primary source of cash is dividends from the subsidiary banks. The subsidiary banks are subject to certain restrictions on the amount of dividends that they may declare without prior regulatory approval. The dividends declared cannot be in excess of the amount which would cause the subsidiary banks to fall below the minimum required for capital adequacy purposes.
The Company and its subsidiary banks are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory - and additional discretionary - actions by regulators that, if undertaken, could have a direct material effect on the Company’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company’s and it’s subsidiary banks’ assets, liabilities, and certain off-balance-sheet items are calculated under regulatory accounting practices. The Company’s and its subsidiary banks’ capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Prompt corrective action provisions are not applicable to bank holding companies.
Quantitative measures established by regulation to ensure capital adequacy require the Company and its subsidiary banks to maintain minimum amounts and ratios (set forth in the table below) of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier 1 capital (as defined) to average assets (as defined). Management believes the Company and its subsidiary banks meet all capital adequacy requirements to which they are subject as of December 31, 2003 and 2002.
As of December 31, 2003, the most recent notification from the Federal Deposit Insurance Corporation categorized the subsidiary banks as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized the subsidiary banks must maintain the total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as set forth in the well-capitalized column in the table below. There are no conditions or events since that notification that management believes have changed the subsidiary banks’ categories.
The required and actual amounts and ratios for the Company and its subsidiary banks are presented below (dollars in thousands):
N/A - not applicable
Note 18. Fair Value of Financial Instruments
Fair values of financial instruments are management’s estimate of the values at which the instruments could be exchanged in a transaction between willing parties. These estimates are subjective and may vary significantly from amounts that would be realized in actual transactions. In addition, other significant assets are not considered financial assets including deferred tax assets, premises and equipment and intangibles. Further, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on the fair value estimates and have not been considered in any of the estimates.
The following methods and assumptions were used by the Company in estimating the fair value of its financial instruments:
Cash and due from banks, interest bearing deposits with banks and federal funds sold: The carrying amounts reported in the balance sheet approximate fair value.
Investment securities available for sale: Fair values for investment securities are based on quoted market prices, where available. If quoted prices are not available, fair values are based on quoted market prices of comparable instruments.
Loans held for sale: Fair values are based on Federal Home Loan Mortgage Corporation quoted market prices.
Loans: Most commercial loans and some real estate mortgage loans are made on a variable rate basis. For those variable-rate loans that reprice frequently with no significant change in credit risk, fair values are based on carrying values. The fair values for fixed rate and all other loans are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers with similar credit quality.
Accrued interest receivable and payable: The carrying amounts of accrued interest approximate their fair values.
Non-interest bearing deposits: The fair values disclosed are equal to their balance sheet carrying amounts, which represent the amount payable on demand.
Interest bearing deposits: The fair values disclosed for deposits with no defined maturities are equal to their carrying amounts, which represent the amount payable on demand. The carrying amounts for variable-rate, fixed-term money market accounts and certificates of deposit approximate their fair value at the reporting date. Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on similar certificates to a schedule of aggregated expected monthly maturities on time deposits.
Short-term borrowings: The carrying amounts of federal funds purchased, borrowings under repurchase agreements and other short-term borrowings with maturities of 90 days or less approximate their fair values. The fair value of short-term borrowings greater than 90 days is based on the discounted value of contractual cash flows.
Long-term borrowings: The fair values of the Company’s long-term borrowings (other than deposits) are estimated using discounted cash flow analyses, based on the Company’s current incremental borrowing rates for similar types of borrowing arrangements.
Junior subordinated notes issued to capital trusts: The fair values of the Company’s junior subordinated notes issued to capital trusts is estimated based on the quoted market prices of the trusts’ preferred security instruments.
Interest rate swap contracts: The fair value of interest rate swap contacts is obtained from dealer quotes. These values represent the estimated amount the Company would receive or pay to terminate the agreements, taking into account current interest rates and, when appropriate the current creditworthiness of the counter-parties.
Off-balance-sheet instruments: Fair values for the Company’s off-balance-sheet lending commitments (guarantees, letters of credit and commitments to extend credit) are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements.
The estimated fair value of financial instruments is as follows (in thousands):
Note 19. Stock Option Plans
The Company adopted the Omnibus Incentive Plan (the “Omnibus Plan”) which was established in 1997 and subsequently modified. Options outstanding under the Company’s previous Coal City Corporation Plan adopted in 1995 were transferred to the Omnibus Plan with the number of options and exercise prices being converted using a ratio of 83.5 to 1. The Omnibus Plan as modified 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 (“ISO”), non-qualified stock options (“NQSO”), stock appreciation rights or restricted stock. A committee, appointed by the Board of Directors, administers the Omnibus Plan.
In addition, through a previous merger, the Company adopted the Avondale 1995 Plan (“1995 Plan”). Effective with the merger, no further options were granted through the 1995 Plan.
Options granted under the plans may be exercised at such times and be subject to such restrictions and conditions as the committee shall in each instance approve, which may not be the same for each grant. Each option granted shall expire at such time as the committee shall determine at the time of grant; provided, however, that no option granted under the Omnibus Plan shall be exercisable later than the fifteenth anniversary date of its grant (ten years if an ISO) and provided further that no option granted under the 1995 Plan shall be exercisable later than the tenth anniversary of the date of its grant. The option price for each grant of an option shall be determined by the committee, provided that the option price shall not be less than 100% of the fair market value of a share on the date the option is granted. In the event any holder of 10% or more of the shares is granted an incentive stock option, the option price shall not be less than 110% of the fair market value of a share on the date of grant.
The Company split its common shares three-for-two by paying a 50% stock dividend in December 2003. The option shares and prices have been adjusted to reflect the split.
Outstanding options under the Omnibus Plan and the 1995 Plan were 1,823,156 and 1,683,854 as of December 31, 2003 and 2002, respectively. Substantially all of the outstanding options vest after a period of four years from their grant date. There were no stock appreciation rights outstanding as of December 31, 2003 and 2002.
Other pertinent information related to the options is as follows:
The following table presents certain information with respect to outstanding and exercisable stock options:
Shares exercised pertaining to the 1995 plan were 2,250 and 55,227 during 2003 and 2002, respectively. Options outstanding pertaining to the 1995 Plan were 182,916, 185,166, and 240,393 at December 31, 2003, 2002 and 2001, respectively.
The Company also grants restricted shares to select officers within the organization and directors who elect to receive restricted stock in lieu of cash for directors’ fees. These restricted shares vest over a one to three year period. Holders of restricted shares are entitled to receive cash dividends paid to the Company’s common stockholders and have the right to vote the restricted shares prior to vesting. Compensation expense for the restricted shares equals the market price of the related stock at the date of grant and is amortized on a straight-line basis over the vesting period. In 2003, 10,785 restricted shares were granted, with a weighted-average grant-date per share fair value of $27.43. As of December 31, 2003, all 10,785 restricted shares granted in 2003 were outstanding. The Company recognized $61 thousand in compensation expense related to the restricted stock grants during 2003. No restricted shares were granted or outstanding in 2002 and 2001.
Note 20. Derivative Financial Instruments
The Company uses interest rate swaps to hedge its interest rate risk. The Company had seven fair value commercial loan interest rate swaps with a notional amount of $21.7 million at December 31, 2003. For fair value hedges, the changes in fair values of both the hedging derivative and the hedged item were recorded in current earnings as other income or other expense. When a fair value hedge no longer qualifies for hedge accounting, previous adjustments to the carrying value of the hedged item are reversed immediately to current earnings and the hedge is reclassified to a trading position recorded at fair value.
Interest rate swap contracts involve the risk of dealing with counterparties and their ability to meet contractual terms. The net amount payable or receivable under interest rate swaps is accrued as an adjustment to interest income. The net amount payable was approximately $27 thousand and $12 thousand at December 31, 2003 and 2002, respectively. The Company had no interest rate swaps outstanding during the year ended December 31, 2001. 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 December 31, 2003, the Company’s credit exposure relating to interest rate swaps was not significant.
Activity in the notional amounts of end-user derivatives for the year ended December 31, 2003, is summarized as follows (in thousands):
The following table summarizes the weighted average receive and pay rates for the interest rate swaps at December 31, 2003 (dollars in thousands):
Methods and assumptions used by the Company in estimating the fair value of its interest rate swaps are discussed in Note 18 to consolidated financial statements.
Note 21. Condensed Parent Company Financial Information
The condensed financial statements of MB Financial, Inc. (parent company only) are presented below:
Balance Sheets
(In thousands)
Statements of Income (In thousands)
Statements of Cash Flows (In thousands)
Item 9.
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
There has been no change in our independent accountants during the two most recent fiscal years.
Item 9A.
Item 9A. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures: An evaluation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the “Act”)) was carried out as of December 31, 2003 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 December 31, 2003, our disclosure controls and procedures were effective in ensuring that the information we are required to disclose in the reports we file or submit under the Act is (i) accumulated and communicated to our management (including the Chief Executive Officer and Chief Financial Officer) in a timely manner, and (ii) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.
(b) Changes in Internal Control Over Financial Reporting: During the quarter ended December 31, 2003, no change occurred in our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART III
Item 10.
Item 10. Directors and Executive Officers of the Registrant
Directors and Executive Officers. The information concerning our directors and executive officers required by this item is incorporated herein by reference from our definitive proxy statement for our 2004 Annual Meeting of Stockholders, a copy of which will be filed with the Securities and Exchange Commission not later than 120 days after the end of our fiscal year.
Section 16(a) Beneficial Ownership Reporting Compliance. The information concerning compliance with the reporting requirements of Section 16(a) of the Securities Exchange Act of 1934 by our directors, officers and ten percent stockholders required by this item is incorporated herein by reference from our definitive proxy statement for our 2004 Annual Meeting of Stockholders, a copy of which will be filed with the Securities and Exchange Commission not later than 120 days after the end of our fiscal year.
Code of Ethics. We have adopted a code of ethics that applies to our principal executive officer, principal financial officer, principal accounting officer, and persons performing similar functions, and to all of our other employees and our directors. A copy of our code of ethics is available on our Internet website address, www.mbfinancial.com.
Item 11.
Item 11. Executive Compensation
The information concerning compensation required by this item is incorporated herein by reference from our definitive proxy statement for our 2004 Annual Meeting of Stockholders, a copy of which will be filed with the Securities and Exchange Commission not later than 120 days after the end of our fiscal year.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information concerning security ownership of certain beneficial owners and management required by this item is incorporated herein by reference from our definitive proxy statement for our 2004 Annual Meeting of Stockholders, a copy of which will be filed with the Securities and Exchange Commission not later than 120 days after the end of our fiscal year.
The following table sets forth information as of December 31, 2003 with respect to compensation plans under which shares of our common stock may be issued:
Equity Compensation Plan Information
(1) We split our common shares three-for-two by paying a 50% stock dividend in December 2003. The option shares and exercise prices have been adjusted to reflect the dividend.
(2) Includes 1,601,153 shares remaining available for future issuance under our 1997 Omnibus Incentive Plan, of which, up to 289,215 shares could be awarded to plan participants as restricted stock.
(3) Includes 348,727 shares remaining available for future issuance under the Avondale 1995 Plan. Notwithstanding this availability, we will not grant future options under the Avondale 1995 Plan.
Not included in the table are shares of our common stock that may be acquired by directors and officers who participate in the MB Financial, Inc. Stock Deferred Compensation Plan. This plan, along with the MB Financial, Inc. Non-Stock Deferred Compensation Plan, allows directors and eligible officers to defer a portion of their future cash compensation. Neither plan has been approved by our stockholders. All distributions under the stock plan are made in shares of our common stock purchased by the plan trustee on the open market, except for fractional shares, which are paid in cash.
Item 13.
Item 13. Certain Relationships and Related Transactions
The information concerning certain relationships and related transactions required by this item is incorporated herein by reference from our definitive proxy statement for our 2004 Annual Meeting of Stockholders, a copy of which will be filed with the Securities and Exchange Commission not later than 120 days after the end of our fiscal year.
Item 14.
Item 14. Principal Accountant Fees and Services
The information concerning principal accountant fees and services is incorporated herein by reference from our definitive proxy statement for our 2004 Annual Meeting of Stockholders, a copy of which will be filed not later than 120 days after the end of our fiscal year.
PART IV
Item 15.
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a)(1)
Financial Statements: See Part II-Item 8. Financial Statements and Supplementary Data.
(a)(2)
Financial Statement Schedules: All financial statement schedules have been omitted as the information is not required under the related instructions or is not applicable.
(a)(3)
Exhibits: See Exhibit Index.
(b)
Reports on Form 8-K: On October 27, 2003, we furnished a Current Report on Form 8-K reporting under Item 12 the press release for our 2003 third quarter earnings.
(c) Exhibits: See Exhibit Index.
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
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 January 9, 2004, by and among the Registrant and First SecurityFed Financial, Inc. (incorporated herein by reference to Exhibit 2 to the Registrant’s Current Report on Form 8-K filed on January 14, 2004 (File No.0-24566-01))
3.1
Charter of the Registrant, as amended (incorporated herein by reference to Exhibit 3.1 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2001 (File No. 0-24566-01))
3.2
Bylaws of the Registrant, as amended (incorporated herein by reference to Exhibit 3.2 to Amendment No. One to the Registration Statement on Form S-1 of the Registrant and MB Financial Capital Trust I filed on August 7, 2002 (File Nos. 333-97007 and 333-97007-01))
4.1
The Registrant hereby agrees to furnish to the Commission, upon request, the instruments defining the rights of the holders of each issue of long-term debt of the Registrant and its consolidated subsidiaries
4.2
Certificate of Registrant’s Common Stock (incorporated herein by reference to Exhibit 4.1 to Amendment No. One to the Registrant’s Registration Statement on Form S-4 (No. 333-64584))
10.1
Employment Agreement between the Registrant (as successor to Old MB Financial) and Robert S. Engelman, Jr. (incorporated herein by reference to Exhibit 10.2 to the Registration Statement on Form S-4 of Old MB Financial (then known as Avondale Financial Corp.) (No. 333-70017))
10.2
Employment Agreement between the Registrant and Mitchell Feiger (incorporated herein by reference to Exhibit 10.2 to the Registrant’s Annual Report on Form 10-K for the year-end December 31, 2002 (File No. 0-24566-01))
10.3
Form of Employment Agreement between the Registrant and Burton Field (incorporated herein by reference to Exhibit 10.5 to Old MB Financial’s Annual Report on Form 10-K for the fiscal year ended December 31, 1999 (File No. 0-24566))
10.4
Form of Change of Control Severance Agreement between MB Financial Bank, National Association and each of William F. McCarty III, Thomas Panos, Jill E. York, Thomas P. Fitzgibbon, Jr., Jeffrey L. Husserl and others (incorporated herein by reference to Exhibit 10.4 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2001 (File No. 0-24566-01))
10.5
Avondale Financial Corp. 1995 Stock Option and Incentive Plan (incorporated herein by reference to Exhibit 4.3 to the Registration Statement on Form S-8 of Old MB Financial (then known as Avondale Financial Corp.) (No. 33-98860))
Exhibit Number
Description
10.6
Coal City Corporation 1995 Stock Option Plan (incorporated herein by reference to Exhibit 10.6 to the Registrant’s Registration Statement on Form S-4 (No. 333-64584))
10.7
1997 MB Financial, Inc. Omnibus Incentive Plan*
10.8
MB Financial Stock Deferred Compensation Plan (incorporated herein by reference to Exhibit 10.8(a) to Amendment No. One to the Registrant’s Registration Statement on Form S-4 (No. 333-64584))
10.9
MB Financial Non-Stock Deferred Compensation Plan (incorporated herein by reference to Exhibit 10.8(b) to Amendment No. One to the Registrant’s Registration Statement on Form S-4 (No. 333-64584))
10.10
Avondale Federal Savings Bank Supplemental Executive Retirement Plan Agreement (incorporated herein by reference to Exhibit 10.2 to Old MB Financial’s (then known as Avondale Financial Corp.) Annual Report on Form 10-K for the year ended December 31, 1996 (File No. 0-24566))
10.11
Non-Competition Agreement between the Registrant and E.M. Bakwin (incorporated herein by reference to Exhibit 10.11 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2001 (File No. 0-24566-01))
10.12
Non-Competition Agreement between the Registrant and Kenneth A. Skopec (incorporated herein by reference to Exhibit 10.12 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2001 (File No. 0-24566-01))
10.13
Employment Agreement between MB Financial Bank, N.A. and Ronald D. Santo (incorporated herein by reference to Exhibit 10.14 to the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2002 (File No. 0-24566-01))
Subsidiaries of the Registrant*
Consent of KPMG LLP*
Power of Attorney*
31.1
Rule 13a - 14(a)/15d - 14(a) Certification (Chief Executive Officer)*
31.2
Rule 13a - 14(a)/15d - 14(a) Certification (Chief Financial Officer)*
Section 1350 Certifications*
* Filed herewith.