MB Financial 10-K 2013 FY Annual report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

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

For the fiscal year ended December 31, 2013

OR

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

For the transition period from                          to                         

Commission file number 0-24566-01

MB FINANCIAL, INC.

(Exact name of registrant as specified in its charter)

Maryland	36-4460265
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
800 West Madison Street, Chicago, Illinois	60607
(Address of principal executive offices)	(Zip Code)

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

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Name of each exchange on which registered
Common Stock, par value $0.01 per share	The NASDAQ Stock Market LLC

Securities registered pursuant to Section 12(g) of the Act:

None

(Title of Class)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ý No o

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes o Noý

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  YesýNoo

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statement incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See definition of "large accelerated filer," “accelerated filer" and "smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filerý	Accelerated filero
Non-accelerated filero (Do not check if a smaller reporting company)	Smaller reporting companyo

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  YesoNoý

The aggregate market value of the voting shares held by non-affiliates of the Registrant was approximately $1,421,825,010 as of June 30, 2013, the last business day of the Registrant’s most recently completed second fiscal quarter.  Solely for the purpose of this computation, it has been assumed that executive officers and directors of the Registrant are “affiliates.”

There were issued and outstanding 54,962,647 shares of the Registrant’s common stock as of February 19, 2014.

DOCUMENTS INCORPORATED BY REFERENCE:

Document	Part of Form 10-K
Portions of the definitive Proxy Statement to be used in conjunction with the Registrant’s 2014 Annual Meeting of Stockholders.	Part III

MB FINANCIAL, INC. AND SUBSIDIARIES

FORM 10-K

December 31, 2013

INDEX

		Page
	PART I
Item 1	Business	4
Item 1A	Risk Factors	17
Item 1B	Unresolved Staff Comments	26
Item 2	Properties	26
Item 3	Legal Proceedings	26
Item 4	Mine Safety Disclosures	27
	PART II
Item 5	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	27
Item 6	Selected Financial Data	30
Item 7	Management’s Discussion and Analysis of Financial Condition and Results of Operations	34
Item 7A	Quantitative and Qualitative Disclosures about Market Risk	59
Item 8	Financial Statements and Supplementary Data	62
Item 9	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	128
Item 9A	Controls and Procedures	128
Item 9B	Other Information	128
	PART III
Item 10	Directors, Executive Officers, and Corporate Governance	129
Item 11	Executive Compensation	129
Item 12	Security Ownership of Certain Beneficial Owners, and Management and Related Stockholder Matters	129
Item 13	Certain Relationships, Related Transactions and Director Independence	130
Item 14	Principal Accountant Fees and Services	130
	PART IV
Item 15	Exhibits and Financial Statement Schedules	130
	Signatures	131

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PART I

Item 1.   Business

Special Note Regarding Forward-Looking Statements

When used in this Annual Report on Form 10-K and in other documents filed or furnished with the Securities and Exchange Commission, in press releases or other public shareholder communications, or in oral statements made with the approval of an authorized executive officer, the words or phrases “believe,” “will,” “should,” “will likely result,” “are expected to,” “will continue,” “is anticipated,” “estimate,” “project,” “plans,” or similar expressions are intended to identify “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995.  You are cautioned not to place undue reliance on any forward-looking statements, which speak only as of the date made.  These statements may relate to MB Financial, Inc.’s future financial performance, strategic plans or objectives, revenues or earnings projections, or other financial items.  By their nature, these statements are subject to numerous uncertainties that could cause actual results to differ materially from those anticipated in the statements.

Important factors that could cause actual results to differ materially from the results anticipated or projected include, but are not limited to, the following: (1) expected revenues, cost savings, synergies and other benefits from the pending MB Financial-Taylor Capital merger and our other merger and acquisition activities might not be realized within the anticipated time frames or at all, and costs or difficulties relating to integration matters, including but not limited to customer and employee retention, might be greater than expected; (2) the requisite stockholder and regulatory approvals for the MB Financial-Taylor Capital merger might not be obtained; (3) the possibility that the expected benefits of the FDIC-assisted and other transactions we previously completed will not be realized; (4) the credit risks of lending activities, including changes in the level and direction of loan delinquencies and write-offs and changes in estimates of the adequacy of the allowance for loan losses, which could necessitate additional provisions for loan losses, resulting both from loans we originate and loans we acquire from other financial institutions; (5) results of examinations by the Office of Comptroller of Currency, the Federal Reserve Board and other regulatory authorities, including the possibility that any such regulatory authority may, among other things, require us to increase our allowance for loan losses or write-down assets; (6) competitive pressures among depository institutions; (7) interest rate movements and their impact on customer behavior and net interest margin; (8) the impact of repricing and competitors’ pricing initiatives on loan and deposit products; (9) fluctuations in real estate values; (10) the ability to adapt successfully to technological changes to meet customers’ needs and developments in the market-place; (11) our ability to realize the residual values of our direct finance, leveraged, and operating leases; (12) our ability to access cost-effective funding; (13) changes in financial markets; (14) changes in economic conditions in general and in the Chicago metropolitan area in particular; (15) the costs, effects and outcomes of litigation; (16) new legislation or regulatory changes, including but not limited to the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the "Dodd-Frank Act") and regulations adopted thereunder, changes in capital requirements pursuant to the Dodd-Frank Act and the implementation of the Basel III capital standards, other governmental initiatives affecting the financial services industry and changes in federal and/or state tax laws or interpretations thereof by taxing authorities; (17) changes in accounting principles, policies or guidelines; (18) our future acquisitions of other depository institutions or lines of business; and (19) future goodwill impairment due to changes in our business, changes in market conditions, or other factors.

We do not undertake any obligation to update any forward-looking statement to reflect circumstances or events that occur after the date on which the forward-looking statement is made.

General

MB Financial, Inc., headquartered in Chicago, Illinois, is a financial holding company with banking offices located primarily in the Chicago area.  The words “MB Financial,”  “the Company,” “we,” “our” and “us” refer to MB Financial, Inc. and its consolidated subsidiaries, unless the context indicates otherwise.  Our primary market is the Chicago metropolitan area, in which we operate 84 banking offices through our bank subsidiary, MB Financial Bank, N.A. (MB Financial Bank). Through MB Financial Bank, 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, leasing, retail banking and wealth management.  As of December 31, 2013, on a consolidated basis, we had total assets of $9.6 billion, deposits of $7.4 billion, stockholders’ equity of $1.3 billion, and client assets under management of $3.2 billion in our Wealth Management Group (including $2.0 billion in our trust department and $1.2 billion in our majority-owned asset management firm, Cedar Hill Associates LLC).

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MB Financial, Inc. was incorporated as a Maryland corporation in 2001 in connection with a merger of predecessor companies. We have completed a number of acquisitions in recent years, including the following recent transactions.

During 2009 and 2010, MB Financial Bank acquired certain assets and assumed certain liabilities of the following institutions in transactions facilitated by the Federal Deposit Insurance Corporation (FDIC):

• Glenwood, Illinois-based Heritage Community Bank (Heritage);

• Oak Forest, Illinois-based InBank;

• Chicago, Illinois-based Corus Bank, N.A. (Corus);

• Aurora, Illinois-based Benchmark Bank (Benchmark);

• Chicago, Illinois-based New Century Bank (New Century); and

• Chicago, Illinois-based Broadway Bank (Broadway).  

For the Heritage, Benchmark, New Century and Broadway transactions, MB Financial Bank entered into loss-share agreements with the FDIC.  Under the loss-share agreements, MB Financial Bank shares with the FDIC in the losses on assets (generally loans and other real estate owned referred to as “covered loans” and “covered other real estate owned”) covered under the agreements for specified time periods (generally ten years for single family residential real estate loans and five years for commercial loans), after which MB Financial Bank will absorb 100% of any losses. See “Item 1A. Risk Factors-Our participation in the loss-share agreements with the FDIC requires that we follow certain servicing procedures, and the terms of certain loans may exceed the coverage periods under the loss-share agreements.”

On December 28, 2012, MB Financial Bank acquired Celtic Leasing Corp. (“Celtic”), a privately held, mid-ticket equipment leasing company. See Note 2 of the notes to our audited consolidated financial statements contained in Item 8 of this report for additional information.

On July 14, 2013, the Company and Taylor Capital Group, Inc. (“Taylor Capital”) entered into an Agreement and Plan of Merger (the "Merger Agreement") whereby the Company will acquire Taylor Capital. The Merger Agreement provides that, upon the terms and subject to the conditions set forth therein, Taylor Capital will merge with and into the Company, with the Company as the surviving corporation in the merger. Immediately following the Merger, Taylor Capital's wholly owned bank subsidiary, Cole Taylor Bank, will merge with the Company's wholly owned bank subsidiary, MB Financial Bank. Cole Taylor Bank is a commercial bank headquartered in Chicago with $5.7 billion in assets, $3.6 billion in loans and $3.7 billion in deposits as of December 31, 2013. The merger is subject to regulatory approvals, approval by the Company's stockholders, approval by Taylor Capital stockholders and certain other customary closing conditions and is expected to close in the first half of 2014. See Note 2 of the notes to our audited consolidated financial statements contained in Item 8 of this report for additional information.

MB Financial Bank Subsidiaries

MB Financial Bank, our largest subsidiary, has two wholly owned subsidiaries with significant operating activities: LaSalle Systems Leasing, Inc. ("LaSalle") and Celtic. MB Financial Bank also has a majority owned subsidiary with significant operating activities, Cedar Hill Associates, LLC ("Cedar Hill").

LaSalle, which we acquired in 2002, focuses on leasing technology-related equipment to middle market and larger businesses located throughout the United States.  LaSalle also specializes in brokering third party equipment maintenance contracts as well as technology-related equipment. Celtic focuses on leasing equipment to middle market health care, legal, technology, and manufacturing companies located throughout the United States.

Cedar Hill is an asset management firm located in Chicago, Illinois in which we acquired a majority interest in April 2008.

During the fourth quarter of 2012, Vision Investment Services, Inc., a registered broker/dealer with the Securities and Exchange Commission and a subsidiary of MB Financial Bank, was dissolved.

Operating Segments

Our operations are managed based on the operating results of two reportable segments: banking and leasing. Our chief operating decision-makers use financial information from our two reportable segments to make operating and strategic decisions. For financial information about our reportable segments, see Note 21 of the Notes to the Consolidated Financial Statements contained in Item 8. of this report.

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Banking. We concentrate on serving small and middle market businesses and their owners. We also serve consumers who live or work near our branches. We operate four primary lines of business within our banking segment: commercial banking, lease banking, retail banking, and wealth management. Each is described below.

Commercial Banking.  Commercial banking focuses on serving middle market businesses, primarily located in the Chicago metropolitan area. We provide a full set of credit, deposit, treasury management, capital markets, and international banking products to these companies. In general, our credit products are designed for companies with annual revenues between $10 million and $250 million. We have a broad range of credit products for our target market, including working capital loans and lines of credit; accounts receivable financing; inventory and equipment financing; industrial revenue bond financing; business acquisition loans; owner occupied real estate loans; and financial, performance and commercial letters of credit. Our deposit and treasury management products are designed for companies with annual revenues up to $500 million and include internet banking products, investment sweep accounts, zero balance accounts, automated tax payments, ATM access, telephone banking, lockbox, automated clearing house transactions, account reconciliation, controlled disbursement, detail and general information reporting, wire transfers, vault services for currency and coin, and checking accounts. Our capital markets products include derivatives and interest rate risk solutions, capital solutions, merger and acquisition advisory, and real estate debt placement. Our international banking services include trade services, export trade finance, and foreign exchange. We also provide a full set of credit, deposit and treasury management services for real estate operators and investors.

Lease Banking. Lease banking offers loans similar to those offered in the commercial banking business line but serves equipment leasing companies located throughout the United States. We have provided banking services to this industry for more than four decades. Competition in serving equipment lessors generally comes from large banks, finance companies, large industrial companies and some community banks. We compete based upon rapid decision-making and elite service and by providing flexible financial solutions to meet our customers' needs. We provide full banking services to leasing companies by financing the debt portion of leveraged equipment leases (referred to as lease loans), providing short and long-term equity financing and making working capital and bridge loans. For lease loans, a lessee's credit is often rated as investment grade for its public debt by Moody's, Standard & Poors or the equivalent. Whether or not a lessee has a public debt rating, they are subject to the same internal credit analysis as any other customer of MB Financial Bank. Lessees include investment grade “Fortune 1000” companies located throughout the U.S. and large middle-market companies.

Retail Banking. Retail banking has 84 banking offices and approximately 122 ATMs located throughout the Chicago metropolitan area. We also have one branch in Philadelphia, Pennsylvania. Our target customer includes individuals who live and work near our branch offices, as well as companies with annual revenues of $1 to $10 million located near our offices. We offer a variety of personal banking options designed to meet the needs of all market segments. In addition to traditional checking account products, we offer both internet banking and mobile banking services to provide convenience and added technology for our customers. Our customers can take advantage of our MB Debit MasterCard, our Platinum Credit Card and our Everyday Prepaid Card. Our retail lending division offers mortgages and other personal loan solutions.

Our business banking division continues to grow rapidly. This division offers the same business services available to our larger commercial business customers, customized to smaller businesses. These customers are afforded the expertise of a business banker and the personal attention of a local branch. We offer a small business corporate credit card as well as a MasterCard multi-card which serves as a travel and entertainment card or a purchasing card for our larger commercial customers.

Our cards division, MB Payment Solutions, offers general reloadable prepaid cards, payroll cards, incentive cards and gift cards. These products are extended to existing customers and offered nationally to companies needing card payment solutions.

Wealth Management.  Our wealth management group provides comprehensive wealth management solutions to individuals, corporations and not-for-profits. We provide investment management, custody, personal trust, financial planning and wealth advisory services to business owners, high net worth individuals, foundations and endowments, and private banking services through our private bankers, asset management and trust advisors and Cedar Hill. Estate settlement, guardianship and retirement plan services are provided through our asset management and trust group. Our investment advisors working in our branches offer a wide variety of financial products and services to our retail customers, including non-FDIC insured investment alternatives and/or insurance products. MB Financial Bank subsidiary Cedar Hill also provides clients with non-FDIC insured investment alternatives and/or insurance products.

Leasing. Leasing includes lease originations and related services offered through our lease subsidiaries, LaSalle Systems Leasing, Inc. and Celtic Leasing Corp. We invest directly in equipment that we lease (referred to as direct finance, leveraged or operating leases) to "Fortune 1000," large middle-market companies and healthcare providers located throughout the United States. Our lease portfolio is made up of various kinds of equipment, generally technology related, such as computer systems, satellite equipment, medical equipment and general manufacturing equipment. We seek leasing transactions where we believe the equipment

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leased is integral to the lessee's business, thereby increasing the likelihood of renewal at the end of the lease term. Our leasing subsidiaries also specialize in brokering third party equipment maintenance contracts to large companies.

Lending Activities

General.  Our loan portfolio consists primarily of loans to businesses or for business purposes.

Commercial.  We make commercial loans mainly to middle market businesses, most often located in the Chicago area.  Borrowers tend to be privately-owned and are generally manufacturers, wholesalers, distributors, long-term health care operators and service providers.  Loan products offered are primarily working capital, term loans and lines of credit that help our customers finance accounts receivable, inventory and equipment.  We also offer financial, performance and commercial letters of credit.  Commercial loans secured by owner occupied real estate are classified as commercial real estate loans.  Most commercial loans are short-term in nature, being one year or less, with the maximum term generally being five to seven years.  Our commercial loans typically range in size from $250 thousand to $30 million.

Lines of credit for customers are typically secured and are subject to renewal upon a satisfactory review of the borrower’s financial condition and credit history.  Secured short-term commercial business loans are usually collateralized by accounts receivable, inventory, equipment and/or real estate, and advances are usually predicated on predetermined advance rates depending upon asset class.  Such loans are typically, but not always, guaranteed by the owners of the business.  Collateral securing commercial loans may depreciate over time, be difficult to appraise and fluctuate in value based on the success of the business.  In addition, in the case of loans secured by accounts receivable, the availability of funds for repayment and economic conditions may impact the ability of the borrower to collect the amounts due from its customers.  Accordingly, we make our commercial loans primarily based on the historical and expected cash flow of the borrower, secondarily on underlying collateral provided by the borrower, and lastly on guarantor support.

Commercial Real Estate.  We originate commercial real estate loans that are generally secured by multi-unit residential property and owner and non-owner occupied commercial and industrial property.  Longer term commercial real estate loans are generally made at fixed rates, although some have interest rates that change based on the Prime Rate or LIBOR.  Generally, most loans are structured with a balloon payment at the end of five years or less. Periodically, terms of up to twenty-five years are offered on fully amortizing loans.  For our fixed rate loans with maturities greater than five years, we may enter into interest rate swap agreements with a third party to mitigate interest rate risk.  In deciding whether to make a commercial real estate loan, we consider, among other things, the experience and qualifications of the borrower as well as the value and cash flow of the underlying property.  Some factors considered are net operating income of the property before debt service and depreciation, the debt service coverage ratio (the ratio of the property’s net cash flow to debt service requirements), the global cash flows of the borrower, the ratio of the loan amount to the property value and the overall creditworthiness of the prospective borrower.  Our commercial real estate loans typically range in size from $250 thousand to $30 million.

The repayment of commercial real estate loans is often dependent on the successful operations of the property securing the loan or the business conducted on the property securing the loan.  In addition, most commercial real estate loans are not fully amortized over the loan period, but have balloon payments due at maturity.  A borrower’s ability to make a balloon payment typically will depend on their ability to either refinance the loan or complete a timely sale of the underlying property.

Construction Real Estate.  Prior to 2008, we provided construction loans for the acquisition and development of land and construction of condominiums, townhomes, and one-to-four family residences.  We also provided acquisition, development and construction loans for retail and other commercial purposes, primarily in our market areas, as well as provided financing for owner occupied real estate. Since 2008, we have primarily focused on providing construction loans for owner occupied real estate and periodically funding apartment projects to strong borrowers.  Construction lending can involve a higher level of risk than other types of lending because funds are advanced partially based upon the value of the project, which is uncertain prior to the project’s completion.  Because of the uncertainties inherent in estimating construction costs as well as the market value of a completed project and the effects of governmental regulation on real property, our estimates with regards to the total funds required to complete a project and the related loan-to-value ratio may vary from actual results.  As a result, construction loans often involve the disbursement of substantial funds with repayment dependent, in part, on the success of the ultimate project and the ability of the borrower to sell or lease the property or refinance the indebtedness.  If our estimate of the value of a project at completion proves to be overstated or market values have declined since we originated our loan, we may have inadequate security for repayment of the loan and we may incur a loss.

Lease Loans.  We lend money to leasing companies to finance the debt portion of leases (which we refer to as lease loans).  A lease loan arises when a leasing company discounts the equipment rental revenue stream owed to a leasing company by a lessee.  Lease loans generally are non-recourse to the leasing company, and, consequently, our recourse is limited to the lessee and the

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leased equipment.  For this reason, we underwrite lease loans by examining the creditworthiness of the lessee rather than the lessor.  Generally, lease loans are secured by an assignment of lease payments and a security interest in the equipment being leased.  As with commercial loans secured by equipment, equipment securing our lease loans may depreciate over time, may be difficult to value and may fluctuate in value.  We rely on the lessee’s continuing financial stability, rather than the value of the leased equipment, for repayment of all required amounts under lease loans.  In the event of default, it is unlikely that the proceeds from the sale of leased equipment will be sufficient to satisfy the outstanding unpaid amounts under terms of the lease loan.

The lessees usually acknowledge our security interest in the leased equipment and often agree to send lease payments directly to us.  Lessees are often companies that have an investment grade public debt rating by Moody’s or Standard & Poors or the equivalent although we also provide credit to below investment grade and non-rated companies.  Whether or not a lessee has a public debt rating, they are subject to the same internal credit analysis as any other customer.  Lease loans typically have a fixed interest rate and are fully amortizing, with maturities typically ranging from three to five years. 

Primarily through our leasing segment, we also invest directly in equipment leased to other companies (which we refer to as direct finance, leveraged or operating leases).  The profitability of these investments depends, to a great degree, upon our ability to realize the expected residual values of this equipment.  See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations-Critical Accounting Policies-Residual Value of Our Direct Finance, Leveraged, and Operating Leases.”

Residential Real Estate.  We originate fixed and adjustable rate residential real estate loans secured by one to four unit dwellings.  Terms of first mortgages generally range from five to thirty years.  In deciding whether to make a residential real estate loan, we consider the qualifications of the borrower as well as the value of the underlying property.  Our general practice is to sell a majority of our newly originated fixed-rate residential real estate loans and to hold in portfolio a limited number of adjustable-rate residential real estate loans with 15 and 30 year maturities.

Consumer.  Our consumer loan portfolio is primarily focused on indirect vehicle loans through a network of motorcycle, powersports, recreational vehicles, and marine dealers in 47 states. Terms of these fixed rate loans typically range from two to twenty years depending on the product. In deciding whether to make an indirect loan, we consider the qualifications of the borrower as well as the value of the collateral.

Our consumer loan portfolio also includes home equity lines of credit, fixed-rate home equity loans, personal and business credit cards, and to a lesser extent, secured and unsecured consumer loans.  Home equity lines of credit and home equity loans are generally extended up to 80% of the value of the property, less outstanding first mortgage loans. Terms for home equity lines of credit are 10-years of interest only payments and a 10-year fully amortizing repayment thereafter.   Terms for home equity loans typically range from five to ten years.  In deciding whether to make a home equity line of credit or loan, we consider the qualifications of the borrower(s) as well as the value of the underlying property.  In deciding whether to make other consumer loans, we evaluate the qualifications of the borrower(s) and any collateral, if applicable.

Unsecured consumer loans typically have shorter terms and lower balances with higher yields as compared to residential real estate loans, but carry a higher risk of default.  Consumer loan collections are dependent on the borrower’s continuing financial stability, and thus, are more likely to be affected by adverse personal circumstances.  Furthermore, the application of various federal and state laws, including bankruptcy and insolvency laws, may limit the amount which can be recovered on these loans in the event of default.

Competition

We face substantial competition in all phases of our operations, including deposit gathering and loan origination, from a variety of competitors.  Commercial banks, savings institutions, brokerage firms, credit unions, mutual fund companies, asset management firms, insurance companies and specialty finance companies all compete with us for new and existing customers.  We compete by providing quality services and expertise to our customers, ease of access to our facilities, convenient hours and competitive pricing (including competitive interest rates paid on deposits, interest rates charged on loans and fees charged for other non-interest related services).

Personnel

As of December 31, 2013, we and our subsidiaries employed a total of 1,775 full-time equivalent employees.  We consider our relationship with our employees to be good.

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Supervision and Regulation

We, our bank subsidiary, and its subsidiaries, are subject to an extensive system of laws and regulations that are intended primarily for the protection of customers and depositors and not for the protection of security holders.  These laws and regulations govern such areas as capital, permissible activities, allowance for loan losses, loans and investments, and rates of interest that can be charged on loans.  Described below are elements of selected laws and regulations.  The descriptions are not intended to be complete and are qualified in their entirety by reference to the full text of the statutes and regulations described.

Holding Company Regulation.As a bank holding company and financial holding company, we are subject to comprehensive regulation by the Board of Governors of the Federal Reserve System, frequently referred to as the Federal Reserve Board, under the Bank Holding Company Act of 1956, as amended by the Gramm-Leach-Bliley Act of 1999 (the “Gramm-Leach-Bliley Act”), the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), enacted on July 21, 2010, and other legislation.  We must file reports with the Federal Reserve Board and such additional information as the Federal Reserve Board may require, and our holding company and non-banking affiliates are subject to examination by the Federal Reserve Board.  Under Federal Reserve Board policy, the Dodd-Frank Act and Federal Reserve Board regulations, a bank holding company must serve as a source of strength for its bank subsidiaries.  The Federal Reserve Board may require, and has required in the past, a holding company to contribute additional capital to an undercapitalized bank subsidiary.  The Bank Holding Company Act provides that a bank holding company must obtain Federal Reserve Board approval before:

• Acquiring directly or indirectly, ownership or control of any voting shares of another bank or bank holding company if, after such acquisition, it would own or control more than 5% of such shares (unless it already owns or controls the majority of such shares);

• Acquiring control of, or all or substantially all of the assets of, another bank or bank holding company, or

• Merging or consolidating with another bank holding company.

The Bank Holding Company Act generally prohibits a bank holding company from acquiring direct or indirect ownership or control of more than 5% of the voting shares of any company which is not a bank or bank holding company, or from engaging directly or indirectly in activities other than those of banking, managing or controlling banks, or providing services for its subsidiaries.  The principal exceptions to these prohibitions involve certain non-bank activities which, by statute or by Federal Reserve Board regulation or order, have been identified as activities closely related to the business of banking or managing or controlling banks.  The list of activities permitted by the Federal Reserve Board includes, among other things: lending; operating a savings institution, mortgage company, finance company, credit card company or factoring company; performing certain data processing operations; providing certain investment and financial advice; underwriting and acting as an insurance agent for certain types of credit-related insurance; leasing property on a full-payout, non-operating basis; selling money orders, travelers’ checks and United States Savings Bonds; real estate and personal property appraising; providing tax planning and preparation services; and, subject to certain limitations, providing securities brokerage services for customers. 

The Gramm-Leach-Bliley Act amended portions of the Bank Holding Company Act of 1956 to authorize bank holding companies, such as us, directly or through non-bank subsidiaries to engage in securities, insurance and other activities that are financial in nature or incidental to a financial activity.  In order to undertake these activities, a bank holding company must become a “financial holding company” by submitting to the appropriate Federal Reserve Bank a declaration that the company elects to be a financial holding company and a certification that all of the depository institutions controlled by the company are well capitalized and well managed.  We submitted the declaration of our election to become a financial holding company with the Federal Reserve Bank of Chicago in June 2002, and our election became effective in July 2002.

Depository Institution Regulation.Our bank subsidiary is subject to regulation by the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation.  This regulatory structure includes:

• Real estate lending standards, which provide guidelines concerning loan-to-value ratios for various types of real estate loans;

• Risk-based capital rules, including accounting for interest rate risk, concentration of credit risk and the risks posed by non-traditional activities;

• Rules requiring depository institutions to develop and implement internal procedures to evaluate and control credit and settlement exposure to their correspondent banks;

• Rules restricting types and amounts of equity investments; and

• Rules addressing various safety and soundness issues, including operations and managerial standards, standards for asset quality, earnings and compensation standards.

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Capital Adequacy.  The Federal Reserve Board, Office of the Comptroller of the Currency and Federal Deposit Insurance Corporation (collectively, the federal banking agencies) have issued substantially similar risk-based and leverage capital regulations applicable to bank holding companies and banks.  In addition, these agencies may from time to time require that a bank holding company or bank maintain capital above the minimum levels, based on its financial condition or actual or anticipated growth.

The Federal Reserve Board’s risk-based regulations establish a two-tier capital framework.  Tier 1 capital generally consists of common stockholders’ equity, retained earnings, a limited amount of qualifying perpetual preferred stock, qualifying trust preferred securities and noncontrolling interests in the equity accounts of consolidated subsidiaries, less goodwill and certain intangibles.  Tier 2 capital generally consists of certain hybrid capital instruments and perpetual debt, mandatory convertible debt securities and a limited amount of subordinated debt, qualifying preferred stock, loan loss allowance, and unrealized holding gains on certain equity securities.  The sum of Tier 1 and Tier 2 capital represents qualifying total capital, at least 50% of which must consist of Tier 1 capital.

Risk-based capital ratios are calculated by dividing Tier 1 and total capital by risk-weighted assets.  Assets and off-balance sheet exposures are assigned to one of four categories of risk-weights, based primarily on relative credit risk.  For bank holding companies, generally the minimum Tier 1 risk-based capital ratio is 4% and the minimum total risk-based capital ratio is 8%.  Our Tier 1 and total risk-based capital ratios under these guidelines at December 31, 2013 were 15.28% and 16.53%, respectively.

The Federal Reserve Board’s leverage capital guidelines establish a minimum leverage ratio determined by dividing Tier 1 capital by adjusted average total assets.  The minimum leverage ratio is 3% for bank holding companies that meet certain specified criteria, including having the highest regulatory rating.  All other bank holding companies generally are required to maintain a leverage ratio of at least 4%.  At December 31, 2013, we had a leverage ratio of 11.22%.

The federal banking agencies’ current risk-based capital rules are based upon the 1988 capital accord (“Basel I”) of the Basel Committee on Banking Supervision (the “Basel Committee”).  The Basel Committee is a committee of central banks and bank supervisors/regulators from the major industrialized countries that develops broad policy guidelines for use by each country’s supervisors in determining the supervisory policies and regulations to which they apply.  Actions of the Committee have no direct effect on banks in participating countries.  In 2004, the Basel Committee published a new capital accord (“Basel II”) to replace Basel I.  Basel II provides two approaches for setting capital standards for credit risk — an internal ratings-based approach tailored to individual institutions’ circumstances and a standardized approach that bases risk weightings on external credit assessments to a much greater extent than permitted in existing risk-based capital guidelines.  Basel II also addresses capital requirements for operational risk and refines the existing capital requirements for market risk exposures.

A final rule implementing the advanced approaches of Basel II in the United States, which applies only to certain large or internationally active banking organizations, or “core banks” — defined as those with consolidated total assets of $250 billion or more or consolidated on-balance sheet foreign exposures of $10 billion or more, became effective as of April 1, 2008.  Certain other U.S. banking organizations would have the option to adopt the requirements of this rule.  The Company is not required to comply with the advanced approaches of Basel II.

In 2009, the United States Treasury Department issued a policy statement (the “Treasury Policy Statement”) entitled “Principles for Reforming the U.S. and International Regulatory Capital Framework for Banking Firms,” which contemplates changes to the existing regulatory capital regime involving substantial revisions to major parts of the Basel I and Basel II capital frameworks and affecting all regulated banking organizations and other systemically important institutions.  The Treasury Policy Statement calls for, among other things, higher and stronger capital requirements for all banking firms, with changes to the regulatory capital framework to be phased in over a period of several years.

The Dodd-Frank Act includes certain provisions concerning the capital regulations of the United States banking regulators, which are often referred to as the “Collins Amendment.”  These provisions are intended to subject bank holding companies to the same capital requirements as their bank subsidiaries and to eliminate or significantly reduce the use of hybrid capital instruments, especially trust preferred securities, as regulatory capital. Under the Collins Amendment, trust preferred securities issued by a company, such as our company, with total consolidated assets of less than $15 billion before May 19, 2010 and treated as regulatory capital are grandfathered, but any such securities issued later are not eligible as regulatory capital.  The banking regulators must develop regulations setting minimum risk-based and leverage capital requirements for holding companies and banks on a consolidated basis that are no less stringent than the generally applicable requirements in effect for depository institutions under the prompt corrective action regulations discussed below.  The banking regulators also must seek to make capital standards countercyclical so that the required levels of capital increase in times of economic expansion and decrease in times of economic contraction. 

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In December 2010 and January 2011, the Basel Committee published the final texts of reforms on capital and liquidity generally referred to as “Basel III.”  Although Basel III is intended to be implemented by participating countries for large, internationally active banks, its provisions are considered by United States banking regulators in developing new regulations applicable to other banks and bank holding companies.

For banks in the United States, among the most significant provisions of Basel III concerning capital are the following:

• minimum capital ratios, including a minimum ratio of common equity to risk-weighted assets;

• an additional countercyclical capital buffer to be imposed by banking regulators periodically at their discretion, with advance notice;

• restrictions on capital distributions and discretionary bonuses when capital ratios fall within the buffer zone;

• deduction from common equity of deferred tax assets that depend on future profitability to be realized;

• increased capital requirements for counterparty credit risk relating to over the counter (OTC) derivatives, repos and securities financing activities; and

• for capital instruments issued on or after January 13, 2013 (other than common equity), a loss-absorbency requirement.

The federal banking agencies have adopted regulations to implement the provisions of the Dodd-Frank Act and Basel III on capital. These are described below under “--New Capital Regulations.”

The Basel III provisions on liquidity include complex criteria establishing a liquidity coverage ratio (“LCR”) and a net stable funding ratio (“NSFR”).  The purpose of the LCR is to ensure that banks and their holding companies maintain adequate unencumbered, high quality liquid assets to meet liquidity needs for 30 days under a severe liquidity stress scenario.  The purpose of the NSFR is to promote more medium and long-term funding of assets and activities, using a one-year horizon.  Although Basel III is described as a “final text,” it is subject to the resolution of certain issues and to further guidance and modification, as well as to adoption by United States banking regulators, including decisions as to whether and to what extent it will apply to United States banks that are not large, internationally active banks.  In June 2011, the federal banking agencies adopted a rule applicable to only large, internationally active banks requiring their risk-based capital to meet the higher of the minimum requirements under the advanced approaches or under the risk-based capital rules generally applicable to United States banks. In November 2013, the United States banking agencies published proposed rules establishing various liquidity requirements for entities with total consolidated assets of $50 billion or more.

Prompt Corrective Action.  The Federal Deposit Insurance Corporation Improvement Act of 1991, among other things, identifies five capital categories for insured depository institutions (well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized) and requires the respective federal bank regulatory agencies to implement systems for “prompt corrective action” for insured depository institutions that do not meet minimum capital requirements within these categories.  This act imposes progressively more restrictive constraints on operations, management and capital distributions, depending on the category in which an institution is classified.  Failure to meet the capital guidelines could also subject a banking institution to capital raising requirements.  An “undercapitalized” bank must develop a capital restoration plan and its parent holding company must guarantee that bank’s compliance with the plan.  The liability of the parent holding company under any such guarantee is limited to the lesser of five percent of the bank’s assets at the time it became “undercapitalized” or the amount needed to comply with the plan.  Furthermore, in the event of the bankruptcy of the parent holding company, such guarantee would take priority over the parent’s general unsecured creditors.  In addition, the Federal Deposit Insurance Corporation Improvement Act requires the various regulatory agencies to prescribe certain non-capital standards for safety and soundness relating generally to operations and management, asset quality and executive compensation and permits regulatory action against a financial institution that does not meet these standards.

The various federal bank regulatory agencies have adopted substantially similar regulations that define the five capital categories identified by the Federal Deposit Insurance Corporation Improvement Act, using the total risk-based capital, Tier 1 risk-based capital and leverage capital ratios as the relevant capital measures.  These regulations establish various degrees of corrective action to be taken when an institution is considered undercapitalized.  Under the regulations, a “well capitalized” institution must have a Tier 1 risk-based capital ratio of at least 6%, a total risk-based capital ratio of at least 10% and a leverage ratio of at least 5% and not be subject to a capital directive or order.  An institution is “adequately capitalized” if it has a Tier 1 risk-based capital ratio of at least 4%, a total risk-based capital ratio of at least 8% and a leverage ratio of at least 4% (3% in certain circumstances).  An institution is “undercapitalized” if it has a Tier 1 risk-based capital ratio of less than 4%, a total risk-based capital ratio of less than 8% or a leverage ratio of less than 4% (3% in certain circumstances).  An institution is “significantly undercapitalized” if it has a Tier 1 risk-based capital ratio of less than 3%, a total risk-based capital ratio of less than 6% or a leverage ratio of less than 3%.  An institution is “critically undercapitalized” if its tangible equity is equal to or less than 2% of total assets.  Generally, an institution may be reclassified in a lower capitalization category if it is determined that the institution is in an unsafe or unsound condition or engaged in an unsafe or unsound practice.

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As of December 31, 2013, our bank subsidiary met the requirements to be classified as “well-capitalized.”

In connection with new capital rules, certain changes to the prompt corrective action rules have also been proposed. See “--New Capital Regulations” below.

New Capital Regulations

The federal banking agencies have adopted regulations that substantially amend the capital regulations currently applicable to us. These regulations implement the Basel III regulatory capital reforms and changes required by the Dodd-Frank Act.

New Capital Rules. Effective January 1, 2015 (with some changes transitioned into full effectiveness over two to four years), we and our bank subsidiary will be subject to new capital requirements adopted by the Federal Reserve and the OCC. These new requirements create a new required ratio for common equity Tier 1 (“CET1”) capital, increase the leverage and Tier 1 capital ratios, change the risk-weights of certain assets for purposes of the risk-based capital ratios, create an additional capital conservation buffer over the required capital ratios and change what qualifies as capital for purposes of meeting these various capital requirements. Beginning in 2016, failure to maintain the required capital conservation buffer will limit our ability and the ability of our bank subsidiary to pay dividends, repurchase shares or pay discretionary bonuses.

Under the new capital regulations, the minimum capital ratios are: (1) CET1 capital ratio of 4.5% of risk-weighted assets; (2) a Tier 1 capital ratio of 6.0% of risk-weighted assets; (3) a total capital ratio of 8.0% of risk-weighted assets; and (4) a leverage ratio of 4.0%. CET1 generally consists of common stock; retained earnings; accumulated other comprehensive income (“AOCI”), explained below, unless we elect to exclude AOCI from regulatory capital, as discussed below; and certain minority interests; all subject to applicable regulatory adjustments and deductions.

There are a number of changes in what constitutes regulatory capital, some of which are subject to transition periods. These changes include the phasing-out of certain instruments as qualifying capital. We and our bank subsidiary do not have any of these instruments. Under the new requirements for total capital, Tier 2 capital is no longer limited to the amount of Tier 1 capital included in total capital. Mortgage servicing rights, certain deferred tax assets and investments in unconsolidated subsidiaries over designated percentages of CET1 will be deducted from capital. In addition, Tier 1 capital will include AOCI, which includes all unrealized gains and losses on available for sale debt and equity securities. Because of our asset size, we have the one-time option of deciding in the first quarter of 2015 whether to permanently opt-out of the inclusion of accumulated other comprehensive income in our capital calculations. We are planning to take advantage of this opt-out to reduce the impact of market volatility on our regulatory capital levels.

The new requirements also include changes in the risk-weights of assets to better reflect credit risk and other risk exposures. These include a 150% risk weight (up from 100%) for certain high volatility commercial real estate acquisition, development and construction loans and for non-residential mortgage loans that are 90 days past due or otherwise in nonaccrual status; a 20% (up from 0%) credit conversion factor for the unused portion of a commitment with an original maturity of one year or less that is not unconditionally cancellable (currently set at 0%); a 250% risk weight (up from 100%) for mortgage servicing and deferred tax assets that are not deducted from capital; and increased risk-weights (0% to 600%) for equity exposures.

In addition to the minimum CET1, Tier 1 and total capital ratios, we and our bank subsidiary will have to maintain a capital conservation buffer consisting of additional CET1 capital greater than 2.5% of risk-weighted assets above the required minimum levels in order to avoid limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses based on percentages of eligible retained income that could be utilized for such actions. This new capital conservation buffer requirement is be phased in beginning in January 2016 at 0.625% of risk-weighted assets and increasing each year until fully implemented in January 2019.

The OCC’s prompt corrective action standards will change when these new capital ratios become effective. Under the new standards, in order to be considered well-capitalized, our bank subsidiary would have to have a CET1 ratio of 6.5% (new), a Tier 1 ratio of 8% (increased from 6%), a total capital ratio of 10% (unchanged) and a leverage ratio of 5% (unchanged).

We have conducted a pro forma analysis of the application of these new capital requirements as of September 30, 2013. We have determined that we and our bank subsidiary meet all these new requirements, including the full capital conservation buffer, and our bank subsidiary would remain well-capitalized if these new requirements had been effect on that date.

Dividends.  The Federal Reserve Board’s policy is that a bank holding company should pay cash dividends only to the extent that its net income for the past year is sufficient to cover both the cash dividends and a rate of earnings retention that is consistent with

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the holding company’s capital needs, asset quality and overall financial condition, and that it is inappropriate for a bank holding company experiencing serious financial problems to borrow funds to pay dividends.  Furthermore, a bank that is classified under the prompt corrective action regulations as “undercapitalized” will be prohibited from paying any dividends.

Our primary source for cash dividends is the dividends we receive from our bank subsidiary.  Our bank is subject to various regulatory policies and requirements relating to the payment of dividends, including requirements to maintain capital above regulatory minimums.  A national bank must obtain the approval of the Office of the Comptroller of the Currency prior to paying a dividend if the total of all dividends declared by the national bank in any calendar year will exceed the sum of the bank’s net profits for that year and its retained net profits for the preceding two calendar years, less any required transfers to surplus. Furthermore, if the dividend amount is in excess of the sum of the bank’s net profits for the current year and the preceding two calendar years, the excess amount can be offset by the retained net profits of the preceding third and fourth calendar years.

As described above under “--New Capital Regulations,” the capital conservation buffer requirement can also restrict our ability and the ability of our bank subsidiary to pay dividends.

Federal Deposit Insurance Reform.  The FDIC maintains the Deposit Insurance Fund (the “DIF”).  The deposit accounts of our bank subsidiary are insured by the DIF to the maximum amount provided by law.  The general insurance limit is $250 thousand, but for non-interest bearing transaction accounts, there was unlimited insurance coverage until January 1, 2013.  This insurance is backed by the full faith and credit of the United States Government.

As insurer, the FDIC is authorized to conduct examinations of and to require reporting by DIF-insured institutions.  It also may prohibit any DIF-insured institution from engaging in any activity the FDIC determines by regulation or order to pose a serious threat to the DIF.  The FDIC also has the authority to take enforcement actions against insured institutions.

The FDIC assesses deposit insurance premiums on each insured institution quarterly based on annualized rates for one of four risk categories. Each institution is assigned to one of four risk categories based on its capital, supervisory ratings and other factors.  Well capitalized institutions that are financially sound with only a few minor weaknesses are assigned to Risk Category I.  Risk Categories II, III and IV present progressively greater risks to the DIF. 

As required by the Dodd-Frank Act, the FDIC has adopted rules under which insurance premium assessments are based on an institution’s total assets minus its tangible equity (defined as Tier 1 capital) instead of its deposits.  Under these rules, an institution with total assets of less than $10 billion will be assigned to a Risk Category as described above, and a range of initial base assessment rates will apply to each category, subject to adjustment downward based on unsecured debt issued by the institution and, except for an institution in Risk Category I, adjustment upward if the institution’s brokered deposits exceed 10% of its domestic deposits, to produce total base assessment rates.  Total base assessment rates range from 2.5 to 9 basis points for Risk Category I, 9 to 24 basis points for Risk Category II, 18 to 33 basis points for Risk Category III, and 30 to 45 basis points for Risk Category IV, all subject to further adjustment upward if the institution holds more than a de minimis amount of unsecured debt issued by another FDIC-insured institution. The FDIC may increase or decrease its rates by 2.0 basis points without further rulemaking.  In an emergency, the FDIC may also impose a special assessment.

For a bank that has had total assets of $10 billion or more for four consecutive quarters, FDIC regulations require the bank to be assessed quarterly for deposit insurance under a scorecard method. The scorecard method uses a performance score and a loss severity score, which are combined and converted into an initial base assessment rate.  The performance score is based on measures of the bank’s ability to withstand asset-related stress and funding-related stress and weighted CAMELS ratings. The loss severity score is a measure of potential losses to the FDIC in the event of the bank’s failure. Under a formula, the performance score and loss severity score are combined and converted to a total score that determines the bank’s initial base assessment rate. The FDIC has the discretion to alter the total score based on factors not captured by the scorecard.  The resulting initial base assessment rate is subject to adjustments downward based on long term unsecured debt issued by the bank, to adjustment upward based on long term unsecured debt held by the bank that is issued by other FDIC-insured institutions, and to further adjustment upward if the bank’s brokered deposits exceed 10% of its domestic deposits.  Modifications to the scorecard method may apply to certain “highly complex institutions.”

In addition, all institutions with deposits insured by the FDIC are required to pay assessments to fund interest payments on bonds issued by the Financing Corporation, a mixed-ownership government corporation established to recapitalize a predecessor to the Deposit Insurance Fund.  These assessments will continue until the Financing Corporation bonds mature in 2019.

Insurance of deposits may be terminated by the FDIC upon a finding that the institution has engaged or is engaging in unsafe and unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law,

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regulation, rule, order or condition imposed by the FDIC or written agreement entered into with the FDIC. The management of the Bank does not know of any practice, condition or violation that might lead to termination of deposit insurance.

Pursuant to the Dodd-Frank Act, the FDIC has established 2.0% as the designated reserve ratio (DRR), that is, the ratio of the DIF to insured deposits. The FDIC has adopted a plan under which it will meet the statutory minimum DRR of 1.35% (formerly 1.15%) by September 30, 2020, the deadline imposed by the Dodd-Frank Act.  The Dodd-Frank requires the FDIC to offset the effect of the increase in the statutory minimum DRR to 1.35% on institutions with assets less than $10 billion.  The FDIC has not yet announced how it will implement this offset or how larger institutions will be affected by it.

Transactions with Affiliates.  We and our bank subsidiary are affiliates within the meaning of the Federal Reserve Act.  The Federal Reserve Act imposes limitations on a bank with respect to extensions of credit to, investments in, and certain other transactions with, its parent bank holding company and the holding company’s other subsidiaries.  Furthermore, bank loans and extensions of credit to affiliates also are subject to various collateral requirements.

Community Reinvestment Act.  Under the Community Reinvestment Act, every FDIC-insured institution is obligated, consistent with safe and sound banking practices, to help meet the credit needs of its entire community, including low and moderate income neighborhoods.  The Community Reinvestment Act requires the appropriate federal banking regulator, in connection with the examination of an insured institution, to assess the institution’s record of meeting the credit needs of its community and to consider this record in its evaluation of certain applications, such as a merger or the establishment of a branch.  An unsatisfactory rating may be used as the basis for the denial of an application and will prevent a bank holding company of the institution from making an election to become a financial holding company.

As of its last examination, MB Financial Bank received a Community Reinvestment Act rating of “outstanding.”

Interstate Banking and Branching.  The Federal Reserve Board may approve an application of a bank holding company to acquire control of, or acquire all or substantially all of the assets of, a bank located in a state other than the bank holding company’s home state, without regard to whether the transaction is prohibited by the laws of any state.  The Federal Reserve Board may not approve the acquisition of a bank that has not been in existence for the minimum time period (not exceeding five years) specified by the law of the target bank’s home state.  The Federal Reserve Board also may not approve an application if the bank holding company (and its bank affiliates) controls or would control more than ten percent of the insured deposits in the United States or, generally, 30% or more of the deposits in the target bank’s home state or in any state in which the target bank maintains a branch.  Individual states may waive the 30% statewide concentration limit.  Each state may limit the percentage of total insured deposits in the state that may be held or controlled by a bank or bank holding company to the extent the limitation does not discriminate against out-of-state banks or bank holding companies.  Under the Dodd-Frank Act, the OCC may generally approve de novo branching by a national bank outside its home state.

The federal banking agencies are authorized to approve interstate bank merger transactions without regard to whether these transactions are prohibited by the law of any state, unless the home state of one of the banks opted out of interstate mergers prior to June 1, 1997.  Interstate acquisitions of branches are permitted only if the law of the state in which the branch is located permits these acquisitions.  Interstate mergers and branch acquisitions are subject to the nationwide and statewide-insured deposit concentration limits described above.

Privacy Rules.  Federal banking regulators, as required under the Gramm-Leach-Bliley Act, have adopted rules limiting the ability of banks and other financial institutions to disclose nonpublic information about consumers to non-affiliated third parties.  The rules require disclosure of privacy policies to consumers and, in some circumstances, allow consumers to prevent disclosure of certain personal information to non-affiliated third parties.  The privacy provisions of the Gramm-Leach-Bliley Act affect how consumer information is transmitted through diversified financial services companies and conveyed to outside vendors.

International Money Laundering Abatement and Financial Anti-Terrorism Act of 2001.  The President signed the USA Patriot Act of 2001 into law in October 2001.  This act contains the International Money Laundering Abatement and Financial Anti-Terrorism Act of 2001 (the “IMLAFA”).  The IMLAFA substantially broadens existing anti-money laundering legislation and the extraterritorial jurisdiction of the United States, imposes certain compliance and due diligence obligations, defines certain crimes and penalties, compels the production of documents located both inside and outside the United States, including those of foreign institutions that have a correspondent relationship in the United States, and clarifies the safe harbor from civil liability to customers.  The U.S. Treasury Department has issued a number of regulations implementing the USA Patriot Act that apply certain of its requirements to financial institutions such as our banking and broker-dealer subsidiaries.  The regulations impose obligations on financial institutions to maintain appropriate policies, procedures and controls to detect, prevent and report money laundering and terrorist financing.  The increased obligations of financial institutions, including us, to identify their customers, watch for and report suspicious transactions, respond to requests for information by regulatory authorities and law enforcement agencies, and

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share information with other financial institutions, requires the implementation and maintenance of internal procedures, practices and controls which have increased, and may continue to increase, our costs and may subject us to liability.

As noted above, enforcement and compliance-related activity by government agencies has increased. Money laundering and anti-terrorism compliance is among the areas receiving a high level of focus in the present environment.

Volcker Rule. Under the Dodd-Frank Act and regulations adopted by the federal banking agencies in December 2013 to implement the provisions of the Act known as the Volcker Rule, FDIC-insured depository institutions, their holding companies, subsidiaries and affiliates, (collectively, “banking entities”), are generally prohibited, subject to certain exemptions, from proprietary trading and from acquiring or retaining an ownership interest in a "covered fund". These regulations become effective April 15, 2014, with a conformance period for certain features lasting until July 21, 2015.

Activities eligible for exemptions include, among others, certain underwriting, marketing and risk-mitigating hedging activities, and, if certain conditions are met, ownership of interests in certain hedge funds or private equity funds offered to customers of a banking entity’s trust or investment advisory or certain other services, if the banking entity does not guarantee or insure the performance of such a fund. These conditions include, among others, limits on such ownership interests (3% of total ownership interests for any single fund and 3% of Tier 1 capital for the aggregate value of all ownership interests in such funds); a requirement that the amount of such ownership interests be deducted from regulatory capital; a requirement that, for purposes of these limits, ownership interests held by a director or employee of the banking entity are attributed to the banking entity if the banking entity finances the acquisition of the director’s or employee’s ownership interest; and a prohibition against certain transactions between a banking entity and such a fund, including loans, purchases of assets and others. No director or employee of the banking entity (or its affiliates) may hold an ownership interest in such a fund unless directly engaged in providing investment advisory or other services to the fund when the ownership interest is acquired.

Regulatory Reform. On July 21, 2010, the Dodd-Frank Act was signed into law. The Dodd-Frank Act (as amended) implements far-reaching changes across the financial regulatory landscape, including provisions that, among other things:

• Centralize responsibility for consumer financial protection by creating the Bureau of Consumer Financial Protection, with broad rulemaking, supervision and enforcement authority for a wide range of consumer protection laws that would apply to all banks and certain others, including the examination and enforcement powers with respect to any bank with more than $10 billion in assets and its affiliates, and the power to prohibit unfair, deceptive or abusive acts or practices.

• Restrict the preemption of state consumer financial protection law by federal law and disallow subsidiaries and affiliates of national banks, such as MB Financial Bank, from availing themselves of such preemption.

• Require new capital rules.

• Require publicly-traded bank holding companies with assets of $10 billion or more to establish a risk committee responsible for enterprise-wide risk management practices, comprised of independent directors including one risk management expert.

• Change the assessment base for federal deposit insurance from the amount of insured deposits to consolidated average assets less tangible capital.

• Increase the minimum ratio of net worth to insured deposits of the Deposit Insurance Fund from 1.15% to 1.35% and require the FDIC, in setting assessments, to offset the effect of the increase on institutions with assets of less than $10 billion.  This increase is generally expected to impose more deposit insurance cost on institutions with assets of $10 billion or more.

• Provide for new disclosure and other requirements relating to executive compensation and corporate governance, including guidelines or regulations on incentive-based compensation and a prohibition on compensation arrangements that encourage inappropriate risks or that could provide excessive compensation.

• Make permanent the $250 thousand limit for federal deposit insurance and provided unlimited federal deposit insurance until January 1, 2013 for non-interest bearing demand transaction accounts at all insured depository institutions (later legislation extended this unlimited coverage to IOLTA accounts until January 1, 2013).

• Repeal the federal prohibitions on the payment of interest on demand deposits, thereby permitting depository institutions to pay interest on business transaction and other accounts.

• Allow de novo interstate branching by banks.

• Give the Federal Reserve Board the authority to establish rules regarding interchange fees charged for electronic debit transactions by a payment card issuer that, together with its affiliates, has assets of $10 billion or more and to enforce a new statutory requirement that such fees be reasonable and proportional to the actual cost of a transaction to the issuer.  The Federal Reserve Board has adopted rules under this provision that limit the swipe fees that a debit card issuer can charge a merchant for a transaction to the sum of 21 cents and five basis points times the value of the transaction, plus up to one cent for fraud prevention costs.

• Increase the authority of the Federal Reserve Board to examine the Company and its non-bank subsidiaries.

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• Require all bank holding companies to serve as a source of financial strength to their depository institution subsidiaries in the event such subsidiaries suffer from financial distress.

• Restrict proprietary trading by banks, bank holding companies and others, and their acquisition and retention of ownership interests in and sponsorship of hedge funds and private equity funds, as described above under “--Volcker Rule.” 

• Require annual stress testing by banks with more than $10 billion in assets and impose certain reporting and disclosure requirements.

Many aspects of the Dodd-Frank Act are subject to rulemaking and will take effect over several years, making it difficult to anticipate the overall financial impact on the Company and the financial services industry more generally.

Incentive Compensation. The Dodd-Frank Act requires the federal banking regulators and other agencies, including the Securities and Exchange Commission, to issue regulations or guidelines requiring disclosure to the regulators of incentive-based compensation arrangements and to prohibit incentive-based compensation arrangements for directors, officers or employees that encourage inappropriate risks by providing excessive compensation, fees or benefits or that could lead to material financial loss to a financial institution.  Proposed regulations for this purpose have been published, which are based upon the key principles that incentive compensation arrangements should (i) provide incentives that do not encourage risk-taking beyond the organization’s ability to effectively identify and manage risks, (ii) be compatible with effective internal controls and risk management, and (iii) be supported by strong corporate governance, including active and effective oversight by the organization’s board of directors and appropriate policies, procedures and monitoring.  The proposed regulations are consistent with the Guidance on Sound Incentive Compensation Policies issued by regulators in 2010.

As part of the regular, risk-focused examination process, the incentive compensation arrangements of banking organizations will be reviewed, and the regulator’s findings will be incorporated into the organization’s supervisory ratings, which can affect the organization’s ability to make acquisitions and take other actions. Enforcement actions may be taken against a banking organization if its incentive compensation arrangements, or related risk-management control or governance processes, pose a risk to the organization’s safety and soundness and the organization is not taking prompt and effective measures to correct any deficiencies.

The scope and content of the U.S. banking regulations and regulators’ policies on executive compensation are continuing to develop and are likely to continue evolving in the near future. It cannot be determined at this time whether compliance with such policies will adversely affect the Company’s ability to hire, retain and motivate its key employees.

Other Future Legislation and Changes in Regulations.  From time to time, various other legislative and regulatory initiatives are introduced in Congress and state legislatures, as well as by regulatory agencies. Such initiatives may include proposals to expand or contract the powers of bank holding companies and depository institutions or proposals to substantially change the financial institution regulatory system. Such legislation could change banking statutes and the operating environment of the Company in substantial and unpredictable ways. If enacted, such legislation could increase or decrease the cost of doing business, limit or expand permissible activities or affect the competitive balance among banks, savings associations, credit unions, and other financial institutions. The Company cannot predict whether any such legislation will be enacted, and, if enacted, the effect that it, or any implementing regulations, would have on the financial condition or results of operations of the Company. A change in statutes, regulations or regulatory policies applicable to the MB Financial or any of its subsidiaries could have a material effect on the business of the Company.

Internet Website

We maintain a website with the address www.mbfinancial.com.  The information contained on our website is not included as a part of, or incorporated by reference into, this Annual Report on Form 10-K.  Other than an investor’s own Internet access charges, we make available free of charge through our website our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, and amendments to these reports, as soon as reasonably practicable after we have electronically filed such material with, or furnished such material to, the Securities and Exchange Commission.

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Item 1A.   Risk Factors

An investment in our securities is subject to risks inherent in our business.  Before making an investment decision, you should carefully consider the risks and uncertainties described below together with all of the other information included in this report.  In addition to the risks and uncertainties described below, other risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially and adversely affect our business, financial condition and results of operations.  The value or market price of our securities could decline due to any of these identified or other risks, and you could lose all or part of your investment.

A substantial portion of our loan portfolio is secured by real estate. Deterioration in the real estate markets or other segments of our loan portfolio could lead to losses, which could have a material negative effect on our financial condition and results of operations.

As of December 31, 2013, excluding loans acquired in the Heritage, Benchmark, Broadway and New Century FDIC-assisted transactions and covered by our loss-sharing agreements with the FDIC for those transactions, approximately 42% of our total loan portfolio was secured by real estate (compared to approximately 43% as of December 31, 2012), a majority of which is commercial real estate. 

Our commercial real estate portfolio consists of health care, industrial, multifamily, office, retail and church and schools loans.  Our concentration in commercial real estate loans involves additional risk as the values of the properties securing the loans have declined over the past several years.  Vacancy rates have increased over the past several years, resulting in lower cash flows on the underlying properties and stress on our customer's ability to repay their loans.

At December 31, 2013, excluding loans acquired in the Heritage, Benchmark, Broadway and New Century FDIC-assisted transactions and covered by our loss-sharing agreements with the FDIC for those transactions, our commercial real estate loans totaled $1.6 billion, or 29% of our total loan portfolio. This loan type represented approximately 55% of our total non-performing loans as of December 31, 2013.

A weak real estate market could result in additional charge-offs and provisions for loan losses, which could have a material negative effect on our financial condition and results of operations.

Repayment of our commercial loans and lease loans is often dependent on the cash flows of the borrower or lessee, which may be unpredictable, and the collateral securing these loans may fluctuate in value.

We make our commercial loans primarily based on the identified cash flow of the borrower and secondarily on the underlying collateral provided by the borrower. Collateral securing commercial loans may depreciate over time, be difficult to appraise and fluctuate in value. In the case of loans secured by accounts receivable, the availability of funds for the repayment of these loans may be substantially dependent on the ability of the borrower to collect the amounts due from its customers. Accordingly, we make our commercial loans primarily based on the historical and expected cash flow of the borrower and secondarily on underlying collateral provided by the borrower. At December 31, 2013, our commercial loans totaled $1.3 billion, or 22% of our total loan portfolio. This loan type represented approximately 17% of our total non-performing loans as of December 31, 2013.

We lend money to small and mid-sized independent leasing companies to finance the debt portion of leases. A lease loan arises when a leasing company discounts the equipment rental revenue stream owed to the leasing company by a lessee. Our lease loans entail many of the same types of risks as our commercial loans. Lease loans generally are non-recourse to the leasing company, and, consequently, our recourse is limited to the lessee and the leased equipment. As with commercial loans secured by equipment, the equipment securing our lease loans may depreciate over time, may be difficult to appraise and may fluctuate in value. We rely on the lessee’s continuing financial stability, rather than the value of the leased equipment, for the repayment of all required amounts under lease loans. In the event of a default on a lease loan, it is unlikely that the proceeds from the sale of the leased equipment will be sufficient to satisfy the outstanding unpaid amounts under the terms of the loan. At December 31, 2013, our lease loans totaled $1.5 billion, or 26% of our total loan portfolio. This loan type represented approximately 4% of our total non-performing loans as of December 31, 2013.

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We have been negatively affected by credit risk associated with residential real estate.

We originate fixed and adjustable rate loans secured by one- to four-family residential real estate.  Our general practice is to sell a majority of our newly originated fixed-rate residential real estate loans and to hold in portfolio a limited number of adjustable-rate residential real estate loans with 15 and 30 year maturities. Our portfolio also includes home equity lines of credit and fixed-rate second mortgage loans.  Home equity lines of credit are generally extended up to 80% of the value of the property, less existing liens.  Terms for second mortgages typically range from five to ten years.

This type of real estate lending is generally sensitive to regional and local economic conditions that significantly impact the ability of borrowers to meet their loan payment obligations, making loss levels difficult to predict. The decline in residential real estate values as a result of the downturn in the Chicago-area housing markets has reduced the value of the real estate collateral securing these types of loans and increased the risk that we will incur losses if borrowers default on their loans. Residential loans with high combined loan-to-value ratios generally will be more sensitive to declining property values than those with lower combined loan-to-value ratios and therefore may experience a higher incidence of default and severity of losses. In addition, if the borrowers sell their homes, the borrowers may be unable to repay their loans in full from the sale proceeds. As a result, these loans may experience higher rates of delinquencies, defaults and losses, which could in turn adversely affect our financial condition and results of operations.

Our non-performing consumer related loans decreased from $30.9 million, or 26% of our total non-performing loans, as of December 31, 2012 to $25.4 million, or 24% of our total non-performing loans, as of December 31, 2013, primarily due to decreases in non-performing home equity and residential real estate loans. These two categories combined accounted for 94% of the consumer related non-performing loans as of December 31, 2013.

As it relates to our residential mortgage loan sales, we may be required to repurchase some of those loans or indemnify the loan purchaser for damages caused by a breach of representations and warranties contained in the loan sale agreement.

Although we believe that our mortgage documentation and procedures have been appropriate, it is possible that we will receive repurchase requests from our mortgage purchasers, including Fannie Mae and Freddie Mac, in the future, and we may not be able to reach favorable settlements with respect to such requests. It is possible that we may sustain losses associated with such loan repurchases and indemnification payments.

Changes in economic conditions, particularly an economic slowdown in the Chicago area, could hurt our business.

Our business is directly affected by market conditions, trends in industry and finance, legislative and regulatory changes, and changes in governmental monetary and fiscal policies and inflation, all of which are beyond our control. Deterioration in economic conditions, particularly within the Chicago area, could result in the following consequences, among others, any of which could hurt our business materially:

• loan delinquencies may increase;

• problem assets and foreclosures may increase;

• demand for our products and services may decline;

• collateral for our loans may decline in value, in turn reducing a customer’s borrowing power; and

• the net worth and liquidity of loan guarantors may decline, impairing their ability to honor commitments to us.

Except for our leasing and lease loan activities and certain treasury management services, which are nationwide, our lending and deposit gathering activities are concentrated in the Chicago metropolitan area. Our success depends on the general economic conditions of this metropolitan area and its surrounding areas.

Many of the loans in our portfolio are secured by real estate. Most of these loans are secured by properties located in the Chicago metropolitan area. Deterioration in the real estate markets where collateral for a mortgage loan is located could negatively affect the borrower’s ability to repay the loan and the value of the collateral securing the loan. Real estate values are affected by various other factors, including changes in general or regional economic conditions, governmental rules or policies and natural disasters such as tornados.

Negative changes in the regional and general economy could reduce our growth rate, impair our ability to collect loans and generally have a negative effect on our financial condition and results of operations.

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Negative developments in the financial industry have adversely affected our industry and our business.

Negative developments in the financial industry and the impact of new legislation and regulations in response to those developments could restrict our business operations, including our ability to originate loans, and negatively impact our results of operations and financial condition. Overall, during the past few years, the regulatory environment has had a negative effect on our business.

Fiscal challenges facing the U.S. government and the governments of other countries could have a material adverse impact on financial markets and economic conditions in the United States and worldwide, which could in turn have a material adverse effect on our liquidity, financial condition and results of operations.

Many of our investment securities are issued by and some of our loans are made to the U.S. government and government agencies and sponsored entities. As a result of uncertain domestic political conditions, including the recent federal government shutdown and potential future federal government shutdowns, the possibility of the federal government defaulting on its obligations for a period of time due to debt ceiling limitations or other unresolved political issues, investments in financial instruments issued or guaranteed by the federal government and loans to the federal government pose credit default and liquidity risks. In 2011, Standard & Poor’s lowered its long term sovereign credit rating on the United States from AAA to AA+. A further downgrade or a downgrade by other rating agencies, as well as sovereign debt issues facing the governments of other countries, could have a material adverse impact on financial markets and economic conditions in the United States and worldwide. Any such adverse impact could have a material adverse effect on our liquidity, financial condition and results of operations.

Our allowance for loan losses may prove to be insufficient to absorb losses in our loan portfolio.

Lending money is a substantial part of our business. Every loan carries a certain risk that it will not be repaid in accordance with its terms or that any underlying collateral will not be sufficient to assure repayment. This risk is affected by, among other things:

• cash flow of the borrower and/or the project being financed;

• changes and uncertainties as to the future value of the collateral, in the case of a collateralized loan;

• credit experience of a particular borrower;

• changes in economic and industry conditions; and

• duration of the loan.

We maintain an allowance for loan losses, a reserve established through a provision for loan losses charged to expense, which we believe is appropriate to provide for probable losses in our loan portfolio. The amount of this allowance is determined by our management through a periodic review and consideration of several factors, including, but not limited to:

• our general reserve, based on our historical default and loss experience as well as current macroeconomic factors; and

• our specific reserve, based on our evaluation of non-performing loans and their underlying collateral.

The determination of the appropriate level of the allowance for loan losses inherently involves a high degree of subjectivity and requires us to make significant estimates of current credit risks and future trends, all of which may undergo material changes. Deterioration in economic conditions affecting borrowers, new information regarding existing loans, identification of additional problem loans and other factors, both within and outside of our control, may require an increase in the allowance for loan losses. In addition, bank regulatory agencies periodically review our allowance for loan losses and may require an increase in the provision for possible loan losses or the recognition of further loan charge-offs, based on judgments different than those of management. In addition, if charge-offs in future periods exceed the allowance for loan losses, we may need additional provisions to replenish the allowance for loan losses. Any increases in the allowance for loan losses will result in a decrease in net income and, most likely, capital, and may have a material negative effect on our financial condition and results of operations.

The fair value of our investment securities can fluctuate due to market conditions outside of our control.

As of December 31, 2013, our investment securities portfolio contained 345 securities in an unrealized loss position (with total unrealized losses of $11.3 million as of that date), compared to 117 securities in an unrealized loss position as of December 31, 2012 (with total unrealized losses of $6.4 million as of that date). Factors beyond our control can significantly influence the fair value of securities in our investment securities portfolio and can cause potential adverse changes to the fair value of these securities. These factors include but are not limited to rating agency downgrades of the securities, defaults by the issuer or with respect to the underlying securities, changes in market interest rates and instability in the credit markets. Any of these mentioned factors could cause an-other-than-temporary impairment or permanent impairment of these assets, which would lead to accounting charges which could have a material negative effect on our financial condition and results of operations. In addition, we have a large longer term municipal security portfolio that would decline substantially in value if interest rates increase materially.

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Higher FDIC deposit insurance premiums and assessments could significantly increase our non-interest expense.

FDIC insurance rates increased significantly in 2009, and we may pay higher FDIC premiums in the future.  The Dodd-Frank Act established 1.35% as the minimum Designated Reserve Ratio ("DRR"). The FDIC has determined that the DRR should be 2.0% and has adopted a plan under which it will meet the statutory minimum DRR of 1.35% by the statutory deadline of September 30, 2020. The Dodd-Frank Act requires the FDIC to offset the effect of the increase in the statutory minimum DRR to 1.35% from the former statutory minimum of 1.15% on institutions with assets less than $10 billion.  The FDIC has not announced how it will implement this offset or how larger institutions will be affected by it.

Changes in interest rates may reduce our net interest income, and may result in higher defaults in a rising rate environment.

Our consolidated operating results are largely dependent on our net interest income. Net interest income is the difference between interest earned on loans and investments and interest expense incurred on deposits and other borrowings. Our net interest income is impacted by changes in market rates of interest, changes in credit spreads, changes in the shape of the yield curve, the interest rate sensitivity of our assets and liabilities, prepayments on our loans and investments, and the mix of our funding sources and assets, among other things.

Our interest earning assets and interest bearing liabilities may react in different degrees to changes in market interest rates. Interest rates on some types of assets and liabilities may fluctuate prior to changes in broader market interest rates, while rates on other types may lag behind. The result of these changes to rates may cause differing spreads on interest earning assets and interest bearing liabilities. While we take measures intended to manage the risks from changes in market interest rates, we cannot control or accurately predict changes in market rates of interest or be sure our protective measures are adequate.

If the interest rates paid on deposits and other interest bearing liabilities increase at a faster rate than the interest rates received on loans and other interest earning assets, our net interest income, and therefore earnings, could be adversely affected.  As a result of the relatively low interest rate environment, an increasing percentage of our deposits have been comprised of deposits bearing no or a relatively low rate of interest. We would incur a higher cost of funds to retain these deposits in a rising interest rate environment. In addition, a substantial portion of our loans (approximately 41% of our total loan portfolio as of December 31, 2013) have adjustable interest rates.  While the higher payment amounts we would receive on these loans in a rising interest rate environment may increase our interest income, some borrowers may be unable to afford the higher payment amounts, which may result in a higher rate of default. A portion of our adjustable rate loans have interest rate floors that are in-the-money and may not adjust upward immediately with increases in interest rates. Rising interest rates also may reduce the demand for loans and the value of our fixed-rate investment securities.

We pursue a strategy of supplementing internal growth by acquiring other financial companies or their assets and liabilities that we believe will help us fulfill our strategic objectives and enhance our earnings. There are risks associated with this strategy, including the following:

• We may be exposed to potential asset quality issues or unknown or contingent liabilities of the banks, businesses, assets, and liabilities we acquire. If these issues or liabilities exceed our estimates, our results of operations and financial condition may be materially negatively affected;

• Prices at which acquisitions can be made fluctuate with market conditions. We have experienced times during which acquisitions could not be made in specific markets at prices we considered acceptable and expect that we will experience this condition in the future;

• The acquisition of other entities generally requires integration of systems, procedures and personnel of the acquired entity into our company to make the transaction economically successful. This integration process is complicated and time consuming and can also be disruptive to the customers of the acquired business. If the integration process is not conducted successfully and with minimal effect on the acquired business and its customers, we may not realize the anticipated economic benefits of particular acquisitions within the expected time frame, and we may lose customers or employees of the acquired business. We may also experience greater than anticipated customer losses even if the integration process is successful;

• To the extent our costs of an acquisition exceed the fair value of the net assets acquired, the acquisition will generate goodwill.  As discussed below, we are required to assess our goodwill for impairment at least annually, and any goodwill impairment charge could have a material adverse effect on our results of operations and financial condition;

• To finance an acquisition, we may borrow funds, thereby increasing our leverage and diminishing our liquidity, or raise additional capital, which could dilute the interests of our existing stockholders; and

• We have completed various acquisitions in the past few years that enhanced our rate of growth.  We may not be able to continue to sustain our past rate of growth or to grow at all in the future.

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The success of our pending acquisition of Taylor Capital is dependent on a number of factors beyond our control.

The success of our pending acquisition of Taylor Capital, whereby Taylor Capital would be merged with MB Financial, Inc. and Taylor Capital's bank subsidiary, Cole Taylor Bank, would be merged with MB Financial Bank, is subject to a number of uncertain factors, including, but not limited to:

• obtaining the requisite regulatory approvals in order to consummate the transactions. MB Financial and Taylor Capital must obtain approvals from the Federal Reserve Board and the Office of the Comptroller of the Currency. Other approvals, waivers or consents from regulators may also be required. An adverse development in either party’s regulatory standing or other factors could result in an inability to obtain approval or delay their receipt. These regulators may impose conditions on the completion of the transactions. It is a condition to each company’s obligation to complete the merger that the requisite regulatory approvals be obtained without the imposition of any condition or restriction that would reasonably be expected to have a material adverse effect on, or materially and adversely affect the economic benefits to be realized by MB Financial (as the surviving corporation of the merger) and its subsidiaries, taken as a whole, after giving effect to the merger;

• obtaining the requisite stockholder approvals from the MB Financial and Taylor Capital stockholders;

• our ability to realize expected revenues, cost savings, synergies and other benefits from the acquisition within the expected time frames or at all, and costs or difficulties relating to integration matters, including but not limited to customer and employee retention, might be greater than expected; and

• the credit quality of loans and other assets acquired from Taylor Capital.

MB Financial and Taylor Capital have operated and, until the completion of the acquisition, will continue to operate, independently. The success of the acquisition, including anticipated benefits and cost savings, will depend, in part, on MB Financial’s ability to successfully combine the businesses of MB Financial and Taylor Capital. To realize these anticipated benefits and cost savings, after the completion of the acquisition, MB Financial expects to integrate Taylor Capital’s business into its own. It is possible that the integration process could result in the loss of key employees, the disruption of each company’s ongoing businesses or inconsistencies in standards, controls, procedures and policies that adversely affect the combined company’s ability to maintain relationships with clients, customers, depositors and employees or to achieve the anticipated benefits and cost savings of the merger. The loss of key employees could adversely affect MB Financial’s ability to successfully conduct its business in the markets in which Taylor Capital now operates, which could have an adverse effect on MB Financial’s financial results and the value of its common stock. If MB Financial experiences difficulties with the integration process, the anticipated benefits of the acquisition may not be realized fully or at all, or may take longer to realize than expected. As with any merger of financial institutions, there also may be business disruptions that cause MB Financial and/or Taylor Capital to lose customers or cause customers to close their accounts with MB Financial and/or Taylor Capital and move their business to competing financial institutions. Integration efforts between the two companies will also divert management attention and resources. Post-acquisition, our total consolidated assets will exceed $10 billion and as a result, there may be higher expectations from regulators, formal capital stress testing requirements and direct examination by the Consumer Financial Protection Bureau. In addition, post acquisition the Company may be impacted by the Durbin Amendment to the Dodd-Frank Act regarding limits on debit card interchange fees.

Our participation in the loss-share agreements with the FDIC requires that we follow certain servicing procedures, and the terms of certain loans may exceed the coverage periods under the loss-share agreements.

MB Financial Bank entered into loss-share agreements with the FDIC as part of the Heritage, Benchmark, Broadway and New Century transactions. These loss-share agreements require that MB Financial Bank follow certain servicing procedures as specified in the agreement.  A failure to follow these procedures or any other breach of the agreement by MB Financial Bank could result in the loss of FDIC reimbursement of losses on covered loans and other real estate owned, which could have a material negative effect on our financial condition and results of operations. In addition, the loss-share agreements protect MB Financial Bank against losses for limited periods of time (generally ten years for single family residential real estate loans and five years for commercial loans). To the extent MB Financial Bank continues to hold any of the covered loans following the expiration of the applicable loss-share period, it will absorb 100% of any losses. The commercial loan loss-share agreements begin to expire as follows: Heritage in March 2014, Benchmark in December 2014, and Broadway and New Century in June 2015.

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Our growth or future losses may require us to raise additional capital in the future, but that capital may not be available when it is needed or the cost of that capital may be very high.

We are required by regulatory authorities to maintain adequate levels of capital to support our operations. We anticipate that our capital resources will satisfy our capital requirements for the foreseeable future. We may at some point need to raise additional capital to support continued growth or losses, both internally and through acquisitions. Any capital we obtain may result in the dilution of the interests of existing holders of our common stock.

Our ability to raise additional capital, if needed, will depend on conditions in the capital markets at that time (which are outside our control) and on our financial condition and performance. Accordingly, we cannot make assurances of our ability to raise additional capital if needed, or if the terms will be acceptable to us. If we cannot raise additional capital when needed, our ability to further expand our operations through internal growth and acquisitions could be materially impaired and our financial condition and liquidity could be materially and negatively affected.

Conditions in the financial markets may limit our access to additional funding to meet our liquidity needs.

Liquidity is essential to our business, as we must maintain sufficient funds to respond to the needs of depositors and borrowers. An inability to raise funds through deposits, borrowings, the sale or pledging as collateral of loans and other assets could have a substantial negative effect on our liquidity. Our access to funding sources in amounts adequate to finance our activities could be impaired by factors that affect us specifically or the financial services industry in general. Factors that could negatively affect our access to liquidity sources include a decrease in the level of our business activity due to a market downturn or negative regulatory action against us. Our ability to borrow could also be impaired by factors that are not specific to us, such as severe disruption of the financial markets or negative news and expectations about the prospects for the financial services industry as a whole, as evidenced by recent turmoil in the domestic and worldwide credit markets.

Our wholesale funding sources may prove insufficient to replace deposits or support our future growth.

As a part of our liquidity management, we use a number of funding sources in addition to core deposit growth and repayments and maturities of loans and investments. These sources include brokered certificates of deposit, repurchase agreements, federal funds purchased and Federal Home Loan Bank advances. Negative operating results or changes in industry conditions could lead to an inability to replace these additional funding sources at maturity. Our financial flexibility could be constrained if we are unable to maintain our access to funding or if adequate financing is not available to accommodate future growth at acceptable interest rates. Finally, if we are required to rely more heavily on more expensive funding sources to support future growth, our revenues may not increase proportionately to cover our costs. In this case, our results of operations and financial condition would be negatively affected.

The soundness of other financial institutions could negatively affect us.

Our ability to engage in routine funding and other transactions could be negatively affected by the actions and commercial soundness of other financial institutions. Financial services institutions are interrelated as a result of trading, clearing, counterparty or other relationships. Defaults by, or even rumors or questions about, one or more financial services institutions, or the financial services industry generally, have led to market-wide liquidity problems and losses of depositor, creditor and counterparty confidence and could lead to losses or defaults by us or by other institutions. We could experience increases in deposits and assets as a result of the difficulties or failures of other banks, which would increase the capital we need to support our growth.

Non-compliance with the USA PATRIOT Act, Bank Secrecy Act, or other laws and regulations could result in fines or sanctions.

The USA PATRIOT and Bank Secrecy Acts require financial institutions to develop programs to prevent financial institutions from being used for money laundering and terrorist activities. If such activities are detected, financial institutions are obligated to file suspicious activity reports with the U.S. Treasury’s Office of Financial Crimes Enforcement Network. These rules require financial institutions to establish procedures for identifying and verifying the identity of customers seeking to open new financial accounts. Failure to comply with these regulations could result in fines or sanctions. During the last year, several banking institutions have received large fines for non-compliance with these laws and regulations. Although we have developed policies and procedures designed to assist in compliance with these laws and regulations, no assurance can be given that these policies and procedures will be effective in preventing violations of these laws and regulations.

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We provide treasury management services to money services businesses, which include check cashers, issuers/sellers of traveler’s checks, money orders and stored value cards, and money transmitters.  Providing banking services to money service businesses exposes us to enhanced risks from noncompliance with a variety of laws and regulations.

We provide treasury management services to the check cashing industry, offering check clearing, monetary instrument, depository, and credit services.  We also provide treasury management services to money transmitters.  Financial institutions that open and maintain accounts for money services businesses are expected to apply the requirements of the USA PATRIOT Act and Bank Secrecy Act, as they do with all accountholders, on a risk-assessed basis.  As with any category of accountholder, there will be money services businesses that pose little risk of money laundering or lack of compliance with other laws and regulations and those that pose a significant risk.  Providing treasury management services to money services businesses represent a significant compliance and regulatory risk, and failure to comply with all statutory and regulatory requirements could result in fines or sanctions.

Prepaid card products and services are subject to extensive regulatory supervision and rules which are expensive to comply with.

We offer several prepaid card products for our retail and commercial banking customers and to support our national product initiative. We are the issuing bank for all products, and in some cases are also the program manager. We currently have general purpose reloadable payroll, incentive and gift card programs. Prepaid cards are highly regulated by federal and state authorities.  Some of the laws and related regulations in this area include consumer protection, escheatment, privacy, anti-money laundering and data protection laws.  Compliance with these laws and regulations is costly, difficult and requires significant personnel resources.

Issuers of prepaid cards have suffered significant losses in recent years with respect to the theft of cardholder data that has been illegally exploited for personal gain. Criminals are using increasingly sophisticated methods to engage in illegal activities involving cards and cardholder information, such as counterfeiting, fraudulent payment or refund schemes and identity theft. We rely upon third parties for some transaction processing services, which subject us and our cardholders to risks related to the vulnerabilities of those third parties.  Theft or fraud-related losses involving our prepaid cards and other products and services could result in reputational damage to us and adversely affect our operating results.

Financial reform legislation will, among other things, tighten capital standards and result in new regulations that are expected to increase our costs of operations.

On July 21, 2010, President Obama signed the Dodd-Frank Act into law.  This law significantly changes the current bank regulatory structure and affects the lending, deposit, investment, trading and operating activities of financial institutions and their holding companies. The Dodd-Frank Act requires various federal agencies to adopt a broad range of new implementing rules and regulations and to prepare numerous studies and reports for Congress. The federal agencies are given significant discretion in drafting the implementing rules and regulations, and consequently, many of the details and much of the impact of the Dodd-Frank Act may not be known for many months or years.

Among the many requirements in the Dodd-Frank Act for new banking regulations is the requirement for new capital regulations.  Generally, trust preferred securities will no longer be eligible as Tier 1 capital, but the Company’s currently outstanding trust preferred securities will be grandfathered.  See “Item 1. Business-Supervision and Regulation-New Capital Regulations.”

The Dodd-Frank Act also broadened the base for FDIC insurance assessments. Assessments are now based on the average consolidated total assets less tangible equity capital of a financial institution and are generally expected to increase for institutions having total assets in excess of $10 billion. The Dodd-Frank Act also permanently increased the maximum amount of deposit insurance for banks, savings institutions and credit unions to $250,000 per depositor.

In addition, the Dodd-Frank Act increased the authority of the Federal Reserve Board to examine the Company and its non-bank subsidiaries and gave the Federal Reserve Board the authority to establish rules regarding interchange fees charged for an electronic debit transaction by a payment card issuer that, together with its affiliates, has assets of $10 billion or more, and to enforce a new statutory requirement that such fees be reasonable and proportional to the actual cost of a transaction to the issuer.  By regulation, the Federal Reserve Board has limited the fees for such a transaction to the sum of 21 cents plus five basis points times the value of the transaction, plus up to one cent for fraud prevention costs. 

The Dodd-Frank Act created a Bureau of Consumer Financial Protection with broad powers to supervise and enforce consumer protection laws. The Bureau has broad rule-making authority for a wide range of consumer protection laws that apply to all banks,

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including the authority to prohibit “unfair, deceptive or abusive” acts and practices. The Bureau has examination and enforcement authority over all banks with more than $10 billion in assets.

Many aspects of the Dodd-Frank Act are subject to rulemaking and will take effect over several years, making it difficult to anticipate the overall financial impact on the Company.  However, compliance with this law and its implementing regulations has resulted, and will continue to result, in additional operating costs that could have a material adverse effect on our future financial condition and results of operations.  For additional discussion of the Dodd-Frank Act, see “Item 1. Business—Supervision and Regulation-Regulatory Reform.”

New or changing tax, accounting, and regulatory rules and interpretations could significantly impact strategic initiatives, results of operations, cash flows, and financial condition.

The financial services industry is extensively regulated. Federal and state banking regulations are designed primarily to protect the deposit insurance funds and consumers, not to benefit a company’s stockholders. These regulations may sometimes impose significant limitations on operations. The significant federal and state banking regulations that affect us are described in this report under the heading “Item 1. Business-Supervision and Regulation”. These regulations, along with the currently existing tax, accounting, securities, insurance, and monetary laws, regulations, rules, standards, policies, and interpretations control the methods by which financial institutions conduct business, implement strategic initiatives and tax compliance, and govern financial reporting and disclosures. These laws, regulations, rules, standards, policies, and interpretations are constantly evolving and may change significantly over time.

Significant legal actions could subject us to substantial liabilities.

We are from time to time subject to claims related to our operations. These claims and legal actions, including supervisory actions by our regulators, could involve large monetary claims and significant defense costs. As a result, we may be exposed to substantial liabilities, which could negatively affect our results of operations and financial condition.

The loss of certain key personnel could negatively affect our operations.

Our success depends in large part on the retention of a limited number of key management and other banking personnel. We could undergo a difficult transition period if we were to lose the services of any of these individuals. Our success also depends on the experience of our banking facilities’ managers and bankers and on their relationships with the customers and communities they serve. The loss of these key persons could negatively impact the affected banking operations. The pending Taylor Capital acquisition could impact the retention of key personnel. See "--The success of our pending acquisition of Taylor Capital is dependent on a number of factors beyond our control."

We may experience future goodwill impairment.

If our estimates of the fair value of our goodwill change as a result of changes in our business or other factors, we may determine that an impairment charge is necessary. Estimates of fair value are based on a complex model using, among other things, estimated cash flows and industry pricing multiples. Based on the Company's 2013 goodwill impairment testing, the fair values of the two reporting units, banking and leasing, were in excess of their carrying value.  If the fair values of the two reporting units were less than their book value of total common stockholders' equity for an extended period of time, the Company will consider this and other factors, including the anticipated cash flows of each of the reporting units, to determine whether goodwill is impaired. No assurance can be given that the Company will not record an impairment loss on goodwill in the future and any such impairment loss could have a material adverse effect on our results of operations and financial condition. It is expected that the completion of our acquisition of Taylor Capital will increase goodwill.

Our future success is dependent on our ability to compete effectively in the highly competitive banking industry.

We face substantial competition in all phases of our operations from a variety of different competitors. Our future growth and success will depend on our ability to compete effectively in this highly competitive environment. To date, we have grown our business successfully by focusing on our business lines and emphasizing the high level of service and responsiveness desired by our customers. We compete for loans, deposits and other financial services with other commercial banks, thrifts, credit unions, brokerage houses, mutual funds, insurance companies and specialized finance companies. Many of our competitors offer products and services which we do not offer, and many have substantially greater resources and lending limits, name recognition and market presence that benefit them in attracting business. In addition, larger competitors may be able to price loans and deposits more aggressively than we do, and smaller newer competitors may also be more aggressive in terms of pricing loan and deposit products than we are in order to obtain a share of the market. Some of the financial institutions and financial services organizations with

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which we compete are not subject to the same degree of regulation as is imposed on bank holding companies, federally insured state-chartered banks and national banks and federal savings banks. In addition, increased competition among financial services companies due to the recent consolidation of certain competing financial institutions and the conversion of certain investment banks to bank holding companies may negatively affect our ability to successfully market our products and services. As a result, these competitors have certain advantages over us in accessing funding and in providing various services.

Our operations rely on numerous external vendors.

We rely on numerous external vendors to provide us with products and services necessary to maintain our day-to-day operations. Accordingly, our operations are exposed to risk that these vendors will not perform in accordance with the contracted arrangements under service level agreements. The failure of an external vendor to perform in accordance with the contracted arrangements under service level agreements because of changes in the vendor's organizational structure, financial condition, support for existing products and services or strategic focus or for any other reason, could be disruptive to our operations, which in turn could have a material negative impact on our financial condition and results of operations. We also could be adversely affected to the extent such an agreement is not renewed by the third party vendor or is renewed on terms less favorable to us.

 We are subject to certain risks in connection with our use of technology.

Our security measures may not be sufficient to mitigate the risk of a cyber attack or cyber theft.

Communications and information systems are essential to the conduct of our business, as we use such systems to manage our customer relationships, our general ledger and virtually all other aspects of our business. Our operations rely on the secure processing, storage, and transmission of confidential and other information in our computer systems and networks. Although we take protective measures and endeavor to modify them as circumstances warrant, the security of our computer systems, software, and networks may be vulnerable to breaches, unauthorized access, misuse, computer viruses, or other malicious code and cyber attacks that could have a security impact. If one or more of these events occur, this could jeopardize our or our customers' confidential and other information processed and stored in, and transmitted through, our computer systems and networks, or otherwise cause interruptions or malfunctions in our operations or the operations of our customers or counterparties. We may be required to expend significant additional resources to modify our protective measures or to investigate and remediate vulnerabilities or other exposures, and we may be subject to litigation and financial losses that are either not insured against or not fully covered through any insurance maintained by us. We could also suffer significant reputational damage.

Security breaches in our internet banking activities could further expose us to possible liability and damage our reputation. Any compromise of our security also could deter customers from using our internet banking services that involve the transmission of confidential information. We rely on standard internet security systems to provide the security and authentication necessary to effect secure transmission of data. These precautions may not protect our systems from compromises or breaches of our security measures, which could result in significant legal liability and significant damage to our reputation and our business.

Our security measures may not protect us from systems failures or interruptions.

While we have established policies and procedures to prevent or limit the impact of systems failures and interruptions, there can be no assurance that such events will not occur or that they will be adequately addressed if they do. In addition, we outsource certain aspects of our data processing and other operational functions to certain third-party providers. If our third-party providers encounter difficulties, or if we have difficulty in communicating with them, our ability to adequately process and account for transactions could be affected, and our business operations could be adversely impacted. Threats to information security also exist in the processing of customer information through various other vendors and their personnel.

The occurrence of any systems failure or interruption could damage our reputation and result in a loss of customers and business, could subject us to additional regulatory scrutiny, or could expose us to legal liability. Any of these occurrences could have a material adverse effect on our financial condition and results of operations.

New lines of business or new products and services may subject us to additional risks.

From time to time, we may seek to implement new lines of business or offer new products and services within existing lines of business. There are substantial risks and uncertainties associated with these efforts, particularly in instances where the markets are not fully developed.  In developing and marketing new lines of business and/or new products and services, we may invest significant time and resources. Initial timetables for the introduction and development of new lines of business and/or new products or services may not be achieved, and price and profitability targets may not prove feasible, which could in turn have a material negative effect on our operating results.

25

Item 1B.   Unresolved Staff Comments

None.

Item 2.   Properties

We conduct our business at 84 banking offices located in the Chicago metropolitan area and one banking office in Philadelphia, Pennsylvania.  We own a majority of our banking center facilities.  The remaining facilities are leased.  We have approximately 122 ATMs at our branches and 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.  See Note 7 of the notes to our consolidated financial statements for additional information regarding our premises and equipment.

We also have non-bank office locations in Chicago and Forest Park, Illinois; Paramus, New Jersey; Birmingham and Troy, Michigan; Columbus, Ohio; and Irvine, LaJolla and Newport Beach, California.  These offices are used by our lease banking personnel and our Cedar Hill, LaSalle and Celtic subsidiaries.

We believe our facilities in the aggregate are suitable and adequate to operate our banking and related business.

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 adverse effect on our consolidated financial position or results of operation.

On July 26, 2013, an action captioned James Sullivan v. Taylor Capital Group, Inc., et al., Case No. 2013-CH17751 (the “Sullivan Action”) was commenced against Taylor Capital, the board of directors of Taylor Capital (the “Taylor Capital Board”), and MB Financial (collectively, the “Defendants”) in the Circuit Court of Cook County, Illinois (the “Court”), alleging that the Taylor Capital Board breached its fiduciary duties in connection with the pending MB Financial/Taylor Capital merger (the “Merger”) and that MB Financial aided and abetted those breaches of fiduciary duty. On August 8, 2013, a stockholder class action captioned Dennis Panozzo v. Taylor Capital Group, Inc., et. al., Case No. 2013-CH-18546 (the “Panozzo Action”) was commenced against the Defendants in the Court making similar allegations in connection with the Merger. Subsequently, on September 10, 2013, the Sullivan Action and the Panozzo Action were consolidated pursuant to Court order under the first-filed Sullivan Action, Case No. 2013-CH17751 (as so consolidated, the “Action”). On October 24, 2013, the plaintiffs in the Action (the “Plaintiffs”) filed a consolidated amended class action complaint, alleging that the Taylor Capital Board breached its fiduciary duties in connection with the Merger, including by making incomplete and misleading disclosures concerning the Merger, and that MB Financial aided and abetted those breaches of fiduciary duty.

On February 17, 2014, solely to eliminate the costs, risks, burden, distraction and expense of further litigation and to put the claims that were or could have been asserted to rest, the Defendants entered into a memorandum of understanding (the “MOU”) with the Plaintiffs regarding the settlement of the Action pursuant to which Taylor Capital and MB Financial agreed to make certain supplemental disclosures concerning the Merger, which each of Taylor Capital and MB Financial did in a Current Report on Form 8-K filed by each company on February 18, 2014 (the “Form 8-Ks”). The MOU also provides that, solely for purposes of settlement, the Court will certify a class consisting of all persons who were record or beneficial stockholders of Taylor Capital when the Merger was approved by the Taylor Capital Board or any time thereafter (the “Class”). In addition, the MOU provides that, subject to approval by the Court after notice to the members of the Class (the “Class Members”), the Action will be dismissed with prejudice and all claims that the Class Members may possess with regard to the Merger, with the exception of claims for statutory appraisal, will be released. In connection with the settlement, the Plaintiffs’ counsel have expressed their intention to seek an award by the Court of attorneys’ fees and expenses. The amount of the award to the Plaintiffs’ counsel will ultimately be determined by the Court. This payment will not affect the amount of merger consideration to be paid by MB Financial or that any Taylor Capital stockholder will receive in the Merger. There can be no assurance that the parties will ultimately enter into a definitive settlement agreement or that the Court will approve the settlement even if the parties enter into such an agreement. In the absence of either event, the proposed settlement as contemplated by the MOU may be terminated.

The Defendants continue to believe that the Action is without merit, have vigorously denied, and continue to vigorously deny, all of the allegations of wrongful or actionable conduct asserted in the Action, and the Taylor Capital Board vigorously maintains that it diligently and scrupulously complied with its fiduciary duties, that the joint proxy statement/prospectus dated January 14, 2014 mailed to the stockholders of Taylor Capital and MB Financial is complete and accurate in all material respects and that no further disclosure is required under applicable law. The Defendants are entering into the MOU and the contemplated

26

settlement solely to eliminate the costs, risks, burden, distraction and expense of further litigation and to put the claims that were or could have been asserted to rest. Nothing in the MOU, any settlement agreement or any public filing, including the Form 8-Ks, shall be deemed an admission of the legal necessity of filing or the materiality under applicable laws of any of the additional information contained therein or in any public filing associated with the proposed settlement of the Action.

Based on information currently available, consultations with counsel and established reserves, management believes that the eventual outcome of this litigation will not have a material adverse effect on the Company's consolidated financial position or results of operations.

Item 4.   Mine Safety Disclosures

Not applicable.

PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Our common stock is traded on the NASDAQ Global Select Market under the symbol “MBFI.”  There were approximately 1,416 holders of record of our common stock as of December 31, 2013.

The following table presents quarterly market price information and cash dividends paid per share for our common stock for 2013 and 2012:

	Market Price Range
	High		Low		Dividends Paid
2013
Quarter ended December 31, 2013	$	32.85	$	27.86	$	0.12
Quarter ended September 30, 2013	29.74		26.70		0.12
Quarter ended June 30, 2013	27.13		22.52		0.10
Quarter ended March 31, 2013	24.58		20.11		0.10
2012
Quarter ended December 31, 2012	$	20.66	$	17.00	$	0.10
Quarter ended September 30, 2012	22.46		19.71		0.01
Quarter ended June 30, 2012	22.21		18.88		0.01
Quarter ended March 31, 2012	22.26		17.11		0.01

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 MB Financial Bank and cash on hand.  We have an internal policy which provides that dividends paid to us by MB Financial 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 12%, 9% and 8%, respectively.  These ratios are in excess of the minimum ratios currently required for a bank to be considered “well capitalized” for regulatory purposes (10%, 6% and 5%, respectively).  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 and Note 17 of notes to consolidated financial statements contained in Item 8 of this report.

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The following table sets forth information for the three months ended December 31, 2013 with respect to our repurchases of our outstanding common shares:

	Total Number of Shares Purchased (1)	Average Price Paid per Share		Number of Shares Purchased as Part Publicly Announced Plans or Programs	Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs
October 1, 2013 — October 31, 2013	633	$	29.62	—	1,000,000
November 1, 2013 — November 30, 2013	—	—		—	1,000,000
December 1, 2013 — December 31, 2013	—	—		—	1,000,000
Total	633	$	29.62	—

(1)          Represents shares withheld to satisfy tax withholding obligations upon the exercise of stock options and vesting of restricted stock awards.

In the fourth quarter of 2012, the Company's board of directors authorized the Company to purchase up to one million shares of common stock from time to time over the next two years, subject to market conditions and other factors.

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Stock Performance Presentation

The following line graph shows a comparison of the cumulative returns for the period beginning December 31, 2008 and ending December 31, 2013 of the Company's common stock, the NASDAQ Composite Index and the SNL Mid Cap Bank Index. The information assumes that $100 was invested at the closing price on December 31, 2008 in the Company's common stock and each index, and that all dividends were reinvested.

COMPARISON OF 5-YEAR CUMULATIVE TOTAL RETURN

FOR MB FINANCIAL, INC., NASDAQ COMPOSITE INDEX

AND SNL MID CAP BANK INDEX

	Period Ending
Index	12/31/2008		12/31/2009		12/31/2010		12/31/2011		12/31/2012		12/31/2013
MB Financial, Inc.	$	100.00	$	71.24	$	62.74	$	62.08	$	72.18	$	119.11
NASDAQ Composite Index	100.00		145.36		171.74		170.38		200.63		281.22
SNL Mid Cap Bank Index	100.00		84.77		98.57		86.65		97.11		144.27

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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 and the consolidated financial statements and notes thereto included herein in response to Item 8 (in thousands, except common share data).

On August 10, 2009, the Company sold its merchant card processing business.  In accordance with accounting principles generally accepted in the United States of America (GAAP), the assets, liabilities, results of operations, including a pre-tax gain of $10.2 million, and cash flows of the Company’s merchant card processing business have been shown separately as discontinued operations in the consolidated balance sheets, consolidated statements of operations, and consolidated statements of cash flows for all periods presented.

For purposes of the following discussion, balances, average rate, income and expenses associated with the Company’s merchant card processing business have been excluded from continuing operations.

Our summary consolidated financial information and other financial data contain information determined by methods other than in accordance with GAAP.  These measures include net interest income on a fully tax equivalent basis and net interest margin on a fully tax equivalent basis.

The tax equivalent adjustment to net interest income and net interest margin recognizes the income tax savings when comparing taxable and tax-exempt assets and assumes a 35% tax rate.  Management believes that it is a standard practice in the banking industry to present net interest income and net interest margin on a fully tax equivalent basis, and accordingly believes that providing these measures may be useful for peer comparison purposes, making the measure more meaningful when comparing our operating results from period to period.

A reconciliation of net interest margin on a fully tax equivalent basis to net interest margin is contained in the “Selected Financial Data” discussed below.

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Selected Financial Data:

	As of or for the Year Ended December 31,
(Dollars in thousands, except per share data)	2013			2012			2011			2010 (1)			2009 (2)
Statement of Income Data:
Interest income	$	297,895		$	335,310		$	384,560		$	429,640		$	393,538
Interest expense	25,559			42,522			59,287			89,868			142,986
Net interest income	272,336			292,788			325,273			339,772			250,552
Provision for credit losses	(5,804		)	(8,900		)	120,750			246,200			231,800
Net interest income after provision for credit losses	278,140			301,688			204,523			93,572			18,752
Non-interest income	154,394			129,193			122,719			195,041			127,583
Non-interest expenses	294,588			304,030			283,246			268,061			224,179
Income (loss) before income taxes	137,946			126,851			43,996			20,552			(77,844		)
Applicable income tax expense (benefit)	39,491			36,477			5,268			24			(45,265		)
Income (loss) from continuing operations	98,455			90,374			38,728			20,528			(32,579		)
Income from discontinued operations, net of income tax	—			—			—			—			6,453
Net income (loss)	98,455			90,374			38,728			20,528			(26,126		)
Dividends and discount accretion on preferred shares	—			3,269			10,414			10,382			10,298
Net income (loss) available to common stockholders	$	98,455		$	87,105		$	28,314		$	10,146		$	(36,424	)
Common Share Data:
Basic earnings (loss) per common share from continuing operations	$	1.81		$	1.61		$	0.52		$	0.19		$	(1.07	)
Basic earnings per common share from discontinued operations	—			—			—			—			0.16
Basic earnings (loss) per common share	1.81			1.61			0.52			0.19			(0.91		)
Diluted earnings (loss) per common share from continuing operations	1.79			1.60			0.52			0.19			(1.07		)
Diluted earnings per common share from discontinued operations	—			—			—			—			0.16
Diluted earnings (loss) per common share	1.79			1.60			0.52			0.19			(0.91		)
Common book value per common share	24.14			23.29			21.92			21.14			20.75
Weighted average common shares outstanding:
Basic	54,509,612			54,270,297			54,057,158			52,724,715			40,042,655
Diluted	54,993,865			54,505,976			54,337,280			53,035,047			40,042,655
Dividend payout ratio (3)	24.58		%	8.13		%	7.69		%	21.05		%	NM
Cash dividends per common share	$	0.44		$	0.13		$	0.04		$	0.04		$	0.15

(1) In 2010, we completed two FDIC-assisted transactions.  See Note 2 in the notes to consolidated financial statements contained under Item 8. Financial Statements and Supplementary Data.

(2) In 2009, we completed four FDIC-assisted transactions.

(3) Not meaningful for 2009 due to our net loss for that year.

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Selected Financial Data (continued):

	As of or for the Year Ended December 31,
(Dollars in thousands)	2013			2012			2011			2010			2009
Balance Sheet Data:
Cash and cash equivalents	$	473,459		$	287,543		$	244,565		$	844,159		$	402,020
Investment securities	2,352,862			2,416,977			2,509,412			1,677,929			2,913,594
Loans, gross	5,712,551			5,766,930			5,950,995			6,617,811			6,524,547
Allowance for loan losses	111,746			124,204			126,798			192,217			177,072
Loans held for sale	629			7,492			4,727			—			—
Total assets	9,641,427			9,571,805			9,833,072			10,320,364			10,865,393
Deposits	7,381,259			7,542,697			7,647,607			8,152,958			8,683,276
Short-term and long-term borrowings	555,548			336,652			486,218			553,917			655,266
Junior subordinated notes issued to capital trusts	152,065			152,065			158,538			158,571			158,677
Stockholders’ equity	1,326,682			1,275,770			1,393,027			1,344,786			1,251,180
Performance Ratios:
Return on average assets	1.05		%	0.95		%	0.39		%	0.20		%	(0.27		)%
Return on average equity	7.59			6.83			2.85			1.54			(2.32		)
Return on average common equity	7.59			7.05			2.43			0.89			(3.91		)
Net interest margin (1)	3.31			3.49			3.75			3.72			2.85
Tax equivalent effect	0.28			0.24			0.15			0.11			0.12
Net interest margin — fully tax equivalent basis (1)	3.59			3.73			3.90			3.83			2.97
Loans to deposits	77.39			76.46			77.82			81.17			75.14
Asset Quality Ratios:
Non-performing loans to total loans (2)	1.87		%	2.03		%	2.17		%	5.48		%	4.16		%
Non-performing assets to total assets (3)	1.36			1.62			2.12			4.21			2.84
Allowance for loan losses to total loans	1.96			2.15			2.13			2.90			2.71
Allowance for loan losses to non-performing loans (2)	104.87			106.17			98.00			53.03			65.26
Net loan charge-offs to average loans	0.16			(0.02		)	2.90			3.42			3.09
Liquidity and Capital Ratios:
Tier 1 capital to risk-weighted assets	15.28		%	14.73		%	17.34		%	15.75		%	13.51		%
Total capital to risk-weighted assets	16.53			16.62			19.39			17.75			15.45
Tier 1 capital to average assets	11.22			10.50			11.73			10.66			8.71
Average equity to average assets	13.82			13.35			13.65			12.65			11.51
Other:
Banking facilities	85			86			88			90			87
Full time equivalent employees	1,775			1,758			1,684			1,703			1,638

(1) Net interest margin represents net interest income from continuing operations as a percentage of average interest earning assets.

(2) Non-performing loans include loans accounted for on a non-accrual basis and accruing loans contractually past due 90 days or more as to interest or principal.  Non-performing loans excludes purchased credit-impaired loans that were acquired as part of the Heritage, InBank, Corus, Benchmark, Broadway, and New Century FDIC-assisted transactions.  See Note 5 in the notes to consolidated financial statements contained under Item 8. Financial Statements and Supplementary Data.

(3) Non-performing assets include non-performing loans, other real estate owned and other repossessed assets.  Non-performing assets exclude other real estate owned that is related to the Heritage, InBank, Benchmark, Broadway, and New Century FDIC-assisted transactions.  See Note 5 in the notes to consolidated financial statements contained under Item 8. Financial Statements and Supplementary Data.

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Selected Financial Data (continued):

The following table sets forth our selected quarterly financial data (in thousands, except common share data):

	Three Months Ended 2013												Three Months Ended 2012
	December			September			June			March			December			September			June			March
Statement of Income Data:
Interest income	$	73,829		$	74,820		$	74,118		$	75,128		$	77,614		$	82,663		$	85,593		$	89,440
Interest expense	5,566			5,912			6,638			7,443			8,098			10,588			11,489			12,347
Net interest income	68,263			68,908			67,480			67,685			69,516			72,075			74,104			77,093
Provision for credit losses	(3,000		)	(3,304		)	500			—			1,000			(13,000		)	—			3,100
Net interest income after provision for credit losses	71,263			72,212			66,980			67,685			68,516			85,075			74,104			73,993
Non-interest income	39,045			37,707			38,939			38,703			37,911			32,491			29,348			29,443
Non-interest expenses	76,641			76,265			70,253			71,429			72,732			85,103			72,275			73,920
Income before income taxes	33,667			33,654			35,666			34,959			33,695			32,463			31,177			29,516
Income tax expense	9,811			9,254			10,373			10,053			9,683			9,330			9,034			8,430
Net income	$	23,856		$	24,400		$	25,293		$	24,906		$	24,012		$	23,133		$	22,143		$	21,086
Dividends and discount accretion on preferred shares	—			—			—			—			—			—			—			3,269
Net income available to common stockholders	$	23,856		$	24,400		$	25,293		$	24,906		$	24,012		$	23,133		$	22,143		$	17,817
Net interest margin	3.23		%	3.37		%	3.33		%	3.32		%	3.31		%	3.42		%	3.59		%	3.64		%
Tax equivalent effect	0.27			0.29			0.28			0.27			0.26			0.25			0.24			0.23
Net interest margin on a fully tax equivalent basis	3.50		%	3.66		%	3.61		%	3.59		%	3.57		%	3.67		%	3.83		%	3.87		%
Common Share Data:
Basic earnings per common share	$	0.44		$	0.45		$	0.46		$	0.46		$	0.44		$	0.43		$	0.41		$	0.33
Diluted earnings per common share	0.43			0.44			0.46			0.46			0.44			0.42			0.41			0.33
Weighted average common shares outstanding	54,622,584			54,565,089			54,436,043			54,411,806			54,401,504			54,346,827			54,174,717			54,155,856
Diluted weighted average common shares outstanding	55,237,160			55,130,653			54,868,075			54,736,644			54,597,737			54,556,517			54,448,709			54,411,916

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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 Item 1A Risks Factors, Item 7A, Quantitative and Qualitative Disclosures about Market Risk, and our consolidated financial statements and notes thereto appearing under Item 8 of this report.

Overview

We had net income and net income available to common stockholders of $98.5 million for the year ended December 31, 2013 compared to net income and net income available to common stockholders of $90.4 million and $87.1 million, respectively, for the year ended December 31, 2012 and net income and net income available to common shareholders of $38.7 million and $28.3 million, respectively, for the year ended December 31, 2011. Fully diluted earnings per common share were $1.79 for the year ended December 31, 2013 compared to $1.60 per common share in 2012 and $0.52 per common share in 2011.

The increase in earnings from the year ended December 31, 2012 to the year ended December 31, 2013 was primarily due to an increase in non-interest income of $25.2 million primarily from revenues earned from our key fee initiatives (predominantly leasing revenues) and decrease of $9.4 million in non-interest expense primarily from gains recognized on other real estate owned, partially offset by a $20.5 million decrease in net interest income. Net interest income decreased as a result of a decline in average earning assets (primarily as a result of a decrease in covered loans) and a decrease of the net interest margin.  The increase in earnings from the year ended December 31, 2011 to the year ended December 31, 2012 was primarily due to a $129.7 million decrease in provision for credit losses as a result of improved credit quality, partially offset by a $32.5 million decrease in net interest income as a result of a decline in average earning assets and net interest margin and a $12.7 million increase in prepayment fees on interest bearing liabilities. 

On March 14, 2012, we repurchased all $196.0 million of preferred stock issued in 2008 to the U.S. Department of Treasury as part of the Troubled Asset Relief Program (“TARP”) Capital Purchase Program. The repurchase resulted in a one-time, non-cash after-tax charge of approximately $1.2 million or $0.02 per common share in the first quarter of 2012, related to unaccreted discount recorded at the date of issuance.

The profitability of our operations depends primarily on our net interest income after provision for credit losses, which is the difference between interest earned on interest earning assets and interest paid on interest bearing liabilities less provision for credit losses.  The provision for credit losses is dependent on changes in our loan portfolio and management’s assessment of the collectability of our loan portfolio as well as prevailing economic and market conditions.  

Our net income is also affected by non-interest income and non-interest expenses.  During the years ended December 31, 2013, 2012 and 2011, non-interest income included revenue from our key fee initiatives: capital markets and international banking service fees, commercial deposit and treasury management fees, net lease financing income, trust and asset management fees, and card fees. Non-interest income also included loan service fees, consumer and other deposit service fees, brokerage fees, net gain (loss) on investment securities, increase in cash surrender value of life insurance, net gain (loss) on sale of other assets, accretion of the FDIC indemnification asset, net gains on sale of loans and other operating income.  During the years ended December 31, 2013, 2012 and 2011, non-interest expenses included salaries and employee benefits, occupancy and equipment expense, computer services and telecommunication expense, advertising and marketing expense, professional and legal expense, other intangibles amortization expense, merger related expenses, branch impairment charges, other real estate owned gains or losses, other real estate expenses (net of rental income), prepayment fees on interest bearing liabilities and other operating expenses.  Additionally, dividends on preferred shares reduced net income available to common stockholders.

Net interest income is affected by changes in the volume and mix of interest earning assets, interest earned on those assets, the volume and mix of interest bearing liabilities and interest paid on interest bearing liabilities.  Non-interest income and non-interest expenses are impacted by growth of banking and leasing operations and growth in the number of loan and deposit accounts through both acquisitions and core banking and leasing business growth.  Growth in operations affects other expenses primarily as a result of additional employee, branch facility and promotional marketing expense.  Growth in the number of loan and deposit accounts affects other income, including service fees as well as other expenses such as computer services, supplies, postage, telecommunications and other miscellaneous expenses.  Non-performing asset levels impact salaries and benefits, legal expenses and other real estate owned expenses.

34

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

Residual Value of Our Direct Finance, Leveraged, and Operating Leases.  Lease residual value represents the present value of the estimated fair value of the leased equipment at the termination date of the lease.  Realization of these residual values depends on many factors, including management’s use of estimates, assumptions, and judgment to determine such values.  Several other factors outside of management’s control may reduce the residual values realized, including general market conditions at the time of expiration of the lease, whether there has been technological or economic obsolescence or unusual wear and tear on, or use of, the equipment and the cost of comparable equipment.  If, upon the expiration of a lease, we sell the equipment and the amount realized is less than the recorded value of the residual interest in the equipment, we will recognize a loss reflecting the difference.  On a quarterly basis, management reviews the lease residuals for potential impairment.  If we fail to realize our aggregate recorded residual values, our financial condition and profitability could be adversely affected.  At December 31, 2013, the aggregate residual value of the equipment leased under our direct finance, leveraged, and operating leases totaled $76.8 million.  See Note 1 and Note 6 of our audited consolidated financial statements for additional information.

Income Tax Accounting.  ASC Topic 740 provides guidance on accounting for income taxes by prescribing the minimum recognition threshold that a tax position must meet to be recognized in the financial statements.  ASC Topic 740 also provides guidance on measurement, recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.  As of December 31, 2013, the Company had $80 thousand of uncertain tax positions.  The Company elects to treat interest and penalties recognized for the underpayment of income taxes as income tax expense.  However, interest and penalties imposed by taxing authorities on issues specifically addressed in ASC Topic 740 will be taken out of the tax reserves up to the amount allocated to interest and penalties.  The amount of interest and penalties exceeding the amount allocated in the tax reserves will be treated as income tax expense.  As of December 31, 2013, the Company had approximately $7 thousand of accrued interest related to tax reserves.  The application of income tax law is inherently complex.  Laws and regulations in this area are voluminous and are often ambiguous.  As such, we are required to make many subjective assumptions and judgments regarding our income tax exposures.  Interpretations of, and guidance surrounding income tax laws and regulations change over time.  As such, changes in our subjective assumptions and judgments can materially affect amounts recognized in the consolidated balance sheets and statements of income.

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Fair Value of Assets and Liabilities.  ASC Topic 820 defines fair value as the price that would be received to sell a financial asset or paid to transfer a financial liability in an orderly transaction between market participants at the measurement date.

The degree of management judgment involved in determining the fair value of assets and liabilities is dependent upon the availability of quoted market prices or observable market parameters. For financial instruments that trade actively and have quoted market prices or observable market parameters, there is minimal subjectivity involved in measuring fair value. When observable market prices and parameters are not fully available, management judgment is necessary to estimate fair value. In addition, changes in market conditions may reduce the availability of quoted prices or observable data. For example, reduced liquidity in the capital markets or changes in secondary market activities could result in observable market inputs becoming unavailable. Therefore, when market data is not available, the Company would use valuation techniques requiring more management judgment to estimate the appropriate fair value measurement.

See Note 18 to the consolidated financial statements for a complete discussion on the Company’s use of fair valuation of assets and liabilities and the related measurement techniques.

Goodwill.  The excess of the cost of an acquisition over the fair value of the net assets acquired, including core deposit and client relationship intangibles, consists of goodwill.  See Note 8 to the consolidated financial statements for further information regarding core deposit and client relationship intangibles.  The Company reviews goodwill to determine potential impairment annually, or more frequently if events and circumstances indicate that goodwill might be impaired, by comparing the carrying value of the reporting units with the fair value of the reporting units.

The Company’s annual assessment date for goodwill impairment testing is as of December 31. As of December 31, 2013, the Company had two reporting units: banking and leasing. Based on the Company's 2013 goodwill impairment testing, the fair values of the two reporting units were in excess of their carrying value.  No impairment losses were recognized during the years ended December 31, 2013, 2012 and 2011.

Recent Accounting Pronouncements.  Refer to Note 1 of our consolidated financial statements for a description of recent accounting pronouncements including the respective dates of adoption and effects on results of operations and financial condition.

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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).  The table below and the discussion that follows contain presentations of net interest income and net interest margin on a tax-equivalent basis, which is adjusted for the tax-favored status of income from certain loans and investments.  Net interest margin also is presented on a tax-equivalent basis in “Item 6 Selected Financial Data.”  We believe this measure to be the preferred industry measurement of net interest income, as it provides a relevant comparison between taxable and non-taxable amounts.

Reconciliations of net interest income and net interest margin on a tax-equivalent basis to net interest income and net interest margin in accordance with accounting principles generally accepted in the United States of America are provided in the table.

	Year Ended December 31,
(dollars in thousands)	2013						2012						2011
	Average				Yield/		Average				Yield/		Average				Yield/
	Balance		Interest		Rate		Balance		Interest		Rate		Balance		Interest		Rate
Interest Earning Assets:
Loans (1) (2) (3)	$	5,282,072	$	228,931	4.33	%	$	5,412,373	$	263,079	4.86	%	$	5,867,533	$	317,566	5.41	%
Loans exempt from federal income taxes (4)	326,426		14,786		4.47		278,925		13,275		4.68		231,505		11,118		4.74
Taxable investment securities	1,393,341		26,084		1.87		1,542,814		33,424		2.17		1,669,971		41,349		2.48
Investment securities exempt from federal income taxes (4)	933,840		50,098		5.36		815,500		45,094		5.53		460,971		26,562		5.76
Federal funds sold	4,510		15		0.33		—		—		—		—		—		—
Other interest bearing deposits	283,854		690		0.24		337,325		867		0.26		442,190		1,153		0.26
Total interest earning assets	8,224,043		$	320,604	3.90		8,386,937		$	355,739	4.24		8,672,170		$	397,748	4.59
Non-interest earning assets	1,167,834						1,161,048						1,283,963
Total assets	$	9,391,877					$	9,547,985					$	9,956,133
Interest Bearing Liabilities:
Deposits:
NOW and money market deposit	$	2,698,226	$	3,483	0.13	%	$	2,646,299	$	4,286	0.16	%	$	2,678,049	$	7,637	0.29	%
Savings deposit	839,025		546		0.07		789,595		786		0.10		732,731		1,379		0.19
Time deposits	1,639,054		15,211		0.93		2,132,370		25,186		1.18		2,610,436		35,865		1.37
Short-term borrowings	264,381		622		0.24		231,872		1,204		0.52		244,594		849		0.35
Long-term borrowings and junior subordinated notes	223,266		5,697		2.52		362,255		11,060		3.00		439,054		13,557		3.05
Total interest bearing liabilities	5,663,952		$	25,559	0.45		6,162,391		$	42,522	0.69		6,704,864		$	59,287	0.88
Non-interest bearing deposits	2,234,537						1,973,666						1,771,918
Other non-interest bearing liabilities	195,397						137,302						120,647
Stockholders’ equity	1,297,991						1,274,626						1,358,704
Total liabilities and stockholders’ equity	$	9,391,877					$	9,547,985					$	9,956,133
Net interest income/interest rate spread (5)			$	295,045	3.45	%			$	313,217	3.55	%			$	338,461	3.71	%
Less: taxable equivalent adjustment			22,709						20,429						13,188
Net interest income, as reported			$	272,336					$	292,788					$	325,273
Net interest margin (6)					3.31	%					3.49	%					3.75	%
Tax equivalent effect					0.28	%					0.24	%					0.15	%
Net interest margin on a fully tax equivalent basis (6)					3.59	%					3.73	%					3.90	%

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

(2)       Interest income includes amortization of deferred loan origination fees of $3.6 million, $3.5 million and $4.7 million for the years ended December 31, 2013, 2012 and 2011, respectively.

(3)       Loans held for sale are included in the average loan balance listed.  Related interest income is included in loan interest income.

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

(5)       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.

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

Net interest income on a fully tax equivalent basis decreased $18.2 million during the year ended December 31, 2013 compared to the year ended December 31, 2012. The decrease from the year ended December 31, 2012 was due to a $162.9 million decrease in average earning asset balances (primarily as a result of a decrease in covered loans) as well as a 14 basis point decline in net interest margin on a fully tax equivalent basis. The net interest margin, expressed on a fully tax equivalent basis, was 3.59% for 2013 and 3.73% for 2012. The decrease in the margin during 2013 was primarily due to a decrease in yields on loans, as a result of tighter credit spreads and lower covered loan yields, and a decrease in yields on investment securities, partially offset by a lower cost of funds.

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Net interest income on a fully tax equivalent basis decreased $25.2 million during the year ended December 31, 2012 compared to the year ended December 31, 2011, primarily due to a $285.2 million decrease in average interest earning assets and a 17 basis point decline in our net interest margin on a fully tax equivalent basis. The decrease in average interest earning assets was primarily due to a decrease in loan balances (primarily covered and real estate related loans). The net interest margin, expressed on a fully tax equivalent basis, was 3.73% for 2012 and 3.90% for 2011. The decline in the margin was primarily due to lower covered loan yields (negatively impacted the margin by 12 basis points), and tighter credit spreads, partially offset by a lower costs of funds.

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 (dollars in thousands).

	Year Ended December 31,
	2013 Compared to 2012									2012 Compared to 2011
	Change Due to Volume			Change Due to Rate			Total Change			Change Due to Volume			Change Due to Rate			Total Change
Interest Earning Assets:
Loans	$	(6,208	)	$	(27,940	)	$	(34,148	)	$	(23,549	)	$	(30,938	)	$	(54,487	)
Loans exempt from federal income taxes (1)	2,176			(665		)	1,511			2,258			(101		)	2,157
Taxable investment securities	(3,055		)	(4,285		)	(7,340		)	(2,999		)	(4,926		)	(7,925		)
Investment securities exempt from federal income taxes (1)	6,382			(1,378		)	5,004			19,645			(1,113		)	18,532
Federal funds sold	15			—			15			—			—			—
Other interest bearing deposits	(132		)	(45		)	(177		)	(270		)	(16		)	(286		)
Total decrease in interest income	(822		)	(34,313		)	(35,135		)	(4,915		)	(37,094		)	(42,009		)
Interest Bearing Liabilities:
Deposits
NOW and money market deposit accounts	83			(886		)	(803		)	(90		)	(3,261		)	(3,351		)
Savings deposits	46			(286		)	(240		)	100			(693		)	(593		)
Time deposits	(5,179		)	(4,796		)	(9,975		)	(6,047		)	(4,632		)	(10,679		)
Short-term borrowings	149			(731		)	(582		)	(46		)	401			355
Long-term borrowings and junior subordinated notes	(3,756		)	(1,607		)	(5,363		)	(2,347		)	(150		)	(2,497		)
Total decrease in interest expense	(8,657		)	(8,306		)	(16,963		)	(8,430		)	(8,335		)	(16,765		)
Total increase (decrease) in net interest income	$	7,835		$	(26,007	)	$	(18,172	)	$	3,515		$	(28,759	)	$	(25,244	)

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

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Non-interest Income

	Year Ended
	December 31, 2013			December 31, 2012			Increase/ (Decrease)			Percentage Change
Non-interest income (in thousands):
Capital markets and international banking fees	$	3,560		$	5,086		$	(1,526	)	(30.0	)%
Commercial deposit and treasury management fees	24,867			23,636			1,231			5.2
Lease financing, net	61,243			36,382			24,861			68.3
Trust and asset management fees	19,142			17,990			1,152			6.4
Card fees	11,013			9,368			1,645			17.6
Loan service fees	5,563			5,845			(282		)	(4.8	)
Consumer and other deposit service fees	13,968			14,428			(460		)	(3.2	)
Brokerage fees	4,907			4,792			115			2.4
Net (loss) gain on investment securities	(1		)	555			(556		)	(100.2	)
Increase in cash surrender value of life insurance	3,385			3,570			(185		)	(5.2	)
Net loss on sale of assets	(323		)	(942		)	619			(65.7	)
Accretion of FDIC indemnification asset	342			1,055			(713		)	(67.6	)
Net gain on sale of loans	1,664			2,325			(661		)	(28.4	)
Other operating income	5,064			5,103			(39		)	(0.8	)
Total non-interest income	$	154,394		$	129,193		$	25,201		19.5	%

Non-interest income increased by $25.2 million, or 19.5%, for the year ended December 31, 2013 compared to the year ended December 31, 2012, driven by revenue from our key fee initiatives.

• Net lease financing income increased as a result of leasing revenues attributable to the addition of Celtic ($25.9 million).

• Card fee income increased due to higher revenues on prepaid, debit and credit cards.

• Commercial deposit and treasury management fees increased as a result of the addition of new treasury management services customers.

• Trust and asset management fees increased due to strong equity market performance and the addition of new clients.

• Capital markets and international banking service fees decreased due to lower swap, syndication, and merger and acquisition advisory revenues.

• Accretion of FDIC indemnification asset decreased, consistent with the decrease in the related asset balance.

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	Year Ended
	December 31, 2012			December 31, 2011		Increase/ (Decrease)			Percentage Change
Non-interest income (in thousands):
Capital markets and international banking fees	$	5,086		$	1,870	$	3,216		172.0	%
Commercial deposit and treasury management fees	23,636			23,559		77			0.3
Lease financing, net	36,382			26,939		9,443			35.1
Trust and asset management fees	17,990			17,324		666			3.8
Card fees	9,368			7,032		2,336			33.2
Loan service fees	5,845			6,355		(510		)	(8.0	)
Consumer and other deposit service fees	14,428			15,375		(947		)	(6.2	)
Brokerage fees	4,792			5,884		(1,092		)	(18.6	)
Net gain on investment securities	555			640		(85		)	(13.3	)
Increase in cash surrender value of life insurance	3,570			4,377		(807		)	(18.4	)
Net (loss) gain on sale of assets	(942		)	283		(1,225		)	(432.9	)
Accretion of FDIC indemnification asset	1,055			4,838		(3,783		)	(78.2	)
Net gain on sale of loans	2,325			2,607		(282		)	(10.8	)
Other operating income	5,103			5,636		(533		)	(9.5	)
Total non-interest income	$	129,193		$	122,719	$	6,474		5.3	%

Non-interest income increased by $6.5 million, or 5.3%, for the year ended December 31, 2012 compared to the year ended December 31, 2011, driven by revenue from our key fee initiatives.

• Net lease financing income increased as a result of an increase in equipment remarketing gain and fees from the sale of equipment maintenance contracts.

• Capital markets and international banking service fees increased due to an increase in interest rate swap fees, merger and acquisition advisory fees, and international banking activities.

• Card fee income increased primarily due to card interchange income being limited in the fourth quarter of 2011 as a result of the Durbin Amendment of the Dodd-Frank Act, additional debit card activity, and an increase in fees earned on credit cards and prepaid cards.

These fee income increases were partially offset by the following items.

• Losses recognized on the sale of assets increased as a result of the disposal of fixed assets.

• Accretion of FDIC indemnification asset decreased $3.8 million, consistent with the decrease in the related asset balance.

• Brokerage fees declined due to a decrease in third party brokerage revenues.

• Consumer and other deposit service fees decreased as a result of lower NSF fees.

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Non-interest Expenses

	Year Ended
	December 31, 2013			December��31, 2012		Increase/ (Decrease)			Percentage Change
Non-interest expense (in thousands):
Salaries and employee benefits	$	177,858		$	165,696	$	12,162		7.3	%
Occupancy and equipment expense	36,878			35,806		1,072			3.0
Computer services and telecommunication expense	18,883			15,499		3,384			21.8
Advertising and marketing expense	8,272			8,183		89			1.1
Professional and legal expense	8,807			6,110		2,697			44.1
Other intangibles amortization expense	6,084			5,010		1,074			21.4
Branch impairment charges	—			2,190		(2,190		)	(100.0	)
Net (gain) loss recognized on other real estate owned	(1,528		)	17,594		(19,122		)	(108.7	)
Other real estate expense, net	747			2,990		(2,243		)	(75.0	)
Prepayment fees on interest bearing liabilities	—			12,682		(12,682		)	(100.0	)
Other operating expenses	38,587			32,270		6,317			19.6
Total non-interest expenses	$	294,588		$	304,030	$	(9,442	)	(3.1	)%

Non-interest expense decreased by $9.4 million, or 3.1%, from the year ended December 31, 2012 to the year ended December 31, 2013.

• Salaries and employee benefits increased primarily due to the addition of Celtic (approximately $11 million).

• Other operating expenses were higher in 2013 as a result of an increase in the clawback liability related to our loss share agreements with the FDIC.

• Computer services and telecommunication expenses increased due primarily to an increase in spending on IT security, data warehouse, investments in our key fee initiatives, as well as higher transaction volumes in leasing, treasury management and card areas.

• Professional and legal expense increased due to merger-related expenses of $2.4 million primarily related to fairness opinion, legal and consulting expense incurred in connection with the pending acquisition of Taylor Capital.

• Other intangible amortization expense increased due to the impact of Celtic.

• Other real estate expense decreased due to a reduced other real estate owned inventory in 2013.

• Net gain of $1.5 million was recognized on other real estate owned in 2013 compared to a net loss of $17.6 million in 2012.

• Non-interest expense for 2012 was impacted by $12.7 million in prepayment fees related to the early redemption of interest bearing liabilities and $2.2 million in branch impairment charges.

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	Year Ended
	December 31, 2012		December 31, 2011		Increase/ (Decrease)			Percentage Change
Non-interest expense (in thousands):
Salaries and employee benefits	$	165,696	$	153,858	$	11,838		7.7	%
Occupancy and equipment expense	35,806		35,467		339			1.0
Computer services and telecommunication expense	15,499		14,885		614			4.1
Advertising and marketing expense	8,183		7,038		1,145			16.3
Professional and legal expense	6,110		6,147		(37		)	(0.6	)
Other intangibles amortization expense	5,010		5,665		(655		)	(11.6	)
Branch impairment charges	2,190		1,594		596			37.4
Net loss recognized on other real estate owned	17,594		13,613		3,981			29.2
Other real estate expense, net	2,990		4,294		(1,304		)	(30.4	)
Prepayment fees on interest bearing liabilities	12,682		—		12,682			100.0
Other operating expenses	32,270		40,685		(8,415		)	(20.7	)
Total non-interest expenses	$	304,030	$	283,246	$	20,784		7.3	%

Non-interest expense increased by $20.8 million, or 7.3%, from the year ended December 31, 2011 to the year ended December 31, 2012.

• We recognized $12.7 million in prepayment fees on interest bearing liabilities in the third quarter of 2012 in order to lower our future funding costs, including a $100 million FHLB advance with a 3.85% interest rate, brokered certificates of deposit of $101 million with a 3.16% average interest rate and the $6.2 million of junior subordinated notes issued to FOBB Statutory Trust I with a 10.6% interest rate.

• Salaries and employee benefits expense increased primarily due to annual salary increases, an increase in incentives, commissions on higher lease revenues, and higher health insurance claims.

• Losses recognized on other real estate owned were higher as a result of increased impairments due to a decline in the value of land held in other real estate owned.

• Other operating expenses were down partially due to the decrease in FDIC insurance premiums as a result of a change in the assessment computation during the second quarter of 2012 and the impact of improved credit quality on the computation.

• Other operating expenses were also favorably impacted in 2012 by a decrease in the clawback liability related to our loss share agreements with the FDIC recorded during the year.

• Other real estate expense decreased as a result of fewer properties in other real estate owned throughout 2012 compared to 2011.

Income Taxes

Income tax expense for the year ended December 31, 2013 was $39.5 million compared to $36.5 million for the year ended December 31, 2012.  The increase was primarily due to an increase in our pre-tax income during the year ended December 31, 2013. 

Income tax expense for the year ended December 31, 2012 was $36.5 million compared to $5.3 million for the year ended December 31, 2011.  The increase was primarily due to an increase in our pre-tax income during the year ended December 31, 2012. 

As previously stated in the “Critical Accounting Policies” section above, income tax expense recorded in the consolidated statement of operations 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.

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Balance Sheet

Total assets increased $69.6 million, or 0.7%, from December 31, 2012 to December 31, 2013. 

• Cash and cash equivalents increased by $185.9 million from December 31, 2012 to December 31, 2013 due to a higher cash balance held at the Federal Reserve to increase on-balance sheet liquidity.

• Investment securities decreased $64.1 million, or 2.7%, from December 31, 2012 to December 31, 2013 mostly as a result of the principal payments received on mortgage-backed securities that were not reinvested in the portfolio.

• Gross loans, excluding covered loans, increased from 2012 to 2013 by $159.8 million, or 3.0%. The growth in loans was driven by increases in commercial and industrial and commercial loans collateralized by assignment of lease payments, offset by decreases in commercial real estate loans.

• Gross loans decreased by $54.4 million, or 0.9%, to $5.7 billion at December 31, 2013 from $5.8 billion at December 31, 2012 mainly as a result of the decrease in covered loans, which decreased $214.1 million.

Total liabilities increased by $18.7 million, or 0.2%, from December 31, 2012 to December 31, 2013. 

• Total deposits decreased by $161.4 million, or 2.1%, to $7.4 billion at December 31, 2013 from $7.5 billion at December 31, 2012, primarily due to a decrease in certificates of deposit balances.

• Noninterest bearing deposits increased by 9.8% and comprised 32.2% of total deposits at December 31, 2013 compared to 28.7% at December 31, 2012. Over the past year, our deposit mix improved as low cost deposits (noninterest bearing deposits, money market and NOW accounts and savings accounts) increased by $190.5 million, or 3.3%, driven by the growth in noninterest bearing deposits.

• Total borrowings increased by $218.9 million, or 44.8%, to $707.6 million at December 31, 2013. Early in the fourth quarter of 2013, we entered into a $300.0 million short-term advance from the Federal Home Loan Bank of Chicago ("FHLB") at an annual interest rate of 0.17% for 80 days and held cash at the Federal Reserve to increase our on-balance sheet liquidity in preparation for an adverse market reaction to the Federal government shutdown and potential breach of the debt ceiling.

• This increase in short-term borrowings was partially offset by the prepayment of the $50.0 million subordinated debt facility in the first quarter of 2013.

Total stockholders’ equity increased $50.9 million at December 31, 2013 compared to December 31, 2012 primarily as a result of our earnings for 2013 partly offset by dividends and the decrease in accumulated other comprehensive income.

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Investment Securities

The primary purpose of the investment portfolio is to provide a source of earnings, be a source of liquidity, and serve as a tool for managing interest rate risk.  In managing the portfolio, we seek to balance safety of principal and liquidity, and diversification considerations with maximum return.  See “Liquidity” and “Capital Resources” in this Item 7 and “Quantitative and Qualitative Disclosures About Market Risk - Asset Liability Management” under Item 7A.

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

	Year Ended December 31,
	2013				2012				2011
	Amortized Cost		Fair Value		Amortized Cost		Fair Value		Amortized Cost		Fair Value
Available for sale
U.S. Government sponsored agencies and enterprises	$	50,486	$	52,068	$	38,605	$	41,315	$	39,640	$	42,401
States and political subdivisions	19,398		19,143		679,991		725,019		500,979		535,660
Residential mortgage-backed securities	696,415		701,233		930,413		939,202		1,256,696		1,281,806
Commercial mortgage-backed securities	50,891		52,941		51,100		54,126		51,324		52,685
Corporate bonds	284,083		283,070		97,014		96,674		5,899		5,899
Equity securities	10,649		10,457		11,398		11,835		10,457		10,846
	1,111,922		1,118,912		1,808,521		1,868,171		1,864,995		1,929,297
Held to maturity
States and political subdivisions	932,955		936,173		237,563		258,602		240,183		247,664
Residential mortgage-backed securities	249,578		262,756		255,858		277,079		259,100		263,358
	1,182,533		1,198,929		493,421		535,681		499,283		511,022
Total	$	2,294,455	$	2,317,841	$	2,301,942	$	2,403,852	$	2,364,278	$	2,440,319

Securities of states and political subdivisions with an approximate fair value of $656.6 million were transferred from available for sale to held to maturity during the third quarter of 2013, which is the new cost basis. As of the date of the transfer, the resulting unrealized holding gain continues to be reported as a separate component of stockholders’ equity as accumulated other comprehensive income, net of tax. This unrealized gain will be amortized over the remaining life of the securities as a yield adjustment.

Fannie Mae issued mortgage-backed securities included in the available for sale and held to maturity portfolios had an aggregate book value and market value of $227.9 million and $230.6 million, respectively, at December 31, 2013.  Freddie Mac issued mortgage-backed securities included in the available for sale and held to maturity portfolios had an aggregate book value and market value of $281.1 million and $284.0 million at December 31, 2013, respectively.  We do not have any meaningful direct or indirect holdings of subprime residential mortgage investment securities, home equity lines of credit investment securities, or any Fannie Mae or Freddie Mac preferred or common equity securities in our investment portfolio.  Additionally, more than 95% of our mortgage-backed securities are U.S. agency guaranteed.

The Company has no direct exposure to the State of Illinois, but approximately 27% of the state and political subdivisions portfolio consists of securities issued by municipalities in Illinois.  Approximately 37% of state and political subdivisions securities are insured and approximately 90% of our state and political subdivisions securities consist of general obligation issues.

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The following table sets forth certain information regarding contractual maturities and the weighted average yields of our investment securities at December 31, 2013 (dollars in thousands):

	Due in One Year or Less				Due after One Year through Five Years				Due after Five Years through Ten Years				Due after Ten Years
	Balance		Weighted Average Yield		Balance		Weighted Average Yield		Balance		Weighted Average Yield		Balance		Weighted Average Yield
Available for sale (fair value)
U.S. Government sponsored agencies and enterprises	$	—	—	%	$	52,068	2.27	%	$	—	—	%	$	—	—	%
States and political subdivision (1)	505		1.54		7,702		1.61		7,582		4.97		3,354		5.35
Residential mortgage-backed securities (2)	7		7.82		4,583		2.85		50,470		1.68		646,173		1.21
Commercial mortgage-backed securities (2)	1		5.73		232		2.49		7		6.77		52,701		4.95
Corporate bonds	—		—		277,905		2.69		—		—		5,165		3.19
Equity securities	—		—		—		—		—		—		10,457		2.16
	513		1.63		342,490		2.60		58,059		2.11	%	717,850		1.54
Held to maturity (amortized cost)
States and political subdivision (1)	27,708		0.79		252,967		1.38		121,269		2.73		531,011		3.74
Residential mortgage-backed securities (2)	—		—		—		—		—		—		249,578		4.00
	27,708		0.79		252,967		1.38		121,269		2.73		780,589		3.82
Total	$	28,221	0.81	%	$	595,457	2.08	%	$	179,328	2.53	%	$	1,498,439	2.73	%

(1)   Yield is reflected on a fully tax equivalent basis utilizing a 35% tax rate.

(2)   These securities are presented based upon contractual maturities.

Loan Portfolio

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

	At December 31,
	2013				2012				2011				2010				2009
	Amount		% of Total		Amount		% of Total		Amount		% of Total		Amount		% of Total		Amount		% of Total
Commercial related credits:
Commercial	$	1,281,377	22	%	$	1,220,472	21	%	$	1,113,123	19	%	$	1,206,984	18	%	$	1,387,476	21	%
Commercial collateralized by assignment of lease payments	1,494,188		26		1,303,020		23		1,208,575		20		1,053,446		16		953,452		15
Commercial real estate	1,647,700		29		1,761,832		30		1,853,788		31		2,176,584		33		2,472,520		38
Construction real estate	141,253		3		110,261		2		183,789		3		423,339		6		594,482		9
Total commercial related credits	4,564,518		80		4,395,585		76		4,359,275		73		4,860,353		73		5,407,930		83
Other loans:
Residential real estate	314,440		5		314,359		5		316,787		5		328,482		5		291,022		4
Indirect vehicle	262,632		5		208,633		4		187,481		3		175,664		3		180,267		3
Home equity	268,289		5		305,186		5		336,043		6		381,662		6		405,439		6
Other consumer	66,952		1		93,317		2		88,865		2		59,320		1		66,293		1
Total other loans	912,313		16		921,495		16		929,176		16		945,128		15		943,021		14
Gross loans excluding covered loans	5,476,831		96		5,317,080		92		5,288,451		89		5,805,481		88		6,350,951		97
Covered loans (1)	235,720		4		449,850		8		662,544		11		812,330		12		173,596		3
Total loans (2)	$	5,712,551	100	%	$	5,766,930	100	%	$	5,950,995	100	%	$	6,617,811	100	%	$	6,524,547	100	%

(1) Loans that MB Financial Bank will share losses with the FDIC are referred to as “covered loans.”

(2) Gross loan balances at December 31, 2013, 2012, 2011, 2010, and 2009 are net of unearned income, including net deferred loans fees of $1.9 million, $1.1 million, $1.0 million, $3.3 million, and $4.6 million, respectively.

Gross loans, excluding covered loans, increased from 2012 to 2013 by $159.8 million, or 3.0%. Gross loans, excluding covered loans, increased from 2011 to 2012 by $28.6 million.

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The increase in commercial loans from December 31, 2012 to December 31, 2013 was due to increased demand near the end of the fourth quarter of 2013.  The lease loan portfolio increased, as we continued to emphasize growth in this area, both organically and through our acquisition of Celtic, completed at the end of 2012.  We believe that our lease loan portfolio has historically performed better than our other lending categories as a result of lessees typically being larger than our typical middle market customer with more staying power during economic downturns and the leased equipment being central to their operations. The decrease in commercial real estate loans from December 31, 2012 to December 31, 2013 was due to remixing our loan portfolio to reduce problem credits. 

Loan Maturities

The following table sets forth information regarding our non-performing loans and the scheduled maturity information for the performing loans in our loan portfolio at December 31, 2013 (in thousands).  Demand loans, loans having no stated schedule of repayments, loans with no stated maturity and overdrafts are reported as due in one year or less (dollars in thousands).

			Due in One Year Or Less				Due after One Year Through Five Years				Due after Five Years
	Non-Performing		Fixed		Floating		Fixed		Floating		Fixed		Floating
	Loans (1)		Rate (2)		Rate (2)		Rate (2)		Rate (2)		Rate (2)		Rate (2)		Total
Commercial loans	$	17,781	$	74,419	$	558,455	$	95,467	$	313,918	$	65,801	$	155,536	$	1,281,377
Commercial loans collateralized by assignment of lease payments	4,567		143,962		—		1,241,066		—		104,593		—		1,494,188
Commercial real estate	58,292		128,426		97,371		643,310		435,764		115,358		169,179		1,647,700
Construction real estate	475		1,624		43,960		6,690		51,869		—		36,635		141,253
Residential real estate	13,009		26,864		5		2,156		359		100,503		171,544		314,440
Indirect vehicle	1,459		9,157		—		143,090		—		108,926		—		262,632
Home equity	10,969		849		35,870		3,263		110,848		34,953		71,537		268,289
Other consumer loans	9		25,366		12,486		2,524		4,650		1,557		20,360		66,952
Covered loans	—		142,489		34,550		28,479		10,405		6,068		13,729		235,720
Gross loans	$	106,561	$	553,156	$	782,697	$	2,166,045	$	927,813	$	537,759	$	638,520	$	5,712,551

(1) Excludes purchased credit-impaired loans that were acquired as part of the Heritage, InBank, Corus, Benchmark, Broadway, and New Century transactions.  See Note 5 to our Consolidated Financial Statements for further information regarding purchased credit-impaired loans.

(2) Excludes non-performing loans.

Asset Quality

Non-performing loans include loans accounted for on a non-accrual basis and accruing loans contractually past due 90 days or more as to interest or principal.  Management reviews the loan portfolio for problem loans on an ongoing basis.  During the ordinary course of business, management becomes aware of borrowers that may not be able to meet the contractual requirements of loan agreements.  These loans are placed under close supervision with consideration given to placing the loan on non-accrual status, increasing the allowance for loan losses and (if appropriate) partial or full charge-off.  After a loan is placed on non-accrual status, any interest previously accrued but not yet collected is reversed against current income.  Generally, if interest payments are received on non-accrual loans, these payments will be applied to principal and not taken into income.  Loans will not be placed back on accrual status unless back interest and principal payments are made.  With respect to the loans that were on non-accrual status as of December 31, 2013 and 2012, the gross interest income that would have been recorded on such loans during the years ended December 31, 2013 and 2012 had such loans been current in accordance with their original terms was approximately $4.7 million and $5.6 million, respectively.  The amount of interest income on impaired loans that was included in net income for the years ended December 31, 2013 and 2012 was $1.9 million and $1.6 million, respectively.  Our general policy is to place loans 90 days past due on non-accrual status, as well as those loans that continue to pay, but display a well-defined material weakness.

Non-performing loans exclude purchased credit-impaired loans that were acquired as part of the Heritage, InBank, Corus, Benchmark, Broadway, and New Century FDIC-assisted transactions.  Fair value of these loans as of acquisition includes estimates of credit losses.  During the year ended December 31, 2013, there was a negative provision for credit losses of $2.5 million and net recoveries of $218 thousand, respectively, in relation to 15 pools of purchased loans with a total carrying amount of $195.5 million as of December 31, 2013. During the year ended December 31, 2012, there was a provision to the allowance for loan losses of $8.1 million and net charge-offs of $4.4 million in relation to 14 pools of purchased loans with a total carrying amount of $261.9 million as of December 31, 2012.  There was $2.2 million in allowance for loan losses related to these purchased loans

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at December 31, 2013 and $4.5 million at December 31, 2012. See Note 5 of the notes to our consolidated financial statements for further information regarding purchased credit-impaired loans.

The following table sets forth the amounts of non-performing loans and non-performing assets at the dates indicated (dollars in thousands):

	At December 31,
	2013			2012			2011			2010			2009
Non-performing loans:
Non-accruing loans	$	106,115		$	115,387		$	129,309		$	362,441		$	270,839
Loans 90 days or more past due, still accruing interest	446			1,599			82			1			477
Total non-performing loans	106,561			116,986			129,391			362,442			271,316
Other real estate owned	23,289			36,977			78,452			71,476			36,711
Repossessed assets	840			773			156			82			333
Total non-performing assets	$	130,690		$	154,736		$	207,999		$	434,000		$	308,360
Total allowance for loan losses (1)	$	111,746		$	124,204		$	126,798		$	192,217		$	177,072
Accruing restructured loans (2)	29,430			21,256			37,996			22,543			—
Total non-performing loans to total loans	1.87		%	2.03		%	2.17		%	5.48		%	4.16		%
Total non-performing assets to total assets	1.36			1.62			2.12			4.21			2.84
Allowance for loan losses to non-performing loans	104.87			106.17			98.00			53.03			65.26

(1) The reserve for unfunded credit commitments (primarily letters of credit) was reclassified from the allowance for loan losses to other liabilities as of June 30, 2011.  Includes $13.6 million and $3.1 million of reserves on unfunded credit commitments at December 31, 2010, and 2009, respectively.

(2) Accruing restructured loans consists primarily of commercial real estate, home equity and residential real estate loans that have been modified and are performing in accordance with those modified terms. The balance consisted primarily of commercial real estate loans in 2010 and 2011, and residential real estate and home equity loans in 2012 and 2013.

A loan is classified as a troubled debt restructuring when a borrower is experiencing financial difficulties that leads to a restructuring of the loan, and the Company grants concessions to the borrower in the restructuring that it would not otherwise consider. These concessions may include rate reductions, principal forgiveness, extension of maturity date and other actions intended to minimize potential losses.  A loan that is modified at a market rate of interest may no longer be classified as troubled debt restructuring in the calendar year subsequent to the restructuring if it is in compliance with the modified terms.  Payment performance prior and subsequent to the restructuring is taken into account in assessing whether it is likely that the borrower can meet the new terms.  This may result in the loan being returned to accrual at the time of restructuring.  A period of sustained repayment for at least six months generally is required for return to accrual status.

Occasionally, the Company will restructure a note into two separate notes (A/B structure), charging off the entire B portion of the note. The A note is structured with appropriate loan-to-value and cash flow coverage ratios that provide for a high likelihood of repayment. The A note is classified as a non-performing note until the borrower has displayed a historical payment performance for a reasonable time prior to and subsequent to the restructuring. A period of sustained repayment for at least six months generally is required to return the note to accrual status provided that management has determined that the performance is reasonably expected to continue. The A note will be classified as a restructured note (either performing or nonperforming) through the calendar year of the restructuring that the historical payment performance has been established.

Non-performing assets consists of non-performing loans as well as other repossessed assets and other real estate owned.  Other real estate owned represents properties acquired through foreclosure or other proceedings and is recorded at fair value less the estimated cost of disposal at the date of acquisition.  Other real estate owned is evaluated regularly to ensure that the recorded amount is supported by its current fair value.  Valuation allowances to reduce the carrying amount to fair value less estimated costs of disposal are recorded as necessary.  Gains and losses and changes in valuations on other real estate owned are included in net gain (loss) recognized on other real estate within non-interest expense.  Expenses, net of rental income, from the operations of other real estate owned are reflected as a separate line item on the income statement.  Other repossessed assets primarily consist of repossessed vehicles.  Losses on repossessed vehicles are charged-off to the allowance when title is taken and the vehicle is valued.  Once the Bank obtains title, repossessed vehicles are not included in loans, but are classified as “other assets” on the consolidated balance sheets.  The typical holding period for resale of repossessed automobiles is less than 90 days unless significant repairs to the vehicle are needed which occasionally results in a longer holding period.  The typical holding period for motorcycles

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can be more than 90 days, as the average motorcycle re-sale period is longer than the average automobile re-sale period.  The longer average period for motorcycles is a result of cyclical trends in the motorcycle market.

Other real estate owned that is related to our FDIC-assisted transactions is excluded from non-performing assets.  Other real estate owned related to the Heritage, Benchmark, Broadway, and New Century transactions, which totaled $19.6 million and $21.4 million at December 31, 2013 and 2012, respectively, is subject to the loss-share agreements with the FDIC. 

The following table presents a summary of other real estate owned (“OREO”), excluding assets related to FDIC-assisted transactions, for the years ended December 31, 2013, 2012 and 2011 (in thousands):

	2013			2012			2011
Beginning balance	$	36,977		$	78,452		$	71,476
Transfers in at fair value less estimated costs to sell	6,164			4,535			59,261
Capitalized OREO costs	74			2,809			1,534
Fair value adjustments	(96		)	(15,901		)	(10,988		)
Net gains on sales of OREO	1,984			1,398			1,016
Cash received upon disposition	(21,814		)	(34,316		)	(43,847		)
Ending balance	$	23,289		$	36,977		$	78,452

As of December 31, 2013, the OREO portfolio consisted of 14 properties with $12.1 million of OREO balance related to land loans, five properties with $5.1 million of OREO balance related to construction loans, eight properties with $5.2 million of OREO balance related to commercial real estate loans and seven properties with $886 thousand of OREO balance related to residential real estate loans.  In addition, the Company also recorded losses of $360 thousand, $3.1 million, and $3.6 million on OREO related to assets acquired in FDIC-assisted transactions for the years ended December 31, 2013, 2012 and 2011, respectively. 

Potential Problem Loans

We define potential problem loans as performing loans rated substandard and that do not meet the definition of a non-performing loan (See “Asset Quality” section above for non-performing loans). We do not necessarily expect to realize losses on potential problem loans, but we recognize potential problem loans carry a higher probability of default and require additional attention by management. The following table sets forth the aggregate principal amount of potential problem loans at the dates indicated (in thousands):

	At December 31,
	2013		2012
Commercial loans	$	43,844	$	27,224
Commercial loans collateralized by assignment of lease payments	2,459		6,375
Commercial real estate	32,895		66,996
Construction real estate	391		10,958
Total	$	79,589	$	111,553

Allowance for Loan Losses

Management believes the allowance for loan losses accounting policy is critical to the portrayal and understanding of our financial condition and results of operations. Selection and application of this “critical accounting policy” involves judgments, estimates, and uncertainties that are subject to change. In the event that different assumptions or conditions were to prevail, and depending upon the severity of such changes, materially different financial condition or results of operations is a reasonable possibility.

We maintain our allowance for loan losses at a level that management believes is appropriate to absorb probable losses on existing loans based on an evaluation of the collectability of loans, underlying collateral and prior loss experience.

Our allowance for loan losses is comprised of three elements: a commercial related general loss reserve; a commercial related specific reserve for impaired loans; and a consumer related reserve for smaller-balance homogenous loans. Each element is discussed below.

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Commercial Related General Loss Reserve.  We maintain a general loan loss reserve for the four categories of commercial-related loans in our portfolio: commercial loans, commercial loans collateralized by the assignment of lease payments (lease loans), commercial real estate loans and construction real estate loans.

Under our loan risk rating system, each loan, with the exception of those included in large groups of smaller-balance homogeneous consumer related loans, is risk rated between one and nine by the originating loan officer, Senior Credit Management, Loan Review or any loan committee. Loans rated "one" represent those loans least likely to default and a loan rated "nine" represents a loss. The probability of loans defaulting for each risk rating, sometimes referred to as default factors, are estimated based on the frequency with which loans migrate from one risk rating to another and to default status over time. We use a loan loss reserve model that incorporates the migration of loan risk ratings and historical default data over a multi-year period to develop our estimated default factors (EDFs). The model tracks annual loan rating migrations by loan type and currently uses loan risk rating migrations for 13 years. The migration data is adjusted by using average losses for an economic cycle (approximately 12 years) to develop EDFs by loan type, risk rating and maturity. EDFs are updated annually in December.

Estimated loan default factors are multiplied by individual loan balances in each risk-rating category and again multiplied by an historical loss given default estimate for each loan type (which incorporates estimated recoveries) to determine the appropriate allowance by loan type. This approach is applied to the commercial, lease, commercial real estate, and construction real estate components of the portfolio.

To account for current economic conditions, the general allowance for loan and lease losses (ALLL) also includes adjustments for macroeconomic factors. Macroeconomic factors adjust the ALLL upward or downward based on the current point in the economic cycle using predictive economic data and are applied to the loan loss model through a separate allowance element for the commercial, commercial real estate, construction real estate and lease loan components. To determine our macroeconomic factors, we use specific economic data that has shown to be a statistically reliable predictor of our credit losses relative to our long term average credit losses. We tested over 20 economic variables (U.S. manufacturing index, unemployment rate, U.S. GDP growth, etc.). We annually review this data to determine that such a relationship continues to exist. We currently use the following macroeconomic indicators in our macroeconomic factor computation:

Commercial loans and lease loans:  Japanese bilateral dollar exchange, our prior period charge-off rates and the consumer confidence index.

Commercial real estate loans and construction loans:  Prime rate, our prior period charge-off rates and the annual change in the U.S. commercial real estate index.

Using the indicators noted above, a predicted charge-off percentage is calculated. The predicted charge-off percentage is then compared to the cycle average charge-off percentage used in our EDF computation discussed above, and a macroeconomic adjustment factor is calculated. The macroeconomic adjustment factor is applied to each commercial loan type. Each year, we review the predictive nature of the macroeconomic factors by comparing actual charge-offs to the predicted model charge-offs, re-run our regression analysis and re-calibrate the macroeconomic factors as appropriate.

The commercial related general loss reserve was $78.3 million as of December 31, 2013 and $91.7 million as of December 31, 2012. The reduction in the general loss reserve was the result of the improvement in credit quality of performing commercial related loans (noted through improved risk ratings) and improved loss history (noted through lower loss given default statistics and lower default factors). Reserves on impaired commercial related loans are included in the “Commercial Related Specific Reserves” section below. 

Commercial Related Specific Reserves.  Our allowance for loan losses also includes specific reserves on impaired commercial loans. A loan is considered to be impaired when management believes, after considering collection efforts and other factors, the borrower's financial condition is such that the collection of all contractual principal and interest payments due is doubtful.

At each quarter-end, impaired commercial loans are reviewed individually, with adjustments made to the general calculated reserve for each loan as deemed necessary. Specific adjustments are made depending on expected cash flows and/or the value of the collateral securing each loan. Generally, the Company obtains a current external appraisal (within 12 months) on real estate secured impaired loans. Our appraisal policy is designed to comply with the Interagency Appraisal and Evaluation Guidelines, most recently updated in December 2010. As part of our compliance with these guidelines, we maintain an internal Appraisal Review Department that engages and reviews all third party appraisals.

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In addition, each impaired commercial loan with real estate collateral is reviewed quarterly by our appraisal department to determine that the most recent valuation remains appropriate during subsequent quarters until the next appraisal is received. If considered necessary by our appraisal department, the appraised value may be further discounted by internally applying accepted appraisal methodologies to an older appraisal. Accepted appraisal methodologies include: income capitalization approach adjusting for changes in underlying leases, adjustments related to condominium projects with units sales, adjustments for loan fundings, and “As is” compared to “As Stabilized” valuations.

Other valuation techniques are also used to value non-real estate assets. Discounts may be applied in the impairment analysis used for general business assets (GBA). Examples of GBA include accounts receivable, inventory, and any marketable securities pledged. The discount is used to reflect collection risk in the event of default that may not have been included in the valuation of the asset.

The total commercial related specific reserves component of the allowance decreased to $12.8 million as of December 31, 2013 from $13.2 million as of December 31, 2012. 

Consumer Related Reserves.  Pools of homogenous loans with similar risk and loss characteristics are also assessed for probable losses. These loan pools include consumer, residential real estate, home equity, credit cards and indirect vehicle loans. Migration probabilities obtained from past due roll rate analyses and historical loss rates are applied to current balances to forecast charge-offs over a one-year time horizon. The reserves for consumer related loans totaled $20.6 million at December 31, 2013 and $19.2 million at December 31, 2012.

We consistently apply our methodology for determining the appropriateness of the allowance for loan losses but may adjust our methodologies and assumptions based on historical information related to charge-offs and management's evaluation of the loan portfolio. In this regard, we periodically review the following to validate our allowance for loan losses: historical net charge-offs as they relate to prior periods' allowance for loan loss, comparison of historical loan migration in past years compared to the current year, overall credit trends and ratios and any significant changes in loan concentrations. In reviewing this data, we adjust qualitative factors within our allowance methodology to appropriately reflect any changes warranted by the validation process. Management believes it has established an allowance for probable loan losses as appropriate under GAAP.

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The following table presents an analysis of the allowance for loan losses for the years presented (dollars in thousands):

	Year Ended December 31,
	2013			2012			2011			2010			2009
Balance at beginning of year	$	128,279		$	135,975		$	192,217		$	177,072		$	144,001
Provision for credit losses	(5,804		)	(8,900		)	120,750			246,200			231,800
Charge-offs:
Commercial	3,706			2,408			17,571			58,077			46,113
Commercial collateralized by assignment of lease payments	—			1,721			1,466			1,711			5,407
Commercial real estate	7,517			11,377			96,633			79,828			38,842
Residential real estate	2,796			2,944			12,643			3,326			1,476
Construction real estate	980			4,007			52,917			94,533			103,789
Indirect vehicle	2,911			2,259			2,836			3,199			4,085
Home equity	3,692			4,551			11,066			4,632			3,443
Other consumer	2,073			1,349			1,648			1,755			1,124
Total charge-offs	23,675			30,616			196,780			247,061			204,279
Recoveries:
Commercial	3,156			3,475			5,370			8,788			1,491
Commercial collateralized by assignment of lease payments	1,131			6,720			225			184			—
Commercial real estate	6,025			16,987			3,332			2,070			40
Residential real estate	479			501			49			184			44
Construction real estate	1,616			2,019			8,590			3,170			2,957
Indirect vehicle	1,411			1,096			1,399			1,163			757
Home equity	594			671			224			351			53
Other consumer	250			351			599			96			208
Total recoveries	14,662			31,820			19,788			16,006			5,550
Net charge-offs (recoveries)	9,013			(1,204		)	176,992			231,055			198,729
Allowance for credit losses	113,462			128,279			135,975			192,217			177,072
Allowance for unfunded credit commitments(1)	(1,716		)	(4,075		)	(9,177		)	—			—
Allowance for loan losses(2)	$	111,746		$	124,204		$	126,798		$	192,217		$	177,072
Total loans at December 31,	$	5,712,551		$	5,766,930		$	5,950,995		$	6,617,811		$	6,524,547
Ratio of allowance to total loans	1.96		%	2.15		%	2.13		%	2.90		%	2.71		%
Ratio of net charge-offs (recoveries) to average loans	0.16			(0.02		)	2.90			3.42			3.09

(1) The reserve for unfunded credit commitments (primarily letters of credit) was reclassified from the allowance for loan losses to other liabilities as of June 30, 2011.

(2) Includes $13.6 million and $3.1 million of reserves on unfunded credit commitments at December 31, 2010, and 2009, respectively.

Net charge-offs of $9.0 million were recorded in the year ended December 31, 2013 compared to net recoveries of $1.2 million in the year ended December 31, 2012. As a result of the improvement in credit quality of performing commercial related loans (noted through improved risk ratings) and improved loss history (noted through lower loss given default statistics and lower default factors), negative provision for credit losses of $5.8 million was recorded for the year ended December 31, 2013.

Net recoveries of $1.2 million were recorded in the year ended December 31, 2012 compared to net charge-offs of $177.0 million in the year ended December 31, 2011. As a result of lower downward migration of loans to non-performing status and higher collateral value underlying the loans that did migrate as well as net recoveries for the year, negative provision for credit losses of $8.9 million was recorded for the year ended December 31, 2012 compared to a provision of $120.8 million in the prior year.

The provision for credit losses for the year ended December 31, 2011 included approximately $50 million in connection with the sale of certain loans to third parties. The loans sold had an aggregate carrying amount of $281.6 million prior to the

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transfer to loans held for sale, including $156.3 million in non-performing loans. We recognized approximately $87 million in charge-offs as a result of the sale.

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

	At December 31,
	2013				2012				2011				2010				2009
			% of Total				% of Total				% of Total				% of Total				% of Total
	Amount		Loans		Amount		Loans		Amount		Loans		Amount		Loans		Amount		Loans
Commercial loans	$	22,977	22	%	$	22,498	21	%	$	21,106	19	%	$	28,747	18	%	$	39,226	21	%
Commercial loans collateralized by assignment of lease payments	9,159		26		7,755		23		7,561		20		6,424		16		8,726		15
Commercial real estate	49,942		29		59,048		30		68,658		31		105,875		33		56,710		38
Residential real estate	8,872		5		6,941		5		3,935		5		5,104		5		2,934		4
Construction real estate	6,794		3		11,159		2		15,639		3		37,215		6		59,760		9
Consumer related loans	11,770		11		12,287		11		9,862		11		8,852		10		9,716		10
Covered loans	2,232		4		4,516		8		37		11		—		12		—		3
Total (1)	$	111,746	100	%	$	124,204	100	%	$	126,798	100	%	$	192,217	100	%	$	177,072	100	%

(1) The reserve for unfunded credit commitments (primarily letters of credit) was reclassified from the allowance for loan losses to other liabilities as of June 30, 2011.  Includes $13.6 million and $3.1 million of reserves on unfunded credit commitments at December 31, 2010 and 2009, respectively.

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

We utilize an internal asset classification system as a means of reporting problem and potential problem assets. At scheduled meetings of the board of directors of MB Financial Bank, a watch list is presented, showing significant loan relationships listed as “Special Mention,” “Substandard,” and “Doubtful.” An asset is classified Substandard if it is inadequately protected by the current net worth and paying capacity of the obligor or the collateral pledged, if any. Substandard assets include those characterized by the distinct possibility that we will sustain some loss if the deficiencies are not corrected. Assets classified as Doubtful have all the weaknesses inherent in those classified Substandard with the added characteristic that the weaknesses present make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable. Assets classified as Loss are those considered uncollectible and viewed as valueless assets and have been charged-off. Assets that do not currently expose us to sufficient risk to warrant classification in one of the aforementioned categories, but possess weaknesses that deserve management's close attention are deemed to be Special Mention.

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

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

Sources of Funds

General.  Deposits, short-term and long-term borrowings, including junior subordinated notes issued to capital trusts and subordinated debt, loan and investment security repayments and prepayments, proceeds from the sale of securities, and cash flows generated from operations are the primary sources of our funds for lending, investing, leasing and other general purposes.  Loan repayments are a relatively predictable source of funds except during periods of significant interest rate volatility, while deposit flows tend to fluctuate with prevailing interests rates, money markets conditions, general economic conditions and competition.

Deposits.  We offer a variety of deposit accounts with a range of interest rates and terms.  Our core deposits consist of checking accounts, NOW accounts, money market accounts, savings accounts and non-public certificates of deposit.  These deposits, along with brokered deposits, and short-term and long-term borrowings are used to support our asset base.  Our deposits are obtained predominantly from the geographic trade areas surrounding each of our office locations.  We rely primarily on customer service and long-standing relationships with customers to attract and retain deposits; however, market interest rates and rates offered by competing financial institutions significantly affect our ability to attract and retain deposits.  We also use brokered deposits as an alternative funding source which allows us flexibility in managing our overall interest expense.  Over the past twelve months, our deposit mix improved as low cost deposits (noninterest bearing deposits, money market and NOW accounts, and savings accounts) increased by $190.5 million, or 3.3%, and certificates of deposit decreased by $352.0 million, or 19.3%, at December 31, 2013 compared to the prior year. Noninterest bearing deposits grew by $211.3 million, or 9.8%, compared to December 31, 2012. Low cost deposits comprised 80% of total deposits at December 31, 2013 compared to 76% at December 31, 2012.

The following table sets forth the composition of our deposits at the dates indicated (dollars in thousands):

	At December 31,
	2013				2012
	Amount		Percent		Amount		Percent
Demand deposits, noninterest bearing	$	2,375,863	32	%	$	2,164,547	29	%
NOW and money market accounts	2,682,419		36		2,747,273		36
Savings deposits	855,394		12		811,333		11
Certificates of deposit, $100,000 or more	827,413		11		1,020,033		14
Other certificates of deposit	640,170		9		799,511		10
Total	$	7,381,259	100	%	$	7,542,697	100	%

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The following table sets forth the maturities of certificates of deposit and other time deposits $100,000 and over at December 31, 2013 (in thousands):

Certificates of deposit $100,000 and over:
Maturing within three months	$	176,090
After three but within six months	111,925
After six but within twelve months	234,224
After twelve months	273,650
Total certificates of deposit $100,000 and over (1)	$	795,889
Other time deposits $100,000 and over (2):
Maturing within three months	$	7,419
After three but within six months	6,355
After six but within twelve months	10,480
After twelve months	7,270
Total other time deposits $100,000 and over	$	31,524

(1) Includes brokered deposits of $224.2 million.

(2) Consists of time deposits held in individual retirement accounts (IRAs) and time certificates that the customer has the option to increase the principal balance and maintain the original interest rate.

Borrowings.  Short-term borrowings were $493.4 million at December 31, 2013 compared to $220.6 million at December 31, 2012.  Early in the fourth quarter of 2013, we entered into a $300.0 million short-term advance from the Federal Home Loan Bank at an annual interest rate of 0.17% for 80 days and held cash at the Federal Reserve to increase our on-balance sheet liquidity in preparation for an adverse market reaction to the Federal government shutdown and potential breach on the debt ceiling.

We have access to a variety of borrowing sources and use short-term and long-term borrowings to support our asset base.  Short-term borrowings from time to time include federal funds purchased, securities sold under agreements to repurchase, lines of credit from correspondent banks and Federal Home Loan Bank advances.  We also offer customers a deposit account that sweeps balances in excess of an agreed upon target amount into overnight repurchase agreements.

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The following table sets forth certain information regarding our short-term borrowings at the dates and for the periods indicated (dollars in thousands):

	At or For the Year Ended December 31,
	2013			2012			2011
Federal funds purchased:
Average balance outstanding	$	6		$	13		$	13
Maximum outstanding at any month-end during the period	—			—			—
Balance outstanding at end of period	—			—			—
Weighted average interest rate during the period	0.29		%	0.45		%	0.36		%
Weighted average interest rate at end of the period	—			—			—
Securities sold under agreements to repurchase:
Average balance outstanding	$	198,652		$	210,891		$	239,917
Maximum outstanding at any month-end during the period	240,600			270,245			292,353
Balance outstanding at end of period	193,389			208,242			216,439
Weighted average interest rate during the period	0.21		%	0.26		%	0.27		%
Weighted average interest rate at end of the period	0.20			0.23			0.30
Federal Home Loan Bank advances:
Average balance outstanding	$	65,559		$	13,826		$	4,664
Maximum outstanding at any month-end during the period	300,000			24,006			8,966
Balance outstanding at end of period	300,000			12,360			3,515
Weighted average interest rate during the period	0.29		%	3.51		%	4.50		%
Weighted average interest rate at end of the period	0.17			3.58			3.66
Correspondent bank line of credit:
Average balance outstanding	$	164		$	7,142		$	—
Maximum outstanding at any month-end during the period	—			35,000			—
Balance outstanding at end of period	—			—			—
Weighted average interest rate during the period	2.20		%	2.28		%	—		%
Weighted average interest rate at end of the period	—			—			—

Long-term borrowings include notes payable to other banks to support a portfolio of equipment that we own and lease to other companies, Federal Home Loan Bank advances, structured repurchase agreements, and subordinated debt.  As of December 31, 2013 and December 31, 2012, our long-term borrowings were $62.2 million and $116.1 million, respectively. During the first quarter of 2013, we pre-paid a $50.0 million subordinated debt facility. 

Junior subordinated notes issued to capital trusts include debentures sold to Coal City Capital Trust I, FOBB Statutory Trust III, MB Financial Capital Trust II, MB Financial Capital Trust III, MB Financial Capital Trust IV, MB Financial Capital Trust V, and MB Financial Capital Trust VI in connection with the issuance of their preferred securities in 1998, 2003, 2005, 2006, 2006, 2007, and 2007, respectively. As of December 31, 2013 and December 31, 2012, our junior subordinated notes issued to capital trusts were $152.1 million.  See Notes 1 and 12 to the consolidated financial statements for further analysis.

Liquidity

Liquidity management is monitored by an Asset/Liability Committee, consisting of members of management, which reviews funding requirements, current liquidity position, sources and stability of funding, marketability of assets, options for attracting additional funds, and anticipated future funding needs, including the level of unfunded commitments.

Our primary sources of funds are retail and commercial deposits, short-term and long-term borrowings, public funds and funds generated from operations.  Funds from operations include principal and interest payments received on loans and securities.  While maturities and scheduled amortization of loans and securities provide an indication of the timing of the receipt of funds, changes in interest rates, economic conditions and competition strongly influence mortgage prepayment rates and deposit flows, reducing the predictability of the timing on sources of funds.

We have no required regulatory liquidity ratios to maintain; however, we adhere to an internal policy which dictates internal thresholds.  This policy provides that we may not have a ratio of loans to deposits (including customer repurchase

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agreements) in excess of 90%.  In addition, our internal policy addresses current regulatory proposals that include (i) a “liquidity coverage ratio” or LCR, designed to ensure that a bank maintains an adequate level of unencumbered, high-quality assets sufficient to meet the bank’s liquidity needs over a 30-day time horizon under an acute liquidity stress scenario and should exceed 110%, and (ii) a “net stable funding ratio” or NSFR, which is the proportion/ratio of available long-term assets to long-term, stable funding.  At December 31, 2013, we were in compliance with the foregoing policies.

At December 31, 2013, we had outstanding letters of credit, loan origination commitments and unused commercial and retail lines of credit of approximately $1.5 billion.  We anticipate that we will have sufficient funds available to meet current origination and other lending commitments.  Certificates of deposit scheduled to mature within one year totaled $1.1 billion at December 31, 2013, including brokered deposits.

In the event that additional short-term liquidity is needed, we have established relationships with several large and regional banks to provide short-term borrowings in the form of federal funds purchases.  While, at December 31, 2013, there were no firm lending commitments in place, management believes that we could borrow approximately $280.0 million for a short time from these banks on a collective basis.  Additionally, we are a member of Federal Home Loan Bank of Chicago (FHLB).  As of December 31, 2013, the Company had $304.3 million outstanding in FHLB advances, and could borrow an additional amount of approximately $209.6 million.  As a contingency plan for significant funding needs, the Asset/Liability Committee may also consider the sale of investment securities, selling securities under agreement to repurchase, or the temporary curtailment of lending activities.  As of December 31, 2013, the Company had approximately $1.4 billion of unpledged securities, excluding securities available for pledge at the FHLB.

Our main sources of liquidity at the holding company level are dividends from MB Financial Bank and cash on hand. In addition, the Company has a $35.0 million unsecured line of credit with a correspondent bank. As of December 31, 2013, no amount was outstanding. The holding company had $122.0 million in cash of December 31, 2013.

MB Financial Bank is subject to various regulatory capital requirements which affect its ability to pay dividends to us.  Failure to meet minimum capital requirements can initiate certain mandatory and discretionary actions by regulators that, if undertaken, could have a direct material effect on our financial statements.  Additionally, our current internal policy effectively limits the amount of dividends our bank subsidiary may pay to us by requiring the bank to maintain total risk-based capital, Tier 1 risk-based capital and Tier 1 leverage capital ratios of 12%, 9% and 8%, respectively.  The minimum ratios required for a bank to be considered “well capitalized” for regulatory purposes are currently 10%, 6% and 5%, respectively.  In addition to adhering to our policy, there are regulatory restrictions on the ability of national banks to pay dividends.  See “Item 1. Business — Supervision and Regulation.”

Off-Balance Sheet Arrangements and Aggregate Contractual Obligations

Commitments.As a financial services provider, we routinely enter into commitments to extend credit, including loan commitments, standby and commercial letters of credit.  While these contractual obligations represent our future cash requirements, a significant portion of commitments to extend credit may expire without being drawn upon.  Such commitments are subject to the same credit policies and approval process accorded to loans made by us.  For additional information, see Note 16 “Commitments and Contingencies” to the consolidated financial statements.

Derivative Financial Instruments.Derivatives have become one of several components of our asset/liability management activities to manage interest rate risk.  Using derivative instruments, principally interest rate swaps, our interest rate sensitivity is adjusted to maintain the desired interest rate risk profile.  We currently use fair value type hedges, or interest rate swaps, to mitigate the interest sensitivity of certain qualifying commercial loans.  The change in fair value of both the interest rate swap and hedged instrument is recorded in current earnings.

We also offer various derivatives, including interest rate swaps and foreign currency forward contracts, to our customers to mitigate our exposure to market risk through the execution of off-setting positions with inter-bank dealer counterparties.  This permits us to offer customized risk management solutions to our customers.  These customer accommodations and any offsetting financial contracts are treated as stand-alone derivative instruments which do not qualify for hedge accounting.

For additional information, including the notional amount and fair value of our derivative instruments at December 31, 2013, see Note 20 “Derivative Financial Instruments” to the consolidated financial statements.

Contractual Obligations.In the ordinary course of operations, we enter into certain contractual obligations.  Such obligations include the funding of operations through debt issuances, subordinated notes issued to capital trusts, operating leases for premises and equipment, as well as capital expenditures for new premises and equipment.

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The following table summarizes our significant contractual obligations and other potential funding needs at December 31, 2013 (in thousands):

Contractual Obligations	Total		Less than 1 Year		1 - 3 Years		3 - 5 Years		More than 5 Years
Time certificates	$	1,467,583	$	1,064,248	$	270,344	$	68,159	$	64,832
Long-term borrowings	62,159		8,974		48,658		931		3,596
Junior subordinated notes issued to capital trusts(1)	152,065		—		—		—		152,065
Operating leases	35,730		5,408		8,611		5,131		16,580
Capital expenditures	1,979		1,979		—		—		—
Total	$	1,719,516	$	1,080,609	$	327,613	$	74,221	$	237,073
Commitments to extend credit and letters of credit	$	1,493,236

(1) May be called for redemption by us at any time. See Note 12 to the audited consolidated financial statements under Item 8. Financial Statements and Supplementary Data.

Capital Resources

MB Financial Bank is subject to the risk based capital regulations administered by the banking regulatory agencies.  The risk based capital guidelines are designed to make regulatory capital requirements more sensitive to differences in risk profiles among banks, to account for off-balance sheet exposure, and to minimize disincentives for holding liquid assets.  Under the regulations, assets and off-balance sheet items are assigned to broad risk categories, each with appropriate weights.  The resulting capital ratios represent capital as a percentage of total risk weighted assets and off-balance sheet items.  Under the prompt corrective action regulations, to be adequately capitalized a bank must maintain minimum ratios of total capital to risk-weighted assets of 8.00%, Tier 1 capital to risk-weighted assets of 4.00%, and Tier 1 capital to total assets of 4.00%.  Failure to meet these capital requirements can initiate certain mandatory and possibly additional discretionary, actions by regulators, which, if undertaken, could have a direct material effect on the bank’s financial statements.  As of December 31, 2013, the most recent notification from the federal banking regulators categorized MB Financial Bank as well capitalized.

A well capitalized institution must maintain a minimum ratio of total capital to risk-weighted assets of at least 10.00%, a minimum ratio of Tier 1 capital to risk weighted assets of at least 6.00%, a minimum ratio of Tier 1 capital to total assets of at least 5.00% and must not be subject to any written order, agreement or directive requiring it to meet or maintain a specific capital level.  There are no conditions or events since that notification that management believes have changed our bank subsidiary’s capital classification.  On a consolidated basis, we must maintain a minimum ratio of Tier 1 capital to total assets of 4.00%, a minimum ratio of Tier 1 capital to risk-weighted assets of 4.00% and a minimum ratio of total-capital to risk-weighted assets of 8.00%.  See “Item 1. Business — Supervision and Regulation — Capital Adequacy” and “Prompt Corrective Action.”  In addition, our internal policy requires us, on a consolidated basis, to maintain these ratios at or above 8.00%, 9.00% and 12.00%, respectively.

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As of December 31, 2013, MB Financial Bank was “well capitalized” under the capital adequacy requirements to which it is subject.  The following table sets forth the actual and required regulatory capital amounts and ratios for MB Financial Bank and at the consolidated level as of December 31, 2013 (dollars in thousands):

									Required To Be Well
					Required For Capital				Capitalized Under Prompt Corrective
	Actual				Adequacy Purposes				Action Provisions
	Amount		Ratio		Amount		Ratio		Amount		Ratio
Total capital (to risk-weighted assets):
Consolidated	$	1,106,541	16.53	%	$	535,430	8.00	%	N/A		N/A
MB Financial Bank	974,189		14.59		534,004		8.00		$	667,505	10.00	%
Tier 1 capital (to risk-weighted assets):
Consolidated	$	1,022,512	15.28	%	$	267,715	4.00	%	N/A		N/A
MB Financial Bank	890,380		13.34		267,002		4.00		$	400,503	6.00	%
Tier 1 capital (to average assets):
Consolidated	$	1,022,512	11.22	%	$	364,587	4.00	%	N/A		N/A
MB Financial Bank	890,380		9.79		363,904		4.00		$	454,880	5.00	%

N/A — not applicable

We established statutory trusts for the sole purpose of issuing trust preferred securities and related trust common securities.  The trust preferred securities were included in our consolidated Tier 1 Capital and Total Capital at December 31, 2013. 

As of December 31, 2013, we had approximately $2.0 million in capital expenditure commitments outstanding which relate to various projects to renovate existing branches.  We expect to pay the outstanding commitments as of December 31, 2013 through the normal cash flows of our business operations.

Statement of Cash Flows

Operating Activities.  Cash flows from operating activities primarily include net income, adjusted for items in net income that did not impact cash.  Net cash flows provided by operating activities increased by $10.9 million to $192.8 million for the year ended December 31, 2013 from $181.8 million for the year ended December 31, 2012.  The increase was primarily due to the increase in net income in 2013.

Net cash flows provided by operating activities decreased by $90.8 million to $181.8 million for the year ended December 31, 2012 from $272.6 million for the year ended December 31, 2011.  The decrease was primarily due to the decrease in provision for credit losses, partially offset by an increase in net income in 2012.

Investing Activities.  Cash from investing activities reflects the impact of loans and investment securities acquired for the Company’s interest-earning asset portfolios, as well as cash flows from asset sales and the impact of acquisitions.  For the year ended December 31, 2013, the Company had net cash flows used in investing activities of $39.2 million compared to net cash flows provided by investing activities of $330.2 million for the year ended December 31, 2012.  The change was primarily due to more purchases of investment securities, less of decrease in loans and less proceeds from FDIC related covered assets.

For the year ended December 31, 2012, the Company had net cash flows provided by investing activities of $330.2 million compared to net cash flows used in investing activities of $287.9 million for the year ended December 31, 2011.  The change was primarily due to fewer purchases of investment securities.

Financing Activities.  Cash flows from financing activities include transactions and events whereby cash is obtained from depositors, creditors or investors.  For the year ended December 31, 2013, the Company had net cash flows provided by financing activities of $32.4 million compared to net cash flows used in financing activities of $469.0 million for the year ended December 31, 2012.  The change in cash flows from financing activities was primarily due to an increase in short-term borrowings in 2013 and the repayments of borrowings and preferred stock in the prior year.

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For the year ended December 31, 2012, the Company had net cash flows used in financing activities of $469.0 million compared to net cash flows used in financing activities of $584.3 million for the year ended December 31, 2011.  The change in cash flows from financing activities was primarily due to less of a decrease in deposits offset by the repayments of borrowings and preferred stock.

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, and is addressed through a selection of funding and hedging instruments supporting balance sheet growth, as well as monitoring our asset investment strategies.

Asset Liability Management.  Management and our Treasury Group continually monitor our sensitivity to interest rate changes.  It is our policy to maintain an acceptable level of interest rate risk over a range of possible changes in interest rates while remaining responsive to market demand for loan and deposit products.  The strategy we employ to manage our interest rate risk is to measure our risk using an asset/liability simulation model.  The model considers several factors to determine our potential exposure to interest rate risk, including measurement of repricing gaps, duration, convexity, value at risk, and the market value of portfolio equity under assumed changes in the level of interest rates, shape of the yield curves, and general market volatility.  Management controls our interest rate exposure using several strategies, which include adjusting the maturities of securities in our investment portfolio, and limiting fixed rate loans or fixed rate deposits with terms of more than five years.  We also use derivative instruments, principally interest rate swaps, to manage our interest rate risk.  See “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 our interest earning assets or average rate of our interest bearing liabilities is more sensitive than the other to changes in market interest rates.  Such a change in sensitivity could reflect a number of possible mismatches in the repricing opportunities of our assets and liabilities.

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

Variable rate assets and liabilities that reprice at similar times, have similar maturities or repricing dates, but are based on different indexes still have interest rate risk.  Basis risk reflects the possibility that indexes will not move in a coordinated manner.

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 own to those with limited average life changes under certain interest-rate shock scenarios or securities with embedded prepayment penalties.

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, 2013 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

59

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, 2013 based on contractual maturities and scheduled rate adjustments within a three-month period and subsequent selected time intervals.  The loan amounts in the table reflect principal balances expected to be reinvested and/or repriced because of contractual amortization and rate adjustments on adjustable-rate loans.  Loan and investment securities’ contractual maturities and amortization reflect expected prepayment assumptions.  While NOW, money market and savings deposit accounts have adjustable rates, it is assumed that the interest rates on some of the accounts will not adjust immediately to changes in other interest rates.

Therefore, the information in the table is calculated assuming that NOW, money market and savings deposits will reprice as follows: 4%, 10% and 5%, respectively, in the first three months, 12%, 26%, and 15%, respectively, in the next nine months, 51%, 58% and 58%, respectively, from one year to five years, and 33%, 6%, and 22%, respectively over five years (dollars in thousands):

	Time to Maturity or Repricing
	0 – 90			91 - 365			1 – 5			Over 5
	Days			Days			Years			Years			Total
Interest Earning Assets:
Interest earning deposits with banks	$	267,571		$	225		$	470		$	—		$	268,266
Federal funds sold	42,950			—			—			—			42,950
Investment securities	178,037			239,961			1,274,214			660,650			2,352,862
Loans held for sale	629			—			—			—			629
Loans, including covered loans	2,407,736			1,231,581			1,987,248			85,986			5,712,551
Total interest earning assets	$	2,896,923		$	1,471,767		$	3,261,932		$	746,636		$	8,377,258
Interest Bearing Liabilities:
NOW and money market deposit accounts	$	201,174		$	544,323		$	1,483,395		$	453,527		$	2,682,419
Savings deposits	46,857			132,089			485,824			190,624			855,394
Time deposits	327,852			736,891			347,954			54,885			1,467,582
Short-term borrowings	309,669			29,008			112,166			42,546			493,389
Long-term borrowings	2,537			6,596			50,681			2,345			62,159
Junior subordinated notes issued to capital trusts	152,065			—			—			—			152,065
Total interest bearing liabilities	$	1,040,154		$	1,448,907		$	2,480,020		$	743,927		$	5,713,008
Rate sensitive assets (RSA)	$	2,896,923		$	4,368,690		$	7,630,622		$	8,377,258		$	8,377,258
Rate sensitive liabilities (RSL)	1,040,154			2,489,061			4,969,081			5,713,008			5,713,008
Cumulative GAP (GAP=RSA-RSL)	1,856,769			1,879,629			2,661,541			2,664,250			2,664,250
RSA/Total assets	30.05		%	45.31		%	79.14		%	86.89		%	86.89		%
RSL/Total assets	10.79			25.82			51.54			59.25			59.25
GAP/Total assets	19.26			19.50			27.61			27.63			27.63
GAP/RSA	64.09			43.03			34.88			31.80			31.80

Certain shortcomings are inherent in the method of analysis presented in the foregoing table.  For example, although certain assets and liabilities may have similar maturities or periods to repricing, they may react in different degrees to changes in market interest rates.  Also, the interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types of assets may lag behind changes in market rates.  Additionally, in the event of a change in interest rates, prepayment and early withdrawal levels would likely deviate significantly from those assumed in calculating the table.  Therefore, we do not rely on a gap analysis to manage our interest rate risk, but rather we use what we believe to be the more reliable simulation model relating to changes in net interest income.

60

Based on simulation modeling which assumes gradual changes in interest rates over a one-year period, we believe that our net interest income would change due to changes in interest rates as follows (dollars in thousands):

Gradual	Changes in Net Interest Income Over One Year Horizon
Changes in	At December 31, 2013					At December 31, 2012
Levels of	Dollar			Percentage		Dollar			Percentage
Interest Rates	Change			Change		Change			Change
+2.00%	$	10,596		3.84	%	$	7,932		2.72	%
+1.00%	5,554			2.01		4,174			1.43
-1.00%	(6,553		)	(2.38	)	(3,915		)	(1.34	)

In the interest rate sensitivity table above, changes in net interest income between December 31, 2013 and December 31, 2012 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 changes in net interest income incorporate the impact of loan floors as well as shifts from low cost deposits to certificates of deposit in a rising rate environment.

The assumptions used in our interest rate sensitivity simulation discussed above are inherently uncertain and, as a result, the simulations cannot precisely measure net interest income or precisely predict the impact of changes in interest rates on net interest income.  Our model assumes that a portion of our variable rate loans that have minimum interest rates will remain in our portfolio regardless of changes in the interest rate environment.  Actual results will differ from simulated results due to timing, magnitude and frequency of interest rate changes as well as changes in market conditions and management strategies.

61

Item 8.   Financial Statements and Supplementary Data

MB FINANCIAL, INC.

CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2013, 2012, and 2011

INDEX

	Page
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING	63
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON INTERNAL CONTROL OVER FINANCIAL REPORTING	64
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON THE CONSOLIDATED FINANCIAL STATEMENTS	65
FINANCIAL STATEMENTS
Consolidated Balance Sheets	66
Consolidated Statements of Operations	67
Consolidated Statements of Comprehensive Income	69
Consolidated Statements of Changes in Stockholders’ Equity	70
Consolidated Statements of Cash Flows	72
Notes to Consolidated Financial Statements	74

62

MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

The management of MB Financial, Inc. (the Company) is responsible for establishing and maintaining adequate internal control over financial reporting.

The Company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America. The Company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. All internal control systems, no matter how well designed, have inherent limitations, including the possibility of human error and the circumvention of overriding controls.  Accordingly, even effective internal control over financial reporting can provide only reasonable assurance with respect to financial statement preparation.  Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2013, based on the framework set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control—Integrated Framework of 1992. Based on that assessment, management concluded that, as of December 31, 2013, the Company’s internal control over financial reporting is effective based on the criteria established in Internal Control—Integrated Framework.

McGladrey LLP, an independent registered public accounting firm that audited the 2013 consolidated financial statements of the Company included in this Annual Report on 10-K, has audited the effectiveness of the Company's internal control over financial reporting as of December 31, 2013. Their report, which expresses an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting as of December 31, 2013 is included in this Item under the heading “Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting.”

/s/ Mitchell Feiger	/s/ Jill E. York
Mitchell Feiger	Jill E. York
President and	Vice President and
Chief Executive Officer	Chief Financial Officer

February 20, 2014

63

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON INTERNAL CONTROL OVER FINANCIAL REPORTING

To the Board of Directors and Stockholders

MB Financial, Inc.

We have audited MB Financial, Inc.’s internal control over financial reporting as of December 31, 2013, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 1992.  The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control Over Financial Reporting.  Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances.  We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.  A company’s internal control over financial reporting includes those policies and procedures that (a) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (b) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (c) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.  Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, MB Financial, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2013, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 1992.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements as of and for the year ended December 31, 2013 of MB Financial, Inc. and our report dated February 20, 2014 expressed an unqualified opinion.

/s/ McGladrey LLP

Chicago, Illinois

February 20, 2014

64

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON THE CONSOLIDATED FINANCIAL STATEMENTS

To the Board of Directors and Stockholders

MB Financial, Inc.

We have audited the accompanying consolidated balance sheets of MB Financial, Inc. and Subsidiaries as of December 31, 2013 and 2012, and the related consolidated statements of operations, comprehensive income, changes in stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2013.  These financial statements are the responsibility of the Company’s management.  Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).  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, 2013 and 2012, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2013, in conformity with U.S. generally accepted accounting principles.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), MB Financial Inc. and Subsidiaries’ internal control over financial reporting as of December 31, 2013, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 1992, and our report dated February 20, 2014 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

/s/ McGladrey LLP

Chicago, Illinois

February 20, 2014

65

FINANCIAL STATEMENTS

MB FINANCIAL, INC. & SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

December 31, 2013 and 2012

(Amounts in thousands, except common share data)

	December 31, 2013			December 31, 2012
ASSETS
Cash and due from banks	$	205,193		$	176,010
Interest earning deposits with banks	268,266			111,533
Total cash and cash equivalents	473,459			287,543
Federal funds sold	42,950			—
Investment securities:
Securities available for sale, at fair value	1,118,912			1,868,171
Securities held to maturity, at amortized cost ($1.2 billion and $0.5 billion fair value at December 31, 2013 and 2012, respectively)	1,182,533			493,421
Non-marketable securities - FHLB and FRB stock	51,417			55,385
Total investment securities	2,352,862			2,416,977
Loans held for sale	629			7,492
Loans:
Total loans, excluding covered loans	5,476,831			5,317,080
Covered loans	235,720			449,850
Total loans	5,712,551			5,766,930
Less: Allowance for loan losses	111,746			124,204
Net loans	5,600,805			5,642,726
Lease investment, net	131,089			129,823
Premises and equipment, net	221,065			221,533
Cash surrender value of life insurance	130,181			128,879
Goodwill	423,369			423,369
Other intangibles	23,428			29,512
Other real estate owned, net	23,289			36,977
Other real estate owned related to FDIC-assisted transactions	20,472			22,478
FDIC indemnification asset	11,675			39,345
Other assets	186,154			185,151
Total assets	$	9,641,427		$	9,571,805
LIABILITIES AND STOCKHOLDERS’ EQUITY
LIABILITIES
Deposits:
Noninterest bearing	$	2,375,863		$	2,164,547
Interest bearing	5,005,396			5,378,150
Total deposits	7,381,259			7,542,697
Short-term borrowings	493,389			220,602
Long-term borrowings	62,159			116,050
Junior subordinated notes issued to capital trusts	152,065			152,065
Accrued expenses and other liabilities	225,873			264,621
Total liabilities	8,314,745			8,296,035
STOCKHOLDERS’ EQUITY
Common stock, ($0.01 par value; authorized 70,000,000 shares at December 31, 2013 and 2012; issued 55,148,409 and 54,955,284 shares at December 31, 2013 and 2012, respectively)	551			550
Additional paid-in capital	738,053			732,771
Retained earnings	581,998			507,933
Accumulated other comprehensive income	8,383			36,326
Less: 184,173 and 170,567 shares of treasury stock, at cost, at December 31, 2013 and 2012, respectively	(3,747		)	(3,293		)
Controlling interest stockholders’ equity	1,325,238			1,274,287
Noncontrolling interest	1,444			1,483
Total stockholders’ equity	1,326,682			1,275,770
Total liabilities and stockholders’ equity	$	9,641,427		$	9,571,805

     See Accompanying Notes to Consolidated Financial Statements.

66

MB FINANCIAL, INC. & SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

Years Ended December 31, 2013, 2012, and 2011

(Amounts in thousands, except share and per share data)

	2013			2012			2011
Interest income:
Loans	$	238,542		$	271,708		$	324,793
Investment securities:
Taxable	26,084			33,424			41,349
Nontaxable	32,564			29,311			17,265
Federal funds sold	15			—			—
Other interest earning accounts	690			867			1,153
Total interest income	297,895			335,310			384,560
Interest expense:
Deposits	19,240			30,258			44,881
Short-term borrowings	622			1,204			849
Long-term borrowings and junior subordinated notes	5,697			11,060			13,557
Total interest expense	25,559			42,522			59,287
Net interest income	272,336			292,788			325,273
Provision for credit losses	(5,804		)	(8,900		)	120,750
Net interest income after provision for credit losses	278,140			301,688			204,523
Non-interest income:
Capital markets and international banking fees	3,560			5,086			1,870
Commercial deposit and treasury management fees	24,867			23,636			23,559
Lease financing, net	61,243			36,382			26,939
Trust and asset management fees	19,142			17,990			17,324
Card fees	11,013			9,368			7,032
Loan service fees	5,563			5,845			6,355
Consumer and other deposit service fees	13,968			14,428			15,375
Brokerage fees	4,907			4,792			5,884
Net (loss) gain on investment securities	(1		)	555			640
Increase in cash surrender value of life insurance	3,385			3,570			4,377
Net (loss) gain on sale of assets	(323		)	(942		)	283
Accretion of FDIC indemnification asset	342			1,055			4,838
Net gain on sale of loans	1,664			2,325			2,607
Other operating income	5,064			5,103			5,636
Total non-interest income	154,394			129,193			122,719
Non-interest expenses:
Salaries and employee benefits	177,858			165,696			153,858
Occupancy and equipment expense	36,878			35,806			35,467
Computer services and telecommunication expense	18,883			15,499			14,885
Advertising and marketing expense	8,272			8,183			7,038
Professional and legal expense	8,807			6,110			6,147
Other intangibles amortization expense	6,084			5,010			5,665
Branch impairment charges	—			2,190			1,594
Net (gain) loss recognized on other real estate owned	(1,528		)	17,594			13,613
Other real estate expense, net	747			2,990			4,294
Prepayment fees on interest bearing liabilities	—			12,682			—
Other operating expenses	38,587			32,270			40,685
Total non-interest expenses	294,588			304,030			283,246
Income before income taxes	137,946			126,851			43,996
Income tax expense	39,491			36,477			5,268
Net income	$	98,455		$	90,374		$	38,728
Dividends and discount accretion on preferred shares	—			3,269			10,414
Net income available to common stockholders	$	98,455		$	87,105		$	28,314

See Accompanying Notes to Consolidated Financial Statements.

67

MB FINANCIAL, INC. & SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS - (Continued)

Years Ended December 31, 2013, 2012, and 2011

(Amounts in thousands, except share and per share data)

	2013		2012		2011
Common share data:
Basic earnings per common share	$	1.81	$	1.61	$	0.52
Diluted earnings per common share	1.79		1.60		0.52
Weighted average common shares outstanding for basic earnings per common share	54,509,612		54,270,297		54,057,158
Diluted weighted average common shares outstanding for diluted earnings per common share	54,993,865		54,505,976		54,337,280

See Accompanying Notes to Consolidated Financial Statements.

68

MB FINANCIAL, INC. & SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

Years Ended December 31, 2013, 2012, and 2011

(Amounts in thousands)

	2013			2012			2011
Net income	$	98,455		$	90,374		$	38,728
Unrealized holding (losses) gains on investment securities, net of reclassification adjustments	(43,543		)	(4,097		)	28,501
Reclassification adjustment for amortization of unrealized gains on investment securities transferred to held to maturity from available for sale	(2,478		)	—			—
Reclassification adjustments for losses (gains) included in net income	1			(555		)	(640		)
Other comprehensive (loss) income, before tax	(46,020		)	(4,652		)	27,861
Income tax benefit (expense) related to items of other comprehensive (loss) income	18,077			1,828			(10,944		)
Other comprehensive (loss) income, net of tax	(27,943		)	(2,824		)	16,917
Comprehensive income	$	70,512		$	87,550		$	55,645

See Accompanying Notes to Consolidated Financial Statements.

69

MB FINANCIAL, INC. & SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

Years Ended December 31, 2013, 2012, and 2011

(Amounts in thousands, except share and per share data)

	Preferred Stock			Common Stock		Additional Paid-in Capital			Retained Earnings			Accumulated Other Comprehensive Income, Net of Tax			Treasury Stock			Noncontrolling Interest			Total Stock- holders’ Equity
Balance at December 31, 2010	$	194,104		$	546	$	725,400		$	402,810		$	22,233		$	(2,828	)	$	2,521		$	1,344,786
Net income	—			—		—			38,728			—			—			239			38,967
Other comprehensive income, net of tax	—			—		—			—			16,917			—			—			16,917
Cash dividends declared on common shares ($0.04 per share)	—			—		—			(2,185		)	—			—			—			(2,185		)
Dividends and discount accretion on preferred shares	615			—		—			(10,414		)	—			—			—			(9,799		)
Restricted common stock activity, net of tax	—			1		(157		)	(968		)	—			968			—			(156		)
Stock option activity, net of tax	—			1		1,103			(15		)	—			104			—			1,193
Issuance of shares of common stock, net of issuance costs	—			—		16			—			—			—			—			16
Repurchase of common shares in connection with
employee benefit plans and held in trust for
deferred compensation plan	—			—		50			—			—			(1,288		)	—			(1,238		)
Stock-based compensation expense	—			—		4,836			—			—			—			—			4,836
Distributions to noncontrolling interest	—			—		—			—			—			—			(310		)	(310		)
Balance at December 31, 2011	$	194,719		$	548	$	731,248		$	427,956		$	39,150		$	(3,044	)	$	2,450		$	1,393,027
Net income	—			—		—			90,374			—			—			230			90,604
Other comprehensive loss, net of tax	—			—		—			—			(2,824		)	—			—			(2,824		)
Cash dividends declared on common shares ($0.13 per share)	—			—		—			(7,149		)	—			—			—			(7,149		)
Dividends and discount accretion on preferred shares	1,281			—		—			(3,269		)	—			—			—			(1,988		)
Repurchase of preferred shares and warrant	(196,000		)	—		(1,518		)	—			—			—			—			(197,518		)
Restricted common stock activity, net of tax	—			2		(704		)	18			—			1,774			—			1,090
Stock option activity, net of tax	—			—		(694		)	3			—			345			—			(346		)
Repurchase of common shares in connection with
employee benefit plans and held in trust for
deferred compensation plan	—			—		369			—			—			(2,368		)	—			(1,999		)
Stock-based compensation expense	—			—		4,806			—			—			—			—			4,806
Additional investment in subsidiary	—			—		(736		)	—			—			—			(904		)	(1,640		)
Distributions to noncontrolling interest	—			—		—			—			—			—			(293		)	(293		)
Balance at December 31, 2012	$	—		$	550	$	732,771		$	507,933		$	36,326		$	(3,293	)	$	1,483		$	1,275,770

70

MB FINANCIAL, INC. & SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY - (Continued)

Years Ended December 31, 2013, 2012, and 2011

(Amounts in thousands, except share and per share data)

	Preferred Stock		Common Stock		Additional Paid-in Capital			Retained Earnings			Accumulated Other Comprehensive Income, Net of Tax			Treasury Stock			Noncontrolling Interest			Total Stock- holders’ Equity
Balance at December 31, 2012	$	—	$	550	$	732,771		$	507,933		$	36,326		$	(3,293	)	$	1,483		$	1,275,770
Net income	—		—		—			98,455			—			—			186			98,641
Other comprehensive loss, net of tax	—		—		—			—			(27,943		)	—			—			(27,943		)
Cash dividends declared on common shares ($0.44 per share)	—		—		—			(24,290		)	—			—			—			(24,290		)
Restricted common stock activity, net of tax	—		1		(739		)	(100		)	—			1,725			—			887
Stock option activity, net of tax	—		—		58			—			—			499			—			557
Repurchase of common shares in connection with
employee benefit plans and held in trust for
deferred compensation plan	—		—		507			—			—			(2,678		)	—			(2,171		)
Stock-based compensation expense	—		—		5,456			—			—			—			—			5,456
Distributions to noncontrolling interest	—		—		—			—			—			—			(225		)	(225		)
Balance at December 31, 2013	$	—	$	551	$	738,053		$	581,998		$	8,383		$	(3,747	)	$	1,444		$	1,326,682

See Accompanying Notes to Consolidated Financial Statements.

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MB FINANCIAL, INC. & SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

Years Ended December 31, 2013, 2012, and 2011

(Amounts in Thousands)

	2013			2012			2011
Cash Flows From Operating Activities
Net income	$	98,455		$	90,374		$	38,728
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation of premises and equipment	18,051			16,273			13,577
Depreciation of leased equipment	33,842			36,146			42,390
Impairment charges on branch facilities	—			2,190			1,594
Compensation expense for restricted stock awards	4,280			3,544			3,277
Compensation expense for stock option grants	1,176			1,262			1,559
Loss (gain) on sales of premises and equipment and leased equipment	362			(2,204		)	(1,923		)
Amortization of other intangibles	6,084			5,010			5,665
Provision for credit losses	(5,804		)	(8,900		)	120,750
Deferred income tax expense	21,681			15,177			5,166
Amortization of premiums and discounts on investment securities, net	47,771			44,543			40,894
Accretion of premiums and discounts on loans, net	(7,122		)	(13,797		)	(30,329		)
Accretion of FDIC indemnification asset	(342		)	(1,055		)	(4,838		)
Net loss (gain) on investment securities	1			(555		)	(640		)
Proceeds from sale of loans held for sale	86,505			96,243			47,128
Origination of loans held for sale	(77,935		)	(96,480		)	(51,038		)
Net gain on sale of loans held for sale	(1,664		)	(2,325		)	(2,607		)
Net gain on sales of other real estate owned	(1,984		)	(1,398		)	(1,016		)
Fair value adjustments on other real estate owned	96			15,901			10,988
Net loss on sales of other real estate owned related to FDIC-assisted transactions	360			3,091			3,641
Increase in cash surrender value of life insurance	(3,385		)	(3,570		)	(4,377		)
Decrease (increase) in other assets, net	17,485			(67,511		)	8,393
(Decrease) increase in other liabilities, net	(45,155		)	49,861			25,599
Net cash provided by operating activities	192,758			181,820			272,581
Cash Flows From Investing Activities
Increase in federal funds sold	(42,950		)	—			—
Proceeds from sales of investment securities available for sale	989			15,416			22,960
Proceeds from maturities and calls of investment securities available for sale	496,258			608,665			406,154
Purchase of investment securities available for sale	(484,113		)	(605,098		)	(769,897		)
Proceeds from maturities and calls of investment securities held to maturity	17,087			2,134			543
Purchase of investment securities held to maturity	(61,073		)	(2,187		)	(501,464		)
Purchase of non-marketable securities - FHLB and FRB stock	(547		)	(44		)	(646		)
Redemption of non-marketable securities - FHLB and FRB stock	4,515			25,491			—
Net decrease in loans	38,725			219,125			189,630
Proceeds from sale of loans held for sale	—			—			207,530
Purchases of premises and equipment	(18,345		)	(30,926		)	(18,030		)
Purchases of leased equipment	(47,108		)	(45,749		)	(59,764		)
Proceeds from sales of premises and equipment	—			1,516			1,483
Proceeds from sales of leased equipment	8,532			13,071			8,041
Capital improvements on other real estate owned	(74		)	(2,809		)	(1,534		)
Proceeds from sale of other real estate owned	21,814			34,316			43,847
Proceeds from sale of other real estate owned related to FDIC-assisted transactions	15,194			40,298			26,932
Life insurance death benefit	2,083			—			4,114
Net cash paid in acquisition	—			(27,010		)	—
Net proceeds from FDIC related covered assets	9,766			83,954			152,238
Net cash (used in) provided by investing activities	(39,247		)	330,163			(287,863		)
Cash Flows From Financing Activities
Net decrease in deposits	(161,438		)	(104,910		)	(505,351		)
Net increase (decrease) in short-term borrowings	272,787			648			(48,890		)
Proceeds from long-term borrowings	7,725			6,742			14,854
Principal paid on long-term borrowings	(61,616		)	(156,956		)	(33,663		)
Redemption of junior subordinated notes issued to capital trusts	—			(6,186		)	—
Repurchase of preferred stock and warrant	—			(197,518		)	—
Treasury stock transactions, net	(1,672		)	(249		)	(1,149		)
Stock options exercised	1,014			154			1,903
Excess tax benefits from share-based payment arrangements	(325		)	(390		)	(53		)
Dividends paid on preferred stock	—			(3,239		)	(9,799		)
Dividends paid on common stock	(24,070		)	(7,101		)	(2,164		)
Net cash provided by (used in) financing activities	32,405			(469,005		)	(584,312		)
Net increase (decrease) in cash and cash equivalents	$	185,916		$	42,978		$	(599,594	)
Cash and cash equivalents:
Beginning of year	287,543			244,565			844,159
End of year	$	473,459		$	287,543		$	244,565

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MB FINANCIAL, INC. & SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS - (Continued)

Years Ended December 31, 2013, 2012, and 2011

(Amounts in Thousands)

	2013		2012			2011
Supplemental Disclosures of Cash Flow Information:
Cash payments for:
Interest paid to depositors and other borrowed funds	$	26,345	$	44,212		$	61,098
Net income tax payments (refunds), net	35,375		9,883			(7,015		)
Supplemental Schedule of Noncash Investing Activities:
Investment securities held to maturity purchased not settled	$	321	$	—		$	—
Transfer of investment securities available for sale to investment securities held to maturity	656,617		—			—
Loans transferred to other real estate owned	6,164		4,535			59,261
Loans transferred to other real estate owned related to FDIC-assisted transactions	16,023		19,705			59,973
Loans transferred to repossessed vehicles	871		1,496			1,281
Loans transferred to loans held for sale	—		—			205,740
Operating leases rewritten as direct finance leases included as loans	6,936		7,760			3,068
Reclassification of reserves on unfunded credit commitments	—		—			17,050
Supplemental Schedule of Noncash Investing Activities From Acquisitions:
Noncash assets acquired:
Investment securities available for sale	$	—	$	635		$	—
Loans and leases	—		32,933			—
Premises and equipment	—		81			—
Goodwill	—		36,300			—
Other intangibles	—		5,028			—
Other assets	—		27,323			—
Total noncash assets acquired	$	—	$	102,300		$	—
Liabilities assumed:
Accrued expenses and other liabilities	$	—	$	75,290		$	—
Total liabilities assumed	$	—	$	75,290		$	—
Net noncash assets acquired	$	—	$	27,010		$	—
Net cash and cash equivalents paid	$	—	$	(27,010	)	$	—
Net gains recorded on acquisitions	$	—	$	—		$	—

See Accompanying Notes to Consolidated Financial Statements.

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MB FINANCIAL, INC. & SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1.    Significant Accounting Policies

MB Financial, Inc. (the "Company," "we," "us," "our") is a financial holding company that provides a full range of financial services to individuals and corporate customers through its banking subsidiary, MB Financial Bank, N.A. ("MB Financial Bank").

The Company’s primary market is the Chicago, Illinois metropolitan area, in which MB Financial Bank operates 84 banking offices through MB Financial Bank.

MB Financial Bank, our largest subsidiary, has two wholly owned subsidiaries with significant operating activities: LaSalle Systems Leasing, Inc. and Celtic Leasing Corp. MB Financial Bank also has a majority owned subsidiary with significant operating activities, Cedar Hill Associates, LLC. Vision Investment Services, Inc., a subsidiary of MB Financial Bank, was dissolved in the fourth quarter of 2012.

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 accordance with applicable accounting standards, the Company does not consolidate statutory trusts established for the sole purpose of issuing trust preferred securities and related trust common securities.  See Note 12 below for more detail.  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; residual value of direct finance, leveraged, and operating leases; income tax accounting; fair value measurements for assets and liabilities; and goodwill.

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, with original maturities of 90 days or less.

Investment securities: 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 movements in interest rates, changes in the maturity mix of assets and liabilities, liquidity needs, regulatory capital considerations, and other 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.  Securities classified as held to maturity are those securities that the Company intends to hold until maturity and are reported at amortized cost.

The historical cost of debt securities is adjusted for amortization of premiums and accretion of discounts over the estimated life of the security, using the level-yield method.  In determining the estimated life of a mortgage-related security, certain judgments are required as to the timing and amount of future principal prepayments.  These judgments are made based upon the actual performance of the underlying security and the general market consensus regarding changes in mortgage interest rates and underlying prepayment estimates.  Amortization of premium and accretion of discount is included in interest income from the related security.  Realized gains or losses, determined on the basis of the cost of specific securities sold, are included in earnings.

The Company evaluates the portfolio for impairment each quarter.  In estimating other-than-temporary losses, the Company considers the length of time and the extent to which the fair value has been less than cost, the financial condition and near-term prospects of the issuer, and whether the Company is more likely than not to sell the security before recovery of its cost basis.  If the Company intends to sell an impaired security, the Company records an other-than-temporary loss in an amount equal to the entire difference between the fair value and amortized cost.  If a security is determined to be other-than-temporarily impaired, but the Company does not intend to sell the security, only the credit portion of the estimated loss is recognized in earnings, with the other portion of the loss recognized in other comprehensive income.

Federal Home Loan Bank and Federal Reserve Bank stock: The Company owns investments in the stock of the Federal Reserve Bank of Chicago (“FRB”) and the Federal Home Loan Bank of Chicago (“FHLB”). No ready market exists for these stocks, and they have no quoted market values. The Bank, as a member of the Federal Reserve System and the FHLB, is required to maintain an investment in the capital stock of the FRB and FHLB. The stock is redeemable at par by the FRB and FHLB, respectively, and is, therefore, carried at cost and periodically evaluated for impairment. 

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Loans held for sale: Mortgage loans originated and intended for sale in the secondary market are reflected at fair value.  Gains and losses recognized on mortgage loans held for sale include the value of the mortgage servicing rights if the loan is sold with servicing retained by the Company.  Mortgage servicing rights are stratified based on the predominant risk characteristics of rates, terms, and the underlying loan types to measure its fair value.  The amount of impairment recognized is the amount by which the capitalized mortgage servicing rights for a stratum exceed their fair value.

Loans and leases: 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 quarterly 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 income is accrued daily on the Company’s outstanding loan balances.  The accrual of interest on loans is discontinued at the time the loan is 90 days past due unless the credit is well-secured and in process of renewal or collection.  Past due status is based on contractual terms of the loan.  In all cases, loans are placed on non-accrual or charged-off at an earlier date if collection of principal or interest is considered doubtful.  All interest accrued but not collected for loans that are placed on non-accrual or charged-off is reversed against interest income.

For impaired loans, accrual of interest is discontinued on a loan when management believes, after considering collection efforts and other factors, the borrower’s financial condition is such that collection of interest is doubtful.  Cash collections on impaired loans are generally 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 include nonaccrual loans and loans classified as a troubled debt restructuring. 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, based on 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 are charged against the allowance for loan losses.

Troubled debt restructurings:  A loan is classified as a troubled debt restructuring when a borrower is experiencing financial difficulties that leads to a restructuring of the loan, and the Company grants concessions to the borrower in the restructuring that it would not otherwise consider. These concessions may include rate reductions, principal forgiveness, deferral of past due interest or principal, extension of maturity date, modification of amortization schedules, redemption of past due taxes and other actions intended to minimize potential losses.

In determining whether a debtor is experiencing financial difficulties, the Company considers if the debtor is in payment default or would be in payment default in the foreseeable future without the modification, the debtor declared or is in the process of declaring bankruptcy, there is substantial doubt that the debtor will continue as a going concern, the debtor has securities that have been or are in the process of being delisted, the debtor’s entity-specific projected cash flows will not be sufficient to service any of its debt, or the debtor cannot obtain funds from sources other than the existing creditors at a market rate for debt with similar risk characteristics.

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In determining whether the Company has granted a concession, the Company assesses, if it does not expect to collect all amounts due, whether the current value of the collateral will satisfy the amounts owed, whether additional collateral or guarantees from the debtor will serve as adequate compensation for other terms of the restructuring, and whether the debtor otherwise has access to funds at a market rate for debt with similar risk characteristics.

A loan that is modified at a market rate of interest will not be classified as troubled debt restructuring in the calendar year subsequent to the restructuring if it is in compliance with the modified terms.  Payment performance prior and subsequent to the restructuring is taken into account in assessing whether it is likely that the borrower can meet the new terms.  Under certain circumstances, a loan may be returned to accrual at the time of restructuring.  A period of sustained repayment for at least six months generally is required for return to accrual status.

Periodically, the Company will restructure a note into two separate notes (A/B structure), charging off the entire B portion of the note. The A note is structured with appropriate loan-to-value and cash flow coverage ratios that provide for a high likelihood of repayment. The A note is classified as a non-performing note until the borrower has displayed a historical payment performance for a reasonable time prior to and subsequent to the restructuring. A period of sustained repayment for at least six months generally is required to return the note to accrual status provided that management has determined that the performance is reasonably expected to continue. The A note will be classified as a restructured note (either performing or nonperforming) through the calendar year of the restructuring that the historical payment performance has been established.

Allowance for loan and lease losses:  The allowance for loan and lease losses (ALLL) is established through a provision for credit losses charged to expense.  Loans are charged against the ALLL when management believes that collectability of the principal is unlikely.  The allowance is an amount that management believes will be appropriate to absorb probable losses on existing loans, based on an evaluation of the collectability of loans and prior loss and recovery experience as appropriate under GAAP.  The ALLL 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 MB Financial Bank’s ALLL, and may require it to recognize adjustments to its allowance based on their judgments of information available to them at the time of their examinations.

The ALLL is comprised of three elements: a commercial related general loss reserve; a commercial related specific reserve for impaired loans; and a consumer related reserve for smaller-balance homogenous loans.  Each element is discussed below.

Commercial Related General Loss Reserve - We maintain a general loan loss reserve for the four categories of commercial related loans in our portfolio - commercial loans, commercial loans collateralized by the assignment of lease payments (lease loans), commercial real estate loans and construction real estate loans. 

Under our loan risk rating system, each loan, with the exception of those included in large groups of smaller-balance homogeneous consumer related loans, is risk rated between one and nine by the originating loan officer, Senior Credit Management, Loan Review or any loan committee.  Loans rated "one" represent those loans least likely to default and a loan rated "nine" represents a loss.  The probability of loans defaulting for each risk rating, sometimes referred to as default factors, are estimated based on the frequency with which loans migrate from one risk rating to another and to default status over time.  We use a loan loss reserve model that incorporates the migration of loan risk ratings and historical default data over a multi-year period to develop our estimated default factors (EDFs).  The model tracks annual loan rating migrations by loan type and currently uses loan risk rating migrations for 13 years.  The migration data is adjusted by using average losses for an economic cycle (approximately 12 years) to develop EDFs by loan type, risk rating and maturity.  EDFs are updated annually in December. 

Estimated loan default factors are multiplied by individual loan balances in each risk-rating category and again multiplied by an historical loss given default estimate for each loan type (which incorporates estimated recoveries) to determine the appropriate allowance by loan type.  This approach is applied to the commercial, lease, commercial real estate, and construction real estate components of the portfolio.

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To account for current economic conditions, the general allowance for loan and lease losses also includes adjustments for macroeconomic factors.  Macroeconomic factors adjust the ALLL upward or downward based on the current point in the economic cycle using predictive economic data and are applied to the loan loss model through a separate allowance element for the commercial, commercial real estate, construction real estate and lease loan components.  To determine our macroeconomic factors, we use specific economic data that has shown to be a statistically reliable predictor of our credit losses relative to our long term average credit losses. We tested over 20 economic variables (U.S. manufacturing index, unemployment rate, U.S. GDP growth, etc.). We annually review this data to determine that such a relationship continues to exist. We currently use the following macroeconomic indicators in our macroeconomic factor computation:

Commercial loans and lease loans:  Japanese bilateral dollar exchange, our prior period charge-off rates and the consumer confidence index.

Commercial real estate loans and construction loans:  Prime rate, our prior period charge-off rates and the annual change in the U.S. commercial real estate index.

Using the indicators noted above, a predicted charge-off percentage is calculated.  The predicted charge-off percentage is then compared to the cycle average charge-off percentage used in our EDF computation discussed above, and a macroeconomic adjustment factor is calculated.  The macroeconomic adjustment factor is applied to each commercial loan type.  Each year, we review the predictive nature of the macroeconomic factors by comparing actual charge-offs to the predicted model charge-offs, re-run our regression analysis and re-calibrate the macroeconomic factors as appropriate.

Commercial Related Specific Reserves - The ALLL also includes specific reserves on impaired commercial related loans.  A loan is considered to be impaired when management believes, after considering collection efforts and other factors, the borrower’s financial condition is such that the collection of all contractual principal and interest payments due is doubtful.

At each quarter-end, impaired loans are reviewed individually, with adjustments made to the general calculated reserve for each loan as deemed necessary.  Specific adjustments are made depending on expected cash flows and/or the value of the collateral securing each loan.  Generally, the Company obtains a current external appraisal (within 12 months) on real estate secured impaired loans.  Our appraisal policy is designed to comply with the Interagency Appraisal and Evaluation Guidelines, most recently updated in December 2010. As part of our compliance with these guidelines, we maintain an internal Appraisal Review Department that engages and reviews all third party appraisals.

In addition, each impaired commercial loan with real estate collateral is reviewed quarterly by our appraisal department to determine that the most recent valuation remains appropriate during subsequent quarters until the next appraisal is received.  If considered necessary by our appraisal department, the appraised value may be further discounted by internally applying accepted appraisal methodologies to an older appraisal.  Accepted appraisal methodologies include:  income capitalization approach adjusting for changes in underlying leases, adjustments related to condominium projects with units sales, adjustments for loan fundings, and “As is” compared to “As Stabilized” valuations. 

Other valuation techniques are also used to value non-real estate assets.  Discounts may be applied in the impairment analysis used for general business assets (GBA).  Examples of GBA include accounts receivable, inventory, and any marketable securities pledged. The discount is used to reflect collection risk in the event of default that may not have been included in the valuation of the asset.

Consumer Related Reserves - Pools of homogeneous loans with similar risk and loss characteristics are also assessed for probable losses.  These loan pools include consumer, residential real estate, home equity, credit cards and indirect vehicle loans.  Migration probabilities obtained from past due roll rate analyses and historical loss rates are applied to current balances to forecast charge-offs over a one-year time horizon.

We consistently apply our methodology for determining the appropriateness of the allowance for loan losses but may adjust our methodologies and assumptions based on historical information related to charge-offs and management's evaluation of the loan portfolio. In this regard, we periodically review the following to validate our allowance for loan losses: historical net charge-offs as they relate to prior periods' allowance for loan loss, comparison of historical loan migration in past years compared to the current year, overall credit trends and ratios and any significant changes in loan concentrations. In reviewing this data, we adjust qualitative factors within our allowance methodology to appropriately reflect any changes warranted by the validation process.

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Acquired loans: Purchased loans acquired in a business combination are segregated into three types: pass rated loans with no discount attributable to credit quality, non-impaired loans with a discount attributable at least in part to credit quality and impaired loans with evidence of significant credit deterioration. 

• Pass rated loans (typically performing loans) are accounted for in accordance with ASC 310-20 “Nonrefundable Fees and Other Costs” as these loans do not have evidence of credit deterioration since origination.

• Non-impaired loans (typically past-due loans, special mention loans and performing substandard loans) are accounted for in accordance with ASC 310-30 “Receivables - Loans and Debt Securities Acquired with Deteriorated Credit Quality” as they display at least some level of credit deterioration since origination.

• Impaired loans (typically substandard loans on non-accrual status) are accounted for in accordance with ASC 310-30 as they display significant credit deterioration since origination.

In accordance with ASC 310-30, for both purchased non-impaired loans and purchased impaired loans, the difference between contractually required payments at acquisition and the cash flows expected to be collected is referred to as the non-accretable difference. This amount is not recognized as a yield adjustment or as a loss accrual or a valuation allowance. Further, any excess of cash flows expected at acquisition over the estimated fair value is referred to as the accretable yield and is recognized into interest income over the remaining life of the loan when there is a reasonable expectation about the amount and timing of such cash flows.

Increases in expected cash flows subsequent to the initial investment are recognized prospectively through adjustment of the yield net of any impact of the loss share agreement with the FDIC, if applicable, on the loan over its remaining estimated life. Decreases in expected cash flows are recognized immediately as impairment. If the Company does not have the information necessary to reasonably estimate cash flows to be expected, it may use the cost recovery method or cash basis method of income recognition. Valuation allowances on these impaired loans reflect only losses incurred after the acquisition (meaning the present value of all cash flows expected at acquisition that ultimately are not to be received).

Substantially all of the loans acquired in transactions with the FDIC displayed at least some level of credit deterioration and as such are included as non-impaired and impaired loans as described immediately above.

Lease investments: The Company’s investment in operating leases is reported as lease investments, net.  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 life of five years or less.

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 over the estimated useful lives of the assets.  Useful lives range from five to 10 years for furniture and equipment, and five to 39 years for buildings and building improvements.  Land improvements are amortized over a period of 15 years and leasehold improvements are amortized over the term of the related lease or the estimated useful lives of the improvements, whichever is shorter.  Land is not subject to depreciation.  Maintenance and repairs are charged to expense as incurred, while major improvements are capitalized and amortized to operating expense over their identified useful lives.  Premises and equipment and other long-lived assets are tested for impairment whenever events or changes in circumstances indicate the carrying amount of the assets may not be recoverable from future undiscounted cash flows.  If impaired, the assets are recorded at fair value. 

Other real estate owned (OREO): OREO includes real estate assets that have been received in satisfaction of debt.  OREO is initially recorded at fair value less estimated selling costs, which establishes the cost basis.  Subsequently, OREO is carried at the lower of the cost basis 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 net loss recognized on other real estate owned.  Operating results from OREO are recorded separately on the income statement within other real estate expense, net.

Cash surrender value of life insurance: The Company has purchased bank-owned life insurance policies on certain executives.  Bank-owned life insurance is recorded at its cash surrender value.  Changes in the cash surrender values are included in non-interest income.

Goodwill: The excess of the cost of an acquisition over the fair value of the net assets acquired, including core deposit and client relationship intangibles, consists of goodwill.  Under the provisions of ASC Topic 350, goodwill is subject to at least annual

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assessments for impairment by applying a fair value based test.  The Company reviews goodwill and other intangible assets to determine potential impairment annually, or more frequently if events and circumstances indicate that the asset might be impaired, by comparing the carrying value of the asset with the anticipated future cash flows. The Company's annual assessment is done at the unit level. As of December 31, 2013, the annual assessment date, the Company had two reporting units: banking and leasing. The Company did not recognize impairment losses during the year ended December 31, 2013.

Other intangibles: The Company’s other intangible assets consist of core deposit and customer intangibles obtained through acquisitions.  Core deposit intangibles (the portion of an acquisition purchase price which represents value assigned to the existing deposit base) have finite lives and are amortized by the declining balance method over four to 15 years.  Other intangible assets are tested for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable from future undiscounted cash flows.  If impaired, the assets are recorded at fair value.

FDIC indemnification asset: As part of the Heritage, Benchmark, Broadway, and New Century transactions, MB Financial Bank entered into loss-share agreements with the FDIC. These agreements cover realized losses on loans and foreclosed real estate. These loss-share assets are measured separately from the loan portfolios because they are not contractually embedded in the loans and are not transferable with the loans should MB Financial Bank choose to dispose of them. Fair values at the acquisition dates were estimated based on projected cash flows available for loss-share based on the credit adjustments estimated for each loan pool and the loss-share percentages.  The loss-share assets are also separately measured from the related loans and foreclosed real estate and recorded separately on the balance sheet.  The corresponding accretion is recorded separately on the income statement.  Although these assets are contractual receivables from the FDIC, there are no contractual interest rates.

When cash flow estimates are adjusted downward for a particular loan pool, the FDIC indemnification asset is increased.  An allowance for loan losses is established for the impairment of the loans.  A provision for loan losses is recognized for the difference between the increase in the FDIC indemnification asset and the decrease in cash flows.

When cash flow estimates are adjusted upward for a particular loan pool, the FDIC indemnification asset is decreased.  The difference between the decrease in the FDIC indemnification asset and the increase in cash flows is accreted over the estimated life of the loan pool.

When cash flow estimates are adjusted downward for covered foreclosed real estate, the FDIC indemnification asset is increased.  A charge is recognized for the difference between the increase in the FDIC indemnification asset and the decrease in cash flows.

When cash flow estimates are adjusted upward for covered foreclosed real estate, the FDIC indemnification asset is decreased.  Any write-down after the transfer to covered foreclosed real estate is reversed.

In both scenarios, the claw-back liability will increase or decrease accordingly.

Preferred stock: Preferred stock callable at the option of the Company is initially recorded at the amount of proceeds received.  Any discount from the liquidation value is accreted to the expected call date and charged to retained earnings.  This accretion is recorded using the level-yield method.  Preferred dividends paid (declared and accrued) and any accretion is deducted from net income for computing income available to common stockholders and earnings per share computations.

Treasury stock: Treasury stock is recorded at acquisition cost. Gains and losses on disposition are recorded as increases or decreases to additional paid-in capital with losses in excess of previously recorded gains charged directly to retained earnings.

Derivative financial instruments and hedging activities: ASC Topic 815 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.  ASC Topic 815 requires that changes in the derivative’s fair value be recognized currently in earnings unless specific hedge accounting criteria are met.  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.

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), 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), or a non-designated derivative (i.e. an instrument with no hedging designation).  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. 

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Ineffective portions of changes in the fair value of cash flow hedges are recognized in earnings.  Changes in the fair value of derivatives that are not designated as fair value or cash flow are reported currently in earnings, as noninterest income.

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.

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; 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.

Transfers of financial assets: Transfers of financial assets are accounted for as sales, when control over the assets has been surrendered.  Control over transferred assets is deemed to be surrendered when the assets have been isolated from the Company, the transferee obtains the right (free of conditions that constrain it from taking advantage of the right) to pledge or exchange the transferred assets, and the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.

Sale of maintenance contracts: LaSalle Business Solutions, LLC (LBS), a subsidiary of LaSalle Systems Leasing, Inc., sells third party maintenance contracts to customers.  The maintenance is serviced by third party providers, with LBS maintaining no legal obligation under the contract to perform additional services.  Revenues are recorded net of cost of sales, as LBS is viewed as an agent under ASC Topic 605, accepting minimal credit risk, maintaining no obligation to perform maintenance under the contracts and having no control over selection of the maintenance supplier.

Asset management and trust assets: Assets of the asset management and trust department, other than trust cash on deposit at MB Financial Bank, are not included in these consolidated financial statements because they are not assets of the bank.

Stock-based compensation: The Company accounts for its equity awards in accordance with ASC Topic 718.  ASC Topic 718 requires public companies to recognize compensation expense related to stock-based equity awards in their income statements.  See Note 19 below for more information.

Income taxes: Deferred taxes are provided on a liability method whereby deferred tax assets are recognized for deductible temporary differences, operating loss carryforwards and tax credit carryforwards, while 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.

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Basic and diluted earnings per common share: Earnings per common share is computed using the two-class method. Basic earnings per common share is computed by dividing net income available to common stockholders by the weighted-average number of common shares outstanding during the applicable period, excluding outstanding participating securities. Participating securities include non-vested restricted stock awards and restricted stock units, though no actual shares of common stock related to restricted stock units are issued until the settlement of such units, to the extent holders of these securities receive non-forfeitable dividends or dividend equivalents at the same rate as holders of the Company's common stock. Diluted earnings per common share is computed using the weighted-average number of shares determined for the basic earnings per common share computation plus the dilutive effect of stock compensation using the treasury stock method.

The following table presents a reconciliation of the number of shares used in the calculation of basic and diluted earnings per common share (amounts in thousands, except common share data):

	Years Ended December 31,
	2013		2012		2011
Distributed earnings allocated to common stock	$	24,290	$	7,149	$	2,185
Undistributed earnings	74,165		83,225		36,543
Net income	98,455		90,374		38,728
Less: preferred stock dividends and discount accretion	—		3,269		10,414
Net income available to common stockholders	98,455		87,105		28,314
Less: earnings and dividends allocated to participating securities	2		3		33
Earnings allocated to common stockholders	$	98,453	$	87,102	$	28,281
Weighted average shares outstanding for basic earnings per common share	54,509,612		54,270,297		54,057,158
Dilutive effect of equity awards	484,253		235,679		280,122
Weighted average shares outstanding for diluted earnings per common share	54,993,865		54,505,976		54,337,280
Basic earnings per common share	$	1.81	$	1.61	$	0.52
Diluted earnings per common share	1.79		1.60		0.52

Comprehensive income: Comprehensive income consists of net income and other comprehensive income.  Other comprehensive income includes unrealized gains and losses on securities available-for-sale, net of deferred taxes, which are reported as a separate component of stockholders’ equity on the consolidated balance sheet.

Segment Reporting: An operating segment is a component of an entity: (i) engages in business activities from which it may earn revenues and incur expenses; (ii) has operating results that are reviewed regularly by the entity’s chief operating decision maker to make decisions about resources to be allocated to the segment and assess its performance; and (iii) has discrete financial information available. As of December 31, 2013, the Company had two reportable operating segments: banking and leasing. 

New authoritative accounting guidance:

ASC Topic 805 “Business Combinations.” New authoritative accounting guidance under ASC Topic 805, “Business Combinations” amended prior guidance on the subsequent accounting for an indemnification asset recognized at the acquisition date as a result of a government-assisted (Federal Deposit Insurance Corporation) acquisition of a financial institution that includes a loss-sharing agreement. The new authoritative guidance requires that at each subsequent reporting date, an acquirer measure an indemnification asset on the same basis as the indemnified liability or asset, subject to any contractual limitations on its amount, and, for an indemnification asset that is not subsequently measured at fair value, management's assessment of the collectability of the indemnification asset. Any amortization of changes in value should be limited to the contractual term of the indemnification agreement (that is, the lesser of the term of the indemnification agreement and the remaining life of the indemnified assets). The Company adopted this new authoritative guidance on January 1, 2013, and it did not have an impact on the Company's statements of operations and financial condition.

ASC Topic 210 “Disclosures about Offsetting Assets and Liabilities.” New authoritative accounting guidance under ASC Topic 210, “Disclosures about Offsetting Assets and Liabilities” amended prior guidance to require an entity to disclose both gross and net information about both instruments and transactions eligible for offset in the statement of financial position and instruments and transactions subject to an agreement similar to a master netting arrangement. The instruments and transactions would include

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derivatives, sale and repurchase agreements and reverse sale and repurchase agreements, and securities borrowing and securities lending arrangements. This new authoritative guidance was further amended to clarify the scope of offsetting disclosures. The Company adopted the new authoritative guidance on January 1, 2013, and it did not have an impact on the Company's statements of operations and financial condition. See disclosures in Note 20.

ASC Topic 220 “Comprehensive Income.” New authoritative accounting guidance under ASC Topic 220, “Comprehensive Income” amended prior guidance to improve the reporting of reclassifications out of accumulated other comprehensive income by requiring an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component. In addition, an entity is required to present, either on the face of the statement or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income if the amount reclassified is required under U.S. GAAP. The Company adopted this new authoritative guidance on January 1, 2013, and it did not have an impact on the Company's statements of operations and financial condition.

ASC Topic 815 “Derivatives and Hedging.” New authoritative accounting guidance under ASC Topic 815, “Derivatives and Hedging” amended prior guidance to permit the Fed Funds Effective Swap Rate (OIS) to be used as a U.S. benchmark interest rate for hedge accounting purposes, in addition to U.S. government treasury obligation rates and London Interbank Offered Rate swap rate. The amendments also remove the restriction on using different benchmark rates for similar hedges. The new authoritative guidance was effective prospectively for new and redesignated hedging relationships entered into on or after July 17, 2013 and it did not have an impact on the Company's statements of operations and financial condition.

ASC Topic 740 “Income Taxes.” New authoritative accounting guidance under ASC Topic 740, “Income Taxes” amended prior guidance to include explicit guidance on the financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. An unrecognized tax benefit, or a portion of an unrecognized tax benefit, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, except as follows. To the extent a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction to settle any additional income taxes that would result from the disallowance of a tax position or the tax law of the applicable jurisdiction does not require the entity to use, and the entity does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. The new authoritative guidance will be for reporting periods after January 1, 2014 and is not expected to have an impact on the Company's statements of operations and financial condition.

ASC Topic 310 "Receivables." New authoritative accounting guidance under ASC Topic 310, “Receivables” amended prior guidance to clarify that an in substance repossession or foreclosure occurs, and a creditor is considered to have received physical

possession of residential real estate property collateralizing a consumer mortgage loan, upon either (1) the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure or (2) the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. Additionally, the amendments require interim and annual disclosures. The new authoritative guidance will be for reporting periods after January 1, 2015 and is not expected to have an impact on the Company's statements of operations and financial condition.

Reclassifications: Certain prior period amounts have been reclassified to conform to current period presentation.  These reclassifications did not result in any changes to previously reported net income or stockholders’ equity.

Note 2.    Business Combinations

Celtic Leasing Corp.  The following business combination was accounted for under the acquisition method of accounting.  Accordingly, the results of operations of the acquired company have been included in the Company’s results of operations since the date of acquisition.  Under this method of accounting, assets and liabilities acquired are recorded at their estimated fair values, net of applicable income tax effects.  The excess cost over fair value of net assets acquired is recorded as goodwill.  In the event that the fair value of net assets acquired exceeds the cost, the Company will record a gain on the acquisition.

On December 28, 2012, MB Financial Bank acquired a 100% equity interest in Celtic Leasing Corp. (“Celtic”), a privately held, mid-ticket equipment leasing company. Celtic specializes in solutions for the health care, legal, technology, and manufacturing industries. MB Financial Bank estimated contingent consideration related to the transaction which may be paid out at future dates. This consideration is based on the performance of lease residual values which will be determined in future years over an earn-out period. As the consideration paid for Celtic exceeded the net assets acquired, goodwill was recorded on the acquisition. Goodwill recorded in the transaction is not tax deductible. The purchase accounting entries were finalized for lease loans, goodwill and

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other intangibles in the fourth quarter of 2013. The impact of any future changes to the amount of contingent consideration will be reflected in the statement of operations.

Estimated fair values of the assets acquired and liabilities assumed in the Celtic transaction, as of the closing date of the transaction were as follows (in thousands):

Assets Acquired and Liabilities Assumed

(Dollar Amounts in Thousands)

	Celtic
	December 28,
	2012
ASSETS
Cash and cash equivalents	$	31,647
Investment securities available for sale	635
Loans and leases	32,933
Premises and equipment	81
Goodwill	36,300
Other intangibles	5,028
Other assets	27,323
Total assets	$	133,947
LIABILITIES
Accrued expenses and other liabilities	$	75,290
Total liabilities	$	75,290
Cash paid (received) on acquisition	$	58,657
Net gain recorded on acquisition	$	—

Taylor Capital Group, Inc. On July 14, 2013, the Company and Taylor Capital Group, Inc. (“Taylor Capital”) entered into an Agreement and Plan of Merger (the "Merger Agreement") whereby the Company will acquire Taylor Capital. The Merger Agreement provides that, upon the terms and subject to the conditions set forth therein, Taylor Capital will merge with and into the Company, with the Company as the surviving corporation in the merger. Immediately following the Merger, Taylor Capital's wholly owned bank subsidiary, Cole Taylor Bank, will merge with the Company's wholly owned bank subsidiary, MB Financial Bank. Cole Taylor Bank is a commercial bank headquartered in Chicago with $5.7 billion in assets, $3.6 billion in loans and $3.7 billion in deposits as of December 31, 2013.

Subject to the terms and conditions of the Merger Agreement, at the effective time of the Merger (the "Effective Time"), each share of Taylor Capital common stock and each share of Taylor Capital nonvoting convertible preferred stock ("non-voting preferred stock") will be converted into the right to receive, promptly following the Effective Time, (1) 0.64318 of a share of the Company's common stock and (2) $4.08 in cash. All "in-the-money" Taylor Capital stock options and warrants outstanding immediately prior to the Effective Time will be canceled in exchange for a cash payment as provided in the Merger Agreement, as will all then-outstanding unvested restricted stock awards of Taylor Capital; however, the cash consideration paid for such restricted stock awards will remain subject to vesting or other lapse restrictions. Each share of Taylor Capital's Perpetual Non-Cumulative Preferred Stock, Series A, will be exchanged for a share of a series of preferred stock of the Company with substantially identical terms.

The merger is subject to regulatory approvals, approval by the Company's stockholders, approval by Taylor Capital stockholders and certain other customary closing conditions and is expected to close in the first half of 2014. In addition, it is a condition to the Company's obligation to complete the Merger that the shares of Taylor Capital common stock and Taylor Capital nonvoting preferred stock whose holders have perfected appraisal rights under Delaware law represent less than nine percent of the total number of outstanding shares of Taylor Capital common stock and Taylor Capital nonvoting preferred stock.

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Note 3.    Restrictions on Cash and Due From Banks

MB Financial Bank is 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 required reserve balances was approximately $75.1 million and $64.4 million at December 31, 2013 and 2012, respectively.

The nature of the Company’s business requires that it maintain amounts with banks and federal funds sold which, at times, may exceed federally insured limits.  Management monitors these correspondent relationships and the Company has not experienced any losses in such accounts.

Note 4. Investment Securities

Carrying amounts and fair values of investment securities were as follows (in thousands):

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
December 31, 2013
Available for Sale
U.S. Government sponsored agencies and enterprises	$	50,486	$	1,704	$	(122	)	$	52,068
States and political subdivisions	19,398		22		(277		)	19,143
Residential mortgage-backed securities	696,415		8,555		(3,737		)	701,233
Commercial mortgage-backed securities	50,891		2,050		—			52,941
Corporate bonds	284,083		1,597		(2,610		)	283,070
Equity securities	10,649		—		(192		)	10,457
	1,111,922		13,928		(6,938		)	1,118,912
Held to Maturity
States and political subdivisions	932,955		7,584		(4,366		)	936,173
Residential mortgage-backed securities	249,578		13,178		—			262,756
	1,182,533		20,762		(4,366		)	1,198,929
Total	$	2,294,455	$	34,690	$	(11,304	)	$	2,317,841
December 31, 2012
Available for Sale
U.S. Government sponsored agencies and enterprises	$	38,605	$	2,710	$	—		$	41,315
States and political subdivisions	679,991		45,571		(543		)	725,019
Residential mortgage-backed securities	930,413		14,038		(5,249		)	939,202
Commercial mortgage-backed securities	51,100		3,026		—			54,126
Corporate bonds	97,014		213		(553		)	96,674
Equity securities	11,398		447		(10		)	11,835
	1,808,521		66,005		(6,355		)	1,868,171
Held to Maturity
States and political subdivisions	237,563		21,039		—			258,602
Residential mortgage-backed securities	255,858		21,221		—			277,079
	493,421		42,260		—			535,681
Total	$	2,301,942	$	108,265	$	(6,355	)	$	2,403,852

Securities of states and political subdivisions with a fair value of $656.6 million were transferred from available for sale to held to maturity during the third quarter of 2013, which is the new cost basis. As of the date of the transfer, the resulting unrealized holding gain continues to be reported as a separate component of stockholders’ equity as accumulated other comprehensive income, net of tax. This unrealized gain will be amortized over the remaining life of the securities as a yield adjustment.

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We do not have any meaningful direct or indirect holdings of subprime residential mortgage loans, home equity lines of credit, or any Fannie Mae or Freddie Mac preferred or common equity securities in our investment portfolio. 

The Company has no direct exposure to the State of Illinois, but approximately 27% of the state and political subdivisions portfolio consists of securities issued by municipalities located in Illinois as of December 31, 2013. Approximately 90% of such securities were general obligation issues as of December 31, 2013.

Unrealized losses on investment securities and the fair value of the related securities at December 31, 2013 were as follows (in thousands):

	Less Than 12 Months					12 Months or More					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
	Value		Losses			Value		Losses			Value		Losses
Available for Sale
U.S. Government sponsored agencies and enterprises	$	18,598	$	(122	)	$	—	$	—		$	18,598	$	(122	)
States and political subdivisions	2,275		(166		)	4,748		(111		)	7,023		(277		)
Residential mortgage-backed securities	232,807		(2,905		)	44,182		(832		)	276,989		(3,737		)
Corporate bonds	122,344		(2,606		)	705		(4		)	123,049		(2,610		)
Equity securities	10,457		(192		)	—		—			10,457		(192		)
	386,481		(5,991		)	49,635		(947		)	436,116		(6,938		)
Held to Maturity
States and political subdivisions	235,016		(4,330		)	1,301		(36		)	236,317		(4,366		)
Totals	$	621,497	$	(10,321	)	$	50,936	$	(983	)	$	672,433	$	(11,304	)

Unrealized losses on investment securities and the fair value of the related securities at December 31, 2012 were as follows (in thousands):

	Less Than 12 Months					12 Months or More					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
	Value		Losses			Value		Losses			Value		Losses
Available for Sale
States and political subdivisions	$	57,540	$	(543	)	$	—	$	—		$	57,540	$	(543	)
Residential mortgage-backed securities	270,539		(5,083		)	16,434		(166		)	286,973		(5,249		)
Corporate bonds	58,241		(553		)	—		—			58,241		(553		)
Equity securities	30		(10		)	—		—			30		(10		)
Totals	$	386,350	$	(6,189	)	$	16,434	$	(166	)	$	402,784	$	(6,355	)

The total number of security positions in the investment portfolio in an unrealized loss position at December 31, 2013 was 345 compared to 117 at December 31, 2012. Declines in the fair value of available for sale securities below their cost that are deemed to be other than temporary are reflected in earnings as realized losses to the extent the impairment is related to credit losses. The amount of the impairment related to other factors is recognized in other comprehensive income. In estimating other-than-temporary impairment losses, management considers, among other things, (i) the length of time and the extent to which the fair value has been less than cost, (ii) the financial condition and near-term prospects of the issuer, and (iii) whether or not the Company is more likely than not to sell the security before recovery of its cost basis.

As of December 31, 2013, management does not have the intent to sell any of the securities in the table above and believes that it is more likely than not that the Company will not have to sell any such securities before a recovery of cost. The fair value is expected to recover as the bonds approach their maturity date or repricing date or if market yields for such investments decline. Accordingly, as of December 31, 2013, management believes the impairments detailed in the table above are temporary.

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Net (losses) gains recognized on investment securities available for sale were as follows (in thousands):

	For the Years Ended December 31,
	2013			2012			2011
Realized gains	$	15		$	787		$	647
Realized losses	(2		)	(8		)	(7		)
Impairment charges	(14		)	(224		)	—
Net (losses) gains	$	(1	)	$	555		$	640

The amortized cost and fair value of investment securities as of December 31, 2013 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, mortgage-backed securities are not included in the maturity categories in the following maturity summary.

	Amortized		Fair
(In thousands)	Cost		Value
Available for sale:
Due in one year or less	$	504	$	505
Due after one year through five years	337,107		337,675
Due after five years through ten years	7,676		7,582
Due after ten years	8,680		8,519
Equity securities	10,649		10,457
Residential and commercial mortgage-backed securities	747,306		754,174
	1,111,922		1,118,912
Held to maturity:
Due in one year or less	27,708		27,715
Due after one year through five years	252,967		254,608
Due after five years through ten years	121,269		121,128
Due after ten years	531,011		532,722
Residential mortgage-backed securities	249,578		262,756
	1,182,533		1,198,929
Total	$	2,294,455	$	2,317,841

Investment securities available for sale with carrying amounts of $908.4 million and $989.6 million at December 31, 2013 and 2012, respectively, were pledged as collateral on public deposits and for other purposes as required or permitted by law. Of those pledged, the Company had investment securities available for sale pledged as collateral for advances from the Federal Home Loan Bank of $29.0 million and $32.1 million at December 31, 2013 and 2012, respectively.

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Note 5. Loans

Loans consist of the following at (in thousands):

	December 31,
	2013		2012
Commercial	$	1,281,377	$	1,220,472
Commercial collateralized by assignment of lease payments	1,494,188		1,303,020
Commercial real estate	1,647,700		1,761,832
Residential real estate	314,440		314,359
Construction real estate	141,253		110,261
Indirect vehicle	262,632		208,633
Home equity	268,289		305,186
Other consumer	66,952		93,317
Gross loans, excluding covered loans	5,476,831		5,317,080
Covered loans	235,720		449,850
Total loans(1)	$	5,712,551	$	5,766,930

(1)Gross loan balances at December 31, 2013 and 2012 are net of unearned income, including net deferred loan fees of $1.9 million and $1.1 million, respectively.

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 a majority of the loan customers are located in the markets serviced by MB Financial Bank.

The Company's extension of credit is governed by its Credit Risk Policy which was established to control the quality of the Company's loans. These policies and procedures are reviewed and approved by the Board of Directors on a regular basis.

Commercial Loans. Commercial credit is extended primarily to middle market customers. Such credits are typically comprised of working capital loans, loans for physical asset expansion, asset acquisition loans and other business loans. Loans to closely held businesses will generally be guaranteed in full or for a meaningful amount by the businesses' principal owners. Commercial loans are made based primarily on the historical and projected cash flow of the borrower and secondarily on the underlying collateral provided by the borrower. The cash flows of borrowers, however, may not behave as forecasted and collateral securing loans may fluctuate in value due to economic or individual performance factors. Minimum standards and underwriting guidelines have been established for all commercial loan types.

Commercial Loans Collateralized by Assignment of Lease Payments ("Lease Loans"). The Company makes lease loans to both investment grade and non-investment grade companies. Investment grade lessees are companies rated in one of the four highest categories by Moody's Investor Services or Standard & Poor's Rating Services. In the event the related lessee has not received any such rating, where the related lessee would be viewed under the underwriting polices of the Company as an investment grade company. Whether or not companies fall into this category, each lease loan is considered on its individual merit based on financial information available at the time of underwriting.

Commercial Real Estate Loans. Commercial real estate loans are subject to underwriting standards and processes similar to commercial loans. These loans are viewed primarily as cash flow loans and the repayment of these loans is largely dependent on the successful operation of the property. Loan performance may be adversely affected by factors impacting the general economy or conditions specific to the real estate market such as geographic location and/or property type.

Construction Real Estate Loans. The Company defines construction loans as loans where the loan proceeds are controlled by the Company and used exclusively for the improvement of real estate in which the Company holds a mortgage. Due to the inherent risk in this type of loan, they are subject to other industry specific policy guidelines outlined in the Company's Credit Risk Policy.

Consumer Related Loans. The Company originates direct and indirect consumer loans including primarily residential real estate, home equity lines and loans, credit cards, and indirect motorcycle loans using a matrix-based credit analysis as part of the underwriting process. Each loan type has a separate specified matrix which consists of several factors including debt to income,

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type of collateral and loan to collateral value, credit history and Company relationship with the borrower. Indirect loan and credit card underwriting involves the use of risk-based pricing in the underwriting process.

Loans outstanding to executive officers and directors of the Company and MB Financial Bank, including companies in which they have management control or controlling beneficial ownership, at December 31, 2013 and 2012, were approximately $24.0 million. Total advances on loans outstanding to executive officers and directors, including companies in which they have management control or controlling beneficial ownership, were $2.7 million, and total repayments were $2.7 million during the year ended December 31, 2013. In the opinion of management, these loans have similar terms to other customer loans and do not present more than normal risk of collection.

 A collateral pledge agreement exists whereby at all times, the Company must keep on hand, free of all other pledges, liens, and encumbrances, first mortgage loans and home equity loans with unpaid principal balances aggregating no less than 133% for first mortgage loans and 250% for home equity loans of the outstanding advances from the Federal Home Loan Bank.  As of December 31, 2013 and 2012, the Company had $518.4 million and $28.4 million, respectively, of loans pledged as collateral for Federal Home Loan Bank advances. 

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The following table presents the contractual aging of the recorded investment in past due loans by class of loans as of December 31, 2013 and 2012 (in thousands):

	Current		30-59 Days Past Due		60-89 Days Past Due		Loans Past Due 90 Days or More		Total Past Due		Total
December 31, 2013
Commercial	$	1,273,302	$	5,952	$	626	$	1,497	$	8,075	$	1,281,377
Commercial collateralized by assignment of lease payments	1,489,391		3,841		656		300		4,797		1,494,188
Commercial real estate:
Healthcare	213,665		—		—		3,064		3,064		216,729
Industrial	372,975		5,465		—		1,404		6,869		379,844
Multifamily	302,456		3,078		181		2,226		5,485		307,941
Retail	334,198		328		2,816		7,258		10,402		344,600
Office	155,936		—		—		2,066		2,066		158,002
Other	233,464		4,898		259		1,963		7,120		240,584
Residential real estate	302,362		1,422		1,030		9,626		12,078		314,440
Construction real estate	138,563		391		—		2,299		2,690		141,253
Indirect vehicle	259,488		2,210		657		277		3,144		262,632
Home equity	257,219		1,725		2,165		7,180		11,070		268,289
Other consumer	66,866		81		1		4		86		66,952
Gross loans, excluding covered loans	5,399,885		29,391		8,391		39,164		76,946		5,476,831
Covered loans	135,717		902		3,346		95,755		100,003		235,720
Total loans (1)	$	5,535,602	$	30,293	$	11,737	$	134,919	$	176,949	$	5,712,551
Nonperforming loan aging	$	56,339	$	14,325	$	3,283	$	32,614	$	50,222	$	106,561
Non-covered loans related to FDIC transactions (2)	$	13,541	$	163	$	391	$	6,550	$	7,104	$	20,645
December 31, 2012
Commercial	$	1,215,957	$	639	$	754	$	3,122	$	4,515	$	1,220,472
Commercial collateralized by assignment of lease payments	1,288,341		11,252		2,847		580		14,679		1,303,020
Commercial real estate:
Healthcare	192,039		—		—		3,238		3,238		195,277
Industrial	402,813		548		424		7,700		8,672		411,485
Multifamily	353,966		1,282		—		3,103		4,385		358,351
Retail	375,900		6,933		518		9,331		16,782		392,682
Office	186,665		742		280		1,125		2,147		188,812
Other	210,456		851		1,837		2,081		4,769		215,225
Residential real estate	306,927		382		1,248		5,802		7,432		314,359
Construction real estate	106,158		1,139		97		2,867		4,103		110,261
Indirect vehicle	206,126		1,588		498		421		2,507		208,633
Home equity	291,737		3,557		1,888		8,004		13,449		305,186
Other consumer	93,266		47		—		4		51		93,317
Gross loans, excluding covered loans	5,230,351		28,960		10,391		47,378		86,729		5,317,080
Covered loans	301,260		5,831		7,478		135,281		148,590		449,850
Total loans (1)	$	5,531,611	$	34,791	$	17,869	$	182,659	$	235,319	$	5,766,930
Nonperforming loan aging	$	69,836	$	3,171	$	3,718	$	40,261	$	47,150	$	116,986
Non-covered loans related to FDIC transactions (2)	$	12,752	$	312	$	1,542	$	7,115	$	8,969	$	21,721

(1)          Includes loans related to the InBank FDIC-assisted transaction completed by MB Financial Bank in 2009.

(2)          Loans related to the InBank FDIC-assisted transaction completed by MB Financial Bank in 2009.

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The following table presents the recorded investment in nonaccrual loans and loans past due ninety days or more and still accruing by class of loans as of December 31, 2013 and 2012 (in thousands):

	2013				2012
			Loans past due				Loans past due
	Nonaccrual		90 days or more and still accruing		Nonaccrual		90 days or more and still accruing
Commercial	$	17,781	$	—	$	23,886	$	229
Commercial collateralized by assignment of lease payments	4,276		291		1,180		222
Commercial real estate:
Healthcare	3,064		—		3,238		—
Industrial	15,265		155		19,179		147
Multifamily	5,145		—		7,225		—
Office	11,703		—		3,263		—
Retail	2,969		—		17,019		—
Other	19,991		—		9,437		—
Residential real estate	13,009		—		10,943		—
Construction real estate	475		—		1,028		—
Indirect vehicle	1,459		—		1,494		—
Home equity	10,969		—		17,486		1,000
Other consumer	9		—		9		1
Total	$	106,115	$	446	$	115,387	$	1,599

The reduction in interest income associated with loans on nonaccrual status was approximately $4.7 million, $5.6 million, and $11.9 million for the years ended December 31, 2013, 2012, and 2011, respectively.

The Company utilizes an internal asset classification system as a means of reporting problem and potential problem loans. Under the Company's risk rating system, the Company classifies potential problem and problem loans as “Special Mention,” “Substandard,” and “Doubtful.” Substandard loans include those characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected. Loans classified as Doubtful have all the weaknesses inherent in those classified Substandard with the added characteristic that the weaknesses present make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable. Loans that do not currently expose the Company to sufficient risk to warrant classification in one of the aforementioned categories, but possess weaknesses that deserve management's close attention are deemed to be Special Mention. Risk ratings are updated at least annually and any time the situation warrants.

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Loans that are not rated are included in groups of homogeneous loans with similar risk and loss characteristics and therefore are not included in the tables below. The following tables present the risk category of loans by class of loans based on the most recent analysis performed and the contractual aging as of December 31, 2013 and 2012 (in thousands):

	Pass		Special Mention		Substandard		Doubtful		Total
December 31, 2013
Commercial	$	1,193,114	$	26,637	$	61,000	$	626	$	1,281,377
Commercial collateralized by assignment of lease payments	1,486,899		553		6,736		—		1,494,188
Commercial real estate:
Healthcare	189,705		21,186		2,774		3,064		216,729
Industrial	345,236		5,328		29,280		—		379,844
Multifamily	296,179		342		11,420		—		307,941
Retail	316,420		10,660		17,520		—		344,600
Office	151,393		2,682		3,927		—		158,002
Other	217,188		349		23,047		—		240,584
Construction real estate	139,847		540		866		—		141,253
Total	$	4,335,981	$	68,277	$	156,570	$	3,690	$	4,564,518
December 31, 2012
Commercial	$	1,136,294	$	33,068	$	50,895	$	215	$	1,220,472
Commercial collateralized by assignment of lease payments	1,292,241		3,322		7,457		—		1,303,020
Commercial real estate:
Healthcare	170,265		21,774		—		3,238		195,277
Industrial	355,218		15,243		41,024		—		411,485
Multifamily	318,991		25,297		14,063		—		358,351
Retail	340,919		25,096		26,667		—		392,682
Office	159,056		7,120		22,636		—		188,812
Other	193,824		2,553		18,848		—		215,225
Construction real estate	97,724		552		11,985		—		110,261
Total	$	4,064,532	$	134,025	$	193,575	$	3,453	$	4,395,585

Approximately $80.7 million and $85.5 million of the substandard and doubtful loans were non-performing as of December 31, 2013 and 2012, respectively.

For residential real estate, home equity indirect vehicle and other consumer loan classes, the Company also evaluates credit quality based on the aging status of the loan, which was previously presented, and by payment activity. The following table presents the recorded investment in those loan classes based on payment activity as of December 31, 2013 and 2012 (in thousands):

	Performing		Non-performing		Total
December 31, 2013
Residential real estate	$	301,431	$	13,009	$	314,440
Indirect vehicle	261,173		1,459		262,632
Home equity	257,320		10,969		268,289
Other consumer	66,943		9		66,952
Total	$	886,867	$	25,446	$	912,313
December 31, 2012
Residential real estate	$	303,416	$	10,943	$	314,359
Indirect vehicle	207,139		1,494		208,633
Home equity	286,700		18,486		305,186
Other consumer	93,307		10		93,317
Total	$	890,562	$	30,933	$	921,495

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The following tables present loans individually evaluated for impairment by class of loans as of December 31, 2013 and 2012 (in thousands):

	December 31, 2013
	Unpaid Principal Balance		Recorded Investment		Partial Charge-offs		Allowance for Loan Losses Allocated		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:
Commercial	$	8,903	$	8,903	$	—	$	—	$	8,259	$	—
Commercial collateralized by assignment of lease payments	3,401		3,401		—		—		1,030		6
Commercial real estate:
Healthcare	—		—		—		—		2,698		—
Industrial	7,560		7,560		—		—		8,900		—
Multifamily	1,166		1,166		—		—		758		11
Retail	4,466		4,466		—		—		3,628		—
Office	559		527		32		—		922		—
Other	2,963		2,963		—		—		4,380		—
Residential real estate	4,234		4,234		—		—		3,260		—
Construction real estate	—		—		—		—		—		—
Indirect vehicle	—		—		—		—		—		—
Home equity	577		577		—		—		797		—
Other consumer	—		—		—		—		—		—
With an allowance recorded:
Commercial	8,923		8,919		4		4,284		13,476		4
Commercial collateralized by assignment of lease payments	1,060		1,060		—		144		1,279		192
Commercial real estate:
Healthcare	3,186		3,064		122		382		8,189		—
Industrial	7,707		7,705		2		3,038		3,699		—
Multifamily	5,374		5,374		—		1,661		6,443		340
Retail	14,169		12,428		1,741		1,511		12,885		280
Office	2,442		2,442		—		791		4,045		—
Other	20,367		17,029		3,338		796		12,868		20
Residential real estate	13,496		12,710		786		3,119		12,966		245
Construction real estate	475		475		—		227		1,603		—
Indirect vehicle	173		123		50		57		86		—
Home equity	23,840		23,395		445		1,358		24,283		772
Other consumer	—		—		—		—		—		—
Total	$	135,041	$	128,521	$	6,520	$	17,368	$	136,454	$	1,870

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	December 31, 2012
	Unpaid Principal Balance		Recorded Investment		Partial Charge-offs		Allowance for Loan Losses Allocated		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:
Commercial	$	10,993	$	9,505	$	1,488	$	—	$	14,089	$	105
Commercial collateralized by assignment of lease payments	390		390		—		—		278		9
Commercial real estate:
Healthcare	10,943		3,238		7,705		—		2,751		—
Industrial	16,891		14,940		1,951		—		16,374		29
Multifamily	800		800		—		—		1,340		14
Retail	5,372		4,917		455		—		9,241		—
Office	1,568		1,568		—		—		1,151		—
Other	4,860		4,860		—		—		6,005		—
Residential real estate	3,097		2,711		386		—		6,476		—
Construction real estate	—		—		—		—		577		—
Indirect vehicle	—		—		—		—		—		—
Home equity	2,558		2,558		—		—		8,976		—
Other consumer	—		—		—		—		182		—
With an allowance recorded:
Commercial	14,484		14,381		103		3,620		8,455		—
Commercial collateralized by assignment of lease payments	885		885		—		188		1,130		95
Commercial real estate:
Healthcare	—		—		—		—		3,901		—
Industrial	5,525		4,238		1,287		1,255		2,443		—
Multifamily	8,233		7,249		984		2,284		5,847		180
Retail	23,144		17,257		5,887		3,604		10,058		293
Office	1,706		1,695		11		522		1,904		—
Other	4,661		4,577		84		1,263		6,082		16
Residential real estate	10,565		10,565		—		2,858		3,417		227
Construction real estate	4,552		2,167		2,385		497		3,775		61
Indirect vehicle	—		—		—		—		—		—
Home equity	13,765		13,763		2		850		4,800		563
Other consumer	—		—		—		—		—		—
Total	$	144,992	$	122,264	$	22,728	$	16,941	$	119,252	$	1,592

Average impaired loans for the years ended December 31, 2013, 2012 and 2011 were $136.5 million, $119.3 million and $267.8 million, respectively.  Interest income recognized on impaired loans was $1.9 million, $1.6 million and $3.0 million for the years ended December 31, 2013, 2012 and 2011, respectively.

Impaired loans included accruing restructured loans of $29.4 million and $21.3 million that have been modified and are performing in accordance with those modified terms as of December 31, 2013 and 2012, respectively.  In addition, impaired loans included $25.0 million and $28.4 million of non-performing, restructured loans as of December 31, 2013 and 2012, respectively.

Loans may be restructured in an effort to maximize collections from financially distressed borrowers. We use various restructuring techniques, including, but not limited to, deferral of past due interest or principal, implementing an A/B note structure, redeeming past due taxes, reduction of interest rates, extending maturities and modification of amortization schedules. Residential real estate loans are restructured in an effort to minimize losses while allowing borrowers to remain in their primary residences when possible. Programs that we offer to residential real estate borrowers include the Home Affordable Refinance Program (“HARP”) and a restructuring program similar to the Home Affordable Modification Program (“HAMP”) for first mortgage borrowers as well as the Second Lien Modification Program (“2MP”) and similar programs for home equity borrowers in keeping with the restructuring techniques discussed above.

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Occasionally, the Company will restructure a note into two separate notes (A/B structure), charging off the entire B portion of the note. The A note is structured with appropriate loan-to-value and cash flow coverage ratios that provide for a high likelihood of repayment. The A note is classified as a non-performing note until the borrower has displayed a historical payment performance for a reasonable time prior to and subsequent to the restructuring. A period of sustained repayment for at least six months generally is required to return the note to accrual status provided that management has determined that the performance is reasonably expected to continue. The A note will be classified as a restructured note (either performing or nonperforming) through the calendar year of the restructuring that the historical payment performance has been established. As of December 31, 2013, there was approximately $1.1 million in recorded investment in relation to one A/B structure.  As of December 31, 2012, there was approximately $3.1 million in recorded investment in relation to one A/B structures.  Both of these A/B structures are included above as accruing restructured loans.

A loan classified as a troubled debt restructuring will no longer be included in the troubled debt restructuring disclosures in the years after the restructuring if the loan performs in accordance with the terms specified by the restructuring agreement and the interest rate specified in the restructuring agreement represents a market rate at the time of modification. The specified interest rate is considered a market rate when the interest rate is equal or greater than the rate the Company is willing to accept at the time of restructuring for a new loan with comparable risk. If there are concerns that the borrower would not be able to meet the modified terms of the loan, the loan would continue to be included in the troubled debt restructuring disclosures.

Impairment analyses on commercial-related loans classified as troubled debt restructurings are performed in conjunction with the normal allowance for loan loss process. See Note 1 for additional information. Consumer loans classified as troubled debt restructurings are aggregated in two pools that share common risk characteristics, home equity and residential real estate loans, with impairment measured on a quarterly basis based on the present value of expected future cash flows discounted at the loan's effective interest rate.

The following table presents loans that have been restructured during the year ended December 31, 2013 (dollars in thousands):

	December 31, 2013
	Number of Loans	Pre-Modification Recorded Investment		Post-Modification Recorded Investment		Charge-offs and Specific Reserves
Performing:
Commercial real estate:
Multifamily	1	$	601	$	601	$	—
Residential real estate	6	910		910		—
Home equity	14	2,204		2,204		—
Total	21	$	3,715	$	3,715	$	—
Non-Performing:
Commercial	2	$	1,251	$	1,251	$	673
Commercial collateralized by assignment of lease payments	1	3,401		3,401		—
Commercial real estate:
Healthcare	1	3,164		3,164		496
Industrial	4	2,570		2,570		1,425
Multifamily	2	623		623		169
Retail	3	862		862		235
Other	1	84		84		23
Residential real estate	9	1,803		1,682		121
Indirect vehicle	26	171		129		42
Home equity	26	3,430		3,430		—
Total	75	$	17,359	$	17,196	$	3,184

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The following table presents loans that have been restructured during the year ended December 31, 2012 (dollars in thousands):

	December 31, 2012
	Number of Loans	Pre-Modification Recorded Investment		Post-Modification Recorded Investment		Charge-offs and Specific Reserves
Performing:
Commercial real estate:
Multifamily	2	$	262	$	262	$	—
Retail	1	236		236		—
Residential real estate	4	1,575		1,575		—
Construction real estate	1	1,158		1,158		—
Home equity	53	7,943		7,867		76
Total	61	$	11,174	$	11,098	$	76
Non-Performing:
Commercial	4	$	3,305	$	3,305	$	73
Commercial collateralized by assignment of lease payments	1	202		202		168
Commercial real estate:
Industrial	1	284		284		77
Multifamily	2	333		333		220
Retail	4	818		818		204
Other	1	157		157		50
Residential real estate	5	1,092		857		235
Home equity	42	5,283		5,283		—
Total	60	$	11,474	$	11,239	$	1,027

Of the troubled debt restructurings entered into during the past twelve months, $843 thousand subsequently defaulted during the year ended December 31, 2013.  Performing troubled debt restructurings are considered to have defaulted when they become 90 days or more past due post restructuring or are placed on non-accrual status.

The following tables present the troubled debt restructurings activity during the year ended December 31, 2013 (dollars in thousands):

	Performing			Non-performing
Beginning balance	$	21,256		$	28,418
Additions	3,715			17,359
Charge-offs	(71		)	(3,810		)
Principal payments, net	(2,813		)	(8,901		)
Removals	—			(565		)
Transfer to other real estate owned	—			(206		)
Transfer from non-performing/performing	8,603			1,260
Transfer to non-performing/performing	(1,260		)	(8,603		)
Ending balance	$	29,430		$	24,952

Approximately $8.6 million of non-performing troubled debt restructurings were transferred to performing status. A majority of these loans were identified as non-performing troubled debt restructurings during 2012 and have performed in accordance with the modified terms. The loans continue to be reported as performing troubled debt restructurings. The loans transferred to nonperforming in the table above were restructured in 2010 and 2011.

Loans removed from troubled debt restructuring status are those that were restructured in a previous calendar year at a market rate of interest and have performed in compliance with the modified terms.

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The following table presents the type of modification for loans that have been restructured and the post-modification recorded investment during the year ended December 31, 2013 (dollars in thousands):

	December 31, 2013
	Extended		Extended		Extended		Extended
	Maturity,		Maturity, Delay		Maturity and		Maturity, Delay				Delay in
	Amortization		in Payments and		Delay in Payments		in Payments and				Payments or
	and Reduction		Reduction of		or Reduction of		Reduction of		Extended		Reduction of
	of Interest Rate		Interest Rate		Interest Rate		Amount		Maturity		Interest Rate		Total
Commercial	$	42	$	—	$	1,209	$	—	$	—	$	—	$	1,251
Commercial collateralized by assignment of lease payments	—		—		3,401		—		—		—		3,401
Commercial real estate:
Healthcare	—		—		—		3,164		—		—		3,164
Industrial	—		—		—		—		2,570		—		2,570
Multifamily	187		—		—		—		601		436		1,224
Retail	256		205		401		—		—		—		862
Office	—		—		—		—		—		—		—
Other	84		—		—		—		—		—		84
Residential real estate	1,917		—		—		—		178		618		2,713
Construction real estate	—		—		—		—		—		—		—
Indirect vehicle	—		—		—		—		44		127		171
Home equity	2,875		—		708		—		440		1,611		5,634
Other consumer	—		—		—		—		—		—		—
Total	$	5,361	$	205	$	5,719	$	3,164	$	3,833	$	2,792	$	21,074

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Activity in the allowance for loan losses was as follows (in thousands):

	Year Ended December 31,
	2013			2012			2011
Balance at beginning of year	$	128,279		$	135,975		$	192,217
Provision for credit losses	(5,804		)	(8,900		)	120,750
Charge-offs:
Commercial	3,706			2,408			17,571
Commercial collateralized by assignment of lease payments	—			1,721			1,466
Commercial real estate	7,517			11,377			96,633
Residential real estate	2,796			2,944			12,643
Construction real estate	980			4,007			52,917
Indirect vehicle	2,911			2,259			2,836
Home equity	3,692			4,551			11,066
Other consumer	2,073			1,349			1,648
Total charge-offs	23,675			30,616			196,780
Recoveries:
Commercial	3,156			3,475			5,370
Commercial collateralized by assignment of lease payments	1,131			6,720			225
Commercial real estate	6,025			16,987			3,332
Residential real estate	479			501			49
Construction real estate	1,616			2,019			8,590
Indirect vehicle	1,411			1,096			1,399
Home equity	594			671			224
Other consumer	250			351			599
Total recoveries	14,662			31,820			19,788
Net charge-offs (recoveries)	9,013			(1,204		)	176,992
Allowance for credit losses	113,462			128,279			135,975
Allowance for unfunded credit commitments	(1,716		)	(4,075		)	(9,177		)
Balance at December 31,	$	111,746		$	124,204		$	126,798

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The following table presents the activity in the allowance for credit losses, balance in allowance for credit losses and recorded investment in loans by portfolio segment and based on impairment method as of December 31, 2013 and 2012 (in thousands):

	Commercial			Commercial collateralized  by assignment of lease payments			Commercial real estate			Residential real estate		Construction real estate			Indirect vehicle		Home equity		Other Consumer		Unfunded Commitments			Total
December 31, 2013
Allowance for credit losses:
Beginning balance	$	24,943		$	7,755		$	61,056		$	6,941	$	11,222		$	1,324	$	9,401	$	1,562	$	4,075		$	128,279
Transfer to (from) allowance for unfunded credit commitments	—			—			—			—		500			—		—		—		(500		)	—
Charge-offs	3,706			—			7,517			2,796		980			2,911		3,692		2,073		—			23,675
Recoveries	3,156			1,131			6,025			479		1,616			1,411		594		250		—			14,662
Provision	(932		)	273			(7,936		)	4,248		(5,502		)	1,838		2,175		1,891		(1,859		)	(5,804		)
Ending balance	$	23,461		$	9,159		$	51,628		$	8,872	$	6,856		$	1,662	$	8,478	$	1,630	$	1,716		$	113,462
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	4,284		$	144		$	8,179		$	3,119	$	227		$	57	$	1,358	$	—	$	689		$	18,057
Collectively evaluated for impairment	18,693			9,015			41,763			5,753		6,567			1,605		7,120		1,630		1,027			93,173
Acquired and accounted for under ASC 310-30 (1)	484			—			1,686			—		62			—		—		—		—			2,232
Total ending allowance balance	$	23,461		$	9,159		$	51,628		$	8,872	$	6,856		$	1,662	$	8,478	$	1,630	$	1,716		$	113,462
Loans:
Individually evaluated for impairment	$	17,822		$	4,461		$	64,724		$	16,944	$	475		$	123	$	23,972	$	—	$	—		$	128,521
Collectively evaluated for impairment	1,246,523			1,489,727			1,582,976			293,883		140,778			262,509		244,317		66,952		—			5,327,665
Acquired and accounted for under ASC 310-30 (1)	35,673			—			140,504			5,448		48,313			—		107		26,320		—			256,365
Total ending loans balance	$	1,300,018		$	1,494,188		$	1,788,204		$	316,275	$	189,566		$	262,632	$	268,396	$	93,272	$	—		$	5,712,551
December 31, 2012
Allowance for credit losses:
Beginning balance	$	21,106		$	7,561		$	68,695		$	3,935	$	15,639		$	1,834	$	7,333	$	695	$	9,177		$	135,975
Transfer to (from) allowance for unfunded credit commitments	—			—			—			—		1,132			—		—		—		(1,132		)	—
Charge-offs	2,408			1,721			11,377			2,944		4,007			2,259		4,551		1,349		—			30,616
Recoveries	3,475			6,720			16,987			501		2,019			1,096		671		351		—			31,820
Provision	2,770			(4,805		)	(13,249		)	5,449		(3,561		)	653		5,948		1,865		(3,970		)	(8,900		)
Ending balance	$	24,943		$	7,755		$	61,056		$	6,941	$	11,222		$	1,324	$	9,401	$	1,562	$	4,075		$	128,279
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	3,620		$	188		$	8,928		$	2,858	$	497		$	—	$	850	$	—	$	3,499		$	20,440
Collectively evaluated for impairment	18,878			7,567			50,120			4,083		10,662			1,324		8,551		1,562		576			103,323
Acquired and accounted for under ASC 310-30 (1)	2,445			—			2,008			—		63			—		—		—		—			4,516
Total ending allowance balance	$	24,943		$	7,755		$	61,056		$	6,941	$	11,222		$	1,324	$	9,401	$	1,562	$	4,075		$	128,279
Loans:
Individually evaluated for impairment	$	23,886		$	1,275		$	65,339		$	13,276	$	2,167		$	—	$	16,321	$	—	$	—		$	122,264
Collectively evaluated for impairment	1,178,804			1,301,745			1,696,493			297,144		108,094			208,633		288,865		93,317		—			5,173,095
Acquired and accounted for under ASC 310-30 (1)	65,658			—			247,390			6,528		118,360			—		465		33,170		—			471,571
Total ending loans balance	$	1,268,348		$	1,303,020		$	2,009,222		$	316,948	$	228,621		$	208,633	$	305,651	$	126,487	$	—		$	5,766,930

(1)  Loans acquired in FDIC-assisted transactions and accounted for under ASC Subtopic 310-30 “Receivables — Loans and Debt Securities Acquired with Deteriorated Credit Quality.”

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Purchased loans acquired in a business combination are recorded at estimated fair value on their purchase date without a carryover of the related allowance for loan losses.  These acquired loans are segregated into three types: pass rated loans with no discount attributable to credit quality, non-impaired loans with a discount attributable at least in part to credit quality and impaired loans with evidence of significant credit deterioration. 

• Pass rated loans (typically performing loans) are accounted for in accordance with ASC 310-20 "Nonrefundable Fees and Other Costs" as these loans do not have evidence of credit deterioration since origination.

• Non-impaired loans (typically past-due loans, special mention loans and performing substandard loans) are accounted for in accordance with ASC 310-30 as they display at least some level of credit deterioration since origination.

• Impaired loans (typically substandard loans on non-accrual status) are accounted for in accordance with ASC 310-30 as they display significant credit deterioration since origination.

In accordance with ASC 310-30, for both purchased non-impaired loans and purchased impaired loans, the difference between contractually required payments at acquisition and the cash flows expected to be collected is referred to as the non-accretable difference. Further, any excess of cash flows expected at acquisition over the estimated fair value is referred to as the accretable yield and is recognized into interest income over the remaining life of the loan when there is a reasonable expectation about the amount and timing of such cash flows.

Substantially all of the loans acquired in transactions with the FDIC displayed at least some level of credit deterioration and as such are included as non-impaired and impaired loans as described immediately above.

During the year ended December 31, 2013, there was a negative provision for credit losses of $2.5 million and net recoveries of $218 thousand, respectively, in relation to 15 pools of purchased loans with a total carrying amount of $195.5 million as of December 31, 2013. During the year ended December 31, 2012, there was a provision for credit losses of $8.1 million and net charge-offs of $4.4 million in relation to 14 pools of purchased loans with a total carrying amount of $261.9 million as of December 31, 2012.  There was $2.2 million in allowance for loan losses related to these purchased loans at December 31, 2013 and $4.5 million at December 31, 2012.  The provision for credit losses and accompanying charge-offs are included in the table above.

Changes in the accretable yield for loans acquired in FDIC-assisted transactions and accounted for under ASC 310-30 were as follows for the years ended December 31, 2013 and 2012 (in thousands):

	Year Ended December 31,
	2013			2012
Balance at beginning of period	$	5,685		$	18,703
Accretion	(4,456		)	(13,535		)
Other	1,108			517
Balance at end of period	$	2,337		$	5,685

In our FDIC-assisted transactions, the fair value of purchased impaired loans, on the acquisition date, was determined based on assigned risk ratings, expected cash flows and the fair value of loan collateral. The fair value of loans that were non-impaired was determined based on estimates of losses on defaults and other market factors. Due to the loss-share agreements with the FDIC, MB Financial Bank recorded a receivable (FDIC indemnification asset) from the FDIC equal to the present value of the corresponding reimbursement percentages on the estimated losses embedded in the loan portfolio.

When cash flow estimates are adjusted downward for a particular loan pool, the FDIC indemnification asset is increased. An allowance for loan losses is established for the impairment of the loans. A provision for loan losses is recognized for the difference between the increase in the FDIC indemnification asset and the decrease in cash flows.

When cash flow estimates are adjusted upward for a particular loan pool, the FDIC indemnification asset is decreased. The difference between the decrease in the FDIC indemnification asset and the increase in cash flows is accreted over the estimated life of the loan pool.

When cash flow estimates are adjusted downward for covered foreclosed real estate, the FDIC indemnification asset is increased. A charge is recognized for the difference between the increase in the FDIC indemnification asset and the decrease in cash flows.

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When cash flow estimates are adjusted upward for covered foreclosed real estate, the FDIC indemnification asset is decreased. Any write-down after the transfer to covered foreclosed real estate is reversed.

In both scenarios, the clawback liability (the amount the FDIC requires MB Financial Bank to pay back if certain thresholds are met) will increase or decrease accordingly.

The carrying amount of covered loans and other purchased non-covered loans at December 31, 2013 consisted of purchased credit-impaired loans and non-credit-impaired loans as shown in the following table (in thousands):

December 31, 2013	Purchased Impaired Loans		Purchased  Non-Impaired Loans		Total
Covered loans:
Commercial related (1)	$	9,445	$	5,629	$	15,074
Commercial	803		2,764		3,567
Commercial real estate	51,762		88,742		140,504
Construction real estate	41,928		6,385		48,313
Other	2,529		25,733		28,262
Total covered loans	$	106,467	$	129,253	$	235,720
Estimated receivable amount from the FDIC under the loss-share agreement (2)	$	570	$	9,974	$	10,544
Non covered loans:
Commercial related (3)	$	4,726	$	12,306	$	17,032
Other	89		3,524		3,613
Total non-covered loans	$	4,815	$	15,830	$	20,645

(1) Covered commercial related loans include commercial, commercial real estate and construction real estate loans acquired in connection with the Heritage and Benchmark FDIC-assisted transactions.

(2) Estimated reimbursable amounts from the FDIC under the loss-share agreement exclude $1.1 million in reimbursable amounts related to covered other real estate owned.

(3) Non covered commercial related loans include commercial, commercial real estate and construction real estate for InBank.

Outstanding balances on purchased loans from the FDIC were $248.6 million and $515.7 million as of December 31, 2013 and 2012, respectively.  The related carrying amount on loans purchased from the FDIC was $235.7 million and $471.6 million as of December 31, 2013 and 2012, respectively.

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Note 6.   Lease Investments

The lease portfolio is comprised of various types of equipment, generally technology related, including computer systems and satellite equipment, medical equipment, material handling and general manufacturing equipment. 

Lease investments by categories follow (in thousands):

	December 31,
	2013			2012
Direct finance leases:
Minimum lease payments	$	155,945		$	96,834
Estimated unguaranteed residual values	31,272			32,013
Less: unearned income	(14,473		)	(6,995		)
Direct finance leases (1)	$	172,744		$	121,852
Leveraged leases:
Minimum lease payments	$	24,320		$	28,831
Estimated unguaranteed residual values	2,508			2,714
Less: unearned income	(1,644		)	(2,376		)
Less: related non-recourse debt	(23,243		)	(27,319		)
Leveraged leases (1)	$	1,941		$	1,850
Operating leases:
Equipment, at cost	$	218,473		$	222,083
Less accumulated depreciation	(87,384		)	(92,260		)
Lease investments, net	$	131,089		$	129,823

(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 are classified as direct finance leases. If these direct finance leases have non-recourse debt associated with them and meet the additional requirements for a leveraged lease, they are further classified as leverage leases, and the associated debt is netted with the outstanding balance in the consolidated financial statements. Interest income on direct finance and leveraged leases is recognized using methods which approximate a level yield over the term of the lease.

Operating leases are investments in equipment leased to other companies, where the residual component makes up more than 10% of the investment.  The Company funds most of the lease equipment purchases internally, but has some loans at other banks which totaled $17.5 million at December 31, 2013 and $21.1 million at December 31, 2012.

The minimum lease payments receivable for the various categories of leases are due as follows (in thousands) for the years ending December 31,

	Direct Finance		Leveraged		Operating
Year	Leases		Leases		Leases		Total
2014	$	62,310	$	13,622	$	34,839	$	110,771
2015	45,899		7,395		23,263		76,557
2016	26,814		2,482		13,981		43,277
2017	13,247		642		5,232		19,121
2018	5,838		179		2,011		8,028
Thereafter	1,837		—		421		2,258
	$	155,945	$	24,320	$	79,747	$	260,012

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At December 31, 2013, the following reflects the residual values for leases by category in the year the initial lease term ends (in thousands):

	Residual Values
	Direct
End of initial lease term	Finance		Leveraged		Operating
December 31,	Leases		Leases		Leases		Total
2014	$	12,417	$	802	$	13,239	$	26,458
2015	7,427		974		8,310		16,711
2016	6,203		609		9,793		16,605
2017	2,975		105		6,680		9,760
2018	1,420		18		3,533		4,971
Thereafter	830		—		1,433		2,263
	$	31,272	$	2,508	$	42,988	$	76,768

The lease residual value represents the present value of the estimated fair value of the leased equipment at the termination of the lease.  Lease residual values are reviewed quarterly, and any write-downs or charge-offs deemed necessary are recorded in the period in which they become known. To mitigate this risk of loss, we usually limit individual leased equipment residuals to approximately $500 thousand per transaction and seek to diversify both the type of equipment leased and the industries in which the lessees participate.  Often times, there are several individual lease schedules under one master lease.  There were 3,590 leases at December 31, 2013 compared to 3,464 at December 31, 2012.  The average residual value per lease schedule was approximately $21 thousand at December 31, 2013 and $22 thousand at December 31, 2012.  The average residual value per master lease schedule was approximately $82 thousand at December 31, 2013 and $79 thousand at December 31, 2012.

Income from lease financing, net was composed of (in thousands):

	Years Ended December 31,
	2013			2012			2011
Rental income	$	62,629		$	49,473		$	54,859
Equipment maintenance contracts revenue, net of cost of sales	11,071			14,129			7,713
Vendor promotional income	7,587			4,051			3,191
Other lease related revenue	1,796			167			408
Gain on sale of lease payments and leased equipment, net of residual write downs	12,002			4,708			3,158
Income on lease investments, gross	95,085			72,528			69,329
Less:
Depreciation on operating leases	(33,842		)	(36,146		)	(42,390		)
Lease financing, net	$	61,243		$	36,382		$	26,939

Extension rents received in excess of residual values are reflected in rental income. Equipment maintenance contracts revenue represents the gross amount of revenue paid for maintenance contracts and other services brokered to customers.  The maintenance contracts are serviced by third parties, with the Company maintaining no obligation under the contracts.  The cost of sales is the amount paid by the Company to the third party maintenance provider. From time to time, the Company sells minimum lease payments to third parties.

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. 

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Note 7.    Premises and Equipment

Premises and equipment consisted of (in thousands):

	December 31,
	2013			2012
Land and land improvements	$	67,389		$	69,832
Buildings	98,675			97,365
Furniture and equipment	97,766			88,425
Buildings and leasehold improvements	55,639			49,813
	319,469			305,435
Accumulated depreciation	(98,404		)	(83,902		)
Premises and equipment, net	$	221,065		$	221,533

Depreciation on premises and equipment totaled $18.1 million, $16.3 million, and $13.6 million for the years ended December 31, 2013, 2012, and 2011, respectively.

Note 8.   Goodwill and Intangibles

The excess of the cost of an acquisition over the fair value of the net assets acquired, including core deposit and client relationship intangibles, consists of goodwill. Under ASC Topic 350, goodwill is subject to at least annual assessments for impairment by applying a fair value based test. The Company reviews goodwill to determine potential impairment annually, or more frequently if events and circumstances indicate that goodwill might be impaired, by comparing the carrying value of the reporting units with the fair value of the reporting units.

The Company's annual assessment date is as of December 31. As of December 31, 2013, the Company had two reporting units: banking and leasing. Based on the Company's 2013 goodwill impairment testing, the fair values of the two reporting units were in excess of their carrying value. No impairment losses were recognized during the years ended December 31, 2013, 2012, or 2011. The carrying amount of goodwill was $423.4 million at December 31, 2013 and 2012.

The Company has other intangible assets consisting of core deposit and client relationship intangibles that had a remaining weighted average amortization period of approximately four years as of December 31, 2013.

The following table presents the changes in the carrying amount of core deposit and client relationship intangibles, gross carrying amount, accumulated amortization, and net book value as of December 31, 2013 and 2012 (in thousands):

	December 31,
	2013			2012
Balance at beginning of period	$	29,512		$	29,494
Amortization expense	(6,084		)	(5,010		)
Other intangibles from business combinations	—			5,028
Balance at end of period	$	23,428		$	29,512
Gross carrying amount	$	60,292		$	61,429
Accumulated amortization	(36,864		)	(31,917		)
Net book value	$	23,428		$	29,512

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

Years ending December 31,	Amount
2014	$	4,748
2015	4,030
2016	3,418
2017	3,071
2018	2,812
Thereafter	5,349
	$	23,428

Note 9. Deposits

The composition of deposits was as follows (in thousands):

	December 31,
	2013		2012
Demand deposit accounts, noninterest bearing	$	2,375,863	$	2,164,547
NOW and money market accounts	2,682,419		2,747,273
Savings accounts	855,394		811,333
Certificates of deposit, $100,000 or more	827,413		1,020,033
Other certificates of deposit	640,170		799,511
Total	$	7,381,259	$	7,542,697

Certificates of deposit of $100,000 or more included $224.2 million and $294.2 million of brokered deposits at December 31, 2013 and 2012, respectively.  Brokered deposits typically consist of smaller individual time certificates that have the same liquidity characteristics and yields consistent with time certificates of $100,000 or more.

At December 31, 2013, the scheduled maturities of certificates of deposit were as follows (in thousands):

2014	$	1,064,248
2015	205,921
2016	64,423
2017	49,420
2018	18,739
Thereafter	64,832
	$	1,467,583

Note 10. Short-Term Borrowings

Short-term borrowings were as follows as of December 31, 2013 and 2012 (dollars in thousands):

	December 31,
	2013				2012
	Weighted Average				Weighted Average
	Cost		Amount		Cost		Amount
Customer repurchase agreements	0.20	%	$	193,389	0.23	%	$	208,242
Federal Home Loan Bank advances	0.17	%	300,000		3.58	%	12,360
	0.18	%	$	493,389	0.42	%	$	220,602

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The Company had a fixed rate $300.0 million Federal Home Loan Bank ("FHLB") advance with a maturity date less than one year at December 31, 2013 and $12.4 million in fixed rate FHLB advances with a maturity date less than one year at December 31, 2012.  At December 31, 2013, the interest rate on the advance outstanding on that date was 0.17% and the advance matured on January 2, 2014. The Company has investment securities available for sale and loans pledged as collateral on these FHLB advances. See Note 4. Investment Securities and Note 5. Loans of the notes to the consolidated financial statements.

Securities sold under agreements to repurchase are agreements in which the Company acquires funds by selling assets to another party under a simultaneous agreement to repurchase the same assets 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.  All securities sold under agreements to repurchase are recorded on the face of the balance sheet.

On March 9, 2012, the Company entered into a $35.0 million unsecured line of credit with a correspondent bank. Interest is payable at a rate of one month LIBOR + 2.00%. As of December 31, 2013, no amount was outstanding. The line originally matured on March 8, 2013, was renewed and is scheduled to mature on March 7, 2014.

Note 11. Long-term Borrowings

The Company had FHLB advances with original contractual maturities greater than one year of $4.3 million and $4.4 million at December 31, 2013 and 2012, respectively. As of December 31, 2013, the advances had fixed terms with effective interest rates, net of discounts, ranging from 3.23% to 5.87% and maturities ranging from April 2021 to April 2035. The Company has investment securities available for sale and loans pledged as collateral on these FHLB advances. See Note 4. Investment Securities and Note 5. Loans of the notes to the consolidated financial statements.

The Company had notes payable to banks totaling $17.5 million and $21.1 million at December 31, 2013 and 2012, respectively, which as of December 31, 2013, were accruing interest at rates ranging from 2.50% to 12.00%.  Lease investments includes equipment with an amortized cost of $25.7 million and $29.7 million at December 31, 2013 and 2012, respectively, that is pledged as collateral on these notes.

The Company had a $40.0 million10-year structured repurchase agreement as of December 31, 2013 and 2012, which bears interest at a fixed rate borrowing of 4.75% and expires in 2016.

During the first quarter of 2013, MB Financial Bank pre-paid a $50.0 million subordinated debt facility.  Interest was payable at a rate of 3-month LIBOR +1.70%. 

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

	Amount
Years ending December 31,
2014	$	8,974
2015	5,743
2016	42,915
2017	751
2018	180
Thereafter	3,596
	$	62,159

Note 12. Junior Subordinated Notes Issued to Capital Trusts

The Company has established statutory trusts 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 Company’s outstanding trust preferred securities qualify, and are treated by the Company, as Tier 1 regulatory capital.  The Company 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

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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, 2013 (in thousands):

	Coal City Capital Trust I		MB Financial Capital Trust II		MB Financial Capital Trust III		MB Financial Capital Trust IV
Junior Subordinated Notes:
Principal balance	$	25,774	$	36,083	$	10,310	$	20,619
Annual interest rate	3-mo LIBOR + 1.80%		3-mo LIBOR + 1.40%		3-mo LIBOR + 1.50%		3-mo LIBOR + 1.52%
Stated maturity date	September 1, 2028		September 15, 2035		September 23, 2036		September 15, 2036
Call date	September 1, 2008		December 15, 2010		September 23, 2011		September 15, 2011
Trust Preferred Securities:
Face Value	$	25,000	$	35,000	$	10,000	$	20,000
Annual distribution rate	3-mo LIBOR + 1.80%		3-mo LIBOR + 1.40%		3-mo LIBOR + 1.50%		3-mo LIBOR + 1.52%
Issuance date	July 1998		August 2005		July 2006		August 2006
Distribution dates (1)	Quarterly		Quarterly		Quarterly		Quarterly

	MB Financial Capital Trust V		MB Financial Capital Trust VI		FOBB Statutory Trust III (2)
Junior Subordinated Notes:
Principal balance	$	30,928	$	23,196	$	5,155
Annual interest rate	3-mo LIBOR + 1.30%		3-mo LIBOR + 1.30%		3-mo LIBOR + 2.80%
Stated maturity date	December 15, 2037		October 30, 2037		January 23, 2034
Call date	December 15, 2012		October 30, 2012		January 23, 2009
Trust Preferred Securities:
Face Value	$	30,000	$	22,500	$	5,000
Annual distribution rate	3-mo LIBOR + 1.30%		3-mo LIBOR + 1.30%		3-mo LIBOR + 2.80%
Issuance date	September 2007		October 2007		December 2003
Distribution dates (1)	Quarterly		Quarterly		Quarterly

(1) All distributions are cumulative and paid in cash.

(2) FOBB Statutory Trust III was established by First Oak Brook Bancshares, Inc. (“FOBB”) prior to the Company's acquisition of FOBB, and the junior subordinated note issued by FOBB to FOBB Statutory Trust III was assumed by the Company upon completion of the acquisition.

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.  Each trust’s ability to pay amounts due on the trust preferred securities is solely dependent upon the Company making payment on the related junior subordinated notes.  The Company’s obligation under the junior subordinated notes and other relevant trust agreements, in aggregate, constitute a full and unconditional guarantee by the Company of each trust’s obligations under the trust preferred securities issued by each trust.  The Company has the right to defer payment of interest on the notes and, therefore, distributions on the trust preferred securities, for up to five years, but not beyond the stated maturity date in the table above.  During any such deferral period, the Company may not pay cash dividends on its common or preferred stock and generally may not repurchase its common or preferred stock.

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Note 13. Lease Commitments and Rental Expense

The Company leases office space for certain branch offices.  At December 31, 2013, the future minimum annual rental commitments for these noncancelable leases and subleases of such space were as follows (in thousands):

	Gross		Sublease		Net
Years ending December 31,	Rents		Rents		Rents
2014	$	5,408	$	926	$	4,482
2015	4,801		697		4,104
2016	3,810		444		3,366
2017	2,929		422		2,507
2018	2,202		414		1,788
Thereafter	16,580		1,005		15,575
	$	35,730	$	3,908	$	31,822

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.

Net rental expense for the years ended December 31, 2013, 2012, and 2011 amounted to $4.7 million, $5.4 million, and $5.3 million, respectively.

Note 14. Employee Benefit Plans

The Company has a defined contribution 401(k) profit sharing plan that covers most full-time employees who have completed three months of service.  Each participant under the plan may contribute up to 75% of his/her eligible 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.

During 2013, each participant was eligible for a maximum total Company matching contribution of 3.5% of their eligible compensation.  Additionally, the Company may make annual discretionary profit sharing contributions. The Company’s total contribution to the plan for the year ended December 31, 2013 was estimated to be $7.0 million and was $6.9 million and $6.1 million for the years ended December 31, 2012 and 2011, respectively.

The Company has deferred compensation plans that allow certain executives, senior officers, directors and other employees to defer payment of up 100% of their base salary and bonus in the case of employees and board fees in the case of directors.  Discretionary Company contributions to these plans for the year ended December 31, 2013 were estimated to be approximately $643 thousand.  Contributions to these plans were $464 thousand and $492 thousand for the years ended December 31, 2012 and 2011, respectively.  In addition, pursuant to the Company’s agreement entered into with the Company’s Chief Executive Officer, he is entitled to receive on each December 31st while he is employed by the Company (starting December 31, 2007) a fully vested employer contribution to his account under the Company's non-stock deferred compensation plan in amount equal to 20% of his base salary then in effect.  The amounts deferred can be invested in MB Financial stock (under the Company’s stock deferred compensation plan) or publicly traded mutual funds (under the Company’s non-stock deferred compensation plan) at the discretion of the participant.  The cost of the MB Financial common stock held by MB Financial’s deferred compensation plans is reported separately in a manner similar to treasury stock (that is, changes in fair value are not recognized) with a corresponding deferred compensation obligation reflected in additional paid-in capital.  The amounts of the assets that are not invested in MB Financial common stock are recorded at their fair market value in other assets on the consolidated balance sheet.  As of December 31, 2013, the fair value of the assets held in other publicly traded funds totaled $10.7 million.  A liability is established, in other liabilities, on the consolidated balance sheet, for the fair value of the obligation to the participants.  Any increase or decrease in the fair market value of plan assets is recorded in other non-interest income on the consolidated statement of operations.  Any increase or decrease in the fair value of the deferred compensation obligation to participants is recorded as additional compensation expense or a reduction of compensation expense on the consolidated statement of operations.  The increase in fair market value of the assets and the obligation related to the deferred compensation plan was $1.6 million for the year ended December 31, 2013.

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Note 15. Income Taxes

The deferred taxes consist of (in thousands):

	December 31,
	2013			2012
Deferred tax asset:
Allowance for credit losses	$	44,418		$	50,336
Federal net operating loss carryforwards	—			1,926
State net operating loss carryforwards	24,354			23,677
Other real estate owned	7,878			22,153
Stock options and restricted stock	5,816			5,808
Loans	6,833			8,628
Deferred compensation	8,423			6,129
Tax credit carryforwards	13,233			15,491
Bonus accrual	4,739			4,438
Merger and non-compete accrual	623			865
Other items	1,222			1,343
Total deferred tax asset	117,539			140,794
Valuation allowance	—			—
Total deferred tax asset, net of valuation allowance	117,539			140,794
Deferred tax liability:
Premises and equipment	(118,000		)	(116,780		)
Deferred income from FDIC-assisted transactions	(48,272		)	(50,565		)
Investment securities	(5,030		)	(5,573		)
FHLB stock dividends	(2,441		)	(2,774		)
Core deposit intangible	(2,918		)	(2,669		)
Other items	(3,799		)	(3,673		)
Total deferred tax liability	(180,460		)	(182,034		)
Net deferred tax liability	(62,921		)	(41,240		)
Net unrealized holding gain on investment securities available for sale	(5,354		)	(23,431		)
Net deferred tax liability	$	(68,275	)	$	(64,671	)

The Company’s state net operating loss carryforwards totaled $450.7 million at December 31, 2013 and begin to expire in 2015 through 2027.  In January of 2011, the State of Illinois enacted legislation suspending the utilization of net operating loss carryforwards. For Illinois purposes, no carryover deduction is allowed for any taxable year ending after December 31, 2010 and prior to December 31, 2012, and no carryover deduction can exceed $100,000 for any taxable year ending on or after December 31, 2012 and prior to December 31, 2014. Further, the legislation extended the carryover period for Illinois net operating losses by the number of taxable years in which carryover deductions are disallowed or limited.  The Company's tax credit carryforwards include federal alternative minimum tax credits of $12.4 million with an indefinite carryforward period and general business credits of $700 thousand with expiration dates occurring in 2028 through 2033. Management has determined that is more likely than not that the deferred tax assets, including the net operating loss carryforwards, as of December 31, 2013, will be realized and that no valuation allowance is required.

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Income taxes attributable to continuing operations consist of (in thousands):

	Years Ended December 31,
	2013		2012		2011
Current expense (benefit):
Federal	$	12,234	$	15,075	$	713
State	5,576		6,225		(611		)
Foreign	—		—		—
	17,810		21,300		102
Deferred expense	21,681		15,177		5,166
	$	39,491	$	36,477	$	5,268

The reconciliation between the statutory federal income tax rate of 35% and the effective tax rate on income from continuing operations follows (in thousands):

	Years Ended December 31,
	2013			2012			2011
Federal income tax expense at expected statutory rate	$	48,281		$	44,398		$	15,398
Increase (decrease) due to:
Tax exempt income, net	(14,200		)	(12,539		)	(8,162		)
State tax benefit resulting from change in tax rate	—			—			(2,100		)
State tax expense net of federal impact	6,508			5,014			1,703
Nonincludable increase in cash surrender value of life insurance	(1,111		)	(1,177		)	(1,529		)
Nondeductible merger expense	591			—			—
Adjustment of tax contingency reserves	(24		)	14			35
Other items, net	(554		)	767			(77		)
Income tax expense	$	39,491		$	36,477		$	5,268

ASC Topic 740, "Accounting for Uncertainty in Income Taxes" provides guidance on financial statement recognition and measurement of tax positions taken, or expected to be taken, in tax returns.

A reconciliation of the change in unrecognized tax benefits from January 1, 2013 to December 31, 2013 is as follows (in thousands):

	Unrecognized Tax Benefit Without Interest			Interest on unrecognized Tax Benefit			Total Unrecognized Tax Benefit Including Interest
Balance at January 1, 2013	$	95		$	9		$	104
Increases for tax positions of prior years	15			5			20
Benefits recognized	(37		)	(7		)	(44		)
Balance at December 31, 2013	$	73		$	7		$	80

The whole amount of unrecognized tax benefits would affect the tax provision and the effective income tax rate if recognized in future periods.  The Company elects to treat interest and penalties recognized for the underpayment of income taxes as income tax expense, to the extent not included in unrecognized tax benefits.

The Company’s federal income tax returns are open and subject to examination for the 2010 tax return year and forward.  The Company’s various state income tax returns are generally open for the 2010 tax return year and forward based on individual state statutes of limitation.  The Company is not currently under examination by any taxing authority. 

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Note 16. Commitments and Contingencies

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

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

At December 31, 2013 and 2012, the following financial instruments were outstanding, the contractual amounts of which represent off-balance sheet credit risk (in thousands):

	Contractual Amount
	2013		2012
Commitments to extend credit:
Home equity lines	$	208,581	$	239,771
Other commitments	1,214,391		911,166
Letters of credit:
Standby	69,556		66,247
Commercial	708		465

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 home equity lines of credit may expire without being drawn upon.  Therefore, the total commitment amounts do not necessarily represent future cash requirements.  The amount of collateral obtained, if it is deemed necessary by the Company, is based on management’s credit evaluation of the customer.

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

Both standby and commercial letters of credit may be issued for any length of time, but normally do not exceed a period of five years.  These letters of credit may also be extended or amended from time to time depending on the bank customer’s needs.  As of December 31, 2013, the maximum remaining term for any standby letters of credit matures on December 31, 2021.  A fee is 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, 2013, the aggregate contractual amount of these letters of credit, which represents the maximum potential amount of future payments that the Company would be obligated to pay, increased $3.6 million to $70.3 million from $66.7 million at December 31, 2012.  Of the $70.3 million in commitments outstanding at December 31, 2013, approximately $63.8 million of the letters of credit have been issued or renewed since December 31, 2012.

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.  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.

As of December 31, 2013, the Company had approximately $2.0 million in capital expenditure commitments outstanding which relate to various projects to renovate existing branches.

Concentrations of credit risk:  The majority of the loans, commitments to extend credit and standby letters of credit have been granted to customers in the Company’s market area.  As of December 31, 2013, approximately 27% of our investments in securities issued by states and political subdivisions were within the state of Illinois.  We did not hold any direct exposure to the state of Illinois as of December 31, 2013. The distribution of commitments to extend credit approximates the distribution of loans outstanding.  Standby letters of credit are granted primarily to commercial borrowers. Lease banking provides banking services

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to lessors located throughout the United States. Our leasing subsidiaries originate leases to companies located through the United States.

Contingencies: In the normal course of business, the Company is involved in various legal proceedings.  In the opinion of management, any liability resulting from pending proceedings would not be expected to have a material adverse effect on the Company’s consolidated financial statements.

On July 26, 2013, an action captioned James Sullivan v. Taylor Capital Group, Inc., et al., Case No. 2013-CH17751 (the “Sullivan Action”) was commenced against Taylor Capital, the board of directors of Taylor Capital (the “Taylor Capital Board”), and MB Financial (collectively, the “Defendants”) in the Circuit Court of Cook County, Illinois (the “Court”), alleging that the Taylor Capital Board breached its fiduciary duties in connection with the pending MB Financial/Taylor Capital merger (the “Merger”) and that MB Financial aided and abetted those breaches of fiduciary duty. On August 8, 2013, a stockholder class action captioned Dennis Panozzo v. Taylor Capital Group, Inc., et. al., Case No. 2013-CH-18546 (the “Panozzo Action”) was commenced against the Defendants in the Court making similar allegations in connection with the Merger. Subsequently, on September 10, 2013, the Sullivan Action and the Panozzo Action were consolidated pursuant to Court order under the first-filed Sullivan Action, Case No. 2013-CH17751 (as so consolidated, the “Action”). On October 24, 2013, the plaintiffs in the Action (the “Plaintiffs”) filed a consolidated amended class action complaint, alleging that the Taylor Capital Board breached its fiduciary duties in connection with the Merger, including by making incomplete and misleading disclosures concerning the Merger, and that MB Financial aided and abetted those breaches of fiduciary duty.

On February 17, 2014, solely to eliminate the costs, risks, burden, distraction and expense of further litigation and to put the claims that were or could have been asserted to rest, the Defendants entered into a memorandum of understanding (the “MOU”) with the Plaintiffs regarding the settlement of the Action pursuant to which Taylor Capital and MB Financial agreed to make certain supplemental disclosures concerning the Merger, which each of Taylor Capital and MB Financial did in a Current Report on Form 8-K filed by each company on February 18, 2014 (the “Form 8-Ks”). The MOU also provides that, solely for purposes of settlement, the Court will certify a class consisting of all persons who were record or beneficial stockholders of Taylor Capital when the Merger was approved by the Taylor Capital Board or any time thereafter (the “Class”). In addition, the MOU provides that, subject to approval by the Court after notice to the members of the Class (the “Class Members”), the Action will be dismissed with prejudice and all claims that the Class Members may possess with regard to the Merger, with the exception of claims for statutory appraisal, will be released. In connection with the settlement, the Plaintiffs’ counsel have expressed their intention to seek an award by the Court of attorneys’ fees and expenses. The amount of the award to the Plaintiffs’ counsel will ultimately be determined by the Court. This payment will not affect the amount of merger consideration to be paid by MB Financial or that any Taylor Capital stockholder will receive in the Merger. There can be no assurance that the parties will ultimately enter into a definitive settlement agreement or that the Court will approve the settlement even if the parties enter into such an agreement. In the absence of either event, the proposed settlement as contemplated by the MOU may be terminated.

The Defendants continue to believe that the Action is without merit, have vigorously denied, and continue to vigorously deny, all of the allegations of wrongful or actionable conduct asserted in the Action, and the Taylor Capital Board vigorously maintains that it diligently and scrupulously complied with its fiduciary duties, that the joint proxy statement/prospectus dated January 14, 2014 mailed to the stockholders of Taylor Capital and MB Financial is complete and accurate in all material respects and that no further disclosure is required under applicable law. The Defendants are entering into the MOU and the contemplated settlement solely to eliminate the costs, risks, burden, distraction and expense of further litigation and to put the claims that were or could have been asserted to rest. Nothing in the MOU, any settlement agreement or any public filing, including the Form 8-Ks, shall be deemed an admission of the legal necessity of filing or the materiality under applicable laws of any of the additional information contained therein or in any public filing associated with the proposed settlement of the Action.

Based on information currently available, consultations with counsel and established reserves, management believes that the eventual outcome of this litigation will not have a material adverse effect on the Company's consolidated financial position or results of operations.

Note 17. Regulatory Matters

The Company’s primary source of cash is dividends from its bank subsidiary.  The bank subsidiary is subject to certain restrictions on the amount of dividends that it may declare without prior regulatory approval.  In addition, the dividends declared cannot be in excess of the amount which would cause the bank subsidiary to fall below the minimum required for capital adequacy purposes.

The Company and its bank subsidiary 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

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guidelines and the regulatory framework for prompt corrective action, the Company’s and its bank subsidiary’s assets, liabilities, and certain off-balance-sheet items are calculated under regulatory accounting practices.  The Company’s and its bank subsidiary’s 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 bank subsidiary 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 bank subsidiary met all capital adequacy requirements to which they are subject as of December 31, 2013 and 2012.

As of December 31, 2013, the most recent regulatory notification categorized the bank subsidiary as “well capitalized” under the regulatory framework for prompt corrective action.  To be categorized as “well capitalized,” the bank subsidiary 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 bank subsidiary’s categories.

The required and actual amounts and ratios for the Company and its bank subsidiary are presented below (dollars in thousands):

									To Be Well Capitalized Under
					For Capital				Prompt Corrective
	Actual				Adequacy Purposes				Action Provisions
	Amount		Ratio		Amount		Ratio		Amount		Ratio
As of December 31, 2013
Total capital (to risk-weighted assets):
Consolidated	$	1,106,541	16.53	%	$	535,430	8.00	%	N/A		N/A
MB Financial Bank	974,189		14.59		534,004		8.00		$	667,505	10.00	%
Tier 1 capital (to risk-weighted assets):
Consolidated	1,022,512		15.28	%	267,715		4.00	%	N/A		N/A
MB Financial Bank	890,380		13.34		267,002		4.00		400,503		6.00	%
Tier 1 capital (to average assets):
Consolidated	1,022,512		11.22	%	364,587		4.00	%	N/A		N/A
MB Financial Bank	890,380		9.79		363,904		4.00		454,880		5.00	%
As of December 31, 2012
Total capital (to risk-weighted assets):
Consolidated	$	1,059,357	16.62	%	$	509,885	8.00	%	N/A		N/A
MB Financial Bank	983,817		15.49		508,016		8.00		$	635,021	10.00	%
Tier 1 capital (to risk-weighted assets):
Consolidated	939,087		14.73	%	254,942		4.00	%	N/A		N/A
MB Financial Bank	863,836		13.60		254,008		4.00		381,012		6.00	%
Tier 1 capital (to average assets):
Consolidated	939,087		10.50	%	357,906		4.00	%	N/A		N/A
MB Financial Bank	863,836		9.68		356,984		4.00		446,230		5.00	%

N/A — not applicable

Note 18. Fair Value Measurements

ASC Topic 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. A fair value measurement assumes that the transaction to sell the asset or transfer the liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability. The price in the principal (or most advantageous) market used to measure the fair value of the asset or liability shall not be adjusted for transaction costs. An orderly transaction is a transaction that assumes exposure to the market for a period prior to the measurement date to allow for marketing activities that are usual and customary for transactions involving such assets and liabilities; it is not a forced transaction. Market participants are buyers and sellers in the principal market that are (i) independent, (ii) knowledgeable, (iii) able to transact and (iv) willing to transact.

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ASC Topic 820 requires the use of valuation techniques that are consistent with the market approach, the income approach and/or the cost approach. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets and liabilities. The income approach uses valuation techniques to convert expected future amounts, such as cash flows or earnings, to a single present value amount on a discounted basis. The cost approach is based on the amount that currently would be required to replace the service capacity of an asset (replacement cost). Valuation techniques should be consistently applied. Inputs to valuation techniques refer to the assumptions that market participants would use in pricing the asset or liability. Inputs may be observable, meaning those that reflect the assumptions market participants would use in pricing the asset or liability developed based on market data obtained from independent sources, or unobservable, meaning those that reflect the reporting entity's own assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. In that regard, ASC Topic 820 establishes a fair value hierarchy for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The fair value hierarchy is as follows:

Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

Level 3: Significant unobservable inputs that reflect a reporting entity's own assumptions about the assumptions that market participants would use in pricing an asset or liability.

A description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below.

In general, fair value is based upon quoted market prices, where available. If such quoted market prices are not available, fair value is based upon internally developed models that primarily use, as inputs, observable market-based parameters. Valuation adjustments may be made to ensure that financial instruments are recorded at fair value. These adjustments may include amounts to reflect counterparty credit quality, the Company's creditworthiness, among other things, as well as unobservable parameters. Any such valuation adjustments are applied consistently over time. Our valuation methodologies may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. While management believes the Company's valuation methodologies are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date. Transfers between levels of the fair value hierarchy are recognized on the actual date of the event or circumstances that caused the transfer, which generally coincides with the Company's monthly and/or quarterly valuation process.

Financial Instruments Recorded at Fair Value on a Recurring Basis

Securities Available for Sale. The fair values of securities available for sale are determined by quoted prices in active markets, when available, and classified as Level 1. If quoted market prices are not available, the fair value is determined by a matrix pricing, which is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities' relationship to other benchmark quoted securities and classified as Level 2. In cases where significant credit valuation adjustments are incorporated into the estimation of fair value, reported amounts are classified as Level 3 inputs.

Loans Held for Sale. Mortgage loans originated and held for sale in the secondary market are carried at fair value. The fair value of loans held for sale is determined using quoted secondary market prices and classified as level 2.

Assets Held in Trust for Deferred Compensation and Associated Liabilities.Assets held in trust for deferred compensation are recorded at fair value and included in “Other Assets” on the consolidated balance sheets. These assets are invested in mutual funds and classified as Level 1. Deferred compensation liabilities, also classified as Level 1, are carried at the fair value of the obligation to the employee, which corresponds to the fair value of the invested assets.

Derivatives. Currently, we use interest rate swaps to manage our interest rate risk. The valuation of these instruments is determined using widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of each derivative and classified as Level 2. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including LIBOR rate curves. We also obtain dealer quotations for these derivatives for

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comparative purposes to assess the reasonableness of the model valuations. We also offer other derivatives, including foreign currency forward contracts and interest rate lock commitments, to our customers and offset our exposure from such contracts by purchasing other financial contracts, which are valued using market consensus prices.

The following table summarizes financial assets and financial liabilities measured at fair value on a recurring basis as of December 31, 2013 and 2012, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value (in thousands):

	Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
2013
Financial assets
Securities available for sale:
U.S. Government sponsored agencies and enterprises	$	52,068	$	—	$	52,068	$	—
States and political subdivisions	19,143		—		19,143		—
Residential mortgage-backed securities	701,233		—		700,542		691
Commercial mortgage-backed securities	52,941		—		52,941		—
Corporate bonds	283,070		—		277,905		5,165
Equity securities	10,457		10,457		—		—
Loans held for sale	629		—		629		—
Assets held in trust for deferred compensation	10,679		10,679		—		—
Derivative financial instruments	18,645		—		18,645		—
Financial liabilities
Other liabilities (1)	10,569		10,569		—		—
Derivative financial instruments	18,632		—		18,632		—
2012
Financial assets
Securities available for sale:
U.S. Government sponsored agencies and enterprises	$	41,315	$	—	$	41,315	$	—
States and political subdivisions	725,019		—		725,019		—
Residential mortgage-backed securities	939,202		—		938,354		848
Commercial mortgage-backed securities	54,126		—		54,126		—
Corporate bonds	96,674		—		91,451		5,223
Equity securities	11,835		11,835		—		—
Loans held for sale	7,492		—		7,492		—
Assets held in trust for deferred compensation	7,746		7,746		—		—
Derivative financial instruments	29,096		—		29,096		—
Financial liabilities
Other liabilities (1)	7,746		7,746		—		—
Derivative financial instruments	29,055		—		29,055		—

(1) Liabilities associated with assets held in trust for deferred compensation

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The following table presents additional information about the unobservable inputs used in the fair value measurement of financial assets measured on a recurring basis that were categorized within the Level 3 of the fair value hierarchy (fair value in thousands):

	Fair Value at		Valuation	Unobservable
	December 31, 2013		Technique	Input	Range
Residential mortgage-backed securities	$	691	Discounted cash flows	Constant pre-payment rates
				(CPR) assumption	1% - 3% CPR
Corporate bonds	5,165		Discounted cash flows	Credit assumption	20% Loss

The Company did not have any transfers between Level 1 and Level 2 of the fair value hierarchy during the year ended December 31, 2013. The Company's policy for determining transfers between levels occurs at the end of the reporting period when circumstances in the underlying valuation criteria change and result in transfer between levels.

The following table presents additional information about financial assets measured at fair value on a recurring basis for which the Company used significant unobservable inputs (Level 3) (in thousands):

	Year Ended December 31
	2013			2012
Balance, beginning of period	$	6,071		$	6,992
Other comprehensive income	(44		)	81
Principal payments	(157		)	(885		)
Impairment charge	(14		)	(117		)
Balance, ending of period	$	5,856		$	6,071

Financial Instruments Recorded at Fair Value on a Nonrecurring Basis

The Company may be required, from time to time, to measure certain financial assets and financial liabilities at fair value on a nonrecurring basis in accordance with U.S. GAAP. These include assets that are measured at the lower of cost or fair value that were recognized at fair value below cost at the end of the period.

Impaired Loans.Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. Once a loan is identified as individually impaired, management measures impairment in accordance with ASC Topic 310. The fair value of impaired loans is estimated using one of several methods, including collateral value, market value of similar debt, enterprise value, liquidation value and discounted cash flows. Those impaired loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans. In accordance with ASC Topic 820, impaired loans where an allowance is established based on the fair value of collateral require classification in the fair value hierarchy. Collateral values are estimated using Level 3 inputs based on customized discounting criteria. For a majority of impaired real estate loans where an allowance is established based on the fair value of collateral (approximately 85%), the Company obtains a current external appraisal. Other valuation techniques are used as well, including internal valuations, comparable property analysis and contractual sales information.

Non-Financial Assets and Non-Financial Liabilities Recorded at Fair Value

The Company has no non-financial assets or non-financial liabilities measured at fair value on a recurring basis. Certain non-financial assets and non-financial liabilities measured at fair value on a non-recurring basis include foreclosed assets and non-financial long-lived assets.

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Other Real Estate and Repossessed Vehicles Owned (Foreclosed Assets). Foreclosed assets, upon initial recognition, are measured and reported at fair value through a charge-off to the allowance for possible loan losses based upon the fair value of the foreclosed asset. The fair value of foreclosed assets, upon initial recognition, are estimated using Level 3 inputs based on customized discounting criteria.

Non-Financial Long-Lived Assets.  During the year ended December 31, 2012, the Company recognized branch impairment charges of $2.2 million caused by the decision to close branches in that year.  The fair value of the branch was estimated using Level 3 inputs based on internal appraisals.

Assets measured at fair value on a nonrecurring basis as of December 31, 2013 and 2012 are included in the table below (in thousands):

	Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
2013
Financial assets:
Impaired loans	$	77,497	$	—	$	—	$	77,497
Non-financial assets:
Foreclosed assets	44,601		—		—		44,601
2012
Financial assets:
Impaired loans	$	62,258	$	—	$	—	$	62,258
Non-financial assets:
Foreclosed assets	60,228		—		—		60,228
Long-lived assets	2,314		—		—		2,314

The following table presents additional information about the unobservable inputs used in the fair value measurement of financial assets measured on a nonrecurring basis that were categorized within the Level 3 of the fair value hierarchy (fair value in thousands):

	Fair Value at		Valuation	Unobservable
	December 31, 2013		Technique	Input	Range
Impaired loans	$	77,497	Appraisal of collateral	Appraisal adjustments - sales costs	5% - 10%
Foreclosed assets	44,601		Appraisal of collateral	Appraisal adjustments - sales costs	5% - 10%

ASC Topic 825 requires disclosure of the fair value of financial assets and financial liabilities, including those financial assets and financial liabilities that are not measured and reported at fair value on a recurring basis or non-recurring basis. The methodologies for estimating the fair value of financial assets and financial liabilities that are measured at fair value on a recurring or non-recurring basis are discussed above. The estimated fair value approximates carrying value for cash and cash equivalents, accrued interest and the cash surrender value of life insurance policies. The methodologies for other financial assets and financial liabilities are discussed below:

The following methods and assumptions were used by the Company in estimating the fair values of its other 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.

Securities held to maturity: The fair values of securities held to maturity are determined by quoted prices in active markets, when available, and classified as Level 1. If quoted market prices are not available, the fair value is determined by a matrix pricing, which is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities' relationship to other benchmark quoted securities and classified

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as Level 2. In cases where significant credit valuation adjustments are incorporated into the estimation of fair value, reported amounts are classified as Level 3.

Non-marketable securities - FHLB and FRB Stock: The carrying amounts reported in the balance sheet approximate fair value.

Loans: The fair values for loans are estimated using discounted cash flow analyses, using the corporate bond curve adjusted for liquidity for commercial loans and the swap curve adjusted for liquidity for retail loans.

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 amounts payable on demand. Fair values for certificates of deposit are estimated using a discounted cash flow calculation that applies the Company's current incremental borrowing rates for similar terms.

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 are estimated based on the quoted market prices, when available, of the related trust preferred security instruments, or are estimated based on the quoted market prices of comparable trust preferred securities.

Accrued interest: The carrying amount of accrued interest receivable and payable approximate their fair values.

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.

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The estimated fair values of financial instruments are as follows (in thousands):

	December 31, 2013
	Carrying Amount		Estimated Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Financial Assets:
Cash and due from banks	$	205,193	$	205,193	$	205,193	$	—	$	—
Interest bearing deposits with banks	268,266		268,266		268,266		—		—
Federal funds sold	42,950		42,950		42,950		—		—
Investment securities available for sale	1,118,912		1,118,912		10,457		1,102,599		5,856
Investment securities held to maturity	1,182,533		1,198,929		—		1,198,929		—
Non-marketable securities - FHLB and FRB stock	51,417		51,417		—		—		51,417
Loans held for sale	629		629		—		629		—
Loans, net	5,600,805		5,583,759		—		—		5,583,759
Accrued interest receivable	36,593		36,593		36,593		—		—
Derivative financial instruments	18,645		18,645		—		18,645		—
Financial Liabilities:
Non-interest bearing deposits	$	2,375,863	$	2,375,863	$	2,375,863	$	—	$	—
Interest bearing deposits	5,005,396		5,012,928		—		—		5,012,928
Short-term borrowings	493,389		493,384		—		—		493,384
Long-term borrowings	62,159		66,301		—		—		66,301
Junior subordinated notes issued to capital trusts	152,065		101,247		—		—		101,247
Accrued interest payable	2,042		2,042		2,042		—		—
Derivative financial instruments	18,632		18,632		—		18,632		—

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	December 31, 2012
	Carrying Amount		Estimated Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Financial Assets:
Cash and due from banks	$	176,010	$	176,010	$	176,010	$	—	$	—
Interest bearing deposits with banks	111,533		111,533		111,533		—		—
Investment securities available for sale	1,868,171		1,868,171		11,835		1,850,265		6,071
Investment securities held to maturity	493,421		535,681		—		535,681		—
Non-marketable securities - FHLB and FRB stock	55,385		55,385		—		—		55,385
Loans held for sale	7,492		7,492		—		7,492		—
Loans, net	5,642,726		5,659,598		—		—		5,659,598
Accrued interest receivable	36,040		36,040		36,040		—		—
Derivative financial instruments	29,096		29,096		—		29,096		—
Financial Liabilities:
Non-interest bearing deposits	$	2,164,547	$	2,164,547	$	2,164,547	$	—	$	—
Interest bearing deposits	5,378,150		5,399,709		—		—		5,399,709
Short-term borrowings	220,602		220,683		—		—		220,683
Long-term borrowings	116,050		117,809		—		—		117,809
Junior subordinated notes issued to capital trusts	152,065		104,009		—		—		104,009
Accrued interest payable	2,828		2,828		2,828		—		—
Derivative financial instruments	29,055		29,055		—		29,055		—

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Note 19. Stock Incentive Plans

ASC Topic 718 requires that the grant date fair value of equity awards to employees be recognized as compensation expense over the period during which an employee is required to provide service in exchange for such award.

The following table summarizes the impact of the Company’s share-based payment plans in the financial statements for the periods shown (in thousands):

	Year Ended December 31,
	2013		2012		2011
Total cost of share-based payment plans during the year	$	5,456	$	4,806	$	4,836
Amount of related income tax benefit recognized in income	$	2,159	$	1,918	$	1,972

The Company adopted the Omnibus Incentive Plan (the “Omnibus Plan”) in 1997.  In June 2011, the Company’s stockholders approved an amendment and restatement of the Omnibus Plan to add 2,300,000 authorized shares for a total of 8,300,000 shares of common stock for issuance to directors, officers, and employees of the Company or any of its subsidiaries.  Equity grants under the Omnibus Plan can be in the form of incentive stock options, non-qualified stock options, stock appreciation rights, restricted stock, restricted stock units, performance shares, performance units, and other stock-based awards.  Shares awarded in the form of restricted stock, restricted stock units, performance shares, performance units, or other stock-based awards generally will reduce the shares available under the Omnibus Plan on a 2-for-1 basis.  As of December 31, 2013, there were 1,615,377 shares available for future grants.

Annual equity-based incentive awards are typically granted to selected officers and employees mid-year.  Options are granted with an exercise price equal to no less than the market price of the Company’s shares at the date of grant; those option awards generally vest over four years of service and have 10-year contractual terms.  Restricted shares and units typically vest over a two to four year period. Equity awards may also be granted at other times throughout the year in connection with the recruitment and retention of officers and employees.  Directors currently may elect, in lieu of cash, to receive up to 70% of their fees in stock options with a five year term, which are fully vested on the grant date (provided that the director may not sell the underlying shares for at least six months after the grant date), and up to 100% of their fees in restricted shares, which vest one year after the grant date.

The following table summarizes stock options outstanding for the year ended December 31, 2013:

	Number of Options		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (in years)	Aggregate Intrinsic Value (in thousands)
Options outstanding as of December 31, 2012	2,739,753		$	27.34
Granted	225,269		27.34
Exercised	(381,417	)	25.11
Expired or cancelled	(118,690	)	31.13
Forfeited	(21,163	)	20.04
Options outstanding as of December 31, 2013	2,443,752		$	27.57	4.71	$	14,980
Options exercisable as of December 31, 2013	1,766,966		$	29.93	3.43	$	7,761

The fair value of each option award is estimated on the date of grant using the Black-Scholes option pricing model based on certain assumptions.  Expected volatility is based on historical volatility and the expectations of future volatility of Company shares.  The risk free interest rate for periods within the contractual term of the option is based on the U.S. Treasury yield curve in effect at the time of the grant.  The expected life of options is estimated based on historical employee behavior and represents the period of time that options granted are expected to remain outstanding.

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The following assumptions were used for options granted during the years ended December 31, 2013, 2012, and 2011:

	For the Years Ended December 31,
	2013			2012			2011
Risk-free interest rate	1.92		%	1.02		%	1.95		%
Expected volatility of Company’s stock	25.18		%	27.17		%	43.72		%
Expected dividend yield	1.73		%	2.00		%	1.48		%
Expected life of options (years)	5.6			5.7			5.8
Weighted average fair value per option of options granted during the year	$	5.88		$	4.23		$	7.57

The total intrinsic value of options exercised during the years ended December 31, 2013, 2012, and 2011 was $1.3 million, $203 thousand, and $314 thousand, respectively.

The following is a summary of changes in restricted shares and units for the year ended December 31, 2013:

	Number of Shares		Weighted Average Grant Date Fair Value
Shares and Units Outstanding at December 31, 2012	634,211		$	18.82
Granted	272,152		26.92
Vested	(203,495	)	16.78
Forfeited	(17,149	)	20.86
Shares and Units Outstanding at December 31, 2013	685,719		$	22.59

The total intrinsic value of restricted shares that vested during the years ended December 31, 2013, 2012, and 2011 was $5.8 million, $6.2 million, and $2.2 million, respectively.

The Company issued 56,752 and 65,333 market-based restricted stock units in 2013 and 2012, respectively, which entitle recipients to shares of common stock at the end of a three year vesting period. Recipients will earn shares, totaling between 0% and 175% of the number of units issued, based on the Company's total stockholder return relative to a specified peer group of financial institutions over the three year period. The market-based restricted stock units are included in the preceding table as if the recipients earned shares equal to 100% of the units issued. A Monte Carlo simulation model was used to value the market-based restricted stock units at the time of issuance.

The Company issued 92,717 shares and 66,193 shares of market-based restricted stock in 2011 and 2010, respectively.  The market component of the vesting terms for each award requires that, for ten consecutive trading days, the closing price of the Company’s stock be at least $27.00 for awards issued in 2011 and $25.80 for awards issued in 2010.  The market components for awards issued in 2011 and 2010 have been satisfied as of December 31, 2013. Awards issued in 2011 will vest in full in 2014, on the third anniversary of the grant date. Awards issued in 2010 vested in full in 2013. A Monte Carlo simulation model was used to value the market-based restricted stock awards at the time of issuance.

Effective January 1, 2010, the Company began issuing shares of common stock under the Omnibus Plan as Salary Stock, classified as other stock-based awards, to certain executive officers. This stock is fully vested as of the grant date and the related expense is included in salaries and employee benefits on the Consolidated Statements of Operations. Holders of Salary Stock have all of the rights of a stockholder, including the right to vote the shares and the right to receive any dividends that may be paid thereon. As a condition of receiving the Salary Stock, the holders entered into agreements with the Company providing that they may not sell or otherwise transfer the shares of Salary Stock for two years, except in the event of disability or death.  During the three months ended March 31, 2013, the Company issued 876 shares of Salary Stock at a weighted average issuance price of $22.39 and subsequently ended the issuance of new shares of Salary Stock. During the year ended December 31, 2012, the Company issued 14,855 shares of Salary Stock at a weighted average issuance price of $20.10.

As of December 31, 2013, there was $12.6 million of total unrecognized compensation cost related to nonvested share-based compensation arrangements (including share option and nonvested share awards) granted under the Omnibus Plan.  At December 31, 2013, the weighted-average period over which the unrecognized compensation expense is expected to be recognized was approximately 2.7 years.

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Note 20. Derivative Financial Instruments

The Company offers various derivatives, including interest rate swaps and foreign currency forward contracts, to our customers which can mitigate our exposure to market risk through the execution of off-setting positions with inter-bank dealer counterparties. This also permits the Company to offer customized risk management solutions to our customers. These customer accommodations and any offsetting financial contracts are treated as non-designated derivative instruments and carried at fair value through an adjustment to the income statement.

Interest rate swap and foreign currency forward contracts involve the risk of dealing with counterparties and their ability to meet contractual terms. The net amount payable or receivable under interest rate swaps is accrued as an adjustment to interest income.  The net amount payable for December 31, 2013 was approximately $25 thousand, and the net amount payable for December 31, 2012 was approximately $30 thousand.  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 generally required from the counterparties involved if the net value of the swaps exceeds a nominal amount.  At December 31, 2013, the Company’s credit exposure relating to interest rate swaps was approximately $17.4 million, which is secured by the underlying collateral on customer loans. 

The Company also enters into mortgage banking derivatives which are designated as non-designated derivatives. These derivatives include interest rate lock commitments provided to customers to fund certain mortgage loans to be sold into the secondary market and forward commitments for the future delivery of such loans. It is the Company's practice to enter into forward commitments for the future delivery of residential mortgage loans when interest rate lock commitments are entered into in order to economically hedge the effect of future changes in interest rates on its commitments to fund the loans as well as on its portfolio of mortgage loans held-for-sale.

The Company had fair value commercial loan interest rate swaps, to hedge its interest rate risk, with an aggregate notional amount of $238 thousand at December 31, 2013.  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.

The Company’s derivative financial instruments are summarized below as of December 31, 2013 and 2012 (in thousands):

	Asset Derivatives								Liability Derivatives
	December 31, 2013				December 31, 2012				December 31, 2013					December 31, 2012
	Notional		Estimated		Notional		Estimated		Notional		Estimated			Notional		Estimated
	Amount		Fair Value		Amount		Fair Value		Amount		Fair Value			Amount		Fair Value
Derivative instruments designated as hedges of fair value:
Interest rate swap contracts (1)	$	—	$	—	$	—	$	—	$	238	$	(23	)	$	3,707	$	(94	)
Stand-alone derivative instruments: (2)
Interest rate swap contracts	550,883		17,298		460,956		27,740		551,798		(17,350		)	462,012		(27,832		)
Interest rate options contracts	83,907		323		70,346		157		84,953		(323		)	70,346		(157		)
Foreign exchange contracts	31,361		1,006		20,033		1,062		47,760		(935		)	19,337		(961		)
Mortgage banking derivatives	1,783		18		11,400		137		250		(1		)	4,000		(11		)
Total non-hedging derivative instruments	667,934		18,645		562,735		29,096		684,761		(18,609		)	555,695		(28,961		)
Total	$	667,934	$	18,645	$	562,735	$	29,096	$	684,999	$	(18,632	)	$	559,402	$	(29,055	)

(1) Hedged fixed-rate commercial real estate loans

(2) These portfolio swaps are not designated as hedging instruments under ASC Topic 815.

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Amounts included in the other income in the consolidated statements of operations related to derivative financial instruments were as follows (in thousands):

	Years Ended December 31,
	2013			2012			2011
Derivative instruments designated as hedges of fair value:
Interest rate swap contracts	$	9		$	(15	)	$	(166	)
Stand-alone derivative instruments:
Interest rate swap contracts	40			30			163
Interest rate options contracts	—			—			—
Foreign exchange contracts	(30		)	67			8
Mortgage banking derivatives	(109		)	96			31
Total non-hedging derivative instruments	(99		)	193			202
Total	$	(90	)	$	178		$	36

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.

Certain instruments and transactions subject to an agreement similar to a master netting arrangement are eligible for offset in the consolidated balance sheet. The instruments and transactions would include derivatives, sale and repurchase agreements and reverse sale and repurchase agreements, and securities borrowing and securities lending arrangements. The Company’s derivative transactions with financial institution counterparties are generally executed under International Swaps and Derivative Association (“ISDA”) master agreements which include “right of set-off” provisions. Under these agreements, there is generally a legally enforceable right to offset recognized amounts, and there may be an intention to settle such amounts on a net basis. The Company, however, does not generally offset such financial instruments for financial reporting purposes.

Information about the Company's financial instruments that are eligible for offset in the consolidated balance sheet as of December 31, 2013 is summarized below (in thousands):

	Financial Assets						Financial Liabilities
	Gross Amount Recognized		Gross Amount Offset		Net Amount Recognized		Gross Amount Recognized		Gross Amount Offset		Net Amount Recognized
Derivatives:
Interest rate swaps, caps and floors	$	5,792	$	—	$	5,792	$	11,904	$	—	$	11,904
Foreign currency forward contracts	80		—		80		848		—		848
Mortgage banking derivatives	3		—		3		1		—		1
Total derivatives	5,875		—		5,875		12,753		—		12,753
Repurchase agreements	—		—		—		193,389		—		193,389
Total	$	5,875	$	—	$	5,875	$	206,142	$	—	$	206,142

	Financial Assets									Financial Liabilities
	Net Amount Recognized		Financial Instruments			Collateral		Net Amount		Net Amount Recognized		Financial Instruments			Collateral			Net Amount
Derivatives:
Counterparty A	$	883	$	(883	)	$	—	$	—	$	10,669	$	(883	)	$	(9,786	)	$	—
Counterparty B	1,836		(412		)	—		1,424		412		(412		)	—			—
Counterparty C	2,380		(1,612		)	—		768		1,612		(1,612		)	—			—
Other counterparties	776		(5		)	—		771		60		(5		)	—			55
Total derivatives	5,875		(2,912		)	—		2,963		12,753		(2,912		)	(9,786		)	55
Repurchase agreements	—		—			—		—		193,389		—			(193,389		)	—
Total	$	5,875	$	(2,912	)	$	—	$	2,963	$	206,142	$	(2,912	)	$	(203,175	)	$	55

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Information about the Company's financial instruments that are eligible for offset in the consolidated balance sheet as of December 31, 2012 is summarized below (in thousands):

	Financial Assets						Financial Liabilities
	Gross Amount Recognized		Gross Amount Offset		Net Amount Recognized		Gross Amount Recognized		Gross Amount Offset		Net Amount Recognized
Derivatives:
Interest rate swaps, caps and floors	$	192	$	—	$	192	$	27,890	$	—	$	27,890
Foreign currency forward contracts	43		—		43		929		—		929
Mortgage banking derivatives	1		—		1		11		—		11
Total derivatives	236		—		236		28,830		—		28,830
Repurchase agreements	—		—		—		208,242		—		208,242
Total	$	236	$	—	$	236	$	237,072	$	—	$	237,072

	Financial Assets									Financial Liabilities
	Net Amount Recognized		Financial Instruments			Collateral		Net Amount		Net Amount Recognized		Financial Instruments			Collateral			Net Amount
Derivatives:
Counterparty A	$	68	$	(68	)	$	—	$	—	$	25,497	$	(68	)	$	(25,429	)	$	—
Counterparty B	84		(84		)	—		—		633		(84		)	(549		)	—
Counterparty C	36		(36		)	—		—		2,305		(36		)	(2,269		)	—
Other counterparties	48		(42		)	—		6		395		(42		)	(298		)	55
Total derivatives	236		(230		)	—		6		28,830		(230		)	(28,545		)	55
Repurchase agreements	—		—			—		—		208,242		—			(208,242		)	—
Total	$	236	$	(230	)	$	—	$	6	$	237,072	$	(230	)	$	(236,787	)	$	55

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Note 21. Operating Segments

The Company's operations consist of two reportable operating segments: banking and leasing. The Company offers different products and services through its two segments, and the regulatory environment is significantly different for banking compared to leasing. The accounting policies of the segments are generally the same as those described in Note 1. Significant Accounting Policies.

The banking segment generates its revenues primarily from its lending and deposit gathering activities. The profitability of this segment's operations depends primarily on its net interest income after provision for credit losses, which is the difference between interest earned on interest earning assets and interest paid on interest bearing liabilities less provision for credit losses.  The provision for credit losses is dependent on changes in its loan portfolio and management’s assessment of the collectability of the loan portfolio as well as prevailing economic and market conditions.  The banking segment is also subject to an extensive system of laws and regulations that are intended primarily for the protection of customers and depositors.  These laws and regulations govern such areas as capital, permissible activities, allowance for loan losses, loans and investments, and rates of interest that can be charged on loans. 

The leasing segment generates its revenues through lease originations and related services offered through the Company's leasing subsidiaries, LaSalle Systems Leasing, Inc. and Celtic Leasing Corp. The leasing subsidiaries invest directly in equipment that we lease (referred to as direct finance, leveraged or operating leases) to "Fortune 1000," large middle-market companies and healthcare providers located throughout the United States. The lease portfolio is made up of various kinds of equipment, generally technology related, such as computer systems, satellite equipment, medical equipment and general manufacturing equipment. The leasing subsidiaries also specialize in selling third party equipment maintenance contracts to large companies.

Net interest income for the leasing segment includes adjustments based on the Company's internal funds transfer pricing model as well as interest on loans originated for the sole purpose of funding equipment purchases related to leases at the Company's lease subsidiaries. The provision for credit losses and non-interest expense for the leasing segment includes adjustments for internal allocations of certain expenses.

The following table presents summary financial information for the reportable segments (in thousands):

	Banking			Leasing			Consolidated
Year ended December 31,
2013
Net interest income	$	267,131		$	5,205		$	272,336
Provision for credit losses	(6,167		)	363			(5,804		)
Non-interest income	94,600			59,794			154,394
Non-interest expense	259,753			34,835			294,588
Income tax expense	28,201			11,290			39,491
Net income	$	79,944		$	18,511		$	98,455
Total assets	$	9,225,610		$	415,817		$	9,641,427
Year ended December 31,
2012
Net interest income	$	290,881		$	1,907		$	292,788
Provision for credit losses	(9,035		)	135			(8,900		)
Non-interest income	95,449			33,744			129,193
Non-interest expense	284,452			19,578			304,030
Income tax expense	30,780			5,697			36,477
Net income	$	80,133		$	10,241		$	90,374
Total assets	$	9,203,837		$	367,968		$	9,571,805
Year ended December 31,
2011
Net interest income	$	324,356		$	917		$	325,273
Provision for credit losses	120,808			(58		)	120,750
Non-interest income	95,936			26,783			122,719
Non-interest expense	267,455			15,791			283,246
Income tax expense	1,182			4,086			5,268
Net income	$	30,847		$	7,881		$	38,728
Total assets	$	9,623,039		$	210,033		$	9,833,072

125

Note 22. Condensed Parent Company Financial Information

The condensed financial statements of MB Financial, Inc. (parent company only) are presented below:

Balance Sheets

(In thousands)

	December 31,
	2013		2012
Assets
Cash	$	122,001	$	57,303
Loans	—		6,960
Investments in subsidiaries	1,340,641		1,346,590
Other assets	24,505		21,796
Total assets	$	1,487,147	$	1,432,649
Liabilities and Stockholders’ Equity
Junior subordinated notes issued to capital trusts	$	152,065	$	152,065
Other liabilities	8,400		4,814
Stockholders’ equity	1,326,682		1,275,770
Total liabilities and stockholders’ equity	$	1,487,147	$	1,432,649

Statements of Operations

(In thousands)

	Years Ended December 31,
	2013			2012			2011
Dividends from subsidiaries	$	80,500		$	146,000		$	—
Interest and other income	4,215			1,682			3,410
Interest and other expense	7,143			7,117			6,248
Income (loss) before income tax benefit and equity in undistributed net income (loss) of subsidiaries	77,572			140,565			(2,838		)
Income tax benefit	(1,223		)	(2,192		)	(1,151		)
Income (loss) before equity in undistributed net income of subsidiaries	78,795			142,757			(1,687		)
Equity in undistributed net income (loss) of subsidiaries	19,660			(52,383		)	40,415
Net income	98,455			90,374			38,728
Dividends and discount accretion on preferred shares	—			3,269			10,414
Net income available to common stockholders	$	98,455		$	87,105		$	28,314

126

Statements of Cash Flows

(In thousands)

	Years Ended December 31,
	2013			2012			2011
Cash Flows From Operating Activities
Net income	$	98,455		$	90,374		$	38,728
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization of restricted stock awards	4,280			3,544			3,277
Compensation expense for stock option grants	1,176			1,262			1,559
Equity in undistributed net income of subsidiaries	(19,660		)	52,383			(40,415		)
Change in other assets and other liabilities	(1,460		)	(5,064		)	8,275
Net cash provided by operating activities	82,791			142,499			11,424
Cash Flows From Investing Activities
Net decrease in loans	6,960			21,010			18,009
Net cash provided by investing activities	6,960			21,010			18,009
Cash Flows From Financing Activities
Treasury stock transactions, net	(1,672		)	(249		)	(1,149		)
Stock options exercised	1,014			154			1,903
Excess tax benefits from share-based payment arrangements	(325		)	(390		)	(53		)
Dividends paid on common stock	(24,070		)	(7,101		)	(2,164		)
Dividends paid on preferred stock	—			(3,239		)	(9,799		)
Repurchase of preferred stock and warrant	—			(197,518		)	—
Redemption of on junior subordinated notes issued to capital trusts	—			(6,186		)	—
Net cash used in financing activities	(25,053		)	(214,529		)	(11,262		)
Net increase (decrease) in cash	64,698			(51,020		)	18,171
Cash:
Beginning of year	57,303			108,323			90,152
End of year	$	122,001		$	57,303		$	108,323

Note 23.   Preferred Stock

The Series A Preferred Stock was issued as part of the Troubled Asset Relief Program (“TARP”) Capital Purchase Program of the United States Department of the Treasury (“Treasury”).  The Series A Preferred Stock qualified as Tier 1 capital and provided for cumulative dividends on the liquidation preference amount on a quarterly basis at a rate of 5% per annum for the first five years, and 9% per annum thereafter.  Concurrent with issuing the Series A Preferred Stock, the Company issued to the Treasury a 10 year warrant (the “Warrant”) to purchase 1,012,048 shares (subsequently reduced to 506,024 shares, as described below) of the Company’s Common Stock at an exercise price of $29.05 per share.

On September 17, 2009, the Company completed a public offering of its common stock by issuing 12,578,125 shares of common stock for aggregate gross proceeds of $201.3 million.  The net proceeds to the Company after deducting underwriting discounts and commissions and offering expenses were approximately $190.9 million.  With the proceeds from this offering and the proceeds received by the Company from issuances pursuant to its Dividend Reinvestment and Stock Purchase Plan, the Company has received aggregate gross proceeds from “Qualified Equity Offerings” in excess of the $196.0 million aggregate liquidation preference amount of the Series A Preferred Stock.  As a result, the number of shares of the Company’s common stock underlying the Warrant was reduced by 50%, from 1,012,048 shares to 506,024 shares.

On March 14, 2012, the Company repurchased all $196.0 million of the Series A Preferred Stock. On May 2, 2012, the Company repurchased the Warrant in full for approximately $1.5 million.

127

Item 9.   Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

Not applicable.

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, 2013 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, 2013, our disclosure controls and procedures were effective in ensuring that the information we are required to disclose in the reports we file or submit under the Act is (i) accumulated and communicated to our management (including the Chief Executive Officer and Chief Financial Officer) to allow timely decisions regarding required disclosure, and (ii) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

b)           Management’s Annual Report on Internal Control Over Financial Reporting: The annual report of management on the effectiveness of our internal control over financial reporting and the attestation report thereon issued by our independent registered public accounting firm are set forth under “Management’s Report on Internal Control Over Financial Reporting” and “Report of Independent Registered Public Accounting Firm on Internal Control over Financial Reporting” under “Item 8. Financial Statements and Supplementary Data.”

c)           Changes in Internal Control Over Financial Reporting: During the quarter ended December 31, 2013, no change occurred in our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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

Item 9B.    Other Information

Not applicable.

128

PART III

Item 10.   Directors, Executive Officers and Corporate Governance

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 2014 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 2014 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.   Executive Compensation

The information concerning compensation and other matters required by this item is incorporated herein by reference from our definitive proxy statement for our 2014 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.   Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

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 2014 Annual Meeting of Stockholders, a copy of which will be filed with the Securities and Exchange Commission no later than 120 days after the end of our fiscal year.

The following table sets forth information as of December 31, 2013 with respect to compensation plans under which shares of our common stock may be issued:

Equity Compensation Plan Information

Plan Category	Number of Shares to be Issued upon Exercise of Outstanding Options, warrants and rights (1)	Weighted Average Exercise Price of Outstanding Options, warrants and rights(1)		Number of Shares Remaining Available for Future Issuance Under Equity Compensation Plans (Excluding Shares Reflected in the first column) (2)
Equity compensation plans approved by stockholders	2,615,989	$	27.57	1,615,377
Equity compensation plans not approved by stockholders	N/A	N/A		N/A
Total	2,615,989	$	27.57	1,615,377

(1) Includes 122,085 shares underlying market-based restricted stock units and 43,340 shares underlying restricted stock units.  Recipients of market-based restricted stock units will earn shares, totaling between 0% and 175% of the number of units issued, based on the Company's total stockholder return relative to a specified peer group of financial institutions over a three year period.  The market-based restricted stock units are included in the preceding table as if the recipients earned shares equal to 100% of the units issued.  Additionally, there were 14,953 shares underlying stock options and 6,812 shares underlying director stock units that we assumed in our 2006 acquisition of First Oak Brook Bancshares, Inc.  The market-based restricted stock units, restricted stock units and director stock units do not have an exercise price and are not taken into account in the determination of the weighted average exercise price.

(2)  Represents shares remaining available for future awards under our Amended and Restated Omnibus Incentive Plan (Omnibus Plan). Awards in the form of restricted stock, restricted stock units, performance shares, performance units and other stock-based awards generally will reduce the shares available under the Omnibus Plan on a 2-for-1 basis.

N/A — not applicable

129

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 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.   Certain Relationships, Related Transactions and Director Independence

The information concerning certain relationships and related transactions and director independence required by this item is incorporated herein by reference from our definitive proxy statement for our 2014 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.   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 2014 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.   Exhibits and Financial Statement Schedules

(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)	Exhibits: See Exhibit Index.

130

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, thereunto duly authorized.

MB FINANCIAL, INC.

(registrant)

By:	/s/Mitchell Feiger
	Mitchell Feiger
	President and Chief Executive Officer
	(Principal Executive Officer)
February 20, 2014

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.

Signatures		Title
/s/Mitchell Feiger		Director, President and Chief Executive Officer
Mitchell Feiger		(Principal Executive Officer)	February 20, 2014
/s/Jill E. York		Vice President and Chief Financial Officer
Jill E. York		(Principal Financial Officer and Principal Accounting Officer)	February 20, 2014
/s/Thomas H. Harvey*		Director	February 20, 2014
Thomas H. Harvey
/s/David P. Bolger*		Director	February 20, 2014
David P. Bolger
/s/Robert S. Engelman, Jr.*		Director	February 20, 2014
Robert S. Engelman, Jr.
/s/Charles J. Gries*		Director	February 20, 2014
Charles J. Gries
/s/James N. Hallene*		Director	February 20, 2014
James N. Hallene
/s/Richard J. Holmstrom*		Director	February 20, 2014
Richard J. Holmstrom
/s/Karen J. May*		Director	February 20, 2014
Karen J. May
/s/Ronald D. Santo*		Director	February 20, 2014
Ronald D. Santo
/s/Renee Togher*		Director	February 20, 2014
Renee Togher
*By:	/s/Mitchell Feiger	Attorney-in-Fact

131

EXHIBIT INDEX
Exhibit Number	Description
2.1	Agreement and Plan of Merger, dated as of July 14, 2013, by and among the Registrant and Taylor Capital Group, Inc. (incorporated herein by reference to Exhibit 2.1 to the Registrant's Current Report on Form 8-K filed on July 18, 2013 (File No.0-24566-01))
2.2	Agreement and Plan of Merger, dated as of May 1, 2006, by and among the Registrant, MBFI Acquisition Corp. and First Oak Brook Bancshares, Inc. (“First Oak Brook”)(incorporated herein by reference to Exhibit 2.1 to the Registrant’s Current Report on Form 8-K filed on May 2, 2006 (File No.0-24566-01))
2.3	Purchase and Assumption Agreement among Federal Deposit Insurance Corporation, Receiver of Corus Bank, National Association, Chicago, Illinois, Federal Deposit Insurance Corporation and MB Financial Bank, N.A., dated as of September 11, 2009 (incorporated herein by reference to Exhibit 2.1 to the Registrant’s Current Report on Form 8-K filed on September 17, 2010 (File No.0-24566-01))
2.4	Purchase and Assumption Agreement among Federal Deposit Insurance Corporation, Receiver of Broadway Bank, Chicago, Illinois, Federal Deposit Insurance Corporation and MB Financial Bank, N.A., dated as of April 23, 2010 (incorporated herein by reference to Exhibit 2.6 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2010 (File No. 0-24566-01))
2.5	Purchase and Assumption Agreement among Federal Deposit Insurance Corporation, Receiver of New Century Bank, Chicago, Illinois, Federal Deposit Insurance Corporation and MB Financial Bank, N.A., dated as of April 23, 2010 (incorporated herein by reference to Exhibit 2.7 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2010 (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 Quarterly Report on Form 10-Q for the quarter ended June 30, 2011 (File No. 0-24566-01))
3.1A	Articles Supplementary to the Charter of the Registrant for the Registrant’s Fixed Rate Cumulative Perpetual Preferred Stock, Series A (incorporated herein by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K filed on December 8, 2008 (File No.0-24566-01))
3.2	Bylaws of the Registrant, as amended (incorporated herein by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K filed on April 2, 2012 (File No. 0-24566-01))
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))
4.3	Warrant to purchase shares of the Registrant’s Common Stock (incorporated herein by reference to Exhibit 4.1 to the Registrant’s Current Report on Form 8-K filed on December 8, 2008 (File No.0-24566-01))
10.1	Letter Agreement, dated as of December 5, 2008, between the Registrant and the United States Department of the Treasury (incorporated herein by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on December 8, 2008 (File No.0-24566-01))

132

EXHIBIT INDEX
Exhibit Number	Description
10.2	Amended and Restated Employment Agreement between the Registrant and Mitchell Feiger (incorporated herein by reference to Exhibit 10.2 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2008 (File No. 0-24566-01))
10.3	Employment Agreement between MB Financial Bank, N.A. and Burton J. Field (incorporated herein by reference to Exhibit 10.3 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2008 (File No. 0-24566-01))
10.4	Form of Change and Control Severance Agreement between MB Financial Bank, National Association and Jill E. York (incorporated herein by reference to Exhibit 10.4 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2008 (File No. 0-24566-01))
10.4B	Form of Change and Control Severance Agreement between MB Financial Bank, National Association and each of Burton Field, Larry J. Kallembach, Brian Wildman, Rosemarie Bouman and Susan Peterson (incorporated herein by reference to Exhibit 10.4B to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2008 (File No. 0-24566-01))
10.4C	Form of Change in Control Severance Agreement between MB Financial Bank, National Association and each of Mark A. Heckler and Edward F. Milefchik (incorporated herein by reference to Exhibit 10.4C to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2011 (File No. 0-24566-01))
10.5	Form of Letter Agreement dated December 4, 2008 between MB Financial, Inc. and each of Mitchell Feiger, Jill E. York, Burton Field, Larry J. Kallembach, Brian Wildman, Rosemarie Bouman, and Susan Peterson relating to the TARP Capital Purchase Program (incorporated herein by reference to Exhibit 10.5 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2008 (File No. 0-24566-01))
10.5A	Form of Compensation Amendment and Waiver Agreement under the TARP Capital Purchase Program between MB Financial, Inc. and certain employees (incorporated herein by reference to Exhibit 10.5A to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2009 (File No. 0-24566-01))
10.5B	Form of Compensation Amendment and Waiver Agreement under the TARP Capital Purchase Program between MB Financial, Inc. and each of Mark A. Heckler and Edward F. Milefchik (incorporated herein by reference to Exhibit 10.5B to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2011 (File No. 0-24566-01))
10.7	MB Financial, Inc. Second Amended and Restated Omnibus Incentive Plan (the “Omnibus Incentive Plan”) (incorporated herein by reference to Appendix A to the Registrant’s definitive proxy statement filed on April 27, 2011 (File No. 0-24566-01))
10.8	MB Financial Stock Deferred Compensation Plan (incorporated herein by reference to Exhibit 10.8 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2008 (File No. 0-24566-01))
10.9	MB Financial Non-Stock Deferred Compensation Plan (incorporated herein by reference to Exhibit 10.9 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2008 (File No. 0-24566-01))
10.10	Avondale Federal Savings Bank Supplemental Executive Retirement Plan Agreement (incorporated herein by reference to Exhibit 10.2 to Old MB Financial’s (then known as Avondale Financial Corp.) Annual Report on Form 10-K for the year ended December 31, 1996 (File No. 0-24566))

133

EXHIBIT INDEX
Exhibit Number	Description
10.11	Agreement Regarding Salary Adjustment and Portion of Salary Payable by Stock, dated as of December 21, 2009, between MB Financial, Inc. and Mitchell Feiger (incorporated herein by reference to Exhibit 10.11 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2009 (File No. 0-24566-01))
10.11A	Form of Agreement Regarding Salary Adjustment and Portion of Salary Payable by Stock between MB Financial, Inc. and Rosemarie Bouman, Burton J. Field, Mark A. Heckler, Larry J. Kallembach, Edward F. Milefchik, Susan G. Peterson and Brian J. Wildman (incorporated herein by reference to Exhibit 10.11A to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2011 (File No. 0-24566-01))
10.12	Agreement Regarding Salary Adjustment and Portion of Salary Payable by Stock, dated as of December 21, 2009, between MB Financial, Inc. and Jill E. York (incorporated herein by reference to Exhibit 10.12 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2009 (File No. 0-24566-01))
10.13	Amended and Restated Employment Agreement between MB Financial Bank, N.A. and Ronald D. Santo (incorporated herein by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on December 14, 2004 (File No. 0-24566-01))
10.13A	Amendment to Amended and Restated Employment Agreement between MB Financial Bank, N.A. and Ronald D. Santo ((incorporated herein by reference to Exhibit 10.13A to the Registrant’s Annual Report on Form 10-K/A for the year ended December 31, 2006, filed on March 2, 2007 (File No. 0-24566-01))
10.15	Tax Gross Up Agreements between the Registrant and each of Mitchell Feiger, Burton J. Field, Jill E. York, Larry J. Kallembach, Brian Wildman, and Susan Peterson (incorporated herein by reference to Exhibit 10.15 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2008 (File No. 0-24566-01))
10.15A	Tax Gross Up Agreement between the Registrant and Rosemarie Bouman (incorporated herein by reference to Exhibit 10.15A to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2008 (File No. 0-24566-01))
10.16	Form of Incentive Stock Option Agreement for Executive Officers under the Omnibus Incentive Plan (incorporated herein by reference to Exhibit 10.16 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2007 (File No. 0-24566-01))
10.17	Form of Non-Qualified Stock Option Agreement for Directors under the Omnibus Incentive Plan (incorporated herein by reference to Exhibit 10.16 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2007 (File No. 0-24566-01))
10.18	Form of Restricted Stock Agreement for Executive Officers under the Omnibus Incentive Plan (incorporated herein by reference to Exhibit 10.16 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2007 (File No. 0-24566-01))
10.18A	Amendment to Form of Incentive Stock Option Agreement and Form of Restricted Stock Agreement for Executive Officers under the Omnibus Incentive Plan (incorporated herein by reference to Exhibit 10.18A to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2008 (File No. 0-24566-01))

134

EXHIBIT INDEX
Exhibit Number	Description
10.18B	Form of Performance-Based Restricted Stock Agreement for Executive Officers under the Omnibus Incentive Plan (incorporated herein by reference to Exhibit 10.18B to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2009 (File No. 0-24566-01))
10.18C	Form of Restricted Stock Agreement for grants on December 2, 2009 to Mitchell Feiger, Jill E. York and Burton J. Field (incorporated herein by reference to Exhibit 10.18C to the Registrant’s Current Report on Form 8-K filed on December 7, 2009 (File No. 0-24566-01))
10.19	Form of Restricted Stock Agreement for Directors under the Omnibus Incentive Plan (incorporated herein by reference to Exhibit 10.16 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2007 (File No. 0-24566-01))
10.20	First Oak Brook Bancshares, Inc. Incentive Compensation Plan (incorporated herein by reference to Appendix A to the definitive proxy statement filed by First Oak Brook on March 30, 2004 (File No. 0-14468))
10.20A	Amendment to First Oak Brook Bancshares, Inc. Incentive Compensation Plan ((incorporated herein by reference to Exhibit 10.20A to the Registrant’s Annual Report on Form 10-K/A for the year ended December 31, 2006, filed on March 2, 2007 (File No. 0-24566-01))
10.21	First Oak Brook Bancshares, Inc. 2001 Stock Incentive Plan (incorporated herein by reference to Appendix A to the definitive proxy statement filed by First Oak Brook on April 2, 2001 (File No. 0-14468))
10.21A	Amendment to First Oak Brook Bancshares, Inc. 2001 Stock Incentive Plan ((incorporated herein by reference to Exhibit 10.21A to the Registrant’s Annual Report on Form 10-K/A for the year ended December 31, 2006, filed on March 2, 2007 (File No. 0-24566-01))
10.22	First Oak Brook Bancshares, Inc. Directors Stock Plan (incorporated herein by reference to Exhibit 4.1 to the Registration Statement on Form S-8 filed by First Oak Brook on October 25, 1999 (File No. 333-89647))
10.22A	Amendment to First Oak Brook Bancshares, Inc. Directors Stock Plan (incorporated herein by reference to Exhibit 10.22A to the Registrant’s Quarterly Report on Form 10-Q/A for the quarter ended March 31, 2007 filed on May 15, 2007 (File No. 0-24566-01))
10.23	Reserved.
10.24	Reserved.
10.25	Reserved.
10.26	Reserved.
10.27	First Oak Brook Bancshares, Inc. Executive Deferred Compensation Plan (incorporated by reference to Exhibit 10.3 to First Oak Brook’s Annual Report on Form 10-K for the year ended December 31, 1997 (File No. 0-14468))
10.27A	Amendment to First Oak Brook Bancshares, Inc. Executive Deferred Compensation Plan (incorporated herein by reference to Exhibit 10.27A to the Registrant’s Quarterly Report on Form 10-Q/A for the quarter ended March 31, 2007 filed on May 15, 2007)

135

EXHIBIT INDEX
Exhibit Number	Description
10.29	Form of Transitional Employment Agreement between the Registrant (as successor to First Oak Brook) and Rosemarie Bouman (incorporated herein by reference to Exhibit 10.10 to First Oak Brook’s Annual Report on Form 10-K for the year ended December 31, 1998 (File No. 0-14468))
10.29A	First Amendment to Transitional Employment Agreement between the Registrant (as successor to First Oak Brook) and Rosemarie Bouman ((incorporated herein by reference to Exhibit 10.28A to the Registrant’s Annual Report on Form 10-K/A for the year ended December 31, 2006, filed March 2, 2007 (File No. 0-24566-01))
10.29B	Second Amendment to Transitional Employment Agreement between the Registrant (as successor to First Oak Brook) and Rosemarie Bouman ((incorporated herein by reference to Exhibit 10.28B to the Registrant’s Annual Report on Form 10-K/A for the year ended December 31, 2006, filed March 2, 2007 (File No. 0-24566-01))
10.30	Form of Performance Share Unit Award Agreement (incorporated herein by reference to Exhibit 10.30 to the Registrant's Current Report on Form 8-K filed on September 5, 2012 (File No. 0-24566-01))
10.31	Form of Incentive Stock Option Agreement (Management Committee) (incorporated herein by reference to Exhibit 10.31 to the Registrant's Current Report on Form 8-K filed on September 5, 2012 (File No. 0-24566-01))
10.32	Form of Restricted Stock Agreement (Management Committee) (incorporated herein by reference to Exhibit 10.32 to the Registrant's Current Report on Form 8-K filed on September 5, 2012 (File No. 0-24566-01))
10.32A	Form of Restricted Stock Unit Agreement (Management Committee) (incorporated herein by reference to Exhibit 10.32A to the Registrant's Current Report on Form 8-K filed on September 5, 2012 (File No. 0-24566-01))
21	Subsidiaries of the Registrant*
23	Consent of McGladrey LLP *
24	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)*
32	Section 1350 Certifications*
101	The following financial statements from the MB Financial, Inc. Annual Report on Form 10-K for the year ended December 31, 2013, formatted in Extensive Business Reporting Language (XBRL): (i) consolidated balance sheets, (ii) consolidated statements of operations, (iii) consolidated statements of comprehensive income, (iv) consolidated statements of cash flows and (v) the notes to consolidated financial statements*

*  Filed herewith

136