The following is a discussion and analysis of MB Financial, Inc.'s financial condition and results of operations and should be read in conjunction with the consolidated financial statements and notes thereto appearing elsewhere in this report. The words "we," "our" and "us" refer to MB Financial, Inc. and its wholly owned subsidiaries, unless we indicate otherwise.

Overview

The profitability of our operations depends primarily on our net interest income after provision for loan losses, which is the difference between interest earned on interest earning assets and interest paid on interest bearing liabilities less provision for loan losses. The provision for loan 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. Additionally, our net income is affected by other income and other expenses. The provision for loan losses reflects the amount that we believe is adequate to cover potential credit losses in our loan portfolio. For the three and nine month periods under report, other income consisted of loan service fees, deposit service fees, net lease financing income, brokerage fees, asset management and trust fees, net gains on the sale of investment securities available for sale, increase in cash surrender value of life insurance, net gains (losses) on sale of other assets, acquisition related gains and other operating income. Other expenses include salaries and employee benefits, occupancy and equipment expense, computer services expense, advertising and marketing expense, professional and legal expense, brokerage fee expense, telecommunication expense, other intangibles amortization expense, FDIC insurance premiums, impairment charges and other operating expenses. Our net income also is affected by discontinued operations, which for the periods under report represents the results of operations from our merchant card processing business, which we sold during the third quarter of 2009, resulting in the recognition of a pre-tax gain of $10.2 million. We entered into a revenue sharing agreement with the purchaser of that business to offer merchant card processing services to our bank customers on a going forward basis. We expect that the impact on our future earnings per share and operating results from the sale of our merchant card processing business, including any income we earn under the revenue sharing agreement, will be immaterial.

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. Other income and other expenses are impacted by growth of operations and growth in the number of loan and deposit accounts through both acquisitions and core banking business growth. Growth in operations affects other expenses primarily as a result of additional employees, branch facilities and promotional marketing expense. Growth in the number of loan and deposit accounts affects other income, including service fees as well as other expenses such as computer services, supplies, postage, telecommunications and other miscellaneous expenses.

The Company had net income available to common stockholders of $4.9 million for the third quarter of 2009, compared to net income available to common shareholders of $13.2 million for the third quarter of 2008. Our 2009 third quarter results generated an annualized return on average assets of 0.30% and an annualized return on average common equity of 2.13%, compared to 0.63% and 5.91%, respectively, for the same period in 2008. Fully diluted earnings per common share for the third quarter of 2009 were $0.12 compared to $0.38 per common share in the 2008 third quarter.

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.

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

Residual Value of Our Direct Finance, Leveraged, and Operating Leases. Lease residual value represents the present value of the estimated fair value of the leased equipment at the termination date of the lease. Realization of these residual values depends on many factors, including management's use of estimates, assumptions, and judgment to determine such values. Several other factors outside of management's control may reduce the residual values realized, including general market conditions at the time of expiration of the lease, whether there has been technological or economic obsolescence or unusual wear and tear on, or use of, the equipment and the cost of comparable equipment. If, upon the expiration of a lease, we sell the equipment and the amount realized is less than the recorded value of the residual interest in the equipment, we will recognize a loss reflecting the difference. On a quarterly basis, management reviews the lease residuals for potential impairment. If we fail to realize our aggregate recorded residual values, our financial condition and profitability could be adversely affected. At September 30, 2009, the aggregate residual value of the equipment leased under our direct finance, leveraged, and operating leases totaled $55.2 million. See Note 1 and Note 7 of the notes to our December 31, 2008 audited consolidated financial statements contained in our Annual Report Form 10-K for the year ended December 31, 2008 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 September 30, 2009, the Company had $500 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 September 30, 2009, the Company did not have any 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.

Goodwill. The excess of the cost of an acquisition over the fair value of the net assets acquired consists of goodwill, and core deposit and client relationship intangibles. See Note 7 to the Consolidated Financial Statements for further information regarding core deposit and client relationship intangibles. Under the provisions of ASC Topic 350, goodwill is subject to at least annual 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 date is as of December 31. No impairment losses were recognized during the last nine months ended September 30, 2009 or 2008. Goodwill is tested for impairment at the reporting unit level. A reporting unit is a majority owned subsidiary of the Company for which discrete financial information is available and regularly reviewed by management. MB Financial Bank is currently the Company's only applicable reporting unit for purposes of testing goodwill impairment.

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Results of Operations

Third Quarter Results

The Company had net income available to common stockholders of $4.9 million for the third quarter of 2009, compared to net income available to common shareholders of $13.2 million for the third quarter of 2008. The results for the third quarter of 2009 generated an annualized return on average assets of 0.30% and an annualized return on average common equity of 2.13%, compared to 0.63% and 5.91%, respectively, for the same period in 2008.

Net interest income was $60.9 million for the three months ended September 30, 2009, an increase of $4.3 million, or 7.6% from $56.6 million for the comparable period in 2008. See "Net Interest Margin" section below for further analysis.

Provision for loan losses was $45.0 million in the third quarter of 2009 as compared to $18.4 million in third quarter of 2008. Net charge-offs were $37.1 million in the quarter ended September 30, 2009 compared to $12.1 million in the quarter ended September 30, 2008. The increase in our provision for loan losses was primarily due to the increases in non-performing loans and net charge-offs, and the migration of performing loans from better risk ratings to worse risk ratings during the third quarter of 2009. The migration of performing loans to worse risk ratings was primarily due to worsening macroeconomic factors, declines in the values of collateral and a deteriorating business environment during 2009. Also factoring into our provision was our loan growth over the past twelve months.

The underlying value of collateral on impaired loans deteriorated during the fourth quarter of 2008 and the first nine months of 2009. Overall, the business environment has been adverse for many households and businesses in the United States, including those in the Chicago metropolitan area. The business environment began to significantly deteriorate beginning in the third quarter of 2008 as a result of significant job losses and housing foreclosures. Single family homes, condominiums, retail property, manufacturing property, and vacant land all experienced a significant decrease in demand due to the worsening economic environment during the past several quarters. As a result, significant declines in the values of single family homes and other properties occurred and required higher reserves on impaired loans, potential problem loans and increased reserves based on the macroeconomic environment.

See "Asset Quality" below for further analysis of the allowance for loan losses.

Other Income (in thousands):
                                                Three Months Ended
                                            September 30, September 30,    Increase/  Percentage
                                                2009          2008        (Decrease)    Change
Other income:
      Loan service fees                        $    1,565    $    2,385    $    (820)      (34%)
      Deposit service fees                          7,912         7,330           582         8%
      Lease financing, net                          3,937         4,533         (596)      (13%)
      Brokerage fees                                1,004         1,177         (173)      (15%)
      Trust and asset management fees               3,169         3,276         (107)       (3%)
      Net gain on sale of investment
      securities                                        3             -             3        N/A
      Increase in cash surrender value of
      life insurance                                  664         1,995       (1,331)      (67%)
      Net gain on sale of other assets                 12            26          (14)      (54%)
      Acquisition related gain                     10,222             -        10,222        N/A
      Other operating income                        2,412         1,158         1,254       108%
Total other income                             $   30,900    $   21,880    $    9,020        41%

Other income increased for the third quarter of 2009 compared to the third quarter of 2008, primarily due to the gain recognized on the InBank transaction. Loan service fees decreased, primarily due to a decrease in letter of credit and prepayment fees. Deposit service fees increased primarily due to an increase in commercial deposit fees mostly due to the Corus transaction. Net lease financing decreased, primarily due to lower residual realizations during the third quarter of 2009 compared to the third quarter of 2008. The decrease in cash surrender value of life insurance was primarily due to a decrease in overall interest rates from the third quarter of 2008 to the third quarter of 2009, and $938 thousand of death benefits on bank owned life insurance policies that we recognized during the three months ended September 30, 2008. Other operating income increased primarily due to an increase in market value of assets held in trust for deferred compensation during the third quarter of 2009 compared to the third quarter of 2008. See Note 2 to the Consolidated Financial Statements for further information regarding the InBank and Corus transactions.

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Other Expense (in thousands):
                                                 Three Months Ended
                                             September 30, September 30,    Increase /  Percentage
                                                 2009          2008         (Decrease)    Change

Other expense:
      Salaries and employee benefits           $    31,196   $    29,139    $     2,057         7%
      Occupancy and equipment expense                7,803         7,107            696        10%
      Computer services expense                      2,829         1,840            989        54%
      Advertising and marketing expense              1,296         1,451          (155)      (11%)
      Professional and legal expense                 1,126           884            242        27%
      Brokerage fee expense                            478           564           (86)      (15%)
      Telecommunication expense                        812           620            192        31%
      Other intangibles amortization expense           966           913             53         6%
      FDIC insurance premiums                        3,206           292          2,914       998%
      Impairment charges                             4,000             -          4,000        N/A
      Other operating expenses                       5,446         4,963            483        10%
Total other expenses                           $    59,158   $    47,773    $    11,385        24%

The Heritage, InBank and Corus transactions increased salaries and employee benefits expense, occupancy and equipment expense, computer services expense, and FDIC insurance premiums from the third quarter of 2008 to the third quarter of 2009 by approximately $1.7 million, $473 thousand, $765 thousand, and $564 thousand, respectively. Additionally, FDIC insurance premium expense increased due to our FDIC credits being fully utilized during the fourth quarter of 2008 combined with the FDIC increasing its assessment rate from the third quarter of 2008 to the third quarter of 2009. During the third quarter of 2009, the Company conducted an impairment review of branch office locations to be consolidated due to the Company's recent acquisitions. As a result, the Company recognized a $4.0 million impairment charge related to three branches in the third quarter of 2009. See Note 2 to the Consolidated Financial Statements for further information regarding our acquisitions of Heritage, InBank, and Corus.

The Company had an income tax benefit of $15.2 million for the three months ended September 30, 2009 compared to an income tax benefit of $743 thousand for the same period in 2008. In the third quarter of 2009, the Company increased the amount of benefit recognized with respect to certain previously identified uncertain tax positions as a result of developments in pending tax audits. The increase in recognized tax benefit resulted in a $7.8 million increase in income tax benefit in the third quarter of 2009.

Year-To-Date Results

The Company had a net loss available to common stockholders of $24.1 million for the first nine months of 2009, compared to net income available to common stockholders of $41.0 million for the first nine months of 2008. The results for the first nine months of 2009 generated an annualized return on average assets of (0.24%) and an annualized return on average common equity of (3.65%), compared to 0.67% and 6.22%, respectively, for the same period in 2008.

Net interest income was $176.4 million for the nine months ended September 30, 2009, an increase of $10.2 million, or 6.1% from $166.1 million for the comparable period in 2008. See "Net Interest Margin" section below for further analysis.

Provision for loan losses was $161.8 million in the first nine months of 2009 as compared to $53.1 million in the first nine months of 2008. Net charge-offs were $116.6 million in the nine months ended September 30, 2009 compared to $29.4 million in the nine months ended September 30, 2008. The increase in our provision for loan losses was primarily due to the increases in non-performing loans and net charge-offs, and the migration of performing loans from better risk ratings to worse risk ratings during the nine months ended September 30, 2009. The migration of performing loans to worse risk ratings was primarily due to worsening macroeconomic factors, declines in the values of collateral and deteriorating business environment during the nine months ended September 30, 2009. Also factoring into our provision was our loan growth over the past nine months.

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Additionally, the underlying value of collateral on impaired loans deteriorated during the fourth quarter of 2008 and the first nine months of 2009. Overall, the business environment has been adverse for many households and businesses in the United States, including those in the Chicago metropolitan area. The business environment began to significantly deteriorate beginning in the third quarter of 2008 as a result of significant job losses and housing foreclosures. Single family homes, condominiums, retail property, manufacturing property, and vacant land all experienced a significant decrease in demand due to the worsening economic environment during the past several quarters. As a result, significant declines in the values of single family homes and other properties occurred and required higher reserves on impaired loans, potential problem loans and increased reserves based on the macroeconomic environment.

See "Asset Quality" below for further analysis of the allowance for loan losses.

Other Income (in thousands):
                                                 Nine Months Ended
                                            September 30, September 30,    Increase/   Percentage
                                                2009          2008         (Decrease)    Change
Other income:
      Loan service fees                        $    5,190    $    7,330    $   (2,140)      (29%)
      Deposit service fees                         21,289        20,747            542         3%
      Lease financing, net                         12,729        12,369            360         3%
      Brokerage fees                                3,334         3,349           (15)       (0%)
      Trust and asset management fees               9,246         9,085            161         2%
      Net gain on sale of investment
      securities                                   13,790         1,106         12,684     1,147%
      Increase in cash surrender value of
      life insurance                                1,790         4,729        (2,939)      (62%)
      Net loss on sale of other assets               (25)         (230)            205      (89%)
      Acquisition related gain                     10,222             -         10,222        N/A
      Other operating income                        6,662         4,304          2,358        55%
Total other income                             $   84,227    $   62,789     $   21,438        34%

As in the "Third Quarter Results", other income was impacted during the nine months ended September 30, 2009 by the $10.2 million gain generated by the InBank transaction, as well as a net gain on sale of investment securities of $13.8 million compared with a net gain on sale of investment securities of $1.1 million during the nine months ended September 30, 2008. Loan service fees decreased, primarily due to a decrease in letter of credit and prepayment fees. The decrease in cash surrender value of life insurance was primarily due to a decrease in overall interest rates from the nine months ended September 30, 2008 to the nine months ended September 30, 2009, and $1.4 million of death benefits on bank owned life insurance policies that we recognized during the nine months ended September 30, 2008. Other operating income increased primarily due to an increase in gains recognized on the sale of loans, and an increase in market value of assets held in trust for deferred compensation during the nine months ended September 30, 2009.

Other Expense (in thousands):
                                                 Nine Months Ended
                                            September 30, September 30,    Increase/  Percentage
                                                2009          2008        (Decrease)    Change
Other expense:
      Salaries and employee benefits          $    87,263   $    84,778    $    2,485         3%
      Occupancy and equipment expense              22,636        21,574         1,062         5%
      Computer services expense                     7,129         5,419         1,710        32%
      Advertising and marketing expense             3,502         4,186         (684)      (16%)
      Professional and legal expense                3,215         1,993         1,222        61%
      Brokerage fee expense                         1,446         1,453           (7)       (0%)
      Telecommunication expense                     2,306         2,154           152         7%
      Other intangibles amortization
      expense                                       2,841         2,641           200         8%
      FDIC insurance premiums                      12,663           689        11,974     1,738%
      Impairment charges                            4,000             -         4,000        N/A
      Other operating expenses                     15,677        14,492         1,185         8%
Total other expense                           $   162,678   $   139,379    $   23,299        17%

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Other expense increased primarily due to an increase in FDIC insurance premium expense, as general insurance assessment rates increased and the FDIC imposed a special premium on all insured depository institutions based on assets as of June 30, 2009. The Heritage, InBank and Corus transactions increased salaries and employee benefits expense, occupancy and equipment expense, computer services expense, and FDIC insurance premiums by approximately $2.4 million, $808 thousand, $1.2 million and $653 thousand, respectively. Professional and legal expense increased primarily due to loan collection costs during the nine months ended September 30, 2009. Other operating expenses increased primarily due to an increase in expenses related to other real estate owned from the nine months ended September 30, 2008 to the nine months ended September 30, 2009. As in the "Third Quarter Results", other expense was also impacted during the nine months ended September 30, 2009 by the $4.0 million impairment charge relating to the consolidation of the three branch offices.

The Company had an income tax benefit of $42.7 million for the first nine months ended September 30, 2009 compared to income tax benefit of $4.2 million for the same period in 2008. During the nine months ended September 30, 2009, our taxable income significantly decreased compared to the same period in 2008, primarily due to our results of operations during the nine months ended September 30, 2009. As in the "Third Quarter Results", the Company increased the amount of benefit recognized with respect to certain previously identified uncertain tax positions as a result of certain developments in pending tax audits. The increase in recognized tax benefit resulted in a $7.8 million increase in income tax benefit in the nine months ended September 30, 2009.

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Net Interest Margin

The following table presents, for the periods indicated, the total dollar amount
of interest income from average interest earning assets and the resultant
yields, as well as the interest expense on average interest bearing liabilities,
. . .