10-Q 1 a09301710q.htm 10-Q Document



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
FORM 10-Q
 
(Mark One)
 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended September 30, 2017
 
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 001-36599
 
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
 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.  Yes x No o
 
Indicate by check mark whether the registrant 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).  Yes x No o
 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company.  See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer x
 
Accelerated filer o
Non-accelerated filer o
(Do not check if a smaller reporting company)
 
Smaller reporting company o
 
 
Emerging growth company o
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o No x
 
There were issued and outstanding 83,894,031 shares of the Registrant’s common stock as of November 6, 2017.
 







MB FINANCIAL, INC.
 
FORM 10-Q
 
September 30, 2017
 
INDEX
 



i



PART I.        FINANCIAL INFORMATION
Item 1.
  Financial Statements

MB FINANCIAL, INC. & SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except share and per share data)
 
 
(Unaudited)
 
 
 
 
September 30, 2017
 
December 31, 2016
ASSETS
 
 

 
 

Cash and due from banks
 
$
361,080

 
$
364,783

Interest earning deposits with banks
 
82,636

 
98,686

Total cash and cash equivalents
 
443,716

 
463,469

Investment securities:
 
 

 
 

Securities available for sale, at fair value
 
1,497,543

 
1,696,195

Securities held to maturity, at amortized cost ($1,031,746 fair value at September 30, 2017 and $1,093,740 at December 31, 2016)
 
994,238

 
1,069,750

Non-marketable securities - FHLB and FRB stock
 
152,345

 
143,276

Total investment securities
 
2,644,126

 
2,909,221

Loans held for sale
 
722,754

 
716,883

Loans:
 
 

 
 

Total loans, excluding purchased credit-impaired loans
 
13,753,459

 
12,605,726

Purchased credit-impaired loans
 
131,919

 
163,077

Total loans
 
13,885,378

 
12,768,803

Less: Allowance for loan and lease losses
 
159,128

 
139,366

Net loans
 
13,726,250

 
12,629,437

Lease investments, net
 
371,541

 
311,327

Premises and equipment, net
 
286,482

 
293,910

Cash surrender value of life insurance
 
204,855

 
200,945

Goodwill
 
999,925

 
1,001,038

Other intangibles
 
56,745

 
62,959

Mortgage servicing rights, at fair value
 
261,446

 
238,011

Other real estate owned, net
 
13,020

 
26,279

Other real estate owned related to FDIC-assisted transactions
 
4,817

 
5,006

Other assets
 
380,858

 
443,832

Total assets
 
$
20,116,535

 
$
19,302,317

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 

 
 

LIABILITIES
 
 

 
 

Deposits:
 
 

 
 

Non-interest bearing
 
$
6,101,159

 
$
6,408,169

Interest bearing
 
8,313,985

 
7,702,279

Total deposits
 
14,415,144

 
14,110,448

Short-term borrowings
 
1,865,415

 
1,569,288

Long-term borrowings
 
405,715

 
311,790

Junior subordinated notes issued to capital trusts
 
211,289

 
210,668

Accrued expenses and other liabilities
 
526,880

 
520,914

Total liabilities
 
17,424,443

 
16,723,108

STOCKHOLDERS’ EQUITY
 
 

 
 

Preferred stock, ($0.01 par value, authorized 10,000,000 shares at September 30, 2017 and December 31, 2016; Series A, 8% perpetual non-cumulative, 4,000,000 shares issued and outstanding at September 30, 2017 and December 31, 2016, $25 liquidation value; Series B, 8% cumulative voting convertible, no shares issued and outstanding at September 30, 2017 and 125 shares issued and outstanding at December 31, 2016, $1,000 liquidation value)
 
115,280

 
115,572

Common stock, ($0.01 par value; authorized 120,000,000 shares at September 30, 2017 and December 31, 2016; issued 85,765,314 shares at September 30, 2017 and 85,630,748 shares at December 31, 2016)
 
858

 
856

Additional paid-in capital
 
1,685,971

 
1,678,826

Retained earnings
 
940,948

 
838,892

Accumulated other comprehensive income
 
9,772

 
5,190

Less: 1,878,217 and 1,905,479 shares of treasury common stock, at cost, at September 30, 2017 and December 31, 2016, respectively
 
(60,737
)
 
(60,384
)
Controlling interest stockholders’ equity
 
2,692,092

 
2,578,952

Non-controlling interest
 
—

 
257

Total stockholders’ equity
 
2,692,092

 
2,579,209

Total liabilities and stockholders’ equity
 
$
20,116,535

 
$
19,302,317



     See Accompanying Notes to Consolidated Financial Statements.

1



MB FINANCIAL, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands, except share and per share data) (Unaudited)
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
September 30,
 
 
2017
 
2016
 
2017
 
2016
Interest income:
 
 

 
 

 
 
 
 
Loans:
 
 
 
 
 
 
 
 
Taxable
 
$
155,440

 
$
118,675

 
$
432,603

 
$
333,829

Nontaxable
 
2,632

 
2,846

 
8,303

 
8,173

Investment securities:
 
 

 
 

 
 

 
 

Taxable
 
8,440

 
8,844

 
26,279

 
26,209

Nontaxable
 
9,731

 
10,382

 
29,541

 
31,802

Other interest earning accounts and Federal funds sold
 
327

 
164

 
754

 
430

Total interest income
 
176,570

 
140,911

 
497,480

 
400,443

Interest expense:
 
 

 
 

 
 
 
 
Deposits
 
10,865

 
6,681

 
27,133

 
18,255

Short-term borrowings
 
5,148

 
1,092

 
11,440

 
2,723

Long-term borrowings and junior subordinated notes
 
3,610

 
2,367

 
9,923

 
6,788

Total interest expense
 
19,623

 
10,140

 
48,496

 
27,766

Net interest income
 
156,947

 
130,771

 
448,984

 
372,677

Provision for credit losses
 
4,517

 
6,549

 
17,950

 
16,941

Net interest income after provision for credit losses
 
152,430

 
124,222

 
431,034

 
355,736

Non-interest income:
 
 

 
 

 
 
 
 
Mortgage banking revenue
 
27,575

 
49,095

 
84,853

 
116,192

Lease financing revenue, net
 
23,148

 
18,864

 
62,967

 
53,618

Commercial deposit and treasury management fees
 
14,508

 
12,957

 
43,696

 
36,383

Trust and asset management fees
 
8,702

 
8,244

 
25,720

 
24,430

Card fees
 
4,585

 
4,161

 
13,564

 
11,731

Capital markets and international banking fees
 
4,870

 
3,313

 
11,709

 
9,311

Consumer and other deposit service fees
 
3,424

 
3,559

 
10,072

 
9,745

Brokerage fees
 
1,004

 
1,294

 
3,379

 
3,767

Loan service fees
 
2,114

 
1,792

 
6,120

 
5,505

Increase in cash surrender value of life insurance
 
1,321

 
1,055

 
3,910

 
2,759

Net gain on investment securities
 
83

 
—

 
451

 
269

Net (loss) gain on disposal of other assets
 
(180
)
 
5

 
(307
)
 
(45
)
Other operating income
 
4,110

 
4,048

 
11,420

 
8,415

Total non-interest income
 
95,264

 
108,387

 
277,554

 
282,080

Non-interest expenses:
 
 

 
 

 
 
 
 
Salaries and employee benefits expense
 
105,815

 
111,478

 
309,932

 
292,073

Occupancy and equipment expense
 
15,382

 
14,766

 
45,710

 
41,441

Computer services and telecommunication expense
 
10,062

 
12,836

 
29,287

 
31,668

Advertising and marketing expense
 
2,558

 
3,084

 
8,964

 
8,926

Professional and legal expense
 
2,109

 
4,460

 
7,250

 
10,370

Other intangibles amortization expense
 
2,038

 
1,674

 
6,214

 
4,917

Branch exit and facilities impairment charges
 
2,773

 
(2,908
)
 
8,680

 
(2,709
)
Net loss (gain) recognized on other real estate owned and other related expenses
 
(86
)
 
(721
)
 
1,448

 
(809
)
Other operating expenses
 
21,643

 
25,716

 
66,033

 
68,214

Total non-interest expenses
 
162,294

 
170,385

 
483,518

 
454,091

Income before income taxes
 
85,400

 
62,224

 
225,070

 
183,725

Income tax expense
 
24,557

 
17,805

 
65,224

 
56,780

Net income
 
60,843

 
44,419

 
159,846

 
126,945

Dividends on preferred shares
 
2,002

 
2,004

 
6,007

 
6,004

Net income available to common stockholders
 
$
58,841

 
$
42,415

 
$
153,839

 
$
120,941

     

2



MB FINANCIAL, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS - (Continued)
(Amounts in thousands, except share and per share data) (Unaudited)

 
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
September 30,
 
 
2017
 
2016
 
2017
 
2016
Common share data:
 
 

 
 

 
 
 
 
Basic earnings per common share
 
$
0.70

 
$
0.55

 
$
1.84

 
$
1.62

Diluted earnings per common share
 
0.69

 
0.54

 
1.81

 
1.60

Weighted average common shares outstanding for basic earnings per common share
 
83,891,175

 
77,506,885

 
83,799,694

 
74,780,943

Diluted weighted average common shares outstanding for diluted earnings per common share
 
84,779,797

 
78,683,170

 
84,775,952

 
75,727,580










































 
See Accompanying Notes to Consolidated Financial Statements.

3



MB FINANCIAL, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Amounts in thousands) (Unaudited)

 
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
September 30,
 
 
2017
 
2016
 
2017
 
2016
 
 
 
 
 
 
 
 
 
Net income
 
$
60,843

 
$
44,419

 
$
159,846

 
$
126,945

Unrealized holding (gains) losses on investment securities, net of reclassification adjustments
 
(890
)
 
(7,679
)
 
9,143

 
15,603

Reclassification adjustment for amortization of unrealized gains on investment securities transferred to held to maturity from available for sale
 
(266
)
 
(554
)
 
(1,089
)
 
(2,081
)
Reclassification adjustments for gains included in net income
 
(83
)
 
—

 
(451
)
 
(269
)
Other comprehensive (loss) income, before tax
 
(1,239
)
 
(8,233
)
 
7,603

 
13,253

Income tax expense (benefit) related to items of other comprehensive income (loss)
 
491

 
3,265

 
(3,021
)
 
(5,267
)
Other comprehensive (loss) income, net of tax
 
(748
)
 
(4,968
)
 
4,582

 
7,986

Comprehensive income
 
$
60,095

 
$
39,451

 
$
164,428

 
$
134,931





































See Accompanying Notes to Consolidated Financial Statements.

4




MB FINANCIAL, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
Nine Months Ended September 30, 2017 and 2016
(Amounts in thousands, except per share data) (Unaudited)
 
 
Preferred
Stock
Common
Stock
Additional
Paid-in
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Income,
Net of Tax
Treasury
Stock
Non-controlling
Interest
Total Stock-
holders’
Equity
Balance at December 31, 2015
$
115,280

$
756

$
1,280,870

$
731,812

$
15,777

$
(58,504
)
$
1,293

$
2,087,284

Net income
—

—

—

126,945

—

—

139

127,084

Other comprehensive income, net of tax
—

—

—

—

7,986

—

—

7,986

Issuance of preferred and common stock due to business combination
1,227

97

383,775

—

—

—

—

385,099

Cash dividends declared on preferred shares
—

—

—

(6,004
)
—

—

—

(6,004
)
Cash dividends declared on common shares ($0.55 per share)
—

—

—

(42,984
)
—

—

—

(42,984
)
Restricted common stock activity, net of tax
—

1

(2,263
)
—

—

750

—

(1,512
)
Stock option activity, net of tax
—

1

272

—

—

(157
)
—

116

Repurchase of common shares in connection with employee benefit plans and held in trust for deferred compensation plan
—

—

381

—

—

(4,173
)
—

(3,792
)
Stock-based compensation expense
—

—

12,573

—

—

—

—

12,573

Purchase of additional investment in subsidiary from minority owners
—

—

(1,267
)
—

—

—

(1,069
)
(2,336
)
Distributions to non-controlling interest
—

—

—

—

—

—

(106
)
(106
)
Balance at September 30, 2016
$
116,507

$
855

$
1,674,341

$
809,769

$
23,763

$
(62,084
)
$
257

$
2,563,408

 
 
 
 
 
 
 
 
 
Balance at December 31, 2016
$
115,572

$
856

$
1,678,826

$
838,892

$
5,190

$
(60,384
)
$
257

$
2,579,209

Net income
—

—

—

159,846

—

—

—

159,846

Other comprehensive income, net of tax
—

—

—

—

4,582

—

—

4,582

Conversion of preferred stock to common stock
(292
)
—

292

—

—

—

—

—

Cash dividends declared on preferred shares
—

—

—

(6,007
)
—

—

—

(6,007
)
Cash dividends declared on common shares ($0.61 per share)
—

—

—

(51,783
)
—

—

—

(51,783
)
Restricted common stock activity, net of tax
—

—

(6,829
)
—

—

3,549

—

(3,280
)
Stock option activity, net of tax
—

2

330

—

—

—

—

332

Repurchase of common shares in connection with employee benefit plans and held in trust for deferred compensation plan
—

—

605

—

—

(3,902
)
—

(3,297
)
Stock-based compensation expense
—

—

13,317

—

—

—

—

13,317

Purchase of additional investment in subsidiary from minority owners
—

—

(570
)
—

—

—

(257
)
(827
)
Balance at September 30, 2017
$
115,280

$
858

$
1,685,971

$
940,948

$
9,772

$
(60,737
)
$
—

$
2,692,092

















See Accompanying Notes to Consolidated Financial Statements.

5



MB FINANCIAL, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands) (Unaudited)
 
 
 
Nine Months Ended
 
 
September 30,
 
 
2017
 
2016
Cash Flows From Operating Activities
 
 

 
 

Net income
 
$
159,846

 
$
126,945

Adjustments to reconcile net income to net cash provided by operating activities:
 
 

 
 

Depreciation of premises and equipment and leased equipment
 
69,859

 
55,259

Branch exit and facilities impairment charges
 
8,680

 
(2,709
)
Compensation expense for share-based payment plans
 
13,317

 
12,573

Net gain on sales of premises and equipment and leased equipment
 
(794
)
 
(255
)
Amortization of other intangibles
 
6,214

 
4,917

Provision for credit losses
 
17,950

 
16,941

Deferred income tax expense
 
37,574

 
26,208

Amortization of premiums and discounts on investment securities, net
 
30,124

 
34,968

Accretion of discounts on loans, net
 
(21,760
)
 
(25,426
)
Net gain on investment securities
 
(451
)
 
(269
)
Proceeds from sale of loans held for sale
 
3,665,709

 
4,601,291

Origination of loans held for sale
 
(3,629,230
)
 
(4,694,890
)
Net gain on sale of loans held for sale
 
(10,073
)
 
(41,518
)
Change in fair value of mortgage servicing rights
 
20,601

 
59,894

Net loss (gain) on other real estate owned
 
1,294

 
(1,823
)
Net loss on other real estate owned related to FDIC-assisted transactions
 
103

 
448

Increase in cash surrender value of life insurance
 
(3,910
)
 
(2,759
)
Increase in other assets, net
 
(25,122
)
 
(162,260
)
(Decrease) increase in other liabilities, net
 
(49,043
)
 
22,618

Net cash provided by operating activities
 
290,888

 
30,153

Cash Flows From Investing Activities
 
 

 
 

Proceeds from sales of investment securities available for sale
 
2,271

 
19,023

Proceeds from maturities and calls of investment securities available for sale
 
249,264

 
212,283

Purchases of investment securities available for sale
 
(66,402
)
 
(19,905
)
Proceeds from maturities and calls of investment securities held to maturity
 
105,065

 
115,040

Purchases of investment securities held to maturity
 
(36,877
)
 
(12,690
)
Purchases of non-marketable securities - FHLB and FRB stock
 
(135,479
)
 
(15,999
)
Redemption of non-marketable securities - FHLB and FRB stock
 
126,410

 
23

Net increase in loans
 
(1,100,271
)
 
(780,864
)
Purchases of mortgage servicing rights
 
(839
)
 
(3,423
)
Purchases of premises and equipment and leased equipment
 
(130,313
)
 
(125,372
)
Proceeds from sales of premises and equipment and leased equipment
 
20,860

 
5,194

Capital improvements on other real estate owned
 
—

 
(96
)
Proceeds from sale of other real estate owned
 
18,432

 
8,081

Proceeds from sale of other real estate owned related to FDIC-assisted transactions
 
3,141

 
7,105

Net cash paid in business acquisition
 
—

 
(9,010
)
Purchase of additional investment in subsidiary from minority owners
 
(827
)
 
(2,336
)
Net proceeds from FDIC related covered assets
 
(583
)
 
(3,182
)
Net cash used in investing activities
 
(946,148
)
 
(606,128
)
Cash Flows From Financing Activities
 
 

 
 

Net increase in deposits
 
304,696

 
384,628

Proceeds from short-term borrowings - FHLB advances
 
3,125,000

 
2,200,000

Principal paid on short-term borrowings - FHLB advances
 
(3,150,000
)
 
(1,925,000
)
Net increase in short-term borrowings
 
171,127

 
17,277

Proceeds from long-term borrowings
 
348,235

 
182,247

Principal paid on long-term borrowings
 
(104,310
)
 
(136,877
)
Treasury stock transactions, net
 
(3,238
)
 
(3,792
)
Stock options exercised
 
1,715

 
1,062

Dividends paid on preferred stock
 
(6,007
)
 
(6,004
)
Dividends paid on common stock
 
(51,711
)
 
(42,748
)
Net cash provided by financing activities
 
635,507

 
670,793

Net (decrease) increase in cash and cash equivalents
 
$
(19,753
)
 
$
94,818

Cash and cash equivalents:
 
 

 
 

Beginning of period
 
463,469

 
381,441

End of period
 
$
443,716

 
$
476,259



6



MB FINANCIAL, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - (Continued)
(Amounts in thousands) (Unaudited)

 
 
 
Nine Months Ended
 
 
September 30,
 
 
2017
 
2016
Supplemental Disclosures of Cash Flow Information:
 
 

 
 

Cash payments for:
 
 

 
 

Interest paid to depositors and on other borrowed funds
 
$
47,104

 
$
26,952

Income tax (refunds) payments, net
 
(4,762
)
 
4,576

Supplemental Schedule of Noncash Investing Activities:
 
 

 
 

Investment securities available for sale sold not settled
 
$
—

 
$
(9,741
)
Investment securities held to maturity purchased not settled
 
2,433

 
440

Loans transferred to other real estate owned
 
6,467

 
3,566

Loans transferred to other real estate owned related to FDIC-assisted transactions
 
2,721

 
1,145

Loans transferred to repossessed assets
 
1,410

 
2,796

Operating leases rewritten as direct finance leases included as loans
 
1,484

 
642

Long-term borrowings transferred to short-term borrowings
 
150,000

 
150,000

Supplemental Schedule of Noncash Investing Activities From Acquisitions:
 
 

 
 

Noncash assets acquired:
 
 

 
 

Investment securities available for sale
 
$
—

 
$
505,564

Non-marketable securities - FHLB and FRB stock
 
—

 
16,000

Loans
 
1,846

 
1,952,826

Premises and equipment
 
—

 
39,061

Cash surrender value of life insurance
 
—

 
59,917

Goodwill
 
(1,113
)
 
268,729

Core deposit intangible
 
—

 
25,500

Other real estate owned
 
—

 
4,148

Other assets
 
(733
)
 
27,615

Total noncash assets acquired
 
$
—

 
$
2,899,360

Liabilities assumed:
 
 

 
 

Deposits
 
$
—

 
$
2,389,423

Short-term borrowings
 
—

 
48,305

Long-term borrowings
 
—

 
16,000

Junior subordinated notes issued to capital trusts
 
—

 
28,075

Other liabilities
 
—

 
23,477

Total liabilities assumed
 
$
—


$
2,505,280


















 
See Accompanying Notes to Consolidated Financial Statements.

7




MB FINANCIAL, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1.
   Basis of Presentation
 
These unaudited consolidated financial statements include the accounts of MB Financial, Inc., a Maryland corporation (the “Company”), and its subsidiaries, including its wholly owned national bank subsidiary, MB Financial Bank, N.A. (“MB Financial Bank”), based in Chicago, Illinois. In the opinion of management, all normal recurring adjustments necessary for a fair presentation of the financial condition, results of operations and cash flows for the interim periods have been made. The results of operations for the nine months ended September 30, 2017 are not necessarily indicative of the results to be expected for the entire fiscal year.
These unaudited interim financial statements have been prepared in conformity with U.S. generally accepted accounting principles (“GAAP”) and industry practice. Certain information in footnote disclosure normally included in financial statements prepared in accordance with U.S. GAAP and industry practice has been condensed or omitted pursuant to rules and regulations of the Securities and Exchange Commission. These financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions which affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements, as well as the reported amounts of income and expenses during the reported periods. Actual results could differ from those estimates.
Certain prior period amounts have been reclassified to conform to current period presentation. These reclassifications did not result in any changes to previously reported net income or stockholders’ equity.

Note 2.
New Authoritative Accounting Guidance

ASC Topic 805 "Business Combinations." New authoritative accounting guidance under ASC Topic 805 "Business Combinations" amends prior guidance to clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The new authoritative guidance will be effective for reporting periods after January 1, 2018. This new authoritative guidance is not expected to have a significant impact on the Company's statements of operations or financial condition.

ASC Topic 606 "Revenue from Contracts with Customers." New authoritative accounting guidance under ASC Topic 606, "Revenue from Contracts with Customers" amended prior guidance to require an entity to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services and to provide clarification on identifying performance obligations and licensing implementation guidance. The new authoritative guidance was initially effective for reporting periods after January 1, 2017 but was deferred to January 1, 2018. The Company's revenue is comprised of interest income on financial assets, which is excluded from the scope of this new guidance, and non-interest income. The Company expects this new guidance will require it to change how certain recurring revenue streams are recognized within trust and asset management fees, card fees and lease financing revenue but does not expect these changes to have a significant impact on its statements of operations or financial condition. The Company continues to evaluate the impact of this guidance on other components of non-interest income. The Company expects to adopt this new guidance on January 1, 2018 with a cumulative effect adjustment to opening retained earnings, if such adjustment is deemed to be significant.

ASC Topic 825 "Financial Instruments." New authoritative accounting guidance under ASC Topic 825 "Financial Instruments" amended prior guidance to require equity investments (except those accounted for under the equity method of accounting) to be measured at fair value with changes in fair value recognized in net income. An entity may choose to measure equity investments that do not have readily determinable fair values at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or similar investment of the same issuer. The new guidance simplifies the impairment assessment of equity investments without readily determinable fair values, requires public entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes, requires an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from changes in the instrument-specific credit risk when the entity has selected the fair value option for financial instruments and requires separate presentation of financial assets and liabilities by measurement category and form of financial asset. The new authoritative guidance will be effective for reporting periods after January 1, 2018 and is not expected to have a significant impact on the Company's statements of operations or financial condition.


8



ASC Topic 405 "Liabilities-Extinguishment of Liabilities." New authoritative accounting guidance under ASC Topic 405, "Liabilities-Extinguishment of Liabilities" amended prior guidance to clarify that liabilities related to the sale of prepaid store-value products within the scope of this guidance are financial liabilities and that breakage for those liabilities are to be accounted for consistent with the breakage guidance in ASC Topic 606 "Revenue from Contracts with Customers." The new authoritative guidance will be effective for reporting periods after January 1, 2018. The Company is evaluating the new guidance but does not expect it to have a significant impact on the Company's statements of operations or financial condition.

ASC Topic 842 "Leases." New authoritative accounting guidance under ASC Topic 842 "Leases" amended prior guidance to require lessees to recognize the assets and liabilities arising from all leases on the balance sheet. The new authoritative guidance defines a lease as a contract, or part of a contract, that conveys the right to control the use of identified property, plant, or equipment (an identified asset) for a period of time in exchange for consideration. In addition, the qualifications for a sale and leaseback transaction have been amended. The new authoritative guidance also requires qualitative and quantitative disclosures by lessees and lessors to meet the objective of enabling users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases. In transition, lessees and lessors are required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. The new authoritative guidance will be effective for reporting periods after January 1, 2019. The Company is evaluating the new guidance and its impact on the Company's statements of operations and financial condition. The Company expects an increase in assets and liabilities as a result of recording additional lease contracts where the Company is lessee.

ASC Topic 815 "Derivatives and Hedging." New authoritative accounting guidance under ASC Topic 815 "Derivatives and Hedging" amended prior guidance to clarify that a change in the counterparty to a derivative instrument that has been designated as the hedging instrument does not, in and of itself, require dedesignation of that hedging relationship provided that all other hedge accounting criteria continue to be met. An entity has an option to apply the amendments in this new authoritative guidance on either a prospective basis or a modified retrospective basis. The Company adopted this new authoritative guidance on January 1, 2017, and it did not have a significant impact on the Company's statements of operations or financial condition.

New authoritative accounting guidance under ASC Topic 815 "Derivatives and Hedging" also amended prior guidance to clarify what steps are required when assessing whether the economic characteristics and risks of call (put) options are clearly and closely related to the economic characteristics and risks of their debt hosts, which is one of the criteria for bifurcating an embedded derivative. An entity is required to consider whether (1) the payoff is adjusted based on changes in an index, (2) the payoff is indexed to an underlying other than interest rates or credit risk, (3) the debt involves a substantial premium or discount, and (4) the call (put) option is contingently exercisable. An entity should apply this new authoritative guidance on a modified retrospective basis to existing debt instruments as of the beginning of the fiscal year for which the amendments are effective. The Company adopted this new authoritative guidance on January 1, 2017, and it did not have a significant impact on the Company's statements of operations or financial condition.

New authoritative accounting guidance under ASC Topic 815 "Derivatives and Hedging" amended prior guidance to better align an entity's risk management activities and financial reporting for hedging relationships through changes to both the designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results. The new authoritative guidance expands and refines hedge accounting for both nonfinancial and financial risk components. The new authoritative guidance will be effective for reporting periods after January 1, 2019 with early adoption permitted. This new authoritative guidance is not expected to have a significant impact on the Company's statements of operations or financial condition.

ASC Topic 323 "Investment - Equity Method and Joint Ventures." New authoritative accounting guidance under ASC Topic 323 "Investment - Equity Method and Joint Ventures" amended prior guidance to eliminate the requirement to retroactively adopt the equity method of accounting as a result of an increase in the level of ownership interest or degree of influence. The new authoritative guidance required that the equity method investor add the cost of acquiring the additional interest in the investee to the current basis of the investor’s previously held interest and adopt the equity method of accounting as of the date the investment becomes qualified for equity method accounting. The Company adopted this new authoritative guidance on January 1, 2017, and it did not have an impact on the Company's statements of operations or financial condition.
 
ASC Topic 718 "Compensation - Stock Compensation." New authoritative accounting guidance under ASC Topic 718 "Compensation - Stock Compensation" amended prior guidance in several aspects, including the income tax consequences, classification of awards as either equity or liability, and classification on the statement of cash flows. The new authoritative guidance allows for all excess tax benefits and tax deficiencies to be recognized as income tax benefit or expense in the income statement. The tax effects of exercised or vested awards should be treated as discrete items in the reporting period in which they occur. An entity also should recognize excess tax benefits regardless of whether the benefit reduces taxes payable in the current period. For the statement of cash flows, excess tax benefits should be classified along with other income tax cash flows as an operating activity, and cash paid by an employer when directly withholding shares for tax withholding purposes should be classified

9



as a financing activity. The new authoritative guidance also allows an entity to make an entity-wide accounting policy election to either estimate the number of awards that are expected to vest or account for forfeitures when they occur. In addition, the threshold to qualify for equity classification permits withholding up to the maximum statutory tax rates in the applicable jurisdictions. The Company early adopted the new guidance in the third quarter of 2016. The Company has also elected to account for forfeitures when they occur.

New authoritative accounting guidance under ASC Topic 718 "Compensation - Stock Compensation" amends prior guidance by clarifying which changes to terms or conditions of a share-based payment award requires an entity to apply modification accounting. An entity should account for the effects of a modification unless the fair value, vesting conditions and classification of the modified award are the same as the original award. The new authoritative guidance will be effective for reporting periods after January 1, 2018 with early adoption permitted. This new authoritative guidance is not expected to have a significant impact on the Company's statements of operations or financial condition.

ASC Topic 326 "Financial Instruments - Credit Losses." New authoritative accounting guidance under ASC Topic 326 "Financial Instruments - Credit Losses" amended the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information for credit loss estimates. The measurement of expected credit losses is based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. The new authoritative guidance also requires a financial asset (or a group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected (net of the allowance for credit losses). In addition, the credit losses relating to available-for-sale debt securities should be recorded through an allowance for credit losses rather than a write-down. The new authoritative guidance will be effective for reporting periods after January 1, 2020. The Company is evaluating the new guidance and expects it to have an impact on the Company's statements of operations and financial condition, the significance of which is not yet known. Due to the significant differences in the new authoritative guidance from the existing GAAP, the implementation of this guidance may result in material changes in our accounting for credit losses on the financial instruments. As part of the Company's evaluation process, it has established a steering committee and working group, including individuals from various functional areas, to assess processes, portfolio segmentation, system requirements and needed resources. The Company is also considering third-party consultants to assist in the evaluation process.

ASC Topic 230 "Statement of Cash Flows." New authoritative accounting guidance under ASC Topic 230 "Statement of Cash Flows" addresses eight specific cash flow classification issues with the objective of reducing the existing diversity in practice. The new authoritative guidance will be effective for reporting periods after January 1, 2018. This new authoritative guidance is not expected to have a significant impact on the Company's statements of operations or financial condition.

New authoritative accounting guidance under ASC Topic 230 "Statement of Cash Flows" amends prior guidance to require an entity to include amounts generally described as restricted cash and restricted cash equivalents with cash and cash equivalents when reconciling the beginning of period and end of period total amounts shown on the statement of cash flows. The new authoritative guidance will be effective for reporting periods after January 1, 2018. This new authoritative guidance is not expected to have a significant impact on the Company's statements of operations or financial condition.

ASC Topic 740 "Income Taxes." New authoritative accounting guidance under ASC Topic 740 "Income Taxes" amends prior guidance to require an entity to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. The new authoritative guidance will be effective for reporting periods after January 1, 2018. This new authoritative guidance is not expected to have a significant impact on the Company's statements of operations or financial condition.

ASC Topic 350 "Intangibles-Goodwill and Other." New authoritative accounting guidance under ASC Topic 350 "Intangibles-Goodwill and Other" amends prior guidance to eliminate Step 2 from the goodwill impairment test and require an entity to perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. Additionally, an entity should consider income tax effects from any tax deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable. The new authoritative guidance will be effective for reporting periods after January 1, 2020. The Company is evaluating the new guidance and its impact on the Company's statements of operations and financial condition.

ASC Topic 610 "Other Income - Gains and Losses from the Derecognition of Nonfinancial Assets." New authoritative accounting guidance under ASC Topic 610 "Other Income - Gains and Losses from the Derecognition of Nonfinancial Assets" amends prior guidance to clarify the scope of Subtopic 610-20 by defining in substance nonfinancial assets and to add guidance for partial sales

10



of nonfinancial assets. The new authoritative guidance will be effective for reporting periods after January 1, 2018. This new authoritative guidance is not expected to have a significant impact on the Company's statements of operations or financial condition.

ASC Topic 310 "Receivables - Nonrefundable Fees and Other Costs." New authoritative accounting guidance under ASC Topic 310 "Receivables - Nonrefundable Fees and Other Costs" amends prior guidance by shortening the amortization period for certain callable debt securities held at a premium requiring the premium to be amortized to the earliest call date. The new authoritative guidance will be effective for reporting periods after January 1, 2019 with early adoption permitted. The Company is evaluating the new guidance and its impact on the Company's statements of operations and financial condition.

Note 3.
  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 share and per share data).
 
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
September 30,
 
 
2017
 
2016
 
2017
 
2016
Distributed earnings allocated to common stock
 
$
17,823

 
$
16,114

 
$
51,783

 
$
42,984

Undistributed earnings
 
43,020

 
28,305

 
108,063

 
83,961

Net income
 
60,843

 
44,419

 
159,846

 
126,945

Less: preferred stock dividends
 
2,002

 
2,004

 
6,007

 
6,004

Net income available to common stockholders for basic earnings per common share
 
58,841

 
42,415

 
153,839

 
120,941

Plus: preferred stock dividends on convertible preferred stock
 
2

 
4

 
7

 
4

Less: earnings allocated to participating securities
 
1

 
2

 
3

 
6

Earnings allocated to common stockholders for diluted earnings per common share
 
$
58,842

 
$
42,417

 
$
153,843

 
$
120,939

Weighted average shares outstanding for basic earnings per common share
 
83,891,175

 
77,506,885

 
83,799,694

 
74,780,943

Dilutive effect of:
 
 
 
 
 
 
 
 
Stock options
 
502,794

 
491,238

 
564,541

 
378,420

Restricted shares and units
 
379,684

 
672,480

 
404,850

 
564,028

Convertible preferred stock
 
6,144

 
12,567

 
6,867

 
4,189

Total dilutive effect of equity awards and convertible preferred stock
 
888,622

 
1,176,285

 
976,258

 
946,637

Weighted average shares outstanding for diluted earnings per common share
 
84,779,797

 
78,683,170

 
84,775,952

 
75,727,580

Basic earnings per common share
 
$
0.70

 
$
0.55

 
$
1.84

 
$
1.62

Diluted earnings per common share
 
0.69

 
0.54

 
1.81

 
1.60

 

11



Note 4.
   Business Combinations
 
American Chartered Bancorp, Inc. On August 24, 2016, American Chartered Bancorp, Inc. ("American Chartered"), an Illinois corporation, was merged (the "American Chartered merger") with and into the Company, pursuant to the Agreement and Plan of Merger, dated as of November 20, 2015 (the "Merger Agreement"), by and between the Company and American Chartered. This transaction continues to solidify the Company's market position in Chicago. At the effective time of the merger (the "American Chartered Effective Time"), (i) each share of the common stock, no par value, of American Chartered ("American Chartered Common Stock") that was issued and outstanding immediately prior to the American Chartered Effective Time, (ii) each share of American Chartered’s 8% Cumulative Voting Convertible Preferred Stock, Series D ("American Chartered Series D Preferred Stock"), that was issued and outstanding immediately prior to the American Chartered Effective Time whose holder elected pursuant to American Chartered’s charter to receive the same consideration in the American Chartered merger as holders of American Chartered Common Stock, based on the number of shares of American Chartered Common Stock into which such share of American Chartered Series D Preferred Stock would otherwise then be convertible, and (iii) each share of American Chartered Non-Voting Perpetual Preferred Stock, Series F, that was issued and outstanding immediately prior to the American Chartered Effective Time, was converted into the right to receive, subject to the election and proration procedures set forth in the Merger Agreement: (1) cash in the amount of $9.30 (the "Cash Consideration") or (2) 0.2732 shares of the Company's common stock, with cash paid in lieu of fractional Company shares determined by multiplying the fractional Company share amount by $39.01 (the average closing sale price of the Company's common stock for the five full trading days ending on August 23, 2016) (the "Stock Consideration"). The holders of such shares of American Chartered stock also could elect to receive a combination of the Cash Consideration and the Stock Consideration for their shares. Each share of American Chartered Series D Preferred Stock whose holder did not elect to receive the same consideration in the American Chartered merger as holders of American Chartered Common Stock, based on the number of shares of American Chartered Common Stock into which such share of American Chartered Series D Preferred Stock would otherwise then be convertible, was converted into the right to receive one share of the Company's 8% cumulative voting convertible preferred stock, Series B. Consideration paid was $487.4 million, including $382.8 million in common stock (9.7 million shares), $102.3 million in cash and $2.3 million in preferred stock and stock-based awards assumed. The $102.3 million in cash consideration includes payments for the value of the net option shares of the American Chartered stock options pursuant to the Merger Agreement.

This 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, the assets acquired, liabilities assumed and consideration paid are recorded at their estimated fair values. 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. As the consideration paid for American Chartered exceeded the net assets acquired, goodwill of $274.9 million was recorded on the acquisition and allocated to the banking segment. Goodwill recorded in the transaction, which reflects the increased Chicago market share and related synergies expected from the combined operations, is not tax deductible. During the first quarter of 2017, the fair value estimates of loans increased by $1.8 million compared to previously reported balances, which decreased the deferred tax asset by $733 thousand and goodwill by $1.1 million. The amounts recognized for the business combination in the financial statements have been determined to be final as of March 31, 2017.

12




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

 
 
August 24, 2016
ASSETS
 
 
Cash and cash equivalents
 
$
93,307

Investment securities available for sale
 
505,564

Non-marketable securities - FRB and FHLB Stock
 
16,000

Loans
 
1,942,548

Premises and equipment
 
39,048

Cash surrender value of life insurance
 
59,917

Goodwill
 
274,885

Other intangibles
 
25,452

Other real estate owned
 
3,960

Other assets
 
31,408

Total assets
 
$
2,992,089

LIABILITIES
 
 
Deposits
 
$
2,389,327

Short-term borrowings
 
48,305

Long-term borrowings
 
16,000

Junior subordinated notes issued to capital trusts
 
28,075

Accrued expenses and other liabilities
 
22,966

Total liabilities
 
$
2,504,673

Total identifiable net assets
 
$
487,416

 
 
 
Consideration:
 
 
Market value of common stock at $39.28 per share at August 24, 2016 (9,744,636 shares of common stock issued)
 
$
382,769

Series B preferred stock at $2,337.97 per share at August 24, 2016 (525 shares of preferred stock issued) (1)
 
1,227

Stock-based compensation attributed to pre-business combination service
 
1,103

Cash paid
 
102,317

   Total fair value of consideration, excluding Series B preferred stock
 
$
487,416

(1) 
Per share fair value amount determined as if the shares of Series B preferred stock were converted into shares of common stock.
 
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 and lease 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 Topic 310-20 "Nonrefundable Fees and Other Costs" as these loans do not have evidence of credit deterioration since origination.
•
Non-impaired loans (typically performing substandard loans) are accounted for in accordance with ASC Topic 310-30 if 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 Topic 310-30 as they display significant credit deterioration since origination.

For pass rated loans (non-purchased credit-impaired loans), the difference between the estimated fair value of the loans and the principal outstanding is accreted over the remaining life of the loans. The accretable discount for the non-purchased credit-impaired loans was $20.7 million as of the date of the acquisition.

In accordance with ASC Topic 310-30, for both purchased non-impaired loans (performing substandard loans) and purchased credit-impaired loans, the loans are pooled by loan type and 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 pools when there is a reasonable expectation about the amount and timing of such cash flows. The non-accretable and accretable discount for the purchased credit-impaired loans was $18.4 million and $5.3 million, respectively, as of the date of the acquisition.

13




The following table presents the acquired loans as of the acquisition date (in thousands):

 
 
Purchased
Credit-Impaired
Loans
 
Purchased Non-Credit-Impaired
Loans
Fair value
 
$
62,104

 
$
1,880,444

Gross contractual amounts receivable
 
93,490

 
2,149,868

Best estimate of contractual cash flows not expected to be collected (1)
 
22,293

 
114,154

Best estimate of contractual cash flows expected to be collected
 
71,197

 
2,035,714

(1) 
Includes interest payments not expected to be collected due to loan prepayments as well as principal and interest payments not expected to be collected due to customer defaults.

The Company incurred costs of $2.0 million directly related to the consummation of the merger for the year ended December 31, 2016, which was recorded in professional and legal fees on the statement of operations. The data processing systems were converted in September 2016.

The following table provides the unaudited pro forma information for the results of operations for the three and nine months ended September 30, 2016, as if the acquisition had occurred on January 1, 2016. The pro forma results combine the historical results of American Chartered into the Company's consolidated statement of operations including the impact of certain acquisition accounting adjustments including loan discount accretion, investment securities discount accretion, intangible assets amortization, deposit premium accretion and borrowing discount amortization. The pro forma results have been prepared for comparative purposes only and are not necessarily indicative of the results that would have been obtained had the acquisition actually occurred on January 1, 2016. No assumptions have been applied to the pro forma results of operations regarding possible revenue enhancements, provision for credit losses, expense efficiencies or asset dispositions. The merger related expenses that have been recognized are included in net income in the table below.

 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
September 30,
 
 
2016
 
2016
(in thousands)
 
 
 
 
Total revenues (net interest income plus non-interest income)
 
$
258,611

 
$
735,408

Net income
 
50,029

 
149,111


Revenues and earnings of the acquired company since the acquisition date have not been disclosed as it is not practicable as American Chartered was merged into the Company and separate financial information is not readily available.


14



Note 5.
          Investment Securities
 
Amortized cost and fair value of investment securities were as follows as of the dates indicated (in thousands):
 
 
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
September 30, 2017
 
 

 
 

 
 

 
 

Available for Sale
 
 

 
 

 
 

 
 

U.S. Government sponsored agencies and enterprises
 
$
23,077

 
$
69

 
$
—

 
$
23,146

States and political subdivisions
 
366,187

 
20,009

 
(367
)
 
385,829

Residential mortgage-backed securities
 
878,167

 
4,773

 
(7,680
)
 
875,260

Commercial mortgage-backed securities
 
86,411

 
1,097

 
(291
)
 
87,217

Corporate bonds
 
114,581

 
450

 
(17
)
 
115,014

Equity securities
 
11,177

 
—

 
(100
)
 
11,077

Total Available for Sale
 
1,479,600

 
26,398

 
(8,455
)
 
1,497,543

Held to Maturity
 
 

 
 

 
 

 
 

States and political subdivisions
 
888,576

 
35,952

 
(476
)
 
924,052

Residential mortgage-backed securities
 
105,662

 
2,032

 
—

 
107,694

Total Held to Maturity
 
994,238

 
37,984

 
(476
)
 
1,031,746

Total
 
$
2,473,838

 
$
64,382

 
$
(8,931
)
 
$
2,529,289

December 31, 2016
 
 

 
 

 
 

 
 

Available for Sale
 
 

 
 

 
 

 
 

U.S. Government sponsored agencies and enterprises
 
$
23,267

 
$
148

 
$
—

 
$
23,415

States and political subdivisions
 
376,541

 
15,669

 
(845
)
 
391,365

Residential mortgage-backed securities
 
988,744

 
5,741

 
(10,801
)
 
983,684

Commercial mortgage-backed securities
 
91,949

 
1,221

 
(162
)
 
93,008

Corporate bonds
 
193,164

 
1,426

 
(695
)
 
193,895

Equity securities
 
11,000

 
—

 
(172
)
 
10,828

Total Available for Sale
 
1,684,665

 
24,205

 
(12,675
)
 
1,696,195

Held to Maturity
 
 
 
 
 
 
 
 

States and political subdivisions
 
910,608

 
21,609

 
(3,039
)
 
929,178

Residential mortgage-backed securities
 
159,142

 
5,420

 
—

 
164,562

Total Held to Maturity
 
1,069,750

 
27,029

 
(3,039
)
 
1,093,740

Total
 
$
2,754,415

 
$
51,234

 
$
(15,714
)
 
$
2,789,935

 
 
 
 
 
 
 
 
 
 
The Company has no direct exposure to the State of Illinois in its investment securities portfolio, but approximately 20% of the state and political subdivisions portfolio consisted of securities issued by municipalities located in Illinois as of September 30, 2017. Approximately 95% of the state and political subdivisions securities were general obligation issues, and 27% were insured or had another form of credit enhancement as of September 30, 2017.


15



Unrealized losses on investment securities by length of time in a continuous unrealized loss position and the fair value of the related securities at September 30, 2017 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
 
$
1,364

 
$
(4
)
 
$
19,044

 
$
(363
)
 
$
20,408

 
$
(367
)
Residential mortgage-backed securities
 
308,732

 
(4,229
)
 
222,269

 
(3,451
)
 
531,001

 
(7,680
)
Commercial mortgage-backed securities
 
9,602

 
(188
)
 
11,445

 
(103
)
 
21,047

 
(291
)
Corporate bonds
 
—

 
—

 
9,978

 
(17
)
 
9,978

 
(17
)
Equity securities
 
11,077

 
(100
)
 
—

 
—

 
11,077

 
(100
)
Total Available for Sale
 
330,775

 
(4,521
)
 
262,736

 
(3,934
)
 
593,511

 
(8,455
)
Held to Maturity
 
 

 
 

 
 

 
 

 
 

 
 

States and political subdivisions
 
38,118

 
(432
)
 
2,329

 
(44
)
 
40,447

 
(476
)
Total
 
$
368,893

 
$
(4,953
)
 
$
265,065

 
$
(3,978
)
 
$
633,958

 
$
(8,931
)
 
Unrealized losses on investment securities by length of time in a continuous unrealized loss position and the fair value of the related securities at December 31, 2016 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
 
$
42,806

 
$
(845
)
 
$
—

 
$
—

 
$
42,806

 
$
(845
)
Residential mortgage-backed securities
 
623,732

 
(10,084
)
 
54,990

 
(717
)
 
678,722

 
(10,801
)
Commercial mortgage-backed securities
 
7,062

 
(9
)
 
11,612

 
(153
)
 
18,674

 
(162
)
Corporate bonds
 
21,028

 
(204
)
 
20,088

 
(491
)
 
41,116

 
(695
)
Equity securities
 
10,828

 
(172
)
 
—

 
—

 
10,828

 
(172
)
Total Available for Sale
 
705,456

 
(11,314
)
 
86,690

 
(1,361
)
 
792,146

 
(12,675
)
Held to Maturity
 
 

 
 

 
 

 
 

 
 

 
 

States and political subdivisions
 
243,568

 
(2,999
)
 
2,988

 
(40
)
 
246,556

 
(3,039
)
Total
 
$
949,024

 
$
(14,313
)
 
$
89,678

 
$
(1,401
)
 
$
1,038,702

 
$
(15,714
)
 
The total number of security positions in the investment portfolio in an unrealized loss position at September 30, 2017 was 397 compared to 615 at December 31, 2016. This decrease in total number of security positions in a continuous unrealized loss position from December 31, 2016 to September 30, 2017 was mainly attributable to the mortgage-backed securities in the investment securities portfolio. 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 the Company is more likely than not to sell the security before recovery of its cost basis.
 
As of September 30, 2017, 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 securities approach their maturity date or repricing date or if market yields for such investments decline. Accordingly, as of September 30, 2017, management believes the impairments detailed in the table above are temporary.

Changes in market interest rates can significantly influence the fair value of securities, and the fair value of our municipal securities portfolio would decline substantially if interest rates increase materially.


16



Net gains recognized on investment securities available for sale were as follows (in thousands):
 
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
September 30,
 
 
2017
 
2016
 
2017
 
2016
Realized gains
 
$
83

 


 
$
457

 
$
323

Realized losses
 
—

 
—

 
(6
)
 
(54
)
Net gains
 
$
83

 
$
—

 
$
451

 
$
269

 
The amortized cost and fair value of investment securities as of September 30, 2017 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
 
$
145,205

 
$
145,902

Due after one year through five years
 
106,869

 
111,113

Due after five years through ten years
 
57,764

 
59,755

Due after ten years
 
194,007

 
207,219

Equity securities
 
11,177

 
11,077

Residential and commercial mortgage-backed securities
 
964,578

 
962,477

 
 
1,479,600

 
1,497,543

Held to maturity:
 
 

 
 

Due in one year or less
 
41,530

 
41,588

Due after one year through five years
 
152,848

 
159,474

Due after five years through ten years
 
204,683

 
215,747

Due after ten years
 
489,515

 
507,243

Residential mortgage-backed securities
 
105,662

 
107,694

 
 
994,238

 
1,031,746

Total
 
$
2,473,838

 
$
2,529,289

 
Investment securities with a carrying amount of $833.4 million at September 30, 2017 and $1.0 billion at December 31, 2016 were pledged as collateral on public deposits and for other purposes as required or permitted by law, while only $691.3 million and $756.5 million were required to be pledged at September 30, 2017 and December 31, 2016, respectively.
 

17



Note 6.
        Loans
 
Loans consist of the following at (in thousands):

 
 
September 30,
2017
 
December 31,
2016
Commercial loans
 
$
4,793,838

 
$
4,346,506

Commercial loans collateralized by assignment of lease payments
 
2,074,215

 
2,002,976

Commercial real estate
 
4,094,706

 
3,788,016

Residential real estate
 
1,433,595

 
1,060,828

Construction real estate
 
395,794

 
518,562

Indirect vehicle
 
655,213

 
541,680

Home equity
 
228,726

 
266,377

Other consumer loans
 
77,372

 
80,781

Total loans, excluding purchased credit-impaired loans
 
13,753,459

 
12,605,726

Purchased credit-impaired loans
 
131,919

 
163,077

Total loans
 
$
13,885,378

 
$
12,768,803

 

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. Except for commercial loans collateralized by assignment of lease payments, asset-based loans, residential real estate loans and indirect vehicle loans, credit risk tends to be geographically concentrated in that a majority of the loan customers are located in Illinois.
 
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. This policy is reviewed and approved by the Enterprise Risk Committee of the Company's Board of Directors on an annual basis.
 
Commercial Loans. Commercial credit is extended primarily to emerging middle market and 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 significant amount by the businesses' principal owners. Commercial loans are made based primarily on the historical cash flow of the borrower and secondarily on the underlying collateral provided by the borrower. The cash flows of borrowers, however, may not perform 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. Asset-based loans, also included in commercial loans, are made to businesses with the primary source of repayment derived from payments on the related assets securing the loan. Collateral for these loans may include accounts receivable, inventory and equipment, and is monitored regularly to ensure ongoing sufficiency of collateral coverage and quality. The primary risk for these loans is a significant decline in collateral values due to general market conditions. Loan terms that mitigate these risks include typical industry amortization schedules, percentage of collateral advances, maintenance of cash collateral accounts and regular asset monitoring. Because of the national scope of our asset-based lending, the risk of these loans is also diversified by geography.
 
Commercial Loans Collateralized by Assignment of Lease Payments ("Lease Loans"). The Company makes lease loans to lessors where the underlying leases are with 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. Whether or not companies fall into this category, each lease loan is considered on its individual merit based on the financial wherewithal of the lessee using financial information available at the time of underwriting. In addition, leases that transfer substantially all of the benefits and risk related to the equipment ownership are classified as direct finance leases and are included in lease loans.
 
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 property income based loans and the repayment of these loans is largely dependent on the successful operation of the property, which also serves as collateral for the loan. 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 monitored by the Company and used exclusively for the improvement of real estate in which the Company holds a mortgage. Due to the inherent

18



risk in this type of loan, these loans 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 vehicle loans (motorcycle, marine, recreational and powersports vehicles). Each loan type is underwritten based upon several factors including debt to income, type of collateral and loan to collateral value, credit history and the Company's relationship with the borrower. Indirect loan and credit card underwriting involves the use of risk-based pricing in the underwriting process.

Purchased credit-impaired loans. Purchased credit-impaired loans are accounted for under ASC Topic 310-30, which include purchased credit-impaired loans acquired through business combinations, FDIC-assisted transactions and re-purchase transactions with the Government National Mortgage Association ("GNMA"). The loans re-purchased from GNMA were originally sold by the Company with servicing retained and subsequently became delinquent. These loans are also insured by the Federal Housing Administration (commonly referred to as "FHA") or the U.S. Department of Veterans Affairs (commonly referred to as "VA") where the Company would be able to recover the principal balance of these loans. All re-purchases from GNMA are at the Company's discretion.

A collateral pledge agreement exists whereby at all times, the Company must keep on hand, free of all other pledges, liens, and encumbrances, loans with unpaid principal balances aggregating no less than 129% for qualifying first mortgage loans, 231% for home equity loans, 183% for qualifying commercial real estate loans and 108% for loans held for sale, of the outstanding advances from the Federal Home Loan Bank.  As of September 30, 2017 and December 31, 2016, the Company had $5.6 billion and $5.5 billion, respectively, of loans pledged as collateral for long-term Federal Home Loan Bank advances and third party letters of credit, while only $4.2 billion and $3.2 billion were required to be pledged at September 30, 2017 and December 31, 2016, respectively.


19



The following table presents the contractual aging of the recorded investment in past due loans by class of loans as of September 30, 2017 and December 31, 2016 (in thousands):

 
 
Current
 
30-59 Days
Past Due
 
60-89 Days
Past Due
 
Loans Past Due
90 Days or More
 
Total
Past Due
 
Total
September 30, 2017
 
 

 
 

 
 

 
 

 
 

 
 

Commercial
 
$
4,782,808

 
$
5,438

 
$
351

 
$
5,241

 
$
11,030

 
$
4,793,838

Commercial collateralized by assignment of lease payments
 
2,059,556

 
10,488

 
3,810

 
361

 
14,659

 
2,074,215

Commercial real estate:
 
 

 
 

 
 

 
 

 
 

 
 

Healthcare
 
698,919

 
—

 
—

 
—

 
—

 
698,919

Industrial
 
856,630

 
—

 
—

 
755

 
755

 
857,385

Multifamily
 
608,254

 
959

 
—

 
569

 
1,528

 
609,782

Retail
 
508,048

 
1,021

 
—

 
258

 
1,279

 
509,327

Office
 
447,671

 
2,131

 
—

 
1,634

 
3,765

 
451,436

Other
 
964,855

 
1,896

 
87

 
1,019

 
3,002

 
967,857

Residential real estate
 
1,422,321

 
575

 
4,299

 
6,400

 
11,274

 
1,433,595

Construction real estate
 
395,226

 
568

 
—

 
—

 
568

 
395,794

Indirect vehicle
 
649,884

 
3,938

 
992

 
399

 
5,329

 
655,213

Home equity
 
222,804

 
1,743

 
753

 
3,426

 
5,922

 
228,726

Other consumer
 
77,109

 
89

 
79

 
95

 
263

 
77,372

Total loans, excluding purchased credit-impaired loans
 
13,694,085

 
28,846

 
10,371

 
20,157

 
59,374

 
13,753,459

Purchased credit-impaired loans
 
72,900

 
4,438

 
6,602

 
47,979

 
59,019

 
131,919

Total loans
 
$
13,766,985

 
$
33,284

 
$
16,973

 
$
68,136

 
$
118,393

 
$
13,885,378

Non-performing loan aging
 
$
27,148

 
$
1,179

 
$
2,244

 
$
20,044

 
$
23,467

 
$
50,615

 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2016
 
 

 
 

 
 

 
 

 
 

 
 

Commercial
 
$
4,337,348

 
$
2,515

 
$
156

 
$
6,487

 
$
9,158

 
$
4,346,506

Commercial collateralized by assignment of lease payments
 
1,989,934

 
9,229

 
1,869

 
1,944

 
13,042

 
2,002,976

Commercial real estate:
 
 

 
 

 
 

 
 

 
 

 
 

Healthcare
 
582,450

 
—

 
—

 
—

 
—

 
582,450

Industrial
 
825,715

 
3,045

 
3,293

 
1,340

 
7,678

 
833,393

Multifamily
 
547,107

 
458

 
53

 
379

 
890

 
547,997

Retail
 
506,789

 
568

 
—

 
—

 
568

 
507,357

Office
 
405,992

 
350

 
475

 
6,381

 
7,206

 
413,198

Other
 
899,950

 
2,385

 
1,155

 
131

 
3,671

 
903,621

Residential real estate
 
1,041,189

 
8,248

 
3,409

 
7,982

 
19,639

 
1,060,828

Construction real estate
 
518,171

 
—

 
391

 
—

 
391

 
518,562

Indirect vehicle
 
537,221

 
2,836

 
1,062

 
561

 
4,459

 
541,680

Home equity
 
261,765

 
1,219

 
815

 
2,578

 
4,612

 
266,377

Other consumer
 
80,443

 
152

 
120

 
66

 
338

 
80,781

Total loans, excluding purchased credit-impaired loans
 
12,534,074

 
31,005

 
12,798

 
27,849

 
71,652

 
12,605,726

Purchased credit-impaired loans
 
86,169

 
6,546

 
6,600

 
63,762

 
76,908

 
163,077

Total loans
 
$
12,620,243

 
$
37,551

 
$
19,398

 
$
91,611

 
$
148,560

 
$
12,768,803

Non-performing loan aging
 
$
28,364

 
$
2,308

 
$
978

 
$
27,702

 
$
30,988

 
$
59,352

 

 

20



The following table presents the recorded investment in non-accrual loans and loans past due ninety days or more and still accruing by class of loans, excluding purchased credit-impaired loans, as of September 30, 2017 and December 31, 2016 (in thousands):
 
 
 
September 30, 2017
 
December 31, 2016
 
 
 
 
Loans past due
 
 
 
Loans past due
 
 
Non-accrual
 
90 days or more
and still accruing
 
Non-accrual
 
90 days or more
and still accruing
Commercial
 
$
7,079

 
$
—

 
$
11,222

 
$
1,406

Commercial collateralized by assignment of lease payments
 
1,054

 
360

 
1,364

 
1,197

Commercial real estate:
 
 

 
 

 
 

 
 

Healthcare
 
—

 
—

 
—

 
—

Industrial
 
2,215

 
—

 
276

 
1,064

Multifamily
 
1,110

 
—

 
2,662

 
—

Office
 
2,973

 
—

 
896

 
6,381

Retail
 
382

 
—

 
384

 
—

Other
 
1,058

 
15

 
83

 
21

Residential real estate
 
18,811

 
185

 
16,538

 
235

Construction real estate
 
—

 
—

 
—

 
—

Indirect vehicle
 
2,440

 
34

 
2,355

 
10

Home equity
 
12,803

 
—

 
13,187

 
—

Other consumer
 
1

 
95

 
7

 
64

Total
 
$
49,926

 
$
689

 
$
48,974

 
$
10,378

 
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 as 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. Loans rated but not adversely classified are deemed to be Pass. Risk ratings are updated any time the situation warrants and at least annually.


21



Loans not rated are included in groups of homogeneous loans with similar risk and loss characteristics and are not included in the table below. The following tables present the risk category of loans by class of loans based on the most recent analysis performed, excluding purchased credit-impaired loans, as of September 30, 2017 and December 31, 2016 (in thousands):
 
 
 
Pass
 
Special
Mention
 
Substandard
 
Doubtful
 
Total
September 30, 2017
 
 

 
 

 
 

 
 

 
 

Commercial
 
$
4,556,245

 
$
160,905

 
$
76,688

 
$
—

 
$
4,793,838

Commercial collateralized by assignment of lease payments
 
2,053,456

 
12,405

 
8,354

 
—

 
2,074,215

Commercial real estate:
 
 

 
 

 
 

 
 

 
 

Healthcare
 
659,945

 
2,675

 
36,299

 
—

 
698,919

Industrial
 
830,106

 
15,401

 
11,878

 
—

 
857,385

Multifamily
 
601,515

 
151

 
8,116

 
—

 
609,782

Retail
 
505,004

 
1,566

 
2,757

 
—

 
509,327

Office
 
442,550

 
3,782

 
5,104

 
—

 
451,436

Other
 
893,589

 
46,688

 
27,580

 
—

 
967,857

Construction real estate
 
395,267

 
527

 
—

 
—

 
395,794

Total
 
$
10,937,677

 
$
244,100

 
$
176,776

 
$
—

 
$
11,358,553

December 31, 2016
 
 

 
 

 
 

 
 

 
 

Commercial
 
$
4,127,397

 
$
113,838

 
$
105,271

 
$
—

 
$
4,346,506

Commercial collateralized by assignment of lease payments
 
1,981,689

 
16,010

 
5,277

 
—

 
2,002,976

Commercial real estate:
 
 

 
 

 
 

 
 

 
 

Healthcare
 
545,663

 
32,251

 
4,536

 
—

 
582,450

Industrial
 
814,668

 
17,962

 
763

 
—

 
833,393

Multifamily
 
544,071

 
312

 
3,614

 
—

 
547,997

Retail
 
498,458

 
8,350

 
549

 
—

 
507,357

Office
 
404,811

 
5,299

 
3,088

 
—

 
413,198

Other
 
820,229

 
44,629

 
38,763

 
—

 
903,621

Construction real estate
 
518,562

 
—

 
—

 
—

 
518,562

Total
 
$
10,255,548

 
$
238,651

 
$
161,861

 
$
—

 
$
10,656,060

 
Approximately $15.9 million and $17.3 million of the substandard loans were non-performing as of September 30, 2017 and December 31, 2016, 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, excluding purchased credit-impaired loans, as of September 30, 2017 and December 31, 2016 (in thousands):
 
 
 
Performing
 
Non-performing
 
Total
September 30, 2017
 
 

 
 

 
 

Residential real estate
 
$
1,414,599

 
$
18,996

 
$
1,433,595

Indirect vehicle
 
652,739

 
2,474

 
655,213

Home equity
 
215,923

 
12,803

 
228,726

Other consumer
 
77,276

 
96

 
77,372

Total
 
$
2,360,537

 
$
34,369

 
$
2,394,906

December 31, 2016
 
 

 
 

 
 

Residential real estate
 
$
1,044,055

 
$
16,773

 
$
1,060,828

Indirect vehicle
 
539,315

 
2,365

 
541,680

Home equity
 
253,190

 
13,187

 
266,377

Other consumer
 
80,710

 
71

 
80,781

Total
 
$
1,917,270

 
$
32,396

 
$
1,949,666



22



The recorded investment in residential mortgage loans secured by residential real estate properties (including purchased credit-impaired loans) for which foreclosure proceedings are in process totaled $46.1 million and $29.1 million at September 30, 2017 and December 31, 2016, respectively.
 
The following tables present loans individually evaluated for impairment by class of loans, excluding purchased credit-impaired loans, as of September 30, 2017 and December 31, 2016 (in thousands):
 
 
 
September 30, 2017
 
 
 
 
 
 
 
 
 
 
Three Months Ended
 
Nine Months Ended
 
 
Unpaid
Principal
Balance
 
Recorded
Investment
 
Partial
Charge-offs
 
Allowance for
Loan Losses
Allocated
 
Average
Recorded
Investment
 
Interest
Income
Recognized
 
Average
Recorded
Investment
 
Interest
Income
Recognized
With no related allowance recorded:
 
 

 
 

 
 

 
 

 
 

 
 

 
 
 
 
Commercial
 
$
2,997

 
$
2,997

 
$
—

 
$
—

 
$
2,470

 
$
22

 
$
4,064

 
$
59

Commercial collateralized by assignment of lease payments
 
16

 
1

 
15

 
—

 
1

 
—

 
403

 
—

Commercial real estate:
 
 

 
 

 
 

 
 

 
 

 
 

 
 
 
 
Healthcare
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Industrial
 
1,238

 
1,238

 
—

 
—

 
1,350

 
—

 
1,684

 
8

Multifamily
 
—

 
—

 
—

 
—

 
—

 
—

 
1,686

 
29

Retail
 
—

 
—

 
—

 
—

 
—

 
—

 
1,088

 
27

Office
 
1,860

 
1,856

 
4

 
—

 
1,903

 
6

 
1,715

 
12

Other
 
3,542

 
3,542

 
—

 
—

 
3,552

 
57

 
1,197

 
57

Residential real estate
 
750

 
718

 
32

 
—

 
—

 
—

 
—

 
—

Construction real estate
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Indirect vehicle
 
572

 
349

 
223

 
—

 
621

 
10

 
396

 
20

Home equity
 
108

 
108

 
—

 
—

 
26

 
—

 
476

 
—

Other consumer
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

With an allowance recorded:
 
 

 
 

 
 

 
 

 
 

 
 

 
 
 
 
Commercial
 
7,645

 
7,645

 
—

 
1,012

 
8,406

 
29

 
8,481

 
202

Commercial collateralized by assignment of lease payments
 
920

 
920

 
—

 
585

 
500

 
14

 
168

 
14

Commercial real estate:
 
 

 
 

 
 

 
 

 
 

 
 

 
 
 
 
Healthcare
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Industrial
 
3,254

 
3,243

 
11

 
432

 
3,293

 
34

 
2,213

 
66

Multifamily
 
569

 
569

 
—

 
234

 
565

 
—

 
379

 
—

Retail
 
—

 
—

 
—

 
—

 
—

 
—

 
1,799

 
28

Office
 
961

 
960

 
1

 
34

 
214

 
4

 
72

 
4

Other
 
591

 
591

 
—

 
155

 
115

 
—

 
39

 
—

Residential real estate
 
20,876

 
18,652

 
2,224

 
2,169

 
18,655

 
16

 
17,126

 
21

Construction real estate
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Indirect vehicle
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Home equity
 
29,648

 
27,360

 
2,288

 
2,562

 
27,421

 
12

 
27,820

 
39

Other consumer
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Total
 
$
75,547

 
$
70,749

 
$
4,798

 
$
7,183

 
$
69,092

 
$
204

 
$
70,806

 
$
586


 

23



 
 
December 31, 2016
 
 
 
 
 
 
 
 
 
 
Year Ended
 
 
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
 
$
9,056

 
$
9,056

 
$
—

 
$
—

 
$
5,944

 
$
—

Commercial collateralized by assignment of lease payments
 
1,129

 
747

 
382

 
—

 
1,045

 
34

Commercial real estate:
 
 

 
 

 
 

 
 

 
 

 
 

Healthcare
 
—

 
—

 
—

 
—

 
—

 
—

Industrial
 
—

 
—

 
—

 
—

 
402

 
—

Multifamily
 
1,922

 
1,922

 
—

 
—

 
2,348

 
—

Retail
 
2,670

 
929

 
1,741

 
—

 
2,165

 
—

Office
 
—

 
—

 
—

 
—

 
256

 
—

Other
 
—

 
—

 
—

 
—

 
60

 
—

Residential real estate
 
—

 
—

 
—

 
—

 
—

 
—

Construction real estate
 
—

 
—

 
—

 
—

 
—

 
—

Indirect vehicle
 
223

 
122

 
101

 
—

 
252

 
—

Home equity
 
—

 
—

 
—

 
—

 
143

 
—

Other consumer
 
—

 
—

 
—

 
—

 
—

 
—

With an allowance recorded:
 
 

 
 

 
 

 
 

 
 

 
 

Commercial
 
14,403

 
14,403

 
—

 
2,889

 
22,737

 
—

Commercial collateralized by assignment of lease payments
 
—

 
—

 
—

 
—

 
2,397

 
18

Commercial real estate:
 
 

 
 

 
 

 
 

 
 

 
 

Healthcare
 
—

 
—

 
—

 
—

 
—

 
—

Industrial
 
—

 
—

 
—

 
—

 
—

 
—

Multifamily
 
—

 
—

 
—

 
—

 
—

 
—

Retail
 
3,592

 
3,592

 
—

 
354

 
6,827

 
—

Office
 
—

 
—

 
—

 
—

 
745

 
—

Other
 
—

 
—

 
—

 
—

 
235

 
—

Residential real estate
 
16,257

 
14,353

 
1,904

 
2,163

 
13,412

 
—

Construction real estate
 
—

 
—

 
—

 
—

 
—

 
—

Indirect vehicle
 
—

 
—

 
—

 
—

 
—

 
—

Home equity
 
31,104

 
28,790

 
2,314

 
2,930

 
28,677

 
—

Other consumer
 
—

 
—

 
—

 
—

 
—

 
—

Total
 
$
80,356

 
$
73,914

 
$
6,442

 
$
8,336

 
$
87,645

 
$
52

 
Impaired loans included accruing restructured loans of $32.9 million and $32.7 million that have been modified and are performing in accordance with those modified terms as of September 30, 2017 and December 31, 2016, respectively.  In addition, impaired loans included $24.4 million and $27.1 million of non-performing restructured loans as of September 30, 2017 and December 31, 2016, 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, deferring past due interest or principal, implementing an A/B note structure, redeeming past due taxes, reducing interest rates, extending maturities and modifying 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.

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 to or greater than the rate the Company is willing to accept at the

24



time of restructuring for a new loan with comparable risk. If there are concerns that the borrower will not be able to meet the modified terms of the loan, the loan will 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 and lease losses process. 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 were restructured during the three months ended September 30, 2017 (dollars in thousands):
 
 
 
September 30, 2017
 
 
Number of
Loans
 
Pre-Modification Recorded
Investment
 
Post-Modification Recorded
Investment
 
Charge-offs and
Specific Reserves
Performing:
 
 
 
 

 
 

 
 

Commercial real estate
 

 
 

 
 

 
 

Industrial
 
1
 
$
387

 
$
387

 
$
—

Retail
 
2
 
337

 
337

 
—

     Other
 
2
 
3,555

 
3,555

 
—

Home equity
 
1
 
19

 
19

 
1

Total
 
6
 
$
4,298

 
$
4,298

 
$
1

Non-Performing:
 
 
 
 

 
 

 
 

Residential real estate
 
11
 
$
2,775

 
$
2,775

 
$
739

Indirect vehicle
 
20
 
153

 
153

 
105

Home equity
 
1
 
15

 
15

 
1

Total
 
32
 
$
2,943

 
$
2,943

 
$
845


The following table presents loans that were restructured during the nine months ended September 30, 2017 (dollars in thousands):

 
 
September 30, 2017
 
 
Number of
Loans
 
Pre-Modification Recorded
Investment
 
Post-Modification Recorded
Investment
 
Charge-offs and
Specific Reserves
Performing:
 
 
 
 

 
 

 
 

Commercial
 
5
 
$
2,491

 
$
2,491

 
$
373

Commercial real estate
 
 
 
 

 
 

 
 

Industrial
 
3
 
3,174

 
3,174

 
—

Retail
 
2
 
337

 
337

 
—

     Office
 
1
 
549

 
549

 
—

     Other
 
3
 
3,703

 
3,703

 
—

Residential real estate
 
6
 
902

 
902

 
135

Home equity
 
4
 
97

 
97

 
7

Total
 
24
 
$
11,253

 
$
11,253

 
$
515

Non-Performing:
 
 
 
 

 
 

 
 

Commercial
 
2
 
$
676

 
$
676

 
$
—

Commercial real estate:
 
 
 
 

 
 
 
 
Multifamily
 
3
 
290

 
290

 
—

Retail
 
1
 
906

 
906

 
—

Residential real estate
 
28
 
5,155

 
5,155

 
1,182

Indirect vehicle
 
31
 
250

 
250

 
134

Home equity
 
4
 
608

 
608

 
58

Total
 
69
 
$
7,885

 
$
7,885

 
$
1,374



25



The following table presents loans that were restructured during the three months ended September 30, 2016 (dollars in thousands):
 
 
September 30, 2016
 
 
Number of
Loans
 
Pre-Modification Recorded
Investment
 
Post-Modification Recorded
Investment
 
Charge-offs and
Specific Reserves
Performing:
 
 

 
 

 
 

 
 

Residential real estate
 
2

 
$
101

 
$
101

 
$
18

Home equity
 
2

 
102

 
102

 
12

Total
 
4

 
$
203

 
$
203

 
$
30

Non-Performing:
 
 

 
 

 
 

 
 

Commercial
 
3

 
$
5,874

 
$
5,874

 
$
1,490

Residential real estate
 
4

 
484

 
484

 
85

Indirect vehicle
 
7

 
34

 
34

 
17

Home equity
 
5

 
489

 
489

 
72

Total
 
19

 
$
6,881

 
$
6,881

 
$
1,664


The following table presents loans that were restructured during the nine months ended September 30, 2016 (dollars in thousands):
 
 
September 30, 2016
 
 
Number of
Loans
 
Pre-Modification Recorded
Investment
 
Post-Modification Recorded
Investment
 
Charge-offs and
Specific Reserves
Performing:
 
 
 
 

 
 

 
 

Commercial
 
1
 
$
1,870

 
$
1,870

 
$
412

Residential real estate
 
2
 
101

 
101

 
18

Home equity
 
4
 
511

 
511

 
12

Total
 
7
 
$
2,482

 
$
2,482

 
$
442

Non-Performing:
 
 
 
 

 
 

 
 

Commercial
 
7
 
$
14,481

 
$
14,481

 
$
4,990

Residential real estate
 
6
 
639

 
639

 
85

Indirect vehicle
 
25
 
183

 
183

 
60

Home equity
 
28
 
3,600

 
3,600

 
138

Total
 
66
 
$
18,903

 
$
18,903

 
$
5,273


Of the troubled debt restructurings entered into during the past twelve months, none subsequently defaulted during the nine months ended September 30, 2017.  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 table presents the troubled debt restructurings activity during the nine months ended September 30, 2017 (in thousands):
 
 
Performing
 
Non-performing
Beginning balance
 
$
32,687

 
$
27,068

Additions
 
11,253

 
7,885

Charge-offs
 
—

 
(520
)
Principal payments, net
 
(1,001
)
 
(4,601
)
Removals
 
(11,546
)
 
(3,429
)
Transfer to other real estate owned
 
—

 
(590
)
Transfers in
 
2,056

 
599

Transfers out
 
(599
)
 
(2,056
)
Ending balance
 
$
32,850

 
$
24,356



26



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.

The following table presents the type of modification for loans that have been restructured during the nine months ended September 30, 2017 (in thousands):
 
September 30, 2017
 
 
 
 
 
 
 
 
 
Extended
 
 
 
 
 
 
 
Maturity,
 
 
 
Delay in
 
 
 
Amortization
 
Extended
 
Payments and/or
 
 
 
and Reduction
 
Maturity and/or
 
Reduction of
 
 
 
of Interest Rate
 
Amortization
 
Interest Rate
 
Total
Commercial
$
—

 
$
3,167

 
$
—

 
$
3,167

Commercial collateralized by assignment of lease payments
—

 
—

 
—

 
—

Commercial real estate:
 
 
 
 
 
 
 
   Healthcare
—

 
—

 
—

 
—

   Industrial
—

 
3,174

 
—

 
3,174

   Multifamily
—

 
290

 
—

 
290

   Retail
—

 
906

 
337

 
1,243

   Office
—

 
549

 
—

 
549

   Other
—

 
3,703

 
—

 
3,703

Residential real estate
3,885

 
1,589

 
583

 
6,057

Construction real estate
—

 
—

 
—

 
—

Indirect vehicle
—

 
—

 
250

 
250

Home equity
—

 
35

 
670

 
705

Other consumer
—

 
—

 
—

 
—

     Total
$
3,885

 
$
13,413

 
$
1,840

 
$
19,138



27



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 September 30, 2017 and 2016 (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
September 30, 2017
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Allowance for credit losses:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Three Months Ended
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
 
$
43,783

 
$
12,765

 
$
63,247

 
$
8,249

 
$
15,263

 
$
3,963

 
$
4,750

 
$
2,013

 
$
2,264

 
$
156,297

Charge-offs
 
235

 
188

 
31

 
541

 
—

 
1,097

 
439

 
299

 
—

 
2,830

Recoveries
 
719

 
—

 
1,432

 
38

 
502

 
498

 
149

 
82

 
—

 
3,420

Provision
 
1,715

 
240

 
935

 
94

 
(707
)
 
1,317

 
422

 
489

 
12

 
4,517

Ending balance
 
$
45,982

 
$
12,817

 
$
65,583

 
$
7,840

 
$
15,058

 
$
4,681

 
$
4,882

 
$
2,285

 
$
2,276

 
$
161,404

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Nine Months Ended
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
 
$
44,661

 
$
12,238

 
$
51,807

 
$
5,971

 
$
14,758

 
$
3,421

 
$
4,689

 
$
1,821

 
$
2,476

 
$
141,842

Charge-offs
 
1,103

 
188

 
1,378

 
901

 
—

 
3,438

 
873

 
1,243

 
—

 
9,124

Recoveries
 
3,568

 
712

 
2,312

 
624

 
661

 
1,715

 
724

 
420

 
—

 
10,736

Provision
 
(1,144
)
 
55

 
12,842

 
2,146

 
(361
)
 
2,983

 
342

 
1,287

 
(200
)
 
17,950

Ending balance
 
$
45,982

 
$
12,817

 
$
65,583

 
$
7,840

 
$
15,058

 
$
4,681

 
$
4,882

 
$
2,285

 
$
2,276

 
$
161,404

Ending allowance balance attributable to loans:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Individually evaluated for impairment
 
$
1,012

 
$
585

 
$
855

 
$
2,169

 
$
—

 
$
—

 
$
2,562

 
$
—

 
$
1,220

 
$
8,403

Collectively evaluated for impairment
 
44,879

 
12,232

 
63,868

 
5,671

 
15,023

 
4,681

 
2,320

 
2,285

 
1,056

 
152,015

Acquired and accounted for under ASC 310-30 (1)
 
91

 
—

 
860

 
—

 
35

 
—

 
—

 
—

 
—

 
986

Total ending allowance balance
 
$
45,982

 
$
12,817

 
$
65,583

 
$
7,840

 
$
15,058

 
$
4,681

 
$
4,882

 
$
2,285

 
$
2,276

 
$
161,404

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Individually evaluated for impairment
 
$
10,642

 
$
921

 
$
11,999

 
$
19,370

 
$
—

 
$
349

 
$
27,468

 
$
—

 
$
—

 
$
70,749

Collectively evaluated for impairment
 
4,783,196

 
2,073,294

 
4,082,707

 
1,414,225

 
395,794

 
654,864

 
201,258

 
77,372

 
—

 
13,682,710

Acquired and accounted for under ASC 310-30 (1)
 
13,677

 
—

 
32,063

 
68,071

 
5,183

 
—

 
11,200

 
1,725

 
—

 
131,919

Total ending loans balance
 
$
4,807,515

 
$
2,074,215

 
$
4,126,769

 
$
1,501,666

 
$
400,977

 
$
655,213

 
$
239,926

 
$
79,097

 
$
—

 
$
13,885,378

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

28



 
 
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
September 30, 2016
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Allowance for credit losses:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Three Months Ended
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
 
$
50,297

 
$
10,549

 
$
46,040

 
$
4,800

 
$
14,230

 
$
3,100

 
$
4,199

 
$
2,399

 
$
2,719

 
$
138,333

Charge-offs
 
1,341

 
367

 
529

 
290

 
7

 
838

 
376

 
409

 
—

 
4,157

Recoveries
 
665

 
3

 
324

 
45

 
50

 
436

 
65

 
86

 
—

 
1,674

Provision
 
(3,894
)
 
2,944

 
1,239

 
1,575

 
2,033

 
598

 
2,309

 
(407
)
 
152

 
6,549

Ending balance
 
$
45,727

 
$
13,129

 
$
47,074

 
$
6,130

 
$
16,306

 
$
3,296

 
$
6,197

 
$
1,669

 
$
2,871

 
$
142,399

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Nine Months Ended
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
 
$
39,316

 
$
10,434

 
$
45,475

 
$
5,734

 
$
15,113

 
$
2,418

 
$
7,374

 
$
2,276

 
$
3,368

 
$
131,508

Charge-offs
 
2,126

 
3,288

 
2,601

 
1,134

 
151

 
2,420

 
1,233

 
1,216

 
—

 
14,169

Recoveries
 
1,997

 
520

 
2,761

 
151

 
94

 
1,400

 
576

 
620

 
—

 
8,119

Provision
 
6,540

 
5,463

 
1,439

 
1,379

 
1,250

 
1,898

 
(520
)
 
(11
)
 
(497
)
 
16,941

Ending balance
 
$
45,727

 
$
13,129

 
$
47,074

 
$
6,130

 
$
16,306

 
$
3,296

 
$
6,197

 
$
1,669

 
$
2,871

 
$
142,399

Ending allowance balance attributable to loans:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Individually evaluated for impairment
 
$
5,401

 
$
3,933

 
$
363

 
$
2,394

 
$
—

 
$
—

 
$
3,252

 
$
—

 
$
737

 
$
16,080

Collectively evaluated for impairment
 
40,161

 
9,196

 
46,235

 
3,736

 
16,249

 
3,296

 
2,945

 
1,669

 
2,134

 
125,621

Acquired and accounted for under ASC 310-30 (1)
 
165

 
—

 
476

 
—

 
57

 
—

 
—

 
—

 
—

 
698

Total ending allowance balance
 
$
45,727

 
$
13,129

 
$
47,074

 
$
6,130

 
$
16,306

 
$
3,296

 
$
6,197

 
$
1,669

 
$
2,871

 
$
142,399

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Individually evaluated for impairment
 
$
19,284

 
$
8,054

 
$
6,530

 
$
13,268

 
$
—

 
$
125

 
$
27,276

 
$
—

 
$
—

 
$
74,537

Collectively evaluated for impairment
 
4,366,528

 
1,865,326

 
3,788,271

 
985,559

 
451,023

 
522,146

 
248,012

 
77,956

 
—

 
12,304,821

Acquired and accounted for under ASC 310-30 (1)
 
22,913

 
—

 
41,286

 
66,698

 
14,131

 
—

 
13,886

 
2,424

 
—

 
161,338

Total ending loans balance
 
$
4,408,725

 
$
1,873,380

 
$
3,836,087

 
$
1,065,525

 
$
465,154

 
$
522,271

 
$
289,174

 
$
80,380

 
$
—

 
$
12,540,696


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

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 and lease 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 Topic 310-20 "Nonrefundable Fees and Other Costs" as these loans do not have evidence of credit deterioration since origination.
•
Non-impaired loans (typically performing substandard loans) are accounted for in accordance with ASC Topic 310-30 if 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 Topic 310-30 as they display significant credit deterioration since origination.

For pass rated loans (non-purchased credit-impaired loans), the difference between the estimated fair value of the loans and the principal outstanding is accreted over the remaining life of the loans.

In accordance with ASC 310-30, for both purchased non-impaired loans and purchased credit-impaired loans, the loans are pooled by loan type and 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 pools when there is a reasonable expectation about the amount and timing of such cash flows.


29



Substantially all of the loans acquired in FDIC-assisted transactions 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 nine months ended September 30, 2017, there was a provision for credit losses of $243 thousand and net charge-offs of $123 thousand in relation to purchased credit-impaired loans. There was $986 thousand and $866 thousand in allowance for loan and lease losses related to these purchased credit-impaired loans at September 30, 2017 and December 31, 2016, respectively.  The provision for credit losses and accompanying charge-offs are included in the table above.
 
Changes in the accretable yield for loans acquired and accounted for under ASC 310-30 were as follows for the three and nine months ended September 30, 2017 and 2016 (in thousands):
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
September 30,
 
 
2017
 
2016
 
2017
 
2016
Balance at beginning of period
 
$
12,686

 
$
13,160

 
$
16,050

 
$
12,596

Purchases
 
—

 
805

 
43

 
805

Accretion
 
(4,315
)
 
(2,564
)
 
(9,334
)
 
(7,193
)
Other (1)
 
3,453

 
2,523

 
5,065

 
7,716

Balance at end of period
 
$
11,824

 
$
13,924

 
$
11,824

 
$
13,924


(1) 
Primarily includes discount transfers from non-accretable discount to accretable discount due to better than expected performance of loan pools acquired and accounted for under ASC 310-30.
 
In our FDIC-assisted transactions, the fair value of purchased credit-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, we 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.

For other loans acquired through business combinations, the fair value of purchased credit-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.

The carrying amount of loans acquired through a business combination by loan pool type are as follows (in thousands):
September 30, 2017
 
Purchased
Credit-Impaired
Loans
 
Purchased Non-Credit-Impaired
Loans
 
Total
Covered loans (1):
 
 

 
 

 
 

Consumer related
 
$
15,658

 
$
—

 
$
15,658

Non-covered loans:
 
 

 
 

 
 

Commercial loans
 
13,677

 
353,489

 
367,166

Commercial loans collateralized by assignment of lease payments
 
—

 
50,629

 
50,629

Commercial real estate
 
32,063

 
873,179

 
905,242

Construction real estate
 
5,183

 
7,418

 
12,601

Consumer related
 
5,277

 
291,376

 
296,653

Total non-covered loans
 
56,200

 
1,576,091

 
1,632,291

Total acquired
 
$
71,858

 
$
1,576,091

 
$
1,647,949

(1) 
Covered loans refer to loans covered under loss-sharing agreements with the FDIC.

In addition to loans acquired through a business combination noted in the table above, consumer related purchased credit-impaired loans includes loans repurchased from GNMA of $60.1 million as of September 30, 2017.

Effective April 1, 2014, the losses on commercial related loans (commercial, commercial real estate and construction real estate) acquired in connection with the Heritage Community Bank ("Heritage") FDIC-assisted transaction ceased being covered under the loss-share agreement for that transaction. The carrying amount of those loans was $1.5 million as of September 30, 2017.

30



Any recoveries, net of expenses, received on commercial related loans on which losses were incurred prior to April 1, 2014 were covered (and any such net recoveries must be shared with the FDIC in accordance with the loss-share agreement) through March 31, 2017. The losses on consumer related loans acquired in connection with the Heritage FDIC-assisted transaction will continue to be covered under the loss-share agreement through March 31, 2019.

The losses on commercial related loans acquired in connection with the Benchmark Bank ("Benchmark") FDIC-assisted transaction ceased to be covered under the loss-share agreement for that transaction effective January 1, 2015. The carrying amount of those loans was $197 thousand as of September 30, 2017. Any recoveries, net of expenses, received on commercial related loans on which losses were incurred prior to January 1, 2015 will continue to be covered (and any such net recoveries must be shared with the FDIC in accordance with the loss-share agreements) through December 31, 2017. The losses on consumer related loans acquired in connection with the Benchmark FDIC-assisted transaction will continue to be covered under the loss-share agreements through December 31, 2019.

Effective July 1, 2015, the losses on commercial related loans acquired in connection with Broadway Bank ("Broadway") and New Century Bank ("New Century") FDIC-assisted transactions ceased to be covered under the loss-share agreements for those transactions. The carrying amount of those loans was $4.5 million as of September 30, 2017. Any recoveries, net of expenses, received on commercial related loans on which losses were incurred prior to July 1, 2015 will continue to be covered (and any such net recoveries must be shared with the FDIC in accordance with the loss-share agreements) through June 30, 2018. The losses on consumer related loans acquired in connection with the Broadway and New Century FDIC-assisted transactions will continue to be covered under the loss-share agreement through June 30, 2020.


31


Note 7.
  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. Goodwill is tested for impairment at the reporting unit level. The Company has three reporting units: Banking, Leasing and Mortgage Banking. No impairment losses were recognized during the nine months ended September 30, 2017 or 2016. The carrying amount of goodwill was $999.9 million and $1.0 billion at September 30, 2017 and December 31, 2016, respectively.

The following table presents the changes in the carrying amount of goodwill for the nine months ended September 30, 2017 (in thousands): 
 
 
Banking
 
Leasing
 
Mortgage Banking
 
Total
Balance at beginning of period
 
$
960,398

 
$
40,640

 
$
—

 
$
1,001,038

Goodwill from business combinations (1)
 
(1,113
)
 
—

 
—

 
(1,113
)
Balance at end of period
 
$
959,285

 
$
40,640

 
$
—

 
$
999,925

(1) 
Due to the adjustments recognized for the American Chartered merger during the first quarter of 2017.
 
The Company has other intangible assets consisting of core deposit and client relationship intangibles that had a remaining weighted average amortization period of approximately 13 years as of September 30, 2017.
 
The following table presents the changes during the nine months ended September 30, 2017 in the carrying amount of core deposit and client relationship intangibles, and the gross carrying amount, accumulated amortization, and net book value as of September 30, 2017 (in thousands):
 
 
 
September 30, 2017
Balance at beginning of period
 
$
62,959

Amortization expense
 
(6,214
)
Balance at end of period
 
$
56,745

 
 
 
Gross carrying amount
 
$
112,820

Accumulated amortization
 
(56,075
)
Net book value
 
$
56,745

 
The following presents the estimated future amortization expense of other intangible assets (in thousands):
 
Year ending December 31,
 
Amount
2017
 
$
1,979

2018
 
7,451

2019
 
5,674

2020
 
5,022

2021
 
4,790

Thereafter
 
31,829

 
 
$
56,745

 

32


Note 8.
Deposits
 
The composition of deposits was as follows as of September 30, 2017 and December 31, 2016 (in thousands):
 
 
 
September 30,
 
December 31,
 
 
2017
 
2016
Demand deposit accounts, non-interest bearing
 
$
6,101,159

 
$
6,408,169

NOW, money market and interest bearing deposits
 
4,842,097

 
4,543,004

Savings accounts
 
1,088,194

 
1,135,992

Certificates of deposit, $250,000 or more
 
1,430,706

 
1,144,121

Other certificates of deposit
 
952,988

 
879,162

Total
 
$
14,415,144

 
$
14,110,448


Certificates of deposit of $250,000 or more included $997.7 million and $795.0 million of brokered deposits at September 30, 2017 and December 31, 2016, respectively.  Brokered deposits typically consist of smaller individual time certificates that have the same liquidity characteristics and yields consistent with time certificates of $250,000 or more.

Note 9.
Short-Term Borrowings
 
Short-term borrowings were as follows as of September 30, 2017 and December 31, 2016 (dollars in thousands):
 
 
 
September 30, 2017
 
December 31, 2016
 
 
Weighted Average Interest Rate
 
Amount
 
Weighted Average Interest Rate
 
Amount
Customer repurchase agreements
 
0.26
%
 
$
222,915

 
0.22
%
 
$
237,538

Federal Home Loan Bank advances
 
1.22

 
1,400,000

 
0.63

 
1,275,000

Federal funds purchased
 
1.35

 
242,500

 
0.80

 
46,750

Line of credit
 
—

 
—

 
2.52

 
10,000

 Total
 
1.12
%
 
$
1,865,415

 
0.59
%
 
$
1,569,288

 
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. The Company pledges mortgage-backed securities as collateral for the repurchase agreements and may be required to provide additional collateral based on the fair value of those securities.
 
The Company had Federal Home Loan Bank fixed rate advances with a maturity date less than one year of $1.4 billion at September 30, 2017 and $1.3 billion at December 31, 2016. At September 30, 2017, the interest rate on the advances outstanding on that date had rates ranging from 0.85% to 1.30% with maturities from October 2017 to June 2018. The Company has loans pledged as collateral on this FHLB advance. See Note 6. Loans of the notes to the consolidated financial statements.

On December 18, 2015, the Company entered into a $35.0 million unsecured line of credit at the holding company level with a correspondent bank. Interest is payable at a rate of one month LIBOR + 1.75%. No borrowings under the line of credit were outstanding as of September 30, 2017, and $10.0 million were outstanding as of December 31, 2016. The line of credit is scheduled to mature on June 30, 2018.
 

33


Note 10.
Long-Term Borrowings
 
Long-term borrowings were as follows as of September 30, 2017 and December 31, 2016 (dollars in thousands):
 
 
 
September 30, 2017
 
December 31, 2016
 
 
Weighted Average Interest Rate
 
Amount
 
Weighted Average Interest Rate
 
Amount
Federal Home Loan Bank advances
 
1.47
%
 
$
306,367

 
0.85
%
 
$
230,865

Notes payable
 
4.06

 
88,348

 
4.18

 
66,925

Term note
 
2.98

 
11,000

 
2.52

 
14,000

 Total
 
2.08
%
 
$
405,715

 
1.64
%
 
$
311,790

 
The Company had Federal Home Loan Bank ("FHLB") advances with remaining contractual maturities greater than one year of $306.4 million at September 30, 2017 and $230.9 million at December 31, 2016. As of September 30, 2017, the advances had fixed terms with effective interest rates, net of discounts, ranging from 1.35% to 5.87% and maturities ranging from December 2018 to April 2035. The Company has loans pledged as collateral on these FHLB advances. See Note 6. Loans of the notes to the consolidated financial statements.
 
The Company had notes payable to banks totaling $73.6 million and $66.9 million at September 30, 2017 and December 31, 2016, respectively, which as of September 30, 2017, were accruing interest at rates ranging from 2.25% to 7.40%, with a weighted average rate of 4.28%.  Lease investments includes equipment with an amortized cost of $88.3 million and $79.6 million at September 30, 2017 and December 31, 2016, respectively, that is pledged as collateral on these notes. At September 30, 2017, the Company also had $14.8 million in other secured borrowings (included in the notes payable above) with a weighted average rate of 2.97%.

On August 24, 2016, the Company assumed a $16.0 million unsecured term loan at the holding company level with a correspondent bank through the American Chartered merger. Interest is payable at a rate of one month LIBOR + 1.75% and the loan matures on June 30, 2020. Principal payments of $1.0 million are due quarterly until maturity. As of September 30, 2017, $11.0 million of principal was outstanding.



34



Note 11.
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 2 regulatory capital. Prior to the completion of the American Chartered merger, the trust preferred securities qualified, and were 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 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 September 30, 2017 (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)
 
TAYC
Capital Trust II (3)
Junior Subordinated Notes:
 
 

 
 

 
 

 
 

Principal balance
 
$
30,928

 
$
23,196

 
$
5,155

 
$
41,238

Annual interest rate
 
3-mo LIBOR + 1.30%

 
3-mo LIBOR + 1.30%

 
3-mo LIBOR + 2.80%

 
3-mo LIBOR + 2.68%

Stated maturity date
 
December 15, 2037

 
October 30, 2037

 
January 23, 2034

 
June 17, 2034

Call date
 
December 15, 2012

 
October 30, 2012

 
January 23, 2009

 
June 17, 2009

Trust Preferred Securities:
 
 

 
 

 
 

 
 

Face Value
 
$
30,000

 
$
22,500

 
$
5,000

 
$
40,000

Annual distribution rate
 
3-mo LIBOR + 1.30%

 
3-mo LIBOR + 1.30%

 
3-mo LIBOR + 2.80%

 
3-mo LIBOR + 2.68%

Issuance date
 
September 2007

 
October 2007

 
December 2003

 
June 2004

Distribution dates (1)
 
Quarterly

 
Quarterly

 
Quarterly

 
Quarterly

 
 
American Chartered Statutory Trust I (4)
 
American Chartered Statutory Trust II (4)
Junior Subordinated Notes:
 
 

 
 

Principal balance
 
$
20,619

 
$
10,310

Annual interest rate
 
3-mo LIBOR + 3.60%

 
3-mo LIBOR + 2.75%

Stated maturity date
 
December 18, 2031

 
October 7, 2034

Call date
 
December 18, 2006

 
October 7, 2009

Trust Preferred Securities:
 
 

 
 

Face Value
 
$
20,000

 
$
10,000

Annual distribution rate
 
3-mo LIBOR + 3.60%

 
3-mo LIBOR + 2.75%

Issuance date
 
November 2001

 
August 2004

Distribution dates (1)
 
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 in 2006, and the junior subordinated notes issued by FOBB to FOBB Statutory Trust III were assumed by the Company upon completion of the acquisition.

35



(3) 
TAYC Capital Trust II was established by Taylor Capital Group, Inc. (“Taylor Capital”) prior to the Company's acquisition of Taylor Capital in 2014, and the junior subordinated notes issued by Taylor Capital to TAYC Capital Trust II were assumed by the Company upon completion of the acquisition. Principal balance and face value amounts associated with TAYC Capital Trust II do not include purchase accounting adjustments to such amounts, which in each case resulted in a remaining discount of $6.5 million at September 30, 2017.
(4) 
American Chartered Statutory Trust I and American Chartered Statutory Trust II were established by American Chartered prior to the Company's acquisition of American Chartered in August 2016, and the junior subordinated notes issued by American Chartered to American Chartered Statutory Trust I and American Chartered Statutory Trust II were assumed by the Company upon completion of the acquisition. Principal balance and face value amounts associated with American Chartered Statutory Trust I and American Chartered Statutory Trust II do not include purchase accounting adjustments to such amounts, which in each case resulted in a remaining discount of $6.1 million at September 30, 2017.
 
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.

Note 12.
Commitments and Contingencies
 
Commitments: The Company is a party to credit-related financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers.  These financial instruments include commitments to extend credit, standby letters of credit and commercial letters of credit.  Such commitments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheets.
 
The Company’s exposure to credit loss is represented by the contractual amount of these commitments.  The Company follows the same credit policies in making commitments as it does for on-balance-sheet instruments.
 
At September 30, 2017 and December 31, 2016, the following financial instruments were outstanding, the contractual amounts of which represent off-balance sheet credit risk (in thousands):
 
 
Contractual Amount
 
 
September 30, 2017
 
December 31, 2016
Commitments to extend credit:
 
 

 
 

Home equity lines
 
$
207,444

 
$
235,279

Other commitments
 
3,914,154

 
3,679,259

Letters of credit:
 
 

 
 

Standby
 
183,396

 
185,386

Commercial
 
4,133

 
1,766

 
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 September 30, 2017, the maximum remaining term for any standby letters of credit was September 30, 2030.  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.

36



 
At September 30, 2017, 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 $377 thousand to $187.5 million from $187.2 million at December 31, 2016.  Of the $187.5 million in commitments outstanding at September 30, 2017, approximately $28.4 million of the letters of credit have been issued or renewed since December 31, 2016.
 
Letters of credit issued on behalf of bank customers may be done on either a secured or unsecured basis.  If a letter credit is 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 September 30, 2017, the Company had approximately $6.0 million in capital expenditure commitments outstanding which relate to various projects to renovate the corporate office space and branches.
 
Concentrations of credit risk:  As of September 30, 2017, approximately 20% 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 September 30, 2017. Our commitments to extend credit are primarily related to commercial credits.  Standby letters of credit are granted primarily to commercial borrowers. Our asset-based loans are made to borrowers located throughout the United States. Lease banking provides banking services to lessors located throughout the United States. Our leasing subsidiaries originate leases to companies located throughout the United States. In addition, our mortgage segment and indirect vehicle lenders originate loans to borrowers located throughout 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.

Note 13.
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.

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.


37



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.

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.

Loans. The Company has elected to record certain mortgage loans at fair value. The fair value of these loans is determined using quoted secondary market prices and classified as Level 2.

Mortgage Servicing Rights. The Company has elected to record its mortgage servicing rights at fair value. Mortgage servicing rights do not trade in an active market with readily observable prices. Accordingly, the Company determines the fair value of mortgage servicing rights by estimating the fair value of the future cash flows associated with the mortgage loans being serviced. Key economic assumptions used in measuring the fair value of mortgage servicing rights include, but are not limited to, prepayment speeds, discount rates, delinquencies and cost to service. The assumptions used in the model are validated on a regular basis. The fair value is validated on a quarterly basis with an independent third party. Any material discrepancies between the internal model and the third party validation are investigated and resolved by an internal committee. Due to the nature of the valuation inputs, mortgage servicing rights are classified in Level 3 of the fair value hierarchy.

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. The Company also obtains dealer quotations for these derivatives for comparative purposes to assess the reasonableness of the model valuations. In addition, the Company uses forward commitments to buy to-be-announced mortgage securities for which we do not intend to take delivery of the security and will enter into an offsetting position before physical delivery to lessen the price volatility of the mortgage servicing rights asset. Dealer quotations are used for these derivatives and are classified as Level 1. The Company also offers 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. For certain interest rate lock commitments, the Company uses an external valuation model that relies on internally developed inputs to estimate the fair value of its interest rate lock commitments which is based on unobservable inputs that reflect management’s assumptions and specific information about each borrower transaction and is classified in Level 3 of the hierarchy.
 

38



The following table summarizes financial assets and financial liabilities measured at fair value on a recurring basis as of September 30, 2017 and December 31, 2016, 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)
September 30, 2017
 
 

 
 

 
 

 
 

Financial assets
 
 

 
 

 
 

 
 

Securities available for sale:
 
 

 
 

 
 

 
 

U.S Government sponsored agencies and enterprises
 
$
23,146

 
$
—

 
$
23,146

 
$
—

States and political subdivisions
 
385,829

 
—

 
385,456

 
373

Residential mortgage-backed securities
 
875,260

 
—

 
875,195

 
65

Commercial mortgage-backed securities
 
87,217

 
—

 
87,217

 
—

Corporate bonds
 
115,014

 
—

 
115,014

 
—

Equity securities
 
11,077

 
11,077

 
—

 
—

Loans held for sale
 
722,754

 
—

 
722,754

 
—

Loans
 
14,481

 
—

 
14,481

 
—

Mortgage servicing rights
 
261,446

 
—

 
—

 
261,446

Assets held in trust for deferred compensation
 
20,103

 
20,103

 
—

 
—

Derivative financial instruments
 
36,018

 
2,366

 
31,713

 
1,939

Financial liabilities
 
 

 
 

 
 

 
 

Other liabilities (1)
 
20,103

 
20,103

 
—

 
—

Derivative financial instruments
 
39,915

 
1,583

 
38,332

 
—

December 31, 2016
 
 

 
 

 
 

 
 

Financial assets
 
 

 
 

 
 

 
 

Securities available for sale:
 
 

 
 

 
 

 
 

U.S. Government sponsored agencies and enterprises
 
$
23,415

 
$
—

 
$
23,415

 
$
—

States and political subdivisions
 
391,365

 
—

 
390,992

 
373

Residential mortgage-backed securities
 
983,684

 
—

 
983,513

 
171

Commercial mortgage-backed securities
 
93,008

 
—

 
93,008

 
—

Corporate bonds
 
193,895

 
—

 
193,895

 
—

Equity securities
 
10,828

 
10,828

 
—

 
—

   Loans held for sale
 
716,883

 
—

 
716,883

 
—

Loans
 
16,273

 
—

 
16,273

 
—

Mortgage servicing rights
 
238,011

 
—

 
—

 
238,011

Assets held in trust for deferred compensation
 
18,723

 
18,723

 
—

 
—

Derivative financial instruments
 
44,586

 
7,687

 
33,739

 
3,160

Financial liabilities
 
 

 
 

 
 

 
 

Other liabilities (1)
 
18,723

 
18,723

 
—

 
—

Derivative financial instruments
 
63,885

 
2,046

 
61,839

 
—

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

39



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 at
 
 
 
 
 
 
 
September 30, 2017
 
Valuation Technique
 
Unobservable Input
 
Range
 
(in thousands)
 
 
 
 
 
 
States and political subdivisions
$
373

 
Discounted cash flows
 
Credit assumption
 
45% - 50% Loss
Residential mortgage-backed securities
65

 
Discounted cash flows
 
Constant pre-payment rates (CPR)
 
1% - 3%
Mortgage servicing rights
261,446

 
Discounted cash flows
 
CPR
 
6.80% - 8.42%
 
 
 
 
 
Discount rate
 
9.53 - 11.05
 
 
 
 
 
Maturity (months)
 
323 - 358
 
 
 
 
 
Delinquencies
 
2.16 - 4.82
 
 
 
 
 
Costs to service
 
$ 67 - $ 227
 
 
 
 
 
Additive delinquent costs to service
 
$ 175 - $ 1,000
Derivative financial instruments (mortgage
1,939

 
Sales cash flows
 
Expected closing ratio
 
70% - 95%
   interest rate lock commitments)
 
 
 
 
Expected delivery price
 
98.41 bps - 108.57 bps

The significant unobservable inputs used in the fair value measurement of the Company’s mortgage servicing rights include prepayment speeds, discount rates, maturities, delinquencies and cost to service. Significant increases in prepayment speeds, discount rates, delinquencies or cost to service would result in a significantly lower fair value measurement. Conversely, significant decreases in prepayment speeds, discount rates, delinquencies or costs to service would result in a significantly higher fair value measurement. With the exception of changes in delinquencies, which can change the cost to service, the unobservable inputs move independently of each other.

Key economic assumptions used in the measuring of the fair value of the mortgage servicing rights and the sensitivity of the fair value to immediate adverse changes in those assumptions at September 30, 2017 are presented in the following table. This table does not take into account the derivatives used to economically hedge the mortgage servicing rights.

(dollars in thousands, except for weighted average cost to service)
September 30, 2017
Weighted average CPR
7.58
%
Impact on fair value of 10% adverse change
$
9,030

Impact on fair value of 20% adverse change
18,615

 
 
Weighted average discount rate
9.81
%
Impact on fair value of 10% adverse change
$
11,673

Impact on fair value of 20% adverse change
24,415

 
 
Weighted average delinquency rate
4.57
%
Impact on fair value of 10% adverse change
$
1,567

Impact on fair value of 20% adverse change
3,499

 
 
Weighted average costs to service
$
90.45

Impact on fair value of 10% adverse change
4,919

Impact on fair value of 20% adverse change
9,838


The Company did not have any transfers between Level 1 and Level 2 of the fair value hierarchy during the nine months ended September 30, 2017. 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.


40



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):
 
 
 
Nine Months Ended
 
 
September 30,
 
 
2017
 
2016
 
2017
 
2016
 
2017
 
2016
(in thousands)
 
Investment Securities
 
Mortgage Servicing Rights
 
Derivatives
Balance, beginning of period
 
$
544

 
$
773

 
$
238,011

 
$
168,162

 
$
3,160

 
$
3,822

Purchases
 
—

 
—

 
839

 
3,423

 
—

 
—

Originations
 
—

 
—

 
43,197

 
43,039

 
—

 
—

Included in earnings
 
—

 
—

 
(20,601
)
 
(59,894
)
 
(1,221
)
 
8,739

Principal payments
 
(106
)
 
(151
)
 
—

 
—

 
—

 
—

Sales
 
—

 
—

 
—

 
—

 
—

 
—

Balance, ending of period
 
$
438

 
$
622

 
$
261,446

 
$
154,730

 
$
1,939

 
$
12,561

 
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 (100% at September 30, 2017), 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.

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 loan and lease 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.  Non-financial long-lived assets, when determined to be impaired, are measured and reported at fair value using Level 3 inputs based on customized discounting criteria.


41



Assets measured at fair value on a nonrecurring basis as of September 30, 2017 and December 31, 2016 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)
September 30, 2017
 
 

 
 

 
 

 
 

Financial assets:
 
 

 
 

 
 

 
 

Impaired loans
 
$
53,842

 
$
—

 
$
—

 
$
53,842

Non-financial assets:
 
 
 
 
 
 
 
 
Foreclosed assets
 
18,334

 
—

 
—

 
18,334

December 31, 2016
 
 

 
 

 
 

 
 

Financial assets:
 
 

 
 

 
 

 
 

Impaired loans
 
$
54,576

 
$
—

 
$
—

 
$
54,576

Non-financial assets:
 
 
 
 
 
 
 
 
Foreclosed assets
 
31,607

 
—

 
—

 
31,607

 
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 at
Valuation
Unobservable
 
 
September 30, 2017
Technique
Input
Range
 
(in thousands)
 
 
 
Impaired loans
$
53,842

Appraisal of collateral
Appraisal adjustments
5% - 10%
Foreclosed assets
18,334

Appraisal of collateral
Appraisal adjustments
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 and interest earning deposits with banks: 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 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.


42



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.
 
The estimated fair values of financial instruments are as follows (in thousands):
 
 
September 30, 2017
 
 
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
 
$
361,080

 
$
361,080

$
361,080

$
—

$
—

   Interest earning deposits with banks
 
82,636

 
82,636

82,636

—

—

   Investment securities available for sale
 
1,497,543

 
1,497,543

11,077

1,486,028

438

   Investment securities held to maturity
 
994,238

 
1,031,746

—

1,031,746

—

   Non-marketable securities - FHLB and FRB stock
 
152,345

 
152,345

—

—

152,345

   Loans held for sale
 
722,754

 
722,754

—

722,754

—

   Loans, net
 
13,726,250

 
13,928,427

—

14,481

13,913,946

   Accrued interest receivable
 
61,962

 
61,962

61,962

—

—

   Derivative financial instruments
 
36,018

 
36,018

2,366

31,713

1,939

Financial Liabilities:
 
 
 
 
 
 
 
   Non-interest bearing deposits
 
$
6,101,159

 
$
6,101,159

$
6,101,159

$
—

$
—

   Interest bearing deposits
 
8,313,985

 
8,310,123

—

—

8,310,123

   Short-term borrowings
 
1,865,415

 
1,865,796

—

—

1,865,796

   Long-term borrowings
 
405,715

 
411,218

—

—

411,218

   Junior subordinated notes issued to capital trusts
 
211,289

 
177,843

—

—

177,843

   Accrued interest payable
 
5,680

 
5,680

5,680

—

—

   Derivative financial instruments
 
39,915

 
39,915

1,583

38,332

—




43



 
 
December 31, 2016
 
 
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
 
$
364,783

 
$
364,783

$
364,783

$
—

$
—

Interest earning deposits with banks
 
98,686

 
98,686

98,686

—

—

Investment securities available for sale
 
1,696,195

 
1,696,195

10,828

1,684,823

544

Investment securities held to maturity
 
1,069,750

 
1,093,740

—

1,093,740

—

Non-marketable securities - FHLB and FRB stock
 
143,276

 
143,276

—

—

143,276

Loans held for sale
 
716,883

 
716,883

—

716,883

—

Loans, net
 
12,629,437

 
12,747,107

—

16,273

12,730,834

Accrued interest receivable
 
59,024

 
59,024

59,024

—

—

Derivative financial instruments
 
44,586

 
44,586

7,687

33,739

3,160

Financial Liabilities:
 
 

 
 

 
 
 
Non-interest bearing deposits
 
$
6,408,169

 
$
6,408,169

$
6,408,169

$
—

$
—

Interest bearing deposits
 
7,702,279

 
7,698,839

—

—

7,698,839

Short-term borrowings
 
1,569,288

 
1,569,314

—

—

1,569,314

Long-term borrowings
 
311,790

 
317,028

—

—

317,028

Junior subordinated notes issued to capital trusts
 
210,668

 
157,098

—

—

157,098

Accrued interest payable
 
4,288

 
4,288

4,288

—

—

Derivative financial instruments
 
63,885

 
63,885

2,046

61,839

—

 

44



Note 14.
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):
 
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
September 30,
 
 
2017
 
2016
 
2017
 
2016
Total compensation expense for share-based payment plans during the period
 
$
4,393

 
$
4,238

 
$
13,317

 
$
12,573

Amount of related income tax benefit recognized in income (1)
 
2,175

 
3,394

 
8,513

 
6,649

(1) Includes tax benefits recorded for the vesting of restricted shares and exercise of options.
 
The Company adopted the Omnibus Incentive Plan (the “Omnibus Plan”) in 1997.  On May 28, 2014, the Company’s stockholders approved the third amendment and restatement of the Omnibus Plan to add 3,100,000 authorized shares for a total of 11,400,000 shares of common stock authorized to be utilized in connection with awards under the Omnibus Plan to directors, officers, and employees of the Company or any of its subsidiaries. The number of shares authorized increased by 2,400,000 to 13,800,000 upon completion of the Taylor Capital merger.  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. No more than 10% of the total number of authorized shares may be issued with respect to awards granted after May 28, 2014, other than stock appreciation rights, stock options and performance-based awards, which at the date of grant are scheduled to fully vest prior to three years from the date of grant (although such awards may provide scheduled vesting earlier with respect to some of such shares and for acceleration of vesting as provided in the Omnibus Plan).  As of September 30, 2017, there were 2,924,386 shares available for future grants.
 
Annual equity-based incentive awards are generally granted to selected officers and employees in the first quarter of the 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 changes in stock options for the nine months ended September 30, 2017:
 
 
 
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, 2016
 
1,940,405

 
$
27.45

 
5.31
 
 

Granted
 
163,818

 
45.53

 
 
 
 

Exercised
 
(327,970
)
 
28.03

 
 
 
 

Expired
 
—

 
—

 
 
 
 

Forfeited or cancelled
 
(15,093
)
 
31.95

 
 
 
 

Options outstanding as of September 30, 2017
 
1,761,160

 
$
28.99

 
5.40
 
$
28,356

Options exercisable as of September 30, 2017
 
1,167,465

 
$
26.60

 
3.97
 
$
21,522

 
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

45



time of the grant.  The expected life of options is estimated based on historical employee behavior and represents the period of time that options granted are expected to remain outstanding.

 The following assumptions were used for options granted during the nine months ended September 30, 2017:
 
 
September 30, 2017
Risk-free interest rate
 
2.18
%
Expected volatility of Company’s stock
 
22.71
%
Expected dividend yield
 
1.68
%
Expected life of options
 
5.8 years

Weighted average fair value per option of options granted during the year
 
$
9.40

 
The total intrinsic value of options exercised during the nine months ended September 30, 2017 and 2016 was $5.2 million and $3.6 million, respectively.
 
The following is a summary of changes in restricted shares and units for the nine months ended September 30, 2017:
 
 
 
Number of
Shares and Units
 
Weighted
Average
Grant Date
Fair Value
Shares and units outstanding at December 31, 2016
 
998,807

 
$
31.20

Granted
 
379,962

 
45.77

Vested
 
(379,375
)
 
30.63

Forfeited or cancelled
 
(21,506
)
 
35.10

Shares and units outstanding at September 30, 2017
 
977,888

 
36.99


The total intrinsic value of restricted shares that vested during the nine months ended September 30, 2017 and 2016 was $17.4 million and $15.7 million, respectively.
 
The Company awarded 65,476, 80,780 and 71,560 market-based restricted stock units in 2017, 2016 and 2015, 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 Company awarded 48,569 market-based restricted stock units in 2014 that vested in 2017. Recipients earned shares totaling approximately 121% of the number of units issued, based on the Company’s total shareholder 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 awarded.

As of September 30, 2017, there was $26.1 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 September 30, 2017, the weighted-average period over which the unrecognized compensation expense is expected to be recognized was approximately two years.


46



Note 15.
Derivative Financial Instruments
 
The Company offers various derivatives, including interest rate swaps and foreign currency forward contracts, to its qualifying 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 statement of operations.

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 as of September 30, 2017 and December 31, 2016 was approximately $1 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 September 30, 2017, the Company’s credit exposure relating to interest rate swaps was approximately $11.3 million, which is secured by the underlying collateral on customer loans. 
 
The Company also enters into mortgage banking derivatives which are classified as non-designated hedging 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 $70 thousand at September 30, 2017.  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.

Interest rate swaps, swaptions and treasury futures are used in order to lessen the price volatility of the mortgage servicing rights asset. The Company also uses forward commitments to buy to-be-announced ("TBA") mortgage securities for which the Company does not intend to take delivery of the security and will enter into an offsetting position before physical delivery to lessen the price volatility of the mortgage servicing rights asset. These derivatives are recorded at their fair value on the consolidated balance sheets in other assets with changes in fair value recorded on the consolidated statements of operations in mortgage banking revenue in non-interest income.
 

47



The Company’s derivative financial instruments are summarized below as of September 30, 2017 and December 31, 2016 (in thousands):

 
 
Asset Derivatives
 
Liability Derivatives
 
 
September 30, 2017
 
December 31, 2016
 
September 30, 2017
 
December 31, 2016
 
 
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)
 
$
—

 
$
—

 
$
—

 
$
—

 
$
70

 
$
(1
)
 
$
107

 
$
(4
)
Stand-alone derivative instruments: (2)
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Interest rate swap contracts
 
1,554,709

 
24,609

 
1,310,057

 
25,471

 
1,554,709

 
(24,609
)
 
1,310,057

 
(25,471
)
Interest rate options contracts
 
337,999

 
1,698

 
217,546

 
881

 
337,999

 
(1,698
)
 
217,546

 
(881
)
Foreign exchange contracts
 
35,672

 
2,157

 
40,641

 
4,429

 
34,837

 
(1,997
)
 
40,505

 
(4,265
)
Spot foreign exchange contracts
 
342

 
3

 
1,691

 
12

 
223

 
—

 
660

 
(5
)
Mortgage related derivatives:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
   Interest rate swap contracts
 
413,000

 
3,246

 
383,000

 
2,946

 
1,223,000

 
(10,027
)
 
1,458,000

 
(31,212
)
   Treasury futures contracts
 
42,500

 
74

 
15,500

 
41

 
45,000

 
(216
)
 
—

 
—

      TBA mortgage securities
 
—

 
—

 
—

 
—

 
140,000

 
(1,105
)
 
55,000

 
(132
)
   Forward loan sale commitments
 
759,500

 
2,292

 
585,000

 
7,646

 
133,500

 
(262
)
 
386,000

 
(1,915
)
   Interest rate lock commitments
 
555,375

 
1,939

 
543,901

 
3,160

 
—

 
—

 
—

 
—

Total stand-alone derivative instruments
 
3,699,097

 
36,018

 
3,097,336

 
44,586

 
3,469,268

 
(39,914
)
 
3,467,768

 
(63,881
)
Total
 
$
3,699,097

 
$
36,018

 
$
3,097,336

 
$
44,586

 
$
3,469,338

 
$
(39,915
)
 
$
3,467,875

 
$
(63,885
)

(1) Derivative instruments designated to hedge fixed-rate commercial real estate loans.
(2) These portfolio swaps are not designated as hedging instruments under ASC Topic 815.

Amounts included in other operating income in the consolidated statements of operations related to derivative financial instruments were as follows (in thousands):
 
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
September 30,
 
 
2017
 
2016
 
2017
 
2016
Derivative instruments designated as hedges of fair value:
 
 

 
 

 
 
 
 
Interest rate swap contracts
 
$
—

 
$
3

 
$
2

 
$
3

Stand-alone derivative instruments:
 
 

 
 

 
 

 
 

Interest rate swap contracts
 
3,276

 
5,296

 
6,749

 
5,260

Interest rate options contracts
 
—

 
(36
)
 
—

 
—

Foreign exchange contracts
 
(70
)
 
1,362

 
190

 
1,362

Spot foreign exchange contracts
 
629

 
6

 
2,036

 
6

Mortgage related derivatives
 
(11,625
)
 
(8,118
)
 
(22,067
)
 
31,653

Total stand-alone derivative instruments
 
(7,790
)
 
(1,490
)
 
(13,092
)
 
38,281

Total
 
$
(7,790
)
 
$
(1,487
)
 
$
(13,090
)
 
$
38,284

 
Methods and assumptions used by the Company in estimating the fair value of its interest rate swaps are discussed in Note 13 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.

48




Information about the Company's financial instruments that are eligible for offset in the consolidated balance sheet as of September 30, 2017 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 swap contracts, caps and floors
 
$
7,583

 
$
—

 
$
7,583

 
$
18,821

 
$
—

 
$
18,821

   Foreign exchange contracts
 
748

 
—

 
748

 
1,636

 
—

 
1,636

   Mortgage related derivatives
 
5,612

 
—

 
5,612

 
11,610

 
—

 
11,610

     Total derivatives
 
13,943

 
—

 
13,943

 
32,067

 
—

 
32,067

Repurchase agreements
 
—

 
—

 
—

 
222,915

 
—

 
222,915

   Total
 
$
13,943

 
$
—

 
$
13,943

 
$
254,982

 
$
—

 
$
254,982

 
 
Financial Assets
 
Financial Liabilities
 
 
Net Amount Recognized
 
Financial Instruments
 
Collateral
 
Net Amount
 
Net Amount Recognized
 
Financial Instruments
 
Collateral
 
Net Amount
Derivatives:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
   Counterparty A
 
$
4,941

 
$
(4,941
)
 
$
—

 
$
—

 
$
12,399

 
$
(4,941
)
 
$
(7,458
)
 
$
—

   Counterparty B
 
2,276

 
(2,276
)
 
—

 
—

 
9,044

 
(2,276
)
 
(6,768
)
 
—

   Counterparty C
 
243

 
(243
)
 
—

 
—

 
2,434

 
(243
)
 
(2,191
)
 
—

   Other counterparties
 
6,483

 
(4,268
)
 
—

 
2,215

 
8,190

 
(4,268
)
 
(3,922
)
 
—

     Total derivatives
 
13,943

 
(11,728
)
 
—

 
2,215

 
32,067

 
(11,728
)
 
(20,339
)
 
—

Repurchase agreements
 
—

 
—

 
—

 
—

 
222,915

 
—

 
(222,915
)
 
—

   Total
 
$
13,943

 
$
(11,728
)
 
$
—

 
$
2,215

 
$
254,982

 
$
(11,728
)
 
$
(243,254
)
 
$
—


Information about the Company's financial instruments that are eligible for offset in the consolidated balance sheet as of December 31, 2016 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 swap contracts, caps and floors
 
$
7,885

 
$
—

 
$
7,885

 
$
18,564

 
$
—

 
$
18,564

   Foreign exchange contracts
 
4,315

 
—

 
4,315

 
1,674

 
—

 
1,674

   Mortgage related derivatives
 
10,633

 
—

 
10,633

 
33,259

 
—

 
33,259

     Total derivatives
 
22,833

 
—

 
22,833

 
53,497

 
—

 
53,497

Repurchase agreements
 
—

 
—

 
—

 
237,538

 
—

 
237,538

   Total
 
$
22,833

 
$
—

 
$
22,833

 
$
291,035

 
$
—

 
$
291,035

 
 
Financial Assets
 
Financial Liabilities
 
 
Net Amount Recognized
 
Financial Instruments
 
Collateral
 
Net Amount
 
Net Amount Recognized
 
Financial Instruments
 
Collateral
 
Net Amount
Derivatives:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
   Counterparty A
 
$
2,697

 
$
(2,697
)
 
$
—

 
$
—

 
$
18,768

 
$
(2,697
)
 
$
(16,071
)
 
$
—

   Counterparty B
 
4,683

 
(4,683
)
 
—

 
—

 
12,881

 
(4,683
)
 
(8,198
)
 
—

   Counterparty C
 
64

 
(64
)
 
—

 
—

 
4,919

 
(64
)
 
(4,855
)
 
—

   Other counterparties
 
15,389

 
(10,938
)
 
—

 
4,451

 
16,929

 
(10,938
)
 
(5,980
)
 
11

     Total derivatives
 
22,833

 
(18,382
)
 
—

 
4,451

 
53,497

 
(18,382
)
 
(35,104
)
 
11

Repurchase agreements
 
—

 
—

 
—

 
—

 
237,538

 
—

 
(237,538
)
 
—

   Total
 
$
22,833

 
$
(18,382
)
 
$
—

 
$
4,451

 
$
291,035

 
$
(18,382
)
 
$
(272,642
)
 
$
11



49



Note 16.
  Operating Segments

The Company's operations consist of three reportable operating segments: Banking, Leasing and Mortgage Banking. The Company offers different products and services through its three segments. The accounting policies of the segments are generally the same as those of the consolidated company.

The Banking Segment generates its revenues primarily from its lending, deposit gathering and fee business 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 the Banking Segment's 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 depositors and other customers, federal deposit insurance funds and the banking system as a whole.  These laws and regulations govern such areas as capital, permissible activities, allowance for loan and lease 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. The Leasing Segment invests directly in equipment that the Company leases (referred to as direct finance, leveraged or operating leases) to "Fortune 1000," 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, industrial, construction and transportation equipment. The Leasing Segment also specializes in selling third party equipment maintenance contracts to large companies.

The Mortgage Banking Segment originates residential mortgage loans for sale to investors and for the Company's portfolio through its retail and third party originator channels. This segment also services residential mortgage loans for various investors and for loans owned by the Company. The Mortgage Banking Segment is subject to an extensive system of laws and regulations that are intended primarily for the protection of customers.

Net interest income for the Leasing and Mortgage Banking segments include adjustments based on the Company's internal funds transfer pricing model. Non-interest income for the Leasing Segment includes income on loans originated for the sole purpose of funding equipment purchases related to leases at the Company's lease subsidiaries.

The following tables present summary financial information for the reportable segments (in thousands):
 
Banking
 
Leasing
 
Mortgage Banking
 
Consolidated
Three months ended September 30, 2017
 
 
 
 
 
 
 
Net interest income
$
142,888

 
$
2,686

 
$
11,373

 
$
156,947

Provision for credit losses
3,637

 
399

 
481

 
4,517

Non-interest income
45,091

 
22,597

 
27,576

 
95,264

Non-interest expense (1)
112,977

 
14,535

 
34,782

 
162,294

Income tax expense
18,781

 
4,307

 
1,469

 
24,557

Net income
$
52,584

 
$
6,042

 
$
2,217

 
$
60,843

Total assets
$
16,406,714

 
$
1,307,459

 
$
2,402,362

 
$
20,116,535

Three months ended September 30, 2016
 
 
 
 
 
 
 
Net interest income
$
119,685

 
$
2,168

 
$
8,918

 
$
130,771

Provision for credit losses
4,394

 
1,964

 
191

 
6,549

Non-interest income
40,533

 
18,759

 
49,095

 
108,387

Non-interest expense (1)
117,211

 
12,604

 
40,570

 
170,385

Income tax expense
8,420

 
2,484

 
6,901

 
17,805

Net income
$
30,193

 
$
3,875

 
$
10,351

 
$
44,419

Total assets
$
16,453,379

 
$
1,126,847

 
$
1,761,656

 
$
19,341,882


(1) 
Includes merger related and repositioning expenses of $1.6 million and $11.4 million in the Banking Segment for the three months ended September 30, 2017 and 2016, respectively.

50



 
 
 
 
 
 
 
 
 
Banking
 
Leasing
 
Mortgage Banking
 
Consolidated
Nine months ended September 30, 2017
 
 
 
 
 
 
 
Net interest income
$
410,319

 
$
7,300

 
$
31,365

 
$
448,984

Provision for credit losses
16,054

 
674

 
1,222

 
17,950

Non-interest income
130,460

 
62,240

 
84,854

 
277,554

Non-interest expense (1)
337,185

 
41,815

 
104,518

 
483,518

Income tax expense
50,103

 
10,951

 
4,170

 
65,224

Net income
$
137,437

 
$
16,100

 
$
6,309

 
$
159,846

Total assets
$
16,406,714

 
$
1,307,459

 
$
2,402,362

 
$
20,116,535

Nine months ended September 30, 2016
 
 
 
 
 
 
 
Net interest income
$
341,445

 
$
7,002

 
$
24,230

 
$
372,677

Provision for credit losses
14,390

 
2,045

 
506

 
16,941

Non-interest income
112,221

 
53,670

 
116,189

 
282,080

Non-interest expense (1)
307,733

 
35,916

 
110,442

 
454,091

Income tax expense
36,120

 
8,872

 
11,788

 
56,780

Net income
$
95,423

 
$
13,839

 
$
17,683

 
$
126,945

Total assets
$
16,453,379

 
$
1,126,847

 
$
1,761,656

 
$
19,341,882

(1) 
Includes merger related and repositioning expenses of $9.0 million and $17.2 million in the Banking Segment for the nine months ended September 30, 2017 and 2016, respectively.

Note 17.
  Preferred Stock

On August 18, 2014, in connection with the Taylor Capital merger, the Company issued one share of its Perpetual Non-Cumulative Preferred Stock, Series A (“Company Series A Preferred Stock”), in exchange for each of the 4,000,000 outstanding shares of Taylor Capital’s Perpetual Non-Cumulative Preferred Stock, Series A. Holders of the Company Series A Preferred Stock are entitled to receive, when as and if declared by the Company’s board of directors, non-cumulative cash dividends on the liquidation preference amount, which is $25 per share, at a rate of 8.00% per annum, payable quarterly. The Company Series A Preferred Stock is callable in February 2018. The Company Series A Preferred Stock is included in Tier 1 capital for regulatory capital purposes.

On August 24, 2016, in connection with the American Chartered merger, the Company issued one share of its Cumulative Voting Convertible Preferred Stock, Series B ("Company Series B Preferred Stock"), in exchange for each of the 525 shares of American Chartered's Series D Preferred Stock outstanding immediately prior to the merger whose holders did not elect to receive the same consideration in the Merger as holders of American Chartered Common Stock, based on the number of shares of American Chartered Common Stock into which each such share of American Chartered Series D Preferred Stock would otherwise then be convertible. Holders of the Company Series B Preferred Stock were entitled to receive cumulative cash dividends on the liquidation preference amount, which was $1,000 per share, at a rate of 8.00% per annum, had the right to vote on all matters upon which holders of the Company's common stock were entitled to vote and had the right to convert each share into shares of the Company's common stock at any time. The Company Series B Preferred stock had a mandatory conversion date of September 20, 2017. The Company Series B Preferred Stock was included in Tier 2 capital for regulatory capital purposes. During the fourth quarter of 2016, 400 shares of the Company Series B Preferred stock were voluntarily converted by the holders of such shares into shares of the Company's common stock. On September 20, 2017, the remaining 125 shares of the Company Series B Preferred stock were converted into shares of the Company's common stock pursuant to the mandatory conversion provision referred to above.


51




Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
The following is a discussion and analysis of MB Financial, Inc.’s financial condition and results of operations and should be read in conjunction with the consolidated financial statements and notes thereto appearing elsewhere in this report. The words “the Company,” “we,” “our” and “us” refer to MB Financial, Inc. and its consolidated subsidiaries, unless we indicate otherwise.

Overview
 
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 periods under report, non-interest income included revenue from our key fee initiatives: net lease financing income, mortgage banking revenue, commercial deposit and treasury management fees, trust and asset management fees, card fees and capital markets and international banking fees. Non-interest income also included consumer and other deposit service fees, brokerage fees, loan service fees, increase in cash surrender value of life insurance, net gain on investment securities, net loss on disposal of other assets and other operating income. During the periods under report, non-interest expenses included salaries and employee benefits expense, occupancy and equipment expense, computer services and telecommunication expense, advertising and marketing expense, professional and legal expense, other intangibles amortization expense, branch exit and facilities impairment charges, net (gain) loss on other real estate owned and other related expenses 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, leasing and mortgage banking 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.

On August 24, 2016, the Company completed its merger with American Chartered Bancorp, Inc. ("American Chartered"). Consideration paid by the Company was $487.4 million, including $382.8 million in common stock (9.7 million shares), $102.3 million in cash and $2.3 million in preferred stock and stock-based awards assumed. The Company recorded $274.9 million in goodwill and $25.5 million in other intangibles as a result of this acquisition. These and other amounts recognized for this business combination in the financial statements as of March 31, 2017 were determined to be final. See Note 4 of the notes to our consolidated financial statements for additional information.    

The Company had net income of $60.8 million for the three months ended September 30, 2017 compared to $44.4 million for the three months ended September 30, 2016. Net income available to common stockholders was $58.8 million for the three months ended September 30, 2017 compared to $42.4 million for the three months ended September 30, 2016. Fully diluted earnings per common share were $0.69 for the three months ended September 30, 2017 compared to $0.54 per common share for the three months ended September 30, 2016.

The Company had net income of $159.8 million for the nine months ended September 30, 2017 compared to $126.9 million for the nine months ended September 30, 2016. Net income available to common stockholders was $153.8 million for the nine months ended September 30, 2017 compared to $120.9 million for the nine months ended September 30, 2016. Fully diluted earnings per common share were $1.81 for the nine months ended September 30, 2017 compared to $1.60 per common share for the nine months ended September 30, 2016.

The results of operations for the three months ended September 30, 2017 and 2016 were impacted by $1.6 million and $11.4 million in merger related and repositioning expenses, respectively, and the results of operations for the nine months ended September 30, 2017 and 2016 were impacted by $9.0 million and $17.2 million in merger related and repositioning expenses, respectively. See "Non-interest Expenses" section for a detailed schedule of merger related and repositioning expenses.


52



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 expected.  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 and Lease Losses.  The allowance for loan and lease 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 and lease 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 non-performing 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 and lease 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 and lease losses, based on their judgments about information available to them at the time of their examination. We believe the allowance for loan and lease losses is appropriate and properly recorded in the financial statements.  See “Allowance for Loan and Lease 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. The aggregate residual value of the equipment leased under our direct finance, leveraged, and operating leases totaled $196.9 million at September 30, 2017 and $178.4 million at December 31, 2016.  See Note 1 and Note 6 to the audited consolidated financial statements contained in our Annual Report Form 10-K for the year ended December 31, 2016 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, 2017, the Company had $113 thousand in 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.  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 operations.
 
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

53



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 13 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 7 to our 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. Goodwill is tested for impairment at the reporting unit level. The Company has three reporting units: banking, leasing and mortgage banking.  No impairment losses were recognized during the nine months ended September 30, 2017 or 2016. We are not aware of any events or circumstances subsequent to our annual goodwill impairment testing date of December 31, 2016 that would indicate impairment of goodwill at September 30, 2017. The carrying amount of goodwill was $999.9 million and $1.0 billion at September 30, 2017 and December 31, 2016, respectively. The change in the carrying amount of goodwill from December 31, 2016 was due to adjustments recognized for the American Chartered merger.

Value of Mortgage Servicing Rights. The Company originates and sells residential mortgage loans in the secondary market and may retain the right to service the loans sold. Servicing involves the collection of payments from individual borrowers and the distribution of those payments to the investors. Upon a sale of mortgage loans for which servicing rights are retained, the retained mortgage servicing rights asset is capitalized at the fair value of future net cash flows expected to be realized for performing servicing activities. Purchased mortgage servicing rights are recorded at the purchase price at the date of purchase and at fair value thereafter.

Mortgage servicing rights do not trade in an active market with readily observable prices. The Company determines the fair value of mortgage servicing rights by estimating the fair value of the future cash flows associated with the mortgage loans being serviced. Key economic assumptions used in measuring the fair value of mortgage servicing rights include, but are not limited to, prepayment speeds, discount rates, delinquencies and cost to service. The assumptions used in the valuation model are validated on a periodic basis. The fair value is validated on a quarterly basis with an independent third party. Material discrepancies between the internal valuation and the third party valuation are analyzed and an internal committee determines whether or not an adjustment is required.

The Company has elected to account for mortgage servicing rights using the fair value option. Changes in the fair value are recognized in mortgage banking revenue on the Company's Consolidated Statements of Operations.
  
Recent Accounting Pronouncements.  Refer to Note 2 of our consolidated financial statements for a description of recent accounting pronouncements including the respective dates of adoption and anticipated effects on results of operations and financial condition.
 
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.  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. The table below and the discussion that follows also contains presentations of net interest margin on a tax equivalent basis excluding the effect of acquisition accounting discount accretion on loans acquired through the American Chartered and Taylor Capital mergers ("bank mergers").
 
Reconciliations of net interest income and net interest margin on a tax-equivalent basis and net interest margin on a tax-equivalent basis excluding the effect of acquisition accounting discount accretion on loans acquired through the bank mergers 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. For additional information, see "Non-GAAP Financial Information."

54



We have revised the method of annualizing interest income and interest expense for the calculation of net interest margin, net interest margin on a fully tax equivalent basis and net interest margin on a fully tax equivalent basis excluding the effect of acquisition accounting discount accretion on loans acquired through the bank mergers to take into account the day count interest payment convention at the interest earning asset or interest bearing liability level. Among the most common conventions are 30/360 or 365, actual/360 or 365, and actual/actual. Prior period net interest margin, net interest margin on a fully tax equivalent basis and net interest margin on a fully tax equivalent basis excluding the effect of acquisition accounting discount accretion on loans acquired through bank mergers have been revised to reflect this change in method and have decreased by approximately three to four basis points compared to what was previously reported for the three and nine months ended September 30, 2016.
 
 
 
Three Months Ended September 30,
(dollars in thousands)
 
2017
 
2016
 
 
Average
 
 
 
Yield/
 
Average
 
 
 
Yield/
 
 
Balance
 
Interest
 
Rate
 
Balance
 
Interest
 
Rate
Interest Earning Assets:
 
 

 
 

 
 

 
 

 
 

 
 

Loans held for sale
 
$
725,899

 
$
6,651

 
3.67
 %
 
$
835,953

 
$
7,074

 
3.38
 %
Loans (1) (2) 
 
13,288,369

 
148,788

 
4.41

 
10,697,141

 
111,601

 
4.11

Loans exempt from federal income taxes (3)
 
321,284

 
4,050

 
4.93

 
374,126

 
4,378

 
4.58

Taxable investment securities
 
1,445,619

 
8,440

 
2.34

 
1,592,547

 
8,844

 
2.22

Investment securities exempt from federal income taxes (3)
 
1,255,025

 
14,971

 
4.77

 
1,318,855

 
15,972

 
4.84

Federal funds sold
 
38

 
0

 
1.74

 
36

 
0

 
1.00

Other interest earning deposits
 
147,065

 
327

 
0.88

 
103,061

 
164

 
0.63

Total interest earning assets
 
17,183,299

 
$
183,227

 
4.21

 
14,921,719

 
$
148,033

 
3.92

Non-interest earning assets
 
2,762,556

 
 
 
 
 
2,326,712

 
 
 
 
Total assets
 
$
19,945,855

 
 
 
 
 
$
17,248,431

 
 
 
 
Interest Bearing Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
Deposits:
 
 
 
 
 
 
 
 
 
 
 
 
NOW, money market and interest bearing deposits
 
$
4,740,210

 
$
4,485

 
0.38
 %
 
$
4,161,913

 
$
2,299

 
0.22
 %
Savings deposits
 
1,094,625

 
289

 
0.10

 
1,080,609

 
231

 
0.09

Time deposits
 
2,239,088

 
6,091

 
1.08

 
1,959,989

 
4,151

 
0.84

Short-term borrowings
 
1,838,284

 
5,148

 
1.11

 
1,144,899

 
1,092

 
0.38

Long-term borrowings and junior subordinated notes
 
553,924

 
3,610

 
2.50

 
599,133

 
2,367

 
1.54

Total interest bearing liabilities
 
10,466,131

 
$
19,623

 
0.74

 
8,946,543

 
$
10,140

 
0.45

Non-interest bearing deposits
 
6,337,955

 
 
 
 
 
5,524,043

 
 
 
 
Other non-interest bearing liabilities
 
479,488

 


 
 
 
461,243

 


 
 
Stockholders’ equity
 
2,662,281

 
 
 
 
 
2,316,602

 
 
 
 
Total liabilities and stockholders’ equity
 
$
19,945,855

 
 
 
 
 
$
17,248,431

 
 
 
 
Net interest income/interest rate spread (4)
 
 

 
$
163,604

 
3.47
 %
 
 
 
$
137,893

 
3.47
 %
Less: taxable equivalent adjustment
 
 

 
6,657

 
 
 
 
 
7,122

 
 
Net interest income, as reported
 
 

 
$
156,947

 
 
 
 
 
$
130,771

 
 
Net interest margin (5)
 
 

 
 

 
3.60
 %
 
 

 
 

 
3.46
 %
Tax equivalent effect
 
 

 
 

 
0.16
 %
 
 

 
 

 
0.19
 %
Net interest margin on a fully tax equivalent basis (non-GAAP) (5)
 
 

 
 

 
3.76
 %
 
 

 
 

 
3.65
 %
Effect of acquisition accounting discount accretion on loans acquired through bank mergers
 
 
 
 
 
(0.20
)%
 
 
 
 
 
(0.18
)%
Net interest margin on a fully tax equivalent basis, excluding the effect of acquisition accounting discount accretion on loans acquired through bank mergers (non-GAAP)
 
 
 
 
 
3.56
 %
 
 
 
 
 
3.47
 %
 
(1)       Non-accrual loans are included in average loans.
(2)       Interest income includes amortization of net deferred loan origination fees and costs.
(3)       Non-taxable loan and investment income is presented on a fully tax equivalent basis assuming a 35% tax rate.
(4)       Interest rate spread represents the difference between the average yield on interest earning assets and the average cost of interest bearing liabilities and is presented on a fully tax equivalent basis.
(5)       Net interest margin represents net interest income as a percentage of average interest earning assets.

Net interest income on a fully tax equivalent basis increased $25.7 million during the three months ended September 30, 2017 compared to the three months ended September 30, 2016 due to higher average loan balances, as a result of the loans acquired through the American Chartered merger and loan growth in the legacy portfolio, and higher loan yields partly offset by higher funding costs. The net interest margin, expressed on a fully tax equivalent basis, was 3.76% for the third quarter of 2017 and 3.65% for the third quarter of 2016. Net interest income in the third quarter of 2017 included interest income of $7.9 million resulting from accretion of the acquisition accounting discount recorded on loans acquired in bank mergers compared to $6.2 million in the third quarter of 2016. Excluding the accretion of the acquisition accounting discount recorded on loans acquired in bank mergers, our net interest margin on a fully tax equivalent basis would have been 3.56% and 3.47% for the three months

55



ended September 30, 2017 and September 30, 2016, respectively. The increase in our net interest margin on a fully tax equivalent basis was due to higher loan yields partly offset by increased funding costs.

 
 
Nine Months Ended September 30,
(dollars in thousands)
 
2017
 
2016
 
 
Average
 
 
 
Yield/
 
Average
 
 
 
Yield/
 
 
Balance
 
Interest
 
Rate
 
Balance
 
Interest
 
Rate
Interest Earning Assets:
 
 

 
 

 
 

 
 

 
 

 
 

Loans held for sale
 
$
626,000

 
$
17,118

 
3.65
 %
 
$
741,880

 
$
19,351

 
3.48
 %
Loans (1) (2) 
 
12,817,685

 
415,485

 
4.29

 
9,944,457

 
314,478

 
4.18

Loans exempt from federal income taxes (3)
 
351,763

 
12,773

 
4.79

 
360,284

 
12,574

 
4.59

Taxable investment securities
 
1,525,546

 
26,279

 
2.30

 
1,528,251

 
26,209

 
2.29

Investment securities exempt from federal income taxes (3)
 
1,265,378

 
45,449

 
4.79

 
1,340,185

 
48,926

 
4.87

Federal funds sold
 
74

 
1

 
1.41

 
38

 
0

 
1.00

Other interest earning deposits
 
121,783

 
753

 
0.83

 
105,660

 
430

 
0.54

Total interest earning assets
 
16,708,229

 
$
517,858

 
4.11

 
14,020,755

 
$
421,968

 
3.98

Non-interest earning assets
 
2,741,325

 
 
 
 
 
2,142,106

 
 
 
 
Total assets
 
$
19,449,554

 
 
 
 
 
$
16,162,861

 
 
 
 
Interest Bearing Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
Deposits:
 
 
 
 
 
 
 
 
 
 
 
 
NOW and money market deposit
 
$
4,592,898

 
$
10,391

 
0.30
 %
 
$
4,036,193

 
$
6,434

 
0.21
 %
Savings deposit
 
1,113,044

 
789

 
0.09

 
1,024,050

 
564

 
0.07

Time deposits
 
2,146,564

 
15,953

 
0.99

 
1,856,635

 
11,257

 
0.81

Short-term borrowings
 
1,678,537

 
11,440

 
0.91

 
1,051,802

 
2,723

 
0.35

Long-term borrowings and junior subordinated notes
 
532,176

 
9,923

 
2.42

 
613,998

 
6,788

 
1.44

Total interest bearing liabilities
 
10,063,219

 
$
48,496

 
0.64

 
8,582,678

 
$
27,766

 
0.43

Non-interest bearing deposits
 
6,294,974

 
 
 
 
 
4,980,904

 
 
 
 
Other non-interest bearing liabilities
 
465,268

 


 
 
 
416,667

 


 
 
Stockholders’ equity
 
2,626,093

 
 
 
 
 
2,182,612

 
 
 
 
Total liabilities and stockholders’ equity
 
$
19,449,554

 
 
 
 
 
$
16,162,861

 
 
 
 
Net interest income/interest rate spread (4)
 
 

 
$
469,362

 
3.47
 %
 
 
 
$
394,202

 
3.55
 %
Less: taxable equivalent adjustment
 
 

 
20,378

 
 
 
 
 
21,525

 
 
Net interest income, as reported
 
 

 
$
448,984

 
 
 
 
 
$
372,677

 
 
Net interest margin (5)
 
 

 
 

 
3.56
 %
 
 

 
 

 
3.52
 %
Tax equivalent effect
 
 

 
 

 
0.16
 %
 
 

 
 

 
0.20
 %
Net interest margin on a fully tax equivalent basis (non-GAAP) (5)
 
 

 
 

 
3.72
 %
 
 

 
 

 
3.72
 %
Effect of acquisition accounting discount accretion on loans acquired through bank mergers
 
 
 
 
 
(0.19
)%
 
 
 
 
 
(0.22
)%
Net interest margin on a fully tax equivalent basis, excluding the effect of acquisition accounting discount accretion on loans acquired through bank mergers (non-GAAP)
 
 
 
 
 
3.53
 %
 
 
 
 
 
3.50
 %
 
(1)       Non-accrual loans are included in average loans.
(2)       Interest income includes amortization of net deferred loan origination fees and costs.
(3)       Non-taxable loan and investment income is presented on a fully tax equivalent basis assuming a 35% tax rate.
(4)       Interest rate spread represents the difference between the average yield on interest earning assets and the average cost of interest bearing liabilities and is presented on a fully tax equivalent basis.
(5)       Net interest margin represents net interest income as a percentage of average interest earning assets.

Net interest income on a fully tax equivalent basis increased $75.2 million during the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016 due to higher average loan balances, as a result of the loans acquired through the American Chartered merger and loan growth in the legacy portfolio, partly offset by higher funding costs. The net interest margin, expressed on a fully tax equivalent basis, was 3.72% for the nine months ended September 30, 2017 and September 30, 2016. Net interest income in the nine months ended September 30, 2017 included interest income of $21.8 million resulting from accretion of the acquisition accounting discount recorded on loans acquired in bank mergers compared to $21.2 million in the nine months ended September 30, 2016. Excluding the accretion of the acquisition accounting discount recorded on loans acquired in bank mergers, our net interest margin on a fully tax equivalent basis would have been 3.53% for the nine months ended September 30, 2017 and 3.50% for the nine months ended September 30, 2016.


56



Non-interest Income

The following table presents non-interest income for the three months ended September 30, 2017 compared to the three months ended September 30, 2016 (in thousands):

 
 
Three Months Ended
 
 
 
 
 
 
September 30,
 
 
 
 
 
 
2017
 
2016
 
Increase/
(Decrease)
 
Percentage
Change
Non-interest income:
 
 
 
 
 
 
 
 
Mortgage banking revenue
 
$
27,575

 
$
49,095

 
$
(21,520
)
 
(43.8
)%
Lease financing revenue, net
 
23,148

 
18,864

 
4,284

 
22.7

Commercial deposit and treasury management fees
 
14,508

 
12,957

 
1,551

 
12.0

Trust and asset management fees
 
8,702

 
8,244

 
458

 
5.6

Card fees
 
4,585

 
4,161

 
424

 
10.2

Capital markets and international banking fees
 
4,870

 
3,313

 
1,557

 
47.0

Consumer and other deposit service fees
 
3,424

 
3,559

 
(135
)
 
(3.8
)
Brokerage fees
 
1,004

 
1,294

 
(290
)
 
(22.4
)
Loan service fees
 
2,114

 
1,792

 
322

 
18.0

Increase in cash surrender value of life insurance
 
1,321

 
1,055

 
266

 
25.2

Net gain on investment securities
 
83

 
—

 
83

 
—

Net loss on disposal of other assets
 
(180
)
 
5

 
(185
)
 
N/M

Other operating income
 
4,110

 
4,048

 
62

 
1.5

Total non-interest income
 
$
95,264

 
$
108,387

 
$
(13,123
)
 
(12.1
)%
N/M - Not meaningful

Non-interest income decreased by $13.1 million, or 12.1%, for the three months ended September 30, 2017 compared to the three months ended September 30, 2016.

•
Mortgage banking revenue decreased due to lower mortgage origination volume and gain on sale margin.
•
Lease financing revenue increased due to higher fees from the sale of third-party equipment maintenance contracts and promotional income partly offset by lower residual gains.
•
Commercial deposit and treasury management fees increased due to new customer activity as well as the increased customer base from the American Chartered merger.
•
Capital markets and international banking fees increased due to higher swap fees.


57



The following table presents non-interest income for the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016 (in thousands):

 
 
Nine Months Ended
 
 
 
 
 
 
September 30,
 
 
 
 
 
 
2017
 
2016
 
Increase/
(Decrease)
 
Percentage
Change
Non-interest income:
 
 
 
 
 
 
 
 
Mortgage banking revenue
 
$
84,853

 
$
116,192

 
$
(31,339
)
 
(27.0
)%
Lease financing revenue, net
 
62,967

 
53,618

 
9,349

 
17.4

Commercial deposit and treasury management fees
 
43,696

 
36,383

 
7,313

 
20.1

Trust and asset management fees
 
25,720

 
24,430

 
1,290

 
5.3

Card fees
 
13,564

 
11,731

 
1,833

 
15.6

Capital markets and international banking fees
 
11,709

 
9,311

 
2,398

 
25.8

Consumer and other deposit service fees
 
10,072

 
9,745

 
327

 
3.4

Brokerage fees
 
3,379

 
3,767

 
(388
)
 
(10.3
)
Loan service fees
 
6,120

 
5,505

 
615

 
11.2

Increase in cash surrender value of life insurance
 
3,910

 
2,759

 
1,151

 
41.7

Net gain on investment securities
 
451

 
269

 
182

 
67.7

Net loss on sale of assets
 
(307
)
 
(45
)
 
(262
)
 
582.2

Other operating income
 
11,420

 
8,415

 
3,005

 
35.7

Total non-interest income
 
$
277,554

 
$
282,080

 
$
(4,526
)
 
(1.6
)%

Non-interest income decreased by $4.5 million, or 1.6%, for the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016.

•
Mortgage banking revenue decreased due to lower mortgage origination volume, gain on sale margin and mortgage servicing revenue. Mortgage servicing revenue for the nine months ended September 30, 2016 was positively impacted by the fair value changes of mortgage servicing rights net of the related economic hedge activity.
•
Lease financing revenue increased due to higher rental income, fees from the sale of third-party equipment maintenance contracts and promotional income.
•
Commercial deposit and treasury management fees increased due to new customer activity as well as the increased customer base from the American Chartered merger.
•
Trust and asset management fees increased due to the addition of new customers.
•
Card fees increased due to higher credit and debit card fees as a result of increased volume.
•
Capital markets and international banking fees increased due to higher swap and international banking fees.
•
Other operating income increased due to an increase in the market value of assets held for deferred compensation and recoveries of a low to moderate income real estate investment that was previously written off.

58



Non-interest Expenses
 
The following table presents non-interest expense for the three months ended September 30, 2017 compared to the three months ended September 30, 2016 (in thousands):
 
 
Three Months Ended
 
 
 
 
 
 
September 30,
 
 
 
 
 
 
2017
 
2016
 
Increase/
(Decrease)
 
Percentage
Change
Non-interest expenses:
 
 

 
 

 
 

 
 

Salaries and employee benefits expense
 
$
105,815

 
$
111,478

 
$
(5,663
)
 
(5.1
)%
Occupancy and equipment expense
 
15,382

 
14,766

 
616

 
4.2

Computer services and telecommunication expense
 
10,062

 
12,836

 
(2,774
)
 
(21.6
)
Advertising and marketing expense
 
2,558

 
3,084

 
(526
)
 
(17.1
)
Professional and legal expense
 
2,109

 
4,460

 
(2,351
)
 
(52.7
)
Other intangibles amortization expense
 
2,038

 
1,674

 
364

 
21.7

Branch exit and facilities impairment charges
 
2,773

 
(2,908
)
 
5,681

 
(195.4
)
Net gain recognized on other real estate owned and other expense
 
(86
)
 
(721
)
 
635

 
(88.1
)
Other operating expenses
 
21,643

 
25,716

 
(4,073
)
 
(15.8
)
Total non-interest expenses
 
$
162,294

 
$
170,385

 
$
(8,091
)
 
(4.7
)%

Non-interest expenses decreased by $8.1 million, or 4.7%, for the three months ended September 30, 2017 from the three months ended September 30, 2016. Non-interest expenses include $1.6 million and $11.4 million in merger related and repositioning expenses for the three months ended September 30, 2017 and 2016, respectively.

The following table presents the detail of the merger related and repositioning expenses for the three months ended September 30, 2017 and 2016 (dollars in thousands):
 
 
Three Months Ended
 
 
September 30,
 
 
2017
 
2016
Merger related and repositioning expenses (1):
 
 
 
 
   Salaries and employee benefits
 
$
988

 
$
8,684

   Occupancy and equipment expense
 
—

 
104

   Computer services and telecommunication expense
 
(31
)
 
3,105

   Advertising and marketing expense
 
—

 
53

   Professional and legal expense
 
—

 
1,681

   Branch exit and facilities impairment charges (2)
 
1,014

 
(2,908
)
   Other operating expenses
 
(392
)
 
649

Total merger related and repositioning expenses
 
$
1,579

 
$
11,368

(1) 
Primarily includes costs incurred in connection with the American Chartered merger.
(2) 
Includes costs associated with office space reconfiguration in the third quarter of 2017 and a reversal of an exit cost due to a favorable lease termination in the third quarter of 2016 on a branch acquired through the Taylor Capital merger.

Explanations for changes other than merger related and repositioning expenses are as follows:

•
Salaries and employee benefits expense increased due to annual pay increases, new hires and increased staff from the American Chartered merger.
•
Occupancy and equipment expense increased due to higher depreciation and property tax expenses.
•
Professional and legal expense decreased due to lower legal fees.
•
Branch exit and facilities impairment charges increased due to the closing of four branches in the third quarter of 2017.
•
Higher gains were recognized on other real estate properties in the third quarter of 2016 compared to the third quarter of 2017.
•
Other operating expenses decreased due to the $4.0 million contribution to MB Financial Charitable Foundation made in the three months ended September 30, 2016.


59



The following table presents non-interest expense for the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016 (in thousands):
 
 
Nine Months Ended
 
 
 
 
 
 
September 30,
 
 
 
 
 
 
2017
 
2016
 
Increase/
(Decrease)
 
Percentage
Change
Non-interest expenses:
 
 

 
 

 
 

 
 

Salaries and employee benefits
 
$
309,932

 
$
292,073

 
$
17,859

 
6.1
 %
Occupancy and equipment expense
 
45,710

 
41,441

 
4,269

 
10.3

Computer services and telecommunication expense
 
29,287

 
31,668

 
(2,381
)
 
(7.5
)
Advertising and marketing expense
 
8,964

 
8,926

 
38

 
0.4

Professional and legal expense
 
7,250

 
10,370

 
(3,120
)
 
(30.1
)
Other intangibles amortization expense
 
6,214

 
4,917

 
1,297

 
26.4

Branch exit and facilities impairment charges
 
8,680

 
(2,709
)
 
11,389

 
(420.4
)
Net loss (gain) recognized on other real estate owned and other expense
 
1,448

 
(809
)
 
2,257

 
(279.0
)
Other operating expenses
 
66,033

 
68,214

 
(2,181
)
 
(3.2
)
Total non-interest expenses
 
$
483,518

 
$
454,091

 
$
29,427

 
6.5
 %

Non-interest expenses increased by $29.4 million, or 6.5%, for the nine months ended September 30, 2017 from the nine months ended September 30, 2016. Non-interest expenses include $9.0 million and $17.2 million in merger related and repositioning expenses for the nine months ended September 30, 2017 and 2016, respectively.

The following table presents the detail of the merger related and repositioning expenses for the nine months ended September 30, 2017 and 2016 (dollars in thousands):
 
 
Nine Months Ended
 
 
September 30,
 
 
2017
 
2016
Merger related and repositioning expenses (1):
 
 
 
 
   Salaries and employee benefits
 
$
2,154

 
$
9,089

   Occupancy and equipment expense
 
10

 
112

   Computer services and telecommunication expense
 
230

 
3,921

   Advertising and marketing expense
 
—

 
117

   Professional and legal expense
 
100

 
1,879

   Branch exit and facilities impairment charges (2)
 
6,921

 
(2,864
)
   Contingent consideration expense - Celtic acquisition (3)
 
—

 
2,703

   Other operating expenses
 
(412
)
 
2,264

Total merger related and repositioning expenses
 
$
9,003

 
$
17,221

(1) 
Primarily includes costs incurred in connection with the American Chartered merger.
(2) 
Includes costs associated with office space reconfiguration in the third quarter of 2017, exit charges on branches closed in the second quarter of 2017 as a result of the American Chartered merger, a gain on the sale of a branch in the first quarter of 2017 and a reversal of an exit cost due to a favorable lease termination in the third quarter of 2016 on a branch acquired through the Taylor Capital merger.
(3) 
Includes an increase in our contingent consideration accrual for our acquisition of Celtic Leasing Corp. as a result of stronger lease residual performance than previously estimated. Resides in other operating expenses in the consolidated statements of operations.

Explanations for changes other than merger related and repositioning expenses are as follows:

•
Salaries and employee benefits expense increased due to annual pay increases, new hires and increased staff from the American Chartered merger.
•
Occupancy and equipment expense increased due to higher depreciation, property tax and rental operating expenses as a result of the American Chartered merger.
•
Branch exit and facilities impairment charges increased due to the closing of four branches in the third quarter of 2017.
•
Non-interest expense was also impacted by a net loss recognized on other real estate owned properties in the first half of 2017 compared to a net gain in the same period last year.
•
Other operating expenses increased as a result of higher filing fees and FDIC assessments due to our larger balance sheet.

60




Income Taxes

Income tax expense for the nine months ended September 30, 2017 was $65.2 million compared to $56.8 million for the nine months ended September 30, 2016. The increase was primarily due to an increase in our pre-tax income during the nine months ended September 30, 2017 partially offset by tax benefits of $9.0 million associated with stock-based compensation, the impact of the July 1, 2017 Illinois income tax rate increase on our Illinois deferred tax assets, a reversal of a tax liability no longer needed related to two of our acquired entities and a reduction in tax accruals attributable to compensation. The tax expense or benefit related to the vesting of restricted shares and exercises of stock options can fluctuate from period to period based on the level of overall activity and changes in the market value of our common shares.

The following table presents information on our income tax rate (dollars in thousands):
 
 
Nine Months Ended
 
 
September 30,
 
 
2017
 
2016
Income before income taxes - as reported
 
$
225,070

 
$
183,725

Tax at Federal statutory rate (35%)
 
78,775

 
64,304

 
 
 
 
 
Increase (decrease) due to:
 
 
 
 
Tax exempt income, net
 
(14,379
)
 
(14,616
)
State tax expense (benefit), net of Federal impact
 
9,592

 
6,796

Other items, net
 
266

 
1,306

Tax expense before discrete items
 
74,254

 
57,790

Income tax rate before discrete items (effective tax rate)
 
33.0
%
 
31.5
%
 
 
 
 
 
Discrete tax expense (benefit) items (1)
 
(6,926
)
 
(2,105
)
Discrete tax expense (benefit) merger related items (2)
 
(2,104
)
 
1,095

Income tax expense - as reported
 
$
65,224

 
$
56,780

Income tax rate
 
29.0
%
 
30.9
%

(1) 
Includes tax benefits on the vesting of restricted shares, exercise of options and other compensation as well as a tax benefit due to the impact of the Illinois state income tax rate increase (effective July 1, 2017) on our deferred tax assets.
(2) 
Includes reversals of a tax liability no longer needed specifically related to two entities we acquired and certain non-deductible merger related items.

Operating Segments

The Company's operations consist of three reportable operating segments: Banking, Leasing and Mortgage Banking. Our Banking Segment generates revenues primarily from its lending, deposit gathering and fee business activities. Our Leasing Segment generates revenues through lease originations and related services. Our Mortgage Banking Segment originates residential mortgage loans for sale to investors through its retail and third party origination channels as well as residential mortgage loans held in our loan portfolio. The Mortgage Banking Segment also services residential mortgage loans owned by investors and the Company.

Three Month Comparison

Net income from our Banking Segment for the three months ended September 30, 2017 increased $22.4 million to $52.6 million compared to the three months ended September 30, 2016. This increase was due to the increase in net interest income driven by legacy loan growth and loans acquired through the American Chartered merger, and increased non-interest income. The increased non-interest income was due to higher commercial deposit and treasury management fees and higher capital markets and international banking fees. The increase in net interest and non-interest income were partly offset by higher salaries and employee benefits expense (due to annual pay increases, new hires and increased staff from the American Chartered merger) and higher branch exit and facilities impairment charges (due to the closing of four branches). The Banking Segment was also favorably impacted by tax benefits of $4.0 million mostly due to the impact of the rate increase on our Illinois deferred tax assets and a reduction in tax accruals attributable to compensation.

Net income from our Leasing Segment for the three months ended September 30, 2017 increased $2.2 million to $6.0 million compared to the three months ended September 30, 2016. This increase in net income was due to higher lease financing revenue and lower provision for credit losses partly offset by increased salaries and employee benefits expense (as a result of the

61



investment in sales and other revenue generating staff). Lease financing revenue increased due to higher fees from the sale of third-party equipment maintenance contracts and promotional income partly offset by lower residual gains.

Net income from our Mortgage Banking Segment for the three months ended September 30, 2017 decreased $8.1 million to $2.2 million compared to the three months ended September 30, 2016. This decrease in net income was due to lower mortgage origination volume and gain on sale margin. The decrease in mortgage banking revenue was partly offset by an increase in net interest income from higher residential real estate loan balances held for investment and a decrease in salaries and employee benefits expense due to lower commissions (a result of lower mortgage origination volume) and an overall decline in full time equivalent employees.

Nine Month Comparison

Net income from our Banking Segment for the nine months ended September 30, 2017 increased $42.0 million to $137.4 million compared to the nine months ended September 30, 2016. This increase was primarily due to the increase in net interest income, driven by legacy loan growth and loans acquired through the American Chartered merger, and increased non-interest income. The increased non-interest income was due to higher commercial deposit and treasury management, capital markets and international banking, trust and asset management, and card fees. The increase in net interest and non-interest income were partly offset by higher salaries and employee benefits expense (due to annual pay increases, new hires and increased staff from the American Chartered merger), higher occupancy and equipment expense (due to higher depreciation expense and rental operating expenses as a result of the American Chartered merger) and higher branch exit and facilities impairment charges (due to the closing of nine branches). The Banking Segment was also favorably impacted by tax benefits of $9.0 million associated with stock-based compensation, the impact of the rate increase on our Illinois deferred tax assets, a reversal of a tax liability no longer needed related to two of our acquired entities and a reduction in tax accruals attributable to compensation.

Net income from our Leasing Segment for the nine months ended September 30, 2017 increased $2.3 million to $16.1 million compared to the nine months ended September 30, 2016. This increase in net income was due to the increase in lease financing revenues as a result of higher rental income, fees from the sale of third-party equipment maintenance contracts and promotional income. The increase in lease financing revenues was in part offset by increased non-interest expense due to higher salaries and employee benefits expense (increased salaries related to the investment in sales and other revenue generating staff and higher commissions expense as a result of higher lease financing revenue) and an increase in other operating expenses related to internal support functions from the Banking Segment. In addition, lower provision for credit losses for the nine months ended September 30, 2017 compared to the same period in 2016 contributed to the increase in net income. The nine months ended September 30, 2016 included a provision for credit losses for a potential problem credit that improved later that year.

Net income from our Mortgage Banking Segment for the nine months ended September 30, 2017 decreased $11.4 million to $6.3 million compared to the nine months ended September 30, 2016. This decrease in net income was due to lower mortgage origination volume due to higher mortgage interest rates and lower mortgage servicing revenue. Mortgage servicing revenue decreased as mortgage servicing revenue for the nine months ended September 30, 2016 was positively impacted by fair value changes of mortgage servicing rights net of the related economic hedge activity. The decrease in mortgage banking revenue was partly offset by an increase in net interest income from higher residential real estate loan balances held for investment and a decrease in salaries and employee benefits expense. Salaries and employee benefits expense decreased due to lower commission and overtime expenses attributable to a decrease in origination volume, lower bonus expense, and a decline in the number of employees.


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Balance Sheet
 
Total assets increased $814.2 million, or 4.2%, to $20.1 billion at September 30, 2017 from December 31, 2016 mainly due to the increase in loans. 

•
Investment securities decreased $265.1 million, or 9.1%, from December 31, 2016 to September 30, 2017 due to principal payments on our mortgage-backed securities.

•
Total loans, excluding purchased credit-impaired, increased by $1.1 billion, or 9.1%, to $13.8 billion at September 30, 2017 from December 31, 2016. This increase was due to growth in commercial, commercial real estate and residential real estate loans.
 
Total liabilities increased by $701.3 million, or 4.2%, to $17.4 billion at September 30, 2017 from December 31, 2016 mostly due to the increase in deposits and short-term borrowings.
 
•
Total deposits increased by $304.7 million, or 2.2%, to $14.4 billion at September 30, 2017 from December 31, 2016. Compared to December 31, 2016, interest bearing deposits increased by $611.7 million, or 7.9% mostly due to higher money market, NOW and certificate of deposit balances.

•
Total borrowings increased by $390.7 million, or 18.7%, to $2.5 billion at September 30, 2017 due mostly to the increase in short-term FHLB advances and federal funds purchased.

Total stockholders’ equity increased $112.9 million, or 4.4%, to $2.7 billion at September 30, 2017 compared to December 31, 2016 as a result of earnings for the nine months ended September 30, 2017 net of dividends declared.

Investment Securities
 
The following table sets forth the amortized cost and fair value of our investment securities, by type of security as indicated (in thousands):
 
 
 
September 30, 2017
 
December 31, 2016
 
September 30, 2016
 
 
Amortized
Cost
 
Fair
Value
 
Amortized
Cost
 
Fair
Value
 
Amortized
Cost
 
Fair
Value
Available for sale
 
 

 
 

 
 

 
 

 
 

 
 

U.S. Government sponsored agencies and enterprises
 
$
23,077

 
$
23,146

 
$
23,267

 
$
23,415

 
$
53,456

 
$
53,968

States and political subdivisions
 
366,187

 
385,829

 
376,541

 
391,365

 
383,041

 
410,737

Residential mortgage-backed securities
 
878,167

 
875,260

 
988,744

 
983,684

 
1,066,834

 
1,076,337

Commercial mortgage-backed securities
 
86,411

 
87,217

 
91,949

 
93,008

 
93,962

 
96,993

Corporate bonds
 
114,581

 
115,014

 
193,164

 
193,895

 
208,940

 
210,193

Equity securities
 
11,177

 
11,077

 
11,000

 
10,828

 
10,932

 
11,128

Total Available for Sale
 
1,479,600

 
1,497,543

 
1,684,665

 
1,696,195

 
1,817,165

 
1,859,356

Held to maturity
 
 

 
 

 
 

 
 

 
 

 
 

States and political subdivisions
 
888,576

 
924,052

 
910,608

 
929,178

 
939,491

 
993,140

Residential mortgage-backed securities
 
105,662

 
107,694

 
159,142

 
164,562

 
175,771

 
182,698

Total Held to Maturity
 
994,238

 
1,031,746

 
1,069,750

 
1,093,740

 
1,115,262

 
1,175,838

Total
 
$
2,473,838

 
$
2,529,289

 
$
2,754,415

 
$
2,789,935

 
$
2,932,427

 
$
3,035,194



63



Loan Portfolio
 
The following table sets forth the composition of our loan portfolio (excluding loans held for sale) as of the dates indicated showing the balances of legacy loans and loans acquired through the American Chartered and Taylor Capital mergers (dollars in thousands):
 
 
 
September 30, 2017
 
December 31, 2016
 
 
Legacy (1)
Acquired (2)
Total
 
% of
Total
 
Legacy (1)
Acquired (2)
Total
 
% of
Total
Commercial related credits:
 
 
 
 

 
 

 
 
 
 

 
 

Commercial loans
 
$
4,440,349

$
353,489

$
4,793,838

 
35
%
 
$
3,548,747

$
797,759

$
4,346,506

 
34
%
Commercial loans collateralized by assignment of lease payments
 
2,023,586

50,629

2,074,215

 
15

 
1,898,857

104,119

2,002,976

 
16

Commercial real estate
 
3,221,527

873,179

4,094,706

 
29

 
2,509,314

1,278,702

3,788,016

 
29

Construction real estate
 
388,376

7,418

395,794

 
3

 
503,226

15,336

518,562

 
4

Total commercial related credits
 
10,073,838

1,284,715

11,358,553

 
82

 
8,460,144

2,195,916

10,656,060

 
83

Other loans:
 
 
 
 

 
 

 
 
 
 

 
 

Residential real estate
 
1,202,265

231,330

1,433,595

 
10

 
775,576

285,252

1,060,828

 
8

Indirect vehicle
 
653,682

1,531

655,213

 
4

 
539,916

1,764

541,680

 
4

Home equity
 
170,619

58,107

228,726

 
2

 
179,886

86,491

266,377

 
2

Other consumer loans
 
76,964

408

77,372

 
1

 
80,028

753

80,781

 
1

Total other loans
 
2,103,530

291,376

2,394,906

 
17

 
1,575,406

374,260

1,949,666

 
15

Total loans excluding purchased credit-impaired loans
 
12,177,368

1,576,091

13,753,459

 
99

 
10,035,550

2,570,176

12,605,726

 
98

Purchased credit-impaired loans
 
85,817

46,102

131,919

 
1

 
96,169

66,908

163,077

 
2

Total loans
 
$
12,263,185

$
1,622,193

$
13,885,378

 
100
%
 
$
10,131,719

$
2,637,084

$
12,768,803

 
100
%

(1) 
Legacy loans include all loans other than those acquired through the American Chartered and Taylor Capital mergers, including loans acquired in connection with our FDIC-assisted transactions and our other acquisition transactions, as well as new loans originated subsequent to the American Chartered and Taylor Capital mergers, and American Chartered and Taylor Capital loans that have been renewed.
(2) 
Represents loans acquired through the American Chartered and Taylor Capital mergers that have not yet been renewed. These balances will decrease to zero over time.
 
Total loans increased by $1.1 billion to $13.9 billion at September 30, 2017 from $12.8 billion at December 31, 2016. This increase was due to growth in commercial, commercial real estate and residential real estate 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 and lease 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. 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 that we believe will result in a loss of principal and interest.
 
Non-performing loans exclude loans held for sale. Fair value of these loans as of acquisition includes estimates of credit losses.  

64



    
The following table sets forth the amounts of non-performing loans, non-performing assets and purchased credit-impaired loans (excluding loans held for sale and other real estate owned acquired as part of our FDIC-assisted transactions) as well as other information regarding asset quality at the dates indicated (dollars in thousands):
 
 
 
September 30,
2017
 
December 31,
2016
 
September 30,
2016
Non-performing loans:
 
 

 
 

 
 

Non-accruing loans
 
$
49,926

 
$
48,974

 
$
52,135

Loans 90 days or more past due, still accruing interest
 
689

 
10,378

 
1,774

Total non-performing loans
 
50,615

 
59,352

 
53,909

Other real estate owned
 
13,020

 
26,279

 
33,105

Repossessed assets
 
497

 
322

 
453

Total non-performing assets
 
$
64,132

 
$
85,953

 
$
87,467

Purchased credit-impaired loans
 
$
131,919

 
$
163,077

 
$
161,338

Total allowance for loan and lease losses
 
$
159,128

 
$
139,366

 
$
139,528

Accruing restructured loans (1)
 
32,850

 
32,687

 
28,561

Total non-performing loans to total loans
 
0.36
%
 
0.46
%
 
0.43
%
Total non-performing assets to total assets
 
0.32

 
0.45

 
0.45

Allowance for loan and lease losses to total non-performing loans
 
314.39

 
234.81

 
258.82

 
(1) 
Accruing restructured loans consists of loans that have been modified and are performing in accordance with those modified terms.

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.
 
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 statement of operations.  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 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. 


65



The following table presents a summary of other real estate owned, excluding assets related to FDIC-assisted transactions, for the nine months ended September 30, 2017 and 2016 (in thousands):
 
 
 
September 30,
 
 
2017
 
2016
Beginning balance
 
$
26,279

 
$
31,553

Transfers in at fair value less estimated costs to sell
 
6,467

 
3,566

Acquired from business combination
 
—

 
4,148

Capitalized other real estate owned costs
 
—

 
96

Fair value adjustments
 
(2,120
)
 
980

Net gains on sales of other real estate owned
 
826

 
843

Cash received upon disposition
 
(18,432
)
 
(8,081
)
Ending balance
 
$
13,020

 
$
33,105


 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):
 
 
September 30,
2017
 
December 31,
2016
Commercial loans
 
$
69,608

 
$
94,049

Commercial loans collateralized by assignment of lease payments
 
7,250

 
3,505

Commercial real estate
 
83,982

 
46,990

Total
 
$
160,840

 
$
144,544


Allowance for Loan and Lease Losses

Management believes the allowance for loan and lease 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 and lease 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 and lease 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.
 
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. A loan rated "one" represents a loan least likely to default, while 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

66



rating migrations for 16 years. The migration data is adjusted by using average losses for an economic cycle (approximately 15 years) to develop EDFs by loan type, risk rating and maturity. EDFs are updated annually in December.
 
EDFs 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 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 review this data annually 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:  total industry capacity utilization, our prior period net charge-off rates and the yield on BBB-rated debt.
 
Commercial real estate loans and construction loans:  M2 Money stock, our prior period net charge-off rates, the U.S. commercial real estate index and the CBOE Volatility Index.
 
Using the indicators noted above, a predicted net charge-off percentage is calculated. The predicted net charge-off percentage is then compared to the cycle average net charge-off percentage, 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 net charge-offs to the predicted model net charge-offs, re-run our regression analyses and re-calibrate the macroeconomic factors as appropriate.

The commercial related general loss reserve was $137.6 million as of September 30, 2017 and $120.2 million as of December 31, 2016. The increase in the commercial related general loss reserve was due to loan growth. Reserves on impaired commercial related loans are included in the “Commercial Related Specific Reserves” section below. 
 
Commercial Related Specific Reserves.  Our allowance for loan and lease 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.

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 to reflect current values.
 
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 was $2.5 million as of September 30, 2017 compared to $3.2 million as of December 31, 2016.
 
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

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forecast charge-offs over a one-year time horizon. The reserves for consumer related loans totaled $19.1 million at September 30, 2017 and $15.9 million at December 31, 2016.
 
We consistently apply our methodology for determining the appropriateness of the allowance for loan and lease 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 and lease losses: historical net charge-offs as they relate to prior periods' allowance for loan and lease 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.
        
We recorded a provision for credit losses of $8.0 million for acquired loans related to the non-purchased credit-impaired bank merger loans as accounted for in accordance with ASC Topic 310-20 for the nine months ended September 30, 2017. No additional provisions were recorded on the purchase credit-impaired bank merger loans accounted for in accordance with ASC Topic 310-30.

The provision for credit losses for non-purchased credit-impaired loans bank merger loans is calculated using a process similar to the one used for the legacy portfolio. A general loan loss reserve is calculated for the non-purchased credit-impaired bank merger loans that have renewed and not renewed separately using the same loan loss reserve model used for the legacy loans. The general loan loss reserve is calculated 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. The probability of loans defaulting for each risk rating (referred to as default factors) is estimated based on the frequency with which loans migrate from one risk rating to another and to default status over time. The 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 to determine the appropriate allowance. The bank merger loans are risk rated using the Company's rating methodology. The general loan loss reserve amount is adjusted upward to reflect uncertainty regarding the performance of the acquired portfolios due to our limited history with the borrowers.

For non-purchased credit-impaired bank merger loans that renewed during the period (quarter or year to date), the default factors were multiplied by the loan balance and loss given default estimate to calculate the required reserves. The amount of required reserves was recognized as a provision for credit losses in the statement of operations. For non-purchased credit-impaired bank merger loans that were not renewed subsequent to the merger consummation, the default factors were multiplied by the loan balance and the historical loss given default estimate. The resulting general loan loss reserve was compared to the remaining acquisition accounting discounts related to credit on the non-purchased credit-impaired bank merger loans, with the excess recognized as a provision for credit losses in the statement of operations.

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

 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
September 30,
 
 
2017
 
2016
 
2017
 
2016
Balance at beginning of period
 
$
156,297

 
$
138,333

 
$
141,842

 
$
131,508

Provision for credit losses
 
4,517

 
6,549

 
17,950

 
16,941

Charge-offs:
 
 

 
 

 
 
 
 

Commercial loans
 
235

 
1,341

 
1,103

 
2,126

Commercial loans collateralized by assignment of lease payments
 
188

 
367

 
188

 
3,288

Commercial real estate
 
31

 
529

 
1,378

 
2,601

Construction real estate
 
—

 
7

 
—

 
151

Residential real estate
 
541

 
290

 
901

 
1,134

Home equity
 
439

 
376

 
873

 
1,233

Indirect vehicles
 
1,097

 
838

 
3,438

 
2,420

Other consumer loans
 
299

 
409

 
1,243

 
1,216

Total charge-offs
 
2,830

 
4,157

 
9,124

 
14,169

Recoveries:
 
 

 
 

 
 

 
 

Commercial loans
 
719

 
665

 
3,568

 
1,997

Commercial loans collateralized by assignment of lease payments
 
—

 
3

 
712

 
520

Commercial real estate
 
1,432

 
324

 
2,312

 
2,761

Construction real estate
 
502

 
50

 
661

 
94

Residential real estate
 
38

 
45

 
624

 
151

Home equity
 
149

 
65

 
724

 
576

Indirect vehicles
 
498

 
436

 
1,715

 
1,400

Other consumer loans
 
82

 
86

 
420

 
620

Total recoveries
 
3,420

 
1,674

 
10,736

 
8,119

Net (recoveries) charge-offs
 
(590
)
 
2,483

 
(1,612
)
 
6,050

Allowance for credit losses
 
161,404

 
142,399

 
161,404

 
142,399

Allowance for unfunded credit commitments
 
(2,276
)
 
(2,871
)
 
(2,276
)
 
(2,871
)
Allowance for loan and lease losses
 
$
159,128

 
$
139,528

 
$
159,128

 
$
139,528

Total loans
 
$
13,885,378

 
$
12,540,696

 
$
13,885,378

 
$
12,540,696

Ratio of allowance to total loans
 
1.15
 %
 
1.11
%
 
1.15
 %
 
1.11
%
Ratio of net (recoveries) charge-offs to average loans (annualized)
 
(0.02
)
 
0.09

 
(0.02
)
 
0.08


Net recoveries of $590 thousand were recorded in the three months ended September 30, 2017 compared to net charge-offs of $2.5 million in the three months ended September 30, 2016. A provision for credit losses of $4.5 million was recorded for the three months ended September 30, 2017 compared to $6.5 million for the three months ended September 30, 2016. The decrease in provision for credit losses was due to net recoveries and lower provision for credit losses related to bank merger acquired loan portfolio. The provision for credit losses for the three months ended September 30, 2017 included a provision for credit losses of $1.1 million related to the bank merger acquired loan portfolio for loan renewals subsequent to the acquisition date compared to provision for credit losses of $3.2 million for the three months ended September 30, 2016.
    
Net recoveries of $1.6 million were recorded in the nine months ended September 30, 2017 compared to net charge-offs of $6.1 million in the nine months ended September 30, 2016. A provision for credit losses of $18.0 million was recorded for the nine months ended September 30, 2017 compared to $16.9 million for the nine months ended September 30, 2016. The increase in provision for credit losses was due to loan growth in the nine months ended September 30, 2017. The provision for credit losses for the nine months ended September 30, 2017 included a provision for credit losses of $8.0 million related to the bank merger acquired loan portfolio for loan renewals subsequent to the acquisition date compared to a negative provision for credit losses of $377 thousand for the nine months ended September 30, 2016.

Additions to the allowance for loan and lease 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 and lease 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

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believes the allowance for loan and lease 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 and lease 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 and lease 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 and lease losses at the time of their examination.

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 and lease loss allowances may become necessary.


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Lease Investments

The lease portfolio is comprised of various types of equipment, generally technology related, healthcare, material handling and general manufacturing equipment. 

Lease investments by categories follow (in thousands):
 
 
 
September 30,
2017
 
December 31,
2016
 
September 30,
2016
Direct finance leases:
 
 

 
 

 
 
Minimum lease payments
 
$
450,748

 
$
433,451

 
$
382,032

Estimated unguaranteed residual values
 
69,152

 
78,256

 
76,197

Less: unearned income
 
(36,088
)
 
(36,327
)
 
(32,707
)
Direct finance leases (1)
 
$
483,812

 
$
475,380

 
$
425,522

Leveraged leases:
 
 

 
 

 
 

Minimum lease payments
 
$
267

 
$
821

 
$
1,101

Estimated unguaranteed residual values
 
54

 
108

 
118

Less: unearned income
 
(5
)
 
(25
)
 
(37
)
Less: related non-recourse debt
 
(263
)
 
(803
)
 
(1,075
)
Leveraged leases (1)
 
$
53

 
$
101

 
$
107

Operating leases:
 
 

 
 

 
 

Equipment, at cost
 
$
530,629

 
$
440,861

 
$
403,525

Less accumulated depreciation
 
(159,088
)
 
(129,534
)
 
(125,878
)
Lease investments, net
 
$
371,541

 
$
311,327

 
$
277,647

 
(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 leveraged leases, and the associated debt is netted with the outstanding balance in the consolidated financial statements. Interest income on direct finance and leveraged leases is recognized using methods which approximate a level yield over the term of the lease. Operating leases are investments in equipment leased to other companies, where the residual component makes up more than 10% of the investment.  The Company funds most of the lease equipment purchases internally, but has some loans at other banks which totaled $73.6 million at September 30, 2017, $66.9 million at December 31, 2016 and $66.5 million at September 30, 2016.

At September 30, 2017, 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
2017
 
$
2,709

 
$
36

 
$
5,652

 
$
8,397

2018
 
14,734

 
18

 
11,499

 
26,251

2019
 
13,722

 
—

 
13,228

 
26,950

2020
 
12,960

 
—

 
20,228

 
33,188

2021
 
3,537

 
—

 
24,446

 
27,983

Thereafter
 
21,490

 
—

 
52,661

 
74,151

 
 
$
69,152

 
$
54

 
$
127,714

 
$
196,920

 
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 generally 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 seek to diversify both the type of equipment

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leased and the industries in which the lessees participate. Often times, there are several individual lease schedules under one master lease.  There were 4,638 leases at September 30, 2017 compared to 4,248 at December 31, 2016.  The average residual value per lease schedule was approximately $42 thousand at September 30, 2017 and December 31, 2016.  The average residual value per master lease schedule was approximately $174 thousand at September 30, 2017 and $176 thousand at December 31, 2016. Certain residual values have less than full residual risk.
 
Liquidity and Sources of Capital
 
Our cash flows are composed of three classifications: cash flows from operating activities, cash flows from investing activities, and cash flows from financing activities.

Cash flows from operating activities primarily include net income, adjusted for items in net income that did not impact cash.  Net cash flows provided by operating activities were $290.9 million for the nine months ended September 30, 2017 compared to net cash flows provided by operating activities of $30.2 million for the nine months ended September 30, 2016.  The change was mostly due to net proceeds of loans held for sale in the nine months ended September 30, 2017 compared to net originations of loans held for sale for the same period in the prior year as well as a decrease in other assets.

Cash flows 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 nine months ended September 30, 2017, the Company had net cash flows used in investing activities of $946.1 million compared to net cash flows used in investing activities of $606.1 million for the nine months ended September 30, 2016.  The change was due to the increase in loans during the nine months ended September 30, 2017.

Cash flows from financing activities include transactions and events whereby cash is obtained from depositors, creditors or investors.  For the nine months ended September 30, 2017, the Company had net cash flows provided by financing activities of $635.5 million compared to net cash flows provided by financing activities of $670.8 million for the nine months ended September 30, 2016.  The change in cash flows from financing activities was due to less growth in deposits partly offset by the increase in borrowings compared to the nine months ended September 30, 2016.

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 September 30, 2017, there were no firm lending commitments in place, management believes that we could borrow approximately $402.5 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 September 30, 2017, the Company had $1.7 billion outstanding in FHLB advances, and could borrow an additional amount of approximately $318.4 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 September 30, 2017, the Company had approximately $1.7 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. We also maintain a $35.0 million unsecured line of credit at the holding company level with a correspondent bank. No borrowings were outstanding on the line of credit as of September 30, 2017. The line of credit is scheduled to mature on June 30, 2018. The holding company had $33.6 million in cash as of September 30, 2017.

See Notes 9 and 10 of the Financial Statements presented under Item 1 of this report for details of period end balances and other information for these various funding sources. There were no material changes outside the ordinary course of business in the Company’s contractual obligations at September 30, 2017 as compared to December 31, 2016.

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. The minimum ratios required for a bank to be considered “well capitalized” for regulatory purposes are a total risk-based capital ratio of 10.00%, a Tier 1 capital to risk-weighted assets ratio of 8.00%, a common equity Tier 1 capital to risk-weighted assets ratio of 6.50% and a Tier 1 capital to average assets ratio of 5.00%.   In addition, we have an internal policy which provides that dividends paid to us by MB Financial Bank cannot exceed an amount that would cause MB Financial Bank’s total risk-based capital ratio, Tier 1 capital to risk-weighted assets ratio, common equity Tier 1 capital to risk-weighted assets ratio and Tier 1 capital to average assets ratio to fall below 11%, 9%, 7.5% and 7%, respectively.  See “Item 1. Business — Supervision and Regulation” in our Annual Report on Form 10-K for the year ended December 31, 2016.


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At September 30, 2017, the Company’s total risk-based capital ratio was 11.67%, Tier 1 capital to risk-weighted assets ratio was 9.46%, common equity Tier 1 capital to risk-weighted assets ratio was 8.80% and Tier 1 capital to average asset ratio was 8.59%. At September 30, 2017, MB Financial Bank’s total risk-based capital ratio was 11.29%, Tier 1 capital to risk-weighted assets ratio was 10.34%, common equity Tier 1 capital to risk-weighted assets ratio was 10.34% and Tier 1 capital to average asset ratio was 9.39%. MB Financial Bank was categorized as “Well-Capitalized” at September 30, 2017 under the regulations of the Office of the Comptroller of the Currency.

The Company and MB Financial Bank must maintain a capital conservation buffer consisting of additional common equity Tier 1 capital greater than 2.5% of risk-weighted assets above the required minimum levels in order to avoid limitations on paying dividends, repurchasing shares, and paying discretionary bonuses.  The new capital conservation buffer requirement began phasing in on January 1, 2016 when a buffer greater than 0.625% of risk-weighted assets was required, which amount will increase each year until the buffer requirement is fully implemented on January 1, 2019. At September 30, 2017, the Company and MB Financial Bank maintained capital above the 1.25% conservation buffer required for 2017.

Non-GAAP Financial Information

This report contains certain financial information determined by methods other than in accordance with accounting principles generally accepted in the United States of America (GAAP). These measures include net interest income on a fully tax equivalent basis, net interest margin on a fully tax equivalent basis and net interest margin on a fully tax equivalent basis excluding the effect of the acquisition accounting discount accretion on loans acquired through the bank mergers. Our management uses these non-GAAP measures, together with the related GAAP measures, in its analysis of our performance and in making business decisions. Management also uses these measures for peer comparisons. The tax equivalent adjustment to net interest income recognizes the income tax savings when comparing taxable and tax-exempt assets and assumes a 35% tax rate. Management believes that it is a standard practice in the banking industry to present net interest income and net interest margin on a fully tax equivalent basis, and accordingly believes that providing these measures may be useful for peer comparison purposes. Management also believes that presenting net interest margin on a tax equivalent basis excluding the effect of the acquisition accounting discount accretion on loans acquired through the Taylor Capital and American Chartered mergers is useful in assessing the impact of acquisition accounting on net interest margin, as the effect of loan discount accretion is expected to decrease as the acquired loans mature or roll off our balance sheet. These disclosures should not be viewed as substitutes for the results determined to be in accordance with GAAP, nor are they necessarily comparable to non-GAAP performance measures that may be presented by other companies. Reconciliations of net interest income on a fully tax equivalent basis to net interest income and net interest margin on a fully tax equivalent basis and net interest margin on a fully tax equivalent basis excluding the effect of the acquisition accounting discount accretion on loans acquired through the Taylor Capital and American Chartered mergers to net interest margin are contained in the tables under “Net Interest Margin.”

Forward-Looking Statements
    
When used in this Quarterly Report on Form 10-Q and in other 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 MB Financial-American Chartered merger might not be realized 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; (2) the credit risks of lending activities, including changes in the level and direction of loan delinquencies and write-offs and changes in estimates of the adequacy of the allowance for loan losses, which could necessitate additional provisions for loan losses, resulting both from originated loans and loans acquired from other financial institutions; (3) competitive pressures among depository institutions; (4) interest rate movements and their impact on customer behavior, net interest margin and the value of our mortgage servicing rights; (5) the possibility that our mortgage banking business may experience increased volatility in its revenues and earnings and the possibility that the profitability of our mortgage banking business could be significantly reduced if we are unable to originate and sell mortgage loans at profitable margins or if changes in interest rates negatively impact the value of our mortgage servicing rights; (6) the impact of repricing and competitors’ pricing initiatives on loan and deposit products; (7) fluctuations in real estate

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values; (8) the ability to adapt successfully to technological changes to meet customers’ needs and developments in the market place; (9) the possibility that security measures implemented might not be sufficient to mitigate the risk of a cyber attack or cyber theft, and that such security measures might not protect against systems failures or interruptions; (10) our ability to realize the residual values of its direct finance, leveraged and operating leases; (11) the ability to access cost-effective funding; (12) changes in financial markets; (13) changes in economic conditions in general and in the Chicago metropolitan area in particular; (14) the costs, effects and outcomes of litigation; (15) 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, changes in the interpretation and/or application of laws and regulations by regulatory authorities, other governmental initiatives affecting the financial services industry and changes in federal and/or state tax laws or interpretations thereof by taxing authorities; (16) changes in accounting principles, policies or guidelines; (17) our future acquisitions of other depository institutions or lines of business; and (18) 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.

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Item 3.
  Quantitative and Qualitative Disclosures about Market Risk
 
Market Risk and Asset Liability Management
 
Market Risk.  Market risk is the risk that the market value or estimated fair value of our assets, liabilities, and derivative financial instruments will decline as a result of changes in interest rates or financial market volatility, or that our net income will be significantly reduced by interest rate changes.  Market risk is managed operationally in our Treasury Group and is addressed through a selection of funding and hedging instruments supporting balance sheet 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 Note 15 to the Consolidated Financial Statements.
 
Interest Rate Risk.  Interest rate risk can come in a variety of forms, including repricing risk, yield curve risk, basis risk, and prepayment risk.  We experience repricing risk when the change in the average yield of 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, or that have similar maturities or repricing dates, are based on different indexes that 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 positive gap would tend to positively affect net interest income.  Conversely, during a period of falling interest rates, a positive gap position would tend to result in a decrease in net interest income.

The following table sets forth the amounts of interest earning assets and interest bearing liabilities outstanding at September 30, 2017 that we anticipate, based upon certain assumptions, to reprice or mature in each of the future time periods shown.  Except as stated below, the amount of assets and liabilities shown which reprice or mature during a particular period were determined based on the earlier of the term to repricing or the term to repayment of the asset or liability. 

The table is intended to provide an approximation of the projected repricing of assets and liabilities at September 30, 2017 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

75



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: 36%, 29%, and 10%, respectively, in the first three months, 10%, 21%, and 17%, respectively, in the next nine months, 32%, 44%, and 50%, respectively, from one year to five years, and 22%, 6%, and 23%, 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
 
$
79,964

 
$
475

 
$
1,947

 
$
250

 
$
82,636

Investment securities
 
161,233

 
375,655

 
1,136,749

 
970,489

 
2,644,126

Loans held for sale
 
722,754

 
—

 
—

 
—

 
722,754

Loans, including covered loans
 
8,108,625

 
1,432,937

 
3,649,959

 
693,857

 
13,885,378

Total interest earning assets
 
$
9,072,576

 
$
1,809,067

 
$
4,788,655

 
$
1,664,596

 
$
17,334,894

Interest Bearing Liabilities:
 
 

 
 

 
 

 
 

 
 

NOW, money market and interest bearing deposits
 
$
1,573,723

 
$
757,065

 
$
1,831,307

 
$
680,002

 
$
4,842,097

Savings deposits
 
108,819

 
183,633

 
543,964

 
251,778

 
1,088,194

Time deposits
 
443,084

 
1,067,081

 
869,707

 
3,822

 
2,383,694

Short-term borrowings
 
1,765,415

 
100,000

 
—

 
—

 
1,865,415

Long-term borrowings
 
24,663

 
305,137

 
69,319

 
6,596

 
405,715

Junior subordinated notes issued to capital trusts
 
211,289

 
—

 
—

 
—

 
211,289

Total interest bearing liabilities
 
$
4,126,993

 
$
2,412,916

 
$
3,314,297

 
$
942,198

 
$
10,796,404

Rate sensitive assets (RSA)
 
$
9,072,576

 
$
10,881,643

 
$
15,670,298

 
$
17,334,894

 
$
17,334,894

Rate sensitive liabilities (RSL)
 
4,126,993

 
6,539,909

 
9,854,206

 
10,796,404

 
10,796,404

Cumulative GAP (GAP=RSA-RSL)
 
4,945,583

 
4,341,734

 
5,816,092

 
6,538,490

 
6,538,490

RSA/Total assets
 
45.10
%
 
54.09
%
 
77.90
%
 
86.17
%
 
86.17
%
RSL/Total assets
 
20.52

 
32.51

 
48.99

 
53.67

 
53.67

GAP/Total assets
 
24.58

 
21.58

 
28.91

 
32.50

 
32.50

GAP/RSA
 
54.51

 
39.90

 
37.12

 
37.72

 
37.72

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

Based on simulation modeling which assumes 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
 
September 30, 2017
 
December 31, 2016
Levels of
 
Dollar
 
Percentage
 
Dollar
 
Percentage
Interest Rates
 
Change
 
Change
 
Change
 
Change
+ 2.00%
 
$
41,233

 
6.71
 %
 
$
47,407

 
7.94
 %
+ 1.00%
 
22,401

 
3.64

 
25,076

 
4.20

- 1.00%
 
(28,604
)
 
(4.65
)
 
(26,252
)
 
(4.39
)
 
In the interest rate sensitivity table above, changes in net interest income between September 30, 2017 and December 31, 2016 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 higher cost certificates of deposit in a rising rate environment. Based on immediate changes in interest rates over a one-year period, we believe that our net interest income would increase 14.61% and 7.61% with increases in interest rates of 2.00% and 1.00%, respectively, and decrease 11.02% with a decrease in interest rates of 1.00%.

76



 
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.
 
Item 4.
Controls and Procedures
 
Evaluation of Disclosure Controls and Procedures: An evaluation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the “Act”)) was carried out as of September 30, 2017 under the supervision and with the participation of our Chief Executive Officer, Chief Financial Officer and several other members of our senior management.  Our Chief Executive Officer and Chief Financial Officer concluded that, as of September 30, 2017, 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.
 
Changes in Internal Control Over Financial Reporting: During the quarter ended September 30, 2017, 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.
 

77


PART II.        OTHER INFORMATION

Item 1.
  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.


Item 1A.
  Risk Factors
 
There have been no material changes to the risk factors disclosed in Item 1A. Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2016.

Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
 
The following table sets forth information for the three months ended September 30, 2017 with respect to our repurchases of our outstanding common shares:
 
 
 
Total Number of
Shares Purchased (1)
 
Average Price Paid
per Share
 
Total Number of Shares Purchased
as Part of Publicly Announced
Plans or Programs
 
Approximate Dollar Value of
Shares that May Yet Be
Purchased Under the Plans
or Programs (in Thousands)
July 1, 2017 — July 31, 2017
 
—

 
$
—

 
—

 
$
—

August 1, 2017 — August 31, 2017
 
18,756

 
39.53

 
—

 
—

September 1, 2017 — September 30, 2017
 
—

 
—

 
—

 
—

Total
 
18,756

 
$
39.53

 
—

 
 

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



78



Item 6.
  Exhibits

Exhibit Number
 
Description
 
 
 
 
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))

 
 
 
 
Amendment, dated as of June 30, 3014, to Agreement and Plan of Merger, dated as of July 14, 2013, by and between 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 1, 2014 (File No.0-24566-01))
 
 
 
 
Letter Agreement, dated as of June 30, 3014, by and between the Registrant and Taylor Capital Group, Inc. (incorporated herein by reference to Exhibit 2.2 to the Registrant's Current Report on Form 8-K filed on July 1, 2014 (File No.0-24566-01))
 
 
 
 
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))
 
 
 
 
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, 2009 (File No.0-24566-01))
 
 
 
 
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))
 
 
 
 
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))
 
 
 
 
Agreement and Plan of Merger, dated as of November 20, 2015, by and between the Registrant and American Chartered Bancorp, Inc. (incorporated herein by reference to Exhibit 2.1 to the Registrant's Current Report on Form 8-K filed on November 24, 2015 (File No.001-36599))
 
 
 
 
Charter 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 August 30, 2016 (File No. 001-36599))
 
 
 
 
Articles Supplementary to the Charter of the Registrant for the Registrant’s Perpetual Non-Cumulative Preferred Stock, Series A (incorporated herein by reference to Exhibit 3.3 to the Registrant’s Registration Statement on Form 8-A filed on August 14, 2014 (File No.001-36599))
 
 
 
 
Articles Supplementary to the Charter of the Registrant for the Registrant’s Cumulative Voting Convertible Preferred Stock, Series B (incorporated herein by reference to Exhibit 3.2 to the Registrant’s Current Report on Form 8-K filed on August 30, 2016 (File No.001-36599))
 
 
 
 
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 March 2, 2015 (File No. 001-36599))
 
 
 

79




Exhibit Number
 
Description
 
 
 
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
 
 
 
10.1
 
Reserved
 
 
 
 
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))
 
 
 
 
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))
 
 
 
 
Form of Change and Control Severance Agreement between MB Financial Bank, National Association and each of Brian Wildman and Rosemarie Bouman (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))
 
 
 
 
Form of Change in Control Severance Agreement between MB Financial Bank, National Association and Mark A. Heckler (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))
 
 
 
 
Form of Change in Control Severance Agreement between MB Financial Bank, National Association and Randall T. Conte (incorporated herein by reference to Exhibit 10.4D to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2014 (File No. 001-36599))
 
 
 
10.5
 
Reserved
 
 
 
10.5A
 
Reserved
 
 
 
10.5B
 
Reserved
 
 
 
 
MB Financial, Inc. Third 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 11, 2014 (File No. 0-24566-01))
 
 
 
 
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))
 
 
 
 

80



Exhibit Number
 
Description
 
 
 
 
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
 
Reserved
 
 
 
 
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))
 
 
 
 
Form of Agreement Regarding Salary Adjustment and Portion of Salary Payable by Stock between MB Financial, Inc. and Rosemarie Bouman, Mark A. Heckler 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))
 
 
 
 
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))
 
 
 
 
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))
 
 
 
 
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))
 
 
 
 
Tax Gross Up Agreements between the Registrant and each of Mitchell Feiger, Jill E. York and Brian Wildman (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))
 
 
 
 
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))
 
 
 
 
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))
 
 
 
 
Form of Non-Qualified Stock Option Agreement for Directors under the Omnibus Incentive Plan (incorporated herein by reference to Exhibit 10.17 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2007 (File No. 0-24566-01))


81



Exhibit Number
 
Description
 
 
 
 
Form of Restricted Stock Agreement for Executive Officers under the Omnibus Incentive Plan (incorporated herein by reference to Exhibit 10.18 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2007 (File No. 0-24566-01))
 
 
 
 
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))
 
 
 
 
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))
 
 
 
 
Form of Restricted Stock Agreement for grants on December 2, 2009 to Mitchell Feiger and Jill E. York (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))
 
 
 
 
Form of Restricted Stock Agreement for Directors under the Omnibus Incentive Plan (incorporated herein by reference to Exhibit 10.19 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2007 (File No. 0-24566-01))
 
 
 
 
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))
 
 
 
 
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))
 
 
 
 
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))
 
 
 
 
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))
 
 
 
 
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))
 
 
 
 
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))
 
 
 
 
Letter Agreement, dated as of June 30, 2014, by and among the Registrant and certain principal stockholders of Taylor Capital Group, Inc. (incorporated herein by reference to Exhibit 10.1 to the Registrant's Current Report on Form 8-K filed on July 1, 2014 (File No.0-24566-01))
 
 
 
 
Supplemental Agreement, dated as of August 15, 2014, by and among the Registrant, MB Financial Bank, N.A., and Jennifer W. Steans, as representative of certain principal stockholders of Taylor Capital Group, Inc. (incorporated herein by reference to Exhibit 10.2 to the Registrant's Current Report on Form 8-K filed on August 20, 2014 (File No.001-36599))



82



Exhibit Number
 
Description
 
 
 
 
Escrow Agreement, dated as of August 15, 2014, by and among MB Financial Bank, N.A., Jennifer W. Steans, as representative of certain principal stockholders of Taylor Capital Group, Inc., and The Northern Trust Company, as escrow agent (incorporated herein by reference to Exhibit 10.3 to the Registrant's Current Report on Form 8-K filed on August 20, 2014 (File No.001-36599))
 
 
 
 
Second Amendment to Letter Agreement Re: Escrow of Merger Consideration, dated as of December 16, 2016, by and among the Registrant, MB Financial Bank, N.A., and Jennifer W. Steans, as representative of certain principal stockholders of Taylor Capital Group, Inc. (incorporated herein by reference to Exhibit 10.23C to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2016 (File No. 001-36599))
 
 
 
 
Employment Agreement, dated as of July 14, 2013 by and between the Registrant, MB Financial Bank, N.A. and Mark A. Hoppe (included as Exhibit E to the Agreement and Plan of Merger, dated as of July 14, 2013, by and between 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)))
 
 
 
 
Taylor Capital Group, Inc. Deferred Compensation Plan (incorporated herein by reference to Exhibit 10.1 to the Annual Report on Form 10-K of Taylor Capital Group, Inc. for the year ended December 31, 2008 (File No. 000-50034))
 
 
 
 
Trust Under Taylor Capital Group, Inc. Deferred Compensation Plan (incorporated herein by reference to Exhibit 10.17 of the Registration Statement on Form S-1 of Taylor Capital Group, Inc. filed May 24, 2002 (Registration No. 333-89158))
 
 
 
 
Amendment to the Taylor Capital Group, Inc. Deferred Compensation Plan (incorporated herein by reference to Exhibit 10.25B to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2014 (File No. 001-36599))
 
 
 
 
Taylor Capital Group, Inc. Senior Officer Change in Control Severance Plan (incorporated herein by reference to Exhibit 10.1 of the Quarterly Report on Form 10-Q of Taylor Capital Group, Inc. for the quarterly period ended June 30, 2009 (File No. 000-50034))
 
 
 
 
Amendment to the Taylor Capital Group, Inc. Senior Officer Change in Control Severance Plan (incorporated herein by reference to Exhibit 10.26A to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2014 (File No. 001-36599))
 
 
 
 
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))
 
 
 
 
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 (File No. 0-24566-01))
 
 
 
 
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))
 
 
 
 
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))

83



 
Exhibit Number
 
Description
 
 
 
 
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))
 
 
 
 
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))
 
 
 
 
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))
 
 
 
 
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))
 
 
 
 
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))
 
 
 
 
Rule 13a — 14(a)/15d — 14(a) Certification (Chief Executive Officer)*
 
 
 
 
Rule 13a — 14(a)/15d — 14(a) Certification (Chief Financial Officer)*
 
 
 
 
Section 1350 Certifications*
 
 
 
101
 
The following financial statements from the MB Financial, Inc. Quarterly Report on Form 10-Q for the quarter ended September 30, 2017, 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

84




SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
MB FINANCIAL, INC.
(registrant)
 
Date:
November 6, 2017
By:
/s/Mitchell Feiger
 
 
 
Mitchell Feiger
 
 
 
President and Chief Executive Officer
 
 
 
(Principal Executive Officer)
 
 
 
 
Date:
November 6, 2017
By:
/s/Randall T. Conte
 
 
 
Randall T. Conte
 
 
 
Vice President and Chief Financial Officer
 
 
 
(Principal Financial Officer)
 



85