Toggle SGML Header (+)


Section 1: 10-K (10-K)

Document






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

 
FORM 10-K
 
(Mark One)
 
ý
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 


For the fiscal year ended December 31, 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
 

Securities registered pursuant to Section 12(b) of the Act:
 
Title of each class
 
Name of each exchange on which registered
 
 
 
Common Stock, par value $0.01 per share
 
The NASDAQ Stock Market LLC
Depositary Shares, each representing a 1/40th interest in a share of 6.00% Perpetual Non-Cumulative Preferred Stock, Series C
 
The NASDAQ Stock Market LLC
 

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

None
(Title of Class) 






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

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes o No ý
 

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 ý 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 ý No o

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

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

Large accelerated filer ý
 
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 Act).  Yes o No ý
 

The aggregate market value of the voting shares held by non-affiliates of the Registrant was approximately $3,569,929,567 as of June 30, 2017, the last business day of the Registrant’s most recently completed second fiscal quarter.  Solely for the purpose of this computation, it has been assumed that executive officers and directors of the Registrant are "affiliates."
 

There were issued and outstanding 83,988,326 shares of the Registrant’s common stock as of February 23, 2018.
 


DOCUMENTS INCORPORATED BY REFERENCE:
 

Document
 
Part of Form 10-K
 
 
 
Portions of the definitive Proxy Statement to be used in conjunction with the Registrant’s 2018 Annual Meeting of Stockholders.
 
Part III
















MB FINANCIAL, INC. AND SUBSIDIARIES
 
FORM 10-K
 
December 31, 2017
 
INDEX
 
 
 
 
Page
 
 
 
Item 1
 
Item 1A
 
Item 1B
 
Item 2
 
Item 3
 
Item 4
 
 
 
 
 
 
 
 
Item 5
 
Item 6
 
Item 7
 
Item 7A
 
Item 8
 
Item 9
 
Item 9A
 
Item 9B
 
 
 
 
 
 
 
 
Item 10
 
Item 11
 
Item 12
 
Item 13
 
Item 14
 
 
 
 
 
 
 
 
Item 15
 
 
 


3



PART I


Item 1.
Business
 
General
 
MB Financial, Inc., headquartered in Chicago, Illinois, is a financial holding company with banking offices located primarily in the Chicago area.  The words “MB Financial,”  “the Company,” “we,” “our” and “us” refer to MB Financial, Inc. and its consolidated subsidiaries, unless the context indicates otherwise.  Our primary market is the Chicago metropolitan area, in which we operate 86 banking offices through our bank subsidiary, MB Financial Bank, N.A. (MB Financial Bank). Through MB Financial Bank, we offer a broad range of financial services predominately to small and middle market businesses and individuals in the markets that we serve. We also offer financial services on a national basis. Our main business segments include Banking, Leasing and Mortgage Banking.  As of December 31, 2017, on a consolidated basis, we had total assets of $20.1 billion, deposits of $15.0 billion, stockholders’ equity of $3.0 billion, and client assets under management or advisement of $8.2 billion in our wealth management group (including $3.1 billion in our trust department and $5.1 billion in our bank-owned investment management firm, MSA Holdings, LLC ("MSA"), the parent company of our registered investment advisors, MainStreet Investment Advisors, LLC ("MainStreet") and Cedar Hill Associates LLC ("Cedar Hill").
 
MB Financial, Inc. was incorporated as a Maryland corporation in 2001 in connection with a merger of predecessor companies. We have completed a number of acquisitions in recent years.
 
On August 18, 2014, the Company acquired Taylor Capital Group, Inc. ("Taylor Capital"), a bank holding company and the parent company of Cole Taylor Bank, a commercial bank headquartered in Chicago, through the merger of Taylor Capital with and into the Company, followed immediately by the merger of Cole Taylor Bank with and into MB Financial Bank. Consideration paid by the Company was $648.8 million, including $519.3 million in common stock and $129.5 million in cash. The Company issued 19.6 million shares of common stock as a result of the merger. In addition, each share of Taylor Capital’s Perpetual Non-Cumulative Preferred Stock, Series A was converted into one share of the Company's Perpetual Non-Cumulative Preferred Stock, Series A with substantially identical terms. On February 15, 2018, the Company redeemed all of the outstanding shares of Company's Perpetual Non-Cumulative Preferred Stock, Series A.
    
On December 31, 2015, MB Financial Bank acquired a 100% equity interest in MSA, then the parent company of MainStreet and Cambium Asset Management, LLC ("Cambium"), a registered investment advisor. See Note 2 of the notes to our audited consolidated financial statements contained in Item 8 of this report for additional information regarding this acquisition. In 2017, Cambium was merged into Cedar Hill, a registered investment advisor subsidiary of MB Financial Bank which became a subsidiary of MSA following that transaction.

On August 24, 2016, the Company acquired American Chartered Bancorp, Inc. ("American Chartered"), a bank holding company and the parent company of American Chartered Bank, a commercial bank headquartered in Schaumburg, Illinois, through the merger of American Chartered with and into the Company, followed immediately by the merger of American Chartered Bank with and into MB Financial Bank. 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. See Note 2 of the notes to our audited consolidated financial statements contained in Item 8 of this report for additional information.
    
MB Financial Bank Subsidiaries

MB Financial Bank, our largest subsidiary, has three wholly owned subsidiaries with significant operating activities: Celtic Leasing Corp. (“Celtic”), MB Equipment Finance, LLC, ("MB Equipment Finance"), and MSA.
 
Celtic focuses on leasing equipment to middle market health care, legal, technology, and manufacturing companies located throughout the United States. MB Equipment Finance offers a full range of equipment finance options and specializes in originating and syndicating commercial equipment leases of U.S. middle-market companies. In addition, MB Equipment Finance focuses on leasing technology-related equipment to middle market and larger businesses located throughout the United States through its LaSalle Systems Leasing Division.  This division also specializes in brokering third party equipment maintenance contracts as well as technology-related equipment.
 
In October 2016, MB Financial Bank formed a new subsidiary, MB Financial International, Inc., to serve as the holding company for LaSalle Solutions Canada Inc., a Canadian leasing company, and MB Business Capital Canada Inc., a Canadian asset-based lending company.

4




Operating Segments
 
Our operations are managed based on the operating results of three reportable segments: Banking, Leasing and Mortgage Banking. Our chief operating decision-makers use financial information from our three reportable segments to make operating and strategic decisions. For financial information about our reportable segments, see Note 21 of the notes to our audited consolidated financial statements contained in Item 8 of this report.

Banking. We concentrate on serving small and middle market businesses and their owners. We also focus on serving consumers who live or work near our branches. We operate the following lines of business within our Banking Segment: commercial banking, loans to leasing companies, retail banking, cards and bank sponsorships, and wealth management. Each is described below.

Commercial Banking.  Commercial banking focuses on serving middle market businesses, primarily located in the Chicago metropolitan, southern Wisconsin and northern Indiana areas, except for our long-term health care and asset-based lending which have a more national scope. We provide a full set of credit, deposit, treasury management, capital markets, and international banking products to these companies. In general, our credit products are designed for companies with annual revenues between $3 million and $500 million. We have a broad range of credit products for our target market, including working capital loans and lines of credit; accounts receivable financing; inventory and equipment financing; industrial revenue bond financing; ESOP financing; business acquisition loans; owner occupied real estate loans; asset-based loans; and financial, performance and commercial letters of credit. Our deposit and treasury management products are designed for companies with annual revenues up to $500 million and include internet banking products, investment sweep accounts, zero balance accounts, automated tax payments, ATM access, telephone banking, lockbox, automated clearing house transactions, account reconciliation, controlled disbursement, detail and general information reporting, wire transfers, vault services for currency and coin, remote deposit capture and checking accounts. Our capital markets products include derivatives and interest rate risk solutions, capital solutions, merger and acquisition advisory, and real estate debt and equity placement. Our international banking services include trade services, export trade finance, and foreign exchange. We also provide a full set of credit, deposit and treasury management services for real estate operators and investors. Some treasury management services are provided nationwide.

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

Retail Banking. Retail banking has 86 banking offices and 129 ATMs located throughout the Chicago metropolitan area. Our target customers are small businesses (with annual revenues up to $10 million) located in our market and consumers who live and work near our banking centers. We offer our retail banking customers, both business and consumer, a variety of deposit products and services, such as checking, savings, money market, NOW and certificates of deposit. Our products are designed to meet the needs of customers of all ages and lifestyles. Our services are conveniently delivered through our branch network, as well as through our electronic channels, internet and mobile banking, providing added access for all clients.

Our business banking division continues to grow. This division offers the expertise of a business banker, coupled with the personal attention of a local branch, to small businesses in our market. These businesses are afforded the same services available to our larger commercial customers, customized to meet the unique needs of our entrepreneurial clients.

Cards and Bank Sponsorships. Our cards and bank sponsorship division offers general reloadable prepaid cards, payroll cards, incentive cards, and gift cards. These products are extended to existing customers and offered nationally (through sponsorship programs where MB Financial Bank is the issuing bank) to companies needing card payment solutions. In addition, we offer a small business corporate credit card, as well as a commercial multi-card which serves as both a travel and entertainment card and a purchasing card for our larger business customers.
 
Wealth Management.  Our wealth management group provides comprehensive wealth management solutions. We provide investment management, private banking services, financial planning and wealth advisory services to business owners, high net worth individuals, foundations, endowments and municipal agencies, through our private bankers, asset management and trust

5




advisors, as well as through Cedar Hill, our registered investment advisor focused on the high net worth sector. In addition, personal trust, custody, estate settlement, guardianship and retirement plan services are provided through our asset management and trust advisors. MainStreet, our registered investment advisor focused on the institutional sector, provides investment advisory solutions to the bank trust and independent trust company markets.

Leasing. Leasing includes lease originations and related services offered through our leasing subsidiaries, Celtic and MB Equipment Finance. We invest directly in equipment that we lease (referred to as direct finance, leveraged or operating leases) to "Fortune 1000," large middle-market companies and health care providers located throughout the United States. Our lease portfolio consists of various kinds of equipment, generally technology related, such as computer systems, satellite equipment, medical equipment and general manufacturing, industrial, construction and transportation equipment. We seek leasing transactions where we believe the equipment leased is integral to the lessee's business, thereby increasing the likelihood of renewal at the end of the lease term. Our leasing subsidiaries also specialize in brokering third party equipment maintenance contracts to large companies.

Mortgage Banking. The Mortgage Banking Segment conducts business on a national level and originates residential mortgage loans for sale to investors and for the Company's portfolio through its 49 mortgage retail offices, third-party channels, and our 86 Chicago area retail banking branches. This segment also services residential mortgage loans for various investors and for loans owned by the Company and makes bulk purchases of servicing rights.

Lending Activities
 
General.  Our loan portfolio consists primarily of loans to businesses or for business purposes.
 
Commercial.  We make commercial loans mainly to middle market businesses, generally located in the Chicago, southern Wisconsin and northern Indiana areas.  Borrowers tend to be privately-owned and are generally manufacturers, wholesalers, distributors, long-term health care operators and service providers. Certain long-term health care borrowers are located outside the Chicago, southern Wisconsin and northern Indiana areas.  Loan products offered are primarily working capital, term loans and lines of credit that help our customers finance accounts receivable, inventory and equipment.  We also offer financial, performance and commercial letters of credit.  Commercial loans secured by owner occupied real estate are classified as commercial real estate loans.  Most commercial loans are short-term in nature, being one year or less, with the maximum term generally being five to seven years. 

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

We also offer asset-based loans to businesses with collateral as the primary source of repayment. Most asset-based borrowers are located outside the Chicago, southern Wisconsin, and northern Indiana areas.  Collateral for these loans may include accounts receivable, inventory, equipment and owner occupied real estate.  Collateral is monitored regularly to insure ongoing sufficiency of 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 asset appraisals with typical industry advance rates and amortization periods on fixed assets, percentage of collateral advance rates on current assets, ongoing field exams, dominion over cash collections using 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 industry and geography.
 
Commercial Real Estate.  We originate commercial real estate loans that are generally secured by multi-unit residential property and owner and non-owner occupied commercial and industrial property.  Longer term commercial real estate loans are generally made at fixed rates, although some have interest rates that change based on the Prime Rate or LIBOR.  Generally, most loans are structured with a balloon payment at the end of five years or less. Periodically, terms of up to twenty-five years are offered on fully amortizing loans.  For our fixed rate loans with maturities greater than five years, we may enter into interest rate swap agreements with a third party to mitigate interest rate risk.  In deciding whether to make a commercial real estate loan, we consider, among other things, the experience and qualifications of the borrower as well as the value and cash flow of the underlying property.  Some other factors considered are net operating income of the property before debt service and depreciation, the debt service

6




coverage ratio (the ratio of the property’s net cash flow to debt service requirements), the global cash flows of the borrower, the ratio of the loan amount to the property value and the overall creditworthiness of the prospective borrower.  Our commercial real estate loans typically range in size from $250 thousand to $30 million.
 
The repayment of commercial real estate loans is often dependent on the successful operations of the property securing the loan or the business conducted on the property securing the loan.  In addition, most commercial real estate loans are not fully amortized over the loan period, but have balloon payments due at maturity.  A borrower’s ability to make a balloon payment typically will depend on their ability to either refinance the loan or complete a timely sale of the underlying property.
 
Construction Real Estate.  Construction lending can involve a higher level of risk than other types of lending because funds are advanced partially based upon the value of the project, which is uncertain prior to the project’s completion.  Because of the uncertainties inherent in estimating construction costs as well as the market value of a completed project and the effects of governmental regulation on real property, our estimates with regard to the total funds required to complete a project and the related loan-to-value ratio may vary from actual results.  As a result, construction loans often involve the disbursement of substantial funds with repayment dependent, in part, on the success of the ultimate project and the ability of the borrower to sell or lease the property or refinance the indebtedness. 

Lease Loans.  We lend money to leasing companies to finance the debt portion of leases (which we refer to as lease loans).  A lease loan arises when a lessor discounts the equipment rental revenue stream owed to the lessor by a lessee.  Lease loans generally are non-recourse to the leasing company, and, consequently, our recourse is limited to the lessee and the leased equipment.  For this reason, we underwrite lease loans by examining the creditworthiness of the lessee rather than the lessor.  Generally, lease loans are secured by an assignment of lease payments and a security interest in the equipment being leased.  As with commercial loans secured by equipment, equipment securing our lease loans may depreciate over time, may be difficult to value and may fluctuate in value.  We rely on the lessee’s continuing financial stability, rather than the value of the leased equipment, for repayment of all required amounts under lease loans.  In the event of default, it is unlikely that the proceeds from the sale of leased equipment will be sufficient to satisfy the outstanding unpaid amounts under terms of the lease loan.
 
The lessees usually acknowledge our security interest in the leased equipment and often agree to send lease payments directly to us.  Lessees are often companies that have an investment grade public debt rating by Moody’s or the equivalent although we also provide credit to below investment grade and non-rated companies.  Whether or not a lessee has a public debt rating, they are subject to the same internal credit analysis as any other customer.  Lease loans typically have a fixed interest rate and are fully amortizing, with maturities typically ranging from three to five years. 
 
Primarily through our Leasing Segment, we also invest directly in equipment leased to other companies (which we refer to as direct finance, leveraged or operating leases).  The profitability of these investments depends, to a great degree, upon our ability to realize the expected residual values of this equipment.  See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations-Critical Accounting Policies-Residual Value of Our Direct Finance, Leveraged, and Operating Leases.”
 
Residential Real Estate.  We originate fixed and adjustable rate residential real estate loans secured by one to four unit dwellings.  Terms of first mortgages generally range from five to thirty years.  In deciding whether to make a residential real estate loan, we consider the qualifications of the borrower as well as the value of the underlying property. 
 
Consumer.  Our consumer loan portfolio is primarily focused on indirect vehicle loans through a network of motorcycle, powersports, recreational vehicles, and marine dealers in 47 states. Terms of these fixed rate loans typically range from two to fifteen years depending on the product. In deciding whether to make an indirect loan, we consider the qualifications of the borrower as well as the value of the collateral.

Our consumer loan portfolio also includes home equity lines of credit, fixed-rate home equity loans, personal and business credit cards, and to a lesser extent, secured and unsecured consumer loans.  Home equity lines of credit and home equity loans are generally extended up to 80% of the value of the property, less outstanding first mortgage loans. Typical terms for home equity lines of credit are 10 years of interest only payments and a 10-year fully amortizing repayment thereafter.   Terms for home equity loans typically range from five to ten years.  In deciding whether to make a home equity line of credit or loan, we consider the qualifications of the borrower(s) as well as the value of the underlying property.  In deciding whether to make other consumer loans, we evaluate the qualifications of the borrower(s) and any collateral, if applicable.
 
Unsecured consumer loans typically have shorter terms and lower balances with higher yields as compared to residential real estate loans, but carry a higher risk of default.  Consumer loan collections are dependent on the borrower’s continuing financial stability, and thus, are more likely to be affected by adverse personal circumstances.  Furthermore, the application of various

7




federal and state laws, including bankruptcy and insolvency laws, may limit the amount which can be recovered on these loans in the event of default.

Competition
 
We face substantial competition in all phases of our operations, including deposit gathering and loan origination, from a variety of competitors.  Commercial banks, savings institutions, brokerage firms, credit unions, mutual fund companies, asset management firms, insurance companies and specialty finance companies all compete with us for new and existing customers.  We compete by providing quality services and expertise to our customers, ease of access to our facilities, convenient hours and competitive pricing (including competitive interest rates paid on deposits, interest rates charged on loans and fees charged for other non-interest related services).
 
Personnel
 
As of December 31, 2017, we and our subsidiaries employed a total of 3,574 full-time equivalent employees.  We consider our relationship with our employees to be good.

Supervision and Regulation
 
We, our bank subsidiary (MB Financial Bank), and its subsidiaries, are subject to an extensive system of laws and regulations that are intended primarily for the protection of customers and depositors and not for the protection of security holders.  These laws and regulations govern such areas as capital, permissible activities, allowance for loan and lease losses, loans and investments, and rates of interest that can be charged on loans.  Described below are elements of selected laws and regulations.  The descriptions are not intended to be complete and are qualified in their entirety by reference to the full text of the statutes and regulations described.
 
Holding Company Regulation.  As a bank holding company and financial holding company, we are subject to comprehensive regulation by the Board of Governors of the Federal Reserve System, frequently referred to as the Federal Reserve Board, under the Bank Holding Company Act of 1956 (the "Bank Holding Company Act"), as amended by the Gramm-Leach-Bliley Act of 1999 (the “Gramm-Leach-Bliley Act”), the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), enacted on July 21, 2010, and other legislation.  We must file reports with the Federal Reserve Board and such additional information as the Federal Reserve Board may require, and our holding company and non-banking affiliates are subject to examination by the Federal Reserve Board.  Under Federal Reserve Board policy, the Dodd-Frank Act and Federal Reserve Board regulations, a bank holding company must serve as a source of strength for its bank subsidiaries.  The Federal Reserve Board may require, and has required in the past, a holding company to contribute additional capital to an undercapitalized bank subsidiary.  The Bank Holding Company Act provides that a bank holding company must obtain Federal Reserve Board approval before:
 
Acquiring directly or indirectly, ownership or control of any voting shares of another bank or bank holding company if, after such acquisition, it would own or control more than 5% of such shares (unless it already owns or controls the majority of such shares);
Acquiring control of, or all or substantially all of the assets of, another bank or bank holding company, or
Merging or consolidating with another bank holding company.
 
The Bank Holding Company Act generally prohibits a bank holding company from acquiring direct or indirect ownership or control of more than 5% of the voting shares of any company which is not a bank or bank holding company, or from engaging directly or indirectly in activities other than those of banking, managing or controlling banks, or providing services for its subsidiaries.  The principal exceptions to these prohibitions involve certain non-bank activities which, by statute or by Federal Reserve Board regulation or order, have been identified as activities closely related to the business of banking or managing or controlling banks.  The list of activities permitted by the Federal Reserve Board includes, among other things: lending; operating a savings institution, mortgage company, finance company, credit card company or factoring company; performing certain data processing operations; providing certain investment and financial advice; underwriting and acting as an insurance agent for certain types of credit-related insurance; leasing property on a full-payout, non-operating basis; selling money orders, travelers’ checks and United States Savings Bonds; real estate and personal property appraising; providing tax planning and preparation services; and, subject to certain limitations, providing securities brokerage services for customers. 
 
The Gramm-Leach-Bliley Act amended portions of the Bank Holding Company Act to authorize bank holding companies, such as us, directly or through non-bank subsidiaries to engage in securities, insurance and other activities that are financial in nature or incidental to a financial activity.  In order to undertake these activities, a bank holding company must become a “financial holding company” by submitting to the appropriate Federal Reserve Bank a declaration that the company elects to be a financial

8




holding company and a certification that all of the depository institutions controlled by the company are well capitalized and well managed.  Our election to become a financial holding company became effective in July 2002.
 
Depository Institution Regulation.  Our bank subsidiary is subject to regulation by the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation.  This regulatory structure includes, among other items:

Real estate lending standards, which provide guidelines concerning loan-to-value ratios for various types of real estate loans;
Risk-based capital rules, including accounting for interest rate risk, concentration of credit risk and the risks posed by non-traditional activities;
Rules requiring depository institutions to develop and implement internal procedures to evaluate and control credit and settlement exposure to their correspondent banks;
Rules restricting types and amounts of equity investments; and
Rules addressing various safety and soundness issues, including operations and managerial standards, standards for asset quality, earnings and compensation standards.

Our bank subsidiary and its affiliates are subject to the examination and enforcement powers of the Consumer Financial Protection Bureau (the “CFPB”) with respect to federal consumer financial laws.
 
Capital Adequacy.  The Federal Reserve Board, Office of the Comptroller of the Currency and Federal Deposit Insurance Corporation (collectively, the federal banking agencies) have issued risk-based and leverage capital regulations applicable to bank holding companies and banks.  In addition, these agencies may from time to time require that a bank holding company or bank maintain capital above the minimum levels, based on its financial condition or actual or anticipated growth.

Effective January 1, 2015 (with some provisions phased in over several years), we and our bank subsidiary became subject to new capital regulations adopted by the Federal Reserve and the OCC, which establish required minimum risk-based capital ratios for common equity Tier 1 (“CET1”), Tier 1, and total capital and a minimum required leverage ratio and capital conservation buffer; prescribe the risk-weightings of certain assets for purposes of the risk-based capital ratios; and define what qualifies as capital for purposes of meeting the capital requirements. These regulations implement the regulatory capital reforms required by the Dodd Frank Act and the Basel Committee on Banking Supervision. The federal banking agencies have also adopted a rule on liquidity coverage requirements, which applies only to banking organizations with total consolidated assets of $250 billion or more or on-balance sheet foreign exposure of $10 billion or more, and sets less stringent requirements for institutions that do not meet these requirements but have $50 billion in or more in total assets.

Under the capital regulations, the minimum capital ratios are: (1) a CET1 capital ratio of 4.5% of risk-weighted assets; (2) a Tier 1 capital ratio of 6.0% of risk-weighted assets; (3) a total capital ratio of 8.0% of risk-weighted assets; and (4) a leverage ratio (the ratio of Tier 1 capital to average total adjusted assets) of 4.0%.  CET1 generally consists of common stock; retained earnings; accumulated other comprehensive income (“AOCI”) unless an institution elects to exclude AOCI from regulatory capital; and certain minority interests; all subject to applicable regulatory adjustments and deductions. Tier 1 capital generally consists of CET1 and noncumulative perpetual preferred stock. Tier 2 capital generally consists of other preferred stock and subordinated debt meeting certain conditions plus an amount of the allowance for loan and lease losses up to 1.25% of assets. Total capital is the sum of Tier 1 and Tier 2 capital.

There are a number of changes in what constitutes regulatory capital compared to the rules in effect prior to January 1, 2015, some of which are subject to transition periods.  These changes include the phasing-out of certain instruments as qualifying capital and eliminate or significantly reduce the use of hybrid capital instruments, especially trust preferred securities, as regulatory capital. Mortgage servicing and deferred tax assets over designated percentages of the CET1 threshold are deducted from capital.  In addition, Tier 1 capital includes AOCI, which includes all unrealized gains and losses on available for sale debt and equity securitiesHowever, because of our asset size at the time of election, we were eligible for the one-time option of permanently opting out of the inclusion of unrealized gains and losses on available for sale debt and equity securities in our capital calculations.  We elected this option in the first quarter of 2015.

For purposes of determining risk-based capital, assets and certain off-balance sheet items are risk-weighted from 0% to 1,250%, depending on the risk characteristics of the asset or item. The current regulations changed the risk-weighting of certain assets to better reflect credit risk and other risk exposure compared to the earlier capital rules. These include a 150% risk weight for certain high volatility commercial real estate acquisition, development and construction loans and for non-residential mortgage loans that are 90 days past due or otherwise in non-accrual status; a 20% credit conversion factor for the unused portion of a commitment with an original maturity of one year or less that is not unconditionally cancellable; and, starting in 2018, a 250% risk weight for mortgage servicing and deferred tax assets that are not deducted from capital.

9





In addition to the minimum CET1, Tier 1, leverage ratio and total capital ratios, the Company and the Bank must maintain a capital conservation buffer consisting of additional CET1 capital greater than 2.5% of risk-weighted assets above the required minimum risk-based capital levels to avoid limitations on paying dividends, repurchasing shares, and paying discretionary bonuses.  The capital conservation buffer requirement began to be phased in on January 1, 2016 when a buffer greater than 0.625% of risk-weighted assets was required, which amount increases each year until the buffer requirement is fully implemented on January 1, 2019.
 
To be considered "well capitalized," a bank holding company must have, on a consolidated basis, a total risk-based capital ratio of 10.0% or greater and a Tier 1 risk-based capital ratio of 6.0% or greater and must not be subject to an individual order, directive or agreement under which the FRB requires it to maintain a specific capital level. 

As of December 31, 2017, we and our bank subsidiary met the requirements to be "well capitalized" and the full capital conservation buffer requirement. The well capitalized standard for the Bank is discussed below.
 
Prompt Corrective Action.  The Federal Deposit Insurance Corporation Improvement Act of 1991 ("the Act"), among other things, identifies five capital categories for insured depository institutions (well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized) and requires the respective federal bank regulatory agencies to implement systems for “prompt corrective action” for insured depository institutions that do not meet minimum capital requirements within these categories.  The Act imposes progressively more restrictive constraints on operations, management and capital distributions, depending on the category in which an institution is classified.  Failure to meet the capital guidelines could also subject a banking institution to capital raising requirements.  An “undercapitalized” bank must develop a capital restoration plan and its parent holding company must guarantee that bank’s compliance with the plan.  The liability of the parent holding company under any such guarantee is limited to the lesser of 5% of the bank’s assets at the time it became “undercapitalized” or the amount needed to comply with the plan.  Furthermore, in the event of the bankruptcy of the parent holding company, such guarantee would take priority over the parent’s general unsecured creditors.  In addition, the Act requires the various regulatory agencies to prescribe certain non-capital standards for safety and soundness relating generally to operations and management, asset quality and executive compensation and permits regulatory action against a financial institution that does not meet these standards.
 
The various federal bank regulatory agencies have adopted substantially similar regulations that define the five capital categories identified by the Federal Deposit Insurance Corporation Improvement Act, using the total risk-based capital, Tier 1 risk-based capital, CET1 and leverage capital ratios as the relevant capital measures.  A “well capitalized” institution must have a Tier 1 risk-based capital ratio of at least 8%, a total risk-based capital ratio of at least 10%, a CET1 capital ratio of at least 6.5% and a leverage ratio of at least 5% and not be subject to a capital directive or order.  An institution is “adequately capitalized” if it has a Tier 1 risk-based capital ratio of at least 6%, a total risk-based capital ratio of at least 8%, a CET1 capital ratio of at least 4.5% and a leverage ratio of at least 4%.  An institution is “undercapitalized” if it has a Tier 1 risk-based capital ratio of less than 6%, a total risk-based capital ratio of less than 8%, a CET1 capital ratio of less than 4.5% or a leverage ratio of less than 4%.  An institution is “significantly undercapitalized” if it has a Tier 1 risk-based capital ratio of less than 4%, a total risk-based capital ratio of less than 6%, a CET1 capital ratio of less than 3%, or a leverage ratio of less than 3%.  An institution is “critically undercapitalized” if its tangible equity is equal to or less than 2% of total assets.  Generally, an institution may be reclassified in a lower capitalization category if it is determined that the institution is in an unsafe or unsound condition or engaged in an unsafe or unsound practice.
 
As of December 31, 2017, our bank subsidiary met the requirements to be classified as “well capitalized.”

Dividends.  The Federal Reserve Board’s policy is that a bank holding company should pay cash dividends only to the extent that its net income for the past year is sufficient to cover both the cash dividends and a rate of earnings retention that is consistent with the holding company’s capital needs, asset quality and overall financial condition, and that it is inappropriate for a bank holding company experiencing serious financial problems to borrow funds to pay dividends.  Furthermore, a bank that is classified under the prompt corrective action regulations as “undercapitalized” will be prohibited from paying any dividends.

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

10





As described above under “--Capital Adequacy,” beginning January 1, 2016 the capital conservation buffer requirement can also restrict our ability and the ability of our bank subsidiary to pay dividends.

Stress Testing. As required by the Dodd-Frank Act and the regulations of the Federal Reserve Board and the OCC, institutions such as the Company and our subsidiary bank, with average total consolidated assets greater than $10 billion, must conduct annual, company-run stress tests under the baseline, adverse and severely adverse scenarios provided by the federal banking regulators. The regulators may also require the use of additional scenarios. The stress test is a process to assess the potential impact of scenarios on the consolidated earnings, losses and capital of an institution over the planning horizon, taking into account the institution’s condition, risks, exposures, strategies and activities. The purpose of the stress tests is to ensure that institutions have robust, forward-looking capital planning that accounts for their risks and to help ensure that institutions have sufficient capital throughout times of economic and financial stress. Beginning with the 2016 stress test, which is the first stress test we and our bank subsidiary conducted under the regulations, the company-run stress tests are to be conducted using data as of December 31st of the preceding calendar year and the scenarios released by the agencies from time to time. Aligned with the prior year, stress test results must be reported to the agencies by July 31st of each year, with public disclosure of a summary of the stress test results between October 15th and October 31st. The stress test results are an important factor considered by the Federal Reserve Board and the OCC in evaluating, among other matters, the capital adequacy of the Company and our subsidiary bank and whether any proposed payments of dividends or stock repurchases may be an unsafe or unsound practice. We and our subsidiary bank must consider the results of stress tests in the normal course of business, including consideration of capital planning, assessment of capital adequacy and risk management practices.
 
Federal Deposit Insurance Reform.  The FDIC maintains the Deposit Insurance Fund (the “DIF”).  The deposit accounts of our bank subsidiary are insured by the DIF to the maximum amount provided by law.  The general insurance limit is $250 thousand.  This insurance is backed by the full faith and credit of the United States Government.
 
As insurer, the FDIC is authorized to conduct examinations of and to require reporting by DIF-insured institutions.  It also may prohibit any DIF-insured institution from engaging in any activity the FDIC determines by regulation or order to pose a serious threat to the DIF.  The FDIC also has the authority to take enforcement actions against insured institutions.
 
As required by the Dodd-Frank Act, the FDIC has adopted rules under which insurance premiums are assessed on an institution’s total assets minus its tangible equity (defined as Tier 1 capital).  For a bank with total assets of $10 billion or more, FDIC regulations require the bank to be assessed under a scorecard method. The scorecard method uses a performance score and a loss severity score, which are combined and converted into an initial base assessment rate.  The performance score is based on measures of the bank’s ability to withstand asset-related stress and funding-related stress and weighted CAMELS ratings. The loss severity score is a measure of potential losses to the FDIC in the event of the bank’s failure. Under a formula, the performance score and loss severity score are combined and converted to a total score that determines the bank’s initial base assessment rate. The FDIC has the discretion to alter the total score based on factors not captured by the scorecard.  The resulting initial base assessment rate is subject to adjustments downward based on long term unsecured debt issued by the bank, to adjustment upward based on long term unsecured debt held by the bank that is issued by other FDIC-insured institutions, and to further adjustment upward if the bank’s brokered deposits exceed 10% of its domestic deposits.  Modifications to the scorecard method may apply to certain “highly complex institutions.” Currently, initial base assessment rates range from 3 to 30 basis points and are subject to certain adjustments. In addition, the FDIC may increase or decrease its rate schedules by 2.0 basis points without rulemaking, and in an emergency, may impose a special assessment.

Pursuant to the Dodd-Frank Act, the FDIC has established 2.0% as the designated reserve ratio (DRR), that is, the ratio of the DIF to insured deposits. The FDIC has adopted a plan under which it will meet the statutory minimum DRR of 1.35% (formerly 1.15%) by September 30, 2020, the deadline imposed by the Dodd-Frank Act.  The Dodd-Frank requires the FDIC to offset the effect of the increase in the statutory minimum DRR to 1.35% on institutions with assets less than $10 billion. To implement this offset, the FDIC’s rules require institutions with total assets of $10 billion or more to pay a surcharge during a temporary period.

In addition, all institutions with deposits insured by the FDIC are required to pay assessments to fund interest payments on bonds issued by the Financing Corporation, a mixed-ownership government corporation established to recapitalize a predecessor to the Deposit Insurance Fund.  These assessments will continue until the Financing Corporation bonds mature in 2019.
 
Insurance of deposits may be terminated by the FDIC upon a finding that the institution has engaged or is engaging in unsafe and unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law,

11




regulation, rule, order or condition imposed by the FDIC or written agreement entered into with the FDIC. We do not know of any practice, condition or violation that might lead to termination of deposit insurance.
 
Transactions with Affiliates.  We and our bank subsidiary are affiliates within the meaning of the Federal Reserve Act.  The Federal Reserve Act imposes limitations on a bank with respect to extensions of credit to, investments in, and certain other transactions with, its parent bank holding company and the holding company’s other subsidiaries.  Furthermore, bank loans and extensions of credit to affiliates also are subject to various collateral requirements.
 
Community Reinvestment Act.  Under the Community Reinvestment Act, every FDIC-insured institution is obligated, consistent with safe and sound banking practices, to help meet the credit needs of its assessment area, including low and moderate income neighborhoods.  The Community Reinvestment Act requires the appropriate federal banking regulator, in connection with the examination of an insured institution, to assess the institution’s record of meeting the credit needs of its community and to consider this record in its evaluation of certain applications, such as a merger or the establishment of a branch.  An unsatisfactory rating may be used as the basis for the denial of an application and will prevent a bank holding company of the institution from making an election to become a financial holding company.
 
As of its last examination, MB Financial Bank received a Community Reinvestment Act rating of “outstanding.”
 
Interstate Banking and Branching.  The Federal Reserve Board may approve an application of a bank holding company to acquire control of, or acquire all or substantially all of the assets of, a bank located in a state other than the bank holding company’s home state, without regard to whether the transaction is prohibited by the laws of any state.  The Federal Reserve Board may not approve the acquisition of a bank that has not been in existence for the minimum time period (not exceeding five years) specified by the law of the target bank’s home state.  The Federal Reserve Board also may not approve an application if the bank holding company (and its bank affiliates) controls or would control more than ten percent of the insured deposits in the United States or, generally, 30% or more of the deposits in the target bank’s home state or in any state in which the target bank maintains a branch.  Individual states may waive the 30% statewide concentration limit.  Each state may limit the percentage of total insured deposits in the state that may be held or controlled by a bank or bank holding company to the extent the limitation does not discriminate against out-of-state banks or bank holding companies.  Under the Dodd-Frank Act, the OCC may generally approve de novo branching by a national bank outside its home state.
 
The federal banking agencies are authorized to approve interstate bank merger transactions without regard to whether these transactions are prohibited by the law of any state, unless the home state of one of the banks opted out of interstate mergers prior to June 1, 1997.  Interstate acquisitions of branches are permitted only if the law of the state in which the branch is located permits these acquisitions.  Interstate mergers and branch acquisitions are subject to the nationwide and statewide-insured deposit concentration limits described above.
 
Privacy Rules.  Federal banking regulators, as required under the Gramm-Leach-Bliley Act, have adopted rules limiting the ability of banks and other financial institutions to disclose nonpublic information about consumers to non-affiliated third parties.  The rules require disclosure of privacy policies to consumers and, in some circumstances, allow consumers to prevent disclosure of certain personal information to non-affiliated third parties.  The privacy provisions of the Gramm-Leach-Bliley Act affect how consumer information is transmitted through diversified financial services companies and conveyed to outside vendors.
 
International Money Laundering Abatement and Financial Anti-Terrorism Act of 2001.  The President signed the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (the "USA PATRIOT Act") into law in October 2001.  This act contains the International Money Laundering Abatement and Financial Anti-Terrorism Act of 2001 (the "IMLAFA").  The IMLAFA substantially broadens earlier anti-money laundering legislation and the extraterritorial jurisdiction of the United States, imposes certain compliance and due diligence obligations, defines certain crimes and penalties, compels the production of documents located both inside and outside the United States, including those of foreign institutions that have a correspondent relationship in the United States, and clarifies the safe harbor from civil liability to customers.  The U.S. Department of the Treasury has issued a number of regulations implementing the USA PATRIOT Act that apply certain of its requirements to financial institutions such as our bank.  The regulations impose obligations on financial institutions to maintain appropriate policies, procedures and controls to detect, prevent and report money laundering and terrorist financing. There is also increased scrutiny of compliance with the rules enforced by the Office of Foreign Assets Control, commonly known as "OFAC," which is responsible for administering economic sanctions programs that affect transactions with designated foreign countries, nationals, and others.  The obligations of financial institutions, including us, to identify their customers, watch for and report suspicious transactions, respond to requests for information by regulatory authorities and law enforcement agencies, and share information with other financial institutions, requires the implementation and maintenance of internal procedures, practices and controls which have increased, and may continue to increase, our costs and may subject us to liability.


12




In May 2016, the Financial Crimes Enforcement Network ("FinCEN"), which is a unit of the U.S. Department of the Treasury that adopts regulations implementing the USA PATRIOT Act, the Bank Secrecy Act, and other anti-money laundering legislation, issued final rules governing enhanced customer due diligence. The rules impose several new requirements on covered financial institutions, which includes MB Financial Bank. For each such customer (entity) that opens an account (including an existing customer opening a new account), the covered financial institution must identify and verify the customer's "beneficial owners," of the underlying entity as defined in the rules.
 
As noted above, enforcement and compliance-related activity by government agencies has increased. Money laundering and anti-terrorism compliance is among the areas receiving a high level of focus in the present environment.

Volcker Rule. Under the Dodd-Frank Act and regulations adopted by the federal banking agencies to implement the provisions of the Act known as the Volcker Rule, FDIC-insured depository institutions, their holding companies, subsidiaries and affiliates, (collectively, “banking entities”), are generally prohibited, subject to certain exemptions, from proprietary trading and from acquiring or retaining an ownership interest in a "covered fund."

Activities eligible for exemptions include, among others, certain underwriting, marketing and risk-mitigating hedging activities, fiduciary transactions, and, if certain conditions are met, ownership of interests in certain hedge funds or private equity funds offered to customers of a banking entity’s trust or investment advisory or certain other services, if the banking entity does not guarantee or insure the performance of such a fund. These conditions include, among others, limits on such ownership interests (3% of total ownership interests for any single fund and 3% of Tier 1 capital for the aggregate value of all ownership interests in such funds); a requirement that the amount of such ownership interests be deducted from regulatory capital; a requirement that, for purposes of these limits, ownership interests held by a director or employee of the banking entity are attributed to the banking entity if the banking entity finances the acquisition of the director’s or employee’s ownership interest; and a prohibition against certain transactions between a banking entity and such a fund, including loans, purchases of assets and others. No director or employee of the banking entity (or its affiliates) may hold an ownership interest in such a fund unless directly engaged in providing investment advisory or other services to the fund when the ownership interest is acquired.
 
Regulatory Reform.  On July 21, 2010, the Dodd-Frank Act was signed into law. The Dodd-Frank Act (as amended) implements far-reaching changes across the financial regulatory landscape, including provisions that, among other things:
 
Centralize responsibility for consumer financial protection by creating the CFPB, with broad rulemaking, supervision and enforcement authority for a wide range of consumer protection laws that apply to all banks and certain others, including examination and enforcement powers with respect to any bank with more than $10 billion in assets and its affiliates, and the power to prohibit unfair, deceptive or abusive acts or practices.
Restrict the preemption of state consumer financial protection law by federal law and disallow subsidiaries and affiliates of national banks, such as MB Financial Bank, from availing themselves of such preemption.
Require new capital rules (discussed under “--Capital Adequacy” above).
Require publicly-traded bank holding companies with assets of $10 billion or more to establish a risk committee responsible for enterprise-wide risk management practices, comprised of an independent chairman and at least one risk management expert.
Change the assessment base for federal deposit insurance from the amount of insured deposits to consolidated average assets less tangible capital.
Increase the minimum ratio of net worth to insured deposits of the Deposit Insurance Fund from 1.15% to 1.35% and require the FDIC, in setting assessments, to offset the effect of the increase on institutions with assets of less than $10 billion.  This increase is generally expected to impose more deposit insurance cost on institutions with assets of $10 billion or more.
Provide for new disclosure and other requirements relating to executive compensation and corporate governance, including guidelines or regulations on incentive-based compensation and a prohibition on compensation arrangements that encourage inappropriate risks or that could provide excessive compensation.
Make permanent the $250 thousand general limit for federal deposit insurance.
Repeal the federal prohibitions on the payment of interest on demand deposits, thereby permitting depository institutions to pay interest on business transaction and other accounts.
Allow de novo interstate branching by banks.
Give the Federal Reserve Board the authority to establish rules regarding interchange fees charged for electronic debit transactions by a payment card issuer that, together with its affiliates, has assets of $10 billion or more and to enforce a new statutory requirement that such fees be reasonable and proportional to the actual cost of a transaction to the issuer.  The Federal Reserve Board has adopted rules under this provision that limit the swipe fees that a debit card issuer can charge a merchant for a transaction to the sum of 21 cents and five basis points times the value of the transaction, plus up to one cent for fraud prevention costs.

13




Increase the authority of the Federal Reserve Board to examine the Company and its non-bank subsidiaries.
Require all bank holding companies to serve as a source of financial strength to their depository institution subsidiaries in the event such subsidiaries suffer from financial distress.
Restrict proprietary trading by banks, bank holding companies and others, and their acquisition and retention of ownership interests in and sponsorship of hedge funds and private equity funds, as described above under “--Volcker Rule.” 
Require annual stress testing by banks and their holding companies with more than $10 billion in assets and impose certain reporting and disclosure requirements.
 
Certain aspects of the Dodd-Frank Act remain subject to rulemaking and take effect over several years.

Consumer Protection Laws. We are subject to a number of federal and state consumer protection laws, including laws designed to protect customers and promote lending to various sectors of the economy and population. These laws include, among others, the Equal Credit Opportunity Act, the Fair Credit Reporting Act, the Truth in Lending Act, the Home Mortgage Disclosure Act, the Real Estate Settlement Procedures Act, and their respective state law counterparts.

As indicated above, the Dodd-Frank Act created the CFPB, an independent federal agency with broad rulemaking, supervisory and enforcement powers under various federal consumer financial protection laws, including the laws referenced above, fair lending laws and certain other statutes. The CFPB has examination and primary enforcement authority with respect to depository institutions with $10 billion or more in assets, their service providers and certain non-depository entities such as debt collectors and consumer reporting agencies. Our subsidiary bank is subject to the CFPB’s examination and primary enforcement authority.

The CFPB has authority to prevent unfair, deceptive or abusive practices in connection with the offering of consumer financial products. The Dodd-Frank Act authorizes the CFPB to establish certain minimum standards for the origination of residential mortgages including a determination of the borrower’s ability to repay. In addition, the Dodd-Frank Act allows borrowers to raise certain defenses to foreclosure if they receive any loan other than a “qualified mortgage” as defined by the CFPB. The Dodd-Frank Act permits states to adopt consumer protection laws and standards that are more stringent than those adopted at the federal level and, in certain circumstances, permits state attorneys general to enforce compliance with both the state and federal laws and regulations.

The CFPB has finalized a number of significant rules which impact nearly every aspect of the lifecycle of a residential mortgage loan. Among other things, the rules adopted by the CFPB require banks to: (i) develop and implement procedures to ensure compliance with the “ability to repay” test and identify whether a loan meets a new definition for a “qualified mortgage,” in which case a rebuttable presumption exists that the creditor extending the loan has satisfied the ability to repay test; (ii) implement new or revised disclosures, policies and procedures for originating and servicing mortgages including, but not limited to, pre-loan counseling, early intervention with delinquent borrowers and specific loss mitigation procedures for loans secured by a borrower's principal residence; (iii) comply with additional restrictions on mortgage loan originator hiring and compensation; (iv) comply with new disclosure requirements and standards for appraisals and certain financial products; and (v) maintain escrow accounts for higher-priced mortgage loans for a longer period of time. The rules include the TILA-RESPA Integrated Disclosure (TRID) rules. The TRID rules contain requirements and disclosure forms that are required to be provided to borrowers. In addition to the exercise of its rulemaking authority, the CFPB’s supervisory powers entitle the CFPB to examine institutions for violations of consumer lending laws, even in the absence of consumer complaints or damages.

Incentive Compensation.  The Dodd-Frank Act requires the federal banking regulators and other agencies, including the Securities and Exchange Commission, to issue regulations or guidelines requiring disclosure to the regulators of incentive-based compensation arrangements and to prohibit incentive-based compensation arrangements for directors, officers or employees that encourage inappropriate risks by providing excessive compensation, fees or benefits or that could lead to material financial loss to a financial institution.  Proposed regulations for this purpose have been published, which are based upon the key principles that incentive compensation arrangements should (i) provide incentives that do not encourage risk-taking beyond the organization’s ability to effectively identify and manage risks, (ii) be compatible with effective internal controls and risk management, and (iii) be supported by strong corporate governance, including active and effective oversight by the organization’s board of directors and appropriate policies, procedures and monitoring.  It is proposed that institutions with assets between $1 and $50 billion must maintain records documenting their incentive-based compensation arrangements. In addition, those institutions are to ensure that those arrangements appropriately balance risk and financial rewards, are compatible with effective risk management and are supported by effective governance. The CFPB has issued a bulletin on sales and other incentive programs indicating that it expects institutions to institute effective risk controls for these programs that include risks to customers from unfair and abusive sales practices and other practices and factors, and a robust compliance management system.
 

14




As part of the regular, risk-focused examination process, the incentive compensation arrangements of banking organizations will be reviewed, and the regulator’s findings will be incorporated into the organization’s supervisory ratings, which can affect the organization’s ability to make acquisitions and take other actions. Enforcement actions may be taken against a banking organization if its incentive compensation arrangements, or related risk-management control or governance processes, pose a risk to the organization’s safety and soundness and the organization is not taking prompt and effective measures to correct any deficiencies.
 
The scope and content of the U.S. banking regulations and regulators’ policies on executive compensation are continuing to develop and are likely to continue evolving in the future. It cannot be determined at this time whether compliance with such policies will adversely affect the Company’s ability to hire, retain and motivate its key employees.

Registered Investment Advisors

Cedar Hill and MainStreet are registered investment advisors under the Investment Advisers Act of 1940, as amended (the “Investment Advisers Act”), and as such are supervised by the Securities and Exchange Commission. The Investment Advisers Act imposes numerous obligations on registered investment advisors, including record-keeping, operational and marketing requirements, disclosure obligations and prohibitions on fraudulent activities. Investment advisors also are subject to certain state securities laws and regulations.
 
Other Future Legislation and Changes in Regulations.  From time to time, various other legislative and regulatory initiatives are introduced in Congress and state legislatures, as well as by regulatory agencies. Such initiatives may include proposals to expand or contract the powers of bank holding companies and depository institutions or proposals to substantially change the financial institution regulatory system. Such legislation could change banking statutes and the operating environment of the Company in substantial and unpredictable ways. If enacted, such legislation could increase or decrease the cost of doing business, limit or expand permissible activities or affect the competitive balance among banks, savings associations, credit unions, and other financial institutions. The Company cannot predict whether any such legislation will be enacted, and, if enacted, the effect that it, or any implementing regulations, would have on the financial condition or results of operations of the Company. A change in statutes, regulations or regulatory policies applicable to the MB Financial or any of its subsidiaries could have a material effect on the business of the Company.
 
Internet Website
 
We maintain a website with the address www.mbfinancial.com.  The information contained on our website is not included as a part of, or incorporated by reference into, this Annual Report on Form 10-K.  Other than an investor’s own Internet access charges, we make available free of charge through our website our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, and amendments to these reports, as soon as reasonably practicable after we have electronically filed such material with, or furnished such material to, the Securities and Exchange Commission.


15





Item 1A.
  Risk Factors
 
An investment in our securities is subject to risks inherent in our business.  Before making an investment decision, you should carefully consider the risks and uncertainties described below together with all of the other information included in this report.  In addition to the risks and uncertainties described below, other risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially and adversely affect our business, financial condition and results of operations.  The value or market price of our securities could decline due to any of these identified or other risks, and you could lose all or part of your investment.
 
A substantial portion of our loan portfolio is secured by real estate. Deterioration in the real estate markets or other segments of our loan portfolio could lead to losses, which could have a material negative effect on our financial condition and results of operations.
 
As of December 31, 2017 and 2016, excluding purchased credit-impaired loans, approximately 44% of our total loan portfolio was secured by real estate, a majority of which is commercial real estate. 
 
Our commercial real estate portfolio consists of health care, industrial, multifamily, office, retail, church and school loans.  Our concentration in commercial real estate loans involves additional risk as the values of the properties securing the loans can decline.  In addition, vacancy rates can increase, resulting in lower cash flows on the underlying properties and stress on our customer's ability to repay their loans.
 
At December 31, 2017, excluding purchased credit-impaired loans, our commercial real estate loans totaled $4.1 billion, or 30% of our total loan portfolio. This loan type represented approximately 28% of our total non-performing loans as of December 31, 2017.

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

This type of real estate lending is generally sensitive to regional and local economic conditions that significantly impact the ability of borrowers to meet their loan payment obligations, making loss levels difficult to predict. Our non-performing consumer related loans were $32.4 million, or 55% of our total non-performing loans, as of December 31, 2016 compared to $37.1 million, or 48% of our total non-performing loans, as of December 31, 2017. Non-performing home equity and residential real estate loans together accounted for 91% of the consumer related non-performing loans as of December 31, 2017.
 
A weak real estate market could result in additional charge-offs and provisions for loan losses, which could have a material negative effect on our financial condition and results of operations.
 
Repayment of our commercial loans and lease loans is often dependent on the cash flows of the borrower or lessee, which may be unpredictable, and the collateral securing these loans may fluctuate in value.
 
We make our commercial loans primarily based on the identified cash flow of the borrower and secondarily on the underlying collateral provided by the borrower. Collateral securing commercial loans may depreciate over time, be difficult to appraise and fluctuate in value. In the case of loans secured by accounts receivable, the availability of funds for the repayment of these loans may be substantially dependent on the ability of the borrower to collect the amounts due from its customers. Accordingly, we make our commercial loans primarily based on the historical and expected cash flow of the borrower and secondarily on underlying collateral provided by the borrower. At December 31, 2017, our commercial loans totaled $4.8 billion, or 34% of our total loan portfolio. This loan type represented approximately 23% of our total non-performing loans as of December 31, 2017.
 
We lend money to small and mid-sized independent lessors to finance the debt portion of leases. A lease loan arises when a lessor discounts the equipment rental revenue stream owed to the lessor by a lessee. Our lease loans entail many of the same types of risks as our commercial loans. Lease loans generally are non-recourse to the leasing company, and, consequently, our recourse is limited to the lessee and the leased equipment. As with commercial loans secured by equipment, the equipment securing our lease loans may depreciate over time, may be difficult to appraise and may fluctuate in value. We rely on the lessee’s continuing financial stability, rather than the value of the leased equipment, for the repayment of all required amounts under lease loans. In the event of a default on a lease loan, it is unlikely that the proceeds from the sale of the leased equipment will be sufficient to satisfy the

16




outstanding unpaid amounts under the terms of the loan. At December 31, 2017, our lease loans totaled $2.1 billion, or 15% of our total loan portfolio. This loan type represented approximately 1% of our total non-performing loans as of December 31, 2017.
 
Changes in economic conditions, particularly an economic slowdown in the Chicago area and state of Illinois, could hurt our business.

Our business is directly affected by market conditions, trends in industry and finance, legislative and regulatory changes, and changes in governmental monetary and fiscal policies and inflation, all of which are beyond our control. Deterioration in economic conditions, particularly within the Chicago area, could result in the following consequences, among others, any of which could hurt our business materially:
 
loan delinquencies may increase;
problem assets and foreclosures may increase;
demand for our products and services may decline;
collateral for our loans may decline in value, in turn reducing a customer’s borrowing power; and
the net worth and liquidity of loan guarantors may decline, impairing their ability to honor commitments to us.
 
Our lending and deposit gathering activities are mostly concentrated in the Chicago metropolitan area. Our success depends on the general economic conditions of this metropolitan area and throughout Illinois. Our nationwide activities include: leasing and lease loans, asset-based lending, indirect lending, mortgage banking, and certain treasury management services.

Both the State of Illinois and the City of Chicago currently face significant fiscal challenges, including large budget deficits, substantial unfunded pension obligations and low credit ratings, which could negatively impact us to the extent this leads to declines in business activity and overall economic conditions in Illinois and the Chicago metropolitan area. In addition, until July 2017, the State of Illinois operated without a budget for more than two years, which in some cases led to the State not meeting its financial obligations in a timely manner. Some of our commercial loan borrowers are health care operators and service providers who may be dependent on the receipt of contractual payments and reimbursements from the State of Illinois for services rendered. To the extent the State delays or suspends these payments and reimbursements, this could adversely affect the ability of borrowers to meet their loan repayment obligations to us. Any resulting delinquencies and defaults on these loans would in turn adversely affect our financial condition and results of operations.
 
Many of the loans in our portfolio are secured by real estate. Many of these loans are secured by properties located in the Chicago metropolitan area. Deterioration in the real estate markets where collateral for a mortgage loan is located could negatively affect the borrower’s ability to repay the loan and the value of the collateral securing the loan. Real estate values are affected by various other factors, including changes in general or regional economic conditions, governmental rules or policies and natural disasters such as tornadoes.
 
Negative changes in the regional and general economy could reduce our growth rate, impair our ability to collect loans and generally have a negative effect on our financial condition and results of operations.

Our allowance for loan and lease losses may prove to be insufficient to absorb losses in our loan portfolio.
 
Lending money is a substantial part of our business. Every loan carries a certain risk that it will not be repaid in accordance with its terms or that any underlying collateral will not be sufficient to assure repayment. This risk is affected by, among other things:
 
cash flow of the borrower and/or the project being financed;
changes and uncertainties as to the future value of the collateral, in the case of a collateralized loan;
credit experience of a particular borrower;
changes in economic and industry conditions; and
duration of the loan.
 
We maintain an allowance for loan and lease losses, a reserve established through a provision for credit losses charged to expense, which we believe is appropriate to provide for probable losses in our loan portfolio. The amount of this allowance is determined by our management through a periodic review and consideration of several factors, including, but not limited to:

our general reserve, based on our historical default and loss experience as well as current macroeconomic factors; and
our specific reserve, based on our evaluation of non-performing loans and their underlying collateral.
 

17




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

We are subject to information security, recovery, and other risks in connection with our use of technology.

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

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

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

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

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

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

We are subject to certain risks in connection with our data management or aggregation.

We are reliant on our ability to manage data and our ability to aggregate data in an accurate and timely manner to ensure effective risk reporting and management. Our ability to manage data and aggregate data may be limited by the effectiveness of our policies, programs, processes and practices that govern how data is acquired, validated, stored, protected and processed. While we continuously update our policies, programs, processes and practices, many of our data management and aggregation processes are manual and subject to human error or system failure. Failure to manage data effectively and to aggregate data in an accurate and timely manner may limit our ability to manage current and emerging risks, as well as to manage changing business needs.


18




Conditions in the financial markets may limit our access to additional funding to meet our liquidity needs.
 
Liquidity is essential to our business, as we must maintain sufficient funds to respond to the needs of depositors and borrowers. An inability to raise funds through deposits, borrowings, the sale or pledging as collateral of loans and other assets could have a substantial negative effect on our liquidity. Our access to funding sources in amounts adequate to finance our activities could be impaired by factors that affect us specifically or the financial services industry in general. Factors that could negatively affect our access to liquidity sources include a decrease in the level of our business activity due to a market downturn or negative regulatory action against us. Our ability to borrow could also be impaired by factors that are not specific to us, such as severe disruption of the financial markets or negative news and expectations about the prospects for the financial services industry as a whole, as evidenced by recent turmoil in the domestic and worldwide credit markets.
 
Our wholesale funding sources may prove insufficient to replace deposits or support our future growth.
 
As a part of our liquidity management, we use a number of funding sources in addition to core deposit growth and repayments and maturities of loans and investments. These sources include brokered certificates of deposit, repurchase agreements, federal funds purchased and Federal Home Loan Bank advances. Negative operating results or changes in industry conditions could lead to an inability to replace these additional funding sources at maturity. Our financial flexibility could be constrained if we are unable to maintain our access to funding or if adequate financing is not available to accommodate future growth at acceptable interest rates. Finally, if we are required to rely more heavily on more expensive funding sources to support future growth, our revenues may not increase proportionately to cover our costs. In this case, our results of operations and financial condition would be negatively affected.
 
Our mortgage business may increase volatility in our consolidated revenues and earnings and our residential mortgage lending profitability could be significantly reduced if we are not able to originate and sell mortgage loans at profitable margins.

We significantly increased our mortgage business as a result of our acquisition of Taylor Capital’s mortgage business in the Taylor Capital merger, which we completed in 2014, and transferred approximately 165 residential mortgage team members from Busey Bank to our company in December 2017. As a result of the factors set forth below with respect to our mortgage business, we could experience significant volatility in our consolidated revenue and consolidated net income.

Mortgage production, especially refinancing, generally declines in rising interest rate environments. We have experienced historically low interest rates in recent years but have started to increase in 2017. When interest rates rise, or even if they do not, there can be no assurance that our mortgage production will continue at current levels. Because we sell a substantial portion of the mortgage loans we originate, the profitability of our mortgage banking operations depends in large part upon our ability to aggregate a high volume of loans and sell them in the secondary market at a gain. Thus, in addition to the interest rate environment, our mortgage business is dependent upon (i) the existence of an active secondary market and (ii) our ability to profitably sell loans into that market. The loans in our held for sale portfolio are carried at fair market value with changes recognized in our statement of operations. Carrying the loans at fair value may also increase the volatility in our earnings.

Our ability to sell mortgage loans readily is dependent upon the availability of an active secondary market for single-family mortgage loans, which in turn depends in part upon the continuation of programs currently offered by the government sponsored enterprises ("GSEs") and other institutional and non-institutional investors. These entities account for a substantial portion of the secondary market in residential mortgage loans. Because the largest participants in the secondary market are GSEs whose activities are governed by federal law, any future changes in laws that significantly affect them could, in turn, materially and adversely affect us. The impact on us of existing proposals to reform Fannie Mae and Freddie Mac, which were placed into conservatorship in 2008, is difficult to predict. In addition, our ability to sell mortgage loans readily is dependent upon our ability to remain eligible for the programs offered by GSEs and other market participants. Our ability to remain eligible to originate and securitize government insured loans may also depend on our having an acceptable delinquency ratio for Federal Housing Administration loans relative to our peers.

Any significant impairment of our eligibility to participate in the programs offered by the GSEs could materially and adversely affect us. Further, the criteria for loans to be accepted under such programs may be changed from time-to-time by the sponsoring entity which could result in a lower volume of corresponding loan originations or other administrative costs.


19




Changes in interest rates may change the value of our mortgage servicing rights portfolio which may increase the volatility of our earnings and negatively impact regulatory capital.

As a result of our mortgage servicing business, we have a sizable portfolio of mortgage servicing rights. A mortgage servicing right is the right to service a mortgage loan - collect principal, interest and escrow amounts - for a fee. We invest in mortgage servicing rights to support mortgage banking strategies and diversify revenue streams from our Mortgage Banking Segment.
 
We measure and carry all of our residential mortgage servicing rights using the fair value measurement method. Fair value is determined as the present value of estimated future net servicing income, calculated based on a number of variables, including assumptions about the likelihood of prepayment by borrowers as well as delinquencies.

The primary risk associated with mortgage servicing rights is that in a declining interest rate environment, they will likely lose a substantial portion of their value as a result of higher than anticipated prepayments. Moreover, if prepayments are greater than expected, the cash we receive over the life of the mortgage loans would be reduced. Conversely, these assets generally increase in value in a rising interest rate environment to the extent that prepayments are slower than previously estimated. Although we invest in mortgage servicing rights to diversify the revenue streams from our Mortgage Banking Segment, the increasing size of our mortgage servicing rights portfolio may increase our interest rate risk and correspondingly, the volatility of our earnings, especially if we cannot adequately hedge the interest rate risk relating to our mortgage servicing rights.

At December 31, 2017, our mortgage servicing rights had a fair value of $276.3 million compared to $238.0 million at December 31, 2016. Changes in fair value of our mortgage servicing rights are recorded to earnings in each period. Depending on the interest rate environment, it is possible that the fair value of our mortgage servicing rights may be reduced in the future. If such changes in fair value significantly reduce the carrying value of our mortgage servicing rights, our financial condition and results of operations would be negatively affected.

The Basel III Rule requires deductions from Common Equity Tier 1 Capital in the event mortgage servicing rights exceed a certain percentage of a bank’s Common Equity Tier 1 threshold.

Certain hedging strategies that we use to manage investment in mortgage servicing rights, mortgage loans held for sale and interest rate lock commitments may be ineffective to offset any adverse changes in the fair value of these assets due to changes in interest rates and market liquidity.

We use derivative instruments to economically hedge mortgage servicing rights, mortgage loans held for sale and interest rate lock commitments to offset changes in fair value resulting from changing interest rate environments. Our hedging strategies are susceptible to prepayment risk, basis risk, market volatility and changes in the shape of the yield curve, among other factors. In addition, hedging strategies rely on assumptions and projections regarding assets and general market factors. If these assumptions and projections prove to be incorrect or our hedging strategies do not adequately mitigate the impact of changes in interest rates, we may incur losses that would adversely impact earnings.

Our mortgage loan representation and warranty reserve for losses could be insufficient.

We currently maintain a representation and warranty reserve, which is a liability on our consolidated balance sheets, to reflect our best estimate of expected losses that we will incur on loans that we have sold or securitized into the secondary market and must subsequently repurchase or with respect to which we must indemnify the purchasers and insurers because of violations of customary representations and warranties. Increases to this reserve for current loan sales reduce mortgage banking revenue. The level of the reserve reflects management's continuing evaluation of loss experience on repurchased loans, indemnifications and present economic conditions, as well as the actions of loan purchasers and guarantors. The determination of the appropriate level of the mortgage loan representation and warranty reserve inherently involves a high degree of subjectivity and requires us to make estimates of repurchase risks and expected losses subsequently experienced. Both the assumptions and estimates used could be inaccurate, resulting in a level of reserve that is less than actual losses. If additional reserves are required, it could have a material adverse effect on our business, financial condition and results of operations. Representation and warranty reserves were $7.0 million as of December 31, 2017.

A significant increase in certain loan balances associated with our mortgage business may result in liquidity risk related to the funding of these loans.

The held for sale loan balance in our mortgage business represents mortgage loans that are in the process of being sold to various investors. Loan balances steadily accumulate and then decrease at the time of sale. We fund these balances through short term funding, primarily through Federal Home Loan Bank ("FHLB") advances, which require collateral. In the event that we experience

20




a significant increase in our held for sale loan balances, our liquidity could be negatively impacted as we increase our short term borrowings and therefore our required collateral. Although we have access to other sources of contingent liquidity, we could be materially and adversely affected if we fail to effectively manage this risk.

Changes in interest rates may reduce our net interest income, and may result in higher defaults in a rising rate environment.
 
Our consolidated operating results are largely dependent on our net interest income. Net interest income is the difference between interest earned on loans and investments and interest expense incurred on deposits and other borrowings. Our net interest income is impacted by changes in market rates of interest, changes in credit spreads, changes in the shape of the yield curve, the interest rate sensitivity of our assets and liabilities, prepayments on our loans and investments, and the mix of our funding sources and assets, among other things.
 
Our interest earning assets and interest bearing liabilities may react in different degrees to changes in market interest rates. Interest rates on some types of assets and liabilities may fluctuate prior to changes in broader market interest rates, while rates on other types may lag behind. The result of these changes to rates may cause differing spreads on interest earning assets and interest bearing liabilities. While we take measures intended to manage the risks from changes in market interest rates, we cannot control or accurately predict changes in market rates of interest or be sure our protective measures are adequate.

If the interest rates paid on deposits and other interest bearing liabilities increase at a faster rate than the interest rates received on loans and other interest earning assets, our net interest income, and therefore earnings, could be adversely affected.  As a result of the relatively low interest rate environment, an increasing percentage of our deposits have been comprised of deposits bearing no or a relatively low rate of interest. We would incur a higher cost of funds to retain these deposits in a rising interest rate environment. In addition, a substantial portion of our loans (approximately 62% of our total loan portfolio as of December 31, 2017) have adjustable interest rates.  While the higher payment amounts we would receive on these loans in a rising interest rate environment may increase our interest income, some borrowers may be unable to afford the higher payment amounts, which may result in a higher rate of default. A portion of our adjustable rate loans have interest rate floors that are in-the-money and may not adjust upward immediately with increases in interest rates. Rising interest rates also may reduce the demand for loans and the value of our fixed-rate investment securities.

Negative developments in the financial industry could adversely affect our industry and our business.
 
Negative developments in the financial industry and the impact of new legislation and regulations in response to those developments could restrict our business operations, including our ability to originate loans, and negatively impact our results of operations and financial condition.

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

Many of our investment securities are issued by and some of our loans are made to the U.S. government and government agencies and sponsored entities. Uncertain domestic political conditions, including prior federal government shutdowns and potential future federal government shutdowns, any future concerns regarding the possibility of the federal government defaulting on its obligations for a period of time due to potential future debt ceiling limitations or other unresolved political issues, may pose credit default and liquidity risks with respect to investments in financial instruments issued or guaranteed by the federal government and loans to the federal government. Any downgrade in the sovereign credit rating of the United States, as well as sovereign debt issues facing the governments of other countries, could have a material adverse impact on financial markets and economic conditions in the United States and worldwide. Any such adverse impact could have a material adverse effect on our liquidity, financial condition and results of operations.

The fair value of our investment securities can fluctuate due to market conditions outside of our control.
 
As of December 31, 2017, our investment securities portfolio contained 471 securities in an unrealized loss position (with total unrealized losses of $13.2 million as of that date), compared to 615 securities in an unrealized loss position as of December 31, 2016 (with total unrealized losses of $15.7 million as of that date). Factors beyond our control can significantly influence the fair value of securities in our investment securities portfolio and can cause potential adverse changes to the fair value of these securities. These factors include but are not limited to rating agency downgrades of the securities, defaults by the issuer or with respect to the underlying securities, changes in market interest rates and instability in the credit markets. Any of these mentioned factors could cause an-other-than-temporary impairment or permanent impairment of these assets, which would lead to accounting charges

21




which could have a material negative effect on our financial condition and results of operations. In addition, we have a large longer term municipal security portfolio that would decline substantially in value if interest rates increase materially.

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

New accounting standards may result in a significant change to the Company’s recognition of credit losses and may materially impact the Company’s financial condition or results of operations.

In June 2016, the Financial Accounting Standards Board issued new authoritative accounting guidance under ASC Topic 326 "Financial Instruments - Credit Losses" amending the incurred loss impairment methodology in current accounting principles generally accepted in the United States of America ("GAAP") with a methodology that reflects expected credit losses (referred to as the "CECL model") and requires consideration of a broader range of reasonable and supportable information for credit loss estimates, which goes into effect for the Company on January 1, 2020. Under the incurred loss model, the Company delays recognition of losses until it is probable that a loss has been incurred. The CECL model represents a dramatic departure from the incurred loss model. The CECL model requires a financial asset (or a group of financial assets) measured at amortized cost basis, such as loans held for investment and held-to-maturity debt securities, to be presented at the net amount expected to be collected (net of the allowance for credit losses). Similarly, the credit losses relating to available-for-sale debt securities will be recorded through an allowance for credit losses rather than a write-down. In addition, the measurement of expected credit losses will take place at the time the financial asset is first added to the balance sheet (with periodic updates thereafter) and will be 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.

As such, the CECL model will materially impact how the Company determines its allowance for loan and lease losses and may require the Company to significantly increase its allowance for loan and lease losses. Furthermore, the Company may experience more fluctuations in its allowance for loan and lease losses, which may be significant. If the Company were required to materially increase its allowance for loan and lease losses, it may negatively impact the Company’s financial condition and results of operations. The Company is currently 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. The Company expects the CECL model will require the Company to recognize a one-time cumulative adjustment to the Company’s allowance for loan and lease losses in order to fully transition from the incurred loss model to the CECL model, which could negatively impact the Company's financial condition and results of operations.

The recently enacted tax reform legislation is expected to have a significant impact on the Company, and our financial condition and results of operations could be adversely affected by the broader implications of the legislation.

H.R. 1, which was originally known as the "Tax Cuts and Jobs Act" and was signed into law in December 2017, is expected to have a significant impact on our financial statements and customers. It will take some time for us to analyze all of the implications of this legislation. Although we realized a one-time tax benefit of $104.2 million in the fourth quarter of 2017 resulting from the revaluation of our deferred tax liabilities following the enactment of the legislation and generally benefit from the legislation’s reduction in the Federal corporate income tax rate, a tax rate reduction potentially has broader implications for our operations, as the new rate could cause positive or negative effects on loan demand and on our pricing models, municipal bonds, tax credits, and other investments. The interest deduction limitation implemented by the legislation could make some businesses and industries less inclined to borrow, potentially reducing demand for our commercial loan products. Further, the legislation’s limitation on the mortgage interest deduction and state and local tax deduction for individual taxpayers could increase the after-tax cost of owning a home for some of our potential and existing customers and potentially reduce demand for, or the individual size of, the residential mortgage loans we originate.


22




Financial reform legislation has, among other things, tightened capital standards and resulted in new regulations that may increase our costs of operations.
 
On July 21, 2010, the Dodd-Frank Act was signed into law.  This law significantly changes the bank regulatory structure and affects the lending, deposit, investment, trading and operating activities of financial institutions and their holding companies. The Dodd-Frank Act requires various federal agencies to adopt a broad range of new implementing rules and regulations and to prepare numerous studies and reports for Congress. The federal agencies are given significant discretion in drafting the implementing rules and regulations, and consequently, many of the details and much of the impact of the Dodd-Frank Act may not be known for many months or years.
 
Among the many requirements in the Dodd-Frank Act for banking regulations is the requirement for capital regulations.  Generally, trust preferred securities will no longer be eligible as Tier 1 capital.  See “Item 1. Business--Supervision and Regulation--Capital Adequacy.”
 
The Dodd-Frank Act created the CFPB, which has broad powers to supervise and enforce consumer protection laws. The CFPB has broad rule-making authority for a wide range of consumer protection laws that apply to all banks, including the authority to prohibit “unfair, deceptive or abusive” acts and practices. The CFPB has examination and enforcement authority over all banks with more than $10 billion in assets.
 
In addition, the Dodd-Frank Act increased the authority of the Federal Reserve Board to examine the Company and its non-bank subsidiaries and gave the Federal Reserve Board the authority to establish rules regarding interchange fees charged for an electronic debit transaction by a payment card issuer that, together with its affiliates, has assets of $10 billion or more, and to enforce a new statutory requirement that such fees be reasonable and proportional to the actual cost of a transaction to the issuer.  By regulation, the Federal Reserve Board has limited the fees for such a transaction to the sum of 21 cents plus five basis points times the value of the transaction, plus up to one cent for fraud prevention costs. 
 
Certain aspects of the Dodd-Frank Act remain subject to rulemaking and will take effect over several years.  Compliance with this law and its implementing regulations has resulted, and will continue to result, in additional operating costs that could have a material adverse effect on our future financial condition and results of operations.  For additional discussion of the Dodd-Frank Act, see “Item 1. Business—Supervision and Regulation-Regulatory Reform.”
 
We are subject to federal and state fair lending laws, and failure to comply with these laws could lead to material penalties.

Federal and state fair lending laws and regulations, such as the Equal Credit Opportunity Act and the Fair Housing Act, impose nondiscriminatory lending requirements on financial institutions. The Department of Justice, CFPB and other federal and state agencies are responsible for enforcing these laws and regulations. Private parties may also have the ability to challenge an institution’s performance under fair lending laws in private class action litigation. A successful challenge to our performance under the fair lending laws and regulations could adversely impact our rating under the CRA and result in a wide variety of sanctions, including the required payment of damages and civil money penalties, injunctive relief, imposition of restrictions on merger and acquisition activity and restrictions on expansion activity, which could negatively impact our reputation, business, financial condition and results of operations.

Rulemaking changes implemented by the CFPB in particular are expected to result in higher regulatory and compliance costs that may adversely affect our financial condition and results of operations.

As noted above, the Dodd-Frank Act created the CFPB, an independent federal agency with broad rulemaking, supervisory and enforcement powers under various federal consumer financial protection laws. The CFPB's jurisdiction also extends to unfair, deceptive, or abusive acts or practices. The CFPB has examination and primary enforcement authority with respect to depository institutions with $10 billion or more in assets and their affiliates, their service providers and certain non-depository entities such as debt collectors and consumer reporting agencies.

Since its formation, the CFPB has finalized a number of significant rules that could have a significant impact on our business and the financial services industry more generally. In particular, as discussed above under “Item 1. Business--Supervision and Regulation-Consumer Protection Laws,” the CFPB has adopted rules impacting nearly every aspect of the lifecycle of a residential mortgage loan. Among other things, the rules adopted by the CFPB require banks to: (i) develop and implement procedures to ensure compliance with an “ability to repay” test and identify whether a loan meets a new definition for a “qualified mortgage,” in which case a safe harbor or a rebuttable presumption exists (dependent on whether the loan is a higher priced covered transaction) that the creditor extending the loan has satisfied the ability to repay test; (ii) implement new or revised disclosures, policies and procedures for originating and servicing mortgages including, but not limited to, providing a written list of homeownership

23




counseling organizations, early intervention with delinquent borrowers and specific loss mitigation procedures for loans secured by a borrower's principal residence; (iii) comply with additional restrictions on mortgage loan originator hiring and compensation; (iv) comply with new disclosure requirements and standards for appraisals and certain financial products; and (v) maintain escrow accounts for higher-priced mortgage loans for a longer period of time. The rules include the TILA-RESPA Integrated Disclosure (TRID) rules. The TRID rules contain requirements and disclosure forms that are required to be provided to borrowers. The CFPB has also issued guidance which could significantly affect the automotive financing industry by subjecting indirect motorcycle and motorsport lenders, such as our subsidiary bank, to regulation as creditors under the Equal Credit Opportunity Act, which would make indirect lenders monitor and control certain credit policies and procedures undertaken by dealers.

Compliance with the rules and policies adopted by the CFPB may limit the products we may permissibly offer to some or all of our customers, or limit the terms on which those products may be issued, or may adversely affect our ability to conduct our business as previously conducted (including our residential mortgage and indirect lending businesses in particular). We may also be required to add compliance personnel or incur other significant compliance-related expenses. Our business, financial condition, results of operations and/or competitive position may be adversely affected as a result.

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

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

We provide treasury management services to money services businesses, which include check cashers, issuers/sellers of traveler’s checks, money orders and stored value cards, and money transmitters.  Providing banking services to money service businesses exposes us to enhanced risks from noncompliance with a variety of laws and regulations.
 
We provide treasury management services to the check cashing industry, offering currency, check clearing, monetary instrument, depository and credit services.  We also provide treasury management services to money transmitters.  Financial institutions that open and maintain accounts for money services businesses are expected to apply the requirements of the USA PATRIOT Act and Bank Secrecy Act, as they do with all account holders, on a risk-assessed basis.  As with any category of account holder, there will be money services businesses that pose lower risk of money laundering or lack of compliance with other laws and regulations and those that pose a significant risk.  Providing treasury management services to money services businesses represent a significant compliance and regulatory risk, and failure to comply with all statutory and regulatory requirements could result in fines or sanctions.

Prepaid card products and services are subject to extensive regulatory supervision that create significant compliance and operating costs, as well as the risk of data breaches.
 
We offer prepaid gift and incentive cards to our customers.   Additionally, we provide sponsorship and issuing services to corporate clients who have developed and manage their own card programs for their customers.  Through these sponsorship and issuing relationships, we maintain the critical oversight and control responsibilities of the program, while our corporate clients take on various key management roles, including the marketing, processing and distribution of the cards. Our prepaid card products and our involvement with the card programs of our corporate clients subject us to certain risks.

Prepaid cards operate in a highly regulated environment and are subject to extensive supervision and examination.   This regulatory environment includes an expectation of a comprehensive Bank Secrecy Acts/anti-money laundering oversight and monitoring program, as well as federal and state laws addressing consumer protection, escheatment, privacy and data protection.  Compliance with these laws and regulations are costly, challenging and require significant personnel resources.

The issuance and delivery of prepaid products depend on a variety of processing platforms, networks and third party service providers in order to transmit, store and communicate customer and transactional data.  If our systems, or the systems of one of our third party service providers were breached, critical data and information could be lost, compromised or misused.  These

24




breaches may result in significant financial loss to customers and result in reputational damage to us and adversely affect our operating results.

Our operations rely on numerous external vendors.

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

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

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

We may be exposed to potential asset quality issues or unknown or contingent liabilities of the banks, businesses, assets, and liabilities we acquire. If these issues or liabilities exceed our estimates, our results of operations and financial condition may be materially negatively affected;
Prices at which acquisitions can be made fluctuate with market conditions. We have experienced times during which acquisitions could not be made in specific markets at prices we considered acceptable and expect that we will experience this condition in the future;
The acquisition of other entities generally requires integration of systems, procedures and personnel of the acquired entity into our company to make the transaction economically successful. This integration process is complicated and time consuming and can also be disruptive to the customers of the acquired business. If the integration process is not conducted successfully and with minimal effect on the acquired business and its customers, we may not realize the anticipated economic benefits of particular acquisitions within the expected time frame, and we may lose customers or employees of the acquired business. We may also experience greater than anticipated customer losses even if the integration process is successful;
To the extent our costs of an acquisition exceed the fair value of the net assets acquired, the acquisition will generate goodwill.  As discussed below, we are required to assess our goodwill for impairment at least annually, and any goodwill impairment charge could have a material adverse effect on our results of operations and financial condition;
To finance an acquisition, we may borrow funds, thereby increasing our leverage and diminishing our liquidity, or raise additional capital, which could dilute the interests of our existing stockholders; and
We have completed various acquisitions in the past few years that enhanced our rate of growth.  We may not be able to continue to sustain our past rate of growth or to grow at all in the future.

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

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


25




Our future success is dependent on our ability to compete effectively in the highly competitive banking industry.
 
We face substantial competition in all phases of our operations from a variety of competitors. Our future growth and success will depend on our ability to compete effectively in this highly competitive environment. To date, we have grown our business successfully by focusing on our business lines and emphasizing the high level of service and responsiveness desired by our customers. We compete for loans, deposits and other financial services with other commercial banks, thrifts, credit unions, brokerage houses, mutual funds, insurance companies and specialized finance companies. Many of our competitors offer products and services which we do not offer, and many have substantially greater resources and lending limits, name recognition and market presence that benefit them in attracting business. In addition, larger competitors may be able to price loans and deposits more aggressively than we do, and smaller newer competitors may also be more aggressive in terms of pricing loan and deposit products than we are to obtain a share of the market. Some of the financial institutions and financial services organizations with which we compete are not subject to the same degree of regulation as is imposed on bank holding companies, federally insured state-chartered banks and national banks and federal savings banks. In addition, increased competition among financial services companies due to the recent consolidation of certain competing financial institutions and the conversion of certain investment banks to bank holding companies may negatively affect our ability to successfully market our products and services. As a result, these competitors have certain advantages over us in accessing funding and in providing various services.

Our growth or future losses may require us to raise additional capital in the future, but that capital may not be available when it is needed or the cost of that capital may be very high.
 
We are required by regulatory authorities to maintain adequate levels of capital to support our operations. We anticipate that our capital resources will satisfy our capital requirements for the foreseeable future. We may at some point need to raise additional capital to support continued growth or losses, both internally and through acquisitions. Any capital we obtain may result in the dilution of the interests of our existing stockholders.
 
Our ability to raise additional capital, if needed, will depend on conditions in the capital markets at that time (which are outside our control) and on our financial condition and performance. Accordingly, we cannot make assurances of our ability to raise additional capital if needed, or if the terms will be acceptable to us. If we cannot raise additional capital when needed, our ability to further expand our operations through internal growth and acquisitions could be materially impaired and our financial condition and liquidity could be materially and negatively affected.

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

The loss of certain key personnel could negatively affect our operations.
 
Our success depends in large part on the retention of a limited number of key management and other banking personnel. We could undergo a difficult transition period if we were to lose the services of any of these individuals. Our success also depends on the experience of our banking facilities’ managers and bankers and on their relationships with the customers and communities they serve. The loss of these key persons could negatively impact the affected banking operations.
 
Any inaccurate assumptions in our analytical and forecasting models could cause us to miscalculate our projected revenue or losses, which could adversely affect the Company's statements of operations or financial condition.

We use analytical and forecasting models to estimate the effects of economic conditions on our financial assets and liabilities as well as our mortgage servicing rights. Those models include assumptions about interest rates and consumer behavior that may be incorrect. If our model assumptions are incorrect, improperly applied or inadequate, we may record higher than expected losses or lower than expected revenues which could have a material adverse effect on our business, financial condition and results of operations.


26




We rely on dividends from the Bank for substantially all of our revenue at the holding company level.

We are an entity separate and distinct from our principal subsidiary, MB Financial Bank, and derive substantially all of our revenue at the holding company level in the form of dividends from that subsidiary. Accordingly, we are, and will be, dependent upon dividends from MB Financial Bank to pay the principal of and interest on our indebtedness, to satisfy our other cash needs and to pay dividends on our common and preferred stock. MB Financial Bank's ability to pay dividends is subject to its ability to earn net income and to meet certain regulatory requirements. In the event MB Financial Bank is unable to pay dividends to us, we may not be able to pay dividends on our common or preferred stock. Also, our right to participate in a distribution of assets upon a subsidiary's liquidation or reorganization is subject to the prior claims of the subsidiary's creditors.

If we defer payments of interest on our junior subordinated debt securities, or if certain defaults relating to those debt securities occur, we will be prohibited from declaring or paying dividends or distributions on, and from making liquidation payments with respect to, our capital stock.

As of December 31, 2017, we had outstanding $211.5 million aggregate principal amount of junior subordinated debt securities issued in connection with the sale of trust preferred securities by certain subsidiaries that are statutory business trusts. We have also guaranteed these trust preferred securities.

As of December 31, 2017, we had ten separate series of these junior subordinated debt securities outstanding, each series having been issued under a separate indenture and with a separate guarantee. Each of these indentures, together with the related guarantee, prohibits us, subject to limited exceptions, from declaring or paying any dividends or distributions on, or redeeming, repurchasing, acquiring or making any liquidation payments with respect to, any of our capital stock at any time when (i) there shall have occurred and be continuing an event of default under the indenture or any event, act or condition that with notice or lapse of time or both would constitute an event of default under the indenture; (ii) we are in default with respect to payment of any obligations under the related guarantee; or (iii) we have deferred payment of interest on the junior subordinated debt securities outstanding under that indenture. In that regard, we are entitled, at our option but subject to certain conditions, to defer payments of interest on the junior subordinated debt securities of each series from time to time for up to five consecutive years.

Events of default under each indenture generally consist of failure to pay interest on the junior subordinated debt securities outstanding under that indenture under certain circumstances other than pursuant to a permitted deferral, failure to pay any principal of or premium on such junior subordinated debt securities when due, failure to comply with certain covenants under the indenture, and certain events of bankruptcy, insolvency or liquidation.

As a result of these provisions, if we were to be in default under the applicable indenture or under the applicable guarantee or elect to defer payments of interest on any series of junior subordinated debt securities, we would be prohibited from declaring or paying any dividends on our capital stock, from redeeming, repurchasing or otherwise acquiring any of our capital stock, and from making any payments to holders of our capital stock in the event of our liquidation, which would likely have a material negative effect on the market value of our common and preferred stock.

Our charter contains a provision which could limit the voting rights of a holder of our common stock.

Our charter provides that any person or group who acquires beneficial ownership of our common stock in excess of 14.9% of the outstanding shares may not vote the excess shares. Accordingly, if you acquire beneficial ownership of more than 14.9% of the outstanding shares of our common stock, your voting rights with respect to our common stock will not be commensurate with your economic interest in our company.

27





Anti-takeover provisions could negatively affect our stockholders.

Provisions in our charter and bylaws, the corporate laws of the state of Maryland and federal laws and regulations could delay or prevent a third party from acquiring us, despite the possible benefit to our stockholders, or otherwise negatively affect the market value of our stock. These provisions include: a prohibition on voting shares of our common stock beneficially owned in excess of 14.9% of total shares outstanding; advance notice requirements for nominations for election to our board of directors and for proposing matters that stockholders may act on at stockholder meetings; and a requirement that only directors may fill a vacancy in our board of directors. Our charter also authorizes our board of directors to issue preferred or other stock, and preferred or other stock could be issued as a defensive measure in response to a takeover proposal. In addition, because we are a bank holding company, the ability of a third party to acquire us is limited by applicable banking laws and regulations. The Bank Holding Company Act requires any bank holding company to obtain the approval of the Federal Reserve Board before acquiring 5% or more of any class of our voting securities. Any entity that is a holder of 25% or more of any class of our voting securities, or a holder of a lesser percentage if such holder otherwise exercises a “controlling influence” over us, is subject to regulation as a bank holding company under the Bank Holding Company Act. Under the Change in Bank Control Act of 1978, as amended, any person (or persons acting in concert), other than a bank holding company, is required to notify the Federal Reserve Board before acquiring 10% or more of any class of our voting securities.

We may experience future goodwill impairment.
 
If our estimates of the fair value of our goodwill change as a result of changes in our business or other factors, we may determine that an impairment charge is necessary. Estimates of fair value are based on a fairly complex model using, among other things, estimated cash flows and industry pricing multiples. Based on the Company's 2017 goodwill impairment testing of the three reporting units, banking, leasing, and mortgage banking, no reductions to goodwill were made.  If the fair values of the three reporting units were less than their book value of total common stockholders' equity, the Company will consider this and other factors, including the anticipated cash flows of each of the reporting units, to determine whether goodwill is impaired. No assurance can be given that the Company will not record an impairment loss on goodwill in the future and any such impairment loss could have a material adverse effect on our results of operations and financial condition.

Our participation in the loss-share agreements with the FDIC requires that we follow certain servicing procedures, and the terms of certain loans may exceed the coverage periods under the loss-share agreements.
 
MB Financial Bank entered into loss-share agreements with the FDIC as part of the Heritage Community Bank ("Heritage"), Benchmark Bank ("Benchmark"), Broadway Bank ("Broadway"), and New Century Bank ("New Century") transactions. These loss-share agreements require that MB Financial Bank follow certain servicing procedures as specified in the agreement.  A failure to follow these procedures or any other breach of the agreement by MB Financial Bank could result in the loss of FDIC reimbursement of losses on covered loans and other real estate owned, which could have a material negative effect on our financial condition and results of operations. In addition, the loss-share agreements protect MB Financial Bank against losses for limited periods of time (generally ten years for single family residential real estate (consumer) loans and five years for commercial loans). To the extent MB Financial Bank continues to hold any of the covered loans following the expiration of the applicable loss-share period, it will absorb 100% of any losses. The commercial loan loss-share agreements for the Heritage and Benchmark transactions expired in March 2014 and December 2014, respectively, and the commercial loan loss-share agreements for the Broadway and New Century transactions expired in June 2015. The consumer loan loss-share agreements for the Heritage and Benchmark transactions will expire in March 2019 and December 2019, respectively, and the consumer loan loss-share agreements for the Broadway and New Century transactions will expire in June 2020.

Higher FDIC deposit insurance premiums and assessments could significantly increase our non-interest expense.
 
FDIC insurance rates increased significantly in 2009, and we may pay higher FDIC premiums in the future.  The Dodd-Frank Act established 1.35% as the minimum Designated Reserve Ratio ("DRR"). The FDIC has determined that the DRR should be 2.0% and has adopted a plan under which it will meet the statutory minimum DRR of 1.35% by the statutory deadline of September 30, 2020. The Dodd-Frank Act requires the FDIC to offset the effect of the increase in the statutory minimum DRR to 1.35% from the former statutory minimum of 1.15% on institutions with assets less than $10 billion.  The FDIC has adopted a rule to implement this offset, under which institutions with assets of $10 billion or more pay a temporary surcharge.


28




Item 1B.
  Unresolved Staff Comments
 
None.
 
Item 2.
  Properties
 
We conduct our business at 86 banking offices located in the Chicago metropolitan area.  We own a majority of our banking center facilities.  The remaining facilities are leased.  We have 129 ATMs at our branches and at other locations.  We believe that all of our properties and equipment are well maintained, in good operating condition and adequate for all of our present and anticipated needs.  See Note 7 of the notes to our consolidated financial statements contained in Item 8 of this report for additional information regarding our premises and equipment.
 
We also have non-bank office locations, mainly used by our subsidiaries, in Illinois, Arizona, California, Colorado, Georgia, Indiana, Kansas, Kentucky, Maryland, Michigan, Minnesota, Missouri, New Jersey, New York, North Carolina, Pennsylvania, Tennessee, Texas, Washington, and Wisconsin.  We operate 49 mortgage retail offices in 16 states. We have two non-bank office locations in Canada for MB Financial International, Inc., a subsidiary of MB Financial Bank.
 
We believe our facilities in the aggregate are suitable and adequate to operate our businesses.

Item 3.
  Legal Proceedings
 
We are involved from time to time as plaintiff or defendant in various legal actions arising in the normal course of our businesses.  While the ultimate outcome of pending proceedings cannot be predicted with certainty, it is the opinion of management, after consultation with counsel representing us in such proceedings, that the resolution of these proceedings should not have a material adverse effect on our consolidated financial position or results of operation.

Item 4.
  Mine Safety Disclosures
     
Not applicable.

29




PART II
 

Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities
 
Our common stock is traded on the NASDAQ Global Select Market under the symbol “MBFI.”  There were approximately 1,634 holders of record of our common stock as of December 31, 2017.
 
The following table presents quarterly market price information and quarterly cash dividends paid per share for our common stock for 2017 and 2016:
 
 
 
Market Price Range
 
 
High
 
Low
 
Dividends
Paid
2017
 
 
 
 
 
 
Quarter ended December 31, 2017
 
$
47.64

 
$
42.39

 
$
0.21

Quarter ended September 30, 2017
 
45.54

 
38.29

 
0.21

Quarter ended June 30, 2017
 
45.22

 
39.20

 
0.21

Quarter ended March 31, 2017
 
48.47

 
39.97

 
0.19

2016
 
 

 
 

 
 

Quarter ended December 31, 2016
 
$
48.06

 
$
35.00

 
$
0.19

Quarter ended September 30, 2016
 
39.50

 
39.12

 
0.19

Quarter ended June 30, 2016
 
36.71

 
36.19

 
0.19

Quarter ended March 31, 2016
 
33.62

 
32.78

 
0.17

 
The timing and amount of cash dividends paid depends on our earnings, capital requirements, financial condition and other relevant factors.  The primary source for dividends paid to stockholders is dividends paid to us from MB Financial Bank and cash on hand.  We have an internal policy which provides that dividends paid to us by MB Financial Bank cannot exceed an amount that would cause the bank’s Total risk-based capital, Tier 1 risk-based capital, Common equity tier 1 capital and Tier 1 leverage capital ratios to fall below 11%, 9%, 7.5% and 7%, respectively.  These ratios are in excess of the minimum ratios required for a bank to be considered “well capitalized” for regulatory purposes, which are 10%, 8%, 6.5% and 5%, respectively. See “Item 1. Business - Supervision and Regulation - Capital Adequacy” above. Our internal policy also requires the Company to maintain these ratios on a consolidated basis.  In addition to adhering to our internal policy, there are regulatory restrictions on the ability of national banks to pay dividends.  See “Item 1. Business - Supervision and Regulation - Dividends” above and Note 17 of notes to consolidated financial statements contained in Item 8 of this report.
 
The following table sets forth information for the three months ended December 31, 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)
October 1, 2017 — October 31, 2017
 

 
$

 

 
$

November 1, 2017 — November 30, 2017
 

 

 

 

December 1, 2017 — December 31, 2017
 
703

 
44.52

 

 

Total
 
703

 
$
44.52

 

 
 

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


30




Stock Performance Presentation
 
The following line graph shows a comparison of the cumulative returns for the period beginning December 31, 2012 and ending December 31, 2017 of the Company's common stock, the NASDAQ Composite Index and the SNL Mid Cap Bank Index. The information assumes that $100 was invested at the closing price on December 31, 2012 in the Company's common stock and each index, and that all dividends were reinvested.
 
COMPARISON OF 5-YEAR CUMULATIVE TOTAL RETURN
FOR MB FINANCIAL, INC., NASDAQ COMPOSITE INDEX
AND SNL MID CAP BANK INDEX

392333721_chart-17130af4353d5436a7e.jpg
 
 
 
Period Ending
Index
 
12/31/2012
 
12/31/2013
 
12/31/2014
 
12/31/2015
 
12/31/2016
 
12/31/2017
MB Financial, Inc.
 
$
100.00

 
$
165.01

 
$
172.08

 
$
172.92

 
$
257.29

 
$
245.94

NASDAQ Composite Index
 
100.00

 
140.12

 
160.78

 
171.97

 
187.22

 
242.71

SNL Mid Cap Bank Index
 
100.00

 
148.57

 
151.34

 
162.90

 
226.19

 
227.11

 


31





Item 6.
Selected Financial Data
 
Set forth below and on the following page is our summary consolidated financial information and other financial data.  This information should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included herein in response to Item 7 and the consolidated financial statements and notes thereto included herein in response to Item 8 (in thousands, except common share data). 

Our summary consolidated financial information and other financial data contain information determined by methods other than in accordance with GAAP.  These measures include net interest income on a fully tax equivalent basis and net interest margin on a fully tax equivalent basis. A reconciliation of net interest margin on a fully tax equivalent basis to net interest margin is contained in the “Selected Financial Data” tables below. For additional information, see "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Non-GAAP Financial Information."

Selected Financial Data:
 
 
 
As of or for the Year Ended December 31,
(Dollars in thousands, except per share data)
 
2017
 
2016 (1)
 
2015
 
2014 (2)
 
2013
Statement of Operations Data:
 
 

 
 

 
 

 
 

 
 

Interest income
 
$
672,446

 
$
557,177

 
$
494,234

 
$
375,148

 
$
297,895

Interest expense
 
70,069

 
39,286

 
28,628

 
24,325

 
25,559

Net interest income
 
602,377


517,891


465,606


350,823


272,336

Provision for credit losses
 
21,593

 
19,563

 
21,386

 
12,052

 
(5,804
)
Net interest income after provision for credit losses
 
580,784


498,328


444,220


338,771


278,140

Non-interest income
 
366,873

 
374,903

 
322,093

 
221,305

 
154,394

Non-interest expenses
 
658,842

 
619,851

 
534,154

 
436,782

 
294,588

Income before income taxes
 
288,815


253,380


232,159


123,294


137,946

Income tax (benefit) expense
 
(15,225
)
 
79,244

 
73,211

 
37,193

 
39,491

Net income
 
304,040


174,136


158,948


86,101


98,455

Dividends and discount accretion on preferred shares
 
8,007

 
8,009

 
8,000

 
4,000

 

Net income available to common stockholders
 
$
296,033


$
166,127


$
150,948


$
82,101


$
98,455

Common Share Data:
 
 

 
 

 
 

 
 

 
 

Basic earnings per common share
 
$
3.53

 
$
2.16

 
$
2.03

 
$
1.32

 
$
1.81

Diluted earnings per common share
 
3.49

 
2.13

 
2.02

 
1.31

 
1.79

Book value per common share
 
32.17

 
29.43

 
26.77

 
25.58

 
24.14

Weighted average common shares outstanding:
 
 

 
 

 
 

 
 

 
 

Basic
 
83,836,732

 
76,968,823

 
74,177,574

 
62,012,196

 
54,509,612

Diluted
 
84,823,456

 
77,976,121

 
74,849,030

 
62,573,406

 
54,993,865

Dividend payout ratio on common stock
 
23.50
%
 
34.74
%
 
32.18
%
 
39.69
%
 
24.58
%
Cash dividends per common share
 
$
0.82

 
$
0.74

 
$
0.65

 
$
0.52

 
$
0.44

 
(1) 
On August 24, 2016, we completed the American Chartered merger. See Note 2 of the notes to consolidated financial statements contained under "Item 8. Financial Statements and Supplementary Data."
(2) 
On August 18, 2014, we completed the Taylor Capital merger. See "Item 1. Business" section.



32




Selected Financial Data (continued):
 
 
 
As of or for the Year Ended December 31,
(Dollars in thousands)
 
2017
 
2016
 
2015
 
2014
 
2013
Balance Sheet Data:
 
 

 
 

 
 

 
 

 
 

Cash and cash equivalents
 
$
579,221

 
$
463,469

 
$
381,441

 
$
312,081

 
$
473,459

Investment securities
 
2,481,519

 
2,909,221

 
2,930,066

 
2,723,701

 
2,352,862

Loans, gross
 
13,966,062

 
12,768,803

 
9,793,998

 
9,083,217

 
5,712,551

Allowance for loan and lease losses
 
157,710

 
139,366

 
128,140

 
110,026

 
111,746

Loans held for sale
 
548,578

 
716,883

 
744,727

 
737,209

 
629

Total assets
 
20,086,940

 
19,302,317

 
15,585,007

 
14,602,099

 
9,641,427

Deposits
 
14,958,378

 
14,110,448

 
11,505,215

 
10,990,942

 
7,381,259

Short-term and long-term borrowings
 
1,366,197

 
1,881,078

 
1,406,011

 
1,014,331

 
555,548

Junior subordinated notes issued to capital trusts
 
211,494

 
210,668

 
186,164

 
185,778

 
152,065

Stockholders’ equity
 
3,009,823

 
2,579,209

 
2,087,284

 
2,028,286

 
1,326,682

Performance Ratios:
 
 

 
 

 
 

 
 

 
 

Return on average assets
 
1.55
%
 
1.03
%
 
1.07
%
 
0.75
%
 
1.05
%
Return on average equity
 
11.41

 
7.65

 
7.72

 
5.40

 
7.59

Return on average common equity
 
11.71

 
7.69

 
7.77

 
5.29

 
7.59

Net interest margin (1)
 
3.54

 
3.50

 
3.60

 
3.51

 
3.29

Tax equivalent effect
 
0.16

 
0.20

 
0.21

 
0.24

 
0.28

Net interest margin — fully tax equivalent basis (1) 
 
3.70


3.70


3.81


3.75


3.57

Loans to deposits
 
93.37


90.49


85.13


82.64


77.39

Asset Quality Ratios:
 
 

 
 

 
 

 
 

 
 

Non-performing loans to total loans (2)
 
0.55
%
 
0.46
%
 
1.07
%
 
0.96
%
 
1.87
%
Non-performing assets to total assets (3)
 
0.43

 
0.45

 
0.87

 
0.73

 
1.36

Allowance for loan and lease losses to total loans
 
1.13

 
1.09

 
1.31

 
1.21

 
1.96

Allowance for loan and lease losses to non-performing loans (2)
 
205.33

 
234.81

 
122.43

 
126.34

 
104.87

Net loan charge-offs to average loans
 
0.03

 
0.09

 
0.04

 
0.18

 
0.16

Liquidity and Capital Ratios:
 
 

 
 

 
 

 
 

 
 

Common equity tier 1 capital to risk-weighted assets
 
9.40
%
 
8.72
%
 
9.27
%
 
N/A

 
N/A

Tier 1 capital to risk-weighted assets
 
11.20

 
9.40

 
11.54

 
12.61
%
 
15.28
%
Total capital to risk-weighted assets
 
14.23

 
11.63

 
12.54

 
13.62

 
16.53

Tier 1 capital to average assets
 
10.02

 
8.38

 
10.40

 
10.47

 
11.22

Average equity to average assets
 
13.58

 
13.45

 
13.89

 
13.96

 
13.82

Other:
 
 

 
 

 
 

 
 

 
 

Banking facilities
 
86

 
96

 
81

 
86

 
85

Full time equivalent employees
 
3,574

 
3,486

 
2,980

 
2,839

 
1,775

 
(1) 
Net interest margin represents net interest income as a percentage of average interest earning assets. Prior periods have been revised to reflect the revised method of annualizing interest income and interest expense. See "Net Interest Income" under "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations."
(2) 
Non-performing loans include loans accounted for on a non-accrual basis and accruing loans contractually past due 90 days or more as to interest or principal.  Non-performing loans excludes purchased credit-impaired loans and loans held for sale.  See Note 5 in the notes to consolidated financial statements contained under "Item 8. Financial Statements and Supplementary Data."
(3) 
Non-performing assets include non-performing loans, other real estate owned and other repossessed assets.  Non-performing assets excludes purchased credit-impaired loans, loans held for sale, and other real estate owned related to FDIC transactions.  See Note 5 in the notes to consolidated financial statements contained under "Item 8. Financial Statements and Supplementary Data."


33




Selected Financial Data (continued):

The following table sets forth our selected quarterly financial data (in thousands, except common share data):
 
 
 
Three Months Ended 2017
 
Three Months Ended 2016
 
 
December
 
September
 
June
 
March
 
December
 
September
 
June
 
March
Statement of Operations Data:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Interest income
 
$
174,966

 
$
176,570

 
$
164,999

 
$
155,911

 
$
156,734

 
$
140,911

 
$
131,540

 
$
127,992

Interest expense
 
21,573

 
19,623

 
16,005

 
12,868

 
11,520

 
10,140

 
8,938

 
8,688

Net interest income
 
153,393


156,947


148,994


143,043


145,214


130,771


122,602


119,304

Provision for credit losses
 
3,643

 
4,517

 
9,699

 
3,734

 
2,622

 
6,549

 
2,829

 
7,563

Net interest income after provision for credit losses
 
149,750


152,430


139,295


139,309


142,592


124,222


119,773


111,741

Non-interest income
 
89,319

 
95,264

 
90,517

 
91,773

 
92,823

 
108,387

 
92,000

 
81,693

Non-interest expenses
 
175,324

 
162,294

 
165,559

 
155,665

 
165,760

 
170,385

 
147,906

 
135,800

Income before income taxes
 
63,745


85,400


64,253


75,417


69,655


62,224


63,867


57,634

Income tax (benefit) expense
 
(80,449
)
 
24,557

 
19,787

 
20,880

 
22,464

 
17,805

 
20,455

 
18,520

Net income
 
$
144,194


$
60,843


$
44,466


$
54,537


$
47,191


$
44,419


$
43,412


$
39,114

Dividends on preferred shares
 
2,000

 
2,002

 
2,002

 
2,003

 
2,005

 
2,004

 
2,000

 
2,000

Net income available to common stockholders
 
$
142,194


$
58,841


$
42,464


$
52,534


$
45,186


$
42,415


$
41,412


$
37,114

Net interest margin
 
3.49
%
 
3.60
%
 
3.55
%
 
3.52
%
 
3.47
%
 
3.46
%
 
3.56
%
 
3.53
%
Tax equivalent effect
 
0.14

 
0.16

 
0.16

 
0.17

 
0.18

 
0.19

 
0.21

 
0.22

Net interest margin on a fully tax equivalent basis
 
3.63
%

3.76
%

3.71
%

3.69
%

3.65
%

3.65
%

3.77
%

3.75
%
Common Share Data:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Basic earnings per common share
 
$
1.69

 
$
0.70

 
$
0.51

 
$
0.63

 
$
0.54

 
$
0.55

 
$
0.56

 
$
0.51

Diluted earnings per common share
 
1.67

 
0.69

 
0.50

 
0.62

 
0.53

 
0.54

 
0.56

 
0.50

Weighted average common shares outstanding
 
83,946,637

 
83,891,175

 
83,842,963

 
83,662,430

 
83,484,899

 
77,506,885

 
73,475,258

 
73,330,731

Diluted weighted average common shares outstanding
 
84,964,759

 
84,779,797

 
84,767,414

 
84,778,130

 
84,674,181

 
78,683,170

 
74,180,374

 
73,966,935




34





Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
The following is a discussion and analysis of our financial position and results of operations and should be read in conjunction with the information set forth under Item 1A Risks Factors, Item 7A, Quantitative and Qualitative Disclosures about Market Risk, and our consolidated financial statements and notes thereto appearing under Item 8 of this report.

Special Note Regarding Forward-Looking Statements
 
When used in this Annual Report on Form 10-K and in other documents filed or furnished with the Securities and Exchange Commission, in press releases or other public shareholder communications, or in oral statements made with the approval of an authorized executive officer, the words or phrases “believe,” “will,” “should,” “will likely result,” “are expected to,” “will continue,” “is anticipated,” “estimate,” “project,” “plans,” or similar expressions are intended to identify “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995.  You are cautioned not to place undue reliance on any forward-looking statements, which speak only as of the date made.  These statements may relate to MB Financial, Inc.’s future financial performance, strategic plans or objectives, revenues or earnings projections, or other financial items.  By their nature, these statements are subject to numerous uncertainties that could cause actual results to differ materially from those anticipated in the statements.
 
Important factors that could cause actual results to differ materially from the results anticipated or projected include, but are not limited to, the following: (1) the possibility that the actual reduction in our effective tax rate expected to result from H.R. 1, originally known as the "Tax Cut and Jobs Act" (the "Tax Reform Legislation") might be different from the estimated reduction set forth in this document; (2) the risk that funds obtained from capital raising activities will not be utilized efficiently or effectively; (3) expected revenues, cost savings, synergies, and other benefits from our merger and acquisition activities 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; (4) the credit risks of lending activities, including changes in the level and direction of loan delinquencies and write-offs and changes in estimates of the adequacy of the allowance for loan and lease losses, which could necessitate additional provisions for loan losses, resulting both from originated loans and loans acquired from other financial institutions; (5) the quality and composition of our securities portfolio; (6) competitive pressures among depository institutions; (7) interest rate movements and their impact on customer behavior, net interest margin and the value of our mortgage servicing rights; (8) 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; (9) the impact of repricing and competitors’ pricing initiatives on loan and deposit products; (10) fluctuations in real estate values; (11) results of examinations of us and our bank subsidiary by regulatory authorities and the possibility that any such regulatory authority may, among other things, limit our business activities, require us to change our business mix, increase our allowance for loan and lease losses, write-down asset values or increase our capital levels, or affect our ability to borrow funds or maintain or increase deposits, which could adversely affect our liquidity and earnings; (12) our ability to adapt successfully to technological changes to meet customers’ needs and developments in the market place; (13) 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; (14) our ability to realize the residual values of our direct finance, leveraged and operating leases; (15) our ability to access cost-effective funding; (16) changes in financial markets; (17) changes in economic conditions in general and in the Chicago metropolitan area in particular; (18) the costs, effects and outcomes of litigation; (19) 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, including but not limited to the Tax Reform Legislation, or interpretations thereof by taxing authorities; (20) changes in accounting principles, policies or guidelines; (21) our future acquisitions of other depository institutions or lines of business; and (22) 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.
 

35




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, 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 (loss) on investment securities, net gain (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 (recovery), net loss (gain) recognized on other real estate owned and other related expense, prepayment fees on interest bearing liabilities, and other operating expenses. Additionally, dividends on preferred shares reduced net income available to common stockholders.

Net interest income is affected by changes in the volume and mix of interest earning assets, interest earned on those assets, the volume and mix of interest bearing liabilities and interest paid on interest bearing liabilities. Non-interest income and non-interest expenses are impacted by growth of banking, leasing and mortgage banking operations and growth in the number of loan and deposit accounts through both acquisitions and core business growth. Growth in operations affects other expenses primarily as a result of additional employee, 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 December 31, 2015, the Company completed the acquisition of MSA Holdings, LLC ("MSA"), then the parent company of MainStreet Investment Advisors, LLC and Cambium Asset Management, LLC. The Company recorded $13.5 million in goodwill and $8.8 million in other intangibles as a result of this acquisition. See Note 2 of the notes to our audited consolidated financial statements contained in Item 8 of this report for additional information. In 2017, Cambium was merged into Cedar Hill, a registered investment advisor subsidiary of MB Financial Bank which became a subsidiary of MSA following that transaction.

On August 24, 2016, the Company completed the American Chartered Bancorp, Inc. ("American Chartered") merger. 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 results of operations acquired from American Chartered are included in the Company's 2016 results of operations for the 129 days from the date of the acquisition through December 31, 2016. See Note 2 of the notes to our audited consolidated financial statements contained in Item 8 of this report for additional information.    

We had net income and net income available to common stockholders of $304.0 million and $296.0 million, respectively, for the year ended December 31, 2017 compared to net income and net income available to common stockholders of $174.1 million and $166.1 million, respectively, for the year ended December 31, 2016 and net income and net income available to common stockholders of $158.9 million and $150.9 million, respectively for the year ended December 31, 2015. Fully diluted earnings per common share were $3.49 for the year ended December 31, 2017 compared to $2.13 per common share in 2016 and $2.02 per common share in 2015.

The increase in earnings from the year ended December 31, 2016 to the year ended December 31, 2017 was due to strong loan growth, improvements in nearly all key fee initiatives, our merger with American Chartered completed in the third quarter of 2016, and the tax benefit recognized due to the tax reform legislation, partly offset by an increase in non-interest expense. Net interest income increased by $84.5 million due to organic loan growth as well as the full year impact of the American Chartered merger. This increase was partly offset by the $39.0 million increase in non-interest expense mostly due to the full year impact of the American Chartered merger. Non-interest expense also increased due to higher salaries and employee benefits expense (new hires, annual pay increases, and $2.7 million in one-time bonuses associated with the tax reform legislation), higher branch exit and facilities impairment charges (closing of nine branches), and a $7.5 million charitable contribution associated with the tax reform legislation. In addition, the Company recognized a $104.2 million tax benefit in 2017 due to the impact of the tax reform legislation on our net deferred tax liabilities.


36




The increase in earnings from the year ended December 31, 2015 to the year ended December 31, 2016 was due to higher net interest income and non-interest income. Net interest income increased by $52.3 million due to organic loan growth as well as the impact of the American Chartered merger. Non-interest income increased by $52.8 million primarily as a result of the $31.0 million increase in mortgage banking revenue and the $9.3 million increase in trust and asset management fees. These increases were partly offset by the $85.7 million increase in non-interest expense as a result of higher salaries and employee benefits, occupancy and equipment, computer services and telecommunication, and other operating expenses impacted by the American Chartered merger and acquisition of MSA as well as a $4.0 million charitable contribution. Non-interest expense was also higher due to the $18.2 million increase in merger related and repositioning expenses as a result of the American Chartered merger and the contingent consideration expense related to our December 2012 acquisition of Celtic. See "Non-interest Expenses" section for a detailed schedule of merger related expenses. Given Celtic's stronger than expected lease residual performance subsequent to the acquisition, we increased the fair value of the residual based contingent consideration by $3.7 million during 2016.

Critical Accounting Policies
 
Our consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States of America and follow general practices within the industries in which we operate.  This preparation requires management to make estimates, assumptions, and judgments that affect the amounts reported in the financial statements and accompanying notes.  These estimates, assumptions, and judgments are based on information available as of the date of the financial statements; accordingly, as this information changes, actual results could differ from the estimates, assumptions, and judgments reflected in the financial statements.  Certain policies inherently have a greater reliance on the use of estimates, assumptions, and judgments and, as such, have a greater possibility of producing results that could be materially different than originally reported.  Management believes the following policies are both important to the portrayal of our financial condition and results of operations and require subjective or complex judgments; therefore, management considers the following to be critical accounting policies.  Management has reviewed the application of these policies 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.  At December 31, 2017, the aggregate residual value of the equipment leased under our direct finance, leveraged, and operating leases totaled $214.3 million compared to $178.4 million at December 31, 2016.  See Note 1 and Note 6 of our audited consolidated financial statements for additional information.

Income Tax Accounting.  Accounting Standards Codification ("ASC") Topic 740 provides guidance on accounting for income taxes by prescribing the minimum recognition threshold that a tax position must meet to be recognized in the financial statements.  ASC Topic 740 also provides guidance on measurement, recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.  As of December 31, 2017, the Company had $113 thousand of uncertain tax positions.  The Company elects to treat interest and penalties recognized for the underpayment of income taxes as income tax expense.  However, interest and penalties imposed by taxing authorities on issues specifically addressed in ASC Topic 740 will be taken out of the tax reserves up to the amount allocated to interest and penalties.  The amount of interest and penalties exceeding the amount allocated in the tax reserves will be treated as income tax expense.  As of December 31, 2017, the Company had no accrued interest related to tax reserves.  The application of income tax law is inherently complex.  Laws and regulations in this area are voluminous and

37




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 addition, changes in market conditions may reduce the availability of quoted prices or observable data. For example, reduced liquidity in the capital markets or changes in secondary market activities could result in observable market inputs becoming unavailable. Therefore, when market data is not available, the Company would use valuation techniques requiring more management judgment to estimate the appropriate fair value measurement.
 
See Note 18 to our audited consolidated financial statements for a complete discussion on the Company’s use of fair valuation of assets and liabilities and the related measurement techniques.
 
Goodwill.  The excess of the cost of an acquisition over the fair value of the net assets acquired, including core deposit and client relationship intangibles, consists of goodwill.  See Note 8 to our audited consolidated financial statements for further information regarding core deposit and client relationship intangibles.  The Company reviews goodwill to determine potential impairment annually, or more frequently if events and circumstances indicate that goodwill might be impaired, by comparing the carrying value of the reporting units with the fair value of the reporting units.
 
The Company’s annual assessment date for goodwill impairment testing is as of December 31. As of December 31, 2017, the Company had three reporting units: banking, leasing and mortgage banking. Based on the Company's goodwill impairment testing, no impairment losses were recognized during the years ended December 31, 2017, 2016 and 2015. The carrying amount of goodwill increased $2.5 million to $1.0 billion at December 31, 2017 due to the Busey staff transfer as well as 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 1 of our audited consolidated financial statements for a description of recent accounting pronouncements including the respective dates of adoption and effects or expected effects on our results of operations and financial condition.
 

38




Non-GAAP Financial Information

This report contains certain financial information determined by methods other than in accordance with 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 Taylor Capital and American Chartered mergers ("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. 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 bank 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 bank mergers to net interest margin are contained in the tables under “Net Interest Income.”

Net Interest Income
 
The following table presents, for the periods indicated, the total dollar amount of interest income from average interest earning assets and the related yields, as well as the interest expense on average interest bearing liabilities, and the related costs, expressed both in dollars and rates (dollars in thousands).  The table below and the discussion that follows contain presentations of net interest income and net interest margin on a tax-equivalent basis, which is adjusted for the tax-favored status of income from certain loans and investments.  Net interest margin also is presented on a tax-equivalent basis in “Item 6 Selected Financial Data.”  We believe this measure to be the preferred industry measurement of net interest income, as it provides a relevant comparison between taxable and non-taxable amounts. 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 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 bank mergers to net interest income and net interest margin in accordance with GAAP are provided in the table. For additional information, see "Non-GAAP Financial Information."

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 years ended December 31, 2016 and 2015.



39




 
 
Year Ended December 31,
(dollars in thousands)
 
2017
 
2016
 
2015
 
 
Average
 
 
 
Yield/
 
Average
 
 
 
Yield/
 
Average
 
 
 
Yield/
 
 
Balance
 
Interest
 
Rate
 
Balance
 
Interest
 
Rate
 
Balance
 
Interest
 
Rate
Interest Earning Assets:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Loans held for sale
 
$
632,927

 
$
22,801

 
3.60
 %
 
$
771,384

 
$
26,450

 
3.43
 %
 
$
740,975

 
$
26,804

 
3.62
 %
Loans (1) (2) (3)
 
12,986,256

 
564,433

 
4.31

 
10,489,352

 
441,427

 
4.16

 
8,815,956

 
377,520

 
4.24

Loans exempt from federal income taxes (4)
 
336,086

 
16,408

 
4.82

 
368,108

 
17,109

 
4.57

 
331,323

 
14,335

 
4.27

Taxable investment securities
 
1,472,596

 
33,975

 
2.31

 
1,576,836

 
35,571

 
2.26

 
1,538,709

 
39,299

 
2.55

Investment securities exempt from federal income taxes (4)
 
1,261,295

 
60,336

 
4.78

 
1,331,323

 
64,649

 
4.86

 
1,282,909

 
63,037

 
4.91

Federal funds sold
 
64

 
1

 
1.45

 
37

 
0

 
1.00

 
70

 
1

 
0.99

Other interest bearing deposits
 
182,651

 
1,353

 
0.74

 
106,075

 
587

 
0.55

 
117,344

 
318

 
0.27

Total interest earning assets
 
16,871,875

 
$
699,307

 
4.11

 
14,643,115

 
$
585,793

 
3.97

 
12,827,286

 
$
521,314

 
4.04

Non-interest earning assets
 
2,758,432

 
 

 
 

 
2,281,357

 
 

 
 

 
2,000,598

 
 

 
 

Total assets
 
$
19,630,307

 
 

 
 

 
$
16,924,472

 
 

 
 

 
$
14,827,884

 
 

 
 

Interest Bearing Liabilities:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Deposits:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Money market, NOW, and interest bearing deposits
 
$
4,689,676

 
$
16,008

 
0.34
 %
 
$
4,185,129

 
$
9,027

 
0.22
 %
 
$
4,053,848

 
$
7,060

 
0.17
 %
Savings deposit
 
1,114,936

 
1,267

 
0.11

 
1,053,429

 
837

 
0.08

 
962,221

 
502

 
0.05

Certificates of deposit
 
2,232,171

 
23,410

 
1.05

 
1,903,503

 
15,715

 
0.83

 
1,769,979

 
12,096

 
0.68

Short-term borrowings
 
1,558,501

 
14,697

 
0.94

 
1,131,560

 
4,195

 
0.37

 
933,530

 
1,412

 
0.15

Long-term borrowings and junior subordinated notes
 
571,462

 
14,687

 
2.50

 
589,559

 
9,512

 
1.58

 
297,990

 
7,558

 
2.50

Total interest bearing liabilities
 
10,166,746

 
$
70,069

 
0.69

 
8,863,180

 
$
39,286

 
0.44

 
8,017,568

 
$
28,628

 
0.36

Non-interest bearing deposits
 
6,314,086

 
 

 
 

 
5,351,197

 
 

 
 

 
4,381,030

 
 

 
 

Other non-interest bearing liabilities
 
484,564

 
 

 
 

 
433,202

 
 

 
 

 
370,374

 
 

 
 

Stockholders’ equity
 
2,664,911

 
 

 
 

 
2,276,893

 
 

 
 

 
2,058,912

 
 

 
 

Total liabilities and stockholders’ equity
 
$
19,630,307

 
 

 
 

 
$
16,924,472

 
 

 
 

 
$
14,827,884

 
 

 
 

Net interest income/interest rate spread (5)
 
 

 
$
629,238

 
3.42
 %
 
 

 
$
546,507

 
3.53
 %
 
 

 
$
492,686

 
3.68
 %
Less: taxable equivalent adjustment
 
 

 
26,861

 
 

 
 

 
28,616

 
 

 
 

 
27,080

 
 

Net interest income, as reported
 
 

 
$
602,377

 
 

 
 

 
$
517,891

 
 

 
 

 
$
465,606

 
 

Net interest margin (6)
 
 

 
 

 
3.54
 %
 
 

 
 

 
3.50
 %
 
 

 
 

 
3.60
 %
Tax equivalent effect
 
 

 
 

 
0.16
 %
 
 

 
 

 
0.20
 %
 
 

 
 

 
0.21
 %
Net interest margin on a fully tax equivalent basis (6)
 
 

 
 

 
3.70
 %
 
 

 
 

 
3.70
 %
 
 

 
 

 
3.81
 %
Effect of acquisition accounting discount accretion on loans acquired through bank mergers
 
 
 
 
 
(0.18
)%
 
 
 
 
 
(0.21
)%
 
 
 
 
 
(0.28
)%
Net interest margin on a fully tax equivalent basis, excluding the effect of acquisition accounting discount accretion on loans acquired through bank mergers
 
 
 
 
 
3.52
 %
 
 
 
 
 
3.49
 %
 
 
 
 
 
3.53
 %
 
(1)       Non-accrual loans are included in average loans.
(2)       Interest income includes amortization of net deferred loan origination fees and costs.
(3)       Loans held for sale are included in the average loan balance listed.  Related interest income is included in loan interest income.
(4)       Non-taxable loan and investment income is presented on a fully tax equivalent basis assuming a 35% tax rate.
(5)       Interest rate spread represents the difference between the average yield on interest earning assets and the average cost of interest bearing liabilities and is presented on a fully tax equivalent basis.
(6)       Net interest margin represents net interest income as a percentage of average interest earning assets.

Net interest income and net interest margin on a fully tax equivalent basis were impacted by the American Chartered merger for the year ended December 31, 2017 and 2016 and by the Taylor Capital merger for the years ended December 31, 2017, 2016, and 2015. Acquired assets and assumed liabilities were recorded at fair value as required by the acquisition method of accounting. Fair value adjustments (premiums or discounts) are amortized or accreted into net interest income over the remaining terms of the related interest earning assets and interest bearing liabilities.
    
Net interest income on a fully tax equivalent basis increased $82.7 million during the year ended December 31, 2017 compared to the year ended December 31, 2016. The increase in net interest income was due to organic loan growth and the full year impact of the interest earning assets acquired through the American Chartered merger. Net interest income in 2017 included interest income of $27.8 million resulting from accretion of the acquisition accounting discount recorded on loans acquired in the bank mergers compared to $28.8 million in 2016, which increased the net interest margin by 18 and 21 basis points, respectively. The net interest margin, expressed on a fully tax equivalent basis, was 3.70% for 2017 and 2016. Excluding the acquisition accounting loan discount accretion, our net interest margin on a fully tax equivalent basis would have been 3.52% for 2017 and 3.49% for 2016. This three basis point increase was mostly due to an increase in average loan yields partly offset by an increase in cost of deposits and borrowings.

Net interest income on a fully tax equivalent basis increased $53.8 million during the year ended December 31, 2016 compared to the year ended December 31, 2015. The increase in net interest income was due to organic loan growth and the interest earning assets and interest bearing liabilities acquired through the American Chartered merger. In addition, net interest income in 2016 included interest income of $28.8 million resulting from accretion of the acquisition accounting discount recorded on loans acquired in the bank mergers compared to $33.6 million in 2015, which increased the net interest margin by 21 and 28 basis points, respectively. The net interest margin, expressed on a fully tax equivalent basis, was 3.70% for 2016 and 3.81% for

40




2015. Excluding the acquisition accounting loan discount accretion, our net interest margin on a fully tax equivalent basis would have been 3.49% for 2016 and 3.53% for 2015. This four basis point decrease was mostly due to a decrease in average yields earned on investment securities and an increase in cost of deposits and borrowings.
 
Volume and Rate Analysis of Net Interest Income
 
The following table presents the extent to which changes in volume and interest rates of interest earning assets and interest bearing liabilities have affected our interest income and interest expense during the periods indicated.  Information is provided in each category with respect to (i) changes attributable to changes in volume (changes in volume multiplied by prior period rate), (ii) changes attributable to changes in rates (changes in rates multiplied by prior period volume) and (iii) change attributable to a combination of changes in rate and volume (change in rates multiplied by the changes in volume) (in thousands).  Changes attributable to the combined impact of volume and rate have been allocated proportionately to the changes due to volume and the changes due to rate (in thousands).
 
 
Year Ended December 31,
 
 
2017 Compared to 2016
 
2016 Compared to 2015
 
 
Change
Due to
Volume
 
Change
Due to
Rate
 
Total
Change
 
Change
Due to
Volume
 
Change
Due to
Rate
 
Total
Change
Interest Earning Assets:
 
 

 
 

 
 

 
 

 
 

 
 

Loans held for sale
 
$
(4,935
)
 
$
1,286

 
$
(3,649
)
 
$
1,075

 
$
(1,429
)
 
$
(354
)
Loans
 
108,107

 
14,899

 
123,006

 
70,524

 
(6,617
)
 
63,907

Loans exempt from federal income taxes (1)
 
(1,536
)
 
835

 
(701
)
 
1,664

 
1,110

 
2,774

Taxable investment securities
 
(2,391
)
 
795

 
(1,596
)
 
954

 
(4,682
)
 
(3,728
)
Investment securities exempt from federal income taxes (1)
 
(3,361
)
 
(952
)
 
(4,313
)
 
2,358

 
(746
)
 
1,612

Federal funds sold
 

 
1

 
1

 
(1
)
 

 
(1
)