Toggle SGML Header (+)


Section 1: 10-Q (10-Q)

Document




UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
FORM 10-Q
 
(Mark One)
 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended June 30, 2018
 
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from                          to                         
 
Commission file number 001-36599
 
MB FINANCIAL, INC.
(Exact name of registrant as specified in its charter)
Maryland
 
36-4460265
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
 
 
800 West Madison Street, Chicago, Illinois
 
60607
(Address of principal executive offices)
 
(Zip Code)
 
Registrant’s telephone number, including area code:  (888) 422-6562
 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.  Yes x No o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x No o
 

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o No x
 
There were issued and outstanding 84,200,745 shares of the Registrant’s common stock as of August 8, 2018.
 







MB FINANCIAL, INC.
 
FORM 10-Q
 
June 30, 2018
 
INDEX
 

 
 
 
Page
PART I.
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
Item 3.
 
Item 4.
 
 
 
 
 
PART II.
 
 
Item 1.
 
Item 1A.
 
Item 2.
 
Item 6.
 
 
 


i




PART I.        FINANCIAL INFORMATION
Item 1.
  Financial Statements

MB FINANCIAL, INC. & SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except share and per share data)
 
 
(Unaudited)
 
 
 
 
June 30, 2018
 
December 31, 2017
ASSETS
 
 

 
 

Cash and due from banks
 
$
373,448

 
$
397,880

Interest earning deposits with banks
 
119,672

 
181,341

Total cash and cash equivalents
 
493,120

 
579,221

Investment securities:
 
 

 
 

Securities available for sale, at fair value
 
1,647,260

 
1,408,326

Securities held to maturity, at amortized cost ($940,203 fair value at June 30, 2018 and $992,455 at December 31, 2017)
 
923,036

 
959,082

Marketable equity securities, at fair value
 
10,922

 

Non-marketable securities - FHLB and FRB stock
 
115,453

 
114,111

Total investment securities
 
2,696,671

 
2,481,519

Loans held for sale
 
423,367

 
548,578

Loans:
 
 

 
 

Total loans, excluding purchased credit-impaired loans
 
13,719,244

 
13,846,318

Purchased credit-impaired loans
 
101,001

 
119,744

Total loans
 
13,820,245

 
13,966,062

Less: Allowance for loan and lease losses
 
162,790

 
157,710

Net loans
 
13,657,455

 
13,808,352

Lease investments, net
 
433,505

 
409,051

Premises and equipment, net
 
281,458

 
286,690

Cash surrender value of life insurance
 
205,982

 
203,602

Goodwill
 
999,925

 
1,003,548

Other intangibles
 
50,968

 
54,766

Mortgage servicing rights, at fair value
 
296,629

 
276,279

Other real estate owned, net
 
10,869

 
9,736

Other real estate owned related to FDIC-assisted transactions
 
2,908

 
4,788

Other assets
 
413,700

 
420,810

Total assets
 
$
19,966,557

 
$
20,086,940

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 

 
 

LIABILITIES
 
 

 
 

Deposits:
 
 

 
 

Non-interest bearing
 
$
6,347,208

 
$
6,381,512

Interest bearing
 
8,575,455

 
8,576,866

Total deposits
 
14,922,663

 
14,958,378

Short-term borrowings
 
651,462

 
861,039

Long-term borrowings
 
730,292

 
505,158

Junior subordinated notes issued to capital trusts
 
194,450

 
211,494

Accrued expenses and other liabilities
 
518,997

 
541,048

Total liabilities
 
17,017,864

 
17,077,117

STOCKHOLDERS’ EQUITY
 
 

 
 

Preferred stock, ($0.01 par value, authorized 10,000,000 shares at June 30, 2018 and December 31, 2017; Series A, 8% perpetual non-cumulative, none issued and outstanding at June 30, 2018 and 4,000,000 shares issued and outstanding at December 31, 2017, $25 liquidation value; Series C, 6% perpetual non-cumulative, 200,000 shares issued and outstanding at June 30, 2018 and December 31, 2017, $1,000 liquidation value)
 
194,719

 
309,999

Common stock, ($0.01 par value; authorized 120,000,000 shares at June 30, 2018 and December 31, 2017; issued 86,121,465 shares at June 30, 2018 and 85,801,702 shares at December 31, 2017)
 
861

 
858

Additional paid-in capital
 
1,698,057

 
1,691,007

Retained earnings
 
1,127,814

 
1,065,303

Accumulated other comprehensive (loss) income
 
(9,818
)
 
3,584

Less: 1,926,871 and 1,883,810 shares of treasury common stock, at cost, at June 30, 2018 and December 31, 2017, respectively
 
(62,940
)
 
(60,928
)
Total stockholders’ equity
 
2,948,693

 
3,009,823

Total liabilities and stockholders’ equity
 
$
19,966,557

 
$
20,086,940



     See Accompanying Notes to Consolidated Financial Statements.

1




MB FINANCIAL, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands, except share and per share data) (Unaudited)
 
 
Three Months Ended
 
Six Months Ended
 
 
June 30,
 
June 30,
 
 
2018
 
2017
 
2018
 
2017
Interest income:
 
 

 
 

 
 
 
 
Loans:
 
 
 
 
 
 
 
 
Taxable
 
$
164,401

 
$
143,426

 
$
321,520

 
$
277,163

Nontaxable
 
2,330

 
2,791

 
4,601

 
5,671

Investment securities:
 
 

 
 

 
 

 
 

Taxable
 
10,578

 
8,717

 
18,512

 
17,839

Nontaxable
 
9,439

 
9,837

 
18,915

 
19,810

Other interest earning accounts and Federal funds sold
 
244

 
228

 
375

 
427

Total interest income
 
186,992

 
164,999

 
363,923

 
320,910

Interest expense:
 
 

 
 

 
 
 
 
Deposits
 
17,386

 
8,793

 
32,418

 
16,268

Short-term borrowings
 
2,769

 
3,912

 
5,285

 
6,292

Long-term borrowings and junior subordinated notes
 
7,768

 
3,300

 
13,770

 
6,313

Total interest expense
 
27,923

 
16,005

 
51,473

 
28,873

Net interest income
 
159,069

 
148,994

 
312,450

 
292,037

Provision for credit losses
 
6,219

 
9,699

 
13,727

 
13,433

Net interest income after provision for credit losses
 
152,850

 
139,295

 
298,723

 
278,604

Non-interest income:
 
 

 
 

 
 
 
 
Mortgage banking revenue
 
18,926

 
30,152

 
43,973

 
58,608

Lease financing revenue, net
 
22,918

 
18,401

 
47,628

 
39,819

Treasury management fees
 
15,066

 
14,499

 
30,222

 
29,188

Wealth management fees
 
8,969

 
8,498

 
18,090

 
17,018

Card fees
 
5,654

 
4,413

 
10,441

 
8,979

Capital markets and international banking fees
 
3,785

 
3,586

 
6,783

 
6,839

Consumer and other deposit service fees
 
2,929

 
3,285

 
5,841

 
6,648

Brokerage fees
 
1,050

 
1,250

 
1,914

 
2,375

Loan service fees
 
2,148

 
2,037

 
4,393

 
4,006

Increase in cash surrender value of life insurance
 
1,272

 
1,301

 
2,380

 
2,589

Net (loss) gain on investment securities
 
(86
)
 
137

 
(260
)
 
368

Net loss on disposal of other assets
 
(397
)
 
(4
)
 
(754
)
 
(127
)
Other operating income
 
6,072

 
3,615

 
10,457

 
7,310

Total non-interest income
 
88,306

 
91,170

 
181,108

 
183,620

Non-interest expenses:
 
 

 
 

 
 
 
 
Salaries and employee benefits expense
 
123,478

 
102,566

 
229,992

 
204,117

Occupancy and equipment expense
 
16,451

 
15,284

 
33,880

 
30,328

Computer services and telecommunication expense
 
10,871

 
9,785

 
22,027

 
19,225

Advertising and marketing expense
 
3,342

 
3,245

 
7,205

 
6,406

Professional and legal expense
 
8,887

 
2,450

 
10,785

 
5,141

Other intangibles amortization expense
 
1,896

 
2,086

 
3,798

 
4,176

Branch exit and facilities impairment charges
 
340

 
6,589

 
340

 
5,907

Net loss recognized on other real estate owned and other related expense
 
1,048

 
690

 
1,095

 
1,534

Loss on extinguishment of debt
 

 

 
3,136

 

Goodwill impairment loss
 
3,623

 

 
3,623

 

Other operating expenses
 
23,056

 
23,517

 
44,997

 
45,720

Total non-interest expenses
 
192,992

 
166,212

 
360,878

 
322,554

Income before income taxes
 
48,164

 
64,253

 
118,953

 
139,670

Income tax expense
 
9,631

 
19,787

 
23,663

 
40,667

Net income
 
38,533

 
44,466

 
95,290

 
99,003

Dividends on preferred shares
 
3,000

 
2,002

 
6,100

 
4,005

Return from preferred stockholders due to redemption
 

 

 
(15,280
)
 

Net income available to common stockholders
 
$
35,533

 
$
42,464

 
$
104,470

 
$
94,998

     

2




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

 
 
 
Three Months Ended
 
Six Months Ended
 
 
June 30,
 
June 30,
 
 
2018
 
2017
 
2018
 
2017
Common share data:
 
 

 
 

 
 
 
 
Basic earnings per common share
 
$
0.42

 
$
0.51

 
$
1.24

 
$
1.13

Diluted earnings per common share
 
0.42

 
0.50

 
1.23

 
1.12

Weighted average common shares outstanding for basic earnings per common share
 
84,253,966

 
83,842,963

 
84,160,344

 
83,753,195

Diluted weighted average common shares outstanding for diluted earnings per common share
 
85,251,810

 
84,767,414

 
85,074,626

 
84,773,271










































 
See Accompanying Notes to Consolidated Financial Statements.

3




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

 
 
 
Three Months Ended
 
Six Months Ended
 
 
June 30,
 
June 30,
 
 
2018
 
2017
 
2018
 
2017
 
 
 
 
 
 
 
 
 
Net income
 
$
38,533

 
$
44,466

 
$
95,290

 
$
99,003

Unrealized holding (gains) losses on investment securities, net of reclassification adjustments
 
(7,968
)
 
3,979

 
(20,060
)
 
10,033

Reclassification adjustment for amortization of unrealized losses (gains) on investment securities transferred to held to maturity from available for sale
 
115

 
(350
)
 
266

 
(823
)
Reclassification adjustments for losses (gains) included in net income
 
86

 
(137
)
 
260

 
(368
)
Other comprehensive (loss) income, before tax
 
(7,767
)
 
3,492

 
(19,534
)
 
8,842

Income tax expense (benefit) related to items of other comprehensive (loss) income
 
2,097

 
(1,387
)
 
5,225

 
(3,512
)
Other comprehensive (loss) income, net of tax
 
(5,670
)
 
2,105

 
(14,309
)
 
5,330

Comprehensive income
 
$
32,863

 
$
46,571

 
$
80,981

 
$
104,333





































See Accompanying Notes to Consolidated Financial Statements.

4





MB FINANCIAL, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
Six Months Ended June 30, 2018 and 2017
(Amounts in thousands, except per share data) (Unaudited)
 
 
Preferred
Stock
Common
Stock
Additional
Paid-in
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Income (Loss),
Net of Tax
Treasury
Stock
Non-controlling
Interest
Total Stock-
holders’
Equity
Balance at December 31, 2016
$
115,572

$
856

$
1,678,826

$
838,892

$
5,190

$
(60,384
)
$
257

$
2,579,209

Net income



99,003




99,003

Other comprehensive income, net of tax




5,330



5,330

Cash dividends declared on preferred shares



(4,005
)



(4,005
)
Cash dividends declared on common shares ($0.40 per share)



(33,960
)



(33,960
)
Restricted common stock activity, net of tax


(6,837
)


3,550


(3,287
)
Stock option activity, net of tax

1

448





449

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


461



(3,017
)

(2,556
)
Stock-based compensation expense


8,924





8,924

Purchase of additional investment in subsidiary from minority owners


(570
)



(257
)
(827
)
Balance at June 30, 2017
$
115,572

$
857

$
1,681,252

$
899,930

$
10,520

$
(59,851
)
$

$
2,648,280

 
 
 
 
 
 
 
 
 
Balance at December 31, 2017
$
309,999

$
858

$
1,691,007

$
1,065,303

$
3,584

$
(60,928
)
$

$
3,009,823

Cumulative effect of accounting changes



(1,204
)
907



(297
)
Net income



95,290




95,290

Other comprehensive loss, net of tax




(14,309
)


(14,309
)
Redemption of preferred stock
(115,280
)


15,280




(100,000
)
Cash dividends declared on preferred shares



(6,100
)



(6,100
)
Cash dividends declared on common shares ($0.48 per share)



(40,755
)



(40,755
)
Restricted common stock activity, net of tax

1

(3,210
)




(3,209
)
Stock option activity, net of tax

2

428





430

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


686



(2,012
)

(1,326
)
Stock-based compensation expense


9,146





9,146

Balance at June 30, 2018
$
194,719

$
861

$
1,698,057

$
1,127,814

$
(9,818
)
$
(62,940
)
$

$
2,948,693

















See Accompanying Notes to Consolidated Financial Statements.

5




MB FINANCIAL, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands) (Unaudited)
 
 
 
Six Months Ended
 
 
June 30,
 
 
2018
 
2017
Cash Flows From Operating Activities
 
 

 
 

Net income
 
$
95,290

 
$
99,003

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

 
 

Depreciation of premises and equipment and leased equipment
 
55,690

 
44,922

Branch exit and facilities impairment charges
 
340

 
5,907

Compensation expense for share-based payment plans
 
9,146

 
8,924

Net loss (gain) on sales of premises and equipment and leased equipment
 
684

 
(752
)
Amortization of other intangibles
 
3,798

 
4,176

Provision for credit losses
 
13,727

 
13,433

Deferred income tax expense
 
26,233

 
22,072

Amortization of premiums and discounts on investment securities, net
 
16,731

 
20,754

Accretion of discounts on loans, net
 
(9,239
)
 
(13,858
)
Net loss (gain) on investment securities
 
260

 
(368
)
Proceeds from sale of loans held for sale
 
2,046,650

 
2,340,861

Origination of loans held for sale
 
(1,949,399
)
 
(2,321,902
)
Net loss on sale of loans held for sale
 
13,732

 
887

Origination of mortgage servicing rights
 
(25,041
)
 
(27,568
)
Change in fair value of mortgage servicing rights
 
4,826

 
16,677

Net loss on other real estate owned
 
737

 
1,313

Increase in cash surrender value of life insurance
 
(2,380
)
 
(2,589
)
Loss on extinguishment of debt
 
3,136

 

Goodwill impairment loss
 
3,623

 

Increase in other assets, net
 
13,370

 
2,797

Decrease in other liabilities, net
 
(58,110
)
 
(37,530
)
Net cash provided by operating activities
 
263,804

 
177,159

Cash Flows From Investing Activities
 
 

 
 

Proceeds from sales of investment securities available for sale
 
2,610

 
2,271

Proceeds from maturities and calls of investment securities available for sale
 
202,918

 
167,856

Purchases of investment securities available for sale
 
(480,158
)
 
(47,016
)
Proceeds from maturities and calls of investment securities held to maturity
 
62,668

 
72,250

Purchases of investment securities held to maturity
 
(26,443
)
 
(29,457
)
Purchase of marketable equity securities
 
(312
)
 

Proceeds from sales of marketable equity securities
 
178

 

Purchases of non-marketable securities - FHLB and FRB stock
 
(33,212
)
 
(110,711
)
Redemption of non-marketable securities - FHLB and FRB stock
 
31,870

 
93,783

Net decrease (increase) in loans
 
143,580

 
(832,802
)
Purchases of mortgage servicing rights
 
(135
)
 
(786
)
Purchases of premises and equipment and leased equipment
 
(76,901
)
 
(78,833
)
Proceeds from sales of premises and equipment and leased equipment
 
7,361

 
14,227

Proceeds from sale of other real estate owned
 
2,766

 
16,686

Proceeds from sale of other real estate owned related to FDIC-assisted transactions
 
1,213

 
2,587

Purchase of additional investment in subsidiary from minority owners
 

 
(827
)
Net proceeds from FDIC related covered assets
 
434

 
(227
)
Net cash used in investing activities
 
(161,563
)
 
(730,999
)
Cash Flows From Financing Activities
 
 

 
 

Net (decrease) increase in deposits
 
(35,715
)
 
151,371

Proceeds from short-term borrowings - FHLB advances
 
140,000

 
2,350,000

Principal paid on short-term borrowings - FHLB advances
 
(550,000
)
 
(2,125,000
)
Net increase in other short-term borrowings
 
15,423

 
49,070

Proceeds from long-term borrowings
 
451,827

 
262,864

Principal paid on long-term borrowings
 
(41,693
)
 
(94,494
)
Redemption of junior subordinated notes issued to capital trusts
 
(20,619
)
 

Redemption of preferred stock
 
(100,000
)
 

Treasury stock transactions, net
 
(1,326
)
 
(2,556
)
Stock options exercised
 
2,803

 
1,376

Dividends paid on preferred stock
 
(8,100
)
 
(4,005
)
Dividends paid on common stock
 
(40,942
)
 
(33,998
)
Net cash (used in) provided by financing activities
 
(188,342
)
 
554,628

Net (decrease) increase in cash and cash equivalents
 
$
(86,101
)
 
$
788

Cash and cash equivalents:
 
 

 
 

Beginning of period
 
579,221

 
463,469

End of period
 
$
493,120

 
$
464,257



6




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

 
 
 
Six Months Ended
 
 
June 30,
 
 
2018
 
2017
Supplemental Disclosures of Cash Flow Information:
 
 

 
 

Cash payments for:
 
 

 
 

Interest paid to depositors and on other borrowed funds
 
$
50,873

 
$
27,666

Income tax payments, net
 
1,951

 
2,486

Supplemental Schedule of Noncash Investing Activities:
 
 

 
 

Investment securities held to maturity purchased not settled
 
$
8,806

 
$
2,553

Loans transferred to other real estate owned
 
3,890

 
2,658

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

 
2,321

Loans transferred to repossessed assets
 
1,299

 
969

Operating leases rewritten as direct finance leases included as loans
 
2,359

 
1,547

Long-term borrowings transferred to short-term borrowings
 
185,000

 
150,000

Supplemental Schedule of Noncash Investing Activities From Acquisitions:
 
 

 
 

Adjustments to noncash assets previously acquired:
 
 

 
 

Loans
 
$

 
$
1,846

Goodwill
 

 
(1,113
)
Other assets
 

 
(733
)
Total adjustments to noncash assets previously acquired
 
$

 
$













 
See Accompanying Notes to Consolidated Financial Statements.

7





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

Note 1.
   Basis of Presentation
 
These unaudited consolidated financial statements include the accounts of MB Financial, Inc., a Maryland corporation (the “Company”), and its subsidiaries, including its wholly owned national bank subsidiary, MB Financial Bank, N.A. (“MB Financial Bank”), based in Chicago, Illinois. In the opinion of management, all normal recurring adjustments necessary for a fair presentation of the financial condition, results of operations and cash flows for the interim periods have been made. The results of operations for the six months ended June 30, 2018 are not necessarily indicative of the results to be expected for the entire fiscal year.
These unaudited interim financial statements have been prepared in conformity with U.S. generally accepted accounting principles (“GAAP”) and industry practice. Certain information in footnote disclosure normally included in financial statements prepared in accordance with U.S. GAAP and industry practice has been condensed or omitted pursuant to rules and regulations of the Securities and Exchange Commission. These financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions which affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements, as well as the reported amounts of income and expenses during the reported periods. Actual results could differ from those estimates.
Certain prior period amounts have been reclassified to conform to current period presentation. These reclassifications did not result in any changes to previously reported net income or stockholders’ equity.

Note 2.
New Authoritative Accounting Guidance

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

ASC Topic 606 "Revenue from Contracts with Customers." New authoritative accounting guidance under ASC Topic 606, "Revenue from Contracts with Customers" amended prior guidance to require an entity to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The new authoritative guidance was initially effective for reporting periods after January 1, 2017 but was deferred to January 1, 2018. The Company's revenue is comprised of interest income on financial assets, which is excluded from the scope of this new guidance, and non-interest income. This new guidance changes how certain recurring revenue streams are recognized within lease financing revenue and insignificant components of non-interest income. The Company adopted this new authoritative guidance on January 1, 2018, and it did not have a significant impact on the Company's statements of operations or financial condition. See "Accounting changes" below.

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


8




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

ASC Topic 842 "Leases." New authoritative accounting guidance under ASC Topic 842 "Leases" amended prior guidance to require lessees to recognize the assets and liabilities arising from all leases on the balance sheet. The new authoritative guidance defines a lease as a contract, or part of a contract, that conveys the right to control the use of identified property, plant, or equipment (an identified asset) for a period of time in exchange for consideration. In addition, the qualifications for a sale and leaseback transaction have been amended. The new authoritative guidance also requires qualitative and quantitative disclosures by lessees and lessors to meet the objective of enabling users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases. In transition, lessees and lessors are required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. The new authoritative guidance will be effective for reporting periods after January 1, 2019. In July 2018, the Financial Accounting Standards Board issued new authoritative guidance to provide an additional transition method that allows entities to not apply this new guidance in the comparative periods presented in the financial statements and instead recognize a cumulative effect adjustment to the beginning retained earnings at the date of application. The Company is evaluating the new guidance and its impact on the Company's statements of operations and financial condition. The Company expects an increase in assets and liabilities as a result of recording additional lease contracts where the Company is lessee.

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

ASC Topic 718 "Compensation - Stock Compensation." New authoritative accounting guidance under ASC Topic 718 "Compensation - Stock Compensation" amends prior guidance by clarifying which changes to terms or conditions of a share-based payment award require an entity to apply modification accounting. An entity should account for the effects of a modification unless the fair value, vesting conditions and classification of the modified award are the same as the original award. The Company adopted this new authoritative guidance on January 1, 2018, and it did not have a significant impact on the Company's statements of operations or financial condition.

ASC Topic 326 "Financial Instruments - Credit Losses." New authoritative accounting guidance under ASC Topic 326 "Financial Instruments - Credit Losses" amended the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information for credit loss estimates. The measurement of expected credit losses is based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. The new authoritative guidance also requires a financial asset (or a group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected (net of the allowance for credit losses). In addition, the credit losses relating to available-for-sale debt securities should be recorded through an allowance for credit losses rather than a write-down. The new authoritative guidance will be effective for reporting periods after January 1, 2020. The Company is evaluating the new guidance and expects it to have an impact on the Company's statements of operations and financial condition, the significance of which is not yet known nor can it be reasonably estimated currently. Due to the significant differences in the new authoritative guidance from existing GAAP, the implementation of this guidance may result in material changes in our accounting for credit losses on the financial instruments and will be impacted by the Company's loan and securities portfolios' composition, attributes, and quality in addition to the prevailing economic conditions and forecasts at the time of adoption. As part of the Company's evaluation process, it has established a steering committee and working group, including individuals from various functional areas, to assess processes and related controls, portfolio segmentation, model development, system requirements, and needed resources.

ASC Topic 230 "Statement of Cash Flows." New authoritative accounting guidance under ASC Topic 230 "Statement of Cash Flows" addresses eight specific cash flow classification issues with the objective of reducing the existing diversity in practice. The Company adopted this new authoritative guidance on January 1, 2018, and it did not have a significant impact on the Company's statements of operations or financial condition.


9




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

ASC Topic 740 "Income Taxes." New authoritative accounting guidance under ASC Topic 740 "Income Taxes" amends prior guidance to require an entity to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. The Company adopted this new authoritative guidance on January 1, 2018, and it did not have a significant impact on the Company's statements of operations or financial condition.

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

ASC Topic 610 "Other Income - Gains and Losses from the Derecognition of Nonfinancial Assets." New authoritative accounting guidance under ASC Topic 610 "Other Income - Gains and Losses from the Derecognition of Nonfinancial Assets" amends prior guidance to clarify the scope of Subtopic 610-20 by defining in substance nonfinancial assets and to add guidance for partial sales of nonfinancial assets. The Company adopted this new authoritative guidance on January 1, 2018, and it did not have a significant impact on the Company's statements of operations or financial condition.

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

ASC Topic 220 "Income Statement - Reporting Comprehensive Income." New authoritative accounting guidance under ASC Topic 220 "Income Statement - Reporting Comprehensive Income" allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from enactment of H.R. 1, originally known as the "Tax Cuts and Jobs Act." The new authoritative guidance will be effective for reporting periods after January 1, 2019 with early adoption permitted. The Company early adopted the new guidance on January 1, 2018, and it did not have a significant impact on the Company's statements of operations or financial condition. See "Accounting changes" below.

Accounting changes. The Company adopted the new authoritative accounting guidance under ASC Topic 606, "Revenue from Contracts with Customers" on January 1, 2018 using the modified retrospective transition method for contracts that were not completed at the date of initial application. The Company recognized a cumulative effect reduction to the beginning retained earnings totaling $683 thousand. This amount relates to lease financing revenue where the Company's performance obligation is over time. Previously, such revenue was recognized immediately. See "Lease financing revenue, net" below.

The new authoritative accounting guidance under ASC Topic 606 requires an entity to recognize revenue in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. To achieve this, the Company takes the following steps: identify the contract(s) with a customer; identify the performance obligations in the contract; determine the transaction price; allocate the transaction price to the performance obligations in the contract; and recognize revenue when (or as) the Company satisfies a performance obligation. The non-interest revenue streams that are considered to be in the scope of this new guidance are discussed below.

Lease financing revenue, net. Fees from the sale of third-party equipment maintenance contracts are included within lease financing revenue, net. The Company sells third-party equipment maintenance contracts and provides customers with an asset and maintenance contract management tool over the life of the maintenance contract. Since the Company provides support for the asset and maintenance contract management tool, the Company's performance obligation is satisfied over the life of the maintenance contract, and the fees are recognized monthly over the life of the maintenance contract. Payment is typically received at the time of sale of the maintenance contract.

10





Treasury management fees and consumer and other deposit service fees. Deposit related fees (account analysis fees, monthly service fees, and other related fees) are included within treasury management fees and consumer and other deposit service fees. The Company's performance obligation is ongoing and either party may cancel at any time. These fees are generally recognized as the services are rendered on a monthly basis. Payment is typically received monthly.

Wealth management fees. Wealth management fees include revenue from the management and advisement of client assets and trust administration. The Company's performance obligation is generally satisfied over time, and the fees are recognized monthly. Payment is typically received quarterly or annually.

Card fees. Card fees include debit and credit card interchange fees and ATM fees. For debit and credit card transactions, the Company considers the merchant as the customer for interchange revenue with the performance obligation being satisfied when the cardholder purchases goods or services from the merchant. Interchange revenue is recognized as the services are provided. The Company's performance obligation for ATM fees is satisfied when services are provided, and the fees are recognized at that time. Payment is typically received immediately or in the following month.

Capital markets and international banking fees. Capital markets and international banking fees include M&A advisory and syndication fees. The Company's performance obligation is generally satisfied over time, and the fees are recognized monthly. For M&A advisory fees, a portion of the payment is received at the beginning of the engagement with the remainder once the transaction is completed. For syndication fees, payment is received annually.

The Company also adopted the new authoritative accounting guidance under ASC Topic 825 "Financial Instruments" and ASC Topic 220 "Income Statement - Reporting Comprehensive Income" on January 1, 2018. The Company recognized a cumulative effect increase to the beginning retained earnings and accumulated other comprehensive income totaling $385 thousand under ASC Topic 825 representing the fair value adjustment to equity securities at the date of initial application. In addition, the Company reclassified $729 thousand from accumulated other comprehensive loss to retained earnings for the stranded tax effects resulting from enactment of the Tax Cuts and Jobs Act at the date of initial application of the new guidance under ASC Topic 220.


11




Note 3.
  Earnings Per Common Share
 
Earnings per common share is computed using the two-class method. Basic earnings per common share is computed by dividing net income available to common stockholders by the weighted-average number of common shares outstanding during the applicable period, excluding outstanding participating securities. Participating securities include non-vested restricted stock awards and restricted stock units, though no actual shares of common stock related to restricted stock units are issued until the settlement of such units, to the extent holders of these securities receive non-forfeitable dividends or dividend equivalents at the same rate as holders of the Company's common stock. Diluted earnings per common share is computed using the weighted-average number of shares determined for the basic earnings per common share computation plus the dilutive effect of stock compensation using the treasury stock method.

The following table presents a reconciliation of the number of shares used in the calculation of basic and diluted earnings per common share (amounts in thousands, except share and per share data).
 
 
 
Three Months Ended
 
Six Months Ended
 
 
June 30,
 
June 30,
 
 
2018
 
2017
 
2018
 
2017
Distributed earnings allocated to common stock
 
$
20,472

 
$
17,829

 
$
40,755

 
$
33,960

Undistributed earnings
 
18,061

 
26,637

 
54,535

 
65,043

Net income
 
38,533

 
44,466

 
95,290

 
99,003

Less: preferred stock dividends
 
3,000

 
2,002

 
6,100

 
4,005

Plus: return from preferred stockholders due to redemption (1)
 

 

 
15,280

 

Net income available to common stockholders for basic earnings per common share
 
35,533

 
42,464

 
104,470

 
94,998

Plus: preferred stock dividends on convertible preferred stock
 

 
2

 

 
5

Less: earnings allocated to participating securities
 
1

 
1

 
3

 
2

Earnings allocated to common stockholders for diluted earnings per common share
 
$
35,532

 
$
42,465

 
$
104,467

 
$
95,001

Weighted average shares outstanding for basic earnings per common share
 
84,253,966

 
83,842,963

 
84,160,344

 
83,753,195

Dilutive effect of:
 
 
 
 
 
 
 
 
Stock options
 
553,999

 
554,314

 
530,892

 
595,415

Restricted shares and units
 
443,845

 
363,003

 
383,390

 
417,433

Convertible preferred stock
 

 
7,134

 

 
7,228

Total dilutive effect of equity awards and convertible preferred stock
 
997,844

 
924,451

 
914,282

 
1,020,076

Weighted average shares outstanding for diluted earnings per common share
 
85,251,810

 
84,767,414

 
85,074,626

 
84,773,271

Basic earnings per common share
 
$
0.42

 
$
0.51

 
$
1.24

 
$
1.13

Diluted earnings per common share
 
0.42

 
0.50

 
1.23

 
1.12

(1) 
Represents the excess carrying amount over the redemption price of the 8% Series A non-cumulative perpetual preferred stock redeemed in the first quarter of 2018.


12




Note 4.
          Investment Securities
 
Amortized cost and fair value of investment securities, excluding marketable equity securities and non-marketable FHLB and FRB stock, were as follows as of the dates indicated (in thousands):
 
 
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
June 30, 2018
 
 

 
 

 
 

 
 

Available for Sale
 
 

 
 

 
 

 
 

U.S. Government sponsored agencies and enterprises
 
$
5,098

 
$

 
$
(72
)
 
$
5,026

States and political subdivisions
 
338,927

 
11,686

 
(552
)
 
350,061

Residential mortgage-backed securities
 
1,225,978

 
1,594

 
(21,993
)
 
1,205,579

Commercial mortgage-backed securities
 
63,527

 
84

 
(187
)
 
63,424

Corporate bonds
 
23,179

 

 
(9
)
 
23,170

Total Available for Sale
 
1,656,709

 
13,364

 
(22,813
)
 
1,647,260

Held to Maturity
 
 

 
 

 
 

 
 

States and political subdivisions
 
884,576

 
18,512

 
(1,745
)
 
901,343

Residential mortgage-backed securities
 
38,460

 
400

 

 
38,860

Total Held to Maturity
 
923,036

 
18,912

 
(1,745
)
 
940,203

Total
 
$
2,579,745

 
$
32,276

 
$
(24,558
)
 
$
2,587,463

December 31, 2017
 
 

 
 

 
 

 
 

Available for Sale
 
 

 
 

 
 

 
 

U.S. Government sponsored agencies and enterprises
 
$
23,013

 
$
3

 
$
(9
)
 
$
23,007

States and political subdivisions
 
363,813

 
15,998

 
(486
)
 
379,325

Residential mortgage-backed securities
 
861,594

 
3,035

 
(11,930
)
 
852,699

Commercial mortgage-backed securities
 
71,554

 
612

 
(131
)
 
72,035

Corporate bonds
 
70,155

 
84

 
(42
)
 
70,197

Equity securities (1)
 
11,236

 

 
(173
)
 
11,063

Total Available for Sale
 
1,401,365

 
19,732

 
(12,771
)
 
1,408,326

Held to Maturity
 
 
 
 
 
 
 
 

States and political subdivisions
 
878,400

 
32,559

 
(447
)
 
910,512

Residential mortgage-backed securities
 
80,682

 
1,261

 

 
81,943

Total Held to Maturity
 
959,082

 
33,820

 
(447
)
 
992,455

Total
 
$
2,360,447

 
$
53,552

 
$
(13,218
)
 
$
2,400,781

(1) 
Reflected in marketable equity securities on the consolidated balance sheet following the adoption of the new guidance under ASC Topic 825 "Financial Instruments" on January 1, 2018.
 
The increase in investment securities was due to investments in residential mortgage-backed securities in the first quarter of 2018. The Company has no direct exposure to the State of Illinois in its investment securities portfolio, but approximately 20% of the state and political subdivisions portfolio consisted of securities issued by municipalities located in Illinois as of June 30, 2018. Approximately 95% of the state and political subdivisions securities were general obligation issues, and 27% were insured or had another form of credit enhancement as of June 30, 2018.


13




Unrealized losses on investment securities by length of time in a continuous unrealized loss position and the fair value of the related securities at June 30, 2018 were as follows (in thousands):
 
 
 
Less Than 12 Months
 
12 Months or More
 
Total
 
 
Fair
 
Unrealized
 
Fair
 
Unrealized
 
Fair
 
Unrealized
 
 
Value
 
Losses
 
Value
 
Losses
 
Value
 
Losses
Available for Sale
 
 

 
 

 
 

 
 

 
 

 
 

U.S. Government sponsored agencies and enterprises
 
$
5,026

 
$
(72
)
 
$

 
$

 
$
5,026

 
$
(72
)
States and political subdivisions
 
13,492

 
(57
)
 
18,587

 
(495
)
 
32,079

 
(552
)
Residential mortgage-backed securities
 
713,248

 
(7,402
)
 
398,203

 
(14,591
)
 
1,111,451

 
(21,993
)
Commercial mortgage-backed securities
 
31,993

 
(127
)
 
11,263

 
(60
)
 
43,256

 
(187
)
Corporate bonds
 
23,170

 
(9
)
 

 

 
23,170

 
(9
)
Total Available for Sale
 
786,929

 
(7,667
)
 
428,053

 
(15,146
)
 
1,214,982

 
(22,813
)
Held to Maturity
 
 

 
 

 
 

 
 

 
 

 
 

States and political subdivisions
 
131,461

 
(1,191
)
 
14,546

 
(554
)
 
146,007

 
(1,745
)
Total
 
$
918,390

 
$
(8,858
)
 
$
442,599

 
$
(15,700
)
 
$
1,360,989

 
$
(24,558
)
 
Unrealized losses on investment securities by length of time in a continuous unrealized loss position and the fair value of the related securities at December 31, 2017 were as follows (in thousands):
 
 
 
Less Than 12 Months
 
12 Months or More
 
Total
 
 
Fair
 
Unrealized
 
Fair
 
Unrealized
 
Fair
 
Unrealized
 
 
Value
 
Losses
 
Value
 
Losses
 
Value
 
Losses
Available for Sale
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Government sponsored agencies and enterprises
 
$
5,111

 
$
(9
)
 
$

 
$

 
$
5,111

 
$
(9
)
States and political subdivisions
 
9,016

 
(29
)
 
18,754

 
(457
)
 
27,770

 
(486
)
Residential mortgage-backed securities
 
256,769

 
(1,853
)
 
407,224

 
(10,077
)
 
663,993

 
(11,930
)
Commercial mortgage-backed securities
 
19,483

 
(20
)
 
14,583

 
(111
)
 
34,066

 
(131
)
Corporate bonds
 
7,052

 
(8
)
 
9,963

 
(34
)
 
17,015

 
(42
)
Equity securities
 
11,063

 
(173
)
 

 

 
11,063

 
(173
)
Total Available for Sale
 
308,494

 
(2,092
)
 
450,524

 
(10,679
)
 
759,018

 
(12,771
)
Held to Maturity
 
 

 
 

 
 

 
 

 
 

 
 

States and political subdivisions
 
45,499

 
(257
)
 
12,561

 
(190
)
 
58,060

 
(447
)
Total
 
$
353,993

 
$
(2,349
)
 
$
463,085

 
$
(10,869
)
 
$
817,078

 
$
(13,218
)
 
The total number of security positions in the investment portfolio in an unrealized loss position at June 30, 2018 was 626 compared to 471 at December 31, 2017. This increase in total number of security positions in a continuous unrealized loss position from December 31, 2017 to June 30, 2018 was mainly attributable to the mortgage-backed securities in the investment securities portfolio.

Declines in the fair value of available for sale securities below their cost that are deemed to be other than temporary are reflected in earnings as realized losses to the extent the impairment is related to credit losses. The amount of the impairment related to other factors is recognized in other comprehensive income. In estimating other-than-temporary impairment losses, management considers, among other things, (i) the length of time and the extent to which the fair value has been less than cost, (ii) the financial condition and near-term prospects of the issuer, and (iii) whether the Company is more likely than not to sell the security before recovery of its cost basis.
 
As of June 30, 2018, management does not have the intent to sell any of the securities in the table above and believes that it is more likely than not that the Company will not have to sell any such securities before a recovery of cost. The fair value is expected to recover as the securities approach their maturity date or repricing date or if market yields for such investments decline. Accordingly, as of June 30, 2018, management believes the impairments detailed in the table above are temporary.

14





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

Net gains (losses) recognized on investment securities were as follows (in thousands):
 
 
 
Three Months Ended
 
Six Months Ended
 
 
June 30,
 
June 30,
 
 
2018
 
2017
 
2018
 
2017
Realized gains
 
$
62

 
$
137

 
$
150

 
$
374

Realized losses
 
(148
)
 

 
(410
)
 
(6
)
Net (losses) gains
 
$
(86
)
 
$
137

 
$
(260
)
 
$
368

 
The amortized cost and fair value of investment securities as of June 30, 2018 by contractual maturity are shown below. Maturities may differ from contractual maturities in mortgage-backed securities because the mortgages underlying the securities may be called or repaid without any penalties. Therefore, mortgage-backed securities are not included in the maturity categories in the following maturity summary.

 
 
Amortized
 
Fair
(In thousands)
 
Cost
 
Value
Available for sale:
 
 

 
 

Due in one year or less
 
$
61,670

 
$
62,235

Due after one year through five years
 
124,424

 
128,078

Due after five years through ten years
 
40,076

 
40,532

Due after ten years
 
141,034

 
147,412

Residential and commercial mortgage-backed securities
 
1,289,505

 
1,269,003

 
 
1,656,709

 
1,647,260

Held to maturity:
 
 

 
 

Due in one year or less
 
42,695

 
42,916

Due after one year through five years
 
175,308

 
180,895

Due after five years through ten years
 
224,040

 
229,732

Due after ten years
 
442,533

 
447,800

Residential mortgage-backed securities
 
38,460

 
38,860

 
 
923,036

 
940,203

Total
 
$
2,579,745

 
$
2,587,463

 
Investment securities with a carrying amount of $738.6 million at June 30, 2018 and $726.1 million at December 31, 2017 were pledged as collateral on public deposits and for other purposes as required or permitted by law, while only $606.0 million and $625.2 million were required to be pledged at June 30, 2018 and December 31, 2017, respectively.

Investment securities held to maturity with a carrying amount of $2.6 million were transferred to the available for sale portfolio and subsequently sold during the first quarter of 2018. These investment securities were obligations of states and political subdivisions that were downgraded and no longer met our credit criteria.
 

15




Note 5.
        Loans
 
Loans consist of the following at (in thousands):

 
 
June 30,
2018
 
December 31,
2017
Commercial loans
 
$
4,816,545

 
$
4,786,180

Commercial loans collateralized by assignment of lease payments
 
2,100,460

 
2,113,135

Commercial real estate
 
3,929,327

 
4,147,529

Residential real estate
 
1,352,625

 
1,432,458

Construction real estate
 
495,805

 
406,849

Indirect vehicle
 
749,983

 
667,928

Home equity
 
192,785

 
219,098

Other consumer loans
 
81,714

 
73,141

Total loans, excluding purchased credit-impaired loans
 
13,719,244

 
13,846,318

Purchased credit-impaired loans
 
101,001

 
119,744

Total loans
 
$
13,820,245

 
$
13,966,062

 

Loans are made to individuals as well as commercial and tax exempt entities. Specific loan terms vary as to interest rate, repayment, and collateral requirements based on the type of loan requested and the credit worthiness of the prospective borrower. Except for commercial loans collateralized by assignment of lease payments, asset-based loans, residential real estate loans, and indirect vehicle loans, credit risk tends to be geographically concentrated in that a majority of the loan customers are located in Illinois.
 
The Company's extension of credit is governed by its Credit Risk Policy, which was established to control the quality of the Company's loans. This policy is reviewed and approved by the Enterprise Risk Committee of the Company's Board of Directors on an annual basis.
 
Commercial Loans. Commercial credit is extended mostly to middle market customers. Such credits are typically comprised of working capital loans, loans for physical asset expansion, asset acquisition loans and other business loans. Loans to closely held businesses will generally be guaranteed in full or for a significant amount by the businesses' principal owners. Commercial loans are made based primarily on the historical cash flow of the borrower and secondarily on the underlying collateral provided by the borrower. The cash flows of borrowers, however, may not perform as forecasted and collateral securing loans may fluctuate in value due to economic or individual performance factors. Minimum standards and underwriting guidelines have been established for all commercial loan types. Asset-based loans, also included in commercial loans, are made to businesses with the primary source of repayment derived from payments on the related assets securing the loan. Collateral for these loans may include accounts receivable, inventory and equipment, and is monitored regularly to ensure ongoing sufficiency of collateral coverage and quality. The primary risk for these loans is a significant decline in collateral values due to general market conditions. Loan terms that mitigate these risks include typical industry amortization schedules, percentage of collateral advances, maintenance of cash collateral accounts and regular asset monitoring. Because of the national scope of our asset-based lending, the risk of these loans is also diversified by geography.
 
Commercial Loans Collateralized by Assignment of Lease Payments ("Lease Loans"). The Company makes lease loans to lessors where the underlying leases are with both investment grade and non-investment grade companies. Investment grade lessees are companies rated in one of the four highest categories by Moody's Investor Services. Whether or not companies fall into this category, each lease loan is considered on its individual merit based on the financial wherewithal of the lessee using financial information available at the time of underwriting. In addition, leases that transfer substantially all of the benefits and risk related to the equipment ownership are classified as direct finance leases and are included in lease loans.
 
Commercial Real Estate Loans. Commercial real estate loans are subject to underwriting standards and processes similar to commercial loans. These loans are viewed primarily as property income based loans and the repayment of these loans is largely dependent on the successful operation of the property, which also serves as collateral for the loan. In addition, $1.2 billion of commercial real estate loans at June 30, 2018 were secured by owner-occupied properties where the primary source of repayment is the cash flow from the ongoing operations and activities conducted by the owner of the property. Loan performance may be adversely affected by factors impacting the general economy or conditions specific to the real estate market such as geographic location and/or property type.
 

16




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

Consumer Related Loans. The Company originates direct and indirect consumer loans, including residential real estate, home equity lines and loans, credit cards, and indirect vehicle loans (motorcycle, marine, recreational, and powersports vehicles). Each loan type is underwritten based upon several factors including debt to income, type of collateral and loan to collateral value, credit history, and the Company's relationship with the borrower. Indirect loan and credit card underwriting involves the use of risk-based pricing in the underwriting process.

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

Pledged loans. A collateral pledge agreement exists whereby at all times, the Company must keep on hand, free of all other pledges, liens, and encumbrances, loans with unpaid principal balances aggregating no less than 160% for qualifying first mortgage loans, 170% for home equity loans, 161% for qualifying commercial real estate loans and 105% for loans held for sale, of the outstanding advances from the Federal Home Loan Bank.  As of June 30, 2018 and December 31, 2017, the Company had $4.3 billion and $4.7 billion, respectively, of loans pledged as collateral for long-term Federal Home Loan Bank advances and third party letters of credit, while only $3.2 billion and $3.1 billion were required to be pledged at June 30, 2018 and December 31, 2017, respectively.
The Company also has a collateral pledge agreement with the Federal Reserve Bank. As of June 30, 2018 and December 31, 2017, the Company had $858.9 million and $902.2 million, respectively, of loans pledged as collateral at the Federal Reserve Bank for the discount window as a backup liquidity funding source.


17




The following table presents the contractual aging of the recorded investment in past due loans by class of loans as of June 30, 2018 and December 31, 2017 (in thousands):

 
 
Current
 
30-59 Days
Past Due
 
60-89 Days
Past Due
 
Loans Past Due
90 Days or More
 
Total
Past Due
 
Total
June 30, 2018
 
 

 
 

 
 

 
 

 
 

 
 

Commercial
 
$
4,808,606

 
$
116

 
$
217

 
$
7,606

 
$
7,939

 
$
4,816,545

Commercial collateralized by assignment of lease payments
 
2,069,443

 
16,560

 
10,769

 
3,688

 
31,017

 
2,100,460

Commercial real estate:
 
 

 
 

 
 

 
 

 
 

 
 

Health care
 
694,863

 

 

 

 

 
694,863

Industrial
 
857,560

 
764

 

 
3,424

 
4,188

 
861,748

Multifamily
 
549,083

 
529

 

 

 
529

 
549,612

Retail
 
489,135

 

 

 
835

 
835

 
489,970

Office
 
430,984

 

 

 
228

 
228

 
431,212

Other
 
900,604

 
552

 
86

 
680

 
1,318

 
901,922

Residential real estate
 
1,341,504

 
617

 
1,687

 
8,817

 
11,121

 
1,352,625

Construction real estate
 
495,805

 

 

 

 

 
495,805

Indirect vehicle
 
744,297

 
3,947

 
1,131

 
608

 
5,686

 
749,983

Home equity
 
186,479

 
1,187

 
794

 
4,325

 
6,306

 
192,785

Other consumer
 
81,541

 
91