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Section 1: 10-Q (10-Q)

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Table of Contents

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 _________________________________________
FORM 10-Q
_________________________________________
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2018
OR
¨
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 001-35077
_____________________________________ 
WINTRUST FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter) 
Illinois
36-3873352
(State of incorporation or organization)
(I.R.S. Employer Identification No.)
9700 W. Higgins Road, Suite 800
Rosemont, Illinois 60018
(Address of principal executive offices)

(847) 939-9000
(Registrant’s telephone number, including area code)
______________________________________ 
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 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  þ    No  ¨
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  þ    No  ¨
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. (Check one):
 
Large accelerated filer
 
þ
 
 
Accelerated filer
 
¨
Non-accelerated filer
 
¨
(Do not check if a smaller reporting company)
 
Smaller reporting company
 
¨
Emerging growth company
 
¨
 
 
 
 
 
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.    ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  þ
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Common Stock — no par value, 56,392,334 shares, as of October 31, 2018
 


Table of Contents

TABLE OF CONTENTS
 
 
 
Page
 
PART I. — FINANCIAL INFORMATION
 
ITEM 1.
ITEM 2.
ITEM 3.
ITEM 4.
 
PART II. — OTHER INFORMATION
 
ITEM 1.
ITEM 1A.
ITEM 2.
ITEM 3.
Defaults Upon Senior Securities
NA
ITEM 4.
Mine Safety Disclosures
NA
ITEM 5.
Other Information
NA
ITEM 6.
 


Table of Contents

PART I
ITEM 1. FINANCIAL STATEMENTS
WINTRUST FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CONDITION
 
(Unaudited)
 
 
 
(Unaudited)
(In thousands, except share data)
September 30,
2018
 
December 31,
2017
 
September 30,
2017
Assets
 
 
 
 
 
Cash and due from banks
$
279,936

 
$
277,534

 
$
251,896

Federal funds sold and securities purchased under resale agreements
57

 
57

 
56

Interest bearing deposits with banks
1,137,044

 
1,063,242

 
1,218,728

Available-for-sale securities, at fair value
2,164,985

 
1,803,666

 
1,665,903

Held-to-maturity securities, at amortized cost ($911.6 million, $812.5 million and $807.0 million fair value at September 30, 2018, December 31, 2017 and September 30, 2017 respectively)
966,438

 
826,449

 
819,340

Trading account securities
688

 
995

 
643

Equity securities with readily determinable fair value
36,414

 

 

Federal Home Loan Bank and Federal Reserve Bank stock
99,998

 
89,989

 
87,192

Brokerage customer receivables
15,649

 
26,431

 
23,631

Mortgage loans held-for-sale, at fair value
338,111

 
313,592

 
370,282

Loans, net of unearned income, excluding covered loans
23,123,951

 
21,640,797

 
20,912,781

Covered loans

 

 
46,601

Total loans
23,123,951

 
21,640,797

 
20,959,382

Allowance for loan losses
(149,756
)
 
(137,905
)
 
(133,119
)
Allowance for covered loan losses

 

 
(758
)
Net loans
22,974,195

 
21,502,892

 
20,825,505

Premises and equipment, net
664,469

 
621,895

 
609,978

Lease investments, net
199,241

 
212,335

 
193,828

Accrued interest receivable and other assets
700,568

 
567,374

 
580,612

Trade date securities receivable

 
90,014

 
189,896

Goodwill
537,560

 
501,884

 
502,021

Other intangible assets
27,378

 
17,621

 
18,651

Total assets
$
30,142,731

 
$
27,915,970

 
$
27,358,162

Liabilities and Shareholders’ Equity
 
 
 
 
 
Deposits:
 
 
 
 
 
Non-interest bearing
$
6,399,213

 
$
6,792,497

 
$
6,502,409

Interest bearing
18,517,502

 
16,390,850

 
16,392,654

Total deposits
24,916,715

 
23,183,347

 
22,895,063

Federal Home Loan Bank advances
615,000

 
559,663

 
468,962

Other borrowings
373,571

 
266,123

 
251,680

Subordinated notes
139,172

 
139,088

 
139,052

Junior subordinated debentures
253,566

 
253,566

 
253,566

Trade date securities payable

 

 
880

Accrued interest payable and other liabilities
664,885

 
537,244

 
440,034

Total liabilities
26,962,909

 
24,939,031

 
24,449,237

Shareholders’ Equity:
 
 
 
 
 
Preferred stock, no par value; 20,000,000 shares authorized:
 
 
 
 
 
Series D - $25 liquidation value; 5,000,000 shares issued and outstanding at September 30, 2018, December 31, 2017 and September 30, 2017
125,000

 
125,000

 
125,000

Common stock, no par value; $1.00 stated value; 100,000,000 shares authorized at September 30, 2018, December 31, 2017 and September 30, 2017; 56,486,573 shares issued at September 30, 2018, 56,068,220 shares issued at December 31, 2017 and 55,939,801 shares issued at September 30, 2017
56,486

 
56,068

 
55,940

Surplus
1,553,353

 
1,529,035

 
1,519,596

Treasury stock, at cost, 109,404 shares at September 30, 2018, 103,013 shares at December 31, 2017, and 101,738 shares at September 30, 2017
(5,547
)
 
(4,986
)
 
(4,884
)
Retained earnings
1,543,680

 
1,313,657

 
1,254,759

Accumulated other comprehensive loss
(93,150
)
 
(41,835
)
 
(41,486
)
Total shareholders’ equity
3,179,822

 
2,976,939

 
2,908,925

Total liabilities and shareholders’ equity
$
30,142,731

 
$
27,915,970

 
$
27,358,162

See accompanying notes to unaudited consolidated financial statements.

1

Table of Contents

WINTRUST FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
 
Three Months Ended
 
Nine Months Ended
(In thousands, except per share data)
September 30,
2018
 
September 30,
2017
 
September 30,
2018
 
September 30,
2017
Interest income
 
 
 
 
 
 
 
Interest and fees on loans
$
271,134

 
$
223,897

 
$
761,191

 
$
628,876

Mortgage loans held-for-sale
5,285

 
3,223

 
12,329

 
10,267

Interest bearing deposits with banks
5,423

 
3,272

 
11,462

 
6,529

Federal funds sold and securities purchased under resale agreements

 

 
1

 
2

Investment securities
21,710

 
16,058

 
60,726

 
45,155

Trading account securities
11

 
8

 
29

 
23

Federal Home Loan Bank and Federal Reserve Bank stock
1,235

 
1,080

 
3,988

 
3,303

Brokerage customer receivables
164

 
150

 
488

 
473

Total interest income
304,962

 
247,688

 
850,214

 
694,628

Interest expense
 
 
 
 
 
 
 
Interest on deposits
48,736

 
23,655

 
110,578

 
58,396

Interest on Federal Home Loan Bank advances
1,947

 
2,151

 
9,849

 
6,674

Interest on other borrowings
2,003

 
1,482

 
5,400

 
3,770

Interest on subordinated notes
1,773

 
1,772

 
5,333

 
5,330

Interest on junior subordinated debentures
2,940

 
2,640

 
8,239

 
7,481

Total interest expense
57,399

 
31,700

 
139,399

 
81,651

Net interest income
247,563

 
215,988

 
710,815

 
612,977

Provision for credit losses
11,042

 
7,896

 
24,431

 
21,996

Net interest income after provision for credit losses
236,521

 
208,092

 
686,384

 
590,981

Non-interest income
 
 
 
 
 
 
 
Wealth management
22,634

 
19,803

 
68,237

 
59,856

Mortgage banking
42,014

 
28,184

 
112,808

 
86,061

Service charges on deposit accounts
9,331

 
8,645

 
27,339

 
25,606

Gains (losses) on investment securities, net
90

 
39

 
(249
)
 
31

Fees from covered call options
627

 
1,143

 
2,893

 
2,792

Trading (losses) gains, net
(61
)
 
(129
)
 
166

 
(869
)
Operating lease income, net
9,132

 
8,461

 
27,569

 
21,048

Other
16,163

 
13,585

 
42,079

 
43,943

Total non-interest income
99,930

 
79,731

 
280,842

 
238,468

Non-interest expense
 
 
 
 
 
 
 
Salaries and employee benefits
123,855

 
106,251

 
357,966

 
312,069

Equipment
10,827

 
9,947

 
31,426

 
28,858

Operating lease equipment depreciation
7,370

 
6,794

 
20,843

 
17,092

Occupancy, net
14,404

 
13,079

 
41,834

 
38,766

Data processing
9,335

 
7,851

 
26,580

 
23,580

Advertising and marketing
11,120

 
9,572

 
31,726

 
23,448

Professional fees
9,914

 
6,786

 
23,047

 
18,956

Amortization of other intangible assets
1,163

 
1,068

 
3,164

 
3,373

FDIC insurance
4,205

 
3,877

 
13,165

 
11,907

OREO expense, net
596

 
590

 
4,502

 
2,994

Other
20,848

 
17,760

 
60,502

 
54,194

Total non-interest expense
213,637

 
183,575

 
614,755

 
535,237

Income before taxes
122,814

 
104,248

 
352,471

 
294,212

Income tax expense
30,866

 
38,622

 
88,962

 
105,311

Net income
$
91,948

 
$
65,626

 
$
263,509

 
$
188,901

Preferred stock dividends
2,050

 
2,050

 
6,150

 
7,728

Net income applicable to common shares
$
89,898

 
$
63,576

 
$
257,359

 
$
181,173

Net income per common share—Basic
$
1.59

 
$
1.14

 
$
4.57

 
$
3.34

Net income per common share—Diluted
$
1.57

 
$
1.12

 
$
4.50

 
$
3.23

Cash dividends declared per common share
$
0.19

 
$
0.14

 
$
0.57

 
$
0.42

Weighted average common shares outstanding
56,366

 
55,796

 
56,268

 
54,292

Dilutive potential common shares
918

 
966

 
912

 
2,305

Average common shares and dilutive common shares
57,284

 
56,762

 
57,180

 
56,597

See accompanying notes to unaudited consolidated financial statements.

2

Table of Contents

WINTRUST FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
 
 
Three Months Ended
 
Nine Months Ended
(In thousands)
September 30,
2018
 
September 30,
2017
 
September 30,
2018
 
September 30,
2017
Net income
$
91,948

 
$
65,626

 
$
263,509

 
$
188,901

Unrealized (losses) gains on available-for-sale securities
 
 
 
 
 
 
 
Before tax
(18,149
)
 
811

 
(63,788
)
 
25,783

Tax effect
4,872

 
(158
)
 
17,123

 
(9,968
)
Net of tax
(13,277
)
 
653

 
(46,665
)
 
15,815

Reclassification of net gains on available-for-sale securities included in net income
 
 
 
 
 
 
 
Before tax
1,001

 
39

 
6

 
31

Tax effect
(271
)
 
(15
)
 
(1
)
 
(12
)
Net of tax
730

 
24

 
5

 
19

Reclassification of amortization of unrealized gains and losses on investment securities transferred to held-to-maturity from available-for-sale
 
 
 
 
 
 
 
Before tax
33

 
33

 
49

 
1,483

Tax effect
(9
)
 
(13
)
 
(13
)
 
(583
)
Net of tax
24

 
20

 
36

 
900

Net unrealized (losses) gains on available-for-sale securities
(14,031
)
 
609

 
(46,706
)
 
14,896

Unrealized gains on derivative instruments
 
 
 
 
 
 
 
Before tax
212

 
394

 
4,369

 
1,699

Tax effect
(57
)
 
(158
)
 
(1,173
)
 
(669
)
Net unrealized gains on derivative instruments
155

 
236

 
3,196

 
1,030

Foreign currency adjustment
 
 
 
 
 
 
 
Before tax
2,586

 
5,643

 
(3,927
)
 
10,678

Tax effect
(644
)
 
(1,437
)
 
976

 
(2,762
)
Net foreign currency adjustment
1,942

 
4,206

 
(2,951
)
 
7,916

Total other comprehensive (loss) income
(11,934
)
 
5,051

 
(46,461
)
 
23,842

Comprehensive income
$
80,014

 
$
70,677

 
$
217,048

 
$
212,743

See accompanying notes to unaudited consolidated financial statements.

3

Table of Contents

WINTRUST FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (UNAUDITED)
(In thousands)
Preferred
stock
 
Common
stock
 
Surplus
 
Treasury
stock
 
Retained
earnings
 
Accumulated
other
comprehensive
loss
 
Total
shareholders’
equity
Balance at January 1, 2017
$
251,257

 
$
51,978

 
$
1,365,781

 
$
(4,589
)
 
$
1,096,518

 
$
(65,328
)
 
$
2,695,617

Net income

 

 

 

 
188,901

 

 
188,901

Other comprehensive income, net of tax

 

 

 

 

 
23,842

 
23,842

Cash dividends declared on common stock

 

 

 

 
(22,932
)
 

 
(22,932
)
Dividends on preferred stock

 

 

 

 
(7,728
)
 

 
(7,728
)
Stock-based compensation

 

 
8,160

 

 

 

 
8,160

Conversion of Series C preferred stock to common stock
(126,257
)
 
3,121

 
123,136

 

 

 

 

Common stock issued for:
 
 
 
 
 
 
 
 
 
 
 
 
 
Exercise of stock options and warrants

 
702

 
19,544

 

 

 

 
20,246

Restricted stock awards

 
79

 
(79
)
 
(295
)
 

 

 
(295
)
Employee stock purchase plan

 
28

 
1,893

 

 

 

 
1,921

Director compensation plan

 
32

 
1,161

 

 

 

 
1,193

Balance at September 30, 2017
$
125,000

 
$
55,940

 
$
1,519,596

 
$
(4,884
)
 
$
1,254,759

 
$
(41,486
)
 
$
2,908,925

Balance at January 1, 2018
$
125,000

 
$
56,068

 
$
1,529,035

 
$
(4,986
)
 
$
1,313,657

 
$
(41,835
)
 
$
2,976,939

Cumulative effect adjustment from the adoption of:
 
 
 
 
 
 
 
 
 
 
 
 
 
Accounting Standards Update (“ASU”) 2016-01

 

 

 

 
1,880

 
(1,880
)
 

ASU 2017-12

 

 

 

 
(116
)
 

 
(116
)
ASU 2018-02

 

 

 

 
2,974

 
(2,974
)
 

Net income

 

 

 

 
263,509

 

 
263,509

Other comprehensive loss, net of tax

 

 

 

 

 
(46,461
)
 
(46,461
)
Cash dividends declared on common stock

 

 

 

 
(32,074
)
 

 
(32,074
)
Dividends on preferred stock

 

 

 

 
(6,150
)
 

 
(6,150
)
Stock-based compensation

 

 
10,346

 

 

 

 
10,346

Common stock issued for:
 
 
 
 
 
 
 
 
 
 
 
 
 
Exercise of stock options and warrants

 
283

 
10,952

 
(192
)
 

 

 
11,043

Restricted stock awards

 
93

 
(93
)
 
(369
)
 

 

 
(369
)
Employee stock purchase plan

 
23

 
1,862

 

 

 

 
1,885

Director compensation plan

 
19

 
1,251

 

 

 

 
1,270

Balance at September 30, 2018
$
125,000

 
$
56,486

 
$
1,553,353

 
$
(5,547
)
 
$
1,543,680

 
$
(93,150
)
 
$
3,179,822

See accompanying notes to unaudited consolidated financial statements.

4

Table of Contents


WINTRUST FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
 
Nine Months Ended
(In thousands)
September 30,
2018
 
September 30,
2017
Operating Activities:
 
 
 
Net income
$
263,509

 
$
188,901

Adjustments to reconcile net income to net cash provided by operating activities
 
 
 
Provision for credit losses
24,431

 
21,996

Depreciation, amortization and accretion, net
48,908

 
46,514

Stock-based compensation expense
10,346

 
8,160

Net amortization of premium on securities
5,998

 
4,694

Accretion of discount on loans
(15,510
)
 
(16,885
)
Mortgage servicing rights fair value change, net
(3,660
)
 
1,338

Originations and purchases of mortgage loans held-for-sale
(3,027,658
)
 
(2,812,685
)
Proceeds from sales of mortgage loans held-for-sale
3,060,577

 
2,916,368

Bank owned life insurance ("BOLI") income
(5,448
)
 
(2,770
)
Decrease in trading securities, net
307

 
1,346

Net decrease in brokerage customer receivables
10,782

 
1,550

Gains on mortgage loans sold
(80,826
)
 
(67,239
)
Losses (gains) on investment securities, net
249

 
(31
)
Gains on sales of premises and equipment, net
(34
)
 
(88
)
Net losses on sales and fair value adjustments of other real estate owned
3,808

 
969

Increase in accrued interest receivable and other assets, net
(97,844
)
 
(63,064
)
Increase (decrease) in accrued interest payable and other liabilities, net
63,166

 
(80,099
)
Net Cash Provided by Operating Activities
261,101

 
148,975

Investing Activities:
 
 
 
Proceeds from maturities and calls of available-for-sale securities
222,387

 
215,522

Proceeds from maturities and calls of held-to-maturity securities
8,061

 
102,361

Proceeds from sales of available-for-sale securities
209,640

 
121,795

Proceeds from sales of equity securities with readily determinable fair value
1,895

 

Proceeds from sales and capital distributions of equity securities without readily determinable fair value
680

 

Purchases of available-for-sale securities
(777,324
)
 
(446,278
)
Purchases of held-to-maturity securities
(148,865
)
 
(287,976
)
Purchases of equity securities without readily determinable fair value
(3,779
)
 

(Purchase) redemption of Federal Home Loan Bank and Federal Reserve Bank stock, net
(10,009
)
 
46,302

Distributions from investments in partnerships, net
3,181

 
465

Net cash paid in business combinations
(13,749
)
 
(284
)
Proceeds from sales of other real estate owned
16,892

 
12,892

Cash paid to the FDIC related to reimbursements on covered assets

 
(258
)
Net increase in interest bearing deposits with banks
(75,636
)
 
(236,531
)
Net increase in loans
(1,304,555
)
 
(1,176,279
)
Redemption of BOLI
8,134

 

Purchases of premises and equipment, net
(52,639
)
 
(39,583
)
Net Cash Used for Investing Activities
(1,915,686
)
 
(1,687,852
)
Financing Activities:
 
 
 
Increase in deposit accounts
1,520,270

 
1,236,548

Increase (decrease) in subordinated notes and other borrowings, net
109,112

 
(20,111
)
Increase in Federal Home Loan Bank advances, net
52,000

 
313,000

Cash payments to settle contingent consideration liabilities recognized in business combinations

 
(1,058
)
Issuance of common shares resulting from the exercise of stock options, employee stock purchase plan and conversion of common stock warrants
14,390

 
23,360

Common stock repurchases for tax withholdings related to stock-based compensation
(561
)
 
(295
)
Dividends paid
(38,224
)
 
(30,660
)
Net Cash Provided by Financing Activities
1,656,987

 
1,520,784

Net Increase (Decrease) in Cash and Cash Equivalents
2,402

 
(18,093
)
Cash and Cash Equivalents at Beginning of Period
277,591

 
270,045

Cash and Cash Equivalents at End of Period
$
279,993

 
$
251,952

See accompanying notes to unaudited consolidated financial statements.

5

Table of Contents

WINTRUST FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(1) Basis of Presentation

The consolidated financial statements of Wintrust Financial Corporation and Subsidiaries (“Wintrust” or the “Company”) presented herein are unaudited, but in the opinion of management reflect all necessary adjustments of a normal or recurring nature for a fair presentation of results as of the dates and for the periods covered by the consolidated financial statements.

The accompanying consolidated financial statements are unaudited and do not include information or footnotes necessary for a complete presentation of financial condition, results of operations or cash flows in accordance with U.S. generally accepted accounting principles ("GAAP"). The unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements and notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017 (“2017 Form 10-K”). Operating results reported for the period are not necessarily indicative of the results which may be expected for the entire year. Reclassifications of certain prior period amounts have been made to conform to the current period presentation.

The preparation of the financial statements requires management to make estimates, assumptions and judgments that affect the reported amounts of assets and liabilities. Management believes that the estimates made are reasonable, however, changes in estimates may be required if economic or other conditions develop differently from management’s expectations. Certain policies and accounting principles 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 views critical accounting policies to be those which are highly dependent on subjective or complex judgments, estimates and assumptions, and where changes in those estimates and assumptions could have a significant impact on the financial statements. Management currently views the determination of the allowance for loan losses and the allowance for losses on lending-related commitments, loans acquired with evidence of credit quality deterioration since origination, estimations of fair value, the valuations required for impairment testing of goodwill, the valuation and accounting for derivative instruments and income taxes as the accounting areas that require the most subjective and complex judgments, and as such could be the most subject to revision as new information becomes available. Descriptions of the Company's significant accounting policies are included in Note 1 - “Summary of Significant Accounting Policies” of the 2017 Form 10-K.

(2) Recent Accounting Developments

Revenue Recognition

In May 2014, the Financial Accounting Standards Board ("FASB") issued ASU No. 2014-09, which created “Revenue from Contracts with Customers (Topic 606),” to clarify the principles for recognizing revenue and develop a common revenue standard for customer contracts. This ASU provides guidance regarding how an entity should 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 ASU also added a new subtopic to the codification, ASC 340-40, “Other Assets and Deferred Costs: Contracts with Customers” to provide guidance on costs related to obtaining and fulfilling a customer contract. Furthermore, the new standard requires disclosure of sufficient information to enable users of financial statements to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. At the time ASU No. 2014-09 was issued, the guidance was effective for fiscal years beginning after December 15, 2016. In July 2015, the FASB approved a deferral of the effective date by one year, which resulted in the guidance becoming effective for the Company as of January 1, 2018.

The FASB continued to issue various updates to clarify and improve specific areas of ASU No. 2014-09. In March 2016, the FASB issued ASU No. 2016-08, “Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net),” to clarify the implementation guidance within ASU No. 2014-09 surrounding principal versus agent considerations and its impact on revenue recognition. In April 2016, the FASB issued ASU No. 2016-10, “Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing,” to also clarify the implementation guidance within ASU No. 2014-09 related to these two topics. In May 2016, the FASB issued ASU No. 2016-11, “Revenue Recognition (Topic 605) and Derivative and Hedging (Topic 815): Rescission of SEC Guidance Because of Accounting Standards Updates 2014-09 and 2014-16 Pursuant to Staff Announcements at the March 3, 2016 EITF Meeting,” to remove certain areas of SEC Staff Guidance from those specific Topics. In May 2016 and December 2016, the FASB issued ASU 2016-12, “Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients” and ASU 2016-20, “Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers,” to clarify specific aspects of implementation, including the collectability criterion, exclusion of sales taxes collected from a transaction price, noncash

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consideration, contract modifications, completed contracts at transition, the applicability of loan guarantee fees, impairment of capitalized contract costs and certain disclosure requirements. In February 2017, the FASB issued ASU No. 2017-05, “Other Income - Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20): Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets,” to clarify the implementation guidance within ASU No. 2014-09 surrounding transfers of nonfinancial assets, including partial sales of such assets, and its impact on revenue recognition. Like ASU No. 2014-09, this guidance became effective for the Company starting January 1, 2018.

The Company adopted ASU No. 2014-09 and all subsequent updates issued to clarify and improve specific areas of this ASU as of January 1, 2018. As certain significant revenue sources related to financial instruments such as interest income are considered not in-scope, the new guidance did not have a significant impact on the Company's consolidated financial statements. Revenue sources impacted by the new guidance include brokerage and trust and asset management fees from the wealth management business unit, card-based fees, deposit-related fees and other non-interest income. During implementation, the Company reviewed specific contracts with customers across these various sources of revenue. Reviews of such contracts assisted in identifying any characteristics of such contracts that could result in a change in the Company's current practices for recognition of revenue and recognition of costs incurred to obtain or fulfill such contracts. After review of such contracts, the Company identified no indication within the terms of such contracts that a significant change in the Company's current practices and accounting policies was necessary. The Company elected to adopt the new guidance using the modified retrospective approach applied to all contracts as of the date of initial application at January 1, 2018. Electing the modified retrospective approach resulted in no cumulative effect adjustment to the opening balance of retained earnings at the date of initial application. Additional disclosures have been added in accordance with the new guidance. See Note 13 – Revenue from Contracts with Customers for discussion of the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers.

Financial Instruments

In January 2016, the FASB issued ASU No. 2016-01, “Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities,” to improve the accounting for financial instruments. This ASU requires equity securities with readily determinable fair values to be measured at fair value with changes recognized in net income. Such equity securities with readily determinable fair values are no longer classified as available-for-sale securities or trading securities within the consolidated financial statements of an entity. For equity securities without a readily determinable fair value, the value of the equity securities may be elected to be measured at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer instead of fair value, unless a qualitative assessment indicates impairment. Additionally, this ASU requires the separate presentation of financial assets and financial liabilities by measurement category and form of financial asset on the balance sheet or the accompanying notes to the financial statements.

The Company adopted this guidance as of January 1, 2018. For equity securities with a readily determinable fair value, this guidance was applied under a modified retrospective approach with a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption. As of January 1, 2018, the Company reclassified approximately $1.9 million from accumulated other comprehensive income, related to previously recognized unrealized gains, net of deferred taxes, from equity securities with readily determinable fair values, to retained earnings. Equity securities with readily determinable fair values are now prospectively presented separate from available-for-sale securities and trading securities within the Company's Consolidated Statements of Condition. Additionally, for the nine months ended September 30, 2018, the Company recognized $456,000 of net unrealized gains from equity securities with readily determinable fair values directly to earnings. For equity securities without a readily determinable fair value, the Company elected to measure such investments at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer, unless a qualitative assessment indicates impairment, which was applied prospectively. Equity securities without readily determinable fair values are included within accrued interest receivable and other assets within the Company's Consolidated Statements of Condition. See Note 5 - Investment Securities for further discussion of equity securities with and without readily determinable fair values.

In January 2018, the FASB issued ASU No. 2018-03, “Technical Corrections and Improvements to Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities,” to clarify certain aspects of the guidance issued in ASU No. 2016-01, including aspects of equity securities without a readily determinable fair value. This guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years beginning after June 15, 2018. Early adoption is permitted. As these clarifications did not have a material impact on the Company's consolidated financial statements, the Company elected to early adopt this guidance as of January 1, 2018.


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Leases

In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842),” to improve transparency and comparability across entities regarding leasing arrangements. This ASU requires the recognition of a separate lease liability representing the required discounted lease payments over the lease term and a separate lease asset representing the right to use the underlying asset during the same lease term. Further, this ASU provides clarification regarding the identification of certain components of contracts that would represent a lease as well as requires additional disclosures to the notes of the financial statements. Additionally, in January 2018, the FASB issued ASU No. 2018-01, "Leases (Topic 842): Land Easement Practical Expedient for Transition to Topic 842," to permit an entity to elect an optional practical expedient to not evaluate under Topic 842 land easements that exist or expired before the entity's adoption of Topic 842 and that were not previously accounted for as leases under existing accounting guidance. This guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, and is to be applied under a modified retrospective approach, including the option to apply certain practical expedients.

The FASB has continued to issue various updates to clarify and improve specific areas of ASU No. 2016-02. In July 2018, the FASB issued ASU No. 2018-10, “Codification Improvements to Topic 842, Leases,” to clarify the implementation guidance within ASU No. 2016-02 surrounding narrow aspects of Topic 842, including lessee reassessment of lease classifications, the rate implicit in a lease, lessor reassessment of lease terms and purchase options and variable lease payments that depend on an index or a rate. Also, in July 2018, the FASB issued ASU No. 2018-11, “Leases (Topic 842): Targeted Improvements,” to clarify the implementation guidance within ASU No. 2016-02 surrounding comparative period reporting requirements for initial adoption as well as separating lease and non-lease components in a contract and allocating consideration in the contract to the separate components. Like ASU No. 2016-02, this guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, and is to be applied under a modified retrospective approach.

The Company continues to evaluate the impact of adopting this new guidance on the consolidated financial statements. Excluding any impact from the clarification of contracts representing a lease, the Company expects to primarily recognize separate lease liabilities and right to use assets for the amounts related to certain facilities under operating lease agreements disclosed in Note 15 - Minimum Lease Commitments in the 2017 Form 10-K. Other leasing arrangements in which the Company expects to recognize separate lease liabilities and right to use assets include those related to the use of signage related to certain sponsorships and other agreements and certain automatic teller machines. The Company does not expect to significantly change operating lease agreements prior to adoption. The Company has established a committee consisting of individuals from various areas of the Company tasked with transitioning the Company to the new guidance requirements. The Company continues to review lease agreements related to certain assets as well as other agreements with components representing a lease across its various business units to determine the impact of adoption on the Company's consolidated financial statements. Additionally, the Company is reviewing methodologies for determining an appropriate discount rate for the measurement of separate lease liabilities and right of use assets. Current controls and processes are also being reviewed to determine any need for changes in response to the guidance.

Derivatives

In August 2017, the FASB issued ASU No. 2017-12, “Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities,” to improve the financial reporting of hedging relationships to better align the economic results of an entity’s risk management activities and disclosures within its financial statements. In addition, this ASU makes certain targeted improvements to simplify the application of the hedge accounting, including to derivative instruments as well as allow a one-time election to reclassify fixed-rate, prepayable debt securities from a held-to-maturity classification to an available-for-sale classification. This guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Guidance related to existing cash flow hedges and, if elected, fair value hedges is to be applied under a modified retrospective approach and guidance related to amended presentation and disclosures is to be applied under a prospective approach.

Early adoption is permitted as of the beginning of an annual period that has not been issued or made available for issuance. The Company elected to early adopt this guidance as of January 1, 2018. See Note 15 - Derivative Financial Instruments for further discussion of early adoption of this guidance. The impact of early adoption on the financial statements included the following:

As allowed under the guidance, for certain existing derivative instruments designated as fair value hedges, the Company transitioned the measurement methodology for the related hedged item (loans) to be in accordance with the guidance without dedesignation of the hedging relationship. This resulted in a negative cumulative basis adjustment to loans of $116,000 with a corresponding adjustment to retained earnings.
No fixed-rate, prepayable held-to-maturity securities were transferred to an available-for-sale classification.
The entire change in the hedging instrument included in the assessment of hedge effectiveness of fair value hedges is presented in the same income statement line as the current impact of the effective portion of such hedge, or interest income

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and interest expense for interest rate hedging. The Company has previously recognized this ineffectiveness within non-interest income. For the first nine months of 2018, the Company recognized $55,000 of such change in interest income.

In October 2018, the FASB issued ASU No. 2018-16, “Derivatives and Hedging (Topic 815): Inclusion of the Secured Overnight Financing Rate (SOFR) Overnight Index Swap (OIS) Rate as a Benchmark Interest Rate for Hedge Accounting Purposes,” to permit the use of the OIS rate based on SOFR as a U.S. benchmark interest rate for hedge accounting purposes. This guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, and is to be applied prospectively for qualifying new or redesignated hedging relationships entered into on or after the date of adoption. Early adoption is permitted as the Company has early adopted ASU 2017-12 as discussed above.

Allowance for Credit Losses

In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” to replace the current incurred loss methodology for recognizing credit losses, which delays recognition until it is probable a loss has been incurred, with a methodology that reflects an estimate of all expected credit losses and considers additional reasonable and supportable forecasted information when determining credit loss estimates. This impacts the calculation of an allowance for credit losses for all financial assets measured under the amortized cost basis, including held-to-maturity debt securities and PCI loans at the time of and subsequent to acquisition. Additionally, credit losses related to available-for-sale debt securities would be recorded through the allowance for credit losses and not as a direct adjustment to the amortized cost of the securities. This guidance is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years, and is to be applied under a modified retrospective approach.

The Company is currently evaluating the impact of adopting this new guidance on the consolidated financial statements as well as the impact on current systems and processes. Specifically, the Company has established a committee consisting of individuals from the various areas of the Company tasked with transitioning to the new requirements. At this time, the Company is finalizing potential accounting policy elections and potential modeling methodologies for estimating expected credit losses using reasonable and supportable forecast information. Additionally, the Company has identified certain historical data and system requirements and has selected platforms to build, store, execute and determine the financial impact. Current controls and processes are also being reviewed to determine any need for changes in response to the guidance.

Statement of Cash Flows

In August 2016, the FASB issued ASU No. 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (a consensus of the FASB Emerging Issues Task Force),” to clarify the presentation of specific types of cash flow receipts and payments, including the payment of debt prepayment or debt extinguishment costs, contingent consideration cash payments paid subsequent to the acquisition date and proceeds from settlement of BOLI policies. This guidance became effective as of January 1, 2018 and was applied under a retrospective approach resulting in additional disclosure, including cash payments made to settle contingent consideration liabilities recognized in prior business combinations.

In November 2016, the FASB issued ASU No. 2016-18 “Statement of Cash Flows (Topic 230): Restricted Cash (a consensus of the FASB Emerging Issues Task Force),” to clarify the classification and presentation of changes in restricted cash on the statement of cash flows. This guidance became effective as of January 1, 2018 and did not have a material impact on the Company.

Income Taxes

In October 2016, the FASB issued ASU No. 2016-16, “Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory,” to improve the accounting for intra-entity transfers of assets other than inventory. This ASU allows the recognition of current and deferred income taxes for such transfers prior to the subsequent sale of the transferred assets to an outside party. Initial recognition of current and deferred income taxes is currently prohibited for intra-entity transfers of assets other than inventory. This guidance became effective as of January 1, 2018 and did not have a material impact on the Company. 

The Tax Cuts and Jobs Act (the “Tax Act”) was enacted on December 22, 2017, and the Company recognized a provisional tax benefit of $7.6 million in 2017 to reflect the impact of the Tax Act, primarily reflecting estimated effects of a lower federal income tax rate on its net deferred tax liabilities and a transition tax due on the deferred earnings of the Company's Canadian subsidiary. Estimates were made in good faith and were subject to change as additional information and interpretive guidance regarding provisions of the Tax Act became available. Staff Accounting Bulletin 118 provides a measurement period, not to extend beyond one year from the date of enactment, during which a company may complete the accounting for the impacts of the Tax Act. During the three months ended September 30, 2018, the Company finalized the provisional amounts recorded for the year ended December 31, 2017 related to the Tax Cuts and Jobs Act and recorded an additional net tax benefit of $1.2 million.

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Business Combinations

In January 2017, the FASB issued ASU No. 2017-01, “Business Combinations (Topic 805): Clarifying the Definition of a Business,” to improve such definition and, as a result, assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or as business combinations. The definition of a business impacts many areas of accounting including acquisitions, disposals, goodwill and consolidation. This guidance became effective as of January 1, 2018 and was applied under a prospective approach. See Note 3 - Business Combinations for further discussion of business combinations including the acquisition of Chicago Shore Corporation ("CSC") as well as the acquisition of certain assets and assumption of certain liabilities of the mortgage banking business of iFreedom Direct Corporation DBA Veterans First Mortgage ("Veterans First") during the current period.

Goodwill

In January 2017, the FASB issued ASU No. 2017-04, “Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment,” to simplify the subsequent measurement of goodwill. When the carrying amount of a reporting unit exceeds its fair value, an entity would no longer be required to determine goodwill impairment by assigning the fair value of a reporting unit to all of its assets and liabilities as if that reporting unit was acquired in a business combination. Goodwill impairment would be recognized according to the excess of the carrying amount of the reporting unit over the calculated fair value of such unit. This guidance is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years, and is to be applied under a prospective approach. The Company does not expect this guidance to have a material impact on the Company's consolidated financial statements.

Compensation

In March 2017, the FASB issued ASU No. 2017-07, “Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost,” to improve the presentation of net periodic pension cost and net periodic post-retirement benefit cost. An entity will be required to report the service cost component of such costs in the same line item or items as other compensation costs related to services rendered. Additionally, only the service cost component will be eligible for capitalization when applicable. This guidance became effective as of January 1, 2018 and was applied under a retrospective approach related to presentation of the service cost component and a prospective approach related to capitalization of such costs. Adoption of this guidance did not have a material impact on the Company's consolidated financial statements.

In May 2017, the FASB issued ASU No. 2017-09, “Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting,” to clarify when modification accounting is appropriate for changes to the terms and conditions of a share-based payment award. An entity will be required to account for such changes as a modification unless certain criteria is met. This guidance became effective as of January 1, 2018 and was applied under a prospective approach for awards modified on or after the adoption date. Adoption of this guidance did not have a material impact on the Company's consolidated financial statements.

Amortization of Premium on Certain Debt Securities

In March 2017, the FASB issued ASU No. 2017-08, “Receivables - Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities,” to amend the amortization period for certain purchased callable debt securities held at a premium. The amortization period for such securities will be shortened to the earliest call date. This guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, and is to be applied under a modified retrospective approach. Early adoption is permitted as of the beginning of an annual period that has not been issued or made available for issuance. The Company did not early adopt this guidance as of January 1, 2018. The Company is currently evaluating the impact of adopting this new guidance on the consolidated financial statements.

Accumulated Other Comprehensive Income (Loss)

In February 2018, the FASB issued ASU No. 2018-02, “Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income,” to allow a reclassification from accumulated other comprehensive income to retained earnings related to the stranded tax effects within other comprehensive income resulting from the Federal income tax rate reduction in the Tax Act. This guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, and is to be applied either in the period of adoption or retrospectively to each period or periods in which the effect of the Tax Act is recognized.


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Early adoption is permitted as of the beginning of an annual period that has not been issued or made available for issuance. The Company elected to early adopt this guidance as of January 1, 2018 and applied such reclassification in the current period (period of adoption). As of January 1, 2018, the Company reclassified a stranded credit of $3.0 million from accumulated other comprehensive income to retained earnings. The Company has a policy for releasing the income tax effects from accumulated other comprehensive income using an individual security approach.

Fair Value Measurement

In August 2018, the FASB issued ASU No. 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirement for Fair Value Measurement,” to modify disclosure requirements on fair value measurements and inputs. This guidance is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years, and is to be applied prospectively or retrospectively depending upon the disclosure requirement. Early adoption is permitted.

Intangibles

In August 2018, the FASB issued ASU No. 2018-15, “Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract,” to align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with similar requirements related to implementation costs incurred to develop or obtain internal-use software. In addition, the amendment requires any capitalized implementation costs related to a hosting arrangement to be expensed over the term of the hosting arrangement. This guidance is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years, and is to be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. Early adoption is permitted, including adoption in any interim period. The Company is currently evaluating the impact of adopting this new guidance on the consolidated financial statements.

(3) Business Combinations

Non FDIC-Assisted Bank Acquisitions

On August 1, 2018, the Company acquired CSC. CSC was the parent company of Delaware Place Bank. Through this transaction, the Company acquired Delaware Place Bank’s one banking location in Chicago, Illinois. Delaware Place Bank was merged into the Company's wholly-owned subsidiary Wintrust Bank. The Company acquired assets with a fair value of approximately $282.2 million, including approximately $151.0 million of loans, and assumed deposits with a fair value of approximately $213.1 million. Additionally, the Company recorded goodwill of $27.2 million on the acquisition.

FDIC-Assisted Transactions

From 2010 to 2012, the Company acquired the banking operations, including the acquisition of certain assets and the assumption of liabilities, of nine financial institutions in FDIC-assisted transactions. Loans comprised the majority of the assets acquired in nearly all of these FDIC-assisted transactions, of which eight such transactions were subject to loss sharing agreements with the FDIC whereby the FDIC agreed to reimburse the Company for 80% of losses incurred on the purchased loans, other real estate owned (“OREO”), and certain other assets. Additionally, clawback provisions within these loss share agreements with the FDIC required the Company to reimburse the FDIC for actual losses on covered assets that were lower than the original loss estimates agreed upon with the FDIC with respect of such assets in the loss share agreements. The Company refers to the loans subject to these loss sharing agreements as “covered loans” and uses the term “covered assets” to refer to covered loans, covered OREO and certain other covered assets during periods subject to such agreements.

As of dates subject to such agreements, the loans covered by the loss share agreements were classified and presented as covered loans and the estimated reimbursable losses were recorded as an FDIC indemnification asset or liability in the Consolidated Statements of Condition. The Company recorded the acquired assets and liabilities at their estimated fair values at the acquisition date. The fair value for loans reflected expected credit losses at the acquisition date. Therefore, the Company only recognized a provision for credit losses and charge-offs on the acquired loans for any further credit deterioration subsequent to the acquisition date. See Note 7 — Allowance for Loan Losses, Allowance for Losses on Lending-Related Commitments and Impaired Loans for further discussion of the allowance on covered loans.

The loss share agreements with the FDIC covered realized losses on loans, foreclosed real estate and certain other assets and required the Company to record loss share assets and liabilities that were measured separately from the loan portfolios because they were not contractually embedded in the loans and were not transferable with the loans had the Company chosen to dispose of them. Fair values at the acquisition dates were estimated based on projected cash flows available for loss share based on the

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credit adjustments estimated for each loan pool and the loss share percentages. The loss share assets and liabilities were recorded as FDIC indemnification assets and other liabilities, respectively, on the Consolidated Statements of Condition as of dates covered by loss share agreements. Subsequent to the acquisition date, reimbursements received from the FDIC for actual incurred losses reduced the FDIC indemnification assets. Reductions to expected losses, to the extent such reductions to expected losses were the result of an improvement to the actual or expected cash flows from the covered assets, also reduced the FDIC indemnification assets and, if necessary, increased any loss share liability when necessary reductions exceeded the current value of the FDIC indemnification assets. In accordance with the clawback provision noted above, the Company was required to reimburse the FDIC when actual losses were less than certain thresholds established for each loss share agreement. The balance of these estimated reimbursements in accordance with clawback provisions and any related amortization were adjusted periodically for changes in the expected losses on covered assets. On the Consolidated Statements of Condition as of dates subject to loss share agreements, estimated reimbursements from clawback provisions were recorded as a reduction to the FDIC indemnification asset or, if necessary, an increase to the loss share liability, which was included within accrued interest payable and other liabilities. In the second quarter of 2017, the Company recorded a $4.9 million reduction to the estimated loss share liability as a result of an adjustment related to such clawback provisions. Although these assets were contractual receivables from the FDIC and these liabilities were contractual payables to the FDIC, there were no contractual interest rates. Additional expected losses, to the extent such expected losses resulted in recognition of an allowance for covered loan losses, increased the FDIC indemnification asset or reduced the FDIC indemnification liability. The corresponding amortization was recorded as a component of non-interest income on the Consolidated Statements of Income during periods covered by loss share agreements.

The following table summarizes the activity in the Company’s FDIC indemnification liability during the periods covered by loss share agreements indicated below:
 
Three Months Ended
 
Nine Months Ended
(Dollars in thousands)
September 30,
2017
 
September 30,
2017
Balance at beginning of period
$
15,375

 
$
16,701

Reductions from reimbursable expenses
(159
)
 
(316
)
Amortization
311

 
1,010

Changes in expected reimbursements to the FDIC for changes in expected credit losses and reimbursable expenses
994

 
(1,665
)
Payments received from the FDIC
(1,049
)
 
(258
)
Balance at end of period
$
15,472

 
$
15,472


On October 16, 2017, the Company entered into agreements with the FDIC that terminated all existing loss share agreements with the FDIC. Under the terms of the agreements, the Company made a net payment of $15.2 million to the FDIC as consideration for the early termination of the loss share agreements. The Company recorded a pre-tax gain of approximately $0.4 million in the fourth quarter of 2017 to write off the remaining loss share asset, relieve the claw-back liability and recognize the payment to the FDIC.

Mortgage Banking Acquisitions

On January 4, 2018, the Company acquired Veterans First with assets including mortgage-servicing-rights on approximately 10,000 loans, totaling an estimated $1.6 billion in unpaid principal balance. The Company recorded goodwill of $9.1 million on the acquisition.

On February 14, 2017, the Company acquired certain assets and assumed certain liabilities of the mortgage banking business of American Homestead Mortgage, LLC ("AHM") in a business combination. The Company recorded goodwill of $999,000 on the acquisition.

Purchased Credit Impaired ("PCI") Loans

Purchased loans acquired in a business combination are recorded at estimated fair value on their purchase date. For PCI loans, expected future cash flows at the purchase date in excess of the fair value of loans are recorded as interest income over the life of the loans if the timing and amount of the future cash flows is reasonably estimable (“accretable yield”). The difference between contractually required payments and the cash flows expected to be collected at acquisition is referred to as the non-accretable difference and represents probable losses in the portfolio.


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In determining the acquisition date fair value of PCI loans, and in subsequent accounting, the Company aggregates these purchased loans into pools of loans by common risk characteristics, such as credit risk rating and loan type. Subsequent to the purchase date, increases in cash flows over those expected at the purchase date are recognized as interest income prospectively. Subsequent decreases to the expected cash flows will result in a provision for loan losses.

The Company purchased a portfolio of life insurance premium finance receivables in 2009. These purchased life insurance premium finance receivables are valued on an individual basis. If credit related conditions deteriorate, an allowance related to these loans will be established as part of the provision for credit losses.

See Note 6—Loans, for additional information on PCI loans.

(4) Cash and Cash Equivalents

For purposes of the Consolidated Statements of Cash Flows, the Company considers cash and cash equivalents to include cash on hand, cash items in the process of collection, non-interest bearing amounts due from correspondent banks, federal funds sold and securities purchased under resale agreements with original maturities of three months or less. These items are included within the Company’s Consolidated Statements of Condition as cash and due from banks, and federal funds sold and securities purchased under resale agreements.

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(5) Investment Securities

The following tables are a summary of the investment securities portfolios as of the dates shown:
 
September 30, 2018
(Dollars in thousands)
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
Available-for-sale securities
 
 
 
 
 
 
 
U.S. Treasury
$
125,153

 
$

 
$
(392
)
 
$
124,761

U.S. Government agencies
111,997

 
8

 
(985
)
 
111,020

Municipal
133,006

 
1,481

 
(1,114
)
 
133,373

Corporate notes:
 
 
 
 
 
 
 
Financial issuers
97,085

 
87

 
(4,719
)
 
92,453

Other
1,000

 

 

 
1,000

Mortgage-backed: (1)
 
 
 
 
 
 
 
Mortgage-backed securities
1,744,600

 
121

 
(87,950
)
 
1,656,771

Collateralized mortgage obligations
47,909

 
4

 
(2,306
)
 
45,607

Equity securities (2)

 

 

 

Total available-for-sale securities
$
2,260,750

 
$
1,701

 
$
(97,466
)
 
$
2,164,985

Held-to-maturity securities
 
 
 
 
 
 
 
U.S. Government agencies
$
713,423

 
$

 
$
(47,706
)
 
$
665,717

Municipal
253,015

 
629

 
(7,764
)
 
245,880

Total held-to-maturity securities
$
966,438

 
$
629

 
$
(55,470
)
 
$
911,597

Equity securities with readily determinable fair value (2)
$
33,512

 
$
4,206

 
$
(1,304
)
 
$
36,414


 
December 31, 2017
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
(Dollars in thousands)
 
 
 
Available-for-sale securities
 
 
 
 
 
 
 
U.S. Treasury
$
144,904

 
$

 
$
(1,082
)
 
$
143,822

U.S. Government agencies
157,638

 
2

 
(725
)
 
156,915

Municipal
113,197

 
2,712

 
(557
)
 
115,352

Corporate notes:
 
 
 
 
 
 
 
Financial issuers
30,309

 
43

 
(301
)
 
30,051

Other
1,000

 

 
(1
)
 
999

Mortgage-backed: (1)
 
 
 
 
 
 
 
Mortgage-backed securities
1,291,695

 
446

 
(31,955
)
 
1,260,186

Collateralized mortgage obligations
60,092

 
64

 
(617
)
 
59,539

Equity securities (2)
34,234

 
3,357

 
(789
)
 
36,802

Total available-for-sale securities
$
1,833,069

 
$
6,624

 
$
(36,027
)
 
$
1,803,666

Held-to-maturity securities
 
 
 
 
 
 
 
U.S. Government agencies
$
579,062

 
$
23

 
$
(14,066
)
 
$
565,019

Municipal
247,387

 
2,668

 
(2,558
)
 
247,497

Total held-to-maturity securities
$
826,449

 
$
2,691

 
$
(16,624
)
 
$
812,516

(1)
Consisting entirely of residential mortgage-backed securities, none of which are subprime.
(2)
As a result of the adoption of ASU No. 2016-01 effective January 1, 2018, equity securities with readily determinable fair value are no longer presented within available-for-sale securities and are now presented as equity securities with readily determinable fair values in the Company's Consolidated Statements of Condition for the current period.


14

Table of Contents

 
September 30, 2017
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
(Dollars in thousands)
 
 
 
Available-for-sale securities
 
 
 
 
 
 
 
U.S. Treasury
$
144,872

 
$

 
$
(727
)
 
$
144,145

U.S. Government agencies
159,884

 
10

 
(566
)
 
159,328

Municipal
113,796

 
2,493

 
(273
)
 
116,016

Corporate notes:
 
 
 
 
 
 
 
Financial issuers
60,325

 
63

 
(771
)
 
59,617

Other
1,000

 

 
(3
)
 
997

Mortgage-backed: (1)
 
 
 
 
 
 
 
Mortgage-backed securities
1,114,655

 
1,477

 
(30,436
)
 
1,085,696

Collateralized mortgage obligations
63,934

 
230

 
(412
)
 
63,752

Equity securities (2)
33,166

 
3,867

 
(681
)
 
36,352

Total available-for-sale securities
$
1,691,632

 
$
8,140

 
$
(33,869
)
 
$
1,665,903

Held-to-maturity securities
 
 
 
 
 
 
 
U.S. Government agencies
$
585,061

 
$
249

 
$
(12,579
)
 
$
572,731

Municipal
234,279

 
2,185

 
(2,159
)
 
234,305

Total held-to-maturity securities
$
819,340

 
$
2,434

 
$
(14,738
)
 
$
807,036

(1)
Consisting entirely of residential mortgage-backed securities, none of which are subprime.
(2)
As a result of the adoption of ASU No. 2016-01 effective January 1, 2018, equity securities with readily determinable fair value are no longer presented within available-for-sale securities and are now presented as equity securities with readily determinable fair values in the Company's Consolidated Statements of Condition for the current period.

Equity securities without readily determinable fair values totaled $26.6 million as of September 30, 2018. Equity securities without readily determinable fair values are included as part of accrued interest receivable and other assets in the Company's Consolidated Statements of Condition. The Company recorded no upward adjustments on such securities in the third quarter of 2018 and $156,000 on a year-to-date basis, related to observable price changes in orderly transactions for the identical or a similar investment of the same issuer in accordance with the adoption of ASU No. 2016-01. No downward adjustments of equity securities without readily determinable fair values related to observable price changes in orderly transactions for the identical or a similar investment of the same issuer were recorded during the current periods. The Company monitors its equity investments without a readily determinable fair values to identify potential transactions that may indicate an observable price change requiring adjustment to its carrying amount.


15

Table of Contents

The following table presents the portion of the Company’s available-for-sale and held-to-maturity investment securities portfolios which has gross unrealized losses, reflecting the length of time that individual securities have been in a continuous unrealized loss position at September 30, 2018:
 
Continuous unrealized
losses existing for
less than 12 months
 
Continuous unrealized
losses existing for
greater than 12 months
 
Total
(Dollars in thousands)
Fair Value
 
Unrealized Losses
 
Fair Value
 
Unrealized Losses
 
Fair Value
 
Unrealized Losses
Available-for-sale securities
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury
$
100,008

 
$
(131
)
 
$
24,753

 
$
(261
)
 
$
124,761

 
$
(392
)
U.S. Government agencies
37,672

 
(914
)
 
70,032

 
(71
)
 
107,704

 
(985
)
Municipal
38,774

 
(553
)
 
20,489

 
(561
)
 
59,263

 
(1,114
)
Corporate notes:
 
 
 
 
 
 
 
 
 
 
 
Financial issuers
68,639

 
(4,475
)
 
3,730

 
(244
)
 
72,369

 
(4,719
)
Other

 

 

 

 

 

Mortgage-backed:
 
 
 
 
 
 
 
 
 
 
 
Mortgage-backed securities
573,401

 
(14,706
)
 
1,079,068

 
(73,244
)
 
1,652,469

 
(87,950
)
Collateralized mortgage obligations
22,524

 
(1,228
)
 
22,671

 
(1,078
)
 
45,195

 
(2,306
)
Total available-for-sale securities
$
841,018

 
$
(22,007
)
 
$
1,220,743

 
$
(75,459
)
 
$
2,061,761

 
$
(97,466
)
Held-to-maturity securities
 
 
 
 
 
 
 
 
 
 
 
U.S. Government agencies
$
298,736

 
$
(12,317
)
 
$
366,981

 
$
(35,389
)
 
$
665,717

 
$
(47,706
)
Municipal
146,750

 
(3,854
)
 
83,874

 
(3,910
)
 
230,624

 
(7,764
)
Total held-to-maturity securities
$
445,486

 
$
(16,171
)
 
$
450,855

 
$
(39,299
)
 
$
896,341

 
$
(55,470
)

The Company conducts a regular assessment of its available-for-sale and held-to-maturity investment securities to determine whether securities are other-than-temporarily impaired considering, among other factors, the nature of the securities, credit ratings or financial condition of the issuer, the extent and duration of the unrealized loss, expected cash flows, market conditions and the Company’s ability to hold the securities through the anticipated recovery period.

The Company does not consider available-for-sale and held-to-maturity securities with unrealized losses at September 30, 2018 to be other-than-temporarily impaired. The Company does not intend to sell these investments and it is more likely than not that the Company will not be required to sell these investments before recovery of the amortized cost bases, which may be the maturity dates of the securities. The unrealized losses within each category have occurred as a result of changes in interest rates, market spreads and market conditions subsequent to purchase. Securities with continuous unrealized losses existing for more than twelve months were primarily mortgage-backed securities and corporate notes.


16

Table of Contents

The following table provides information as to the amount of gross gains and losses, adjustments and impairment on investment securities and proceeds received through the sale or call of investment securities:

 
Three months ended September 30,
 
Nine months ended September 30,
(Dollars in thousands)
2018
 
2017
 
2018
 
2017
Realized gains on investment securities
$
1,051

 
$
58

 
$
1,057

 
$
106

Realized losses on investment securities
(50
)
 
(19
)
 
(1,051
)
 
(75
)
Net realized gains on investment securities
1,001

 
$
39

 
6

 
$
31

Unrealized gains on equity securities with readily determinable fair value
530

 

 
2,632

 

Unrealized losses on equity securities with readily determinable fair value
(1,111
)
 

 
(2,176
)
 

Net unrealized (losses) gains on equity securities with readily determinable fair value
(581
)
 

 
456

 

Upward adjustments of equity securities without readily determinable fair values

 

 
156

 

Downward adjustments of equity securities without readily determinable fair values

 

 

 

Impairment of equity securities without readily determinable fair values
(330
)
 

 
(867
)
 

Adjustment and impairment, net, of equity securities without readily determinable fair values
(330
)
 

 
(711
)
 

Other than temporary impairment charges

 

 

 

Gains (losses) on investment securities, net
$
90

 
$
39

 
$
(249
)
 
$
31

Proceeds from sales of available-for-sale securities
$
649

 
$
133,089

 
$
209,640

 
$
121,795

Proceeds from sales of equity securities with readily determinable fair value
1,895

 

 
1,895

 

Proceeds from sales and capital distributions of equity securities without readily determinable fair value
64

 

 
680

 


During the three months ended September 30, 2018, the Company recorded $330,000 of impairment of equity securities without readily determinable fair values. On a year-to-date basis, the Company recorded impairment of equity securities without readily determinable fair values totaling $867,000. The Company conducts a quarterly assessment of its equity securities without a readily determinable fair values to determine whether impairment exists in such securities, considering, among other factors, the nature of the securities, financial condition of the issuer and expected future cash flows.


17

Table of Contents

The amortized cost and fair value of available-for-sale and held-to-maturity investment securities as of September 30, 2018, December 31, 2017 and September 30, 2017, by contractual maturity, are shown in the following table. Contractual maturities may differ from actual maturities as borrowers may have the right to call or repay obligations with or without call or prepayment penalties. Mortgage-backed securities are not included in the maturity categories in the following maturity summary as actual maturities may differ from contractual maturities because the underlying mortgages may be called or prepaid without penalties:
 
September 30, 2018
 
December 31, 2017
 
September 30, 2017
(Dollars in thousands)
Amortized Cost
 
Fair Value
 
Amortized Cost
 
Fair Value
 
Amortized Cost
 
Fair Value
Available-for-sale securities
 
 
 
 
 
 
 
 
 
 
 
Due in one year or less
$
128,184

 
$
127,844

 
$
300,833

 
$
299,285

 
$
150,907

 
$
150,241

Due in one to five years
174,968

 
174,877

 
97,019

 
97,326

 
282,443

 
282,121

Due in five to ten years
118,229

 
113,875

 
33,947

 
35,029

 
38,339

 
39,458

Due after ten years
46,860

 
46,011

 
15,249

 
15,499

 
8,188

 
8,283

Mortgage-backed
1,792,509

 
1,702,378

 
1,351,787

 
1,319,725

 
1,178,589

 
1,149,448

Equity securities (1)

 

 
34,234

 
36,802

 
33,166

 
36,352

Total available-for-sale securities
$
2,260,750

 
$
2,164,985

 
$
1,833,069

 
$
1,803,666

 
$
1,691,632

 
$
1,665,903

Held-to-maturity securities
 
 
 
 
 
 
 
 
 
 
 
Due in one year or less
$
5,521

 
$
5,511

 
$
170

 
$
171

 
$
170

 
$
171

Due in one to five years
31,782

 
31,160

 
38,392

 
38,012

 
36,914

 
36,734

Due in five to ten years
255,146

 
243,608

 
205,227

 
203,680

 
193,387

 
192,581

Due after ten years
673,989

 
631,318

 
582,660

 
570,653

 
588,869

 
577,550

Total held-to-maturity securities
$
966,438

 
$
911,597

 
$
826,449

 
$
812,516

 
$
819,340

 
$
807,036

(1)
As a result of the adoption of ASU No. 2016-01 effective January 1, 2018, equity securities with readily determinable fair value are no longer presented within available-for-sale securities and are now presented as equity securities with readily determinable fair values in the Company's Consolidated Statements of Condition for the current period.

Securities having a fair value of $1.7 billion at September 30, 2018 as well as securities having a fair value of $1.7 billion and $1.6 billion at December 31, 2017 and September 30, 2017, respectively, were pledged as collateral for public deposits, trust deposits, Federal Home Loan Bank ("FHLB") advances, securities sold under repurchase agreements and derivatives. At September 30, 2018, there were no securities of a single issuer, other than U.S. Government-sponsored agency securities, which exceeded 10% of shareholders’ equity.

18

Table of Contents

(6) Loans

The following table shows the Company’s loan portfolio by category as of the dates shown:
 
September 30,
 
December 31,
 
September 30,
(Dollars in thousands)
2018
 
2017
 
2017
Balance:
 
 
 
 
 
Commercial
$
7,473,958

 
$
6,787,677

 
$
6,456,034

Commercial real estate
6,746,774

 
6,580,618

 
6,400,781

Home equity
578,844

 
663,045

 
672,969

Residential real estate
924,250

 
832,120

 
789,499

Premium finance receivables—commercial
2,885,327

 
2,634,565

 
2,664,912

Premium finance receivables—life insurance
4,398,971

 
4,035,059

 
3,795,474

Consumer and other
115,827

 
107,713

 
133,112

Total loans, net of unearned income, excluding covered loans
$
23,123,951

 
$
21,640,797

 
$
20,912,781

Covered loans

 

 
46,601

Total loans
$
23,123,951

 
$
21,640,797

 
$
20,959,382

Mix:
 
 
 
 
 
Commercial
32
%
 
31
%
 
31
%
Commercial real estate
29

 
30

 
31

Home equity
3

 
3

 
3

Residential real estate
4