0001139812-18-000059.txt : 20181109 0001139812-18-000059.hdr.sgml : 20181109 20181109165708 ACCESSION NUMBER: 0001139812-18-000059 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 101 CONFORMED PERIOD OF REPORT: 20180930 FILED AS OF DATE: 20181109 DATE AS OF CHANGE: 20181109 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MB FINANCIAL INC /MD CENTRAL INDEX KEY: 0001139812 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 364460265 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-36599 FILM NUMBER: 181173799 BUSINESS ADDRESS: STREET 1: 800 WEST MADISON STREET CITY: CHICAGO STATE: IL ZIP: 60607 BUSINESS PHONE: 888-422-6562 MAIL ADDRESS: STREET 1: 6111 NORTH RIVER ROAD CITY: ROSEMONT STATE: IL ZIP: 60018 FORMER COMPANY: FORMER CONFORMED NAME: MB FINANCIAL INC /MD DATE OF NAME CHANGE: 20011115 FORMER COMPANY: FORMER CONFORMED NAME: MB FINANCIAL INC/IL DATE OF NAME CHANGE: 20011113 FORMER COMPANY: FORMER CONFORMED NAME: MB MIDCITY INC DATE OF NAME CHANGE: 20010502 10-Q 1 a09301810q.htm 10-Q Document




UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
FORM 10-Q
 
(Mark One)
 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended September 30, 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 every Interactive Data File required to be submitted 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 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, a 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
 
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 84,236,864 shares of the Registrant’s common stock as of November 9, 2018.
 







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



i




PART I.        FINANCIAL INFORMATION
Item 1.
  Financial Statements

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

 
 

Cash and due from banks
 
$
342,933

 
$
397,880

Interest earning deposits with banks
 
87,740

 
181,341

Total cash and cash equivalents
 
430,673

 
579,221

Investment securities:
 
 

 
 

Securities available for sale, at fair value
 
1,710,636

 
1,408,326

Securities held to maturity, at amortized cost ($932,756 fair value at September 30, 2018 and $992,455 at December 31, 2017)
 
923,082

 
959,082

Marketable equity securities, at fair value
 
10,901

 

Non-marketable securities - FHLB and FRB stock
 
107,407

 
114,111

Total investment securities
 
2,752,026

 
2,481,519

Loans held for sale
 
51,834

 
548,578

Loans:
 
 

 
 

Total loans, excluding purchased credit-impaired loans
 
13,843,880

 
13,846,318

Purchased credit-impaired loans
 
91,072

 
119,744

Total loans
 
13,934,952

 
13,966,062

Less: Allowance for loan and lease losses
 
155,411

 
157,710

Net loans
 
13,779,541

 
13,808,352

Lease investments, net
 
429,843

 
409,051

Premises and equipment, net
 
274,006

 
286,690

Cash surrender value of life insurance
 
207,280

 
203,602

Goodwill
 
999,925

 
1,003,548

Other intangibles
 
49,114

 
54,766

Mortgage servicing rights, at fair value
 
295,803

 
276,279

Other real estate owned, net
 
10,933

 
9,736

Other real estate owned related to FDIC-assisted transactions
 
2,661

 
4,788

Other assets
 
436,332

 
420,810

Total assets
 
$
19,719,971

 
$
20,086,940

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 

 
 

LIABILITIES
 
 

 
 

Deposits:
 
 

 
 

Non-interest bearing
 
$
6,036,012

 
$
6,381,512

Interest bearing
 
8,672,781

 
8,576,866

Total deposits
 
14,708,793

 
14,958,378

Short-term borrowings
 
903,355

 
861,039

Long-term borrowings
 
451,677

 
505,158

Junior subordinated notes issued to capital trusts
 
133,995

 
211,494

Accrued expenses and other liabilities
 
556,822

 
541,048

Total liabilities
 
16,754,642

 
17,077,117

STOCKHOLDERS’ EQUITY
 
 

 
 

Preferred stock, ($0.01 par value, authorized 10,000,000 shares at September 30, 2018 and December 31, 2017; Series A, 8% perpetual non-cumulative, none issued and outstanding at September 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 September 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 September 30, 2018 and December 31, 2017; issued 86,160,783 shares at September 30, 2018 and 85,801,702 shares at December 31, 2017)
 
862

 
858

Additional paid-in capital
 
1,703,404

 
1,691,007

Retained earnings
 
1,147,060

 
1,065,303

Accumulated other comprehensive (loss) income
 
(17,186
)
 
3,584

Less: 1,940,112 and 1,883,810 shares of treasury common stock, at cost, at September 30, 2018 and December 31, 2017, respectively
 
(63,530
)
 
(60,928
)
Total stockholders’ equity
 
2,965,329

 
3,009,823

Total liabilities and stockholders’ equity
 
$
19,719,971

 
$
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
 
Nine Months Ended
 
 
September 30,
 
September 30,
 
 
2018
 
2017
 
2018
 
2017
Interest income:
 
 

 
 

 
 
 
 
Loans:
 
 
 
 
 
 
 
 
Taxable
 
$
168,190

 
$
155,440

 
$
489,710

 
$
432,603

Nontaxable
 
2,146

 
2,632

 
6,747

 
8,303

Investment securities:
 
 

 
 

 
 

 
 

Taxable
 
10,366

 
8,440

 
28,878

 
26,279

Nontaxable
 
9,387

 
9,731

 
28,302

 
29,541

Other interest earning accounts and Federal funds sold
 
1,650

 
327

 
2,025

 
754

Total interest income
 
191,739

 
176,570

 
555,662

 
497,480

Interest expense:
 
 

 
 

 
 
 
 
Deposits
 
20,485

 
10,865

 
52,903

 
27,133

Short-term borrowings
 
2,317

 
5,148

 
7,602

 
11,440

Long-term borrowings and junior subordinated notes
 
7,089

 
3,610

 
20,859

 
9,923

Total interest expense
 
29,891

 
19,623

 
81,364

 
48,496

Net interest income
 
161,848

 
156,947

 
474,298

 
448,984

Provision for credit losses
 
21,503

 
4,517

 
35,230

 
17,950

Net interest income after provision for credit losses
 
140,345

 
152,430

 
439,068

 
431,034

Non-interest income:
 
 

 
 

 
 
 
 
Mortgage banking revenue
 
9,916

 
28,242

 
53,889

 
86,850

Lease financing revenue, net
 
25,205

 
23,148

 
72,833

 
62,967

Treasury management fees
 
15,226

 
14,508

 
45,448

 
43,696

Wealth management fees
 
9,089

 
8,702

 
27,179

 
25,720

Card fees
 
5,362

 
4,585

 
15,803

 
13,564

Capital markets and international banking fees
 
1,913

 
4,870

 
8,696

 
11,709

Consumer and other deposit service fees
 
3,051

 
3,424

 
8,892

 
10,072

Brokerage fees
 
1,138

 
1,004

 
3,052

 
3,379

Loan service fees
 
2,103

 
2,114

 
6,496

 
6,120

Increase in cash surrender value of life insurance
 
1,298

 
1,321

 
3,678

 
3,910

Net (loss) gain on investment securities
 
(85
)
 
83

 
(345
)
 
451

Net loss on disposal of other assets
 
(32
)
 
(180
)
 
(786
)
 
(307
)
Other operating income
 
5,657

 
4,110

 
16,114

 
11,420

Total non-interest income
 
79,841

 
95,931

 
260,949

 
279,551

Non-interest expenses:
 
 

 
 

 
 
 
 
Salaries and employee benefits expense
 
101,885

 
105,815

 
331,877

 
309,932

Occupancy and equipment expense
 
16,117

 
15,382

 
49,997

 
45,710

Computer services and telecommunication expense
 
12,684

 
10,062

 
34,711

 
29,287

Advertising and marketing expense
 
3,432

 
2,558

 
10,637

 
8,964

Professional and legal expense
 
2,586

 
2,109

 
13,371

 
7,250

Other intangibles amortization expense
 
1,854

 
2,038

 
5,652

 
6,214

Branch exit and facilities impairment charges
 
3,292

 
2,773

 
3,632

 
8,680

Net loss (gain) recognized on other real estate owned and other related expense
 
248

 
(86
)
 
1,343

 
1,448

Loss on extinguishment of debt
 
6,255

 

 
9,391

 

Goodwill impairment loss
 

 

 
3,623

 

Other operating expenses
 
20,191

 
22,310

 
65,188

 
68,030

Total non-interest expenses
 
168,544

 
162,961

 
529,422

 
485,515

Income before income taxes
 
51,642

 
85,400

 
170,595

 
225,070

Income tax expense
 
8,928

 
24,557

 
32,591

 
65,224

Net income
 
42,714

 
60,843

 
138,004

 
159,846

Dividends on preferred shares
 
3,000

 
2,002

 
9,100

 
6,007

Return from preferred stockholders due to redemption
 

 

 
(15,280
)
 

Net income available to common stockholders
 
$
39,714

 
$
58,841

 
$
144,184

 
$
153,839

     

2




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

 
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
September 30,
 
 
2018
 
2017
 
2018
 
2017
Common share data:
 
 

 
 

 
 
 
 
Basic earnings per common share
 
$
0.47

 
$
0.70

 
$
1.71

 
$
1.84

Diluted earnings per common share
 
0.47

 
0.69

 
1.69

 
1.81

Weighted average common shares outstanding for basic earnings per common share
 
84,369,519

 
83,891,175

 
84,230,835

 
83,799,694

Diluted weighted average common shares outstanding for diluted earnings per common share
 
85,335,109

 
84,779,797

 
85,162,220

 
84,775,952










































 
See Accompanying Notes to Consolidated Financial Statements.

3




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

 
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
September 30,
 
 
2018
 
2017
 
2018
 
2017
 
 
 
 
 
 
 
 
 
Net income
 
$
42,714

 
$
60,843

 
$
138,004

 
$
159,846

Unrealized holding (gains) losses on investment securities, net of reclassification adjustments
 
(10,296
)
 
(890
)
 
(30,356
)
 
9,143

Reclassification adjustment for amortization of unrealized losses (gains) on investment securities transferred to held to maturity from available for sale
 
152

 
(266
)
 
418

 
(1,089
)
Reclassification adjustments for losses (gains) included in net income
 
85

 
(83
)
 
345

 
(451
)
Other comprehensive (loss) income, before tax
 
(10,059
)
 
(1,239
)
 
(29,593
)
 
7,603

Income tax expense (benefit) related to items of other comprehensive (loss) income
 
2,691

 
491

 
7,916

 
(3,021
)
Other comprehensive (loss) income, net of tax
 
(7,368
)
 
(748
)
 
(21,677
)
 
4,582

Comprehensive income
 
$
35,346

 
$
60,095

 
$
116,327

 
$
164,428





































See Accompanying Notes to Consolidated Financial Statements.

4





MB FINANCIAL, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
Nine Months Ended September 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



159,846




159,846

Other comprehensive income, net of tax




4,582



4,582

Conversion of preferred stock to common stock
(292
)

292






Cash dividends declared on preferred shares



(6,007
)



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



(51,783
)



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


(6,829
)


3,549


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

2

330





332

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


605



(3,902
)

(3,297
)
Stock-based compensation expense


13,317





13,317

Purchase of additional investment in subsidiary from minority owners


(570
)



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

$
858

$
1,685,971

$
940,948

$
9,772

$
(60,737
)
$

$
2,692,092

 
 
 
 
 
 
 
 
 
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



138,004




138,004

Other comprehensive loss, net of tax




(21,677
)


(21,677
)
Redemption of preferred stock
(115,280
)


15,280




(100,000
)
Cash dividends declared on preferred shares



(9,100
)



(9,100
)
Cash dividends declared on common shares ($0.72 per share)



(61,223
)



(61,223
)
Restricted common stock activity, net of tax

2

(3,178
)




(3,176
)
Stock option activity, net of tax

2

856





858

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


1,031



(2,602
)

(1,571
)
Stock-based compensation expense


13,688





13,688

Balance at September 30, 2018
$
194,719

$
862

$
1,703,404

$
1,147,060

$
(17,186
)
$
(63,530
)
$

$
2,965,329

















See Accompanying Notes to Consolidated Financial Statements.

5




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

 
 

Net income
 
$
138,004

 
$
159,846

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

 
 

Depreciation of premises and equipment and leased equipment
 
84,762

 
69,859

Branch exit and facilities impairment charges
 
3,632

 
8,680

Compensation expense for share-based payment plans
 
13,688

 
13,317

Net loss (gain) on sales of premises and equipment and leased equipment
 
633

 
(794
)
Amortization of other intangibles
 
5,652

 
6,214

Provision for credit losses
 
35,230

 
17,950

Deferred income tax expense
 
32,190

 
37,574

Amortization of premiums and discounts on investment securities, net
 
24,998

 
30,124

Accretion of discounts on loans, net
 
(13,789
)
 
(21,760
)
Net loss (gain) on investment securities
 
345

 
(451
)
Proceeds from sale of loans held for sale
 
2,442,638

 
3,665,709

Origination of loans held for sale
 
(2,051,710
)
 
(3,629,230
)
Net loss (gain) on sale of loans held for sale
 
11,087

 
(10,073
)
Origination of mortgage servicing rights
 
(30,086
)
 
(43,197
)
Change in fair value of mortgage servicing rights
 
10,723

 
20,601

Net loss on other real estate owned
 
798

 
1,397

Increase in cash surrender value of life insurance
 
(3,678
)
 
(3,910
)
Loss on extinguishment of debt
 
9,391

 

Goodwill impairment loss
 
3,623

 

(Decrease) increase in other assets, net
 
(8,401
)
 
18,075

Decrease in other liabilities, net
 
(16,074
)
 
(49,043
)
Net cash provided by operating activities
 
693,656

 
290,888

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
 
312,450

 
249,264

Purchases of investment securities available for sale
 
(668,673
)
 
(66,402
)
Proceeds from maturities and calls of investment securities held to maturity
 
82,245

 
105,065

Purchases of investment securities held to maturity
 
(56,271
)
 
(36,877
)
Purchase of marketable equity securities
 
(376
)
 

Proceeds from sales of marketable equity securities
 
178

 

Purchases of non-marketable securities - FHLB and FRB stock
 
(44,505
)
 
(135,479
)
Redemption of non-marketable securities - FHLB and FRB stock
 
51,208

 
126,410

Net decrease (increase) in loans
 
85,407

 
(1,100,271
)
Purchases of mortgage servicing rights
 
(161
)
 
(839
)
Purchases of premises and equipment and leased equipment
 
(99,225
)
 
(130,313
)
Proceeds from sales of premises and equipment and leased equipment
 
5,780

 
20,860

Proceeds from sale of other real estate owned
 
3,727

 
18,432

Proceeds from sale of other real estate owned related to FDIC-assisted transactions
 
1,469

 
3,141

Purchase of additional investment in subsidiary from minority owners
 

 
(827
)
Net proceeds from FDIC related covered assets
 
818

 
(583
)
Net cash used in investing activities
 
(323,319
)
 
(946,148
)
Cash Flows From Financing Activities
 
 

 
 

Net (decrease) increase in deposits
 
(249,585
)
 
304,696

Proceeds from short-term borrowings - FHLB advances
 
340,000

 
3,125,000

Principal paid on short-term borrowings - FHLB advances
 
(725,000
)
 
(3,150,000
)
Net increase in other short-term borrowings
 
167,316

 
171,127

Proceeds from long-term borrowings
 
465,130

 
348,235

Principal paid on long-term borrowings
 
(258,611
)
 
(104,310
)
Redemption of junior subordinated notes issued to capital trusts
 
(87,631
)
 

Redemption of preferred stock
 
(100,000
)
 

Treasury stock transactions, net
 
(1,571
)
 
(3,238
)
Stock options exercised
 
3,399

 
1,715

Dividends paid on preferred stock
 
(11,100
)
 
(6,007
)
Dividends paid on common stock
 
(61,232
)
 
(51,711
)
Net cash (used in) provided by financing activities
 
(518,885
)
 
635,507

Net decrease in cash and cash equivalents
 
$
(148,548
)
 
$
(19,753
)
Cash and cash equivalents:
 
 

 
 

Beginning of period
 
579,221

 
463,469

End of period
 
$
430,673

 
$
443,716



6




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

 
 
 
Nine Months Ended
 
 
September 30,
 
 
2018
 
2017
Supplemental Disclosures of Cash Flow Information:
 
 

 
 

Cash payments for:
 
 

 
 

Interest paid to depositors and on other borrowed funds
 
$
81,364

 
$
47,104

Income tax payments (refunds), net
 
3,511

 
(4,762
)
Supplemental Schedule of Noncash Investing Activities:
 
 

 
 

Investment securities held to maturity purchased not settled
 
$
1,699

 
$
2,433

Loans transferred to other real estate owned
 
4,974

 
6,467

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

 
2,721

Loans transferred to repossessed assets
 
1,878

 
1,410

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

 
1,484

Long-term borrowings transferred to short-term borrowings
 
260,000

 
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 nine months ended September 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 and expects to adopt the new guidance prospectively as of January 1, 2019 and to not restate comparative periods.

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. In October 2018, the Financial Accounting Standards Board issued new authoritative guidance to permit the use of the Overnight Index Swap rate based on Secured Overnight Financing Rate as a U.S. benchmark interest rate for hedge accounting purposes. 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 financial instruments and will be impacted by the Company's loan and securities portfolios' composition, attributes, and quality in addition to prevailing economic conditions and forecasts at the time of adoption. As part of the Company's evaluation process, it had 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, however, due to the pending merger with Fifth Third Bancorp, the Company has changed its evaluation process to incorporate the transition of the Company's assets to Fifth Third Bancorp.


9




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.

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.

ASC Topic 820 "Fair Value Measurement." New authoritative accounting guidance under ASC Topic 820 "Fair Value Measurement" amends prior guidance to modify the disclosure requirements. The new authoritative guidance removes the requirement to disclose the amount and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, the policy for timing of transfers between levels, the valuation processes for Level 3 fair value measurements. It also adds the requirement to disclose the changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements and the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. The new authoritative guidance will be effective for reporting periods after January 1, 2020 with early adoption permitted. The Company is evaluating the new guidance and its impact on the Company's statements of operations and financial condition.

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.

10





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.

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 received 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
 
Nine Months Ended
 
 
September 30,
 
September 30,
 
 
2018
 
2017
 
2018
 
2017
Distributed earnings allocated to common stock
 
$
20,468

 
$
17,823

 
$
61,223

 
$
51,783

Undistributed earnings
 
22,246

 
43,020

 
76,781

 
108,063

Net income
 
42,714

 
60,843

 
138,004

 
159,846

Less: preferred stock dividends
 
3,000

 
2,002

 
9,100

 
6,007

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

 

 
15,280

 

Net income available to common stockholders for basic earnings per common share
 
39,714

 
58,841

 
144,184

 
153,839

Plus: preferred stock dividends on convertible preferred stock
 

 
2

 

 
7

Less: earnings allocated to participating securities
 
1

 
1

 
4

 
3

Earnings allocated to common stockholders for diluted earnings per common share
 
$
39,713

 
$
58,842

 
$
144,180

 
$
153,843

Weighted average shares outstanding for basic earnings per common share
 
84,369,519

 
83,891,175

 
84,230,835

 
83,799,694

Dilutive effect of:
 
 
 
 
 
 
 
 
Stock options
 
463,024

 
502,794

 
508,270

 
564,541

Restricted shares and units
 
502,566

 
379,684

 
423,115

 
404,850

Convertible preferred stock
 

 
6,144

 

 
6,867

Total dilutive effect of equity awards and convertible preferred stock
 
965,590

 
888,622

 
931,385

 
976,258

Weighted average shares outstanding for diluted earnings per common share
 
85,335,109

 
84,779,797

 
85,162,220

 
84,775,952

Basic earnings per common share
 
$
0.47

 
$
0.70

 
$
1.71

 
$
1.84

Diluted earnings per common share
 
0.47

 
0.69

 
1.69

 
1.81

(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
September 30, 2018
 
 

 
 

 
 

 
 

Available for Sale
 
 

 
 

 
 

 
 

U.S. Government sponsored agencies and enterprises
 
$
5,087

 
$

 
$
(85
)
 
$
5,002

States and political subdivisions
 
335,034

 
8,928

 
(706
)
 
343,256

Residential mortgage-backed securities
 
1,344,270

 
1,209

 
(29,205
)
 
1,316,274

Commercial mortgage-backed securities
 
41,070

 
62

 
(92
)
 
41,040

Corporate bonds
 
5,065

 

 
(1
)
 
5,064

Total Available for Sale
 
1,730,526

 
10,199

 
(30,089
)
 
1,710,636

Held to Maturity
 
 

 
 

 
 

 
 

States and political subdivisions
 
899,865

 
12,991

 
(3,562
)
 
909,294

Residential mortgage-backed securities
 
23,217

 
245

 

 
23,462

Total Held to Maturity
 
923,082

 
13,236

 
(3,562
)
 
932,756

Total
 
$
2,653,608

 
$
23,435

 
$
(33,651
)
 
$
2,643,392

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 nine months ended September 30, 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 September 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 September 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 September 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
 
$
5,002

 
$
(85
)
 
$

 
$

 
$
5,002

 
$
(85
)
States and political subdivisions
 
27,107

 
(140
)
 
18,453

 
(566
)
 
45,560

 
(706
)
Residential mortgage-backed securities
 
765,346

 
(11,848
)
 
411,324

 
(17,357
)
 
1,176,670

 
(29,205
)
Commercial mortgage-backed securities
 
16,989

 
(46
)
 
11,713

 
(46
)
 
28,702

 
(92
)
Corporate bonds
 
5,064

 
(1
)
 

 

 
5,064

 
(1
)
Total Available for Sale
 
819,508

 
(12,120
)
 
441,490

 
(17,969
)
 
1,260,998

 
(30,089
)
Held to Maturity
 
 

 
 

 
 

 
 

 
 

 
 

States and political subdivisions
 
289,842

 
(2,824
)
 
16,463

 
(738
)
 
306,305

 
(3,562
)
Total
 
$
1,109,350

 
$
(14,944
)
 
$
457,953

 
$
(18,707
)
 
$
1,567,303

 
$
(33,651
)
 
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 September 30, 2018 was 761 compared to 471 at December 31, 2017. The increase in the total number of security positions in a continuous unrealized loss position and the increase in the unrealized losses from December 31, 2017 to September 30, 2018 was due to the increases in market interest rates. 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.

Declines in the fair value of available for sale securities below their cost that are deemed to be other than temporary are reflected in earnings as realized losses to the extent the impairment is related to credit losses. The amount of the impairment related to other factors is recognized in other comprehensive income. In estimating other-than-temporary impairment losses, management considers, among other things, (i) the length of time and the extent to which the fair value has been less than cost, (ii) the financial condition and near-term prospects of the issuer, and (iii) whether the Company is more likely than not to sell the security before recovery of its cost basis.
 
As of September 30, 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

14




expected to recover as the securities approach their maturity date or repricing date or if market yields for such investments decline. Accordingly, as of September 30, 2018, management believes the impairments detailed in the table above are temporary.

Net gains (losses) recognized on investment securities were as follows (in thousands):
 
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
September 30,
 
 
2018
 
2017
 
2018
 
2017
Realized gains
 
$
42

 
$
83

 
$
192

 
$
457

Realized losses
 
(127
)
 

 
(537
)
 
(6
)
Net (losses) gains
 
$
(85
)
 
$
83

 
$
(345
)
 
$
451

 
The amortized cost and fair value of investment securities as of September 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
 
$
44,036

 
$
44,350

Due after one year through five years
 
128,692

 
131,525

Due after five years through ten years
 
39,263

 
39,458

Due after ten years
 
133,195

 
137,989

Residential and commercial mortgage-backed securities
 
1,385,340

 
1,357,314

 
 
1,730,526

 
1,710,636

Held to maturity:
 
 

 
 

Due in one year or less
 
66,747

 
67,040

Due after one year through five years
 
150,122

 
154,149

Due after five years through ten years
 
230,783

 
234,855

Due after ten years
 
452,213

 
453,250

Residential mortgage-backed securities
 
23,217

 
23,462

 
 
923,082

 
932,756

Total
 
$
2,653,608

 
$
2,643,392

 
Investment securities with a carrying amount of $794.1 million at September 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 $710.4 million and $625.2 million were required to be pledged at September 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):

 
 
September 30,
2018
 
December 31,
2017
Commercial loans
 
$
4,936,536

 
$
4,786,180

Commercial loans collateralized by assignment of lease payments
 
2,065,588

 
2,113,135

Commercial real estate
 
3,832,032

 
4,147,529

Residential real estate
 
1,403,087

 
1,432,458

Construction real estate
 
548,882

 
406,849

Indirect vehicle
 
790,573

 
667,928

Home equity
 
181,477

 
219,098

Other consumer loans
 
85,705

 
73,141

Total loans, excluding purchased credit-impaired loans
 
13,843,880

 
13,846,318

Purchased credit-impaired loans
 
91,072

 
119,744

Total loans
 
$
13,934,952

 
$
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 September 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 repurchase transactions with the Government National Mortgage Association ("GNMA"). The loans repurchased 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 repurchases 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, 157% 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 September 30, 2018 and December 31, 2017, the Company had $3.9 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 $3.1 billion were required to be pledged at September 30, 2018 and December 31, 2017. The Company also has a collateral pledge agreement with the Federal Reserve Bank. As of September 30, 2018 and December 31, 2017, the Company had $859.0 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 September 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
September 30, 2018
 
 

 
 

 
 

 
 

 
 

 
 

Commercial
 
$
4,927,393

 
$
3,487

 
$
1,077

 
$
4,579

 
$
9,143

 
$
4,936,536

Commercial collateralized by assignment of lease payments
 
2,032,510

 
29,858

 
2,458

 
762

 
33,078

 
2,065,588

Commercial real estate:
 
 

 
 

 
 

 
 

 
 

 
 

Health care
 
664,187

 
269

 

 

 
269

 
664,456

Industrial
 
865,914

 

 

 
2,811

 
2,811

 
868,725

Multifamily
 
503,597

 
128

 

 
529

 
657

 
504,254

Retail
 
479,167

 
413

 

 
819

 
1,232

 
480,399

Office
 
418,330

 

 

 
120

 
120

 
418,450

Other
 
887,428

 
2,547

 
175

 
5,598

 
8,320

 
895,748

Residential real estate
 
1,388,338

 
659

 
2,610

 
11,480

 
14,749

 
1,403,087

Construction real estate
 
548,882

 

 

 

 

 
548,882

Indirect vehicle
 
783,161

 
4,747

 
1,847

 
818

 
7,412

 
790,573

Home equity
 
175,747

 
2,650

 
836

 
2,244

 
5,730

 
181,477

Other consumer
 
85,284

 
169

 
113

 
139

 
421

 
85,705