Document
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 June 30, 2017
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, 55,810,134 shares, as of July 31, 2017
 


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)
June 30,
2017
 
December 31,
2016
 
June 30,
2016
Assets
 
 
 
 
 
Cash and due from banks
$
296,105

 
$
267,194

 
$
267,551

Federal funds sold and securities purchased under resale agreements
56

 
2,851

 
4,024

Interest bearing deposits with banks
1,011,635

 
980,457

 
693,269

Available-for-sale securities, at fair value
1,649,636

 
1,724,667

 
637,663

Held-to-maturity securities, at amortized cost ($787.5 million, $607.6 million and $1.0 billion fair value at June 30, 2017, December 31, 2016 and June 30, 2016 respectively)
793,376

 
635,705

 
992,211

Trading account securities
1,987

 
1,989

 
3,613

Federal Home Loan Bank and Federal Reserve Bank stock
80,812

 
133,494

 
121,319

Brokerage customer receivables
23,281

 
25,181

 
26,866

Mortgage loans held-for-sale
382,837

 
418,374

 
554,256

Loans, net of unearned income, excluding covered loans
20,743,332

 
19,703,172

 
18,174,655

Covered loans
50,119

 
58,145

 
105,248

Total loans
20,793,451

 
19,761,317

 
18,279,903

Allowance for loan losses
(129,591
)
 
(122,291
)
 
(114,356
)
Allowance for covered loan losses
(1,074
)
 
(1,322
)
 
(2,412
)
Net loans
20,662,786

 
19,637,704

 
18,163,135

Premises and equipment, net
605,211

 
597,301

 
595,792

Lease investments, net
191,248

 
129,402

 
103,749

Accrued interest receivable and other assets
577,359

 
593,796

 
670,014

Trade date securities receivable
133,130

 

 
1,079,238

Goodwill
500,260

 
498,587

 
486,095

Other intangible assets
19,546

 
21,851

 
21,821

Total assets
$
26,929,265

 
$
25,668,553

 
$
24,420,616

Liabilities and Shareholders’ Equity
 
 
 
 
 
Deposits:
 
 
 
 
 
Non-interest bearing
$
6,294,052

 
$
5,927,377

 
$
5,367,672

Interest bearing
16,311,640

 
15,731,255

 
14,674,078

Total deposits
22,605,692

 
21,658,632

 
20,041,750

Federal Home Loan Bank advances
318,270

 
153,831

 
588,055

Other borrowings
277,710

 
262,486

 
252,611

Subordinated notes
139,029

 
138,971

 
138,915

Junior subordinated debentures
253,566

 
253,566

 
253,566

Trade date securities payable
5,151

 

 
40,000

Accrued interest payable and other liabilities
490,389

 
505,450

 
482,124

Total liabilities
24,089,807

 
22,972,936

 
21,797,021

Shareholders’ Equity:
 
 
 
 
 
Preferred stock, no par value; 20,000,000 shares authorized:
 
 
 
 
 
Series C - $1,000 liquidation value; no shares issued and outstanding at June 30, 2017, and 126,257 shares issued and outstanding at December 31, 2016 and June 30, 2016, respectively

 
126,257

 
126,257

Series D - $25 liquidation value; 5,000,000 shares issued and outstanding at June 30, 2017, December 31, 2016 and June 30, 2016, respectively
125,000

 
125,000

 
125,000

Common stock, no par value; $1.00 stated value; 100,000,000 shares authorized at June 30, 2017, December 31, 2016 and June 30, 2016; 55,801,665 shares issued at June 30, 2017, 51,978,289 shares issued at December 31, 2016 and 51,708,585 shares issued at June 30, 2016
55,802

 
51,978

 
51,708

Surplus
1,511,080

 
1,365,781

 
1,350,751

Treasury stock, at cost, 101,738 shares at June 30, 2017, 97,749 shares at December 31, 2016, and 89,430 shares at June 30, 2016
(4,884
)
 
(4,589
)
 
(4,145
)
Retained earnings
1,198,997

 
1,096,518

 
1,008,464

Accumulated other comprehensive loss
(46,537
)
 
(65,328
)
 
(34,440
)
Total shareholders’ equity
2,839,458

 
2,695,617

 
2,623,595

Total liabilities and shareholders’ equity
$
26,929,265

 
$
25,668,553

 
$
24,420,616

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
 
Six Months Ended
(In thousands, except per share data)
June 30,
2017
 
June 30,
2016
 
June 30,
2017
 
June 30,
2016
Interest income
 
 
 
 
 
 
 
Interest and fees on loans
$
212,709

 
$
178,530

 
$
412,023

 
$
351,657

Interest bearing deposits with banks
1,634

 
793

 
3,257

 
1,539

Federal funds sold and securities purchased under resale agreements
1

 
1

 
2

 
2

Investment securities
15,524

 
16,398

 
29,097

 
33,588

Trading account securities
4

 
14

 
15

 
25

Federal Home Loan Bank and Federal Reserve Bank stock
1,153

 
1,112

 
2,223

 
2,049

Brokerage customer receivables
156

 
216

 
323

 
435

Total interest income
231,181

 
197,064

 
446,940

 
389,295

Interest expense
 
 
 
 
 
 
 
Interest on deposits
18,471

 
13,594

 
34,741

 
26,375

Interest on Federal Home Loan Bank advances
2,933

 
2,984

 
4,523

 
5,870

Interest on other borrowings
1,149

 
1,086

 
2,288

 
2,144

Interest on subordinated notes
1,786

 
1,777

 
3,558

 
3,554

Interest on junior subordinated debentures
2,433

 
2,353

 
4,841

 
4,573

Total interest expense
26,772

 
21,794

 
49,951

 
42,516

Net interest income
204,409

 
175,270

 
396,989

 
346,779

Provision for credit losses
8,891

 
9,129

 
14,100

 
17,163

Net interest income after provision for credit losses
195,518

 
166,141

 
382,889

 
329,616

Non-interest income
 
 
 
 
 
 
 
Wealth management
19,905

 
18,852

 
40,053

 
37,172

Mortgage banking
35,939

 
36,807

 
57,877

 
58,542

Service charges on deposit accounts
8,696

 
7,726

 
16,961

 
15,132

Gains (losses) on investment securities, net
47

 
1,440

 
(8
)
 
2,765

Fees from covered call options
890

 
4,649

 
1,649

 
6,361

Trading losses, net
(420
)
 
(316
)
 
(740
)
 
(484
)
Operating lease income, net
6,805

 
4,005

 
12,587

 
6,811

Other
18,110

 
11,636

 
30,358

 
27,252

Total non-interest income
89,972

 
84,799

 
158,737

 
153,551

Non-interest expense
 
 
 
 
 
 
 
Salaries and employee benefits
106,502

 
100,894

 
205,818

 
196,705

Equipment
9,909

 
9,307

 
18,911

 
18,074

Operating lease equipment depreciation
5,662

 
3,385

 
10,298

 
5,435

Occupancy, net
12,586

 
11,943

 
25,687

 
23,891

Data processing
7,804

 
7,138

 
15,729

 
13,657

Advertising and marketing
8,726

 
6,941

 
13,876

 
10,720

Professional fees
7,510

 
5,419

 
12,170

 
9,478

Amortization of other intangible assets
1,141

 
1,248

 
2,305

 
2,546

FDIC insurance
3,874

 
4,040

 
8,030

 
7,653

OREO expense, net
739

 
1,348

 
2,404

 
1,908

Other
19,091

 
19,306

 
36,434

 
34,632

Total non-interest expense
183,544

 
170,969

 
351,662

 
324,699

Income before taxes
101,946

 
79,971

 
189,964

 
158,468

Income tax expense
37,049

 
29,930

 
66,689

 
59,316

Net income
$
64,897

 
$
50,041

 
$
123,275

 
$
99,152

Preferred stock dividends
2,050

 
3,628

 
5,678

 
7,256

Net income applicable to common shares
$
62,847

 
$
46,413

 
$
117,597

 
$
91,896

Net income per common share—Basic
$
1.15

 
$
0.94

 
$
2.20

 
$
1.88

Net income per common share—Diluted
$
1.11

 
$
0.90

 
$
2.11

 
$
1.80

Cash dividends declared per common share
$
0.14

 
$
0.12

 
$
0.28

 
$
0.24

Weighted average common shares outstanding
54,775

 
49,140

 
53,528

 
48,794

Dilutive potential common shares
1,812

 
3,965

 
2,981

 
3,887

Average common shares and dilutive common shares
56,587

 
53,105

 
56,509

 
52,681

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
 
Six Months Ended
(In thousands)
June 30,
2017
 
June 30,
2016
 
June 30,
2017
 
June 30,
2016
Net income
$
64,897

 
$
50,041

 
$
123,275

 
$
99,152

Unrealized gains on securities
 
 
 
 
 
 
 
Before tax
17,593

 
5,968

 
24,972

 
31,144

Tax effect
(6,910
)
 
(2,244
)
 
(9,810
)
 
(12,232
)
Net of tax
10,683

 
3,724

 
15,162

 
18,912

Reclassification of net gains (losses) included in net income
 
 
 
 
 
 
 
Before tax
47

 
1,440

 
(8
)
 
2,765

Tax effect
(18
)
 
(565
)
 
3

 
(1,086
)
Net of tax
29

 
875

 
(5
)
 
1,679

Reclassification of amortization of unrealized gains and losses on investment securities transferred to held-to-maturity from available-for-sale
 
 
 
 
 
 
 
Before tax
22

 
(3,832
)
 
1,450

 
(7,257
)
Tax effect
(9
)
 
1,506

 
(570
)
 
2,845

Net of tax
13

 
(2,326
)
 
880

 
(4,412
)
Net unrealized gains on securities
10,641

 
5,175

 
14,287

 
21,645

Unrealized (losses) gains on derivative instruments
 
 
 
 
 
 
 
Before tax
(310
)
 
(523
)
 
1,305

 
(45
)
Tax effect
123

 
206

 
(511
)
 
18

Net unrealized (losses) gains on derivative instruments
(187
)
 
(317
)
 
794

 
(27
)
Foreign currency adjustment
 
 
 
 
 
 
 
Before tax
3,820

 
856

 
5,035

 
9,203

Tax effect
(987
)
 
(244
)
 
(1,325
)
 
(2,553
)
Net foreign currency adjustment
2,833

 
612

 
3,710

 
6,650

Total other comprehensive income
13,287

 
5,470

 
18,791

 
28,268

Comprehensive income
$
78,184

 
$
55,511

 
$
142,066

 
$
127,420

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, 2016
$
251,287

 
$
48,469

 
$
1,190,988

 
$
(3,973
)
 
$
928,211

 
$
(62,708
)
 
$
2,352,274

Net income

 

 

 

 
99,152

 

 
99,152

Other comprehensive income, net of tax

 

 

 

 

 
28,268

 
28,268

Cash dividends declared on common stock

 

 

 

 
(11,643
)
 

 
(11,643
)
Dividends on preferred stock

 

 

 

 
(7,256
)
 

 
(7,256
)
Stock-based compensation

 

 
4,752

 

 

 

 
4,752

Conversion of Series C preferred stock to common stock
(30
)
 
1

 
29

 

 

 

 

Common stock issued for:
 
 
 
 
 
 
 
 
 
 
 
 
 
New issuance, net of costs

 
3,000

 
149,823

 

 

 

 
152,823

Exercise of stock options and warrants

 
97

 
2,991

 

 

 

 
3,088

Restricted stock awards

 
87

 
114

 
(172
)
 

 

 
29

Employee stock purchase plan

 
29

 
1,270

 

 

 

 
1,299

Director compensation plan

 
25

 
784

 

 

 

 
809

Balance at June 30, 2016
$
251,257

 
$
51,708

 
$
1,350,751

 
$
(4,145
)
 
$
1,008,464

 
$
(34,440
)
 
$
2,623,595

Balance at January 1, 2017
$
251,257

 
$
51,978

 
$
1,365,781

 
$
(4,589
)
 
$
1,096,518

 
$
(65,328
)
 
$
2,695,617

Net income

 

 

 

 
123,275

 

 
123,275

Other comprehensive income, net of tax

 

 

 

 

 
18,791

 
18,791

Cash dividends declared on common stock

 

 

 

 
(15,118
)
 

 
(15,118
)
Dividends on preferred stock

 

 

 

 
(5,678
)
 

 
(5,678
)
Stock-based compensation

 

 
5,746

 

 

 

 
5,746

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

 
573

 
14,488

 

 

 

 
15,061

Restricted stock awards

 
79

 
(79
)
 
(295
)
 

 

 
(295
)
Employee stock purchase plan

 
19

 
1,230

 

 

 

 
1,249

Director compensation plan

 
32

 
778

 

 

 

 
810

Balance at June 30, 2017
$
125,000

 
$
55,802

 
$
1,511,080

 
$
(4,884
)
 
$
1,198,997

 
$
(46,537
)
 
$
2,839,458

See accompanying notes to unaudited consolidated financial statements.

4

Table of Contents


WINTRUST FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
 
Six Months Ended
(In thousands)
June 30,
2017
 
June 30,
2016
Operating Activities:
 
 
 
Net income
$
123,275

 
$
99,152

Adjustments to reconcile net income to net cash provided by (used for) operating activities
 
 
 
Provision for credit losses
14,100

 
17,163

Depreciation, amortization and accretion, net
29,958

 
27,296

Stock-based compensation expense
5,746

 
4,752

Net amortization of premium on securities
3,198

 
1,840

Accretion of discount on loans
(11,979
)
 
(15,849
)
Mortgage servicing rights fair value change, net
(1,265
)
 
(4,291
)
Originations and purchases of mortgage loans held-for-sale
(1,856,725
)
 
(1,948,890
)
Proceeds from sales of mortgage loans held-for-sale
1,928,870

 
1,825,686

Bank owned life insurance ("BOLI") income
(1,873
)
 
(1,729
)
Decrease (increase) in trading securities, net
2

 
(3,165
)
Net decrease in brokerage customer receivables
1,900

 
765

Gains on mortgage loans sold
(43,547
)
 
(43,014
)
Losses (gains) on investment securities, net
8

 
(2,765
)
Gains on early extinguishment of debt

 
(4,305
)
(Gains) losses on sales of premises and equipment, net
(140
)
 
3

Net losses on sales and fair value adjustments of other real estate owned
896

 
322

Increase in accrued interest receivable and other assets, net
(45,232
)
 
(116,118
)
(Decrease) increase in accrued interest payable and other liabilities, net
(22,451
)
 
70,756

Net Cash Provided by (Used for) Operating Activities
124,741

 
(92,391
)
Investing Activities:
 
 
 
Proceeds from maturities of available-for-sale securities
138,516

 
529,463

Proceeds from maturities of held-to-maturity securities
50,923

 
319

Proceeds from sales and calls of available-for-sale securities
9,729

 
1,071,996

Proceeds from calls of held-to-maturity securities
51,062

 
281,981

Purchases of available-for-sale securities
(185,245
)
 
(1,526,467
)
Purchases of held-to-maturity securities
(256,532
)
 
(350,078
)
Redemption (purchase) of Federal Home Loan Bank and Federal Reserve Bank stock, net
52,682

 
(19,738
)
Net cash paid in business combinations
(284
)
 
(18,133
)
Proceeds from sales of other real estate owned
8,601

 
19,455

Proceeds received from the FDIC related to reimbursements on covered assets
791

 
420

Net increase in interest bearing deposits with banks
(31,178
)
 
(81,250
)
Net increase in loans
(1,032,772
)
 
(942,958
)
Redemption of BOLI

 
659

Purchases of premises and equipment, net
(26,260
)
 
(24,235
)
Net Cash Used for Investing Activities
(1,219,967
)
 
(1,058,566
)
Financing Activities:
 
 
 
Increase in deposit accounts
947,150

 
1,302,188

Increase (decrease) in subordinated notes and other borrowings, net
15,163

 
(13,249
)
Increase (decrease) in Federal Home Loan Bank advances, net
163,000

 
(271,025
)
Proceeds from the issuance of common stock, net

 
152,823

Redemption of junior subordinated debentures, net

 
(10,695
)
Issuance of common shares resulting from the exercise of stock options, employee stock purchase plan and conversion of common stock warrants
17,120

 
5,766

Common stock repurchases for tax withholdings related to stock-based compensation
(295
)
 
(172
)
Dividends paid
(20,796
)
 
(18,899
)
Net Cash Provided by Financing Activities
1,121,342

 
1,146,737

Net Increase (Decrease) in Cash and Cash Equivalents
26,116

 
(4,220
)
Cash and Cash Equivalents at Beginning of Period
270,045

 
275,795

Cash and Cash Equivalents at End of Period
$
296,161

 
$
271,575

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 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, 2016 (“2016 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, allowance for covered 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 2016 Form 10-K.

(2) Recent Accounting Developments

Revenue Recognition

In May 2014, the 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 would result in the guidance becoming effective for fiscal years beginning after December 15, 2017.

The FASB has 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 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

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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 is effective for fiscal years beginning after December 15, 2017.

The Company is currently evaluating the impact on the consolidated financial statements of adopting this new guidance. The Company is currently assessing specific characteristics of the various sources of revenues previously identified as being affected by the new guidance and has reviewed specific contracts related to those sources. As certain significant revenue sources such as interest income are considered not in-scope, the Company does not believe the new guidance will have a significant impact on its consolidated financial statements. The Company expects to adopt the new guidance using the modified retrospective approach.

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 investments with readily determinable fair values to be measured at fair value with changes recognized in net income regardless of classification. For equity investments without a readily determinable fair value, the value of the investment would 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. This guidance is effective for fiscal years beginning after December 15, 2017 and is to be applied prospectively with a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption. The Company is currently evaluating the impact of adopting this new guidance on the consolidated financial statements.

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. Additionally, 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. 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 Company is currently evaluating 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 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 2016 Form 10-K. Additionally, the Company does not expect to significantly change operating lease agreements prior to adoption.

Derivatives

In March 2016, the FASB issued ASU No. 2016-05, Derivatives and Hedging (Topic 815): Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships, to clarify guidance surrounding the effect on an existing hedging relationship of a change in the counterparty to a derivative instrument that has been designated as a hedging instrument. This ASU states that a change in counterparty to such derivative instrument does not, in and of itself, require dedesignation of that hedging relationship provided that all other hedge accounting criteria continue to be met. This guidance was effective for fiscal years beginning after December 15, 2016 and did not have a material impact on the Company's consolidated financial statements.

Equity Method Investments

In March 2016, the FASB issued ASU No. 2016-07, Investments - Equity Method and Joint Ventures (Topic 323): Simplifying the Transition to the Equity Method of Accounting, to simplify the accounting for investments qualifying for the use of the equity method of accounting. This ASU eliminates the requirement to retroactively adopt the equity method of accounting when an investment qualifies for such method as a result of an increase in the level of ownership interest or degree of influence. The ASU requires the equity method investor add the cost of acquiring the additional interest to the current basis and adopt the equity method of accounting as of that date going forward. Additionally, for available-for-sale equity securities that become qualified for equity method accounting, the ASU requires the related unrealized holding gains or losses included in accumulated other comprehensive

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income be recognized in earnings at the date the investment qualifies for such accounting. This guidance was effective for fiscal years beginning after December 15, 2016 and did not have a material impact on the Company's consolidated financial statements.

Employee Share-Based Compensation

In March 2016, the FASB issued ASU No. 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, to simplify the accounting for several areas of share-based payment transactions. This included the recognition of all excess tax benefits and tax deficiencies as income tax expense instead of surplus, the classification on the statement of cash flows of excess tax benefits and taxes paid when the employer withholds shares for tax-withholding purposes. Additionally, related to forfeitures, the ASU provides the option to estimate the number of awards that are expected to vest or account for forfeitures as they occur. This guidance was effective for fiscal years beginning after December 15, 2016. In the first six months of 2017, the Company recorded $3.9 million of excess tax benefits within income tax expense on the Consolidated Statements of Income as a result of adoption.

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 the allowance for credit losses for all financial assets measured under the amortized cost basis, including 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 group consisting of individuals from the various areas of the Company tasked with transitioning to the new requirements. At this time, the Company is reviewing potential methodologies for estimating expected credit losses using reasonable and supportable forecast information and has identified certain data and system requirements.

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 is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years, and is to be applied under a retrospective approach, if practicable. The Company does not expect this guidance to have a material impact on the Company's consolidated financial statements.

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 is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years, and is to be applied under a retrospective approach. The Company does not expect this guidance to have a material impact on the Company's consolidated financial statements.

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 is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years, and is to be applied under a modified retrospective approach through cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. The Company is currently evaluating the impact of adopting this new guidance on the consolidated financial statements.


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Consolidation

In October 2016, the FASB issued ASU No. 2016-17, Consolidation (Topic 810): Interest Held through Related Parties That Are under Common Control, to amend guidance from ASU No. 2015-02 regarding how a reporting entity treats indirect interests in a variable interest entity (“VIE”) held through related parties under common control when determining whether the reporting entity is the primary beneficiary of such VIE. This guidance was effective for fiscal years beginning after December 15, 2016 and did not have a material impact on the Company's consolidated financial statements.

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 is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years, and is to be applied under a prospective approach. The Company expects the adoption of this new guidance to impact the determination of whether future acquisitions are considered a business combination and the resulting impact of such determination on the consolidated financial statements.

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 postretirement 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 is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years, and is to be applied under a retrospective approach related to presentation of the service cost component and a prospective approach related to capitalization of such costs. Early adoption is permitted as of the beginning of an annual period that has not been issued or made available for issuance. The Company has not early adopted this guidance. When adopted, the Company does not expect this guidance to 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 is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years, and is to be applied under a prospective approach for awards modified on or after the adoption date. Early adoption is permitted as of the beginning of an annual period that has not been issued or made available for issuance. The Company has not early adopted this guidance. When adopted, the Company does not expect this guidance to 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

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has not been issued or made available for issuance. The Company has not early adopted this guidance. 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 November 18, 2016, the Company acquired First Community Financial Corporation ("FCFC"). FCFC was the parent company of First Community Bank. Through this transaction, the Company acquired First Community Bank's two banking locations in Elgin, Illinois. First Community Bank was merged into the Company's wholly-owned subsidiary St. Charles Bank & Trust Company ("St. Charles Bank"). The Company acquired assets with a fair value of approximately $187.2 million, including approximately $79.5 million of loans, and assumed deposits with a fair value of approximately $150.3 million. Additionally, the Company recorded goodwill of $13.0 million on the acquisition.

On August 19, 2016, the Company, through its wholly-owned subsidiary Lake Forest Bank & Trust Company ("Lake Forest Bank"), acquired approximately $561.4 million in performing loans and related relationships from an affiliate of GE Capital Franchise Finance. The loans are to franchise operators (primarily quick service restaurant concepts) in the Midwest and in the Western portion of the United States.

On March 31, 2016, the Company acquired Generations Bancorp, Inc. ("Generations"). Generations was the parent company of Foundations Bank, which had one banking location in Pewaukee, Wisconsin. Foundations Bank was merged into the Company's wholly-owned subsidiary Town Bank. The Company acquired assets with a fair value of approximately $134.2 million, including approximately $67.4 million of loans, and assumed deposits with a fair value of approximately $100.2 million. Additionally, the Company recorded goodwill of $11.5 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 comprise the majority of the assets acquired in nearly all of these FDIC-assisted transactions, most of which are subject to loss sharing agreements with the FDIC whereby the FDIC has 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 require the Company to reimburse the FDIC in the event that actual losses on covered assets are 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. The agreements with the FDIC require that the Company follow certain servicing procedures or risk losing the FDIC reimbursement of covered asset losses.

The loans covered by the loss sharing agreements are classified and presented as covered loans and the estimated reimbursable losses are recorded as an FDIC indemnification asset or other 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 will only recognize 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 cover realized losses on loans, foreclosed real estate and certain other assets and require the Company to record loss share assets and liabilities that are measured separately from the loan portfolios because they are not contractually embedded in the loans and are not transferable with the loans should the Company choose to dispose of them. Fair values at the acquisition dates were estimated based on projected cash flows available for loss share based on the credit adjustments estimated for each loan pool and the loss share percentages. The loss share assets and liabilities are recorded as FDIC indemnification assets and other liabilities, respectively, on the Consolidated Statements of Condition. Subsequent to the acquisition date, reimbursements received from the FDIC for actual incurred losses will reduce the FDIC indemnification assets. Reductions to expected losses, to the extent such reductions to expected losses are the result of an improvement to the actual or expected cash flows from the covered assets, will also reduce the FDIC indemnification assets and, if necessary, increase any loss share liability when necessary reductions exceed the current value of the FDIC indemnification assets. In accordance with the clawback provision noted above, the Company may be required to reimburse the FDIC when actual losses are 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 are adjusted periodically for changes in the expected losses on covered assets. On the Consolidated Statements

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of Condition, estimated reimbursements from clawback provisions are recorded as a reduction to the FDIC indemnification asset or, if necessary, an increase to the loss share liability, which is 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 are contractual receivables from the FDIC and these liabilities are contractual payables to the FDIC, there are no contractual interest rates. Additional expected losses, to the extent such expected losses result in recognition of an allowance for covered loan losses, will increase the FDIC indemnification asset or reduce the FDIC indemnification liability. The corresponding amortization is recorded as a component of non-interest income on the Consolidated Statements of Income.

The following table summarizes the activity in the Company’s FDIC indemnification liability during the periods indicated:
 
Three Months Ended
 
Six Months Ended
(Dollars in thousands)
June 30,
2017
 
June 30,
2016
 
June 30,
2017
 
June 30,
2016
Balance at beginning of period
$
18,263

 
$
10,029

 
$
16,701

 
$
6,100

Reductions from reimbursable expenses
(75
)
 
(648
)
 
(157
)
 
(730
)
Amortization
455

 
506

 
699

 
866

Changes in expected reimbursements (to) from the FDIC for changes in expected credit losses and reimbursable expenses
(3,673
)
 
1,785

 
(2,659
)
 
5,073

Payments received from the FDIC
405

 
57

 
791

 
420

Balance at end of period
$
15,375

 
$
11,729

 
$
15,375

 
$
11,729


Mortgage Banking Acquisitions

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

PCI Loans

Purchased loans acquired in a business combination are recorded at estimated fair value on their purchase date. 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.

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 generally 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.


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(5) Investment Securities

The following tables are a summary of the available-for-sale and held-to-maturity securities portfolios as of the dates shown:
 
June 30, 2017
(Dollars in thousands)
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
Available-for-sale securities
 
 
 
 
 
 
 
U.S. Treasury
$
119,804

 
$

 
$
(723
)
 
$
119,081

U.S. Government agencies
158,162

 
22

 
(674
)
 
157,510

Municipal
121,610

 
2,774

 
(264
)
 
124,120

Corporate notes:
 
 
 
 
 
 
 
Financial issuers
60,340

 
71

 
(810
)
 
59,601

Other
1,000

 

 
(3
)
 
997

Mortgage-backed: (1)
 
 
 
 
 
 
 
Mortgage-backed securities
1,139,734

 
2,301

 
(31,704
)
 
1,110,331

Collateralized mortgage obligations
42,845

 
433

 
(319
)
 
42,959

Equity securities
32,642

 
3,028

 
(633
)
 
35,037

Total available-for-sale securities
$
1,676,137

 
$
8,629

 
$
(35,130
)
 
$
1,649,636

Held-to-maturity securities
 
 
 
 
 
 
 
U.S. Government agencies
$
585,071

 
$
556

 
$
(7,461
)
 
$
578,166

Municipal
208,305

 
2,298

 
(1,280
)
 
209,323

Total held-to-maturity securities
$
793,376

 
$
2,854

 
$
(8,741
)
 
$
787,489

 
December 31, 2016
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
(Dollars in thousands)
 
 
 
Available-for-sale securities
 
 
 
 
 
 
 
U.S. Treasury
$
142,741

 
$
1

 
$
(759
)
 
$
141,983

U.S. Government agencies
189,540

 
47

 
(435
)
 
189,152

Municipal
129,446

 
2,969

 
(606
)
 
131,809

Corporate notes:
 
 
 
 
 
 
 
Financial issuers
65,260

 
132

 
(1,000
)
 
64,392

Other
1,000

 

 
(1
)
 
999

Mortgage-backed: (1)
 
 
 
 
 
 
 
Mortgage-backed securities
1,185,448

 
284

 
(54,330
)
 
1,131,402

Collateralized mortgage obligations
30,105

 
67

 
(490
)
 
29,682

Equity securities
32,608

 
3,429

 
(789
)
 
35,248

Total available-for-sale securities
$
1,776,148

 
$
6,929

 
$
(58,410
)
 
$
1,724,667

Held-to-maturity securities
 
 
 
 
 
 
 
U.S. Government agencies
$
433,343

 
$
7

 
$
(24,470
)
 
$
408,880

Municipal
202,362

 
647

 
(4,287
)
 
198,722

Total held-to-maturity securities
$
635,705

 
$
654

 
$
(28,757
)
 
$
607,602

 
June 30, 2016
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
(Dollars in thousands)
 
 
 
Available-for-sale securities
 
 
 
 
 
 
 
U.S. Treasury
$
122,296

 
$
35

 
$
(1
)
 
$
122,330

U.S. Government agencies
69,678

 
238

 

 
69,916

Municipal
108,179

 
3,588

 
(127
)
 
111,640

Corporate notes:
 
 
 
 
 
 
 
Financial issuers
68,097

 
1,502

 
(1,411
)
 
68,188

Other
1,500

 
2

 

 
1,502

Mortgage-backed: (1)
 
 
 
 
 
 
 
Mortgage-backed securities
162,593

 
4,280

 
(150
)
 
166,723

Collateralized mortgage obligations
40,419

 
457

 
(91
)
 
40,785

Equity securities
51,426

 
5,544

 
(391
)
 
56,579

Total available-for-sale securities
$
624,188

 
$
15,646

 
$
(2,171
)
 
$
637,663

Held-to-maturity securities
 
 
 
 
 
 
 
U.S. Government agencies
$
789,482

 
$
11,861

 
$
(647
)
 
$
800,696

Municipal
202,729

 
6,967

 
(213
)
 
209,483

Total held-to-maturity securities
$
992,211

 
$
18,828

 
$
(860
)
 
$
1,010,179

(1)
Consisting entirely of residential mortgage-backed securities, none of which are subprime.


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Table of Contents

The following table presents the portion of the Company’s available-for-sale and held-to-maturity securities portfolios which has gross unrealized losses, reflecting the length of time that individual securities have been in a continuous unrealized loss position at June 30, 2017:
 
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
$
119,081

 
$
(723
)
 
$

 
$

 
$
119,081

 
$
(723
)
U.S. Government agencies
152,149

 
(674
)
 

 

 
152,149

 
(674
)
Municipal
145,960

 
(155
)
 
5,852

 
(109
)
 
151,812

 
(264
)
Corporate notes:
 
 
 
 
 
 
 
 
 
 
 
Financial issuers

 

 
35,154

 
(810
)
 
35,154

 
(810
)
Other
997

 
(3
)
 

 

 
997

 
(3
)
Mortgage-backed:
 
 
 
 
 
 
 
 
 
 
 
Mortgage-backed securities
932,800

 
(31,704
)
 

 

 
932,800

 
(31,704
)
Collateralized mortgage obligations
11,809

 
(122
)
 
7,353

 
(197
)
 
19,162

 
(319
)
Equity securities
10,189

 
(271
)
 
5,138

 
(362
)
 
15,327

 
(633
)
Total available-for-sale securities
$
1,372,985

 
$
(33,652
)
 
$
53,497

 
$
(1,478
)
 
$
1,426,482

 
$
(35,130
)
Held-to-maturity securities
 
 
 
 
 
 
 
 
 
 
 
U.S. Government agencies
$
363,692

 
$
(7,461
)
 
$

 
$

 
$
363,692

 
$
(7,461
)
Municipal
73,447

 
(1,280
)
 

 

 
73,447

 
(1,280
)
Total held-to-maturity securities
$
437,139

 
$
(8,741
)
 
$

 
$

 
$
437,139

 
$
(8,741
)

The Company conducts a regular assessment of its 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 securities with unrealized losses at June 30, 2017 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 corporate notes and mortgage-backed securities. Unrealized losses recognized on corporate notes and mortgage-backed securities are the result of increases in yields for similar types of securities.

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

 
Three months ended June 30,
 
Six months ended June 30,
(Dollars in thousands)
2017
 
2016
 
2017
 
2016
Realized gains
$
48

 
$
1,487

 
$
48

 
$
4,037

Realized losses
(1
)
 
(47
)
 
(56
)
 
(1,272
)
Net realized gains (losses)
$
47

 
$
1,440

 
$
(8
)
 
$
2,765

Other than temporary impairment charges

 

 

 

Gains (losses) on investment securities, net
$
47

 
$
1,440

 
$
(8
)
 
$
2,765

Proceeds from sales and calls of available-for-sale securities
$
3,724

 
$
1,068,795

 
$
9,729

 
$
1,071,996

Proceeds from calls of held-to-maturity securities
2

 
183,738

 
51,062

 
281,981



13

Table of Contents


The amortized cost and fair value of securities as of June 30, 2017, December 31, 2016 and June 30, 2016, 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 determined to be available-for-sale 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:
 
June 30, 2017
 
December 31, 2016
 
June 30, 2016
(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
$
125,706

 
$
125,170

 
$
145,353

 
$
145,062

 
$
214,917

 
$
215,290

Due in one to five years
289,688

 
289,243

 
321,019

 
320,423

 
113,263

 
113,395

Due in five to ten years
38,213

 
39,463

 
27,319

 
28,451

 
28,111

 
30,870

Due after ten years
7,309

 
7,433

 
34,296

 
34,399

 
13,459

 
14,021

Mortgage-backed
1,182,579

 
1,153,290

 
1,215,553

 
1,161,084

 
203,012

 
207,508

Equity securities
32,642

 
35,037

 
32,608

 
35,248

 
51,426

 
56,579

Total available-for-sale securities
$
1,676,137

 
$
1,649,636

 
$
1,776,148

 
$
1,724,667

 
$
624,188

 
$
637,663

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

 
$

 
$

 
$

 
$

 
$

Due in one to five years
32,925

 
32,776

 
29,794

 
29,416

 
27,505

 
27,738

Due in five to ten years
172,398

 
172,800

 
69,664

 
67,820

 
68,691

 
70,121

Due after ten years
588,053

 
581,913

 
536,247

 
510,366

 
896,015

 
912,320

Total held-to-maturity securities
$
793,376

 
$
787,489

 
$
635,705

 
$
607,602

 
$
992,211

 
$
1,010,179

Securities having a fair value of $1.5 billion at June 30, 2017 as well as securities having a fair value of $1.4 billion at December 31, 2016 and June 30, 2016 were pledged as collateral for public deposits, trust deposits, Federal Home Loan Bank ("FHLB") advances, securities sold under repurchase agreements and derivatives. At June 30, 2017, there were no securities of a single issuer, other than U.S. Government-sponsored agency securities, which exceeded 10% of shareholders’ equity.

14

Table of Contents

(6) Loans

The following table shows the Company’s loan portfolio by category as of the dates shown:
 
June 30,
 
December 31,
 
June 30,
(Dollars in thousands)
2017
 
2016
 
2016
Balance:
 
 
 
 
 
Commercial
$
6,406,289

 
$
6,005,422

 
$
5,144,533

Commercial real estate
6,402,494

 
6,196,087

 
5,848,334

Home equity
689,483

 
725,793

 
760,904

Residential real estate
762,810

 
705,221

 
653,664

Premium finance receivables—commercial
2,648,386

 
2,478,581

 
2,478,280

Premium finance receivables—life insurance
3,719,043

 
3,470,027

 
3,161,562

Consumer and other
114,827

 
122,041

 
127,378

Total loans, net of unearned income, excluding covered loans
$
20,743,332

 
$
19,703,172

 
$
18,174,655

Covered loans
50,119

 
58,145

 
105,248

Total loans
$
20,793,451

 
$
19,761,317

 
$
18,279,903

Mix:
 
 
 
 
 
Commercial
31
%
 
30
%
 
28
%
Commercial real estate
31

 
31

 
31

Home equity
3

 
4

 
4

Residential real estate
3

 
4

 
4

Premium finance receivables—commercial
13

 
12

 
14

Premium finance receivables—life insurance
18

 
18

 
17

Consumer and other
1

 
1

 
1

Total loans, net of unearned income, excluding covered loans
100
%
 
100
%
 
99
%
Covered loans

 

 
1

Total loans
100
%
 
100
%
 
100
%

The Company’s loan portfolio is generally comprised of loans to consumers and small to medium-sized businesses located within the geographic market areas that the banks serve. The premium finance receivables portfolios are made to customers throughout the United States and Canada. The Company strives to maintain a loan portfolio that is diverse in terms of loan type, industry, borrower and geographic concentrations. Such diversification reduces the exposure to economic downturns that may occur in different segments of the economy or in different industries.

Certain premium finance receivables are recorded net of unearned income. The unearned income portions of such premium finance receivables were $81.0 million at June 30, 2017, $69.6 million at December 31, 2016 and $64.1 million at June 30, 2016. PCI loans are recorded net of credit discounts. See “Acquired Loan Information at Acquisition” below.

Total loans, excluding PCI loans, include net deferred loan fees and costs and fair value purchase accounting adjustments totaling $6.5 million at June 30, 2017, $2.6 million at December 31, 2016 and $(5.0) million at June 30, 2016. The net credit balance at June 30, 2016, is primarily the result of purchase accounting adjustments related to acquisitions in 2016 and 2015.

It is the policy of the Company to review each prospective credit in order to determine the appropriateness and, when required, the adequacy of security or collateral necessary to obtain when making a loan. The type of collateral, when required, will vary from liquid assets to real estate. The Company seeks to ensure access to collateral, in the event of default, through adherence to state lending laws and the Company’s credit monitoring procedures.

15

Table of Contents

Acquired Loan Information at Acquisition—PCI Loans

As part of the Company's previous acquisitions, the Company acquired loans for which there was evidence of credit quality deterioration since origination (PCI loans) and determined that it was probable that the Company would be unable to collect all contractually required principal and interest payments. The following table presents the unpaid principal balance and carrying value for these acquired loans:
 
 
June 30, 2017
 
December 31, 2016
 
(Dollars in thousands)
Unpaid
Principal
Balance
 
Carrying
Value
 
Unpaid
Principal
Balance
 
Carrying
Value
 
 
PCI loans
$
443,216

 
$
412,519

 
$
509,446

 
$
471,786


See Note 7—Allowance for Loan Losses, Allowance for Losses on Lending-Related Commitments and Impaired Loans for further discussion regarding the allowance for loan losses associated with PCI loans at June 30, 2017.

Accretable Yield Activity - PCI Loans

Changes in expected cash flows may vary from period to period as the Company periodically updates its cash flow model assumptions for PCI loans. The factors that most significantly affect the estimates of gross cash flows expected to be collected, and accordingly the accretable yield, include changes in the benchmark interest rate indices for variable-rate products and changes in prepayment assumptions and loss estimates. The following table provides activity for the accretable yield of PCI loans:

Three Months Ended
 
Six Months Ended
(Dollars in thousands)
June 30,
2017

June 30,
2016

June 30,
2017
 
June 30,
2016
Accretable yield, beginning balance
$
45,762

 
$
59,218

 
$
49,408

 
$
63,902

Acquisitions
(105
)
 
125

 
426

 
1,266

Accretable yield amortized to interest income
(5,477
)
 
(5,199
)
 
(11,076
)
 
(10,656
)
Accretable yield amortized to indemnification asset/liability (1)
(361
)
 
(1,624
)
 
(715
)
 
(3,795
)
Reclassification from non-accretable difference (2)
3,554

 
2,536