10-Q 1 a09301610q.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, 2016
 
OR
 
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from                          to                         
 
Commission file number 001-36599
 
MB FINANCIAL, INC.
(Exact name of registrant as specified in its charter)
 
Maryland
 
36-4460265
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
 
 
800 West Madison Street, Chicago, Illinois
 
60607
(Address of principal executive offices)
 
(Zip Code)
 
Registrant’s telephone number, including area code:  (888) 422-6562
 

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer x
 
Accelerated filer o
 
 
 
Non-accelerated filer o
(Do not check if a smaller reporting company)
 
Smaller reporting company o
 
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 83,577,088 shares of the Registrant’s common stock as of November 9, 2016.
 






MB FINANCIAL, INC.
 
FORM 10-Q
 
September 30, 2016
 
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, 2016
 
December 31, 2015
ASSETS
 
 

 
 

Cash and due from banks
 
$
351,009

 
$
307,869

Interest earning deposits with banks
 
125,250

 
73,572

Total cash and cash equivalents
 
476,259

 
381,441

Investment securities:
 
 

 
 

Securities available for sale, at fair value
 
1,859,356

 
1,585,023

Securities held to maturity, at amortized cost ($1,175,838 fair value at September 30, 2016 and $1,274,767 at December 31, 2015)
 
1,115,262

 
1,230,810

Non-marketable securities - FHLB and FRB stock
 
146,209

 
114,233

Total investment securities
 
3,120,827

 
2,930,066

Loans held for sale
 
899,412

 
744,727

Loans:
 
 

 
 

Total loans, excluding purchased credit impaired loans
 
12,379,358

 
9,652,592

Purchased credit impaired loans
 
161,338

 
141,406

Total loans
 
12,540,696

 
9,793,998

Less: Allowance for loan and lease losses
 
139,528

 
128,140

Net loans
 
12,401,168

 
9,665,858

Lease investments, net
 
277,647

 
211,687

Premises and equipment, net
 
283,112

 
236,013

Cash surrender value of life insurance
 
199,628

 
136,953

Goodwill
 
993,799

 
725,070

Other intangibles
 
65,395

 
44,812

Mortgage servicing rights, at fair value
 
154,730

 
168,162

Other real estate owned, net
 
33,105

 
31,553

Other real estate owned related to FDIC-assisted transactions
 
5,177

 
10,717

Other assets
 
431,623

 
297,948

Total assets
 
$
19,341,882

 
$
15,585,007

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 

 
 

LIABILITIES
 
 

 
 

Deposits:
 
 

 
 

Non-interest bearing
 
$
6,410,334

 
$
4,627,184

Interest bearing
 
7,868,932

 
6,878,031

Total deposits
 
14,279,266

 
11,505,215

Short-term borrowings
 
1,496,319

 
1,005,737

Long-term borrowings
 
311,645

 
400,274

Junior subordinated notes issued to capital trusts
 
209,159

 
186,164

Accrued expenses and other liabilities
 
482,085

 
400,333

Total liabilities
 
16,778,474

 
13,497,723

STOCKHOLDERS’ EQUITY
 
 

 
 

Preferred stock, ($0.01 par value, authorized 10,000,000 shares at September 30, 2016 and December 31, 2015; Series A, 8% perpetual non-cumulative, 4,000,000 shares issued and outstanding at September 30, 2016 and December 31, 2015, $25 liquidation value; Series B, 8% cumulative voting convertible, 525 shares issued and outstanding at September 30, 2016 and none issued and outstanding at December 31, 2015)
 
116,507

 
115,280

Common stock, ($0.01 par value; authorized 120,000,000 shares at September 30, 2016 and 100,000,000 shares at December 31, 2015; issued 85,547,217 shares at September 30, 2016 and 75,566,885 shares at December 31, 2015)
 
855

 
756

Additional paid-in capital
 
1,674,341

 
1,280,870

Retained earnings
 
809,769

 
731,812

Accumulated other comprehensive income
 
23,763

 
15,777

Less: 1,991,960 and 1,888,556 shares of treasury common stock, at cost, at September 30, 2016 and December 31, 2015, respectively
 
(62,084
)
 
(58,504
)
Controlling interest stockholders’ equity
 
2,563,151

 
2,085,991

Non-controlling interest
 
257

 
1,293

Total stockholders’ equity
 
2,563,408

 
2,087,284

Total liabilities and stockholders’ equity
 
$
19,341,882

 
$
15,585,007



     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,
 
 
2016
 
2015
 
2016
 
2015
Interest income:
 
 

 
 

 
 
 
 
Loans:
 
 
 
 
 
 
 
 
Taxable
 
$
118,675

 
$
100,573

 
$
333,829

 
$
298,187

Nontaxable
 
2,846

 
2,283

 
8,173

 
6,716

Investment securities:
 
 

 
 

 
 

 
 

Taxable
 
8,844

 
9,655

 
26,209

 
29,591

Nontaxable
 
10,382

 
10,752

 
31,802

 
30,005

Other interest earning accounts
 
164

 
89

 
430

 
208

Total interest income
 
140,911

 
123,352

 
400,443

 
364,707

Interest expense:
 
 

 
 

 
 
 
 
Deposits
 
6,681

 
5,102

 
18,255

 
14,301

Short-term borrowings
 
1,092

 
395

 
2,723

 
1,027

Long-term borrowings and junior subordinated notes
 
2,367

 
1,886

 
6,788

 
5,542

Total interest expense
 
10,140

 
7,383

 
27,766

 
20,870

Net interest income
 
130,771

 
115,969

 
372,677

 
343,837

Provision for credit losses
 
6,549

 
5,358

 
16,941

 
14,628

Net interest income after provision for credit losses
 
124,222

 
110,611

 
355,736

 
329,209

Non-interest income:
 
 

 
 

 
 
 
 
Mortgage banking revenue
 
49,095

 
30,692

 
116,192

 
90,884

Lease financing revenue, net
 
18,864

 
20,000

 
53,618

 
60,644

Commercial deposit and treasury management fees
 
12,957

 
11,472

 
36,383

 
33,572

Trust and asset management fees
 
8,244

 
6,002

 
24,430

 
17,468

Card fees
 
4,161

 
3,335

 
11,731

 
11,671

Capital markets and international banking fees
 
3,313

 
2,357

 
9,311

 
5,793

Consumer and other deposit service fees
 
3,559

 
3,499

 
9,745

 
9,842

Brokerage fees
 
1,294

 
1,281

 
3,767

 
4,502

Loan service fees
 
1,792

 
1,531

 
5,505

 
4,369

Increase in cash surrender value of life insurance
 
1,055

 
852

 
2,759

 
2,527

Net gain (loss) on investment securities
 
—

 
371

 
269

 
(173
)
Net gain (loss) on sale of assets
 
5

 
1

 
(45
)
 
(2
)
Other operating income
 
4,048

 
858

 
8,415

 
5,371

Total non-interest income
 
108,387

 
82,251

 
282,080

 
246,468

Non-interest expenses:
 
 

 
 

 
 
 
 
Salaries and employee benefits
 
111,478

 
87,891

 
292,073

 
258,822

Occupancy and equipment
 
14,766

 
12,458

 
41,441

 
37,575

Computer services and telecommunication
 
12,836

 
8,567

 
31,668

 
26,008

Advertising and marketing
 
3,084

 
2,578

 
8,926

 
7,521

Professional and legal
 
4,460

 
1,801

 
10,370

 
6,884

Other intangibles amortization
 
1,674

 
1,542

 
4,917

 
4,569

Branch exit and facilities impairment charges
 
(2,908
)
 
70

 
(2,709
)
 
7,899

Net (gain) loss recognized on other real estate owned and other related expenses
 
(721
)
 
577

 
(809
)
 
2,197

Prepayment fees on interest bearing liabilities
 
—

 
—

 
—

 
85

Other operating expenses
 
25,716

 
18,782

 
68,214

 
55,363

Total non-interest expenses
 
170,385

 
134,266

 
454,091

 
406,923

Income before income taxes
 
62,224

 
58,596

 
183,725

 
168,754

Income tax expense
 
17,805

 
18,318

 
56,780

 
53,413

Net income
 
44,419

 
40,278

 
126,945

 
115,341

Dividends on preferred shares
 
2,004

 
2,000

 
6,004

 
6,000

Net income available to common stockholders
 
$
42,415

 
$
38,278

 
$
120,941

 
$
109,341

     

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,
 
 
2016
 
2015
 
2016
 
2015
Common share data:
 
 

 
 

 
 
 
 
Basic earnings per common share
 
$
0.55

 
$
0.52

 
$
1.62

 
$
1.47

Diluted earnings per common share
 
0.54

 
0.51

 
1.60

 
1.45

Weighted average common shares outstanding for basic earnings per common share
 
77,506,885

 
74,297,281

 
74,780,943

 
74,478,164

Diluted weighted average common shares outstanding for diluted earnings per common share
 
78,683,170

 
75,029,827

 
75,727,580

 
75,154,585










































 
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,
 
 
2016
 
2015
 
2016
 
2015
 
 
 
 
 
 
 
 
 
Net income
 
$
44,419

 
$
40,278

 
$
126,945

 
$
115,341

Unrealized holding (losses) gains on investment securities, net of reclassification adjustments
 
(7,679
)
 
4,989

 
15,603

 
3,507

Reclassification adjustment for amortization of unrealized gains on investment securities transferred to held to maturity from available for sale
 
(554
)
 
(1,010
)
 
(2,081
)
 
(2,669
)
Reclassification adjustments for (gains) losses included in net income
 
—

 
(371
)
 
(269
)
 
173

Other comprehensive (loss) income, before tax
 
(8,233
)
 
3,608

 
13,253

 
1,011

Income tax benefit (expense) related to items of other comprehensive (loss)
income
 
3,265

 
(1,418
)
 
(5,267
)
 
(399
)
Other comprehensive (loss) income, net of tax
 
(4,968
)
 
2,190

 
7,986

 
612

Comprehensive income
 
$
39,451

 
$
42,468

 
$
134,931

 
$
115,953





































See Accompanying Notes to Consolidated Financial Statements.

4



MB FINANCIAL, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
Nine Months Ended September 30, 2016 and 2015
(Amounts in thousands, except per share data) (Unaudited)
 
 
Preferred
Stock
Common
Stock
Additional
Paid-in
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Income,
Net of Tax
Treasury
Stock
Noncontrolling
Interest
Total Stock-
holders’
Equity
Balance at December 31, 2014
$
115,280

$
751

$
1,267,761

$
629,677

$
20,356

$
(6,974
)
$
1,435

$
2,028,286

Net income
—

—

—

115,341

—

—

211

115,552

Other comprehensive income, net of tax
—

—

—

—

612

—

—

612

Issuance of common stock
—

—

218

—

—

—

—

218

Cash dividends declared on preferred shares
—

—

—

(6,000
)
—

—

—

(6,000
)
Cash dividends declared on common shares ($0.48 per share)
—

—

—

(36,229
)
—

—

—

(36,229
)
Restricted common stock activity, net of tax
—

5

(1,841
)
—

—

2,876

—

1,040

Stock option activity, net of tax
—

—

(133
)
—

—

—

—

(133
)
Repurchase of common shares
—

—

—

—

—

(47,215
)
—

(47,215
)
Repurchase of common shares in connection with employee benefit plans and held in trust for deferred compensation plan
—

—

360

—

—

(3,945
)
—

(3,585
)
Stock-based compensation expense
—

—

10,983

—

—

—

—

10,983

Distributions to non-controlling interest
—

—

—

—

—

—

(301
)
(301
)
Balance at September 30, 2015
$
115,280

$
756

$
1,277,348

$
702,789

$
20,968

$
(55,258
)
$
1,345

$
2,063,228

 
 
 
 
 
 
 
 
 
Balance at December 31, 2015
$
115,280

$
756

$
1,280,870

$
731,812

$
15,777

$
(58,504
)
$
1,293

$
2,087,284

Net income
—

—

—

126,945

—

—

139

127,084

Other comprehensive income, net of tax
—

—

—

—

7,986

—

—

7,986

Issuance of preferred and common stock due to business combination
1,227

97

383,775

—

—

—

—

385,099

Cash dividends declared on preferred shares
—

—

—

(6,004
)
—

—

—

(6,004
)
Cash dividends declared on common shares ($0.55 per share)
—

—

—

(42,984
)
—

—

—

(42,984
)
Restricted common stock activity, net of tax
—

1

(2,263
)
—

—

750

—

(1,512
)
Stock option activity, net of tax
—

1

272

—

—

(157
)
—

116

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

—

381

—

—

(4,173
)
—

(3,792
)
Stock-based compensation expense
—

—

12,573

—

—

—

—

12,573

Purchase of additional investment in subsidiary from minority owners
—

—

(1,267
)
—

—

—

(1,069
)
(2,336
)
Distributions to non-controlling interest
—

—

—

—

—

—

(106
)
(106
)
Balance at September 30, 2016
$
116,507

$
855

$
1,674,341

$
809,769

$
23,763

$
(62,084
)
$
257

$
2,563,408

















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,
 
 
2016
 
2015
Cash Flows From Operating Activities
 
 

 
 

Net income
 
$
126,945

 
$
115,341

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

 
 

Depreciation of premises and equipment and leased equipment
 
55,259

 
45,550

Branch exit and facilities impairment charges
 
(2,709
)
 
7,899

Compensation expense for share-based payment plans
 
12,573

 
10,983

Net (gain) loss on sales of premises and equipment and leased equipment
 
(255
)
 
1,800

Amortization of other intangibles
 
4,917

 
4,569

Provision for credit losses
 
16,941

 
14,628

Deferred income tax expense
 
26,208

 
13,521

Amortization of premiums and discounts on investment securities, net
 
34,968

 
35,441

Accretion of discounts on loans, net
 
(25,426
)
 
(26,365
)
Accretion of FDIC indemnification asset
 
—

 
(72
)
Net (gain) loss on investment securities
 
(269
)
 
173

Proceeds from sale of loans held for sale
 
4,601,291

 
5,500,778

Origination of loans held for sale
 
(4,694,890
)
 
(5,450,842
)
Net gain on sale of loans held for sale
 
(41,518
)
 
(25,449
)
Change in fair value of mortgage servicing rights
 
59,894

 
40,568

Net (gain) loss on other real estate owned
 
(1,823
)
 
2,070

Net loss (gain) on other real estate owned related to FDIC-assisted transactions
 
448

 
(296
)
Increase in cash surrender value of life insurance
 
(2,759
)
 
(2,527
)
Increase in other assets, net
 
(162,260
)
 
(120,160
)
Increase (decrease) in other liabilities, net
 
22,618

 
(8,576
)
Net cash provided by operating activities
 
30,153

 
159,034

Cash Flows From Investing Activities
 
 

 
 

Proceeds from sales of investment securities available for sale
 
19,023

 
28,356

Proceeds from maturities and calls of investment securities available for sale
 
212,283

 
206,378

Purchases of investment securities available for sale
 
(19,905
)
 
(148,374
)
Proceeds from maturities and calls of investment securities held to maturity
 
115,040

 
61,521

Purchases of investment securities held to maturity
 
(12,690
)
 
(295,857
)
Purchases of non-marketable securities - FHLB and FRB stock
 
(15,999
)
 
(35,831
)
Redemption of non-marketable securities - FHLB and FRB stock
 
23

 
20,000

Net increase in loans
 
(780,864
)
 
(248,219
)
Purchases of mortgage servicing rights
 
(3,423
)
 
(785
)
Proceeds from sale of mortgage servicing rights
 
—

 
103,105

Purchases of premises and equipment and leased equipment
 
(125,372
)
 
(64,149
)
Proceeds from sales of premises and equipment and leased equipment
 
5,194

 
3,993

Capital improvements on other real estate owned
 
(96
)
 
—

Proceeds from sale of other real estate owned
 
8,081

 
3,153

Proceeds from sale of other real estate owned related to FDIC-assisted transactions
 
7,105

 
9,674

Net cash paid in business acquisition
 
(9,010
)
 
—

Purchase of additional investment in subsidiary from minority owners
 
(2,336
)
 
—

Net proceeds from FDIC related covered assets
 
(3,182
)
 
(6,831
)
Net cash used in investing activities
 
(606,128
)
 
(363,866
)
Cash Flows From Financing Activities
 
 

 
 

Net increase in deposits
 
384,628

 
263,636

Net increase in short-term borrowings
 
442,277

 
9,114

Proceeds from long-term borrowings
 
182,247

 
27,159

Principal paid on long-term borrowings
 
(286,877
)
 
(14,900
)
Treasury stock transactions, net
 
(3,792
)
 
(50,800
)
Stock options exercised
 
1,062

 
499

Excess tax expense from share-based payment arrangements
 
—

 
241

Dividends paid on preferred stock
 
(6,004
)
 
(6,000
)
Dividends paid on common stock
 
(42,748
)
 
(35,953
)
Net cash provided by financing activities
 
670,793

 
192,996

Net increase (decrease) in cash and cash equivalents
 
$
94,818

 
$
(11,836
)
Cash and cash equivalents:
 
 

 
 

Beginning of period
 
381,441

 
312,081

End of period
 
$
476,259

 
$
300,245



6


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

 
 
 
Nine Months Ended
 
 
September 30,
 
 
2016
 
2015
Supplemental Disclosures of Cash Flow Information:
 
 

 
 

Cash payments for:
 
 

 
 

Interest paid to depositors and on other borrowed funds
 
$
26,952

 
$
21,656

Income tax payments, net
 
4,576

 
(4,958
)
Supplemental Schedule of Noncash Investing Activities:
 
 

 
 

Investment securities available for sale sold not settled
 
$
(9,741
)
 
$
—

Investment securities held to maturity purchased not settled
 
440

 
11,656

Loans held for sale transferred to loans held for investment
 
—

 
44,078

Loans transferred to other real estate owned
 
3,566

 
15,612

Loans transferred to other real estate owned related to FDIC-assisted transactions
 
1,145

 
3,221

Loans transferred to repossessed assets
 
2,796

 
777

Operating leases rewritten as direct finance leases included as loans
 
642

 
6,940

Supplemental Schedule of Noncash Investing Activities From Acquisitions:
 
 

 
 

Noncash assets acquired:
 
 

 
 

Investment securities available for sale
 
$
505,564

 
$
—

Non-marketable securities - FHLB and FRB stock
 
16,000

 
—

Loans
 
1,952,826

 
—

Premises and equipment
 
39,061

 
—

Cash surrender value of life insurance
 
59,917

 
—

Goodwill
 
268,729

 
—

Core deposit intangible
 
25,500

 
—

Other real estate owned
 
4,148

 
—

Other assets
 
27,615

 
—

Total noncash assets acquired
 
$
2,899,360

 
$
—

Liabilities assumed:
 
 

 
 

Deposits
 
$
2,389,423

 
$
—

Short-term borrowings
 
48,305

 
—

Long-term borrowings
 
16,000

 
—

Junior subordinated notes issued to capital trusts
 
28,075

 
—

Other liabilities
 
23,477

 
—

Total liabilities assumed
 
$
2,505,280


$
—


















 
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, 2016 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, 2015.
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 810 "Consolidation." New authoritative accounting guidance under ASC Topic 810, "Consolidation" amended prior guidance over the consolidation of certain legal entities. The new authoritative guidance modifies the evaluation of whether limited partnerships and similar legal entities are variable interest entities or voting interest entities, eliminates the presumption that a general partner should consolidate a limited partnership, affects the consolidation analysis of reporting entities that are involved with variable interest entities and provides a scope exception from consolidation guidance for reporting entities with interests in legal entities that are required to comply with or operate in accordance with requirements similar to those for registered money market funds. The Company adopted this new authoritative guidance on January 1, 2016, and it did not have an impact on the Company's statements of operations or financial condition.

ASC Topic 835 "Interest." New authoritative accounting guidance under ASC Topic 835, "Interest" amended prior guidance to simplify the presentation of debt issuance costs. The new authoritative guidance requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The Company adopted this new authoritative guidance on January 1, 2016, and it did not have an impact on the Company's statements of operations or financial condition.

ASC Topic 805 "Business Combinations." New authoritative accounting guidance under ASC Topic 805, "Business Combinations" amended prior guidance to require that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. The new guidance requires that the acquirer record, in the same period’s financial statements, the effect on earnings of changes in depreciation, amortization, or other income effects, if any, as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date. It also requires an entity to present separately on the face of the statement of operations or disclose in the notes the portion of the amount recorded in current-period earnings by line items that would have been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition date. The Company adopted this new authoritative guidance on January 1, 2016, and it did not have an 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 and to provide clarification on identifying performance obligations and licensing implementation guidance. The new authoritative guidance was initially effective for reporting periods after January 1, 2017 but was deferred to

8


January 1, 2018. The Company is evaluating the new guidance but does not expect it to have a significant impact on the Company's statements of operations or financial condition.

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 new authoritative guidance will be effective for reporting periods after January 1, 2018 and is not expected to have a significant impact on the Company's statements of operations or financial condition.

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 new authoritative guidance will be effective for reporting periods after January 1, 2018. The Company is evaluating the new guidance but does not expect it to 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. The Company is evaluating the new guidance and its impact on the Company's statements of operations and financial condition.

ASC Topic 815 "Derivatives and Hedging." New authoritative accounting guidance under ASC Topic 815 "Derivatives and Hedging" amended prior guidance to clarify that a change in the counterparty to a derivative instrument that has been designated as the hedging instrument does not, in and of itself, require dedesignation of that hedging relationship provided that all other hedge accounting criteria continue to be met. An entity has an option to apply the amendments in this new authoritative guidance on either a prospective basis or a modified retrospective basis. The new authoritative guidance will be effective for reporting periods after January 1, 2017 and early adoption is permitted. This new authoritative guidance is not expected to have a significant impact on the Company's statements of operations or financial condition.

New authoritative accounting guidance under ASC Topic 815 "Derivatives and Hedging" amended prior guidance to clarify what steps are required when assessing whether the economic characteristics and risks of call (put) options are clearly and closely related to the economic characteristics and risks of their debt hosts, which is one of the criteria for bifurcating an embedded derivative. An entity is required to consider whether (1) the payoff is adjusted based on changes in an index, (2) the payoff is indexed to an underlying other than interest rates or credit risk, (3) the debt involves a substantial premium or discount, and (4) the call (put) option is contingently exercisable. An entity should apply this new authoritative guidance on a modified retrospective basis to existing debt instruments as of the beginning of the fiscal year for which the amendments are effective. The new authoritative guidance will be effective for reporting periods after January 1, 2017 and early adoption is permitted. This new authoritative guidance is not expected to have a significant impact on the Company's statements of operations or financial condition.

ASC Topic 323 "Investment - Equity Method and Joint Ventures." New authoritative accounting guidance under ASC Topic 323 "Investment - Equity Method and Joint Ventures" amended prior guidance to eliminate the requirement to retroactively adopt the equity method of accounting as a result of an increase in the level of ownership interest or degree of influence. The new authoritative guidance required that the equity method investor add the cost of acquiring the additional interest in the investee to the current basis of the investor’s previously held interest and adopt the equity method of accounting as of the date the investment becomes qualified for equity method accounting. The new authoritative guidance will be effective for reporting periods after January 1,

9


2017 and early adoption is permitted. This new authoritative guidance is not expected to have a significant impact on the Company's statements of operations or financial condition.
 
ASC Topic 718 "Compensation - Stock Compensation." New authoritative accounting guidance under ASC Topic 718 "Compensation - Stock Compensation" amended prior guidance on several aspects, including the income tax consequences, classification of awards as either equity or liability, and classification on the statement of cash flows. The new authoritative guidance allows for all excess tax benefits and tax deficiencies to be recognized as income tax benefit or expense in the income statement. The tax effects of exercised or vested awards should be treated as discrete items in the reporting period in which they occur. An entity also should recognize excess tax benefits regardless of whether the benefit reduces taxes payable in the current period. For the statement of cash flows, excess tax benefits should be classified along with other income tax cash flows as an operating activity, and cash paid by an employer when directly withholding shares for tax withholding purposes should be classified as a financing activity. The new authoritative guidance also allows an entity to make an entity-wide accounting policy election to either estimate the number of awards that are expected to vest or account for forfeitures when they occur. In addition, the threshold to qualify for equity classification permits withholding up to the maximum statutory tax rates in the applicable jurisdictions. The new authoritative guidance will be effective for reporting periods after January 1, 2017 and early adoption is permitted. The Company early adopted the new guidance in the third quarter of 2016, and as a result, recorded a $1.8 million tax benefit in the Company's statements of operations. The Company has also elected to account for forfeitures when they occur.

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 its impact on the Company's statements of operations or financial condition.

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 new authoritative guidance will be effective for reporting periods after January 1, 2018. This new authoritative guidance is not expected to 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 new authoritative guidance will be effective for reporting periods after January 1, 2018. The Company is evaluating the new guidance and its impact on the Company's statements of operations or financial condition.


10


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,
 
 
2016
 
2015
 
2016
 
2015
Distributed earnings allocated to common stock
 
$
16,114

 
$
12,733

 
$
42,984

 
$
36,227

Undistributed earnings
 
28,305

 
27,545

 
83,961

 
79,114

Net income
 
44,419

 
40,278

 
126,945

 
115,341

Less: preferred stock dividends
 
2,004

 
2,000

 
6,004

 
6,000

Net income available to common stockholders for basic earnings per common share
 
42,415

 
38,278

 
120,941

 
109,341

Plus: preferred stock dividends on convertible preferred stock
 
4

 
—

 
4

 
—

Less: earnings allocated to participating securities
 
2

 
2

 
6

 
5

Earnings allocated to common stockholders for diluted earnings per common share
 
$
42,417

 
$
38,276

 
$
120,939

 
$
109,336

Weighted average shares outstanding for basic earnings per common share
 
77,506,885

 
74,297,281

 
74,780,943

 
74,478,164

Dilutive effect of equity awards
 
1,176,285

 
732,546

 
946,637

 
676,421

Weighted average shares outstanding for diluted earnings per common share
 
78,683,170

 
75,029,827

 
75,727,580

 
75,154,585

Basic earnings per common share
 
$
0.55

 
$
0.52

 
$
1.62

 
$
1.47

Diluted earnings per common share
 
0.54

 
0.51

 
1.60

 
1.45

 

11


Note 4.
   Business Combinations
 
MSA, Holding, LLC On December 31, 2015, MB Financial Bank acquired a 100% equity interest in MSA Holdings, LLC, ("MSA") the parent company of MainStreet Investment Advisors, LLC and Cambium Asset Management, LLC. Main Street Advisors provides investment management solutions to the bank trust and independent trust company markets.  Through its registered investment advisor, Cambium LLC, MSA provides efficient, cost-effective account management solutions on a discretionary basis for high net worth clients, both individuals and institutions, and small accounts through its BluePrint portfolio solution.

This business combination was accounted for under the acquisition method of accounting. Accordingly, the results of operations of the acquired company were included in the Company’s results of operations starting on January 1, 2016. Under this method of accounting, assets and liabilities acquired are recorded at their estimated fair values, net of applicable income tax effects. The excess cost over fair value of net assets acquired was recorded as goodwill. The Company recorded $13.5 million in goodwill and $8.8 million in other intangibles as a result of this acquisition. The amounts recognized for the business combination in the financial statements as of June 30, 2016 were determined to be final.

American Chartered Bancorp, Inc. Effective August 24, 2016, American Chartered Bancorp, Inc. ("American Chartered"), an Illinois corporation, was merged (the "Merger") with and into MB Financial, Inc., a Maryland corporation ("MB Financial"), pursuant to the Agreement and Plan of Merger, dated as of November 20, 2015 (the "Merger Agreement"), by and between MB Financial and American Chartered. This transaction continues to solidify the Company's market position in Chicago. At the effective time of the Merger (the "Effective Time"), (i) each share of the common stock, no par value, of American Chartered ("American Chartered Common Stock") that was issued and outstanding immediately prior to the Effective Time, (ii) each share of American Chartered’s 8% Cumulative Voting Convertible Preferred Stock, Series D ("American Chartered Series D Preferred Stock"), that was issued and outstanding immediately prior to the Effective Time whose holder elected pursuant to American Chartered’s charter to receive the same consideration in the Merger as holders of American Chartered Common Stock, based on the number of shares of American Chartered Common Stock into which such share of American Chartered Series D Preferred Stock would otherwise then be convertible, and (iii) each share of American Chartered Non-Voting Perpetual Preferred Stock, Series F, that was issued and outstanding immediately prior to the Effective Time, was converted into the right to receive, subject to the election and proration procedures set forth in the Merger Agreement: (1) cash in the amount of $9.30 (the "Cash Consideration") or (2) 0.2732 shares of the Company's common stock, with cash paid in lieu of fractional Company shares determined by multiplying the fractional Company share amount by $39.01 (the average closing sale price of the Company's common stock for the five full trading days ending on August 23, 2016) (the "Stock Consideration"). The holders of such shares of American Chartered stock also could elect to receive a combination of the Cash Consideration and the Stock Consideration for their shares. Each share of American Chartered Series D Preferred Stock whose holder did not elect to receive the same consideration in the Merger as holders of American Chartered Common Stock, based on the number of shares of American Chartered Common Stock into which such share of American Chartered Series D Preferred Stock would otherwise then be convertible, was converted into the right to receive one share of the Company's 8% cumulative voting convertible preferred stock, Series B. Consideration paid was $487.4 million, including $382.8 million in common stock (9.7 million shares), $102.3 million in cash and $2.3 million in preferred stock and stock-based awards assumed. The $102.3 million in cash consideration includes payments for the value of the net option shares of the American Chartered stock options pursuant to the Agreement and Plan of Merger.

This business combination was accounted for under the acquisition method of accounting. Accordingly, the results of operations of the acquired company have been included in the Company’s results of operations since the date of acquisition. Under this method of accounting, the assets acquired, liabilities assumed and consideration paid are recorded at their estimated fair values. The excess cost over fair value of net assets acquired is recorded as goodwill. In the event that the fair value of net assets acquired exceeds the cost, the Company will record a gain on the acquisition. As the consideration paid for American Chartered exceeded the net assets acquired, goodwill of $268.8 million was recorded on the acquisition and allocated to the banking segment. Goodwill recorded in the transaction, which reflects the increased Chicago market share and related synergies expected from the combined operations, is not tax deductible. The amounts recognized for the business combination in the financial statements as of September 30, 2016 have been determined only provisionally as fair values continue to be assessed.

12



Estimated fair values of the assets acquired and liabilities assumed in the American Chartered transaction, as of the closing date of the transaction were as follows (in thousands):

 
 
August 24, 2016
ASSETS
 
 
Cash and cash equivalents
 
$
93,307

Investment securities available for sale
 
505,564

Non-marketable securities - FRB and FHLB Stock
 
16,000

Loans
 
1,952,826

Premises and equipment
 
39,061

Cash surrender value of life insurance
 
59,917

Goodwill
 
268,758

Other intangibles
 
25,500

Other real estate owned
 
4,148

Other assets
 
27,615

Total assets
 
$
2,992,696

LIABILITIES
 
 
Deposits
 
$
2,389,423

Short-term borrowings
 
48,305

Long-term borrowings
 
16,000

Junior subordinated notes issued to capital trusts
 
28,075

Accrued expenses and other liabilities
 
23,477

Total liabilities
 
$
2,505,280

Total identifiable net assets
 
$
487,416

 
 
 
Consideration:
 
 
Market value of common stock at $39.28 per share at August 24, 2016 (9,744,636 shares of common stock issued)
 
$
382,769

Series B preferred stock at $2,337.97 per share at August 24, 2016 (525 shares of preferred stock issued) (1)
 
1,227

Stock-based compensation attributed to pre-business combination service
 
1,103

Cash paid
 
102,317

   Total fair value of consideration, excluding Series B preferred stock
 
$
487,416

(1) 
Per share fair value amount determined as if the shares of Series B were converted into shares common stock.
 
Purchased loans acquired in a business combination are recorded at estimated fair value on their purchase date without a carryover of the related allowance for loan and lease losses. These acquired loans are segregated into three types: pass rated loans with no discount attributable to credit quality, non-impaired loans with a discount attributable at least in part to credit quality and impaired loans with evidence of significant credit deterioration.  

•
Pass rated loans (typically performing loans) are accounted for in accordance with ASC 310-20 "Nonrefundable Fees and Other Costs" as these loans do not have evidence of credit deterioration since origination.
•
Non-impaired loans (typically performing substandard loans) are accounted for in accordance with ASC 310-30 if they display at least some level of credit deterioration since origination.
•
Impaired loans (typically substandard loans on non-accrual status) are accounted for in accordance with ASC 310-30 as they display significant credit deterioration since origination.

For pass rated loans (non-purchased credit-impaired loans), the difference between the estimated fair value of the loans and the principal outstanding is accreted over the remaining life of the loans. The accretable discount for the non-purchased credit-impaired loans was $29.0 million as of the date of the acquisition.

In accordance with ASC 310-30, for both purchased non-impaired loans (performing substandard loans) and purchased credit-impaired loans, the loans are pooled by loan type and the difference between contractually required payments at acquisition and the cash flows expected to be collected is referred to as the non-accretable difference. Further, any excess of cash flows expected at acquisition over the estimated fair value is referred to as the accretable yield and is recognized into interest income over the remaining life of the loan pools when there is a reasonable expectation about the amount and timing of such cash flows. The non-accretable and accretable discount for the purchased credit-impaired loans was $4.3 million and $805 thousand, respectively, as of the date of the acquisition.

13



The following table presents the acquired loans as of the acquisition date (in thousands):

 
 
Purchased
Credit-Impaired
Loans
 
Purchased Non-Credit-Impaired
Loans
Fair value
 
$
24,575

 
$
1,928,251

Gross contractual amounts receivable
 
31,408

 
2,207,765

Best estimate of contractual cash flows not expected to be collected (1)
 
5,048

 
129,027

Best estimate of contractual cash flows expected to be collected
 
26,360

 
2,078,738

(1) 
Includes interest payments not expected to be collected due to loan prepayments as well as principal and interest payments not expected to be collected due to customer default.

The Company incurred costs of $1.8 million directly related to the consummation of the merger for the nine months ended September 30, 2016, which is recorded in professional and legal fees on the statement of operations. The data processing systems were converted in September 2016.

The following table provides the unaudited pro forma information for the results of operations for the nine months ended September 30, 2016 and 2015, as if the acquisition had occurred January 1, 2015. The pro forma results combine the historical results of American Chartered into the Company's consolidated statement of operations including the impact of certain acquisition accounting adjustments including loan discount accretion, investment securities discount accretion, intangible assets amortization, deposit premium accretion and borrowing discount amortization. The pro forma results have been prepared for comparative purposes only and are not necessarily indicative of the results that would have been obtained had the acquisition actually occurred on January 1, 2015. No assumptions have been applied to the pro forma results of operations regarding possible revenue enhancements, provision for credit losses, expense efficiencies or asset dispositions. The merger related expenses that have been recognized are included in net income in the table below.

 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
September 30,
 
 
2016
 
2015
 
2016
 
2015
(in thousands)
 
 
 
 
 
 
 
 
Total revenues (net interest income plus non-interest income)
 
$
256,866

 
$
228,099

 
$
731,987

 
$
678,735

Net income
 
48,432

 
50,581

 
147,078

 
141,751


Revenues and earnings of the acquired company since the acquisition date have not been disclosed as it is not practicable as American Chartered was merged into the Company and separate financial information is not readily available.


14


Note 5.
          Investment Securities
 
Amortized cost and fair value of investment securities were as follows as of the dates indicated (in thousands):
 
 
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
September 30, 2016
 
 

 
 

 
 

 
 

Available for Sale
 
 

 
 

 
 

 
 

U.S. Government sponsored agencies and enterprises
 
$
53,456

 
$
512

 
$
—

 
$
53,968

States and political subdivisions
 
383,041

 
27,914

 
(218
)
 
410,737

Residential mortgage-backed securities
 
1,066,834

 
10,948

 
(1,445
)
 
1,076,337

Commercial mortgage-backed securities
 
93,962

 
3,203

 
(172
)
 
96,993

Corporate bonds
 
208,940

 
2,167

 
(914
)
 
210,193

Equity securities
 
10,932

 
196

 
—

 
11,128

Total Available for Sale
 
1,817,165

 
44,940

 
(2,749
)
 
1,859,356

Held to Maturity
 
 

 
 

 
 

 
 

States and political subdivisions
 
939,491

 
53,682

 
(33
)
 
993,140

Residential mortgage-backed securities
 
175,771

 
6,927

 
—

 
182,698

Total Held to Maturity
 
1,115,262

 
60,609

 
(33
)
 
1,175,838

Total
 
$
2,932,427

 
$
105,549

 
$
(2,782
)
 
$
3,035,194

December 31, 2015
 
 

 
 

 
 

 
 

Available for Sale
 
 

 
 

 
 

 
 

U.S. Government sponsored agencies and enterprises
 
$
63,805

 
$
806

 
$
—

 
$
64,611

States and political subdivisions
 
373,285

 
23,083

 
(1
)
 
396,367

Residential mortgage-backed securities
 
759,816

 
7,363

 
(3,630
)
 
763,549

Commercial mortgage-backed securities
 
128,509

 
1,839

 
(241
)
 
130,107

Corporate bonds
 
222,784

 
815

 
(3,971
)
 
219,628

Equity securities
 
10,757

 
4

 
—

 
10,761

Total Available for Sale
 
1,558,956

 
33,910

 
(7,843
)
 
1,585,023

Held to Maturity
 
 
 
 
 
 
 
 

States and political subdivisions
 
1,016,519

 
36,874

 
(638
)
 
1,052,755

Residential mortgage-backed securities
 
214,291

 
7,721

 
—

 
222,012

Total Held to Maturity
 
1,230,810

 
44,595

 
(638
)
 
1,274,767

Total
 
$
2,789,766

 
$
78,505

 
$
(8,481
)
 
$
2,859,790

 
 
 
 
 
 
 
 
 
 
The Company has no direct exposure to the State of Illinois, but approximately 21% of the state and political subdivisions portfolio consisted of securities issued by municipalities located in Illinois as of September 30, 2016. Approximately 97% of the state and political subdivisions securities were general obligation issues, and 48% were insured or had another form of credit enhancement as of September 30, 2016.


15


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, 2016 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
 
 

 
 

 
 

 
 

 
 

 
 

States and political subdivisions
 
$
20,526

 
$
(218
)
 
$
—

 
$
—

 
$
20,526

 
$
(218
)
Residential mortgage-backed securities
 
374,312

 
(1,214
)
 
27,699

 
(231
)
 
402,011

 
(1,445
)
Commercial mortgage-backed securities
 
71

 
(1
)
 
11,664

 
(171
)
 
11,735

 
(172
)
Corporate bonds
 
9,834

 
(155
)
 
19,950

 
(759
)
 
29,784

 
(914
)
Total Available for Sale
 
404,743

 
(1,588
)
 
59,313

 
(1,161
)
 
464,056

 
(2,749
)
Held to Maturity
 
 

 
 

 
 

 
 

 
 

 
 

States and political subdivisions
 
31,142

 
(32
)
 
387

 
(1
)
 
31,529

 
(33
)
Total
 
$
435,885

 
$
(1,620
)
 
$
59,700

 
$
(1,162
)
 
$
495,585

 
$
(2,782
)
 
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, 2015 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
 
 
 
 
 
 
 
 
 
 
 
 
States and political subdivisions
 
$
219

 
$
(1
)
 
$
—

 
$
—

 
$
219

 
$
(1
)
Residential mortgage-backed securities
 
357,877

 
(2,835
)
 
43,566

 
(795
)
 
401,443

 
(3,630
)
Commercial mortgage-backed securities
 
2,324

 
(5
)
 
11,809

 
(236
)
 
14,133

 
(241
)
Corporate bonds
 
73,774

 
(1,164
)
 
18,286

 
(2,807
)
 
92,060

 
(3,971
)
Total Available for Sale
 
434,194

 
(4,005
)
 
73,661

 
(3,838
)
 
507,855

 
(7,843
)
Held to Maturity
 
 

 
 

 
 

 
 

 
 

 
 

States and political subdivisions
 
66,152

 
(519
)
 
6,190

 
(119
)
 
72,342

 
(638
)
Total
 
$
500,346

 
$
(4,524
)
 
$
79,851

 
$
(3,957
)
 
$
580,197

 
$
(8,481
)
 
The total number of security positions in the investment portfolio in an unrealized loss position at September 30, 2016 was 271 compared to 193 at December 31, 2015. This increase in total number of security positions in a continuous unrealized loss position from December 31, 2015 to September 30, 2016 was mainly attributable to the mortgage-backed securities in the investment securities portfolio.  Declines in the fair value of available for sale securities below their cost that are deemed to be other than temporary are reflected in earnings as realized losses to the extent the impairment is related to credit losses. The amount of the impairment related to other factors is recognized in other comprehensive income. In estimating other-than-temporary impairment losses, management considers, among other things, (i) the length of time and the extent to which the fair value has been less than cost, (ii) the financial condition and near-term prospects of the issuer, and (iii) whether the Company is more likely than not to sell the security before recovery of its cost basis.
 
As of September 30, 2016, management does not have the intent to sell any of the securities in the table above at September 30, 2016 and believes that it is more likely than not that the Company will not have to sell any such securities before a recovery of cost. The fair value is expected to recover as the securities approach their maturity date or repricing date or if market yields for such investments decline. Accordingly, as of September 30, 2016, management believes the impairments detailed in the table above at September 30, 2016 are temporary.

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.


16


Net gains (losses) recognized on investment securities available for sale were as follows (in thousands):
 
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
September 30,
 
 
2016
 
2015
 
2016
 
2015
Realized gains
 
$
—

 
$
371

 
$
323

 
$
1,454

Realized losses
 
—

 
—

 
(54
)
 
(1,627
)
Net gains (losses)
 
$
—

 
$
371

 
$
269

 
$
(173
)
 
The amortized cost and fair value of investment securities as of September 30, 2016 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
 
$
81,215

 
$
81,620

Due after one year through five years
 
267,485

 
273,115

Due after five years through ten years
 
44,899

 
46,964

Due after ten years
 
251,838

 
273,199

Equity securities
 
10,932

 
11,128

Residential and commercial mortgage-backed securities
 
1,160,796

 
1,173,330

 
 
1,817,165

 
1,859,356

Held to maturity:
 
 

 
 

Due in one year or less
 
87,409

 
87,524

Due after one year through five years
 
146,995

 
151,557

Due after five years through ten years
 
159,780

 
171,871

Due after ten years
 
545,307

 
582,188

Residential mortgage-backed securities
 
175,771

 
182,698

 
 
1,115,262

 
1,175,838

Total
 
$
2,932,427

 
$
3,035,194

 
Investment securities with a carrying amount of $1.2 billion at September 30, 2016 and $1.4 billion at December 31, 2015 were pledged as collateral on public deposits and for other purposes as required or permitted by law, while only $839.3 million and $878.2 million were required to be pledged at September 30, 2016 and December 31, 2015, respectively. Of those pledged, the Company had investment securities pledged as collateral for advances from the Federal Home Loan Bank of $108.8 million at December 31, 2015 and none were pledged at September 30, 2016.

 

17


Note 6.
        Loans
 
Loans consist of the following at (in thousands):

 
 
September 30,
2016
 
December 31,
2015
Commercial loans
 
$
4,385,812

 
$
3,616,286

Commercial loans collateralized by assignment of lease payments
 
1,873,380

 
1,779,072

Commercial real estate
 
3,794,801

 
2,695,676

Residential real estate
 
998,827

 
628,169

Construction real estate
 
451,023

 
252,060

Indirect vehicle
 
522,271

 
384,095

Home equity
 
275,288

 
216,573

Other consumer loans
 
77,956

 
80,661

Total loans, excluding purchased credit-impaired loans
 
12,379,358

 
9,652,592

Purchased credit-impaired loans
 
161,338

 
141,406

Total loans
 
$
12,540,696

 
$
9,793,998

 

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 the markets serviced by MB Financial Bank.
 
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 primarily to emerging middle market and 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 and projected cash flow of the borrower and secondarily on the underlying collateral provided by the borrower. The cash flows of borrowers, however, may not behave 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 or Standard & Poor's Rating Services or, in the event the related lessee has not received any such rating, where the related lessee would be viewed under the underwriting policies of the Company as an investment grade company. 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.
 
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 cash flow loans and the repayment of these loans is largely dependent on the successful operation 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.
 

18


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

A collateral pledge agreement exists whereby at all times, the Company must keep on hand, free of all other pledges, liens, and encumbrances, first mortgage loans and home equity loans with unpaid principal balances aggregating no less than 133% for first mortgage loans and 250% for home equity loans of the outstanding advances from the Federal Home Loan Bank.  As of September 30, 2016 and December 31, 2015, the Company had $4.9 billion and $3.2 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 and $2.2 billion were required to be pledged at September 30, 2016 and December 31, 2015, respectively.


19


The following table presents the contractual aging of the recorded investment in past due loans by class of loans as of September 30, 2016 and December 31, 2015 (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, 2016
 
 

 
 

 
 

 
 

 
 

 
 

Commercial
 
$
4,376,819

 
$
2,649

 
$
104

 
$
6,240

 
$
8,993

 
$
4,385,812

Commercial collateralized by assignment of lease payments
 
1,855,322

 
12,141

 
4,672

 
1,245

 
18,058

 
1,873,380

Commercial real estate:
 
 

 
 

 
 

 
 

 
 

 
 

Healthcare
 
572,228

 
—

 
—

 
—

 
—

 
572,228

Industrial
 
854,045

 
298

 
1,289

 
—

 
1,587

 
855,632

Multifamily
 
549,486

 
141

 
366

 
113

 
620

 
550,106

Retail
 
522,696

 
333

 
235

 
453

 
1,021

 
523,717

Office
 
416,965

 
1,336

 
49

 
—

 
1,385

 
418,350

Other
 
871,881

 
1,646

 
532

 
709

 
2,887

 
874,768

Residential real estate
 
986,386

 
2,347

 
1,739

 
8,355

 
12,441

 
998,827

Construction real estate
 
451,023

 
—

 
—

 
—

 
—

 
451,023

Indirect vehicle
 
518,881

 
2,301

 
716

 
373

 
3,390

 
522,271

Home equity
 
270,028

 
1,475

 
490

 
3,295

 
5,260

 
275,288

Other consumer
 
77,570

 
166

 
129

 
91

 
386

 
77,956

Total loans, excluding purchased credit-impaired loans
 
12,323,330

 
24,833

 
10,321

 
20,874

 
56,028

 
12,379,358

Purchased credit-impaired loans
 
92,346

 
1,108

 
5,848

 
62,036

 
68,992

 
161,338

Total loans
 
$
12,415,676

 
$
25,941

 
$
16,169

 
$
82,910

 
$
125,020

 
$
12,540,696

Non-performing loan aging
 
$
31,009

 
$
373

 
$
1,801

 
$
20,726

 
$
22,900

 
$
53,909

 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2015
 
 

 
 

 
 

 
 

 
 

 
 

Commercial
 
$
3,586,372

 
$
22,956

 
$
97

 
$
6,861

 
$
29,914

 
$
3,616,286

Commercial collateralized by assignment of lease payments
 
1,758,839

 
3,399

 
5,902

 
10,932

 
20,233

 
1,779,072

Commercial real estate:
 
 

 
 

 
 

 
 

 
 

 
 

Healthcare
 
476,939

 
—

 
—

 
—

 
—

 
476,939

Industrial
 
400,182

 
—

 
—

 
757

 
757

 
400,939

Multifamily
 
399,333

 
622

 
88

 
934

 
1,644

 
400,977

Retail
 
410,958

 
6,189

 
7,411

 
180

 
13,780

 
424,738

Office
 
223,935

 
58

 
—

 
5,189

 
5,247

 
229,182

Other
 
760,530

 
622

 
82

 
1,667

 
2,371

 
762,901

Residential real estate
 
612,573

 
5,193

 
1,729

 
8,674

 
15,596

 
628,169

Construction real estate
 
252,060

 
—

 
—

 
—

 
—

 
252,060

Indirect vehicle
 
380,899

 
2,085

 
698

 
413

 
3,196

 
384,095

Home equity
 
207,818

 
1,774

 
1,398

 
5,583

 
8,755

 
216,573

Other consumer
 
80,225

 
254

 
84

 
98

 
436

 
80,661

Total loans, excluding purchased credit-impaired loans
 
9,550,663

 
43,152

 
17,489

 
41,288

 
101,929

 
9,652,592

Purchased credit-impaired loans
 
81,250

 
3,311

 
4,439

 
52,406

 
60,156

 
141,406

Total loans
 
$
9,631,913

 
$
46,463

 
$
21,928

 
$
93,694

 
$
162,085

 
$
9,793,998

Non-performing loan aging
 
$
44,290

 
$
9,827

 
$
9,367

 
$
41,177

 
$
60,371

 
$
104,661

 

 

20


The following table presents the recorded investment in non-accrual loans and loans past due ninety days or more and still accruing by class of loans, excluding purchased credit-impaired loans, as of September 30, 2016 and December 31, 2015 (in thousands):
 
 
 
September 30, 2016
 
December 31, 2015
 
 
 
 
Loans past due
 
 
 
Loans past due
 
 
Non-accrual
 
90 days or more
and still accruing
 
Non-accrual
 
90 days or more
and still accruing
Commercial
 
$
8,583

 
$
1,166

 
$
24,689

 
$
42

Commercial collateralized by assignment of lease payments
 
4,996

 
153

 
7,027

 
5,318

Commercial real estate:
 
 

 
 

 
 

 
 

Healthcare
 
—

 
—

 
—

 
—

Industrial
 
278

 
—

 
1,136

 
—

Multifamily
 
2,648

 
—

 
3,415

 
—

Office
 
447

 
—

 
4,496

 
693

Retail
 
607

 
—

 
17,594

 
—

Other
 
531

 
144

 
1,544

 
195

Residential real estate
 
16,781

 
220

 
17,951

 
253

Construction real estate
 
—

 
—

 
—

 
—

Indirect vehicle
 
1,955

 
—

 
2,046

 
—

Home equity
 
15,300

 
—

 
18,156

 
—

Other consumer
 
9

 
91

 
11

 
95

Total
 
$
52,135

 
$
1,774

 
$
98,065

 
$
6,596

 
The Company utilizes an internal asset classification system as a means of reporting problem and potential problem loans. Under the Company's risk rating system, the Company classifies potential problem and problem loans as “Special Mention,” “Substandard,” and “Doubtful.” Substandard loans include those characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected. Loans classified as Doubtful have all the weaknesses inherent in those classified as Substandard with the added characteristic that the weaknesses present make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable. Loans that do not currently expose the Company to sufficient risk to warrant classification in one of the aforementioned categories but possess weaknesses that deserve management's close attention are deemed to be Special Mention. Risk ratings are updated any time the situation warrants and at least annually. Loans listed as not rated are included in groups of homogeneous loans with similar risk and loss characteristics.


21


The following tables present the risk category of loans by class of loans based on the most recent analysis performed, excluding purchased credit-impaired loans, as of September 30, 2016 and December 31, 2015 (in thousands):
 
 
 
Pass
 
Special
Mention
 
Substandard
 
Doubtful
 
Total
September 30, 2016
 
 

 
 

 
 

 
 

 
 

Commercial
 
$
4,163,243

 
$
131,163

 
$
91,406

 
$
—

 
$
4,385,812

Commercial collateralized by assignment of lease payments
 
1,859,012

 
5,504

 
8,864

 
—

 
1,873,380

Commercial real estate:
 
 

 
 

 
 

 
 

 
 

Healthcare
 
555,166

 
17,062

 
—

 
—

 
572,228

Industrial
 
831,090

 
23,751

 
791

 
—

 
855,632

Multifamily
 
546,183

 
312

 
3,611

 
—

 
550,106

Retail
 
514,299

 
8,646

 
772

 
—

 
523,717

Office
 
409,124

 
5,086

 
4,140

 
—

 
418,350

Other
 
828,578

 
26,085

 
20,105

 
—

 
874,768

Construction real estate
 
451,023

 
—

 
—

 
—

 
451,023

Total
 
$
10,157,718

 
$
217,609

 
$
129,689

 
$
—

 
$
10,505,016

December 31, 2015
 
 

 
 

 
 

 
 

 
 

Commercial
 
$
3,373,943

 
$
115,548

 
$
126,795

 
$
—

 
$
3,616,286

Commercial collateralized by assignment of lease payments
 
1,760,674

 
4,367

 
14,031

 
—

 
1,779,072

Commercial real estate:
 
 

 
 

 
 

 
 

 
 

Healthcare
 
472,599

 
4,340

 
—

 
—

 
476,939

Industrial
 
380,200

 
19,011

 
1,728

 
—

 
400,939

Multifamily
 
396,117

 
595

 
4,265

 
—

 
400,977

Retail
 
393,543

 
13,310

 
17,885

 
—

 
424,738

Office
 
216,584

 
3,797

 
8,801

 
—

 
229,182

Other
 
730,713

 
6,193

 
25,995

 
—

 
762,901

Construction real estate
 
252,060

 
—

 
—

 
—

 
252,060

Total
 
$
7,976,433

 
$
167,161

 
$
199,500

 
$
—

 
$
8,343,094

 
Approximately $18.1 million and $59.6 million of the substandard loans were non-performing as of September 30, 2016 and December 31, 2015, respectively.
 
For residential real estate, home equity, indirect vehicle and other consumer loan classes, which are not rated, the Company evaluates credit quality based on the aging status of the loan, which was previously presented, and by payment activity. The following table presents the recorded investment in those loan classes based on payment activity, excluding purchased credit-impaired loans, as of September 30, 2016 and December 31, 2015 (in thousands):
 
 
 
Performing
 
Non-performing
 
Total
September 30, 2016
 
 

 
 

 
 

Residential real estate
 
$
981,826

 
$
17,001

 
$
998,827

Indirect vehicle
 
520,316

 
1,955

 
522,271

Home equity
 
259,988

 
15,300

 
275,288

Other consumer
 
77,856

 
100

 
77,956

Total
 
$
1,839,986

 
$
34,356

 
$
1,874,342

December 31, 2015
 
 

 
 

 
 

Residential real estate
 
$
609,965

 
$
18,204

 
$
628,169

Indirect vehicle
 
382,049

 
2,046

 
384,095

Home equity
 
198,417

 
18,156

 
216,573

Other consumer
 
80,555

 
106

 
80,661

Total
 
$
1,270,986

 
$
38,512

 
$
1,309,498


The recorded investment in residential mortgage loans secured by residential real estate properties for which foreclosure proceedings are in process totaled $23.6 million and $20.8 million at September 30, 2016 and December 31, 2015, respectively.

22


 
The following tables present loans individually evaluated for impairment by class of loans, excluding purchased credit-impaired loans, as of September 30, 2016 and December 31, 2015 (in thousands):
 
 
 
September 30, 2016
 
 
 
 
 
 
 
 
 
 
Three Months Ended
 
Nine Months Ended
 
 
Unpaid
Principal
Balance
 
Recorded
Investment
 
Partial
Charge-offs
 
Allowance for
Loan Losses
Allocated
 
Average
Recorded
Investment
 
Interest
Income
Recognized
 
Average
Recorded
Investment
 
Interest
Income
Recognized
With no related allowance recorded:
 
 

 
 

 
 

 
 

 
 

 
 

 
 
 
 
Commercial
 
$
1,808

 
$
1,808

 
$
—

 
$
—

 
$
1,871

 
$
—

 
$
2,377

 
$
—

Commercial collateralized by assignment of lease payments
 
1,161

 
794

 
367

 
—

 
1,141

 
27

 
1,026

 
27

Commercial real estate:
 
 

 
 

 
 

 
 

 
 

 
 

 
 
 
 
Healthcare
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Industrial
 
—

 
—

 
—

 
—

 
—

 
—

 
536

 
—

Multifamily
 
1,981

 
1,981

 
—

 
—

 
2,334

 
—

 
2,362

 
—

Retail
 
2,683

 
943

 
1,740

 
—

 
949

 
—

 
2,577

 
—

Office
 
—

 
—

 
—

 
—

 
—

 
—

 
342

 
—

Other
 
—

 
—

 
—

 
—

 
—

 
—

 
80

 
—

Residential real estate
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Construction real estate
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Indirect vehicle
 
218

 
125

 
93

 
—

 
277

 
—

 
292

 
—

Home equity
 
—

 
—

 
—

 
—

 
—

 
—

 
192

 
—

Other consumer
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

With an allowance recorded:
 
 

 
 

 
 

 
 

 
 

 
 

 
 
 
 
Commercial
 
17,476

 
17,476

 
—

 
5,401

 
19,180

 
—

 
26,513

 
—

Commercial collateralized by assignment of lease payments
 
7,260

 
7,260

 
—

 
3,933

 
5,086

 
—

 
3,201

 
18

Commercial real estate:
 
 

 
 

 
 

 
 

 
 

 
 

 
 
 
 
Healthcare
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Industrial
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Multifamily
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Retail
 
3,606

 
3,606

 
—

 
363

 
3,612

 
—

 
7,911

 
—

Office
 
—

 
—

 
—

 
—

 
—

 
—

 
995

 
—

Other
 
—

 
—

 
—

 
—

 
—

 
—

 
314

 
—

Residential real estate
 
15,117

 
13,268

 
1,849

 
2,394

 
13,325

 
—

 
13,068

 
—

Construction real estate
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Indirect vehicle
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Home equity
 
29,688

 
27,276

 
2,412

 
3,252

 
27,443

 
—

 
28,635

 
—

Other consumer
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Total
 
$
80,998

 
$
74,537

 
$
6,461

 
$
15,343

 
$
75,218

 
$
27

 
$
90,421

 
$
45


 

23


 
 
December 31, 2015
 
 
 
 
 
 
 
 
 
 
Year Ended
 
 
Unpaid
Principal
Balance
 
Recorded
Investment
 
Partial
Charge-offs
 
Allowance for
Loan Losses
Allocated
 
Average
Recorded
Investment
 
Interest
Income
Recognized
With no related allowance recorded:
 
 

 
 

 
 

 
 

 
 
 
 
Commercial
 
$
11,253

 
$
11,253

 
$
—

 
$
—

 
$
6,628

 
$
—

Commercial collateralized by assignment of lease payments
 
3,453

 
2,949

 
504

 
—

 
1,035

 
54

Commercial real estate:
 
 

 
 

 
 

 
 

 
 

 
 

Healthcare
 
—

 
—

 
—

 
—

 
—

 
—

Industrial
 
820

 
757

 
63

 
—

 
3,467

 
—

Multifamily
 
575

 
575

 
—

 
—

 
1,540

 
17

Retail
 
7,872

 
6,131

 
1,741

 
—

 
2,768

 
—

Office
 
1,608

 
1,031

 
577

 
—

 
1,663

 
—

Other
 
—

 
—

 
—

 
—

 
965

 
—

Residential real estate
 
970

 
970

 
—

 
—

 
717

 
—

Construction real estate
 
—

 
—

 
—

 
—

 
—

 
—

Indirect vehicle
 
—

 
—

 
—

 
—

 
—

 
—

Home equity
 
927

 
927

 
—

 
—

 
1,000

 
—

Other consumer
 
—

 
—

 
—

 
—

 
—

 
—

With an allowance recorded:
 
 

 
 

 
 

 
 

 
 

 
 

Commercial
 
23,394

 
23,394

 
—

 
7,523

 
18,820

 
—

Commercial collateralized by assignment of lease payments
 
3,297

 
3,297

 
—

 
1,790

 
4,013

 
104

Commercial real estate:
 
 

 
 

 
 

 
 

 
 

 
 

Healthcare
 
—

 
—

 
—

 
—

 
—

 
—

Industrial
 
—

 
—

 
—

 
—

 
228

 
—

Multifamily
 
2,155

 
2,155

 
—

 
17

 
3,307

 
27

Retail
 
16,034

 
16,034

 
—

 
4,926

 
8,885

 
—

Office
 
2,929

 
2,929

 
—

 
1,717

 
2,457

 
—

Other
 
592

 
592

 
—

 
199

 
9,629

 
—

Residential real estate
 
12,950

 
12,769

 
181

 
2,634

 
13,484

 
—

Construction real estate
 
—

 
—

 
—

 
—

 
214

 
—

Indirect vehicle
 
119

 
119

 
—

 
—

 
287

 
—

Home equity
 
28,696

 
28,583

 
113

 
3,131

 
27,747

 
—

Other consumer
 
—

 
—

 
—

 
—

 
—

 
—

Total
 
$
117,644

 
$
114,465

 
$
3,179

 
$
21,937

 
$
108,854

 
$
202

 
Impaired loans included accruing restructured loans of $28.6 million and $27.0 million that have been modified and are performing in accordance with those modified terms as of September 30, 2016 and December 31, 2015, respectively.  In addition, impaired loans included $23.4 million and $23.6 million of non-performing restructured loans as of September 30, 2016 and December 31, 2015, respectively.
 
Loans may be restructured in an effort to maximize collections from financially distressed borrowers. We use various restructuring techniques, including, but not limited to, deferring past due interest or principal, implementing an A/B note structure, redeeming past due taxes, reducing interest rates, extending maturities and modifying amortization schedules. Residential real estate loans are restructured in an effort to minimize losses while allowing borrowers to remain in their primary residences when possible. Programs that we offer to residential real estate borrowers include the Home Affordable Refinance Program (“HARP”), a restructuring program similar to the Home Affordable Modification Program (“HAMP”) for first mortgage borrowers, the Second Lien Modification Program (“2MP”) and similar programs for home equity borrowers in keeping with the restructuring techniques discussed above.


24


Periodically, the Company will restructure a note into two separate notes (A/B structure), charging off the entire B portion of the note. The A note is structured with appropriate loan-to-value and cash flow coverage ratios that provide for a high likelihood of repayment. The A note is classified as a non-performing note until the borrower has displayed a historical payment performance for a reasonable time prior to and subsequent to the restructuring. A period of sustained repayment for at least six months generally is required to return the note to accrual status provided that management has determined that the performance is reasonably expected to continue. The A note will be classified as a restructured note (either performing or non-performing) through the calendar year of the restructuring that the historical payment performance has been established. As of September 30, 2016 and December 31, 2015, there was one A/B structure with a recorded investment of $943 thousand and $1.0 million, respectively, which is included above as an accruing restructured loan. 

A loan classified as a troubled debt restructuring will no longer be included in the troubled debt restructuring disclosures in the years after the restructuring if the loan performs in accordance with the terms specified by the restructuring agreement and the interest rate specified in the restructuring agreement represents a market rate at the time of modification. The specified interest rate is considered a market rate when the interest rate is equal to or greater than the rate the Company is willing to accept at the time of restructuring for a new loan with comparable risk. If there are concerns that the borrower will not be able to meet the modified terms of the loan, the loan will continue to be included in the troubled debt restructuring disclosures.

Impairment analyses on commercial-related loans classified as troubled debt restructurings are performed in conjunction with the normal allowance for loan and lease losses process. Consumer loans classified as troubled debt restructurings are aggregated in two pools that share common risk characteristics, home equity and residential real estate loans, with impairment measured on a quarterly basis based on the present value of expected future cash flows discounted at the loan's effective interest rate.

The following table presents loans that were restructured during the three months ended September 30, 2016 (dollars in thousands):
 
 
 
September 30, 2016
 
 
Number of
Loans
 
Pre-Modification Recorded
Investment
 
Post-Modification Recorded
Investment
 
Charge-offs and
Specific Reserves
Performing:
 
 
 
 

 
 

 
 

Residential real estate
 
2
 
$
101

 
$
101

 
$
18

Home equity
 
2
 
102

 
102

 
12

Total
 
4
 
$
203

 
$
203

 
$
30

Non-Performing:
 
 
 
 

 
 

 
 

Commercial
 
3
 
$
5,874

 
$
5,874

 
$
1,490

Residential real estate
 
4
 
484

 
484

 
85

Indirect vehicle
 
7
 
34

 
34

 
17

Home equity
 
5
 
489

 
489

 
72

Total
 
19
 
$
6,881

 
$
6,881

 
$
1,664



25


The following table presents loans that were restructured during the nine months ended September 30, 2016 (dollars in thousands):


 
 
September 30, 2016
 
 
Number of
Loans
 
Pre-Modification Recorded
Investment
 
Post-Modification Recorded
Investment
 
Charge-offs and
Specific Reserves
Performing:
 
 
 
 

 
 

 
 

Commercial
 
1
 
$
1,870

 
$
1,870

 
$
412

Residential real estate
 
2
 
101

 
101

 
18

Home equity
 
4
 
511

 
511

 
12

Total
 
7
 
$
2,482

 
$
2,482

 
$
442

Non-Performing:
 
 
 
 

 
 

 
 

Commercial
 
7
 
$
14,481

 
$
14,481

 
$
4,990

Residential real estate
 
6
 
639

 
639

 
85

Indirect vehicle
 
25
 
183

 
183

 
60

Home equity
 
28
 
3,600

 
3,600

 
138

Total
 
66
 
$
18,903

 
$
18,903

 
$
5,273

 
 
 
 
 
 
 
 
 

The following table presents loans that were restructured during the three months ended September 30, 2015 (dollars in thousands):
 
 
September 30, 2015
 
 
Number of
Loans
 
Pre-Modification Recorded
Investment
 
Post-Modification Recorded
Investment
 
Charge-offs and
Specific Reserves
Performing:
 
 

 
 

 
 

 
 

Home equity
 
4

 
$
477

 
$
477

 
$
—

Total
 
4

 
$
477

 
$
477

 
$
—

Non-Performing:
 
 

 
 

 
 

 
 

Indirect vehicle
 
7

 
$
45

 
$
45

 
$
16

Home equity
 
4

 
550

 
550

 
8

Total
 
11

 
$
595

 
$
595

 
$
24


The following table presents loans that were restructured during the nine months ended September 30, 2015 (dollars in thousands):
 
 
September 30, 2015
 
 
Number of
Loans
 
Pre-Modification Recorded
Investment
 
Post-Modification Recorded
Investment
 
Charge-offs and
Specific Reserves
Performing:
 
 
 
 

 
 

 
 

Commercial
 
1
 
$
80

 
$
80

 
$
—

Home equity
 
16
 
4,290

 
4,290

 
—

Total
 
17
 
$
4,370

 
$
4,370

 
$
—

Non-Performing:
 
 
 
 

 
 

 
 

Commercial real estate:
 
 
 
 
 
 
 
 
Multifamily
 
1
 
$
334

 
$
334

 
$
—

Residential real estate
 
1
 
140

 
140

 
17

Indirect vehicle
 
13
 
75

 
75

 
23

Home equity
 
9
 
1,348

 
1,348

 
130

Total
 
24
 
$
1,897

 
$
1,897

 
$
170



26


Of the troubled debt restructurings entered into during the past twelve months, $224 thousand subsequently defaulted during the nine months ended September 30, 2016.  Performing troubled debt restructurings are considered to have defaulted when they become 90 days or more past due post-restructuring or are placed on non-accrual status.

The following table presents the troubled debt restructurings activity during the nine months ended September 30, 2016 (in thousands):
 
 
Performing
 
Non-performing
Beginning balance
 
$
26,991

 
$
23,619

Additions
 
2,482

 
18,903

Charge-offs
 
—

 
(1,046
)
Principal payments, net
 
(2,145
)
 
(8,695
)
Removals
 
(1,655
)
 
(6,384
)
Transfer to other real estate owned
 
—

 
(112
)
Transfers in
 
3,677

 
789

Transfers out
 
(789
)
 
(3,677
)
Ending balance
 
$
28,561

 
$
23,397


Loans removed from troubled debt restructuring status are those that were restructured in a previous calendar year at a market rate of interest and have performed in compliance with the modified terms.

The following table presents the type of modification for loans that have been restructured during the nine months ended September 30, 2016 (in thousands):
 
September 30, 2016
 
 
 
 
 
 
 
 
 
Extended
 
 
 
 
 
 
 
Maturity,
 
 
 
Delay in
 
 
 
Amortization
 
Extended
 
Payments or
 
 
 
and Reduction
 
Maturity and/or
 
Reduction of
 
 
 
of Interest Rate
 
Amortization
 
Interest Rate
 
Total
Commercial
$
—

 
$
14,481

 
$
1,870

 
$
16,351

Commercial collateralized by assignment of lease payments
—

 
—

 
—

 
—

Commercial real estate:
 
 
 
 
 
 
 
   Healthcare
—

 
—

 
—

 
—

   Industrial
—

 
—

 
—

 
—

   Multifamily
—

 
—

 
—

 
—

   Retail
—

 
—

 
—

 
—

   Office
—

 
—

 
—

 
—

   Other
—

 
—

 
—

 
—

Residential real estate
484

 
256

 
—

 
740

Construction real estate
—

 
—

 
—

 
—

Indirect vehicle
—

 
—

 
183

 
183

Home equity
3,220

 
820

 
71

 
4,111

Other consumer
—

 
—

 
—

 
—

     Total
$
3,704

 
$
15,557

 
$
2,124

 
$
21,385



27


The following table presents the activity in the allowance for credit losses, balance in allowance for credit losses and recorded investment in loans by portfolio segment and based on impairment method as of September 30, 2016 and 2015 (in thousands):
 
 
Commercial
 
Commercial
collateralized  by
assignment of
lease payments
 
Commercial
real estate
 
Residential
real estate
 
Construction
real estate
 
Indirect
vehicle
 
Home
equity
 
Other consumer
 
Unfunded
commitments
 
Total
September 30, 2016
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Allowance for credit losses:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Three Months Ended
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
 
$
50,297

 
$
10,549

 
$
46,040

 
$
4,800

 
$
14,230

 
$
3,100

 
$
4,199

 
$
2,399

 
$
2,719

 
$
138,333

Charge-offs
 
1,341

 
367

 
529

 
290

 
7

 
838

 
376

 
409

 
—

 
4,157

Recoveries
 
665

 
3

 
324

 
45

 
50

 
436

 
65

 
86

 
—

 
1,674

Provision
 
(3,894
)
 
2,944

 
1,239

 
1,575

 
2,033

 
598

 
2,309

 
(407
)
 
152

 
6,549

Ending balance
 
$
45,727

 
$
13,129

 
$
47,074

 
$
6,130

 
$
16,306

 
$
3,296

 
$
6,197

 
$
1,669

 
$
2,871

 
$
142,399

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Nine Months Ended
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
 
$
39,316

 
$
10,434

 
$
45,475

 
$
5,734

 
$
15,113

 
$
2,418

 
$
7,374

 
$
2,276

 
$
3,368

 
$
131,508

Charge-offs
 
2,126

 
3,288

 
2,601

 
1,134

 
151

 
2,420

 
1,233

 
1,216

 
—

 
14,169

Recoveries
 
1,997

 
520

 
2,761

 
151

 
94

 
1,400

 
576

 
620

 
—

 
8,119

Provision
 
6,540

 
5,463

 
1,439

 
1,379

 
1,250

 
1,898

 
(520
)
 
(11
)
 
(497
)
 
16,941

Ending balance
 
$
45,727

 
$
13,129

 
$
47,074

 
$
6,130

 
$
16,306

 
$
3,296

 
$
6,197

 
$
1,669

 
$
2,871

 
$
142,399

Ending allowance balance attributable to loans:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Individually evaluated for impairment
 
$
5,401

 
$
3,933

 
$
363

 
$
2,394

 
$
—

 
$
—

 
$
3,252

 
$
—

 
$
737

 
$
16,080

Collectively evaluated for impairment
 
40,161

 
9,196

 
46,235

 
3,736

 
16,249

 
3,296

 
2,945

 
1,669

 
2,134

 
125,621

Acquired and accounted for under ASC 310-30 (1)
 
165

 
—

 
476

 
—

 
57

 
—

 
—

 
—

 
—

 
698

Total ending allowance balance
 
$
45,727

 
$
13,129

 
$
47,074

 
$
6,130

 
$
16,306

 
$
3,296

 
$
6,197

 
$
1,669

 
$
2,871

 
$
142,399

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Individually evaluated for impairment
 
$
19,284

 
$
8,054

 
$
6,530

 
$
13,268

 
$
—

 
$
125

 
$
27,276

 
$
—

 
$
—

 
$
74,537

Collectively evaluated for impairment
 
4,366,528

 
1,865,326

 
3,788,271

 
985,559

 
451,023

 
522,146

 
248,012

 
77,956

 
—

 
12,304,821

Acquired and accounted for under ASC 310-30 (1)
 
22,913

 
—

 
41,286

 
66,698

 
14,131

 
—

 
13,886

 
2,424

 
—

 
161,338

Total ending loans balance
 
$
4,408,725

 
$
1,873,380

 
$
3,836,087

 
$
1,065,525

 
$
465,154

 
$
522,271

 
$
289,174

 
$
80,380

 
$
—

 
$
12,540,696

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

28


 
 
Commercial
 
Commercial
collateralized  by
assignment of
lease payments
 
Commercial
real estate
 
Residential
real estate
 
Construction
real estate
 
Indirect
vehicle
 
Home
equity
 
Other consumer
 
Unfunded
commitments
 
Total
September 30, 2015
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Allowance for credit losses:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Three Months Ended
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
 
$
39,142

 
$
11,268

 
$
38,076

 
$
6,669

 
$
12,459

 
$
1,909

 
$
8,412

 
$
2,135

 
$
4,060

 
$
124,130

Charge-offs
 
1,657

 
1,980

 
170

 
292

 
5

 
581

 
358

 
467

 
—

 
5,510

Recoveries
 
456

 
11

 
2,402

 
337

 
216

 
334

 
186

 
118

 
—

 
4,060

Provision
 
5,044

 
985

 
1,216

 
(868
)
 
123

 
512

 
(1,490
)
 
484

 
(648
)
 
5,358

Ending balance
 
$
42,985

 
$
10,284

 
$
41,524

 
$
5,846

 
$
12,793

 
$
2,174

 
$
6,750

 
$
2,270

 
$
3,412

 
$
128,038

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Nine Months Ended
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
 
$
29,571

 
$
9,962

 
$
41,826

 
$
6,646

 
$
8,918

 
$
1,687

 
$
9,456

 
$
1,960

 
$
4,031

 
$
114,057

Charge-offs
 
2,283

 
2,080

 
2,312

 
1,189

 
11

 
2,082

 
1,078

 
1,391

 
—

 
12,426

Recoveries
 
1,514

 
1,100

 
6,338

 
417

 
253

 
1,354

 
447

 
356

 
—

 
11,779

Provision
 
14,183

 
1,302

 
(4,328
)
 
(28
)
 
3,633

 
1,215

 
(2,075
)
 
1,345

 
(619
)
 
14,628

Ending balance
 
$
42,985

 
$
10,284

 
$
41,524

 
$
5,846

 
$
12,793

 
$
2,174

 
$
6,750

 
$
2,270

 
$
3,412

 
$
128,038

Ending allowance balance attributable to loans:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Individually evaluated for impairment
 
$
7,943

 
$
2,618

 
$
3,123

 
$
2,834

 
$
—

 
$
8

 
$
2,478

 
$
—

 
$
1,388

 
$
20,392

Collectively evaluated for impairment
 
34,731

 
7,666

 
36,975

 
3,012

 
12,700

 
2,166

 
4,272

 
2,270

 
2,024

 
105,816

Acquired and accounted for under ASC 310-30 (1)
 
311

 
—

 
1,426

 
—

 
93

 
—

 
—

 
—

 
—

 
1,830

Total ending allowance balance
 
$
42,985

 
$
10,284

 
$
41,524

 
$
5,846

 
$
12,793

 
$
2,174

 
$
6,750

 
$
2,270

 
$
3,412

 
$
128,038

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Individually evaluated for impairment
 
$
36,325

 
$
6,724

 
$
29,354

 
$
14,233

 
$
—

 
$
131

 
$
29,520

 
$
—

 
$
—

 
$
116,287

Collectively evaluated for impairment
 
3,404,307

 
1,686,816

 
2,550,655

 
592,938

 
255,620

 
345,600

 
193,653

 
87,612

 
—

 
9,117,201

Acquired and accounted for under ASC 310-30 (1)
 
37,189

 
—

 
47,803

 
43,735

 
12,372

 
—

 
11,986

 
2,608

 
—

 
155,693

Total ending loans balance
 
$
3,477,821

 
$
1,693,540

 
$
2,627,812

 
$
650,906

 
$
267,992

 
$
345,731

 
$
235,159

 
$
90,220

 
$
—

 
$
9,389,181


(1) 
Loans acquired in business combinations and accounted for under ASC Subtopic 310-30 “Receivables — Loans and Debt Securities Acquired with Deteriorated Credit Quality.”

Purchased loans acquired in a business combination are recorded at estimated fair value on their purchase date without a carryover of the related allowance for loan and lease losses. These acquired loans are segregated into three types: pass rated loans with no discount attributable to credit quality, non-impaired loans with a discount attributable at least in part to credit quality and impaired loans with evidence of significant credit deterioration.  

•
Pass rated loans (typically performing loans) are accounted for in accordance with ASC 310-20 "Nonrefundable Fees and Other Costs" as these loans do not have evidence of credit deterioration since origination.
•
Non-impaired loans (typically performing substandard loans) are accounted for in accordance with ASC 310-30 if they display at least some level of credit deterioration since origination.
•
Impaired loans (typically substandard loans on non-accrual status) are accounted for in accordance with ASC 310-30 as they display significant credit deterioration since origination.

For pass rated loans (non-purchased credit-impaired loans), the difference between the estimated fair value of the loans and the principal outstanding is accreted over the remaining life of the loans.

In accordance with ASC 310-30, for both purchased non-impaired loans and purchased credit-impaired loans, the loans are pooled by loan type and the difference between contractually required payments at acquisition and the cash flows expected to be collected is referred to as the non-accretable difference. Further, any excess of cash flows expected at acquisition over the estimated fair value is referred to as the accretable yield and is recognized into interest income over the remaining life of the loan pools when there is a reasonable expectation about the amount and timing of such cash flows.


29


Substantially all of the loans acquired in transactions with the FDIC displayed at least some level of credit deterioration and as such are included as non-impaired and impaired loans as described immediately above.

During the nine months ended September 30, 2016, there was a negative provision for credit losses of $515 thousand and net charge-offs of $864 thousand in relation to purchased loans. There was $698 thousand and $2.1 million in allowance for loan and lease losses related to these purchased loans at September 30, 2016 and December 31, 2015, respectively.  The provision for credit losses and accompanying charge-offs are included in the table above.
 
Changes in the accretable yield for loans acquired and accounted for under ASC 310-30 were as follows for the three and nine months ended September 30, 2016 and 2015 (in thousands):
 
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
September 30,
 
 
2016
 
2015
 
2016
 
2015
Balance at beginning of period
 
$
13,160

 
$
11,456

 
$
12,596

 
$
7,434

Purchases
 
805

 
—

 
805

 
—

Accretion
 
(2,564
)
 
(1,794
)
 
(7,193
)
 
(5,541
)
Other (1)
 
2,523

 
590

 
7,716

 
8,359

Balance at end of period
 
$
13,924

 
$
10,252

 
$
13,924

 
$
10,252


(1) 
Primarily includes discount transfers from non-accretable discount to accretable discount due to better than expected performance of loan pools acquired and accounted for under ASC 310-30.
 
In our FDIC-assisted transactions, the fair value of purchased credit-impaired loans, on the acquisition date, was determined based on assigned risk ratings, expected cash flows and the fair value of loan collateral. The fair value of loans that were non-impaired was determined based on estimates of losses on defaults and other market factors. Due to the loss-share agreements with the FDIC, we recorded a receivable (FDIC indemnification asset) from the FDIC equal to the present value of the corresponding reimbursement percentages on the estimated losses embedded in the loan portfolio.

When cash flow estimates are adjusted downward for a particular loan pool, the FDIC indemnification asset is increased. An allowance for loan and lease losses is established for the impairment of the loans. A provision for credit losses is recognized for the difference between the increase in the FDIC indemnification asset and the decrease in cash flows.

When cash flow estimates are adjusted upward for a particular loan pool, the FDIC indemnification asset is decreased. The difference between the decrease in the FDIC indemnification asset and the increase in cash flows is accreted over the estimated life of the loan pool.

When cash flow estimates are adjusted downward for covered foreclosed real estate, the FDIC indemnification asset is increased. A charge is recognized for the difference between the increase in the FDIC indemnification asset and the decrease in cash flows.

When cash flow estimates are adjusted upward for covered foreclosed real estate, the FDIC indemnification asset is decreased. Any write-down after the transfer to covered foreclosed real estate is reversed.

In both scenarios, the clawback liability (the amount the FDIC requires the Company to pay back if certain thresholds are met) will increase or decrease accordingly.

For other loans acquired through business combinations, the fair value of purchased credit-impaired loans, on the acquisition date, was determined based on assigned risk ratings, expected cash flows and the fair value of loan collateral. The fair value of loans that were non-impaired was determined based on estimates of losses on defaults and other market factors.


30


The carrying amount of loans acquired through a business combination by loan pool type are as follows (in thousands):

September 30, 2016
 
Purchased
Credit-Impaired
Loans
 
Purchased Non-Credit-Impaired
Loans
 
Total
Covered loans:
 
 

 
 

 
 

Consumer related
 
$
18,619

 
$
—

 
$
18,619

Non-covered loans:
 
 

 
 

 
 

Commercial loans
 
22,913

 
972,065

 
994,978

Commercial loans collateralized by assignment of lease payments
 
—

 
72,193

 
72,193

Commercial real estate
 
41,286

 
1,412,677

 
1,453,963

Construction real estate
 
14,131

 
38,568

 
52,699

Consumer related
 
64,389

 
403,608

 
467,997

Total non-covered loans
 
142,719

 
2,899,111

 
3,041,830

Total acquired
 
$
161,338

 
$
2,899,111

 
$
3,060,449


Effective April 1, 2014, the losses on commercial related loans (commercial, commercial real estate and construction real estate) acquired in connection with the Heritage Community Bank ("Heritage") FDIC-assisted transaction ceased being covered under the loss-share agreement for that transaction. The carrying amount of those loans was $1.9 million as of September 30, 2016. Any recoveries, net of expenses, received on commercial related loans on which losses were incurred prior to April 1, 2014 will continue to be covered (and any such net recoveries must be shared with the FDIC in accordance with the loss-share agreement) through March 31, 2017. The losses on consumer related loans acquired in connection with the Heritage FDIC-assisted transaction will continue to be covered under the loss-share agreement through March 31, 2019.

The losses on commercial related loans acquired in connection with the Benchmark Bank ("Benchmark") FDIC-assisted transaction ceased to be covered under the loss-share agreement for that transaction effective January 1, 2015. The carrying amount of those loans was $1.7 million as of September 30, 2016. Any recoveries, net of expenses, received on commercial related loans on which losses were incurred prior to January 1, 2015 will continue to be covered (and any such net recoveries must be shared with the FDIC in accordance with the loss-share agreements) through December 31, 2017. The losses on consumer related loans acquired in connection with the Benchmark FDIC-assisted transaction will continue to be covered under the loss-share agreements through December 31, 2019.

Effective July 1, 2015, the losses on commercial related loans acquired in connection with Broadway Bank ("Broadway") and New Century Bank ("New Century") FDIC-assisted transactions ceased to be covered under the loss-share agreements for those transactions. The carrying amount of those loans was $8.2 million as of September 30, 2016. Any recoveries, net of expenses, received on commercial related loans on which losses were incurred prior to July 1, 2015 will continue to be covered (and any such net recoveries must be shared with the FDIC in accordance with the loss-share agreements) through June 30, 2018. The losses on consumer related loans acquired in connection with the Broadway and New Century FDIC-assisted transactions will continue to be covered under the loss-share agreement through June 30, 2020.

Consumer related purchased credit-impaired loans also included re-purchase transactions with GNMA of $60.6 million as of September 30, 2016. 

31


Note 7.
  Goodwill and Intangibles
 
The excess of the cost of an acquisition over the fair value of the net assets acquired, including core deposit and client relationship intangibles, consists of goodwill. Under ASC Topic 350, goodwill is subject to at least annual assessments for impairment by applying a fair value based test. The Company reviews goodwill to determine potential impairment annually, or more frequently if events and circumstances indicate that goodwill might be impaired, by comparing the carrying value of the reporting units with the fair value of the reporting units.
 
The Company's annual assessment date is as of December 31. Goodwill is tested for impairment at the reporting unit level. The Company has three reporting units: Banking, Leasing and Mortgage Banking. No impairment losses were recognized during the nine months ended September 30, 2016 or 2015. The carrying amount of goodwill was $993.8 million and $725.1 million at September 30, 2016 and December 31, 2015, respectively.

The following table presents the changes in the carrying amount of goodwill for the nine months ended September 30, 2016 (in thousands): 
 
 
Banking
 
Leasing
 
Mortgage Banking
 
Total
Balance at beginning of period
 
$
684,430

 
$
40,640

 
$
—

 
$
725,070

Goodwill from business combinations (1)
 
268,729

 
—

 
—

 
268,729

Balance at end of period
 
$
953,159

 
$
40,640

 
$
—

 
$
993,799

(1) 
Due to the American Chartered merger and adjustments recognized for the MSA acquisition.
 
The Company has other intangible assets consisting of core deposit and client relationship intangibles that had a remaining weighted average amortization period of approximately thirteen years as of September 30, 2016.
 
The following table presents the changes during the nine months ended September 30, 2016 in the carrying amount of core deposit and client relationship intangibles, and the gross carrying amount, accumulated amortization, and net book value as of September 30, 2016 (in thousands):
 
 
 
September 30, 2016
Balance at beginning of period
 
$
44,812

Amortization expense
 
(4,917
)
Other intangibles from acquisition
 
25,500

Balance at end of period
 
$
65,395

 
 
 
Gross carrying amount
 
$
118,792

Accumulated amortization
 
(53,397
)
Net book value
 
$
65,395

 
The following presents the estimated future amortization expense of other intangible assets (in thousands):
 
Year ending December 31,
 
Amount
2016
 
$
2,390

2017
 
8,198

2018
 
7,456

2019
 
5,677

2020
 
5,026

Thereafter
 
36,648

 
 
$
65,395

 

32


Note 8.
Deposits
 
The composition of deposits was as follows as of September 30, 2016 and December 31, 2015 (in thousands):
 
 
 
September 30,
 
December 31,
 
 
2016
 
2015
Demand deposit accounts, non-interest bearing
 
$
6,410,334

 
$
4,627,184

NOW, money market and interest bearing deposits
 
4,660,407

 
4,144,633

Savings accounts
 
1,147,900

 
974,555

Certificates of deposit, $250,000 or more
 
1,121,599

 
877,352

Other certificates of deposit
 
939,026

 
881,491

Total
 
$
14,279,266

 
$
11,505,215


Certificates of deposit of $250,000 or more included $759.3 million and $500.2 million of brokered deposits at September 30, 2016 and December 31, 2015, respectively.  Brokered deposits typically consist of smaller individual time certificates that have the same liquidity characteristics and yields consistent with time certificates of $250,000 or more.

Note 9.
Short-Term Borrowings
 
Short-term borrowings were as follows as of September 30, 2016 and December 31, 2015 (dollars in thousands):
 
 
 
September 30, 2016
 
December 31, 2015
 
 
Weighted Average Interest Rate
 
Amount
 
Weighted Average Interest Rate
 
Amount
Customer repurchase agreements
 
0.21
%
 
$
256,569

 
0.20
%
 
$
201,207

Federal Home Loan Bank advances
 
0.38

 
1,200,000

 
0.17

 
775,000

Federal funds purchased
 
0.60

 
39,750

 
0.09

 
4,530

Line of credit
 
—

 
—

 
2.18

 
25,000

 Total
 
0.36
%
 
$
1,496,319

 
0.23
%
 
$
1,005,737

 
Securities sold under agreements to repurchase are agreements in which the Company acquires funds by selling assets to another party under a simultaneous agreement to repurchase the same assets at a specified price and date.  The Company enters into repurchase agreements and also offers a demand deposit account product to customers that sweeps their balances in excess of an agreed upon target amount into overnight repurchase agreements.  All securities sold under agreements to repurchase are recorded on the face of the balance sheet. The Company pledges mortgage-backed securities as collateral for the repurchase agreements and may be required to provide additional collateral based on the fair value of those securities.
 
The Company had Federal Home Loan Bank fixed rate advances with a maturity date less than one year of $1.2 billion and $775.0 million at September 30, 2016 and December 31, 2015, respectively. At September 30, 2016, the interest rate on the advances outstanding on that date had rates ranging from 0.24% to 0.40% with maturities from October 3, 2016 to June 23, 2017. The Company has investment securities available for sale and loans pledged as collateral on this FHLB advance. See Note 5. Investment Securities and Note 6. Loans of the notes to the consolidated financial statements.

On December 18, 2015, the Company entered into a $35.0 million unsecured line of credit at the holding company level with a correspondent bank. Interest is payable at a rate of one month LIBOR + 1.75%. Nothing was outstanding as of September 30, 2016, and $25.0 million was outstanding as of December 31, 2015. The line of credit is scheduled to mature on June 30, 2017.
 

33


Note 10.
Long-Term Borrowings
 
The Company had Federal Home Loan Bank advances with remaining contractual maturities greater than one year of $230.1 million at September 30, 2016 and $305.2 million at December 31, 2015. As of September 30, 2016, the advances had fixed terms with effective interest rates, net of discounts, ranging from 0.30% to 5.87% and maturities ranging from December 2017 to April 2035. The Company has investment securities available for sale and loans pledged as collateral on these FHLB advances. See Note 5. Investment Securities and Note 6. Loans of the notes to the consolidated financial statements.
 
The Company had notes payable to banks totaling $66.5 million and $55.0 million at September 30, 2016 and December 31, 2015, respectively, which as of September 30, 2016, were accruing interest at rates ranging from 2.46% to 7.40%, with a weighted average rate of 4.22%.  Lease investments includes equipment with an amortized cost of $79.0 million and $65.8 million at September 30, 2016 and December 31, 2015, respectively, that is pledged as collateral on these notes.

On August 24, 2016, the Company assumed a $16.0 million unsecured term loan at the holding company level with a correspondent bank through the American Chartered merger. Interest is payable at a rate of one month LIBOR + 1.75% and matures on June 30, 2020. Principal payments of $1.0 million are due quarterly until maturity. As of September 30, 2016, $15.0 million was outstanding.
 
The Company had a $40.0 million 10-year structured repurchase agreement as of December 31, 2015, which had a fixed interest rate of 4.75% and matured in March 2016.


34


Note 11.
Junior Subordinated Notes Issued to Capital Trusts
 
The Company has established statutory trusts for the sole purpose of issuing trust preferred securities and related trust common securities.  The proceeds from such issuances were used by the trusts to purchase junior subordinated notes of the Company, which are the sole assets of each trust.  Concurrently with the issuance of the trust preferred securities, the Company issued guarantees for the benefit of the holders of the trust preferred securities.  The Company’s outstanding trust preferred securities qualify, and are treated by the Company, as Tier 2 regulatory capital. Prior to the completion of the American Chartered merger, the trust preferred securities qualified, and were treated by the Company, as Tier 1 regulatory capital.  The Company owns all of the common securities of each trust.  The trust preferred securities issued by each trust rank equally with the common securities in right of payment, except that if an event of default under the indenture governing the notes has occurred and is continuing, the preferred securities will rank senior to the common securities in right of payment.
 
The table below summarizes the outstanding junior subordinated notes and the related trust preferred securities issued by each trust as of September 30, 2016 (in thousands):
 
 
 
Coal City
Capital Trust I
 
MB Financial
Capital Trust II
 
MB Financial
Capital Trust III
 
MB Financial
Capital Trust IV
Junior Subordinated Notes:
 
 

 
 

 
 

 
 

Principal balance
 
$
25,774

 
$
36,083

 
$
10,310

 
$
20,619

Annual interest rate
 
3-mo LIBOR + 1.80%

 
3-mo LIBOR + 1.40%

 
3-mo LIBOR + 1.50%

 
3-mo LIBOR + 1.52%

Stated maturity date
 
September 1, 2028

 
September 15, 2035

 
September 23, 2036

 
September 15, 2036

Call date
 
September 1, 2008

 
December 15, 2010

 
September 23, 2011

 
September 15, 2011

Trust Preferred Securities:
 
 

 
 

 
 

 
 

Face Value
 
$
25,000

 
$
35,000

 
$
10,000

 
$
20,000

Annual distribution rate
 
3-mo LIBOR + 1.80%

 
3-mo LIBOR + 1.40%

 
3-mo LIBOR + 1.50%

 
3-mo LIBOR + 1.52%

Issuance date
 
July 1998

 
August 2005

 
July 2006

 
August 2006

Distribution dates (1)
 
Quarterly

 
Quarterly

 
Quarterly

 
Quarterly

 
 
MB Financial
Capital Trust V
 
MB Financial
Capital Trust VI
 
FOBB
Statutory Trust III (2)
 
TAYC
Capital Trust II (3)
Junior Subordinated Notes:
 
 

 
 

 
 

 
 

Principal balance
 
$
30,928

 
$
23,196

 
$
5,155

 
$
41,238

Annual interest rate
 
3-mo LIBOR + 1.30%

 
3-mo LIBOR + 1.30%

 
3-mo LIBOR + 2.80%

 
3-mo LIBOR + 2.68%

Stated maturity date
 
December 15, 2037

 
October 30, 2037

 
January 23, 2034

 
June 17, 2034

Call date
 
December 15, 2012

 
October 30, 2012

 
January 23, 2009

 
June 17, 2009

Trust Preferred Securities:
 
 

 
 

 
 

 
 

Face Value
 
$
30,000

 
$
22,500

 
$
5,000

 
$
40,000

Annual distribution rate
 
3-mo LIBOR + 1.30%

 
3-mo LIBOR + 1.30%

 
3-mo LIBOR + 2.80%

 
3-mo LIBOR + 2.68%

Issuance date
 
September 2007

 
October 2007

 
December 2003

 
June 2004

Distribution dates (1)
 
Quarterly

 
Quarterly

 
Quarterly

 
Quarterly

 
 
American Chartered Statutory Trust I (4)
 
American Chartered Statutory Trust II (4)
Junior Subordinated Notes:
 
 

 
 

Principal balance
 
$
20,619

 
$
10,464

Annual interest rate
 
3-mo LIBOR + 3.60%

 
3-mo LIBOR + 2.75%

Stated maturity date
 
December 18, 2031

 
October 7, 2034

Call date
 
December 18, 2006

 
October 7, 2009

Trust Preferred Securities:
 
 

 
 

Face Value
 
$
20,000

 
$
10,000

Annual distribution rate
 
3-mo LIBOR + 3.60%

 
3-mo LIBOR + 2.75%

Issuance date
 
November 2001

 
August 2004

Distribution dates (1)
 
Quarterly

 
Quarterly

 
(1) 
All distributions are cumulative and paid in cash.
(2) 
FOBB Statutory Trust III was established by First Oak Brook Bancshares, Inc. (“FOBB”) prior to the Company's acquisition of FOBB in 2006, and the junior subordinated notes issued by FOBB to FOBB Statutory Trust III were assumed by the Company upon completion of the acquisition.

35


(3) 
TAYC Capital Trust II was established by Taylor Capital Group, Inc. (“Taylor Capital”) prior to the Company's acquisition of Taylor Capital in 2014, and the junior subordinated notes issued by Taylor Capital to TAYC Capital Trust II were assumed by the Company upon completion of the acquisition. Principal balance and face value amounts associated with TAYC Capital Trust II do not include purchase accounting adjustments to such amounts, which in each case resulted in a discount of $6.8 million.
(4) 
American Chartered Statutory Trust I and American Chartered Statutory Trust II were established by American Chartered prior to the Company's acquisition of American Chartered in August 2016, and the junior subordinated notes issued by American Chartered to American Chartered Statutory Trust I and American Chartered Statutory Trust II were assumed by the Company upon completion of the acquisition. Principal balance and face value amounts associated with American Chartered Statutory Trust I and American Chartered Statutory Trust II do not include purchase accounting adjustments to such amounts, which in each case resulted in a discount of $8.0 million.
 
The trust preferred securities are subject to mandatory redemption, in whole or in part, upon repayment of the junior subordinated notes at the stated maturity date or upon redemption.  Each trust’s ability to pay amounts due on the trust preferred securities is solely dependent upon the Company making payment on the related junior subordinated notes.  The Company’s obligation under the junior subordinated notes and other relevant trust agreements, in aggregate, constitute a full and unconditional guarantee by the Company of each trust’s obligations under the trust preferred securities issued by each trust.  The Company has the right to defer payment of interest on the notes and, therefore, distributions on the trust preferred securities, for up to five years, but not beyond the stated maturity date in the table above.  During any such deferral period, the Company may not pay cash dividends on its common or preferred stock and generally may not repurchase its common or preferred stock.

Note 12.
Commitments and Contingencies
 
Commitments: The Company is a party to credit-related financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers.  These financial instruments include commitments to extend credit, standby letters of credit and commercial letters of credit.  Such commitments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheets.
 
The Company’s exposure to credit loss is represented by the contractual amount of these commitments.  The Company follows the same credit policies in making commitments as it does for on-balance-sheet instruments.
 
At September 30, 2016 and December 31, 2015, the following financial instruments were outstanding, the contractual amounts of which represent off-balance sheet credit risk (in thousands):
 
 
Contractual Amount
 
 
September 30, 2016
 
December 31, 2015
Commitments to extend credit:
 
 

 
 

Home equity lines
 
$
243,331

 
$
187,478

Other commitments
 
3,596,246

 
3,049,152

Letters of credit:
 
 

 
 

Standby
 
172,737

 
137,945

Commercial
 
5,211

 
1,108

 
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract.  Commitments generally have fixed expiration dates or other termination clauses and may require a payment of a fee.  The commitments for home equity lines of credit may expire without being drawn upon.  Therefore, the total commitment amounts do not necessarily represent future cash requirements.  The amount of collateral obtained, if it is deemed necessary by the Company, is based on management’s credit evaluation of the customer.
 
The Company, in the normal course of its business, regularly offers standby and commercial letters of credit to its bank customers.  Standby and commercial letters of credit are a conditional but irrevocable form of guarantee.  Under letters of credit, the Company typically guarantees payment to a third party beneficiary upon the default of payment or nonperformance by the bank customer and upon receipt of complying documentation from that beneficiary.
 
Both standby and commercial letters of credit may be issued for any length of time, but normally do not exceed a period of five years.  These letters of credit may also be extended or amended from time to time depending on the bank customer’s needs.  As of September 30, 2016, the maximum remaining term for any standby letters of credit was September 30, 2030.  A fee is charged to the bank customer and is recognized as income over the life of the letter of credit, unless considered non-rebatable under the terms of a letter of credit application.
 

36


At September 30, 2016, the aggregate contractual amount of these letters of credit, which represents the maximum potential amount of future payments that the Company would be obligated to pay, increased $38.9 million to $177.9 million from $139.1 million at December 31, 2015.  Of the $177.9 million in commitments outstanding at September 30, 2016, approximately $121.0 million of the letters of credit have been issued or renewed since December 31, 2015.
 
Letters of credit issued on behalf of bank customers may be done on either a secured or unsecured basis.  If a letter credit is secured, the collateral can take various forms including bank accounts, investments, fixed assets, inventory, accounts receivable or real estate.  The Company takes the same care in making credit decisions and obtaining collateral when it issues letters of credit on behalf of its customers as it does when making other types of loans.
 
As of September 30, 2016, the Company had approximately $7.1 million in capital expenditure commitments outstanding which relate to various projects to renovate the corporate office space and branches.
 
Concentrations of credit risk:  The majority of the loans, commitments to extend credit and standby letters of credit have been granted to customers in the Company’s market area.  As of September 30, 2016, approximately 21% of our investments in securities issued by states and political subdivisions were within the state of Illinois.  We did not hold any direct exposure to the state of Illinois as of September 30, 2016. Our commitments to extend credit are primarily related to commercial credits.  Standby letters of credit are granted primarily to commercial borrowers. Our asset-based loans are made to borrowers located throughout the United States. Lease banking provides banking services to lessors located throughout the United States. Our leasing subsidiaries originate leases to companies located throughout the United States. In addition, our mortgage segment and indirect vehicle lenders originate loans to borrowers located throughout the United States.
 
Contingencies: In the normal course of business, the Company is involved in various legal proceedings.  In the opinion of management, any liability resulting from pending proceedings would not be expected to have a material adverse effect on the Company’s consolidated financial statements.

Note 13.
Fair Value Measurements
 
ASC Topic 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. A fair value measurement assumes that the transaction to sell the asset or transfer the liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability. The price in the principal (or most advantageous) market used to measure the fair value of the asset or liability is not adjusted for transaction costs. An orderly transaction is a transaction that assumes exposure to the market for a period prior to the measurement date to allow for marketing activities that are usual and customary for transactions involving such assets and liabilities; it is not a forced transaction. Market participants are buyers and sellers in the principal market that are (i) independent, (ii) knowledgeable, (iii) able to transact and (iv) willing to transact.

ASC Topic 820 requires the use of valuation techniques that are consistent with the market approach, the income approach and/or the cost approach. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets and liabilities. The income approach uses valuation techniques to convert expected future amounts, such as cash flows or earnings, to a single present value amount on a discounted basis. The cost approach is based on the amount that currently would be required to replace the service capacity of an asset (replacement cost). Valuation techniques should be consistently applied. Inputs to valuation techniques refer to the assumptions that market participants would use in pricing the asset or liability. Inputs may be observable, meaning those that reflect the assumptions market participants would use in pricing the asset or liability developed based on market data obtained from independent sources, or unobservable, meaning those that reflect the reporting entity's own assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. In that regard, ASC Topic 820 establishes a fair value hierarchy for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The fair value hierarchy is as follows:

Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

Level 3: Significant unobservable inputs that reflect a reporting entity's own assumptions about the assumptions that market participants would use in pricing an asset or liability.


37


A description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below.

In general, fair value is based upon quoted market prices, where available. If such quoted market prices are not available, fair value is based upon internally developed models that primarily use, as inputs, observable market-based parameters. Valuation adjustments may be made to ensure that financial instruments are recorded at fair value. These adjustments may include amounts to reflect counterparty credit quality, the Company's creditworthiness, among other things, as well as unobservable parameters. Any such valuation adjustments are applied consistently over time. Our valuation methodologies may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. While management believes the Company's valuation methodologies are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date. Transfers between levels of the fair value hierarchy are recognized on the actual date of the event or circumstances that caused the transfer, which generally coincides with the Company's monthly and/or quarterly valuation process.

Financial Instruments Recorded at Fair Value on a Recurring Basis

Securities Available for Sale. The fair values of securities available for sale are determined by quoted prices in active markets, when available, and classified as Level 1. If quoted market prices are not available, the fair value is determined by matrix pricing, which is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities' relationship to other benchmark quoted securities and classified as Level 2. In cases where significant credit valuation adjustments are incorporated into the estimation of fair value, reported amounts are classified as Level 3.

Loans Held for Sale. Residential real estate loans originated and held for sale in the secondary market are carried at fair value. The fair value of loans held for sale is determined using quoted secondary market prices and classified as Level 2.

Loans. The Company has elected to record certain mortgage loans at fair value. The fair value of these loans is determined using quoted secondary market prices and classified as Level 2.

Mortgage Servicing Rights. The Company has elected to record its mortgage servicing rights at fair value. Mortgage servicing rights do not trade in an active market with readily observable prices. Accordingly, the Company determines the fair value of mortgage servicing rights by estimating the fair value of the future cash flows associated with the mortgage loans being serviced. Key economic assumptions used in measuring the fair value of mortgage servicing rights include, but are not limited to, prepayment speeds, discount rates, delinquencies and cost to service. The assumptions used in the model are validated on a regular basis. The fair value is validated on a quarterly basis with an independent third party. Material discrepancies between the internal model and the third party validation are investigated and resolved by an internal committee. Due to the nature of the valuation inputs, mortgage servicing rights are classified in Level 3 of the fair value hierarchy.

Assets Held in Trust for Deferred Compensation and Associated Liabilities. Assets held in trust for deferred compensation are recorded at fair value and included in “Other Assets” on the consolidated balance sheets. These assets are invested in mutual funds and classified as Level 1. Deferred compensation liabilities, also classified as Level 1, are carried at the fair value of the obligation to the employee, which corresponds to the fair value of the invested assets.

Derivatives. Currently, we use interest rate swaps to manage our interest rate risk. The valuation of these instruments is determined using widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of each derivative and classified as Level 2. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including LIBOR rate curves. We also obtain dealer quotations for these derivatives for comparative purposes to assess the reasonableness of the model valuations. In addition, we use forward commitments to buy to-be-announced mortgage securities for which we do not intend to take delivery of the security and will enter into an offsetting position before physical delivery to lessen the price volatility of the mortgage servicing rights asset. Dealer quotations are used for these derivatives and are classified as Level 1. We also offer other derivatives, including foreign currency forward contracts and interest rate lock commitments, to our customers and offset our exposure from such contracts by purchasing other financial contracts, which are valued using market consensus prices. For certain interest rate lock commitments, which are classified as Level 3, the Company uses an external valuation model to estimate the fair value of the commitments. This model relies on unobservable, internally developed inputs that reflect management’s assumptions and specific information about each borrower transaction.


38


The following table summarizes financial assets and financial liabilities measured at fair value on a recurring basis as of September 30, 2016 and December 31, 2015, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value (in thousands):
 
 
 
Total
 
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
 
Significant Other
Observable Inputs
(Level 2)
 
Significant
Unobservable Inputs
(Level 3)
September 30, 2016
 
 

 
 

 
 

 
 

Financial assets
 
 

 
 

 
 

 
 

Securities available for sale:
 
 

 
 

 
 

 
 

U.S Government sponsored agencies and enterprises
 
$
53,968

 
$
—

 
$
53,968

 
$
—

States and political subdivisions
 
410,737

 
—

 
410,320

 
417

Residential mortgage-backed securities
 
1,076,337

 
—

 
1,076,132

 
205

Commercial mortgage-backed securities
 
96,993

 
—

 
96,993

 
—

Corporate bonds
 
210,193

 
—

 
210,193

 
—

Equity securities
 
11,128

 
11,128

 
—

 
—

Loans held for sale
 
899,412

 
—

 
899,412

 
—

Loans
 
19,121

 
—

 
19,121

 
—

Mortgage servicing rights
 
154,730

 
—

 
—

 
154,730

Assets held in trust for deferred compensation
 
18,937

 
18,937

 
—

 
—

Derivative financial instruments
 
112,208

 
1,347

 
98,300

 
12,561

Financial liabilities
 
 

 
 

 
 

 
 

Other liabilities (1)
 
18,937

 
18,937

 
—

 
—

Derivative financial instruments
 
70,330

 
6,001

 
64,329

 
—

December 31, 2015
 
 

 
 

 
 

 
 

Financial assets
 
 

 
 

 
 

 
 

Securities available for sale:
 
 

 
 

 
 

 
 

U.S. Government sponsored agencies and enterprises
 
$
64,611

 
$
—

 
$
64,611

 
$
—

States and political subdivisions
 
396,367

 
—

 
395,950

 
417

Residential mortgage-backed securities
 
763,549

 
—

 
763,193

 
356

Commercial mortgage-backed securities
 
130,107

 
—

 
130,107

 
—

Corporate bonds
 
219,628

 
—

 
219,628

 
—

Equity securities
 
10,761

 
10,761

 
—

 
—

   Loans held for sale
 
744,727

 
—

 
744,727

 
—

Loans
 
25,869

 
—

 
25,869

 
—

Mortgage servicing rights
 
168,162

 
—

 
—

 
168,162

Assets held in trust for deferred compensation
 
16,820

 
16,820

 
—

 
—

Derivative financial instruments
 
42,846

 
5,118

 
33,906

 
3,822

Financial liabilities
 
 

 
 

 
 

 
 

Other liabilities (1)
 
16,333

 
16,333

 
—

 
—

Derivative financial instruments
 
36,974

 
6,050

 
30,924

 
—

 
(1) 
Liabilities associated with assets held in trust for deferred compensation
 

39


The following table presents additional information about the unobservable inputs used in the fair value measurement of financial assets measured on a recurring basis that were categorized within the Level 3 of the fair value hierarchy:
 
Fair Value at
 
 
 
 
 
 
 
September 30, 2016
 
Valuation Technique
 
Unobservable Input
 
Range
 
(in thousands)
 
 
 
 
 
 
States and political subdivisions
$
417

 
Discounted cash flows
 
Credit assumption
 
50% Loss
Residential mortgage-backed securities
205

 
Discounted cash flows
 
Constant pre-payment rates (CPR)
 
1% - 3%
Mortgage servicing rights
154,730

 
Discounted cash flows
 
CPR
 
12.3% - 16.1%
 
 
 
 
 
Discount rate
 
9.50 - 12.00
 
 
 
 
 
Maturity (months)
 
327 - 357
 
 
 
 
 
Delinquencies
 
0.51 - 3.86
 
 
 
 
 
Costs to service
 
$ 66 - $ 160
 
 
 
 
 
Costs to service - delinquent
 
$ 150 - $ 1,000
Derivative financial instruments (mortgage
12,561

 
Sales cash flows
 
Expected closing ratio
 
70% - 95%
   interest rate lock commitments)
 
 
 
 
Expected delivery price
 
98.58 bps - 109.77 bps

The significant unobservable inputs used in the fair value measurement of the Company’s mortgage servicing rights include prepayment speeds, discount rates, maturities, delinquencies and cost to service. Significant increases in prepayment speeds, discount rates, delinquencies or cost to service would result in a significantly lower fair value measurement. Conversely, significant decreases in prepayment speeds, discount rates, delinquencies or costs to service would result in a significantly higher fair value measurement. With the exception of changes in delinquencies, which can change the cost to service, the unobservable inputs move independently of each other.

Key economic assumptions used in the measuring of the fair value of the mortgage servicing rights and the sensitivity of the fair value to immediate adverse changes in those assumptions at September 30, 2016 are presented in the following table. This table does not take into account the derivatives used to economically hedge the mortgage servicing rights.

(dollars in thousands, except for weighted average cost to service)
September 30, 2016
Weighted average CPR
15.30
%
Impact on fair value of 10% adverse change
$
(7,917
)
Impact on fair value of 20% adverse change
(15,144
)
 
 
Weighted average discount rate
9.78
%
Impact on fair value of 10% adverse change
$
(5,045
)
Impact on fair value of 20% adverse change
(9,769
)
 
 
Weighted average delinquency rate
1.80
%
Impact on fair value of 10% adverse change
$
(1,329
)
Impact on fair value of 20% adverse change
(2,428
)
 
 
Weighted average costs to service
$
88

Impact on fair value of 10% adverse change
(2,988
)
Impact on fair value of 20% adverse change
(5,976
)

The Company did not have any transfers between Level 1 and Level 2 of the fair value hierarchy during the nine months ended September 30, 2016. The Company's policy for determining transfers between levels occurs at the end of the reporting period when circumstances in the underlying valuation criteria change and result in transfer between levels.


40


The following table presents additional information about financial assets measured at fair value on a recurring basis for which the Company used significant unobservable inputs (Level 3):
 
 
 
Nine Months Ended
 
 
September 30,
 
 
2016
 
2015
 
2016
 
2015
 
2016
 
2015
(in thousands)
 
Investment Securities
 
Mortgage Servicing Rights
 
Derivatives
Balance, beginning of period
 
$
773

 
$
973

 
$
168,162

 
$
235,402

 
$
3,822

 
$
5,074

Purchases
 
—

 
—

 
3,423

 
785

 
—

 
—

Originations
 
—

 
—

 
43,039

 
55,583

 
—

 
—

Included in earnings
 
—

 
—

 
(59,894
)
 
(40,568
)
 
8,739

 
3,088

Principal payments
 
(151
)
 
(115
)
 
—

 
—

 
—

 
—

Sales
 
—

 
—

 
—

 
(103,105
)
 
—

 
—

Balance, ending of period
 
$
622

 
$
858

 
$
154,730

 
$
148,097

 
$
12,561

 
$
8,162

 
Financial Instruments Recorded at Fair Value on a Nonrecurring Basis

The Company may be required, from time to time, to measure certain financial assets and financial liabilities at fair value on a nonrecurring basis in accordance with U.S. GAAP. These include assets that are measured at the lower of cost or fair value that were recognized at fair value below cost at the end of the period.

Impaired Loans. Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. Once a loan is identified as individually impaired, management measures impairment in accordance with ASC Topic 310. The fair value of impaired loans is estimated using one of several methods, including collateral value, market value of similar debt, enterprise value, liquidation value and discounted cash flows. Those impaired loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans. In accordance with ASC Topic 820, impaired loans where an allowance is established based on the fair value of collateral require classification in the fair value hierarchy. Collateral values are estimated using Level 3 inputs based on customized discounting criteria. For a majority of impaired real estate loans where an allowance is established based on the fair value of collateral (100% at September 30, 2016), the Company obtains a current external appraisal. Other valuation techniques are used as well, including internal valuations, comparable property analysis and contractual sales information.

Non-Financial Assets and Non-Financial Liabilities Recorded at Fair Value

The Company has no non-financial assets or non-financial liabilities measured at fair value on a recurring basis. Certain non-financial assets and non-financial liabilities measured at fair value on a non-recurring basis include foreclosed assets and non-financial long-lived assets.

Other Real Estate and Repossessed Vehicles Owned (Foreclosed Assets). Foreclosed assets, upon initial recognition, are measured and reported at fair value through a charge-off to the allowance for loan and lease losses based upon the fair value of the foreclosed asset. The fair value of foreclosed assets, upon initial recognition, are estimated using Level 3 inputs based on customized discounting criteria.
 
Non-Financial Long-Lived Assets.  Non-financial long-lived assets, when determined to be impaired, are measured and reported at fair value using Level 3 inputs based on customized discounting criteria.
 

41


Assets measured at fair value on a nonrecurring basis as of September 30, 2016 and December 31, 2015 are included in the table below (in thousands):
 
 
 
Total
 
Quoted Prices in Active
Markets for Identical
Assets (Level 1)
 
Significant Other
Observable Inputs
(Level 2)
 
Significant
Unobservable Inputs
(Level 3)
September 30, 2016
 
 

 
 

 
 

 
 

Financial assets:
 
 

 
 

 
 

 
 

Impaired loans
 
$
54,740

 
$
—

 
$
—

 
$
54,740

Non-financial assets:
 
 
 
 
 
 
 
 
Foreclosed assets
 
38,735

 
—

 
—

 
38,735

December 31, 2015
 
 

 
 

 
 

 
 

Financial assets:
 
 

 
 

 
 

 
 

Impaired loans
 
$
76,203

 
$
—

 
$
—

 
$
76,203

Non-financial assets:
 
 
 
 
 
 
 
 
Foreclosed assets
 
42,351

 
—

 
—

 
42,351

 
The following table presents additional information about the unobservable inputs used in the fair value measurement of financial assets measured on a nonrecurring basis that were categorized within the Level 3 of the fair value hierarchy:

 
Fair Value at
Valuation
Unobservable
 
 
September 30, 2016
Technique
Input
Range
 
(in thousands)
 
 
 
Impaired loans
$
54,740

Appraisal of collateral
Appraisal adjustments
5% - 10%
Foreclosed assets
38,735

Appraisal of collateral
Appraisal adjustments
5% - 10%

ASC Topic 825 requires disclosure of the fair value of financial assets and financial liabilities, including those financial assets and financial liabilities that are not measured and reported at fair value on a recurring basis or non-recurring basis. The methodologies for estimating the fair value of financial assets and financial liabilities that are measured at fair value on a recurring or non-recurring basis are discussed above. The estimated fair value approximates carrying value for cash and cash equivalents, accrued interest and the cash surrender value of life insurance policies.

The following methods and assumptions were used by the Company in estimating the fair values of its other financial instruments:

Cash and due from banks, interest earning deposits with banks and federal funds sold: The carrying amounts reported in the balance sheet approximate fair value.

Securities held to maturity: The fair values of securities held to maturity are determined by quoted prices in active markets, when available, and classified as Level 1. If quoted market prices are not available, the fair value is determined by a matrix pricing, which is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities' relationship to other benchmark quoted securities and classified as Level 2. In cases where significant credit valuation adjustments are incorporated into the estimation of fair value, reported amounts are classified as Level 3.
  
Non-marketable securities - FHLB and FRB Stock: The carrying amounts reported in the balance sheet approximate fair value.

Loans: The fair values for loans are estimated using discounted cash flow analyses, using the corporate bond curve adjusted for liquidity for commercial loans and the swap curve adjusted for liquidity for retail loans. The Company has elected to record certain mortgage loans at fair value. The fair value of these loans is determined using quoted secondary market prices and classified as Level 2.

Non-interest bearing deposits: The fair values disclosed are equal to their balance sheet carrying amounts, which represent the amount payable on demand.


42


Interest bearing deposits: The fair values disclosed for deposits with no defined maturities are equal to their carrying amounts, which represent the amounts payable on demand. Fair values for certificates of deposit are estimated using a discounted cash flow calculation that applies the Company's current incremental borrowing rates for similar terms.
 
Short-term borrowings: The carrying amounts of federal funds purchased, borrowings under repurchase agreements and other short-term borrowings with maturities of 90 days or less approximate their fair values.  The fair value of short-term borrowings greater than 90 days is based on the discounted value of contractual cash flows.
 
Long-term borrowings: The fair values of the Company's long-term borrowings (other than deposits) are estimated using discounted cash flow analyses, based on the Company's current incremental borrowing rates for similar types of borrowing arrangements.

Junior subordinated notes issued to capital trusts: The fair values of the Company's junior subordinated notes issued to capital trusts are estimated based on the quoted market prices, when available, of the related trust preferred security instruments, or are estimated based on the quoted market prices of comparable trust preferred securities.

Accrued interest: The carrying amounts of accrued interest receivable and payable approximate their fair values.
 
Off-balance-sheet instruments: Fair values for the Company’s off-balance-sheet lending commitments (guarantees, letters of credit and commitments to extend credit) are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements.
 
The estimated fair values of financial instruments are as follows (in thousands):
 
 
September 30, 2016
 
 
Carrying Amount
 
Estimated Fair Value
Quoted Prices in Active
Markets for Identical
Assets (Level 1)
Significant Other
Observable Inputs
(Level 2)
Significant
Unobservable Inputs
(Level 3)
 
 
 
 
 
 
 
 
Financial Assets:
 
 
 
 
 
 
 
   Cash and due from banks
 
$
351,009

 
$
351,009

$
351,009

$
—

$
—

   Interest earning deposits with banks
 
125,250

 
125,250

125,250

—

—

   Investment securities available for sale
 
1,859,356

 
1,859,356

11,128

1,847,606

622

   Investment securities held to maturity
 
1,115,262

 
1,175,838

—

1,175,838

—

   Non-marketable securities - FHLB and FRB stock
 
146,209

 
146,209

—

—

146,209

   Loans held for sale
 
899,412

 
899,412

—

899,412

—

   Loans, net
 
12,401,168

 
12,403,330

—

19,121

12,384,209

   Accrued interest receivable
 
58,541

 
58,541

58,541

—

—

   Derivative financial instruments
 
112,208

 
112,208

1,347

98,300

12,561

Financial Liabilities:
 
 
 
 
 
 
 
   Non-interest bearing deposits
 
$
6,410,334

 
$
6,410,334

$
6,410,334

$
—

$
—

   Interest bearing deposits
 
7,868,932

 
7,873,233

—

—

7,873,233

   Short-term borrowings
 
1,496,319

 
1,496,312

—

—

1,496,312

   Long-term borrowings
 
311,645

 
312,974

—

—

312,974

   Junior subordinated notes issued to capital trusts
 
209,159

 
144,681

—

—

144,681

   Accrued interest payable
 
4,000

 
4,000

4,000

—

—

   Derivative financial instruments
 
70,330

 
70,330

6,001

64,329

—




43


 
 
December 31, 2015
 
 
Carrying Amount
 
Estimated Fair Value
Quoted Prices in Active
Markets for Identical
Assets (Level 1)
Significant Other
Observable Inputs
(Level 2)
Significant
Unobservable Inputs
(Level 3)
Financial Assets:
 
 

 
 

 
 
 
Cash and due from banks
 
$
307,869

 
$
307,869

$
307,869

$
—

$
—

Interest earning deposits with banks
 
73,572

 
73,572

73,572

—

—

Investment securities available for sale
 
1,585,023

 
1,585,023

10,761

1,573,489

773

Investment securities held to maturity
 
1,230,810

 
1,274,767

—

1,274,767

—

Non-marketable securities - FHLB and FRB stock
 
114,233

 
114,233

—

—

114,233

Loans held for sale
 
744,727

 
744,727

—

744,727

—

Loans, net
 
9,665,858

 
9,626,344

—

25,869

9,600,475

Accrued interest receivable
 
53,457

 
53,457

53,457

—

—

Derivative financial instruments
 
42,846

 
42,846

5,118

33,906

3,822

Financial Liabilities:
 
 

 
 

 
 
 
Non-interest bearing deposits
 
$
4,627,184

 
$
4,627,184

$
4,627,184

$
—

$
—

Interest bearing deposits
 
6,878,031

 
6,875,411

—

—

6,875,411

Short-term borrowings
 
1,005,737

 
1,005,705

—

—

1,005,705

Long-term borrowings
 
400,274

 
401,539

—

—

401,539

Junior subordinated notes issued to capital trusts
 
186,164

 
122,696

—

—

122,696

Accrued interest payable
 
3,186

 
3,186

3,186

—

—

Derivative financial instruments
 
36,974

 
36,974

6,050

30,924

—

 

44


Note 14.
Stock Incentive Plans
 
ASC Topic 718 requires that the grant date fair value of equity awards to employees be recognized as compensation expense over the period during which an employee is required to provide service in exchange for such award.
 
The following table summarizes the impact of the Company’s share-based payment plans in the financial statements for the periods shown (in thousands):
 
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
September 30,
 
 
2016
 
2015
 
2016
 
2015
Total cost of share-based payment plans during the period
 
$
4,238

 
$
3,508

 
$
12,573

 
$
10,983

Amount of related income tax benefit recognized in income
 
3,394

 
1,367

 
6,649

 
$
4,288

 
The Company adopted the Omnibus Incentive Plan (the “Omnibus Plan”) in 1997.  On May 28, 2014, the Company’s stockholders approved the third amendment and restatement of the Omnibus Plan to add 3,100,000 authorized shares for a total of 11,400,000 shares of common stock authorized to be utilized in connection with awards under the Omnibus Plan to directors, officers, and employees of the Company or any of its subsidiaries. The number of shares authorized increased by 2,400,000 to 13,800,000 upon completion of the Taylor Capital merger.  Equity grants under the Omnibus Plan can be in the form of incentive stock options, non-qualified stock options, stock appreciation rights, restricted stock, restricted stock units, performance shares, performance units, and other stock-based awards.  Shares awarded in the form of restricted stock, restricted stock units, performance shares, performance units, or other stock-based awards generally will reduce the shares available under the Omnibus Plan on a 2-for-1 basis. No more than 10% of the total number of authorized shares may be issued with respect to awards granted after May 28, 2014, other than stock appreciation rights, stock options and performance-based awards, which at the date of grant are scheduled to fully vest prior to three years from the date of grant (although such awards may provide scheduled vesting earlier with respect to some of such shares and for acceleration of vesting as provided in the Omnibus Plan).   As of September 30, 2016, there were 3,826,110 shares available for future grants.
 
Prior to 2014, annual equity-based incentive awards were typically granted to selected officers and employees mid-year. In 2014, these awards began being granted in the first quarter of the year.  Options are granted with an exercise price equal to no less than the market price of the Company’s shares at the date of grant; those option awards generally vest over four years of service and have 10-year contractual terms.  Restricted shares and units typically vest over a two to four year period.  Equity awards may also be granted at other times throughout the year in connection with the recruitment and retention of officers and employees.  Directors currently may elect, in lieu of cash, to receive up to 70% of their fees in stock options with a five year term, which are fully vested on the grant date (provided that the director may not sell the underlying shares for at least six months after the grant date), and up to 100% of their fees in restricted shares, which vest one year after the grant date.
 
The following table summarizes changes in stock options for the nine months ended September 30, 2016:
 
 
 
Number of
Options
 
Weighted
Average
Exercise
Price
 
Weighted
Average
Remaining
Contractual
Term
(In Years)
 
Aggregate
Intrinsic
Value
(in thousands)
Options outstanding as of December 31, 2015
 
2,192,431

 
$
27.77

 
4.44
 
 

Granted
 
501,538

 
28.86

 
 
 
 

Exercised
 
(461,405
)
 
28.98

 
 
 
 

Expired
 
(35,791
)
 
39.91

 
 
 
 

Forfeited or cancelled
 
(33,680
)
 
31.06

 
 
 
 

Options outstanding as of September 30, 2016
 
2,163,093

 
$
27.51

 
5.26
 
$
22,903

Options exercisable as of September 30, 2016
 
1,423,442

 
$
26.82

 
3.53
 
$
16,109

 
The fair value of each option award is estimated on the date of grant using the Black-Scholes option pricing model based on certain assumptions.  Expected volatility is based on historical volatility and the expectations of future volatility of Company shares.  The risk free interest rate for periods within the contractual term of the option is based on the U.S. Treasury yield curve in effect at the

45


time of the grant.  The expected life of options is estimated based on historical employee behavior and represents the period of time that options granted are expected to remain outstanding.

 The following assumptions were used for options granted during the nine months ended September 30, 2016:
 
 
September 30, 2016
Risk-free interest rate
 
1.44
%
Expected volatility of Company’s stock
 
28.17
%
Expected dividend yield
 
2.21
%
Expected life of options
 
5.6 years

Weighted average fair value per option of options granted during the year
 
$
6.64

 
The total intrinsic value of options exercised during the nine months ended September 30, 2016 and 2015 was $3.6 million and $1.3 million, respectively.
 
The following is a summary of changes in restricted shares and units for the nine months ended September 30, 2016:
 
 
 
Number of
Shares and Units
 
Weighted
Average
Grant Date
Fair Value
Shares and units outstanding at December 31, 2015
 
945,506

 
$
29.92

Granted
 
482,739

 
31.19

Vested
 
(405,633
)
 
28.37

Forfeited or cancelled
 
(23,824
)
 
29.95

Shares and units outstanding at September 30, 2016
 
998,788

 
31.17


The total intrinsic value of restricted shares that vested during the nine months ended September 30, 2016 and 2015 was $15.7 million and $11.3 million, respectively.
 
The Company issued 80,780, 71,560 and 48,569 market-based restricted stock units in 2016, 2015 and 2014, respectively, which entitle recipients to shares of common stock at the end of a three year vesting period. Recipients will earn shares, totaling between 0% and 175% of the number of units issued, based on the Company's total stockholder return relative to a specified peer group of financial institutions over the three year period. The Company issued 56,752 market-based restricted stock units in 2013 that vested in 2016. Recipients earned shares totaling 175% of the number of units issued, based on the Company’s total shareholder return relative to a specified peer group of financial institutions over the three year period. The market-based restricted stock units are included in the preceding table as if the recipients earned shares equal to 100% of the units issued. A Monte Carlo simulation model was used to value the market-based restricted stock units at the time of issuance.

As of September 30, 2016, there was $25.4 million of total unrecognized compensation cost related to nonvested share-based compensation arrangements (including share option and nonvested share awards) granted under the Omnibus Plan.  At September 30, 2016, the weighted-average period over which the unrecognized compensation expense is expected to be recognized was approximately 2.4 years.


46


Note 15.
Derivative Financial Instruments
 
The Company offers various derivatives, including interest rate swaps and foreign currency forward contracts, to its qualifying customers which can mitigate our exposure to market risk through the execution of off-setting positions with inter-bank dealer counterparties. This also permits the Company to offer customized risk management solutions to our customers. These customer accommodations and any offsetting financial contracts are treated as non-designated derivative instruments and carried at fair value through an adjustment to the statement of operations.

Interest rate swap and foreign currency forward contracts involve the risk of dealing with counterparties and their ability to meet contractual terms. The net amount payable or receivable under interest rate swaps is accrued as an adjustment to interest income.  The net amount payable as of September 30, 2016 was approximately $1 thousand, and the net amount payable as of December 31, 2015 was approximately $1 thousand.  The Company's credit exposure on interest rate swaps is limited to the Company's net favorable value and interest payments of all swaps to each counterparty. In such cases, collateral is generally required from the counterparties involved if the net value of the swaps exceeds a nominal amount.  At September 30, 2016, the Company’s credit exposure relating to interest rate swaps was approximately $45.8 million, which is secured by the underlying collateral on customer loans. 
 
The Company also enters into mortgage banking derivatives which are classified as non-designated hedging derivatives. These derivatives include interest rate lock commitments provided to customers to fund certain mortgage loans to be sold into the secondary market and forward commitments for the future delivery of such loans. It is the Company's practice to enter into forward commitments for the future delivery of residential mortgage loans when interest rate lock commitments are entered into in order to economically hedge the effect of future changes in interest rates on its commitments to fund the loans as well as on its portfolio of mortgage loans held-for-sale.
 
The Company had fair value commercial loan interest rate swaps, to hedge its interest rate risk, with an aggregate notional amount of $119 thousand at September 30, 2016.  For fair value hedges, the changes in fair values of both the hedging derivative and the hedged item were recorded in current earnings as other income.

Interest rate swaps, swaptions and treasury futures are used in order to lessen the price volatility of the mortgage servicing rights asset. The Company also uses forward commitments to buy to-be-announced ("TBA") mortgage securities for which the Company does not intend to take delivery of the security and will enter into an offsetting position before physical delivery to lessen the price volatility of the mortgage servicing rights asset. These derivatives are recorded at their fair value on the consolidated balance sheets in other assets with changes in fair value recorded on the consolidated statements of operations in mortgage banking revenue in non-interest income.
 

47


The Company’s derivative financial instruments are summarized below as of September 30, 2016 and December 31, 2015 (in thousands):

 
 
Asset Derivatives
 
Liability Derivatives
 
 
September 30, 2016
 
December 31, 2015
 
September 30, 2016
 
December 31, 2015
 
 
Notional
 
Estimated
 
Notional
 
Estimated
 
Notional
 
Estimated
 
Notional
 
Estimated
 
 
Amount
 
Fair Value
 
Amount
 
Fair Value
 
Amount
 
Fair Value
 
Amount
 
Fair Value
Derivative instruments designated as hedges of fair value:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Interest rate swap contracts (1)
 
$
—

 
$
—

 
$
—

 
$
—

 
$
119

 
$
(5
)
 
$
154

 
$
(9
)
Stand-alone derivative instruments: (2)
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Interest rate swap contracts
 
1,226,157

 
49,520

 
1,034,298

 
27,856

 
1,226,157

 
(49,520
)
 
1,025,186

 
(27,899
)
Interest rate options contracts
 
219,409

 
872

 
222,585

 
628

 
219,409

 
(872
)
 
190,622

 
(585
)
Foreign exchange contracts
 
49,550

 
3,231

 
72,529

 
3,970

 
44,474

 
(3,011
)
 
63,339

 
(3,671
)
Spot foreign exchange contracts
 
742

 
17

 
328

 
5

 
278

 
(6
)
 
132

 
—

Mortgage related derivatives:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
   Interest rate swap contracts
 
1,332,000

 
44,660

 
898,000

 
4,928

 
185,000

 
(10,915
)
 
665,000

 
(3,723
)
   Interest rate swaptions contracts
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

   Treasury futures contracts
 
86,500

 
406

 
—

 
—

 
—

 
—

 
—

 
—

      TBA mortgage securities
 
290,000

 
856

 
35,000

 
33

 
—

 
—

 
—

 
—

   Forward loan sale commitments
 
85,000

 
85

 
503,500

 
1,604

 
1,261,500

 
(6,001
)
 
475,500

 
(1,087
)
   Interest rate lock commitments
 
944,918

 
12,561

 
622,906

 
3,822

 
—

 
—

 
—

 
—

Total stand-alone derivative instruments
 
4,234,276

 
112,208

 
3,389,146

 
42,846

 
2,936,818

 
(70,325
)
 
2,419,779

 
(36,965
)
Total
 
$
4,234,276

 
$
112,208

 
$
3,389,146

 
$
42,846

 
$
2,936,937

 
$
(70,330
)
 
$
2,419,933

 
$
(36,974
)

(1) Derivative instruments designated to hedge fixed-rate commercial real estate loans.
(2) These portfolio swaps are not designated as hedging instruments under ASC Topic 815.

Amounts included in other operating income in the consolidated statements of operations related to derivative financial instruments were as follows (in thousands):
 
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
September 30,
 
 
2016
 
2015
 
2016
 
2015
Derivative instruments designated as hedges of fair value:
 
 

 
 

 
 
 
 
Interest rate swap contracts
 
$
3

 
$
4

 
$
3

 
$
4

Stand-alone derivative instruments:
 
 

 
 

 
 

 
 

Interest rate swap contracts
 
5,296

 
8,614

 
5,260

 
8,623

Interest rate options contracts
 
(36
)
 
—

 
—

 
—

Foreign exchange contracts
 
1,362

 
30

 
1,362

 
91

Spot foreign exchange contracts
 
6

 
14

 
6

 
182

Mortgage related derivatives
 
(8,118
)
 
(9,411
)
 
31,653

 
(9,408
)
Total stand-alone derivative instruments
 
(1,490
)
 
(753
)
 
38,281

 
(512
)
Total
 
$
(1,487
)
 
$
(749
)
 
$
38,284

 
$
(508
)
 
Methods and assumptions used by the Company in estimating the fair value of its interest rate swaps are discussed in Note 13 to consolidated financial statements.

Certain instruments and transactions subject to an agreement similar to a master netting arrangement are eligible for offset in the consolidated balance sheet. The instruments and transactions would include derivatives, sale and repurchase agreements and reverse sale and repurchase agreements, and securities borrowing and securities lending arrangements. The Company’s derivative transactions with financial institution counterparties are generally executed under International Swaps and Derivative Association (“ISDA”) master agreements which include “right of set-off” provisions. Under these agreements, there is generally a legally

48


enforceable right to offset recognized amounts, and there may be an intention to settle such amounts on a net basis. The Company, however, does not generally offset such financial instruments for financial reporting purposes.

Information about the Company's financial instruments that are eligible for offset in the consolidated balance sheet as of September 30, 2016 is summarized below (in thousands):

 
 
Financial Assets
 
Financial Liabilities
 
 
Gross Amount Recognized
 
Gross Amount Offset
 
Net Amount Recognized
 
Gross Amount Recognized
 
Gross Amount Offset
 
Net Amount Recognized
Derivatives:
 
 
 
 
 
 
 
 
 
 
 
 
   Interest rate swap contracts, caps and floors
 
$
652

 
$
—

 
$
652

 
$
50,047

 
$
—

 
$
50,047

   Foreign exchange contracts
 
2,850

 
—

 
2,850

 
1,551

 
—

 
1,551

   Mortgage related derivatives
 
46,008

 
—

 
46,008

 
16,917

 
—

 
16,917

     Total derivatives
 
49,510

 
—

 
49,510

 
68,515

 
—

 
68,515

Repurchase agreements
 
—

 
—

 
—

 
256,569

 
—

 
256,569

   Total
 
$
49,510

 
$
—

 
$
49,510

 
$
325,084

 
$
—

 
$
325,084

 
 
Financial Assets
 
Financial Liabilities
 
 
Net Amount Recognized
 
Financial Instruments
 
Collateral
 
Net Amount
 
Net Amount Recognized
 
Financial Instruments
 
Collateral
 
Net Amount
Derivatives:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
   Counterparty A
 
$
35,142

 
$
(15,868
)
 
$
—

 
$
19,274

 
$
15,868

 
$
(15,868
)
 
$
—

 
$
—

   Counterparty B
 
309

 
(309
)
 
—

 
—

 
11,098

 
(309
)
 
(10,789
)
 
—

   Counterparty C
 
7,740

 
(7,740
)
 
—

 
—

 
17,344

 
(7,740
)
 
(9,604
)
 
—

   Other counterparties
 
6,319

 
(6,296
)
 
—

 
23

 
24,205

 
(6,296
)
 
(17,886
)
 
23

     Total derivatives
 
49,510

 
(30,213
)
 
—

 
19,297

 
68,515

 
(30,213
)
 
(38,279
)
 
23

Repurchase agreements
 
—

 
—

 
—

 
—

 
256,569

 
—

 
(256,569
)
 
—

   Total
 
$
49,510

 
$
(30,213
)
 
$
—

 
$
19,297

 
$
325,084

 
$
(30,213
)
 
$
(294,848
)
 
$
23


Information about the Company's financial instruments that are eligible for offset in the consolidated balance sheet as of December 31, 2015 is summarized below (in thousands):

 
 
Financial Assets
 
Financial Liabilities
 
 
Gross Amount Recognized
 
Gross Amount Offset
 
Net Amount Recognized
 
Gross Amount Recognized
 
Gross Amount Offset
 
Net Amount Recognized
Derivatives:
 
 
 
 
 
 
 
 
 
 
 
 
   Interest rate swap contracts, caps and floors
 
$
5,698

 
$
—

 
$
5,698

 
$
31,446

 
$
—

 
$
31,446

   Foreign exchange contracts
 
2,728

 
—

 
2,728

 
1,805

 
—

 
1,805

   Mortgage related derivatives
 
1,636

 
—

 
1,636

 
1,087

 
—

 
1,087

     Total derivatives
 
10,062

 
—

 
10,062

 
34,338

 
—

 
34,338

Repurchase agreements
 
—

 
—

 
—

 
201,207

 
—

 
201,207

   Total
 
$
10,062

 
$
—

 
$
10,062

 
$
235,545

 
$
—

 
$
235,545

 
 
Financial Assets
 
Financial Liabilities
 
 
Net Amount Recognized
 
Financial Instruments
 
Collateral
 
Net Amount
 
Net Amount Recognized
 
Financial Instruments
 
Collateral
 
Net Amount
Derivatives:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
   Counterparty A
 
$
3,810

 
$
(3,810
)
 
$
—

 
$
—

 
$
11,137

 
$
(3,810
)
 
$
(7,327
)
 
$
—

   Counterparty B
 
6

 
(6
)
 
—

 
—

 
7,808

 
(6
)
 
(7,802
)
 
—

   Counterparty C
 
3,477

 
(3,477
)
 
—

 
—

 
4,963

 
(3,477
)
 
(1,486
)
 
—

   Other counterparties
 
2,769

 
(2,230
)
 
—

 
539

 
10,430

 
(2,230
)
 
(8,034
)
 
166

     Total derivatives
 
10,062

 
(9,523
)
 
—

 
539

 
34,338

 
(9,523
)
 
(24,649
)
 
166

Repurchase agreements
 
—

 
—

 
—

 
—

 
201,207

 
—

 
(201,207
)
 
—

   Total
 
$
10,062

 
$
(9,523
)
 
$
—

 
$
539

 
$
235,545

 
$
(9,523
)
 
$
(225,856
)
 
$
166



49


Note 16.
  Operating Segments

The Company's operations consist of three reportable operating segments: Banking, Leasing and Mortgage Banking. The Company offers different products and services through its three segments. The accounting policies of the segments are generally the same as those of the consolidated company.

The Banking Segment generates its revenues primarily from its lending, deposit gathering and fee business activities. The profitability of this segment's operations depends primarily on its net interest income after provision for credit losses, which is the difference between interest earned on interest earning assets and interest paid on interest bearing liabilities less provision for credit losses.  The provision for credit losses is dependent on changes in the Banking Segment's loan portfolio and management’s assessment of the collectability of the loan portfolio as well as prevailing economic and market conditions.  The Banking Segment is also subject to an extensive system of laws and regulations that are intended primarily for the protection of depositors and other customers, federal deposit insurance funds and the banking system as a whole.  These laws and regulations govern such areas as capital, permissible activities, allowance for loan and lease losses, loans and investments, and rates of interest that can be charged on loans. 

The Leasing Segment generates its revenues through lease originations and related services offered through the Company's leasing subsidiaries, LaSalle Systems Leasing, Inc., Celtic Leasing Corp. and MB Equipment Finance, LLC. The leasing subsidiaries invest directly in equipment that the Company leases (referred to as direct finance, leveraged or operating leases) to "Fortune 1000," middle-market companies and healthcare providers located throughout the United States. The lease portfolio is made up of various kinds of equipment, generally technology related, such as computer systems, satellite equipment, medical equipment and general manufacturing, industrial, construction and transportation equipment. The leasing subsidiaries also specialize in selling third party equipment maintenance contracts to large companies.

The Mortgage Banking Segment originates residential mortgage loans for sale to investors and for the Company's portfolio through its retail and third party originator channels. This segment also services residential mortgage loans for various investors and for loans owned by the Company. The Mortgage Banking Segment is also subject to an extensive system of laws and regulations that are intended primarily for the protection of customers.

Net interest income for the Leasing and Mortgage Banking segments include adjustments based on the Company's internal funds transfer pricing model. Non-interest income for the Leasing Segment includes income on loans originated for the sole purpose of funding equipment purchases related to leases at the Company's lease subsidiaries.

The following tables present summary financial information for the reportable segments (in thousands):
 
Banking
 
Leasing
 
Mortgage Banking
 
Consolidated
Three months ended September 30, 2016
 
 
 
 
 
 
 
Net interest income
$
119,685

 
$
2,168

 
$
8,918

 
$
130,771

Provision for credit losses
4,394

 
1,964

 
191

 
6,549

Non-interest income
40,533

 
18,759

 
49,095

 
108,387

Non-interest expense (1)
117,211

 
12,604

 
40,570

 
170,385

Income tax expense
8,420

 
2,484

 
6,901

 
17,805

Net income
$
30,193

 
$
3,875

 
$
10,351

 
$
44,419

Total assets
$
16,453,379

 
$
1,126,847

 
$
1,761,656

 
$
19,341,882

Three months ended September 30, 2015
 
 
 
 
 
 
 
Net interest income
$
104,714

 
$
2,832

 
$
8,423

 
$
115,969

Provision for credit losses
4,965

 
242

 
151

 
5,358

Non-interest income
31,572

 
19,987

 
30,692

 
82,251

Non-interest expense (1)
88,276

 
11,382

 
34,608

 
134,266

Income tax expense
12,178

 
4,398

 
1,742

 
18,318

Net income
$
30,867

 
$
6,797

 
$
2,614

 
$
40,278

Total assets
$
12,759,341

 
$
956,433

 
$
1,234,327

 
$
14,950,101


(1) 
Includes merger related and repositioning expenses of $11.4 million and $389 thousand in the Banking Segment for the three months ended September 30, 2016 and 2015, respectively.

50


 
Banking
 
Leasing
 
Mortgage Banking
 
Consolidated
Nine months ended September 30, 2016
 
 
 
 
 
 
 
Net interest income
$
341,445

 
$
7,002

 
$
24,230

 
$
372,677

Provision for credit losses
14,390

 
2,045

 
506

 
16,941

Non-interest income
112,221

 
53,670

 
116,189

 
282,080

Non-interest expense (1)
307,733

 
35,916

 
110,442

 
454,091

Income tax expense
36,120

 
8,872

 
11,788

 
56,780

Net income
$
95,423

 
$
13,839

 
$
17,683

 
$
126,945

Total assets
$
16,453,379

 
$
1,126,847

 
$
1,761,656

 
$
19,341,882

Nine months ended September 30, 2015
 
 
 
 
 
 
 
Net interest income
$
313,192

 
$
8,762

 
$
21,883

 
$
343,837

Provision for credit losses
12,783

 
1,598

 
247

 
14,628

Non-interest income
94,197

 
61,383

 
90,888

 
246,468

Non-interest expense (1)
271,248

 
34,866

 
100,809

 
406,923

Income tax expense
35,509

 
13,218

 
4,686

 
53,413

Net income
$
87,849

 
$
20,463

 
$
7,029

 
$
115,341

Total assets
$
12,759,341

 
$
956,433

 
$
1,234,327

 
$
14,950,101


(1) 
Includes merger related and repositioning expenses of $17.2 million and $9.6 million in the Banking Segment for the nine months ended September 30, 2016 and 2015, respectively.


Note 17.
  Preferred Stock

On August 18, 2014, in connection with the Taylor Capital merger, the Company issued one share of its Perpetual Non-Cumulative Preferred Stock, Series A (“Company Series A Preferred Stock”), in exchange for each of the 4,000,000 outstanding shares of Taylor Capital’s Perpetual Non-Cumulative Preferred Stock, Series A. Holders of the Company Series A Preferred Stock are entitled to receive, when as and if declared by the Company’s board of directors, non-cumulative cash dividends on the liquidation preference amount, which is $25 per share, at a rate of 8.00% per annum, payable quarterly. The Company Series A Preferred Stock is callable in February 2018. The Company Series A Preferred Stock is included in Tier 1 capital for regulatory capital purposes.

On August 24, 2016, in connection with the American Chartered merger, the Company issued one share of its Cumulative Voting Convertible Preferred Stock, Series B ("Company Series B Preferred Stock"), in exchange for each of the 525 shares of American Chartered's Series D Preferred Stock outstanding immediately prior to the merger whose holders did not elect to receive the same consideration in the Merger as holders of American Chartered Common Stock, based on the number of shares of American Chartered Common Stock into which each such share of American Chartered Series D Preferred Stock would otherwise then be convertible. Holders of the Company Series B Preferred Stock are entitled to receive cumulative cash dividends on the liquidation preference amount, which is $1,000 per share, at a rate of 8.00% per annum, have the right to vote on all matters upon which holders of the Company's common stock are entitled to vote and have the right to convert each share into shares of the Company's common stock at any time. The Company Series B Preferred stock has a mandatory conversion date of September 20, 2017. The Company Series B Preferred Stock is included in Tier 2 capital for regulatory capital purposes.


51



Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
The following is a discussion and analysis of MB Financial, Inc.’s financial condition and results of operations and should be read in conjunction with the consolidated financial statements and notes thereto appearing elsewhere in this report. The words “the Company,” “we,” “our” and “us” refer to MB Financial, Inc. and its consolidated subsidiaries, unless we indicate otherwise.

Overview
 
The profitability of our operations depends primarily on our net interest income after provision for credit losses, which is the difference between interest earned on interest earning assets and interest paid on interest bearing liabilities less provision for credit losses.  The provision for credit losses is dependent on changes in our loan portfolio and management’s assessment of the collectability of our loan portfolio as well as prevailing economic and market conditions.  

Our net income is also affected by non-interest income and non-interest expenses.  During the periods under report, non-interest income included revenue from our key fee initiatives: net lease financing income, mortgage banking revenue, commercial deposit and treasury management fees, trust and asset management fees, card fees and capital markets and international banking fees. Non-interest income also included consumer and other deposit service fees, brokerage fees, loan service fees, increase in cash surrender value of life insurance, net (gain) loss on investment securities, net gain (loss) on sale of assets and other operating income. During the periods under report, non-interest expenses included salaries and employee benefits expense, occupancy and equipment expense, computer services and telecommunication expense, advertising and marketing expense, professional and legal expense, other intangibles amortization expense, branch exit and facilities impairment charges, net (gain) loss on other real estate owned and other related expenses, prepayment fees on interest bearing liabilities and other operating expenses. Additionally, dividends on preferred shares reduced net income available to common stockholders.

Net interest income is affected by changes in the volume and mix of interest earning assets, interest earned on those assets, the volume and mix of interest bearing liabilities and interest paid on interest bearing liabilities. Non-interest income and non-interest expenses are impacted by growth of banking, leasing and mortgage banking operations and growth in the number of loan and deposit accounts through both acquisitions and core banking and leasing business growth. Growth in operations affects other expenses primarily as a result of additional employee, branch facility and promotional marketing expense. Growth in the number of loan and deposit accounts affects other income, including service fees as well as other expenses such as computer services, supplies, postage, telecommunications and other miscellaneous expenses. Non-performing asset levels impact salaries and benefits, legal expenses and other real estate owned expenses.

On August 24, 2016, the Company completed its merger with American Chartered Bancorp, Inc. ("American Chartered"). Consideration paid by the Company was $487.4 million, including $382.8 million in common stock (9.7 million shares), $102.3 million in cash and $2.3 million in preferred stock and stock-based awards assumed. The results of operations of American Chartered have been included in our results of operations for the 37 days between the date of the merger and quarter end. The Company recorded $268.8 million in goodwill and $25.5 million in other intangibles as a result of this acquisition. These and other amounts recognized for this business combination in the financial statements as of September 30, 2016 have been determined only provisionally as fair values continue to be assessed. See Note 4 of the notes to our consolidated financial statements for additional information.    

On December 31, 2015, the Company completed the acquisition of MSA Holdings, LLC, ("MSA") the parent company of MainStreet Investment Advisors, LLC and Cambium Asset Management, LLC. The Company recorded $13.5 million in goodwill and $8.8 million in other intangibles as a result of this acquisition. See Note 4 of the notes to our consolidated financial statements for additional information.

The Company had net income of $44.4 million for the three months ended September 30, 2016 compared to $40.3 million for the three months ended September 30, 2015. Net income available to common stockholders was $42.4 million for the three months ended September 30, 2016 compared to $38.3 million for the three months ended September 30, 2015. Fully diluted earnings per common share were $0.54 for the three months ended September 30, 2016 compared to $0.51 per common share for the three months ended September 30, 2015.

The Company had net income of $126.9 million for the nine months ended September 30, 2016 compared to $115.3 million for the nine months ended September 30, 2015. Net income available to common stockholders was $120.9 million for the nine months ended September 30, 2016 compared to $109.3 million for the nine months ended September 30, 2015. Fully

52


diluted earnings per common share were $1.60 for the nine months ended September 30, 2016 compared to $1.45 per common share for the nine months ended September 30, 2015.

The results of operations for the nine months ended September 30, 2016 and 2015 were impacted by $17.2 million and $9.6 million in merger related and repositioning expenses, respectively. See "Non-interest Expenses" section for a detailed schedule of merger related and repositioning expenses.

Critical Accounting Policies

Our consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States of America and follow general practices within the industries in which we operate.  This preparation requires management to make estimates, assumptions, and judgments that affect the amounts reported in the financial statements and accompanying notes.  These estimates, assumptions, and judgments are based on information available as of the date of the financial statements; accordingly, as this information changes, actual results could differ from the estimates, assumptions, and judgments reflected in the financial statements.  Certain policies inherently have a greater reliance on the use of estimates, assumptions, and judgments and, as such, have a greater possibility of producing results that could be materially different than originally expected.  Management believes the following policies are both important to the portrayal of our financial condition and results of operations and require subjective or complex judgments; therefore, management considers the following to be critical accounting policies.  Management has reviewed the application of these polices with the Audit Committee of our Board of Directors.
 
Allowance for Loan and Lease Losses.  The allowance for loan and lease losses is subject to the use of estimates, assumptions, and judgments in management's evaluation process used to determine the adequacy of the allowance for loan and lease losses, which combines several factors: management's ongoing review and grading of the loan portfolio, consideration of past loan loss experience, trends in past due and non-performing loans, risk characteristics of the various classifications of loans, existing economic conditions, the fair value of underlying collateral, and other qualitative and quantitative factors which could affect probable credit losses. Because current economic conditions can change and future events are inherently difficult to predict, the anticipated amount of estimated loan losses, and therefore the adequacy of the allowance, could change significantly. As an integral part of their examination process, various regulatory agencies also review the allowance for loan and lease losses. Such agencies may require that certain loan balances be charged off when their credit evaluations differ from those of management or require that adjustments be made to the allowance for loan and lease losses, based on their judgments about information available to them at the time of their examination. We believe the allowance for loan and lease losses is appropriate and properly recorded in the financial statements.  See “Allowance for Loan and Lease Losses” section below for further analysis.
 
Residual Value of Our Direct Finance, Leveraged, and Operating Leases.  Lease residual value represents the present value of the estimated fair value of the leased equipment at the termination date of the lease. Realization of these residual values depends on many factors, including management’s use of estimates, assumptions, and judgment to determine such values. Several other factors outside of management’s control may reduce the residual values realized, including general market conditions at the time of expiration of the lease, whether there has been technological or economic obsolescence or unusual wear and tear on, or use of, the equipment and the cost of comparable equipment. If, upon the expiration of a lease, we sell the equipment and the amount realized is less than the recorded value of the residual interest in the equipment, we will recognize a loss reflecting the difference. On a quarterly basis, management reviews the lease residuals for potential impairment. If we fail to realize our aggregate recorded residual values, our financial condition and profitability could be adversely affected.  At September 30, 2016, the aggregate residual value of the equipment leased under our direct finance, leveraged, and operating leases totaled $168.0 million.  See Note 1 and Note 6 to the audited consolidated financial statements contained in our Annual Report Form 10-K for the year ended December 31, 2015 for additional information.

Income Tax Accounting.  ASC Topic 740 provides guidance on accounting for income taxes by prescribing the minimum recognition threshold that a tax position must meet to be recognized in the financial statements. ASC Topic 740 also provides guidance on measurement, recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.  As of September 30, 2016, the Company had $19 thousand of uncertain tax positions.  The Company elects to treat interest and penalties recognized for the underpayment of income taxes as income tax expense. However, interest and penalties imposed by taxing authorities on issues specifically addressed in ASC Topic 740 will be taken out of the tax reserves up to the amount allocated to interest and penalties. The amount of interest and penalties exceeding the amount allocated in the tax reserves will be treated as income tax expense.  As of September 30, 2016, the Company had approximately $2 thousand of accrued interest related to tax reserves.  The application of income tax law is inherently complex. Laws and regulations in this area are voluminous and are often ambiguous. As such, we are required to make many subjective assumptions and judgments regarding our income tax exposures. Interpretations of, and guidance surrounding income tax laws and regulations change over time. As such, changes in our subjective assumptions and judgments can materially affect amounts recognized in the consolidated balance sheets and statements of operations.

53


 
Fair Value of Assets and Liabilities.  ASC Topic 820 defines fair value as the price that would be received to sell a financial asset or paid to transfer a financial liability in an orderly transaction between market participants at the measurement date. The degree of management judgment involved in determining the fair value of assets and liabilities is dependent upon the availability of quoted market prices or observable market parameters. For financial instruments that trade actively and have quoted market prices or observable market parameters, there is minimal subjectivity involved in measuring fair value. When observable market prices and parameters are not fully available, management judgment is necessary to estimate fair value. In addition, changes in market conditions may reduce the availability of quoted prices or observable data. For example, reduced liquidity in the capital markets or changes in secondary market activities could result in observable market inputs becoming unavailable. Therefore, when market data is not available, the Company would use valuation techniques requiring more management judgment to estimate the appropriate fair value measurement.

See Note 13 to the consolidated financial statements for a complete discussion on the Company’s use of fair valuation of assets and liabilities and the related measurement techniques.
 
Goodwill.  The excess of the cost of an acquisition over the fair value of the net assets acquired, including core deposit and client relationship intangibles, consists of goodwill.  See Note 7 to our consolidated financial statements for further information regarding core deposit and client relationship intangibles.  The Company reviews goodwill to determine potential impairment annually, or more frequently if events and circumstances indicate that goodwill might be impaired, by comparing the carrying value of the reporting units with the fair value of the reporting units.
 
The Company’s annual assessment date for goodwill impairment testing is as of December 31. Goodwill is tested for impairment at the reporting unit level. The Company has three reporting units: banking, leasing and mortgage banking.  No impairment losses were recognized during the nine months ended September 30, 2016 or 2015. We are not aware of any events or circumstances subsequent to our annual goodwill impairment testing date of December 31, 2015 that would indicate impairment of goodwill at September 30, 2016. The carrying amount of goodwill was $993.8 million and $725.1 million at September 30, 2016 and December 31, 2015, respectively. The change in the carrying amount of goodwill from December 31, 2015 was due to the American Chartered merger and adjustments recognized for the MSA acquisition.

Valuation of Mortgage Servicing Rights. The Company originates and sells residential mortgage loans in the secondary market and may retain the right to service the loans sold. Servicing involves the collection of payments from individual borrowers and the distribution of those payments to the investors. Upon a sale of mortgage loans for which servicing rights are retained, the retained mortgage servicing rights asset is capitalized at the fair value of future net cash flows expected to be realized for performing servicing activities. Purchased mortgage servicing rights are recorded at the purchase price at the date of purchase and at fair value thereafter.

Mortgage servicing rights do not trade in an active market with readily observable prices. The Company determines the fair value of mortgage servicing rights by estimating the fair value of the future cash flows associated with the mortgage loans being serviced. Key economic assumptions used in measuring the fair value of mortgage servicing rights include, but are not limited to, prepayment speeds, discount rates, delinquencies and cost to service. The assumptions used in the valuation model are validated on a periodic basis. The fair value is validated on a quarterly basis with an independent third party. Material discrepancies between the internal valuation and the third party valuation are analyzed and resolved by an internal committee.

The Company has elected to account for mortgage servicing rights using the fair value option. Changes in the fair value are recognized in mortgage banking revenue on the Company's consolidated statements of operations.
  
Recent Accounting Pronouncements.  Refer to Note 2 of our consolidated financial statements for a description of recent accounting pronouncements including the respective dates of adoption and anticipated effects on results of operations and financial condition.
 

54


Net Interest Income
 
The following table presents, for the periods indicated, the total dollar amount of interest income from average interest earning assets and the related yields, as well as the interest expense on average interest bearing liabilities, and the related costs, expressed both in dollars and rates (dollars in thousands).  The table below and the discussion that follows contain presentations of net interest income and net interest margin on a tax-equivalent basis, which is adjusted for the tax-favored status of income from certain loans and investments.  We believe this measure to be the preferred industry measurement of net interest income, as it provides a relevant comparison between taxable and non-taxable amounts. The table below and the discussion that follows also contains presentations of net interest margin on a tax equivalent basis excluding the effect of acquisition accounting discount accretion on loans acquired through the American Chartered and Taylor Capital mergers ("bank mergers").
 
Reconciliations of net interest income and net interest margin on a tax-equivalent basis and net interest margin on a tax-equivalent basis excluding the effect of acquisition accounting discount accretion on loans acquired through the bank mergers to net interest income and net interest margin in accordance with accounting principles generally accepted in the United States of America are provided in the table. For additional information, see "Non-GAAP Financial Information."
 
 
 
Three Months Ended September 30,
(dollars in thousands)
 
2016
 
2015
 
 
Average
 
 
 
Yield/
 
Average
 
 
 
Yield/
 
 
Balance
 
Interest
 
Rate
 
Balance
 
Interest
 
Rate
Interest Earning Assets:
 
 

 
 

 
 

 
 

 
 

 
 

Loans held for sale
 
$
835,953

 
$
7,074

 
3.38
 %
 
$
841,663

 
$
7,904

 
3.76
 %
Loans (1) (2) 
 
10,697,141

 
111,601

 
4.15

 
8,854,698

 
92,669

 
4.15

Loans exempt from federal income taxes (3)
 
374,126

 
4,378

 
4.58

 
330,721

 
3,513

 
4.16

Taxable investment securities
 
1,592,547

 
8,844

 
2.22

 
1,543,434

 
9,655

 
2.50

Investment securities exempt from federal income taxes (3)
 
1,318,855

 
15,972

 
4.84

 
1,356,702

 
16,541

 
4.88

Federal funds sold
 
36

 
—

 
1.00

 
38

 
—

 
1.00

Other interest earning deposits
 
103,061

 
164

 
0.63

 
138,542

 
89

 
0.25

Total interest earning assets
 
14,921,719

 
$
148,033

 
3.95

 
13,065,798

 
$
130,371

 
3.96

Non-interest earning assets
 
2,326,712

 
 
 
 
 
1,993,631

 
 
 
 
Total assets
 
$
17,248,431

 
 
 
 
 
$
15,059,429

 
 
 
 
Interest Bearing Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
Deposits:
 
 
 
 
 
 
 
 
 
 
 
 
NOW, money market and interest bearing deposits
 
$
4,161,913

 
$
2,299

 
0.22
 %
 
$
4,119,625

 
$
1,832

 
0.18
 %
Savings deposits
 
1,080,609

 
231

 
0.09

 
965,060

 
124

 
0.05

Time deposits
 
1,959,989

 
4,151

 
0.84

 
1,732,165

 
3,146

 
0.72

Short-term borrowings
 
1,144,899

 
1,092

 
0.38

 
1,079,978

 
395

 
0.15

Long-term borrowings and junior subordinated notes
 
599,133

 
2,367

 
1.55

 
282,033

 
1,886

 
2.62

Total interest bearing liabilities
 
8,946,543

 
$
10,140

 
0.45

 
8,178,861

 
$
7,383

 
0.36

Non-interest bearing deposits
 
5,524,043

 
 
 
 
 
4,428,065

 
 
 
 
Other non-interest bearing liabilities
 
461,243

 


 
 
 
378,276

 


 
 
Stockholders’ equity
 
2,316,602

 
 
 
 
 
2,074,227

 
 
 
 
Total liabilities and stockholders’ equity
 
$
17,248,431

 
 
 
 
 
$
15,059,429

 
 
 
 
Net interest income/interest rate spread (4)
 
 

 
$
137,893

 
3.50
 %
 
 
 
$
122,988

 
3.60
 %
Less: taxable equivalent adjustment
 
 

 
7,122

 
 
 
 
 
7,019

 
 
Net interest income, as reported
 
 

 
$
130,771

 
 
 
 
 
$
115,969

 
 
Net interest margin (5)
 
 

 
 

 
3.49
 %
 
 

 
 

 
3.52
 %
Tax equivalent effect
 
 

 
 

 
0.19
 %
 
 

 
 

 
0.21
 %
Net interest margin on a fully tax equivalent basis (5)
 
 

 
 

 
3.68
 %
 
 

 
 

 
3.73
 %
Effect of acquisition accounting discount accretion on loans acquired through bank mergers
 
 
 
 
 
(0.18
)%
 
 
 
 
 
(0.24
)%
Net interest margin on a fully tax equivalent basis, excluding the effect of acquisition accounting discount accretion on loans acquired through bank mergers
 
 
 
 
 
3.50
 %
 
 
 
 
 
3.49
 %
 
(1)       Non-accrual loans are included in average loans.
(2)       Interest income includes amortization of net deferred loan origination fees and costs.
(3)       Non-taxable loan and investment income is presented on a fully tax equivalent basis assuming a 35% tax rate.
(4)       Interest rate spread represents the difference between the average yield on interest earning assets and the average cost of interest bearing liabilities and is presented on a fully tax equivalent basis.
(5)       Net interest margin represents net interest income as a percentage of average interest earning assets.

Net interest income on a fully tax equivalent basis increased $14.9 million during the three months ended September 30, 2016 compared to the three months ended September 30, 2015 primarily due to higher average loan balances as a result of the

55


loans acquired through the American Chartered merger as well as loan growth in the legacy portfolio. The net interest margin, expressed on a fully tax equivalent basis, was 3.68% for the third quarter of 2016 and 3.73% for the third quarter of 2015. Net interest income in the third quarter of 2016 included interest income of $6.2 million resulting from accretion of the acquisition accounting discount recorded on loans acquired in bank mergers in the third quarter of 2016 compared to $7.4 million in the third quarter of 2015. Excluding the accretion of the acquisition accounting discount recorded on loans acquired in bank mergers, our net interest margin on a fully tax equivalent basis would have been 3.50% for the three months ended September 30, 2016 and 3.49% for the three months ended September 30, 2015.

 
 
Nine Months Ended September 30,
(dollars in thousands)
 
2016
 
2015
 
 
Average
 
 
 
Yield/
 
Average
 
 
 
Yield/
 
 
Balance
 
Interest
 
Rate
 
Balance
 
Interest
 
Rate
Interest Earning Assets:
 
 

 
 

 
 

 
 

 
 

 
 

Loans held for sale
 
$
741,880

 
$
19,351

 
3.48
 %
 
$
760,956

 
$
20,528

 
3.60
 %
Loans (1) (2) 
 
9,944,457

 
314,478

 
4.22

 
8,688,434

 
277,659

 
4.27

Loans exempt from federal income taxes (3)
 
360,284

 
12,574

 
4.59

 
327,292

 
10,333

 
4.21

Taxable investment securities
 
1,528,251

 
26,209

 
2.29

 
1,548,369

 
29,591

 
2.55

Investment securities exempt from federal income taxes (3)
 
1,340,185

 
48,926

 
4.87

 
1,248,978

 
46,161

 
4.93

Federal funds sold
 
38

 
—

 
1.00

 
60

 
—

 
1.00

Other interest earning deposits
 
105,660

 
430

 
0.54

 
109,074

 
208

 
0.25

Total interest earning assets
 
14,020,755

 
$
421,968

 
4.02

 
12,683,163

 
$
384,480

 
4.05

Non-interest earning assets
 
2,142,106

 
 
 
 
 
2,004,278

 
 
 
 
Total assets
 
$
16,162,861

 
 
 
 
 
$
14,687,441

 
 
 
 
Interest Bearing Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
Deposits:
 
 
 
 
 
 
 
 
 
 
 
 
NOW and money market deposit
 
$
4,036,193

 
$
6,434

 
0.21
 %
 
$
3,999,844

 
$
5,061

 
0.17
 %
Savings deposit
 
1,024,050

 
564

 
0.07

 
963,291

 
379

 
0.05

Time deposits
 
1,856,635

 
11,257

 
0.81

 
1,780,491

 
8,861

 
0.67

Short-term borrowings
 
1,051,802

 
2,723

 
0.35

 
942,057

 
1,027

 
0.15

Long-term borrowings and junior subordinated notes
 
613,998

 
6,788

 
1.45

 
279,290

 
5,542

 
2.62

Total interest bearing liabilities
 
8,582,678

 
$
27,766

 
0.43

 
7,964,973

 
$
20,870

 
0.35

Non-interest bearing deposits
 
4,980,904

 
 
 
 
 
4,301,483

 
 
 
 
Other non-interest bearing liabilities
 
416,667

 


 
 
 
362,794

 


 
 
Stockholders’ equity
 
2,182,612

 
 
 
 
 
2,058,191

 
 
 
 
Total liabilities and stockholders’ equity
 
$
16,162,861

 
 
 
 
 
$
14,687,441

 
 
 
 
Net interest income/interest rate spread (4)
 
 

 
$
394,202

 
3.59
 %
 
 
 
$
363,610

 
3.70
 %
Less: taxable equivalent adjustment
 
 

 
21,525

 
 
 
 
 
19,773

 
 
Net interest income, as reported
 
 

 
$
372,677

 
 
 
 
 
$
343,837

 
 
Net interest margin (5)
 
 

 
 

 
3.55
 %
 
 

 
 

 
3.62
 %
Tax equivalent effect
 
 

 
 

 
0.21
 %
 
 

 
 

 
0.21
 %
Net interest margin on a fully tax equivalent basis (5)
 
 

 
 

 
3.76
 %
 
 

 
 

 
3.83
 %
Effect of acquisition accounting discount accretion on loans acquired through bank mergers
 
 
 
 
 
(0.22
)%
 
 
 
 
 
(0.27
)%
Net interest margin on a fully tax equivalent basis, excluding the effect of acquisition accounting discount accretion on loans acquired through bank mergers
 
 
 
 
 
3.54
 %
 
 
 
 
 
3.56
 %

(1)       Non-accrual loans are included in average loans.
(2)       Interest income includes amortization of net deferred loan origination fees and costs.
(3)       Non-taxable loan and investment income is presented on a fully tax equivalent basis assuming a 35% tax rate.
(4)       Interest rate spread represents the difference between the average yield on interest earning assets and the average cost of interest bearing liabilities and is presented on a fully tax equivalent basis.
(5)       Net interest margin represents net interest income as a percentage of average interest earning assets.

Net interest income on a fully tax equivalent basis increased $30.6 million during the nine months ended September 30, 2016 compared to the nine months ended September 30, 2015 primarily due to an increase in average loans, a result of the loan growth in the legacy portfolio and, to a lesser extent, loans acquired through the American Chartered merger, partially offset by an increase in average borrowings and an increase in the cost of deposits. The net interest margin, expressed on a fully tax equivalent basis, was 3.76% for the nine months ended September 30, 2016 and 3.83% for the nine months ended September 30, 2015. Net interest income in the nine months ended September 30, 2016 included interest income of $21.2 million resulting from accretion of the acquisition accounting discount recorded on loans acquired in bank mergers in the nine months ended September 30, 2016 compared to $23.9 million in the nine months ended September 30, 2015. Excluding the accretion of the acquisition accounting discount recorded on loans acquired in bank mergers, our net interest margin on a fully tax equivalent basis would have been 3.54% for the nine months ended September 30, 2016 compared to 3.56% for the nine months ended September 30, 2015.

56



Non-interest Income

The following table presents non-interest income for the three months ended September 30, 2016 compared to the three months ended September 30, 2015 (in thousands):

 
 
Three Months Ended
 
 
 
 
 
 
September 30,
 
 
 
 
 
 
2016
 
2015
 
Increase/
(Decrease)
 
Percentage
Change
Non-interest income:
 
 
 
 
 
 
 
 
Mortgage banking revenue
 
$
49,095

 
$
30,692

 
$
18,403

 
60.0
 %
Lease financing, net
 
18,864

 
20,000

 
(1,136
)
 
(5.7
)
Commercial deposit and treasury management fees
 
12,957

 
11,472

 
1,485

 
12.9

Trust and asset management fees
 
8,244

 
6,002

 
2,242

 
37.4

Card fees
 
4,161

 
3,335

 
826

 
24.8

Capital markets and international banking fees
 
3,313

 
2,357

 
956

 
40.6

Consumer and other deposit service fees
 
3,559

 
3,499

 
60

 
1.7

Brokerage fees
 
1,294

 
1,281

 
13

 
1.0

Loan service fees
 
1,792

 
1,531

 
261

 
17.0

Increase in cash surrender value of life insurance
 
1,055

 
852

 
203

 
23.8

Net gain (loss) on investment securities
 
—

 
371

 
(371
)
 
(100.0
)
Net loss on sale of assets
 
5

 
1

 
4

 
400.0

Other operating income
 
4,048

 
858

 
3,190

 
371.8

Total non-interest income
 
$
108,387

 
$
82,251

 
$
26,136

 
31.8
 %

Non-interest income increased by $26.1 million, or 31.8%, for the three months ended September 30, 2016 compared to the three months ended September 30, 2015.

•
Mortgage banking revenue increased due to higher origination volumes as a result of the favorable interest rate environment and higher gains on sale margins.
•
Lease financing revenue decreased due to a decrease in residual gains.
•
Commercial deposit and treasury management fees increased due to new customer activity as well as the increased customer base as a result of the American Chartered merger.
•
Trust and asset management fees increased due to the addition of new customers as well as the acquisition of MSA.
•
Card fees increased due to higher debit and credit card fees.
•
Capital markets and international banking services fees increased primarily due to higher swap fees.
•
Other operating income increased due to higher earnings from investments in Small Business Investment Companies.



57


The following table presents non-interest income for the nine months ended September 30, 2016 compared to the nine months ended September 30, 2015 (in thousands):

 
 
Nine Months Ended
 
 
 
 
 
 
September 30,
 
 
 
 
 
 
2016
 
2015
 
Increase/
(Decrease)
 
Percentage
Change
Non-interest income:
 
 
 
 
 
 
 
 
Mortgage banking revenue
 
$
116,192

 
$
90,884

 
$
25,308

 
27.8
 %
Lease financing, net
 
53,618

 
60,644

 
(7,026
)
 
(11.6
)
Commercial deposit and treasury management fees
 
36,383

 
33,572

 
2,811

 
8.4

Trust and asset management fees
 
24,430

 
17,468

 
6,962

 
39.9

Card fees
 
11,731

 
11,671

 
60

 
0.5

Capital markets and international banking fees
 
9,311

 
5,793

 
3,518

 
60.7

Consumer and other deposit service fees
 
9,745

 
9,842

 
(97
)
 
(1.0
)
Brokerage fees
 
3,767

 
4,502

 
(735
)
 
(16.3
)
Loan service fees
 
5,505

 
4,369

 
1,136

 
26.0

Increase in cash surrender value of life insurance
 
2,759

 
2,527

 
232

 
9.2

Net gain (loss) on investment securities
 
269

 
(173
)
 
442

 
255.5

Net loss on sale of assets
 
(45
)
 
(2
)
 
(43
)
 
      NM
Other operating income
 
8,415

 
5,371

 
3,044

 
56.7

Total non-interest income
 
$
282,080

 
$
246,468

 
$
35,612

 
14.4
 %
NM - Not meaningful

Non-interest income increased by $35.6 million, or 14.4%, for the nine months ended September 30, 2016 compared to the nine months ended September 30, 2015.

•
Mortgage banking revenue increased due to higher mortgage servicing fees and higher gains on sale margins.
•
Lease financing revenues decreased due to lower residual gains and fees from the sale of third-party equipment maintenance contracts.
•
Commercial deposit and treasury management fees increased due to new customer activity as well as the increased customer base as a result of the American Chartered merger.
•
Trust and asset management fees increased due to the addition of new customers as well as the acquisitions of MSA on December 31, 2015 and the Illinois court-appointed guardianship and special needs trust business in the third quarter of 2015.
•
Capital markets and international banking services fees increased due to higher swap, syndication and M&A advisory fees partly offset by lower commercial real estate advisory fees.
•
Loan service fees increased due to higher unused line and letter of credit fees.
•
Other operating income increased due to higher earnings from investments in Small Business Investment Companies.






58


Non-interest Expenses
 
The following table presents non-interest expense for the three months ended September 30, 2016 compared to the three months ended September 30, 2015 (in thousands):

 
 
Three Months Ended
 
 
 
 
 
 
September 30,
 
 
 
 
 
 
2016
 
2015
 
Increase/
(Decrease)
 
Percentage
Change
Non-interest expenses:
 
 

 
 

 
 

 
 

Salaries and employee benefits
 
$
111,478

 
$
87,891

 
$
23,587

 
26.8
 %
Occupancy and equipment
 
14,766

 
12,458

 
2,308

 
18.5

Computer services and telecommunication
 
12,836

 
8,567

 
4,269

 
49.8

Advertising and marketing
 
3,084

 
2,578

 
506

 
19.6

Professional and legal
 
4,460

 
1,801

 
2,659

 
147.6

Other intangibles amortization
 
1,674

 
1,542

 
132

 
8.6

Branch exit and facilities impairment charges
 
(2,908
)
 
70

 
(2,978
)
 
      NM
Net (gain) loss recognized on other real estate owned and other expense
 
(721
)
 
577

 
(1,298
)
 
(225.0
)
Other operating expenses
 
25,716

 
18,782

 
6,934

 
36.9

Total non-interest expenses
 
$
170,385

 
$
134,266

 
$
36,119

 
26.9
 %
 NM - Not meaningful

Non-interest expenses increased by $36.1 million, or 26.9%, for the three months ended September 30, 2016 from the three months ended September 30, 2015. Non-interest expenses include $11.4 million and $389 thousand in merger related and repositioning expenses for the three months ended September 30, 2016 and 2015, respectively. See merger related and repositioning expenses detail below. Explanations for changes other than merger related and repositioning expenses are as follows:

•
Salaries and employee benefits expense increased due to higher salaries, commission, bonus, temporary help, health insurance and stock-based compensation expense.
•
Salaries expense increased due to annual pay increases, new hires and the additional staff from the acquisition of MSA and American Chartered merger.
•
Commission expense increased due to higher commissions paid in our mortgage banking segment as a result of higher mortgage origination revenues.
•
Bonus expense increased based on company performance through September 30, 2016 as well as an increase due to new hires.
•
Temporary help expense increased due temporary help in our IT and mortgage areas.
•
Occupancy and equipment expense increased due to higher depreciation expense and rental operating expenses as a result of the acquisition of MSA and the American Chartered merger, new offices opened at our mortgage banking segment and an office relocation in our leasing segment.
•
Computer services and telecommunication expense increased due to higher processing costs as a result of increased customer activity and investments in systems.
•
Professional and legal expense increased due to an increase in litigation fees.
•
Non-interest expense was also impacted by higher gains recognized on other real estate owned properties.
•
Other operating expenses increased due to a $4.0 million contribution to MB Financial Charitable Foundation as well as higher FDIC premiums (as a result of MB Financial Bank, N.A. (the "Bank") exceeding $10 billion in assets) and filing and other loan expense.





59



The following table presents the detail of the merger related and repositioning expenses for the three months ended September 30, 2016 and 2015 (dollars in thousands):
 
 
Three Months Ended
 
 
September 30,
 
 
2016
 
2015
Merger related and repositioning expenses:
 
 
 
 
   Salaries and employee benefits
 
$
8,684

 
$
3

   Occupancy and equipment expense
 
104

 
2

   Computer services and telecommunication expense
 
3,105

 
9

   Advertising and marketing expense
 
53

 
—

   Professional and legal expense
 
1,681

 
305

   Branch exit and facilities impairment charges
 
(2,908
)
 
70

   Other operating expenses
 
649

 
—

Total merger related and repositioning expenses
 
$
11,368

 
$
389


In the third quarter of 2016, merger related and repositioning expenses primarily included costs incurred in connection with the American Chartered merger as well as a reversal of an exit cost due to a favorable lease termination on a branch acquired through the Taylor Capital merger.

The following table presents non-interest expense for the nine months ended September 30, 2016 compared to the nine months ended September 30, 2015 (in thousands):

 
 
Nine Months Ended
 
 
 
 
 
 
September 30,
 
 
 
 
 
 
2016
 
2015
 
Increase/
(Decrease)
 
Percentage
Change
Non-interest expenses:
 
 

 
 

 
 

 
 

Salaries and employee benefits
 
$
292,073

 
$
258,822

 
$
33,251

 
12.8
 %
Occupancy and equipment expense
 
41,441

 
37,575

 
3,866

 
10.3

Computer services and telecommunication expense
 
31,668

 
26,008

 
5,660

 
21.8

Advertising and marketing expense
 
8,926

 
7,521

 
1,405

 
18.7

Professional and legal expense
 
10,370

 
6,884

 
3,486

 
50.6

Other intangibles amortization expense
 
4,917

 
4,569

 
348

 
7.6

Branch exit and facilities impairment charges
 
(2,709
)
 
7,899

 
(10,608
)
 
(134.3
)
Net (gain) loss recognized on other real estate owned and other expense
 
(809
)
 
2,197

 
(3,006
)
 
(136.8
)
Prepayment fees on interest bearing liabilities
 
—

 
85

 
(85
)
 
(100.0
)
Other operating expenses
 
68,214

 
55,363

 
12,851

 
23.2

Total non-interest expenses
 
$
454,091

 
$
406,923

 
$
47,168

 
11.6
 %

Non-interest expenses increased by $47.2 million, or 11.6%, for the nine months ended September 30, 2016 from the nine months ended September 30, 2015. Non-interest expenses include $17.2 million and $9.6 million in merger related and repositioning expenses for the nine months ended September 30, 2016 and 2015, respectively. See merger related and repositioning expenses detail below. Explanations for changes other than merger related and repositioning expenses are as follows:

•
Salaries and employee benefits expense increased due to higher salaries, bonus, temporary help and 401(k) match and profit sharing contribution expenses partly offset by lower commission expense.
•
Salaries increased due to annual pay increases, new hires and the increased staff from the American Chartered merger and the acquisition of MSA.
•
Bonus expense increased based on company performance through September 2016 as well as an increase due to new hires.
•
Temporary help expense increased due temporary help in our IT and mortgage areas.

60


•
Commission expense decreased due to lower commissions paid in our leasing segment as a result of lower lease financing revenues.
•
Occupancy and equipment expense increased due to higher depreciation expense and rental operating expenses as a result of the acquisition of MSA and the American Chartered merger, new offices opened at our mortgage banking segment and an office relocation in our leasing segment.
•
Computer services and telecommunication expense increased due to higher processing costs as a result of increased customer activity and investments in systems.
•
Advertising and marketing expense increased due to increased brand awareness advertising.
•
Professional and legal expense increased due to an increase in litigation and consulting fees.
•
Non-interest expense was also impacted by higher gains recognized on other real estate owned properties.
•
Other operating expenses increased due to higher FDIC premiums (as a result of MB Financial Bank, N.A. (the "Bank") exceeding $10 billion in assets), filing and other loan expense and card expenses (higher rewards and product development expense) as well as a $4.0 million contribution to MB Financial Charitable Foundation.

The following table presents the detail of the merger related and repositioning expenses for the nine months ended September 30, 2016 and 2015 (dollars in thousands):
 
 
Nine Months Ended
 
 
September 30,
 
 
2016
 
2015
Merger related and repositioning expenses:
 
 
 
 
   Salaries and employee benefits
 
$
9,089

 
$
36

   Occupancy and equipment expense
 
112

 
275

   Computer services and telecommunication expense
 
3,921

 
409

   Advertising and marketing expense
 
117

 
—

   Professional and legal expense
 
1,879

 
1,006

   Branch exit and facilities impairment charges
 
(2,864
)
 
7,829

   Contingent consideration expense - Celtic acquisition (1)
 
2,703

 
—

   Other operating expenses
 
2,264

 
67

Total merger related and repositioning expenses
 
$
17,221

 
$
9,622


(1) 
Resides in other operating expenses in the consolidated statements of operations.

During the nine months ended September 30, 2016, merger related and repositioning expenses primarily included costs incurred in connection with the American Chartered merger, a reversal of an exit cost due to a favorable lease termination on a branch acquired through the Taylor Capital merger and an increase in our contingent consideration accrual for our acquisition of Celtic Leasing Corp. as a result of stronger lease residual performance than previously estimated. During the nine months ended September 30, 2015, merger related and repositioning expenses were impacted primarily by exit costs on branches we closed in connection with the Taylor Capital merger.

Income Taxes

Income tax expense for the nine months ended September 30, 2016 was $56.8 million compared to $53.4 million for the nine months ended September 30, 2015. The increase was primarily due to an increase in our pre-tax income during the nine months ended September 30, 2016 partially offset by the $1.8 million income tax benefit associated with stock-based compensation a result of the adoption of new authoritative accounting guidance under ASC Topic 718 "Compensation - Stock Compensation" in the third quarter of 2016.

Operating Segments

The Company's operations consist of three reportable operating segments: Banking, Leasing and Mortgage Banking. Our Banking Segment generates revenues primarily from its lending, deposit gathering and fee business activities. Our Leasing Segment generates revenues through lease originations and related services offered through the Company's leasing subsidiaries: LaSalle Systems Leasing, Inc., Celtic Leasing Corp. and MB Equipment Finance, LLC. Our Mortgage Banking Segment originates residential mortgage loans for sale to investors through its retail and third party origination channels as well as residential mortgage loans held in our loan portfolio. The Mortgage Banking Segment also services residential mortgage loans owned by investors and the Company.

61



Net income from our Banking Segment for the three months ended September 30, 2016 decreased $674 thousand to $30.2 million compared to the three months ended September 30, 2015. This decrease was primarily due to higher salaries and employee benefits expense (due to annual pay increases, new hires, increased staff from the American Chartered merger and acquisition of MSA and bonus expense), the contribution to MB Financial Charitable Foundation, and merger related and repositioning expenses partly offset by the increase in net interest income driven by legacy loan growth and loans acquired through the American Chartered merger and an increase in non-interest income (trust and asset management fees, commercial deposit and treasury management fees, and capital markets and international banking fees). Net income from our Leasing Segment for the three months ended September 30, 2016 decreased $2.9 million to $3.9 million compared to the three months ended September 30, 2015. This decrease in net income was due to the decrease in lease financing revenues as a result of lower residual gains and an increase in provision for credit losses. Net income from our Mortgage Banking Segment for the three months ended September 30, 2016 increased $7.7 million to $10.4 million compared to the three months ended September 30, 2015. This increase in net income was due to an increase in mortgage origination fees as a result of higher origination volumes attributable to the favorable interest rate environment and higher gains on sale margins partly offset by higher salaries and benefits expense (due to annual pay increases, new hires and higher commissions) and volume-related other operating expenses.

Net income from our Banking Segment for the nine months ended September 30, 2016 increased $7.6 million to $95.4 million compared to the nine months ended September 30, 2015. This increase in net income was primarily due to an increase in net interest income, driven by loan growth in the legacy portfolio and, to a lesser extent, loans acquired through the American Chartered merger, and an increase in other non-interest income. This increase was partly offset by higher salaries and employee benefits expense due to annual pay increases, new hires, increased staff from the American Chartered merger and acquisition of MSA and bonus expense based on company performance as well as an increase in provision for credit losses expense. Net income from our Leasing Segment for the nine months ended September 30, 2016 decreased $6.6 million to $13.8 million compared to the nine months ended September 30, 2015. This decrease in net income was primarily due to a decrease in lease financing revenues, as a result of a decrease in residual gains and fees from the sale of third-party equipment maintenance contracts. Net income from our Mortgage Banking Segment for the nine months ended September 30, 2016 increased $10.7 million to $17.7 million compared to the nine months ended September 30, 2015. This increase in net income was due to an increase in mortgage origination and servicing fees, partly offset by higher salaries expense due to annual pay increases and new hires and higher bonus expense.

Balance Sheet
 
Total assets increased $3.8 billion, or 24.1%, to $19.3 billion at September 30, 2016 from December 31, 2015 primarily due to the assets acquired through the American Chartered merger. 

•
Cash and cash equivalents increased $94.8 million, or 24.9% from $381.4 million at December 31, 2015 to $476.3 million at September 30, 2016.
 
•
Investment securities increased $190.8 million, or 6.5%, from December 31, 2015 to September 30, 2016 due to the investment securities acquired from the American Chartered merger offset by principal payments on our mortgage-backed securities.

•
Total loans, excluding purchased credit-impaired, increased by $2.7 billion, or 28.2%, to $12.4 billion at September 30, 2016 from December 31, 2015, primarily due to the loans acquired from the American Chartered merger as well as growth in our legacy commercial-related credits.
 
Total liabilities increased by $3.3 billion, or 24.3%, to $16.8 billion at September 30, 2016 from December 31, 2015 primarily due to the liabilities assumed through the American Chartered merger.
 
•
Total deposits increased by $2.8 billion, or 24.1%, to $14.3 billion at September 30, 2016 from December 31, 2015. Non-interest bearing deposits increased by $1.8 billion, or 38.5%, compared to December 31, 2015, while interest bearing deposits increased by $1.0 billion, or 14.4%. The increase in total deposits was primarily due to the deposits assumed in the American Chartered merger as well as strong growth in our legacy non-interest bearing deposits.

•
Total borrowings increased by $424.9 million, or 26.7%, to $2.0 billion at September 30, 2016 primarily due to the increase in short-term FHLB advances.


62


Total stockholders’ equity increased $476.1 million to $2.6 billion at September 30, 2016 compared to December 31, 2015 primarily as a result of the equity issued in the American Chartered merger as well as earnings for the nine months ended September 30, 2016 net of dividends declared.

Investment Securities
 
The following table sets forth the amortized cost and fair value of our investment securities, by type of security as indicated (in thousands):
 
 
 
September 30, 2016
 
December 31, 2015
 
September 30, 2015
 
 
Amortized
Cost
 
Fair
Value
 
Amortized
Cost
 
Fair
Value
 
Amortized
Cost
 
Fair
Value
Available for sale
 
 

 
 

 
 

 
 

 
 

 
 

U.S. Government sponsored agencies and enterprises
 
$
53,456

 
$
53,968

 
$
63,805

 
$
64,611

 
$
64,008

 
$
65,461

States and political subdivisions
 
383,041

 
410,737

 
373,285

 
396,367

 
379,015

 
399,274

Residential mortgage-backed securities
 
1,066,834

 
1,076,337

 
759,816

 
763,549

 
683,955

 
693,225

Commercial mortgage-backed securities
 
93,962

 
96,993

 
128,509

 
130,107

 
150,638

 
154,201

Corporate bonds
 
208,940

 
210,193

 
222,784

 
219,628

 
228,711

 
228,251

Equity securities
 
10,932

 
11,128

 
10,757

 
10,761

 
10,701

 
10,826

Total Available for Sale
 
1,817,165

 
1,859,356

 
1,558,956

 
1,585,023

 
1,517,028

 
1,551,238

Held to maturity
 
 

 
 

 
 

 
 

 
 

 
 

States and political subdivisions
 
939,491

 
993,140

 
1,016,519

 
1,052,755

 
1,002,963

 
1,031,008

Residential mortgage-backed securities
 
175,771

 
182,698

 
214,291

 
222,012

 
221,889

 
232,204

Total Held to Maturity
 
1,115,262

 
1,175,838

 
1,230,810

 
1,274,767

 
1,224,852

 
1,263,212

Total
 
$
2,932,427

 
$
3,035,194

 
$
2,789,766

 
$
2,859,790

 
$
2,741,880

 
$
2,814,450



63


Loan Portfolio
 
The following table sets forth the composition of our loan portfolio (excluding loans held for sale) as of the dates indicated showing the balances of legacy loans and loans acquired through the American Chartered and Taylor Capital mergers (dollars in thousands):
 
 
 
September 30, 2016
 
December 31, 2015
 
 
Legacy (1)
Acquired (2)
Total
 
% of
Total
 
Legacy (1)
Acquired (2)
Total
 
% of
Total
Commercial related credits:
 
 
 
 

 
 

 
 
 
 

 
 

Commercial loans
 
$
3,413,747

$
972,065

$
4,385,812

 
35
%
 
$
2,908,158

$
708,128

$
3,616,286

 
37
%
Commercial loans collateralized by assignment of lease payments
 
1,801,187

72,193

1,873,380

 
15

 
1,687,421

91,651

1,779,072

 
18

Commercial real estate
 
2,382,124

1,412,677

3,794,801

 
30

 
2,040,339

655,337

2,695,676

 
27

Construction real estate
 
412,455

38,568

451,023

 
4

 
238,918

13,142

252,060

 
3

Total commercial related credits
 
8,009,513

2,495,503

10,505,016

 
84

 
6,874,836

1,468,258

8,343,094

 
85

Other loans:
 
 
 
 

 
 

 
 
 
 

 
 

Residential real estate
 
692,205

306,622

998,827

 
8

 
466,794

161,375

628,169

 
6

Indirect vehicle
 
520,421

1,850

522,271

 
4

 
382,000

2,095

384,095

 
4

Home equity
 
181,340

93,948

275,288

 
2

 
202,231

14,342

216,573

 
2

Other consumer loans
 
76,768

1,188

77,956

 
1

 
80,329

332

80,661

 
1

Total other loans
 
1,470,734

403,608

1,874,342

 
15

 
1,131,354

178,144

1,309,498

 
13

Total loans excluding purchased credit-impaired loans
 
9,480,247

2,899,111

12,379,358

 
99

 
8,006,190

1,646,402

9,652,592

 
98

Purchased credit-impaired loans
 
94,562

66,776

161,338

 
1

 
92,429

48,977

141,406

 
2

Total loans
 
$
9,574,809

$
2,965,887

$
12,540,696

 
100
%
 
$
8,098,619

$
1,695,379

$
9,793,998

 
100
%

(1) 
Legacy loans include all loans other than those acquired through the American Chartered and Taylor Capital mergers, including loans acquired in connection with our FDIC-assisted transactions and our other acquisition transactions, as well as new loans originated subsequent to the American Chartered and Taylor Capital mergers and American Chartered and Taylor Capital loans that have been renewed.
(2) 
Represents loans acquired through the American Chartered and Taylor Capital mergers that have not yet been renewed. These balances will decrease to zero over time.
 
Total loans, excluding purchased credit-impaired, increased by $2.7 billion to $12.4 billion at September 30, 2016 from December 31, 2015. Total loans increased by $2.7 billion to $12.5 billion at September 30, 2016 from $9.8 billion at December 31, 2015. The increase in total loans and total loans, excluding purchased credit-impaired, was primarily due to the loans acquired through the American Chartered merger. Legacy residential real estate loan balances have increased from December 31, 2015 as a result of retaining adjustable rate mortgages originated by our Mortgage Banking Segment in our loan portfolio. Legacy construction loans have increased from December 31, 2015 due to draws on new and existing credit lines primarily in the areas of apartments, healthcare and office. Legacy indirect vehicle loans have increased from December 31, 2015 as a result of growth in boat, motorcycle and other recreational vehicle loans.
 
Asset Quality

Non-performing loans include loans accounted for on a non-accrual basis and accruing loans contractually past due 90 days or more as to interest or principal. Management reviews the loan portfolio for problem loans on an ongoing basis. During the ordinary course of business, management becomes aware of borrowers that may not be able to meet the contractual requirements of loan agreements. These loans are placed under close supervision with consideration given to placing the loan on non-accrual status, increasing the allowance for loan and lease losses and (if appropriate) partial or full charge-off. After a loan is placed on non-accrual status, any interest previously accrued but not yet collected is reversed against current income. Generally, if interest payments are received on non-accrual loans, these payments will be applied to principal and not taken into income. Loans will not be placed back on accrual status unless back interest and principal payments are made. Our general policy is to place loans 90 days past due on non-accrual status, as well as those loans that continue to pay, but display a well-defined material weakness that we believe will result in a loss of principal and interest.
 
Non-performing loans exclude loans held for sale. Fair value of these loans as of acquisition includes estimates of credit losses.  

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The following table sets forth the amounts of non-performing loans, non-performing assets, potential problem loans, and purchased credit-impaired loans as well as other information regarding asset quality at the dates indicated (dollars in thousands):
 
 
 
September 30,
2016
 
December 31,
2015
 
September 30,
2015
Non-performing loans:
 
 

 
 

 
 

Non-accruing loans
 
$
52,135

 
$
98,065

 
$
92,302

Loans 90 days or more past due, still accruing interest
 
1,774

 
6,596

 
4,275

Total non-performing loans
 
53,909

 
104,661

 
96,577

Other real estate owned
 
33,105

 
31,553

 
29,587

Repossessed assets
 
453

 
81

 
216

Total non-performing assets
 
$
87,467

 
$
136,295

 
$
126,380

Purchased credit-impaired loans
 
$
161,338

 
$
141,406

 
$
155,693

Total allowance for loan and lease losses
 
$
139,528

 
$
128,140

 
$
124,626

Accruing restructured loans (1)
 
28,561

 
26,991

 
20,120

Total non-performing loans to total loans
 
0.43
%
 
1.07
%
 
1.03
%
Total non-performing assets to total assets
 
0.45

 
0.87

 
0.85

Allowance for loan and lease losses to total non-performing loans
 
258.82

 
122.43

 
129.04

 
(1) 
Accruing restructured loans consists of loans that have been modified and are performing in accordance with those modified terms.

A loan is classified as a troubled debt restructuring when a borrower is experiencing financial difficulties that leads to a restructuring of the loan, and the Company grants concessions to the borrower in the restructuring that it would not otherwise consider. These concessions may include rate reductions, principal forgiveness, extension of maturity date and other actions intended to minimize potential losses.  A loan that is modified at a market rate of interest may no longer be classified as troubled debt restructuring in the calendar year subsequent to the restructuring if it is in compliance with the modified terms.  Payment performance prior and subsequent to the restructuring is taken into account in assessing whether it is likely that the borrower can meet the new terms.  This may result in the loan being returned to accrual at the time of restructuring.  A period of sustained repayment for at least six months generally is required for return to accrual status.
 
Occasionally, the Company will restructure a note into two separate notes (A/B structure), charging off the entire B portion of the note. The A note is structured with appropriate loan-to-value and cash flow coverage ratios that provide for a high likelihood of repayment. The A note is classified as a non-performing note until the borrower has displayed a historical payment performance for a reasonable time prior to and subsequent to the restructuring. A period of sustained repayment for at least six months generally is required to return the note to accrual status provided that management has determined that the performance is reasonably expected to continue. The A note will be classified as a restructured note (either performing or non-performing) through the calendar year of the restructuring that the historical payment performance has been established.

Non-performing assets consists of non-performing loans as well as other repossessed assets and other real estate owned.  Other real estate owned represents properties acquired through foreclosure or other proceedings and is recorded at fair value less the estimated cost of disposal at the date of acquisition.  Other real estate owned is evaluated regularly to ensure that the recorded amount is supported by its current fair value.  Valuation allowances to reduce the carrying amount to fair value less estimated costs of disposal are recorded as necessary.  Gains and losses and changes in valuations on other real estate owned are included in net gain (loss) recognized on other real estate within non-interest expense.  Expenses, net of rental income, from the operations of other real estate owned are reflected as a separate line item on the statement of operations.  Other repossessed assets primarily consist of repossessed vehicles.  Losses on repossessed vehicles are charged-off to the allowance when title is taken and the vehicle is valued.  Once the Bank obtains title, repossessed vehicles are not included in loans, but are classified as “other assets” on the consolidated balance sheets.  The typical holding period for repossessed vehicles (motorcycles, marine vehicles and recreational vehicles) can be more than 90 days as a result of cyclical trends in the motorcycle, marine vehicle and recreational vehicle markets.
 
Other real estate owned that is related to our FDIC-assisted transactions is excluded from non-performing assets. 


65


The following table presents a summary of other real estate owned, excluding assets related to FDIC-assisted transactions, for the nine months ended September 30, 2016 and 2015 (in thousands):
 
 
 
September 30,
 
 
2016
 
2015
Beginning balance
 
$
31,553

 
$
19,198

Transfers in at fair value less estimated costs to sell
 
3,566

 
15,612

Acquired from business combination
 
4,148

 
—

Capitalized other real estate owned costs
 
96

 
—

Fair value adjustments
 
980

 
(2,407
)
Net gains on sales of other real estate owned
 
843

 
337

Cash received upon disposition
 
(8,081
)
 
(3,153
)
Ending balance
 
$
33,105

 
$
29,587


 Potential Problem Loans
 
We define potential problem loans as performing loans rated substandard and that do not meet the definition of a non-performing loan (See “Asset Quality” section above for non-performing loans). We do not necessarily expect to realize losses on potential problem loans, but we recognize potential problem loans carry a higher probability of default and require additional attention by management. The following table sets forth the aggregate principal amount of potential problem loans, excluding purchased credit-impaired loans, at the dates indicated (in thousands):
 
 
September 30,
2016
 
December 31,
2015
 
 
 
 
 
Commercial loans
 
$
82,823

 
$
102,106

Commercial loans collateralized by assignment of lease payments
 
3,868

 
7,004

Commercial real estate
 
24,903

 
30,831

Total
 
$
111,594

 
$
139,941


Allowance for Loan and Lease Losses
 
Management believes the allowance for loan and lease losses accounting policy is critical to the portrayal and understanding of our financial condition and results of operations. Selection and application of this “critical accounting policy” involves judgments, estimates, and uncertainties that are subject to change. In the event that different assumptions or conditions were to prevail, and depending upon the severity of such changes, materially different financial condition or results of operations is a reasonable possibility.

We maintain our allowance for loan and lease losses at a level that management believes is appropriate to absorb probable losses on existing loans based on an evaluation of the collectability of loans, underlying collateral and prior loss experience.

Our allowance for loan and lease losses is comprised of three elements: a commercial related general loss reserve; a commercial related specific reserve for impaired loans; and a consumer related reserve for smaller-balance homogenous loans. Each element is discussed below.
 
Commercial Related General Loss Reserve.  We maintain a general loan loss reserve for the four categories of commercial-related loans in our portfolio: commercial loans, commercial loans collateralized by the assignment of lease payments (lease loans), commercial real estate loans and construction real estate loans.

Under our loan risk rating system, each loan, with the exception of those included in large groups of smaller-balance homogeneous consumer related loans, is risk rated between one and nine by the originating loan officer, Senior Credit Management, Loan Review or any loan committee. Loans rated "one" represent those loans least likely to default and a loan rated "nine" represents a loss. The probability of loans defaulting for each risk rating, sometimes referred to as default factors, are estimated based on the frequency with which loans migrate from one risk rating to another and to default status over time. We use a loan loss reserve model that incorporates the migration of loan risk ratings and historical default data over a multi-year period to develop our estimated default factors (EDFs). The model tracks annual loan rating migrations by loan type and currently uses loan risk

66


rating migrations for 15 years. The migration data is adjusted by using average losses for an economic cycle (approximately 14 years) to develop EDFs by loan type, risk rating and maturity. EDFs are updated annually in December.
 
EDFs are multiplied by individual loan balances in each risk-rating category and again multiplied by an historical loss given default estimate for each loan type (which incorporates estimated recoveries) to determine the appropriate allowance by loan type. This approach is applied to the commercial, lease, commercial real estate, and construction real estate components of the portfolio.

To account for current economic conditions, the general allowance for loan and lease losses (ALLL) also includes adjustments for macroeconomic factors. Macroeconomic factors adjust the ALLL upward or downward based on the current point in the economic cycle using predictive economic data and are applied to the loan loss model through a separate allowance element for the commercial, commercial real estate, construction real estate and lease loan components. To determine our macroeconomic factors, we use specific economic data that has shown to be a statistically reliable predictor of our credit losses relative to our long term average credit losses. We tested over 20 economic variables (U.S. manufacturing index, unemployment rate, U.S. GDP growth, etc.). We annually review this data to determine that such a relationship continues to exist. We currently use the following macroeconomic indicators in our macroeconomic factor computation:
 
Commercial loans and lease loans:  total industry capacity utilization, our prior period charge-off rates and the yield on BBB-rated debt.
 
Commercial real estate loans and construction loans:  M2 Money stock, our prior period charge-off rates, the U.S. commercial real estate index and the contribution of the commercial mortgage-backed security spread to the Cleveland Financial Stress Index.
 
Using the indicators noted above, a predicted charge-off percentage is calculated. The predicted charge-off percentage is then compared to the cycle average charge-off percentage, and a macroeconomic adjustment factor is calculated. The macroeconomic adjustment factor is applied to each commercial loan type. Each year, we review the predictive nature of the macroeconomic factors by comparing actual charge-offs to the predicted model charge-offs, re-run our regression analysis and re-calibrate the macroeconomic factors as appropriate.

The commercial related general loss reserve was $112.7 million as of September 30, 2016 and $94.2 million as of December 31, 2015. The increase in the commercial related general loss reserve was due to the overall growth in the loan portfolio. Reserves on impaired commercial related loans are included in the “Commercial Related Specific Reserves” section below. 
 
Commercial Related Specific Reserves.  Our allowance for loan and lease losses also includes specific reserves on impaired commercial loans. A loan is considered to be impaired when management believes, after considering collection efforts and other factors, the borrower's financial condition is such that the collection of all contractual principal and interest payments due is doubtful.
 
At each quarter-end, impaired commercial loans are reviewed individually, with adjustments made to the general calculated reserve for each loan as deemed necessary. Specific adjustments are made depending on expected cash flows and/or the value of the collateral securing each loan. Generally, the Company obtains a current external appraisal (within 12 months) on real estate secured impaired loans. Our appraisal policy is designed to comply with the Interagency Appraisal and Evaluation Guidelines, most recently updated in December 2010. As part of our compliance with these guidelines, we maintain an internal Appraisal Review Department that engages and reviews all third party appraisals.

In addition, each impaired commercial loan with real estate collateral is reviewed quarterly by our appraisal department to determine whether the most recent valuation remains appropriate during subsequent quarters until the next appraisal is received. If considered necessary by our appraisal department, the appraised value may be further discounted to reflect current values.
 
Other valuation techniques are also used to value non-real estate assets. Discounts may be applied in the impairment analysis used for general business assets (GBA). Examples of GBA include accounts receivable, inventory, and any marketable securities pledged. The discount is used to reflect collection risk in the event of default that may not have been included in the valuation of the asset.
 
The total commercial related specific reserves component of the allowance was $9.7 million as of September 30, 2016 compared to $16.2 million as of December 31, 2015. The decrease in commercial related specific reserves was due to loans that paid off during the second and third quarters of 2016.
 

67


Consumer Related Reserves.  Pools of homogenous loans with similar risk and loss characteristics are also assessed for probable losses. These loan pools include consumer, residential real estate, home equity, credit cards and indirect vehicle loans. Migration probabilities obtained from past due roll rate analyses and historical loss rates are applied to current balances to forecast charge-offs over a one-year time horizon. The reserves for consumer related loans totaled $17.2 million at September 30, 2016 and $17.8 million at December 31, 2015.
 
For loans acquired through bank mergers, the provision for credit losses for non-purchased credit impaired ("non-PCI") loans, as accounted for in accordance with ASC 310-20, is calculated using a process similar to the one used for the MBFI legacy portfolio. A general loan loss reserve is calculated for the bank merger loans renewed and non-renewed loans separately using the same loan loss reserve model used for MBFI legacy loans. The general loan loss reserve is calculated for the four categories of commercial-related loans in our portfolio: commercial loans, commercial loans collateralized by the assignment of lease payments (lease loans), commercial real estate loans and construction real estate loans. The probability of loans defaulting for each risk rating (referred to as default factors) is estimated based on the frequency with which loans migrate from one risk rating to another and to default status over time. The default factors are multiplied by individual loan balances in each risk rating category and again multiplied by an historical loss given default estimate for each loan type to determine the appropriate allowance. The bank merger loans are risk rated using the MBFI rating methodology. The general loan loss reserve amount is adjusted upward to reflect uncertainty regarding the performance of the acquired portfolios due to our limited history with the borrowers.

For bank merger non-PCI loans that renewed during the period (quarter or year to date), the default factors are multiplied by the loan balance and loss given default estimate to calculate the required reserves. The amount of required reserves is recognized as a provision for credit losses in the statement of operations. For bank merger non-PCI loans that were not renewed subsequent to the merger consummation, the default factors are multiplied by the loan balance and the historical loss given default estimate. The resulting general loan loss reserve is compared to the remaining acquisition accounting discounts related to credit on the non-PCI loans, with the excess to be recognized as a provision for credit losses in the statement of operations.

We recorded a negative provision for credit losses of $377 thousand for acquired loans related to the non-PCI bank merger loans for the nine months ended September 30, 2016 primarily due to the reduction in specific reserves. No additional provisions were recorded on the purchased credit impaired bank merger loans accounted for in accordance with ASC 310-30.

We consistently apply our methodology for determining the appropriateness of the allowance for loan and lease losses but may adjust our methodologies and assumptions based on historical information related to charge-offs and management's evaluation of the loan portfolio. In this regard, we periodically review the following to validate our allowance for loan and lease losses: historical net charge-offs as they relate to prior periods' allowance for loan and lease losses, comparison of historical loan migration in past years compared to the current year, overall credit trends and ratios and any significant changes in loan concentrations. In reviewing this data, we adjust qualitative factors within our allowance methodology to appropriately reflect any changes warranted by the validation process. Management believes it has established an allowance for probable loan losses as appropriate under GAAP.


68


The following table presents an analysis of the allowance for loan and lease losses for the periods presented (dollars in thousands):

 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
September 30,
 
 
2016
 
2015
 
2016
 
2015
Balance at beginning of period
 
$
138,333

 
$
124,130

 
$
131,508

 
$
114,057

Provision for credit losses
 
6,549

 
5,358

 
16,941

 
14,628

Charge-offs:
 
 

 
 

 
 
 
 

Commercial loans
 
1,341

 
1,657

 
2,126

 
2,283

Commercial loans collateralized by assignment of lease payments
 
367

 
1,980

 
3,288

 
2,080

Commercial real estate
 
529

 
170

 
2,601

 
2,312

Construction real estate
 
7

 
5

 
151

 
11

Residential real estate
 
290

 
292

 
1,134

 
1,189

Home equity
 
376

 
358

 
1,233

 
1,078

Indirect vehicles
 
838

 
581

 
2,420

 
2,082

Other consumer loans
 
409

 
467

 
1,216

 
1,391

Total charge-offs
 
4,157

 
5,510

 
14,169

 
12,426

Recoveries:
 
 

 
 

 
 

 
 

Commercial loans
 
665

 
456

 
1,997

 
1,514

Commercial loans collateralized by assignment of lease payments
 
3

 
11

 
520

 
1,100

Commercial real estate
 
324

 
2,402

 
2,761

 
6,338

Construction real estate
 
50

 
216

 
94

 
253

Residential real estate
 
45

 
337

 
151

 
417

Home equity
 
65

 
186

 
576

 
447

Indirect vehicles
 
436

 
334

 
1,400

 
1,354

Other consumer loans
 
86

 
118

 
620

 
356

Total recoveries
 
1,674

 
4,060

 
8,119

 
11,779

Net charge-offs
 
2,483

 
1,450

 
6,050

 
647

Allowance for credit losses
 
142,399

 
128,038

 
142,399

 
128,038

Allowance for unfunded credit commitments
 
(2,871
)
 
(3,412
)
 
(2,871
)
 
(3,412
)
Allowance for loan and lease losses
 
$
139,528

 
$
124,626

 
$
139,528

 
$
124,626

Total loans
 
$
12,540,696

 
$
9,389,181

 
$
12,540,696

 
$
9,389,181

Ratio of allowance to total loans
 
1.11
%
 
1.33
%
 
1.11
%
 
1.33
%
Ratio of net charge-offs to average loans
 
0.09

 
0.06

 
0.08

 
0.01


Net charge-offs of $6.1 million were recorded in the nine months ended September 30, 2016 compared to net charge-offs of $647 thousand in the nine months ended September 30, 2015. A provision for credit losses of $16.9 million was recorded for the nine months ended September 30, 2016 compared to $14.6 million for the nine months ended September 30, 2015.
    
The provision for credit losses for the nine months ended September 30, 2016 included a provision for credit losses of $17.3 million for the legacy MB Financial portfolio and a negative provision for credit losses of $377 thousand related to the bank merger acquired loan portfolio for loan renewals subsequent to the acquisition date. In addition, included in the table above are net recoveries for the acquired Taylor Capital loans of $1.3 million for the nine months ended September 30, 2016.

Additions to the allowance for loan and lease losses, which are charged to earnings through the provision for credit losses, are determined based on a variety of factors, including specific reserves, current loan risk ratings, delinquent loans, historical loss experience and economic conditions in our market area. In addition, federal regulatory authorities, as part of the examination process, periodically review our allowance for loan and lease losses. The regulators may require us to record adjustments to the allowance level based upon their assessment of the information available to them at the time of examination. Although management believes the allowance for loan and lease losses is sufficient to cover probable losses inherent in the loan portfolio, there can be no assurance that the allowance will prove sufficient to cover actual loan losses.

We utilize an internal asset classification system as a means of reporting problem and potential problem assets. At scheduled meetings of the board of directors of MB Financial Bank, a watch list is presented, showing significant loan relationships listed as “Special Mention,” “Substandard,” and “Doubtful.” An asset is classified Substandard if it is inadequately protected by the current net worth and paying capacity of the obligor or the collateral pledged, if any. Substandard assets include those

69


characterized by the distinct possibility that we will sustain some loss if the deficiencies are not corrected. Assets classified as Doubtful have all the weaknesses inherent in those classified Substandard with the added characteristic that the weaknesses present make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable. Assets classified as Loss are those considered uncollectible and viewed as valueless assets and have been charged-off. Assets that do not currently expose us to sufficient risk to warrant classification in one of the aforementioned categories, but possess weaknesses that deserve management's close attention are deemed to be Special Mention.

Our determination as to the classification of our assets and the amount of our valuation allowances is subject to review by the Office of the Comptroller of the Currency, MB Financial Bank's primary regulator, which can order the establishment of additional general or specific loss allowances. There can be no assurance that regulators, in reviewing our loan portfolio, will not request us to materially adjust our allowance for loan and lease losses. The Office of the Comptroller of the Currency, in conjunction with the other federal banking agencies, has adopted an interagency policy statement on the allowance for loan and lease losses. The policy statement provides guidance for financial institutions on both the responsibilities of management for the assessment and establishment of adequate allowances and guidance for banking agency examiners to use in determining the adequacy of general valuation guidelines. Generally, the policy statement recommends that (1) institutions have effective systems and controls to identify, monitor and address asset quality problems; (2) management has analyzed all significant factors that affect the collectability of the portfolio in a reasonable manner; and (3) management has established acceptable allowance evaluation processes that meet the objectives set forth in the policy statement. We analyze our process regularly, with modifications made if needed, and report those results four times per year at meetings of our board of directors. However, there can be no assurance that regulators, in reviewing our loan portfolio, will not request us to materially adjust our allowance for loan and lease losses at the time of their examination.

Although management believes that appropriate specific and general loan loss allowances have been established, actual losses are dependent upon future events and, as such, further additions to the level of specific and general loan and lease loss allowances may become necessary.


70


Lease Investments

The lease portfolio is comprised of various types of equipment, generally technology related, healthcare, material handling and general manufacturing equipment. 

Lease investments by categories follow (in thousands):
 
 
 
September 30,
2016
 
December 31,
2015
 
September 30,
2015
Direct finance leases:
 
 

 
 

 
 
Minimum lease payments
 
$
382,032

 
$
392,901

 
$
345,344

Estimated unguaranteed residual values
 
76,197

 
74,411

 
68,297

Less: unearned income
 
(32,707
)
 
(34,675
)
 
(30,300
)
Direct finance leases (1)
 
$
425,522

 
$
432,637

 
$
383,341

Leveraged leases:
 
 

 
 

 
 

Minimum lease payments
 
$
1,101

 
$
3,286

 
$
4,610

Estimated unguaranteed residual values
 
118

 
523

 
845

Less: unearned income
 
(37
)
 
(126
)
 
(187
)
Less: related non-recourse debt
 
(1,075
)
 
(3,199
)
 
(4,482
)
Leveraged leases (1)
 
$
107

 
$
484

 
$
786

Operating leases:
 
 

 
 

 
 

Equipment, at cost
 
$
403,525

 
$
318,843

 
$
290,786

Less accumulated depreciation
 
(125,878
)
 
(107,156
)
 
(106,563
)
Lease investments, net
 
$
277,647

 
$
211,687

 
$
184,223

 
(1) 
Direct finance and leveraged leases are included as commercial loans collateralized by assignment of lease payments for financial statement purposes.
 
Leases that transfer substantially all of the benefits and risk related to the equipment ownership are classified as direct finance leases. If these direct finance leases have non-recourse debt associated with them and meet the additional requirements for a leveraged lease, they are further classified as leverage leases, and the associated debt is netted with the outstanding balance in the consolidated financial statements. Interest income on direct finance and leveraged leases is recognized using methods which approximate a level yield over the term of the lease. Operating leases are investments in equipment leased to other companies, where the residual component makes up more than 10% of the investment.  The Company funds most of the lease equipment purchases internally, but has some loans at other banks which totaled $66.5 million at September 30, 2016, $55.0 million at December 31, 2015 and $49.8 million at September 30, 2015.

At September 30, 2016, the following reflects the residual values for leases by category in the year the initial lease term ends (in thousands):
 
 
 
Residual Values
 
 
Direct
 
 
 
 
 
 
End of initial lease term
 
Finance
 
Leveraged
 
Operating
 
 
December 31,
 
Leases
 
Leases
 
Leases
 
Total
2016
 
$
1,563

 
$
—

 
$
10,161

 
$
11,724

2017
 
18,645

 
99

 
9,318

 
28,062

2018
 
16,150

 
19

 
11,539

 
27,708

2019
 
16,057

 
—

 
11,569

 
27,626

2020
 
10,649

 
—

 
13,869

 
24,518

Thereafter
 
13,133

 
—

 
35,233

 
48,366

 
 
$
76,197

 
$
118

 
$
91,689

 
$
168,004

 
The lease residual value represents the present value of the estimated fair value of the leased equipment at the termination of the lease. Lease residual values are generally reviewed quarterly, and any write-downs or charge-offs deemed necessary are

71


recorded in the period in which they become known. To mitigate this risk of loss, we seek to diversify both the type of equipment leased and the industries in which the lessees participate. Often times, there are several individual lease schedules under one master lease. There were 4,164 leases at September 30, 2016 compared to 4,369 at December 31, 2015.  The average residual value per lease schedule was approximately $40 thousand at September 30, 2016 and $33 thousand at December 31, 2015.  The average residual value per master lease schedule was approximately $172 thousand at September 30, 2016 and $132 thousand at December 31, 2015, respectively.
 
Liquidity and Sources of Capital
 
Our cash flows are composed of three classifications: cash flows from operating activities, cash flows from investing activities, and cash flows from financing activities.

Cash flows from operating activities primarily include net income, adjusted for items in net income that did not impact cash.  Net cash flows provided by operating activities were $30.2 million for the nine months ended September 30, 2016 compared to net cash flows provided by operating activities of $159.0 million for the nine months ended September 30, 2015.  The change was primarily due to lower net originations of loans held for sale.

Cash flows from investing activities reflects the impact of loans and investment securities acquired for the Company’s interest-earning asset portfolios, as well as cash flows from asset sales and the impact of acquisitions.  For the nine months ended September 30, 2016, the Company had net cash flows used in investing activities of $606.1 million compared to net cash flows used in investing activities of $363.9 million for the nine months ended September 30, 2015.  The change was primarily due to the increase in loans offset by less purchases of investment securities during the nine months ended September 30, 2016. The nine months ended September 30, 2015 also included a sale of mortgage servicing rights.

Cash flows from financing activities include transactions and events whereby cash is obtained from depositors, creditors or investors.  For the nine months ended September 30, 2016, the Company had net cash flows provided by financing activities of $670.8 million compared to net cash flows provided by financing activities of $193.0 million for the nine months ended September 30, 2015.  The change in cash flows from financing activities was primarily due to the increase in deposits and borrowings compared to the nine months ended September 30, 2015.

In the event that additional short-term liquidity is needed, we have established relationships with several large and regional banks to provide short-term borrowings in the form of federal funds purchases.  While, at September 30, 2016, there were no firm lending commitments in place, management believes that we could borrow approximately $415.5 million for a short time from these banks on a collective basis.  Additionally, we are a member of Federal Home Loan Bank of Chicago ("FHLB").  As of September 30, 2016, the Company had $1.4 billion outstanding in FHLB advances, and could borrow an additional amount of approximately $1.2 billion.  As a contingency plan for significant funding needs, the Asset/Liability Committee may also consider the sale of investment securities, selling securities under agreement to repurchase, or the temporary curtailment of lending activities.  As of September 30, 2016, the Company had approximately $1.7 billion of unpledged securities, excluding securities available for pledge at the FHLB.

Our main sources of liquidity at the holding company level are dividends from MB Financial Bank and cash on hand. We also maintain a $35.0 million unsecured line of credit at the holding company level with a correspondent bank. Nothing was outstanding on the line of credit as of September 30, 2016. The line of credit is scheduled to mature on June 30, 2017. The holding company had $17.1 million in cash as of September 30, 2016.

See Notes 9 and 10 of the Financial Statements presented under Item 1 of this report for details of period end balances and other information for these various funding sources. There were no material changes outside the ordinary course of business in the Company’s contractual obligations at September 30, 2016 as compared to December 31, 2015.

MB Financial Bank is subject to various regulatory capital requirements which affect its ability to pay dividends to us.  Failure to meet minimum capital requirements can initiate certain mandatory and discretionary actions by regulators that, if undertaken, could have a direct material effect on our financial statements. The minimum ratios required for a bank to be considered “well capitalized” for regulatory purposes are a total risk-based capital ratio of 10.00%, a Tier 1 capital to risk-weighted assets ratio of 8.00%, a common equity Tier 1 capital to risk-weighted assets ratio of 6.50% and a Tier 1 capital to average assets ratio of 5.00%.   In addition, we have an internal policy which provides that dividends paid to us by MB Financial Bank cannot exceed an amount that would cause MB Financial Bank’s total risk-based capital ratio, Tier 1 capital to risk-weighted assets ratio, common equity Tier 1 capital to risk-weighted assets ratio and Tier 1 capital to average assets ratio to fall below 11%, 9%, 7.5% and 7%, respectively.  See “Item 1. Business — Supervision and Regulation” in our Annual Report on Form 10-K for the year ended December 31, 2015.

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At September 30, 2016, the Company’s total risk-based capital ratio was 11.65%, Tier 1 capital to risk-weighted assets ratio was 9.39%, common equity Tier 1 capital to risk-weighted assets ratio was 8.70% and Tier 1 capital to average asset ratio was 9.29%. At September 30, 2016, MB Financial Bank’s total risk-based capital ratio was 11.20%, Tier 1 capital to risk-weighted assets ratio was 10.30%, common equity Tier 1 capital to risk-weighted assets ratio was 10.30% and Tier 1 capital to average asset ratio was 10.28%. MB Financial Bank was categorized as “Well-Capitalized” at September 30, 2016 under the regulations of the Office of the Comptroller of the Currency.

The Company and MB Financial Bank must maintain a capital conservation buffer consisting of additional common equity Tier 1 capital greater than 2.5% of risk-weighted assets above the required minimum levels in order to avoid limitations on paying dividends, repurchasing shares, and paying discretionary bonuses.  The new capital conservation buffer requirement began phasing in on January 1, 2016 when a buffer greater than 0.625% of risk-weighted assets was required, which amount will increase each year until the buffer requirement is fully implemented on January 1, 2019. At September 30, 2016, the Company and MB Financial Bank maintained capital above the 0.625% conservation buffer that was phased in at the beginning of 2016.

Non-GAAP Financial Information

This report contains certain financial information determined by methods other than in accordance with accounting principles generally accepted in the United States of America (GAAP). These measures include net interest income on a fully tax equivalent basis, net interest margin on a fully tax equivalent basis and net interest margin on a fully tax equivalent basis excluding the effect of the acquisition accounting discount accretion on loans acquired through the bank mergers. Our management uses these non-GAAP measures, together with the related GAAP measures, in its analysis of our performance and in making business decisions. Management also uses these measures for peer comparisons. The tax equivalent adjustment to net interest income recognizes the income tax savings when comparing taxable and tax-exempt assets and assumes a 35% tax rate. Management believes that it is a standard practice in the banking industry to present net interest income and net interest margin on a fully tax equivalent basis, and accordingly believes that providing these measures may be useful for peer comparison purposes. Management also believes that presenting net interest margin on a tax equivalent basis excluding the effect of the acquisition accounting discount accretion on loans acquired through the Taylor Capital and American Chartered mergers is useful in assessing the impact of acquisition accounting on net interest margin, as the effect of loan discount accretion is expected to decrease as the acquired loans mature or roll off our balance sheet. These disclosures should not be viewed as substitutes for the results determined to be in accordance with GAAP, nor are they necessarily comparable to non-GAAP performance measures that may be presented by other companies. Reconciliations of net interest income on a fully tax equivalent basis to net interest income and net interest margin on a fully tax equivalent basis and net interest margin on a fully tax equivalent basis excluding the effect of the acquisition accounting discount accretion on loans acquired through the Taylor Capital and American Chartered mergers to net interest margin are contained in the tables under “Net Interest Margin.”

Forward-Looking Statements
    
When used in this Quarterly Report on Form 10-Q and in other documents filed or furnished with the Securities and Exchange Commission, in press releases or other public shareholder communications, or in oral statements made with the approval of an authorized executive officer, the words or phrases “believe,” “will,” “should,” “will likely result,” “are expected to,” “will continue,” “is anticipated,” “estimate,” “project,” “plans,” or similar expressions are intended to identify “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. You are cautioned not to place undue reliance on any forward-looking statements, which speak only as of the date made. These statements may relate to MB Financial, Inc.’s future financial performance, strategic plans or objectives, revenues or earnings projections, or other financial items. By their nature, these statements are subject to numerous uncertainties that could cause actual results to differ materially from those anticipated in the statements.

Important factors that could cause actual results to differ materially from the results anticipated or projected include, but are not limited to, the following: (1) expected revenues, cost savings, synergies and other benefits from the MB Financial-American Chartered merger might not be realized within the expected time frames or at all and costs or difficulties relating to integration matters, including but not limited to customer and employee retention, might be greater than expected; (2) the credit risks of lending activities, including changes in the level and direction of loan delinquencies and write-offs and changes in estimates of the adequacy of the allowance for loan losses, which could necessitate additional provisions for loan losses, resulting both from originated loans and loans acquired from other financial institutions; (3) competitive pressures among depository institutions; (4) interest rate movements and their impact on customer behavior, net interest margin and the value of our mortgage servicing rights; (5) the possibility that our mortgage banking business may experience increased volatility in its revenues and earnings and the possibility that the profitability of our mortgage banking business could be significantly reduced if we are unable to originate and sell mortgage loans at profitable margins or if changes in interest rates negatively impact the value of our mortgage servicing

73


rights; (6) the impact of repricing and competitors’ pricing initiatives on loan and deposit products; (7) fluctuations in real estate values; (8) the ability to adapt successfully to technological changes to meet customers’ needs and developments in the market place; (9) the possibility that security measures implemented might not be sufficient to mitigate the risk of a cyber attack or cyber theft, and that such security measures might not protect against systems failures or interruptions; (10) our ability to realize the residual values of our direct finance, leveraged and operating leases; (11) our ability to access cost-effective funding; (12) changes in financial markets; (13) changes in economic conditions in general and in the Chicago metropolitan area in particular; (14) the costs, effects and outcomes of litigation; (15) new legislation or regulatory changes, including but not limited to the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”) and regulations adopted thereunder, changes in capital requirements pursuant to the Dodd-Frank Act, changes in the interpretation and/or application of laws and regulations by regulatory authorities, other governmental initiatives affecting the financial services industry and changes in federal and/or state tax laws or interpretations thereof by taxing authorities; (16) changes in accounting principles, policies or guidelines; (17) our future acquisitions of other depository institutions or lines of business; and (18) future goodwill impairment due to changes in our business, changes in market conditions, or other factors.
 
We do not undertake any obligation to update any forward-looking statement to reflect circumstances or events that occur after the date on which the forward-looking statement is made.

74



Item 3.
  Quantitative and Qualitative Disclosures about Market Risk
 
Market Risk and Asset Liability Management
 
Market Risk.  Market risk is the risk that the market value or estimated fair value of our assets, liabilities, and derivative financial instruments will decline as a result of changes in interest rates or financial market volatility, or that our net income will be significantly reduced by interest rate changes.  Market risk is managed operationally in our Treasury Group and is addressed through a selection of funding and hedging instruments supporting balance sheet growth, as well as monitoring our asset investment strategies.
 
Asset Liability Management.  Management and our Treasury Group continually monitor our sensitivity to interest rate changes.  It is our policy to maintain an acceptable level of interest rate risk over a range of possible changes in interest rates while remaining responsive to market demand for loan and deposit products.  The strategy we employ to manage our interest rate risk is to measure our risk using an asset/liability simulation model.  The model considers several factors to determine our potential exposure to interest rate risk, including measurement of repricing gaps, duration, convexity, value at risk, and the market value of portfolio equity under assumed changes in the level of interest rates, shape of the yield curves, and general market volatility.  Management controls our interest rate exposure using several strategies, which include adjusting the maturities of securities in our investment portfolio, and limiting fixed rate loans or fixed rate deposits with terms of more than five years.  We also use derivative instruments, principally interest rate swaps, to manage our interest rate risk.  See Note 15 to the Consolidated Financial Statements.
 
Interest Rate Risk.  Interest rate risk can come in a variety of forms, including repricing risk, yield curve risk, basis risk, and prepayment risk.  We experience repricing risk when the change in the average yield of our interest earning assets or average rate of our interest bearing liabilities is more sensitive than the other to changes in market interest rates.  Such a change in sensitivity could reflect a number of possible mismatches in the repricing opportunities of our assets and liabilities.
 
In the event that yields on our assets and liabilities do adjust to changes in market rates to the same extent, we may still be exposed to yield curve risk.  Yield curve risk reflects the possibility the changes in the shape of the yield curve could have different effects on our assets and liabilities.

Variable rate assets and liabilities that reprice at similar times, have similar maturities or repricing dates, are based on different indexes still have interest rate risk.  Basis risk reflects the possibility that indexes will not move in a coordinated manner.
 
We hold mortgage-related investments, including mortgage loans and mortgage-backed securities.  Prepayment risk is associated with mortgage-related investments and results from homeowners’ ability to pay off their mortgage loans prior to maturity.  We limit this risk by restricting the types of mortgage-backed securities we own to those with limited average life changes under certain interest-rate shock scenarios, or securities with embedded prepayment penalties.
 
Measuring Interest Rate Risk.  As noted above, interest rate risk can be measured by analyzing the extent to which the repricing of assets and liabilities are mismatched to create an interest sensitivity gap.  An asset or liability is said to be interest rate sensitive within a specific period if it will mature or reprice within that period.  The interest rate sensitivity gap is defined as the difference between the amount of interest earning assets maturing or repricing within a specific time period and the amount of interest bearing liabilities maturing or repricing within that same time period.  A gap is considered positive when the amount of interest rate sensitive assets exceeds the amount of interest rate sensitive liabilities.  A gap is considered negative when the amount of interest rate sensitive liabilities exceeds the amount of interest rate sensitive assets.  During a period of rising interest rates, therefore, a positive gap would tend to positively affect net interest income.  Conversely, during a period of falling interest rates, a positive gap position would tend to result in a decrease in net interest income.

The following table sets forth the amounts of interest earning assets and interest bearing liabilities outstanding at September 30, 2016 that we anticipate, based upon certain assumptions, to reprice or mature in each of the future time periods shown.  Except as stated below, the amount of assets and liabilities shown which reprice or mature during a particular period were determined based on the earlier of the term to repricing or the term to repayment of the asset or liability. 

The table is intended to provide an approximation of the projected repricing of assets and liabilities at September 30, 2016 based on contractual maturities and scheduled rate adjustments within a three-month period and subsequent selected time intervals.  The loan amounts in the table reflect principal balances expected to be reinvested and/or repriced because of contractual amortization and rate adjustments on adjustable-rate loans.  Loan and investment securities’ contractual maturities and amortization reflect expected prepayment assumptions.  While NOW, money market and savings deposit accounts have adjustable rates, it is assumed that the interest rates on some of the accounts will not adjust immediately to changes in other interest rates. Therefore,

75


the information in the table is calculated assuming that NOW, money market and savings deposits will reprice as follows: 4%, 10%, and 6%, respectively, in the first three months, 11%, 26%, and 15%, respectively, in the next nine months, 52%, 58%, and 57%, respectively, from one year to five years, and 33%, 6%, and 22%, respectively over five years (dollars in thousands):
 
 
 
Time to Maturity or Repricing
 
 
0 – 90
 
91 - 365
 
1 – 5
 
Over 5
 
 
 
 
Days
 
Days
 
Years
 
Years
 
Total
Interest Earning Assets:
 
 

 
 

 
 

 
 

 
 

Interest earning deposits with banks
 
$
122,672

 
$
1,663

 
$
915

 
$
—

 
$
125,250

Investment securities
 
377,222

 
391,334

 
1,626,875

 
725,396

 
3,120,827

Loans held for sale
 
899,412

 
—

 
—

 
—

 
899,412

Loans, including covered loans
 
6,209,997

 
2,063,254

 
3,978,225

 
289,220

 
12,540,696

Total interest earning assets
 
$
7,609,303

 
$
2,456,251

 
$
5,606,015

 
$
1,014,616

 
$
16,686,185

Interest Bearing Liabilities:
 
 

 
 

 
 

 
 

 
 

NOW, money market and interest bearing deposits
 
$
316,546

 
$
895,882

 
$
2,563,162

 
$
884,817

 
$
4,660,407

Savings deposits
 
62,880

 
177,258

 
651,954

 
255,808

 
1,147,900

Time deposits
 
379,663

 
865,653

 
814,871

 
438

 
2,060,625

Short-term borrowings
 
1,265,096

 
67,054

 
147,905

 
16,264

 
1,496,319

Long-term borrowings
 
248,068

 
20,944

 
40,486

 
2,147

 
311,645

Junior subordinated notes issued to capital trusts
 
209,159

 
—

 
—

 
—

 
209,159

Total interest bearing liabilities
 
$
2,481,412

 
$
2,026,791

 
$
4,218,378

 
$
1,159,474

 
$
9,886,055

Rate sensitive assets (RSA)
 
$
7,609,303

 
$
10,065,554

 
$
15,671,569

 
$
16,686,185

 
$
16,686,185

Rate sensitive liabilities (RSL)
 
2,481,412

 
4,508,203

 
8,726,581

 
9,886,055

 
9,886,055

Cumulative GAP (GAP=RSA-RSL)
 
5,127,891

 
5,557,351

 
6,944,988

 
6,800,130

 
6,800,130

RSA/Total assets
 
39.34
%
 
52.04
%
 
81.02
%
 
86.27
%
 
86.27
%
RSL/Total assets
 
12.83

 
23.31

 
45.12

 
51.11

 
51.11

GAP/Total assets
 
26.51

 
28.73

 
35.91

 
35.16

 
35.16

GAP/RSA
 
67.39

 
55.21

 
44.32

 
40.75

 
40.75

 
Certain shortcomings are inherent in the method of analysis presented in the foregoing table.  For example, although certain assets and liabilities may have similar maturities or periods to repricing, they may react in different degrees to changes in market interest rates.  Also, the interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types of assets may lag behind changes in market rates.  Additionally, in the event of a change in interest rates, prepayment and early withdrawal levels would likely deviate significantly from those assumed in calculating the table.  Therefore, we do not rely on a gap analysis to manage our interest rate risk, but rather we use what we believe to be the more reliable simulation model relating to changes in net interest income.

Based on simulation modeling which assumes gradual changes in interest rates over a one-year period, we believe that our net interest income would change due to changes in interest rates as follows (dollars in thousands):
 
Gradual
 
Changes in Net Interest Income Over One Year Horizon
Changes in
 
September 30, 2016
 
December 31, 2015
Levels of
 
Dollar
 
Percentage
 
Dollar
 
Percentage
Interest Rates
 
Change
 
Change
 
Change
 
Change
+ 2.00%
 
$
32,698

 
5.69
 %
 
$
32,845

 
6.91
 %
+ 1.00%
 
17,569

 
3.06

 
16,486

 
3.47

- 1.00%
 
(18,876
)
 
(3.28
)
 
(21,122
)
 
(4.44
)
 
In the interest rate sensitivity table above, changes in net interest income between September 30, 2016 and December 31, 2015 reflect changes in the composition of interest earning assets and interest bearing liabilities, related interest rates, repricing frequencies, and the fixed or variable characteristics of the interest earning assets and interest bearing liabilities.  The changes in net interest income incorporate the impact of loan floors as well as shifts from low cost deposits to higher cost certificates of deposit in a rising rate environment.
 
The assumptions used in our interest rate sensitivity simulation discussed above are inherently uncertain and, as a result, the simulations cannot precisely measure net interest income or precisely predict the impact of changes in interest rates on net

76


interest income.  Our model assumes that a portion of our variable rate loans that have minimum interest rates will remain in our portfolio regardless of changes in the interest rate environment.  Actual results will differ from simulated results due to timing, magnitude and frequency of interest rate changes as well as changes in market conditions and management strategies.
 
Item 4.
Controls and Procedures
 
Evaluation of Disclosure Controls and Procedures: An evaluation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the “Act”)) was carried out as of September 30, 2016 under the supervision and with the participation of our Chief Executive Officer, Chief Financial Officer and several other members of our senior management.  Our Chief Executive Officer and Chief Financial Officer concluded that, as of September 30, 2016, our disclosure controls and procedures were effective in ensuring that the information we are required to disclose in the reports we file or submit under the Act is (i) accumulated and communicated to our management (including the Chief Executive Officer and Chief Financial Officer) to allow timely decisions regarding required disclosure, and (ii) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.
 
Changes in Internal Control Over Financial Reporting: During the quarter ended September 30, 2016, no change occurred in our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
 
We do not expect that our disclosure controls and procedures and internal control over financial reporting will prevent all error and all fraud.  A control procedure, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control procedure are met.  Because of the inherent limitations in all control procedures, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected.  These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns in controls or procedures can occur because of simple error or mistake.  Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control.  The design of any control procedure also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate.  Because of the inherent limitations in a cost-effective control procedure, misstatements due to error or fraud may occur and not be detected.
 

77


PART II.        OTHER INFORMATION

Item 1.
  Legal Proceedings
 
We are involved from time to time as plaintiff or defendant in various legal actions arising in the normal course of our businesses.  While the ultimate outcome of pending proceedings cannot be predicted with certainty, it is the opinion of management, after consultation with counsel representing us in such proceedings, that the resolution of these proceedings should not have a material adverse effect on our consolidated financial position or results of operation.


Item 1A.
  Risk Factors
 
There have been no material changes to the risk factors disclosed in Item 1A. Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2015.

Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
 
The following table sets forth information for the three months ended September 30, 2016 with respect to our repurchases of our outstanding common shares:
 
 
 
Total Number of
Shares Purchased (1)
 
Average Price Paid
per Share
 
Total Number of Shares Purchased
as Part of Publicly Announced
Plans or Programs
 
Approximate Dollar Value of
Shares that May Yet Be
Purchased Under the Plans
or Programs (in Thousands)
July 1, 2016 — July 31, 2016
 
3,527

 
$
37.68

 
—

 
$
—

August 1, 2016 — August 31, 2016
 
30,088

 
39.10

 
—

 
—

September 1, 2016 — September 30, 2016
 
—

 
—

 
—

 
—

Total
 
33,615

 
$
38.95

 
—

 
 

 
(1) 
Includes shares withheld to satisfy tax withholding obligations upon the exercise of stock options and vesting of restricted stock awards.
    
Item 6.
  Exhibits

See Exhibit Index.



78



SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
MB FINANCIAL, INC.
(registrant)
 
Date:
November 9, 2016
By:
/s/Mitchell Feiger
 
 
 
Mitchell Feiger
 
 
 
President and Chief Executive Officer
 
 
 
(Principal Executive Officer)
 
 
 
 
Date:
November 9, 2016
By:
/s/Randall T. Conte
 
 
 
Randall T. Conte
 
 
 
Vice President and Chief Financial Officer
 
 
 
(Principal Financial Officer)
 



79


EXHIBIT INDEX
Exhibit Number
 
Description
 
 
 
2.1
 
Agreement and Plan of Merger, dated as of July 14, 2013, by and among the Registrant and Taylor Capital Group, Inc. (incorporated herein by reference to Exhibit 2.1 to the Registrant's Current Report on Form 8-K filed on July 18, 2013 (File No.0-24566-01))

 
 
 
2.2
 
Amendment, dated as of June 30, 3014, to Agreement and Plan of Merger, dated as of July 14, 2013, by and between the Registrant and Taylor Capital Group, Inc. (incorporated herein by reference to Exhibit 2.1 to the Registrant's Current Report on Form 8-K filed on July 1, 2014 (File No.0-24566-01))
 
 
 
2.3
 
Letter Agreement, dated as of June 30, 3014, by and between the Registrant and Taylor Capital Group, Inc. (incorporated herein by reference to Exhibit 2.2 to the Registrant's Current Report on Form 8-K filed on July 1, 2014 (File No.0-24566-01))
 
 
 
2.4
 
Agreement and Plan of Merger, dated as of May 1, 2006, by and among the Registrant, MBFI Acquisition Corp. and First Oak Brook Bancshares, Inc. (“First Oak Brook”)(incorporated herein by reference to Exhibit 2.1 to the Registrant’s Current Report on Form 8-K filed on May 2, 2006 (File No.0-24566-01))
 
 
 
2.5
 
Purchase and Assumption Agreement among Federal Deposit Insurance Corporation, Receiver of Corus Bank, National Association, Chicago, Illinois, Federal Deposit Insurance Corporation and MB Financial Bank, N.A., dated as of September 11, 2009 (incorporated herein by reference to Exhibit 2.1 to the Registrant’s Current Report on Form 8-K filed on September 17, 2010 (File No.0-24566-01))
 
 
 
2.6
 
Purchase and Assumption Agreement among Federal Deposit Insurance Corporation, Receiver of Broadway Bank, Chicago, Illinois, Federal Deposit Insurance Corporation and MB Financial Bank, N.A., dated as of April 23, 2010 (incorporated herein by reference to Exhibit 2.6 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2010 (File No. 0-24566-01))
 
 
 
2.7
 
Purchase and Assumption Agreement among Federal Deposit Insurance Corporation, Receiver of New Century Bank, Chicago, Illinois, Federal Deposit Insurance Corporation and MB Financial Bank, N.A., dated as of April 23, 2010 (incorporated herein by reference to Exhibit 2.7 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2010 (File No. 0-24566-01))
 
 
 
2.8
 
Agreement and Plan of Merger, dated as of November 20, 2015, by and between the Registrant and American Chartered Bancorp, Inc. (incorporated herein by reference to Exhibit 2.1 to the Registrant's Current Report on Form 8-K filed on November 24, 2015 (File No.001-36599))
 
 
 
3.1
 
Charter of the Registrant, as amended (incorporated herein by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K filed on August 30, 2016 (File No. 001-36599))
 
 
 
3.1A
 
Articles Supplementary to the Charter of the Registrant for the Registrant’s Perpetual Non-Cumulative Preferred Stock, Series A (incorporated herein by reference to Exhibit 3.3 to the Registrant’s Registration Statement on Form 8-A filed on August 14, 2014 (File No.001-36599))
 
 
 
3.1B
 
Articles Supplementary to the Charter of the Registrant for the Registrant’s Cumulative Voting Convertible Preferred Stock, Series B (incorporated herein by reference to Exhibit 3.2 to the Registrant’s Current Report on Form 8-K filed on August 30, 2016 (File No.001-36599))
 
 
 
3.2
 
Bylaws of the Registrant, as amended (incorporated herein by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K filed on March 2, 2015 (File No. 001-36599))
 
 
 

80



EXHIBIT INDEX
Exhibit Number
 
Description
 
 
 
4.1
 
The Registrant hereby agrees to furnish to the Commission, upon request, the instruments defining the rights of the holders of each issue of long-term debt of the Registrant and its consolidated subsidiaries
 
 
 
10.1
 
Reserved
 
 
 
10.2
 
Amended and Restated Employment Agreement between the Registrant and Mitchell Feiger (incorporated herein by reference to Exhibit 10.2 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2008 (File No. 0-24566-01))
 
 
 
10.4
 
Form of Change and Control Severance Agreement between MB Financial Bank, National Association and Jill E. York (incorporated herein by reference to Exhibit 10.4 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2008 (File No. 0-24566-01))
 
 
 
10.4B
 
Form of Change and Control Severance Agreement between MB Financial Bank, National Association and each of Brian Wildman and Rosemarie Bouman (incorporated herein by reference to Exhibit 10.4B to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2008 (File No. 0-24566-01))
 
 
 
10.4C
 
Form of Change in Control Severance Agreement between MB Financial Bank, National Association and Mark A. Heckler (incorporated herein by reference to Exhibit 10.4C to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2011 (File No. 0-24566-01))
 
 
 
10.4D

 
Form of Change in Control Severance Agreement between MB Financial Bank, National Association and Randall T. Conte (incorporated herein by reference to Exhibit 10.4D to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2014 (File No. 001-36599))
 
 
 
10.5
 
Reserved
 
 
 
10.5A
 
Reserved
 
 
 
10.5B
 
Reserved
 
 
 
10.7
 
MB Financial, Inc. Third Amended and Restated Omnibus Incentive Plan (the “Omnibus Incentive Plan”) (incorporated herein by reference to Appendix A to the Registrant’s definitive proxy statement filed on April 11, 2014 (File No. 0-24566-01))
 
 
 
10.7
 
MB Financial, Inc. Third Amended and Restated Omnibus Incentive Plan (the “Omnibus Incentive Plan”) (incorporated herein by reference to Appendix A to the Registrant’s definitive proxy statement filed on April 11, 2014 (File No. 0-24566-01))
 
 
 
 

81


EXHIBIT INDEX
Exhibit Number
 
Description
 
 
 
10.8
 
MB Financial Stock Deferred Compensation Plan (incorporated herein by reference to Exhibit 10.8 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2008 (File No. 0-24566-01))
 
 
 
10.9
 
MB Financial Non-Stock Deferred Compensation Plan (incorporated herein by reference to Exhibit 10.9 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2008 (File No. 0-24566-01))
 
 
 
10.10
 
Avondale Federal Savings Bank Supplemental Executive Retirement Plan Agreement (incorporated herein by reference to Exhibit 10.2 to the Annual Report on Form 10-K of MB Financial, Inc., a Delaware corporation (then known as Avondale Financial Corp.) for the year ended December 31, 1996 (File No. 0-24566))
 
 
 
10.11
 
Agreement Regarding Salary Adjustment and Portion of Salary Payable by Stock, dated as of December 21, 2009, between MB Financial, Inc. and Mitchell Feiger (incorporated herein by reference to Exhibit 10.11 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2009 (File No. 0-24566-01))
 
 
 
10.11A
 
Form of Agreement Regarding Salary Adjustment and Portion of Salary Payable by Stock between MB Financial, Inc. and Rosemarie Bouman, Mark A. Heckler and Brian J. Wildman (incorporated herein by reference to Exhibit 10.11A to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2011 (File No. 0-24566-01))
 
 
 
10.12
 
Agreement Regarding Salary Adjustment and Portion of Salary Payable by Stock, dated as of December 21, 2009, between MB Financial, Inc. and Jill E. York (incorporated herein by reference to Exhibit 10.12 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2009 (File No. 0-24566-01))
 
 
 
10.13
 
Amended and Restated Employment Agreement between MB Financial Bank, N.A. and Ronald D. Santo (incorporated herein by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on December 14, 2004 (File No. 0-24566-01))
 
 
 
10.13A
 
Amendment to Amended and Restated Employment Agreement between MB Financial Bank, N.A. and Ronald D. Santo ((incorporated herein by reference to Exhibit 10.13A to the Registrant’s Annual Report on Form 10-K/A for the year ended December 31, 2006, filed on March 2, 2007 (File No. 0-24566-01))
 
 
 
10.15
 
Tax Gross Up Agreements between the Registrant and each of Mitchell Feiger, Jill E. York and Brian Wildman (incorporated herein by reference to Exhibit 10.15 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2008 (File No. 0-24566-01))
 
 
 
10.15A
 
Tax Gross Up Agreement between the Registrant and Rosemarie Bouman (incorporated herein by reference to Exhibit 10.15A to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2008 (File No. 0-24566-01))
 
 
 
10.16
 
Form of Incentive Stock Option Agreement for Executive Officers under the Omnibus Incentive Plan (incorporated herein by reference to Exhibit 10.16 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2007 (File No. 0-24566-01))
 
 
 


82


EXHIBIT INDEX
Exhibit Number
 
Description
 
 
 
10.17
 
Form of Non-Qualified Stock Option Agreement for Directors under the Omnibus Incentive Plan (incorporated herein by reference to Exhibit 10.16 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2007 (File No. 0-24566-01))
 
 
 
10.18
 
Form of Restricted Stock Agreement for Executive Officers under the Omnibus Incentive Plan (incorporated herein by reference to Exhibit 10.16 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2007 (File No. 0-24566-01))
 
 
 
10.18A
 
Amendment to Form of Incentive Stock Option Agreement and Form of Restricted Stock Agreement for Executive Officers under the Omnibus Incentive Plan (incorporated herein by reference to Exhibit 10.18A to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2008 (File No. 0-24566-01))
 
 
 
10.18B
 
Form of Performance-Based Restricted Stock Agreement for Executive Officers under the Omnibus Incentive Plan (incorporated herein by reference to Exhibit 10.18B to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2009 (File No. 0-24566-01))
 
 
 
10.18C
 
Form of Restricted Stock Agreement for grants on December 2, 2009 to Mitchell Feiger and Jill E. York (incorporated herein by reference to Exhibit 10.18C to the Registrant’s Current Report on Form 8-K filed on December 7, 2009 (File No. 0-24566-01))
 
 
 
10.19
 
Form of Restricted Stock Agreement for Directors under the Omnibus Incentive Plan (incorporated herein by reference to Exhibit 10.16 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2007 (File No. 0-24566-01))
 
 
 
10.20
 
First Oak Brook Bancshares, Inc. Incentive Compensation Plan (incorporated herein by reference to Appendix A to the definitive proxy statement filed by First Oak Brook on March 30, 2004 (File No. 0-14468))
 
 
 
10.20A
 
Amendment to First Oak Brook Bancshares, Inc. Incentive Compensation Plan ((incorporated herein by reference to Exhibit 10.20A to the Registrant’s Annual Report on Form 10-K/A for the year ended December 31, 2006, filed on March 2, 2007 (File No. 0-24566-01))
 
 
 
10.21
 
First Oak Brook Bancshares, Inc. 2001 Stock Incentive Plan (incorporated herein by reference to Appendix A to the definitive proxy statement filed by First Oak Brook on April 2, 2001 (File No. 0-14468))
 
 
 
10.21A
 
Amendment to First Oak Brook Bancshares, Inc. 2001 Stock Incentive Plan ((incorporated herein by reference to Exhibit 10.21A to the Registrant’s Annual Report on Form 10-K/A for the year ended December 31, 2006, filed on March 2, 2007 (File No. 0-24566-01))
 
 
 
10.22
 
First Oak Brook Bancshares, Inc. Directors Stock Plan (incorporated herein by reference to Exhibit 4.1 to the Registration Statement on Form S-8 filed by First Oak Brook on October 25, 1999 (File No. 333-89647))
 
 
 
10.22A
 
Amendment to First Oak Brook Bancshares, Inc. Directors Stock Plan (incorporated herein by reference to Exhibit 10.22A to the Registrant’s Quarterly Report on Form 10-Q/A for the quarter ended March 31, 2007 filed on May 15, 2007 (File No. 0-24566-01))
 
 
 
10.23
 
Letter Agreement, dated as of June 30, 2014, by and among the Registrant and certain principal stockholders of Taylor Capital Group, Inc. (incorporated herein by reference to Exhibit 10.1 to the Registrant's Current Report on Form 8-K filed on July 1, 2014 (File No.0-24566-01))
 
 
 


83



EXHIBIT INDEX
Exhibit Number
 
Description
 
 
 
10.23A
 
Supplemental Agreement, dated as of August 15, 2014, by and among the Registrant, MB Financial Bank, N.A., and Jennifer W. Steans, as representative of certain principal stockholders of Taylor Capital Group, Inc. (incorporated herein by reference to Exhibit 10.2 to the Registrant's Current Report on Form 8-K filed on August 20, 2014 (File No.001-36599))

 
 
 
10.23B
 
Escrow Agreement, dated as of August 15, 2014, by and among MB Financial Bank, N.A., Jennifer W. Steans, as representative of certain principal stockholders of Taylor Capital Group, Inc., and The Northern Trust Company, as escrow agent (incorporated herein by reference to Exhibit 10.2 to the Registrant's Current Report on Form 8-K filed on August 20, 2014 (File No.001-36599))
 
 
 
10.24
 
Employment Agreement, dated as of July 14, 2013 by and between the Registrant, MB Financial Bank, N.A. and Mark A. Hoppe (included as Exhibit E to the Agreement and Plan of Merger, dated as of July 14, 2013, by and between the Registrant and Taylor Capital Group, Inc. (incorporated herein by reference to Exhibit 2.1 to the Registrant's Current Report on Form 8-K filed on July 18, 2013 (File No.0-24566-01)))
 
 
 
10.25
 
Taylor Capital Group, Inc. Deferred Compensation Plan (incorporated herein by reference to Exhibit 10.1 to the Annual Report on Form 10-K of Taylor Capital Group, Inc. for the year ended December 31, 2008 (File No. 000-50034))
 
 
 
10.25A
 
Trust Under Taylor Capital Group, Inc. Deferred Compensation Plan (incorporated herein by reference to Exhibit 10.17 of the Registration Statement on Form S-1 of Taylor Capital Group, Inc. filed May 24, 2002 (Registration No. 333-89158))
 
 
 
10.25B
 
Amendment to the Taylor Capital Group, Inc. Deferred Compensation Plan (incorporated herein by reference to Exhibit 10.25B to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2014 (File No. 001-36599))
 
 
 
10.26
 
Taylor Capital Group, Inc. Senior Officer Change in Control Severance Plan (incorporated herein by reference to Exhibit 10.1 of the Quarterly Report on Form 10-Q of Taylor Capital Group, Inc. for the quarterly period ended June 30, 2009 (File No. 000-50034))
 
 
 
10.26A
 
Amendment to the Taylor Capital Group, Inc. Senior Officer Change in Control Severance Plan (incorporated herein by reference to Exhibit 10.26A to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2014 (File No. 001-36599))
 
 
 
10.27
 
First Oak Brook Bancshares, Inc. Executive Deferred Compensation Plan (incorporated by reference to Exhibit 10.3 to First Oak Brook’s Annual Report on Form 10-K for the year ended December 31, 1997 (File No. 0-14468))
 
 
 
10.27A
 
Amendment to First Oak Brook Bancshares, Inc. Executive Deferred Compensation Plan (incorporated herein by reference to Exhibit 10.27A to the Registrant’s Quarterly Report on Form 10-Q/A for the quarter ended March 31, 2007 filed on May 15, 2007)
 
 
 
10.29
 
Form of Transitional Employment Agreement between the Registrant (as successor to First Oak Brook) and Rosemarie Bouman (incorporated herein by reference to Exhibit 10.10 to First Oak Brook’s Annual Report on Form 10-K for the year ended December 31, 1998 (File No. 0-14468))
 
 
 
10.29A
 
First Amendment to Transitional Employment Agreement between the Registrant (as successor to First Oak Brook) and Rosemarie Bouman ((incorporated herein by reference to Exhibit 10.28A to the Registrant’s Annual Report on Form 10-K/A for the year ended December 31, 2006, filed March 2, 2007 (File No. 0-24566-01))

84


 
EXHIBIT INDEX
Exhibit Number
 
Description
 
 
 
10.29B
 
Second Amendment to Transitional Employment Agreement between the Registrant (as successor to First Oak Brook) and Rosemarie Bouman ((incorporated herein by reference to Exhibit 10.28B to the Registrant’s Annual Report on Form 10-K/A for the year ended December 31, 2006, filed March 2, 2007 (File No. 0-24566-01))
 
 
 
10.30
 
Form of Performance Share Unit Award Agreement (incorporated herein by reference to Exhibit 10.30 to the Registrant's Current Report on Form 8-K filed on September 5, 2012 (File No. 0-24566-01))
 
 
 
10.31
 
Form of Incentive Stock Option Agreement (Management Committee) (incorporated herein by reference to Exhibit 10.31 to the Registrant's Current Report on Form 8-K filed on September 5, 2012 (File No. 0-24566-01))
 
 
 
10.32
 
Form of Restricted Stock Agreement (Management Committee) (incorporated herein by reference to Exhibit 10.32 to the Registrant's Current Report on Form 8-K filed on September 5, 2012 (File No. 0-24566-01))
 
 
 
10.32A
 
Form of Restricted Stock Unit Agreement (Management Committee) (incorporated herein by reference to Exhibit 10.32A to the Registrant's Current Report on Form 8-K filed on September 5, 2012 (File No. 0-24566-01))
 
 
 
31.1
 
Rule 13a — 14(a)/15d — 14(a) Certification (Chief Executive Officer)*
 
 
 
31.2
 
Rule 13a — 14(a)/15d — 14(a) Certification (Chief Financial Officer)*
 
 
 
32
 
Section 1350 Certifications*
 
 
 
101
 
The following financial statements from the MB Financial, Inc. Quarterly Report on Form 10-Q for the quarter ended September 30, 2016, formatted in Extensive Business Reporting Language (XBRL): (i) consolidated balance sheets, (ii) consolidated statements of operations, (iii) consolidated statements of comprehensive income, (iv) consolidated statements of cash flows and (v) the notes to consolidated financial statements*


*  Filed herewith

85