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  • 10-Q (Nov 7, 2017)
  • 10-Q (Aug 7, 2017)
  • 10-Q (May 9, 2017)
  • 10-Q (Aug 5, 2016)
  • 10-Q (May 5, 2016)
  • 10-Q (Nov 4, 2015)

 
8-K

 
Other

MB Financial 10-Q 2017

Documents found in this filing:

  1. 10-Q
  2. Ex-31.1
  3. Ex-31.2
  4. Ex-32
  5. Ex-32
Document




UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
FORM 10-Q
 
(Mark One)
 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended June 30, 2017
 
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from                          to                         
 
Commission file number 001-36599
 
MB FINANCIAL, INC.
(Exact name of registrant as specified in its charter)
Maryland
 
36-4460265
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
 
 
800 West Madison Street, Chicago, Illinois
 
60607
(Address of principal executive offices)
 
(Zip Code)
 
Registrant’s telephone number, including area code:  (888) 422-6562
 

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

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o No x
 
There were issued and outstanding 83,883,046 shares of the Registrant’s common stock as of August 7, 2017.
 








MB FINANCIAL, INC.
 
FORM 10-Q
 
June 30, 2017
 
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)
 
 
 
 
June 30, 2017
 
December 31, 2016
ASSETS
 
 

 
 

Cash and due from banks
 
$
348,550

 
$
364,783

Interest earning deposits with banks
 
115,707

 
98,686

Total cash and cash equivalents
 
464,257

 
463,469

Investment securities:
 
 

 
 

Securities available for sale, at fair value
 
1,567,071

 
1,696,195

Securities held to maturity, at amortized cost ($1,061,044 fair value at June 30, 2017 and $1,093,740 at December 31, 2016)
 
1,022,912

 
1,069,750

Non-marketable securities - FHLB and FRB stock
 
160,204

 
143,276

Total investment securities
 
2,750,187

 
2,909,221

Loans held for sale
 
718,916

 
716,883

Loans:
 
 

 
 

Total loans, excluding purchased credit-impaired loans
 
13,465,064

 
12,605,726

Purchased credit-impaired loans
 
149,077

 
163,077

Total loans
 
13,614,141

 
12,768,803

Less: Allowance for loan and lease losses
 
154,033

 
139,366

Net loans
 
13,460,108

 
12,629,437

Lease investments, net
 
346,036

 
311,327

Premises and equipment, net
 
288,148

 
293,910

Cash surrender value of life insurance
 
203,534

 
200,945

Goodwill
 
999,925

 
1,001,038

Other intangibles
 
58,783

 
62,959

Mortgage servicing rights, at fair value
 
249,688

 
238,011

Other real estate owned, net
 
11,063

 
26,279

Other real estate owned related to FDIC-assisted transactions
 
4,849

 
5,006

Other assets
 
409,563

 
443,832

Total assets
 
$
19,965,057

 
$
19,302,317

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 

 
 

LIABILITIES
 
 

 
 

Deposits:
 
 

 
 

Non-interest bearing
 
$
6,388,292

 
$
6,408,169

Interest bearing
 
7,873,527

 
7,702,279

Total deposits
 
14,261,819

 
14,110,448

Short-term borrowings
 
1,993,358

 
1,569,288

Long-term borrowings
 
330,160

 
311,790

Junior subordinated notes issued to capital trusts
 
211,085

 
210,668

Accrued expenses and other liabilities
 
520,355

 
520,914

Total liabilities
 
17,316,777

 
16,723,108

STOCKHOLDERS’ EQUITY
 
 

 
 

Preferred stock, ($0.01 par value, authorized 10,000,000 shares at June 30, 2017 and December 31, 2016; Series A, 8% perpetual non-cumulative, 4,000,000 shares issued and outstanding at June 30, 2017 and December 31, 2016, $25 liquidation value; Series B, 8% cumulative voting convertible, 125 shares issued and outstanding at June 30, 2017 and December 31, 2016, $1,000 liquidation value)
 
115,572

 
115,572

Common stock, ($0.01 par value; authorized 120,000,000 shares at June 30, 2017 and December 31, 2016; issued 85,725,616 shares at June 30, 2017 and 85,630,748 shares at December 31, 2016)
 
857

 
856

Additional paid-in capital
 
1,681,252

 
1,678,826

Retained earnings
 
899,930

 
838,892

Accumulated other comprehensive income
 
10,520

 
5,190

Less: 1,856,099 and 1,905,479 shares of treasury common stock, at cost, at June 30, 2017 and December 31, 2016, respectively
 
(59,851
)
 
(60,384
)
Controlling interest stockholders’ equity
 
2,648,280

 
2,578,952

Non-controlling interest
 

 
257

Total stockholders’ equity
 
2,648,280

 
2,579,209

Total liabilities and stockholders’ equity
 
$
19,965,057

 
$
19,302,317



     See Accompanying Notes to Consolidated Financial Statements.

1



MB FINANCIAL, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands, except share and per share data) (Unaudited)
 
 
Three Months Ended
 
Six Months Ended
 
 
June 30,
 
June 30,
 
 
2017
 
2016
 
2017
 
2016
Interest income:
 
 

 
 

 
 
 
 
Loans:
 
 
 
 
 
 
 
 
Taxable
 
$
143,426

 
$
110,231

 
$
277,163

 
$
215,154

Nontaxable
 
2,791

 
2,741

 
5,671

 
5,327

Investment securities:
 
 

 
 

 
 

 
 

Taxable
 
8,717

 
7,799

 
17,839

 
17,365

Nontaxable
 
9,837

 
10,644

 
19,810

 
21,420

Other interest earning accounts and Federal funds sold
 
228

 
125

 
427

 
266

Total interest income
 
164,999

 
131,540

 
320,910

 
259,532

Interest expense:
 
 

 
 

 
 
 
 
Deposits
 
8,793

 
5,952

 
16,268

 
11,574

Short-term borrowings
 
3,912

 
910

 
6,292

 
1,631

Long-term borrowings and junior subordinated notes
 
3,300

 
2,076

 
6,313

 
4,421

Total interest expense
 
16,005

 
8,938

 
28,873

 
17,626

Net interest income
 
148,994

 
122,602

 
292,037

 
241,906

Provision for credit losses
 
9,699

 
2,829

 
13,433

 
10,392

Net interest income after provision for credit losses
 
139,295

 
119,773

 
278,604

 
231,514

Non-interest income:
 
 

 
 

 
 
 
 
Mortgage banking revenue
 
29,499

 
39,615

 
57,278

 
67,097

Lease financing revenue, net
 
18,401

 
15,708

 
39,819

 
34,754

Commercial deposit and treasury management fees
 
14,499

 
11,548

 
29,188

 
23,426

Trust and asset management fees
 
8,498

 
8,236

 
17,018

 
16,186

Card fees
 
4,413

 
4,045

 
8,979

 
7,570

Capital markets and international banking fees
 
3,586

 
2,771

 
6,839

 
5,998

Consumer and other deposit service fees
 
3,285

 
3,161

 
6,648

 
6,186

Brokerage fees
 
1,250

 
1,315

 
2,375

 
2,473

Loan service fees
 
2,037

 
1,961

 
4,006

 
3,713

Increase in cash surrender value of life insurance
 
1,301

 
850

 
2,589

 
1,704

Net gain on investment securities
 
137

 
269

 
368

 
269

Net loss on disposal of other assets
 
(4
)
 
(2
)
 
(127
)
 
(50
)
Other operating income
 
3,615

 
2,523

 
7,310

 
4,367

Total non-interest income
 
90,517

 
92,000

 
182,290

 
173,693

Non-interest expenses:
 
 

 
 

 
 
 
 
Salaries and employee benefits expense
 
102,566

 
95,004

 
204,117

 
180,595

Occupancy and equipment expense
 
15,284

 
13,415

 
30,328

 
26,675

Computer services and telecommunication expense
 
9,785

 
9,777

 
19,225

 
18,832

Advertising and marketing expense
 
3,245

 
2,964

 
6,406

 
5,842

Professional and legal expense
 
2,450

 
3,321

 
5,141

 
5,910

Other intangibles amortization expense
 
2,086

 
1,617

 
4,176

 
3,243

Branch exit and facilities impairment charges
 
6,589

 
155

 
5,907

 
199

Net loss (gain) recognized on other real estate owned and other related expenses
 
690

 
258

 
1,534

 
(88
)
Other operating expenses
 
22,864

 
21,395

 
44,390

 
42,498

Total non-interest expenses
 
165,559

 
147,906

 
321,224

 
283,706

Income before income taxes
 
64,253

 
63,867

 
139,670

 
121,501

Income tax expense
 
19,787

 
20,455

 
40,667

 
38,975

Net income
 
44,466

 
43,412

 
99,003

 
82,526

Dividends on preferred shares
 
2,002

 
2,000

 
4,005

 
4,000

Net income available to common stockholders
 
$
42,464

 
$
41,412

 
$
94,998

 
$
78,526

     

2



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

 
 
 
Three Months Ended
 
Six Months Ended
 
 
June 30,
 
June 30,
 
 
2017
 
2016
 
2017
 
2016
Common share data:
 
 

 
 

 
 
 
 
Basic earnings per common share
 
$
0.51

 
$
0.56

 
$
1.13

 
$
1.07

Diluted earnings per common share
 
0.50

 
0.56

 
1.12

 
1.06

Weighted average common shares outstanding for basic earnings per common share
 
83,842,963

 
73,475,258

 
83,753,195

 
73,402,995

Diluted weighted average common shares outstanding for diluted earnings per common share
 
84,767,414

 
74,180,374

 
84,773,271

 
74,073,655










































 
See Accompanying Notes to Consolidated Financial Statements.

3



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

 
 
 
Three Months Ended
 
Six Months Ended
 
 
June 30,
 
June 30,
 
 
2017
 
2016
 
2017
 
2016
 
 
 
 
 
 
 
 
 
Net income
 
$
44,466

 
$
43,412

 
$
99,003

 
$
82,526

Unrealized holding gains on investment securities, net of reclassification adjustments
 
3,979

 
7,706

 
10,033

 
23,282

Reclassification adjustment for amortization of unrealized gains on investment securities transferred to held to maturity from available for sale
 
(350
)
 
(724
)
 
(823
)
 
(1,527
)
Reclassification adjustments for gains included in net income
 
(137
)
 
(269
)
 
(368
)
 
(269
)
Other comprehensive income, before tax
 
3,492

 
6,713

 
8,842

 
21,486

Income tax expense related to items of other comprehensive income
 
(1,387
)
 
(2,669
)
 
(3,512
)
 
(8,532
)
Other comprehensive income, net of tax
 
2,105

 
4,044

 
5,330

 
12,954

Comprehensive income
 
$
46,571

 
$
47,456

 
$
104,333

 
$
95,480





































See Accompanying Notes to Consolidated Financial Statements.

4




MB FINANCIAL, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
Six Months Ended June 30, 2017 and 2016
(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
Non-controlling
Interest
Total Stock-
holders’
Equity
Balance at December 31, 2015
$
115,280

$
756

$
1,280,870

$
731,812

$
15,777

$
(58,504
)
$
1,293

$
2,087,284

Net income



82,526



124

82,650

Other comprehensive income, net of tax




12,954



12,954

Cash dividends declared on preferred shares



(4,000
)



(4,000
)
Cash dividends declared on common shares ($0.36 per share)



(26,870
)



(26,870
)
Restricted common stock activity, net of tax

1

(632
)


699


68

Stock option activity, net of tax


1,183



(56
)

1,127

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


288



(2,871
)

(2,583
)
Stock-based compensation expense


8,335





8,335

Purchase of additional investment in subsidiary from minority owners


(1,267
)



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






(94
)
(94
)
Balance at June 30, 2016
$
115,280

$
757

$
1,288,777

$
783,468

$
28,731

$
(60,732
)
$
254

$
2,156,535

 
 
 
 
 
 
 
 
 
Balance at December 31, 2016
$
115,572

$
856

$
1,678,826

$
838,892

$
5,190

$
(60,384
)
$
257

$
2,579,209

Net income



99,003




99,003

Other comprehensive income, net of tax




5,330



5,330

Cash dividends declared on preferred shares



(4,005
)



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



(33,960
)



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


(6,837
)


3,550


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

1

448





449

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


461



(3,017
)

(2,556
)
Stock-based compensation expense


8,924





8,924

Purchase of additional investment in subsidiary from minority owners


(570
)



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

$
857

$
1,681,252

$
899,930

$
10,520

$
(59,851
)
$

$
2,648,280

















See Accompanying Notes to Consolidated Financial Statements.

5



MB FINANCIAL, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands) (Unaudited)
 
 
 
Six Months Ended
 
 
June 30,
 
 
2017
 
2016
Cash Flows From Operating Activities
 
 

 
 

Net income
 
$
99,003

 
$
82,526

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

 
 

Depreciation of premises and equipment and leased equipment
 
44,922

 
35,676

Branch exit and facilities impairment charges
 
5,907

 
199

Compensation expense for share-based payment plans
 
8,924

 
8,335

Net (gain) loss on sales of premises and equipment and leased equipment
 
(752
)
 
157

Amortization of other intangibles
 
4,176

 
3,243

Provision for credit losses
 
13,433

 
10,392

Deferred income tax expense
 
22,072

 
22,327

Amortization of premiums and discounts on investment securities, net
 
20,754

 
23,488

Accretion of discounts on loans, net
 
(13,858
)
 
(14,961
)
Net gain on investment securities
 
(368
)
 
(269
)
Proceeds from sale of loans held for sale
 
2,340,861

 
2,772,282

Origination of loans held for sale
 
(2,321,902
)
 
(2,833,315
)
Net loss (gain) on sale of loans held for sale
 
887

 
(19,720
)
Change in fair value of mortgage servicing rights
 
16,676

 
61,197

Net loss (gain) on other real estate owned
 
1,313

 
(468
)
Increase in cash surrender value of life insurance
 
(2,589
)
 
(1,704
)
Increase in other assets, net
 
(24,770
)
 
(95,794
)
(Decrease) increase in other liabilities, net
 
(37,530
)
 
18,900

Net cash provided by operating activities
 
177,159

 
72,491

Cash Flows From Investing Activities
 
 

 
 

Proceeds from sales of investment securities available for sale
 
2,271

 
842

Proceeds from maturities and calls of investment securities available for sale
 
167,856

 
133,638

Purchases of investment securities available for sale
 
(47,016
)
 
(17,525
)
Proceeds from maturities and calls of investment securities held to maturity
 
72,250

 
80,037

Purchases of investment securities held to maturity
 
(29,457
)
 
(10,854
)
Purchases of non-marketable securities - FHLB and FRB stock
 
(110,711
)
 
(15,999
)
Redemption of non-marketable securities - FHLB and FRB stock
 
93,783

 

Net increase in loans
 
(832,802
)
 
(397,347
)
Purchases of mortgage servicing rights
 
(786
)
 
(2,961
)
Purchases of premises and equipment and leased equipment
 
(78,833
)
 
(63,123
)
Proceeds from sales of premises and equipment and leased equipment
 
14,227

 
2,079

Proceeds from sale of other real estate owned
 
16,686

 
7,461

Proceeds from sale of other real estate owned related to FDIC-assisted transactions
 
2,587

 
2,891

Purchase of additional investment in subsidiary from minority owners
 
(827
)
 
(2,336
)
Net proceeds from FDIC related covered assets
 
(227
)
 
(2,911
)
Net cash used in investing activities
 
(730,999
)
 
(286,108
)
Cash Flows From Financing Activities
 
 

 
 

Net (decrease) increase in deposits
 
151,371

 
(69,119
)
Proceeds from short-term borrowings - FHLB advances
 
2,350,000

 
850,000

Principal paid on short-term borrowings - FHLB advances
 
(2,125,000
)
 
(525,000
)
Net increase (decrease) in short-term borrowings
 
49,070

 
(83,743
)
Proceeds from long-term borrowings
 
262,864

 
172,075

Principal paid on long-term borrowings
 
(94,494
)
 
(53,805
)
Treasury stock transactions, net
 
(2,556
)
 
(2,583
)
Stock options exercised
 
1,376

 
1,027

Dividends paid on preferred stock
 
(4,005
)
 
(4,000
)
Dividends paid on common stock
 
(33,998
)
 
(26,553
)
Net cash provided by financing activities
 
554,628

 
258,299

Net increase in cash and cash equivalents
 
$
788

 
$
44,682

Cash and cash equivalents:
 
 

 
 

Beginning of period
 
463,469

 
381,441

End of period
 
$
464,257

 
$
426,123



6



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

 
 
 
Six Months Ended
 
 
June 30,
 
 
2017
 
2016
Supplemental Disclosures of Cash Flow Information:
 
 

 
 

Cash payments for:
 
 

 
 

Interest paid to depositors and on other borrowed funds
 
$
27,666

 
$
17,416

Income tax payments, net
 
2,486

 
3,796

Supplemental Schedule of Noncash Investing Activities:
 
 

 
 

Investment securities held to maturity purchased not settled
 
2,553

 

Loans transferred to other real estate owned
 
2,658

 
2,637

Loans transferred to other real estate owned related to FDIC-assisted transactions
 
2,321

 
830

Loans transferred to repossessed assets
 
969

 
2,398

Operating leases rewritten as direct finance leases included as loans
 
1,547

 
363

Long-term borrowings transferred to short-term borrowings
 
150,000

 

Supplemental Schedule of Noncash Investing Activities From Acquisitions:
 
 

 
 

Adjustments to noncash assets previously acquired:
 
 

 
 

Loans
 
1,846

 

Goodwill
 
(1,113
)
 

Other assets
 
(733
)
 

Total adjustments to noncash assets previously acquired
 
$

 
$


















 
See Accompanying Notes to Consolidated Financial Statements.

7




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

Note 1.
   Basis of Presentation
 
 These unaudited consolidated financial statements include the accounts of MB Financial, Inc., a Maryland corporation (the “Company”), and its subsidiaries, including its wholly owned national bank subsidiary, MB Financial Bank, N.A. (“MB Financial Bank”), based in Chicago, Illinois. In the opinion of management, all normal recurring adjustments necessary for a fair presentation of the financial condition, results of operations and cash flows for the interim periods have been made. The results of operations for the six months ended June 30, 2017 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, 2016.
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions which affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements, as well as the reported amounts of income and expenses during the reported periods. Actual results could differ from those estimates.
Certain prior period amounts have been reclassified to conform to current period presentation. These reclassifications did not result in any changes to previously reported net income or stockholders’ equity.

Note 2.
New Authoritative Accounting Guidance

ASC Topic 805 "Business Combinations." New authoritative accounting guidance under ASC Topic 805 "Business Combinations" amends prior guidance to clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The 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 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 January 1, 2018. The Company's revenue is comprised of interest income on financial assets, which is excluded from the scope of this new guidance, and non-interest income. The Company expects this new guidance will require it to change how certain recurring revenue streams are recognized within trust and asset management fees but does not expect these changes to have a significant impact on its statements of operations or financial condition. The Company continues to evaluate the impact of this guidance on other components of non-interest income. The Company expects to adopt this new guidance on January 1, 2018 with a cumulative effect adjustment to opening retained earnings, if such adjustment is deemed to be significant.

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.


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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. The Company expects an increase in assets and liabilities as a result of recording additional lease contracts where the Company is lessee.

ASC Topic 815 "Derivatives and Hedging." New authoritative accounting guidance under ASC Topic 815 "Derivatives and Hedging" amended prior guidance to 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 Company adopted this new authoritative guidance on January 1, 2017, and it did not have a significant impact on the Company's statements of operations or financial condition.

New authoritative accounting guidance under ASC Topic 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 Company adopted this new authoritative guidance on January 1, 2017, and it did not 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 Company adopted this new authoritative guidance on January 1, 2017, and it did not have an 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 in 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 Company early adopted the new guidance in the third quarter of 2016. The Company has also elected to account for forfeitures when they occur.


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ASC Topic 326 "Financial Instruments - Credit Losses." New authoritative accounting guidance under ASC Topic 326 "Financial Instruments - Credit Losses" amended the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information for credit loss estimates. The measurement of expected credit losses is based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. The new authoritative guidance also requires a financial asset (or a group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected (net of the allowance for credit losses). In addition, the credit losses relating to available-for-sale debt securities should be recorded through an allowance for credit losses rather than a write-down. The new authoritative guidance will be effective for reporting periods after January 1, 2020. The Company is evaluating the new guidance and expects it to have an impact on the Company's statements of operations and financial condition, the significance of which is not yet known. Due to the significant differences in the new authoritative guidance from the existing GAAP, the implementation of this guidance may result in material changes in our accounting for credit losses on the financial instruments.

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.

New authoritative accounting guidance under ASC Topic 230 "Statement of Cash Flows" amends prior guidance to require an entity to include amounts generally described as restricted cash and restricted cash equivalents with cash and cash equivalents when reconciling the beginning of period and end of period total amounts shown on the statement of cash flows. The 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.

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

ASC Topic 610 "Other Income - Gains and Losses from the Derecognition of Nonfinancial Assets." New authoritative accounting guidance under ASC Topic 610 "Other Income - Gains and Losses from the Derecognition of Nonfinancial Assets" amends prior guidance to clarify the scope of Subtopic 610-20 by defining in substance nonfinancial assets and to add guidance for partial sales of nonfinancial assets. The 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 and financial condition.

ASC Topic 310 "Receivables - Nonrefundable Fees and Other Costs." New authoritative accounting guidance under ASC Topic 610 "Receivables - Nonrefundable Fees and Other Costs" amends prior guidance by shortening the amortization period for certain callable debt securities held at a premium requiring the premium to be amortized to the earliest call date. The new authoritative guidance will be effective for reporting periods after January 1, 2019 with early adoption permitted. The Company is evaluating the new guidance and its impact on the Company's statements of operations and financial condition.

ASC Topic 718 "Compensation - Stock Compensation." New authoritative accounting guidance under ASC Topic 718 "Compensation - Stock Compensation" amends prior guidance by clarifying which changes to terms or conditions of a share-based payment award requires an entity to apply modification accounting. An entity should account for the effects of a modification unless the fair value, vesting conditions and classification of the modified award are the same as the original award. The new authoritative guidance will be effective for reporting periods after January 1, 2018 with early adoption permitted. This new authoritative guidance is not expected to have a significant impact on the Company's statements of operations or financial condition.



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

The following table presents a reconciliation of the number of shares used in the calculation of basic and diluted earnings per common share (amounts in thousands, except share and per share data).
 
 
 
Three Months Ended
 
Six Months Ended
 
 
June 30,
 
June 30,
 
 
2017
 
2016
 
2017
 
2016
Distributed earnings allocated to common stock
 
$
17,829

 
$
14,216

 
$
33,960

 
$
26,870

Undistributed earnings
 
26,637

 
29,196

 
65,043

 
55,656

Net income
 
44,466

 
43,412

 
99,003

 
82,526

Less: preferred stock dividends
 
2,002

 
2,000

 
4,005

 
4,000

Net income available to common stockholders for basic earnings per common share
 
42,464

 
41,412

 
94,998

 
78,526

Plus: preferred stock dividends on convertible preferred stock
 
2

 

 
5

 

Less: earnings allocated to participating securities
 
1

 
2

 
2

 
4

Earnings allocated to common stockholders for diluted earnings per common share
 
$
42,465

 
$
41,410

 
$
95,001

 
$
78,522

Weighted average shares outstanding for basic earnings per common share
 
83,842,963

 
73,475,258

 
83,753,195

 
73,402,995

Dilutive effect of:
 
 
 
 
 
 
 
 
Stock options
 
554,314

 
326,339

 
595,415

 
281,948

Restricted shares and units
 
363,003

 
378,777

 
417,433

 
388,712

Convertible preferred stock
 
7,134

 

 
7,228

 

Total dilutive effect of equity awards and convertible preferred stock
 
924,451

 
705,116

 
1,020,076

 
670,660

Weighted average shares outstanding for diluted earnings per common share
 
84,767,414

 
74,180,374

 
84,773,271

 
74,073,655

Basic earnings per common share
 
$
0.51

 
$
0.56

 
$
1.13

 
$
1.07

Diluted earnings per common share
 
0.50

 
0.56

 
1.12

 
1.06

 

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Note 4.
   Business Combinations
 
American Chartered Bancorp, Inc. On August 24, 2016, American Chartered Bancorp, Inc. ("American Chartered"), an Illinois corporation, was merged (the "American Chartered merger") with and into the Company, pursuant to the Agreement and Plan of Merger, dated as of November 20, 2015 (the "Merger Agreement"), by and between the Company and American Chartered. This transaction continues to solidify the Company's market position in Chicago. At the effective time of the merger (the "American Chartered 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 American Chartered 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 American Chartered Effective Time whose holder elected pursuant to American Chartered’s charter to receive the same consideration in the American Chartered 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 American Chartered 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 American Chartered 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 Merger Agreement.

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 $274.9 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. During the first quarter of 2017, the fair value estimates of loans increased by $1.8 million compared to previously reported balances, which decreased the deferred tax asset by $733 thousand and goodwill by $1.1 million. The amounts recognized for the business combination in the financial statements have been determined to be final as of March 31, 2017.

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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
 
1,942,548

Premises and equipment
 
39,048

Cash surrender value of life insurance
 
59,917

Goodwill
 
274,885

Other intangibles
 
25,452

Other real estate owned
 
3,960

Other assets
 
31,408

Total assets
 
$
2,992,089

LIABILITIES
 
 
Deposits
 
$
2,389,327

Short-term borrowings
 
48,305

Long-term borrowings
 
16,000

Junior subordinated notes issued to capital trusts
 
28,075

Accrued expenses and other liabilities
 
22,966

Total liabilities
 
$
2,504,673

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 preferred stock were converted into shares of 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 Topic 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 Topic 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 Topic 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 $20.7 million as of the date of the acquisition.

In accordance with ASC Topic 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 $18.4 million and $5.3 million, respectively, as of the date of the acquisition.

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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
 
$
62,104

 
$
1,880,444

Gross contractual amounts receivable
 
93,490

 
2,149,868

Best estimate of contractual cash flows not expected to be collected (1)
 
22,293

 
114,154

Best estimate of contractual cash flows expected to be collected
 
71,197

 
2,035,714

(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 defaults.

The Company incurred costs of $2.0 million directly related to the consummation of the merger for the year ended December 31, 2016, which was 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 three and six months ended June 30, 2016, as if the acquisition had occurred on January 1, 2016. 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, 2016. 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
 
Six Months Ended
 
 
June 30,
 
June 30,
 
 
2016
 
2016
(in thousands)
 
 
 
 
Total revenues (net interest income plus non-interest income)
 
$
245,037

 
$
476,797

Net income
 
51,657

 
99,081


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.


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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
June 30, 2017
 
 

 
 

 
 

 
 

Available for Sale
 
 

 
 

 
 

 
 

U.S. Government sponsored agencies and enterprises
 
$
23,141

 
$
88

 
$

 
$
23,229

States and political subdivisions
 
367,385

 
20,494

 
(528
)
 
387,351

Residential mortgage-backed securities
 
920,005

 
5,520

 
(7,920
)
 
917,605

Commercial mortgage-backed securities
 
88,159

 
1,332

 
(165
)
 
89,326

Corporate bonds
 
137,948

 
679

 
(71
)
 
138,556

Equity securities
 
11,114

 

 
(110
)
 
11,004

Total Available for Sale
 
1,547,752

 
28,113

 
(8,794
)
 
1,567,071

Held to Maturity
 
 

 
 

 
 

 
 

States and political subdivisions
 
896,043

 
35,542

 
(376
)
 
931,209

Residential mortgage-backed securities