Docoh
Loading...

WTFC Wintrust Financial

Filed: 6 Aug 21, 4:46pm
0001015328us-gaap:PerformanceSharesMember2020-06-30
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 _________________________________________

FORM 10-Q
_________________________________________
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2021
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from             to
Commission File Number 001-35077
_____________________________________ 
WINTRUST FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter) 
Illinois36-3873352
(State of incorporation or organization)(I.R.S. Employer Identification No.)
9700 W. Higgins Road, Suite 800
Rosemont, Illinois 60018
(Address of principal executive offices)
(847) 939-9000
(Registrant’s telephone number, including area code)
Title of Each Class Ticker SymbolName of Each Exchange on Which Registered
Common Stock, no par valueWTFCThe NASDAQ Global Select Market
Series D Preferred Stock, no par valueWTFCMThe NASDAQ Global Select Market
Depositary Shares, Each Representing a 1/1,000th Interest in a Share of
WTFCPThe NASDAQ Global Select Market
 6.875% Fixed-Rate Reset Non-Cumulative Perpetual Series E
Preferred Stock, no par value
____________________________________ 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No  
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes      No  
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filerAccelerated filer
Non-accelerated filer(Do not check if a smaller reporting company)Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.    ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes   ☐    No  
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Common Stock — no par value, 57,040,656 shares, as of July 31, 2021


TABLE OF CONTENTS
 
Page
PART I. — FINANCIAL INFORMATION
ITEM 1.
ITEM 2.
ITEM 3.
ITEM 4.
PART II. — OTHER INFORMATION
ITEM 1.
ITEM 1A.
ITEM 2.
ITEM 3.Defaults Upon Senior SecuritiesNA
ITEM 4.Mine Safety DisclosuresNA
ITEM 5.Other InformationNA
ITEM 6.



PART I
ITEM 1. FINANCIAL STATEMENTS
WINTRUST FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CONDITION
(Unaudited)(Unaudited)
(In thousands, except share data)June 30,
2021
December 31,
2020
June 30,
2020
Assets
Cash and due from banks$434,957 $322,415 $344,999 
Federal funds sold and securities purchased under resale agreements52 59 58 
Interest-bearing deposits with banks4,707,415 4,802,527 4,015,072 
Available-for-sale securities, at fair value2,188,608 3,055,839 3,194,961 
Held-to-maturity securities, at amortized cost, net of allowance for credit losses of $90, $59 and $65 at June 30, 2021, December 31, 2020 and June 30, 2020, respectively ($2.5 billion, $593.8 million and $744.3 million fair value at June 30, 2021, December 31, 2020 and June 30, 2020, respectively)2,498,232 579,138 728,465 
Trading account securities2,667 671 890 
Equity securities with readily determinable fair value86,316 90,862 52,460 
Federal Home Loan Bank and Federal Reserve Bank stock136,625 135,588 135,571 
Brokerage customer receivables23,093 17,436 14,623 
Mortgage loans held-for-sale, at fair value984,994 1,272,090 833,163 
Loans, net of unearned income32,911,187 32,079,073 31,402,903 
Allowance for loan losses(261,089)(319,374)(313,510)
Net loans32,650,098 31,759,699 31,089,393 
Premises and equipment, net752,375 768,808 769,909 
Lease investments, net219,023 242,434 237,040 
Accrued interest receivable and other assets1,185,811 1,351,455 1,437,832 
Trade date securities receivable189,851 
Goodwill646,336 645,707 644,213 
Other intangible assets31,997 36,040 41,368 
Total assets$46,738,450 $45,080,768 $43,540,017 
Liabilities and Shareholders’ Equity
Deposits:
Non-interest-bearing$12,796,110 $11,748,455 $10,204,791 
Interest-bearing26,008,506 25,344,196 25,447,083 
Total deposits38,804,616 37,092,651 35,651,874 
Federal Home Loan Bank advances1,241,071 1,228,429 1,228,416 
Other borrowings518,493 518,928 508,535 
Subordinated notes436,719 436,506 436,298 
Junior subordinated debentures253,566 253,566 253,566 
Trade date securities payable0 200,907 
Accrued interest payable and other liabilities1,144,974 1,233,786 1,471,110 
Total liabilities42,399,439 40,964,773 39,549,799 
Shareholders' Equity:
Preferred stock, no par value; 20,000,000 shares authorized:
Series D - $25 liquidation value; 5,000,000 shares issued and outstanding at June 30, 2021, December 31, 2020 and June 30, 2020125,000 125,000 125,000 
Series E - $25,000 liquidation value; 11,500 shares issued and outstanding at June 30, 2021, December 31, 2020 and June 30, 2020287,500 287,500 287,500 
Common stock, no par value; $1.00 stated value; 100,000,000 shares authorized at June 30, 2021, December 31, 2020 and June 30, 2020; 58,770,304 shares issued at June 30, 2021, 58,473,252 shares issued at December 31, 2020 and 58,294,456 shares issued at June 30, 202058,770 58,473 58,294 
Surplus1,669,002 1,649,990 1,643,864 
Treasury stock, at cost, 1,703,627 shares at June 30, 2021 and December 31, 2020, and 720,784 shares at June 30, 2020(100,363)(100,363)(44,891)
Retained earnings2,288,969 2,080,013 1,921,048 
Accumulated other comprehensive income (loss)10,133 15,382 (597)
Total shareholders’ equity4,339,011 4,115,995 3,990,218 
Total liabilities and shareholders’ equity$46,738,450 $45,080,768 $43,540,017 
See accompanying notes to unaudited consolidated financial statements.
1

WINTRUST FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Three Months EndedSix Months Ended
(In thousands, except per share data)June 30,
2021
June 30,
2020
June 30,
2021
June 30,
2020
Interest income
Interest and fees on loans$284,701 $294,746 $558,801 $596,585 
Mortgage loans held-for-sale8,183 4,764 17,219 7,929 
Interest-bearing deposits with banks1,153 1,310 2,352 6,078 
Federal funds sold and securities purchased under resale agreements0 16 0 102 
Investment securities23,623 27,105 42,887 59,572 
Trading account securities1 13 3 20 
Federal Home Loan Bank and Federal Reserve Bank stock1,769 1,765 3,514 3,342 
Brokerage customer receivables149 97 272 255 
Total interest income319,579 329,816 625,048 673,883 
Interest expense
Interest on deposits24,298 50,057 52,242 117,492 
Interest on Federal Home Loan Bank advances4,887 4,934 9,727 8,294 
Interest on other borrowings2,568 3,436 5,177 6,982 
Interest on subordinated notes5,512 5,506 10,989 10,978 
Interest on junior subordinated debentures2,724 2,752 5,428 5,563 
Total interest expense39,989 66,685 83,563 149,309 
Net interest income279,590 263,131 541,485 524,574 
Provision for credit losses(15,299)135,053 (60,646)188,014 
Net interest income after provision for credit losses294,889 128,078 602,131 336,560 
Non-interest income
Wealth management30,690 22,636 59,999 48,577 
Mortgage banking50,584 102,324 164,078 150,650 
Service charges on deposit accounts13,249 10,420 25,285 21,685 
Gains (losses) on investment securities, net1,285 808 2,439 (3,551)
Fees from covered call options1,388 1,388 2,292 
Trading losses, net(438)(634)(19)(1,085)
Operating lease income, net12,240 11,785 26,680 23,769 
Other20,375 14,654 36,029 32,898 
Total non-interest income129,373 161,993 315,879 275,235 
Non-interest expense
Salaries and employee benefits172,817 154,156 353,626 290,918 
Equipment20,866 15,846 41,778 30,680 
Operating lease equipment depreciation9,949 9,292 20,720 18,552 
Occupancy, net17,687 16,893 37,683 34,440 
Data processing6,920 10,406 12,968 18,779 
Advertising and marketing11,305 7,704 19,851 18,566 
Professional fees7,304 7,687 14,891 14,408 
Amortization of other intangible assets2,039 2,820 4,046 5,683 
FDIC insurance6,405 7,081 12,963 11,216 
OREO expense, net769 237 518 (639)
Other24,051 27,246 47,957 51,406 
Total non-interest expense280,112 259,368 567,001 494,009 
Income before taxes144,150 30,703 351,009 117,786 
Income tax expense39,041 9,044 92,752 33,315 
Net income$105,109 $21,659 $258,257 $84,471 
Preferred stock dividends6,991 2,050 13,982 4,100 
Net income applicable to common shares$98,118 $19,609 $244,275 $80,371 
Net income per common share—Basic$1.72 $0.34 $4.29 $1.40 
Net income per common share—Diluted$1.70 $0.34 $4.24 $1.38 
Cash dividends declared per common share$0.31 $0.28 $0.62 $0.56 
Weighted average common shares outstanding57,049 57,567 56,977 57,593 
Dilutive potential common shares726 414 691 481 
Average common shares and dilutive common shares57,775 57,981 57,668 58,074 
See accompanying notes to unaudited consolidated financial statements.
2

WINTRUST FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
 
Three Months EndedSix Months Ended
(In thousands)June 30,
2021
June 30,
2020
June 30,
2021
June 30,
2020
Net income$105,109 $21,659 $258,257 $84,471 
Unrealized gains (losses) on available-for-sale securities
Before tax6,312 5,068 (54,414)96,422 
Tax effect(1,684)(1,350)14,523 (25,697)
Net of tax4,628 3,718 (39,891)70,725 
Reclassification of net gains (losses) on available-for-sale securities included in net income
Before tax584 (341)794 150 
Tax effect(157)92 (213)(40)
Net of tax427 (249)581 110 
Reclassification of amortization of unrealized gains on investment securities transferred to held-to-maturity from available-for-sale
Before tax47 46 104 124 
Tax effect(13)(12)(28)(33)
Net of tax34 34 76 91 
Net unrealized gains (losses) on available-for-sale securities4,167 3,933 (40,548)70,524 
Unrealized (losses) gains on derivative instruments
Before tax(8,788)(2,867)42,004 (41,560)
Tax effect2,341 773 (11,194)11,095 
Net unrealized (losses) gains on derivative instruments(6,447)(2,094)30,810 (30,465)
Foreign currency adjustment
Before tax2,876 6,677 5,610 (7,655)
Tax effect(567)(1,510)(1,121)1,677 
Net foreign currency adjustment2,309 5,167 4,489 (5,978)
Total other comprehensive income (loss)29 7,006 (5,249)34,081 
Comprehensive income$105,138 $28,665 $253,008 $118,552 
See accompanying notes to unaudited consolidated financial statements.
3

WINTRUST FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (UNAUDITED)
(In thousands, except per share data)Preferred
stock
Common
stock
SurplusTreasury
stock
Retained
earnings
Accumulated other
comprehensive (loss) income
Total shareholders’ equity
Balance at March 31, 2020$125,000 $58,266 $1,652,063 $(44,891)$1,917,558 $(7,603)$3,700,393 
Net income— — — — 21,659 — 21,659 
Other comprehensive income, net of tax— — — — — 7,006 7,006 
Cash dividends declared on common stock, $0.28 per share— — — — (16,119)— (16,119)
Dividends on preferred stock, $0.41 per share— — — — (2,050)— (2,050)
Stock-based compensation— — 541 — — — 541 
Issuance of Series E preferred stock287,500 — (10,125)— — — 277,375 
Common stock issued for:
Exercise of stock options and warrants— 158 — — — 161 
Restricted stock awards— (3)— — — 
Employee stock purchase plan— 22 654 — — — 676 
Director compensation plan— — 576 — — — 576 
Balance at June 30, 2020$412,500 $58,294 $1,643,864 $(44,891)$1,921,048 $(597)$3,990,218 
Balance at January 1, 2020$125,000 $57,951 $1,650,278 $(6,931)$1,899,630 $(34,678)$3,691,250 
Cumulative effect adjustment from the adoption of ASU 2016-13, net of tax— — — — (26,717)— (26,717)
Net income— — — — 84,471 — 84,471 
Other comprehensive income, net of tax— — — — — 34,081 34,081 
Cash dividends declared on common stock, $0.56 per share— — — — (32,236)— (32,236)
Dividends on preferred stock, $0.82 per share— — — — (4,100)— (4,100)
Common stock repurchases under authorized program— — — (37,116)— — (37,116)
Stock-based compensation— — (2,278)— — — (2,278)
Issuance of Series E preferred stock287,500 — (10,125)— — — 277,375 
Common stock issued for:
Exercise of stock options and warrants— 98 3,701 (92)— — 3,707 
Restricted stock awards— 193 (193)(752)— — (752)
Employee stock purchase plan— 32 1,353 — — — 1,385 
Director compensation plan— 20 1,128 — — — 1,148 
Balance at June 30, 2020$412,500 $58,294 $1,643,864 $(44,891)$1,921,048 $(597)$3,990,218 
Balance at March 31, 2021$412,500 $58,727 $1,663,008 $(100,363)$2,208,535 $10,104 $4,252,511 
Net income    105,109  105,109 
Other comprehensive income, net of tax     29 29 
Cash dividends declared on common stock, $0.31 per share    (17,684) (17,684)
Dividends on Series D preferred stock, $0.41 per share and Series E preferred stock, $429.69 per share    (6,991) (6,991)
Stock-based compensation  3,332    3,332 
Common stock issued for:
Exercise of stock options and warrants 29 1,251    1,280 
Restricted stock awards 3 (3)   0 
Employee stock purchase plan 11 794    805 
Director compensation plan  620    620 
Balance at June 30, 2021$412,500 $58,770 $1,669,002 $(100,363)$2,288,969 $10,133 $4,339,011 
Balance at January 1, 2021$412,500 $58,473 $1,649,990 $(100,363)$2,080,013 $15,382 $4,115,995 
Net income    258,257  258,257 
Other comprehensive loss, net of tax     (5,249)(5,249)
Cash dividends declared on common stock, $0.62 per share    (35,319) (35,319)
Dividends on Series D preferred stock, $0.82 per share and Series E preferred stock, $859.38 per share    (13,982) (13,982)
Stock-based compensation  6,194    6,194 
Common stock issued for:
Exercise of stock options and warrants 238 10,003    10,241 
Restricted stock awards 10 (10)   0 
Employee stock purchase plan 25 1,595    1,620 
Director compensation plan 24 1,230    1,254 
Balance at June 30, 2021$412,500 $58,770 $1,669,002 $(100,363)$2,288,969 $10,133 $4,339,011 

See accompanying notes to unaudited consolidated financial statements.
4


WINTRUST FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Six Months Ended
(In thousands)June 30,
2021
June 30,
2020
Operating Activities:
Net income$258,257 $84,471 
Adjustments to reconcile net income to net cash provided by (used for) operating activities
Provision for credit losses(60,646)188,014 
Depreciation, amortization and accretion, net51,485 47,138 
Stock-based compensation expense (benefit)6,194 (2,278)
Amortization of premium on securities, net3,797 4,694 
Accretion of discount and deferred fees on loans, net(47,975)(41,304)
Mortgage servicing rights fair value changes, net6,203 38,233 
Non-designated derivatives fair value changes, net(241)(2,724)
Originations and purchases of mortgage loans held-for-sale(3,945,978)(3,426,911)
Early buy-out exercises of mortgage loans held-for-sale guaranteed by U.S. Government Agencies, net of subsequent paydown or payoff(6,997)
Proceeds from sales of mortgage loans held-for-sale4,357,804 3,035,641 
Bank owned life insurance ("BOLI") income(2,466)(666)
(Increase) decrease in trading securities, net(1,996)178 
(Increase) decrease in brokerage customer receivables, net(5,657)1,950 
Gains on mortgage loans sold(132,012)(155,108)
(Gains) losses on investment securities, net(2,439)3,551 
(Gains) losses on sales of premises and equipment, net, and sale of related deposit liabilities(3,782)
Gains on sales and fair value adjustments of other real estate owned, net(332)(694)
Decrease (increase) in accrued interest receivable and other assets, net143,200 (171,099)
Increase in accrued interest payable and other liabilities, net32,344 27,244 
Net Cash Provided by (Used for) Operating Activities648,763 (369,667)
Investing Activities:
Proceeds from maturities and calls of available-for-sale securities908,160 549,981 
Proceeds from maturities and calls of held-to-maturity securities137,273 529,974 
Proceeds from sales of available-for-sale securities2,376 502,676 
Proceeds from sales of equity securities with readily determinable fair value6,259 4,030 
Proceeds from sales and capital distributions of equity securities without readily determinable fair value1,137 444 
Purchases of available-for-sale securities(290,583)(1,048,539)
Purchases of held-to-maturity securities(2,257,847)(124,802)
Purchases of equity securities with readily determinable fair value0 (7,659)
Purchases of equity securities without readily determinable fair value(3,359)(3,166)
Purchases of Federal Home Loan Bank and Federal Reserve Bank stock, net(1,037)(34,832)
Distributions from (contributions to) investments in partnerships, net44 (355)
Proceeds from sales of other real estate owned5,314 5,405 
Decrease (increase) in interest-bearing deposits with banks, net96,948 (1,852,194)
Increase in loans, net(795,270)(4,460,325)
Purchases of premises and equipment, net(12,113)(38,132)
Net Cash Used for Investing Activities(2,202,698)(5,977,494)
Financing Activities:
Increase in deposit accounts, net1,715,840 5,545,133 
(Decrease) increase in other borrowings, net(9,230)98,974 
Increase in Federal Home Loan Bank advances, net12,629 553,500 
Proceeds from the issuance of preferred stock, net0 277,375 
Cash payments to settle contingent consideration liabilities recognized in business combinations(16,583)(1,276)
Issuance of common shares resulting from the exercise of stock options, employee stock purchase plan and conversion of common stock warrants13,115 6,332 
Common stock repurchases under authorized program0 (37,116)
Common stock repurchases for tax withholdings related to stock-based compensation0 (844)
Dividends paid(49,301)(36,336)
Net Cash Provided by Financing Activities1,666,470 6,405,742 
Net Increase in Cash and Cash Equivalents112,535 58,581 
Cash and Cash Equivalents at Beginning of Period322,474 286,476 
Cash and Cash Equivalents at End of Period$435,009 $345,057 
See accompanying notes to unaudited consolidated financial statements.
5

WINTRUST FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(1) Basis of Presentation

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

The accompanying interim consolidated financial statements are unaudited and do not include information or footnotes necessary for a complete presentation of financial condition, results of operations or cash flows in accordance with U.S. generally accepted accounting principles (“GAAP”). The interim unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements and notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020 (“2020 Form 10-K”). Operating results reported for the period are not necessarily indicative of the results which may be expected for the entire year. Reclassifications of certain prior period amounts have been made to conform to the current period presentation.

The preparation of the financial statements requires management to make estimates, assumptions and judgments that affect the reported amounts of assets and liabilities. Management believes that the estimates made are reasonable; however, changes in estimates may be required if economic or other conditions develop differently from management’s expectations. Certain policies and accounting principles inherently have a greater reliance on the use of estimates, assumptions and judgments and as such have a greater possibility of producing results that could be materially different than originally reported. Management views critical accounting policies to be those which are highly dependent on subjective or complex judgments, estimates and assumptions, and where changes in those estimates and assumptions could have a significant impact on the financial statements. Management currently views the determination of the allowance for credit losses, including the allowance for loan losses, the allowance for unfunded commitment losses and the allowance for held-to-maturity securities losses, estimations of fair value, the valuations required for impairment testing of goodwill, the valuation and accounting for derivative instruments and income taxes as the accounting areas that require the most subjective and complex judgments, and as such could be the most subject to revision as new information becomes available. Descriptions of the Company's significant accounting policies are included in Note 1 - “Summary of Significant Accounting Policies” of the 2020 Form 10-K.

(2) Recent Accounting Developments

Legislation and Regulations Issued as a Result of the COVID-19 Pandemic

On March 27, 2020, the President of the United States signed the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act" or the "Act"), which provides entities with optional temporary relief from certain accounting and financial reporting requirements under U.S. GAAP.

Section 4013 of the CARES Act allows financial institutions to suspend application of certain current troubled debt restructuring ("TDR") accounting guidance under Accounting Standards Codification (“ASC”) 310-40 for loan modifications related to the COVID-19 pandemic made between March 1, 2020 and the earlier of December 31, 2020 or 60 days after the end of the COVID-19 national emergency, provided certain criteria are met. This relief can be applied to loan modifications for borrowers that were not more than 30 days past due as of December 31, 2019 and to loan modifications that defer or delay the payment of principal or interest, or change the interest rate on the loan. On December 27, 2020, the Consolidated Appropriations Act, 2021 (the "CAA"), which combined stimulus relief for the COVID-19 pandemic with an omnibus spending bill for the 2021 fiscal year, was signed by the President of the United States. The CAA included extension of TDR accounting relief provided under the CARES Act to January 1, 2022. The Company chose to apply this relief to eligible loan modifications.

The business tax provisions of the Act include temporary changes to income and non-income based tax laws, including immediate recovery of qualified improvement property costs and acceleration of Alternative Minimum Tax (AMT) credits. These provisions did not have a material impact on the Company's deferred taxes.

In April 2020, federal and state banking regulators issued the Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus to provide separate relief, specifically indicating that if a modification is either short-term (e.g., six months) or mandated by a federal or state government in response to the COVID-19 pandemic, the borrower is not considered to be experiencing financial difficulty and thus does not represent a TDR under ASC 310-40. Additionally, in August 2020, regulators issued the Joint Statement on Additional Loan Accommodations
6

Related to the COVID-19 pandemic to provide prudent risk management and consumer protection principles for financial institutions to consider while working with borrowers as loans near the end of initial loan accommodation periods applicable during the COVID-19 pandemic. The Company continues to prudently work with borrowers negatively impacted by the COVID-19 pandemic while managing credit risks and recognizing appropriate allowance for credit losses on its loan portfolio.

Reference Rate Reform

In March 2020, the FASB issued ASU No. 2020-04, “Reference Rate Reform (Topic 848),” which provides temporary optional relief for contracts modified as a result of reference rate reform meeting certain modification criteria, generally allowing an entity to account for contract modifications occurring due to reference rate reform as an event that does not require contract remeasurement or reassessment of a previous accounting determination at the modification date. The guidance also includes temporary optional expedients intended to provide relief from various hedge effectiveness requirements for hedging relationships affected by reference rate reform, provided certain criteria are met, and allows a one-time election to sell or transfer to either available-for-sale or trading any held-to-maturity ("HTM") debt securities that refer to an interest rate affected by reference rate reform and were classified as HTM prior to January 1, 2020. Additionally, in January 2021, the FASB issued ASU No. 2021-01, “Reference Rate Reform (Topic 848): Scope,” which provided additional clarification that certain optional expedients and exceptions noted above apply to derivative instruments that use an interest rate for margining, discounting or contract price alignment that is modified as a result of reference rate reform. This guidance was effective upon issuance and can be applied prospectively, with certain exceptions, through December 31, 2022.

In November 2020, federal and state banking regulators issued the “Interagency Policy Statement on Reference Rates for Loans" to reiterate that a specific replacement rate for loans impacted by reference rate reform has not been endorsed and entities may utilize any replacement reference rate determined to be appropriate based on its funding model and customer needs. As discussed in the “Interagency Policy Statement on Reference Rates for Loans," fallback language should be included in lending contracts to provide for use of a robust fallback rate if the initial reference rate is discontinued. Additionally, federal banking regulators issued the "Interagency Statement on LIBOR Transition" acknowledging that the administrator of USD LIBOR benchmarks has announced it will consult on its intention to cease the publication of the one week and two month USD LIBOR settings immediately following the LIBOR publication on December 31, 2021, and the remaining USD LIBOR settings immediately following the LIBOR publication on June 30, 2023. On March 5, 2021, the administrator of USD LIBOR benchmarks confirmed these dates and will cease publication of USD LIBOR tenors accordingly. As discussed in the "Interagency Statement on LIBOR Transition," regulators encouraged banks to cease entering into new contracts that use USD LIBOR as a reference rate as soon as practicable and in any event by December 31, 2021, in order to facilitate an orderly, safe and sound LIBOR transition. The Company continues to monitor efforts and evaluate the impact of reference rate reform on its consolidated financial statements.
Income Taxes

In December 2019, the FASB issued ASU No. 2019-12, "Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes," to simplify the accounting for income taxes by removing certain exceptions to the general principles of ASC 740, "Income Taxes". The guidance also improved consistent application by clarifying and amending existing guidance from ASC 740. The Company adopted ASU No. 2019-12 as of January 1, 2021. Adoption of this standard did not have a material impact on the Company’s consolidated financial statements.

Investment Securities

In January 2020, the FASB issued ASU No. 2020-01, “Clarifying the Interactions Between Investments-Equity Securities (ASC Topic 321), Investments-Equity Method and Joint Ventures (ASC Topic 323), and Derivatives and Hedging (ASC Topic 815),” which amended ASC 323, Investments-Equity Method & Joint Ventures to clarify that an entity should consider observable transactions that require it to either apply or discontinue using the equity method of accounting for purposes of applying the measurement alternative in accordance with ASC 321, Investments-Equity Securities, immediately before applying or discontinuing the equity method under ASC 323.

The guidance also amended ASC 815, Derivatives & Hedging, to clarify that, when determining the accounting for certain nonderivative forward contracts and purchased options, an entity should not consider how to account for the resulting investments upon eventual settlement or exercise, and that an entity should evaluate the remaining characteristics in accordance with ASC 815 to determine the accounting for those forward contracts and purchased options.

The Company adopted ASU No. 2020-01 as of January 1, 2021 under a prospective approach. Adoption of this standard did not have a material impact on the Company’s consolidated financial statements.
7


Codification Improvements

In October 2020, the FASB issued ASU No. 2020-08, “Codification Improvements to Subtopic 310-20, Receivables — Nonrefundable Fees and Other Costs,” clarifying that, for each reporting period, an entity should reevaluate whether a callable debt security with multiple call dates is within the scope of ASC 310-20, which was amended to require amortization of any premium to the next call date. The next call date was defined as the first date when a call option at a specified price becomes exercisable. The Company adopted ASU No. 2020-08 as of January 1, 2021 under a prospective approach. Adoption of this standard did not have a material impact on the Company’s consolidated financial statements.

Additionally, the FASB issued ASU No. 2020-10, “Codification Improvements,” in October 2020 to improve the consistency of the Codification by adding or moving disclosure-specific guidance contained in the Other Presentation Matters section to the appropriate Disclosure Section for various Topics. The Company adopted ASU No. 2020-10 as of January 1, 2021 under a retrospective approach. Adoption of this standard did not have a material impact on the Company’s consolidated financial statements.

SEC Amendments to Financial Disclosures about Acquired and Disposed Businesses

In May 2020, the SEC issued a final rule on “Amendments to Financial Disclosures about Acquired and Disposed Businesses,” which provides for specific disclosure changes, including revising the investment and income significance tests, conforming the significance threshold and tests for a disposed business to those used for an acquired business, permitting abbreviated financial statements for certain acquisitions of a component of an entity, and reducing the maximum number of years for which financial statements are required for acquired businesses from three years to two years, among other amendments. This guidance was effective on January 1, 2021. The Company does not expect this to have a material impact on the Company’s consolidated financial statements.

Debt
In August 2020, the FASB issued ASU No. 2020-06, “Debt-Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging-Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity,” which includes provisions for reducing the number of accounting models used in accounting for convertible debt instruments and convertible preferred stock, amending derivatives and earnings-per-share (EPS) guidance and expanding disclosures for convertible debt instruments and EPS. This guidance is effective for fiscal years beginning after December 15, 2021, including interim periods therein, and is to be applied under either a full or modified retrospective approach. Early adoption is permitted. The Company does not expect this guidance to have a material impact on the Company’s consolidated financial statements.
SEC Update of Statistical Disclosures for Bank and Savings and Loan Registrants
In September 2020, the SEC issued a final rule on the “Update of Statistical Disclosures for Bank and Savings and Loan Registrants,” which adopts rules to update statistical disclosure requirements for banking registrants. The amendments update and expand the disclosures that registrants are required to provide, codify certain Industry Guide 3 disclosure items and eliminate other Guide 3 disclosures that overlap with SEC rules, GAAP or IFRS standards. In addition, Guide 3 is being rescinded and replaced with a new subpart of Regulation S-K. The SEC ruling is applicable to fiscal years beginning after December 15, 2021 and early compliance is permitted. The Company does not expect this guidance to have a material impact on the Company’s consolidated financial statements.
Issuer’s Accounting for Modifications or Exchanges of Freestanding Equity-Classified Written Call Options
In May 2021, the FASB issued ASU No. 2021-04, “Earnings Per Share (Topic 260), Debt—Modifications and Extinguishments (Subtopic 470-50), Compensation—Stock Compensation (Topic 718), and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options,” which requires an issuer to account for any modification or exchange of the terms or conditions of a freestanding written call option classified as equity, such as warrants, that remains classified as equity as an exchange of the original instrument for a new instrument and provides a framework for measuring and recognizing the effect of the exchange as an adjustment to either equity or expense. This guidance is effective for fiscal years beginning after December 15, 2021, including interim periods therein, and is to be applied prospectively. Early adoption is permitted. The Company does not expect this guidance to have a material impact on the Company’s consolidated financial statements.

8

(3) Cash and Cash Equivalents

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

(4) Investment Securities

The following tables are a summary of the investment securities portfolios as of the dates shown:
June 30, 2021
(Dollars in thousands)Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
Available-for-sale securities
U.S. Government agencies$75,169 $3,685 $0 $78,854 
Municipal163,715 4,738 (157)168,296 
Corporate notes:
Financial issuers98,827 520 (1,818)97,529 
Other1,000 13 0 1,013 
Mortgage-backed: (1)
Mortgage-backed securities1,800,751 50,171 (16,839)1,834,083 
Collateralized mortgage obligations8,596 237 0 8,833 
Total available-for-sale securities$2,148,058 $59,364 $(18,814)$2,188,608 
Held-to-maturity securities
U.S. Government agencies$176,152 $1,064 $(3,454)$173,762 
Municipal191,590 10,838 (308)202,120 
Mortgage-backed securities2,078,678 5,139 (30,834)2,052,983 
Corporate notes51,902 0 (535)51,367 
Total held-to-maturity securities$2,498,322 $17,041 $(35,131)$2,480,232 
Less: Allowance for credit losses(90)
Held-to-maturity securities, net of allowance for credit losses$2,498,232 
Equity securities with readily determinable fair value$81,401 $6,005 $(1,090)$86,316 
(1)Consisting entirely of residential mortgage-backed securities, none of which are subprime.

9

December 31, 2020
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
(Dollars in thousands)
Available-for-sale securities
U.S. Treasury$304,956 $15 $$304,971 
U.S. Government agencies80,074 4,439 84,513 
Municipal141,244 5,707 (41)146,910 
Corporate notes:
Financial issuers91,786 1,363 (2,764)90,385 
Other1,000 20 1,020 
Mortgage-backed: (1)
Mortgage-backed securities2,330,332 86,721 (15)2,417,038 
Collateralized mortgage obligations10,689 313 11,002 
Total available-for-sale securities$2,960,081 $98,578 $(2,820)$3,055,839 
Held-to-maturity securities
U.S. Government agencies$177,959 $2,552 $$180,511 
Municipal200,707 12,232 (214)212,725 
Mortgage-backed securities200,531 200,531 
Total held-to-maturity securities$579,197 $14,784 $(214)$593,767 
Less: Allowance for credit losses(59)
Held-to-maturity securities, net of allowance for credit losses$579,138 
Equity securities with readily determinable fair value$87,618 $3,674 $(430)$90,862 
(1)Consisting entirely of residential mortgage-backed securities, none of which are subprime.

June 30, 2020
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
(Dollars in thousands)
Available-for-sale securities
U.S. Treasury$59,949 $590 $$60,539 
U.S. Government agencies287,811 5,696 293,507 
Municipal147,411 3,721 (253)150,879 
Corporate notes:
Financial issuers106,744 514 (5,398)101,860 
Other1,000 19 1,019 
Mortgage-backed: (1)
Mortgage-backed securities2,459,274 110,354 (7)2,569,621 
Collateralized mortgage obligations17,110 427 (1)17,536 
Total available-for-sale securities$3,079,299 $121,321 $(5,659)$3,194,961 
Held-to-maturity securities
U.S. Government agencies$514,404 $4,961 $$519,365 
Municipal$214,126 10,952 (157)224,921 
Total held-to-maturity securities$728,530 $15,913 $(157)$744,286 
Less: Allowance for credit losses(65)
Held-to-maturity securities, net of allowance for credit losses$728,465 
Equity securities with readily determinable fair value$51,673 $1,164 $(377)$52,460 
(1)Consisting entirely of residential mortgage-backed securities, NaN of which are subprime.

Equity securities without readily determinable fair values totaled $34.0 million as of June 30, 2021. Equity securities without readily determinable fair values are included as part of accrued interest receivable and other assets in the Company's Consolidated Statements of Condition. The Company monitors its equity investments without readily determinable fair values
10

to identify potential transactions that may indicate an observable price change in orderly transactions for the identical or a similar investment of the same issuer, requiring adjustment to its carrying amount. The Company recorded 0 upward and 0 downward adjustments related to such observable price changes for the three and six months ended June 30, 2021. The Company conducts a quarterly assessment of its equity securities without readily determinable fair values to determine whether impairment exists in such securities, considering, among other factors, the nature of the securities, financial condition of the issuer and expected future cash flows. The Company recorded 0 impairment of equity securities without readily determinable fair values for the three months ended June 30, 2021. During the six months ended June 30, 2021, the Company recorded $30,000 of impairment of equity securities without readily determinable fair values.

The following table presents the portion of the Company’s available-for-sale investment securities portfolios that have gross unrealized losses, reflecting the length of time that individual securities have been in a continuous unrealized loss position at June 30, 2021:
Continuous unrealized
losses existing for
less than 12 months
Continuous unrealized
losses existing for
greater than 12 months
Total
(Dollars in thousands)Fair ValueUnrealized LossesFair ValueUnrealized LossesFair ValueUnrealized Losses
Available-for-sale securities
U.S. Government agencies$0 $0 $0 $0 $0 $0 
Municipal34,341 (155)113 (2)34,454 (157)
Corporate notes:
Financial issuers24,381 (619)47,782 (1,199)72,163 (1,818)
Other0 0 0 0 0 0 
Mortgage-backed:
Mortgage-backed securities591,896 (16,812)936 (27)592,832 (16,839)
Collateralized mortgage obligations0 0 0 0 0 0 
Total available-for-sale securities$650,618 $(17,586)$48,831 $(1,228)$699,449 $(18,814)

The Company conducts a regular assessment of its investment securities to determine whether securities are experiencing credit losses. Factors for consideration include the nature of the securities, credit ratings or financial condition of the issuer, the extent of the unrealized loss, expected cash flows, market conditions and the Company’s ability to hold the securities through the anticipated recovery period.

The Company does not consider available-for-sale securities with unrealized losses at June 30, 2021 to be experiencing credit losses and recognized no resulting allowance for credit losses for such individually assessed credit losses. The Company does not intend to sell these investments and it is more likely than not that the Company will not be required to sell these investments before recovery of the amortized cost bases, which may be the maturity dates of the securities. The unrealized losses within each category have occurred as a result of changes in interest rates, market spreads and market conditions subsequent to purchase. Available-for-sale securities with continuous unrealized losses existing for more than twelve months were primarily corporate notes.

See Note 6—Allowance for Credit Losses for further discussion regarding any credit losses associated with held-to-maturity securities at June 30, 2021.

11

The following table provides information as to the amount of gross gains and losses, adjustments and impairment on investment securities recognized in earnings and proceeds received through the sale or call of investment securities:
Three months ended June 30,Six months ended June 30,
(Dollars in thousands)2021202020212020
Realized gains on investment securities$613 $151 $829 $647 
Realized losses on investment securities(29)(492)(35)(497)
Net realized gains (losses) on investment securities584 (341)794 150 
Unrealized gains on equity securities with readily determinable fair value751 1,647 2,626 1,647 
Unrealized losses on equity securities with readily determinable fair value(50)(110)(951)(3,656)
Net unrealized gains (losses) on equity securities with readily determinable fair value701 1,537 1,675 (2,009)
Upward adjustments of equity securities without readily determinable fair values0 0 393 
Downward adjustments of equity securities without readily determinable fair values0 0 
Impairment of equity securities without readily determinable fair values0 (388)(30)(2,085)
Adjustment and impairment, net, of equity securities without readily determinable fair values0 (388)(30)(1,692)
Gains (losses) on investment securities, net$1,285 $808 $2,439 $(3,551)
Proceeds from sales of available-for-sale securities(1)
$2,376 $502,185 $2,376 $502,676 
Proceeds from sales of equity securities with readily determinable fair value4,750 4,000 6,259 4,030 
Proceeds from sales and capital distributions of equity securities without readily determinable fair value751 156 1,137 444 
(1)Includes proceeds from available-for-sale securities sold in accordance with written covered call options sold to a third party.

12

The amortized cost and fair value of available-for-sale and held-to-maturity investment securities as of June 30, 2021, December 31, 2020 and June 30, 2020, by contractual maturity, are shown in the following table. Contractual maturities may differ from actual maturities as borrowers may have the right to call or repay obligations with or without call or prepayment penalties. Mortgage-backed securities are not included in the maturity categories in the following maturity summary as actual maturities may differ from contractual maturities because the underlying mortgages may be called or prepaid without penalties:
June 30, 2021December 31, 2020June 30, 2020
(Dollars in thousands)Amortized CostFair ValueAmortized CostFair ValueAmortized CostFair Value
Available-for-sale securities
Due in one year or less$38,298 $38,508 $343,601 $343,846 $120,316 $121,023 
Due in one to five years87,939 89,869 67,901 70,334 74,427 76,284 
Due in five to ten years119,858 119,979 111,886 112,178 173,429 169,249 
Due after ten years92,616 97,336 95,672 101,441 234,743 241,248 
Mortgage-backed1,809,347 1,842,916 2,341,021 2,428,040 2,476,384 2,587,157 
Total available-for-sale securities$2,148,058 $2,188,608 $2,960,081 $3,055,839 $3,079,299 $3,194,961 
Held-to-maturity securities
Due in one year or less$5,119 $5,152 $7,138 $7,186 $6,988 $7,028 
Due in one to five years56,059 56,988 22,217 23,068 21,818 22,362 
Due in five to ten years171,908 178,864 150,621 159,293 146,937 153,664 
Due after ten years186,558 186,245 198,690 203,689 552,787 561,232 
Mortgage-backed2,078,678 2,052,983 200,531 200,531 
Total held-to-maturity securities$2,498,322 $2,480,232 $579,197 $593,767 $728,530 $744,286 
Less: Allowance for credit losses(90)(59)(65)
Held-to-maturity securities, net of allowance for credit losses$2,498,232 $579,138 $728,465 

Securities having a carrying value of $2.4 billion at June 30, 2021 as well as securities having a carrying value of $2.4 billion and $3.2 billion at December 31, 2020 and June 30, 2020, respectively, were pledged as collateral for public deposits, trust deposits, Federal Home Loan Bank (“FHLB”) advances and available lines of credit, securities sold under repurchase agreements and derivatives. At June 30, 2021, there were 0 securities of a single issuer, other than U.S. Government-sponsored agency securities, which exceeded 10% of shareholders’ equity.

13

(5) Loans

The following table shows the Company’s loan portfolio by category as of the dates shown:
June 30,December 31,June 30,
(Dollars in thousands)202120202020
Balance:
Commercial$11,442,276 $11,955,967 $11,859,232 
Commercial real estate8,678,369 8,494,132 8,200,745 
Home equity369,806 425,263 466,596 
Residential real estate1,530,285 1,259,598 1,427,429 
Premium finance receivables
Commercial insurance4,521,871 4,054,489 3,999,774 
Life insurance6,359,556 5,857,436 5,400,802 
Consumer and other9,024 32,188 48,325 
    Total loans, net of unearned income$32,911,187 $32,079,073 $31,402,903 
Mix:
Commercial35 %37 %38 %
Commercial real estate26 26 26 
Home equity1 
Residential real estate5 
Premium finance receivables
Commercial insurance14 13 13 
Life insurance19 18 17 
Consumer and other0 
Total loans, net of unearned income100 %100 %100 %

The Company’s loan portfolio is generally comprised of loans to consumers and small to medium-sized businesses, which, for the commercial and commercial real estate portfolios, are located primarily within the geographic market areas that the banks serve. Various niche lending businesses, including lease finance and franchise lending, operate on a national level. Additionally, to provide short-term relief due to macroeconomic deterioration from the COVID-19 pandemic to small businesses within such market areas, the Company originated loans through the Paycheck Protection Program ("PPP"), an expansion of guaranteed lending under Section 7(a) of the Small Business Act within the CARES Act. As of June 30, 2021, the Company's commercial portfolio included approximately $1.9 billion of such PPP loans. The premium finance receivables portfolios are made to customers throughout the United States and Canada. The Company strives to maintain a loan portfolio that is diverse in terms of loan type, industry, borrower and geographic concentrations. Such diversification reduces the exposure to economic downturns that may occur in different segments of the economy or in different industries.

Certain premium finance receivables are recorded net of unearned income. The unearned income portions of such premium finance receivables were $125.5 million at June 30, 2021, $113.1 million at December 31, 2020 and $114.8 million at June 30, 2020.

Total loans, excluding PCD loans, include net deferred loan fees and costs and fair value purchase accounting adjustments totaling $(6.3) million at June 30, 2021, $(3.2) million at December 31, 2020 and $(61.7) million at June 30, 2020. Net deferred fees as of June 30, 2021 includes $42.3 million of net deferred fees paid by the Small Business Administration ("SBA") for loans originated under the PPP. As PPP loans share similar characteristics (loan terms), and prepayments are considered probable and can reasonably be estimated due to terms of the program, the Company considers estimated future principal prepayments in recognizing such deferred fees for determining a constant effective yield on the portfolio of loans.

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


14

(6) Allowance for Credit Losses

In accordance with ASC 326, the Company is required to measure the allowance for credit losses of financial assets with similar risk characteristics on a collective or pooled basis. In considering the segmentation of financial assets measured at amortized cost into pools, the Company considered various risk characteristics in its analysis. Generally, the segmentation utilized represents the level at which the Company develops and documents its systematic methodology to determine the allowance for credit losses for the financial assets held at amortized cost, specifically the Company's loan portfolio and debt securities classified as held-to-maturity. Below is a summary of the Company's loan portfolio segments and major debt security types:

Commercial loans, including PPP loans: The Company makes commercial loans for many purposes, including working capital lines and leasing arrangements, that are generally renewable annually and supported by business assets, personal guarantees and additional collateral. Underlying collateral includes receivables, inventory, enterprise value and the assets of the business. Commercial business lending is generally considered to involve a slightly higher degree of risk than traditional consumer bank lending. This portfolio includes a range of industries, including manufacturing, restaurants, franchise, professional services, equipment finance and leasing, mortgage warehouse lending and industrial.

The Company also originated loans through the PPP. Administered by the SBA, the PPP provided short-term relief primarily related to the disruption from COVID-19 to companies and non-profits that met the SBA’s definition of an eligible small business. Under the program, the SBA will forgive all or a portion of the loan if, during a certain period, loans are used for qualifying expenses. If all or a portion of the loan is not forgiven, the borrower is responsible for repayment. PPP loans are fully guaranteed by the SBA, including any portion not forgiven. The SBA guarantee existed at the inception of the loan and throughout its life and is not separated from the loan if the loan is subsequently sold or transferred. As it is not considered a freestanding contract, the Company considers the impact of the SBA guarantee when measuring the allowance for credit losses.

Commercial real estate loans, including construction and development, and non-construction: The Company's commercial real estate loans are generally secured by a first mortgage lien and assignment of rents on the underlying property. Since most of the Company's bank branches are located in the Chicago metropolitan area and southern Wisconsin, a significant portion of the Company's commercial real estate loan portfolio is located in this region. As the risks and circumstances of such loans in construction phase vary from that of non-construction commercial real estate loans, the Company assesses the allowance for credit losses separately for these two segments.

Home equity loans: The Company's home equity loans and lines of credit are primarily originated by each of the bank subsidiaries in their local markets where there is a strong understanding of the underlying real estate value. The Company's banks monitor and manage these loans, and conduct an automated review of all home equity loans and lines of credit at least twice per year. The banks subsidiaries use this information to manage loans that may be higher risk and to determine whether to obtain additional credit information or updated property valuations. In a limited number of cases, the Company may issue home equity credit together with first mortgage financing, and requests for such financing are evaluated on a combined basis.

Residential real estate loans: The Company's residential real estate portfolio includes one- to four-family fixed and adjustable rate mortgages with repricing terms generally over five years, construction loans to individuals and bridge financing loans for qualifying customers. The Company's residential mortgages relate to properties located principally in the Chicago metropolitan area and southern Wisconsin or vacation homes owned by local residents. Due to interest rate risk considerations, the Company generally sells in the secondary market loans originated with long-term fixed rates, however, certain of these loans may be retained within the banks’ own portfolios where they are non-agency conforming, or where the terms of the loans make them favorable to retain. The Company believes that since this loan portfolio consists primarily of locally originated loans, and since the majority of the borrowers are longer-term customers with lower LTV ratios, the Company faces a relatively low risk of borrower default and delinquency. It is not the Company's current practice to underwrite, and there are no plans to underwrite subprime, Alt A, no or little documentation loans, or option ARM loans.

Premium finance receivables: The Company makes loans to businesses to finance the insurance premiums they pay on their commercial insurance policies. The loans are indirectly originated by working through independent medium and large insurance agents and brokers located throughout the United States and Canada. The insurance premiums financed are primarily for commercial customers’ purchases of liability, property and casualty and other commercial insurance. This lending involves relatively rapid turnover of the loan portfolio and high volume of loan originations. The Company performs ongoing credit and other reviews of the agents and brokers to mitigate against the risk of fraud.

The Company also originates life insurance premium finance receivables. These loans are originated directly with the borrowers with assistance from life insurance carriers, independent insurance agents, financial advisors and legal counsel. The life
15

insurance policy is the primary form of collateral. In addition, these loans often are secured with a letter of credit, marketable securities or certificates of deposit. In some cases, the Company may make a loan that has a partially unsecured position.

Consumer and other loans: Included in the consumer and other loan category is a wide variety of personal and consumer loans to individuals. The Company originates consumer loans in order to provide a wider range of financial services to their customers. Consumer loans generally have shorter terms and higher interest rates than mortgage loans but generally involve more credit risk than mortgage loans due to the type and nature of the collateral.

U.S. government agency securities: This security type includes debt obligations of certain government-sponsored entities of the U.S. government such as the Federal Home Loan Bank, Federal Agricultural Mortgage Corporation, Federal Farm Credit Banks Funding Corporation and Fannie Mae. Such securities often contain an explicit or implicit guarantee of the U.S. government.

Municipal securities: The Company's municipal securities portfolio include bond issues for various municipal government entities located throughout the United States, including the Chicago metropolitan area and southern Wisconsin, some of which are privately placed and non-rated. Though the risk of loss is typically low, including within the Company, default history exists on municipal securities within the United States.

Mortgage-backed securities: This security type includes debt obligations supported by pools of individual mortgage loans and issued by certain government-sponsored entities of the U.S. government such as Freddie Mac and Fannie Mae. Such securities are considered to contain an implicit guarantee of the U.S. government.

Corporate notes: The Company's corporate notes portfolio includes bond issues for various public companies representing a diversified population of industries. The risk of loss in this portfolio is considered low based on the characteristics of the investments, including the Company’s own past history with similar investments.

In accordance with ASC 326, the Company elected to not measure an allowance for credit losses on accrued interest as such accrued interest is written off in a timely manner when deemed uncollectible. Any such write-off of accrued interest will reverse previously recognized interest income. In addition, the Company elected to not include accrued interest within presentation and disclosures of the carrying amount of financial assets held at amortized cost. This election is applicable to the various disclosures included within the Company's financial statements. Accrued interest related to financial assets held at amortized cost is included within accrued interest receivable and other assets within the Company's Consolidated Statements of Condition and totaled $119.1 million at June 30, 2021, $121.9 million at December 31, 2020, and $109.1 million at June 30, 2020.

The tables below show the aging of the Company’s loan portfolio by the segmentation noted above at June 30, 2021, December 31, 2020 and June 30, 2020:

As of June 30, 202190+ days and still accruing60-89 days past due30-59 days past due
(In thousands)NonaccrualCurrentTotal Loans
Loan Balances (includes PCD):
Commercial
Commercial, industrial and other, excluding PPP loans$23,232 $1,244 $5,204 $18,468 $9,514,721 $9,562,869 
Commercial PPP loans0 0 0 10 1,879,397 1,879,407 
Commercial real estate
Construction and development1,030 0 0 2,207 1,382,012 1,385,249 
Non-construction25,005 0 4,382 17,491 7,246,242 7,293,120 
Home equity3,478 0 301 777 365,250 369,806 
Residential real estate23,050 0 1,584 2,139 1,503,512 1,530,285 
Premium finance receivables
Commercial insurance loans6,418 3,570 7,759 8,793 4,495,331 4,521,871 
Life insurance loans0 0 0 23,965 6,335,591 6,359,556 
Consumer and other485 178 22 75 8,264 9,024 
Total loans, net of unearned income$82,698 $4,992 $19,252 $73,925 $32,730,320 $32,911,187 
16

As of December 31, 202090+ days and still accruing60-89 days past due30-59 days past due
(In thousands)NonaccrualCurrentTotal Loans
Loan Balances (includes PCD):
Commercial
Commercial, industrial and other, excluding PPP loans$21,743 $307 $6,900 $44,345 $9,166,751 $9,240,046 
Commercial PPP loans36 2,715,885 2,715,921 
Commercial real estate
Construction and development5,633 5,344 1,360,825 1,371,802 
Non-construction40,474 5,178 26,772 7,049,906 7,122,330 
Home equity6,529 47 637 418,050 425,263 
Residential real estate26,071 1,635 12,584 1,219,308 1,259,598 
Premium finance receivables
Commercial insurance loans13,264 12,792 6,798 18,809 4,002,826 4,054,489 
Life insurance loans21,003 30,465 5,805,968 5,857,436 
Consumer and other436 264 24 136 31,328 32,188 
Total loans, net of unearned income$114,150 $13,363 $41,585 $139,128 $31,770,847 $32,079,073 

As of June 30, 202090+ days and still accruing60-89 days past due30-59 days past due
(In thousands)NonaccrualCurrentTotal Loans
Loan Balances (includes PCD):
Commercial
Commercial, industrial and other, excluding PPP loans$42,882 $1,374 $8,952 $23,720 $8,446,936 $8,523,864 
Commercial PPP loans3,335,368 3,335,368 
Commercial real estate
Construction and development9,829 1,944 17,313 1,310,962 1,340,048 
Non-construction54,728 24,536 58,215 6,723,218 6,860,697 
Home equity7,261 1,296 458,039 466,596 
Residential real estate19,529 1,506 4,400 1,401,994 1,427,429 
Premium finance receivables
Commercial insurance loans16,445 35,638 35,967 46,556 3,865,168 3,999,774 
Life insurance loans15 6,386 14,604 5,379,797 5,400,802 
Consumer and other427 156 281 47,457 48,325 
Total loans, net of unearned income$151,116 $37,168 $79,295 $166,385 $30,968,939 $31,402,903 

Credit Quality Indicators

Credit quality indicators, specifically the Company's internal risk rating systems, reflect how the Company monitors credit losses and represents factors used by the Company when measuring the allowance for credit losses. The following discusses the Company's credit quality indicators by financial asset.

Loan portfolios

The Company's ability to manage credit risk depends in large part on our ability to properly identify and manage problem loans. To do so, the Company operates a credit risk rating system under which credit management personnel assign a credit risk rating (1 to 10 rating) to each loan at the time of origination and review loans on a regular basis. These credit risk ratings are also an important aspect of the Company's allowance for credit losses measurement methodology. The credit risk rating structure and classifications are shown below:

Pass (risk rating 1 to 5): Based on various factors (liquidity, leverage, etc.), the Company believes asset quality is acceptable and is deemed to not require additional monitoring by the Company.

Special mention (risk rating 6): Assets in this category are currently protected, potentially weak, but not to the point of substandard classification. Loss potential is moderate if corrective action is not taken.

Substandard accrual (risk rating 7): Assets in this category have well defined weaknesses that jeopardize the liquidation of the debt. Loss potential is distinct but with no discernible impairment.

Substandard nonaccrual/doubtful (risk rating 8 and 9): Assets have all the weaknesses in those classified “substandard accrual” with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of current existing facts, conditions, and values, improbable.

17

Loss/fully charged-off (risk rating 10): Assets in this category are considered fully uncollectible. As such, these assets have no carrying balance on the Company's Consolidated Statements of Condition.

Each loan officer is responsible for monitoring his or her loan portfolio, recommending a credit risk rating for each loan in his or her portfolio and ensuring the credit risk ratings are appropriate. These credit risk ratings are then ratified by the bank’s chief credit officer and/or concurrence credit officer. Credit risk ratings are determined by evaluating a number of factors including: a borrower’s financial strength, cash flow coverage, collateral protection and guarantees.

The Company’s Problem Loan Reporting system includes all loans with credit risk ratings of 6 through 9. This system is designed to provide an on-going detailed tracking mechanism for each problem loan. Once management determines that a loan has deteriorated to a point where it has a credit risk rating of 6 or worse, the Company’s Managed Asset Division performs an overall credit and collateral review. As part of this review, all underlying collateral is identified and the valuation methodology is analyzed and tracked. As a result of this initial review by the Company’s Managed Asset Division, the credit risk rating is reviewed and a portion of the outstanding loan balance may be deemed uncollectible and, as a result, no longer share similar risk characteristics as its related pool. If that is the case, the individual loan is considered collateral dependent and individually assessed for an allowance for credit loss. The Company’s individual assessment utilizes an independent re-appraisal of the collateral (unless such a third-party evaluation is not possible due to the unique nature of the collateral, such as a closely-held business or thinly traded securities). In the case of commercial real estate collateral, an independent third party appraisal is ordered by the Company’s Real Estate Services Group to determine if there has been any change in the underlying collateral value. These independent appraisals are reviewed by the Real Estate Services Group and sometimes by independent third party valuation experts and may be adjusted depending upon market conditions.

Through the credit risk rating process, loans are reviewed to determine if they are performing in accordance with the original contractual terms. If the borrower has failed to comply with the original contractual terms, further action may be required by the Company, including a downgrade in the credit risk rating, movement to non-accrual status or a charge-off. If the Company determines that a loan amount or portion thereof is uncollectible, the loan’s credit risk rating is immediately downgraded to an 8 or 9 and the uncollectible amount is charged-off. Any loan that has a partial charge-off continues to be assigned a credit risk rating of an 8 or 9 for the duration of time that a balance remains outstanding. The Company undertakes a thorough and ongoing analysis to determine if additional impairment and/or charge-offs are appropriate and to begin a workout plan for the credit to minimize actual losses. In determining the appropriate charge-off for collateral-dependent loans, the Company considers the results of appraisals for the associated collateral.

0
The table below shows the Company’s loan portfolio by credit quality indicator and year of origination at June 30, 2021:
As of June 30, 2021Year of OriginationRevolvingTotal
(In thousands)20212020201920182017PriorRevolvingto TermLoans
Loan Balances:
Commercial, industrial and other
Pass$1,131,727 $1,736,155 $1,095,110 $802,071 $577,407 $668,532 $2,985,792 $10,191 $9,006,985 
Special mention18,358 24,384 65,034 42,698 18,528 14,950 112,087 5,696 301,735 
Substandard accrual22,800 19,321 33,852 47,054 24,283 52,697 30,708 202 230,917 
Substandard nonaccrual/doubtful5,205 1,695 1,651 5,263 2,017 6,838 532 31 23,232 
Total commercial, industrial and other$1,178,090 $1,781,555 $1,195,647 $897,086 $622,235 $743,017 $3,129,119 $16,120 $9,562,869 
Commercial PPP
Pass$1,222,905 $656,502 $$$$$$$1,879,407 
Special mention
Substandard accrual
Substandard nonaccrual/doubtful
Total commercial PPP$1,222,905 $656,502 $$$$$$$1,879,407 
Construction and development
Pass$124,444 $384,766 $394,765 $181,800 $92,839 $100,298 $23,614 $1,900 $1,304,426 
Special mention282 12,048 16,506 19,952 23,892 3,272 75,952 
Substandard accrual318 586 2,140 643 154 3,841 
Substandard nonaccrual/doubtful1,030 1,030 
Total construction and development$124,726 $396,814 $411,589 $202,338 $118,871 $105,243 $23,768 $1,900 $1,385,249 
Non-construction
Pass$658,154 $1,257,031 $962,547 $787,771 $762,397 $2,129,706 $171,239 $457 $6,729,302 
Special mention3,898 10,104 62,404 57,544 49,909 187,409 10 371,278 
Substandard accrual1,980 38,518 25,626 19,949 81,462 167,535 
18

Substandard nonaccrual/doubtful1,212 291 23,502 25,005 
Total non-construction$662,052 $1,269,115 $1,063,469 $872,153 $832,546 $2,422,079 $171,249 $457 $7,293,120 
Home equity
Pass$14 $$$47 $28 $7,108 $339,728 $$346,925 
Special mention1,524 5,390 243 7,157 
Substandard accrual185 10,425 898 738 12,246 
Substandard nonaccrual/doubtful149 2,740 589 3,478 
Total home equity$14 $$$232 $177 $21,797 $346,605 $981 $369,806 
Residential real estate
Pass$530,211 $325,133 $220,143 $88,218 $102,470 $212,481 $$$1,478,656 
Special mention443 274 537 2,135 1,872 8,045 13,306 
Substandard accrual1,142 2,277 618 892 1,877 8,467 15,273 
Substandard nonaccrual/doubtful183 1,516 742 5,325 15,284 23,050 
Total residential real estate$531,796 $327,867 $222,814 $91,987 $111,544 $244,277 $$$1,530,285 
Premium finance receivables - commercial
Pass$3,800,468 $660,313 $18,990 $1,950 $53 $$$$4,481,774 
Special mention27,229 4,809 19 32,057 
Substandard accrual322 1,229 65 1,622 
Substandard nonaccrual/doubtful1,378 4,821 196 23 6,418 
Total premium finance receivables - commercial$3,829,397 $671,172 $19,211 $2,038 $53 $$$$4,521,871 
Premium finance receivables - life
Pass$210,484 $712,285 $691,707 $646,188 $674,308 $3,424,010 $$$6,358,982 
Special mention574 574 
Substandard accrual
Substandard nonaccrual/doubtful
Total premium finance receivables - life$210,484 $712,285 $691,707 $646,188 $674,882 $3,424,010 $$$6,359,556 
Consumer and other
Pass$865 $566 $570 $487 $50 $1,492 $4,096 $$8,126 
Special mention22 82 86 200 
Substandard accrual209 213 
Substandard nonaccrual/doubtful101 383 485 
Total consumer and other$865 $572 $592 $588 $132 $2,170 $4,105 $$9,024 
Total loans (1)
Pass$7,679,272 $5,732,751 $3,383,832 $2,508,532 $2,209,552 $6,543,627 $3,524,469 $12,548 $31,594,583 
Special mention50,210 51,623 144,522 122,329 94,857 215,286 117,493 5,939 802,259 
Substandard accrual24,264 24,808 73,312 74,408 48,249 153,903 31,763 940 431,647 
Substandard nonaccrual/doubtful6,583 6,700 3,363 7,341 7,782 49,777 1,121 31 82,698 
Total loans$7,760,329 $5,815,882 $3,605,029 $2,712,610 $2,360,440 $6,962,593 $3,674,846 $19,458 $32,911,187 
(1)Includes $97.7 million of loans with COVID-19 related modifications that migrated from pass as of March 1, 2020 to special mention or substandard accrual as of June 30, 2021. These loans were further qualitatively evaluated as a part of the measurement of the allowance for credit losses as of June 30, 2021.

Held-to-maturity debt securities

The Company conducts an assessment of its investment securities, including those classified as held-to-maturity, at the time of purchase and on at least an annual basis to ensure such investment securities remain within appropriate levels of risk and continue to perform satisfactorily in fulfilling its obligations. The Company considers, among other factors, the nature of the securities and credit ratings or financial condition of the issuer. If available, the Company obtains a credit rating for issuers from a Nationally Recognized Statistical Rating Organization (“NRSRO”) for consideration. If no such rating is available for an issuer, the Company performs an internal rating based on the scale utilized within the loan portfolio as discussed above. For purposes of the table below, the Company has converted any issuer rating from an NRSRO into the Company’s internal ratings based on Investment Policy and review by the Company’s management.

19

As of June 30, 2021Year of OriginationTotal
(In thousands)20212020201920182017PriorBalance
Amortized Cost Balances:
U.S. government agencies
1-4 internal grade$97,789 $25,000 $$50,000 $$3,363 $176,152 
5-7 internal grade
8-10 internal grade
Total U.S. government agencies$97,789 $25,000 $$50,000 $$3,363 $176,152 
Municipal
1-4 internal grade$1,374 $$161 $7,528 $43,574 $138,953 $191,590 
5-7 internal grade
8-10 internal grade
Total municipal$1,374 $$161 $7,528 $43,574 $138,953 $191,590 
Mortgage-backed securities
1-4 internal grade$2,078,678 $$$$$$2,078,678 
5-7 internal grade
8-10 internal grade
Total mortgage-backed securities$2,078,678 $$$$$$2,078,678 
Corporate notes
1-4 internal grade$$13,620 $7,440 $3,305 $3,259 $24,278 $51,902 
5-7 internal grade
8-10 internal grade
Total corporate notes$$13,620 $7,440 $3,305 $3,259 $24,278 $51,902 
Total held-to-maturity securities$2,498,322 
Less: Allowance for credit losses(90)
Held-to-maturity securities, net of allowance for credit losses$2,498,232 

Measurement of Allowance for Credit Losses

The Company's allowance for credit losses consists of the allowance for loan losses, the allowance for unfunded commitment losses and the allowance for held-to-maturity debt security losses. In accordance with ASC 326, the Company measures the allowance for credit losses at the time of origination or purchase of a financial asset, representing an estimate of lifetime expected credit losses on the related asset. When developing its estimate, the Company considers available information relevant to assessing the collectability of cash flows, from both internal and external sources. Historical credit loss experience is one input in the estimation process as well as inputs relevant to current conditions and reasonable and supportable forecasts. In considering past events, the Company considers the relevance, or lack thereof, of historical information due to changes in such things as financial asset underwriting or collection practices, and changes in portfolio mix due to changing business plans and strategies. In considering current conditions and forecasts, the Company considers both the current economic environment and the forecasted direction of the economic environment with emphasis on those factors deemed relevant to or driving changes in expected credit losses. As significant judgment is required, the review of the appropriateness of the allowance for credit losses is performed quarterly by various committees with participation by the Company's executive management.

June 30,December 31,June 30,
(In thousands)202120202020
Allowance for loan losses$261,089 $319,374 $313,510 
Allowance for unfunded lending-related commitments losses42,942 60,536 59,599 
Allowance for loan losses and unfunded lending-related commitments losses304,031 379,910 373,109 
Allowance for held-to-maturity securities losses90 59 65 
Allowance for credit losses$304,121 $379,969 $373,174 

The allowance for credit losses is measured on a collective or pooled basis when similar risk characteristics exist, based upon the segmentation discussed above. The Company utilizes modeling methodologies that estimate lifetime credit loss rates on each pool, including methodologies estimating the probability of default and loss given default on specific segments. Historical credit loss history is adjusted for reasonable and supportable forecasts developed by the Company on a quantitative or qualitative basis and incorporates third party economic forecasts. Reasonable and supportable forecasts consider the macroeconomic factors that are most relevant to evaluating and predicting expected credit losses in the Company's financial assets. Currently, the Company utilizes an eight quarter forecast period using a single macroeconomic scenario provided by a
20

third party and reviewed within the Company's governance structure. For periods beyond the ability to develop reasonable and supportable forecasts, the Company reverts to historical loss rates at an input level, straight-line over a four quarter reversion period. Expected credit losses are measured over the contractual term of the financial asset with consideration of expected prepayments. Expected extensions, renewals or modifications of the financial asset are only considered when either 1) the expected extension, renewal or modification is contained within the existing agreement and is not unconditionally cancelable, or 2) the expected extension, renewal or modification is reasonably expected to result in a TDR. The methodologies discussed above are applied to both current asset balances on the Company's Consolidated Statements of Condition and off-balance sheet commitments (i.e. unfunded lending-related commitments).

Assets that do not share similar risk characteristics with a pool are assessed for the allowance for credit losses on an individual basis. These typically include assets experiencing financial difficulties, including assets rated as substandard nonaccrual and doubtful as well as assets currently classified or expected to be classified as TDRs. If foreclosure is probable or the asset is considered collateral-dependent, expected credit losses are measured based upon the fair value of the underlying collateral adjusted for selling costs, if appropriate. Underlying collateral across the Company's segments consist primarily of real estate, land and construction assets as well as general business assets of the borrower. As of June 30, 2021, excluding loans carried at fair value, substandard nonaccrual loans totaling $50.1 million in carrying balance had no related allowance for credit losses. For certain accruing current and expected TDRs, expected credit losses are measured based upon the present value of future cash flows of the modified asset terms compared to the amortized cost of the asset. Considering accounting relief provided under Section 4013 of the CARES Act, loans identified as being reasonably expected to be modified into TDRs in the future totaled $202,000 as of June 30, 2021.

The Company does not measure an allowance for credit losses on accrued interest receivable balances because these balances are written off in a timely manner as a reduction to interest income when assets are placed on nonaccrual status.

Loan portfolios

A summary of activity in the allowance for credit losses, specifically for the loan portfolio (i.e. allowance for loan losses and allowance for unfunded commitment losses), for the three and six months ended June 30, 2021 and 2020 is as follows.
Three months ended June 30, 2021Commercial Real EstateHome  EquityResidential Real EstatePremium Finance ReceivablesConsumer and OtherTotal Loans
(In thousands)Commercial
Allowance for credit losses at beginning of period$95,640 $181,792 $11,382 $14,242 $17,477 $676 $321,209 
Other adjustments0��0 0 0 33 0 33 
Charge-offs(3,237)(1,412)(142)(3)(2,077)(104)(6,975)
Recoveries902 514 328 36 3,239 34 5,053 
Provision for credit losses5,202 (22,372)(361)1,409 1,227 (394)(15,289)
Allowance for credit losses at period end$98,507 $158,522 $11,207 $15,684 $19,899 $212 $304,031 
Individually measured$8,625 $1,257 $213 $1,045 $0 $77 $11,217 
Collectively measured89,882 157,265 10,994 14,639 19,899 135 292,814 
Loans at period end
Individually measured$30,144 $35,694 $18,080 $29,384 $0 $552 $113,854 
Collectively measured11,412,132 8,642,675 351,726 1,445,561 10,881,427 8,472 32,741,993 
Loans held at fair value0 0 0 55,340 0 0 55,340 
21

Three months ended June 30, 2020CommercialCommercial Real EstateHome  EquityResidential Real EstatePremium Finance ReceivablesConsumer and OtherTotal Loans
(In thousands)
Allowance for credit losses at beginning of period$107,346 $112,796 $12,394 $12,550 $7,880 $446 $253,412 
Other adjustments42 42 
Charge-offs(5,686)(7,224)(239)(293)(3,434)(99)(16,975)
Recoveries112 493 46 30 833 58 1,572 
Provision for credit losses31,825 91,061 (12)(372)12,271 285 135,058 
Allowance for credit losses at period end$133,597 $197,126 $12,189 $11,915 $17,592 $690 $373,109 
Individually measured$12,689 $5,023 $264 $393 $$114 $18,483 
Collectively measured120,908 192,103 11,925 11,522 17,592 576 354,626 
Loans at period end
Individually measured$48,220 $83,664 $22,782 $28,145 $$554 $183,365 
Collectively measured11,811,012 8,117,081 443,814 1,144,670 9,400,576 47,771 30,964,924 
Loans held at fair value254,614 254,614 

Six months ended June 30, 2021Commercial Real EstateHome  EquityResidential Real EstatePremium Finance ReceivablesConsumer and OtherTotal Loans
(In thousands)Commercial
Allowance for credit losses at beginning of period$94,212 $243,603 $11,437 $12,459 $17,777 $422 $379,910 
Other adjustments0 0 0 0 63 0 63 
Charge-offs(15,018)(2,392)(142)(5)(5,316)(218)(23,091)
Recoveries1,354 714 429 240 5,021 66 7,824 
Provision for credit losses17,959 (83,403)(517)2,990 2,354 (58)(60,675)
Allowance for credit losses at period end$98,507 $158,522 $11,207 $15,684 $19,899 $212 $304,031 

Six months ended June 30, 2020Commercial Real EstateHome  EquityResidential Real EstatePremium Finance ReceivablesConsumer and OtherTotal Loans
(In thousands)Commercial
Allowance for credit losses at beginning of period$64,920 $68,511 $3,878 $9,800 $9,647 $1,705 $158,461 
Cumulative effect adjustment from the adoption of ASU 2016-139,039 32,064 9,061 3,002 (4,959)(863)47,344 
Other adjustments(31)(31)
Charge-offs(7,839)(7,794)(1,240)(694)(6,618)(227)(24,412)
Recoveries495 756 340 90 1,943 100 3,724 
Provision for credit losses66,982 103,589 150 (283)17,610 (25)188,023 
Allowance for credit losses at period end$133,597 $197,126 $12,189 $11,915 $17,592 $690 $373,109 

At January 1, 2020, the Company adopted ASU 2016-13, which replaced the previous incurred loss methodology for measuring the allowance for credit losses with a lifetime expected loss methodology. At adoption, the allowance for credit losses related to loans and lending agreements increased approximately $47.3 million, including an increase of approximately $33.2 million recorded to the allowance for unfunded commitment losses within accrued interest and other liabilities on the Company's Consolidated Statements of Condition, with an offsetting amount recorded directly to retained earnings, net of taxes. The remaining $14.2 million cumulative effect adjustment was recorded to the allowance for loan losses, presented separately on the Company's Consolidated Statements of Condition. Of the amount recorded to the allowance for loan losses, $11.0 million related to PCD loans with such offsetting amount added directly to the carrying balance of the loans and the remaining $3.2 million not related to PCD loans recorded directly to retained earnings, net of taxes, on the Company's Consolidated Statements of Condition.

For the three and six month periods ended June 30, 2021, the Company recognized approximately $(15.3) million and $(60.7) million of provision for credit losses, respectively, related to loans and lending agreements. The provision for such periods was primarily the result of improvements in the forecasted macroeconomic forecast, specifically the Company's macroeconomic forecasts of key model inputs (most notably, Commercial Real Estate Price Index and Baa corporate credit spreads) as well as improvements in characteristics of the Company's loan portfolios. While uncertainties remain regarding expected economic recovery, macroeconomic forecasts as of June 30, 2021 assume that the impact of those uncertainties is less severe compared to that assumed at December 31, 2020. Other key drivers of provision for credit losses in these portfolios include, but are not
22

limited to, decreases to COVID-19 related loan modifications and positive loan risk rating migration. Net charge-offs in the three and six month periods ending June 30, 2021, totaled $1.9 million and $15.3 million.

Held-to-maturity debt securities

At January 1, 2020, the Company established an allowance for credit losses on its held-to-maturity debt securities totaling approximately $74,000, which is presented as a reduction to the amortized cost basis of held-to-maturity securities on the Company's Consolidated Statements of Condition. Such adjustment was recorded directly to the Company's retained earnings, net of taxes. For the three and six month periods ended June 30, 2021, the Company recognized approximately $(10,000) and $29,000 of provision for credit losses related to held-to-maturity securities, respectively.

TDRs

At June 30, 2021, the Company had $55.7 million in loans modified in TDRs. The $55.7 million in TDRs represents 273 credits in which economic concessions were granted to certain borrowers to better align the terms of their loans with their current ability to pay.

The Company’s approach to restructuring loans is built on its credit risk rating system, which requires credit management personnel to assign a credit risk rating to each loan. In each case, the loan officer is responsible for recommending a credit risk rating for each loan and ensuring the credit risk ratings are appropriate. These credit risk ratings are then reviewed and approved by the bank’s chief credit officer and/or concurrence credit officer. Credit risk ratings are determined by evaluating a number of factors, including a borrower’s financial strength, cash flow coverage, collateral protection and guarantees. The Company’s credit risk rating scale is one through ten with higher scores indicating higher risk. In the case of loans rated six or worse following modification, the Company’s Managed Assets Division evaluates the loan and the credit risk rating and determines that the loan has been restructured to be reasonably assured of repayment and of performance according to the modified terms and is supported by a current, well-documented credit assessment of the borrower’s financial condition and prospects for repayment under the revised terms.

A modification of a loan with an existing credit risk rating of 6 or worse or a modification of any other credit, which will result in a restructured credit risk rating of 6 or worse must be reviewed for possible TDR classification. In that event, the Company’s Managed Assets Division conducts an overall credit and collateral review. A modification of a loan is considered to be a TDR if both (1) the borrower is experiencing financial difficulty and (2) for economic or legal reasons, the bank grants a concession to a borrower that it would not otherwise consider. The modification of a loan where the credit risk rating is 5 or better after such modification is not considered to be a TDR. Based on the Company’s credit risk rating system, it considers that borrowers whose credit risk rating is 5 or better are not experiencing financial difficulties and therefore, are not considered TDRs.

All credits determined to be a TDR will continue to be classified as a TDR in all subsequent periods, unless the borrower has been in compliance with the loan’s modified terms for a period of six months (including over a calendar year-end) and the current interest rate represents a market rate at the time of restructuring. The Managed Assets Division, in consultation with the respective loan officer, determines whether the modified interest rate represented a current market rate at the time of restructuring. Using knowledge of current market conditions and rates, competitive pricing on recent loan originations, and an assessment of various characteristics of the modified loan (including collateral position and payment history), an appropriate market rate for a new borrower with similar risk is determined. If the modified interest rate meets or exceeds this market rate for a new borrower with similar risk, the modified interest rate represents a market rate at the time of restructuring. Additionally, before removing a loan from TDR classification, a review of the current or previously measured impairment on the loan and any concerns related to future performance by the borrower is conducted. If concerns exist about the future ability of the borrower to meet its obligations under the loans based on a credit review by the Managed Assets Division, the TDR classification is not removed from the loan.

TDRs are individually assessed at the time of the modification and on a quarterly basis to measure an allowance for credit loss. The carrying amount of the loan is compared to the expected payments to be received, discounted at the loan's original rate, or for collateral dependent loans, to the fair value of the collateral. Any shortfall is recorded as a reserve. Each TDR was individually assessed at June 30, 2021 and approximately $2.5 million of reserve was present and appropriately reserved for through the Company’s reserving methodology in the Company’s allowance for credit losses.

TDRs may arise when, due to financial difficulties experienced by the borrower, the Company obtains through physical possession one or more collateral assets in satisfaction of all or part of an existing credit. Once possession is obtained, the Company reclassifies the appropriate portion of the remaining balance of the credit from loans to OREO, which is included within other assets in the Consolidated Statements of Condition. For any residential real estate property collateralizing a
23

consumer mortgage loan, the Company is considered to possess the related collateral only if legal title is obtained upon completion of foreclosure, or the borrower conveys all interest in the residential real estate property to the Company through completion of a deed in lieu of foreclosure or similar legal agreement. At June 30, 2021, the Company had $3.0 million of foreclosed residential real estate properties included within OREO. Furthermore, the recorded investment in residential mortgage loans secured by residential real estate properties for which foreclosure proceedings are in process totaled $14.2 million and $10.7 million at June 30, 2021 and 2020, respectively.

The tables below present a summary of the post-modification balance of loans restructured during the three and six months ended June 30, 2021 and 2020, respectively, which represent TDRs:
Three months ended June 30, 2021
(Dollars in thousands)
Total (1)(2)
Extension at
Below Market
Terms
(2)
Reduction of Interest
Rate (2)
Modification to 
Interest-only
Payments (2)
Forgiveness of Debt(2)
CountBalanceCountBalanceCountBalanceCountBalanceCountBalance
Commercial
Commercial, industrial and other3 $395 3 $395 0 $0 0 $0 0 $0 
Commercial real estate
Non-construction3 2,707 2 2,164 1 543 0 0 0 0 
Residential real estate and other10 1,097 10 1,097 2 616 0 0 0 0 
Total loans16 $4,199 15 $3,656 3 $1,159 0 $0 0 $0 
Three months ended June 30, 2020
(Dollars in thousands)
Total (1)(2)
Extension at
Below Market
Terms (2)
Reduction of Interest
Rate (2)
Modification to 
Interest-only
Payments (2)
Forgiveness of Debt(2)
CountBalanceCountBalanceCountBalanceCountBalanceCountBalance
Commercial
Commercial, industrial and other$3,431 $443 $$3,257 $
Commercial real estate
Non-construction2,082 2,082 
Residential real estate and other21 3,504 21 3,505 10 1,590 
Total loans29 $9,017 26 $3,948 10 $1,590 $5,339 $
(1)TDRs may have more than one modification representing a concession. As such, TDRs during the period may be represented in more than one of the categories noted above.
(2)Balances represent the recorded investment in the loan at the time of the restructuring.

During the three months ended June 30, 2021, 16 loans totaling $4.2 million were determined to be TDRs, compared to 29 loans totaling $9.0 million during the three months ended June 30, 2020. Of these loans extended at below market terms, the weighted average extension had a term of approximately 106 months during the quarter ended June 30, 2021 compared to 18 months for the quarter ended June 30, 2020. Further, the weighted average decrease in the stated interest rate for loans with a reduction of interest rate during the period was approximately 183 basis points and 142 basis points during the three months ended June 30, 2021 and 2020, respectively. Interest-only payment terms were approximately eight months during the three months ended June 30, 2020. Additionally, 0 principal balances were forgiven during the quarters ended June 30, 2021 and 2020.

Six months ended
June 30, 2021
(Dollars in thousands)
Total (1)(2)
Extension at
Below Market
Terms
(2)
Reduction of Interest
Rate
(2)
Modification to 
Interest-only
Payments
(2)
Forgiveness of Debt(2)
CountBalanceCountBalanceCountBalanceCountBalanceCountBalance
Commercial
Commercial, industrial and other5 $546 5 $546 0 $0 0 $0 0 $0 
Commercial real estate
Non-construction5 2,944 4 2,401 2 656 1 113 0 0 
Residential real estate and other26 2,835 26 2,835 11 1,906 0 0 0 0 
Total loans36 $6,325 35 $5,782 13 $2,562 1 $113 0 $0 
24


Six months ended
June 30, 2020
(Dollars in thousands)
Total (1)(2)
Extension at
Below Market
Terms (2)
Reduction of Interest
Rate (2)
Modification to 
Interest-only
Payments (2)
Forgiveness of Debt(2)
CountBalanceCountBalanceCountBalanceCountBalanceCountBalance
Commercial
Commercial, industrial and other12 $9,033 $4,759 $$3,257 $432 
Commercial real estate
Non-construction14 18,135 11 13,511 921 5,545 
Residential real estate and other41 5,646 33 5,395 15 2,376 
Total loans67 $32,814 52 $23,665 18 $3,297 10 $8,802 $432 
(1)TDRs may have more than one modification representing a concession. As such, TDRs during the period may be represented in more than one of the categories noted above.
(2)Balances represent the recorded investment in the loan at the time of the restructuring.

During the six months ended June 30, 2021, 36 loans totaling $6.3 million were determined to be TDRs, compared to 67 loans totaling $32.8 million during the six months ended June 30, 2020. Of these loans extended at below market terms, the weighted average extension had a term of approximately 108 months during the six months ended June 30, 2021 compared to 10 months for the six months ended June 30, 2020. Further, the weighted average decrease in the stated interest rate for loans with a reduction of interest rate during the period was approximately 152 basis points and 158 basis points for the year-to-date periods ended June 30, 2021 and 2020, respectively. Interest-only payment terms were approximately six months and 13 months during the six months ended June 30, 2021 and 2020, respectively. Additionally, 0 balances were forgiven in the first six months of 2021 compared to $453,000 of principal balances were forgiven in the same period of 2020.

The following table presents a summary of all loans restructured in TDRs during the twelve months ended June 30, 2021 and 2020, and such loans that were in payment default under the restructured terms during the respective periods below:
(Dollars in thousands)As of June 30, 2021Three Months Ended
June 30, 2021
Six Months Ended
June 30, 2021
Total (1)(3)
Payments in Default  (2)(3)
Payments in Default  (2)(3)
CountBalanceCountBalanceCountBalance
Commercial
Commercial, industrial and other14 $3,875 4 $1,371 4 $1,371 
Commercial real estate
Non-construction9 4,090 2 1,176 3 1,383 
Residential real estate and other70 11,418 5 379 5 379 
Total loans93 $19,383 11 $2,926 12 $3,133 
(Dollars in thousands)As of June 30, 2020Three Months Ended
June 30, 2020
Six Months Ended
June 30, 2020
Total (1)(3)
Payments in Default  (2)(3)
Payments in Default  (2)(3)
CountBalanceCountBalanceCountBalance
Commercial
Commercial, industrial and other22 $13,989 $4,252 $5,013 
Commercial real estate
Non-construction17 23,578 6,181 6,181 
Residential real estate and other144 15,606 12 2,507 13 2,818 
Total loans183 $53,173 25 $12,940 27 $14,012 
(1)Total TDRs represent all loans restructured in TDRs during the previous twelve months from the date indicated.
(2)TDRs considered to be in payment default are over 30 days past due subsequent to the restructuring.
(3)Balances represent the recorded investment in the loan at the time of the restructuring.

25

(7) Goodwill and Other Intangible Assets

A summary of the Company’s goodwill assets by reporting unit is presented in the following table:
(In thousands)December 31, 2020Goodwill
Acquired
Impairment
Loss
Goodwill AdjustmentsJune 30,
2021
Community banking$536,396 $$$$536,396 
Specialty finance39,938 629 40,567 
Wealth management69,373 69,373 
    Total$645,707 $$$629 $646,336 

The specialty finance unit’s goodwill increased $629,000 in the first six months of 2021 as a result of foreign currency translation adjustments related to the Canadian acquisitions.

The Company assesses each reporting unit’s goodwill for impairment on at least an annual basis and considers potential indicators of impairment at each reporting date between annual goodwill impairment tests. At October 1, 2020, the Company utilized a quantitative approach for its annual goodwill impairment tests of the banking, specialty finance and wealth management reporting units and determined that no impairment existed at that time.

At each reporting date between annual goodwill impairment tests, the Company considers potential indicators of impairment. Given the current and prior economic uncertainty and volatility surrounding COVID-19, the Company assessed whether such events and circumstances resulted in it being more likely than not that the fair value of any reporting unit was less than its carrying value. Potential impairment indicators considered include the condition of the economy and banking industry; government intervention and regulatory updates; the impact of recent events to financial performance and cost factors of the reporting units; performance of the Company’s stock and other relevant events.

At the conclusion of this assessment of all reporting units, the Company determined that as of June 30, 2021, it was more likely than not that the fair value of all reporting units exceeded the respective carrying value of such reporting unit.

26

A summary of intangible assets as of the dates shown and the expected amortization of finite-lived intangible assets as of June 30, 2021 is as follows:
(In thousands)June 30,
2021
December 31,
2020
June 30,
2020
Community banking segment:
Core deposit intangibles with finite lives:
Gross carrying amount$55,206 $55,206 $55,206 
Accumulated amortization(35,549)(32,680)(29,673)
    Net carrying amount$19,657 $22,526 $25,533 
Trademark with indefinite lives:
Carrying amount5,800 5,800 5,800 
Total net carrying amount$25,457 $28,326 $31,333 
Specialty finance segment:
Customer list intangibles with finite lives:
Gross carrying amount$1,969 $1,966 $1,959 
Accumulated amortization(1,686)(1,644)(1,602)
    Net carrying amount$283 $322 $357 
Wealth management segment:
Customer list and other intangibles with finite lives:
Gross carrying amount$20,430 $20,430 $20,430 
Accumulated amortization(14,173)(13,038)(10,752)
    Net carrying amount$6,257 $7,392 $9,678 
Total intangible assets:
Gross carrying amount$83,405 $83,402 $83,395 
Accumulated amortization(51,408)(47,362)(42,027)
Total intangible assets, net$31,997 $36,040 $41,368 
Estimated amortization
Actual in six months ended June 30, 2021$4,046 
Estimated remaining in 20213,687 
Estimated—20226,114 
Estimated—20234,658 
Estimated—20243,259 
Estimated—20252,552 

The core deposit intangibles recognized in connection with prior bank acquisitions are amortized over a ten-year period on an accelerated basis. The customer list intangibles recognized in connection with the purchase of life insurance premium finance assets in 2009 are being amortized over an 18-year period on an accelerated basis. The customer list and other intangibles recognized in connection with prior acquisitions within the wealth management segment are being amortized over a period of up to ten years on a straight-line basis. Indefinite-lived intangible assets consist of certain trade and domain names recognized in connection with the acquisition of Veterans First Mortgage in 2018. As indefinite-lived intangible assets are not amortized, the Company assesses impairment on at least an annual basis.

Total amortization expense associated with finite-lived intangibles totaled approximately $4.0 million and $5.7 million for the six months ended June 30, 2021 and 2020, respectively.

27

(8) Mortgage Servicing Rights (“MSRs”)

The following is a summary of the changes in the carrying value of MSRs, accounted for at fair value, for the periods indicated:
Three Months EndedSix Months Ended
June 30,June 30,June 30,June 30,
(In thousands)2021202020212020
Balance at beginning of the period$124,316 $73,504 $92,081 $85,638 
Additions from loans sold with servicing retained17,512 20,351 42,128 29,798 
Estimate of changes in fair value due to:
Early buyout options (“EBO”) exercised(144)(402)
Payoffs and paydowns(8,540)(8,670)(18,708)(15,694)
Changes in valuation inputs or assumptions(5,540)(7,982)12,505 (22,539)
Fair value at end of the period$127,604 $77,203 $127,604 $77,203 
Unpaid principal balance of mortgage loans serviced for others$12,307,337 $9,188,285 

The Company recognizes MSR assets upon the sale of residential real estate loans to external third parties when it retains the obligation to service the loans and the servicing fee is more than adequate compensation. The initial recognition of MSR assets from loans sold with servicing retained and subsequent changes in fair value of all MSRs are recognized in mortgage banking revenue. MSRs are subject to changes in value from actual and expected prepayment of the underlying loans.

The estimation of fair value related to MSRs is partly impacted by the Company exercising its EBO on eligible loans previously sold to the Government National Mortgage Association (“GNMA”). Under such optional repurchase program, financial institutions acting as servicers are allowed to buy back from the securitized loan pool individual delinquent mortgage loans meeting certain criteria for which the institution was the original transferor of such loans. At the option of the servicer and without prior authorization from GNMA, the servicer may repurchase such delinquent loans for an amount equal to the remaining principal balance of the loan. At the time of such repurchase, any MSR value related to such loans is derecognized.

Starting in 2019, the Company periodically purchased options for the right to purchase securities not currently held within the banks’ investment portfolios and entered into interest rate swaps in which the Company elected to not designate such derivatives as hedging instruments. These option and swap transactions were designed primarily to economically hedge a portion of the fair value adjustments related to MSRs. During the second quarter of 2020, the Company terminated these interest rate swaps. There were no such options or interest rate swaps outstanding as of June 30, 2021. For more information regarding these hedges, see Note 14 - Derivative Financial Instruments in Item 1 of this report.

The MSR asset fair value is determined by using a discounted cash flow model that incorporates the objective characteristics of the portfolio as well as subjective valuation parameters that purchasers of servicing would apply to such portfolios sold into the secondary market. The subjective factors include loan prepayment speeds, discount rates, servicing costs and other economic factors. The Company uses a third party to assist in the valuation of MSRs.

28

(9) Deposits

The following table is a summary of deposits as of the dates shown: 
(Dollars in thousands)June 30,
2021
December 31,
2020
June 30,
2020
Balance:
Non-interest-bearing$12,796,110 $11,748,455 $10,204,791 
NOW and interest-bearing demand deposits3,625,538 3,349,021 3,440,348 
Wealth management deposits4,399,303 4,138,712 4,433,020 
Money market9,843,390 9,348,806 9,288,976 
Savings3,776,400 3,531,029 3,447,352 
Time certificates of deposit4,363,875 4,976,628 4,837,387 
Total deposits$38,804,616 $37,092,651 $35,651,874 
Mix:
Non-interest-bearing33 %32 %29 %
NOW and interest-bearing demand deposits9 10 
Wealth management deposits11 11 12 
Money market25 25 25 
Savings10 10 10 
Time certificates of deposit12 13 14 
Total deposits100 %100 %100 %

Wealth management deposits represent deposit balances (primarily money market accounts) at the Company’s subsidiary banks from brokerage customers of Wintrust Investments, LLC (“Wintrust Investments”), Chicago Deferred Exchange Company (“CDEC”), trust and asset management customers of the Company and brokerage customers from unaffiliated companies.

(10) FHLB Advances, Other Borrowings and Subordinated Notes

The following table is a summary of FHLB advances, other borrowings and subordinated notes as of the dates shown:
(In thousands)June 30,
2021
December 31,
2020
June 30,
2020
FHLB advances$1,241,071 $1,228,429 $1,228,416 
Other borrowings:
Notes payable91,016 101,710 112,401 
Short-term borrowings15,597 11,366 8,458 
Other64,217 65,108 65,980 
Secured borrowings347,663 340,744 321,696 
Total other borrowings518,493 518,928 508,535 
Subordinated notes436,719 436,506 436,298 
Total FHLB advances, other borrowings and subordinated notes$2,196,283 $2,183,863 $2,173,249 

FHLB Advances

FHLB advances consist of obligations of the banks and are collateralized by qualifying commercial and residential real estate and home equity loans and certain securities. FHLB advances are stated at par value of the debt adjusted for unamortized prepayment fees paid at the time of prior restructurings of FHLB advances, unamortized fair value adjustments recorded in connection with advances acquired through acquisitions and debt issuance costs.

Notes Payable

On September 18, 2018, the Company established a $150.0 million term facility ("Term Facility"), which is part of a $200.0 million loan agreement ("Credit Agreement") with unaffiliated banks. The Credit Agreement consists of the Term Facility with
29

an original outstanding balance of $150.0 million and a $50.0 million revolving credit facility ("Revolving Credit Facility"). At June 30, 2021, the Company had a notes payable balance of $91.0 million under the Term Facility. The Term Facility is stated at par of the current outstanding balance of the debt adjusted for unamortized costs paid by the Company in relation to the debt issuance. The Company was contractually required to borrow the entire amount of the Term Facility on September 18, 2018 and all such borrowings must be repaid by September 18, 2023. Beginning December 31, 2018, the Company is required to make quarterly payments of principal plus interest on the Term Facility. At June 30, 2021, the Company had 0 outstanding balance under the Revolving Credit Facility. Unamortized costs paid by the Company in relation to the issuance of the Revolving Credit Facility are classified in other assets on the Consolidated Statements of Condition.

An amendment to the Credit Agreement was executed on and effective as of September 15, 2020. The amendment provided for, among other things, extension of the maturity date under the Revolving Credit Facility to September 14, 2021, revision of certain financial covenants; and the addition of a mechanism to replace LIBOR with an alternate benchmark rate.

Borrowings under the amended Credit Agreement that are considered “Base Rate Loans” bear interest at a rate equal to the sum of (1) 60 basis points (in the case of a borrowing under the Revolving Credit Facility) or 75 basis points (in the case of a borrowing under the Term Facility) plus (2) the highest of (a) the federal funds rate plus 50 basis points, (b) the lender's prime rate, or (c) the Eurodollar Rate (as defined below) that would be applicable for an interest period of one month plus 100 basis points. Borrowings under the agreement that are considered “Eurodollar Rate Loans” bear interest at a rate equal to the sum of (1) 135 basis points (in the case of a borrowing under the Revolving Credit Facility) or 125 basis points (in the case of a borrowing under the Term Facility) plus (2) the LIBOR rate for the applicable period, as adjusted for statutory reserve requirements for eurocurrency liabilities (the “Eurodollar Rate”). A commitment fee is payable quarterly equal to 0.30% of the actual daily amount by which the lenders' commitment under the Revolving Credit Facility exceeded the amount outstanding under such facility.

Borrowings under the amended Credit Agreement are secured by pledges of and first priority perfected security interests in the Company's equity interest in its bank subsidiaries and contain several restrictive covenants, including the maintenance of various capital adequacy levels, asset quality and profitability ratios, and certain restrictions on dividends and other indebtedness. In September 2020, the required levels to maintain for certain restrictive covenants within the Credit Agreement were amended. At June 30, 2021, the Company was in compliance with all such covenants. The Revolving Credit Facility and the Term Facility are available to be utilized, as needed, to provide capital to fund continued growth at the Company’s banks and to serve as an interim source of funds for acquisitions, common stock repurchases or other general corporate purposes.

Short-term Borrowings

Short-term borrowings include securities sold under repurchase agreements and federal funds purchased. These borrowings totaled $15.6 million at June 30, 2021 compared to $11.4 million at December 31, 2020 and $8.5 million at June 30, 2020. At June 30, 2021, December 31, 2020 and June 30, 2020, securities sold under repurchase agreements represent $15.6 million, $11.4 million and $8.5 million, respectively, of customer sweep accounts in connection with master repurchase agreements at the banks. The Company records securities sold under repurchase agreements at their gross value and does not offset positions on the Consolidated Statements of Condition. As of June 30, 2021, the Company had pledged securities related to its customer balances in sweep accounts of $22.3 million. Securities pledged for customer balances in sweep accounts and short-term borrowings from brokers are maintained under the Company’s control and consist of mortgage-backed securities. These securities are included in the available-for-sale portfolio as reflected on the Company’s Consolidated Statements of Condition.

The following is a summary of these securities pledged as of June 30, 2021 disaggregated by investment category and maturity of the related customer sweep account, and reconciled to the outstanding balance of securities sold under repurchase agreements:
(In thousands)Overnight Sweep Collateral
Available-for-sale securities pledged
U.S. Government agencies$10,898 
Mortgage-backed securities11,434 
Total collateral pledged22,332 
Excess collateral6,735 
Securities sold under repurchase agreements$15,597 

30

Other Borrowings

Other borrowings at June 30, 2021 represent a fixed-rate promissory note issued by the Company in June 2017 and amended in March 2020 ("Fixed-Rate Promissory Note") related to and secured by 3 office buildings owned by the Company. At June 30, 2021, the Fixed-Rate Promissory Note had a balance of $64.2 million compared to $65.1 million at December 31, 2020 and $66.0 million at June 30, 2020. Under the Fixed-Rate Promissory Note, during the three months ended March 31, 2020, the Company made monthly principal payments and paid interest at a fixed rate of 3.36%. An amendment to the Fixed-Rate Promissory Note was executed on and effective as of March 31, 2020. The amendment increased the principal amount to $66.4 million, reduced the interest rate to 3.00% and extended the maturity date to March 31, 2025. The Fixed-Rate Promissory Note contains several restrictive covenants, including the maintenance of various capital adequacy levels, asset quality and profitability ratios, and certain restrictions on dividends and indebtedness. At June 30, 2021, the Company was in compliance with all such covenants.

Secured Borrowings

Secured borrowings at June 30, 2021 primarily represents transactions to sell an undivided co-ownership interest in all receivables owed to the Company's subsidiary, First Insurance Funding of Canada ("FIFC Canada"). In December 2014, FIFC Canada sold such interest to an unrelated third party in exchange for a cash payment of approximately C$150 million pursuant to a receivables purchase agreement (“Receivables Purchase Agreement”). The Receivables Purchase Agreement was amended in December 2015, effectively extending the maturity date from December 15, 2015 to December 15, 2017. Additionally, at that time, the unrelated third party paid an additional C$10 million, which increased the total payments to C$160 million. The Receivables Purchase Agreement was again amended in December 2017, effectively extending the maturity date from December 15, 2017 to December 16, 2019. Additionally, in December 2017, the unrelated third party paid an additional C$10 million, which increased the total payments to C$170 million. In June 2018, the unrelated third party paid an additional C$20 million, which increased the total payments to C$190 million. The Receivables Purchase Agreement was again amended in February 2019, effectively extending the maturity date from December 16, 2019 to December 15, 2020. Additionally, in February 2019, the unrelated third party paid an additional C$20 million, which increased the total payments to C$210 million. In May 2019, the unrelated third party paid an additional C$70 million, which increased the total payments to C$280 million. In January 2020, the unrelated third party paid an additional C$40 million, which increased the total payments to C$320 million, and the Receivables Purchase Agreement was amended to effectively extend the maturity date from December 15, 2020 to December 15, 2021. In May 2020, the unrelated third party paid an additional C$100 million, which increased the total payments to C$420 million. In January 2021, the Receivables Purchase Agreement was amended to effectively extend the maturity date from December 15, 2021 to December 15, 2022. These transactions were not considered sales of receivables and, as such, related proceeds received are reflected on the Company’s Consolidated Statements of Condition as a secured borrowing owed to the unrelated third party, net of unamortized debt issuance costs, and translated to the Company’s reporting currency as of the respective date. At June 30, 2021, the translated balance of the secured borrowing totaled $338.5 million compared to $329.9 million at December 31, 2020 and $309.1 million at June 30, 2020. Additionally, the interest rate under the Receivables Purchase Agreement at June 30, 2021 was 1.0790%. The remaining $9.1 million within secured borrowings at June 30, 2021 represents other sold interests in certain loans by the Company that were not considered sales and, as such, related proceeds received are reflected on the Company’s Consolidated Statements of Condition as a secured borrowing owed to the various unrelated third parties.

Subordinated Notes

At June 30, 2021, the Company had outstanding subordinated notes totaling $436.7 million compared to $436.5 million and $436.3 million outstanding at December 31, 2020 and June 30, 2020, respectively. During the second quarter of 2019, the Company issued $300.0 million of subordinated notes, receiving $296.7 million in net proceeds. The subordinated notes have a stated interest rate of 4.85% and mature in June 2029. In 2014, the Company issued $140.0 million of subordinated notes receiving $139.1 million in net proceeds. The subordinated notes have a stated interest rate of 5.00% and mature in June 2024. Subordinated notes are stated at par adjusted for unamortized issuance costs paid related to such debt.

(11) Junior Subordinated Debentures

As of June 30, 2021, the Company owned 100% of the common securities of 11 trusts, Wintrust Capital Trust III, Wintrust Statutory Trust IV, Wintrust Statutory Trust V, Wintrust Capital Trust VII, Wintrust Capital Trust VIII, Wintrust Capital Trust IX, Northview Capital Trust I, Town Bankshares Capital Trust I, First Northwest Capital Trust I, Suburban Illinois Capital Trust II, and Community Financial Shares Statutory Trust II (the “Trusts”) set up to provide long-term financing. The Northview, Town, First Northwest, Suburban, and Community Financial Shares capital trusts were acquired as part of the acquisitions of Northview Financial Corporation, Town Bankshares, Ltd., First Northwest Bancorp, Inc., Suburban Illinois
31

Bancorp, Inc. and Community Financial Shares, Inc., respectively. The Trusts were formed for purposes of issuing trust preferred securities to third-party investors and investing the proceeds from the issuance of the trust preferred securities and common securities solely in junior subordinated debentures issued by the Company (or assumed by the Company in connection with an acquisition), with the same maturities and interest rates as the trust preferred securities. The junior subordinated debentures are the sole assets of the Trusts. In each Trust, the common securities represent approximately 3% of the junior subordinated debentures and the trust preferred securities represent approximately 97% of the junior subordinated debentures.

The Trusts are reported in the Company’s consolidated financial statements as unconsolidated subsidiaries. Accordingly, in the Consolidated Statements of Condition, the junior subordinated debentures issued by the Company to the Trusts are reported as liabilities and the common securities of the Trusts, all of which are owned by the Company, are included in investment securities.

The following table provides a summary of the Company’s junior subordinated debentures as of June 30, 2021. The junior subordinated debentures represent the par value of the obligations owed to the Trusts.
(Dollars in thousands)Common
Securities
Trust 
Preferred
Securities
Junior
Subordinated
Debentures
Rate
Structure
Contractual Rate
at 6/30/2021
Issue
Date
Maturity
Date
Earliest
Redemption
Date
Wintrust Capital Trust III$774 $25,000 $25,774 L+3.253.43 %04/200304/203304/2008
Wintrust Statutory Trust IV619 20,000 20,619 L+2.802.95 %12/200312/203312/2008
Wintrust Statutory Trust V1,238 40,000 41,238 L+2.602.75 %05/200405/203406/2009
Wintrust Capital Trust VII1,550 50,000 51,550 L+1.952.07 %12/200403/203503/2010
Wintrust Capital Trust VIII1,238 25,000 26,238 L+1.451.60 %08/200509/203509/2010
Wintrust Capital Trust IX1,547 50,000 51,547 L+1.631.75 %09/200609/203609/2011
Northview Capital Trust I186 6,000 6,186 L+3.003.18 %08/200311/203308/2008
Town Bankshares Capital Trust I186 6,000 6,186 L+3.003.18 %08/200311/203308/2008
First Northwest Capital Trust I155 5,000 5,155 L+3.003.15 %05/200405/203405/2009
Suburban Illinois Capital Trust II464 15,000 15,464 L+1.751.87 %12/200612/203612/2011
Community Financial Shares Statutory Trust II109 3,500 3,609 L+1.621.74 %06/200709/203706/2012
Total$253,566 2.33 %

The junior subordinated debentures totaled $253.6 million at June 30, 2021, December 31, 2020 and June 30, 2020.

The interest rates on the variable rate junior subordinated debentures are based on the three-month LIBOR rate and reset on a quarterly basis. At June 30, 2021, the weighted average contractual interest rate on the junior subordinated debentures was 2.33%. The Company entered into interest rate swaps with an aggregate notional value of $210.0 million to hedge the variable cash flows on certain junior subordinated debentures. The hedge-adjusted contractual interest rate on the junior subordinated debentures as of June 30, 2021, was 3.97%. Distributions on the common and preferred securities issued by the Trusts are payable quarterly at a rate per annum equal to the interest rates being earned by the Trusts on the junior subordinated debentures. Interest expense on the junior subordinated debentures is deductible for income tax purposes.

The Company has guaranteed the payment of distributions and payments upon liquidation or redemption of the trust preferred securities, in each case to the extent of funds held by the Trusts. The Company and the Trusts believe that, taken together, the obligations of the Company under the guarantees, the junior subordinated debentures, and other related agreements provide, in the aggregate, a full, irrevocable and unconditional guarantee, on a subordinated basis, of all of the obligations of the Trusts under the trust preferred securities. Subject to certain limitations, the Company has the right to defer the payment of interest on the junior subordinated debentures at any time, or from time to time, for a period not to exceed 20 consecutive quarters. The trust preferred securities are subject to mandatory redemption, in whole or in part, upon repayment of the junior subordinated debentures at maturity or their earlier redemption. The junior subordinated debentures are redeemable in whole or in part prior to maturity at any time after the earliest redemption dates shown in the table, and earlier at the discretion of the Company if certain conditions are met, and, in any event, only after the Company has obtained Federal Reserve Bank ("FRB") approval, if then required under applicable guidelines or regulations.

At June 30, 2021, the Company included $245.5 million of the junior subordinated debentures, net of common securities, in Tier 2 regulatory capital.

32

(12) Revenue from Contracts with Customers

Disaggregation of Revenue

The following table presents revenue from contracts with customers, disaggregated by the revenue source:
(Dollars in thousands)Three Months EndedSix Months Ended
Revenue from contracts with customersLocation in income statementJune 30,
2021
June 30,
2020
June 30,
2021
June 30,
2020
Brokerage and insurance product commissionsWealth management$5,148 $4,147 $10,188 $9,428 
TrustWealth management5,379 4,248 10,396 9,539 
Asset managementWealth management20,163 14,241 39,415 29,610 
Total wealth management30,690 22,636 59,999 48,577 
Mortgage broker feesMortgage banking114 174 190 227 
Service charges on deposit accountsService charges on deposit accounts13,249 10,420 25,285 21,685 
Administrative servicesOther non-interest income1,228 933 2,484 2,045 
Card related feesOther non-interest income2,187 1,379 3,961 3,485 
Other deposit related feesOther non-interest income3,265 2,914 6,582 6,092 
Total revenue from contracts with customers$50,733 $38,456 $98,501 $82,111 

Wealth Management Revenue

Wealth management revenue is comprised of brokerage and insurance product commissions, managed money fees and trust and asset management revenue of the Company's 4 wealth management subsidiaries: Wintrust Investments, Great Lakes Advisors, LLC ("GLA"), The Chicago Trust Company, N.A. ("CTC") and CDEC. All wealth management revenue is recognized in the wealth management segment.

Brokerage and insurance product commissions consists primarily of commissions earned from trade execution services on behalf of customers and from selling mutual funds, insurance and other investment products to customers. For trade execution services, the Company recognizes commissions and receives payment from the brokerage customers at the point of transaction execution. Commissions received from the investment or insurance product providers are recognized at the point of sale of the product. The Company also receives trail and other commissions from providers for certain plans. These are generally based on qualifying account values and are recognized once the performance obligation, specific to each provider, is satisfied on a monthly, quarterly or annual basis.

Trust revenue is earned primarily from trust and custody services that are generally performed over time as well as fees earned on funds held during the facilitation of tax-deferred like-kind exchange transactions. Revenue is determined periodically based on a schedule of fees applied to the value of each customer account using a time-elapsed method to measure progress toward complete satisfaction of the performance obligation. Fees are typically billed on a calendar month or quarter basis in advance or in arrears depending upon the contract. Upfront fees received related to the facilitation of tax-deferred like-kind exchange transactions are deferred until the transaction is completed. Additional fees earned for certain extraordinary services performed on behalf of the customers are recognized when the service has been performed.
Asset management revenue is earned from money management and advisory services that are performed over time. Revenue is based primarily on the market value of assets under management or administration using a time-elapsed method to measure progress toward complete satisfaction of the performance obligation. Fees are typically billed on a calendar month or quarter basis in advance or in arrears depending upon the contract. Certain programs provide the customer with an option of paying fees as a percentage of the account value or incurring commission charges for each trade similar to brokerage and insurance product commissions. Trade commissions and any other fees received for additional services are recognized at a point in time once the performance obligation is satisfied.

33

Mortgage Broker Fees

For customers desiring a mortgage product not currently offered by the Company, the Company may refer such customers and, with permission, direct such customers' applications to certain third party mortgage brokers. Mortgage broker fees are received from these brokers for such customer referrals upon settlement of the underlying mortgage. The Company's entitlement to the consideration is contingent on the settlement of the mortgage which is highly susceptible to factors outside of the Company's influence, such as third party broker's underwriting requirements. Also, the uncertainty surrounding the consideration could be resolved in varying lengths of time, dependent upon the third party brokers. Therefore, mortgage broker fees are recognized at the settlement of the underlying mortgage when the consideration is received. Broker fees are recognized in the community banking segment.

Service Charges on Deposit Accounts

Service charges on deposit accounts include fees charged to deposit customers for various services, including account analysis services, and are based on factors such as the size and type of customer, type of product and number of transactions. The fees are based on a standard schedule of fees and, depending on the nature of the service performed, the service is performed at a point in time or over a period of a month. When the service is performed at a point in time, the Company recognizes and receives revenue when the service has been performed. When the service is performed over a period of a month, the Company recognizes and receives revenue in the month the service has been performed. Service charges on deposit accounts are recognized in the community banking segment.

Administrative Services

Administrative services revenue is earned from providing outsourced administrative services, such as data processing of payrolls, billing and cash management services, to temporary staffing service clients located throughout the United States. Fees are charged periodically (typically a payroll cycle) and computed in accordance with the contractually determined rate applied to the total gross billings administered for the period. The revenue is recognized over the period using a time-elapsed method to measure progress toward complete satisfaction of the performance obligation. Other fees are charged on a per occurrence basis as the service is provided in the billing cycle. The Company has certain contracts with customers to perform outsourced administrative services and short-term accounts receivable financing. For these contracts, the total fee is allocated between the administrative services revenue and interest income during the client onboarding process based on the specific client and services provided. Administrative services revenue is recognized in the specialty finance segment.

Card and Other Deposit Related Fees

Card related fees include interchange and merchant revenue, and fees related to debit and credit cards. Interchange revenue is related to the Company issued debit cards. Other deposit related fees primarily include pay by phone processing fees, ATM and safe deposit box fees, check order charges and foreign currency related fees. Card and deposit related fees are generally based on volume of transactions and are recognized at the point in time when the service has been performed. For any consideration that is constrained, the revenue is recognized once the uncertainty is known. Upfront fees received from certain contracts are recognized on a straight line basis over the term of the contract. Card and deposit related fees are recognized in the community banking segment.

34

Contract Balances

The following table provides information about contract assets, contract liabilities and receivables from contracts with customers:
(Dollars in thousands)June 30,
2021
December 31,
2020
June 30,
2020
Contract assets$0 $$
Contract liabilities$1,704 $1,548 $665 
Mortgage broker fees receivable$11 $20 $59 
Administrative services receivable199 64 161 
Wealth management receivable11,274 10,144 10,297 
Card related fees receivable1,556 783 
Total receivables from contracts with customer$13,040 $11,011 $10,517 

Contract liabilities represent upfront fees that the Company received at inception of certain contracts. The revenue recognized that was included in the contract liability balance at beginning of the period totaled $698,000 and $1.1 million for the six months ended June 30, 2021 and 2020, respectively. Receivables are recognized in the period the Company provides services and when the Company's right to consideration is unconditional. Card related fee receivable is the result of volume based fee that the Company receives from a customer on an annual basis in the second quarter of each year. Payment terms on other invoiced amounts are typically 30 days or less. Contract liabilities and receivables from contracts with customers are included within the accrued interest payable and other liabilities and accrued interest receivable and other assets line items, respectively, in the Consolidated Statements of Condition.

Transaction price allocated to the remaining performance obligations

The following table presents the estimated future timing of recognition of upfront fees related to card and deposit related fees. These upfront fees represent performance obligations that are unsatisfied or partially unsatisfied at the end of the reporting period.

(Dollars in thousands)
Estimated remaining in 2021$554 
Estimated—2022400 
Estimated—2023400 
Estimated—2024250 
Estimated—2025100 
Total$1,704 

Practical Expedients and Exemptions

The Company does not adjust the promised amount of consideration for the effects of a significant financing component if the Company expects, at contract inception, that the period between when the Company transfers a promised service to a customer and when the customer pays for that service is one year or less.

The Company recognizes the incremental costs of obtaining a contract as an expense when incurred if the amortization period of the asset that the entity otherwise would have recognized is one year or less.

35

(13) Segment Information

The Company’s operations consist of 3 primary segments: community banking, specialty finance and wealth management.

The 3 reportable segments are strategic business units that are separately managed as they offer different products and services and have different marketing strategies. In addition, each segment’s customer base has varying characteristics and each segment has a different regulatory environment. While the Company’s management monitors each of the 15 bank subsidiaries’ operations and profitability separately, these subsidiaries have been aggregated into 1 reportable operating segment due to the similarities in products and services, customer base, operations, profitability measures, and economic characteristics.

For purposes of internal segment profitability, management allocates certain intersegment and parent company balances. Management allocates a portion of revenues to the specialty finance segment related to loans and leases originated by the specialty finance segment and sold or assigned to the community banking segment. Similarly, for purposes of analyzing the contribution from the wealth management segment, management allocates a portion of the net interest income earned by the community banking segment on deposit balances of customers of the wealth management segment to the wealth management segment. See Note 9 — Deposits, for more information on these deposits. Finally, expenses incurred at the Wintrust parent company are allocated to each segment based on each segment's risk-weighted assets.

The segment financial information provided in the following table has been derived from the internal profitability reporting system used by management to monitor and manage the financial performance of the Company. The accounting policies of the segments are substantially similar to those described in “Summary of Significant Accounting Policies” in Note 1 of the Company’s 2020 Form 10-K. The Company evaluates segment performance based on after-tax profit or loss and other appropriate profitability measures common to each segment.
36

The following is a summary of certain operating information for reportable segments:
Three Months Ended$ Change in
Contribution
% Change  in
Contribution
(Dollars in thousands)June 30,
2021
June 30,
2020
Net interest income:
Community Banking$219,679 $205,678 $14,001 %
Specialty Finance45,194 42,415 2,779 
Wealth Management7,765 8,586 (821)(10)
Total Operating Segments272,638 256,679 15,959 
Intersegment Eliminations6,952 6,452 500 
Consolidated net interest income$279,590 $263,131 $16,459 %
Provision for credit losses:
Community Banking$(15,163)$132,149 $(147,312)NM
Specialty Finance(136)2,904 (3,040)NM
Wealth Management0 %
Total Operating Segments(15,299)135,053 (150,352)NM
Intersegment Eliminations0 
Consolidated provision for credit losses$(15,299)$135,053 $(150,352)NM
Non-interest income:
Community Banking$90,410 $129,698 $(39,288)(30)%
Specialty Finance22,464 21,831 633 
Wealth Management31,843 24,465 7,378 30 
Total Operating Segments144,717 175,994 (31,277)(18)
Intersegment Eliminations(15,344)(14,001)(1,343)10 
Consolidated non-interest income$129,373 $161,993 $(32,620)(20)%
Net revenue:
Community Banking$310,089 $335,376 $(25,287)(8)%
Specialty Finance67,658 64,246 3,412 
Wealth Management39,608 33,051 6,557 20 
Total Operating Segments417,355 432,673 (15,318)(4)
Intersegment Eliminations(8,392)(7,549)(843)11 
Consolidated net revenue$408,963 $425,124 $(16,161)(4)%
Segment profit (loss):
Community Banking$72,752 $(7,315)$80,067 NM
Specialty Finance23,850 22,688 1,162 %
Wealth Management8,507 6,286 2,221 35 
Consolidated net income$105,109 $21,659 $83,450 385 %
Segment assets:
Community Banking$37,619,971 $35,560,107 $2,059,864 %
Specialty Finance7,701,921 6,708,493 993,428 15 
Wealth Management1,416,558 1,271,417 145,141 11 
Consolidated total assets$46,738,450 $43,540,017 $3,198,433 %
NM - Not meaningful





37

Six Months Ended$ Change in
Contribution
% Change  in
Contribution
(Dollars in thousands)June 30,
2021
June 30,
2020
Net interest income:
Community Banking$423,168 $412,513 $10,655 %
Specialty Finance90,093 83,127 6,966 
Wealth Management15,214 16,378 (1,164)(7)
Total Operating Segments528,475 512,018 16,457 
Intersegment Eliminations13,010 12,556 454 
Consolidated net interest income$541,485 $524,574 $16,911 %
Provision for credit losses:
Community Banking$(61,735)$183,826 $(245,561)NM
Specialty Finance1,089 4,188 (3,099)(74)%
Wealth Management0 
Total Operating Segments(60,646)188,014 (248,660)NM
Intersegment Eliminations0 
Consolidated provision for credit losses$(60,646)$188,014 $(248,660)NM
Non-interest income:
Community Banking$237,678 $210,701 $26,977 13 %
Specialty Finance45,573 43,139 2,434 
Wealth Management62,094 48,595 13,499 28 
Total Operating Segments345,345 302,435 42,910 14 
Intersegment Eliminations(29,466)(27,200)(2,266)
Consolidated non-interest income$315,879 $275,235 $40,644 15 %
Net revenue:
Community Banking$660,846 $623,214 $37,632 %
Specialty Finance135,666 126,266 9,400 
Wealth Management77,308 64,973 12,335 19 
Total Operating Segments873,820 814,453 59,367 
Intersegment Eliminations(16,456)(14,644)(1,812)12 
Consolidated net revenue$857,364 $799,809 $57,555 %
Segment profit:
Community Banking$194,553 $27,274 $167,279 613 %
Specialty Finance47,753 44,821 2,932 
Wealth Management15,951 12,376 3,575 29 
Consolidated net income$258,257 $84,471 $173,786 206 %
NM - Not meaningful

(14) Derivative Financial Instruments

The Company primarily enters into derivative financial instruments as part of its strategy to manage its exposure to changes in interest rates. Derivative instruments represent contracts between parties that result in one party delivering cash to the other party based on a notional amount and an underlying term (such as a rate, security price or price index) as specified in the contract. The amount of cash delivered from one party to the other is determined based on the interaction of the notional amount of the contract with the underlying term. Derivatives are also implicit in certain contracts and commitments.

The derivative financial instruments currently used by the Company to manage its exposure to interest rate risk include: (1) interest rate swaps and collars to manage the interest rate risk of certain fixed and variable rate assets and variable rate liabilities; (2) interest rate lock commitments provided to customers to fund certain mortgage loans to be sold into the secondary market; (3) forward commitments for the future delivery of such mortgage loans to protect the Company from adverse changes in interest rates and corresponding changes in the value of mortgage loans held-for-sale; (4) covered call options to economically hedge specific investment securities and receive fee income effectively enhancing the overall yield on such securities to compensate for net interest margin compression; and (5) options and swaps to economically hedge a portion of the fair value adjustments related to the Company's mortgage servicing rights portfolio. The Company also enters into derivatives (typically interest rate swaps) with certain qualified borrowers to facilitate the borrowers’ risk management strategies and concurrently enters into mirror-image derivatives with a third party counterparty, effectively making a market in the derivatives for such borrowers. Additionally, the Company enters into foreign currency contracts to manage foreign exchange risk associated with certain foreign currency denominated assets.

38

The Company recognizes derivative financial instruments in the consolidated financial statements at fair value regardless of the purpose or intent for holding the instrument. The Company records derivative assets and derivative liabilities on the Consolidated Statements of Condition within accrued interest receivable and other assets and accrued interest payable and other liabilities, respectively. Changes in the fair value of derivative financial instruments are either recognized in income or in shareholders’ equity as a component of accumulated other comprehensive income or loss depending on whether the derivative financial instrument qualifies for hedge accounting and, if so, whether it qualifies as a fair value hedge or cash flow hedge.

Changes in fair values of derivatives accounted for as fair value hedges are recorded in income in the same period and in the same income statement line as changes in the fair values of the hedged items that relate to the hedged risk(s). Changes in fair values of derivative financial instruments accounted for as cash flow hedges are recorded as a component of accumulated other comprehensive income or loss, net of deferred taxes, and reclassified to earnings when the hedged transaction affects earnings. Changes in fair values of derivative financial instruments not designated in a hedging relationship pursuant to ASC 815 are reported in non-interest income during the period of the change. Derivative financial instruments are valued by a third party and are corroborated by comparison with valuations provided by the respective counterparties. Fair values of certain mortgage banking derivatives (interest rate lock commitments and forward commitments to sell mortgage loans) are estimated based on changes in mortgage interest rates from the date of the loan commitment. The fair value of foreign currency derivatives is computed based on changes in foreign currency rates stated in the contract compared to those prevailing at the measurement date.

The table below presents the fair value of the Company’s derivative financial instruments as of June 30, 2021, December 31, 2020 and June 30, 2020:
Derivative AssetsDerivative Liabilities
(In thousands)June 30,
2021
December 31,
2020
June 30,
2020
June 30,
2021
December 31,
2020
June 30,
2020
Derivatives designated as hedging instruments under ASC 815:
Interest rate derivatives designated as Cash Flow Hedges$34,743 $8,182 $$24,272 $39,715 $59,573 
Interest rate derivatives designated as Fair Value Hedges78 9,373 14,520 17,052 
Total derivatives designated as hedging instruments under ASC 815$34,821 $8,182 $$33,645 $54,235 $76,625 
Derivatives not designated as hedging instruments under ASC 815:
Interest rate derivatives$153,510 $221,205 $268,709 $153,714 $221,608 $266,894 
Interest rate lock commitments23,175 48,925 58,841 2,834 25 
Forward commitments to sell mortgage loans781 27 3,153 12,510 11,667 
Foreign exchange contracts93 111 47 93 112 54 
Total derivatives not designated as hedging instruments under ASC 815$177,559 $270,241 $327,624 $159,794 $234,230 $278,640 
Total Derivatives$212,380 $278,423 $327,624 $193,439 $288,465 $355,265 

Cash Flow Hedges of Interest Rate Risk

The Company’s objectives in using interest rate derivatives are to add stability to net interest income and to manage its exposure to interest rate movements. To accomplish these objectives, the Company primarily uses interest rate swaps as part of its interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable-rate amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without the exchange of the underlying notional amount. Interest rate collars designated as cash flow hedges involve the receipt of amounts in which the interest rate specified in the contract exceeds the agreed upon cap strike price or the payment of amounts in which the interest rate specified in the contract is below the agreed upon floor strike price at the end of each period.

As of June 30, 2021, the Company had 27 interest rate swap derivatives designated as cash flow hedges of variable rate deposits and certain junior subordinated debentures, and 1 interest rate collar derivative designated as a cash flow hedge of the Company's variable rate Term Facility. When the relationship between the hedged item and hedging instrument is highly effective at achieving offsetting changes in cash flows attributable to the hedged risk, changes in the fair value of these cash flow hedges are recorded in accumulated other comprehensive income or loss and are subsequently reclassified to interest
39

expense as interest payments are made on such variable rate deposits. The changes in fair value (net of tax) are separately disclosed in the Consolidated Statements of Comprehensive Income.

The table below provides details on these cash flow hedges, summarized by derivative type and maturity, as of June 30, 2021:
June 30, 2021
(In thousands)NotionalFair Value
Maturity DateAmountAsset (Liability)
Interest Rate Swaps:
October 2021$25,000 $(151)
November 202120,000 (179)
December 2021165,000 (1,745)
March 2022500,000 (102)
May 2022370,000 (6,063)
June 2022160,000 (2,875)
July 2022230,000 (4,245)
August 2022235,000 (4,813)
March 2023250,000 (98)
April 2024250,000 769 
July 2027 (1)
1,000,000 33,974 
Interest Rate Collars:
September 202391,071 (4,001)
Total Cash Flow Hedges$3,296,071 $10,471 
(1)Interest rate swaps effective starting in July 2022.
A rollforward of the amounts in accumulated other comprehensive income or loss related to interest rate derivatives designated as cash flow hedges follows:
Three Months EndedSix Months Ended
(In thousands)June 30,
2021
June 30,
2020
June 30,
2021
June 30,
2020
Unrealized gain (loss) at beginning of period$19,259 $(56,636)$(31,533)$(17,943)
Amount reclassified from accumulated other comprehensive income to interest expense on deposits, other borrowings and junior subordinated debentures6,866 5,451 13,562 6,541 
Amount of (loss) income recognized in other comprehensive income(15,654)(8,318)28,442 (48,101)
Unrealized gain (loss) at end of period$10,471 $(59,503)$10,471 $(59,503)

As of June 30, 2021, the Company estimates that during the next twelve months $18.3 million will be reclassified from accumulated other comprehensive income or loss as an increase to interest expense.

Fair Value Hedges of Interest Rate Risk

Interest rate swaps designated as fair value hedges involve the payment of fixed amounts to a counterparty in exchange for the Company receiving variable payments over the life of the agreements without the exchange of the underlying notional amount. As of June 30, 2021, the Company has 14 interest rate swaps with an aggregate notional amount of $148.0 million that were designated as fair value hedges primarily associated with fixed rate commercial and industrial and commercial real estate loans as well as life insurance premium finance receivables.

For derivatives designated and that qualify as fair value hedges, the net gain or loss from the entire change in the fair value of the derivative instrument is recognized in the same income statement line item as the earnings effect, including the net gain or loss, of the hedged item (interest income earned on fixed rate loans) when the hedged item affects earnings.

The following table presents the carrying amount of the hedged assets/(liabilities) and the cumulative amount of fair value hedging adjustment included in the carrying amount of the hedged assets/(liabilities) that are designated as a fair value hedge accounting relationship as of June 30, 2021:
40


June 30, 2021
(In thousands)

Derivatives in Fair Value
Hedging Relationships
Location in the Statement of ConditionCarrying Amount of the Hedged Assets/(Liabilities)Cumulative Amount of Fair Value Hedging Adjustment Included in the Carrying Amount of the Hedged Assets/(Liabilities)Cumulative Amount of Fair Value Hedging Adjustment Remaining for any Hedged Assets (Liabilities) for which Hedge Accounting has been Discontinued
Interest rate swapsLoans, net of unearned income$155,996 $9,153 $(144)
Available-for-sale debt securities1,272 93 

The following table presents the loss or gain recognized related to derivative instruments that are designated as fair value hedges for the respective period:
(In thousands)
Derivatives in Fair Value Hedging Relationships
Location of (Loss)/Gain Recognized
in Income on Derivative
Three Months EndedSix Months Ended
June 30, 2021June 30, 2021
Interest rate swapsInterest and fees on loans$43 $30 
Interest income - investment securities

Non-Designated Hedges

The Company does not use derivatives for speculative purposes. Derivatives not designated as accounting hedges are used to manage the Company’s economic exposure to interest rate movements and other identified risks but do not meet the strict hedge accounting requirements of ASC 815. Changes in the fair value of derivatives not designated in hedging relationships are recorded directly in earnings.

Interest Rate Derivatives—Periodically, the Company may purchase interest rate cap derivatives designed to act as an economic hedge of the risk of the negative impact on its fixed-rate loan portfolios from rising interest rates, most notably the LIBOR index. As of June 30, 2021, the Company held interest rate caps with an aggregate notional value of $1.0 billion.

Additionally, the Company has interest rate derivatives, including swaps and option products, resulting from a service the Company provides to certain qualified borrowers. The Company’s banking subsidiaries execute certain derivative products (typically interest rate swaps) directly with qualified commercial borrowers to facilitate their respective risk management strategies. For example, these arrangements allow the Company’s commercial borrowers to effectively convert a variable rate loan to a fixed rate. In order to minimize the Company’s exposure on these transactions, the Company simultaneously executes offsetting derivatives with third parties. In most cases, the offsetting derivatives have mirror-image terms, which result in the positions’ changes in fair value substantially offsetting through earnings each period. However, to the extent that the derivatives are not a mirror-image and because of differences in counterparty credit risk, changes in fair value will not completely offset resulting in some earnings impact each period. Changes in the fair value of these derivatives are included in other non-interest income. At June 30, 2021, the Company had interest rate derivative transactions with an aggregate notional amount of approximately $9.3 billion (all interest rate swaps and caps with customers and third parties) related to this program. These interest rate derivatives had maturity dates ranging from July 2021 to February 2045.

Mortgage Banking 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 a portion of our residential mortgage loan production 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’s mortgage banking derivatives have not been designated as being in hedge relationships. At June 30, 2021, the Company had forward commitments to sell mortgage loans with an aggregate notional amount of approximately $1.6 billion and interest rate lock commitments with an aggregate notional amount of approximately $843.9 million. The fair values of these derivatives were estimated based on changes in mortgage rates from the dates of the commitments. Changes in the fair value of these mortgage banking derivatives are included in mortgage banking revenue.

Foreign Currency Derivatives—These derivatives include foreign currency contracts used to manage the foreign exchange risk associated with foreign currency denominated assets and transactions. Foreign currency contracts, which include spot and
41

forward contracts, represent agreements to exchange the currency of one country for the currency of another country at an agreed-upon price on an agreed-upon settlement date. As a result of fluctuations in foreign currencies, the U.S. dollar-equivalent value of the foreign currency denominated assets or forecasted transactions increase or decrease. Gains or losses on the derivative instruments related to these foreign currency denominated assets or forecasted transactions are expected to substantially offset this variability. As of June 30, 2021, the Company held foreign currency derivatives with an aggregate notional amount of approximately $14.3 million.

Other Derivatives—Periodically, the Company will sell options to a bank or dealer for the right to purchase certain securities held within the banks’ investment portfolios (covered call options). These option transactions are designed primarily to mitigate overall interest rate risk and to increase the total return associated with the investment securities portfolio. These options do not qualify as accounting hedges pursuant to ASC 815, and, accordingly, changes in fair value of these contracts are recognized as other non-interest income. There were 0 covered call options outstanding as of June 30, 2021, December 31, 2020 or June 30, 2020.

Periodically, the Company will purchase options for the right to purchase securities not currently held within the banks' investment portfolios or enter into interest rate swaps in which the Company elects to not designate such derivatives as hedging instruments. These option and swap transactions are designed primarily to economically hedge a portion of the fair value adjustments related to the Company's mortgage servicing rights portfolio. The gain or loss associated with these derivative contracts are included in mortgage banking revenue. There were 0 such options or swaps outstanding as of June 30, 2021.

Amounts included in the Consolidated Statements of Income related to derivative instruments not designated in hedge relationships were as follows:
(In thousands)Three Months EndedSix Months Ended
DerivativeLocation in income statementJune 30,
2021
June 30,
2020
June 30,
2021
June 30,
2020
Interest rate swaps and capsTrading gains (losses), net$(539)$(703)$(111)$(1,131)
Mortgage banking derivativesMortgage banking revenue(10,480)43,292 (27,959)60,559 
Foreign exchange contractsTrading gains (losses), net(3)(9)(8)(13)
Covered call optionsFees from covered call options1,388 1,388 2,292 
Derivative contract held as economic hedge on MSRsMortgage banking revenue0 589 0 4,749 

Credit Risk

Derivative instruments have inherent risks, primarily market risk and credit risk. Market risk is associated with changes in interest rates and credit risk relates to the risk that the counterparty will fail to perform according to the terms of the agreement. The amounts potentially subject to market and credit risks are the streams of interest payments under the contracts and the market value of the derivative instrument and not the notional principal amounts used to express the volume of the transactions. Market and credit risks are managed and monitored as part of the Company's overall asset-liability management process, except that the credit risk related to derivatives entered into with certain qualified borrowers is managed through the Company's standard loan underwriting process since these derivatives are secured through collateral provided by the loan agreements. Actual exposures are monitored against various types of credit limits established to contain risk within parameters. When deemed necessary, appropriate types and amounts of collateral are obtained to minimize credit exposure.

The Company has agreements with certain of its interest rate derivative counterparties that contain cross-default provisions, which provide that if the Company defaults on any of its indebtedness, including default where repayment of the indebtedness has not been accelerated by the lender, then the Company could also be declared in default on its derivative obligations. The Company also has agreements with certain of its derivative counterparties that contain a provision allowing the counterparty to terminate the derivative positions if the Company fails to maintain its status as a well or adequately capitalized institution, which would require the Company to settle its obligations under the agreements. As of June 30, 2021, the fair value of interest rate derivatives in a net liability position that were subject to such agreements, which includes accrued interest related to these agreements, was $151.4 million. If the Company had breached any of these provisions and the derivatives were terminated as a result, the Company would have been required to settle its obligations under the agreements at the termination value and would have been required to pay any additional amounts due in excess of amounts previously posted as collateral with the respective counterparty.

42

The Company is also exposed to the credit risk of its commercial borrowers who are counterparties to interest rate derivatives with the banks. This counterparty risk related to the commercial borrowers is managed and monitored through the banks' standard underwriting process applicable to loans since these derivatives are secured through collateral provided by the loan agreement. The counterparty risk associated with the mirror-image swaps executed with third parties is monitored and managed in connection with the Company's overall asset liability management process.

The Company records interest rate derivatives subject to master netting agreements at their gross value and does not offset derivative assets and liabilities on the Consolidated Statements of Condition. The tables below summarize the Company's interest rate derivatives and offsetting positions as of the dates shown.
Derivative AssetsDerivative Liabilities
Fair ValueFair Value
(In thousands)June 30,
2021
December 31,
2020
June 30,
2020
June 30,
2021
December 31,
2020
June 30,
2020
Gross Amounts Recognized$188,331 $229,387 $268,709 $187,359 $275,843 $343,519 
Less: Amounts offset in the Statements of Financial Condition0 0 
Net amount presented in the Statements of Financial Condition$188,331 $229,387 $268,709 $187,359 $275,843 $343,519 
Gross amounts not offset in the Statements of Financial Condition
Offsetting Derivative Positions(37,895)(8,647)(697)(37,895)(8,647)(697)
Collateral Posted0 (146,240)(266,832)(342,276)
Net Credit Exposure$150,436 $220,740 $268,012 $3,224 $364 $546 

(15) Fair Values of Assets and Liabilities

The Company measures, monitors and discloses certain of its assets and liabilities on a fair value basis. These financial assets and financial liabilities are measured at fair value in three levels, based on the markets in which the assets and liabilities are traded and the observability of the inputs used to determine fair value. These levels are:

Level 1—unadjusted quoted prices in active markets for identical assets or liabilities.

Level 2inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability or inputs that are derived principally from or corroborated by observable market data by correlation or other means.

Level 3—significant unobservable inputs that reflect the Company’s own assumptions that market participants would use in pricing the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation.

A financial instrument’s categorization within the above valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the assets or liabilities. The following is a description of the valuation methodologies used for the Company’s assets and liabilities measured at fair value on a recurring basis.

Available-for-sale debt securities, trading account securities and equity securities with readily determinable fair value—Fair values for available-for-sale debt securities, trading account securities and equity securities with readily determinable fair value are typically based on prices obtained from independent pricing vendors. Securities measured with these valuation techniques are generally classified as Level 2 of the fair value hierarchy. Typically, standard inputs such as benchmark yields, reported trades for similar securities, issuer spreads, benchmark securities, bids, offers and reference data including market research publications are used to fair value these securities. When these inputs are not available, broker/dealer quotes may be obtained by the vendor to determine the fair value of the security. We review the vendor’s pricing methodologies to determine if observable market information is being used, versus unobservable inputs. Fair value measurements using significant inputs that are unobservable in the market due to limited activity or a less liquid market are classified as Level 3 in the fair value hierarchy.
43

The fair value of U.S. Treasury securities and certain equity securities with readily determinable fair value are based on unadjusted quoted prices in active markets for identical securities. As such, these securities are classified as Level 1 in the fair value hierarchy.

The Company’s Investment Operations Department is responsible for the valuation of Level 3 available-for-sale debt securities. The methodology and variables used as inputs in pricing Level 3 securities are derived from a combination of observable and unobservable inputs. The unobservable inputs are determined through internal assumptions that may vary from period to period due to external factors, such as market movement and credit rating adjustments.

At June 30, 2021, the Company classified $117.6 million of municipal securities as Level 3. These municipal securities are bond issues for various municipal government entities primarily located in the Chicago metropolitan area and southern Wisconsin and are privately placed, non-rated bonds without CUSIP numbers. The Company’s methodology for pricing these securities focuses on three distinct inputs: equivalent rating, yield and other pricing terms. To determine the rating for a given non-rated investment debt security, the Investment Operations Department references a rated, publicly issued bond by the same issuer if available. A reduction is then applied to the rating obtained from the comparable bond, as the Company believes if liquidated, a non-rated bond would be valued less than a similar bond with a verifiable rating. The reduction applied by the Company is one complete rating grade (i.e. a “AA” rating for a comparable bond would be reduced to “A” for the Company’s valuation). For bond issues without comparable bond proxies, a rating of "BBB" was assigned. In the second quarter of 2021, all of the ratings derived by the Investment Operations Department using the above process were “BBB” or better. The fair value measurement noted above is sensitive to the rating input, as a higher rating typically results in an increased valuation. The remaining pricing inputs used in the bond valuation are observable. Based on the rating determined in the above process, Investment Operations obtains a corresponding current market yield curve available to market participants. Other terms including coupon, maturity date, redemption price, number of coupon payments per year, and accrual method are obtained from the individual bond term sheets. Certain municipal bonds held by the Company at June 30, 2021 are continuously callable. When valuing these bonds, the fair value is capped at par value as the Company assumes a market participant would not pay more than par for a continuously callable bond.

Mortgage loans held-for-sale—The fair value of mortgage loans held-for-sale is determined by reference to investor price sheets for loan products with similar characteristics. As such, these loans are classified as Level 2 in the fair value hierarchy.

Loans held-for-investment—The fair value for loans in which the Company elected the fair value option is estimated by discounting future scheduled cash flows for the specific loan through maturity, adjusted for estimated credit losses and prepayments. The Company uses a discount rate based on the actual coupon rate of the underlying loan. At June 30, 2021, the Company classified $11.0 million of loans held-for-investment as Level 3. The assumed discount rate used as an input to value these loans at June 30, 2021 was 2.88%. The higher the rate utilized to discount estimated future cash flows, the lower the fair value measurement. As noted above, the fair value estimate also includes assumptions of prepayment speeds and credit losses. The Company included a prepayments speed assumption of 13.30% at June 30, 2021. Prepayment speeds are inversely related to the fair value of these loans as an increase in prepayment speeds results in a decreased valuation. Additionally, the weighted average credit discount used as an input to value the specific loans was 0.61% with credit loss discount ranging from 0%-3% at June 30, 2021.

MSRs—Fair value for MSRs is determined utilizing a valuation model which calculates the fair value of each servicing rights based on the present value of estimated future cash flows. The Company uses a discount rate commensurate with the risk associated with each servicing rights, given current market conditions. At June 30, 2021, the Company classified $127.6 million of MSRs as Level 3. The weighted average discount rate used as an input to value the pool of MSRs at June 30, 2021 was 9.85% with discount rates applied ranging from 6%-21%. The higher the rate utilized to discount estimated future cash flows, the lower the fair value measurement. The fair value of MSRs was also estimated based on other assumptions including prepayment speeds and the cost to service. Prepayment speeds ranged from 6%-92% or a weighted average prepayment speed of 13.30%. Further, for current and delinquent loans, the Company assumed a weighted average cost of servicing of $76 and $340, respectively, per loan. Prepayment speeds and the cost to service are both inversely related to the fair value of MSRs as an increase in prepayment speeds or the cost to service results in a decreased valuation. See Note 8 - Mortgage Servicing Rights (“MSRs”) for further discussion of MSRs.

Derivative instruments—The Company’s derivative instruments include interest rate swaps, caps and collars, commitments to fund mortgages for sale into the secondary market (interest rate locks), forward commitments to end investors for the sale of mortgage loans and foreign currency contracts. Interest rate swaps, caps and collars are valued by a third party, using models that primarily use market observable inputs, such as yield curves, and are classified as Level 2 in the fair value hierarchy. The credit risk associated with derivative financial instruments that are subject to master netting agreements is measured on a net basis by counterparty portfolio. The fair value for mortgage-related derivatives is based on changes in mortgage rates from the
44

date of the commitments. The fair value of foreign currency derivatives is computed based on change in foreign currency rates stated in the contract compared to those prevailing at the measurement date.

At June 30, 2021, the Company classified $22.6 million of derivative assets related to interest rate locks as Level 3. The fair value of interest rate locks is based on prices obtained for loans with similar characteristics from third parties, adjusted for the pull-through rate, which represents the Company’s best estimate of the likelihood that a committed loan will ultimately fund. The weighted-average pull-through rate at June 30, 2021 was 84% with pull-through rates applied ranging from 1% to 100%. Pull-through rates are directly related to the fair value of interest rate locks as an increase in the pull-through rate results in an increased valuation.

Nonqualified deferred compensation assets—The underlying assets relating to the nonqualified deferred compensation plan are included in a trust and primarily consist of non-exchange traded institutional funds which are priced based by an independent third party service. These assets are classified as Level 2 in the fair value hierarchy.

The following tables present the balances of assets and liabilities measured at fair value on a recurring basis for the periods presented:
June 30, 2021
(In thousands)TotalLevel 1Level 2Level 3
Available-for-sale securities
U.S. Treasury$0 $0 $0 $0 
U.S. Government agencies78,854 0 78,854 0 
Municipal168,296 0 50,690 117,606 
Corporate notes98,542 0 98,542 0 
Mortgage-backed1,842,916 0 1,842,916 0 
Trading account securities2,667 0 2,667 0 
Equity securities with readily determinable fair value86,316 78,250 8,066 0 
Mortgage loans held-for-sale984,994 0 984,994 0 
Loans held-for-investment55,340 0 44,333 11,007 
MSRs127,604 0 0 127,604 
Nonqualified deferred compensation assets16,590 0 16,590 0 
Derivative assets212,380 0 189,810 22,570 
Total$3,674,499 $78,250 $3,317,462 $278,787 
Derivative liabilities$193,439 $0 $193,439 $0 
 
 December 31, 2020
(In thousands)TotalLevel 1Level 2Level 3
Available-for-sale securities
U.S. Treasury$304,971 $304,971 $$
U.S. Government agencies84,513 82,547 1,966 
Municipal146,910 37,034 109,876 
Corporate notes91,405 91,405 
Mortgage-backed2,428,040 2,428,040 
Trading account securities671 671 
Equity securities with readily determinable fair value90,862 82,796 8,066 
Mortgage loans held-for-sale1,272,090 1,272,090 
Loans held-for-investment55,134 44,854 10,280 
MSRs92,081 92,081 
Nonqualified deferred compensation assets15,398 15,398 
Derivative assets278,423 230,332 48,091 
Total$4,860,498 $387,767 $4,210,437 $262,294 
Derivative liabilities$288,465 $$288,465 $

45

June 30, 2020
(In thousands)TotalLevel 1Level 2Level 3
Available-for-sale securities
U.S. Treasury$60,539 $60,539 $$
U.S. Government agencies293,507 291,214 2,293 
Municipal150,879 33,624 117,255 
Corporate notes102,879 102,879 
Mortgage-backed2,587,157 2,587,157 
Trading account securities890 890 
Equity securities with readily determinable fair value52,460 44,394 8,066 
Mortgage loans held-for-sale833,163 833,163 
Loans held-for-investment254,614 240,661 13,953 
MSRs77,203 77,203 
Nonqualified deferred compensation assets13,576 13,576 
Derivative assets327,624 269,191 58,433 
Total$4,754,491 $104,933 $4,380,421 $269,137 
Derivative liabilities$355,265 $$355,265 $

The aggregate remaining contractual principal balance outstanding as of June 30, 2021, December 31, 2020 and June 30, 2020 for mortgage loans held-for-sale measured at fair value under ASC 825 was $949.5 million, $1.2 billion and $781.8 million, respectively, while the aggregate fair value of mortgage loans held-for-sale was $985.0 million, $1.3 billion and $833.2 million, for the same respective periods, as shown in the above tables. There were $110.7 million of loans past due greater than 90 days and still accruing in the mortgage loans held-for-sale portfolio as of June 30, 2021 compared to $134.1 million as of December 31, 2020 and $1.3 million as of June 30, 2020. All of the loans past due greater than 90 days and still accruing as of June 30, 2021 were individual delinquent mortgage loans bought back from GNMA at the unconditional option of the Company as servicer for those loans.

The changes in Level 3 assets measured at fair value on a recurring basis during the three and six months ended June 30, 2021 and 2020 are summarized as follows:
U.S. Government agenciesLoans held-for- investmentMortgage
servicing rights
Derivative assets
(In thousands)Municipal
Balance at April 1, 2021$101,748 $1,784 $6,408 $124,316 $25,634 
Total net gains (losses) included in:
Net income (1)
0 (4)167 3,288 (3,064)
Other comprehensive income (loss)(374)0 0 0 0 
Purchases18,163 0 0 0 0 
Issuances0 0 0 0 0 
Sales0 0 0 0 0 
Settlements(1,931)(1,780)(59)0 0 
Net transfers into/(out of) Level 3
0 0 4,491 0 0 
Balance at June 30, 2021$117,606 $0 $11,007 $127,604 $22,570 
(1)Changes in the balance of MSRs and derivative assets related to fair value adjustments are recorded as components of mortgage banking revenue. Changes in the balance of loans held-for-investment related to fair value adjustments are recorded as other non-interest income.
46

U.S. Government AgenciesLoans held-for- investmentMortgage
servicing rights
Derivative Assets
(In thousands)Municipal
Balance at January 1, 2021$109,876 $1,966 $10,280 $92,081 $48,091 
Total net gains (losses) included in:
Net income (1)
0 (4)(363)35,523 (25,521)
Other comprehensive income (loss)(2,442)(24)0 0 0 
Purchases18,163 0 0 0 0 
Issuances0 0 0 0 0 
Sales0 0 0 0 0 
Settlements(7,991)(1,938)(3,977)0 0 
Net transfers into/(out of) Level 3
0 0 5,067 0 0 
Balance at June 30, 2021$117,606 $0 $11,007 $127,604 $22,570 
U.S. Government agenciesLoans held-for- investmentMortgage
servicing rights
Derivative assets
(In thousands)Municipal
Balance at April 1, 2020$113,267 $2,457 $9,568 $73,504 $39,816 
Total net gains (losses) included in:
Net income (1)
200 3,699 18,617 
Other comprehensive income (loss)(546)(7)
Purchases6,997 
Issuances
Sales
Settlements(2,463)(157)(1,364)
Net transfers into/(out of) Level 35,549 
Balance at June 30, 2020$117,255 $2,293 $13,953 $77,203 $58,433 
U.S. Government AgenciesLoans held-for- investmentMortgage
servicing rights
Derivative Assets
(In thousands)Municipal
Balance at January 1, 2020$111,950 $2,646 $9,620 $85,638 $2,631 
Total net gains (losses) included in:
Net income (1)
122 (8,435)55,802 
Other comprehensive income (loss)(1,795)(39)
Purchases12,872 
Issuances
Sales
Settlements(5,772)(314)(1,460)
Net transfers into/(out of) Level 35,671 
Balance at June 30, 2020$117,255 $2,293 $13,953 $77,203 $58,433 
(1)Changes in the balance of MSRs and derivative assets related to fair value adjustments are recorded as components of mortgage banking revenue. Changes in the balance of loans held-for-investment related to fair value adjustments are recorded as other non-interest income.


47

Also, the Company may be required, from time to time, to measure certain other assets at fair value on a nonrecurring basis in accordance with GAAP. These adjustments to fair value usually result from impairment charges on individual assets. For assets measured at fair value on a nonrecurring basis that were still held in the balance sheet at the end of the period, the following table provides the carrying value of the related individual assets or portfolios at June 30, 2021:
June 30, 2021Three Months Ended June 30, 2021
Fair Value Losses Recognized, net
Six Months Ended June 30, 2021
Fair Value Losses Recognized, net
(In thousands)TotalLevel 1Level 2Level 3
Individually assessed loans - foreclosure probable and collateral-dependent$79,696 $$$79,696 $3,983 $16,531 
Other real estate owned (1)
15,572 15,572 749 919 
Total$95,268 $$$95,268 $4,732 $17,450 
(1)Fair value losses recognized, net on other real estate owned include valuation adjustments and charge-offs during the respective period.

Individually assessed loans—In accordance with ASC 326, the allowance for credit losses for loans and other financial assets held at amortized cost should be measured on a collective or pooled basis when such assets exhibit similar risk characteristics. In instances in which a financial asset does not exhibit similar risk characteristics to a pool, the Company is required to measure such allowance for credit losses on an individual asset basis. For the Company's loan portfolio, nonaccrual loans and TDRs are considered to not exhibit similar risk characteristics as pools and thus are individually assessed. Credit losses are measured by estimating the fair value of the loan based on the present value of expected cash flows, the market price of the loan, or the fair value of the underlying collateral. Individually assessed loans are considered a fair value measurement where an allowance for credit loss is established based on the fair value of collateral. Appraised values on relevant real estate properties, which may require adjustments to market-based valuation inputs, are generally used on foreclosure probable and collateral-dependent loans within the real estate portfolios.

The Company’s Managed Assets Division is primarily responsible for the valuation of Level 3 inputs of individually assessed loans. For more information on individually assessed loans refer to Note 6 – Allowance for Credit Losses. At June 30, 2021, the Company had $113.9 million of individually assessed loans classified as Level 3. Of the $113.9 million of individually assessed loans, $79.7 million were measured at fair value based on the underlying collateral of the loan as shown in the table above. The remaining $34.2 million were valued based on discounted cash flows in accordance with ASC 310.

Other real estate owned —Other real estate owned is comprised of real estate acquired in partial or full satisfaction of loans and is included in other assets. Other real estate owned is recorded at its estimated fair value less estimated selling costs at the date of transfer, with any excess of the related loan balance over the fair value less expected selling costs charged to the allowance for loan losses. Subsequent changes in value are reported as adjustments to the carrying amount and are recorded in other non-interest expense. Gains and losses upon sale, if any, are also charged to other non-interest expense. Fair value is generally based on third party appraisals and internal estimates that are adjusted by a discount representing the estimated cost of sale and is therefore considered a Level 3 valuation.

The Company’s Managed Assets Division is primarily responsible for the valuation of Level 3 inputs for other real estate owned. At June 30, 2021, the Company had $15.6 million of other real estate owned classified as Level 3. The unobservable input applied to other real estate owned relates to the 10% reduction to the appraisal value representing the estimated cost of sale of the foreclosed property. A higher discount for the estimated cost of sale results in a decreased carrying value.

The valuation techniques and significant unobservable inputs used to measure both recurring and non-recurring Level 3 fair value measurements at June 30, 2021 were as follows:
48

(Dollars in thousands)Fair ValueValuation MethodologySignificant Unobservable InputRange
of Inputs
Weighted
Average
of Inputs
Impact to valuation
from an increased or
higher input value
Measured at fair value on a recurring basis:
Municipal Securities$117,606 Bond pricingEquivalent ratingBBB-AA+N/AIncrease
Loans held-for-investment11,007 Discounted cash flowsDiscount rate2.88%2.88%Decrease
Credit discount0%-3%0.61%Decrease
Constant prepayment rate (CPR)13.30%13.30%Decrease
MSRs127,604 Discounted cash flowsDiscount rate6%-21%9.85%Decrease
Constant prepayment rate (CPR)6%-92%13.30%Decrease
Cost of servicing$70-$200$76Decrease
Cost of servicing - delinquent$200-$1,000$340Decrease
Derivatives22,570 Discounted cash flowsPull-through rate1%-100%83.98%Increase
Measured at fair value on a non-recurring basis:
Individually assessed loans - foreclosure probable and collateral-dependent$79,696 Appraisal valueAppraisal adjustment - cost of sale10%10.00%Decrease
Other real estate owned15,572 Appraisal valueAppraisal adjustment - cost of sale10%10.00%Decrease
49


The Company is required under applicable accounting guidance to report the fair value of all financial instruments on the Consolidated Statements of Condition, including those financial instruments carried at cost. The table below presents the carrying amounts and estimated fair values of the Company’s financial instruments as of the dates shown:

At June 30, 2021At December 31, 2020At June 30, 2020
CarryingFairCarryingFairCarryingFair
(In thousands)ValueValueValueValueValueValue
Financial Assets:
Cash and cash equivalents$435,009 $435,009 $322,474 $322,474 $345,057 $345,057 
Interest-bearing deposits with banks4,707,415 4,707,415 4,802,527 4,802,527 4,015,072 4,015,072 
Available-for-sale securities2,188,608 2,188,608 3,055,839 3,055,839 3,194,961 3,194,961 
Held-to-maturity securities2,498,232 2,480,232 579,138 593,767 728,465 744,286 
Trading account securities2,667 2,667 671 671 890 890 
Equity securities with readily determinable fair value86,316 86,316 90,862 90,862 52,460 52,460 
FHLB and FRB stock, at cost136,625