FMBI 09.30.2014 10-Q

 
 
 
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________
 
FORM 10-Q
(Mark One)
[X]
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended September 30, 2014
 
 
 
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 0-10967
_______________
 
FIRST MIDWEST BANCORP, INC.
(Exact name of registrant as specified in its charter)
Delaware
 
36-3161078
(State or other jurisdiction of incorporation or organization)
 
(IRS Employer Identification No.)
One Pierce Place, Suite 1500
Itasca, Illinois 60143-9768
(Address of principal executive offices) (zip code)
______________________
Registrant’s telephone number, including area code: (630) 875-7450
______________________

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ].

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [X] No [ ].

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer [X]
 
Accelerated filer [ ]
Non-accelerated filer [ ]
 
Smaller reporting company [ ]
(Do not check if a smaller reporting company)
 
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X].

As of November 3, 2014, there were 75,295,023 shares of common stock, $.01 par value, outstanding.
 




FIRST MIDWEST BANCORP, INC.

FORM 10-Q

TABLE OF CONTENTS
 
 
Page
Part I.
FINANCIAL INFORMATION
 
 
Item 1.
Financial Statements (Unaudited)
 
 
 
 
 
 
 
 
 
Item 2.
 
  and Result of Operations
 
Item 3.
 
Item 4.
 
Part II.
 
 
Item 1.
 
Item 1A.
 
Item 2.
 
Item 6.

2




PART I. FINANCIAL INFORMATION (Unaudited)

ITEM 1. FINANCIAL STATEMENTS

FIRST MIDWEST BANCORP, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Amounts in thousands, except per share data)
 
 
 
 
 
September 30,
2014
 
December 31,
2013
Assets
 
 
 
 
(Unaudited)
 
 
Cash and due from banks
 
$
125,977

 
$
110,417

Interest-bearing deposits in other banks
 
550,606

 
476,824

Trading securities, at fair value
 
17,928

 
17,317

Securities available-for-sale, at fair value
 
997,420

 
1,112,725

Securities held-to-maturity, at amortized cost
 
26,776

 
44,322

Federal Home Loan Bank (“FHLB”) and Federal Reserve Bank stock, at cost
 
35,588

 
35,161

Loans, excluding covered loans
 
6,428,204

 
5,580,005

Covered loans
 
90,875

 
134,355

Allowance for loan and covered loan losses
 
(73,106
)
 
(85,505
)
Net loans
 
6,445,973

 
5,628,855

Other real estate owned (“OREO”), excluding covered OREO
 
29,165

 
32,473

Covered OREO
 
9,277

 
8,863

Federal Deposit Insurance Corporation (“FDIC”) indemnification asset
 
8,699

 
16,585

Premises, furniture, and equipment
 
123,473

 
120,204

Investment in bank-owned life insurance (“BOLI”)
 
195,270

 
193,167

Goodwill and other intangible assets
 
322,664

 
276,366

Accrued interest receivable and other assets
 
207,535

 
180,128

Total assets
 
$
9,096,351

 
$
8,253,407

Liabilities
 
 
 
 
Noninterest-bearing deposits
 
$
2,295,679

 
$
1,911,602

Interest-bearing deposits
 
5,320,454

 
4,854,499

Total deposits
 
7,616,133

 
6,766,101

Borrowed funds
 
132,877

 
224,342

Senior and subordinated debt
 
191,028

 
190,932

Accrued interest payable and other liabilities
 
106,637

 
70,590

Total liabilities
 
8,046,675

 
7,251,965

Stockholders’ Equity
 
 
 
 
Common stock
 
858

 
858

Additional paid-in capital
 
408,789

 
414,293

Retained earnings
 
891,129

 
853,740

Accumulated other comprehensive loss, net of tax
 
(18,852
)
 
(26,792
)
Treasury stock, at cost
 
(232,248
)
 
(240,657
)
Total stockholders’ equity
 
1,049,676

 
1,001,442

Total liabilities and stockholders’ equity
 
$
9,096,351

 
$
8,253,407

 
 
 
 
 
 
 
 
 
September 30, 2014
 
December 31, 2013
 
Preferred
 
Common
 
Preferred
 
Common
 
Shares
 
Shares
 
Shares
 
Shares
 
 
 
 
 
 
 
 
Par Value
$

 
$
0.01

 
$

 
$
0.01

Shares authorized
1,000

 
150,000

 
1,000

 
100,000

Shares issued

 
85,787

 

 
85,787

Shares outstanding

 
75,295

 

 
75,071

Treasury shares

 
10,492

 

 
10,716

See accompanying notes to the unaudited condensed consolidated financial statements.

3




FIRST MIDWEST BANCORP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Amounts in thousands, except per share data)
(Unaudited)
 
 
Quarters Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
 
2014
 
2013
 
2014
 
2013
Interest Income
 
 
 
 
 
 
 
 
Loans, excluding covered loans
 
$
66,117

 
$
60,614

 
$
185,753

 
$
179,156

Covered loans
 
2,596

 
3,142

 
7,139

 
10,742

Investment securities
 
7,465

 
7,742

 
23,489

 
22,755

Other short-term investments
 
684

 
831

 
2,174

 
2,474

Total interest income
 
76,862

 
72,329

 
218,555

 
215,127

Interest Expense
 
 
 
 
 
 
 
 
Deposits
 
2,806

 
2,837

 
7,914

 
9,160

Borrowed funds
 
9

 
390

 
561

 
1,217

Senior and subordinated debt
 
3,016

 
3,436

 
9,047

 
10,306

Total interest expense
 
5,831

 
6,663

 
17,522

 
20,683

Net interest income
 
71,031

 
65,666

 
201,033

 
194,444

Provision for loan and covered loan losses
 
10,727

 
4,770

 
17,509

 
16,257

Net interest income after provision for loan and covered loan
  losses
 
60,304

 
60,896

 
183,524

 
178,187

Noninterest Income
 
 
 
 
 
 
 
 
Service charges on deposit accounts
 
9,902

 
9,472

 
26,895

 
27,267

Wealth management fees
 
6,721

 
6,018

 
19,730

 
17,983

Card-based fees
 
6,646

 
5,509

 
17,950

 
16,132

Mortgage banking income
 
1,125

 
1,273

 
3,199

 
4,251

Other service charges, commissions, and fees
 
5,266

 
5,532

 
13,943

 
13,937

Gains on sales of properties
 
3,954

 

 
3,954

 

Net securities gains
 
2,570

 
33,801

 
8,160

 
34,017

BOLI income (loss)
 
767

 
(13,028
)
 
2,030

 
(12,428
)
Other income
 
156

 
1,682

 
1,748

 
4,116

Gain on termination of FHLB forward commitments
 

 
7,829

 

 
7,829

Loss on extinguishment of debt
 

 

 
(2,059
)
 

Total noninterest income
 
37,107

 
58,088

 
95,550

 
113,104

Noninterest Expense
 
 
 
 
 
 
 
 
Salaries and employee benefits
 
35,933

 
34,270

 
103,985

 
103,760

Net occupancy and equipment expense
 
8,702

 
7,982

 
25,765

 
23,922

Professional services
 
7,098

 
5,517

 
19,004

 
16,330

Technology and related costs
 
4,316

 
2,984

 
10,494

 
8,351

Other expenses
 
14,264

 
13,949

 
39,750

 
39,580

Total noninterest expense
 
70,313

 
64,702

 
198,998

 
191,943

Income before income tax expense
 
27,098

 
54,282

 
80,076

 
99,348

Income tax expense
 
8,549

 
24,959

 
25,363

 
39,207

Net income
 
$
18,549

 
$
29,323

 
$
54,713

 
$
60,141

Per Common Share Data
 
 
 
 
 
 
 
 
Basic earnings per common share
 
$
0.25

 
$
0.39

 
$
0.73

 
$
0.80

Diluted earnings per common share
 
$
0.25

 
$
0.39

 
$
0.73

 
$
0.80

Dividends declared per common share
 
$
0.08

 
$
0.04

 
$
0.23

 
$
0.09

Weighted-average common shares outstanding
 
74,341

 
74,023

 
74,270

 
73,969

Weighted-average diluted common shares outstanding
 
74,352

 
74,034

 
74,282

 
73,978

See accompanying notes to the unaudited condensed consolidated financial statements.

4




FIRST MIDWEST BANCORP, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Dollar amounts in thousands)
(Unaudited)
 
Quarters Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2014
 
2013
 
2014
 
2013
Net income
$
18,549

 
$
29,323

 
$
54,713

 
$
60,141

Securities available-for-sale
 
 
 
 
 
 
 
Unrealized holding (losses) gains:
 
 
 
 
 
 
 
Before tax
(2,693
)
 
6,211

 
22,028

 
5,359

Tax effect
1,003

 
(1,993
)
 
(8,776
)
 
(2,151
)
Net of tax
(1,690
)
 
4,218

 
13,252

 
3,208

Reclassification of net gains included in net income:
 
 
 
 
 
 
Before tax
2,570

 
33,801

 
8,160

 
34,017

Tax effect
(1,051
)
 
(13,825
)
 
(3,337
)
 
(13,913
)
Net of tax
1,519

 
19,976

 
4,823

 
20,104

Net unrealized holding (losses) gains
(3,209
)
 
(15,758
)
 
8,429

 
(16,896
)
Derivative instruments
 
 
 
 
 
 
 
Unrealized holding losses:
 
 
 
 
 
 
 
Before tax
(629
)
 

 
(827
)
 

Tax effect
257

 

 
338

 

Net of tax
(372
)
 

 
(489
)
 

Unrecognized net pension costs
 
 
 
 
 
 
 
Unrealized holding gains:
 
 
 
 
 
 
 
Before tax

 

 

 
10,997

Tax effect

 

 

 
(4,498
)
Net of tax

 

 

 
6,499

Total other comprehensive (loss) income
(3,581
)
 
(15,758
)
 
7,940

 
(10,397
)
Total comprehensive income
$
14,968

 
$
13,565

 
$
62,653

 
$
49,744



 
Accumulated
Unrealized
Gain (Loss)
on Securities
Available-
for-Sale
 
Accumulated Unrealized Loss on Derivative Instruments
 
Unrecognized
Net Pension
Costs
 
Total
Accumulated
Other
Comprehensive
Loss
Balance at December 31, 2012
$
1,115

 
$

 
$
(16,775
)
 
$
(15,660
)
Other comprehensive (loss) income
(16,896
)
 

 
6,499

 
(10,397
)
Balance at September 30, 2013
$
(15,781
)
 
$

 
$
(10,276
)
 
$
(26,057
)
Balance at December 31, 2013
$
(20,419
)
 
$

 
$
(6,373
)
 
$
(26,792
)
Other comprehensive income (loss)
8,429

 
(489
)
 

 
7,940

Balance at September 30, 2014
$
(11,990
)
 
$
(489
)
 
$
(6,373
)
 
$
(18,852
)
 
See accompanying notes to the unaudited condensed consolidated financial statements.


5




FIRST MIDWEST BANCORP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(Amounts in thousands, except per share data)
(Unaudited)
 
Common
Shares
Outstanding
 
Common
Stock
 
Additional
Paid-in
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Loss
 
Treasury
Stock
 
Total
Balance at December 31, 2012
74,840

 
$
858

 
$
418,318

 
$
786,453

 
$
(15,660
)
 
$
(249,076
)
 
$
940,893

Comprehensive income (loss)

 

 

 
60,141

 
(10,397
)
 

 
49,744

Common dividends declared
($0.09 per common share)

 

 

 
(6,759
)
 

 

 
(6,759
)
Share-based compensation expense

 

 
4,366

 

 

 

 
4,366

Restricted stock activity
236

 

 
(9,915
)
 

 

 
8,379

 
(1,536
)
Treasury stock issued to
benefit plans
(2
)
 

 
(92
)
 

 

 
109

 
17

Balance at September 30, 2013
75,074

 
$
858

 
$
412,677

 
$
839,835

 
$
(26,057
)
 
$
(240,588
)
 
$
986,725

Balance at December 31, 2013
75,071

 
$
858

 
$
414,293

 
$
853,740

 
$
(26,792
)
 
$
(240,657
)
 
$
1,001,442

Comprehensive income

 

 

 
54,713

 
7,940

 

 
62,653

Common dividends declared
($0.23 per common share)

 

 

 
(17,324
)
 

 

 
(17,324
)
Share-based compensation expense

 

 
4,461

 

 

 

 
4,461

Restricted stock activity
215

 

 
(9,833
)
 

 

 
7,938

 
(1,895
)
Treasury stock issued to
  benefit plans
9

 

 
(132
)
 

 

 
471

 
339

Balance at September 30, 2014
75,295

 
$
858

 
$
408,789

 
$
891,129

 
$
(18,852
)
 
$
(232,248
)
 
$
1,049,676

 
See accompanying notes to the unaudited condensed consolidated financial statements.

6




FIRST MIDWEST BANCORP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollar amounts in thousands)
(Unaudited)
 
Nine Months Ended 
 September 30,
 
2014
 
2013
Net cash provided by operating activities
$
88,575

 
$
104,383

Investing Activities
 
 
 
Proceeds from maturities, prepayments, and calls of securities available-for-sale
125,244

 
178,256

Proceeds from sales of securities available-for-sale
24,947

 
69,428

Purchases of securities available-for-sale
(16,411
)
 
(326,143
)
Proceeds from maturities, prepayments, and calls of securities held-to-maturity
3,814

 
7,084

Purchases of securities held-to-maturity
(1,998
)
 
(2,636
)
Net (purchases) redemption of FHLB and Federal Reserve Bank stock
(427
)
 
12,071

Net increase in loans
(291,561
)
 
(233,844
)
BOLI income, net of claims
(73
)
 
(2
)
Proceeds from sales of OREO
14,293

 
20,715

Proceeds from sales of premises, furniture, and equipment
3,893

 
1,425

Purchases of premises, furniture, and equipment
(7,885
)
 
(6,586
)
Cash received from acquisitions, net of cash paid
139,486

 

Net cash used in investing activities
(6,678
)
 
(280,232
)
Financing Activities
 
 
 
Net increase in deposit accounts
119,440

 
330,953

Increase in borrowed funds
23,085

 
26,074

(Payment for) proceeds from the termination of FHLB advances and forward
  commitments
(116,609
)
 
7,829

Cash dividends paid
(16,556
)
 
(4,502
)
Restricted stock activity
(2,739
)
 
(1,588
)
Excess tax benefit related to share-based compensation
824

 
55

Net cash provided by financing activities
7,445

 
358,821

Net increase in cash and cash equivalents
89,342

 
182,972

Cash and cash equivalents at beginning of period
587,241

 
716,266

Cash and cash equivalents at end of period
$
676,583

 
$
899,238

 
 
 
 
Supplemental Disclosures of Cash Flow Information:
 
 
 
Income taxes paid (refunded)
$
7,262

 
$
(1,779
)
Interest paid to depositors and creditors
14,714

 
17,715

Dividends declared, but unpaid
6,028

 
3,006

Non-cash transfers of loans to OREO
13,277

 
15,877

Non-cash transfer of loans held-for-investment to loans held-for-sale
70,183

 
1,275

Non-cash transfer of an investment from other assets to securities available-for-sale

 
2,787

 
See accompanying notes to the unaudited condensed consolidated financial statements.

7




NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation – The accompanying unaudited condensed consolidated interim financial statements of First Midwest Bancorp, Inc. (the “Company”), a Delaware corporation, were prepared in accordance with the rules and regulations of the Securities and Exchange Commission ("SEC") for quarterly reports on Form 10-Q and reflect all adjustments that management deems necessary for the fair presentation of the financial position and results of operations for the periods presented. The results of operations for the quarter and nine months ended September 30, 2014 are not necessarily indicative of the results that may be expected for the year ending December 31, 2014.

The accounting and reporting policies of the Company and its subsidiaries conform to U.S. generally accepted accounting principles (“GAAP”) and general practices within the banking industry. The accompanying quarterly statements do not include certain information and footnote disclosures required by GAAP for complete annual financial statements. Therefore, these financial statements should be read in conjunction with the Company’s 2013 Annual Report on Form 10-K (“2013 10-K”). The Company uses the accrual basis of accounting for financial reporting purposes. Certain reclassifications were made to prior year amounts to conform to the current year presentation.

Principles of Consolidation – The accompanying condensed consolidated financial statements include the financial position and results of operations of the Company and its subsidiaries after elimination of all significant intercompany accounts and transactions. Assets held in a fiduciary or agency capacity are not assets of the Company or its subsidiaries and are not included in the condensed consolidated financial statements.

Use of Estimates – The preparation of the condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. Although these estimates and assumptions are based on the best available information, actual results could differ from those estimates.

The accounting policies related to business combinations, loans, the allowance for credit losses, the FDIC indemnification asset, and derivative financial instruments are presented below. For a summary of all other significant accounting policies, please refer to Note 1, “Summary of Significant Accounting Policies,” in the Company’s 2013 10-K.
Business Combinations – Business combinations are accounted for under the acquisition method of accounting. Assets acquired and liabilities assumed are recorded at their estimated fair values as of the date of acquisition, with any excess of the purchase price of the acquisition over the fair value of the net tangible and intangible assets acquired recorded as goodwill. Alternatively, a gain is recorded if the fair value of assets purchased exceeds the fair value of liabilities assumed and consideration paid. The results of operations of the acquired business are included in the Consolidated Statements of Income from the effective date of the acquisition.
Loans – Loans held-for-investment are loans that the Company intends to hold until they are paid in full and are carried at the principal amount outstanding, including certain net deferred loan origination fees. Interest income on loans is accrued based on principal amounts outstanding. Loan origination fees, commitment fees, and certain direct loan origination costs are deferred, and the net amount is amortized as a yield adjustment over the contractual life of the related loans or commitments and included in interest income. Fees related to standby letters of credit are amortized into fee income over the contractual life of the commitment. Other credit-related fees are recognized as fee income when earned. Loans held-for-sale are carried at the lower of aggregate cost or fair value and included in other assets in the Consolidated Statements of Financial Condition.

Acquired and Covered Loans - Acquired loans consist primarily of loans that were acquired in business combinations. Covered loans consist of loans acquired by the Company in FDIC-assisted transactions, the majority of which are covered by loss share agreements with the FDIC (the “FDIC Agreements”), under which the FDIC reimburses the Company for the majority of the losses and eligible expenses related to these assets. No allowance for credit losses is recorded on acquired and covered loans at the acquisition date since business combination accounting requires that they are recorded at fair value.

Acquired and covered loans are separated into (i) non-purchased credit impaired ("Non-PCI") and (ii) purchased credit impaired ("PCI") loans. Non-PCI loans include loans that did not have evidence of credit deterioration since origination. PCI loans include loans that had evidence of credit deterioration since origination and for which it was probable at acquisition that the Company would not collect all contractually required principal and interest payments. Evidence of credit deterioration was evaluated using various indicators, such as past due and non-accrual status. Other key considerations included past performance of the institutions'

8




credit underwriting standards, completeness and accuracy of credit files, maintenance of risk ratings, and age of appraisals. Leases and revolving loans do not qualify to be accounted for as PCI loans.

The acquisition adjustment related to Non-PCI loans is amortized into interest income over the contractual life of the related loans. As the acquisition adjustment is accreted into income over future periods, an allowance for credit losses will be established as necessary to reflect credit deterioration.

PCI loans are accounted for prospectively based on estimates of expected future cash flows. To estimate the fair value, the Company generally aggregates purchased consumer loans and certain smaller balance commercial loans into pools of loans with common risk characteristics, such as delinquency status, credit score, and internal risk rating. The fair values of larger balance commercial loans are estimated on an individual basis. Expected future cash flows in excess of the fair value of loans at the purchase date (“accretable yield”) are recorded as interest income over the life of the loans if the timing and amount of the expected future cash flows can be reasonably estimated. The non-accretable yield represents the difference between contractually required payments and the expected future cash flows determined at acquisition. Subsequent increases in expected future cash flows are recognized as interest income prospectively. The present value of any decreases in expected future cash flows is recognized by recording a charge-off through the allowance for loan and covered loan losses or establishing an allowance for loan and covered loan losses.

Non-accrual Loans Generally, corporate loans are placed on non-accrual status (i) when either principal or interest payments become 90 days or more past due unless the loan is sufficiently collateralized such that full repayment of both principal and interest is expected and is in the process of collection within a reasonable period or (ii) when an individual analysis of a borrower’s creditworthiness warrants a downgrade to non-accrual regardless of past due status. When a loan is placed on non-accrual status, unpaid interest credited to income in the current year is reversed, and unpaid interest accrued in prior years is charged against the allowance for loan losses. After the loan is placed on non-accrual, all debt service payments are applied to the principal on the loan. Future interest income may only be recorded on a cash basis after recovery of principal is reasonably assured. Non-accrual loans are returned to accrual status when the financial position of the borrower and other relevant factors indicate that the Company will collect all principal and interest.

Commercial loans and loans secured by real estate are charged-off when deemed uncollectible. A loss is recorded if the net realizable value of the underlying collateral is less than the outstanding principal and interest. Consumer loans that are not secured by real estate are subject to mandatory charge-off at a specified delinquency date and are usually not classified as non-accrual prior to being charged-off. Closed-end consumer loans, which include installment, automobile, and single payment loans, are usually charged-off no later than the end of the month in which the loan becomes 120 days past due.

PCI loans are generally considered accruing loans unless reasonable estimates of the timing and amount of expected future cash flows cannot be determined. Loans without reasonable future cash flow estimates are classified as non-accrual loans, and interest income is not recognized on those loans until the timing and amount of the expected future cash flows can be reasonably determined.

Troubled Debt Restructurings (“TDRs”) – A restructuring is considered a TDR when (i) the borrower is experiencing financial difficulties and (ii) the creditor grants a concession, such as forgiveness of principal, reduction of the interest rate, changes in payments, or extension of the maturity date. Loans are not classified as TDRs when the modification is short-term or results in an insignificant delay in payments. The Company’s TDRs are determined on a case-by-case basis.

The Company does not accrue interest on a TDR unless it believes collection of all principal and interest under the modified terms is reasonably assured. For a TDR to begin accruing interest, the borrower must demonstrate both some level of past performance and the future capacity to perform under the modified terms. Generally, six months of consecutive payment performance under the restructured terms is required before a TDR is returned to accrual status. However, the period could vary depending on the individual facts and circumstances of the loan. An evaluation of the borrower’s current creditworthiness is used to assess the borrower’s capacity to repay the loan under the modified terms. This evaluation includes an estimate of expected future cash flows, evidence of strong financial position, and estimates of the value of collateral, if applicable. For TDRs to be removed from TDR status in the calendar year after the restructuring, the loans must (i) have an interest rate and terms that reflect market conditions at the time of restructuring, and (ii) be in compliance with the modified terms. If the loan was restructured at below market rates and terms, it continues to be separately reported as restructured until it is paid in full or charged-off.

Impaired Loans – Impaired loans consist of corporate non-accrual loans and TDRs.

A loan is considered impaired when it is probable that the Company will not collect all contractual principal and interest. With the exception of accruing TDRs, impaired loans are classified as non-accrual and are exclusive of smaller homogeneous loans, such as home equity, 1-4 family mortgages, and installment loans. Impaired loans with balances under a specified threshold are not individually evaluated for impairment. For all other impaired loans, impairment is measured by comparing the estimated value

9




of the loan to the recorded book value. The value of collateral-dependent loans is based on the fair value of the underlying collateral, less costs to sell. The value of other loans is measured using the present value of expected future cash flows discounted at the loan’s initial effective interest rate.

90-Days Past Due Loans –The Company’s accrual of interest on loans is discontinued at the time the loan is 90 days past due unless the credit is sufficiently collateralized and in the process of renewal or collection.

Allowance for Credit Losses – The allowance for credit losses is comprised of the allowance for loan losses, the allowance for covered loan losses, and the reserve for unfunded commitments, and is maintained by management at a level believed adequate to absorb estimated losses inherent in the existing loan portfolio. Determination of the allowance for credit losses is subjective since it requires significant estimates and management judgment, including the amounts and timing of expected future cash flows on impaired loans, estimated losses on pools of homogeneous loans, consideration of current economic trends, and other factors.

Loans deemed to be uncollectible are charged-off against the allowance for loan and covered loan losses, while recoveries of amounts previously charged-off are credited to the allowance for loan and covered loan losses. Additions to the allowance for loan and covered loan losses are charged to expense through the provision for loan and covered loan losses. The amount of provision depends on a number of factors, including net charge-off levels, loan growth, changes in the composition of the loan portfolio, and the Company’s assessment of the allowance for loan and covered loan losses based on the methodology discussed below.

Allowance for Loan Losses The allowance for loan losses consists of (i) specific reserves for individual loans where the recorded investment exceeds the value, (ii) an allowance based on a loss migration analysis that uses historical credit loss experience for each loan category, and (iii) an allowance based on other internal and external qualitative factors.

The specific reserves component of the allowance for loan losses is based on a periodic analysis of impaired loans exceeding a fixed dollar amount. If the value of an impaired loan is less than the recorded book value, the Company either establishes a valuation allowance (i.e., a specific reserve) equal to the excess of the book value over the value of the loan as a component of the allowance for loan losses or charges off the amount if it is a confirmed loss.

The general reserve component is based on a loss migration analysis, which examines actual loss experience by loan category for a rolling 8-quarter period and the related internal risk rating for corporate loans. The loss migration analysis is updated quarterly primarily using actual loss experience. This component is then adjusted based on management’s consideration of many internal and external qualitative factors, including:

Changes in the composition of the loan portfolio, trends in the volume of loans, and trends in delinquent and non-accrual loans that could indicate that historical trends do not reflect current conditions.
Changes in credit policies and procedures, such as underwriting standards and collection, charge-off, and recovery practices.
Changes in the experience, ability, and depth of credit management and other relevant staff.
Changes in the quality of the Company’s loan review system and Board of Directors oversight.
The effect of any concentration of credit and changes in the level of concentrations, such as loan type or risk rating.
Changes in the value of the underlying collateral for collateral-dependent loans.
Changes in the national and local economy that affect the collectability of various segments of the portfolio.
The effect of other external factors, such as competition and legal and regulatory requirements, on the Company’s loan portfolio.

Allowance for Covered Loan Losses The Company’s allowance for covered loan losses reflects the difference between the carrying value and the expected future cash flows of the covered PCI loans. On a periodic basis, the adequacy of this allowance is determined through a re-estimation of expected future cash flows on all of the outstanding covered PCI loans using either a probability of default/loss given default (“PD/LGD”) methodology or a specific review methodology. The PD/LGD model is a loss model that estimates expected future cash flows using a probability of default curve and loss given default estimates.

Reserve for Unfunded Commitments The Company also maintains a reserve for unfunded commitments, including letters of credit, for the risk of loss inherent in these arrangements. The reserve for unfunded commitments is estimated using the loss migration analysis from the allowance for loan losses, adjusted for probabilities of future funding requirements. The reserve for unfunded commitments is included in other liabilities in the Consolidated Statements of Financial Condition.

The establishment of the allowance for credit losses involves a high degree of judgment given the difficulty of assessing the factors impacting loan repayment and estimating the timing and amount of losses. While management utilizes its best judgment and information available, the adequacy of the allowance for credit losses depends on a variety of factors beyond the Company’s

10




control, including the performance of its loan portfolio, the economy, changes in interest rates and property values, and the interpretation of loan risk classifications by regulatory authorities.

FDIC Indemnification Asset – The majority of loans and OREO acquired through FDIC-assisted transactions are covered by the FDIC Agreements. The FDIC indemnification asset represents the present value of future expected reimbursements from the FDIC. Since the indemnified items are covered loans and covered OREO, which are initially measured at fair value, the FDIC indemnification asset is also initially measured at fair value by discounting the expected future cash flows to be received from the FDIC. These expected future cash flows are estimated by multiplying estimated losses on covered PCI loans and covered OREO by the reimbursement rates in the FDIC Agreements.

The balance of the FDIC indemnification asset is adjusted periodically to reflect changes in expected future cash flows. Decreases in estimated reimbursements from the FDIC are recorded prospectively through amortization and increases in estimated reimbursements from the FDIC are recognized by an increase in the carrying value of the indemnification asset. Payments from the FDIC for reimbursement of losses result in a reduction of the FDIC indemnification asset.

Derivative Financial Instruments – In the ordinary course of business, the Company enters into derivative transactions as part of its overall interest rate risk management strategy to minimize significant unplanned fluctuations in earnings and expected future cash flows caused by interest rate volatility. All derivative instruments are recorded at fair value as either other assets or other liabilities in the Consolidated Statements of Financial Condition. Subsequent changes in a derivative’s fair value are recognized in earnings unless specific hedge accounting criteria are met.

On the date the Company enters into a derivative contract, the derivative is designated as a fair value hedge, a cash flow hedge, or a non-hedge derivative instrument. Fair value hedges are designed to mitigate exposure to changes in the fair value of an asset or liability attributable to a particular risk, such as interest rate risk. Cash flow hedges are designed to mitigate exposure to variability in expected future cash flows to be received or paid related to an asset, liability, or other type of forecasted transaction. The Company formally documents all relationships between hedging instruments and hedged items, including its risk management objective and strategy.

At the hedge’s inception and quarterly thereafter, a formal assessment is performed to determine the effectiveness of the derivative in offsetting changes in the fair values or expected future cash flows of the hedged items in the current period and prospectively. If a derivative instrument designated as a hedge is terminated or ceases to be highly effective, hedge accounting is discontinued prospectively, and the gain or loss is amortized into earnings. For fair value hedges, the gain or loss is amortized over the remaining life of the hedged asset or liability. For cash flow hedges, the gain or loss is amortized over the same period that the forecasted hedged transactions impact earnings. If the hedged item is disposed of, any fair value adjustments are included in the gain or loss from the disposition of the hedged item. If the forecasted transaction is no longer probable, the gain or loss is included in earnings immediately.

For effective fair value hedges, changes in the fair value of the derivative instruments, as well as changes in the fair value of the hedged item, are recognized in earnings. For cash flow hedges, the effective portion of the change in fair value of the derivative instrument is reported as a component of accumulated other comprehensive loss and is reclassified to earnings when the hedged transaction is reflected in earnings.

Ineffectiveness is calculated based on the change in fair value of the hedged item compared with the change in fair value of the hedging instrument. For all types of hedges, any ineffectiveness in the hedging relationship is recognized in earnings during the period the ineffectiveness occurs.

2.  RECENT EVENTS

Equity Matters
On May 21, 2014, the stockholders of the Company approved an amendment to the Company's Restated Certificate of Incorporation. The amendment increased the Company's authorized common stock by 50,000,000 shares. Following this amendment, the Company is now authorized to issue a total of 151,000,000 shares, including 1,000,000 shares of Preferred Stock, without a par value, and 150,000,000 shares of Common Stock, $0.01 par value per share.

Recent Accounting Pronouncements
Income Taxes: In January of 2014, the Financial Accounting Standards Board ("FASB") issued guidance that requires an entity to present an unrecognized tax benefit, or a portion of an unrecognized tax benefit, as a reduction to a deferred tax asset for a net

11




operating loss carryforward, a similar tax loss, or a tax credit carryforward. To the extent a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date or, if the tax law of the applicable jurisdiction does not require the entity to use, and the entity does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. The guidance is effective for annual and interim reporting periods beginning on or after December 15, 2013, and must be applied prospectively. The adoption of this guidance on January 1, 2014 did not impact the Company's financial condition, results of operations, or liquidity.
Receivables - Troubled Debt Restructurings by Creditors: In January of 2014, the FASB issued guidance to clarify when an in substance repossession or foreclosure occurs and an entity is considered to have received physical possession of the residential real estate property such that a loan receivable should be derecognized and the real estate property recognized. Additionally, the guidance requires interim and annual disclosure of the amount of foreclosed residential real estate property held by the entity and the recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure according to local requirements of the applicable jurisdiction. The guidance is effective for annual and interim periods beginning after December 15, 2014 and can be applied retrospectively or prospectively. Management does not expect the adoption of this guidance will materially impact the Company's financial condition, results of operations, or liquidity.
Reporting Discontinued Operations: In April of 2014, the FASB issued guidance that requires an entity to report a disposal of a component of an entity or a group of components of an entity in discontinued operations if the disposal represents a strategic shift that has (or will have) a major effect on an entity's operations and financial results when the component of an entity or group of components of an entity (i) meets the criteria to be classified as held for sale, (ii) is disposed of by sale, or (iii) is disposed of other than by sale. The guidance is effective for annual and interim reporting periods beginning on or after December 15, 2014, and must be applied prospectively. Management does not expect the adoption of this guidance will materially impact the Company's financial condition, results of operations, or liquidity.
Revenue from Contracts with Customers: In May of 2014, the FASB issued guidance that requires an entity to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance is effective for annual and interim reporting periods beginning on or after December 15, 2016, and must be applied either retrospectively or using the modified retrospective approach. Management is evaluating the new guidance, but does not expect the adoption of this guidance will materially impact the Company's financial condition, results of operations, or liquidity.
Transfers and Servicing: In June of 2014, the FASB issued guidance that requires repurchase-to-maturity transactions to be accounted for as secured borrowings. The guidance also requires separate accounting for a transfer of a financial asset executed contemporaneously with a repurchase agreement with the same counterparty. If the derecognition criteria are met, the initial transfer will generally be accounted for as a sale and the repurchase agreement will generally be accounted for as a secured borrowing. The guidance is effective for annual and interim reporting periods beginning after December 15, 2014. Management is evaluating the new guidance, but does not expect the adoption of this guidance will materially impact the Company's financial condition, results of operations, or liquidity.
Receivables - Troubled Debt Restructurings by Creditors: In August of 2014, the FASB issued guidance that requires an entity to derecognize a mortgage loan and recognize a separate other receivable upon foreclosure if (i) the loan has a government guarantee that is not separable from the loan before foreclosure, (ii) at the time of foreclosure, the creditor has the intent to convey the real estate property to the guarantor and make a claim on that guarantee, and the creditor has the ability to recover under that claim, and (iii) at the time of foreclosure, any amount of the claim that is determined on the basis of the fair value of the real estate is fixed. The separate other receivable is to be measured based on the amount of the loan balance (principal and interest) expected to be recovered from the guarantor. The guidance is effective for annual and interim reporting periods beginning after December 15, 2014. Management is evaluating the new guidance, but does not expect the adoption of this guidance will materially impact the Company's financial condition, results of operations, or liquidity.
Disclosure of Uncertainties about an Entity's Ability to Continue as a Going Concern: In August of 2014, the FASB issued guidance that requires management to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity's ability to continue as a going concern within one year after the date that the financial statements are issued. The guidance is effective for the annual period ending after December 15, 2016, and for annual and interim periods thereafter. Management does not expect the adoption of this guidance will materially impact the Company's financial condition, results of operations, or liquidity.

12




3.  ACQUISITIONS

Completed Acquisitions

Popular Community Bank

On August 8, 2014, First Midwest Bank (the "Bank") completed the acquisition of the Chicago area banking operations of Banco Popular North America (“Popular”), doing business as Popular Community Bank, which is a subsidiary of Popular, Inc. The acquisition included Popular’s twelve full-service retail banking offices and its small business and middle market commercial lending activities in the Chicago metropolitan area at a purchase price of $19.0 million paid in cash.

The assets acquired and liabilities assumed, both intangible and tangible, were recorded at their estimated fair values as of the August 8, 2014 acquisition date and have been accounted for under the acquisition method of accounting. The Company is finalizing the fair values of loans and intangible assets and liabilities. As a result, the fair value adjustments associated with these accounts and goodwill, which are included in the following table, are preliminary and may change.

Popular Acquisition
(Dollar amounts in thousands)
 
 
August 8, 2014
Assets
 
 
Cash and due from banks
 
$
142,276

Loans:
 
 
Commercial, industrial, and agricultural
 
76,680

Commercial real estate:
 
 
Office, retail, and industrial
 
194,312

Multi-family
 
192,464

Other commercial real estate
 
57,111

Total commercial real estate
 
443,887

Consumer
 
28,819

Total loans
 
549,386

Goodwill
 
36,906

Intangible assets
 
8,003

Premises, furniture, and equipment
 
4,647

Accrued interest receivable and other assets
 
1,849

Total assets
 
$
743,067

Liabilities
 
 
Deposits:
 
 
Demand deposits
 
$
163,299

Savings deposits
 
91,205

NOW accounts
 
100,852

Money market deposits
 
181,730

Time deposits
 
194,786

Total deposits
 
731,872

Intangible liabilities
 
10,631

Accrued interest payable and other liabilities
 
564

Total liabilities
 
$
743,067


Expenses related to the acquisition of Popular totaled $2.2 million and $2.8 million during the quarter and nine months ended September 30, 2014, respectively, and are reported within noninterest expense. The acquisition was not considered material to the Company’s financial statements; therefore, pro forma financial data and related disclosures are not included.


13




National Machine Tool Financial Corporation

On September 26, 2014, the Bank completed the acquisition of National Machine Tool Financial Corporation ("National Machine Tool"). National Machine Tool provides equipment leasing and financing alternatives to traditional bank financing. On the date of acquisition, the Bank acquired approximately $4.4 million in direct financing leases, lease loans, and other assets.

Pending Acquisitions

Great Lakes Financial Resources, Inc.

On July 7, 2014, the Company entered into a definitive agreement to acquire the south suburban Chicago-based Great Lakes Financial Resources, Inc. ("Great Lakes"), the holding company for Great Lakes Bank, National Association. As part of the acquisition, the Company will acquire eight locations and approximately $234 million in loans and will assume approximately $490 million in deposits. The merger consideration will be a combination of Company common stock and cash, with an overall transaction value of approximately $58.0 million, subject to certain adjustments based on the price of the Company's common stock prior to closing. The Company received approval for this acquisition from the Federal Reserve, and the acquisition is expected to close before the end of 2014, subject to approval by the stockholders of Great Lakes and certain closing conditions.

4.  SECURITIES

Securities are classified as held-to-maturity, trading, or available-for-sale at the time of purchase. Securities classified as held-to-maturity are securities for which management has the positive intent and ability to hold to maturity and are stated at cost.

The Company’s trading securities consist of diversified investment securities reported at fair value that are held in a grantor trust under deferred compensation arrangements that allow plan participants to direct amounts into a variety of securities, including Company stock. Net trading (losses) gains represent changes in the fair value of the trading securities portfolio and are included in other noninterest income in the Condensed Consolidated Statements of Income.

All other securities are classified as available-for-sale and are carried at fair value with unrealized gains and losses, net of related deferred income taxes, recorded in stockholders’ equity as a separate component of accumulated other comprehensive loss.


14




A summary of the Company's securities portfolio by category and maturity is presented in the following tables.

Securities Portfolio
(Dollar amounts in thousands)
 
September 30, 2014
 
December 31, 2013
 
Amortized Cost
 
Gross Unrealized
 
Fair
 Value
 
Amortized Cost
 
Gross Unrealized
 
Fair
 Value
 
 
Gains
 
Losses
 
 
 
Gains
 
Losses
 
Securities Available-for-Sale
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. agency securities
$
500

 
$

 
$

 
$
500

 
$
500

 
$

 
$

 
$
500

Collateralized mortgage
  obligations (“CMOs”)
424,946

 
1,578

 
(9,977
)
 
416,547

 
490,962

 
1,427

 
(16,621
)
 
475,768

Other mortgage-backed
  securities (“MBSs”)
117,271

 
4,045

 
(827
)
 
120,489

 
135,097

 
3,349

 
(2,282
)
 
136,164

Municipal securities
423,904

 
12,517

 
(1,349
)
 
435,072

 
457,318

 
9,673

 
(5,598
)
 
461,393

Trust preferred
  collateralized debt
  obligations (“CDOs”)
45,021

 

 
(26,652
)
 
18,369

 
46,532

 

 
(28,223
)
 
18,309

Corporate debt securities
3,724

 
122

 

 
3,846

 
12,999

 
1,930

 

 
14,929

Equity securities
2,575

 
77

 
(55
)
 
2,597

 
3,706

 
2,046

 
(90
)
 
5,662

Total available-
  for-sale securities
$
1,017,941

 
$
18,339

 
$
(38,860
)
 
$
997,420

 
$
1,147,114

 
$
18,425

 
$
(52,814
)
 
$
1,112,725

Securities Held-to-Maturity
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Municipal securities
$
26,776

 
$
990

 
$

 
$
27,766

 
$
44,322

 
$

 
$
(935
)
 
$
43,387

Trading Securities
 
 
 
 
 
 
$
17,928

 
 
 
 
 
 
 
$
17,317



Remaining Contractual Maturity of Securities
(Dollar amounts in thousands)
 
September 30, 2014
 
Available-for-Sale
 
Held-to-Maturity
 
Amortized
Cost
 
Fair Value
 
Amortized
Cost
 
Fair Value
One year or less
$
65,157

 
$
63,042

 
$
3,425

 
$
3,552

After one year to five years
80,964

 
78,335

 
8,505

 
8,819

After five years to ten years
196,380

 
190,004

 
5,703

 
5,914

After ten years
130,648

 
126,406

 
9,143

 
9,481

Securities that do not have a single contractual maturity date
544,792

 
539,633

 

 

Total
$
1,017,941

 
$
997,420

 
$
26,776

 
$
27,766


The carrying value of securities available-for-sale that were pledged to secure deposits or for other purposes as permitted or required by law totaled $816.1 million at September 30, 2014 and $755.3 million at December 31, 2013. No securities held-to-maturity were pledged as of September 30, 2014 or December 31, 2013.


15




Purchases and sales of securities are recognized on a trade date basis. Realized securities gains or losses are reported in net securities gains in the Condensed Consolidated Statements of Income. The cost of securities sold is based on the specific identification method. The following table presents net realized gains on securities.

Securities Gains (Losses)
(Dollar amounts in thousands)
 
Quarters Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2014
 
2013
 
2014
 
2013
Gains on sales of securities:
 
 
 
 
 
 
 
Gross realized gains
$
2,570

 
$
34,205

 
$
8,188

 
$
34,421

Gross realized losses

 

 

 

Net realized gains on sales of securities
2,570

 
34,205

 
8,188

 
34,421

Non-cash impairment charges:
 
 
 
 
 
 
 
Other-than-temporary securities impairment ("OTTI")

 
(404
)
 
(28
)
 
(404
)
Net non-cash impairment charges

 
(404
)
 
(28
)
 
(404
)
Net realized gains
$
2,570

 
$
33,801

 
$
8,160

 
$
34,017

Net trading (losses) gains (1)
$
(356
)
 
$
882

 
$
366

 
$
2,132


(1) 
All net trading (losses) gains relate to trading securities still held as of September 30, 2014 and September 30, 2013 and are included in other income in the Condensed Consolidated Statement of Income.

Net realized gains on sales of securities for the third quarter and first nine months of 2014 were $2.6 million and $8.2 million, respectively. During the third quarter of 2014, the Company sold certain corporate bonds and other investments at gains of $2.6 million. Net securities gains for the nine months ended September 30, 2014 also consisted of the sale of a non-accrual CDO at a gain of $3.5 million, sales of municipal securities at gains of $468,000, and the sale of other investments at a gain of $1.6 million.

The non-cash impairment charges for the nine months ended September 30, 2014 in the table above relates to OTTI charges on certain CMOs. For the quarter and nine months ended September 30, 2013, non-cash impairment charges relates to OTTI on municipal securities and CDOs. Accounting guidance requires that the credit portion of an OTTI charge be recognized through income. If a decline in fair value below carrying value is not attributable to credit deterioration and the Company does not intend to sell the security or believe it would not be more likely than not required to sell the security prior to recovery, the Company records the non-credit related portion of the decline in fair value in other comprehensive (loss) income.

The following table presents a rollforward of life-to-date OTTI recognized in earnings related to all available-for-sale securities held by the Company for the quarters and nine months ended September 30, 2014 and 2013. The majority of the beginning and ending balance of OTTI relates to CDOs currently held by the Company.

Changes in OTTI Recognized in Earnings
(Dollar amounts in thousands)
 
Quarters Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2014
 
2013
 
2014
 
2013
Beginning balance
$
23,880

 
$
32,053

 
$
32,422

 
$
38,803

OTTI included in earnings (1):
 
 
 
 
 
 
 
Losses on securities that previously had OTTI

 

 
28

 

Losses on securities that did not previously have OTTI

 
404

 

 
404

Reduction for sales of securities (2)

 
(39
)
 
(8,570
)
 
(6,789
)
Ending balance
$
23,880

 
$
32,418

 
$
23,880

 
$
32,418


(1) 
Included in net securities gains in the Condensed Consolidated Statements of Income.
(2) 
During the nine months ended September 30, 2014, one CDO with a carrying value of $1.3 million was sold. In addition, one CDO with a carrying value of zero was sold during the nine months ended September 30, 2013. These CDOs had OTTI of $8.6 million and $6.8 million, respectively, that were previously recognized in earnings.

16





The following table presents the aggregate amount of unrealized losses and the aggregate related fair values of securities with unrealized losses as of September 30, 2014 and December 31, 2013.

Securities in an Unrealized Loss Position
(Dollar amounts in thousands)
 
 
 
Less Than 12 Months
 
Greater Than 12 Months
 
Total
 
Number of
Securities
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
As of September 30, 2014
 
 
 
 
 
 
 
 
 
 
 
 
 
CMOs
59

 
$
15,653

 
$
139

 
$
312,418

 
$
9,838

 
$
328,071

 
$
9,977

Other MBSs
11

 
173

 
2

 
41,570

 
825

 
41,743

 
827

Municipal securities
92

 
1,318

 
8

 
57,298

 
1,341

 
58,616

 
1,349

CDOs
5

 

 

 
18,369

 
26,652

 
18,369

 
26,652

Equity securities
1

 

 

 
2,238

 
55

 
2,238

 
55

Total
168

 
$
17,144

 
$
149

 
$
431,893

 
$
38,711

 
$
449,037

 
$
38,860

As of December 31, 2013
 
 
 
 
 
 
 
 
 
 
 
 
 
CMOs
67

 
$
338,064

 
$
14,288

 
$
57,269

 
$
2,333

 
$
395,333

 
$
16,621

Other MBSs
19

 
57,311

 
2,281

 
356

 
1

 
57,667

 
2,282

Municipal securities
154

 
65,370

 
3,245

 
27,565

 
2,353

 
92,935

 
5,598

CDOs
6

 

 

 
18,309

 
28,223

 
18,309

 
28,223

Equity securities
1

 
2,168

 
90

 

 

 
2,168

 
90

Total
247

 
$
462,913

 
$
19,904

 
$
103,499

 
$
32,910

 
$
566,412

 
$
52,814


Substantially all of the Company’s CMOs and other MBSs are either backed by U.S. government-owned agencies or issued by U.S. government-sponsored enterprises. Municipal securities are issued by municipal authorities, and the majority are supported by third party insurance or some other form of credit enhancement. Management does not believe any individual unrealized loss as of September 30, 2014 represents an OTTI related to credit deterioration. The unrealized losses associated with these securities are not believed to be attributed to credit quality, but rather to changes in interest rates and temporary market movements. In addition, the Company does not intend to sell the securities with unrealized losses, and it is not more likely than not that the Company will be required to sell them before recovery of their amortized cost basis, which may be at maturity.

The unrealized losses on CDOs as of September 30, 2014 reflect the illiquidity of these structured investment vehicles. Management does not believe these unrealized losses represent OTTI related to credit deterioration. In addition, the Company does not intend to sell the CDOs with unrealized losses within a short period of time, and the Company does not believe it is more likely than not that it will be required to sell them before recovery of their amortized cost basis, which may be at maturity.

Significant judgment is required to calculate the fair value of the CDOs, all of which are pooled. The Company estimates the fair value of these securities using discounted cash flow analyses with the assistance of a structured credit valuation firm. For additional discussion of the CDO valuation methodology, refer to Note 12, “Fair Value."


17




5.  LOANS

Loans Held-for-Investment
The following table presents the Company's loans held-for-investment by class.

Loan Portfolio
(Dollar amounts in thousands)
 
September 30,
2014
 
December 31,
2013
Commercial and industrial
$
2,208,166

 
$
1,830,638

Agricultural
347,511

 
321,702

Commercial real estate:
 
 
 
Office, retail, and industrial
1,422,522

 
1,353,685

Multi-family
559,689

 
332,873

Construction
193,445

 
186,197

Other commercial real estate
871,825

 
807,071

Total commercial real estate
3,047,481

 
2,679,826

Total corporate loans
5,603,158

 
4,832,166

Home equity
517,446

 
427,020

1-4 family mortgages
238,172

 
275,992

Installment
69,428

 
44,827

Total consumer loans
825,046

 
747,839

Total loans, excluding covered loans
6,428,204

 
5,580,005

Covered loans (1)
90,875

 
134,355

Total loans
$
6,519,079

 
$
5,714,360

Deferred loan fees included in total loans
$
4,163

 
$
4,656

Overdrawn demand deposits included in total loans
3,632

 
5,047


(1) 
For information on covered loans, refer to Note 6, “Acquired and Covered Loans.”

The Company primarily lends to community-based and mid-sized businesses, commercial real estate customers, and consumers in its markets. Within these areas, the Company diversifies its loan portfolio by loan type, industry, and borrower.

It is the Company’s policy to review each prospective credit to determine the appropriateness and the adequacy of security or collateral prior to making a loan. In the event of borrower default, the Company seeks recovery in compliance with state lending laws, the Company’s lending standards, and credit monitoring and remediation procedures. A discussion of risk characteristics relevant to each portfolio segment is presented in Note 4, “Loans,” in the Company’s 2013 10-K.


18




Loan Sales
The table below summarizes the Company's loan sales for the quarter and nine months ended September 30, 2014 and 2013.

Loan Sales
(Dollar amounts in thousands)
 
Quarters Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2014
 
2013
 
2014
 
2013
1-4 family mortgage loans
 
 
 
 
 
 
 
Proceeds from sales
$
32,611

 
$
37,060

 
$
117,549

 
$
122,067

Less book value of loans sold:
 
 
 
 
 
 
 
Loans originated with intent to sell
26,384

 
32,485

 
62,319

 
32,807

Loans held-for-investment
5,302

 
3,592

 
52,384

 
85,271

Total book value of loans sold
31,686

 
36,077

 
114,703

 
118,078

Net gains on sales of 1-4 family mortgages
$
925

 
$
983

 
$
2,846

 
$
3,989


The Company retained servicing responsibilities for a portion of the 1-4 family mortgage loans sold and collects servicing fees equal to a percentage of the outstanding principal balance. The Company also retained limited recourse for credit losses on the sold loans. A description of the recourse obligation is presented in Note 11, “Commitments, Guarantees, and Contingent Liabilities.”


19




6.  ACQUIRED AND COVERED LOANS

Acquired loans consist primarily of loans that were acquired in business combinations that are not covered by the FDIC Agreements. These loans are included in loans, excluding covered loans, in the Consolidated Statements of Financial Condition. Covered loans consist of loans acquired by the Company in four FDIC-assisted transactions. Most loans and OREO acquired in three of those transactions are covered by the FDIC Agreements. The significant accounting policies related to acquired and covered loans, which are classified as PCI and Non-PCI, and the related FDIC indemnification asset are presented in Note 1, “Summary of Significant Accounting Policies.”

The following table presents PCI and Non-PCI, loans as of September 30, 2014 and December 31, 2013.

Acquired and Covered Loans
(Dollar amounts in thousands)
 
September 30, 2014
 
December 31, 2013
 
PCI
 
Non-PCI
 
Total
 
PCI
 
Non-PCI
 
Total
Acquired loans
$
20,937

 
$
539,454

 
$
560,391

 
$
15,608

 
$
17,024

 
$
32,632

Covered loans
64,015

 
26,860

 
90,875

 
103,525

 
30,830

 
134,355

Total acquired and covered loans
$
84,952

 
$
566,314

 
$
651,266

 
$
119,133

 
$
47,854

 
$
166,987


In connection with the FDIC Agreements, the Company recorded an indemnification asset. To maintain eligibility for the loss share reimbursement, the Company is required to follow certain servicing procedures as specified in the FDIC Agreements. The Company was in compliance with those requirements as of September 30, 2014 and December 31, 2013.

A rollforward of the carrying value of the FDIC indemnification asset for the quarters and nine months ended September 30, 2014 and 2013 is presented in the following table.
 
Changes in the FDIC Indemnification Asset
(Dollar amounts in thousands)
 
Quarters Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2014
 
2013
 
2014
 
2013
Beginning balance
$
10,276

 
$
23,158

 
$
16,585

 
$
37,051

Amortization
(650
)
 
(116
)
 
(2,784
)
 
(2,348
)
Change in expected reimbursements from the FDIC for changes
  in expected credit losses
(857
)
 
(999
)
 
(325
)
 
(3,453
)
Payments received from the FDIC
(70
)
 
(3,965
)
 
(4,777
)
 
(13,172
)
Ending balance
$
8,699

 
$
18,078

 
$
8,699

 
$
18,078



20




Changes in the accretable yield for acquired and covered PCI loans were as follows.

Changes in Accretable Yield
(Dollar amounts in thousands)
 
Quarters Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2014
 
2013
 
2014
 
2013
Beginning balances
$
35,152

 
$
47,104

 
$
36,792

 
$
51,498

Accretion
(3,346
)
 
(3,410
)
 
(10,277
)
 
(11,752
)
Additions
1,265

 

 
1,265

 

Other (1)
(5,215
)
 
(3,128
)
 
76

 
820

Ending balance
$
27,856

 
$
40,566

 
$
27,856

 
$
40,566


(1) 
Decreases result from the resolution of certain loans occurring earlier than anticipated while increases represent an increase in the expected future cash flows to be collected over the remaining estimated life of the underlying portfolio.


21




7.  PAST DUE LOANS, ALLOWANCE FOR CREDIT LOSSES, IMPAIRED LOANS, AND TDRS

Past Due and Non-accrual Loans

The following table presents an aging analysis of the Company’s past due loans as of September 30, 2014 and December 31, 2013. The aging is determined without regard to accrual status. The table also presents non-performing loans, consisting of non-accrual loans (the majority of which are past due) and loans 90 days or more past due and still accruing interest, as of each balance sheet date.

Aging Analysis of Past Due Loans and Non-Performing Loans by Class
(Dollar amounts in thousands)
 
Aging Analysis (Accruing and Non-accrual)
 
 
Non-performing Loans
 
Current
 
30-89 Days
Past Due
 
90 Days or
More Past
Due
 
Total
Past Due
 
Total
Loans
 
 
Non-
accrual
Loans
 
90 Days Past Due Loans, Still Accruing Interest
September 30, 2014
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial and industrial
$
2,197,785

 
$
6,216

 
$
4,165

 
$
10,381

 
$
2,208,166

 
 
$
19,696

 
$
1,256

Agricultural
347,179

 

 
332

 
332

 
347,511

 
 
361

 

Commercial real estate:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Office, retail, and industrial
1,401,990

 
1,842

 
18,690

 
20,532

 
1,422,522

 
 
16,963

 
3,840

Multi-family
557,852

 
641

 
1,196

 
1,837

 
559,689

 
 
1,536

 

Construction
186,363

 

 
7,082

 
7,082

 
193,445

 
 
7,082

 

Other commercial real estate
861,061

 
4,461

 
6,303

 
10,764

 
871,825

 
 
7,912

 
150

Total commercial real
  estate
3,007,266

 
6,944

 
33,271

 
40,215

 
3,047,481

 
 
33,493

 
3,990

Total corporate loans
5,552,230

 
13,160

 
37,768

 
50,928

 
5,603,158

 
 
53,550

 
5,246

Home equity
509,530

 
3,525

 
4,391

 
7,916

 
517,446

 
 
5,834

 
587

1-4 family mortgages
234,672

 
1,935

 
1,565

 
3,500

 
238,172

 
 
3,235

 
126

Installment
66,997

 
428

 
2,003

 
2,431

 
69,428

 
 
1,909

 
103

Total consumer loans
811,199

 
5,888

 
7,959

 
13,847

 
825,046

 
 
10,978

 
816

Total loans, excluding
  covered loans
6,363,429

 
19,048

 
45,727

 
64,775

 
6,428,204

 
 
64,528

 
6,062

Covered loans
73,370

 
954

 
16,551

 
17,505

 
90,875

 
 
10,905

 
7,031

Total loans
$
6,436,799

 
$
20,002

 
$
62,278

 
$
82,280

 
$
6,519,079

 
 
$
75,433

 
$
13,093

December 31, 2013
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial and industrial
$
1,814,660

 
$
6,872

 
$
9,106

 
$
15,978

 
$
1,830,638

 
 
$
11,767

 
$
393

Agricultural
321,156

 
134

 
412

 
546

 
321,702

 
 
519

 

Commercial real estate:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Office, retail, and industrial
1,335,027

 
2,620

 
16,038

 
18,658

 
1,353,685

 
 
17,076

 
1,315

Multi-family
330,960

 
318

 
1,595

 
1,913

 
332,873

 
 
1,848

 

Construction
180,083

 
23

 
6,091

 
6,114

 
186,197

 
 
6,297

 

Other commercial real estate
795,462

 
5,365

 
6,244

 
11,609

 
807,071

 
 
8,153

 
258

Total commercial real
  estate
2,641,532

 
8,326

 
29,968

 
38,294

 
2,679,826

 
 
33,374

 
1,573

Total corporate loans
4,777,348

 
15,332

 
39,486

 
54,818

 
4,832,166

 
 
45,660

 
1,966

Home equity
415,791

 
4,830

 
6,399

 
11,229

 
427,020

 
 
6,864

 
1,102

1-4 family mortgages
268,912

 
2,046

 
5,034

 
7,080

 
275,992

 
 
5,198

 
548

Installment
42,350

 
330

 
2,147

 
2,477

 
44,827

 
 
2,076

 
92

Total consumer loans
727,053

 
7,206

 
13,580

 
20,786

 
747,839

 
 
14,138

 
1,742

Total loans, excluding
  covered loans
5,504,401

 
22,538

 
53,066

 
75,604

 
5,580,005

 
 
59,798

 
3,708

Covered loans
94,211

 
2,232

 
37,912

 
40,144

 
134,355

 
 
20,942

 
18,081

Total loans
$
5,598,612

 
$
24,770

 
$
90,978

 
$
115,748

 
$
5,714,360

 
 
$
80,740

 
$
21,789



22




Allowance for Credit Losses

The Company maintains an allowance for credit losses at a level deemed adequate by management to absorb probable losses inherent in the loan portfolio. Refer to Note 1, “Summary of Significant Accounting Policies,” for the accounting policy for the allowance for credit losses. A rollforward of the allowance for credit losses by portfolio segment for the quarters and nine months ended September 30, 2014 and 2013 is presented in the table below.

Allowance for Credit Losses by Portfolio Segment
(Dollar amounts in thousands)
 
Commercial,
Industrial,
and
Agricultural
 
Office,
Retail, and
Industrial
 
Multi-
Family
 
Construction
 
Other
Commercial
Real Estate
 
Consumer
 
Covered
Loans
 
Reserve for
Unfunded
Commitments
 
Total
Allowance
Quarter ended September 30, 2014
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
$
29,194

 
$
11,831

 
$
2,048

 
$
4,885

 
$
8,585

 
$
12,440

 
$
9,343

 
$
1,616

 
$
79,942

Charge-offs
(9,763
)
 
(2,514
)
 
(26
)
 
(157
)
 
(1,363
)
 
(3,148
)
 
(135
)
 

 
(17,106
)
Recoveries
716

 
55

 

 

 
108

 
150

 
130

 

 
1,159

Net charge-offs
(9,047
)
 
(2,459
)
 
(26
)
 
(157
)
 
(1,255
)
 
(2,998
)
 
(5
)
 

 
(15,947
)
Provision for loan
  and covered loan
  losses and other
10,458

 
265

 
(65
)
 
(3,130
)
 
189

 
3,699

 
(689
)
 

 
10,727

Ending balance
$
30,605

 
$
9,637

 
$
1,957

 
$
1,598

 
$
7,519

 
$
13,141

 
$
8,649

 
$
1,616

 
$
74,722

Quarter ended September 30, 2013
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
$
31,742

 
$
11,857

 
$
3,424

 
$
4,170

 
$
16,169

 
$
12,367

 
$
14,381

 
$
2,866

 
$
96,976

Charge-offs
(2,719
)
 
(987
)
 
(112
)
 
(470
)
 
(889
)
 
(2,482
)
 
(1,636
)
 

 
(9,295
)
Recoveries
521

 
31

 

 
57

 
253

 
374

 
7

 

 
1,243

Net charge-offs
(2,198
)
 
(956
)
 
(112
)
 
(413
)
 
(636
)
 
(2,108
)
 
(1,629
)
 

 
(8,052
)
Provision for loan
  and covered loan
  losses and other
2,452

 
938

 
(31
)
 
(100
)
 
(1,218
)
 
2,425

 
304

 
(480
)
 
4,290

Ending balance
$
31,996

 
$
11,839

 
$
3,281

 
$
3,657

 
$
14,315

 
$
12,684

 
$
13,056

 
$
2,386

 
$
93,214

Nine months ended September 30, 2014
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
$
30,381

 
$
10,405

 
$
2,017

 
$
6,316

 
$
10,817

 
$
13,010

 
$
12,559

 
$
1,616

 
$
87,121

Charge-offs
(15,542
)
 
(7,108
)
 
(383
)
 
(1,052
)
 
(3,695
)
 
(7,005
)
 
(659
)
 

 
(35,444
)
Recoveries
3,135

 
403

 
3

 
160

 
341

 
502

 
992

 

 
5,536

Net charge-offs
(12,407
)
 
(6,705
)
 
(380
)
 
(892
)
 
(3,354
)
 
(6,503
)
 
333

 

 
(29,908
)
Provision for loan
  and covered loan
  losses and other
12,631

 
5,937

 
320

 
(3,826
)
 
56

 
6,634

 
(4,243
)
 

 
17,509

Ending balance
$
30,605

 
$
9,637

 
$
1,957

 
$
1,598

 
$
7,519

 
$
13,141

 
$
8,649

 
$
1,616

 
$
74,722

Nine months ended September 30, 2013
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
$
36,761

 
$
11,432

 
$
3,575

 
$
5,242

 
$
17,512

 
$
12,862

 
$
12,062

 
$
3,366

 
$
102,812

Charge-offs
(9,010
)
 
(3,702
)
 
(490
)
 
(1,885
)
 
(3,971
)
 
(7,369
)
 
(4,322
)
 

 
(30,749
)
Recoveries
3,183

 
68

 
35

 
62

 
1,614

 
894

 
18

 

 
5,874

Net charge-offs
(5,827
)
 
(3,634
)
 
(455
)
 
(1,823
)
 
(2,357
)
 
(6,475
)
 
(4,304
)
 

 
(24,875
)
Provision for loan
  and covered loan
  losses and other
1,062

 
4,041

 
161

 
238

 
(840
)
 
6,297

 
5,298

 
(980
)
 
15,277

Ending balance
$
31,996

 
$
11,839

 
$
3,281

 
$
3,657

 
$
14,315

 
$
12,684

 
$
13,056

 
$
2,386

 
$
93,214


 

23




The table below provides a breakdown of loans and the related allowance for credit losses by portfolio segment as of September 30, 2014 and December 31, 2013.

Loans and Related Allowance for Credit Losses by Portfolio Segment
(Dollar amounts in thousands)
 
Loans
 
Allowance for Credit Losses
 
Individually
Evaluated
for
Impairment
 
Collectively
Evaluated
for
Impairment
 
PCI
 
Total
 
Individually
Evaluated
for
Impairment
 
Collectively
Evaluated
for
Impairment
 
PCI
 
Total
September 30, 2014
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial, industrial, and
  agricultural
$
18,547

 
$
2,535,395

 
$
1,735

 
$
2,555,677

 
$
3,599

 
$
27,006

 
$

 
$
30,605

Commercial real estate:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Office, retail, and industrial
16,140

 
1,406,307

 
75

 
1,422,522

 

 
9,637

 

 
9,637

Multi-family
1,141

 
554,814

 
3,734

 
559,689

 

 
1,942

 
15

 
1,957

Construction
6,859

 
186,586

 

 
193,445

 

 
1,598

 

 
1,598

Other commercial real estate
4,719

 
860,410

 
6,696

 
871,825

 

 
7,519

 

 
7,519

Total commercial
  real estate
28,859

 
3,008,117

 
10,505

 
3,047,481

 

 
20,696

 
15

 
20,711

Total corporate loans
47,406

 
5,543,512

 
12,240

 
5,603,158

 
3,599

 
47,702

 
15

 
51,316

Consumer

 
816,349

 
8,697

 
825,046

 

 
12,588

 
553

 
13,141

Total loans, excluding
  covered loans
47,406

 
6,359,861

 
20,937

 
6,428,204

 
3,599

 
60,290

 
568

 
64,457

Covered loans

 
26,860

 
64,015

 
90,875

 

 
578

 
8,071

 
8,649

Reserve for unfunded
  commitments

 

 

 

 

 
1,616

 

 
1,616

Total loans
$
47,406

 
$
6,386,721

 
$
84,952

 
$
6,519,079

 
$
3,599

 
$
62,484

 
$
8,639

 
$
74,722

December 31, 2013
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial, industrial, and
  agricultural
$
13,178

 
$
2,137,440

 
$
1,722

 
$
2,152,340

 
$
4,046

 
$
26,335

 
$

 
$
30,381

Commercial real estate:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Office, retail, and industrial
26,348

 
1,327,337

 

 
1,353,685

 
214

 
10,191

 

 
10,405

Multi-family
1,296

 
331,445

 
132

 
332,873

 
18

 
1,999

 

 
2,017

Construction
5,712

 
180,485

 

 
186,197

 
178

 
6,138

 

 
6,316

Other commercial real estate
9,298

 
793,703

 
4,070

 
807,071

 
704

 
10,113

 

 
10,817

Total commercial
  real estate
42,654

 
2,632,970

 
4,202

 
2,679,826

 
1,114

 
28,441

 

 
29,555

Total corporate loans
55,832

 
4,770,410

 
5,924

 
4,832,166

 
5,160

 
54,776

 

 
59,936

Consumer

 
738,155

 
9,684

 
747,839

 

 
13,010

 

 
13,010

Total loans, excluding
  covered loans
55,832

 
5,508,565

 
15,608

 
5,580,005

 
5,160

 
67,786

 

 
72,946

Covered loans

 
30,830

 
103,525

 
134,355

 

 
702

 
11,857

 
12,559

Reserve for unfunded
  commitments

 

 

 

 

 
1,616

 

 
1,616

Total loans
$
55,832

 
$
5,539,395

 
$
119,133

 
$
5,714,360

 
$
5,160

 
$
70,104

 
$
11,857

 
$
87,121



24




Loans Individually Evaluated for Impairment

The following table presents loans individually evaluated for impairment by class of loan as of September 30, 2014 and December 31, 2013. PCI loans are excluded from this disclosure.

Impaired Loans Individually Evaluated by Class
(Dollar amounts in thousands)
 
September 30, 2014
 
 
December 31, 2013
 
Recorded Investment In
 
 
 
 
Recorded Investment In
 
 
 
Loans with
No Specific
Reserve
 
Loans with
a Specific
Reserve
 
Unpaid
Principal
Balance
 
Specific
Reserve
 
 
Loans with
No Specific
Reserve
 
Loans with
a Specific
Reserve
 
Unpaid
Principal
Balance
 
Specific
Reserve
Commercial and industrial
$
2,524

 
$
16,023

 
$
40,067

 
$
2,968

 
 
$
10,047

 
$
3,131

 
$
25,887

 
$
4,046

Agricultural

 

 

 

 
 

 

 

 

Commercial real estate:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Office, retail, and industrial
16,140

 

 
25,614

 

 
 
23,872

 
2,476

 
35,868

 
214

Multi-family
1,141

 

 
1,268

 

 
 
1,098

 
198

 
1,621

 
18

Construction
6,859

 

 
8,412

 

 
 
4,586

 
1,126

 
10,037

 
178

Other commercial real estate
4,719

 

 
6,979

 

 
 
7,553

 
1,745

 
11,335

 
704

Total commercial real
  estate
28,859

 

 
42,273

 

 
 
37,109

 
5,545

 
58,861

 
1,114

Total impaired loans
   individually evaluated
   for impairment
$
31,383

 
$
16,023

 
$
82,340

 
$
2,968

 
 
$
47,156

 
$
8,676

 
$
84,748

 
$
5,160



25




The following table presents the average recorded investment and interest income recognized on impaired loans by class for the quarters and nine months ended September 30, 2014 and 2013. PCI loans are excluded from this disclosure.

Average Recorded Investment and Interest Income Recognized on Impaired Loans by Class
(Dollar amounts in thousands)
 
Quarters Ended September 30,
 
2014
 
2013
 
Average
Recorded
Investment
 
Interest
Income
Recognized (1)
 
Average
Recorded
Investment
 
Interest
Income
Recognized (1)
Commercial and industrial
$
20,137

 
$
57

 
$
20,665

 
$
195

Agricultural

 

 

 

Commercial real estate:
 
 
 
 
 
 
 

Office, retail, and industrial
15,873

 
3

 
25,747

 
5

Multi-family
1,155

 

 
1,337

 

Construction
5,792

 

 
6,511

 

Other commercial real estate
5,234

 
22

 
12,511

 
16

Total commercial real estate
28,054

 
25

 
46,106

 
21

Total impaired loans
$
48,191

 
$
82

 
$
66,771

 
$
216

 
 
 
 
 
 
 
 
 
Nine Months Ended September 30,
 
2014
 
2013
 
Average
Recorded
Investment
 
Interest
Income
Recognized
(1)
 
Average
Recorded
Investment
 
Interest
Income
Recognized
(1)
Commercial and industrial
$
15,222

 
$
204

 
$
22,862

 
$
198

Agricultural

 

 

 

Commercial real estate:
 
 
 
 
 
 
 
Office, retail, and industrial
20,671

 
150

 
24,415

 
15

Multi-family
1,321

 

 
1,071

 

Construction
5,537

 

 
5,987

 

Other commercial real estate
6,701

 
137

 
14,102

 
24

Total commercial real estate
34,230

 
287

 
45,575

 
39

Total impaired loans
$
49,452

 
$
491

 
$
68,437

 
$
237


(1) 
Recorded using the cash basis of accounting.


26




Credit Quality Indicators
Corporate loans and commitments are assessed for credit risk and assigned ratings based on various characteristics, such as the borrower's cash flow, leverage, and collateral. Ratings for commercial credits are reviewed periodically. The following tables present credit quality indicators by class for corporate and consumer loans, excluding covered loans, as of September 30, 2014 and December 31, 2013.
Corporate Credit Quality Indicators by Class, Excluding Covered Loans
(Dollar amounts in thousands)
 
Pass
 
Special
Mention (1) (4)
 
Substandard (2) (4)
 
Non-accrual (3)
 
Total
 
 
 
 
 
 
 
 
 
 
September 30, 2014
 
 
 
 
 
 
 
 
 
Commercial and industrial
$
2,094,453

 
$
66,429

 
$
27,588

 
$
19,696

 
$
2,208,166

Agricultural
346,851

 
299

 

 
361

 
347,511

Commercial real estate:
 
 
 
 
 
 
 
 
 
Office, retail, and industrial
1,343,833

 
28,586

 
33,140

 
16,963

 
1,422,522

Multi-family
545,419

 
5,916

 
6,818

 
1,536

 
559,689

Construction
162,527

 
7,229

 
16,607

 
7,082

 
193,445

Other commercial real estate
816,679

 
22,824

 
24,410

 
7,912

 
871,825

Total commercial real estate
2,868,458

 
64,555

 
80,975

 
33,493

 
3,047,481

Total corporate loans
$
5,309,762

 
$
131,283

 
$
108,563

 
$
53,550

 
$
5,603,158

December 31, 2013
 
 
 
 
 
 
 
 
 
Commercial and industrial
$
1,780,194

 
$
23,806

 
$
14,871

 
$
11,767

 
$
1,830,638

Agricultural
320,839

 
344

 

 
519

 
321,702

Commercial real estate:
 
 
 
 
 
 
 
 
 
Office, retail, and industrial
1,284,394

 
28,677

 
23,538

 
17,076

 
1,353,685

Multi-family
326,901

 
3,214

 
910

 
1,848

 
332,873

Construction
153,949

 
8,309

 
17,642

 
6,297

 
186,197

Other commercial real estate
761,465

 
14,877

 
22,576

 
8,153

 
807,071

Total commercial real estate
2,526,709

 
55,077

 
64,666

 
33,374

 
2,679,826

Total corporate loans
$
4,627,742

 
$
79,227

 
$
79,537

 
$
45,660

 
$
4,832,166


(1) 
Loans categorized as special mention exhibit potential weaknesses that require the close attention of management since these potential weaknesses may result in the deterioration of repayment prospects in the future.
(2) 
Loans categorized as substandard exhibit a well-defined weakness or weaknesses that may jeopardize the liquidation of the debt. These loans continue to accrue interest because they are well secured and collection of principal and interest is expected within a reasonable time.
(3) 
Loans categorized as non-accrual exhibit a well-defined weakness or weaknesses that may jeopardize the liquidation of the debt or result in a loss if the deficiencies are not corrected.
(4) 
Total special mention and substandard loans includes accruing TDRs of $3.5 million as of September 30, 2014 and $2.8 million as of December 31, 2013.



27




Consumer Credit Quality Indicators by Class, Excluding Covered Loans
(Dollar amounts in thousands)
 
Performing
 
Non-accrual
 
Total
September 30, 2014
 
 
 
 
 
Home equity
$
511,612

 
$
5,834

 
$
517,446

1-4 family mortgages
234,937

 
3,235

 
238,172

Installment
67,519

 
1,909

 
69,428

Total consumer loans
$
814,068

 
$
10,978

 
$
825,046

December 31, 2013
 
 
 
 
 
Home equity
$
420,156

 
$
6,864

 
$
427,020

1-4 family mortgages
270,794

 
5,198

 
275,992

Installment
42,751

 
2,076

 
44,827

Total consumer loans
$
733,701

 
$
14,138

 
$
747,839


TDRs

TDRs are generally performed at the request of the individual borrower and may include forgiveness of principal, reduction in interest rates, changes in payments, and maturity date extensions. The table below presents TDRs by class as of September 30, 2014 and December 31, 2013. A discussion of our accounting policies for TDRs can be found in Note 1, “Summary of Significant Accounting Policies.”

TDRs by Class
(Dollar amounts in thousands)
 
As of September 30, 2014
 
As of December 31, 2013
 
Accruing
 
Non-accrual (1)
 
Total
 
Accruing
 
Non-accrual (1)
 
Total
Commercial and industrial
$
2,163

 
$
15,806

 
$
17,969

 
$
6,538

 
$
2,121

 
$
8,659

Agricultural

 

 

 

 

 

Commercial real estate:
 
 
 
 
 
 
 
 
 
 
 
Office, retail, and industrial
592

 

 
592

 
10,271

 

 
10,271

Multi-family
616

 
237

 
853

 
1,038

 
253

 
1,291

Construction

 

 

 

 

 

Other commercial real estate
441

 
186

 
627

 
4,326

 
291

 
4,617

Total commercial real estate
1,649

 
423

 
2,072

 
15,635

 
544

 
16,179

Total corporate loans
3,812

 
16,229

 
20,041

 
22,173

 
2,665

 
24,838

Home equity
752

 
513

 
1,265

 
787

 
512

 
1,299

1-4 family mortgages
885

 
235

 
1,120

 
810

 
906

 
1,716

Installment

 

 

 

 

 

Total consumer loans
1,637

 
748

 
2,385

 
1,597

 
1,418

 
3,015

Total loans
$
5,449

 
$
16,977

 
$
22,426

 
$
23,770

 
$
4,083

 
$
27,853


(1) 
These TDRs are included in non-accrual loans in the preceding tables.

TDRs are included in the calculation of the allowance for credit losses in the same manner as impaired loans. There were $2.6 million in specific reserves related to TDRs as of September 30, 2014 and there were $2.0 million in specific reserves related to TDRs as of December 31, 2013.


28




The following table presents a summary of loans that were restructured during the quarters and nine months ended September 30, 2014 and 2013.

Loans Restructured During the Period
(Dollar amounts in thousands)
 
Number
of
Loans
 
Pre-
Modification
Recorded
Investment
 
Funds
Disbursed
 
Interest
and Escrow
Capitalized
 
Charge-offs
 
Post-
Modification
Recorded
Investment
Quarter ended September 30, 2014
 
 
 
 
 
 
 
 
 
 
Commercial and industrial
5

 
$
23,015

 
$

 
$

 
$

 
$
23,015

Office, retail, and industrial
1

 
417

 

 

 

 
417

Total TDRs restructured during the period
6

 
$
23,432

 
$

 
$

 
$

 
$
23,432

Quarter ended September 30, 2013
 
 
 
 
 
 
 
 
 
 
Commercial and industrial
3

 
$
369

 
$

 
$

 
$

 
$
369

Office, retail, and industrial
2

 
1,674

 

 

 

 
1,674

Other commercial real estate
1

 
10

 

 

 

 
10

Home equity
8

 
822

 

 

 

 
822

Total TDRs restructured during the period
14

 
$
2,875

 
$

 
$

 
$

 
$
2,875

Nine months ended September 30, 2014
 
 
 
 
 
 
 
 
 
 
Commercial and industrial
5

 
$
23,015

 
$

 
$

 
$

 
$
23,015

Office, retail, and industrial
1

 
417

 

 

 

 
417

Home equity
1

 
75

 

 

 

 
75

Total TDRs restructured during the period
7

 
$
23,507

 
$

 
$

 
$

 
$
23,507

Nine months ended September 30, 2013
 
 
 
 
 
 
 
 
 
 
Commercial and industrial
7

 
$
14,439

 
$

 
$
2

 
$

 
$
14,441

Office, retail, and industrial
6

 
2,275

 
30

 

 

 
2,305

Multi-family
5

 
1,275

 

 
57

 

 
1,332

Construction
2

 
508

 

 

 

 
508

Other commercial real estate
5

 
526

 

 

 

 
526

Home equity
9

 
947

 

 

 

 
947

1-4 family mortgages
1

 
132

 

 
4

 

 
136

Total TDRs restructured during the period
35

 
$
20,102

 
$
30

 
$
63

 
$

 
$
20,195



29




Accruing TDRs that do not perform in accordance with their modified terms are transferred to non-accrual. The following table presents TDRs that had payment defaults during the quarters and nine months ended September 30, 2014 and 2013 where the default occurred within twelve months of the restructure date.

TDRs That Defaulted Within Twelve Months of the Restructure Date
(Dollar amounts in thousands)
 
Quarters Ended September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
 
Number
of
Loans
 
Recorded
Investment
 
Number
of
Loans
 
Recorded
Investment
 
Number
of
Loans
 
Recorded
Investment
 
Number
of
Loans
 
Recorded
Investment
Commercial and industrial

 
$

 

 
$

 
2

 
$
125

 
1

 
$
350

Other commercial real estate

 

 

 

 

 

 
3

 
354

Home equity
1

 
77

 

 

 
1

 
77

 

 

Total
1

 
$
77

 

 
$

 
3

 
$
202

 
4

 
$
704


A rollforward of the carrying value of TDRs for the quarters and nine months ended September 30, 2014 and 2013 is presented in the following table.

TDR Rollforward
(Dollar amounts in thousands)
 
Quarters Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2014
 
2013
 
2014
 
2013
Accruing
 
 
 
 
 
 
 
Beginning balance
$
5,697

 
$
8,287

 
$
23,770

 
$
6,867

Additions
417

 
1,128

 
492

 
4,606

Net payments received
(109
)
 
(248
)
 
(1,219
)
 
(415
)
Returned to performing status

 

 
(18,821
)
 
(5,037
)
Net transfers from non-accrual
(556
)
 
15,162

 
1,227

 
18,308

Ending balance
5,449

 
24,329

 
5,449

 
24,329

Non-accrual
 
 
 
 
 
 
 
Beginning balance
1,700

 
18,450

 
4,083

 
10,924

Additions
23,015

 
1,747

 
23,015

 
15,589

Net payments received
(135
)
 
(201
)
 
(292
)
 
(735
)
Charge-offs
(8,159
)
 
(62
)
 
(8,345
)
 
(1,850
)
Transfers to OREO

 
(35
)
 
(257
)
 
(77
)
Loans sold

 

 

 
(806
)
Net transfers to accruing
556

 
(15,162
)
 
(1,227
)
 
(18,308
)
Ending balance
16,977

 
4,737

 
16,977

 
4,737

Total TDRs
$
22,426

 
$
29,066

 
$
22,426

 
$
29,066


For TDRs to be removed from TDR status in the calendar year after the restructuring, the loans must (i) have an interest rate and terms that reflect market conditions at the time of restructuring, and (ii) be in compliance with the modified terms. TDRs that were returned to performing status totaled $18.8 million and $5.0 million for the nine months ended September 30, 2014 and 2013, respectively. Loans that were not restructured at market rates and terms, that are not in compliance with the modified terms, or for which there is a concern about the future ability of the borrower to meet its obligations under the modified terms, continue to be separately reported as restructured until paid in full or charged-off.

There were no material commitments to lend additional funds to borrowers with TDRs as of September 30, 2014 and December 31, 2013.


30




8. EARNINGS PER COMMON SHARE

The table below displays the calculation of basic and diluted earnings per share.

Basic and Diluted Earnings per Common Share
(Amounts in thousands, except per share data)
 
Quarters Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2014
 
2013
 
2014
 
2013
Net income
$
18,549

 
$
29,323

 
$
54,713

 
$
60,141

Net income applicable to non-vested restricted shares
(242
)
 
(416
)
 
(697
)
 
(847
)
Net income applicable to common shares
$
18,307

 
$
28,907

 
$
54,016

 
$
59,294

Weighted-average common shares outstanding:
 
 
 
 
 
 
 
Weighted-average common shares outstanding (basic)
74,341

 
74,023

 
74,270

 
73,969

Dilutive effect of common stock equivalents
11

 
11

 
12

 
9

Weighted-average diluted common shares outstanding
74,352

 
74,034

 
74,282

 
73,978

Basic earnings per common share
$
0.25

 
$
0.39

 
$
0.73

 
$
0.80

Diluted earnings per common share
$
0.25

 
$
0.39

 
$
0.73

 
$
0.80

Anti-dilutive shares not included in the computation of diluted earnings per common share (1)
1,155

 
1,412

 
1,215

 
1,483


(1) 
This amount represents outstanding stock options for which the exercise price is greater than the average market price of the Company's common stock.


31




9.  INCOME TAXES

The following table presents income tax expense and the effective income tax rate for the quarters and nine months ended September 30, 2014 and 2013.

Income Tax Expense
(Dollar amounts in thousands)
 
Quarters Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2014
 
2013
 
2014
 
2013
Income before income tax expense
$
27,098

 
$
54,282

 
$
80,076

 
$
99,348

Income tax expense:
 
 
 
 
 
 
 
Federal income tax expense
$
6,714

 
$
19,145

 
$
19,719

 
$
29,058

State income tax expense
1,835

 
5,814

 
5,644

 
10,149

Total income tax expense
$
8,549

 
$
24,959

 
$
25,363

 
$
39,207

Effective income tax rate
31.5
%
 
46.0
%
 
31.7
%
 
39.5
%

Federal income tax expense and the effective income tax rate are influenced by the amount of tax-exempt income derived from investment securities and BOLI in relation to pre-tax income and state income taxes. State income tax expense and the related effective tax rate are driven by the amount of state tax-exempt income in relation to pre-tax income and state tax rules for consolidated/combined reporting and sourcing of income and expense.

Effective tax rates were elevated for the quarter and nine months ended September 30, 2013 due to a $34.0 million gain recognized on the sale of an equity investment and a $7.8 million gain on the termination of two FHLB forward commitments, which were taxed at statutory rates, and a $13.3 million non-deductible BOLI modification loss. Excluding these transactions, the effective tax rate for the quarter and nine months ended September 30, 2013 would have been 30.5% and 31.2%, respectively. In addition, an increase in income exempt from state taxes contributed to the decrease in the effective income tax rate compared to both prior periods.

The Company's accounting policies for the recognition of income taxes in the Consolidated Statements of Financial Condition and Income are included in Notes 1 and 14 to the Consolidated Financial Statements of the Company's 2013 10-K.


32




10.  DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
In the ordinary course of business, the Company enters into derivative transactions as part of its overall interest rate risk management strategy. The significant accounting policies related to derivative instruments and hedging activities are presented in Note 1, "Summary of Significant Accounting Policies."
Fair Value Hedges

The Company hedges the fair value of fixed rate commercial real estate loans using interest rate swaps through which the Company pays fixed amounts and receives variable amounts. These derivative contracts are designated as fair value hedges.

Fair Value Hedges
(Dollar amounts in thousands)
 
September 30,
2014
 
December 31,
2013
Gross notional amount outstanding
$
13,854

 
$
14,730

Derivative liability fair value
(1,103
)
 
(1,472
)
Weighted-average interest rate received
2.07
%
 
2.08
%
Weighted-average interest rate paid
6.38
%
 
6.39
%
Weighted-average maturity (in years)
3.02

 
3.76

Fair value of assets needed to settle derivative transactions (1)
$
1,130

 
$
1,502


(1) 
This amount represents the fair value if credit risk related contingent features were triggered.

Hedge ineffectiveness is recognized in other noninterest income in the Condensed Consolidated Statements of Income. For the quarters and nine months ended September 30, 2014 and 2013, fair value hedge ineffectiveness was not material.

Cash Flow Hedges

During the nine months ended September 30, 2014, the Company hedged $325.0 million of certain corporate variable rate loans using interest rate swaps through which the Company receives fixed amounts and pays variable amounts. The Company also hedged $325.0 million of borrowed funds using four forward starting interest rate swaps through which the Company receives variable amounts and pays fixed amounts. The four forward starting interest rate swaps begin in 2015 and 2016 and mature in 2019. These derivative contracts are designated as cash flow hedges.

Cash Flow Hedges
(Dollar amounts in thousands)
 
September 30,
2014
 
December 31,
2013
Gross notional amount outstanding
$
650,000

 
$

Derivative asset fair value
1,156

 

Derivative liability fair value
(1,983
)
 

Weighted-average interest rate received
1.63
%
 

Weighted-average interest rate paid
0.16
%
 

Weighted-average maturity (in years)
4.77

 


The effective portion of gains or losses on cash flow hedges is recorded in accumulated other comprehensive income on an after-tax basis and is subsequently reclassified to interest income or expense in the period that the forecasted hedge impacts earnings. Hedge ineffectiveness is determined using a regression analysis at the inception of the hedge relationship and on an ongoing basis. For the quarter ended September 30, 2014, there were no gains or losses related to cash flow hedge ineffectiveness. As of September 30, 2014, the Company estimates that $4.0 million will be reclassified from accumulated other comprehensive income as an increase to interest income over the next twelve months.

33





Other Derivative Instruments

The Company also enters into derivative transactions with its commercial customers and simultaneously enters into an offsetting interest rate derivative transaction with a third party. This transaction allows the Company’s customers to effectively convert a variable rate loan into a fixed rate loan. Due to the offsetting nature of these transactions, the Company does not apply hedge accounting treatment. Transaction fees related to commercial customer derivative instruments of $874,000 and $1.3 million were recorded in noninterest income for the quarter and nine months ended September 30, 2014, respectively. There were $1.4 million and $2.0 million in transaction fees recorded for the quarter and nine months ended September 30, 2013, respectfully.

Other Derivative Instruments
(Dollar amounts in thousands)
 
September 30,
2014
 
December 31,
2013
Gross notional amount outstanding
$
432,977

 
$
256,638

Derivative asset fair value
4,916

 
2,235

Derivative liability fair value
(4,916
)
 
(2,235
)
Fair value of assets needed to settle derivative transactions (1)
4,899

 
1,305


(1) 
This amount represents the fair value if credit risk related contingent features were triggered.

The Company’s derivative portfolio also includes other derivative instruments that do not receive hedge accounting treatment, such as commitments to originate 1-4 family mortgage loans and foreign exchange contracts. In addition, the Company occasionally enters into risk participation agreements with counterparty banks to transfer or assume a portion of the credit risk related to customer transactions. The amounts of these instruments were not material for any periods presented. The Company had no other derivative instruments as of September 30, 2014 or December 31, 2013. The Company does not enter into derivative transactions for purely speculative purposes.

Credit Risk

Derivative instruments are inherently subject to credit risk, which represents the Company’s risk of loss when the counterparty to a derivative contract fails to perform according to the terms of the agreement. Credit risk is managed by limiting and collateralizing the aggregate amount of net unrealized losses by transaction, monitoring the size and the maturity structure of the derivatives, and applying uniform credit standards. Company policy establishes limits on credit exposure to any single counterparty. In addition, the Company established bilateral collateral agreements with derivative counterparties that provide for exchanges of marketable securities or cash to collateralize either party’s net losses above a stated minimum threshold.


34




Certain derivative instruments are subject to master netting agreements with counterparties. The Company records these transactions at their gross fair values and does not offset derivative assets and liabilities in the Consolidated Statements of Financial Condition. The following table presents the Company's derivatives and offsetting positions as of September 30, 2014 and December 31, 2013.

Offsetting Derivatives
(Dollar amounts in thousands)
 
Derivative Assets
 
Derivative Liabilities
 
Fair Value
 
Fair Value
 
September 30,
2014
 
December 31,
2013
 
September 30,
2014
 
December 31,
2013
Gross amounts recognized
$
6,072

 
$
2,235

 
$
8,002

 
$
3,707

Less: amounts offset in the Consolidated Statements of
  Financial Condition

 

 

 

Net amount presented in the Consolidated Statements of
  Financial Condition (1)
6,072

 
2,235

 
8,002

 
3,707

Gross amounts not offset in the Consolidated Statements of Financial Condition
 
 
 
 
Offsetting derivative positions
(1,156
)
 
(704
)
 
(1,156
)
 
(704
)
Cash collateral pledged (2)

 

 
(6,846
)
 
(3,003
)
Net credit exposure
$
4,916

 
$
1,531

 
$

 
$


(1) 
Included in other assets or other liabilities in the Consolidated Statements of Financial Condition.
(2) 
The Company pledged cash collateral of $5.8 million and $3.0 million as of September 30, 2014 and December 31, 2013, respectively, which resulted in a shortage of collateral with counterparties as of September 30, 2014. For purposes of this disclosure, the amount of cash collateral is increased, given excess derivative assets, to fully offset the derivative liability.

As of September 30, 2014 and December 31, 2013, the Company’s derivative instruments generally contained provisions that require the Company’s debt to remain above a certain credit rating by each of the major credit rating agencies or that the Company maintain certain capital levels. If the Company’s debt were to fall below the required credit ratings or the Company's capital were to fall below the required levels, it would be in violation of those provisions, and the counterparties to the derivative instruments could terminate the swap transaction and demand cash settlement of the derivative instrument in an amount equal to the derivative liability fair value. As of September 30, 2014 and December 31, 2013, the Company was not in violation of these provisions.


35




11.  COMMITMENTS, GUARANTEES, AND CONTINGENT LIABILITIES

Credit Commitments and Guarantees
In the normal course of business, the Company enters into a variety of financial instruments with off-balance sheet risk to meet the financing needs of its customers and to conduct lending activities, including commitments to extend credit and standby and commercial letters of credit. These instruments involve elements of credit and interest rate risk in excess of the amount recognized in the Consolidated Statements of Financial Condition.
Contractual or Notional Amounts of Financial Instruments
(Dollar amounts in thousands)
 
September 30,
2014
 
December 31,
2013
Commitments to extend credit:
 
 
 
Commercial, industrial, and agricultural
$
1,202,700

 
$
1,077,201

Commercial real estate
172,012

 
133,867

Home equity
293,122

 
268,311

Other commitments (1)
187,385

 
181,702

Total commitments to extend credit
$
1,855,219

 
$
1,661,081

 
 
 
 
Standby letters of credit
$
125,569

 
$
110,453

Recourse on assets sold:
 
 
 
Unpaid principal balance of loans sold
$
182,834

 
$
170,330

Carrying value of recourse obligation (2)
158

 
162


(1) 
Other commitments includes installment and overdraft protection program commitments.
(2) 
Included in other liabilities in the Consolidated Statements of Financial Condition.
Commitments to extend credit are agreements to lend funds to a customer, subject to contractual terms and covenants. Commitments generally have fixed expiration dates or other termination clauses, variable interest rates, and fee requirements, when applicable. Since many of the commitments are expected to expire without being drawn, the total commitment amounts do not necessarily represent future cash flow requirements.
In the event of a customer's non-performance, the Company's credit loss exposure is equal to the contractual amount of the commitments. The credit risk is essentially the same as extending loans to customers. The Company uses the same credit policies for credit commitments as its loans and minimizes exposure to credit loss through various collateral requirements.
Letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Standby letters of credit generally are contingent on the failure of the customer to perform according to the terms of the contract with the third party and are often issued in favor of a municipality where construction is taking place to ensure the borrower adequately completes the construction.
The maximum potential future payments guaranteed by the Company under standby letters of credit arrangements are equal to the contractual amount of the commitment. If a commitment is funded, the Company may seek recourse through the liquidation of the underlying collateral, including real estate, production plants and property, marketable securities, or receipt of cash.

As a result of the sale of certain 1-4 family mortgage loans, the Company is contractually obligated to repurchase any non-performing loans or loans that do not meet underwriting requirements at recorded value. In accordance with the sales agreements, there is no limitation to the maximum potential future payments or expiration of the Company's recourse obligation. There were no material loan repurchases during the quarters ended September 30, 2014 and 2013.

Legal Proceedings

In the ordinary course of business, there were certain legal proceedings pending against the Company and its subsidiaries at September 30, 2014. While the outcome of any legal proceeding is inherently uncertain, based on information currently available, the Company's management does not expect that any liabilities arising from pending legal matters will have a material adverse effect on the Company's financial position, results of operations, or cash flows.


36




12.  FAIR VALUE
Fair value represents the amount expected to be received to sell an asset or paid to transfer a liability in its principal or most advantageous market in an orderly transaction between market participants at the measurement date. In accordance with fair value accounting guidance, the Company measures, records, and reports various types of assets and liabilities at fair value on either a recurring or non-recurring basis in the Consolidated Statements of Financial Condition. Those assets and liabilities are presented below in the sections titled "Assets and Liabilities Required to be Measured at Fair Value on a Recurring Basis" and "Assets and Liabilities Required to be Measured at Fair Value on a Non-Recurring Basis."
Other assets and liabilities are not required to be measured at fair value in the Consolidated Statements of Financial Condition, but must be disclosed at fair value. Refer to the "Fair Value Measurements of Other Financial Instruments" section of this footnote. Any aggregation of the estimated fair values presented in this footnote does not represent the value of the Company.
Depending on the nature of the asset or liability, the Company uses various valuation methodologies and assumptions to estimate fair value. GAAP provides a three-tiered fair value hierarchy based on the inputs used to measure fair value. The hierarchy is defined as follows:
Level 1 - Quoted prices in active markets for identical assets or liabilities.
Level 2 - Observable inputs other than level 1 prices, such as quoted prices for similar instruments, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data.
Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. These inputs require significant management judgment or estimation, some of which use model-based techniques and may be internally developed.
Assets and liabilities are assigned to a level within the fair value hierarchy based on the lowest level of significant input used to measure fair value. Assets and liabilities may change levels within the fair value hierarchy due to market conditions or other circumstances. Those transfers are recognized on the date of the event that prompted the transfer. There were no transfers of assets or liabilities between levels of the fair value hierarchy during the periods presented.

37




Assets and Liabilities Required to be Measured at Fair Value on a Recurring Basis

The following table provides the fair value for assets and liabilities required to be measured at fair value on a recurring basis in the Consolidated Statements of Financial Condition by level in the fair value hierarchy.

Recurring Fair Value Measurements
(Dollar amounts in thousands)
 
September 30, 2014
 
December 31, 2013
 
Level 1
 
Level 2
 
Level 3
 
Level 1
 
Level 2
 
Level 3
Assets:
 
 
 
 
 
 
 
 
 
 
 
Trading securities:
 
 
 
 
 
 
 
 
 
 
 
Money market funds
$
1,383

 
$

 
$

 
$
1,847

 
$

 
$

Mutual funds
16,545

 

 

 
15,470

 

 

Total trading securities
17,928

 

 

 
17,317

 

 

Securities available-for-sale:
 
 
 
 
 
 
 
 
 
 
 
U.S. Agency securities

 
500

 

 

 
500

 

CMOs

 
416,547

 

 

 
475,768

 

Other MBSs

 
120,489

 

 

 
136,164

 

Municipal securities

 
435,072

 

 

 
461,393

 

CDOs

 

 
18,369

 

 

 
18,309

Corporate debt securities

 
3,846

 

 

 
14,929

 

Equity securities
44

 
2,553

 

 
44

 
5,618

 

Total securities
  available-for-sale
44

 
979,007

 
18,369

 
44

 
1,094,372

 
18,309

Mortgage servicing rights (1)

 

 
1,942

 

 

 
1,893

Derivative assets (1)

 
6,072

 

 

 
2,235

 

Liabilities:
 
 
 
 
 
 
 
 
 
 
 
Derivative liabilities (2)
$

 
$
8,002

 
$

 
$

 
$
3,707

 
$


(1) 
Included in other assets in the Consolidated Statements of Financial Condition.
(2) 
Included in other liabilities in the Consolidated Statements of Financial Condition.

The following sections describe the specific valuation techniques and inputs used to measure financial assets and liabilities at fair value.

Trading Securities
The Company's trading securities consist of diversified investment securities held in a grantor trust and are invested in money market and mutual funds. The fair value of these money market and mutual funds is based on quoted market prices in active exchange markets and is classified in level 1 of the fair value hierarchy.
Securities Available-for-Sale

The Company’s available-for-sale securities are primarily fixed income instruments that are not quoted on an exchange, but may be traded in active markets. The fair values are based on quoted prices in active markets or market prices for similar securities obtained from external pricing services or dealer market participants and are classified in level 2 of the fair value hierarchy. Quarterly, the Company evaluates the methodologies used by its external pricing services to develop the fair values to determine whether the results of the valuations are representative of an exit price in the Company’s principal markets and an appropriate representation of fair value.

CDOs are classified in level 3 of the fair value hierarchy. The Company estimates the fair values for each CDO using discounted cash flow analyses with the assistance of a structured credit valuation firm. This methodology relies on credit analysis and review of historical financial data for each of the issuers of the securities underlying the individual CDO (the “Issuers”) to estimate the expected future cash flows. These estimates are highly subjective and sensitive to several significant, unobservable inputs, including prepayment assumptions, default probabilities, loss given default assumptions, and deferral cure probabilities. The expected future

38




cash flows for each Issuer are then discounted to present values using LIBOR plus an adjustment to reflect the higher risk inherent in these securities given their complex structures and the impact of market factors. Finally, the discounted expected future cash flows for each Issuer are aggregated to derive the estimated fair value for the specific CDO. Information for each CDO, as well as the significant unobservable assumptions, is presented in the following table.

Characteristics of CDOs and Significant Unobservable Inputs
Used in the Valuation of CDOs as of September 30, 2014
(Dollar amounts in thousands)
 
CDO Number
 
1
 
2
 
3
 
4
 
5
Characteristics:
 
 
 
 
 
 
 
 
 
Class
C-1

 
C-1

 
C-1

 
B1

 
C

Original par
$
17,500

 
$
15,000

 
$
15,000

 
$
15,000

 
$
6,500

Amortized cost
7,140

 
5,598

 
12,377

 
13,727

 
6,179

Fair value
4,837

 
704

 
4,872

 
5,428

 
2,528

Lowest credit rating (Moody’s)
 Ca

 
 Ca

 
 Ca

 
 Ca

 
 Ca

Number of underlying Issuers
43

 
54

 
57

 
56

 
74

Percent of Issuers currently
  performing
83.7
%
 
81.5
%
 
77.2
%
 
62.5
%
 
73.0
%
Current deferral and default percent (1)
8.7
%
 
10.3
%
 
11.0
%
 
24.4
%
 
22.5
%
Expected future deferral and
  default percent (2)
12.2
%
 
10.8
%
 
13.5
%
 
19.0
%
 
9.6
%
Excess subordination percent (3)
%
 
%
 
%
 
10.3
%
 
10.1
%
Discount rate risk adjustment (4)
12.5
%
 
14.3
%
 
13.3
%
 
11.8
%
 
12.3
%
Significant unobservable inputs, weighted average of Issuers:
 
 
 
 
 
 
Probability of prepayment
15.2
%
 
7.6
%
 
4.5
%
 
4.5
%
 
3.5
%
Probability of default
18.5
%
 
22.2
%
 
19.8
%
 
26.0
%
 
28.8
%
Loss given default
88.2
%
 
83.2
%
 
89.4
%
 
93.2
%
 
96.3
%
Probability of deferral cure
23.2
%
 
12.4
%
 
36.3
%
 
38.8
%
 
27.6
%

(1) 
Represents actual deferrals and defaults, net of recoveries, as a percent of the original collateral.
(2) 
Represents expected future deferrals and defaults, net of recoveries, as a percent of the remaining performing collateral. The probability of future defaults is derived for each Issuer based on a credit analysis. The associated assumed loss given default is based on historical default and recovery information provided by a nationally recognized credit rating agency and is assumed to be 90% for banks, 85% for insurance companies, and 100% for Issuers that have already defaulted.
(3) 
Represents additional defaults that the CDO can absorb before the security experiences any credit impairment. The excess subordination percentage is calculated by dividing the amount of potential additional loss that can be absorbed (before the receipt of all expected future principal and interest payments is affected) by the total balance of performing collateral.
(4) 
Cash flows are discounted at LIBOR plus this adjustment to reflect the higher risk inherent in these securities.

Most Issuers have the right to prepay the securities on the fifth anniversary of issuance and under other limited circumstances. To estimate prepayments, a credit analysis of each Issuer is performed to estimate its ability and likelihood to fund a prepayment. If a prepayment occurs, the Company receives cash equal to the par value for the portion of the CDO associated with that Issuer.

The likelihood that an Issuer who is currently deferring payment on the securities will pay all deferred amounts and remain current thereafter is based on an analysis of the Issuer’s asset quality, leverage ratios, and other measures of financial viability.
The impact of changes in these key inputs could result in a significantly higher or lower fair value measurement for each CDO. The timing of the default, the magnitude of the default, and the timing and magnitude of the cure probability are directly interrelated. Defaults that occur sooner and/or are greater than anticipated have a negative impact on the valuation. In addition, a high cure probability assumption has a positive effect on the fair value, and, if a cure event takes place sooner than anticipated, the impact on the valuation is also favorable.
Management monitors the valuation results of each CDO on a quarterly basis, which includes an analysis of historical pricing trends for these types of securities, overall economic conditions (such as tracking LIBOR curves), and the performance of the

39




Issuers’ industries. Management also reviews market activity for the same or similar tranches of the CDOs, when available. Annually, management validates significant assumptions by reviewing detailed back-testing performed by the structured credit valuation firm.

A rollforward of the carrying value of CDOs for the quarters and nine months ended September 30, 2014 and 2013 is presented in the following table.

Rollforward of the Carrying Value of CDOs
(Dollar amounts in thousands)
 
Quarters Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2014
 
2013
 
2014
 
2013
Beginning balance
$
18,436

 
$
14,917

 
$
18,309

 
$
12,129

Change in other comprehensive (loss) income (1)
(65
)
 
2,079

 
1,571

 
4,867

Purchases, sales, issuances, settlements, and paydowns (2)
(2
)
 

 
(1,511
)
 

Ending balance
$
18,369

 
$
16,996

 
$
18,369

 
$
16,996

Change in unrealized losses recognized in earnings related to
  securities still held at end of period
$

 
$

 
$

 
$


(1) 
Included in unrealized holding (losses) gains in the Consolidated Statements of Comprehensive Income.
(2) 
For the nine months ended September 30, 2014, one CDO with a carrying value of $1.3 million was sold. In addition, one CDO with a carrying value of zero was sold during the nine months ended September 30, 2013.

Mortgage Servicing Rights

The Company services loans for others totaling $218.9 million as of September 30, 2014 and $214.5 million as of December 31, 2013. These loans are owned by third parties and are not included in the Consolidated Statements of Condition. The Company estimates the fair value of mortgage servicing rights by using a discounted cash flow analysis and classifies them in level 3 of the fair value hierarchy. Additional information regarding the Company’s mortgage servicing rights can be found in Note 21, “Fair Value,” in the Company’s 2013 10-K.

Derivative Assets and Derivative Liabilities
The Company enters into interest rate swaps and derivative transactions with commercial customers. These derivative transactions are executed in the dealer market, and pricing is based on market quotes obtained from the counterparties. The market quotes were developed using market observable inputs, which primarily include LIBOR. Therefore, derivatives are classified in level 2 of the fair value hierarchy. For its derivative assets and liabilities, the Company also considers non-performance risk, including the likelihood of default by itself and its counterparties, when evaluating whether the market quotes from the counterparty are representative of an exit price.

40




Assets and Liabilities Required to be Measured at Fair Value on a Non-Recurring Basis
The following table provides the fair value for each class of assets and liabilities required to be measured at fair value on a non-recurring basis in the Consolidated Statements of Financial Condition by level in the fair value hierarchy.
Non-Recurring Fair Value Measurements
(Dollar amounts in thousands)
 
September 30, 2014
 
December 31, 2013
 
Level 1
 
Level 2
 
Level 3
 
Level 1
 
Level 2
 
Level 3
Collateral-dependent impaired loans (1)
$

 
$

 
$
18,754

 
$

 
$

 
$
13,103

OREO (2)

 

 
17,580

 

 

 
13,347

Loans held-for-sale (3)

 

 
24,504

 

 

 
4,739

Assets held-for-sale (4)

 

 
2,026

 

 

 
4,027


(1) 
Includes impaired loans with charge-offs and impaired loans with a specific reserve during the periods presented.
(2) 
Includes OREO and covered OREO with fair value adjustments subsequent to initial transfer that occurred during the periods presented.
(3) 
Included in other assets in the Consolidated Statements of Financial Condition.
(4) 
Included in premises, furniture, and equipment in the Consolidated Statements of Financial Condition.

Collateral-Dependent Impaired Loans

Certain collateral-dependent impaired loans are subject to fair value adjustments to reflect the difference between the carrying value of the loan and the value of the underlying collateral. The fair values of collateral-dependent impaired loans are primarily determined by current appraised values of the underlying collateral. Based on the age and/or type, appraisals may be adjusted in the range of 0% to 20%. In certain cases, an internal valuation may be used when the underlying collateral is located in areas where comparable sales data is limited or unavailable. Accordingly, collateral-dependent impaired loans are classified in level 3 of the fair value hierarchy.

Collateral-dependent impaired loans for which the fair value is greater than the recorded investment are not measured at fair value in the Consolidated Statements of Financial Condition and are not included in this disclosure.

OREO
The fair value of OREO is measured using the current appraised value of the properties. In certain circumstances, a current appraisal may not be available or may not represent an accurate measurement of the property's fair value due to outdated market information or other factors. In these cases, the fair value is determined based on the lower of the (i) most recent appraised value, (ii) broker price opinion, (iii) current listing price, or (iv) signed sales contract. Given these valuation methods, OREO is classified in level 3 of the fair value hierarchy.
Loans Held-for-Sale
As of September 30, 2014, loans held-for-sale consisted of 1-4 family mortgage loans, which were originated with the intent to sell, and one commercial real estate credit relationship, which was transferred to the held-for-sale category at the contract price. Accordingly, these loans are classified in level 3 of the fair value hierarchy. As of December 31, 2013, loans held-for-sale consists of 1-4 family mortgage loans and one commercial real estate loan.
Assets Held-for-Sale
Assets held-for-sale consist of former branches that are no longer in operation, which were transferred into the held-for-sale category at the lower of their fair value as determined by a current appraisal or their recorded investment. Based on these valuation methods, they are classified in level 3 of the fair value hierarchy.

41




Financial Instruments Not Required to be Measured at Fair Value

For certain financial instruments that are not required to be measured at fair value in the Consolidated Statements of Financial Condition, the Company must disclose the estimated fair values and the level within the fair value hierarchy as shown in the following table.

Fair Value Measurements of Other Financial Instruments
(Dollar amounts in thousands)
 
 
September 30, 2014
 
December 31, 2013
 
Fair Value Hierarchy
Level
 
Carrying
Amount
 
Fair Value
 
Carrying
Amount
 
Fair Value
Assets:
 
 
 
 
 
 
 
 
 
Cash and due from banks
1
 
$
125,977

 
$
125,977

 
$
110,417

 
$
110,417

Interest-bearing deposits in other banks
2
 
550,606

 
550,606

 
476,824

 
476,824

Securities held-to-maturity
2
 
26,776

 
27,766

 
44,322

 
43,387

FHLB and Federal Reserve Bank stock
2
 
35,588

 
35,588

 
35,161

 
35,161

Net loans
3
 
6,445,973

 
6,315,474

 
5,628,855

 
5,544,146

FDIC indemnification asset
3
 
8,699

 
4,659

 
16,585

 
7,829

Investment in BOLI
3
 
195,270

 
195,270

 
193,167

 
193,167

Accrued interest receivable
3
 
27,375

 
27,375

 
25,735

 
25,735

Other interest earning assets
3
 
4,399

 
4,527

 
6,550

 
6,809

Liabilities:
 
 
 
 
 
 
 
 
 
Deposits
2
 
$
7,616,133

 
$
7,610,119

 
$
6,766,101

 
$
6,765,404

Borrowed funds
2
 
132,877

 
132,877

 
224,342

 
226,839

Senior and subordinated debt
1
 
191,028

 
191,769

 
190,932

 
201,147

Accrued interest payable
2
 
5,208

 
5,208

 
2,400

 
2,400


Management uses various methodologies and assumptions to determine the estimated fair values of the financial instruments in the table above. The fair value estimates are made at a discrete point in time based on relevant market information and consider management’s judgments regarding future expected economic conditions, loss experience, and specific risk characteristics of the financial instruments.

Short-Term Financial Assets and Liabilities - For financial instruments with a shorter-term or with no stated maturity, prevailing market rates, and limited credit risk, the carrying amounts approximate fair value. Those financial instruments include cash and due from banks, interest-bearing deposits in other banks, other short-term investments, accrued interest receivable, and accrued interest payable.

Securities Held-to-Maturity - The fair value of securities held-to-maturity is estimated using the present value of expected future cash flows of the remaining maturities of the securities.

FHLB and Federal Reserve Bank Stock - The carrying amounts approximate fair value.

Net Loans - The fair value of loans is estimated using the present value of the expected future cash flows of the remaining maturities of the loans. Prepayment assumptions that consider the Company’s historical experience and current economic and lending conditions were included. The discount rate was based on the LIBOR yield curve with adjustments for liquidity and credit risk. The primary impact of credit risk on the fair value of the loan portfolio was accommodated through the use of the allowance for loan and covered loan losses, which is believed to represent the current fair value of estimated inherent losses in the loan portfolio.

FDIC Indemnification Asset - The fair value of the FDIC indemnification asset is calculated by discounting the expected future cash flows expected to be received from the FDIC. The expected future cash flows are estimated by multiplying anticipated losses on covered loans and covered OREO by the reimbursement rates in the FDIC Agreements.


42




Investment in BOLI - The fair value of the investment in BOLI approximates the carrying amount as both are based on each policy's respective cash surrender value ("CSV"), which is the amount the Company would receive from liquidation of these investments. The CSV is derived from monthly reports provided by the managing brokers and is determined using the Company's initial insurance premium and earnings of the underlying assets, offset by management fees.

Other Interest-Earning Assets - The fair value of other interest-earning assets is estimated using the present value of the expected future cash flows of the remaining maturities of the assets.

Deposits - The fair values disclosed for deposits, savings deposits, NOW accounts, and money market deposits are equal to the amount payable on demand at the reporting date (i.e., their carrying amounts). The fair value for fixed-rate time deposits was estimated using the expected future cash flows discounted based on the LIBOR yield curve, plus or minus the spread associated with current pricing.

Borrowed Funds - The fair value of FHLB advances is estimated by discounting the agreements based on maturities using the rates currently offered for FHLB advances of similar remaining maturities adjusted for prepayment penalties that would be incurred if the borrowings were paid off on the measurement date. The carrying amounts of securities sold under agreements to repurchase approximate their fair value due to their short-term nature.

Senior and Subordinated Debt - The fair value of senior and subordinated debt is determined using quoted market prices.

The Company estimated the fair value of lending commitments outstanding to be immaterial based on the following factors: (i) the limited interest rate exposure of the commitments outstanding due to their variable nature, (ii) the short-term nature of the commitment periods, (iii) termination clauses provided in the agreements, and (iv) the market rate of fees charged.


43




ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

INTRODUCTION

First Midwest Bancorp, Inc. (the “Company”) is a bank holding company headquartered in the Chicago suburb of Itasca, Illinois with operations throughout the greater Chicago metropolitan area as well as northwest Indiana, central and western Illinois, and eastern Iowa. Our principal subsidiary is First Midwest Bank (the “Bank”), which provides a broad range of commercial and retail banking and wealth management services to consumer, commercial and industrial, commercial real estate, and municipal customers through approximately 100 banking offices. We are committed to meeting the financial needs of the people and businesses in the communities where we live and work by providing customized banking solutions, quality products, and innovative services that fulfill those financial needs.

The following discussion and analysis is intended to address the significant factors affecting our results of operations and financial condition for the quarters and nine months ended September 30, 2014 and 2013. When we use the terms “First Midwest,” the “Company,” “we,” “us,” and “our,” we mean First Midwest Bancorp, Inc., a Delaware Corporation, and its consolidated subsidiaries. When we use the term “Bank,” we are referring to our wholly owned banking subsidiary, First Midwest Bank. Management’s discussion and analysis should be read in conjunction with the consolidated financial statements and accompanying notes presented elsewhere in this report, as well as in our 2013 Annual Report on Form 10-K (“2013 10-K”). The results of operations for the quarter and nine months ended September 30, 2014 are not necessarily indicative of future results.

Our results of operations are affected by various factors, many of which are beyond our control, including interest rates, local and national economic conditions, business spending, consumer confidence, certain seasonal factors, legislative and regulatory changes, and changes in real estate and securities markets. Our management evaluates performance using a variety of qualitative and quantitative metrics. The primary quantitative metrics used by management include:

Net Interest Income - Net interest income, our primary source of revenue, equals the difference between interest income and fees earned on interest-earning assets and interest expense incurred on interest-bearing liabilities.
Net Interest Margin - Net interest margin equals net interest income divided by total average interest-earning assets.
Noninterest Income - Noninterest income is the income we earn from fee-based revenues, investment in bank-owned life insurance ("BOLI") and other income, and non-operating revenues.
Asset Quality - Asset quality represents an estimation of the quality of our loan portfolio, including an assessment of the credit risk related to existing and potential loss exposure, and can be evaluated using a number of quantitative measures, such as non-performing loans to total loans.
Regulatory Capital - Our regulatory capital is currently classified in one of the following two tiers: (i) Tier 1 capital consists of common equity, retained earnings, and qualifying trust-preferred securities, less goodwill and most intangible assets and (ii) Tier 2 capital includes qualifying subordinated debt and the allowance for credit losses, subject to limitations.

Unless otherwise stated, all earnings per common share data included in this section and throughout the remainder of this discussion are presented on a diluted basis.

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q may contain certain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. In some cases, forward-looking statements can be identified by the use of words such as “may,” “might,” “will,” “would,” “should,” “could,” “expect,” “plan,” “intend,” “anticipate,” “believe,” “estimate,” “predict,” “probable,” “potential,” “possible,” or “continue” and words of similar import. Forward-looking statements are not historical facts but instead express only management’s beliefs regarding future results or events, many of which, by their nature, are inherently uncertain and outside of management’s control. It is possible that actual results and events may differ, possibly materially, from the anticipated results or events indicated in these forward-looking statements. Forward-looking statements are not guarantees of future performance, and we caution you not to place undue reliance on these statements. Forward-looking statements are made only as of the date of this report, and we undertake no obligation to update any forward-looking statements contained in this report to reflect new information or events or conditions after the date hereof.

Forward-looking statements may be deemed to include, among other things, statements relating to our future financial performance, the performance of our loan or securities portfolio, the expected amount of future credit reserves or charge-offs, corporate strategies or objectives, anticipated trends in our business, regulatory developments, pending acquisition transactions, including estimated synergies, cost savings and financial benefits of pending or consummated transactions, and growth strategies, including possible future acquisitions. These statements are subject to certain risks, uncertainties and assumptions. For a discussion of these risks,

44




uncertainties and assumptions, you should refer to the sections entitled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this report and in our 2013 10-K, as well as our subsequent filings made with the Securities and Exchange Commission ("SEC"). However, these risks and uncertainties are not exhaustive. Other sections of this report describe additional factors that could adversely impact our business and financial performance.

CRITICAL ACCOUNTING POLICIES
Our consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles ("GAAP") and are consistent with predominant practices in the financial services industry. Critical accounting policies are those policies that management believes are the most important to our financial position and results of operations. Application of critical accounting policies requires management to make estimates, assumptions, and judgments based on information available as of the date of the financial statements that affect the amounts reported in the financial statements and accompanying notes. Future changes in information may affect these estimates, assumptions, and judgments, which may affect the amounts reported in the financial statements.
For additional information regarding critical accounting policies, refer to “Summary of Significant Accounting Policies,” presented in Note 1 to the Condensed Consolidated Financial Statements and the section titled “Critical Accounting Policies” in Management’s Discussion and Analysis of Financial Condition and Results of Operations included in the Company’s 2013 10-K. There have been no significant changes in the Company’s application of critical accounting policies related to the allowance for credit losses, valuation of securities, and income taxes since December 31, 2013.

NON-GAAP FINANCIAL INFORMATION

The Company's accounting and reporting policies conform to GAAP and general practice within the banking industry. As a supplement to GAAP, the Company provides non-GAAP performance results, which the Company believes are useful because they assist investors in assessing the Company's operating performance. This includes, but is not limited to, earnings per share, excluding acquisition and integration related expenses, tax-equivalent net interest income (including its individual components), the efficiency ratio, tier 1 common capital to risk-weighted assets, tangible common equity to tangible assets, tangible common equity, excluding accumulated other comprehensive loss, to tangible assets, tangible common equity to risk-weighted assets, and return on average tangible common equity. Although intended to enhance investors' understanding of the Company's business and performance, these non-GAAP financial measures should not be considered an alternative to GAAP.


45




PERFORMANCE OVERVIEW

Table 1
Selected Financial Data
(Dollar and share amounts in thousands, except per share data)
 
Quarters Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2014
 
2013
 
2014
 
2013
Operating Results
 
 
 
 
 
 
 
Interest income
$
76,862

 
$
72,329

 
$
218,555

 
$
215,127

Interest expense
5,831

 
6,663

 
17,522

 
20,683

Net interest income
71,031

 
65,666

 
201,033

 
194,444

Provision for loan and covered loan losses
10,727

 
4,770

 
17,509

 
16,257

Noninterest income
37,107

 
58,088

 
95,550

 
113,104

Noninterest expense
70,313

 
64,702

 
198,998

 
191,943

Income before income tax expense
27,098

 
54,282

 
80,076


99,348

Income tax expense
8,549

 
24,959

 
25,363

 
39,207

Net income
$
18,549

 
$
29,323

 
$
54,713

 
$
60,141

Weighted-average diluted common shares outstanding
74,352

 
74,034

 
74,282

 
73,978

Diluted earnings per common share
$
0.25

 
$
0.39

 
$
0.73

 
$
0.80

Performance Ratios (1)
 
 
 
 
 
 
 
Return on average common equity
6.91
%
 
11.66
%
 
6.99
%
 
8.22
%
Return on average tangible common equity (2)
11.73
%
 
16.33
%
 
10.58
%
 
11.58
%
Return on average assets
0.84
%
 
1.38
%
 
0.86
%
 
0.98
%
Net interest margin – tax equivalent
3.72
%
 
3.63
%
 
3.66
%
 
3.70
%
Efficiency ratio (3)
62.02
%
 
62.70
%
 
64.00
%
 
64.46
%

(1) 
All ratios are presented on an annualized basis.
(2) 
Tangible common equity (“TCE”) represents common stockholders’ equity less goodwill and identifiable intangible assets. Acquisition and integration related expenses of $3.7 million and $4.6 million for the quarter and nine months ended September 30, 2014, respectively, are excluded from the return on average tangible common equity ratio.
(3) 
The efficiency ratio expresses noninterest expense, excluding other real estate owned ("OREO") expense, as a percentage of tax-equivalent net interest income plus total fee-based revenues, other income, net trading (losses) gains, and tax-equivalent adjusted BOLI income. In addition, acquisition and integration related expenses of $3.7 million and $4.6 million are excluded from the efficiency ratio for the quarter and nine months ended September 30, 2014, respectively.
 
September 30,
2014
 
December 31,
2013
 
September 30,
2013
 
September 30, 2014 
 Change From
December 31,
2013
 
September 30,
2013
Balance Sheet Highlights
 
 
 
 
 
 
 
 
 
Total assets
$
9,096,351

 
$
8,253,407

 
$
8,517,913

 
$
842,944

 
$
578,438

Total loans, excluding covered loans
6,428,204

 
5,580,005

 
5,448,929

 
848,199

 
979,275

Total loans, including covered loans
6,519,079

 
5,714,360

 
5,602,234

 
804,719

 
916,845

Total deposits
7,616,133

 
6,766,101

 
7,003,208

 
850,032

 
612,925

Transactional deposits
6,359,686

 
5,558,318

 
5,745,047

 
801,368

 
614,639

Loans-to-deposits ratio
85.6
%
 
84.5
%
 
80.0
%
 
 
 
 
Transactional deposits to total deposits
83.5
%
 
82.1
%
 
82.0
%
 
 
 
 


46




 
September 30,
2014
 
December 31,
2013
 
September 30,
2013
 
September 30, 2014 
 Change From
December 31,
2013
 
September 30,
2013
Asset Quality Highlights (1)
 
 
 
 
 
 
 
 
 
Non-accrual loans
$
63,858

 
$
59,798

 
$
68,170

 
$
4,060

 
$
(4,312
)
90 days or more past due loans
  (still accruing interest)
5,983

 
3,708

 
5,642

 
2,275

 
341

Total non-performing loans
69,841

 
63,506

 
73,812

 
6,335

 
(3,971
)
Accruing troubled debt
  restructurings ("TDRs")
5,449

 
23,770

 
24,329

 
(18,321
)
 
(18,880
)
OREO
29,165

 
32,473

 
35,616

 
(3,308
)
 
(6,451
)
Total non-performing assets
$
104,455

 
$
119,749

 
$
133,757

 
$
(15,294
)
 
$
(29,302
)
30-89 days past due loans
  (still accruing interest)
$
13,459

 
$
20,742

 
$
15,111

 
$
(7,283
)
 
$
(1,652
)
Allowance for Credit Losses
 
 
 
 
 
 
 
 
 
Allowance for credit losses
$
74,722

 
$
87,121

 
$
93,214

 
$
(12,399
)
 
$
(18,492
)
Allowance for credit losses to loans,
  excluding acquired loans,
  including covered loans
1.25
%
 
1.52
%
 
1.66
%
 
 
 
 
Allowance for credit losses to
  non-accrual loans, excluding
  acquired and covered loans
103.47
%
 
124.69
%
 
117.59
%
 
 
 
 

(1) 
Due to the impact of business combination accounting and protection provided by loss share agreements with the FDIC ("the FDIC Agreements"), acquired loans and covered loans and covered OREO are excluded from these metrics to provide for improved comparability to prior periods and better perspective into asset quality trends. For a discussion of acquired and covered loans, refer to Note 1 and Note 6 of “Notes to Condensed Consolidated Financial Statements” in Part I, Item 1 of this Form 10-Q. Asset quality, including acquired loans, covered loans, and covered OREO, is included in the “Loan Portfolio and Credit Quality” section below.

Net income for the third quarter of 2014 was $18.5 million, or $0.25 per share, compared to $29.3 million, or $0.39 per share, for the third quarter of 2013. For the nine months ended September 30, 2014, net income was $54.7 million, or $0.73 per share, compared to $60.1 million, or $0.80 per share, for the same period in 2013.

The third quarter of 2013 net income was impacted by certain significant transactions, which included a $34.0 million gain on the sale of an equity investment, a $7.8 million gain on the termination of two Federal Home Loan Bank ("FHLB") forward commitments, and a $13.3 million non-deductible write-down of the cash surrender values of certain BOLI policies. Excluding these items, which were reported in noninterest income, net income for the third quarter of 2013 was $17.5 million, or $0.24 per share, compared to $18.5 million, or $0.25 per share, for third quarter of 2014. In addition, net income for the third quarter and nine months ended September 30, 2014 was impacted by acquisition and integration related expenses of $3.7 million and $4.6 million, respectively. A discussion of net interest income, noninterest income, and noninterest expense is presented in the following section titled "Earnings Performance."

Total loans, excluding covered loans, of $6.4 billion rose by $848.2 million from December 31, 2013. Total loans, excluding acquired and covered loans, grew 7.5% annualized from December 31, 2013. The majority of the loan growth was driven by the acquisition of Popular, which represents $533.2 million of loans at September 30, 2014. The loan portfolio also benefited from solid performance from our legacy sales platform concentrated within our commercial and industrial and agricultural loan categories.

Non-performing assets, excluding acquired and covered loans and covered OREO, decreased by $15.3 million, or 12.8%, from December 31, 2013 and $29.3 million, or 21.9% from September 30, 2013. Refer to the “Loan Portfolio and Credit Quality” section below for further discussion of our loan portfolio, non-accrual loans, 90 days past due loans, TDRs, and OREO.


47




Acquisitions

On July 7, 2014, the Company entered into a definitive agreement to acquire the south suburban Chicago-based Great Lakes Financial Resources, Inc. ("Great Lakes"), the holding company for Great Lakes Bank, National Association. As part of the acquisition, the Company will acquire eight locations, approximately $490 million in deposits, and $234 million in loans. The Company has received approval for this acquisition from the Federal Reserve, its primary regulator, and the acquisition is expected to close before the end of 2014, subject to approval by the stockholders of Great Lakes and certain closing conditions.

On August 8, 2014, the Bank completed the acquisition of the Chicago area banking operations of Banco Popular North America ("Popular"), doing business as Popular Community Bank, which is a subsidiary of Popular, Inc. The acquisition included Popular's twelve full-service retail banking offices and its small business and middle market commercial lending activities in the Chicago metropolitan area. On the date of acquisition, the Bank assumed $731.9 million in deposits and acquired $549.4 million in loans.

On September 26, 2014, the Bank completed the acquisition of National Machine Tool Financial Corporation ("National Machine Tool"). In business for more than 28 years and a customer of the Bank for more than 15 years, National Machine Tool provides equipment leasing and financing alternatives to traditional bank financing. The addition of equipment leasing to First Midwest's product offerings affords us the opportunity to leverage our sales platform to augment National Machine Tool's historical lease production of approximately $40 million per year.

EARNINGS PERFORMANCE

Net Interest Income

Net interest income is our primary source of revenue and is impacted by interest rates and the volume and mix of interest-earning assets and interest-bearing liabilities. The accounting policies for the recognition of interest income on loans, securities, and other interest-earning assets are presented in Note 1 to the Consolidated Financial Statements of our 2013 10-K.

Our accounting and reporting policies conform to GAAP and general practices within the banking industry. For purposes of this discussion, both net interest income and net interest margin have been adjusted to a fully tax-equivalent basis to more appropriately compare the returns on certain tax-exempt loans and securities to those on taxable interest-earning assets. Although we believe that these non-GAAP financial measures enhance investors’ understanding of our business and performance, they should not be considered an alternative to GAAP. The effect of this adjustment is at the bottom of Tables 2 and 3.

Table 2 summarizes our average interest-earning assets and interest-bearing liabilities for the quarters ended September 30, 2014 and 2013, the related interest income and interest expense for each earning asset category and funding source, and the average interest rates earned and paid. Table 2 also details differences in interest income and expense from the prior quarter and the extent to which any changes are attributable to volume and rate fluctuations. Table 3 presents this same information for the nine months ended September 30, 2014 and 2013.

48




Table 2
Net Interest Income and Margin Analysis
(Dollar amounts in thousands)
 
Quarters Ended September 30,
 
 
Attribution of Change
in Net Interest Income (1)
 
2014
 
 
2013
 
 
 
Average
Balance
 
Interest
 
Yield/
Rate (%)
 
 
Average
Balance
 
Interest
 
Yield/
Rate (%)
 
 
Volume
 
Yield/
Rate
 
Total
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other interest-earning assets
$
476,768

 
$
313

 
0.26
 
 
$
661,779

 
$
469

 
0.28
 
 
$
(74
)
 
$
(82
)
 
$
(156
)
Trading securities
18,363

 
30

 
0.65
 
 
15,543

 
29

 
0.75
 
 
4

 
(3
)
 
1

Investment securities (2)
1,067,742

 
9,659

 
3.62
 
 
1,250,158

 
10,199

 
3.26
 
 
(2,126
)
 
1,586

 
(540
)
FHLB and Federal Reserve
  Bank stock
35,588

 
341

 
3.83
 
 
35,162

 
333

 
3.79
 
 
4

 
4

 
8

Loans (2)(3)
6,302,883

 
69,458

 
4.37
 
 
5,559,932

 
64,326

 
4.59
 
 
6,708

 
(1,576
)
 
5,132

Total interest-earning assets (2)
7,901,344

 
79,801

 
4.01
 
 
7,522,574

 
75,356

 
3.98
 
 
4,516

 
(71
)
 
4,445

Cash and due from banks
126,279

 
 
 
 
 
 
127,847

 
 
 
 
 
 
 
 
 
 
 
Allowance for loan and
  covered loan losses
(77,596
)
 
 
 
 
 
 
(93,940
)
 
 
 
 
 
 
 
 
 
 
 
Other assets
818,066

 
 
 
 
 
 
847,304

 
 
 
 
 
 
 
 
 
 
 
Total assets
$
8,768,093

 
 
 
 
 
 
$
8,403,785

 
 
 
 
 
 
 
 
 
 
 
Liabilities and Stockholders’ Equity:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Savings deposits
$
1,231,700

 
231

 
0.07
 
 
$
1,127,970

 
192

 
0.07
 
 
39

 

 
39

NOW accounts
1,261,522

 
166

 
0.05
 
 
1,175,926

 
162

 
0.05
 
 
4

 

 
4

Money market deposits
1,413,753

 
468

 
0.13
 
 
1,343,263

 
411

 
0.12
 
 
22

 
35

 
57

Time deposits
1,226,025

 
1,941

 
0.63
 
 
1,288,746

 
2,072

 
0.64
 
 
(99
)
 
(32
)
 
(131
)
Borrowed funds
101,674

 
9

 
0.04
 
 
203,613

 
390

 
0.76
 
 
(190
)
 
(191
)
 
(381
)
Senior and subordinated debt
191,013

 
3,016

 
6.26
 
 
214,860

 
3,436

 
6.34
 
 
(377
)
 
(43
)
 
(420
)
Total interest-bearing
  liabilities
5,425,687

 
5,831

 
0.43
 
 
5,354,378

 
6,663

 
0.49
 
 
(601
)
 
(231
)
 
(832
)
Demand deposits
2,208,450

 
 
 
 
 
 
1,975,797

 
 
 
 
 
 
 
 
 
 
 
Other liabilities
83,075

 
 
 
 
 
 
90,154

 
 
 
 
 
 
 
 
 
 
 
Stockholders’ equity - common
1,050,881

 
 
 
 
 
 
983,456

 
 
 
 
 
 
 
 
 
 
 
Total liabilities and
  stockholders’ equity
$
8,768,093

 
 
 
 
 
 
$
8,403,785

 
 
 
 
 
 
 
 
 
 
 
Net interest income/margin (2)
 
 
$
73,970

 
3.72
 
 
 
 
$
68,693

 
3.63
 
 
$
5,117

 
$
160

 
$
5,277

Net interest income (GAAP)
 
 
$
71,031

 
 
 
 
 
 
$
65,666

 
 
 
 
 
 
 
 
 
Tax equivalent adjustment
 
 
2,939

 
 
 
 
 
 
3,027

 
 
 
 
 
 
 
 
 
Tax-equivalent net interest
  income
 
 
$
73,970

 
 
 
 
 
 
$
68,693

 
 
 
 
 
 
 
 
 

(1) 
For purposes of this table, changes which are not due solely to volume changes or rate changes are allocated to these categories on the basis of the percentage relationship of each to the sum of the two.
(2) 
Interest income and yields are presented on a tax-equivalent basis, assuming a federal income tax rate of 35%.
(3) 
This item includes covered interest-earning assets consisting of loans acquired through the Company’s Federal Deposit Insurance Corporation (“FDIC”)-assisted transactions with loss share agreements and the related FDIC indemnification asset. For additional discussion, please refer to Note 1 and Note 6 of “Notes to the Condensed Consolidated Financial Statements” in Part I, Item 1 of this Form 10-Q.


49




Table 3
Net Interest Income and Margin Analysis
(Dollar amounts in thousands)
 
Nine Months Ended September 30,
 
 
Attribution of Change
in Net Interest Income (1)
 
2014
 
 
2013
 
 
 
Average
Balance
 
 
Interest
 
Yield/
Rate (%)
 
 
Average
Balance
 
 
Interest
 
Yield/
Rate (%)
 
 
Volume
 
Yield/
Rate
 
Total
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other interest-earning assets
$
515,380

 
$
1,064

 
0.28
 
 
$
640,551

 
$
1,371

 
0.29
 
 
$
(165
)
 
$
(142
)
 
$
(307
)
Trading securities
17,919

 
86

 
0.64
 
 
15,174

 
89

 
0.78
 
 
16

 
(19
)
 
(3
)
Investment securities (2)
1,115,882

 
30,317

 
3.62
 
 
1,227,619

 
30,303

 
3.29
 
 
(132
)
 
146

 
14

FHLB and Federal Reserve
  Bank stock
35,424

 
1,024

 
3.85
 
 
41,086

 
1,014

 
3.29
 
 
(41
)
 
51

 
10

Loans (2)(3)
5,978,223

 
194,878

 
4.36
 
 
5,439,308

 
191,605

 
4.71
 
 
30,628

 
(27,355
)
 
3,273

Total interest-earning assets (2)
7,662,828

 
227,369

 
3.97
 
 
7,363,738

 
224,382

 
4.07
 
 
30,306

 
(27,319
)
 
2,987

Cash and due from banks
118,350

 
 
 
 
 
 
121,037

 
 
 
 
 
 
 
 
 
 
 
Allowance for loan and
  covered loan losses
(81,098
)
 
 
 
 
 
 
(96,991
)
 
 
 
 
 
 
 
 
 
 
 
Other assets
790,782

 
 
 
 
 
 
858,347

 
 
 
 
 
 
 
 
 
 
 
Total assets
$
8,490,862

 
 
 
 
 
 
$
8,246,131

 
 
 
 
 
 
 
 
 
 
 
Liabilities and Stockholders’ Equity:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Savings deposits
$
1,193,952

 
636

 
0.07
 
 
$
1,126,501

 
647

 
0.08
 
 
54

 
(65
)
 
(11
)
NOW accounts
1,213,471

 
488

 
0.05
 
 
1,162,657

 
505

 
0.06
 
 
25

 
(42
)
 
(17
)
Money market deposits
1,353,857

 
1,253

 
0.12
 
 
1,289,857

 
1,315

 
0.14
 
 
72

 
(134
)
 
(62
)
Time deposits
1,197,232

 
5,537

 
0.62
 
 
1,331,277

 
6,693

 
0.67
 
 
(644
)
 
(512
)
 
(1,156
)
Borrowed funds
162,481

 
561

 
0.46
 
 
202,664

 
1,217

 
0.80
 
 
(534
)
 
(122
)
 
(656
)
Senior and subordinated debt
190,981

 
9,047

 
6.33
 
 
214,829

 
10,306

 
6.41
 
 
(1,131
)
 
(128
)
 
(1,259
)
Total interest-bearing
  liabilities
5,311,974

 
17,522

 
0.44
 
 
5,327,785

 
20,683

 
0.52
 
 
(2,158
)
 
(1,003
)
 
(3,161
)
Demand deposits
2,069,866

 
 
 
 
 
 
1,866,560

 
 
 
 
 
 
 
 
 
 
 
Other liabilities
75,268

 
 
 
 
 
 
87,651

 
 
 
 
 
 
 
 
 
 
 
Stockholders’ equity - common
1,033,754

 
 
 
 
 
 
964,135

 
 
 
 
 
 
 
 
 
 
 
Total liabilities and
  stockholders’ equity
$
8,490,862

 
 
 
 
 
 
$
8,246,131

 
 
 
 
 
 
 
 
 
 
 
Net interest income/margin (2)
 
 
$
209,847

 
3.66
 
 
 
 
$
203,699

 
3.70
 
 
$
32,464

 
$
(26,316
)
 
$
6,148

Net interest income (GAAP)
 
 
$
201,033

 
 
 
 
 
 
$
194,444

 
 
 
 
 
 
 
 
 
Tax equivalent adjustment
 
 
8,814

 
 
 
 
 
 
9,255

 
 
 
 
 
 
 
 
 
Tax-equivalent net interest
  income
 
 
$
209,847

 
 
 
 
 
 
$
203,699

 
 
 
 
 
 
 
 
 

(1) 
For purposes of this table, changes which are not due solely to volume changes or rate changes are allocated to these categories on the basis of the percentage relationship of each to the sum of the two.
(2) 
Interest income and yields are presented on a tax-equivalent basis, assuming a federal income tax rate of 35%.
(3) 
This item includes covered interest-earning assets consisting of loans acquired through the Company’s FDIC-assisted transactions with loss share agreements and the related FDIC indemnification asset. For additional discussion, please refer to Note 1 and Note 6 of “Notes to the Condensed Consolidated Financial Statements” in Part I, Item 1 of this Form 10-Q.

Total average interest-earning assets for the third quarter of 2014 increased by $378.8 million from the third quarter of 2013 and $299.1 million for the first nine months of 2014 compared to the same period in 2013. The increase compared to both prior periods was driven by loans acquired in the Popular acquisition and organic loan growth.
 
The $71.3 million increase in average interest-bearing liabilities compared to the third quarter of 2013 resulted primarily from the Popular acquisition. Compared to the first nine months of 2013, average interest-bearing liabilities decreased $15.8 million primarily

50




due to lower levels of time deposits, the repurchase and retirement of $24.0 million of junior subordinated debentures with a rate of 6.95%, and the prepayment of $114.6 million of FHLB advances with a weighted-average rate of 1.08%, which is net of the yield earned on the cash used for the prepayment. These declines were substantially offset by $731.9 million of deposits assumed in the Popular acquisition.

Tax-equivalent net interest margin for the third quarter of 2014 was 3.72%, an increase of 9 basis points from the third quarter of 2013. The Popular acquisition contributed approximately half of the improvement, adding a greater proportion of higher yielding, fixed rate loans along with low cost deposits. In addition, certain loan hedging strategies and an increase in the yield on covered interest-earning assets drove the higher margin.

For the nine months ended September 30, 2014, tax-equivalent net interest margin was 3.66%, a decline of 4 basis points from the same period in 2013. The decrease in the yield on loans was driven by the flattening of the yield curve, the competitive market environment, and a continued shift in the loan mix to floating rate loans. This decline was partially offset by higher yielding, fixed rate loans acquired in the Popular transaction, certain loan hedging strategies, and an increase in the yield on covered interest-earning assets. Overall, the reduction in net interest margin was partially offset by higher yields on investment securities, a reduction in higher cost borrowed funds, and growth in core deposits.

Higher tax-equivalent net interest income of $5.3 million compared to the third quarter of 2013 and $6.1 million compared to the first nine months of 2013 was primarily due to the Popular acquisition, which contributed $3.5 million of the increase. In addition, continued organic loan growth, the prepayment of FHLB advances, and repurchase and retirement of junior subordinated debentures contributed to the positive variance.


51




Noninterest Income

A summary of noninterest income for the quarters and nine months ended September 30, 2014 and 2013 is presented in the following table.

Table 4
Noninterest Income Analysis
(Dollar amounts in thousands)
 
Quarters Ended 
 September 30,
 
 
 
Nine Months Ended 
 September 30,
 
 
 
2014
 
2013
 
% Change
 
2014
 
2013
 
% Change
Service charges on deposit accounts
$
9,902

 
$
9,472

 
4.5

 
$
26,895

 
$
27,267

 
(1.4
)
Wealth management fees
6,721

 
6,018

 
11.7

 
19,730

 
17,983

 
9.7

Card-based fees (1)
6,646

 
5,509

 
20.6

 
17,950

 
16,132

 
11.3

Merchant servicing fees (2)
2,932

 
2,915

 
0.6

 
8,557

 
8,368

 
2.3

Mortgage banking income
1,125

 
1,273

 
(11.6
)
 
3,199

 
4,251

 
(24.7
)
Other service charges, commissions,
  and fees (2)
2,334

 
2,617

 
(10.8
)
 
5,386

 
5,569

 
(3.3
)
Total fee-based revenues
29,660

 
27,804

 
6.7

 
81,717

 
79,570

 
2.7

Gains on sales of properties
3,954

 

 
100.0

 
3,954

 

 
100.0

Net securities gains
2,570

 
33,801

 
(92.4
)
 
8,160

 
34,017

 
(76.0
)
BOLI income (3)
767

 
284

 
N/M

 
2,030

 
884

 
N/M

Other income (4)(6)
512

 
800

 
(36.0
)
 
1,382

 
1,984

 
(30.3
)
Net trading (losses) gains (5)(6)
(356
)
 
882

 
N/M

 
366

 
2,132

 
(82.8
)
Loss on early extinguishment of debt

 

 

 
(2,059
)
 

 
(100.0
)
BOLI modification loss (3)

 
(13,312
)
 
100.0

 

 
(13,312
)
 
100.0

Gain on termination of FHLB forward
  commitments

 
7,829

 
(100.0
)
 

 
7,829

 
(100.0
)
Total noninterest income
$
37,107

 
$
58,088

 
(36.1
)
 
$
95,550

 
$
113,104

 
(15.5
)

N/M - Not meaningful.

(1) 
Card-based fees consist of debit and credit card interchange fees for processing transactions as well as various fees on both customer and non-customer automated teller machine (“ATM”) and point-of-sale transactions processed through the ATM and point-of-sale networks.
(2) 
These line items are included in other service charges, commissions, and fees in the Condensed Consolidated Statements of Income.
(3) 
These line items are included in BOLI income in the Condensed Consolidated Statements of Income.
(4) 
Other income consists of various items, including safe deposit box rentals, miscellaneous recoveries, and gains on the sales of various assets.
(5) 
Net trading (losses) gains result from changes in the fair value of diversified investment securities held in a grantor trust under deferred compensation arrangements and are substantially offset by nonqualified plan expense for each period presented.
(6) 
These line items are included in other income in the Condensed Consolidated Statements of Income.

Total fee-based revenues continue to be strong and grew to $29.7 million, an increase of 6.7% compared to the third quarter of 2013 and 2.7% from the first nine months of 2013.

Compared to the third quarter of 2013, service charges on deposit accounts were impacted by an increase in service charge volume from existing clients and new customers acquired in the Popular transaction. A lower volume of non-sufficient funds transactions contributed to the decrease in service charges on deposit accounts compared to the nine months ended September 30, 2013.

Wealth management fees increased 11.7% from the third quarter of 2013 and 9.7% from the first nine months of 2013 due to a 10.9% rise in assets under management driven by new customer relationships across all service offerings.

The growth in card-based fees compared to both prior periods reflects higher transaction volumes as well as incentives from a renewed vendor contract.


52




During the third quarter and first nine months of 2014, we sold $31.7 million and $114.7 million of 1-4 family mortgage loans, respectively, compared to $36.1 million and $118.1 million of loans sold during the same periods in 2013. Lower market pricing contributed to the decline in mortgage banking income compared to the third quarter of 2013.

Lower levels of fee income from sales of capital market products to commercial clients contributed to the decrease in other service charges, commissions, and fees compared to the quarter and nine months ended September 30, 2013.

In the third quarter of 2014, we completed the disposition of two branch properties at pre-tax gains of $4.0 million as part of multi-year efforts to optimize our retail distribution.

Net securities gains for the third quarter of 2014 were driven by the sale of longer-duration corporate bonds and other investments, resulting in pre-tax gains of $2.6 million. Net securities gains for the first nine months of 2014 also consisted of the sale of a non-accrual trust-preferred collateralized debt obligation ("CDO") at a pre-tax gain of $3.5 million and sales of municipal securities and other investments at pre-tax gains of $2.1 million.

During the first nine months of 2014, the loss on early extinguishment of debt resulted from the prepayment of $114.6 million in FHLB advances.

Total noninterest income was impacted by certain significant transactions during the third quarter of 2013, including a $34.0 million gain on the sale of an equity investment, a $7.8 million gain on the termination of two FHLB forward commitments, and a $13.3 million write-down of the cash surrender values of certain BOLI policies.



53




Noninterest Expense

A summary of noninterest expense for the quarters and nine months ended September 30, 2014 and 2013 is presented in the following table.

Table 5
Noninterest Expense Analysis
(Dollar amounts in thousands)
 
Quarters Ended 
 September 30,
 
 
 
Nine Months Ended 
 September 30,
 
 
 
2014
 
2013
 
% Change
 
2014
 
2013
 
% Change
Salaries and employee benefits:
 
 
 
 
 
 
 
 
 
 
 
Salaries and wages
$
28,972

 
$
27,254

 
6.3

 
$
84,022

 
$
81,646

 
2.9

Nonqualified plan expense (1)
(386
)
 
1,003

 
N/M

 
350

 
2,394

 
(85.4
)
Retirement and other employee benefits
7,347

 
6,013

 
22.2

 
19,613

 
19,720

 
(0.5
)
Total salaries and employee benefits
35,933

 
34,270

 
4.9

 
103,985

 
103,760

 
0.2

Net occupancy and equipment expense
8,702

 
7,982

 
9.0

 
25,765

 
23,922

 
7.7

Professional services:
 
 
 
 
 
 
 
 
 
 
 
Loan remediation costs
2,107

 
1,893

 
11.3

 
6,336

 
6,579

 
(3.7
)
Other professional services
4,991

 
3,624

 
37.7

 
12,668

 
9,751

 
29.9

Professional services
7,098

 
5,517

 
28.7

 
19,004

 
16,330

 
16.4

Technology and related costs
4,316

 
2,984

 
44.6

 
10,494

 
8,351

 
25.7

Net OREO expense (2)
1,406

 
2,849

 
(50.6
)
 
4,531

 
5,732

 
(21.0
)
Advertising and promotions (2)
1,858

 
2,166

 
(14.2
)
 
5,778

 
5,609

 
3.0

Merchant card expense (2)
2,396

 
2,339

 
2.4

 
6,992

 
6,704

 
4.3

Cardholder expenses (2)
1,120

 
1,031

 
8.6

 
3,215

 
3,003

 
7.1

Other expenses (2)
7,484

 
5,564

 
34.5

 
19,234

 
18,532

 
3.8

Total noninterest expense
$
70,313

 
$
64,702

 
8.7

 
$
198,998

 
$
191,943

 
3.7

Efficiency ratio (3)
62.02
%
 
62.70
%
 
 
 
64.00
%
 
64.46
%
 
 

N/M - Not meaningful.

(1) 
Nonqualified plan expense results from changes in the Company's obligation to participants under deferred compensation agreements and is substantially offset by earnings on related assets, which are reported as net trading (losses) gains and included in noninterest income.
(2) 
These line items are included in other expense in the Condensed Consolidated Statements of Income.
(3) 
The efficiency ratio expresses noninterest expense, excluding OREO expense, as a percentage of tax-equivalent net interest income plus total fee-based revenues, other income, net trading (losses) gains, and tax-equivalent adjusted BOLI income. In addition, acquisition and integration related expenses of $3.7 million and $4.6 million are excluded from the efficiency ratio for the quarter and nine months ended September 30, 2014, respectively.

The efficiency ratio, excluding acquisition and integration related expenses, improved to 62.02% for the third quarter of 2014 and 64.00% for the first nine months of 2014. Total noninterest expense for the third quarter of 2014 increased 8.7% from the third quarter of 2013 and 3.7% for the first nine months of 2014 compared to the same periods in 2013. The rise in total noninterest expense compared to both prior periods resulted primarily from acquisition and integration related expenses, totaling $3.7 million for the third quarter of 2014 and $4.6 million for the nine months ended September 30, 2014. In addition, the recurring costs associated with operating the newly acquired Popular locations contributed to the increase. During the third quarter of 2014, the Company also recorded a $430,000 valuation adjustment relative to the closing of a banking facility.

Compared to both prior periods presented, the increase in salaries and employee benefits resulted from additional employees assumed in the Popular acquisition during the third quarter of 2014. The timing of certain incentive compensation accruals and higher premiums paid for employee insurance also contributed to the variance compared to the third quarter of 2013.
 
Net occupancy and equipment expense increased for the third quarter of 2014 and nine months ended September 30, 2014 due to the acquisition of twelve branches in the Popular transaction and an increase in real estate taxes. Additionally, higher utilities and snow removal costs during the first quarter of 2014 impacted the comparison to the first nine months of 2013.

54





The rise in loan remediation costs compared to the third quarter of 2013 resulted from higher levels of real estate taxes paid to preserve the Company's rights to collateral associated with problem loans and an increase in appraisal costs for underlying collateral. Compared to the first nine months of 2013, loan remediation costs decreased due to lower servicing costs for our covered loan portfolio and a reduction in real estate taxes paid, which was partially offset by higher appraisal costs.

Other professional services expense increased compared to the third quarter and first nine months of 2013. These increases were driven primarily by legal expenses related to acquisition activity which totaled $1.4 million for the third quarter of 2014 and $2.2 million for the first nine months of 2014.

Higher levels of technology and related costs compared to both prior periods presented resulted mainly from conversion costs related to acquisition activity, which totaled $1.1 million for the quarter and nine months ended September 30, 2014.

Compared to both prior periods presented, the decrease in net OREO expense resulted primarily from net gains on sales of OREO properties compared to net losses on sales, as well as lower levels of operating expenses. Higher levels of valuation adjustments partially offset these declines.

Advertising and promotions expense declined compared to the third quarter of 2013 due to the timing of certain advertising costs.

Higher levels of other expenses in the third quarter and first nine months of 2014 resulted from a $430,000 valuation adjustment relative to the closing of a banking facility and miscellaneous expenses related to the Popular acquisition.

Income Taxes

Our provision for income taxes includes both federal and state income tax expense. An analysis of the provision for income taxes is detailed in the following table.

Table 6
Income Tax Expense Analysis
(Dollar amounts in thousands)
 
Quarters Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2014
 
2013
 
2014
 
2013
Income before income tax expense
$
27,098

 
$
54,282

 
$
80,076

 
$
99,348

Income tax expense:
 
 
 
 
 
 
 
Federal income tax expense
$
6,714

 
$
19,145

 
$
19,719

 
$
29,058

State income tax expense
1,835

 
5,814

 
5,644

 
10,149

Total income tax expense
$
8,549

 
$
24,959

 
$
25,363

 
$
39,207

Effective income tax rate
31.5
%
 
46.0
%
 
31.7
%
 
39.5
%

Federal income tax expense and the related effective income tax rate are influenced by the amount of tax-exempt income derived from investment securities and BOLI in relation to pre-tax income and state income taxes. State income tax expense and the related effective tax rate are driven by the amount of state tax-exempt income in relation to pre-tax income and state tax rules related to consolidated/combined reporting and sourcing of income and expense.

Effective tax rates were elevated for the quarter and nine months ended September 30, 2013 due to a $34.0 million gain recognized on the sale of an equity investment and a $7.8 million gain on the termination of two FHLB forward commitments, which was taxed at statutory rates, and a $13.3 million non-deductible BOLI modification loss. Excluding these transactions, the effective tax rate for the quarter and nine months ended September 30, 2013 would have been 30.5% and 31.2%, respectively. In addition, an increase in income exempt from state taxes contributed to the decrease in the effective income tax rate compared to both prior periods.

Our accounting policies for the recognition of income taxes in the Consolidated Statements of Financial Condition and Income are included in Notes 1 and 14 to the Consolidated Financial Statements of our 2013 10-K.


55




FINANCIAL CONDITION

Investment Portfolio Management

Securities that we have the positive intent and ability to hold until maturity are classified as securities held-to-maturity and are accounted for using historical cost, adjusted for amortization of premiums and accretion of discounts. Trading securities are carried at fair value with changes in fair value included in other noninterest income. Our trading securities consist of securities held in a grantor trust for our nonqualified deferred compensation plan and are not considered part of the traditional investment portfolio. All other securities are classified as securities available-for-sale and are carried at fair value with unrealized gains and losses, net of related deferred income taxes, recorded in stockholders’ equity as a separate component of accumulated other comprehensive loss.

We manage our investment portfolio to maximize the return on invested funds within acceptable risk guidelines, to meet pledging and liquidity requirements, and to adjust balance sheet interest rate sensitivity to mitigate the impact of changes in interest rates on net interest income.

From time to time, we adjust the size and composition of our securities portfolio based on a number of factors, including expected loan growth, anticipated changes in collateralized public funds on account, the interest rate environment, and the related value of various segments of the securities markets. The following table provides a valuation summary of our investment portfolio.

Table 7
Investment Portfolio Valuation Summary
(Dollar amounts in thousands)
 
September 30, 2014
 
December 31, 2013
 
Amortized Cost
 
Net
Unrealized
Gains
(Losses)
 
Fair Value
 
% of Total
 
Amortized Cost
 
Net
Unrealized
Gains
(Losses)
 
Fair Value
 
% of Total
Securities Available-for-Sale
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. agency securities
$
500

 
$

 
$
500

 
 
$
500

 
$

 
$
500

 
Collateralized mortgage
  obligations ("CMOs")
424,946

 
(8,399
)
 
416,547

 
40.6
 
490,962

 
(15,194
)
 
475,768

 
41.2
Other mortgage-backed
  securities ("MBSs")
117,271

 
3,218

 
120,489

 
11.8
 
135,097

 
1,067

 
136,164

 
11.8
Municipal securities
423,904

 
11,168

 
435,072

 
42.4
 
457,318

 
4,075

 
461,393

 
39.9
CDOs
45,021

 
(26,652
)
 
18,369

 
1.8
 
46,532

 
(28,223
)
 
18,309

 
1.6
Corporate debt
  securities
3,724

 
122

 
3,846

 
0.4
 
12,999

 
1,930

 
14,929

 
1.3
Equity securities
2,575

 
22

 
2,597

 
0.3
 
3,706

 
1,956

 
5,662

 
0.5
Total available-for-
  sale securities
1,017,941

 
(20,521
)
 
997,420

 
97.3
 
1,147,114

 
(34,389
)
 
1,112,725

 
96.3
Securities Held-to-Maturity
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Municipal securities
26,776

 
990

 
27,766

 
2.7
 
44,322

 
(935
)
 
43,387

 
3.7
Total securities
$
1,044,717

 
$
(19,531
)
 
$
1,025,186

 
100.0
 
$
1,191,436

 
$
(35,324
)
 
$
1,156,112

 
100.0

Portfolio Composition

As of September 30, 2014, our securities portfolio totaled $1.0 billion, decreasing 11.3% compared to December 31, 2013. The reduction in CMOs, MBSs, and municipal securities from December 31, 2013 resulted from sales of $24.9 million and maturities, calls, and prepayments of $125.2 million, which were slightly offset by purchases of $16.4 million. Refer to the "Securities Gains and Losses" section below for further detail.

Approximately 97.5% of our available-for-sale securities portfolio is comprised of U.S. agency securities, CMOs, other MBSs, and municipal securities. The remainder of the portfolio consists of five CDOs with a total fair value of $18.4 million and miscellaneous other securities with fair values of $6.4 million.


56




Investments in municipal securities comprised 43.6%, or $435.1 million, of the total available-for-sale securities portfolio at September 30, 2014. The majority consists of general obligations of local municipalities. Our municipal securities portfolio has historically experienced very low default rates and provides a predictable cash flow.

Table 8
Securities Effective Duration Analysis
(Dollar amounts in thousands)
 
September 30, 2014
 
December 31, 2013
 
Effective
 
Average
 
Yield to
 
Effective
 
Average
 
Yield to
 
Duration (1)
 
Life (2)
 
Maturity (3)
 
Duration (1)
 
Life (2)
 
Maturity (3)
Securities Available-for-Sale
 
 
 
 
 
 
 
 
 
 
 
U.S. agency securities
1.49
%
 
1.50

 
0.49
%
 
2.23
%
 
2.25

 
0.49
%
CMOs
3.92
%
 
3.95

 
1.87
%
 
4.48
%
 
4.26

 
1.86
%
Other MBSs
3.20
%
 
4.42

 
3.00
%
 
3.93
%
 
4.85

 
2.45
%
Municipal securities
3.31
%
 
2.57

 
5.52
%
 
5.11
%
 
3.27

 
5.53
%
CDOs
N/M

 
N/M

 
N/M

 
N/M

 
N/M

 
N/M

Corporate debt securities
0.43
%
 
0.48

 
4.59
%
 
4.86
%
 
7.18

 
6.39
%
Equity securities
N/M

 
N/M

 
N/M

 
 N/M

 
 N/M

 
N/M

Total available-for-sale securities
3.55
%
 
3.39

 
3.61
%
 
4.68
%
 
3.95

 
3.52
%
Securities Held-to-Maturity
 
 
 
 
 
 
 
 
 
 
 
Municipal securities
5.43
%
 
8.05

 
4.48
%
 
6.50
%
 
11.84

 
5.47
%
Total securities
3.60
%
 
3.52

 
3.63
%
 
4.75
%
 
4.26

 
3.60
%

N/M - Not meaningful.

(1) 
The effective duration represents the estimated percentage change in the fair value of the securities portfolio given a 100 basis point increase or decrease in interest rates. This measure is used to evaluate the portfolio’s price volatility at a single point in time and is not intended to be a precise predictor of future fair values since those values will be influenced by a number of factors.
(2) 
Average life is presented in years and represents the weighted-average time to receive half of all future cash flows using the dollar amount of principal paydowns, including estimated principal prepayments, as the weighting factor.
(3) 
Yields on municipal securities are reflected on a tax-equivalent basis, assuming a federal income tax rate of 35%.

Effective Duration

The average life and effective duration of our available-for-sale securities portfolio as of September 30, 2014 declined from December 31, 2013 since cash from maturities and sales of investment securities was not reinvested in the securities portfolio.

Securities Gains and Losses

Net securities gains for the third quarter and first nine months of 2014 were $2.6 million and $8.2 million, respectively. During the third quarter of 2014, we sold certain longer-duration corporate bonds with a carrying value of $9.3 million at gains of $2.0 million and certain other investments, which resulted in gains of $552,000. Net securities gains for the first nine months of 2014 also consisted of the sale of a non-accrual CDO at a gain of $3.5 million, sales of municipal securities at gains of $468,000, and the sale of other investments at a gain of $1.6 million.

Net securities gains for the third quarter and first nine months of 2013 were $33.8 million and $34.0 million, respectively, which resulted primarily from the sale of an equity investment. Net securities gains for the third quarter of 2013 include other-than-temporary securities impairment ("OTTI") charges of $404,000 on four municipal securities.


57




Unrealized Gains and Losses

Unrealized gains and losses on securities available-for-sale represent the difference between the aggregate cost and fair value of the portfolio. These amounts are presented in the Consolidated Statements of Comprehensive Income and reported as a separate component of stockholders’ equity in accumulated other comprehensive loss on an after-tax basis. This balance sheet component will fluctuate as current market interest rates and conditions change and affect the aggregate fair value of the portfolio. Net unrealized losses were $20.5 million at September 30, 2014 compared to $34.4 million at December 31, 2013.

Net unrealized losses in the CMO portfolio totaled $8.4 million at September 30, 2014 compared to $15.2 million at December 31, 2013. CMOs are either backed by U.S. government-owned agencies or issued by U.S. government-sponsored enterprises. We do not believe any individual unrealized loss on this type of security as of September 30, 2014 represents OTTI since the unrealized losses are not believed to be attributed to credit quality.

As of September 30, 2014, net unrealized gains in the municipal securities portfolio totaled $11.2 million compared to $4.1 million as of December 31, 2013. Net unrealized gains on municipal securities include unrealized losses of $1.3 million at September 30, 2014. Substantially all of these securities carry investment grade ratings, with the majority supported by the general revenues of the issuing governmental entity, and are supported by third party bond insurance or other types of credit enhancement. We do not believe the unrealized loss on any of these securities represents OTTI.

Our investments in CDOs are supported by the credit of the underlying banks and insurance companies. The unrealized losses on these securities declined from $28.2 million at December 31, 2013 to $26.7 million at September 30, 2014. We do not believe the unrealized losses on the CDOs as of September 30, 2014 represent OTTI related to credit deterioration. In addition, we do not intend to sell the CDOs with unrealized losses within a short period of time, and we do not believe it is more likely than not that we will be required to sell them before recovery of their amortized cost basis, which may be at maturity. Our estimation of fair values for the CDOs is based on discounted cash flow analyses as described in Note 12 of “Notes to the Condensed Consolidated Financial Statements,” in Part I, Item 1 of this Form 10-Q.

LOAN PORTFOLIO AND CREDIT QUALITY

Loans Held-for-Investment

Our loan portfolio is comprised of both corporate and consumer loans with corporate loans representing 87.2% of total loans, excluding covered loans, at September 30, 2014. Consistent with our emphasis on relationship banking, the majority of our corporate loans are made to our core, multi-relationship customers. The customers usually maintain deposit relationships and utilize our other banking services, such as cash management or wealth management services.

To maximize loan income within an acceptable level of risk, we have certain lending policies and procedures that management reviews on a regular basis. In addition, management receives periodic reporting related to loan production, loan quality, credit concentrations, loan delinquencies, and non-performing and performing potential problem loans to mitigate and monitor potential and current risks in the portfolio. We do not offer any sub-prime products and we have policies to limit our exposure to any single borrower.


58




Table 9
Loan Portfolio
(Dollar amounts in thousands)
 
 
September 30, 2014
 
 
 
 
 
 
 
 
 
 
Legacy
 
Acquired (1)
 
Total
 
% of
Total
 
December 31,
2013
 
% of
Total
 
% Change
Commercial and industrial
 
$
2,131,464

 
$
76,702

 
$
2,208,166

 
34.3
 
$
1,830,638

 
32.8
 
20.6

Agricultural
 
347,391

 
120

 
347,511

 
5.4
 
321,702

 
5.8
 
8.0

Commercial real estate:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Office
 
404,870

 
32,352

 
437,222

 
6.8
 
459,202

 
8.2
 
(4.8
)
Retail
 
383,209

 
70,969

 
454,178

 
7.1
 
392,576

 
7.0
 
15.7

Industrial
 
486,723

 
44,399

 
531,122

 
8.3
 
501,907

 
9.0
 
5.8

Multi-family
 
360,330

 
199,359

 
559,689

 
8.7
 
332,873

 
6.0
 
68.1

Construction
 
193,445

 

 
193,445

 
3.0
 
186,197

 
3.3
 
3.9

Other commercial
  real estate
 
790,383

 
81,442

 
871,825

 
13.6
 
807,071

 
14.5
 
8.0

Total commercial
  real estate
 
2,618,960

 
428,521

 
3,047,481

 
47.5
 
2,679,826

 
48.0
 
13.7

Total corporate loans
 
5,097,815

 
505,343

 
5,603,158

 
87.2
 
4,832,166

 
86.6
 
16.0

Home equity
 
494,975

 
22,471

 
517,446

 
8.0
 
427,020

 
7.7
 
21.2

1-4 family mortgages
 
238,172

 

 
238,172

 
3.7
 
275,992

 
4.9
 
(13.7
)
Installment
 
64,024

 
5,404

 
69,428

 
1.1
 
44,827

 
0.8
 
54.9

Total consumer loans
 
797,171

 
27,875

 
825,046

 
12.8
 
747,839

 
13.4
 
10.3

Total loans, excluding
  covered loans
 
5,894,986

 
533,218

 
6,428,204

 
100.0
 
5,580,005

 
100.0
 
15.2

Covered loans
 
90,875

 

 
90,875

 
 
 
134,355

 
 
 
(32.4
)
Total loans
 
$
5,985,861

 
$
533,218

 
$
6,519,079

 
 
 
$
5,714,360

 
 
 
14.1


(1) 
Acquired loans consist of loans that were acquired in the Popular business combination that are recorded at fair value as of the acquisition date.

Total loans, excluding covered loans, of $6.4 billion rose by $848.2 million from December 31, 2013. Total loans, excluding acquired and covered loans, grew 7.5% annualized from December 31, 2013.

The majority of the loan growth was related to the Popular acquisition, which added $533.2 million of loans at September 30, 2014, and well-balanced growth across the majority of categories. In addition, solid performance from our legacy sales platform concentrated within our commercial and industrial and agricultural loan categories reflects the impact of greater resource investments and expansion into certain sector-based lending areas, such as agri-business, asset-based lending, and healthcare.
During the nine months ended September 30, 2014, total consumer loans grew 10.3% from December 31, 2013. The 1-4 family mortgage portfolio reflects the sale of $114.7 million of 1-4 family mortgage loans. Compared to December 31, 2013, the 21.2% increase in the home equity portfolio was impacted by organic growth, the purchase of $48.7 million of high quality, shorter-duration, floating rate loans, and $22.5 million of loans acquired in the Popular acquisition.

Commercial, Industrial, and Agricultural Loans

Commercial, industrial, and agricultural loans represent 39.7% of total loans, excluding covered loans, and totaled $2.6 billion at September 30, 2014, an increase of $403.3 million, or 18.7% from December 31, 2013. Loans acquired in the Popular transaction during the third quarter of 2014 contributed $76.8 million, or 3.6%, of this growth. Our commercial and industrial loans are a diverse group of loans to community-based and middle market businesses generally located in the Chicago metropolitan area with purposes that range from supporting seasonal working capital needs to term financing of equipment. The underwriting for these loans is based primarily on the identified cash flows of the borrower and secondarily on the underlying collateral provided by the borrower. Most commercial and industrial loans are secured by the assets being financed or other business assets, such as accounts receivable or inventory, and may incorporate a personal guarantee.

59




Agricultural loans are generally provided to meet seasonal production, equipment, and farm real estate borrowing needs of individual and corporate crop and livestock producers. As part of the underwriting process, the Company examines projected future cash flows, financial statement stability, and the value of the underlying collateral. Seasonal crop production loans are repaid by the liquidation of the financed crop that is typically covered by crop insurance. Equipment and real estate term loans are repaid through cash flows of the farming operation.
Commercial Real Estate Loans

Commercial real estate loans represent 47.5% of total loans, excluding covered loans, and totaled $3.0 billion at September 30, 2014 an increase of $367.7 million, or 13.7% from December 31, 2013. Overall, growth was driven by loans acquired in the Popular transaction, which totaled $428.5 million at September 30, 2014. This growth was partially offset by declines in the office, retail, and industrial and other commercial real estate portfolios. Commercial real estate loans are subject to underwriting standards and processes similar to commercial and industrial loans. The repayment of commercial real estate loans depends on the successful operation of the property securing the loan or the business conducted on the property securing the loan. This category of loans may be more adversely affected by conditions in the real estate market. Management monitors and evaluates commercial real estate loans based on cash flow, collateral, geography, and risk rating criteria. The mix of properties securing the loans in our commercial real estate portfolio are balanced between owner-occupied and investor categories and represent varying types across our market footprint.

Construction loans are generally based on estimates of costs and values associated with the completed projects and are underwritten utilizing feasibility studies, independent appraisal reviews, sensitivity analyses of absorption and lease rates, and financial analyses of the developers and property owners. Sources of repayment may be permanent loans from long-term lenders, sales of developed property, or an interim loan commitment until permanent financing is obtained. Generally, construction loans have a higher risk profile than other real estate loans since repayment is impacted by real estate values, interest rate changes, governmental regulation of real property, demand and supply of alternative real estate, the availability of long-term financing, and changes in general economic conditions.

60




The following table presents commercial real estate loan detail.

Table 10
Commercial Real Estate Loans
(Dollar amounts in thousands)
 
 
September 30,
2014
 
% of
Total
 
December 31, 2013
 
% of
Total
Office, retail, and industrial:
 
 
 
 
 
 
 
 
Office
 
$
437,222

 
14.4
 
$
459,202

 
17.1
Retail
 
454,178

 
14.9
 
392,576

 
14.7
Industrial
 
531,122

 
17.4
 
501,907

 
18.7
Total office, retail, and industrial
 
1,422,522

 
46.7
 
1,353,685

 
50.5
Multi-family
 
559,689

 
18.4
 
332,873

 
12.4
Construction
 
193,445

 
6.3
 
186,197

 
7.0
Other commercial real estate
 
 
 
 
 
 
 
 
Rental properties
 
121,573

 
4.0
 
112,887

 
4.2
Service stations and truck stops
 
71,100

 
2.3
 
83,237

 
3.1
Warehouses and storage
 
131,416

 
4.3
 
122,325

 
4.6
Hotels
 
53,187

 
1.7
 
62,451

 
2.3
Restaurants
 
76,459

 
2.5
 
79,809

 
3.0
Automobile dealers
 
33,901

 
1.1
 
37,504

 
1.4
Recreational
 
47,729

 
1.6
 
56,327

 
2.1
Religious
 
35,519

 
1.2
 
32,614

 
1.2
Multi-use properties
 
204,993

 
6.7
 
118,351

 
4.4
Other
 
95,948

 
3.2
 
101,566

 
3.8
Total other commercial real estate
 
871,825

 
28.6
 
807,071

 
30.1
Total commercial real estate
 
$
3,047,481

 
100.0
 
$
2,679,826

 
100.0
Owner-occupied commercial real estate loans,
  excluding multi-family and construction loans
 
$
961,962

 
 
 
$
933,151

 
 
Owner-occupied as a percent of total,
  excluding multi-family and construction loans
 
41.9
%
 
 
 
43.2
%
 
 

Consumer Loans

Consumer loans represent 12.8% of total loans, excluding covered loans, and totaled $825.0 million at September 30, 2014, an increase of $77.2 million, or 10.3% from December 31, 2013. Loans acquired in the Popular transaction during the third quarter of 2014 contributed $27.9 million, or 3.7%, of this growth. Consumer loans are centrally underwritten using a credit scoring model developed by the Fair Isaac Corporation (“FICO”). It uses a risk-based system to determine the probability that a borrower may default on financial obligations to the lender. Underwriting standards for home equity loans are heavily influenced by statutory requirements, which include loan-to-value and affordability ratios, risk-based pricing strategies, and documentation requirements. The home equity category consists mainly of revolving lines of credit secured by junior liens on owner-occupied real estate. Loan-to-value ratios on home equity loans and 1-4 family mortgages are based on the current appraised value of the collateral.


61




Non-performing Assets and Performing Potential Problem Loans

The following table presents our loan portfolio by performing and non-performing status. A discussion of our accounting policies for non-accrual loans, TDRs, and loans 90 days or more past due can be found in Note 1 of “Notes to the Condensed Consolidated Financial Statements” in Part 1, Item 1 of this Form 10-Q.

Table 11
Loan Portfolio by Performing/Non-Performing Status
(Dollar amounts in thousands)
 
 
 
 
 
Accruing
 
 
 
 
 
Total
Loans
 
Current
 
30-89 Days
Past Due
 
90 Days
Past Due
 
TDRs
 
Non-accrual
As of September 30, 2014
 
 
 
 
 
 
 
 
 
 
 
Commercial and industrial
$
2,208,166

 
$
2,179,077

 
$
5,974

 
$
1,256

 
$
2,163

 
$
19,696

Agricultural
347,511

 
347,150

 

 

 

 
361

Commercial real estate:
 
 
 
 
 
 
 
 
 
 
 
Office
437,222

 
428,602

 
867

 
3,766

 

 
3,987

Retail
454,178

 
444,774

 
975

 
74

 
416

 
7,939

Industrial
531,122

 
525,909

 

 

 
176

 
5,037

Multi-family
559,689

 
556,896

 
641

 

 
616

 
1,536

Construction
193,445

 
186,363

 

 

 

 
7,082

Other commercial real estate
871,825

 
859,440

 
3,882

 
150

 
441

 
7,912

Total commercial real estate
3,047,481

 
3,001,984

 
6,365

 
3,990

 
1,649

 
33,493

Total corporate loans
5,603,158

 
5,528,211

 
12,339

 
5,246

 
3,812

 
53,550

Home equity
517,446

 
507,314

 
2,959

 
587

 
752

 
5,834

1-4 family mortgages
238,172

 
232,331

 
1,595

 
126

 
885

 
3,235

Installment
69,428

 
66,988

 
428

 
103

 

 
1,909

Total consumer loans
825,046

 
806,633

 
4,982

 
816

 
1,637

 
10,978

Total loans, excluding covered loans
6,428,204

 
6,334,844

 
17,321

 
6,062

 
5,449

 
64,528

Covered loans
90,875

 
72,137

 
802

 
7,031

 

 
10,905

Total loans
$
6,519,079

 
$
6,406,981

 
$
18,123

 
$
13,093

 
$
5,449

 
$
75,433

As of December 31, 2013
 
 
 
 
 
 
 
 
 
 
 
Commercial and industrial
$
1,830,638

 
$
1,805,516

 
$
6,424

 
$
393

 
$
6,538

 
$
11,767

Agricultural
321,702

 
321,123

 
60

 

 

 
519

Commercial real estate:

 
 
 
 
 
 
 
 
 
 
Office
459,202

 
455,547

 
1,200

 
731

 

 
1,724

Retail
392,576

 
385,234

 
939

 
272

 
624

 
5,507

Industrial
501,907

 
481,766

 
337

 
312

 
9,647

 
9,845

Multi-family
332,873

 
329,669

 
318

 

 
1,038

 
1,848

Construction
186,197

 
179,877

 
23

 

 

 
6,297

Other commercial real estate
807,071

 
789,517

 
4,817

 
258

 
4,326

 
8,153

Total commercial real estate
2,679,826

 
2,621,610

 
7,634

 
1,573

 
15,635

 
33,374

Total corporate loans
4,832,166

 
4,748,249

 
14,118

 
1,966

 
22,173

 
45,660

Home equity
427,020

 
413,912

 
4,355

 
1,102

 
787

 
6,864

1-4 family mortgages
275,992

 
267,497

 
1,939

 
548

 
810

 
5,198

Installment
44,827

 
42,329

 
330

 
92

 

 
2,076

Total consumer loans
747,839

 
723,738

 
6,624

 
1,742

 
1,597

 
14,138

Total loans, excluding covered loans
5,580,005

 
5,471,987

 
20,742

 
3,708

 
23,770

 
59,798

Covered loans
134,355

 
93,100

 
2,232

 
18,081

 

 
20,942

Total loans
$
5,714,360

 
$
5,565,087

 
$
22,974

 
$
21,789

 
$
23,770

 
$
80,740



62




The following table provides a comparison of our non-performing assets and past due loans to prior periods.

Table 12
Non-Performing Assets and Past Due Loans
(Dollar amounts in thousands)
 
2014
 
2013
 
September 30
 
June 30
 
March 31
 
December 31
 
September 30
Non-performing assets, excluding acquired and covered loans and covered OREO (1)
 
 
Non-accrual loans
$
63,858

 
$
66,728

 
$
64,217

 
$
59,798

 
$
68,170

90 days or more past due loans
5,983

 
3,533

 
4,973

 
3,708

 
5,642

Total non-performing loans
69,841

 
70,261

 
69,190

 
63,506

 
73,812

Accruing TDRs
5,449

 
5,697

 
6,301

 
23,770

 
24,329

OREO
29,165

 
30,331

 
30,026

 
32,473

 
35,616

Total non-performing assets
$
104,455

 
$
106,289

 
$
105,517

 
$
119,749

 
$
133,757

30-89 days past due loans
$
13,459

 
$
24,167

 
$
12,861

 
$
20,742

 
$
15,111

Non-accrual loans to total loans
1.08
%
 
1.14
%
 
1.13
%
 
1.07
%
 
1.25
%
Non-performing loans to total loans
1.18
%
 
1.20
%
 
1.22
%
 
1.14
%
 
1.35
%
Non-performing assets to loans plus
  OREO
1.76
%
 
1.81
%
 
1.84
%
 
2.13
%
 
2.44
%
Non-performing acquired loans and OREO (1)
 
 
 
 
 
 
Non-accrual loans
$
670

 
$

 
$

 
$

 
$

90 days or more past due loans
79

 

 

 

 

Total non-performing loans
749

 

 

 

 

OREO

 

 

 

 

Total non-performing assets
$
749

 
$

 
$

 
$

 
$

30-89 days past due loans
$
3,862

 
$

 
$

 
$

 
$

Non-performing covered loans and covered OREO (1)
 
 
 
 
 
 
Non-accrual loans
$
10,905

 
$
13,060

 
$
18,004

 
$
20,942

 
$
30,856

90 days or more past due loans
7,031

 
8,464

 
14,691

 
18,081

 
20,235

Total non-performing loans
17,936

 
21,524

 
32,695

 
39,023

 
51,091

OREO
9,277

 
9,825

 
7,355

 
8,863

 
10,477

Total non-performing assets
$
27,213

 
$
31,349

 
$
40,050

 
$
47,886

 
$
61,568

30-89 days past due loans
$
802

 
$
6,286

 
$
2,439

 
$
2,232

 
$
7,881

Total non-performing assets
 
 
Non-accrual loans
$
75,433

 
$
79,788

 
$
82,221

 
$
80,740

 
$
99,026

90 days or more past due loans
13,093

 
11,997

 
19,664

 
21,789

 
25,877

Total non-performing loans
88,526

 
91,785

 
101,885

 
102,529

 
124,903

Accruing TDRs
5,449

 
5,697

 
6,301

 
23,770

 
24,329

OREO
38,442

 
40,156

 
37,381

 
41,336

 
46,093

Total non-performing assets
$
132,417

 
$
137,638

 
$
145,567

 
$
167,635

 
$
195,325

30-89 days past due loans
$
18,123

 
$
30,453

 
$
15,300

 
$
22,974

 
$
22,992

Non-accrual loans to total loans
1.16
%
 
1.34
%
 
1.41
%
 
1.41
%
 
1.77
%
Non-performing loans to total loans
1.36
%
 
1.54
%
 
1.75
%
 
1.79
%
 
2.23
%
Non-performing assets to loans plus
  OREO
2.02
%
 
2.30
%
 
2.49
%
 
2.91
%
 
3.46
%

(1) 
Due to the impact of business combination accounting and protection provided by the FDIC Agreements, acquired loans and covered loans and covered OREO are separated in this table and excluded from these metrics to provide for improved comparability to prior periods and better perspective into asset quality trends. For a discussion of acquired and covered loans, refer to Note 1 and Note 6 of “Notes to the Condensed Consolidated Financial Statements” in Part I, Item 1 of this Form 10-Q.

Non-performing assets, excluding acquired and covered loans and covered OREO, decreased by $15.3 million, or 12.8%, from December 31, 2013 due primarily to lower levels of accruing TDRs, which was partially offset by a rise in non-performing loans.

63




Two accruing TDRs totaling $18.8 million were returned to performing status after sustained payment performance in accordance with their modified terms, which represent market rates at the time of restructuring. Refer to the "TDRs" section below for further discussion.

TDRs

Loan modifications may be performed at the request of the individual borrower and may include reductions in interest rates, changes in payments, and extensions of maturity dates. We occasionally restructure loans at other than market rates or terms to enable the borrower to work through financial difficulties for a period of time, and these restructures remain classified as TDRs for the remaining terms of the loans.

Table 13
TDRs by Type
(Dollar amounts in thousands)
 
September 30, 2014
 
December 31, 2013
 
September 30, 2013
 
Number
of Loans
 
Amount
 
Number
of Loans
 
Amount
 
Number
of Loans
 
Amount
Commercial and industrial
9

 
$
17,969

 
10

 
$
8,659

 
12

 
$
9,029

Agricultural

 

 

 

 

 

Commercial real estate:
 
 
 
 
 
 
 
 
 
 
 
Office

 

 

 

 

 

Retail
1

 
416

 
2

 
624

 
2

 
626

Industrial
1

 
176

 
3

 
9,647

 
4

 
10,083

Multi-family
4

 
853

 
5

 
1,291

 
5

 
1,304

Construction

 

 

 

 
2

 
495

Other commercial real estate
6

 
627

 
7

 
4,617

 
7

 
4,726

Total commercial real estate
12

 
2,072

 
17

 
16,179

 
20

 
17,234

Total corporate loans
21

 
20,041

 
27

 
24,838

 
32

 
26,263

Home equity
18

 
1,265

 
18

 
1,299

 
14

 
1,068

1-4 family mortgages
11

 
1,120

 
14

 
1,716

 
14

 
1,735

Installment

 

 

 

 

 

Total consumer loans
29

 
2,385

 
32

 
3,015

 
28

 
2,803

Total TDRs
50

 
$
22,426

 
59

 
$
27,853

 
60

 
$
29,066

Accruing TDRs
30

 
$
5,449

 
39

 
$
23,770

 
37

 
$
24,329

Non-accrual TDRs
20

 
16,977

 
20

 
4,083

 
23

 
4,737

Total TDRs
50

 
$
22,426

 
59


$
27,853

 
60

 
$
29,066

Year-to-date charge-offs on TDRs
 
 
$
8,345

 
 
 
$
1,880

 
 
 
$
1,850

Specific reserves related to TDRs
 
 
2,625

 
 
 
1,952

 
 
 
2,024


TDRs totaled $22.4 million at September 30, 2014, decreasing $5.4 million from December 31, 2013.

Accruing TDRs declined $18.3 million from December 31, 2013 driven primarily by the return of two TDRs totaling $18.8 million to performing status during the first quarter of 2014 after sustained payment performance in accordance with their modified terms, which represent market rates at the time of restructuring. This reduction was partially offset by the addition of a corporate loan relationship totaling $2.0 million that was upgraded to accruing TDR status.

At September 30, 2014, non-accrual TDRs totaled $17.0 million compared to $4.1 million at December 31, 2013. The increase was driven primarily by the restructure of one non-accrual credit totaling $15.5 million, net of related charge-offs, during the third quarter of 2014. TDRs are reported as non-accrual if they are not performing in accordance with their modified terms or they have not yet exhibited sufficient performance under their modified terms.


64




Performing Potential Problem Loans

Performing potential problem loans consist of special mention loans and substandard loans. These loans are performing in accordance with contractual terms, but we have concerns about the ability of the borrower to continue to comply with loan terms due to the borrower’s operating or financial difficulties.

Table 14
Performing Potential Problem Loans
(Dollar amounts in thousands)
 
September 30, 2014
 
December 31, 2013
 
Special
Mention (1)
 
Substandard (2)
 
Total (3)
 
Special
Mention (1)
 
Substandard (2)
 
Total (3)
Commercial and industrial
$
66,429

 
$
25,425

 
$
91,854

 
$
23,679

 
$
14,135

 
$
37,814

Agricultural
299

 

 
299

 
344

 

 
344

Commercial real estate:
 
 
 
 
 
 
 
 
 
 
 
Office, retail, and industrial
28,411

 
32,723

 
61,134

 
27,871

 
23,538

 
51,409

Multi-family
5,502

 
6,818

 
12,320

 
2,794

 
499

 
3,293

Construction
7,229

 
16,607

 
23,836

 
8,309

 
17,642

 
25,951

Other commercial real estate
22,528

 
24,410

 
46,938

 
14,567

 
22,576

 
37,143

Total commercial real estate
63,670

 
80,558

 
144,228

 
53,541

 
64,255

 
117,796

Total performing potential 
  problem loans
130,398

 
105,983

 
236,381

 
77,564

 
78,390

 
155,954

Less: acquired performing
  potential problem loans
3,855

 
38,234

 
42,089

 

 

 

Total performing potential
  problem loans, excluding
  acquired loans
$
126,543

 
$
67,749

 
$
194,292

 
$
77,564

 
$
78,390

 
$
155,954

Performing potential problem
  loans to corporate loans
2.33
%
 
1.89
%
 
4.22
%
 
1.61
%
 
1.62
%
 
3.23
%
Performing potential problem
  loans to corporate loans,
  excluding acquired loans
2.48
%
 
1.33
%
 
3.81
%
 
1.61
%
 
1.62
%
 
3.23
%

(1) 
Loans categorized as special mention exhibit potential weaknesses that require the close attention of management since these potential weaknesses may result in the deterioration of repayment prospects in the future.
(2) 
Loans categorized as substandard exhibit a well-defined weakness or weaknesses that may jeopardize the liquidation of the debt. These loans continue to accrue interest because they are well secured and collection of principal and interest is expected within a reasonable time.
(3) 
Total performing potential problem loans excludes accruing TDRs of $3.5 million as of September 30, 2014 and $2.8 million as of December 31, 2013.

Performing potential problem loans totaled $236.4 million as of September 30, 2014 compared to $156.0 million as of December 31, 2013. This increase was impacted by the Popular acquisition, which added $42.1 million of performing potential problem loans. Acquired loans are recorded at fair value, which incorporates credit risk, at the data of acquisition.

Performing potential problem loans, excluding acquired loans, were 3.81% of corporate loans at September 30, 2014 compared to 3.23% at December 31, 2013. This level reflects a greater proportion of loans classified as special mention compared to December 31, 2013. Special mention loans, excluding acquired loans, increased by $49.0 million from December 31, 2013, driven primarily by the downgrade of two corporate loan relationships totaling $37.5 million for which management has specific monitoring plans.






65




OREO

OREO consists of properties acquired as the result of borrower defaults on loans. OREO, excluding covered OREO, was $29.2 million at September 30, 2014, decreasing $3.3 million from December 31, 2013.

Table 15
OREO by Type
(Dollar amounts in thousands)
 
 
September 30, 2014
 
December 31, 2013
 
September 30, 2013
Single-family homes
 
$
2,106

 
$
2,257

 
$
3,028

Land parcels:
 
 
 
 
 
 
Raw land
 
3,145

 
4,037

 
4,540

Commercial lots
 
10,941

 
11,649

 
11,955

Single-family lots
 
1,742

 
3,101

 
3,105

Total land parcels
 
15,828

 
18,787

 
19,600

Multi-family units
 
933

 
346

 
845

Commercial properties
 
10,298

 
11,083

 
12,143

Total OREO, excluding covered OREO
 
29,165

 
32,473

 
35,616

Covered OREO
 
9,277

 
8,863

 
10,477

Total OREO
 
$
38,442

 
$
41,336

 
$
46,093


OREO Activity

A rollforward of OREO balances for the nine months ended September 30, 2014 and 2013 is presented in the following table.

Table 16
OREO Rollforward
(Dollar amounts in thousands)
 
Nine Months Ended
 
September 30, 2014
 
September 30, 2013
 
OREO
 
Covered
OREO
 
Total
 
OREO
 
Covered
OREO
 
Total
Beginning balance
$
32,473

 
$
8,863

 
$
41,336

 
$
39,953

 
$
13,123

 
$
53,076

Transfers from loans
4,749

 
8,528

 
13,277

 
10,775

 
5,102

 
15,877

Proceeds from sales
(6,047
)
 
(8,246
)
 
(14,293
)
 
(13,151
)
 
(7,564
)
 
(20,715
)
Gains (losses) on sales of OREO
703

 
177

 
880

 
(1,333
)
 
17

 
(1,316
)
OREO valuation adjustments
(2,713
)
 
(45
)
 
(2,758
)
 
(628
)
 
(201
)
 
(829
)
Ending Balance
$
29,165

 
$
9,277

 
$
38,442

 
$
35,616

 
$
10,477

 
$
46,093





66




Allowance for Credit Losses

Methodology for the Allowance for Credit Losses

The allowance for credit losses is comprised of the allowance for loan and covered loan losses and the reserve for unfunded commitments and is maintained by management at a level believed adequate to absorb estimated losses inherent in the existing loan portfolio. Determination of the allowance for credit losses is inherently subjective since it requires significant estimates and management judgment, including the amounts and timing of expected future cash flows on impaired loans, estimated losses on pools of homogeneous loans, and consideration of current economic trends.

Acquired loans are recorded at fair value, which incorporates credit risk, at the date of acquisition. No allowance for credit losses is recorded on the acquisition date. As the acquisition adjustment is accreted into income over future periods, an allowance for credit losses will be established as necessary to reflect credit deterioration.

While management utilizes its best judgment and information available, the ultimate adequacy of the allowance for credit losses depends on a variety of factors beyond the Company’s control, including the performance of its loan portfolio, the economy, changes in interest rates and property values, and the interpretation of loan risk ratings by regulatory authorities. Management believes that the allowance for credit losses is an appropriate estimate of credit losses inherent in the loan portfolio as of September 30, 2014.

The accounting policy for the allowance for credit losses is discussed in Note 1 of “Notes to the Condensed Consolidated Financial Statements” in Part I, Item 1 of this Form 10-Q.

An allowance for credit losses is established on legacy loans, which consist of loans originated by the Bank, acquired loans, and covered loans. Additional discussion regarding acquired and covered loans is discussed in Note 6 of “Notes to the Condensed Consolidated Financial Statements” in Part I, Item 1 of this Form 10-Q. The following table provides additional details related to the legacy, covered, and acquired components of the allowance for credit losses and the remaining acquisition adjustment associated with acquired loans for the quarter ended September 30, 2014.

Table 17
Allowance for Credit Losses and Acquisition Adjustment
(Dollar amounts in thousands)
 
 
Legacy and
Covered Loans
 
Acquired Loans
 
Total
Quarter ended September 30, 2014
 
 
 
 
 
 
Beginning balance
 
$
79,942

 
$

 
$
79,942

Net charge-offs
 
(15,947
)
 

 
(15,947
)
Provision for loan and covered loan losses
 
10,727

 

 
10,727

Ending balance
 
$
74,722

 
$

 
$
74,722

Total loans
 
$
5,985,861

 
$
533,218

 
$
6,519,079

Remaining acquisition adjustment
 
N/A

 
13,598

 
13,598

Allowance for credit losses as a percent of total loans
 
1.25
%
 
N/A

 
1.15
%
Remaining acquisition adjustment as a percent of acquired loans
 
N/A

 
2.55
%
 
N/A


N/A - Not applicable.

Excluding acquired loans, the total allowance for credit losses to total loans is 1.25%. Accretion of the acquisition adjustment into interest income totaled $500,000 during the third quarter of 2014, resulting in a remaining acquisition adjustment as a percent of acquired loans of 2.55%.



67




Table 18
Allowance for Credit Losses
and Summary of Credit Loss Experience
(Dollar amounts in thousands)
 
Quarters Ended
 
2014
 
2013
 
September 30
 
June 30
 
March 31
 
December 31
 
September 30
Change in allowance for credit losses
 
 
 
 
 
 
 
 
 
Beginning balance
$
79,942

 
$
82,248

 
$
87,121

 
$
93,214

 
$
96,976

Loan charge-offs:
 
 
 
 
 
 
 
 
 
Commercial, industrial, and agricultural
9,763

 
2,099

 
3,680

 
3,084

 
2,719

Office, retail, and industrial
2,514

 
3,511

 
1,083

 
1,042

 
987

Multi-family
26

 
267

 
90

 
539

 
112

Construction
157

 
234

 
661

 
31

 
470

Other commercial real estate
1,363

 
561

 
1,771

 
813

 
889

Consumer
3,148

 
1,829

 
2,028

 
2,045

 
2,482

Total loan charge-offs
16,971

 
8,501

 
9,313

 
7,554

 
7,659

Recoveries of loan charge-offs:
 
 
 
 
 
 
 
 
 
Commercial, industrial, and agricultural
716

 
259

 
2,160

 
614

 
521

Office, retail, and industrial
55

 
290

 
58

 
160

 
31

Multi-family

 
2

 
1

 
549

 

Construction

 
2

 
158

 
965

 
60

Other commercial real estate
108

 
89

 
144

 
37

 
250

Consumer
150

 
214

 
138

 
177

 
374

Total recoveries of loan charge-offs
1,029

 
856

 
2,659

 
2,502

 
1,236

Net loan charge-offs, excluding
  covered loan charge-offs
15,942

 
7,645

 
6,654

 
5,052

 
6,423

Net covered loan charge-offs (recoveries)
5

 
2

 
(340
)
 
271

 
1,629

Net loan and covered loan charge-offs
15,947

 
7,647

 
6,314

 
5,323

 
8,052

Provision for loan and covered loan losses:

 
 
 
 
 
 
 
 
Provision for loan losses
11,416

 
7,425

 
2,911

 
226

 
4,466

Provision for covered loan losses
(689
)
 
(2,084
)
 
(1,470
)
 
(226
)
 
304

Total provision for loan and covered
  loan losses
10,727

 
5,341

 
1,441

 

 
4,770

Reduction in reserve for unfunded
  commitments (1)

 

 

 
(770
)
 
(480
)
Total provision for loan and
  covered loan losses and other
10,727

 
5,341

 
1,441

 
(770
)
 
4,290

Ending balance
$
74,722

 
$
79,942

 
$
82,248

 
$
87,121

 
$
93,214


(1) 
Included in other noninterest expense in the Consolidated Statements of Income.

68




 
Quarters Ended
 
2014
 
2013
 
September 30
 
June 30
 
March 31
 
December 31
 
September 30
Allowance for credit losses
 
 
 
 
 
 
 
 
 
Allowance for loan losses
$
64,457

 
$
68,983

 
$
69,203

 
$
72,946

 
$
77,772

Allowance for covered loan losses
8,649

 
9,343

 
11,429

 
12,559

 
13,056

Total allowance for loan and
  covered loan losses
73,106

 
78,326

 
80,632

 
85,505

 
90,828

Reserve for unfunded commitments
1,616

 
1,616

 
1,616

 
1,616

 
2,386

Total allowance for credit losses
$
74,722

 
$
79,942

 
$
82,248

 
$
87,121

 
$
93,214

Amounts and ratios, excluding acquired loans, including covered loans (1)
 
 
 
 
Average loans
$
5,980,337

 
$
5,891,127

 
$
5,706,880

 
$
5,658,756

 
$
5,539,776

Net loan charge-offs to average loans,
  annualized
1.06
%
 
0.52
%
 
0.45
%
 
0.37
%
 
0.58
%
Allowance for credit losses at end of
  period as a percent of:
 
 
 
 
 
 
 
 
 
Total loans
1.25
%
 
1.34
%
 
1.41
%
 
1.52
%
 
1.66
%
Non-accrual loans
99.95
%
 
100.19
%
 
100.03
%
 
107.90
%
 
94.13
%
Non-performing loans
85.13
%
 
87.10
%
 
80.73
%
 
84.97
%
 
74.63
%

(1) 
Due to the impact of business combination accounting, acquired loans are excluded from these metrics to provide for improved comparability to prior periods and better perspective into asset quality trends.

Activity in the Allowance for Credit Losses

The allowance for credit losses was $74.7 million as of September 30, 2014, a decline of $12.4 million from December 31, 2013. The allowance for credit losses was 1.25% of total loans, excluding acquired loans, including covered loans, at September 30, 2014 compared to 1.52% at December 31, 2013.

Net loan charge-offs, excluding covered loan charge-offs, increased by $10.9 million from the fourth quarter of 2013, and primarily relates to the recognition of a $7.5 million loss attributable to a longstanding commercial borrowing relationship. This loss resulted from reported accounting irregularities and the resulting impact on the borrower's adherence to customary debt covenants. The Company is aggressively pursuing all appropriate collection and other remedies.

Covered loan charge-offs reflect the decline, and recoveries reflect the increase, in expected future cash flows of certain acquired loans. Management re-estimates expected future cash flows periodically, and the present value of any decreases in expected future cash flows from the FDIC is recorded as either a charge-off or an allowance for covered loan losses is established. Any increases in expected future cash flows are recorded through the allowance for covered loan losses as recoveries to the extent charge-offs were previously taken or prospectively as yield adjustments over the remaining lives of the specific loans.


69




FUNDING AND LIQUIDITY MANAGEMENT

The following table provides a comparison of average funding sources for the quarters ended September 30, 2014, December 31, 2013, and September 30, 2013. We believe that average balances, rather than period-end balances, are more meaningful in analyzing funding sources because of the normal fluctuations that may occur on a daily or monthly basis within funding categories.

Table 19
Funding Sources – Average Balances
(Dollar amounts in thousands)
 
Quarters Ended
 
 
Third Quarter 2014
% Change From
 
September 30,
2014
 
December 31,
2013
 
September 30,
2013
 
 
Fourth
Quarter
2013
 
Third
Quarter
2013
Demand deposits
$
2,208,450

 
$
1,956,570

 
$
1,975,797

 
 
12.9
 %
 
11.8
 %
Savings deposits
1,231,700

 
1,126,737

 
1,127,970

 
 
9.3
 %
 
9.2
 %
NOW accounts
1,261,522

 
1,195,471

 
1,175,926

 
 
5.5
 %
 
7.3
 %
Money market accounts
1,413,753

 
1,356,383

 
1,343,263

 
 
4.2
 %
 
5.2
 %
Transactional deposits
6,115,425

 
5,635,161

 
5,622,956

 
 
8.5
 %
 
8.8
 %
Time deposits
1,209,935

 
1,218,450

 
1,272,670

 
 
(0.7
)%
 
(4.9
)%
Brokered deposits
16,090

 
16,067

 
16,076

 
 
0.1
 %
 
0.1
 %
Total time deposits
1,226,025

 
1,234,517

 
1,288,746

 
 
(0.7
)%
 
(4.9
)%
Total deposits
7,341,450

 
6,869,678

 
6,911,702

 
 
6.9
 %
 
6.2
 %
Securities sold under agreements to
  repurchase
101,348

 
99,207

 
89,029

 
 
2.2
 %
 
13.8
 %
Federal funds purchased
326

 

 
22

 
 
100.0
 %
 
N/M

FHLB advances

 
114,554

 
114,562

 
 
(100.0
)%
 
(100.0
)%
Total borrowed funds
101,674

 
213,761

 
203,613

 
 
(52.4
)%
 
(50.1
)%
Senior and subordinated debt
191,013

 
207,162

 
214,860

 
 
(7.8
)%
 
(11.1
)%
Total funding sources
$
7,634,137

 
$
7,290,601

 
$
7,330,175

 
 
4.7
 %
 
4.1
 %
Average interest rate paid on
  borrowed funds
0.04
%
 
0.72
%
 
0.76
%
 
 
 
 
 
Weighted-average maturity of FHLB
  advances
N/M

 
29.3 months

 
32.6 months

 
 
 
 
 
Weighted-average interest rate of
  FHLB advances
N/M

 
1.34
%
 
1.34
%
 
 
 
 
 

N/M - Not meaningful.

Average funding sources for the third quarter of 2014 increased $343.5 million from the fourth quarter of 2013 and $304.0 million from the third quarter of 2013. Compared to both prior periods presented, the rise in transactional deposits was driven primarily by deposits assumed in the Popular transaction. The reduction in borrowed funds resulted from the prepayment of $114.6 million in FHLB advances with a weighted-average rate of 1.33% during the second quarter of 2014. The reduction in average senior and subordinated debt compared to both prior quarters presented was due to the repurchase and retirement of $24.0 million of junior subordinated debentures with a rate of 6.95% during the fourth quarter of 2013.


70




Table 20
Borrowed Funds
(Dollar amounts in thousands)

 
September 30, 2014
 
 
September 30, 2013
 
Amount
 
Weighted-
Average
Rate (%)
 
 
Amount
 
Weighted-
Average
Rate (%)
At period-end:
 
 
 
 
 
 
 
 
Securities sold under agreements to repurchase
$
107,877

 
0.04
 
 
$
97,500

 
0.03
Federal funds purchased
25,000

 
 
 

 
FHLB advances

 
 
 
114,558

 
1.34
Total borrowed funds
$
132,877

 
0.04
 
 
$
212,058

 
0.74
Average for the year-to-date period:
 
 
 
 
 
 
 
 
Securities sold under agreements to repurchase
$
104,468

 
0.03
 
 
$
88,088

 
0.03
Federal funds purchased
110

 
 
 
7

 
FHLB advances
57,903

 
1.24
 
 
114,569

 
1.40
Total borrowed funds
$
162,481

 
0.46
 
 
$
202,664

 
0.80
Maximum amount outstanding at the end of any day during the period:
 
 
 
 
 
 
 
Securities sold under agreements to repurchase
$
117,772

 
 
 
 
$
106,170

 
 
Federal funds purchased
25,000

 
 
 
 

 
 
FHLB advances
114,551

 
 
 
 
114,581

 
 

Average borrowed funds totaled $162.5 million for the first nine months of 2014 decreasing 19.8% compared to the same period in 2013 due to the prepayment of $114.6 million of FHLB advances during the second quarter of 2014. This decline was partially offset by higher levels of securities sold under agreements to repurchase.

Securities sold under agreements to repurchase generally mature within 1 to 90 days from the transaction date.


71




MANAGEMENT OF CAPITAL

Capital Measurements

A strong capital structure is required under applicable banking regulations and is crucial in maintaining investor confidence, accessing capital markets, and enabling us to take advantage of future growth opportunities. Our capital policy requires that the Company and the Bank maintain capital ratios in excess of the minimum regulatory guidelines. It serves as an internal discipline in analyzing business risks and internal growth opportunities and sets targeted levels of return on equity. Under regulatory capital adequacy guidelines, the Company and the Bank are subject to various capital requirements set and administered by the federal banking agencies. These requirements specify minimum capital ratios, defined as Tier 1 and total capital as a percentage of assets and off-balance sheet items that were weighted according to broad risk categories and a leverage ratio calculated as Tier 1 capital as a percentage of adjusted average assets. We manage our capital ratios for the Bank to consistently maintain these measurements in excess of the Federal Reserve’s minimum levels to be considered “well-capitalized,” which is the highest capital category established.

The following table presents our consolidated measures of capital as of the dates presented and the capital guidelines established by the Federal Reserve for the Bank to be categorized as “well-capitalized.” All regulatory mandated ratios for characterization as “well-capitalized” were exceeded as of September 30, 2014 and December 31, 2013.

All other ratios presented in the table below are capital adequacy metrics used and relied on by investors and industry analysts; however, they are non-GAAP financial measures for SEC purposes. These non-GAAP measures are valuable indicators of a financial institution’s capital strength since they eliminate intangible assets from stockholders’ equity and retain the effect of accumulated other comprehensive loss in stockholders’ equity. Reconciliations of the components of those ratios to GAAP are also presented in the table below.


72




Table 21
Capital Measurements
(Dollar amounts in thousands)
 
September 30,
2014
 
December 31,
2013
 
Regulatory
Minimum
For
Well-
Capitalized
 
Excess Over
Required Minimums
at September 30, 2014
Bank regulatory capital ratios:
 
 
 
 
 
 
 
 
 
Total capital to risk-weighted assets
11.70
%
 
13.86
%
 
10.00
%
 
17
%
 
$
125,043

Tier 1 capital to risk-weighted assets
10.69
%
 
12.61
%
 
6.00
%
 
78
%
 
$
344,057

Tier 1 leverage to average assets
9.42
%
 
10.24
%
 
5.00
%
 
88
%
 
$
368,276

Company regulatory capital ratios (1):
 
 
 
 
 
 
 
 
 
Total capital to risk-weighted assets
10.94
%
 
12.39
%
 
N/A

 
N/A

 
N/A

Tier 1 capital to risk-weighted assets
9.86
%
 
10.91
%
 
N/A

 
N/A

 
N/A

Tier 1 leverage to average assets
8.93
%
 
9.18
%
 
N/A

 
N/A

 
N/A

Company tier 1 common capital to risk-weighted
  assets (1)(2)
9.38
%
 
10.37
%
 
N/A

 
N/A

 
N/A

Reconciliation of Company capital components to GAAP:
 
 
 
 
 
 
 
 
Total stockholders' equity
$
1,049,676

 
$
1,001,442

 
 
 
 
 
 
Goodwill and other intangible assets
(322,664
)
 
(276,366
)
 
 
 
 
 
 
Tangible common equity
727,012

 
725,076

 
 
 
 
 
 
Accumulated other comprehensive loss
18,852

 
26,792

 
 
 
 
 
 
Tangible common equity, excluding accumulated
  other comprehensive loss
$
745,864

 
$
751,868

 
 
 
 
 
 
Total assets
$
9,096,351

 
$
8,253,407

 
 
 
 
 
 
Goodwill and other intangible assets
(322,664
)
 
(276,366
)
 
 
 
 
 
 
Tangible assets
$
8,773,687

 
$
7,977,041

 
 
 
 
 
 
Risk-weighted assets
$
7,636,326

 
$
6,794,666

 
 
 
 
 
 
Company tangible common equity ratios (1)(3):
 
 
 
 
 
 
 
 
 
Tangible common equity to tangible assets
8.29
%
 
9.09
%
 
N/A

 
N/A

 
N/A

Tangible common equity, excluding accumulated
  other comprehensive loss, to tangible assets
8.50
%
 
9.43
%
 
N/A

 
N/A

 
N/A

Tangible common equity to risk-weighted assets
9.52
%
 
10.67
%
 
N/A

 
N/A

 
N/A


N/A - Not applicable.

(1) 
Ratio is not subject to formal Federal Reserve regulatory guidance.
(2) 
Excludes the impact of trust-preferred securities.
(3) 
Tangible common equity (“TCE”) represents common stockholders’ equity less goodwill and identifiable intangible assets. In management’s view, Tier 1 common capital and TCE measures are meaningful to the Company, as well as analysts and investors, in assessing the Company’s use of equity and in facilitating comparisons with competitors.

Overall, the Company's capital ratios decreased compared to December 31, 2013. The Popular acquisition drove this decrease due to the addition of risk-weighted assets and average assets, including goodwill and other intangible assets, in the third quarter of 2014. The Bank's regulatory ratios exceeded all regulatory mandated ratios for characterization as “well-capitalized” as of September 30, 2014.

The Board of Directors reviews the Company’s capital plan each quarter, considering the current and expected operating environment as well as an evaluation of various capital alternatives.


73




Basel III Capital Rules

In July of 2013, the Company and the Bank's primary federal regulator, the Federal Reserve, published final rules establishing a new comprehensive capital framework for U.S. banking organizations. The Basel III Capital Rules are discussed in the "Supervision and Regulation" section in Item 1, "Business" in the Company's 2013 10-K.
Management believes that as of September 30, 2014 the Company and the Bank would meet all capital adequacy requirements under the Basel III Capital Rules on a fully phased-in basis as if such requirements were currently in effect.
Dividends

The Board of Directors approved a quarterly cash dividend of $0.08 per common share during the third quarter of 2014, which follows a dividend increase from $0.07 to $0.08 per common share during the second quarter of 2014.


74




ITEM 3. QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK

Market risk is the risk of loss arising from adverse changes in the fair value of financial instruments due to changes in interest rates, exchange rates, and equity prices. Interest rate risk is our primary market risk and is the result of repricing, basis, and option risk. A description and analysis of our interest rate risk management policies is included in Part II, Item 7A, “Quantitative and Qualitative Disclosures about Market Risk,” in our 2013 10-K.

We seek to achieve consistent growth in net interest income and net income while managing volatility that arises from shifts in interest rates. The Bank’s Asset Liability Committee (“ALCO”) oversees financial risk management by developing programs to measure and manage interest rate risks within authorized limits set by the Bank’s Board of Directors. ALCO also approves the Bank’s asset and liability management policies, oversees the formulation and implementation of strategies to improve balance sheet positioning and earnings, and reviews the Bank’s interest rate sensitivity position. Management uses net interest income simulation modeling to analyze and capture exposure of earnings to changes in interest rates.

Net Interest Income Sensitivity
The analysis of net interest income sensitivity assesses the magnitude of changes in net interest income over a twelve-month measurement period resulting from immediate changes in interest rates using multiple rate scenarios. These scenarios include, but are not limited to, a flat or unchanged rate environment, immediate increases of 100, 200, and 300 basis points, and an immediate decrease of 100 basis points. Due to the low interest rate environment as of September 30, 2014 and December 31, 2013, management determined that an immediate decrease in interest rates greater than 100 basis points was not meaningful for this analysis.
This simulation analysis is based on expected future cash flows and repricing characteristics for balance sheet and off-balance sheet instruments and incorporates market-based assumptions regarding the effect of changing interest rates on the prepayment rates of certain assets and liabilities. In addition, this sensitivity analysis examines assets and liabilities at the beginning of the measurement period and does not assume any changes from growth or business plans over the next twelve months. Interest-earning assets and interest-bearing liabilities are assumed to re-price based on contractual terms over the twelve-month measurement period assuming an instantaneous parallel shift in interest rates in effect at the beginning of the measurement period. The simulation analysis also incorporates assumptions based on the historical behavior of deposit rates in relation to interest rates. Because these assumptions are inherently uncertain, the simulation analysis cannot definitively measure net interest income or predict the impact of the fluctuation in interest rates on net interest income, but does provide an indication of the Company's sensitivity to changes in interest rates. Actual results may differ from simulated results due to timing, magnitude, and frequency of interest rate changes as well as changes in market conditions and management strategies.
Our balance sheet is asset sensitive based on repricing and maturity characteristics and simulation analysis assumptions. The Bank’s current simulation analysis indicates we would benefit from rising interest rates. Interest-earning assets consist of short and long-term products. As of September 30, 2014, 50% of the loan portfolio consisted of fixed rate loans and 50% were floating rate loans. Investments, consisting of securities and interest-bearing deposits, are more heavily weighted toward fixed rate securities at 61% of the total compared to 39% for floating rate interest-bearing deposits in other banks. Fixed rate loans are most sensitive to the 3-5 year portion of the yield curve and the Bank limits its loans with maturities that extend beyond 5 years. The majority of floating rate loans are indexed to the short-term Prime or LIBOR rates. The amount of floating rate loans with interest rate floors was $681.1 million, or 26%, of the floating rate loan portfolio as of September 30, 2014, compared to $807.3 million, or 34%, of the floating rate loan portfolio as of December 31, 2013. On the liability side of the balance sheet, 83.5% of deposits are demand deposits or interest-bearing transactional deposits, which either do not pay interest or the interest rates are expected to rise at a slower pace than short-term interest rates.


75




Analysis of Net Interest Income Sensitivity
(Dollar amounts in thousands)
 
Immediate Change in Rates
 
+300
 
+200
 
+100
 
-100
September 30, 2014:
 
 
 
 
 
 
 
Dollar change
$
44,567

 
$
28,614

 
$
13,384

 
$
(10,265
)
Percent change
15.8
%
 
10.1
%
 
4.7
%
 
(3.6
)%
December 31, 2013:
 
 
 
 
 
 
 
Dollar change
$
45,209

 
$
28,307

 
$
11,925

 
$
(11,791
)
Percent change
17.3
%
 
10.8
%
 
4.6
%
 
(4.5
)%

The sensitivity of estimated net interest income to an instantaneous parallel shift in interest rates is reflected as both dollar and percentage changes. For example, this table illustrates that an instantaneous 200 basis point rise in interest rates as of September 30, 2014 would increase net interest income by $28.6 million, or 10.1%, over the next twelve months compared to no change in interest rates. This same measure was $28.3 million, or 10.8%, as of December 31, 2013, which suggests that the Company was slightly less sensitive to rising rates at September 30, 2014 compared to December 31, 2013.

During the nine months ended September 30, 2014, the increase in floating rate loan balances were funded by an increase in core deposits, which are less rate sensitive. Overall, this increase in rate sensitive assets was offset by the prepayment of $114.6 million of FHLB advances at fixed rates and the hedging of $325.0 million of certain corporate variable rate loans using interest rate swaps through which we receive fixed amounts and pay variable amounts. Fixed rate loans also increased due to the Popular acquisition, which added a greater proportion of higher yielding, fixed rate loans; however, this effect was mostly offset by a decrease in investments as cash flows have not been reinvested in the investment security portfolio during the nine months ended September 30, 2014. While net interest income is projected to decline in a decreasing interest rate environment, we believe the risk of a significant and sustained decrease in interest rates is minimal.

ITEM 4. CONTROLS AND PROCEDURES

At the end of the period covered by this report, (the “Evaluation Date”), the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s President and Chief Executive Officer and its Executive Vice President and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rules 13a-15(e) and 15d-15 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Based on that evaluation, the President and Chief Executive Officer and Executive Vice President and Chief Financial Officer concluded that as of the Evaluation Date, the Company’s disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in Securities and Exchange Commission rules and forms. There were no changes in the Company’s internal control over financial reporting during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

In the ordinary course of business, there were certain legal proceedings pending against the Company and its subsidiaries at September 30, 2014. While the outcome of any legal proceeding is inherently uncertain, based on information currently available, the Company's management believes that any liabilities arising from pending legal matters are not expected to have a material adverse effect on the Company's financial position, results of operations, or cash flows.

ITEM 1A. RISK FACTORS

The Company provided a discussion of certain risks and uncertainties faced by the Company in its Annual Report on Form 10-K for 2013. However, these factors may not be the only risks or uncertainties the Company faces.


76




ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

The following table summarizes the Company’s monthly Common Stock purchases during the third quarter of 2014. The Board approved a stock repurchase program on November 27, 2007. Up to 2.5 million shares of the Company’s Common Stock may be repurchased, and the total remaining authorization under the program was 2,494,747 shares as of September 30, 2014. The repurchase program has no set expiration or termination date.

Issuer Purchases of Equity Securities
 
Total
Number of
Shares
Purchased (1)
 
Average
Price
Paid per
Share
 
Total Number
of Shares
Purchased as
Part of a
Publicly
Announced
Plan or
Program
 
Maximum
Number of
Shares that
May Yet Be
Purchased
Under the
Plan or
Program
July 1 – July 31, 2014
1,553

 
$
16.75

 

 
2,494,747

August 1 – August 31, 2014

 

 

 
2,494,747

September 1 – September 30, 2014

 

 

 
2,494,747

Total
1,553

 
$
16.75

 

 
 

(1) 
Consists of shares acquired pursuant to the Company’s share-based compensation plans and not the Company’s stock repurchase program. Under the terms of these plans, the Company accepts shares of Common Stock from option holders if they elect to surrender previously owned shares upon exercise to cover the exercise price of the stock options or, in the case of restricted shares of Common Stock, the withholding of shares to satisfy tax withholding obligations associated with the vesting of restricted shares.


77




ITEM 6. EXHIBITS
Exhibit
Number
 
Description of Documents
 
 
 
3.1

Restated Certificate of Incorporation of the Company is incorporated herein by reference to Exhibit 3.1 to the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on February 27, 2009.
3.2

Certificate of Amendment of Restated Certificate of Incorporation of the Company is incorporated herein by reference to Exhibit 3.2 to the Company's Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on August 4, 2014.
3.3

Restated By-Laws of the Company are incorporated herein by reference to Exhibit 3.2 to the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on February 28, 2012.
11

Statement re: Computation of Per Share Earnings - The computation of basic and diluted earnings per common share is included in Note 8 of the Company’s Notes to the Condensed Consolidated Financial Statements included in “ITEM 1. FINANCIAL STATEMENTS” of this document.
15

Acknowledgment of Independent Registered Public Accounting Firm.
31.1

Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2

Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 (1)

Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 (1)

Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
99

Report of Independent Registered Public Accounting Firm.
101

Interactive Data File.

(1) 
Furnished, not filed.

78




SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

                      First Midwest Bancorp, Inc.
 
 
                         /s/ PAUL F. CLEMENS
                               Paul F. Clemens
    Executive Vice President and Chief Financial Officer*

Date: November 7, 2014

* Duly authorized to sign on behalf of the registrant.

79