FMBI 03.31.2015 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 March 31, 2015
 
 
 
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 April 30, 2015, there were 77,966,225 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 Results 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)
 
 
 
 
 
March 31,
2015
 
December 31,
2014
Assets
 
 
 
 
(Unaudited)
 
 
Cash and due from banks
 
$
126,450

 
$
117,315

Interest-bearing deposits in other banks
 
492,607

 
488,947

Trading securities, at fair value
 
18,374

 
17,460

Securities available-for-sale, at fair value
 
1,151,603

 
1,187,009

Securities held-to-maturity, at amortized cost
 
25,861

 
26,555

Federal Home Loan Bank ("FHLB") and Federal Reserve Bank ("FRB") stock, at cost
 
38,748

 
37,558

Loans, excluding covered loans
 
6,741,521

 
6,657,418

Covered loans
 
62,830

 
79,435

Allowance for loan and covered loan losses
 
(70,990
)
 
(72,694
)
Net loans
 
6,733,361

 
6,664,159

Other real estate owned ("OREO"), excluding covered OREO
 
26,042

 
26,898

Covered OREO
 
7,309

 
8,068

Federal Deposit Insurance Corporation ("FDIC") indemnification asset
 
8,540

 
8,452

Premises, furniture, and equipment, net
 
128,698

 
131,109

Investment in bank-owned life insurance ("BOLI")
 
207,190

 
206,498

Goodwill and other intangible assets
 
333,202

 
334,199

Accrued interest receivable and other assets
 
200,611

 
190,912

Total assets
 
$
9,498,596

 
$
9,445,139

Liabilities
 
 
 
 
Noninterest-bearing deposits
 
$
2,339,492

 
$
2,301,757

Interest-bearing deposits
 
5,575,187

 
5,586,001

Total deposits
 
7,914,679

 
7,887,758

Borrowed funds
 
131,200

 
137,994

Senior and subordinated debt
 
200,954

 
200,869

Accrued interest payable and other liabilities
 
135,813

 
117,743

Total liabilities
 
8,382,646

 
8,344,364

Stockholders’ Equity
 
 
 
 
Common stock
 
882

 
882

Additional paid-in capital
 
441,689

 
449,798

Retained earnings
 
912,387

 
899,516

Accumulated other comprehensive loss, net of tax
 
(12,805
)
 
(15,855
)
Treasury stock, at cost
 
(226,203
)
 
(233,566
)
Total stockholders’ equity
 
1,115,950

 
1,100,775

Total liabilities and stockholders’ equity
 
$
9,498,596

 
$
9,445,139

 
 
 
 
 
 
 
 
 
March 31, 2015
 
December 31, 2014
 
Preferred
 
Common
 
Preferred
 
Common
 
Shares
 
Shares
 
Shares
 
Shares
 
 
 
 
 
 
 
 
Par value per share
$
—

 
$
0.01

 
$
—

 
$
0.01

Shares authorized
1,000

 
150,000

 
1,000

 
150,000

Shares issued
—

 
88,228

 
—

 
88,228

Shares outstanding
—

 
77,957

 
—

 
77,695

Treasury shares
—

 
10,271

 
—

 
10,533

 
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 
 March 31,
 
 
2015
 
2014
Interest Income
 
 
 
 
Loans
 
$
73,397

 
$
60,940

Investment securities
 
8,293

 
8,005

Other short-term investments
 
779

 
745

Total interest income
 
82,469

 
69,690

Interest Expense
 
 
 
 
Deposits
 
2,525

 
2,597

Borrowed funds
 
18

 
383

Senior and subordinated debt
 
3,144

 
3,015

Total interest expense
 
5,687

 
5,995

Net interest income
 
76,782

 
63,695

Provision for loan and covered loan losses
 
6,552

 
1,441

Net interest income after provision for loan and covered loan losses
 
70,230

 
62,254

Noninterest Income
 
 
 
 
Service charges on deposit accounts
 
9,271

 
8,020

Wealth management fees
 
7,014

 
6,457

Card-based fees
 
6,402

 
5,335

Mortgage banking income
 
1,123

 
1,115

Other service charges, commissions, and fees
 
4,831

 
4,122

Net securities gains
 
512

 
1,073

Other income
 
1,948

 
1,128

Total noninterest income
 
31,101

 
27,250

Noninterest Expense
 
 
 
 
Salaries and employee benefits
 
40,716

 
33,491

Net occupancy and equipment expense
 
10,436

 
9,391

Professional services
 
5,109

 
5,389

Technology and related costs
 
3,687

 
3,074

Net OREO expense
 
1,204

 
1,556

Other expenses
 
11,505

 
10,767

Total noninterest expense
 
72,657

 
63,668

Income before income tax expense
 
28,674

 
25,836

Income tax expense
 
8,792

 
8,172

Net income
 
$
19,882

 
$
17,664

Per Common Share Data
 
 
 
 
Basic earnings per common share
 
$
0.26

 
$
0.24

Diluted earnings per common share
 
$
0.26

 
$
0.24

Dividends declared per common share
 
$
0.09

 
$
0.07

Weighted-average common shares outstanding
 
76,918

 
74,147

Weighted-average diluted common shares outstanding
 
76,930

 
74,159

 
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 
 March 31,
 
2015
 
2014
Net income
$
19,882

 
$
17,664

Securities available-for-sale
 
 
 
Unrealized holding gains:
 
 
 
Before tax
6,312

 
12,690

Tax effect
(2,528
)
 
(5,036
)
Net of tax
3,784

 
7,654

Reclassification of net gains included in net income:
 
 
Before tax
512

 
1,073

Tax effect
(209
)
 
(439
)
Net of tax
303

 
634

Net unrealized holding gains
3,481

 
7,020

Derivative instruments
 
 
 
Unrealized holding losses:
 
 
 
Before tax
(719
)
 
—

Tax effect
288

 
—

Net of tax
(431
)
 
—

Total other comprehensive income
3,050

 
7,020

Total comprehensive income
$
22,932

 
$
24,684



 
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, 2013
$
(20,419
)
 
$
—

 
$
(6,373
)
 
$
(26,792
)
Other comprehensive income
7,020

 
—

 
—

 
7,020

Balance at March 31, 2014
$
(13,399
)
 
$
—

 
$
(6,373
)
 
$
(19,772
)
Balance at December 31, 2014
$
(2,950
)
 
$
(1,138
)
 
$
(11,767
)
 
$
(15,855
)
Other comprehensive income (loss)
3,481

 
(431
)
 
—

 
3,050

Balance at March 31, 2015
$
531

 
$
(1,569
)
 
$
(11,767
)
 
$
(12,805
)
 
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, 2013
75,071

 
$
858

 
$
414,293

 
$
853,740

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

Comprehensive income
—

 
—

 
—

 
17,664

 
7,020

 
—

 
24,684

Common dividends declared
($0.07 per common share)
—

 
—

 
—

 
(5,272
)
 
—

 
—

 
(5,272
)
Share-based compensation expense
—

 
—

 
1,476

 
—

 
—

 
—

 
1,476

Restricted stock activity
195

 
—

 
(9,717
)
 
—

 
—

 
7,742

 
(1,975
)
Treasury stock issued to
benefit plans
—

 
—

 
(43
)
 
—

 
—

 
113

 
70

Balance at March 31, 2014
75,266

 
$
858

 
$
406,009

 
$
866,132

 
$
(19,772
)
 
$
(232,802
)
 
$
1,020,425

Balance at December 31, 2014
77,695

 
$
882

 
$
449,798

 
$
899,516

 
$
(15,855
)
 
$
(233,566
)
 
$
1,100,775

Comprehensive income
—

 
—

 
—

 
19,882

 
3,050

 
—

 
22,932

Common dividends declared
($0.09 per common share)
—

 
—

 
—

 
(7,011
)
 
—

 
—

 
(7,011
)
Share-based compensation expense
—

 
—

 
1,700

 
—

 
—

 
—

 
1,700

Restricted stock activity
264

 
—

 
(9,784
)
 
—

 
—

 
7,311

 
(2,473
)
Treasury stock issued to
  benefit plans
(2
)
 
—

 
(25
)
 
—

 
—

 
52

 
27

Balance at March 31, 2015
77,957

 
$
882

 
$
441,689

 
$
912,387

 
$
(12,805
)
 
$
(226,203
)
 
$
1,115,950

 
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)
 
 
Quarters Ended
March 31,
 
 
2015
 
2014
Net cash provided by operating activities
 
$
34,890

 
$
21,541

Investing Activities
 
 
 
 
Proceeds from maturities, repayments, and calls of securities available-for-sale
 
58,236

 
47,810

Proceeds from sales of securities available-for-sale
 
36,193

 
1,698

Purchases of securities available-for-sale
 
(53,974
)
 
(6,142
)
Proceeds from maturities, repayments, and calls of securities held-to-maturity
 
1,720

 
1,924

Purchases of securities held-to-maturity
 
(1,026
)
 
(853
)
Net purchases of FHLB stock
 
(1,190
)
 
—

Net increase in loans
 
(75,935
)
 
(107,700
)
Premiums paid for BOLI, net of claims
 
191

 
(16
)
Proceeds from sales of OREO
 
2,708

 
5,865

Proceeds from sales of premises, furniture, and equipment
 
195

 
18

Purchases of premises, furniture, and equipment
 
(1,215
)
 
(1,954
)
Net cash used in investing activities
 
(34,097
)
 
(59,350
)
Financing Activities
 
 
 
 
Net increase in deposit accounts
 
26,921

 
50,656

Net decrease in borrowed funds
 
(6,794
)
 
(643
)
Cash dividends paid
 
(6,218
)
 
(5,258
)
Restricted stock activity
 
(2,700
)
 
(2,653
)
Excess tax benefit related to share-based compensation
 
793

 
778

Net cash provided by financing activities
 
12,002

 
42,880

Net increase in cash and cash equivalents
 
12,795

 
5,071

Cash and cash equivalents at beginning of period
 
606,262

 
587,241

Cash and cash equivalents at end of period
 
$
619,057

 
$
592,312

 
 
 
 
 
Supplemental Disclosures of Cash Flow Information:
 
 
 
 
Income taxes paid
 
$
3,096

 
$
2,993

Interest paid to depositors and creditors
 
2,862

 
3,142

Dividends declared, but unpaid
 
7,011

 
5,272

Non-cash transfers of loans to OREO
 
1,038

 
2,562

 
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 ended March 31, 2015 are not necessarily indicative of the results that may be expected for the year ending December 31, 2015.
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 note disclosures required by GAAP for complete annual financial statements. Therefore, these financial statements should be read in conjunction with the Company’s 2014 Annual Report on Form 10-K ("2014 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, see Note 1, "Summary of Significant Accounting Policies," in the Company’s 2014 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 identifiable 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 Condensed 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 – 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 during the coverage period. Acquired loans consist of all other loans that were acquired in business combinations that are not covered by FDIC Agreements. 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. Certain acquired loans that have renewed subsequent to the respective acquisition dates are no longer classified as acquired loans. Instead, they are included with our loan population that is allocated an allowance in accordance with our allowance for loan losses methodology.
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 at the acquisition date. 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

8



was evaluated using various indicators, such as past due and non-accrual status. Other key considerations included past performance of the institutions' 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 since the acquisition date.
PCI loans are accounted for 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 ratings. 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 offset against the allowance for credit losses to the extent an allowance has been established or otherwise 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 providing an allowance for loan and covered loan losses.
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.
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 credit is sufficiently collateralized and in the process of renewal or collection 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 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 of the loan to the recorded book value.

9



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.
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 discounted 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 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 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, under which the FDIC reimburses the Company for the majority of the losses and eligible expenses related to these assets during the indemnification period. 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

10



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 – To provide derivative products to customers and 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 inception.
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 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.


11



2.  RECENT ACCOUNTING PRONOUNCEMENTS
Adopted Accounting Pronouncements
Receivables - Troubled Debt Restructurings by Creditors: In January of 2014, the Financial Accounting Standards Board ("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. The adoption of this guidance on January 1, 2015 did not 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. The adoption of this guidance on January 1, 2015 did not materially impact the Company's financial condition, results of operations, or liquidity.
Recent Accounting Pronouncements
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.
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 annual and interim periods beginning after December 15, 2016. Management does not expect the adoption of this guidance will materially impact the Company's financial condition, results of operations, or liquidity.

12



3.  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 in which plan participants may direct amounts earned to be invested in securities other than Company stock. Net trading gains represent changes in the fair value of the trading securities portfolio and are included in other noninterest income, and the related expense resulting from changes in the Company's obligation to participants is included in salaries and employee benefits 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.
A summary of the Company's securities portfolio by category and maturity is presented in the following tables.
Securities Portfolio
(Dollar amounts in thousands)
 
As of March 31, 2015
 
As of December 31, 2014
 
Amortized Cost
 
Gross Unrealized
 
Fair
 Value
 
Amortized Cost
 
Gross Unrealized
 
Fair
 Value
 
 
Gains
 
Losses
 
 
 
Gains
 
Losses
 
Securities Available-for-Sale
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. agency securities
$
24,350

 
$
357

 
$
—

 
$
24,707

 
$
30,297

 
$
144

 
$
(10
)
 
$
30,431

Collateralized mortgage
  obligations ("CMOs")
524,090

 
3,730

 
(3,756
)
 
524,064

 
538,882

 
2,256

 
(6,982
)
 
534,156

Other mortgage-backed
  securities ("MBSs")
145,846

 
4,891

 
(91
)
 
150,646

 
155,443

 
4,632

 
(310
)
 
159,765

Municipal securities
403,474

 
10,198

 
(554
)
 
413,118

 
414,255

 
10,583

 
(1,018
)
 
423,820

Trust preferred
  collateralized debt
  obligations ("CDOs")
48,357

 
810

 
(15,239
)
 
33,928

 
48,502

 
152

 
(14,880
)
 
33,774

Corporate debt securities
1,725

 
67

 
—

 
1,792

 
1,719

 
83

 
—

 
1,802

Equity securities
3,274

 
89

 
(15
)
 
3,348

 
3,224

 
72

 
(35
)
 
3,261

Total available-
  for-sale securities
$
1,151,116

 
$
20,142

 
$
(19,655
)
 
$
1,151,603

 
$
1,192,322

 
$
17,922

 
$
(23,235
)
 
$
1,187,009

Securities Held-to-Maturity
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Municipal securities
$
25,861

 
$
1,310

 
$
—

 
$
27,171

 
$
26,555

 
$
1,115

 
$
—

 
$
27,670

Trading Securities
 
 
 
 
 
 
$
18,374

 
 
 
 
 
 
 
$
17,460


Remaining Contractual Maturity of Securities
(Dollar amounts in thousands)
 
As of March 31, 2015
 
Available-for-Sale
 
Held-to-Maturity
 
Amortized
Cost
 
Fair Value
 
Amortized
Cost
 
Fair Value
One year or less
$
140,114

 
$
138,835

 
$
3,513

 
$
3,691

After one year to five years
105,125

 
104,166

 
8,451

 
8,879

After five years to ten years
182,290

 
180,626

 
5,194

 
5,457

After ten years
50,377

 
49,918

 
8,703

 
9,144

Securities that do not have a single contractual maturity date
673,210

 
678,058

 
—

 
—

Total
$
1,151,116

 
$
1,151,603

 
$
25,861

 
$
27,171


13



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 $704.0 million at March 31, 2015 and $779.4 million at December 31, 2014. No securities held-to-maturity were pledged as of March 31, 2015 or December 31, 2014.
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 
 March 31,
 
2015
 
2014
Gains (losses) on sales of securities:
 
 
 
Gross realized gains
$
650

 
$
1,101

Gross realized losses
(138
)
 
—

Net realized gains on sales of securities
512

 
1,101

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

 
(28
)
Net non-cash impairment charges
—

 
(28
)
Net realized gains
$
512

 
$
1,073

Net trading gains (1)
$
419

 
$
191


(1) 
All net trading gains relate to trading securities still held as of March 31, 2015 and March 31, 2014 and are included in other income in the Condensed Consolidated Statement of Income.
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 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 ended March 31, 2015 and 2014. 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 
 March 31,
 
2015
 
2014
Beginning balance
$
23,880

 
$
32,422

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

 
28

Reduction for sales of securities (2)
(171
)
 
—

Ending balance
$
23,709

 
$
32,450


(1) 
Included in net securities gains in the Condensed Consolidated Statements of Income.
(2) 
During the quarter ended March 31, 2015, we sold one CMO with a carrying value of $1.3 million that had OTTI of $171,000 that was previously recognized in earnings.

14



The following table presents the aggregate amount of unrealized losses and the aggregate related fair values of securities with unrealized losses as of March 31, 2015 and December 31, 2014.
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 March 31, 2015
 
 
 
 
 
 
 
 
 
 
 
 
 
CMOs
59

 
$
32,270

 
$
63

 
$
229,474

 
$
3,693

 
$
261,744

 
$
3,756

MBSs
5

 
154

 
2

 
21,243

 
89

 
21,397

 
91

Municipal securities
82

 
4,317

 
49

 
41,255

 
505

 
45,572

 
554

CDOs
7

 
1,878

 
24

 
22,318

 
15,215

 
24,196

 
15,239

Equity securities
1

 
—

 
—

 
2,303

 
15

 
2,303

 
15

Total
154

 
$
38,619

 
$
138

 
$
316,593

 
$
19,517

 
$
355,212

 
$
19,655

As of December 31, 2014
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. agency securities
1

 
$
1,943

 
$
10

 
$
—

 
$
—

 
$
1,943

 
$
10

CMOs
87

 
61,321

 
559

 
284,327

 
6,423

 
345,648

 
6,982

MBSs
11

 
1,113

 
1

 
39,043

 
309

 
40,156

 
310

Municipal securities
91

 
1,317

 
9

 
53,987

 
1,009

 
55,304

 
1,018

CDOs
4

 
—

 
—

 
22,791

 
14,880

 
22,791

 
14,880

Equity securities
1

 
—

 
—

 
2,270

 
35

 
2,270

 
35

Total
195

 
$
65,694

 
$
579

 
$
402,418

 
$
22,656

 
$
468,112

 
$
23,235

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 of these securities with unrealized losses as of March 31, 2015 represent OTTI related to credit deterioration. These unrealized losses are attributed to changes in interest rates and temporary market movements. The Company does not intend to sell these securities 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 March 31, 2015 reflect changes in market activity for these securities. 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. For a detailed discussion of the CDO valuation methodology, see Note 11, "Fair Value."

15



4.  LOANS
Loans Held-for-Investment
The following table presents the Company's loans held-for-investment by class.
Loan Portfolio
(Dollar amounts in thousands)
 
March 31,
2015
 
December 31,
2014
Commercial and industrial
$
2,318,058

 
$
2,253,556

Agricultural
368,836

 
358,249

Commercial real estate:
 
 
 
Office, retail, and industrial
1,443,562

 
1,478,379

Multi-family
560,800

 
564,421

Construction
191,104

 
204,236

Other commercial real estate
881,026

 
887,897

Total commercial real estate
3,076,492

 
3,134,933

Total corporate loans
5,763,386

 
5,746,738

Home equity
599,543

 
543,185

1-4 family mortgages
285,758

 
291,463

Installment
92,834

 
76,032

Total consumer loans
978,135

 
910,680

Total loans, excluding covered loans
6,741,521

 
6,657,418

Covered loans (1)
62,830

 
79,435

Total loans
$
6,804,351

 
$
6,736,853

Deferred loan fees included in total loans
$
4,087

 
$
3,922

Overdrawn demand deposits included in total loans
2,141

 
3,438


(1) 
For information on covered loans, see Note 5, "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 5, "Loans" to the Consolidated Financial Statements in the Company’s 2014 10-K.

16



Loan Sales
The table below summarizes the Company's loan sales for the quarters ended March 31, 2015 and 2014.
Loan Sales
(Dollar amounts in thousands)
 
Quarters Ended 
 March 31,
 
2015
 
2014
Corporate loans
 
 
 
Proceeds from sales
$
945

 
$
—

Less book value of loans sold
945

 
—

Net gains on sales of corporate loans
—

 
—

1-4 family mortgage loans
 
 
 
Proceeds from sales
35,582

 
51,900

Less book value of loans sold:
 
 
 
Loans originated with intent to sell
34,496

 
15,458

Loans held-for-investment
—

 
35,369

Total book value of loans sold
34,496

 
50,827

Net gains on sales of 1-4 family mortgages
1,086

 
1,073

Total net gains on loan sales
$
1,086

 
$
1,073

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 10, "Commitments, Guarantees, and Contingent Liabilities."
5.  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 multiple 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."
Effective January 1, 2015, the losses on non-residential mortgage loans and OREO related to one FDIC-assisted transaction are no longer covered under the FDIC Agreements. Accordingly, these non-residential loans and OREO, which totaled $5.1 million at March 31, 2015, were reclassified from covered loans to loans, excluding covered loans. The losses on residential mortgage loans and OREO will continue to be covered under the FDIC Agreements through December 31, 2019. Losses related to non-residential mortgage loans and OREO in two other FDIC-assisted transactions will no longer be covered under the FDIC Agreements effective on July 1, 2015 and October 1, 2015, and residential mortgage loans and OREO will continue to be covered through June 30, 2020 and September 30, 2020.
During the first quarter of 2015, $30.8 million of acquired loans were renewed and no longer classified as acquired loans. See Note 1 "Summary of Significant Accounting Policies" for detail regarding renewed acquired loans.

17



The following table presents PCI and Non-PCI, loans as of March 31, 2015 and December 31, 2014.
Acquired and Covered Loans
(Dollar amounts in thousands)
 
As of March 31, 2015
 
As of December 31, 2014
 
PCI
 
Non-PCI
 
Total
 
PCI
 
Non-PCI
 
Total
Acquired loans
$
37,616

 
$
652,736

 
$
690,352

 
$
28,712

 
$
714,836

 
$
743,548

Covered loans
38,970

 
23,860

 
62,830

 
54,682

 
24,753

 
79,435

Total acquired and covered loans
$
76,586

 
$
676,596

 
$
753,182

 
$
83,394

 
$
739,589

 
$
822,983

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 March 31, 2015 and December 31, 2014.
A rollforward of the carrying value of the FDIC indemnification asset for the quarters ended March 31, 2015 and 2014 is presented in the following table.
Changes in the FDIC Indemnification Asset
(Dollar amounts in thousands)
 
Quarters Ended 
 March 31,
 
2015
 
2014
Beginning balance
$
8,452

 
$
16,585

Amortization
(458
)
 
(1,316
)
Change in expected reimbursements from the FDIC for changes
  in expected credit losses
934

 
1,161

Payments received from the FDIC
(388
)
 
(893
)
Ending balance
$
8,540

 
$
15,537

Changes in the accretable yield for acquired and covered PCI loans were as follows.
Changes in Accretable Yield
(Dollar amounts in thousands)
 
Quarters Ended 
 March 31,
 
2015
 
2014
Beginning balances
$
28,244

 
$
36,792

Accretion
(2,663
)
 
(3,510
)
Other (1)
839

 
(1,272
)
Ending balance
$
26,420

 
$
32,010


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

18



6.  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 March 31, 2015 and December 31, 2014. 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
As of March 31, 2015
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial and industrial
$
2,301,730

 
$
12,128

 
$
4,200

 
$
16,328

 
$
2,318,058

 
 
$
12,913

 
$
1,452

Agricultural
368,505

 
—

 
331

 
331

 
368,836

 
 
358

 
—

Commercial real estate:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Office, retail, and industrial
1,430,272

 
2,064

 
11,226

 
13,290

 
1,443,562

 
 
11,363

 
738

Multi-family
557,665

 
2,557

 
578

 
3,135

 
560,800

 
 
700

 
169

Construction
184,070

 
—

 
7,034

 
7,034

 
191,104

 
 
7,488

 
53

Other commercial real estate
870,026

 
5,780

 
5,220

 
11,000

 
881,026

 
 
5,915

 
602

Total commercial real
  estate
3,042,033

 
10,401

 
24,058

 
34,459

 
3,076,492

 
 
25,466

 
1,562

Total corporate loans
5,712,268

 
22,529

 
28,589

 
51,118

 
5,763,386

 
 
38,737

 
3,014

Home equity
592,994

 
2,852

 
3,697

 
6,549

 
599,543

 
 
5,483

 
248

1-4 family mortgages
282,374

 
1,680

 
1,704

 
3,384

 
285,758

 
 
3,819

 
228

Installment
92,224

 
498

 
112

 
610

 
92,834

 
 
38

 
74

Total consumer loans
967,592

 
5,030

 
5,513

 
10,543

 
978,135

 
 
9,340

 
550

Total loans, excluding
  covered loans
6,679,860

 
27,559

 
34,102

 
61,661

 
6,741,521

 
 
48,077

 
3,564

Covered loans
52,754

 
633

 
9,443

 
10,076

 
62,830

 
 
4,570

 
6,390

Total loans
$
6,732,614

 
$
28,192

 
$
43,545

 
$
71,737

 
$
6,804,351

 
 
$
52,647

 
$
9,954

As of December 31, 2014
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial and industrial
$
2,230,947

 
$
19,505

 
$
3,104

 
$
22,609

 
$
2,253,556

 
 
$
22,693

 
$
205

Agricultural
355,982

 
1,934

 
333

 
2,267

 
358,249

 
 
360

 
—

Commercial real estate:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Office, retail, and industrial
1,463,724

 
2,340

 
12,315

 
14,655

 
1,478,379

 
 
12,939

 
76

Multi-family
562,625

 
1,261

 
535

 
1,796

 
564,421

 
 
754

 
83

Construction
197,255

 
—

 
6,981

 
6,981

 
204,236

 
 
6,981

 
—

Other commercial real estate
876,609

 
5,412

 
5,876

 
11,288

 
887,897

 
 
6,970

 
438

Total commercial real
  estate
3,100,213

 
9,013

 
25,707

 
34,720

 
3,134,933

 
 
27,644

 
597

Total corporate loans
5,687,142

 
30,452

 
29,144

 
59,596

 
5,746,738

 
 
50,697

 
802

Home equity
535,587

 
3,216

 
4,382

 
7,598

 
543,185

 
 
6,290

 
145

1-4 family mortgages
287,892

 
2,246

 
1,325

 
3,571

 
291,463

 
 
2,941

 
166

Installment
75,428

 
506

 
98

 
604

 
76,032

 
 
43

 
60

Total consumer loans
898,907

 
5,968

 
5,805

 
11,773

 
910,680

 
 
9,274

 
371

Total loans, excluding
  covered loans
6,586,049

 
36,420

 
34,949

 
71,369

 
6,657,418

 
 
59,971

 
1,173

Covered loans
66,331

 
2,714

 
10,390

 
13,104

 
79,435

 
 
6,186

 
5,002

Total loans
$
6,652,380

 
$
39,134

 
$
45,339

 
$
84,473

 
$
6,736,853

 
 
$
66,157

 
$
6,175



19



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. See 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 ended March 31, 2015 and 2014 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 March 31, 2015
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
$
29,458

 
$
10,992

 
$
2,249

 
$
2,297

 
$
8,327

 
$
12,145

 
$
7,226

 
$
1,816

 
$
74,510

Charge-offs
(7,449
)
 
(156
)
 
(28
)
 
—

 
(1,317
)
 
(800
)
 
(303
)
 
—

 
(10,053
)
Recoveries
792

 
322

 
4

 
17

 
266

 
321

 
75

 
—

 
1,797

Net charge-offs
(6,657
)
 
166

 
(24
)
 
17

 
(1,051
)
 
(479
)
 
(228
)
 
—

 
(8,256
)
Provision for loan
  and covered loan
  losses and other
9,295

 
(327
)
 
130

 
(238
)
 
(978
)
 
(11
)
 
(1,319
)
 
—

 
6,552

Ending balance
$
32,096

 
$
10,831

 
$
2,355

 
$
2,076

 
$
6,298

 
$
11,655

 
$
5,679

 
$
1,816

 
$
72,806

Quarter ended March 31, 2014
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
$
30,381

 
$
10,405

 
$
2,017

 
$
6,316

 
$
10,817

 
$
13,010

 
$
12,559

 
$
1,616

 
$
87,121

Charge-offs
(3,680
)
 
(1,083
)
 
(90
)
 
(661
)
 
(1,771
)
 
(2,028
)
 
(245
)
 
—

 
(9,558
)
Recoveries
2,160

 
58

 
1

 
158

 
144

 
138

 
585

 
—

 
3,244

Net charge-offs
(1,520
)
 
(1,025
)
 
(89
)
 
(503
)
 
(1,627
)
 
(1,890
)
 
340

 
—

 
(6,314
)
Provision for loan
  and covered loan
  losses and other
(1,569
)
 
3,726

 
40

 
(157
)
 
46

 
825

 
(1,470
)
 
—

 
1,441

Ending balance
$
27,292

 
$
13,106

 
$
1,968

 
$
5,656

 
$
9,236

 
$
11,945

 
$
11,429

 
$
1,616

 
$
82,248




20



The table below provides a breakdown of loans and the related allowance for credit losses by portfolio segment as of March 31, 2015 and December 31, 2014.
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
As of March 31, 2015
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial, industrial, and
  agricultural
$
10,098

 
$
2,672,555

 
$
4,241

 
$
2,686,894

 
$
3,739

 
$
28,131

 
$
226

 
$
32,096

Commercial real estate:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Office, retail, and industrial
10,672

 
1,422,548

 
10,342

 
1,443,562

 
1,008

 
9,823

 
—

 
10,831

Multi-family
684

 
557,728

 
2,388

 
560,800

 
—

 
2,355

 
—

 
2,355

Construction
6,671

 
180,083

 
4,350

 
191,104

 
—

 
1,813

 
263

 
2,076

Other commercial real estate
2,737

 
872,277

 
6,012

 
881,026

 
—

 
6,280

 
18

 
6,298

Total commercial
  real estate
20,764

 
3,032,636

 
23,092

 
3,076,492

 
1,008

 
20,271

 
281

 
21,560

Total corporate loans
30,862

 
5,705,191

 
27,333

 
5,763,386

 
4,747

 
48,402

 
507

 
53,656

Consumer
—

 
967,852

 
10,283

 
978,135

 
—

 
11,293

 
362

 
11,655

Total loans, excluding
  covered loans
30,862

 
6,673,043

 
37,616

 
6,741,521

 
4,747

 
59,695

 
869

 
65,311

Covered loans
—

 
23,860

 
38,970

 
62,830

 
—

 
431

 
5,248

 
5,679

Reserve for unfunded
  commitments
—

 
—

 
—

 
—

 
—

 
1,816

 
—

 
1,816

Total loans
$
30,862

 
$
6,696,903

 
$
76,586

 
$
6,804,351

 
$
4,747

 
$
61,942

 
$
6,117

 
$
72,806

As of December 31, 2014
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial, industrial, and
  agricultural
$
19,796

 
$
2,588,141

 
$
3,868

 
$
2,611,805

 
$
2,249

 
$
27,209

 
$
—

 
$
29,458

Commercial real estate:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Office, retail, and industrial
12,332

 
1,458,918

 
7,129

 
1,478,379

 
271

 
10,721

 
—

 
10,992

Multi-family
939

 
561,400

 
2,082

 
564,421

 
—

 
2,249

 
—

 
2,249

Construction
6,671

 
195,094

 
2,471

 
204,236

 
—

 
2,297

 
—

 
2,297

Other commercial real estate
3,266

 
880,087

 
4,544

 
887,897

 
11

 
8,316

 
—

 
8,327

Total commercial
  real estate
23,208

 
3,095,499

 
16,226

 
3,134,933

 
282

 
23,583

 
—

 
23,865

Total corporate loans
43,004

 
5,683,640

 
20,094

 
5,746,738

 
2,531

 
50,792

 
—

 
53,323

Consumer
—

 
902,062

 
8,618

 
910,680

 
—

 
11,822

 
323

 
12,145

Total loans, excluding
  covered loans
43,004

 
6,585,702

 
28,712

 
6,657,418

 
2,531

 
62,614

 
323

 
65,468

Covered loans
—

 
24,753

 
54,682

 
79,435

 
—

 
488

 
6,738

 
7,226

Reserve for unfunded
  commitments
—

 
—

 
—

 
—

 
—

 
1,816

 
—

 
1,816

Total loans
$
43,004

 
$
6,610,455

 
$
83,394

 
$
6,736,853

 
$
2,531

 
$
64,918

 
$
7,061

 
$
74,510


21



Loans Individually Evaluated for Impairment
The following table presents loans individually evaluated for impairment by class of loan as of March 31, 2015 and December 31, 2014. PCI loans are excluded from this disclosure.
Impaired Loans Individually Evaluated by Class
(Dollar amounts in thousands)
 
As of March 31, 2015
 
 
As of December 31, 2014
 
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
$
756

 
$
9,342

 
$
31,618

 
$
3,739

 
 
$
666

 
$
19,130

 
$
35,457

 
$
2,249

Agricultural
—

 
—

 
—

 
—

 
 
—

 
—

 
—

 
—

Commercial real estate:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Office, retail, and industrial
6,973

 
3,699

 
16,302

 
1,008

 
 
9,623

 
2,709

 
18,340

 
271

Multi-family
684

 
—

 
684

 
—

 
 
939

 
—

 
1,024

 
—

Construction
6,671

 
—

 
7,731

 
—

 
 
6,671

 
—

 
7,731

 
—

Other commercial real estate
2,737

 
—

 
3,954

 
—

 
 
2,752

 
514

 
4,490

 
11

Total commercial real
  estate
17,065

 
3,699

 
28,671

 
1,008

 
 
19,985

 
3,223

 
31,585

 
282

Total impaired loans
   individually evaluated
   for impairment
$
17,821

 
$
13,041

 
$
60,289

 
$
4,747

 
 
$
20,651

 
$
22,353

 
$
67,042

 
$
2,531

The following table presents the average recorded investment and interest income recognized on impaired loans by class for the quarters ended March 31, 2015 and 2014. 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 March 31,
 
2015
 
2014
 
Average
Recorded
Balance
 
Interest
Income
Recognized (1)
 
Average
Recorded
Balance
 
Interest
Income
Recognized (1)
Commercial and industrial
$
14,947

 
$
70

 
$
10,307

 
$
118

Agricultural
—

 
—

 
—

 
—

Commercial real estate:
 
 
 
 
 
 
 

Office, retail, and industrial
11,502

 
29

 
25,469

 
141

Multi-family
812

 
—

 
1,487

 
—

Construction
6,671

 
—

 
5,282

 
—

Other commercial real estate
3,002

 
11

 
8,168

 
8

Total commercial real estate
21,987

 
40

 
40,406

 
149

Total impaired loans
$
36,934

 
$
110

 
$
50,713

 
$
267


(1) 
Recorded using the cash basis of accounting.

22



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 March 31, 2015 and December 31, 2014.
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
 
 
 
 
 
 
 
 
 
 
As of March 31, 2015
 
 
 
 
 
 
 
 
 
Commercial and industrial
$
2,191,522

 
$
69,163

 
$
44,460

 
$
12,913

 
$
2,318,058

Agricultural
368,224

 
254

 
—

 
358

 
368,836

Commercial real estate:
 
 
 
 
 
 
 
 
 
Office, retail, and industrial
1,359,754

 
40,334

 
32,111

 
11,363

 
1,443,562

Multi-family
548,921

 
6,649

 
4,530

 
700

 
560,800

Construction
167,362

 
5,082

 
11,172

 
7,488

 
191,104

Other commercial real estate
834,109

 
31,800

 
9,202

 
5,915

 
881,026

Total commercial real estate
2,910,146

 
83,865

 
57,015

 
25,466

 
3,076,492

Total corporate loans
$
5,469,892

 
$
153,282

 
$
101,475

 
$
38,737

 
$
5,763,386

As of December 31, 2014
 
 
 
 
 
 
 
 
 
Commercial and industrial
$
2,115,170

 
$
84,615

 
$
31,078

 
$
22,693

 
$
2,253,556

Agricultural
357,595

 
294

 
—

 
360

 
358,249

Commercial real estate:
 
 
 
 
 
 
 
 
 
Office, retail, and industrial
1,393,885

 
38,891

 
32,664

 
12,939

 
1,478,379

Multi-family
553,255

 
6,363

 
4,049

 
754

 
564,421

Construction
178,992

 
5,776

 
12,487

 
6,981

 
204,236

Other commercial real estate
829,003

 
32,517

 
19,407

 
6,970

 
887,897

Total commercial real estate
2,955,135

 
83,547

 
68,607

 
27,644

 
3,134,933

Total corporate loans
$
5,427,900

 
$
168,456

 
$
99,685

 
$
50,697

 
$
5,746,738


(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 $1.6 million as of March 31, 2015 and $1.8 million as of December 31, 2014.

23



Consumer Credit Quality Indicators by Class, Excluding Covered Loans
(Dollar amounts in thousands)
 
Performing
 
Non-accrual
 
Total
As of March 31, 2015
 
 
 
 
 
Home equity
$
594,060

 
$
5,483

 
$
599,543

1-4 family mortgages
281,939

 
3,819

 
285,758

Installment
92,796

 
38

 
92,834

Total consumer loans
$
968,795

 
$
9,340

 
$
978,135

As of December 31, 2014
 
 
 
 
 
Home equity
$
536,895

 
$
6,290

 
$
543,185

1-4 family mortgages
288,522

 
2,941

 
291,463

Installment
75,989

 
43

 
76,032

Total consumer loans
$
901,406

 
$
9,274

 
$
910,680

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 March 31, 2015 and December 31, 2014. See Note 1, "Summary of Significant Accounting Policies," for the accounting policy for TDRs.
TDRs by Class
(Dollar amounts in thousands)
 
As of March 31, 2015
 
As of December 31, 2014
 
Accruing
 
Non-accrual (1)
 
Total
 
Accruing
 
Non-accrual (1)
 
Total
Commercial and industrial
$
338

 
$
1,091

 
$
1,429

 
$
269

 
$
18,799

 
$
19,068

Agricultural
—

 
—

 
—

 
—

 
—

 
—

Commercial real estate:
 
 
 
 
 
 
 
 
 
 
 
Office, retail, and industrial
571

 
—

 
571

 
586

 
—

 
586

Multi-family
883

 
228

 
1,111

 
887

 
232

 
1,119

Construction
—

 
—

 
—

 
—

 
—

 
—

Other commercial real estate
357

 
—

 
357

 
433

 
183

 
616

Total commercial real estate
1,811

 
228

 
2,039

 
1,906

 
415

 
2,321

Total corporate loans
2,149

 
1,319

 
3,468

 
2,175

 
19,214

 
21,389

Home equity
562

 
562

 
1,124

 
651

 
506

 
1,157

1-4 family mortgages
870

 
115

 
985

 
878

 
184

 
1,062

Installment
—

 
—

 
—

 
—

 
—

 
—

Total consumer loans
1,432

 
677

 
2,109

 
1,529

 
690

 
2,219

Total loans
$
3,581

 
$
1,996

 
$
5,577

 
$
3,704

 
$
19,904

 
$
23,608


(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 $800,000 in specific reserves related to TDRs as of March 31, 2015 and there were $1.8 million in specific reserves related to TDRs as of December 31, 2014.

24



No loans were restructured during the quarters ended March 31, 2015 and 2014.
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 ended March 31, 2015 and 2014 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 March 31,
 
2015
 
2014
 
Number
of
Loans
 
Recorded
Investment
 
Number
of
Loans
 
Recorded
Investment
Commercial and industrial
—

 
$
—

 
2

 
$
125

Total
—

 
$
—

 
2

 
$
125

A rollforward of the carrying value of TDRs for the quarters ended March 31, 2015 and 2014 is presented in the following table.
TDR Rollforward
(Dollar amounts in thousands)
 
Quarters Ended 
 March 31,
 
2015
 
2014
Accruing
 
 
 
Beginning balance
$
3,704

 
$
23,770

Additions
—

 
—

Net payments received
(42
)
 
(460
)
Returned to performing status
—

 
(18,821
)
Net transfers from non-accrual
(81
)
 
1,812

Ending balance
3,581

 
6,301

Non-accrual
 
 
 
Beginning balance
19,904

 
4,083

Additions
—

 
—

Net payments received
(15,399
)
 
(134
)
Charge-offs
(2,590
)
 
(34
)
Transfers to OREO
—

 
(183
)
Loans sold
—

 
—

Net transfers to accruing
81

 
(1,812
)
Ending balance
1,996

 
1,920

Total TDRs
$
5,577

 
$
8,221

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. No TDRs were returned to performing status during the quarter ended March 31, 2015. TDRs that were returned to performing status totaled $18.8 million for the quarter ended March 31, 2014. 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 March 31, 2015 and there were $666,000 in commitments as of December 31, 2014.

25



7. 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 
 March 31,
 
2015
 
2014
Net income
$
19,882

 
$
17,664

Net income applicable to non-vested restricted shares
(228
)
 
(225
)
Net income applicable to common shares
$
19,654

 
$
17,439

Weighted-average common shares outstanding:
 
 
 
Weighted-average common shares outstanding (basic)
76,918

 
74,147

Dilutive effect of common stock equivalents
12

 
12

Weighted-average diluted common shares outstanding
76,930

 
74,159

Basic earnings per common share
$
0.26

 
$
0.24

Diluted earnings per common share
$
0.26

 
$
0.24

Anti-dilutive shares not included in the computation of diluted earnings per common share (1)
948

 
1,316


(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.
8.  INCOME TAXES
The following table presents income tax expense and the effective income tax rate for the quarters ended March 31, 2015 and 2014.
Income Tax Expense
(Dollar amounts in thousands)
 
Quarters Ended 
 March 31,
 
2015
 
2014
Income before income tax expense
$
28,674

 
$
25,836

Income tax expense:
 
 
 
Federal income tax expense
$
7,076

 
$
6,278

State income tax expense
1,716

 
1,894

Total income tax expense
$
8,792

 
$
8,172

Effective income tax rate
30.7
%
 
31.6
%
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 for consolidated/combined reporting and sourcing of income and expense.
Income tax expense was $8.8 million and $8.2 million for the quarters ended March 31, 2015 and 2014, respectively. The increase resulted primarily from higher levels of income subject to tax at statutory rates in 2015, partially offset by decreases in Illinois and Indiana statutory rates in 2015.
The Company's accounting policies for the recognition of income taxes in the Consolidated Statements of Financial Condition and Income are included in Note 1, "Summary of Significant Accounting Policies" and Note 15, "Income Taxes" to the Consolidated Financial Statements in the Company's 2014 10-K.

26



9.  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)
 
March 31,
2015
 
December 31,
2014
Gross notional amount outstanding
$
12,504

 
$
12,793

Derivative liability fair value
(993
)
 
(1,032
)
Weighted-average interest rate received
2.08
%
 
2.07
%
Weighted-average interest rate paid
6.37
%
 
6.37
%
Weighted-average maturity (in years)
2.71

 
2.95

Fair value of assets needed to settle derivative transactions (1)
$
1,017

 
$
1,057

(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 ended March 31, 2015 and 2014, gains or losses related to fair value hedge ineffectiveness were not material.
Cash Flow Hedges
As of March 31, 2015, the Company hedged $510.0 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 $510.0 million of borrowed funds using forward starting interest rate swaps through which the Company receives variable amounts and pays fixed amounts. These transactions allow the Company to add stability to net interest income and manage its exposure to interest rate movements. The forward starting interest rate swaps begin at various dates between June 2015 and March 2018 and mature between June 2019 and March 2020. These derivative contracts are designated as cash flow hedges.
Cash Flow Hedges
(Dollar amounts in thousands)
 
March 31,
2015
 
December 31,
2014
Gross notional amount outstanding
$
1,020,000

 
$
650,000

Derivative asset fair value
6,352

 
1,166

Derivative liability fair value
(9,001
)
 
(3,096
)
Weighted-average interest rate received
1.57
%
 
1.63
%
Weighted-average interest rate paid
0.17
%
 
0.16
%
Weighted-average maturity (in years)
4.48

 
4.52

The effective portion of gains or losses on cash flow hedges is recorded in accumulated other comprehensive loss on an after-tax basis and is subsequently reclassified to interest income or expense in the period that the forecasted hedge impacts earnings. Hedge effectiveness is determined using a regression analysis at the inception of the hedge relationship and on an ongoing basis. For the quarter ended March 31, 2015, there were no material gains or losses related to cash flow hedge ineffectiveness. As of March 31, 2015, the Company estimates that $4.2 million will be reclassified from accumulated other comprehensive income as an increase to interest income over the next twelve months.

27



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 $662,000 and $204,000 were recorded in noninterest income for the quarters ended March 31, 2015 and 2014, respectively.
Other Derivative Instruments
(Dollar amounts in thousands)
 
March 31,
2015
 
December 31,
2014
Gross notional amount outstanding
$
551,384

 
$
527,893

Derivative asset fair value
10,182

 
7,852

Derivative liability fair value
(10,182
)
 
(7,852
)
Fair value of assets needed to settle derivative transactions (1)
10,522

 
8,130


(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, consisting of 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 March 31, 2015 or December 31, 2014. 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. At March 31, 2015 and December 31, 2014, these collateral agreements covered 100% of the fair value of the Company's outstanding fair value hedges. Derivative assets and liabilities are presented gross, rather than net, of pledged collateral amounts.
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 fair value of the Company's derivatives and offsetting positions as of March 31, 2015 and December 31, 2014.
Fair Value of Offsetting Derivatives
(Dollar amounts in thousands)
 
March 31, 2015
 
December 31, 2014
 
Assets
 
Liabilities
 
Assets
 
Liabilities
Gross amounts recognized
$
16,534

 
$
20,176

 
$
9,018

 
$
11,980

Less: amounts offset in the Consolidated Statements of
  Financial Condition
—

 
—

 
—

 
—

Net amount presented in the Consolidated Statements of
  Financial Condition (1)
16,534

 
20,176

 
9,018


11,980

Gross amounts not offset in the Consolidated Statements of Financial Condition
 
 
 
 
Offsetting derivative positions
(6,367
)
 
(6,367
)
 
(1,195
)
 
(1,195
)
Cash collateral pledged
—

 
(13,809
)
 
—

 
(10,785
)
Net credit exposure
$
10,167

 
$
—

 
$
7,823

 
$
—


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

28



As of March 31, 2015 and December 31, 2014, 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 that credit rating 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 March 31, 2015 and December 31, 2014 the Company was not in violation of these provisions.
10.  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)
 
March 31,
2015
 
December 31,
2014
Commitments to extend credit:
 
 
 
Commercial, industrial, and agricultural
$
1,297,253

 
$
1,299,683

Commercial real estate
170,528

 
170,573

Home equity
324,622

 
317,783

Other commitments (1)
197,075

 
194,556

Total commitments to extend credit
$
1,989,478

 
$
1,982,595

 
 
 
 
Standby letters of credit
$
97,337

 
$
110,639

Recourse on assets sold:
 
 
 
Unpaid principal balance of loans sold
$
196,941

 
$
185,910

Carrying value of recourse obligation (2)
139

 
155


(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 March 31, 2015 and 2014.

29



Legal Proceedings
In the ordinary course of business, there were certain legal proceedings pending against the Company and its subsidiaries at March 31, 2015. 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.
11.  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. See the "Fair Value Measurements of Other Financial Instruments" section of this note. Any aggregation of the estimated fair values presented in this note 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.

30



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)
 
As of March 31, 2015
 
As of December 31, 2014
 
Level 1
 
Level 2
 
Level 3
 
Level 1
 
Level 2
 
Level 3
Assets:
 
 
 
 
 
 
 
 
 
 
 
Trading securities:
 
 
 
 
 
 
 
 
 
 
 
Money market funds
$
1,572

 
$
—

 
$
—

 
$
1,725

 
$
—

 
$
—

Mutual funds
16,802

 
—

 
—

 
15,735

 
—

 
—

Total trading securities
18,374

 
—

 
—

 
17,460

 
—

 
—

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

 
24,707

 
—

 
—

 
30,431

 
—

CMOs
—

 
524,064

 
—

 
—

 
534,156

 
—

Other MBSs
—

 
150,646

 
—

 
—

 
159,765

 
—

Municipal securities
—

 
413,118

 
—

 
—

 
423,820

 
—

CDOs
—

 
—

 
33,928

 
—

 
—

 
33,774

Corporate debt securities
—

 
1,792

 
—

 
—

 
1,802

 
—

Equity securities
—

 
3,348

 
—

 
—

 
3,261

 
—

Total securities
  available-for-sale
—

 
1,117,675

 
33,928

 
—

 
1,153,235

 
33,774

Mortgage servicing rights (1)
—

 
—

 
1,773

 
—

 
—

 
1,728

Derivative assets (1)
—

 
16,534

 
—

 
—

 
9,018

 
—

Liabilities:
 
 
 
 
 
 
 
 
 
 
 
Derivative liabilities (2)
$
—

 
$
20,176

 
$
—

 
$
—

 
$
11,980

 
$
—


(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 estimate the fair value of these securities to determine whether the valuations represent an exit price in the Company’s principal markets.
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 is based on credit analysis and historical financial data for each of the issuers underlying the CDOs (the "Issuers"). These estimates are highly subjective and sensitive to several significant, unobservable inputs. The cash flows for each Issuer are then discounted to present values using LIBOR plus an adjustment to reflect the impact of market factors. Finally, the discounted cash flows for each Issuer are aggregated to derive the estimated fair value for the specific CDO.

31



The following table presents the ranges of significant, unobservable inputs calculated using the weighted average of the Issuers used by the Company as of March 31, 2015.
Significant Unobservable Inputs Used in the Valuation of CDOs
 
 
As of
 
 
March 31, 2015
Probability of prepayment
 
2.9% - 15.2%
Probability of default
 
18.4% - 57.7%
Loss given default
 
83.8% - 97.0%
Probability of deferral cure
 
6.7% - 75.0%
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 semi-annual 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 Issuers’ industries. 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 ended March 31, 2015 and 2014 is presented in the following table.
Rollforward of the Carrying Value of CDOs
(Dollar amounts in thousands)
 
Quarters Ended 
 March 31,
 
2015
 
2014
Beginning balance
$
33,774

 
$
18,309

Change in other comprehensive income (loss) (1)
300

 
3,357

Paydowns
(146
)
 
—

Ending balance
$
33,928

 
$
21,666


(1) 
Included in unrealized holding gains in the Consolidated Statements of Comprehensive Income.
Mortgage Servicing Rights
The Company services loans for others totaling $229.7 million as of March 31, 2015 and $220.4 million as of December 31, 2014. These loans are owned by third parties and are not included in the Consolidated Statements of Financial Condition. The Company determines the fair value of mortgage servicing rights by estimating the present value of expected future cash flows associated with the mortgage loans being serviced 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 22, "Fair Value," to the Consolidated Financial Statements in the Company’s 2014 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

32



likelihood of default by itself and its counterparties, when evaluating whether the market quotes from the counterparty are representative of an exit price.
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)
 
As of March 31, 2015
 
As of December 31, 2014
 
Level 1
 
Level 2
 
Level 3
 
Level 1
 
Level 2
 
Level 3
Collateral-dependent impaired loans (1)
$
—

 
$
—

 
$
10,003

 
$
—

 
$
—

 
$
23,799

OREO (2)
—

 
—

 
5,543

 
—

 
—

 
22,760

Loans held-for-sale (3)
—

 
—

 
8,595

 
—

 
—

 
9,459

Assets held-for-sale (4)
—

 
—

 
2,026

 
—

 
—

 
2,026


(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 15%. 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 March 31, 2015, loans held-for-sale consisted of 1-4 family mortgage loans, which were originated with the intent to sell. These loans were recorded in the held-for-sale category at the contract price and, accordingly, are classified in level 3 of the fair value hierarchy. As of December 31, 2014, loans held-for-sale consists of 1-4 family mortgage loans, which were originated with the intent to sell, and a commercial real estate loan.
Assets Held-for-Sale
Assets held-for-sale consists 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.

33



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)
 
 
As of March 31, 2015
 
As of December 31, 2014
 
Fair Value Hierarchy
Level
 
Carrying
Amount
 
Fair Value
 
Carrying
Amount
 
Fair Value
Assets:
 
 
 
 
 
 
 
 
 
Cash and due from banks
1
 
$
126,450

 
$
126,450

 
$
117,315

 
$
117,315

Interest-bearing deposits in other banks
2
 
492,607

 
492,607

 
488,947

 
488,947

Securities held-to-maturity
2
 
25,861

 
27,171

 
26,555

 
27,670

FHLB and FRB stock
2
 
38,748

 
38,748

 
37,558

 
37,558

Net loans
3
 
6,733,361

 
6,645,251

 
6,664,159

 
6,532,622

FDIC indemnification asset
3
 
8,540

 
4,669

 
8,452

 
3,626

Investment in BOLI
3
 
207,190

 
207,190

 
206,498

 
206,498

Accrued interest receivable
3
 
28,442

 
28,442

 
27,506

 
27,506

Other interest earning assets
3
 
3,268

 
3,352

 
3,799

 
3,904

Liabilities:
 
 
 
 
 
 
 
 
 
Deposits
2
 
$
7,914,679

 
$
7,908,654

 
$
7,887,758

 
$
7,879,413

Borrowed funds
2
 
131,200

 
131,200

 
137,994

 
137,994

Senior and subordinated debt
1
 
200,954

 
208,847

 
200,869

 
209,035

Accrued interest payable
2
 
5,149

 
5,149

 
2,324

 
2,324

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 FRB Stock - The carrying amounts approximate fair value as the stock is non-marketable.
Net Loans - Net loans includes loans held-for-investment, acquired loans, covered loans, and the allowance for loan and covered loan losses. 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 inherent in the loans.
The fair value of the covered loan portfolio is determined by discounting the expected future cash flows at a market interest rate, which is derived from LIBOR swap rates over the life of those loans. The expected future cash flows are derived from the contractual terms of the covered loans, net of any projected credit losses. For valuation purposes, these loans are placed into groups with similar characteristics and risk factors, where appropriate. The timing and amount of credit losses for each group are estimated using historical default and loss experience, current collateral valuations, borrower credit scores, and internal risk ratings. For individually significant loans or credit relationships, the estimated fair value is determined by a specific loan level review utilizing appraised values for collateral and projections of the timing and amount of expected future cash flows.

34



FDIC Indemnification Asset - The fair value of the FDIC indemnification asset is calculated by discounting the expected future cash flows 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.
Investment in BOLI - The fair value of 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 demand 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.
Commitments to Extend Credit and Letters of Credit - The Company estimated the fair value of lending commitments outstanding to be immaterial based on (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.

35



ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
First Midwest Bancorp, Inc. is a bank holding company headquartered in the Chicago suburb of Itasca, Illinois. Our principal subsidiary, First Midwest Bank (the "Bank"), and other affiliates provide a full range of business, middle-market and retail banking and wealth management services to commercial and industrial, commercial real estate, municipal, and consumer customers through over 100 locations in metropolitan Chicago, northwest Indiana, central and western Illinois, and eastern Iowa. 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 Condensed Consolidated Statements of Income for the quarters ended March 31, 2015 and 2014 and Consolidated Statements of Financial Condition as of March 31, 2015 and December 31, 2014. When we use the terms "First Midwest," the "Company," "we," "us," and "our," we mean First Midwest Bancorp, Inc. 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, accompanying notes thereto, and other information presented in Item 1 of this Form 10-Q, as well as in our 2014 Annual Report on Form 10-K ("2014 10-K"). The results of operations for the quarter ended March 31, 2015 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.
•
Noninterest Expense - Noninterest expense is the expense we incur to operate the Company, which includes salaries and employee benefits, net occupancy and equipment, professional services, and other costs.
•
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 classified in one of the following tiers: (i) Common Equity Tier 1 capital ("CET1"), which consists of common equity and retained earnings, less goodwill and other intangible assets and a portion of disallowed deferred tax assets, (ii) Tier 1 capital, which consists of CET1 and qualifying trust preferred securities and the remaining portion of disallowed deferred tax assets, and (iii) Tier 2 capital, which 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," "target," 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, acquisition transactions, including estimated synergies, cost savings and financial benefits of pending or consummated transactions, and growth strategies, including possible future

36



acquisitions. These statements are subject to certain risks, uncertainties and assumptions. For a discussion of these risks, 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 2014 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.
NON-GAAP FINANCIAL INFORMATION
The Company's accounting and reporting policies conform to Generally Accepted Accounting Principles ("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), tax-equivalent net interest margin, 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.
CRITICAL ACCOUNTING ESTIMATES
Our consolidated financial statements are prepared in accordance with GAAP and are consistent with predominant practices in the financial services industry. Application of GAAP 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. Critical accounting estimates are those estimates that management believes are the most important to our financial position and results of operations. Future changes in information may impact these estimates, assumptions, and judgments, which may have a material effect on the amounts reported in the financial statements.
For additional information regarding critical accounting estimates, see the "Summary of Significant Accounting Policies," presented in Note 1 to the Consolidated Financial Statements and the section titled "Critical Accounting Estimates" in Management’s Discussion and Analysis of Financial Condition and Results of Operations included in the Company’s 2014 10-K. There have been no significant changes in the Company’s application of critical accounting estimates related to the allowance for credit losses, valuation of securities, income taxes, and goodwill and other intangible assets since December 31, 2014.

37



PERFORMANCE OVERVIEW
Table 1
Selected Financial Data
(Dollar and share amounts in thousands, except per share data)
 
Quarters Ended 
 March 31,
 
2015
 
2014
Operating Results
 
 
 
Interest income
$
82,469

 
$
69,690

Interest expense
5,687

 
5,995

Net interest income
76,782

 
63,695

Provision for loan and covered loan losses
6,552

 
1,441

Noninterest income
31,101

 
27,250

Noninterest expense
72,657

 
63,668

Income before income tax expense
28,674

 
25,836

Income tax expense
8,792

 
8,172

Net income
$
19,882

 
$
17,664

Weighted-average diluted common shares outstanding
76,930

 
74,159

Diluted earnings per common share
$
0.26

 
$
0.24

Performance Ratios (1)
 
 
 
Return on average common equity
7.15
%
 
6.97
%
Return on average tangible common equity (2)
10.52
%
 
9.81
%
Return on average assets
0.85
%
 
0.86
%
Net interest margin – tax equivalent
3.79
%
 
3.61
%
Efficiency ratio (3)
64.46
%
 
66.66
%

(1) 
All ratios are presented on an annualized basis.
(2) 
Return on average tangible common equity expresses net income available to common stockholders excluding intangibles amortization expense, net of tax, as a percentage of tangible common equity ("TCE"). Intangibles amortization expense totaled $998,000 and $761,000 for the quarters ended March 31, 2015 and 2014, respectively. TCE represents average stockholders' equity less goodwill and average intangible assets.
(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 gains, and tax-equivalent adjusted BOLI income.
 
March 31,
2015
 
December 31,
2014
 
March 31,
2014
 
March 31, 2015 
 Change From
December 31,
2014
 
March 31,
2014
Balance Sheet Highlights
 
 
 
 
 
 
 
 
 
Total assets
$
9,498,596

 
$
9,445,139

 
$
8,328,519

 
$
53,457

 
$
1,170,077

Total loans, excluding covered loans
6,741,521

 
6,657,418

 
5,693,090

 
84,103

 
1,048,431

Total loans, including covered loans
6,804,351

 
6,736,853

 
5,815,477

 
67,498

 
988,874

Total deposits
7,914,679

 
7,887,758

 
6,816,757

 
26,921

 
1,097,922

Core deposits
6,673,534

 
6,616,200

 
5,631,879

 
57,334

 
1,041,655

Loans-to-deposits ratio
86.0
%
 
85.4
%
 
85.3
%
 
 
 
 
Core deposits to total deposits
84.3
%
 
83.9
%
 
82.6
%
 
 
 
 


38



 
March 31,
2015
 
December 31,
2014
 
March 31,
2014
 
March 31, 2015 
 Change From
December 31,
2014
 
March 31,
2014
Asset Quality Highlights (1)
 
 
 
 
 
 
 
 
 
Non-accrual loans
$
48,077

 
$
59,971

 
$
64,217

 
$
(11,894
)
 
$
(16,140
)
90 days or more past due loans
  (still accruing interest)
3,564

 
1,173

 
4,973

 
2,391

 
(1,409
)
Total non-performing loans
51,641

 
61,144

 
69,190

 
(9,503
)
 
(17,549
)
Accruing troubled debt
  restructurings ("TDRs")
3,581

 
3,704

 
6,301

 
(123
)
 
(2,720
)
OREO
26,042

 
26,898

 
30,026

 
(856
)
 
(3,984
)
Total non-performing assets
$
81,264

 
$
91,746

 
$
105,517

 
$
(10,482
)
 
$
(24,253
)
30-89 days past due loans
  (still accruing interest)
$
18,631

 
$
20,073

 
$
12,861

 
$
(1,442
)
 
$
5,770

Allowance for Credit Losses
 
 
 
 
 
 
 
 
 
Allowance for credit losses
$
72,806

 
$
74,510

 
$
82,248

 
$
(1,704
)
 
$
(9,442
)
Allowance for credit losses to total loans
1.07
%
 
1.11
%
 
1.41
%
 
 
 
 
Allowance for credit losses to loans,
  excluding acquired loans (2)
1.19
%
 
1.24
%
 
1.41
%
 
 
 
 
Allowance for credit losses to
  non-accrual loans (1)
139.62
%
 
112.19
%
 
110.28
%
 
 
 
 

(1) 
These amounts and ratios exclude covered loans and covered OREO. For a discussion of covered loans, see Note 1 and Note 5 of "Notes to the Condensed Consolidated Financial Statements" in Part I, Item 1 of this Form 10-Q.
(2) 
Due to the impact of business combination accounting acquired loans are excluded from this metric to provide for improved comparability to prior periods and better perspective into this allowance coverage ratio. For a discussion of acquired loans, see Note 1 and Note 5 of "Notes to Condensed Consolidated Financial Statements" in Part I, Item 1 of this Form 10-Q.
Net income for the first quarter of 2015 was $19.9 million, or $0.26 per share, compared to $17.7 million, or $0.24 per share, for the first quarter of 2014.
The increase in net income compared to the first quarter of 2014 reflects the benefit of the acquisitions completed during the second half of 2014 as well as organic growth, partly offset by a greater provision for loan and covered loan losses. 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 $6.7 billion grew 5.1% on an annualized basis from December 31, 2014. Growth during the first quarter of 2015 was concentrated within our commercial and industrial and agricultural loan categories and reflects the continued expansion into certain sector-based lending areas such as asset-based lending and healthcare. In addition, we purchased $55.1 million of high quality, shorter-duration, floating rate home equity loans.
Non-performing assets, excluding covered loans and covered OREO, decreased by $10.5 million, or 11.4%, from December 31, 2014 and $24.3 million, or 23.0%, from March 31, 2014. Lower levels of non-accrual loans, accruing TDRs, and OREO contributed to the decline compared to both prior periods. See the "Loan Portfolio and Credit Quality" section below for further discussion of our loan portfolio, non-accrual loans, 90 days or more past due loans, TDRs, and OREO.


39



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 2014 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 Table 2.
Table 2 summarizes our average interest-earning assets and interest-bearing liabilities for the quarters ended March 31, 2015 and 2014, 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.

40



Table 2
Net Interest Income and Margin Analysis
(Dollar amounts in thousands)
 
Quarters Ended March 31,
 
 
Attribution of Change
in Net Interest Income (1)
 
2015
 
 
2014
 
 
 
Average
Balance
 
Interest
 
Yield/
Rate (%)
 
 
Average
Balance
 
Interest
 
Yield/
Rate (%)
 
 
Volume
 
Yield/
Rate
 
Total
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other interest-earning assets
$
522,232

 
$
398

 
0.31
 
 
$
537,137

 
$
382

 
0.29
 
 
$
(11
)
 
$
27

 
$
16

Trading securities
17,694

 
24

 
0.54
 
 
17,470

 
28

 
0.64
 
 
—

 
(4
)
 
(4
)
Investment securities (2)
1,200,423

 
10,387

 
3.46
 
 
1,167,803

 
10,403

 
3.56
 
 
665

 
(681
)
 
(16
)
FHLB and Federal Reserve
  Bank stock
37,822

 
357

 
3.78
 
 
35,161

 
335

 
3.81
 
 
25

 
(3
)
 
22

Loans (2)(3)
6,740,399

 
74,186

 
4.46
 
 
5,722,457

 
61,518

 
4.36
 
 
11,108

 
1,560

 
12,668

Total interest-earning assets (2)
8,518,570

 
85,352

 
4.06
 
 
7,480,028

 
72,666

 
3.93
 
 
11,787

 
899

 
12,686

Cash and due from banks
124,730

 
 
 
 
 
 
111,500

 
 
 
 
 
 
 
 
 
 
 
Allowance for loan and
  covered loan losses
(73,484
)
 
 
 
 
 
 
(86,726
)
 
 
 
 
 
 
 
 
 
 
 
Other assets
891,925

 
 
 
 
 
 
777,685

 
 
 
 
 
 
 
 
 
 
 
Total assets
$
9,461,741

 
 
 
 
 
 
$
8,282,487

 
 
 
 
 
 
 
 
 
 
 
Liabilities and Stockholders’ Equity:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Savings deposits
$
1,426,546

 
268

 
0.08
 
 
$
1,159,643

 
202

 
0.07
 
 
49

 
17

 
66

NOW accounts
1,365,494

 
170

 
0.05
 
 
1,181,297

 
170

 
0.06
 
 
27

 
(27
)
 
—

Money market deposits
1,521,762

 
489

 
0.13
 
 
1,311,998

 
420

 
0.13
 
 
67

 
2

 
69

Time deposits
1,266,562

 
1,598

 
0.51
 
 
1,196,449

 
1,805

 
0.61
 
 
116

 
(323
)
 
(207
)
Borrowed funds
127,571

 
18

 
0.06
 
 
222,491

 
383

 
0.70
 
 
(186
)
 
(179
)
 
(365
)
Senior and subordinated debt
200,910

 
3,144

 
6.35
 
 
190,949

 
3,015

 
6.40
 
 
156

 
(27
)
 
129

Total interest-bearing
  liabilities
5,908,845

 
5,687

 
0.39
 
 
5,262,827

 
5,995

 
0.46
 
 
229

 
(537
)
 
(308
)
Demand deposits
2,312,431

 
 
 
 
 
 
1,928,289

 
 
 
 
 
 
 
 
 
 
 
Total funding sources
8,221,276

 
 
 
 
 
 
7,191,116

 
 
 
 
 
 
 
 
 
 
 
Other liabilities
125,703

 
 
 
 
 
 
75,969

 
 
 
 
 
 
 
 
 
 
 
Stockholders’ equity - common
1,114,762

 
 
 
 
 
 
1,015,402

 
 
 
 
 
 
 
 
 
 
 
Total liabilities and
  stockholders’ equity
$
9,461,741

 
 
 
 
 
 
$
8,282,487

 
 
 
 
 
 
 
 
 
 
 
Net interest income/margin (2)
 
 
79,665

 
3.79
 
 
 
 
66,671

 
3.61
 
 
$
11,558

 
$
1,436

 
$
12,994

Tax equivalent adjustment
 
 
(2,883
)
 
 
 
 
 
 
(2,976
)
 
 
 
 
 
 
 
 
 
Net interest income (GAAP)
 
 
$
76,782

 
 
 
 
 
 
$
63,695

 
 
 
 
 
 
 
 
 

(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, see Note 1 and Note 5 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 first quarter of 2015 increased $1.0 billion from the first quarter of 2014, reflecting the impact of loans and securities acquired during the second half of 2014 and solid organic loan growth over the course of the year.
Total average funding sources for the first quarter of 2015 increased $1.0 billion compared to the first quarter of 2014 due primarily to acquisition activity. The decline in borrowed funds resulted from the prepayment of $114.6 million of FHLB advances during the second quarter of 2014.

41



Tax-equivalent net interest margin for the current quarter was 3.79%, increasing 18 basis points from the first quarter of 2014. Excluding acquired loan accretion income and interest rate swaps, tax-equivalent net interest margin was consistent with the first quarter of 2014.
Noninterest Income
A summary of noninterest income for the quarters ended March 31, 2015 and 2014 is presented in the following table.
Table 3
Noninterest Income Analysis
(Dollar amounts in thousands)
 
Quarters Ended 
 March 31,
 
 
 
2015
 
2014
 
% Change
Service charges on deposit accounts
$
9,271

 
$
8,020

 
15.6

Wealth management fees
7,014

 
6,457

 
8.6

Card-based fees (1)
6,402

 
5,335

 
20.0

Merchant servicing fees (2)
2,665

 
2,709

 
(1.6
)
Mortgage banking income
1,123

 
1,115

 
0.7

Other service charges, commissions, and fees
2,166

 
1,413

 
53.3

Total fee-based revenues
28,641

 
25,049

 
14.3

Net securities gains
512

 
1,073

 
(52.3
)
BOLI income (5)
883

 
490

 
80.2

Other income (3)(5)
646

 
447

 
44.5

Net trading gains (4)(5)
419

 
191

 
N/M

Total noninterest income
$
31,101

 
$
27,250

 
14.1


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) 
Merchant servicing fees are included in other service charges, commissions, and fees in the Condensed Consolidated Statements of Income.
(3) 
Other income consists of various items, including safe deposit box rentals, miscellaneous recoveries, and gains on the sales of various assets.
(4) 
Net trading 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.
(5) 
These line items are included in other income in the Condensed Consolidated Statements of Income.
Total fee-based revenues increased 14.3% from the first quarter of 2014, reflecting growth across most categories. Higher levels of service charge volume, primarily from new customers acquired in the acquisitions completed during the second half of 2014, impacted the rise in service charges on deposit accounts. Sales to new and existing customers continued to drive the increase in wealth management fees. The rise in card-based fees reflects higher transaction volumes. Fee income generated by sales of capital market products to commercial clients and gains realized on the sale of leasing equipment contracts contributed to the increase in other service charges, commissions, and fees.
During the first quarter of 2015, the Company recorded net pre-tax securities gains of $512,000 from the sale of various securities compared to a pre-tax securities gain of $1.1 million during the first quarter of 2014.
The rise in BOLI income compared to the first quarter of 2014 resulted from the repositioning of certain investments in the portfolio as well as policies obtained from the 2014 acquisitions.


 


42



Noninterest Expense
A summary of noninterest expense for the quarters ended March 31, 2015 and 2014 is presented in the following table.
Table 4
Noninterest Expense Analysis
(Dollar amounts in thousands)
 
Quarters Ended 
 March 31,
 
 
 
2015
 
2014
 
% Change
Salaries and employee benefits:
 
 
 
 
 
Salaries and wages
$
32,331

 
$
27,197

 
18.9

Nonqualified plan expense (1)
463

 
186

 
N/M

Retirement and other employee benefits
7,922

 
6,108

 
29.7

Total salaries and employee benefits
40,716

 
33,491

 
21.6

Net occupancy and equipment expense
10,436

 
9,391

 
11.1

Professional services
5,109

 
5,389

 
(5.2
)
Technology and related costs
3,687

 
3,074

 
19.9

Merchant card expense (2)
2,197

 
2,213

 
(0.7
)
Advertising and promotions (2)
1,223

 
1,613

 
(24.2
)
Net OREO expense
1,204

 
1,556

 
(22.6
)
Cardholder expenses (2)
1,268

 
1,014

 
25.0

Other expenses (2)
6,817

 
5,927

 
15.0

Total noninterest expense
$
72,657

 
$
63,668

 
14.1

Efficiency ratio (3)
64
%
 
67
%
 
 

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 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 gains, and tax-equivalent adjusted BOLI income.
The efficiency ratio improved to 64% from 67% for the first quarter of 2014. The 14.1% rise in total noninterest expense was substantially due to operating costs of 21 banking locations acquired during the second half of 2014.
Salaries and wages increased compared to the first quarter of 2014 driven by additional salaries resulting from the acquisitions completed during 2014 and other salary expenses associated with growth and organizational needs.
Retirement and other employee benefits rose compared to the first quarter of 2014 due to the acquisitions completed during 2014 and comparatively higher incentive compensation expenses.
Net occupancy and equipment expense increased compared to the first quarter of 2014 driven by a rise in occupancy costs from the acquired banking locations, partially offset by lower year-over-year weather related costs.
Technology and related costs increased from the first quarter of 2014 due primarily to greater processing expenses associated with operating the acquired banking locations.
Advertising and promotions expense decreased compared to the first quarter of 2014 as a result of the timing of certain advertising costs.
Net OREO expense decreased compared to the first quarter of 2014 due to reduced valuation adjustments and higher net gains on sales of OREO properties.
Other expense increased from the first quarter of 2014 resulting primarily from additional FDIC premiums, other intangibles amortization, and other miscellaneous expenses related to the 2014 acquisitions.

43



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 5
Income Tax Expense Analysis
(Dollar amounts in thousands)
 
Quarters Ended 
 March 31,
 
2015
 
2014
Income before income tax expense
$
28,674

 
$
25,836

Income tax expense:
 
 
 
Federal income tax expense
$
7,076

 
$
6,278

State income tax expense
1,716

 
1,894

Total income tax expense
$
8,792

 
$
8,172

Effective income tax rate
30.7
%
 
31.6
%
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.
The decline in the effective income tax rate compared to the first quarter of 2014 resulted primarily from a decrease in the Illinois statutory rate in 2015.
Our accounting policies for the recognition of income taxes in the Consolidated Statements of Financial Condition and Income are included in Notes 1 and 15 to the Consolidated Financial Statements of our 2014 10-K.
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.

44



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 6
Investment Portfolio Valuation Summary
(Dollar amounts in thousands)
 
March 31, 2015
 
December 31, 2014
 
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
$
24,350

 
$
357

 
$
24,707

 
2.1
 
$
30,297

 
$
134

 
$
30,431

 
2.5
Collateralized mortgage
  obligations ("CMOs")
524,090

 
(26
)
 
524,064

 
44.5
 
538,882

 
(4,726
)
 
534,156

 
44.0
Other mortgage-backed
  securities ("MBSs")
145,846

 
4,800

 
150,646

 
12.8
 
155,443

 
4,322

 
159,765

 
13.1
Municipal securities
403,474

 
9,644

 
413,118

 
35.0
 
414,255

 
9,565

 
423,820

 
34.9
Trust preferred
  collateralized debt
  obligations ("CDOs")
48,357

 
(14,429
)
 
33,928

 
2.9
 
48,502

 
(14,728
)
 
33,774

 
2.8
Corporate debt
  securities
1,725

 
67

 
1,792

 
0.1
 
1,719

 
83

 
1,802

 
0.1
Equity securities
3,274

 
74

 
3,348

 
0.3
 
3,224

 
37

 
3,261

 
0.3
Total available-for-
  sale securities
1,151,116

 
487

 
1,151,603

 
97.7
 
1,192,322

 
(5,313
)
 
1,187,009

 
97.7
Securities Held-to-Maturity
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Municipal securities
25,861

 
1,310

 
27,171

 
2.3
 
26,555

 
1,115

 
27,670

 
2.3
Total securities
$
1,176,977

 
$
1,797

 
$
1,178,774

 
100.0
 
$
1,218,877

 
$
(4,198
)
 
$
1,214,679

 
100.0
Portfolio Composition
As of March 31, 2015, our available-for-sale securities portfolio totaled $1.2 billion, decreasing 3.0% compared to December 31, 2014. The reduction in U.S. agency securities, CMOs, MBSs, and municipal securities from December 31, 2014 resulted from sales of $35.7 million and maturities, calls, and prepayments of $58.2 million, offset by purchases of $54.0 million. For additional detail regarding sales of securities see the "Securities Gains and Losses" section below.
Approximately 97% 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 eleven CDOs with a total fair value of $33.9 million and miscellaneous other securities with a total fair value of $5.1 million.
Investments in municipal securities comprised 35.9%, or $413.1 million, of the total available-for-sale securities portfolio at March 31, 2015. The majority consists of general obligations of local municipalities in various states. Our municipal securities portfolio has historically experienced very low default rates and provides a predictable cash flow.

45



Table 7
Securities Effective Duration Analysis
(Dollar amounts in thousands)
 
March 31, 2015
 
December 31, 2014
 
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
2.22
%
 
2.50

 
2.98
%
 
3.32
%
 
3.72

 
2.98
%
CMOs
3.26
%
 
3.57

 
1.81
%
 
3.45
%
 
3.67

 
1.91
%
MBSs
2.77
%
 
4.09

 
2.70
%
 
2.88
%
 
4.18

 
2.77
%
Municipal securities
2.56
%
 
2.32

 
5.36
%
 
2.89
%
 
2.37

 
5.50
%
CDOs
N/M

 
N/M

 
N/M

 
N/M

 
N/M

 
N/M

Corporate debt securities
0.21
%
 
0.25

 
6.72
%
 
0.45
%
 
0.50

 
6.72
%
Equity securities
N/M

 
N/M

 
N/M

 
 N/M

 
 N/M

 
N/M

Total available-for-sale securities
2.91
%
 
3.15

 
3.26
%
 
3.16
%
 
3.26

 
3.37
%
Securities Held-to-Maturity
 
 
 
 
 
 
 
 
 
 
 
Municipal securities
5.64
%
 
7.86

 
4.49
%
 
5.64
%
 
7.85

 
4.60
%
Total securities
2.97
%
 
3.26

 
3.29
%
 
3.21
%
 
3.37

 
3.40
%

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 were both lower than December 31, 2014 at 3.15 years and 2.91%, respectively. These decreases resulted mainly from maturities and sales of investment securities that were not reinvested in the securities portfolio.
Securities Gains and Losses
Net securities gains for the first quarter of 2015 were $512,000 compared to $1.1 million for the first quarter of 2014. During the first quarter of 2015, we sold certain U.S. agency securities, CMOs, MBSs, and municipal securities with a carrying value of $35.7 million at gains of $650,000 and losses of $138,000.
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 gains were $487,000 at March 31, 2015 compared to net unrealized losses of $5.3 million at December 31, 2014.
Net unrealized losses in the CMO portfolio totaled $26,000 at March 31, 2015 compared to $4.7 million at December 31, 2014. Net unrealized losses on CMOs include unrealized losses of $3.8 million at March 31, 2015. 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 these securities as of March 31, 2015 represents OTTI related to credit deterioration. In addition, we do not intend to sell the CMOs 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.
As of March 31, 2015, net unrealized gains in the municipal securities portfolio totaled $9.6 million, consistent with December 31, 2014. Net unrealized gains on municipal securities include unrealized losses of $554,000 at March 31, 2015. Substantially all of

46



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 net unrealized losses on these securities were $14.4 million at March 31, 2015 and $14.7 million at December 31, 2014. We do not believe the unrealized losses on the CDOs as of March 31, 2015 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 described in Note 11 of "Notes to the Condensed Consolidated Financial Statements," in Part I, Item 1 of this Form 10-Q.
LOAN PORTFOLIO AND CREDIT QUALITY
Portfolio Composition
Our loan portfolio is comprised of both corporate and consumer loans with corporate loans representing 85.5% of total loans, excluding covered loans, at March 31, 2015. 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 monitor and mitigate 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.
Table 8
Loan Portfolio
(Dollar amounts in thousands)
 
March 31,
2015
 
% of
Total
 
December 31,
2014
 
% of
Total
 
Annualized% Change
Commercial and industrial
$
2,318,058

 
34.4
 
$
2,253,556

 
33.9
 
11.4

Agricultural
368,836

 
5.5
 
358,249

 
5.4
 
11.8

Commercial real estate:
 
 
 
 
 
 
 
 
 
Office
488,263

 
7.2
 
494,637

 
7.4
 
(5.2
)
Retail
437,751

 
6.5
 
452,225

 
6.8
 
(12.8
)
Industrial
517,548

 
7.7
 
531,517

 
8.0
 
(10.5
)
Multi-family
560,800

 
8.3
 
564,421

 
8.4
 
(2.6
)
Construction
191,104

 
2.8
 
204,236

 
3.1
 
(25.7
)
Other commercial real estate
881,026

 
13.1
 
887,897

 
13.3
 
(3.1
)
Total commercial real estate
3,076,492

 
45.6
 
3,134,933

 
47.0
 
(7.5
)
Total corporate loans
5,763,386

 
85.5
 
5,746,738

 
86.3
 
1.2

Home equity
599,543

 
8.9
 
543,185

 
8.2
 
41.5

1-4 family mortgages
285,758

 
4.2
 
291,463

 
4.4
 
(7.8
)
Installment
92,834

 
1.4
 
76,032

 
1.1
 
88.4

Total consumer loans
978,135

 
14.5
 
910,680

 
13.7
 
29.6

Total loans, excluding covered loans
6,741,521

 
100.0
 
6,657,418

 
100.0
 
5.1

Covered loans
62,830

 
 
 
79,435

 
 
 
(83.6
)
Total loans
$
6,804,351

 
 
 
$
6,736,853

 
 
 
4.0

Total loans, excluding covered loans, of $6.7 billion grew 5.1% on an annualized basis from December 31, 2014. Growth during the first quarter of 2015 was concentrated within our commercial and industrial and agricultural loan categories and reflects the continued expansion into certain sector-based lending areas such as asset-based lending and healthcare. The rise in consumer loans reflects the purchase of $55.1 million of high quality, shorter-duration, floating rate home equity loans.

47



Commercial, Industrial, and Agricultural Loans
Commercial, industrial, and agricultural loans represent 39.9% of total loans, excluding covered loans, and totaled $2.7 billion at March 31, 2015, an increase of $75.1 million, or 11.5% on an annualized basis, from December 31, 2014. Our commercial and industrial loans are a diverse group of loans to 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.
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 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 properties securing the loans in our commercial real estate portfolio are diversified 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.

48



The following table presents commercial real estate loan detail as of March 31, 2015 and December 31, 2014.
Table 9
Commercial Real Estate Loans
(Dollar amounts in thousands)
 
 
March 31,
2015
 
% of
Total
 
December 31, 2014
 
% of
Total
Office, retail, and industrial:
 
 
 
 
 
 
 
 
Office
 
$
488,263

 
15.9
 
$
494,637

 
15.8
Retail
 
437,751

 
14.2
 
452,225

 
14.4
Industrial
 
517,548

 
16.8
 
531,517

 
17.0
Total office, retail, and industrial
 
1,443,562

 
46.9
 
1,478,379

 
47.2
Multi-family
 
560,800

 
18.2
 
564,421

 
18.0
Construction
 
191,104

 
6.2
 
204,236

 
6.5
Other commercial real estate:
 
 
 
 
 
 
 
 
Rental properties
 
119,090

 
3.9
 
123,627

 
3.9
Service stations and truck stops
 
81,149

 
2.6
 
84,108

 
2.7
Warehouses and storage
 
126,433

 
4.1
 
128,396

 
4.1
Hotels
 
35,642

 
1.2
 
46,409

 
1.5
Restaurants
 
74,359

 
2.4
 
74,490

 
2.4
Automobile dealers
 
52,047

 
1.7
 
53,221

 
1.7
Recreational
 
48,188

 
1.6
 
48,718

 
1.5
Religious
 
37,281

 
1.2
 
36,427

 
1.2
Multi-use properties
 
193,471

 
6.3
 
191,011

 
6.1
Other
 
113,366

 
3.7
 
101,490

 
3.2
Total other commercial real estate
 
881,026

 
28.7
 
887,897

 
28.3
Total commercial real estate
 
$
3,076,492

 
100.0
 
$
3,134,933

 
100.0
Owner-occupied commercial real estate loans,
  excluding multi-family and construction loans
 
$
936,024

 
 
 
$
959,635

 
 
Owner-occupied as a percent of total,
  excluding multi-family and construction loans
 
40.3
%
 
 
 
40.6
%
 
 
Commercial real estate loans represent 45.6% of total loans, excluding covered loans, and totaled $3.1 billion at March 31, 2015, decreasing 1.9% from December 31, 2014.
Consumer Loans
Consumer loans represent 14.5% of total loans, excluding covered loans, and totaled $978.1 million at March 31, 2015, an increase of $67.5 million from December 31, 2014. 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.

49



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 10
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 March 31, 2015
 
 
 
 
 
 
 
 
 
 
 
Commercial and industrial
$
2,318,058

 
$
2,298,263

 
$
5,092

 
$
1,452

 
$
338

 
$
12,913

Agricultural
368,836

 
368,478

 
—

 
—

 
—

 
358

Commercial real estate:
 
 
 
 
 
 
 
 
 
 
 
Office
488,263

 
484,132

 
1,128

 
602

 
—

 
2,401

Retail
437,751

 
432,323

 
392

 
77

 
400

 
4,559

Industrial
517,548

 
512,703

 
212

 
59

 
171

 
4,403

Multi-family
560,800

 
556,491

 
2,557

 
169

 
883

 
700

Construction
191,104

 
183,563

 
—

 
53

 
—

 
7,488

Other commercial real estate
881,026

 
868,712

 
5,440

 
602

 
357

 
5,915

Total commercial real estate
3,076,492

 
3,037,924

 
9,729

 
1,562

 
1,811

 
25,466

Total corporate loans
5,763,386

 
5,704,665

 
14,821

 
3,014

 
2,149

 
38,737

Home equity
599,543

 
591,035

 
2,215

 
248

 
562

 
5,483

1-4 family mortgages
285,758

 
279,744

 
1,097

 
228

 
870

 
3,819

Installment
92,834

 
92,224

 
498

 
74

 
—

 
38

Total consumer loans
978,135

 
963,003

 
3,810

 
550

 
1,432

 
9,340

Total loans, excluding covered loans
6,741,521

 
6,667,668

 
18,631

 
3,564

 
3,581

 
48,077

Covered loans
62,830

 
51,389

 
481

 
6,390

 
—

 
4,570

Total loans
$
6,804,351

 
$
6,719,057

 
$
19,112

 
$
9,954

 
$
3,581

 
$
52,647

As of December 31, 2014
 
 
 
 
 
 
 
 
 
 
 
Commercial and industrial
$
2,253,556

 
$
2,225,507

 
$
4,882

 
$
205

 
$
269

 
$
22,693

Agricultural
358,249

 
355,955

 
1,934

 
—

 
—

 
360

Commercial real estate:
 
 
 
 
 
 
 
 
 
 
 
Office
494,637

 
489,915

 
939

 
—

 
—

 
3,783

Retail
452,225

 
446,702

 
288

 
76

 
413

 
4,746

Industrial
531,517

 
525,955

 
979

 
—

 
173

 
4,410

Multi-family
564,421

 
561,436

 
1,261

 
83

 
887

 
754

Construction
204,236

 
197,255

 
—

 
—

 
—

 
6,981

Other commercial real estate
887,897

 
875,080

 
4,976

 
438

 
433

 
6,970

Total commercial real estate
3,134,933

 
3,096,343

 
8,443

 
597

 
1,906

 
27,644

Total corporate loans
5,746,738

 
5,677,805

 
15,259

 
802

 
2,175

 
50,697

Home equity
543,185

 
533,738

 
2,361

 
145

 
651

 
6,290

1-4 family mortgages
291,463

 
285,531

 
1,947

 
166

 
878

 
2,941

Installment
76,032

 
75,423

 
506

 
60

 
—

 
43

Total consumer loans
910,680

 
894,692

 
4,814

 
371

 
1,529

 
9,274

Total loans, excluding covered loans
6,657,418

 
6,572,497

 
20,073

 
1,173

 
3,704

 
59,971

Covered loans
79,435

 
65,682

 
2,565

 
5,002

 
—

 
6,186

Total loans
$
6,736,853

 
$
6,638,179

 
$
22,638

 
$
6,175

 
$
3,704

 
$
66,157



50



The following table provides a comparison of our non-performing assets and past due loans to prior periods.
Table 11
Non-performing Assets and Past Due Loans
(Dollar amounts in thousands)
 
2015
 
2014
 
March 31
 
December 31
 
September 30
 
June 30
 
March 31
Non-performing assets, excluding covered loans and covered OREO
Non-accrual loans
$
48,077

 
$
59,971

 
$
64,528

 
$
66,728

 
$
64,217

90 days or more past due loans
3,564

 
1,173

 
6,062

 
3,533

 
4,973

Total non-performing loans
51,641

 
61,144

 
70,590

 
70,261

 
69,190

Accruing TDRs
3,581

 
3,704

 
5,449

 
5,697

 
6,301

OREO
26,042

 
26,898

 
29,165

 
30,331

 
30,026

Total non-performing assets
$
81,264

 
$
91,746

 
$
105,204

 
$
106,289

 
$
105,517

30-89 days past due loans
$
18,631

 
$
20,073

 
$
17,321

 
$
24,167

 
$
12,861

Non-accrual loans to total loans
0.71
%
 
0.90
%
 
1.00
%
 
1.14
%
 
1.13
%
Non-performing loans to total loans
0.77
%
 
0.92
%
 
1.10
%
 
1.20
%
 
1.22
%
Non-performing assets to loans plus
  OREO
1.20
%
 
1.37
%
 
1.63
%
 
1.81
%
 
1.84
%
Non-performing covered loans and covered OREO (1)
Non-accrual loans
$
4,570

 
$
6,186

 
$
10,905

 
$
13,060

 
$
18,004

90 days or more past due loans
6,390

 
5,002

 
7,031

 
8,464

 
14,691

Total non-performing loans
10,960

 
11,188

 
17,936

 
21,524

 
32,695

OREO
7,309

 
8,068

 
9,277

 
9,825

 
7,355

Total non-performing assets
$
18,269

 
$
19,256

 
$
27,213

 
$
31,349

 
$
40,050

30-89 days past due loans
$
481

 
$
2,565

 
$
802

 
$
6,286

 
$
2,439

Total non-performing assets
Non-accrual loans
$
52,647

 
$
66,157

 
$
75,433

 
$
79,788

 
$
82,221

90 days or more past due loans
9,954

 
6,175

 
13,093

 
11,997

 
19,664

Total non-performing loans
62,601

 
72,332

 
88,526

 
91,785

 
101,885

Accruing TDRs
3,581

 
3,704

 
5,449

 
5,697

 
6,301

OREO
33,351

 
34,966

 
38,442

 
40,156

 
37,381

Total non-performing assets
$
99,533

 
$
111,002

 
$
132,417

 
$
137,638

 
$
145,567

30-89 days past due loans
$
19,112

 
$
22,638

 
$
18,123

 
$
30,453

 
$
15,300

Non-accrual loans to total loans
0.77
%
 
0.98
%
 
1.16
%
 
1.34
%
 
1.41
%
Non-performing loans to total loans
0.92
%
 
1.07
%
 
1.36
%
 
1.54
%
 
1.75
%
Non-performing assets to loans plus
  OREO
1.46
%
 
1.64
%
 
2.02
%
 
2.30
%
 
2.49
%

(1) 
Covered loans and covered OREO are covered by FDIC Agreements that substantially mitigate the risk of loss. Past due covered loans in the tables above are determined by borrower performance compared to contractual terms, but are generally considered accruing loans since they continue to perform in accordance with our expectations of cash flows. For a discussion of covered loans, see Note 1 and Note 5 of "Notes to the Condensed Consolidated Financial Statements" in Part I, Item 1 of this Form 10-Q.
Total non-performing assets, excluding covered loans and covered OREO, decreased by $10.5 million, or 11.4%, from December 31, 2014 and $24.3 million, or 23.0%, from March 31, 2014. Lower levels of non-accrual loans, accruing TDRs, and OREO contributed to the decline compared to both prior periods presented. The improvement in non-accrual loans compared to December 31, 2014 was primarily related to the final resolution of a large commercial loan relationship originally identified in the third quarter of 2014, for which a specific reserve was then established.

51



TDRs
Loan modifications may be performed at the request of an 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 12
TDRs by Type
(Dollar amounts in thousands)
 
March 31, 2015
 
December 31, 2014
 
March 31, 2014
 
Number
of Loans
 
Amount
 
Number
of Loans
 
Amount
 
Number
of Loans
 
Amount
Commercial and industrial
6

 
$
1,429

 
7

 
$
19,068

 
6

 
$
3,003

Commercial real estate:
 
 
 
 
 
 
 
 
 
 
 
Retail
1

 
400

 
1

 
413

 
1

 
386

Industrial
1

 
171

 
1

 
173

 
1

 
180

Multi-family
5

 
1,111

 
5

 
1,119

 
5

 
1,277

Other commercial real estate
3

 
357

 
5

 
616

 
5

 
589

Total commercial real estate
10

 
2,039

 
12

 
2,321

 
12

 
2,432

Total corporate loans
16

 
3,468

 
19

 
21,389

 
18

 
5,435

Home equity
17

 
1,124

 
17

 
1,157

 
18

 
1,288

1-4 family mortgages
9

 
985

 
10

 
1,062

 
12

 
1,498

Total consumer loans
26

 
2,109

 
27

 
2,219

 
30

 
2,786

Total TDRs
42

 
$
5,577

 
46

 
$
23,608

 
48

 
$
8,221

Accruing TDRs
27

 
$
3,581

 
29

 
$
3,704

 
32

 
$
6,301

Non-accrual TDRs
15

 
1,996

 
17

 
19,904

 
16

 
1,920

Total TDRs
42

 
$
5,577

 
46


$
23,608

 
48

 
$
8,221

Year-to-date charge-offs on TDRs
 
 
$
2,590

 
 
 
$
8,457

 
 
 
$
34

Specific reserves related to TDRs
 
 
800

 
 
 
1,765

 
 
 
—

TDRs totaled $5.6 million at March 31, 2015, decreasing $18.0 million from December 31, 2014. Accruing TDRs were $3.6 million at March 31, 2015 compared to $3.7 million at December 31, 2014.
Non-accrual TDRs declined $17.9 million from December 31, 2014, which was primarily driven by the final resolution of a large commercial loan relationship originally identified in 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.

52



Performing Potential Problem Loans
Performing potential problem loans consist of special mention loans and substandard loans. These loans are performing in accordance with their 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 13
Performing Potential Problem Loans
(Dollar amounts in thousands)
 
March 31, 2015
 
December 31, 2014
 
Special
Mention (1)
 
Substandard (2)
 
Total (3)
 
Special
Mention (1)
 
Substandard (2)
 
Total (3)
Commercial and industrial
$
69,163

 
$
44,122

 
$
113,285

 
$
84,615

 
$
30,809

 
$
115,424

Agricultural
254

 
—

 
254

 
294

 
—

 
294

Commercial real estate:
 
 
 
 
 
 
 
 
 
 
 
Office, retail, and industrial
40,163

 
31,710

 
71,873

 
38,718

 
32,251

 
70,969

Multi-family
6,239

 
4,256

 
10,495

 
5,951

 
3,774

 
9,725

Construction
5,082

 
11,172

 
16,254

 
5,776

 
12,487

 
18,263

Other commercial real estate
31,800

 
9,202

 
41,002

 
32,225

 
19,407

 
51,632

Total commercial real estate
83,284

 
56,340

 
139,624

 
82,670

 
67,919

 
150,589

Total performing potential 
  problem loans
$
152,701

 
$
100,462

 
$
253,163

 
$
167,579

 
$
98,728

 
$
266,307


(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 $1.6 million as of March 31, 2015 and $1.8 million as of December 31, 2014.
OREO
OREO consists of properties acquired as the result of borrower defaults on loans. OREO, excluding covered OREO, was $26.0 million at March 31, 2015, decreasing $856,000 from December 31, 2014.
Table 14
OREO by Type
(Dollar amounts in thousands)
 
 
March 31, 2015
 
December 31, 2014
 
March 31, 2014
Single-family homes
 
$
2,254

 
$
2,433

 
$
1,564

Land parcels:
 
 
 
 
 
 
Raw land
 
1,899

 
1,917

 
4,040

Farm land
 
—

 
923

 
—

Commercial lots
 
9,161

 
9,295

 
11,628

Single-family lots
 
1,126

 
1,279

 
1,975

Total land parcels
 
12,186

 
13,414

 
17,643

Multi-family units
 
754

 
758

 
316

Commercial properties
 
10,848

 
10,293

 
10,503

Total OREO, excluding covered OREO
 
26,042

 
26,898

 
30,026

Covered OREO
 
7,309

 
8,068

 
7,355

Total OREO
 
$
33,351

 
$
34,966

 
$
37,381


53



OREO Activity
A rollforward of OREO balances for the quarters ended March 31, 2015 and 2014 is presented in the following table.
Table 15
OREO Rollforward
(Dollar amounts in thousands)
 
Quarters Ended March 31,
 
2015
 
2014
 
OREO
 
Covered
OREO
 
Total
 
OREO
 
Covered
OREO
 
Total
Beginning balance
$
26,898

 
$
8,068

 
$
34,966

 
$
32,473

 
$
8,863

 
$
41,336

Transfers from loans
975

 
63

 
1,038

 
686

 
1,876

 
2,562

Proceeds from sales
(1,894
)
 
(814
)
 
(2,708
)
 
(2,479
)
 
(3,386
)
 
(5,865
)
Gains on sales of OREO
695

 
98

 
793

 
464

 
2

 
466

OREO valuation adjustments
(632
)
 
(106
)
 
(738
)
 
(1,118
)
 
—

 
(1,118
)
Ending balance
$
26,042

 
$
7,309

 
$
33,351

 
$
30,026

 
$
7,355

 
$
37,381


54



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. In addition, certain acquired loans that have renewed subsequent to their respective acquisition dates are no longer classified as acquired loans. Instead, they are included with our loan population that is allocated an allowance in accordance with our allowance for loan losses methodology.
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 March 31, 2015.
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 loans originated by the Bank, acquired loans, and covered loans. Additional discussion regarding acquired and covered loans is discussed in Note 5 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 loans, including covered loans, and acquired loan components of the allowance for credit losses and the remaining acquisition adjustment associated with acquired loans for the quarter ended March 31, 2015.
Table 16
Allowance for Credit Losses and Acquisition Adjustment
(Dollar amounts in thousands)
 
 
Loans and Covered Loans, Excluding Acquired Loans
 
Acquired Loans
 
Total
For the quarter ended or as of March 31, 2015
 
 
 
 
 
 
Beginning balance
 
$
74,510

 
$
—

 
$
74,510

Net charge-offs
 
(8,256
)
 
—

 
(8,256
)
Provision for loan and covered loan losses
 
6,552

 
—

 
6,552

Ending balance
 
$
72,806

 
$
—

 
$
72,806

Total loans
 
$
6,143,450

 
$
660,901

 
$
6,804,351

Remaining acquisition adjustment
 
N/A

 
22,388

 
22,388

Allowance for credit losses to total loans
 
1.19
%
 
N/A

 
1.07
%
Remaining acquisition adjustment to acquired loans
 
N/A

 
3.39
%
 
N/A


N/A - Not applicable.
Excluding acquired loans, the total allowance for credit losses to total loans is 1.19% as of March 31, 2015. Accretion of the acquisition adjustment into interest income totaled $2.3 million during the first quarter of 2015, resulting in a remaining acquisition adjustment as a percent of acquired loans of 3.39%. During the first quarter of 2015, $30.8 million of acquired loans were renewed at market terms and no longer classified as acquired loans. These loans are included in loans and covered loans, excluding acquired loans in the table above and allocated an allowance in accordance with our allowance for loan losses methodology.

55



Table 17
Allowance for Credit Losses
and Summary of Credit Loss Experience
(Dollar amounts in thousands)
 
Quarters Ended
 
2015
 
2014
 
March 31
 
December 31
 
September 30
 
June 30
 
March 31
Change in allowance for credit losses
 
 
 
 
 
 
 
 
 
Beginning balance
$
74,510

 
$
74,722

 
$
79,942

 
$
82,248

 
$
87,121

Loan charge-offs:
 
 
 
 
 
 
 
 
 
Commercial, industrial, and agricultural
7,449

 
1,882

 
9,763

 
2,099

 
3,680

Office, retail, and industrial
156

 
237

 
2,514

 
3,511

 
1,083

Multi-family
28

 
560

 
26

 
267

 
90

Construction
—

 
—

 
157

 
234

 
661

Other commercial real estate
1,317

 
1,139

 
1,363

 
561

 
1,771

Consumer
800

 
569

 
3,148

 
1,829

 
2,028

Total loan charge-offs
9,750

 
4,387

 
16,971

 
8,501

 
9,313

Recoveries of loan charge-offs:
 
 
 
 
 
 
 
 
 
Commercial, industrial, and agricultural
792

 
665

 
716

 
259

 
2,160

Office, retail, and industrial
322

 
94

 
55

 
290

 
58

Multi-family
4

 
84

 
—

 
2

 
1

Construction
17

 
6

 
—

 
2

 
158

Other commercial real estate
266

 
1,386

 
108

 
89

 
144

Consumer
321

 
227

 
150

 
214

 
138

Total recoveries of loan charge-offs
1,722

 
2,462

 
1,029

 
856

 
2,659

Net loan charge-offs, excluding
  covered loan charge-offs
8,028

 
1,925

 
15,942

 
7,645

 
6,654

Net covered loan charge-offs (recoveries)
228

 
146

 
5

 
2

 
(340
)
Net loan and covered loan charge-offs
8,256

 
2,071

 
15,947

 
7,647

 
6,314

Provision for loan and covered loan losses:
 
 
 
 
 
 
 
 
 
Provision for loan losses
7,871

 
2,936

 
11,416

 
7,425

 
2,911

Provision for covered loan losses
(1,319
)
 
(1,277
)
 
(689
)
 
(2,084
)
 
(1,470
)
Total provision for loan and covered
  loan losses
6,552

 
1,659

 
10,727

 
5,341

 
1,441

Increase in reserve for unfunded
  commitments (1)
—

 
200

 
—

 
—

 
—

Total provision for loan and
  covered loan losses and other
6,552

 
1,859

 
10,727

 
5,341

 
1,441

Ending balance
$
72,806

 
$
74,510

 
$
74,722

 
$
79,942

 
$
82,248


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

56



 
Quarters Ended
 
2015
 
2014
 
March 31
 
December 31
 
September 30
 
June 30
 
March 31
Allowance for credit losses
 
 
 
 
 
 
 
 
 
Allowance for loan losses
$
65,311

 
$
65,468

 
$
64,457

 
$
68,983

 
$
69,203

Allowance for covered loan losses
5,679

 
7,226

 
8,649

 
9,343

 
11,429

Total allowance for loan and
  covered loan losses
70,990

 
72,694

 
73,106

 
78,326

 
80,632

Reserve for unfunded commitments
1,816

 
1,816

 
1,616

 
1,616

 
1,616

Total allowance for credit losses
$
72,806

 
$
74,510

 
$
74,722

 
$
79,942

 
$
82,248

Allowance for credit losses and net charge-off ratios
Allowance for credit losses to loans
1.07
%
 
1.11
%
 
1.15
%
 
1.34
%
 
1.41
%
Allowance for credit losses to loans,
excluding acquired loans (1)
1.19
%
 
1.24
%
 
1.25
%
 
1.34
%
 
1.41
%
Allowance for credit losses to
  non-accrual loans (2)
139.62
%
 
112.19
%
 
102.39
%
 
105.80
%
 
110.28
%
Allowance for credit losses to
  non-performing loans (2)
129.99
%
 
110.04
%
 
93.60
%
 
100.48
%
 
102.35
%
Average loans
$
6,731,939

 
$
6,537,251

 
$
6,293,313

 
$
5,891,127

 
$
5,706,880

Net loan charge-offs to average loans,
  annualized
0.50
%
 
0.13
%
 
1.01
%
 
0.53
%
 
0.45
%

(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 this allowance coverage ratio.
(2) 
These amounts and ratios exclude covered loans and covered OREO. For a discussion of covered loans, see Note 5 of "Notes to the Condensed Consolidated Financial Statements" in Part I, Item 1 of this Form 10-Q.
Activity in the Allowance for Credit Losses
The allowance for credit losses was $72.8 million as of March 31, 2015, a decline of $1.7 million from December 31, 2014. The allowance for credit losses was 1.19% of total loans, excluding acquired loans, at March 31, 2015 compared to 1.24% at December 31, 2014.
The provision for loan and covered loan losses was $6.6 million for the first quarter of 2015, increasing $4.7 million from the fourth quarter of 2014, which was primarily impacted by higher level of charge-offs.
Total net loan charge-offs for the first quarter of 2015 reflect the remediation of three corporate relationships. Included was a charge-off related to the final resolution of a large commercial loan relationship originally identified in the third quarter of 2014, for which a specific reserve was then established. In addition, charge-offs were recorded on two classified corporate credits where changes in borrower circumstances dictated accelerated remediation.
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 in that period or an allowance for covered loan losses is established. Any increases in expected future cash flows are recorded through prospective yield adjustments over the remaining lives of the specific loans.


57



FUNDING AND LIQUIDITY MANAGEMENT
The following table provides a comparison of average funding sources for the quarters ended March 31, 2015, December 31, 2014, and March 31, 2014. 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 18
Funding Sources – Average Balances
(Dollar amounts in thousands)
 
Quarters Ended
 
 
First Quarter 2015
% Change From
 
March 31,
2015
 
December 31,
2014
 
March 31,
2014
 
 
Fourth
Quarter
2014
 
First
Quarter
2014
Demand deposits
$
2,312,431

 
$
2,339,298

 
$
1,928,289

 
 
(1.1
)%
 
19.9
 %
Savings deposits
1,426,546

 
1,306,388

 
1,159,643

 
 
9.2
 %
 
23.0
 %
NOW accounts
1,365,494

 
1,331,360

 
1,181,297

 
 
2.6
 %
 
15.6
 %
Money market accounts
1,521,762

 
1,506,643

 
1,311,998

 
 
1.0
 %
 
16.0
 %
Core deposits
6,626,233

 
6,483,689

 
5,581,227

 
 
2.2
 %
 
18.7
 %
Time deposits
1,250,456

 
1,239,257

 
1,180,374

 
 
0.9
 %
 
5.9
 %
Brokered deposits
16,106

 
16,098

 
16,075

 
 
—
 %
 
0.2
 %
Total time deposits
1,266,562

 
1,255,355

 
1,196,449

 
 
0.9
 %
 
5.9
 %
Total deposits
7,892,795

 
7,739,044

 
6,777,676

 
 
2.0
 %
 
16.5
 %
Securities sold under agreements to
  repurchase
127,571

 
110,832

 
107,944

 
 
15.1
 %
 
18.2
 %
FHLB advances
—

 
381

 
114,547

 
 
(100.0
)%
 
(100.0
)%
Total borrowed funds
127,571

 
111,213

 
222,491

 
 
14.7
 %
 
(42.7
)%
Senior and subordinated debt
200,910

 
194,137

 
190,949

 
 
3.5
 %
 
5.2
 %
Total funding sources
$
8,221,276

 
$
8,044,394

 
$
7,191,116

 
 
2.2
 %
 
14.3
 %
Average interest rate paid on
  borrowed funds
0.06
%
 
0.04
%
 
0.70
%
 
 
 
 
 
Weighted-average maturity of FHLB
  advances
N/A

 
N/A

 
26.6 months

 
 
 
 
 
Weighted-average interest rate of
  FHLB advances
N/A

 
N/A

 
1.33
%
 
 
 
 
 

N/A - Not applicable.
Total average funding sources of $8.2 billion for the first quarter of 2015 increased 8.9% on an annualized basis compared to the fourth quarter of 2014 and increased $1.0 billion, or 14.3%, from the first quarter of 2014. Compared to the first quarter of 2014, the increase in core deposits was due primarily to deposits assumed in the acquisitions completed during the second half of 2014.

58



Table 19
Borrowed Funds
(Dollar amounts in thousands)

 
March 31, 2015
 
 
March 31, 2014
 
Amount
 
Weighted-
Average
Rate (%)
 
 
Amount
 
Weighted-
Average
Rate (%)
At period-end:
 
 
 
 
 
 
 
 
Securities sold under agreements to repurchase
$
131,200

 
0.06
 
 
$
109,156

 
0.03
FHLB advances
—

 
—
 
 
114,543

 
1.33
Total borrowed funds
$
131,200

 
0.06
 
 
$
223,699

 
0.69
Average for the year-to-date period:
 
 
 
 
 
 
 
 
Securities sold under agreements to repurchase
$
127,571

 
0.06
 
 
$
107,944

 
0.03
FHLB advances
—

 
—
 
 
114,547

 
1.33
Total borrowed funds
$
127,571

 
0.06
 
 
$
222,491

 
0.70
Maximum amount outstanding at the end of any day during the period:
 
 
 
 
 
 
 
Securities sold under agreements to repurchase
$
142,545

 
 
 
 
$
116,934

 
 
FHLB advances
—

 
 
 
 
114,551

 
 
Average borrowed funds totaled $127.6 million for the first quarter of 2015 decreasing $94.9 million, or 42.7%, compared to the same period in 2014. This decline was primarily due to the prepayment of $114.6 million of FHLB advances during the second quarter of 2014.
Securities sold under agreements to repurchase generally mature within 1 to 90 days from the transaction date.

59




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. On January 1, 2015, the Company and the Bank became subject to final rules establishing a new comprehensive capital framework for U.S. banking organizations published by the Federal Reserve and known as the Basel III Capital Rules. The Basel III Capital Rules are discussed in the "Supervision and Regulation" section in Item 1, "Business" in the Company's 2014 10-K.
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." The information before March 31, 2015 is based on the prior capital rules in effect through December 31, 2014 and the information as of March 31, 2015 is based on the Basel III Capital Rules. We manage our capital ratios for both the Company and 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. All regulatory mandated ratios for characterization as "well-capitalized" were exceeded as of March 31, 2015 and December 31, 2014.
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. 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.

60



Table 20
Capital Measurements
(Dollar amounts in thousands)
 
 
 
 
 
March 31, 2015
 
March 31,
2015
 
December 31,
2014
 
Regulatory
Minimum
For
Well-
Capitalized
 
Excess Over
Required Minimums
Bank regulatory capital ratios (1):
 
 
 
 
 
 
 
 
 
Total capital to risk-weighted assets
11.46
%
 
12.30
%
 
10.00
%
 
15
%
 
$
115,925

Tier 1 capital to risk-weighted assets
10.54
%
 
11.32
%
 
8.00
%
 
32
%
 
$
201,833

Tier 1 common capital to risk-weighted assets
10.54
%
 
N/A

 
6.50
%
 
62
%
 
$
320,826

Tier 1 leverage to average assets
9.29
%
 
9.76
%
 
5.00
%
 
86
%
 
$
386,130

Company regulatory capital ratios (1):
 
 
 
 
 
 
 
 
 
Total capital to risk-weighted assets
11.23
%
 
11.23
%
 
N/A

 
N/A

 
N/A

Tier 1 capital to risk-weighted assets
10.35
%
 
10.19
%
 
N/A

 
N/A

 
N/A

Tier 1 common capital to risk-weighted assets
9.79
%
 
N/A

 
N/A

 
N/A

 
N/A

Tier 1 leverage to average assets
9.32
%
 
9.03
%
 
N/A

 
N/A

 
N/A

Reconciliation of Company capital components to GAAP:
 
 
 
 
 
 
 
 
Total stockholders' equity
$
1,115,950

 
$
1,100,775

 
 
 
 
 
 
Goodwill and other intangible assets
(333,202
)
 
(334,199
)
 
 
 
 
 
 
Tangible common equity
782,748

 
766,576

 
 
 
 
 
 
Accumulated other comprehensive loss
12,805

 
15,855

 
 
 
 
 
 
Tangible common equity, excluding accumulated
  other comprehensive loss
$
795,553

 
$
782,431

 
 
 
 
 
 
Total assets
$
9,498,596

 
$
9,445,139

 
 
 
 
 
 
Goodwill and other intangible assets
(333,202
)
 
(334,199
)
 
 
 
 
 
 
Tangible assets
$
9,165,394

 
$
9,110,940

 
 
 
 
 
 
Risk-weighted assets
$
8,229,627

 
$
7,879,366

 
 
 
 
 
 
Company tangible common equity ratios (2)(3):
 
 
 
 
 
 
 
 
 
Tangible common equity to tangible assets
8.54
%
 
8.41
%
 
N/A

 
N/A

 
N/A

Tangible common equity, excluding accumulated
  other comprehensive loss, to tangible assets
8.68
%
 
8.59
%
 
N/A

 
N/A

 
N/A

Tangible common equity to risk-weighted assets
9.51
%
 
9.73
%
 
N/A

 
N/A

 
N/A


N/A - Not applicable.

(1) 
Basel III Capital Rules became effective for the Bank and the Company on January 1, 2015. These rules revise the risk-based capital requirements and introduce a new capital measure, Tier 1 common capital to risk-weighted assets. As a result, March 31, 2015 ratios are computed using the new rules and prior periods presented are reported using the regulatory guidance applicable at that time.
(2) 
Ratios are not subject to formal Federal Reserve regulatory guidance.
(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.
The Company's capital ratios increased from December 31, 2014, driven primarily by growth in retained earnings, net of dividends paid. The Bank's regulatory capital ratios decreased from December 31, 2014 due primarily to dividends paid to the Company during the first quarter of 2015.
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.

61



Dividends
The Board of Directors approved a quarterly cash dividend of $0.09 per common share during the first quarter of 2015, which follows a dividend increase from $0.07 to $0.08 per common share during the second quarter of 2014.

62



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 2014 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 March 31, 2015 and December 31, 2014, 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. Excluding non-accrual loans and the impact of interest rate swaps, 48% of the loan portfolio consisted of fixed rate loans and 52% were floating rate loans as of March 31, 2015. See Note 9 of "Notes to Condensed Consolidated Financial Statements" in Part I, Item 1 of this Form 10-Q for additional detail regarding interest rate swaps. Investments, consisting of securities and interest-bearing deposits in other banks, are more heavily weighted toward fixed rate securities at 71% of the total compared to 29% 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 active interest rate floors was $603.5 million, or 17%, of the floating rate loan portfolio as of March 31, 2015, compared to $644.6 million, or 19%, of the floating rate loan portfolio as of December 31, 2014. On the liability side of the balance sheet, 84% of deposits are demand deposits or interest-bearing core deposits, which either do not pay interest or the interest rates are expected to rise at a slower pace than short-term interest rates.

63



Analysis of Net Interest Income Sensitivity
(Dollar amounts in thousands)
 
Immediate Change in Rates
 
+300
 
+200
 
+100
 
-100
March 31, 2015:
 
 
 
 
 
 
 
Dollar change
$
45,297

 
$
29,825

 
$
14,526

 
$
(11,539
)
Percent change
15.3
%
 
10.1
%
 
4.9
%
 
(3.9
)%
December 31, 2014:
 
 
 
 
 
 
 
Dollar change
$
42,922

 
$
27,471

 
$
12,707

 
$
(12,748
)
Percent change
14.3
%
 
9.2
%
 
4.2
%
 
(4.3
)%
The sensitivity of estimated net interest income to an instantaneous parallel shift in interest rates is reflected as both dollar and percentage changes. This table illustrates that an instantaneous 200 basis point rise in interest rates as of March 31, 2015 would increase net interest income by $29.8 million, or 10.1%, over the next twelve months compared to no change in interest rates. This same measure was $27.5 million, or 9.2%, as of December 31, 2014.
In rising interest rate scenarios, interest rate risk volatility was more positive at March 31, 2015 compared to December 31, 2014. During the quarter ended March 31, 2015, the increase in floating rate loan balances more than offset the reduction in fixed rate loans and securities. Growth in floating rate loan balances were funded by a rise in core deposits, which are less rate sensitive. Overall, this increase in rate sensitive assets was partially offset by the hedging of $185 million of certain corporate variable rate loans using interest rate swaps through which we receive fixed amounts and pay variable amounts. 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 March 31, 2015. While the outcome of any legal proceeding is inherently uncertain, based on information currently available, the Company's management does not expect any liabilities arising from pending legal matters to have a material adverse effect on the Company's financial condition, 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 2014. However, these factors may not be the only risks or uncertainties the Company faces.

64



ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The following table summarizes the Company’s monthly Common Stock purchases during the first quarter of 2015. 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 March 31, 2015. 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
January 1 – January 31, 2015
—

 
$
—

 
—

 
2,494,747

February 1 – February 28, 2015
143,964

 
16.58

 
—

 
2,494,747

March 1 – March 31, 2015
—

 
—

 
—

 
2,494,747

Total
143,964

 
$
16.58

 
—

 
 

(1) 
Consists of shares acquired pursuant to the Company’s share-based compensation plans and not the Company’s Board-approved stock repurchase program. Under the terms of the Company's share-based compensation plans, the Company accepts previously owned shares of Common Stock surrendered to satisfy tax withholding obligations associated with the vesting of restricted shares or by option holders upon exercise to cover the exercise price of the stock options.


65



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

Amended and Restated By-Laws of the Company is 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 7 of the Company’s Notes to the Condensed Consolidated Financial Statements included in "ITEM 1. FINANCIAL STATEMENTS" of this document.
15

Acknowledgement 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

Review Report of Independent Registered Public Accounting Firm.
101

Interactive Data File.

(1) 
Furnished, not filed.

66



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: May 4, 2015
* Duly authorized to sign on behalf of the registrant.

67