10-Q




 
 
 
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________________
 
FORM 10-Q
(Mark One)
[X]
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended September 30, 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
______________________
 
(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 October 30, 2015, there were 77,949,334 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.
 
 
Item 3.
 
 
Item 4.
 
 
Part II.
 
 
 
Item 1.
 
 
Item 1A.
 
 
Item 2.
 
 
Item 6.
 

2




PART I. FINANCIAL INFORMATION (Unaudited)
ITEM 1. FINANCIAL STATEMENTS
FIRST MIDWEST BANCORP, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Amounts in thousands, except per share data)
 
 
 
 
 
September 30,
2015
 
December 31,
2014
Assets
 
 
 
 
(Unaudited)
 
 
Cash and due from banks
 
$
125,279

 
$
117,315

Interest-bearing deposits in other banks
 
822,264

 
488,947

Trading securities, at fair value
 
17,038

 
17,460

Securities available-for-sale, at fair value
 
1,151,418

 
1,187,009

Securities held-to-maturity, at amortized cost
 
23,723

 
26,555

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

 
37,558

Loans, excluding covered loans
 
6,874,480

 
6,657,418

Covered loans
 
51,219

 
79,435

Allowance for loan and covered loan losses
 
(72,500
)
 
(72,694
)
Net loans
 
6,853,199

 
6,664,159

Other real estate owned ("OREO"), excluding covered OREO
 
31,129

 
26,898

Covered OREO
 
906

 
8,068

Federal Deposit Insurance Corporation ("FDIC") indemnification asset
 
6,106

 
8,452

Premises, furniture, and equipment, net
 
127,443

 
131,109

Investment in bank-owned life insurance ("BOLI")
 
208,666

 
206,498

Goodwill and other intangible assets
 
331,250

 
334,199

Accrued interest receivable and other assets
 
197,877

 
190,912

Total assets
 
$
9,935,046

 
$
9,445,139

Liabilities
 
 
 
 
Noninterest-bearing deposits
 
$
2,671,793

 
$
2,301,757

Interest-bearing deposits
 
5,624,657

 
5,586,001

Total deposits
 
8,296,450

 
7,887,758

Borrowed funds
 
169,943

 
137,994

Senior and subordinated debt
 
201,123

 
200,869

Accrued interest payable and other liabilities
 
119,861

 
117,743

Total liabilities
 
8,787,377

 
8,344,364

Stockholders' Equity
 
 
 
 
Common stock
 
882

 
882

Additional paid-in capital
 
445,037

 
449,798

Retained earnings
 
944,209

 
899,516

Accumulated other comprehensive loss, net of tax
 
(15,818
)
 
(15,855
)
Treasury stock, at cost
 
(226,641
)
 
(233,566
)
Total stockholders' equity
 
1,147,669

 
1,100,775

Total liabilities and stockholders' equity
 
$
9,935,046

 
$
9,445,139

 
 
 
 
 
 
 
 
 
September 30, 2015
 
December 31, 2014
 
(Unaudited)
 
 
 
 
 
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

 
77,942

 

 
77,695

Treasury shares

 
10,286

 

 
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 
 September 30,
 
Nine Months Ended 
 September 30,
 
 
2015
 
2014
 
2015
 
2014
Interest Income
 
 
 
 
 
 
 
 
Loans
 
$
75,522

 
$
68,713

 
$
224,739

 
$
192,892

Investment securities
 
7,723

 
7,465

 
23,839

 
23,489

Other short-term investments
 
1,047

 
684

 
2,739

 
2,174

Total interest income
 
84,292

 
76,862

 
251,317

 
218,555

Interest Expense
 
 
 
 
 
 
 
 
Deposits
 
2,329

 
2,806

 
7,256

 
7,914

Borrowed funds
 
928

 
9

 
1,064

 
561

Senior and subordinated debt
 
3,133

 
3,016

 
9,411

 
9,047

Total interest expense
 
6,390

 
5,831

 
17,731

 
17,522

Net interest income
 
77,902

 
71,031

 
233,586

 
201,033

Provision for loan and covered loan losses
 
4,100

 
10,727

 
16,652

 
17,509

Net interest income after provision for loan and covered loan losses
 
73,802

 
60,304

 
216,934

 
183,524

Noninterest Income
 
 
 
 
 
 
 
 
Service charges on deposit accounts
 
10,519

 
9,902

 
29,676

 
26,895

Wealth management fees
 
7,222

 
6,721

 
21,669

 
19,730

Card-based fees
 
6,868

 
6,646

 
20,223

 
17,950

Mortgage banking income
 
1,402

 
1,125

 
3,964

 
3,199

Other service charges, commissions, and fees
 
7,107

 
5,266

 
17,800

 
13,943

Other income
 
1,372

 
923

 
5,220

 
3,778

Net securities gains
 
524

 
2,570

 
1,551

 
8,160

Gains on sales of properties
 

 
3,954

 

 
3,954

Loss on early extinguishment of debt
 

 

 

 
(2,059
)
Total noninterest income
 
35,014

 
37,107

 
100,103

 
95,550

Noninterest Expense
 
 
 
 
 
 
 
 
Salaries and employee benefits
 
41,361

 
35,471

 
122,371

 
103,523

Net occupancy and equipment expense
 
9,406

 
8,639

 
29,464

 
25,702

Professional services
 
6,172

 
5,692

 
16,603

 
16,772

Technology and related costs
 
3,673

 
3,253

 
10,887

 
9,431

Net OREO expense
 
1,290

 
1,406

 
4,355

 
4,531

Other expenses
 
12,463

 
12,104

 
36,793

 
34,461

Acquisition and integration related expenses
 

 
3,748

 

 
4,578

Total noninterest expense
 
74,365

 
70,313

 
220,473

 
198,998

Income before income tax expense
 
34,451

 
27,098

 
96,564

 
80,076

Income tax expense
 
11,167

 
8,549

 
30,824

 
25,363

Net income
 
$
23,284

 
$
18,549

 
$
65,740

 
$
54,713

Per Common Share Data
 
 
 
 
 
 
 
 
Basic earnings per common share
 
$
0.30

 
$
0.25

 
$
0.84

 
$
0.73

Diluted earnings per common share
 
$
0.30

 
$
0.25

 
$
0.84

 
$
0.73

Dividends declared per common share
 
$
0.09

 
$
0.08

 
$
0.27

 
$
0.23

Weighted-average common shares outstanding
 
77,106

 
74,341

 
77,038

 
74,270

Weighted-average diluted common shares outstanding
 
77,119

 
74,352

 
77,051

 
74,282

 
See accompanying notes to the unaudited condensed consolidated financial statements.

4




FIRST MIDWEST BANCORP, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Dollar amounts in thousands)
(Unaudited)
 
 
Quarters Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
 
2015
 
2014
 
2015
 
2014
Net income
 
$
23,284

 
$
18,549

 
$
65,740

 
$
54,713

Securities available-for-sale
 
 
 
 
 
 
 
 
Unrealized holding gains (losses):
 
 
 
 
 
 
 
 
Before tax
 
6,126

 
(2,693
)
 
748

 
22,028

Tax effect
 
(2,454
)
 
1,003

 
(312
)
 
(8,776
)
Net of tax
 
3,672

 
(1,690
)
 
436

 
13,252

Reclassification of net gains included in net income:
 
 
 
 
 
 
Before tax
 
524

 
2,570

 
1,551

 
8,160

Tax effect
 
(214
)
 
(1,051
)
 
(634
)
 
(3,337
)
Net of tax
 
310

 
1,519

 
917

 
4,823

Net unrealized holding gains (losses)
 
3,362

 
(3,209
)
 
(481
)
 
8,429

Derivative instruments
 
 
 
 
 
 
 
 
Unrealized holding gains (losses):
 
 
 
 
 
 
 
 
Before tax
 
3,420

 
(629
)
 
870

 
(827
)
Tax effect
 
(1,368
)
 
257

 
(352
)
 
338

Net of tax
 
2,052

 
(372
)
 
518

 
(489
)
Total other comprehensive income (loss)
 
5,414

 
(3,581
)
 
37

 
7,940

Total comprehensive income
 
$
28,698

 
$
14,968

 
$
65,777

 
$
62,653



 
 
Accumulated
Unrealized
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 (loss)
 
8,429

 
(489
)
 

 
7,940

Balance at September 30, 2014
 
$
(11,990
)
 
$
(489
)
 
$
(6,373
)
 
$
(18,852
)
Balance at December 31, 2014
 
$
(2,950
)
 
$
(1,138
)
 
$
(11,767
)
 
$
(15,855
)
Other comprehensive (loss) income
 
(481
)
 
518

 

 
37

Balance at September 30, 2015
 
$
(3,431
)
 
$
(620
)
 
$
(11,767
)
 
$
(15,818
)
 
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
 

 

 

 
54,713

 
7,940

 

 
62,653

Common dividends declared
($0.23 per common share)
 

 

 

 
(17,324
)
 

 

 
(17,324
)
Share-based compensation expense
 

 

 
4,461

 

 

 

 
4,461

Restricted stock activity
 
215

 

 
(9,833
)
 

 

 
7,938

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

 

 
(132
)
 

 

 
471

 
339

Balance at September 30, 2014
 
75,295

 
$
858

 
$
408,789

 
$
891,129

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

Balance at December 31, 2014
 
77,695

 
$
882

 
$
449,798

 
$
899,516

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

Comprehensive income
 

 

 

 
65,740

 
37

 

 
65,777

Common dividends declared
($0.27 per common share)
 

 

 

 
(21,047
)
 

 

 
(21,047
)
Purchase of treasury stock
 
(7
)
 

 

 

 

 
(120
)
 
(120
)
Share-based compensation expense
 

 

 
5,459

 

 

 
6,764

 
12,223

Restricted stock activity
 
255

 

 
(10,108
)
 

 

 

 
(10,108
)
Treasury stock purchased for
  benefit plans
 
(1
)
 

 
(112
)
 

 

 
281

 
169

Balance at September 30, 2015
 
77,942

 
$
882

 
$
445,037

 
$
944,209

 
$
(15,818
)
 
$
(226,641
)
 
$
1,147,669

 
See accompanying notes to the unaudited condensed consolidated financial statements.

6




FIRST MIDWEST BANCORP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollar amounts in thousands)
(Unaudited)
 
 
Nine Months Ended 
 September 30,
 
 
2015
 
2014
Net cash provided by operating activities
 
$
94,292

 
$
88,575

Investing Activities
 
 
 
 
Proceeds from maturities, repayments, and calls of securities available-for-sale
 
216,900

 
125,244

Proceeds from sales of securities available-for-sale
 
57,255

 
24,947

Purchases of securities available-for-sale
 
(241,300
)
 
(16,411
)
Proceeds from maturities, repayments, and calls of securities held-to-maturity
 
4,016

 
3,814

Purchases of securities held-to-maturity
 
(1,184
)
 
(1,998
)
Net purchases of FHLB stock
 
(1,190
)
 
(427
)
Net increase in loans
 
(214,357
)
 
(291,561
)
Premiums paid for BOLI, net of claims
 
1,095

 
(73
)
Proceeds from sales of OREO
 
13,820

 
14,293

Proceeds from sales of premises, furniture, and equipment
 
195

 
3,893

Purchases of premises, furniture, and equipment
 
(6,591
)
 
(7,885
)
Cash received from acquisitions, net of cash paid
 

 
139,486

Net cash used in investing activities
 
(171,341
)
 
(6,678
)
Financing Activities
 
 
 
 
Net increase in deposit accounts
 
408,692

 
119,440

Net increase in borrowed funds
 
31,949

 
23,085

Purchase of treasury stock
 
(120
)
 

Payment for the termination of FHLB advances
 

 
(116,609
)
Cash dividends paid
 
(20,132
)
 
(16,556
)
Restricted stock activity
 
(2,853
)
 
(2,739
)
Excess tax benefit related to share-based compensation
 
794

 
824

Net cash provided by financing activities
 
418,330

 
7,445

Net increase in cash and cash equivalents
 
341,281

 
89,342

Cash and cash equivalents at beginning of period
 
606,262

 
587,241

Cash and cash equivalents at end of period
 
$
947,543

 
$
676,583

 
 
 
 
 
Supplemental Disclosures of Cash Flow Information:
 
 
 
 
Income taxes paid
 
$
12,787

 
$
7,262

Interest paid to depositors and creditors
 
14,931

 
14,714

Dividends declared, but unpaid
 
7,137

 
6,028

Non-cash transfers of loans to OREO
 
11,956

 
13,277

Non-cash transfer of loans held-for-investment to loans held-for-sale
 
15,068

 
70,183

 
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 ("consolidated financial statements") of First Midwest Bancorp, Inc. (the "Company"), a Delaware corporation, were prepared in accordance with the rules and regulations of the Securities and Exchange Commission ("SEC") for quarterly reports on Form 10-Q and reflect all adjustments that management deems necessary for the fair presentation of the financial position and results of operations for the periods presented. The results of operations for the quarter and nine months ended September 30, 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 consolidated financial 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 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 consolidated financial statements.
Use of Estimates – The preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the 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 consists 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. Covered loans are reported separately in the financial statements and acquired loans are included within loans held-for-investment.
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 was evaluated using various indicators, such as past due and non-accrual status. Leases and revolving loans do not qualify to be accounted for as PCI loans and are accounted for as Non-PCI loans.

8




The acquisition adjustment related to Non-PCI loans is amortized into interest income over the contractual life of the related loans. If an acquired non-PCI loan is renewed subsequent to the acquisition date, any remaining acquisition adjustment is accreted into interest income and the loan is considered a new loan that is no longer classified as an acquired loan.
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 identifies restructured loans as TDRs 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. 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.

9




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.
The allowance for loan losses also consists of an allowance on acquired Non-PCI and PCI loans. No allowance for loan losses is recorded on acquired loans at the acquisition date. An allowance for credit losses is established as necessary to reflect credit deterioration since the acquisition date. The Non-PCI allowance is based on management's evaluation of the acquired Non-PCI loan portfolio giving consideration to the current portfolio balance including the remaining acquisition adjustments, maturity dates, and overall credit quality. The allowance on acquired PCI loans is determined in the same manner as the allowance for covered loan losses, which is discussed below. Non-PCI acquired loans that have renewed subsequent to the respective acquisition dates are no longer classified as acquired loans. Instead, they are included with our general loan population and allocated an allowance based on a loss migration analysis.
Allowance for Covered Loan Losses The allowance for covered loan losses consists of an allowance on covered Non-PCI and PCI loans. The allowance for covered Non-PCI loans is calculated in the same manner as the general reserve component based on a loss migration analysis as discussed above. The covered PCI allowance 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

10




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 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.
Accounting Pronouncements Pending Adoption
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 was initially effective for annual and interim reporting periods beginning on or after December 15, 2016. In August of 2015, the FASB issued guidance that defers the effective date by one year. The deferral causes the guidance to be effective for annual and interim reporting periods beginning on or after December 15, 2017, and must be applied either retrospectively or using the modified retrospective approach. Early adoption is permitted, but not before the original effective date. 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.
Simplifying the Presentation of Debt Issuance Costs: In April of 2015, the FASB issued guidance to clarify the presentation of debt issuance costs within the balance sheet. Additionally, the guidance requires debt issuance costs related to a recognized debt liability to be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by this amendment. The guidance is effective for annual and interim periods beginning after December 15, 2015. Management does not expect the adoption of this guidance will materially impact the Company's financial condition, results of operations, or liquidity.
Amendments to Consolidation Analysis: In February 2015, the FASB issued guidance that updates current accounting for the consolidation of certain legal entities. This guidance modifies the evaluation of whether limited partnerships and similar legal entities are variable interest entities ("VIEs") or voting interest entities, eliminates the presumption that a general partner should consolidate a limited partnership, affects the consolidation analysis of reporting entities that are involved with VIEs, and provides certain exceptions from consolidation guidance for certain reporting entities. This guidance is effective for annual and interim periods beginning after December 15, 2015. Management does not expect the adoption of this guidance will materially impact the Company's financial condition, results of operations, or liquidity.
Simplifying the Accounting for Measurement-Period Adjustments: In September of 2015, the FASB issued guidance to simplify the recognition of measurement-period adjustments related to a business combination. This guidance eliminates the requirement for an acquirer in a business combination to account for measurement-period adjustments retrospectively. Instead, acquirers must recognize measurement-period adjustments during the reporting period in which the adjustment amounts are determined. In addition, the effect of the adjustments on the income statement must be calculated as if the accounting had been completed at the acquisition date. The guidance is effective for annual and interim periods beginning after December 15, 2015. Early adoption of

12




this guidance is permitted. Management does not expect the adoption of this guidance will materially impact the Company's financial condition, results of operations, or liquidity.
3. ACQUISITIONS
Completed Acquisitions
Popular Community Bank
On August 8, 2014, the Bank completed the acquisition of the Chicago area banking operations of Banco Popular North America ("Popular"), doing business as Popular Community Bank, which is a subsidiary of Popular, Inc. The acquisition included Popular's twelve full-service retail banking offices and its small business and middle market commercial lending activities in the Chicago metropolitan area at a purchase price of $19.0 million paid in cash. The Company recorded goodwill of $32.2 million associated with the acquisition. The assets acquired and liabilities assumed, both intangible and tangible, were recorded at their estimated fair values as of the August 8, 2014 acquisition date and have been accounted for under the acquisition method of accounting. The fair value adjustments associated with this transaction were finalized during the second quarter of 2015 and there were no retrospective adjustments.
Great Lakes Financial Resources, Inc.
On December 2, 2014, the Company completed the acquisition of the south suburban Chicago-based Great Lakes Financial Resources, Inc. ("Great Lakes"), the holding company for Great Lakes Bank, National Association. The Company acquired all assets and assumed all liabilities of Great Lakes, which included seven full-service retail banking offices and one drive-up location, at a purchase price of approximately $55.8 million. Consideration consisted of $38.3 million in Company common stock and $17.5 million in cash. The Company recorded goodwill of $10.3 million associated with the acquisition. The assets acquired and liabilities assumed, both intangible and tangible, were recorded at their estimated fair values as of the December 2, 2014 acquisition date and have been accounted for under the acquisition method of accounting. The Company is finalizing the fair values of the assets and liabilities acquired. As a result, the fair value adjustments associated with these accounts and goodwill are preliminary and may change.
National Machine Tool Financial Corporation
On September 26, 2014, the Bank completed the acquisition of National Machine Tool Financial Corporation ("National Machine Tool"), now known as First Midwest Equipment Finance Co., which provides equipment leasing and commercial financing alternatives to traditional bank financing. On the date of acquisition, the Bank acquired approximately $5.9 million in assets, excluding goodwill, which primarily consisted of direct financing leases, lease loans, and other assets, at a purchase price of $3.1 million paid in cash. Goodwill recorded as a result of the acquisition totaled $4.0 million. The assets acquired and liabilities assumed, both intangible and tangible, were recorded at their estimated fair values as of the September 26, 2014 acquisition date and have been accounted for under the acquisition method of accounting. The fair value adjustments associated with this transaction were finalized during the third quarter of 2015 and there were no retrospective adjustments.
Pending Acquisitions
The Peoples' Bank of Arlington Heights
On September 21, 2015, the Company entered into a definitive agreement to acquire Peoples Bancorp, Inc. and its wholly owned banking subsidiary, The Peoples' Bank of Arlington Heights ("Peoples' Bank"). As part of the acquisition, the Company will acquire two locations in Arlington Heights, Illinois and approximately $57 million in loans and will assume approximately $95 million in deposits. The acquisition is expected to close before the end of 2015, subject to customary regulatory approvals, approval by the stockholders of Peoples Bancorp, Inc., and certain closing conditions.

13




4. SECURITIES
Securities are classified as held-to-maturity, trading, or available-for-sale at the time of purchase. Securities classified as held-to-maturity are securities for which management has the 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.
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 September 30, 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. treasury securities
 
$
1,999

 
$

 
$

 
$
1,999

 
$

 
$

 
$

 
$

U.S. agency securities
 
18,289

 
337

 
(3
)
 
18,623

 
30,297

 
144

 
(10
)
 
30,431

Collateralized mortgage
  obligations ("CMOs")
 
545,992

 
3,765

 
(3,282
)
 
546,475

 
538,882

 
2,256

 
(6,982
)
 
534,156

Other mortgage-backed
  securities ("MBSs")
 
164,326

 
3,290

 
(235
)
 
167,381

 
155,443

 
4,632

 
(310
)
 
159,765

Municipal securities
 
375,323

 
6,880

 
(649
)
 
381,554

 
414,255

 
10,583

 
(1,018
)
 
423,820

Trust preferred
  collateralized debt
  obligations ("CDOs")
 
48,159

 
37

 
(16,326
)
 
31,870

 
48,502

 
152

 
(14,880
)
 
33,774

Corporate debt securities
 

 

 

 

 
1,719

 
83

 

 
1,802

Equity securities
 
3,446

 
93

 
(23
)
 
3,516

 
3,224

 
72

 
(35
)
 
3,261

Total available-
  for-sale securities
 
$
1,157,534

 
$
14,402

 
$
(20,518
)
 
$
1,151,418

 
$
1,192,322

 
$
17,922

 
$
(23,235
)
 
$
1,187,009

Securities Held-to-Maturity
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Municipal securities
 
$
23,723

 
$

 
$
(15
)
 
$
23,708

 
$
26,555

 
$
1,115

 
$

 
$
27,670

Trading Securities
 
 
 
 
 
 
 
$
17,038

 
 
 
 
 
 
 
$
17,460


Remaining Contractual Maturity of Securities
(Dollar amounts in thousands)
 
 
As of September 30, 2015
 
 
Available-for-Sale
 
Held-to-Maturity
 
 
Amortized
Cost
 
Fair
Value
 
Amortized
Cost
 
Fair
Value
One year or less
 
$
135,762

 
$
132,787

 
$
2,223

 
$
2,222

After one year to five years
 
246,191

 
240,797

 
8,727

 
8,721

After five years to ten years
 
13,658

 
13,358

 
4,476

 
4,473

After ten years
 
48,159

 
47,104

 
8,297

 
8,292

Securities that do not have a single contractual maturity date
 
713,764

 
717,372

 

 

Total
 
$
1,157,534

 
$
1,151,418

 
$
23,723

 
$
23,708


14




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 $1.0 billion at September 30, 2015 and $779.4 million at December 31, 2014. No securities held-to-maturity were pledged as of September 30, 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. During the quarters and nine months ended September 30, 2015 and 2014 there were no material gross trading gains (losses). The following table presents net realized gains on available-for-sale securities for the quarters and nine months ended September 30, 2015 and 2014.
Available-for-Sale Securities Gains (Losses)
(Dollar amounts in thousands)
 
 
Quarters Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
 
2015
 
2014
 
2015
 
2014
Gains (losses) on sales of securities:
 
 
 
 
 
 
 
 
Gross realized gains
 
$
524

 
$
2,570

 
$
1,689

 
$
8,188

Gross realized losses
 

 

 
(138
)
 

Net realized gains on sales of securities
 
524

 
2,570

 
1,551

 
8,188

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

 

 

 
(28
)
Net realized gains
 
$
524

 
$
2,570

 
$
1,551

 
$
8,160

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 and nine months ended September 30, 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 
 September 30,
 
Nine Months Ended 
 September 30,
 
 
2015
 
2014
 
2015
 
2014
Beginning balance
 
$
23,709

 
$
23,880

 
$
23,880

 
$
32,422

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

 

 

 
28

Reduction for sales of securities (2)
 

 

 
(171
)
 
(8,570
)
Ending balance
 
$
23,709

 
$
23,880

 
$
23,709

 
$
23,880


(1) 
Included in net securities gains in the Condensed Consolidated Statements of Income.
(2) 
During the nine months ended September 30, 2015, the Company sold one CMO with a carrying value of $1.3 million that had OTTI of $171,000 that was previously recognized in earnings. The Company sold one CDO with a carrying value of $1.3 million during the nine months ended September 30, 2014 that had OTTI of $8.6 million that was previously recognized in earnings.

15




The following table presents the aggregate amount of unrealized losses and the aggregate related fair values of securities with unrealized losses as of September 30, 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 September 30, 2015
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. agency securities
 
1

 
$
2,037

 
$
3

 
$

 
$

 
$
2,037

 
$
3

CMOs
 
53

 
38,105

 
156

 
197,119

 
3,126

 
235,224

 
3,282

MBSs
 
6

 
20,003

 
64

 
9,699

 
171

 
29,702

 
235

Municipal securities
 
109

 
11,540

 
96

 
43,657

 
553

 
55,197

 
649

CDOs
 
8

 
1,693

 
172

 
28,444

 
16,154

 
30,137

 
16,326

Equity securities
 
1

 

 

 
2,319

 
23

 
2,319

 
23

Total
 
178

 
$
73,378

 
$
491

 
$
281,238

 
$
20,027

 
$
354,616

 
$
20,518

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 September 30, 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 September 30, 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 12, "Fair Value."

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5. LOANS
Loans Held-for-Investment
The following table presents the Company's loans held-for-investment by class.
Loan Portfolio
(Dollar amounts in thousands)
 
 
As of
 
 
September 30,
2015
 
December 31,
2014
Commercial and industrial
 
$
2,392,860

 
$
2,253,556

Agricultural
 
393,732

 
358,249

Commercial real estate:
 
 
 
 
Office, retail, and industrial
 
1,414,077

 
1,478,379

Multi-family
 
539,308

 
564,421

Construction
 
192,086

 
204,236

Other commercial real estate
 
869,748

 
887,897

Total commercial real estate
 
3,015,219

 
3,134,933

Total corporate loans
 
5,801,811

 
5,746,738

Home equity
 
647,223

 
543,185

1-4 family mortgages
 
294,261

 
291,463

Installment
 
131,185

 
76,032

Total consumer loans
 
1,072,669

 
910,680

Total loans, excluding covered loans
 
6,874,480

 
6,657,418

Covered loans (1)
 
51,219

 
79,435

Total loans
 
$
6,925,699

 
$
6,736,853

Deferred loan fees included in total loans
 
$
3,846

 
$
3,922

Overdrawn demand deposits included in total loans
 
4,962

 
3,438


(1) 
For information on covered loans, see Note 6, "Acquired and Covered Loans."
The Company lends primarily 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.

17




Loan Sales
The table below summarizes the Company's loan sales for the quarters and nine months ended September 30, 2015 and 2014.
Loan Sales
(Dollar amounts in thousands)
 
 
Quarters Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
 
2015
 
2014
 
2015
 
2014
Corporate loans
 
 
 
 
 
 
 
 
Proceeds from sales
 
$

 
$

 
$
945

 
$
650

Less book value of loans sold
 

 

 
945

 
650

Net gains on sales of corporate loans
 

 

 

 

1-4 family mortgage loans
 
 
 
 
 
 
 
 
Proceeds from sales
 
43,340

 
32,611

 
132,367

 
117,549

Less book value of loans sold:
 
 
 
 
 
 
 
 
Loans originated with intent to sell
 
42,069

 
26,384

 
113,566

 
62,319

Loans held-for-investment
 
120

 
5,302

 
15,068

 
52,384

Total book value of loans sold
 
42,189

 
31,686

 
128,634

 
114,703

Net gains on sales of 1-4 family mortgages
 
1,151

 
925

 
3,733

 
2,846

Total net gains on loan sales
 
$
1,151

 
$
925

 
$
3,733

 
$
2,846

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

18




6. ACQUIRED AND COVERED LOANS
The significant accounting policies related to acquired and covered loans, which are classified as PCI and Non-PCI, and the related FDIC indemnification asset are presented in Note 1, "Summary of Significant Accounting Policies."
The following table presents acquired and covered PCI and Non-PCI loans as of September 30, 2015 and December 31, 2014.
Acquired and Covered Loans
(Dollar amounts in thousands)
 
 
As of September 30, 2015
 
As of December 31, 2014
 
 
PCI
 
Non-PCI
 
Total
 
PCI
 
Non-PCI
 
Total
Acquired loans
 
$
32,942

 
$
541,461

 
$
574,403

 
$
28,712

 
$
714,836

 
$
743,548

Covered loans
 
28,971

 
22,248

 
51,219

 
54,682

 
24,753

 
79,435

Total acquired and covered loans
 
$
61,913

 
$
563,709

 
$
625,622

 
$
83,394

 
$
739,589

 
$
822,983

Non-PCI acquired loans that are renewed are no longer classified as acquired loans. These loans totaled $59.2 million at September 30, 2015.
In connection with the FDIC Agreements, the Company recorded an indemnification asset. To maintain eligibility for the loss share reimbursement, the Company is required to follow certain servicing procedures as specified in the FDIC Agreements. The Company was in compliance with those requirements as of September 30, 2015 and December 31, 2014.
Rollforwards of the carrying value of the FDIC indemnification asset for the quarters and nine months ended September 30, 2015 and 2014 are presented in the following table.
Changes in the FDIC Indemnification Asset
(Dollar amounts in thousands)
 
 
Quarters Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
 
2015
 
2014
 
2015
 
2014
Beginning balance
 
$
7,335

 
$
10,276

 
$
8,452

 
$
16,585

Amortization
 
(321
)
 
(650
)
 
(1,174
)
 
(2,784
)
Change in expected reimbursements from the FDIC for
  changes in expected credit losses
 
487

 
(857
)
 
2,207

 
(325
)
Payments received from the FDIC
 
(1,395
)
 
(70
)
 
(3,379
)
 
(4,777
)
Ending balance
 
$
6,106

 
$
8,699

 
$
6,106

 
$
8,699

Changes in the accretable yield for acquired and covered PCI loans were as follows.
Changes in Accretable Yield
(Dollar amounts in thousands)
 
 
Quarters Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
 
2015
 
2014
 
2015
 
2014
Beginning balances
 
$
20,658

 
$
35,152

 
$
28,244

 
$
36,792

Additions
 

 
1,265

 

 
1,265

Accretion
 
(2,366
)
 
(3,346
)
 
(9,364
)
 
(10,277
)
Other (1)
 
336

 
(5,215
)
 
(252
)
 
76

Ending balance
 
$
18,628

 
$
27,856

 
$
18,628

 
$
27,856


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

19




7. PAST DUE LOANS, ALLOWANCE FOR CREDIT LOSSES, IMPAIRED LOANS, AND TDRS
Past Due and Non-accrual Loans
The following table presents an aging analysis of the Company's past due loans as of September 30, 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 September 30, 2015
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial and industrial
 
$
2,380,931

 
$
6,937

 
$
4,992

 
$
11,929

 
$
2,392,860

 
 
$
6,438

 
$
900

Agricultural
 
393,574

 
71

 
87

 
158

 
393,732

 
 
112

 

Commercial real estate:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Office, retail, and industrial
 
1,398,173

 
9,642

 
6,262

 
15,904

 
1,414,077

 
 
6,961

 

Multi-family
 
535,085

 
1,100

 
3,123

 
4,223

 
539,308

 
 
1,046

 
2,269

Construction
 
188,561

 
467

 
3,058

 
3,525

 
192,086

 
 
3,332

 

Other commercial real estate
 
858,597

 
5,867

 
5,284

 
11,151

 
869,748

 
 
5,898

 
897

Total commercial real
  estate
 
2,980,416

 
17,076

 
17,727

 
34,803

 
3,015,219

 
 
17,237

 
3,166

Total corporate loans
 
5,754,921

 
24,084

 
22,806

 
46,890

 
5,801,811

 
 
23,787

 
4,066

Home equity
 
640,783

 
3,464

 
2,976

 
6,440

 
647,223

 
 
5,201

 
214

1-4 family mortgages
 
290,066

 
2,643

 
1,552

 
4,195

 
294,261

 
 
3,320

 
152

Installment
 
130,292

 
766

 
127

 
893

 
131,185

 
 

 
127

Total consumer loans
 
1,061,141

 
6,873

 
4,655

 
11,528

 
1,072,669

 
 
8,521

 
493

Total loans, excluding
  covered loans
 
6,816,062

 
30,957

 
27,461

 
58,418

 
6,874,480

 
 
32,308

 
4,559

Covered loans
 
48,743

 
250

 
2,226

 
2,476

 
51,219

 
 
1,303

 
1,372

Total loans
 
$
6,864,805

 
$
31,207

 
$
29,687

 
$
60,894

 
$
6,925,699

 
 
$
33,611

 
$
5,931

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



20




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 and nine months ended September 30, 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 September 30, 2015
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
 
$
33,729

 
$
11,345

 
$
2,451

 
$
1,890

 
$
6,367

 
$
10,820

 
$
4,861

 
$
1,816

 
$
73,279

Charge-offs
 
(1,948
)
 
(563
)
 
(68
)
 

 
(598
)
 
(1,172
)
 
(8
)
 

 
(4,357
)
Recoveries
 
347

 
106

 
1

 
114

 
506

 
213

 
7

 

 
1,294

Net charge-offs
 
(1,601
)
 
(457
)
 
(67
)
 
114

 
(92
)
 
(959
)
 
(1
)
 

 
(3,063
)
Provision for loan
  and covered loan
  losses and other
 
3,247

 
967

 
226

 
(559
)
 
(181
)
 
1,144

 
(744
)
 
(591
)
 
3,509

Ending balance
 
$
35,375

 
$
11,855

 
$
2,610

 
$
1,445

 
$
6,094

 
$
11,005

 
$
4,116

 
$
1,225

 
$
73,725

Quarter ended September 30, 2014
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
 
$
29,194

 
$
11,831

 
$
2,048

 
$
4,885

 
$
8,585

 
$
12,440

 
$
9,343

 
$
1,616

 
$
79,942

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

 
(17,106
)
Recoveries
 
716

 
55

 

 

 
108

 
150

 
130

 

 
1,159

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

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

 
265

 
(65
)
 
(3,130
)
 
189

 
3,699

 
(689
)
 

 
10,727

Ending balance
 
$
30,605

 
$
9,637

 
$
1,957

 
$
1,598

 
$
7,519

 
$
13,141

 
$
8,649

 
$
1,616

 
$
74,722

Nine months ended September 30, 2015
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
 
$
29,458

 
$
10,992

 
$
2,249

 
$
2,297

 
$
8,327

 
$
12,145

 
$
7,226

 
$
1,816

 
$
74,510

Charge-offs
 
(13,524
)
 
(2,613
)
 
(565
)
 
(15
)
 
(2,442
)
 
(2,723
)
 
(634
)
 

 
(22,516
)
Recoveries
 
1,993

 
460

 
8

 
334

 
1,902

 
853

 
120

 

 
5,670

Net charge-offs
 
(11,531
)
 
(2,153
)
 
(557
)
 
319

 
(540
)
 
(1,870
)
 
(514
)
 

 
(16,846
)
Provision for loan
  and covered loan
  losses and other
 
17,448

 
3,016

 
918

 
(1,171
)
 
(1,693
)
 
730

 
(2,596
)
 
(591
)
 
16,061

Ending balance
 
$
35,375

 
$
11,855

 
$
2,610

 
$
1,445

 
$
6,094

 
$
11,005

 
$
4,116

 
$
1,225

 
$
73,725

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

 
$
10,405

 
$
2,017

 
$
6,316

 
$
10,817

 
$
13,010

 
$
12,559

 
$
1,616

 
$
87,121

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

 
(35,444
)
Recoveries
 
3,135

 
403

 
3

 
160

 
341

 
502

 
992

 

 
5,536

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

 

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

 
5,937

 
320

 
(3,826
)
 
56

 
6,634

 
(4,243
)
 

 
17,509

Ending balance
 
$
30,605

 
$
9,637

 
$
1,957

 
$
1,598

 
$
7,519

 
$
13,141

 
$
8,649

 
$
1,616

 
$
74,722




21




The table below provides a breakdown of loans and the related allowance for credit losses by portfolio segment as of September 30, 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 September 30, 2015
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial, industrial, and
  agricultural
 
$
3,480

 
$
2,777,887

 
$
5,225

 
$
2,786,592

 
$
926

 
$
33,913

 
$
536

 
$
35,375

Commercial real estate:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Office, retail, and industrial
 
5,923

 
1,403,781

 
4,373

 
1,414,077

 
648

 
11,177

 
30

 
11,855

Multi-family
 
802

 
535,649

 
2,857

 
539,308

 

 
2,581

 
29

 
2,610

Construction
 
1,872

 
185,984

 
4,230

 
192,086

 

 
1,033

 
412

 
1,445

Other commercial real estate
 
3,976

 
859,138

 
6,634

 
869,748

 

 
5,850

 
244

 
6,094

Total commercial real estate
 
12,573

 
2,984,552

 
18,094

 
3,015,219

 
648

 
20,641

 
715

 
22,004

Total corporate loans
 
16,053

 
5,762,439

 
23,319

 
5,801,811

 
1,574

 
54,554

 
1,251

 
57,379

Consumer
 

 
1,063,046

 
9,623

 
1,072,669

 

 
10,767

 
238

 
11,005

Total loans, excluding
  covered loans
 
16,053

 
6,825,485

 
32,942

 
6,874,480

 
1,574

 
65,321

 
1,489

 
68,384

Covered loans
 

 
22,248

 
28,971

 
51,219

 

 
298

 
3,818

 
4,116

Reserve for unfunded
  commitments
 

 

 

 

 

 
1,225

 

 
1,225

Total loans
 
$
16,053

 
$
6,847,733

 
$
61,913

 
$
6,925,699

 
$
1,574

 
$
66,844

 
$
5,307

 
$
73,725

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


22




Loans Individually Evaluated for Impairment
The following table presents loans individually evaluated for impairment by class of loan as of September 30, 2015 and December 31, 2014. PCI loans are excluded from this disclosure.
Impaired Loans Individually Evaluated by Class
(Dollar amounts in thousands)
 
 
As of September 30, 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
 
$
2,244

 
$
1,236

 
$
4,281

 
$
926

 
 
$
666

 
$
19,130

 
$
35,457

 
$
2,249

Agricultural
 

 

 

 

 
 

 

 

 

Commercial real estate:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Office, retail, and industrial
 
4,415

 
1,508

 
11,421

 
648

 
 
9,623

 
2,709

 
18,340

 
271

Multi-family
 
802

 

 
942

 

 
 
939

 

 
1,024

 

Construction
 
1,872

 

 
1,979

 

 
 
6,671

 

 
7,731

 

Other commercial real estate
 
3,976

 

 
4,695

 

 
 
2,752

 
514

 
4,490

 
11

Total commercial real estate
 
11,065

 
1,508

 
19,037

 
648

 
 
19,985

 
3,223

 
31,585

 
282

Total impaired loans
   individually evaluated
   for impairment
 
$
13,309

 
$
2,744

 
$
23,318

 
$
1,574

 
 
$
20,651

 
$
22,353

 
$
67,042

 
$
2,531


23




The following table presents the average recorded investment and interest income recognized on impaired loans by class for the quarters and nine months ended September 30, 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 September 30,
 
 
2015
 
2014
 
 
Average
Recorded
Balance
 
Interest
Income
Recognized (1)
 
Average
Recorded
Balance
 
Interest
Income
Recognized (1)
Commercial and industrial
 
$
5,968

 
$
37

 
$
20,137

 
$
57

Agricultural
 

 

 

 

Commercial real estate:
 
 
 
 
 
 
 
 

Office, retail, and industrial
 
8,814

 
4

 
15,873

 
3

Multi-family
 
925

 
12

 
1,155

 

Construction
 
2,995

 
118

 
5,792

 

Other commercial real estate
 
3,442

 
15

 
5,234

 
22

Total commercial real estate
 
16,176

 
149

 
28,054

 
25

Total impaired loans
 
$
22,144

 
$
186

 
$
48,191

 
$
82

 
 
 
 
 
 
 
 
 
 
 
Nine Months Ended September 30,
 
 
2015
 
2014
 
 
Average
Recorded
Investment
 
Interest
Income
Recognized
(1)
 
Average
Recorded
Investment
 
Interest
Income
Recognized
(1)
Commercial and industrial
 
$
10,457

 
$
113

 
$
15,222

 
$
204

Agricultural
 

 

 

 

Commercial real estate:
 
 
 
 
 
 
 
 
Office, retail, and industrial
 
10,158

 
37

 
20,671

 
150

Multi-family
 
868

 
13

 
1,321

 

Construction
 
4,833

 
118

 
5,537

 

Other commercial real estate
 
3,222

 
34

 
6,701

 
137

Total commercial real estate
 
19,081

 
202

 
34,230

 
287

Total impaired loans
 
$
29,538

 
$
315

 
$
49,452

 
$
491


(1) 
Recorded using the cash basis of accounting.

24




Credit Quality Indicators
Corporate loans and commitments are assessed for credit risk and assigned ratings based on various characteristics, such as the borrower's cash flow, leverage, and collateral. Ratings for commercial credits are reviewed periodically. The following tables present credit quality indicators by class for corporate and consumer loans, excluding covered loans, as of September 30, 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 September 30, 2015
 
 
 
 
 
 
 
 
 
 
Commercial and industrial
 
$
2,247,010

 
$
90,414

 
$
48,998

 
$
6,438

 
$
2,392,860

Agricultural
 
388,034

 

 
5,586

 
112

 
393,732

Commercial real estate:
 
 
 
 
 
 
 
 
 
 
Office, retail, and industrial
 
1,335,648

 
37,420

 
34,048

 
6,961

 
1,414,077

Multi-family
 
527,520

 
6,147

 
4,595

 
1,046

 
539,308

Construction
 
173,821

 
5,181

 
9,752

 
3,332

 
192,086

Other commercial real estate
 
829,347

 
24,140

 
10,363

 
5,898

 
869,748

Total commercial real estate
 
2,866,336

 
72,888

 
58,758

 
17,237

 
3,015,219

Total corporate loans
 
$
5,501,380

 
$
163,302

 
$
113,342

 
$
23,787

 
$
5,801,811

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 $870,000 as of September 30, 2015 and $1.8 million as of December 31, 2014.

25




Consumer Credit Quality Indicators by Class, Excluding Covered Loans
(Dollar amounts in thousands)
 
 
Performing
 
Non-accrual
 
Total
As of September 30, 2015
 
 
 
 
 
 
Home equity
 
$
642,022

 
$
5,201

 
$
647,223

1-4 family mortgages
 
290,941

 
3,320

 
294,261

Installment
 
131,185

 

 
131,185

Total consumer loans
 
$
1,064,148

 
$
8,521

 
$
1,072,669

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 September 30, 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 September 30, 2015
 
As of December 31, 2014
 
 
Accruing
 
Non-accrual (1)
 
Total
 
Accruing
 
Non-accrual (1)
 
Total
Commercial and industrial
 
$
297

 
$
1,063

 
$
1,360

 
$
269

 
$
18,799

 
$
19,068

Commercial real estate:
 
 
 
 
 
 
 
 
 
 
 
 
Office, retail, and industrial
 
166

 

 
166

 
586

 

 
586

Multi-family
 
601

 
192

 
793

 
887

 
232

 
1,119

Other commercial real estate
 
346

 

 
346

 
433

 
183

 
616

Total commercial real estate
 
1,113

 
192

 
1,305

 
1,906

 
415

 
2,321

Total corporate loans
 
1,410

 
1,255

 
2,665

 
2,175

 
19,214

 
21,389

Home equity
 
501

 
681

 
1,182

 
651

 
506

 
1,157

1-4 family mortgages
 
860

 
430

 
1,290

 
878

 
184

 
1,062

Total consumer loans
 
1,361

 
1,111

 
2,472

 
1,529

 
690

 
2,219

Total loans
 
$
2,771

 
$
2,366

 
$
5,137

 
$
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 $769,000 in specific reserves related to TDRs as of September 30, 2015 and there were $1.8 million in specific reserves related to TDRs as of December 31, 2014.

26




The following table presents a summary of loans that were restructured during the quarters and nine months ended September 30, 2015, and 2014.
Loans Restructured During the Period
(Dollar amounts in thousands)
 
Number
of
Loans
 
Pre-
Modification
Recorded
Investment
 
Funds
Disbursed
 
Interest
and Escrow
Capitalized
 
Charge-offs
 
Post-
Modification
Recorded
Investment
Quarter ended September 30, 2015
 
 
 
 
 
 
 
 
 
 
Home equity
1

 
$
120

 
$

 
$

 
$

 
$
120

1-4 family mortgages
2

 
325

 

 

 

 
325

Total loans restructured during the period
3

 
$
445

 
$

 
$

 
$

 
$
445

Quarter ended September 30, 2014
 
 
 
 
 
 
 
 
 
 
Commercial and industrial
5

 
$
23,015

 
$

 
$

 
$

 
$
23,015

Office, retail, and industrial
1

 
417

 

 

 

 
417

Total loans restructured during the period
6

 
$
23,432

 
$

 
$

 
$

 
$
23,432

Nine months ended September 30, 2015
 
 
 
 
 
 
 
 
 
 
Home equity
1

 
$
120

 
$

 
$

 
$

 
$
120

1-4 family mortgages
2

 
325

 

 

 

 
325

Total loans restructured during the period
3

 
$
445

 
$

 
$

 
$

 
$
445

Nine months ended September 30, 2014
 
 
 
 
 
 
 
 
 
 
Commercial and industrial
5

 
$
23,015

 
$

 
$

 
$

 
$
23,015

Office, retail, and industrial
1

 
417

 

 

 

 
417

Home equity
1

 
75

 

 

 

 
75

Total loans restructured during the period
7

 
$
23,507

 
$

 
$

 
$

 
$
23,507


27




Accruing TDRs that do not perform in accordance with their modified terms are transferred to non-accrual. No material loans defaulted within twelve months of the restructure date during the quarters and nine months ended September 30, 2015 and 2014.
A rollforward of the carrying value of TDRs for the quarters and nine months ended September 30, 2015 and 2014 is presented in the following table.
TDR Rollforward
(Dollar amounts in thousands)
 
 
Quarters Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
 
2015
 
2014
 
2015
 
2014
Accruing
 
 
 
 
 
 
 
 
Beginning balance
 
$
3,067

 
$
5,697

 
$
3,704

 
$
23,770

Additions
 
120

 
417

 
120

 
492

Net payments received
 
(355
)
 
(109
)
 
(746
)
 
(1,219
)
Returned to performing status
 

 

 

 
(18,821
)
Net transfers from non-accrual
 
(61
)
 
(556
)
 
(307
)
 
1,227

Ending balance
 
2,771

 
5,449

 
2,771

 
5,449

Non-accrual
 
 
 
 
 
 
 
 
Beginning balance
 
2,070

 
1,700

 
19,904

 
4,083

Additions
 
325

 
23,015

 
325

 
23,015

Net payments received
 
(29
)
 
(135
)
 
(15,483
)
 
(292
)
Charge-offs
 
(61
)
 
(8,159
)
 
(2,687
)
 
(8,345
)
Transfers to OREO
 

 

 

 
(257
)
Net transfers to accruing
 
61

 
556

 
307

 
(1,227
)
Ending balance
 
2,366

 
16,977

 
2,366

 
16,977

Total TDRs
 
$
5,137

 
$
22,426

 
$
5,137

 
$
22,426

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. Loans that were not restructured at market rates and terms, that are not in compliance with the modified terms, or for which there is a concern about the future ability of the borrower to meet its obligations under the modified terms, continue to be separately reported as restructured until paid in full or charged-off.
There were no material commitments to lend additional funds to borrowers with TDRs as of September 30, 2015 and there were $666,000 in commitments as of December 31, 2014.

28




8. EARNINGS PER COMMON SHARE
The table below displays the calculation of basic and diluted earnings per share.
Basic and Diluted Earnings per Common Share
(Amounts in thousands, except per share data)
 
 
Quarters Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
 
2015
 
2014
 
2015
 
2014
Net income
 
$
23,284

 
$
18,549

 
$
65,740

 
$
54,713

Net income applicable to non-vested restricted shares
 
(226
)
 
(242
)
 
(703
)
 
(697
)
Net income applicable to common shares
 
$
23,058

 
$
18,307

 
$
65,037

 
$
54,016

Weighted-average common shares outstanding:
 
 
 
 
 
 
 
 
Weighted-average common shares outstanding (basic)
 
77,106

 
74,341

 
77,038

 
74,270

Dilutive effect of common stock equivalents
 
13

 
11

 
13

 
12

Weighted-average diluted common shares outstanding
 
77,119

 
74,352

 
77,051

 
74,282

Basic earnings per common share ("EPS")
 
$
0.30

 
$
0.25

 
$
0.84

 
$
0.73

Diluted EPS
 
$
0.30

 
$
0.25

 
$
0.84

 
$
0.73

Anti-dilutive shares not included in the computation of
  diluted earnings per common share (1)
 
751

 
1,155

 
822

 
1,215


(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.
9. INCOME TAXES
The following table presents income tax expense and the effective income tax rate for the quarters and nine months ended September 30, 2015 and 2014.
Income Tax Expense
(Dollar amounts in thousands)
 
 
Quarters Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
 
2015
 
2014
 
2015
 
2014
Income before income tax expense
 
$
34,451

 
$
27,098

 
$
96,564

 
$
80,076

Income tax expense:
 
 
 
 
 
 
 
 
Federal income tax expense
 
$
9,036

 
$
6,714

 
$
24,956

 
$
19,719

State income tax expense
 
2,131

 
1,835

 
5,868

 
5,644

Total income tax expense
 
$
11,167

 
$
8,549

 
$
30,824

 
$
25,363

Effective income tax rate
 
32.4
%
 
31.5
%
 
31.9
%
 
31.7
%
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 increase in total income tax expense resulted primarily from higher levels of income subject to tax at statutory rates, partly offset by decreases in state statutory rates.
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.

29




10. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
In the ordinary course of business, the Company enters into derivative transactions as part of its overall interest rate risk management strategy. The significant accounting policies related to derivative instruments and hedging activities are presented in Note 1, "Summary of Significant Accounting Policies."
Fair Value Hedges
The Company hedges the fair value of fixed rate commercial real estate loans using interest rate swaps through which the Company pays fixed amounts and receives variable amounts. These derivative contracts are designated as fair value hedges.
Fair Value Hedges
(Dollar amounts in thousands)
 
 
As of
 
 
September 30, 2015
 
December 31, 2014
Gross notional amount outstanding
 
$
11,918

 
$
12,793

Derivative liability fair value
 
(819
)
 
(1,032
)
Weighted-average interest rate received
 
2.11
%
 
2.07
%
Weighted-average interest rate paid
 
6.36
%
 
6.37
%
Weighted-average maturity (in years)
 
2.21

 
2.95

Fair value of assets needed to settle derivative transactions (1)
 
$
841

 
$
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 and nine months ended September 30, 2015 and 2014 gains or losses related to fair value hedge ineffectiveness were not material.
Cash Flow Hedges
As of September 30, 2015, the Company hedged $710.0 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. Forward starting interest rate swaps of $62.5 million and $200.0 million began during the second and third quarters of 2015, respectively. These derivative contracts are designated as cash flow hedges.
Cash Flow Hedges
(Dollar amounts in thousands)
 
 
As of
 
 
September 30, 2015
 
December 31, 2014
Gross notional amount outstanding
 
$
1,220,000

 
$
650,000

Derivative asset fair value
 
12,784

 
1,166

Derivative liability fair value
 
(13,844
)
 
(3,096
)
Weighted-average interest rate received
 
1.23
%
 
1.63
%
Weighted-average interest rate paid
 
0.72
%
 
0.16
%
Weighted-average maturity (in years)
 
4.16

 
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 and nine months ended September 30, 2015, there were no material gains or losses related to cash flow hedge ineffectiveness. As of September 30, 2015, the Company estimates that $5.2 million will be reclassified from accumulated other comprehensive income as an increase to interest income over the next twelve months.

30




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. The Company's credit exposure on these derivative transactions results primarily from counterparty credit risk. The credit valuation adjustment ("CVA") is a fair value adjustment to the derivative to account for this risk. As of September 30, 2015 and December 31, 2014, the CVA was not material. Transaction fees related to commercial customer derivative instruments of $1.2 million and $2.7 million were recorded in noninterest income for the quarter and nine months ended September 30, 2015, respectively. There were $874,000 and $1.3 million of transaction fees recorded for the quarter and nine months ended September 30, 2014, respectively.
Other Derivative Instruments
(Dollar amounts in thousands)
 
 
As of
 
 
September 30, 2015
 
December 31, 2014
Gross notional amount outstanding
 
$
685,270

 
$
527,893

Derivative asset fair value
 
13,367

 
7,852

Derivative liability fair value
 
(13,367
)
 
(7,852
)
Fair value of assets needed to settle derivative transactions (1)
 
13,764

 
8,130


(1) 
This amount represents the fair value if credit risk related contingent features were triggered.
The Company occasionally enters into risk participation agreements with counterparty banks to transfer or assume a portion of the credit risk related to customer transactions. The amounts of these instruments were not material for any periods presented. The Company had no other derivative instruments as of September 30, 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 September 30, 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.

31




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 September 30, 2015 and December 31, 2014.
Fair Value of Offsetting Derivatives
(Dollar amounts in thousands)
 
 
As of September 30, 2015
 
As of December 31, 2014
 
 
Assets
 
Liabilities
 
Assets
 
Liabilities
Gross amounts recognized
 
$
26,151

 
$
28,030

 
$
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)
 
26,151

 
28,030

 
9,018


11,980

Gross amounts not offset in the Consolidated Statements of
  Financial Condition:
 
 
 
 
 
 
 
 
Offsetting derivative positions
 
(12,788
)
 
(12,788
)
 
(1,195
)
 
(1,195
)
Cash collateral pledged
 

 
(15,242
)
 

 
(10,785
)
Net credit exposure
 
$
13,363

 
$

 
$
7,823

 
$


(1) 
Included in other assets or other liabilities in the Consolidated Statements of Financial Condition.
As of September 30, 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 September 30, 2015 and December 31, 2014 the Company was not in violation of these provisions.

32




11. COMMITMENTS, GUARANTEES, AND CONTINGENT LIABILITIES
Credit Commitments and Guarantees
In the normal course of business, the Company enters into a variety of financial instruments with off-balance sheet risk to meet the financing needs of its customers and to conduct lending activities, including commitments to extend credit and standby and commercial letters of credit. These instruments involve elements of credit and interest rate risk in excess of the amount recognized in the Consolidated Statements of Financial Condition.
Contractual or Notional Amounts of Financial Instruments
(Dollar amounts in thousands)
 
 
As of
 
 
September 30,
2015
 
December 31,
2014
Commitments to extend credit:
 
 
 
 
Commercial, industrial, and agricultural
 
$
1,253,880

 
$
1,299,683

Commercial real estate
 
288,930

 
170,573

Home equity
 
336,786

 
317,783

Other commitments (1)
 
201,646

 
194,556

Total commitments to extend credit
 
$
2,081,242

 
$
1,982,595

 
 
 
 
 
Standby letters of credit
 
$
102,996

 
$
110,639

Recourse on assets sold:
 
 
 
 
Unpaid principal balance of loans sold
 
$
199,748

 
$
185,910

Carrying value of recourse obligation (2)
 
76

 
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 and nine months ended September 30, 2015 and 2014.
Legal Proceedings
In the ordinary course of business, there were certain legal proceedings pending against the Company and its subsidiaries at September 30, 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.

33




12. FAIR VALUE
Fair value represents the amount expected to be received to sell an asset or paid to transfer a liability in its principal or most advantageous market in an orderly transaction between market participants at the measurement date. In accordance with fair value accounting guidance, the Company measures, records, and reports various types of assets and liabilities at fair value on either a recurring or non-recurring basis in the Consolidated Statements of Financial Condition. Those assets and liabilities are presented below in the sections titled "Assets and Liabilities Required to be Measured at Fair Value on a Recurring Basis" and "Assets and Liabilities Required to be Measured at Fair Value on a Non-Recurring Basis."
Other assets and liabilities are not required to be measured at fair value in the Consolidated Statements of Financial Condition, but must be disclosed at fair value. 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.

34




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 September 30, 2015
 
As of December 31, 2014
 
 
Level 1
 
Level 2
 
Level 3
 
Level 1
 
Level 2
 
Level 3
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
Trading securities:
 
 
 
 
 
 
 
 
 
 
 
 
Money market funds
 
$
2,366

 
$

 
$

 
$
1,725

 
$

 
$

Mutual funds
 
14,672

 

 

 
15,735

 

 

Total trading securities
 
17,038

 

 

 
17,460

 

 

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

 
1,999

 

 

 

 

U.S. agency securities
 

 
18,623

 

 

 
30,431

 

CMOs
 

 
546,475

 

 

 
534,156

 

MBSs
 

 
167,381

 

 

 
159,765

 

Municipal securities
 

 
381,554

 

 

 
423,820

 

CDOs
 

 

 
31,870

 

 

 
33,774

Corporate debt securities
 

 

 

 

 
1,802

 

Equity securities
 

 
3,516

 

 

 
3,261

 

Total available-for-sale
  securities
 

 
1,119,548

 
31,870

 

 
1,153,235

 
33,774

Mortgage servicing rights (1)
 

 

 
1,798

 

 

 
1,728

Derivative assets (1)
 

 
26,151

 

 

 
9,018

 

Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
Derivative liabilities (2)
 
$

 
$
28,030

 
$

 
$

 
$
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.

35




The following table presents the ranges of significant, unobservable inputs calculated using the weighted average of the Issuers used by the Company as of September 30, 2015.
Significant Unobservable Inputs Used in the Valuation of CDOs
 
 
As of
September 30, 2015
Probability of prepayment
 
2.4% - 15.4%
Probability of default
 
17.7% - 54.8%
Loss given default
 
88.2% - 96.5%
Probability of deferral cure
 
21.7% - 56.8%
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 and nine months ended September 30, 2015 and 2014 is presented in the following table.
Rollforward of the Carrying Value of CDOs
(Dollar amounts in thousands)
 
 
Quarters Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
 
2015
 
2014
 
2015
 
2014
Beginning balance
 
$
32,004

 
$
18,436

 
$
33,774

 
$
18,309

Change in other comprehensive loss (1)
 
(62
)
 
(65
)
 
(1,560
)
 
1,571

Paydowns
 
(72
)
 
(2
)
 
(344
)
 
(1,511
)
Ending balance
 
$
31,870

 
$
18,369

 
$
31,870

 
$
18,369


(1) 
Included in unrealized holding gains in the Consolidated Statements of Comprehensive Income.
Mortgage Servicing Rights
The Company services loans for others totaling $232.2 million as of September 30, 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

36




fair value hierarchy. For its derivative assets and liabilities, the Company also considers non-performance risk, including the likelihood of default by itself and its counterparties, when evaluating whether the market quotes from the counterparty are representative of an exit price.
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 September 30, 2015
 
As of December 31, 2014
 
 
Level 1
 
Level 2
 
Level 3
 
Level 1
 
Level 2
 
Level 3
Collateral-dependent impaired loans (1)
 
$

 
$

 
$
5,773

 
$

 
$

 
$
23,799

OREO (2)
 

 

 
7,477

 

 

 
22,760

Loans held-for-sale (3)
 

 

 
19,439

 

 

 
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 September 30, 2015, loans held-for-sale consists 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 and are being actively marketed. These branches 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.

37




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
 
 
 
 
September 30, 2015
 
December 31, 2014
 
 
Fair Value Hierarchy
Level
 
Carrying
Amount
 
Fair Value
 
Carrying
Amount
 
Fair Value
Assets:
 
 
 
 
 
 
 
 
 
 
Cash and due from banks
 
1
 
$
125,279

 
$
125,279

 
$
117,315

 
$
117,315

Interest-bearing deposits in other banks
 
2
 
822,264

 
822,264

 
488,947

 
488,947

Securities held-to-maturity
 
2
 
23,723

 
23,708

 
26,555

 
27,670

FHLB and FRB stock
 
2
 
38,748

 
38,748

 
37,558

 
37,558

Loans
 
3
 
6,859,305

 
6,770,861

 
6,672,611

 
6,536,248

Investment in BOLI
 
3
 
208,666

 
208,666

 
206,498

 
206,498

Accrued interest receivable
 
3
 
27,897

 
27,897

 
27,506

 
27,506

Other interest-earning assets
 
3
 
2,357

 
2,357

 
3,799

 
3,799

Liabilities:
 
 
 
 
 
 
 
 
 
 
Deposits
 
2
 
$
8,296,450

 
$
8,295,488

 
$
7,887,758

 
$
7,879,413

Borrowed funds
 
2
 
169,943

 
169,942

 
137,994

 
137,994

Senior and subordinated debt
 
1
 
201,123

 
207,045

 
200,869

 
209,035

Accrued interest payable
 
2
 
5,124

 
5,124

 
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, 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.
Loans - Loans includes the FDIC indemnification asset and net loans, which consists of 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.


38




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.

39




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 as well as wealth management services 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 and nine months ended September 30, 2015 and 2014 and Consolidated Statements of Financial Condition as of September 30, 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 and nine months ended September 30, 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 tax-equivalent 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"), 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,

40




cost savings and financial benefits of pending or consummated transactions, including First Midwest's proposed acquisition of The Peoples' Bank of Arlington Heights, and growth strategies, including possible future 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 U.S. 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. These include, but are not limited to, earnings per share, 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 accounting and reporting policies conform to GAAP and general practices within the banking 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.

41




PERFORMANCE OVERVIEW
Table 1
Selected Financial Data
(Dollar and share amounts in thousands, except per share data)
 
Quarters Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2015
 
2014
 
2015
 
2014
Operating Results
 
 
 
 
 
 
 
Interest income
$
84,292

 
$
76,862

 
$
251,317

 
$
218,555

Interest expense
6,390

 
5,831

 
17,731

 
17,522

Net interest income
77,902

 
71,031

 
233,586

 
201,033

Provision for loan and covered loan losses
4,100

 
10,727

 
16,652

 
17,509

Noninterest income
35,014

 
37,107

 
100,103

 
95,550

Noninterest expense
74,365

 
70,313

 
220,473

 
198,998

Income before income tax expense
34,451

 
27,098

 
96,564


80,076

Income tax expense
11,167

 
8,549

 
30,824

 
25,363

Net income
$
23,284

 
$
18,549

 
$
65,740

 
$
54,713

Weighted-average diluted common shares outstanding
77,119

 
74,352

 
77,051

 
74,282

Diluted earnings per common share
$
0.30

 
$
0.25

 
$
0.84

 
$
0.73

Performance Ratios (1)
 
 
 
 
 
 
 
Return on average common equity
8.06
%
 
6.91
%
 
7.73
%
 
6.99
%
Return on average tangible common equity (2)
11.68
%
 
9.73
%
 
11.28
%
 
9.80
%
Return on average assets
0.94
%
 
0.84
%
 
0.91
%
 
0.86
%
Tax-equivalent net interest margin
3.58
%
 
3.72
%
 
3.70
%
 
3.66
%
Efficiency ratio (3)
63.20
%
 
62.02
%
 
63.10
%
 
64.00
%

(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. Intangibles amortization expense, net of tax, totaled $973,000 and $2.9 million for the quarter and nine months ended September 30, 2015, respectively, and $643,000 and $2.0 million for the same periods in 2014. Tangible common equity 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, and tax-equivalent adjusted BOLI income. BOLI income totaled $926,000 and $3.3 million for the quarter and nine months ended September 30, 2015, respectively, and $767,000 and $2.0 million for the same periods in 2014. In addition, acquisition and integration related expenses of $3.7 million and $4.6 million are excluded from the efficiency ratio for the quarter and nine months ended September 30, 2014, respectively.
 
As of
 
September 30, 2015 
 Change from
September 30,
2015
 
December 31,
2014
 
September 30,
2014
 
December 31,
2014
 
September 30,
2014
Balance Sheet Highlights
 
 
 
 
 
 
 
 
 
Total assets
$
9,935,046

 
$
9,445,139

 
$
9,096,351

 
$
489,907

 
$
838,695

Total loans, excluding covered loans
6,874,480

 
6,657,418

 
6,428,204

 
217,062

 
446,276

Total loans, including covered loans
6,925,699

 
6,736,853

 
6,519,079

 
188,846

 
406,620

Total deposits
8,296,450

 
7,887,758

 
7,616,133

 
408,692

 
680,317

Core deposits
7,137,064

 
6,616,200

 
6,359,686

 
520,864

 
777,378

Loans-to-deposits ratio
83.5
%
 
85.4
%
 
85.6
%
 
 
 
 
Core deposits to total deposits
86.0
%
 
83.9
%
 
83.5
%
 
 
 
 


42




 
As of
 
September 30, 2015 
 Change from
September 30,
2015
 
December 31,
2014
 
September 30,
2014
December 31,
2014
 
September 30,
2014
Asset Quality Highlights (1)
 
 
 
 
 
 
 
 
 
Non-accrual loans
$
32,308

 
$
59,971

 
$
64,528

 
$
(27,663
)
 
$
(32,220
)
90 days or more past due loans
  (still accruing interest)
4,559

 
1,173

 
6,062

 
3,386

 
(1,503
)
Total non-performing loans
36,867

 
61,144

 
70,590

 
(24,277
)
 
(33,723
)
Accruing troubled debt
  restructurings ("TDRs")
2,771

 
3,704

 
5,449

 
(933
)
 
(2,678
)
OREO
31,129

 
26,898

 
29,165

 
4,231

 
1,964

Total non-performing assets
$
70,767

 
$
91,746

 
$
105,204

 
$
(20,979
)
 
$
(34,437
)
30-89 days past due loans
  (still accruing interest)
$
28,629

 
$
20,073

 
$
17,321

 
$
8,556

 
$
11,308

Allowance for Credit Losses
 
 
 
 
 
 
 
 
 
Allowance for credit losses
$
73,725

 
$
74,510

 
$
74,722

 
$
(785
)
 
$
(997
)
Allowance for credit losses to
  total loans (2)
1.06
%
 
1.11
%
 
1.15
%
 
 
 
 
Allowance for credit losses to
  non-accrual loans (1)
215.45
%
 
112.19
%
 
102.39
%
 
 
 
 

(1) 
These amounts and ratios exclude covered loans and covered OREO. For a discussion of covered loans, see Note 1 and Note 6 of "Notes to the Condensed Consolidated Financial Statements" in Part I, Item 1 of this Form 10-Q.
(2) 
Acquired loans are recorded at fair value as of the acquisition date with no allowance for credit losses being established. Included within total loans are loans acquired during 2014, which totaled $545.9 million at September 30, 2015, $718.3 million at December 31, 2014, and $533.2 million at September 30, 2014. These loans have an allowance for loan loss of $1.2 million as of September 30, 2015. In addition, there is a remaining acquisition adjustment of $15.5 million at September 30, 2015, $24.7 million at December 31, 2014, and $13.6 million at September 30, 2014. This acquisition adjustment represents the difference between the contractual loan balances and the carrying value of these loans.
Net income for the third quarter of 2015 was $23.3 million, or $0.30 per share, compared to $18.5 million, or $0.25 per share, for the third quarter of 2014. For the first nine months of 2015, net income was $65.7 million, or $0.84 per share, compared to $54.7 million, or $0.73 per share, for the same period in 2014.
The increases in net income for the third quarter and first nine months of 2015 compared to the same periods in 2014 reflect the benefit of the acquisitions completed during the second half of 2014, organic loan growth, increases in fee-based revenues across all categories, and lower provisioning for credit 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 $6.9 billion grew 4.3% on an annualized basis from December 31, 2014. This growth was concentrated within our commercial and industrial and agricultural loan categories and primarily reflects the continued expansion into certain sector-based lending areas such as asset-based lending, healthcare, structured finance, and leasing. In addition, consumer loans contributed to the loan growth which included expansion of our web-based installment lending program and the purchase of high quality, shorter-duration, floating rate home equity loans.
Non-performing assets, excluding covered loans and covered OREO, decreased by $21.0 million, or 22.9%, from December 31, 2014 and $34.4 million, or 32.7%, from September 30, 2014. 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.

43




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 Tables 2 and 3.
Table 2 summarizes our average interest-earning assets and interest-bearing liabilities for the quarters ended September 30, 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. Table 3 presents this same information for the nine months ended September 30, 2015 and 2014.

44




Table 2
Net Interest Income and Margin Analysis
(Dollar amounts in thousands)
 
Quarters Ended September 30,
 
 
Attribution of Change
in Net Interest Income
 
2015
 
 
2014
 
 
 
Average
Balance
 
Interest
 
Yield/
Rate (%)
 
 
Average
Balance
 
Interest
 
Yield/
Rate (%)
 
 
Volume
 
Yield/
Rate
 
Total
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other interest-earning assets
$
820,318

 
$
645

 
0.31
 
 
$
476,768

 
$
313

 
0.26
 
 
$
299

 
$
33

 
$
332

Securities (1)
1,194,711

 
9,559

 
3.20
 
 
1,086,105

 
9,689

 
3.57
 
 
4,358

 
(4,488
)
 
(130
)
Federal Home Loan Bank
  ("FHLB") and Federal Reserve
  Bank stock
38,748

 
369

 
3.81
 
 
35,588

 
341

 
3.83
 
 
30

 
(2
)
 
28

Loans (1)(2)
6,887,611

 
76,328

 
4.40
 
 
6,302,883

 
69,458

 
4.37
 
 
6,453

 
417

 
6,870

Total interest-earning assets (1)
8,941,388

 
86,901

 
3.86
 
 
7,901,344

 
79,801

 
4.01
 
 
11,140

 
(4,040
)
 
7,100

Cash and due from banks
132,504

 
 
 
 
 
 
126,279

 
 
 
 
 
 
 
 
 
 
 
Allowance for loan and
  covered loan losses
(73,928
)
 
 
 
 
 
 
(77,596
)
 
 
 
 
 
 
 
 
 
 
 
Other assets
875,668

 
 
 
 
 
 
818,066

 
 
 
 
 
 
 
 
 
 
 
Total assets
$
9,875,632

 
 
 
 
 
 
$
8,768,093

 
 
 
 
 
 
 
 
 
 
 
Liabilities and Stockholders' Equity:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Savings deposits
$
1,471,003

 
269

 
0.07
 
 
$
1,231,700

 
231

 
0.07
 
 
44

 
(6
)
 
38

NOW accounts
1,405,371

 
172

 
0.05
 
 
1,261,522

 
166

 
0.05
 
 
16

 
(10
)
 
6

Money market deposits
1,589,582

 
490

 
0.12
 
 
1,413,753

 
468

 
0.13
 
 
49

 
(27
)
 
22

Time deposits
1,173,127

 
1,398

 
0.47
 
 
1,226,025

 
1,941

 
0.63
 
 
(81
)
 
(462
)
 
(543
)
Borrowed funds
168,807

 
928

 
2.18
 
 
101,674

 
9

 
0.04
 
 
912

 
7

 
919

Senior and subordinated debt
201,083

 
3,133

 
6.18
 
 
191,013

 
3,016

 
6.26
 
 
156

 
(39
)
 
117

Total interest-bearing
  liabilities
6,008,973

 
6,390

 
0.42
 
 
5,425,687

 
5,831

 
0.43
 
 
1,096

 
(537
)
 
559

Demand deposits
2,601,442

 
 
 
 
 
 
2,208,450

 
 
 
 
 
 
 
 
 
 
 
Total funding sources
8,610,415

 
 
 
 
 
 
7,634,137

 
 
 
 
 
 
 
 
 
 
 
Other liabilities
130,250

 
 
 
 
 
 
83,075

 
 
 
 
 
 
 
 
 
 
 
Stockholders' equity - common
1,134,967

 
 
 
 
 
 
1,050,881

 
 
 
 
 
 
 
 
 
 
 
Total liabilities and
  stockholders' equity
$
9,875,632

 
 
 
 
 
 
$
8,768,093

 
 
 
 
 
 
 
 
 
 
 
Tax-equivalent net interest
  income/margin (1)
 
 
80,511

 
3.58
 
 
 
 
73,970

 
3.72
 
 
$
10,044

 
$
(3,503
)
 
$
6,541

Tax-equivalent adjustment
 
 
(2,609
)
 
 
 
 
 
 
(2,939
)
 
 
 
 
 
 
 
 
 
Net interest income (GAAP)
 
 
$
77,902

 
 
 
 
 
 
$
71,031

 
 
 
 
 
 
 
 
 

(1) 
Interest income and yields are presented on a tax-equivalent basis, assuming a federal income tax rate of 35%.
(2) 
This item includes loans acquired through the Company's FDIC-assisted transactions subject to loss sharing agreements ("covered loans") and the related FDIC indemnification asset. For additional discussion, see Note 1 and Note 6 of "Notes to the Condensed Consolidated Financial Statements" in Part I, Item 1 of this Form 10-Q.


45




Table 3
Net Interest Income and Margin Analysis
(Dollar amounts in thousands)
 
Nine Months Ended September 30,
 
 
Attribution of Change
in Net Interest Income
 
2015
 
 
2014
 
 
 
Average
Balance
 
Interest
 
Yield/
Rate (%)
 
 
Average
Balance
 
Interest
 
Yield/
Rate (%)
 
 
Volume
 
Yield/
Rate
 
Total
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other interest-earning assets
$
671,794

 
$
1,559

 
0.31
 
 
$
515,380

 
$
1,064

 
0.28
 
 
$
485

 
$
10

 
$
495

Securities (1)
1,196,695

 
29,762

 
3.32
 
 
1,133,801

 
30,403

 
3.58
 
 
2,113

 
(2,754
)
 
(641
)
FHLB and Federal Reserve
  Bank stock
38,442

 
1,094

 
3.79
 
 
35,424

 
1,024

 
3.85
 
 
86

 
(16
)
 
70

Loans (1)(2)
6,815,136

 
227,087

 
4.46
 
 
5,978,223

 
194,878

 
4.36
 
 
26,893

 
5,316

 
32,209

Total interest-earning assets (1)
8,722,067

 
259,502

 
3.98
 
 
7,662,828

 
227,369

 
3.97
 
 
29,577

 
2,556

 
32,133

Cash and due from banks
130,166

 
 
 
 
 
 
118,350

 
 
 
 
 
 
 
 
 
 
 
Allowance for loan and
covered loan losses
(73,761
)
 
 
 
 
 
 
(81,098
)
 
 
 
 
 
 
 
 
 
 
 
Other assets
883,011

 
 
 
 
 
 
790,782

 
 
 
 
 
 
 
 
 
 
 
Total assets
$
9,661,483

 
 
 
 
 
 
$
8,490,862

 
 
 
 
 
 
 
 
 
 
 
Liabilities and Stockholders' Equity:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Savings deposits
$
1,456,160

 
799

 
0.07
 
 
$
1,193,952

 
636

 
0.07
 
 
144

 
19

 
163

NOW accounts
1,383,604

 
506

 
0.05
 
 
1,213,471

 
488

 
0.05
 
 
51

 
(33
)
 
18

Money market deposits
1,556,436

 
1,449

 
0.12
 
 
1,353,857

 
1,253

 
0.12
 
 
189

 
7

 
196

Time deposits
1,218,344

 
4,502

 
0.49
 
 
1,197,232

 
5,537

 
0.62
 
 
100

 
(1,135
)
 
(1,035
)
Borrowed funds
145,611

 
1,064

 
0.98
 
 
162,481

 
561

 
0.46
 
 
(100
)
 
603

 
503

Senior and subordinated debt
200,998

 
9,411

 
6.26
 
 
190,981

 
9,047

 
6.33
 
 
467

 
(103
)
 
364

Total interest-bearing
liabilities
5,961,153

 
17,731

 
0.40
 
 
5,311,974

 
17,522

 
0.44
 
 
851

 
(642
)
 
209

Demand deposits
2,451,597

 
 
 
 
 
 
2,069,866

 
 
 
 
 
 
 
 
 
 
 
Total funding sources
8,412,750

 
 
 
 
 
 
7,381,840

 
 
 
 
 
 
 
 
 
 
 
Other liabilities
124,240

 
 
 
 
 
 
75,268

 
 
 
 
 
 
 
 
 
 
 
Stockholders' equity - common
1,124,493

 
 
 
 
 
 
1,033,754

 
 
 
 
 
 
 
 
 
 
 
Total liabilities and
stockholders' equity
$
9,661,483

 
 
 
 
 
 
$
8,490,862

 
 
 
 
 
 
 
 
 
 
 
Tax Equivalent net interest
  income/margin (1)
 
 
241,771

 
3.70
 
 
 
 
209,847

 
3.66
 
 
$
28,726

 
$
3,198

 
$
31,924

Tax-equivalent adjustment
 
 
(8,185
)
 
 
 
 
 
 
(8,814
)
 
 
 
 
 
 
 
 
 
Net interest income (GAAP)
 
 
$
233,586

 
 
 
 
 
 
$
201,033

 
 
 
 
 
 
 
 
 

(1) 
Interest income and yields are presented on a tax-equivalent basis, assuming a federal income tax rate of 35%.
(2) 
This item includes covered loans and the related FDIC indemnification asset. For additional discussion, see Note 1 and Note 6 of "Notes to the Condensed Consolidated Financial Statements" in Part I, Item 1 of this Form 10-Q.
Total average interest-earning assets and total funding sources for each of the third quarter and first nine months of 2015 increased by approximately $1.0 billion compared to the same periods in 2014. These increases resulted primarily from the impact of acquisitions completed during the second half of 2014 and organic loan growth over the course of the year.
Tax-equivalent net interest margin for the third quarter and first nine months of 2015 was 3.58% and 3.70%, respectively, decreasing 14 basis points from the third quarter of 2014 and increasing 4 basis points from the first nine months of 2014. The decrease in tax-equivalent net interest margin compared to the third quarter of 2014 was due primarily to a rise in other interest-earning assets, lower accretion on covered loans, the continued shift in the loan mix to floating rate loans, and the flattening of the yield curve, which were partially offset by greater accretion on acquired loans related to the 2014 acquisitions. Compared to the first nine months of 2014, the increase in tax-equivalent net interest margin resulted primarily from acquired loan accretion and interest rate swaps, partially offset by lower levels of accretion on covered loans and continued shift in the loan mix. Compared to both prior

46




periods, the margin was also negatively impacted by interest rate swaps related to short-term FHLB advances, which increased the rate on borrowed funds. Excluding the acquired loan accretion related to the 2014 acquisitions, tax-equivalent net interest margin would have been 3.49% and 3.58% for the third quarter and first nine months of 2015, respectively.
Compared to the third quarter and first nine months of 2014, tax-equivalent net interest income increased by $6.5 million and $31.9 million, respectively. These increases were due primarily to the acquisitions completed in 2014, organic loan growth, and the prepayment of FHLB advances during the second quarter of 2014 which were offset by the impact of interest rate swaps related to short-term FHLB advances. Acquired loan accretion related to the 2014 acquisitions contributed $1.8 million and $7.7 million to net interest income for the third quarter and first nine months of 2015, respectively. This acquired loan accretion includes accelerated accretion on purchased credit impaired ("PCI") loans of $556,000 for the third quarter of 2015 and $2.2 million for the first nine months of 2015.
Noninterest Income
A summary of noninterest income for the quarters and nine months ended September 30, 2015 and 2014 are presented in the following table.
Table 4
Noninterest Income Analysis
(Dollar amounts in thousands)
 
Quarters Ended 
 September 30,
 
 
 
Nine Months Ended 
 September 30,
 
 
 
2015
 
2014
 
% Change
 
2015
 
2014
 
% Change
Service charges on deposit accounts
$
10,519

 
$
9,902

 
6.2

 
$
29,676

 
$
26,895

 
10.3

Wealth management fees
7,222

 
6,721

 
7.5

 
21,669

 
19,730

 
9.8

Card-based fees (1)
6,868

 
6,646

 
3.3

 
20,223

 
17,950

 
12.7

Merchant servicing fees (2)
3,207

 
2,932

 
9.4

 
8,810

 
8,557

 
3.0

Mortgage banking income
1,402

 
1,125

 
24.6

 
3,964

 
3,199

 
23.9

Other service charges, commissions,
  and fees
3,900

 
2,334

 
67.1

 
8,990

 
5,386

 
66.9

Total fee-based revenues
33,118

 
29,660

 
11.7

 
93,332

 
81,717

 
14.2

Other income (3)
1,372

 
923

 
48.6

 
5,220

 
3,778

 
38.2

Net securities gains
524

 
2,570

 
(79.6
)
 
1,551

 
8,160

 
(81.0
)
Gains on sales of properties

 
3,954

 
(100.0
)
 

 
3,954

 
(100.0
)
Loss on early extinguishment of debt

 

 

 

 
(2,059
)
 
(100.0
)
Total noninterest income
$
35,014

 
$
37,107

 
(5.6
)
 
$
100,103

 
$
95,550

 
4.8


(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. These fees are substantially offset by merchant card expense included in noninterest expense for each period presented.
(3) 
Other income consists of various items, including BOLI income, safe deposit box rentals, miscellaneous recoveries, and gains on the sales of various assets.
Total fee-based revenues increased 11.7% and 14.2% from the third quarter and first nine months of 2014, respectively, reflecting growth across all categories. The increase in service charges on deposit accounts and card-based fees compared to both prior periods resulted from growth in treasury management services, higher transaction volumes, and services provided to customers added in the 2014 acquisitions.
Compared to both prior periods presented, continued sales of fiduciary and investment advisory services to new and existing customers drove the increases in wealth management fees.
The increase in mortgage banking income resulted primarily from sales of $42.2 million and $128.6 million of 1-4 family mortgage loans in the secondary market during the third quarter and first nine months of 2015, respectively, compared to $31.7 million and $114.7 million for the same periods in 2014.
Compared to both prior periods presented, gains realized on the sale of leasing equipment contracts originated by First Midwest Equipment Finance, which was acquired in September of 2014, drove the increase in other service charges, commissions, and

47




fees. In addition, fee income generated from sales of capital market products to commercial clients and in-house commercial valuation services also contributed to the rise compared to both prior periods presented.
Total noninterest income for the third quarter and first nine months of 2014 was impacted by net securities gains and net gains from the disposition of two branch properties. The increase in other income compared to the first nine months of 2014 was due primarily to greater BOLI income. The loss on early extinguishment of debt resulted from the prepayment of $114.6 million in FHLB advances during the second quarter of 2014.
Noninterest Expense
A summary of noninterest expense for the quarters and nine months ended September 30, 2015 and 2014 are presented in the following table.
Table 5
Noninterest Expense Analysis
(Dollar amounts in thousands)
 
Quarters Ended 
 September 30,
 
 
 
Nine Months Ended 
 September 30,
 
 
 
2015
 
2014
 
% Change
 
2015
 
2014
 
% Change
Salaries and employee benefits:
 
 
 
 
 
 
 
 
 
 
 
Salaries and wages
$
33,554

 
$
28,152

 
19.2

 
$
99,444

 
$
83,938

 
18.5

Retirement and other employee benefits
7,807

 
7,319

 
6.7

 
22,927

 
19,585

 
17.1

Total salaries and employee benefits
41,361

 
35,471

 
16.6

 
122,371

 
103,523

 
18.2

Net occupancy and equipment expense
9,406

 
8,639

 
8.9

 
29,464

 
25,702

 
14.6

Professional services
6,172

 
5,692

 
8.4

 
16,603

 
16,772

 
(1.0
)
Technology and related costs
3,673

 
3,253

 
12.9

 
10,887

 
9,431

 
15.4

Merchant card expense (1)(2)
2,722

 
2,396

 
13.6

 
7,391

 
6,992

 
5.7

Advertising and promotions (1)
1,828

 
1,822

 
0.3

 
5,395

 
5,741

 
(6.0
)
Net OREO expense
1,290

 
1,406

 
(8.3
)
 
4,355

 
4,531

 
(3.9
)
Cardholder expenses (1)
1,354

 
1,120

 
20.9

 
3,914

 
3,215

 
21.7

Other expenses (1)
6,559

 
6,766

 
(3.1
)
 
20,093

 
18,513

 
8.5

Acquisition and integration
  related expenses

 
3,748

 
(100.0
)
 

 
4,578

 
(100.0
)
Total noninterest expense
$
74,365

 
$
70,313

 
5.8

 
$
220,473

 
$
198,998

 
10.8

Efficiency ratio (3)
63
%
 
62
%
 
 
 
63
%
 
64
%
 
 

(1) 
These line items are included in other expense in the Condensed Consolidated Statements of Income.
(2) 
Merchant card expenses are substantially offset by merchant servicing fees included in noninterest income for each period presented.
(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, and tax-equivalent adjusted BOLI income. BOLI income totaled $926,000 and $3.3 million for the quarter and nine months ended September 30, 2015, respectively, and $767,000 and $2.0 million for the same periods in 2014. In addition, acquisition and integration related expenses of $3.7 million and $4.6 million are excluded from the efficiency ratio for the quarter and nine months ended September 30, 2014, respectively.
The rise in total noninterest expense compared to both prior periods presented was impacted by operating costs of the 21 banking locations acquired during the second half of 2014, of which four have been closed. These costs primarily occurred within salaries and employee benefits, net occupancy and equipment expense, technology and related costs, and other expenses.
The increase in professional services compared to the third quarter of 2014 was driven by expenses associated with talent recruitment and organizational growth needs, including an independent cyber-risk assessment as part of a targeted risk mitigation process.
Almost half of the other expenses category consists of FDIC premiums and other intangible amortization expenses. Compared to the first nine months of 2014, the increase resulted primarily from other intangible amortization related to the 2014 acquisitions.

48




Income Taxes
Our provision for income taxes includes both federal and state income tax expense. An analysis of the provision for income taxes is detailed in the following table.
Table 6
Income Tax Expense Analysis
(Dollar amounts in thousands)
 
 
Quarters Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
 
2015
 
2014
 
2015
 
2014
Income before income tax expense
 
$
34,451

 
$
27,098

 
$
96,564

 
$
80,076

Income tax expense:
 
 
 
 
 
 
 
 
Federal income tax expense
 
$
9,036

 
$
6,714

 
$
24,956

 
$
19,719

State income tax expense
 
2,131

 
1,835

 
5,868

 
5,644

Total income tax expense
 
$
11,167

 
$
8,549

 
$
30,824

 
$
25,363

Effective income tax rate
 
32.4
%
 
31.5
%
 
31.9
%
 
31.7
%
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 increase in total income tax expense for the quarter and nine months ended September 30, 2015 compared to the same periods in 2014 resulted primarily from greater income subject to tax at statutory rates, partly offset by decreases in state statutory rates.
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 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 and 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.

49




From time to time, we adjust the size and composition of our securities portfolio based on a number of factors, including expected loan growth, anticipated changes in collateralized public funds on account, the interest rate environment, and the related value of various segments of the securities markets. The following table provides a valuation summary of our investment portfolio.
Table 7
Investment Portfolio Valuation Summary
(Dollar amounts in thousands)
 
 
As of September 30, 2015
 
As of 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. treasury securities
 
$
1,999

 
$

 
$
1,999

 
0.2
 
$

 
$

 
$

 
U.S. agency securities
 
18,289

 
334

 
18,623

 
1.6
 
30,297

 
134

 
30,431

 
2.6
Collateralized mortgage
  obligations ("CMOs")
 
545,992

 
483

 
546,475

 
47.5
 
538,882

 
(4,726
)
 
534,156

 
45.0
Other mortgage-backed
  securities ("MBSs")
 
164,326

 
3,055

 
167,381

 
14.5
 
155,443

 
4,322

 
159,765

 
13.5
Municipal securities
 
375,323

 
6,231

 
381,554

 
33.1
 
414,255

 
9,565

 
423,820

 
35.7
Trust preferred
  collateralized debt
  obligations ("CDOs")
 
48,159

 
(16,289
)
 
31,870

 
2.8
 
48,502

 
(14,728
)
 
33,774

 
2.8
Corporate debt
  securities
 

 

 

 
 
1,719

 
83

 
1,802

 
0.1
Equity securities
 
3,446

 
70

 
3,516

 
0.3
 
3,224

 
37

 
3,261

 
0.3
Total available-for-
  sale securities
 
$
1,157,534

 
$
(6,116
)
 
$
1,151,418

 
100.0
 
$
1,192,322

 
$
(5,313
)
 
$
1,187,009

 
100.0
Securities Held-to-Maturity
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Municipal securities
 
$
23,723

 
$
(15
)
 
$
23,708

 

 
$
26,555

 
$
1,115

 
$
27,670

 
 

Portfolio Composition
As of September 30, 2015, our available-for-sale securities portfolio decreased 3.0% compared to December 31, 2014. The reduction in U.S. agency securities and municipal securities from December 31, 2014 resulted from sales of $55.7 million and maturities, calls, and prepayments of $216.9 million, offset by purchases of $241.3 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. treasury securities, U.S. agency securities, CMOs, MBSs, and municipal securities. The remainder consists of eleven CDOs with a fair value of $31.9 million and miscellaneous other securities with a fair value of $3.5 million.
Investments in municipal securities comprised 33.1% of the total available-for-sale securities portfolio at September 30, 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.

50




Table 8
Securities Effective Duration Analysis
 
As of September 30, 2015
 
As of 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. treasury securities
1.99
%
 
2.00

 
0.68
%
 
%
 

 
%
U.S. agency securities
3.08
%
 
3.23

 
2.83
%
 
3.32
%
 
3.72

 
2.98
%
CMOs
3.28
%
 
3.59

 
1.94
%
 
3.45
%
 
3.67

 
1.91
%
MBSs
3.27
%
 
4.25

 
2.61
%
 
2.88
%
 
4.18

 
2.77
%
Municipal securities
2.89
%
 
2.70

 
5.08
%
 
2.89
%
 
2.37

 
5.50
%
CDOs
N/M

 
N/M

 
N/M

 
N/M

 
N/M

 
N/M

Corporate debt securities
N/M

 
N/M

 
N/M

 
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
3.14
%
 
3.38

 
3.12
%
 
3.16
%
 
3.26

 
3.37
%
Securities Held-to-Maturity
 
 
 
 
 
 
 
 
 
 
 
Municipal securities
6.47
%
 
7.95

 
4.44
%
 
5.64
%
 
7.85

 
4.60
%

N/M - Not meaningful.

(1) 
The effective duration represents the estimated percentage change in the fair value of the securities portfolio given a 100 basis point increase or decrease in interest rates. This measure is used to evaluate the portfolio's price volatility at a single point in time and is not intended to be a precise predictor of future fair values since those values will be influenced by a number of factors.
(2) 
Average life is presented in years and represents the weighted-average time to receive half of all future cash flows using the dollar amount of principal paydowns, including estimated principal prepayments, as the weighting factor.
(3) 
Yields on municipal securities are reflected on a tax-equivalent basis, assuming a federal income tax rate of 35%.
Effective Duration
The average life and effective duration of our available-for-sale securities portfolio as of September 30, 2015 was in line with December 31, 2014 at 3.38 years and 3.14%, respectively.
Securities Gains and Losses
Net securities gains for the third quarter and first nine months of 2015 were $524,000 and $1.6 million, respectively. During the third quarter of 2015, sales consisted of MBSs and equity securities with carrying values that totaled $9.4 million. Net securities gains for the first nine months of 2015 also consisted of certain CMOs, MBSs, and municipal security sales with carrying values of $55.7 million. No impairment charges were recognized during the third quarter and first nine months of 2015.
Net securities gains for the third quarter and first nine months of 2014 were $2.6 million and $8.2 million, respectively. During the first nine months of 2014, we sold a non-accrual CDO with a carrying value of $1.3 million at a gain of $3.5 million and other investments at gains totaling $4.7 million.
Unrealized Gains and Losses
Unrealized gains and losses on securities available-for-sale represent the difference between the aggregate cost and fair value of the portfolio. These amounts are presented in the Consolidated Statements of Comprehensive Income and reported as a separate component of stockholders' equity in accumulated other comprehensive loss on an after-tax basis. This balance sheet component will fluctuate as current market interest rates and conditions change and affect the aggregate fair value of the portfolio. Net unrealized losses were $6.1 million as of September 30, 2015 compared to $5.3 million as of December 31, 2014.
Net unrealized gains in the CMO portfolio totaled $483,000 at September 30, 2015 compared to net unrealized losses of $4.7 million as of December 31, 2014. Net unrealized gains on CMOs include unrealized losses of $3.3 million as of September 30, 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 September 30, 2015 represents an other-than-temporary securities impairment ("OTTI") related to credit deterioration. In addition, we do not intend to sell the CMOs with unrealized losses within

51




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 September 30, 2015, net unrealized gains in the municipal securities portfolio totaled $6.2 million compared to $9.6 million as of December 31, 2014. Net unrealized gains on municipal securities include unrealized losses of $649,000 and $1.0 million as of September 30, 2015 and December 31, 2014, respectively. Substantially all of these securities carry investment grade ratings, with the majority supported by the general revenues of the issuing governmental entity, and are supported by third party bond insurance or other types of credit enhancement. We do not believe the unrealized loss on any of these securities represents OTTI.
Our investments in CDOs are supported by the credit of the underlying banks and insurance companies. The net unrealized losses on these securities were $16.3 million as of September 30, 2015 and $14.7 million as of December 31, 2014. We do not believe the unrealized losses on the CDOs as of September 30, 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 12 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 84.4% of total loans, excluding covered loans, at September 30, 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 9
Loan Portfolio
(Dollar amounts in thousands)
 
 
As of
September 30, 2015
 
% of
Total
 
As of
December 31, 2014
 
% of
Total
 
Annualized% Change
Commercial and industrial
 
$
2,392,860

 
34.8
 
$
2,253,556

 
33.9
 
8.2

Agricultural
 
393,732

 
5.7
 
358,249

 
5.4
 
13.2

Commercial real estate:
 
 
 
 
 
 
 
 
 
 
Office
 
487,629

 
7.1
 
494,637

 
7.4
 
(1.9
)
Retail
 
432,107

 
6.3
 
452,225

 
6.8
 
(5.9
)
Industrial
 
494,341

 
7.2
 
531,517

 
8.0
 
(9.3
)
Multi-family
 
539,308

 
7.8
 
564,421

 
8.4
 
(5.9
)
Construction
 
192,086

 
2.8
 
204,236

 
3.1
 
(7.9
)
Other commercial real estate
 
869,748

 
12.7
 
887,897

 
13.3
 
(2.7
)
Total commercial real estate
 
3,015,219

 
43.9
 
3,134,933

 
47.0
 
(5.1
)
Total corporate loans
 
5,801,811

 
84.4
 
5,746,738

 
86.3
 
1.3

Home equity
 
647,223

 
9.4
 
543,185

 
8.2
 
25.5

1-4 family mortgages
 
294,261

 
4.3
 
291,463

 
4.4
 
1.3

Installment
 
131,185

 
1.9
 
76,032

 
1.1
 
96.7

Total consumer loans
 
1,072,669

 
15.6
 
910,680

 
13.7
 
23.7

Total loans, excluding covered loans
 
6,874,480

 
100.0
 
6,657,418

 
100.0
 
4.3

Covered loans
 
51,219

 
 
 
79,435

 
 
 
(47.4
)
Total loans
 
$
6,925,699

 
 
 
$
6,736,853

 
 
 
3.7


52




Total loans, excluding covered loans, of $6.9 billion grew 4.3% on an annualized basis from December 31, 2014. Growth in corporate loans was concentrated within our commercial and industrial and agricultural loan categories. The increase in commercial and industrial loans primarily reflects the continued expansion into select sector-based lending areas such as asset-based lending, healthcare, structured finance, and leasing. Agricultural loans grew due to new relationships and seasonal draws on lines of credit. The overall decline in commercial real estate loans resulted from the decision of certain customers to opportunistically sell their middle market businesses and investment real estate properties, which more than offset organic growth. The rise in consumer loans reflects the purchase of high quality, shorter-duration, floating rate home equity loans and the expansion of our web-based installment lending program.
Commercial, Industrial, and Agricultural Loans
Commercial, industrial, and agricultural loans represent 40.5% of total loans, excluding covered loans, and totaled $2.8 billion at September 30, 2015, an increase of 8.9% on an annualized basis, from December 31, 2014. Our commercial and industrial loans are a diverse group of loans 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.

53




The following table presents commercial real estate loan detail as of September 30, 2015 and December 31, 2014.
Table 10
Commercial Real Estate Loans
(Dollar amounts in thousands)
 
 
As of
September 30, 2015
 
% of
Total
 
As of
December 31, 2014
 
% of
Total
Office, retail, and industrial:
 
 
 
 
 
 
 
 
Office
 
$
487,629

 
16.2
 
$
494,637

 
15.8
Retail
 
432,107

 
14.3
 
452,225

 
14.4
Industrial
 
494,341

 
16.4
 
531,517

 
17.0
Total office, retail, and industrial
 
1,414,077

 
46.9
 
1,478,379

 
47.2
Multi-family
 
539,308

 
17.9
 
564,421

 
18.0
Construction
 
192,086

 
6.4
 
204,236

 
6.5
Other commercial real estate:
 
 
 
 
 
 
 
 
Multi-use properties
 
190,499

 
6.3
 
191,011

 
6.1
Warehouses and storage
 
125,126

 
4.1
 
128,396

 
4.1
Rental properties
 
114,168

 
3.8
 
123,627

 
3.9
Restaurants
 
78,486

 
2.6
 
74,490

 
2.4
Service stations and truck stops
 
70,737

 
2.3
 
84,108

 
2.7
Automobile dealers
 
51,260

 
1.7
 
53,221

 
1.7
Recreational
 
49,128

 
1.6
 
48,718

 
1.5
Religious
 
41,356

 
1.4
 
36,427

 
1.2
Hotels
 
40,931

 
1.4
 
46,409

 
1.5
Other
 
108,057

 
3.6
 
101,490

 
3.2
Total other commercial real estate
 
869,748

 
28.8
 
887,897

 
28.3
Total commercial real estate
 
$
3,015,219

 
100.0
 
$
3,134,933

 
100.0
Commercial real estate loans represent 43.9% of total loans, excluding covered loans, and totaled $3.0 billion at September 30, 2015, decreasing 5.1% on an annualized basis from December 31, 2014. Owner-occupied commercial real estate loans represent approximately 40% of total commercial real estate loans, excluding multi-family and construction loans, at September 30, 2015 and December 31, 2014.
Consumer Loans
Consumer loans represent 15.6% of total loans, excluding covered loans, and totaled $1.1 billion at September 30, 2015, an increase of 23.7% on an annualized basis from December 31, 2014. Consumer loans are centrally underwritten using a credit scoring model developed by the Fair Isaac Corporation ("FICO"), which employs a risk-based system to determine the probability a borrower may default. 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.

54




Non-performing Assets and Performing Potential Problem Loans
The following table presents our loan portfolio by performing and non-performing status. A discussion of our accounting policies for non-accrual loans, TDRs, and loans 90 days or more past due can be found in Note 1 of "Notes to the Condensed Consolidated Financial Statements" in Part 1, Item 1 of this Form 10-Q.
Table 11
Loan Portfolio by Performing/Non-performing Status
(Dollar amounts in thousands)
 
 
 
 
 
Accruing
 
 
 
 
 
Total
Loans
 
Current
 
30-89 Days
Past Due
 
90 Days
Past Due
 
TDRs
 
Non-accrual
As of September 30, 2015
 
 
 
 
 
 
 
 
 
 
 
Commercial and industrial
$
2,392,860

 
$
2,378,370

 
$
6,855

 
$
900

 
$
297

 
$
6,438

Agricultural
393,732

 
393,549

 
71

 

 

 
112

Commercial real estate:
 
 
 
 
 
 
 
 
 
 
 
Office
487,629

 
481,540

 
3,599

 

 

 
2,490

Retail
432,107

 
423,937

 
5,349

 

 

 
2,821

Industrial
494,341

 
492,040

 
485

 

 
166

 
1,650

Multi-family
539,308

 
534,484

 
908

 
2,269

 
601

 
1,046

Construction
192,086

 
188,552

 
202

 

 

 
3,332

Other commercial real estate
869,748

 
857,026

 
5,581

 
897

 
346

 
5,898

Total commercial real estate
3,015,219

 
2,977,579

 
16,124

 
3,166

 
1,113

 
17,237

Total corporate loans
5,801,811

 
5,749,498

 
23,050

 
4,066

 
1,410

 
23,787

Home equity
647,223

 
638,516

 
2,791

 
214

 
501

 
5,201

1-4 family mortgages
294,261

 
287,907

 
2,022

 
152

 
860

 
3,320

Installment
131,185

 
130,292

 
766

 
127

 

 

Total consumer loans
1,072,669

 
1,056,715

 
5,579

 
493

 
1,361

 
8,521

Total loans, excluding covered loans
6,874,480

 
6,806,213

 
28,629

 
4,559

 
2,771

 
32,308

Covered loans
51,219

 
48,323

 
221

 
1,372

 

 
1,303

Total loans
$
6,925,699

 
$
6,854,536

 
$
28,850

 
$
5,931

 
$
2,771

 
$
33,611

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



55




The following table provides a comparison of our non-performing assets and past due loans to prior periods.
Table 12
Non-performing Assets and Past Due Loans
(Dollar amounts in thousands)
 
As of
 
September 30,
2015
 
June 30,
2015
 
March 31,
2015
 
December 31,
2014
 
September 30,
2014
Non-performing assets, excluding covered loans and covered OREO
Non-accrual loans
$
32,308

 
$
45,009

 
$
48,077

 
$
59,971

 
$
64,528

90 days or more past due loans
4,559

 
2,744

 
3,564

 
1,173

 
6,062

Total non-performing loans
36,867

 
47,753

 
51,641

 
61,144

 
70,590

Accruing TDRs
2,771

 
3,067

 
3,581

 
3,704

 
5,449

OREO
31,129

 
24,471

 
26,042

 
26,898

 
29,165

Total non-performing assets
$
70,767

 
$
75,291

 
$
81,264

 
$
91,746

 
$
105,204

30-89 days past due loans
$
28,629

 
$
28,625

 
$
18,631

 
$
20,073

 
$
17,321

Non-accrual loans to total loans
0.47
%
 
0.66
%
 
0.71
%
 
0.90
%
 
1.00
%
Non-performing loans to total loans
0.54
%
 
0.70
%
 
0.77
%
 
0.92
%
 
1.10
%
Non-performing assets to loans plus
  OREO
1.02
%
 
1.10
%
 
1.20
%
 
1.37
%
 
1.63
%
Non-performing covered loans and covered OREO (1)
Non-accrual loans
$
1,303

 
$
3,712

 
$
4,570

 
$
6,186

 
$
10,905

90 days or more past due loans
1,372

 
1,233

 
6,390

 
5,002

 
7,031

Total non-performing loans
2,675

 
4,945

 
10,960

 
11,188

 
17,936

OREO
906

 
3,759

 
7,309

 
8,068

 
9,277

Total non-performing assets
$
3,581

 
$
8,704

 
$
18,269

 
$
19,256

 
$
27,213

30-89 days past due loans
$
221

 
$
232

 
$
481

 
$
2,565

 
$
802

Total non-performing assets
Non-accrual loans
$
33,611

 
$
48,721

 
$
52,647

 
$
66,157

 
$
75,433

90 days or more past due loans
5,931

 
3,977

 
9,954

 
6,175

 
13,093

Total non-performing loans
39,542

 
52,698

 
62,601

 
72,332

 
88,526

Accruing TDRs
2,771

 
3,067

 
3,581

 
3,704

 
5,449

OREO
32,035

 
28,230

 
33,351

 
34,966

 
38,442

Total non-performing assets
$
74,348

 
$
83,995

 
$
99,533

 
$
111,002

 
$
132,417

30-89 days past due loans
$
28,850

 
$
28,857

 
$
19,112

 
$
22,638

 
$
18,123

Non-accrual loans to total loans
0.49
%
 
0.71
%
 
0.77
%
 
0.98
%
 
1.16
%
Non-performing loans to total loans
0.57
%
 
0.77
%
 
0.92
%
 
1.07
%
 
1.36
%
Non-performing assets to loans plus
  OREO
1.07
%
 
1.22
%
 
1.46
%
 
1.64
%
 
2.02
%

(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 6 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 $21.0 million, or 22.9%, from December 31, 2014 and $34.4 million, or 32.7%, from September 30, 2014, due mainly to lower levels of non-accrual loans. The improvement in non-accrual loans compared to December 31, 2014 related primarily 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.

56




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 term of the loans.
Table 13
TDRs by Type
(Dollar amounts in thousands)
 
As of
 
September 30, 2015
 
December 31, 2014
 
September 30, 2014
 
Number
of Loans
 
Amount
 
Number
of Loans
 
Amount
 
Number
of Loans
 
Amount
Commercial and industrial
5

 
$
1,360

 
7

 
$
19,068

 
9

 
$
17,969

Commercial real estate:
 
 
 
 
 
 
 
 
 
 
 
Retail

 

 
1

 
413

 
1

 
416

Industrial
1

 
166

 
1

 
173

 
1

 
176

Multi-family
3

 
793

 
5

 
1,119

 
4

 
853

Other commercial real estate
3

 
346

 
5

 
616

 
6

 
627

Total commercial real estate
7

 
1,305

 
12

 
2,321

 
12

 
2,072

Total corporate loans
12

 
2,665

 
19

 
21,389

 
21

 
20,041

Home equity
17

 
1,182

 
17

 
1,157

 
18

 
1,265

1-4 family mortgages
11

 
1,290

 
10

 
1,062

 
11

 
1,120

Total consumer loans
28

 
2,472

 
27

 
2,219

 
29

 
2,385

Total TDRs
40

 
$
5,137

 
46

 
$
23,608

 
50

 
$
22,426

Accruing TDRs
23

 
$
2,771

 
29

 
$
3,704

 
30

 
$
5,449

Non-accrual TDRs
17

 
2,366

 
17

 
19,904

 
20

 
16,977

Total TDRs
40

 
$
5,137

 
46


$
23,608

 
50

 
$
22,426

Year-to-date charge-offs on TDRs
 
 
$
2,687

 
 
 
$
8,457

 
 
 
$
8,345

Specific reserves related to TDRs
 
 
769

 
 
 
1,765

 
 
 
2,625

TDRs totaled $5.1 million at September 30, 2015, decreasing $18.5 million from December 31, 2014. Accruing TDRs were $2.8 million at September 30, 2015 compared to $3.7 million at December 31, 2014.
Non-accrual TDRs declined $17.5 million from December 31, 2014 due primarily to 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.

57




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 14
Performing Potential Problem Loans
(Dollar amounts in thousands)
 
As of September 30, 2015
 
As of December 31, 2014
 
Special
Mention (1)
 
Substandard (2)
 
Total (3)
 
Special
Mention (1)
 
Substandard (2)
 
Total (3)
Commercial and industrial
$
90,414

 
$
48,700

 
$
139,114

 
$
84,615

 
$
30,809

 
$
115,424

Agricultural

 
5,586

 
5,586

 
294

 

 
294

Commercial real estate:
 
 
 
 
 
 
 
 
 
 
 
Office, retail, and industrial
37,254

 
34,048

 
71,302

 
38,718

 
32,251

 
70,969

Multi-family
5,741

 
4,595

 
10,336

 
5,951

 
3,774

 
9,725

Construction
5,181

 
9,752

 
14,933

 
5,776

 
12,487

 
18,263

Other commercial real estate
24,140

 
10,363

 
34,503

 
32,225

 
19,407

 
51,632

Total commercial real estate
72,316

 
58,758

 
131,074

 
82,670

 
67,919

 
150,589

Total performing potential 
  problem loans
$
162,730

 
$
113,044

 
$
275,774

 
$
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 $870,000 as of September 30, 2015 and $1.8 million as of December 31, 2014.

Performing potential problem loans were 4.8% of corporate loans at September 30, 2015 compared to 4.6% at December 31, 2014.
OREO
OREO consists of properties acquired as the result of borrower defaults on loans. OREO was $32.0 million at September 30, 2015, decreasing $2.9 million, or 8.4%, from December 31, 2014.
Table 15
OREO by Type
(Dollar amounts in thousands)
 
 
As of
 
 
September 30, 2015
 
December 31, 2014
 
September 30, 2014
Single-family homes
 
$
2,998

 
$
2,433

 
$
2,106

Land parcels:
 
 
 
 
 
 
Raw land
 
2,572

 
1,917

 
3,145

Farm land
 

 
923

 

Commercial lots
 
10,135

 
9,295

 
10,941

Single-family lots
 
1,100

 
1,279

 
1,742

Total land parcels
 
13,807

 
13,414

 
15,828

Multi-family units
 
556

 
758

 
933

Commercial properties
 
13,768

 
10,293

 
10,298

Total OREO, excluding covered OREO
 
31,129

 
26,898

 
29,165

Covered OREO
 
906

 
8,068

 
9,277

Total OREO
 
$
32,035

 
$
34,966

 
$
38,442


58




OREO Activity
A rollforward of OREO balances for the quarters and nine months ended September 30, 2015 and 2014 is presented in the following table.
Table 16
OREO Rollforward
(Dollar amounts in thousands)
 
 
Quarters Ended September 30,
 
 
2015
 
2014
 
 
OREO
 
Covered
OREO
 
Total
 
OREO
 
Covered
OREO
 
Total
Beginning balance
 
$
24,471

 
$
3,759

 
$
28,230

 
$
30,331

 
$
9,825

 
$
40,156

Transfers from loans
 
8,120

 
(821
)
 
7,299

 
1,747

 
2,191

 
3,938

Proceeds from sales
 
(1,291
)
 
(1,945
)
 
(3,236
)
 
(2,350
)
 
(2,783
)
 
(5,133
)
(Losses) gains on sales of OREO
 
(164
)
 
(18
)
 
(182
)
 
96

 
77

 
173

OREO valuation adjustments
 
(7
)
 
(69
)
 
(76
)
 
(659
)
 
(33
)
 
(692
)
Ending balance
 
$
31,129

 
$
906

 
$
32,035

 
$
29,165

 
$
9,277

 
$
38,442

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Nine Months Ended September 30,
 
 
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
 
10,987

 
969

 
11,956

 
4,749

 
8,528

 
13,277

Proceeds from sales
 
(5,742
)
 
(8,078
)
 
(13,820
)
 
(6,047
)
 
(8,246
)
 
(14,293
)
Gains on sales of OREO
 
864

 
195

 
1,059

 
703

 
177

 
880

OREO valuation adjustments
 
(1,878
)
 
(248
)
 
(2,126
)
 
(2,713
)
 
(45
)
 
(2,758
)
Ending balance
 
$
31,129

 
$
906

 
$
32,035

 
$
29,165

 
$
9,277

 
$
38,442


59




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 is 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 September 30, 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.

60




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 6 of "Notes to the Condensed Consolidated Financial Statements" in Part I, Item 1 of this Form 10-Q. The following table provides additional details related to acquired loans, the allowance for credit losses as related to acquired loans and the remaining acquisition adjustment associated with acquired loans as of September 30, 2015 and December 31, 2014.
Table 17
Allowance for Credit Losses and Acquisition Adjustment
(Dollar amounts in thousands)
 
 
Loans and Covered Loans, Excluding Acquired Loans
 
Acquired Loans (1)
 
Total
Nine months ended September 30, 2015
 
 
 
 
 
 
Beginning balance
 
$
74,510

 
$

 
$
74,510

Net charge-offs
 
(16,819
)
 
(27
)
 
(16,846
)
Provision for loan and covered loan losses
 
14,787

 
1,274

 
16,061

Ending balance
 
$
72,478

 
$
1,247

 
$
73,725

As of September 30, 2015
 
 
 
 
 
 
Total loans
 
$
6,379,771

 
$
545,928

 
$
6,925,699

Remaining acquisition adjustment (2)
 
N/A

 
15,502

 
15,502

Allowance for credit losses to total loans
 
1.14
%
 
0.23
%
 
1.06
%
Remaining acquisition adjustment to acquired loans
 
N/A

 
2.84
%
 
N/A

As of December 31, 2014
 
 
 
 
 
 
Total loans
 
$
6,018,591

 
$
718,262

 
$
6,736,853

Remaining acquisition adjustment (2)
 
N/A

 
24,737

 
24,737

Allowance for credit losses to total loans
 
1.24
%
 
N/A

 
1.11
%
Remaining acquisition adjustment to acquired loans
 
N/A

 
3.44
%
 
N/A

N/A - Not applicable.
(1) 
These amounts and ratios relate to the loans acquired in the acquisitions completed during 2014.
(2) 
The remaining acquisition adjustment consists of $6.1 million and $9.4 million relating to PCI and non-purchased credit impaired ("Non-PCI") loans, respectively, as of September 30, 2015, and $11.2 million and $13.5 million relating to PCI and Non-PCI loans, respectively, as of December 31, 2014.
Excluding acquired loans, the total allowance for credit losses to total loans was 1.14% as of September 30, 2015. The acquisition adjustment decreased $9.2 million during the first nine months of 2015, of which $7.7 million accreted into interest income, resulting in a remaining acquisition adjustment as a percent of acquired loans of 2.84%. Acquired loans that are renewed at market terms are no longer classified as acquired loans. These loans totaled $59.2 million as of September 30, 2015 and 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. In addition, during the first nine months of 2015, an allowance of $1.2 million was established on loans acquired during 2014.

61




Table 18
Allowance for Credit Losses
and Summary of Credit Loss Experience
(Dollar amounts in thousands)
 
Quarters Ended
 
September 30,
2015
 
June 30,
2015
 
March 31,
2015
 
December 31,
2014
 
September 30,
2014
Change in allowance for credit losses
 
 
 
 
 
 
 
 
 
Beginning balance
$
73,279

 
$
72,806

 
$
74,510

 
$
74,722

 
$
79,942

Loan charge-offs:
 
 
 
 
 
 
 
 
 
Commercial, industrial, and agricultural
1,948

 
4,127

 
7,449

 
1,882

 
9,763

Office, retail, and industrial
563

 
1,894

 
156

 
237

 
2,514

Multi-family
68

 
469

 
28

 
560

 
26

Construction

 
15

 

 

 
157

Other commercial real estate
598

 
527

 
1,317

 
1,139

 
1,363

Consumer
1,172

 
751

 
800

 
569

 
3,148

Total loan charge-offs
4,349

 
7,783

 
9,750

 
4,387

 
16,971

Recoveries of loan charge-offs:
 
 
 
 
 
 
 
 
 
Commercial, industrial, and agricultural
347

 
854

 
792

 
665

 
716

Office, retail, and industrial
106

 
32

 
322

 
94

 
55

Multi-family
1

 
3

 
4

 
84

 

Construction
114

 
203

 
17

 
6

 

Other commercial real estate
506

 
1,130

 
266

 
1,386

 
108

Consumer
213

 
319

 
321

 
227

 
150

Total recoveries of loan charge-offs
1,287

 
2,541

 
1,722

 
2,462

 
1,029

Net loan charge-offs, excluding
  covered loan charge-offs
3,062

 
5,242

 
8,028

 
1,925

 
15,942

Net covered loan charge-offs
1

 
285

 
228

 
146

 
5

Net loan and covered loan charge-offs
3,063

 
5,527

 
8,256

 
2,071

 
15,947

Provision for loan and covered loan losses:
 
 
 
 
 
 
 
 
 
Provision for loan losses
4,844

 
6,533

 
7,871

 
2,936

 
11,416

Provision for covered loan losses
(744
)
 
(533
)
 
(1,319
)
 
(1,277
)
 
(689
)
Total provision for loan and covered
  loan losses
4,100

 
6,000

 
6,552

 
1,659

 
10,727

(Decrease) increase in reserve for unfunded
  commitments
(591
)
 

 

 
200

 

Total provision for loan and covered
  loan losses and other expense
3,509

 
6,000

 
6,552

 
1,859

 
10,727

Ending balance
$
73,725

 
$
73,279

 
$
72,806

 
$
74,510

 
$
74,722




62




 
Quarters Ended
 
September 30,
2015
 
June 30,
2015
 
March 31,
2015
 
December 31,
2014
 
September 30,
2014
Allowance for credit losses
 
 
 
 
 
 
 
 
 
Allowance for loan losses
$
68,384

 
$
66,602

 
$
65,311

 
$
65,468

 
$
64,457

Allowance for covered loan losses
4,116

 
4,861

 
5,679

 
7,226

 
8,649

Total allowance for loan and
  covered loan losses
72,500

 
71,463

 
70,990

 
72,694

 
73,106

Reserve for unfunded commitments
1,225

 
1,816

 
1,816

 
1,816

 
1,616

Total allowance for credit losses
$
73,725

 
$
73,279

 
$
72,806

 
$
74,510

 
$
74,722

 
Allowance for credit losses to loans (1)
1.06
%
 
1.07
%
 
1.07
%
 
1.11
%
 
1.15
%
Allowance for credit losses to
  non-accrual loans (2)
215.45
%
 
152.01
%
 
139.62
%
 
112.19
%
 
102.39
%
Allowance for credit losses to
  non-performing loans (2)
188.81
%
 
143.27
%
 
129.99
%
 
110.04
%
 
93.60
%
Average loans
$
6,881,128

 
$
6,808,219

 
$
6,731,939

 
$
6,537,251

 
$
6,293,313

Net loan charge-offs to average loans,
  annualized
0.18
%
 
0.33
%
 
0.50
%
 
0.13
%
 
1.01
%

(1) 
Acquired loans are recorded at fair value as of the acquisition date with no allowance for credit losses being established. Included within total loans are loans acquired during 2014 which totaled $545.9 million at September 30, 2015, $587.0 million at June 30, 2015, $660.9 million at March 31, 2015, $718.3 million at December 31, 2014, and $533.2 million at September 30, 2014. These loans have an allowance for loan loss of $1.2 million at September 30, 2015 and $821,000 at June 30, 2015. In addition, there was a remaining acquisition adjustment of $15.5 million at September 30, 2015, $17.5 million at June 30, 2015, $22.4 million at March 31, 2015, $24.7 million at December 31, 2014, and $13.6 million at September 30, 2014. This acquisition adjustment represents the difference between the contractual loan balances and the carrying value of these loans.
(2) 
These amounts and ratios exclude covered loans and covered OREO. For a discussion of covered loans, see Note 6 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 $73.7 million as of September 30, 2015, a decline of $785,000 from December 31, 2014, and represents 1.06% of total loans compared to 1.11% at December 31, 2014. The allowance for credit losses includes a provision of $16.7 million and net loan charge-offs of $16.8 million for the nine months ended September 30, 2015.


63




FUNDING AND LIQUIDITY MANAGEMENT
The following table provides a comparison of average funding sources. We believe that average balances, rather than period-end balances, are more meaningful in analyzing funding sources because of the normal fluctuations that may occur on a daily or monthly basis within funding categories.
Table 19
Funding Sources – Average Balances
(Dollar amounts in thousands)
 
Quarters Ended
 
 
September 30, 2015
% Change From
 
September 30,
2015
 
December 31,
2014
 
September 30,
2014
 
 
December 31, 2014 (1)
 
September 30,
2014
Demand deposits
$
2,601,442

 
$
2,339,298

 
$
2,208,450

 
 
14.9
 %
 
17.8
 %
Savings deposits
1,471,003

 
1,306,388

 
1,231,700

 
 
16.8
 %
 
19.4
 %
NOW accounts
1,405,371

 
1,331,360

 
1,261,522

 
 
7.4
 %
 
11.4
 %
Money market accounts
1,589,582

 
1,506,643

 
1,413,753

 
 
7.3
 %
 
12.4
 %
Core deposits
7,067,398

 
6,483,689

 
6,115,425

 
 
12.0
 %
 
15.6
 %
Time deposits
1,157,005

 
1,239,257

 
1,209,935

 
 
(8.8
)%
 
(4.4
)%
Brokered deposits
16,122

 
16,098

 
16,090

 
 
0.2
 %
 
0.2
 %
Total time deposits
1,173,127

 
1,255,355

 
1,226,025

 
 
(8.7
)%
 
(4.3
)%
Total deposits
8,240,525

 
7,739,044

 
7,341,450

 
 
8.6
 %
 
12.2
 %
Securities sold under agreements to
  repurchase
106,307

 
110,832

 
101,348

 
 
(5.4
)%
 
4.9
 %
Federal funds purchased

 

 
326

 
 
N/A

 
(100.0
)%
FHLB advances
62,500

 
381

 

 
 
N/A

 
100.0
 %
Total borrowed funds
168,807

 
111,213

 
101,674

 
 
69.0
 %
 
66.0
 %
Senior and subordinated debt
201,083

 
194,137

 
191,013

 
 
4.8
 %
 
5.3
 %
Total funding sources
$
8,610,415

 
$
8,044,394

 
$
7,634,137

 
 
9.4
 %
 
12.8
 %
Average interest rate paid on
  borrowed funds
2.18
%
 
0.04
%
 
0.04
%
 
 
 
 
 
Weighted-average maturity of FHLB
  advances
2.1 months

 
N/A

 
N/A

 
 
 
 
 
Weighted-average interest rate of
  FHLB advances
0.32
%
 
N/A

 
N/A

 
 
 
 
 
N/A - Not applicable.
(1) Ratios are presented on an annualized basis.
Total average funding sources for the third quarter of 2015 increased 9.4% on an annualized basis compared to the fourth quarter of 2014 and 12.8% compared to the third quarter of 2014. The addition of $62.5 million of FHLB advances during the second quarter of 2015 contributed to the increase in average borrowed funds compared to the fourth quarter of 2014. The rise in average core deposits compared to the fourth quarter of 2014 resulted primarily from the seasonal increase in average municipal deposits. Compared to the third quarter of 2014, the increase in core deposits was due primarily to the full impact of deposits assumed in the acquisitions completed during the second half of 2014, which further strengthened the Company's core deposit base.

64




Table 20
Borrowed Funds
(Dollar amounts in thousands)
 
As of September 30, 2015
 
 
As of September 30, 2014
 
Amount
 
Weighted-
Average
Rate (%)
 
 
Amount
 
Weighted-
Average
Rate (%)
At period-end:
 
 
 
 
 
 
 
 
Securities sold under agreements to repurchase
$
107,443

 
0.07
 
 
$
107,877

 
0.04
Federal funds purchased

 
 
 
25,000

 
FHLB advances
62,500

 
2.00
 
 

 
Total borrowed funds
$
169,943

 
0.78
 
 
$
132,877

 
0.04
Average for the year-to-date period:
 
 
 
 
 
 
 
 
Securities sold under agreements to repurchase
$
117,681

 
0.06
 
 
$
104,468

 
0.03
Federal funds purchased

 
 
 
110

 
FHLB advances
27,930

 
4.84
 
 
57,903

 
1.24
Total borrowed funds
$
145,611

 
0.98
 
 
$
162,481

 
0.46
Maximum amount outstanding at the end of any day during the period:
 
 
 
 
 
 
 
Securities sold under agreements to repurchase
$
142,545

 
 
 
 
$
117,772

 
 
Federal funds purchased

 
 
 
 
25,000

 
 
FHLB advances
62,500

 
 
 
 
114,551

 
 
Average borrowed funds totaled $145.6 million for the first nine months of 2015 declining $16.9 million, or 10.4%, compared to the same period in 2014. This decrease was due primarily to the prepayment of $114.6 million of FHLB advances during the second quarter of 2014, which was partially offset by the addition of $62.5 million of advances during the second quarter of 2015. The increase in the weighted-average rate on FHLB advances at period-end and the average for the year-to-date period was impacted by $200.0 million in interest rate swaps which have a rate of 2.17%. For a detailed discussion of interest rate swaps, see Note 10 of "Notes to the Condensed Consolidated Financial Statements" in Part I, Item 1 of this Form 10-Q.
Securities sold under agreements to repurchase generally mature within 1 to 90 days from the transaction date.

65




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 presented subsequent to December 31, 2014 is based on the Basel III Capital Rules and the information for prior periods is based on the prior capital rules in effect through December 31, 2014. 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 September 30, 2015 and December 31, 2014.
The tangible common equity 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.

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Table 21
Capital Measurements
(Dollar amounts in thousands)
 
 
 
 
 
As of September 30, 2015
 
As of
 
Regulatory
Minimum
For
Well-
Capitalized
 
 
 
September 30, 2015
 
December 31, 2014
 
 
Excess Over
Required Minimums
Bank regulatory capital ratios (1):
 
 
 
 
 
 
 
 
 
Total capital to risk-weighted assets
11.22
%
 
12.30
%
 
10.00
%
 
12
%
 
$
99,568

Tier 1 capital to risk-weighted assets
10.32
%
 
11.32
%
 
8.00
%
 
29
%
 
$
188,785

Tier 1 common capital to risk-weighted assets
10.32
%
 
N/A

 
6.50
%
 
59
%
 
$
310,984

Tier 1 leverage to average assets
8.90
%
 
9.76
%
 
5.00
%
 
78
%
 
$
368,492

Company regulatory capital ratios (1):
 
 
 
 
 
 
 
 
 
Total capital to risk-weighted assets
11.43
%
 
11.23
%
 
N/A

 
N/A

 
N/A

Tier 1 capital to risk-weighted assets
10.55
%
 
10.19
%
 
N/A

 
N/A

 
N/A

Tier 1 common capital to risk-weighted assets
10.00
%
 
N/A

 
N/A

 
N/A

 
N/A

Tier 1 leverage to average assets
9.29
%
 
9.03
%
 
N/A

 
N/A

 
N/A

Reconciliation of Company capital components to GAAP:
 
 
 
 
 
 
 
 
Total stockholders' equity
$
1,147,669

 
$
1,100,775

 
 
 
 
 
 
Goodwill and other intangible assets
(331,250
)
 
(334,199
)
 
 
 
 
 
 
Tangible common equity
816,419

 
766,576

 
 
 
 
 
 
Accumulated other comprehensive loss
15,818

 
15,855

 
 
 
 
 
 
Tangible common equity, excluding
  accumulated other comprehensive loss
$
832,237

 
$
782,431

 
 
 
 
 
 
Total assets
$
9,935,046

 
$
9,445,139

 
 
 
 
 
 
Goodwill and other intangible assets
(331,250
)
 
(334,199
)
 
 
 
 
 
 
Tangible assets
$
9,603,796

 
$
9,110,940

 
 
 
 
 
 
Risk-weighted assets
$
8,414,729

 
$
7,879,366

 
 
 
 
 
 
Company tangible common equity ratios (2)(3):
 
 
 
 
 
 
 
 
 
Tangible common equity to tangible assets
8.50
%
 
8.41
%
 
N/A

 
N/A

 
N/A

Tangible common equity, excluding
  accumulated other comprehensive loss,
  to tangible assets
8.67
%
 
8.59
%
 
N/A

 
N/A

 
N/A

Tangible common equity to risk-weighted
  assets
9.70
%
 
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, ratios subsequent to December 31, 2014 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 represents common stockholders' equity less goodwill and identifiable intangible assets. In management's view, Tier 1 common capital and tangible common equity 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 which was partially offset by an increase in assets. The Bank's regulatory capital ratios decreased from December 31, 2014 due primarily to dividends paid to the Company during the first nine months of 2015.

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

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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 September 30, 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, 46% of the loan portfolio consisted of fixed rate loans and 54% were floating rate loans as of September 30, 2015, compared to 49% and 51%, respectively, as of December 31, 2014. See Note 10 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 60% of the total compared to 40% 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 $527.0 million, or 14%, of the floating rate loan portfolio as of September 30, 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, 86% 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.

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Analysis of Net Interest Income Sensitivity
(Dollar amounts in thousands)
 
 
Immediate Change in Rates
 
 
+300
 
+200
 
+100
 
-100
As of September 30, 2015
 
 
 
 
 
 
 
 
Dollar change
 
$
60,559

 
$
39,967

 
$
19,516

 
$
(15,644
)
Percent change
 
20.3
%
 
13.4
%
 
6.5
%
 
(5.2
)%
As of 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 September 30, 2015 would increase net interest income by $40.0 million, or 13.4%, 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 September 30, 2015 compared to December 31, 2014. During the nine months ended September 30, 2015, floating rate loan balances increased and fixed rate loans and securities decreased. Growth in floating rate loan balances were funded by a rise in core deposits, which are less rate sensitive. Overall, half of the increase in rate sensitive assets was driven by a rise in other short term interest-earning assets from a seasonal increase in municipal deposits and half of the increase is attributed to growth in floating rate loan balances. While net interest income is projected to decline in a decreasing interest rate environment, we believe the risk of a significant and sustained decrease in interest rates is minimal.
ITEM 4. CONTROLS AND PROCEDURES
At the end of the period covered by this report, (the "Evaluation Date"), the Company carried out an evaluation, under the supervision and with the participation of the Company's management, including the Company's President and Chief Executive Officer and its Executive Vice President and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rules 13a-15(e) and 15d-15 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Based on that evaluation, the President and Chief Executive Officer and Executive Vice President and Chief Financial Officer concluded that as of the Evaluation Date, the Company's disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in Securities and Exchange Commission rules and forms. There were no changes in the Company's internal control over financial reporting during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In the ordinary course of business, there were certain legal proceedings pending against the Company and its subsidiaries at September 30, 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.

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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The following table summarizes the Company's monthly Common Stock purchases during the third quarter of 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 2,487,947 shares as of September 30, 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
July 1 – July 31, 2015
 
1,493

 
$
18.84

 

 
2,494,747

August 1 – August 31, 2015
 
1,752

 
17.77

 

 
2,494,747

September 1 – September 30, 2015
 
8,406

 
17.62

 

 
2,487,947

Total
 
11,651

 
$
17.80

 

 
 

(1) 
Includes 4,851 shares acquired pursuant to the Company's share-based compensation plans and not the Company's Board-approved stock repurchase program and 6,800 of shares purchased in private transactions. 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.


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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 8 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.

72




SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
                      First Midwest Bancorp, Inc.
 
 
                         /s/ PAUL F. CLEMENS
                               Paul F. Clemens
    Executive Vice President and Chief Financial Officer*
Date: November 2, 2015
* Duly authorized to sign on behalf of the registrant.

73