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EX-99 - EXHIBIT 99 - FIRST MIDWEST BANCORP INCfmbi09302016ex99.htm
EX-32.2 - EXHIBIT 32.2 - FIRST MIDWEST BANCORP INCfmbi09302016ex322.htm
EX-32.1 - EXHIBIT 32.1 - FIRST MIDWEST BANCORP INCfmbi09302016ex321.htm
EX-31.2 - EXHIBIT 31.2 - FIRST MIDWEST BANCORP INCfmbi09302016ex312.htm
EX-31.1 - EXHIBIT 31.1 - FIRST MIDWEST BANCORP INCfmbi09302016ex311.htm
EX-15 - EXHIBIT 15 - FIRST MIDWEST BANCORP INCfmbi09302016ex15.htm




 
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, 2016
 
 
 
 
 
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
______________________
 
a3282014fmbilogoa03a05.jpg
(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 60143-1254
(Address of principal executive offices) (zip code)
______________________
Registrant's telephone number, including area code: (630) 875-7463
______________________

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 31, 2016, there were 81,325,864 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,
2016
 
December 31,
2015
Assets
 
 
 
 
(Unaudited)
 
 
Cash and due from banks
 
$
139,538

 
$
114,587

Interest-bearing deposits in other banks
 
362,153

 
266,615

Trading securities, at fair value
 
18,351

 
16,894

Securities available-for-sale, at fair value
 
1,964,030

 
1,306,636

Securities held-to-maturity, at amortized cost
 
20,337

 
23,152

Federal Home Loan Bank ("FHLB") and Federal Reserve Bank ("FRB") stock, at cost
 
53,506

 
39,306

Loans
 
8,171,782

 
7,161,715

Allowance for loan losses
 
(85,308
)
 
(73,630
)
Net loans
 
8,086,474

 
7,088,085

Other real estate owned ("OREO")
 
28,049

 
27,782

Premises, furniture, and equipment, net
 
82,443

 
122,278

Investment in bank-owned life insurance ("BOLI")
 
219,064

 
209,601

Goodwill and other intangible assets
 
367,961

 
339,277

Accrued interest receivable and other assets
 
236,291

 
178,463

Total assets
 
$
11,578,197

 
$
9,732,676

Liabilities
 
 
 
 
Noninterest-bearing deposits
 
$
2,766,265

 
$
2,414,454

Interest-bearing deposits
 
6,339,839

 
5,683,284

Total deposits
 
9,106,104

 
8,097,738

Borrowed funds
 
639,539

 
165,096

Senior and subordinated debt
 
309,444

 
201,208

Accrued interest payable and other liabilities
 
253,846

 
122,366

Total liabilities
 
10,308,933

 
8,586,408

Stockholders' Equity
 
 
 
 
Common stock
 
913

 
882

Additional paid-in capital
 
496,918

 
446,672

Retained earnings
 
1,003,271

 
953,516

Accumulated other comprehensive loss, net of tax
 
(13,402
)
 
(28,389
)
Treasury stock, at cost
 
(218,436
)
 
(226,413
)
Total stockholders' equity
 
1,269,264

 
1,146,268

Total liabilities and stockholders' equity
 
$
11,578,197

 
$
9,732,676

 
 
 
 
 
 
 
 
 
September 30, 2016
 
December 31, 2015
 
(Unaudited)
 
 
 
 
 
Preferred
 
Common
 
Preferred
 
Common
 
Shares
 
Shares
 
Shares
 
Shares
 
 
 
 
 
 
 
 
Par value
$

 
$
0.01

 
$

 
$
0.01

Shares authorized
1,000

 
150,000

 
1,000

 
150,000

Shares issued

 
91,281

 

 
88,228

Shares outstanding

 
81,324

 

 
77,952

Treasury shares

 
9,957

 

 
10,276

 
See accompanying unaudited notes to the 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,
 
 
2016
 
2015
 
2016
 
2015
Interest Income
 
 
 
 
 
 
 
 
Loans
 
$
87,505

 
$
75,522

 
$
252,486

 
$
224,739

Investment securities
 
9,629

 
7,723

 
27,550

 
23,839

Other short-term investments
 
772

 
1,047

 
1,968

 
2,739

Total interest income
 
97,906

 
84,292

 
282,004

 
251,317

Interest Expense
 
 
 
 
 
 
 
 
Deposits
 
2,520

 
2,329

 
7,387

 
7,256

Borrowed funds
 
1,782

 
928

 
4,597

 
1,064

Senior and subordinated debt
 
2,632

 
3,133

 
8,353

 
9,411

Total interest expense
 
6,934

 
6,390

 
20,337

 
17,731

Net interest income
 
90,972

 
77,902

 
261,667

 
233,586

Provision for loan losses
 
9,998

 
4,100

 
25,676

 
16,652

Net interest income after provision for loan losses
 
80,974

 
73,802

 
235,991

 
216,934

Noninterest Income
 
 
 
 
 
 
 
 
Service charges on deposit accounts
 
10,708

 
10,519

 
30,350

 
29,676

Wealth management fees
 
8,495

 
7,222

 
24,696

 
21,669

Card-based fees
 
7,332

 
6,868

 
21,642

 
20,223

Mortgage banking income
 
3,394

 
1,402

 
6,625

 
3,964

Other service charges, commissions, and fees
 
8,537

 
7,107

 
24,681

 
17,800

Net gain on sale-leaseback transaction
 
5,509

 

 
5,509

 

Net securities gains
 
187

 
524

 
1,097

 
1,551

Other income
 
1,691

 
1,372

 
5,001

 
5,220

Total noninterest income
 
45,853

 
35,014

 
119,601

 
100,103

Noninterest Expense
 
 
 
 
 
 
 
 
Salaries and employee benefits
 
46,372

 
41,361

 
137,233

 
122,371

Net occupancy and equipment expense
 
10,755

 
9,406

 
30,380

 
29,464

Professional services
 
6,772

 
6,172

 
17,984

 
16,603

Technology and related costs
 
3,881

 
3,673

 
11,251

 
10,887

Net OREO expense
 
313

 
1,290

 
2,099

 
4,355

Other expenses
 
13,623

 
12,463

 
41,074

 
36,793

Acquisition and integration related expenses
 
1,172

 

 
6,810

 

Total noninterest expense
 
82,888

 
74,365

 
246,831

 
220,473

Income before income tax expense
 
43,939

 
34,451

 
108,761

 
96,564

Income tax expense
 
15,537

 
11,167

 
37,130

 
30,824

Net income
 
$
28,402

 
$
23,284

 
$
71,631

 
$
65,740

Per Common Share Data
 
 
 
 
 
 
 
 
Basic earnings per common share
 
$
0.35

 
$
0.30

 
$
0.89

 
$
0.84

Diluted earnings per common share
 
$
0.35

 
$
0.30

 
$
0.89

 
$
0.84

Dividends declared per common share
 
$
0.09

 
$
0.09

 
$
0.27

 
$
0.27

Weighted-average common shares outstanding
 
80,396

 
77,106

 
79,589

 
77,038

Weighted-average diluted common shares outstanding
 
80,409

 
77,119

 
79,602

 
77,051

 
See accompanying unaudited notes to the 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,
 
 
2016
 
2015
 
2016
 
2015
Net income
 
$
28,402

 
$
23,284

 
$
71,631

 
$
65,740

Securities Available-for-Sale
 
 
 
 
 
 
 
 
Unrealized holding (losses) gains:
 
 
 
 
 
 
 
 
Before tax
 
(6,695
)
 
6,126

 
21,671

 
748

Tax effect
 
2,676

 
(2,454
)
 
(8,665
)
 
(312
)
Net of tax
 
(4,019
)
 
3,672

 
13,006

 
436

Reclassification of net gains included in net income:
 
 
 
 
 
 
Before tax
 
187

 
524

 
1,097

 
1,551

Tax effect
 
(75
)
 
(214
)
 
(439
)
 
(634
)
Net of tax
 
112

 
310

 
658

 
917

Net unrealized holding (losses) gains
 
(4,131
)
 
3,362

 
12,348

 
(481
)
Derivative Instruments
 
 
 
 
 
 
 
 
Unrealized holding (losses) gains:
 
 
 
 
 
 
 
 
Before tax
 
(779
)
 
3,420

 
4,420

 
870

Tax effect
 
311

 
(1,368
)
 
(1,781
)
 
(352
)
Net of tax
 
(468
)
 
2,052

 
2,639

 
518

Total other comprehensive (loss) income
 
(4,599
)
 
5,414

 
14,987

 
37

Total comprehensive income
 
$
23,803

 
$
28,698

 
$
86,618

 
$
65,777



 
 
Accumulated
Unrealized
Gain (Loss) on
Securities
Available-
for-Sale
 
Accumulated Unrealized Gain (Loss) on Derivative Instruments
 
Unrecognized
Net Pension
Costs
 
Total
Accumulated
Other
Comprehensive
Loss
Balance at December 31, 2014
 
$
(2,950
)
 
$
(1,138
)
 
$
(11,767
)
 
$
(15,855
)
Other comprehensive income
 
(481
)
 
518

 

 
37

Balance at September 30, 2015
 
$
(3,431
)
 
$
(620
)
 
$
(11,767
)
 
$
(15,818
)
Balance at December 31, 2015
 
$
(10,271
)
 
$
(2,468
)
 
$
(15,650
)
 
$
(28,389
)
Other comprehensive income
 
12,348

 
2,639

 

 
14,987

Balance at September 30, 2016
 
$
2,077

 
$
171

 
$
(15,650
)
 
$
(13,402
)
 
See accompanying unaudited notes to the 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, 2014
 
77,695

 
$
882

 
$
449,798

 
$
899,516

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

Net income
 

 

 

 
65,740

 

 

 
65,740

Other comprehensive income
 

 

 

 

 
37

 

 
37

Common dividends declared
  ($0.27 per common share)
 

 

 

 
(21,047
)
 

 

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

 

 

 

 
(120
)
 
(120
)
Restricted stock activity
 
255

 

 
(10,108
)
 

 

 

 
(10,108
)
Treasury stock issued to
benefit plans
 
(1
)
 

 
(112
)
 

 

 
281

 
169

Share-based compensation expense
 

 

 
5,459

 

 

 
6,764

 
12,223

Balance at September 30, 2015
 
77,942

 
$
882

 
$
445,037

 
$
944,209

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

Balance at December 31, 2015
 
77,952

 
$
882

 
$
446,672

 
$
953,516

 
$
(28,389
)
 
$
(226,413
)
 
$
1,146,268

Net income
 

 

 

 
71,631

 

 

 
71,631

Other comprehensive income
 

 

 

 

 
14,987

 

 
14,987

Common dividends declared
  ($0.27 per common share)
 

 

 

 
(21,876
)
 

 

 
(21,876
)
Acquisition, net of issuance costs
 
3,042

 
31

 
54,865

 

 

 

 
54,896

Common stock issued
 
10

 

 
169

 

 

 

 
169

Restricted stock activity
 
326

 

 
(10,610
)
 

 

 
8,062

 
(2,548
)
Treasury stock issued to
  benefit plans
 
(6
)
 

 
(21
)
 

 

 
(85
)
 
(106
)
Share-based compensation expense
 

 

 
5,843

 

 

 

 
5,843

Balance at September 30, 2016
 
81,324

 
$
913

 
$
496,918

 
$
1,003,271

 
$
(13,402
)
 
$
(218,436
)
 
$
1,269,264

 
See accompanying unaudited notes to the 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,
 
 
2016
 
2015
Net cash provided by operating activities
 
$
104,235

 
$
93,423

Investing Activities
 
 
 
 
Proceeds from maturities, repayments, and calls of securities available-for-sale
 
263,243

 
216,900

Proceeds from sales of securities available-for-sale
 
42,794

 
57,255

Purchases of securities available-for-sale
 
(824,883
)
 
(241,300
)
Proceeds from maturities, repayments, and calls of securities held-to-maturity
 
4,695

 
4,016

Purchases of securities held-to-maturity
 
(16
)
 
(1,184
)
Purchases of FHLB stock
 
(12,651
)
 
(1,190
)
Net increase in loans
 
(630,012
)
 
(213,488
)
Proceeds from claims on BOLI, net of premiums paid
 
1,597

 
1,095

Proceeds from sales of OREO
 
6,069

 
13,820

Proceeds from sales of premises, furniture, and equipment
 
150,747

 
195

Purchases of premises, furniture, and equipment
 
(12,320
)
 
(6,591
)
Net cash received from acquisitions
 
57,347

 

Net cash used in investing activities
 
(953,390
)
 
(170,472
)
Financing Activities
 
 
 
 
Net increase in deposit accounts
 
413,445

 
408,692

Net increase in borrowed funds
 
472,027

 
31,949

Purchase of treasury stock
 

 
(120
)
Net proceeds from the issuance of subordinated notes
 
146,484

 

Payments for the maturity of subordinated debt
 
(38,500
)
 

Cash dividends paid
 
(21,885
)
 
(20,132
)
Restricted stock activity
 
(2,318
)
 
(2,853
)
Excess tax benefit related to share-based compensation
 
391

 
794

Net cash provided by financing activities
 
969,644

 
418,330

Net increase in cash and cash equivalents
 
120,489

 
341,281

Cash and cash equivalents at beginning of period
 
381,202

 
606,262

Cash and cash equivalents at end of period
 
$
501,691

 
$
947,543

 
 
 
 
 
Supplemental Disclosures of Cash Flow Information:
 
 
 
 
Income taxes paid
 
$
14,645

 
$
12,787

Interest paid to depositors and creditors
 
17,656

 
14,931

Dividends declared, but unpaid
 
7,241

 
7,137

Common stock issued for acquisitions, net of issuance costs
 
54,896

 

Non-cash transfers of loans to OREO
 
3,894

 
11,956

Non-cash transfers of loans held-for-investment to loans held-for-sale
 
77,030

 
32,902

 
See accompanying unaudited notes to the 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, 2016 are not necessarily indicative of the results that may be expected for the year ending December 31, 2016.
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 2015 Annual Report on Form 10-K ("2015 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.
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.
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.
The accounting policies related to business combinations, loans, the allowance for credit losses, 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 2015 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. 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 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. The Company's net investment in direct financing leases is included in loans and consists of future minimum lease payments and estimated residual values, net of unearned income. Interest income on loans is accrued based on principal amounts outstanding. 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 Federal Deposit Insurance Corporation ("FDIC")-assisted transactions, 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 the FDIC Agreements. Covered loans 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

8




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.
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 losses or providing an allowance for 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 status, all debt service payments are applied to the principal on the loan. Future interest income may only be recorded on a cash basis after recovery of principal is reasonably assured. Non-accrual loans are returned to accrual status when the financial position of the borrower and other relevant factors indicate that the Company will collect all principal and interest.
Commercial loans and loans secured by real estate are charged-off when deemed uncollectible. A loss is recorded if the net realizable value of the underlying collateral is less than the outstanding principal and interest. Consumer loans that are not secured by real estate are subject to mandatory charge-off at a specified delinquency date and are usually not classified as non-accrual prior to being charged-off. Closed-end consumer loans, which include installment, automobile, and single payment loans, are usually charged-off no later than the end of the month in which the loan becomes 120 days past due.
PCI loans are generally considered accruing loans unless reasonable estimates of the timing and amount of expected future cash flows cannot be determined. Loans without reasonable future cash flow estimates are classified as non-accrual loans, and interest income is not recognized on those loans until the timing and amount of the expected future cash flows can be reasonably determined.
Troubled Debt Restructurings ("TDRs") – A restructuring is considered a TDR when (i) the borrower is experiencing financial difficulties, and (ii) the creditor grants a concession, such as forgiveness of principal, reduction of the interest rate, changes in payments, or extension of the maturity date. Loans are not classified as TDRs when the modification is short-term or results in an insignificant delay in payments. The Company's TDRs are determined on a case-by-case basis.
The Company does not accrue interest on a TDR unless it believes collection of all principal and interest under the modified terms is reasonably assured. For a TDR to begin accruing interest, the borrower must demonstrate some level of past performance and the future capacity to perform under the modified terms. Generally, six months of consecutive payment performance under the restructured terms is required before a TDR is returned to accrual status. However, the period could vary depending on the individual facts and circumstances of the loan. An evaluation of the borrower's current creditworthiness is used to assess the borrower's capacity to repay the loan under the modified terms. This evaluation includes an estimate of expected future cash flows, evidence of strong financial position, and estimates of the value of collateral, if applicable. For TDRs to be removed from TDR status in the calendar year after the restructuring, the loans must (i) have an interest rate and terms that reflect market conditions at the time of restructuring, and (ii) be in compliance with the modified terms. If the loan was restructured at below market rates and terms, it continues to be separately reported as restructured until it is paid in full or charged-off.
Impaired Loans – Impaired loans consist of corporate non-accrual loans and TDRs. A loan is considered impaired when it is probable that the Company will not collect all contractual principal and interest. With the exception of accruing TDRs, impaired loans are classified as non-accrual and are exclusive of smaller homogeneous loans, such as home equity, 1-4 family mortgages, and installment loans. Impaired loans with balances under a specified threshold are not individually evaluated for impairment. For all other impaired loans, impairment is measured by comparing the estimated value of the loan to the recorded book value.

9




The value of collateral-dependent loans is based on the fair value of the underlying collateral, less costs to sell. The value of other loans is measured using the present value of expected future cash flows discounted at the loan's initial effective interest rate.
Allowance for Credit Losses – The allowance for credit losses is comprised of the allowance for loan losses 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 losses, while recoveries of amounts previously charged-off are credited to the allowance for loan losses. Additions to the allowance for loan losses are charged to expense through the provision for 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 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 and covered Non-PCI and PCI loans. No allowance for loan losses is recorded on acquired loans at the acquisition date. Subsequent to the acquisition date, an allowance for credit losses is established as necessary to reflect credit deterioration. The acquired 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 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 acquired and covered PCI allowance reflects the difference between the carrying value and the discounted expected future cash flows of the acquired and covered PCI loans. On a periodic basis, the adequacy of this allowance is determined through a re-estimation of expected future cash flows on all of the outstanding acquired and 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. Acquired Non-PCI loans that have renewed subsequent to the respective acquisition dates are no longer classified as acquired loans. Instead, they are included in the general loan population and allocated an allowance based on a loss migration analysis.
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.
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
Amendments to Consolidation Analysis: In February 2015, the Financial Accounting Standards Board ("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. The adoption of this guidance on January 1, 2016 did not 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. The adoption of this guidance on January 1, 2016 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. In March of 2016, the FASB issued an amendment to this guidance to clarify the implementation of guidance on principal versus agent consideration. Additional amendments to clarify the implementation guidance on the identification of performance obligations and licensing were issued in April of 2016 and narrow-scope improvements and practical expedients were issued in May of 2016.
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 and the impact to the Company's financial condition, results of operations, and 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. Early adoption is permitted. Management does not expect the adoption of this guidance will materially impact the Company's financial condition, results of operations, or liquidity.
Amendments to Guidance on Classifying and Measuring Financial Instruments: In January of 2016, the FASB issued guidance that will require entities to measure equity investments that do not result in consolidation and are not accounted for under the equity method at fair value. Any changes in fair value will be recognized in net income unless the investments qualify for a new practicability exception. This guidance also requires entities to recognize changes in instrument-specific credit risk related to financial liabilities measured under the fair value option in other comprehensive income. No changes were made to the guidance for classifying and measuring investments in debt securities and loans. This guidance is effective for annual and interim periods beginning after December 15, 2017. Early adoption is permitted. Management does not expect the adoption of this guidance will materially impact the Company's financial condition, results of operations, or liquidity.
Leases: In February of 2016, the FASB issued guidance to increase transparency and comparability across entities for leasing arrangements. This guidance requires lessees to recognize assets and liabilities for most leases. For lessors, this guidance modifies the lease classification criteria and the accounting for sales-type and direct financing leases. In addition, this guidance clarifies criteria for the determination of whether a contract is or contains a lease. This guidance is effective for annual and interim periods beginning after December 15, 2018. Early adoption is permitted.
During the third quarter of 2016, the Company entered into a sale-leaseback transaction that resulted in a deferred gain of $82.5 million. Upon adoption of this guidance, the remaining deferred gain will be recognized immediately as a cumulative-effect adjustment to equity. For additional discussion of the sale-leaseback transaction, see note 8 "Premises, Furniture, and Equipment." Management is evaluating the new guidance and the additional impact to the Company's financial condition, results of operations, or liquidity.

12




Contingent Put and Call Options in Debt Instruments: In March of 2016, the FASB issued final guidance clarifying the requirements for assessing whether contingent call (put) options that can accelerate the payment of principal on debt instruments are clearly and closely related to their debt hosts. Entities are required to apply the guidance to existing debt instruments (or hybrid financial instruments that are determined to have a debt host) using a modified retrospective transition method as of the period of adoption. This guidance is effective for annual and interim periods beginning after December 15, 2016. Early adoption is permitted. Management does not expect the adoption of this guidance will materially impact the Company's financial condition, results of operations, or liquidity.
Equity Method Accounting: In March of 2016, the FASB issued final guidance to simplify the equity method of accounting. The guidance eliminates the requirement to retrospectively apply equity method accounting in previous periods when an investor initially obtains significant influence over an investee. This guidance is effective for annual and interim periods beginning after December 15, 2016. Early adoption is permitted. Management does not expect the adoption of this guidance will materially impact the Company's financial condition, results of operations, or liquidity.
Accounting for Employee Share-based Payments: In March of 2016, the FASB issued guidance to simplify the accounting for employee share-based payment transactions. The guidance requires entities to recognize the income tax effects of awards in the income statement when the awards vest or are settled. In addition, the guidance allows entities to repurchase more of an employee's shares than it can under current guidance for tax withholding purposes without triggering liability accounting and to make a policy election to account for forfeitures as they occur. This guidance is effective for annual and interim reporting periods beginning on or after December 15, 2016. Early adoption is permitted. 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.
Measurement of Credit Losses on Financial Instruments: In June of 2016, the FASB issued guidance that will require entities to present financial assets measured at amortized cost at the net amount expected to be collected, considering an entity's current estimate of all expected credit losses. In addition, credit losses relating to available-for-sale debt securities will be required to be recorded through an allowance for credit losses, with changes in credit loss estimates recognized through current earnings. This guidance is effective for annual and interim periods beginning after December 15, 2019. Early adoption is permitted, but not for periods beginning before December 15, 2018. Management is evaluating the new guidance and the impact to the Company's financial condition, results of operations, and liquidity.
Classification of Certain Cash Receipts and Cash Payments: In August of 2016, the FASB issued guidance clarifying certain cash flow presentation and classification issues to reduce diversity in practice. This guidance is effective for annual and interim reporting periods beginning on or after December 15, 2017. Early adoption is permitted. Management does not expect the adoption of this guidance will materially impact the Company's Consolidated Statement of Cash Flows.
3. ACQUISITIONS
Pending Acquisitions
Standard Bancshares, Inc.
On June 28, 2016, the Company entered into a definitive agreement to acquire Standard Bancshares, Inc. ("Standard"), the holding company for Standard Bank and Trust Company. With the acquisition, the Company would acquire 35 banking offices located primarily in the southwest Chicago suburbs and adjacent markets in northwest Indiana. As of June 30, 2016, Standard had total assets of approximately $2.5 billion with $2.2 billion in deposits and $1.8 billion in loans. The merger agreement provides for a fixed exchange ratio of 0.4350 shares of First Midwest common stock for each share of Standard common stock. As of the date of announcement, the overall transaction was valued at approximately $365 million, including Standard's common stock, stock options, phantom stock, and stock settled rights. The acquisition is expected to close in late 2016 or early 2017, subject to customary regulatory approvals and closing conditions, as well as the approval of the Company's and Standard's shareholders.
Completed Acquisitions
NI Bancshares Corporation
On March 8, 2016, the Company completed the acquisition of NI Bancshares Corporation ("NI Bancshares"), the holding company for The National Bank & Trust Company of Sycamore. As part of the acquisition, the Company acquired all assets and assumed all liabilities of NI Bancshares, which included ten banking offices in northern Illinois and over $700.0 million in trust assets under management. The merger consideration was a combination of Company common stock and cash, at a purchase price of $70.1 million. Goodwill of $20.8 million associated with the acquisition was recorded by the Company. 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.

13




Peoples Bancorp, Inc.
On December 3, 2015, the Company completed the acquisition of Peoples Bancorp, Inc. ("Peoples"), and its wholly-owned banking subsidiary, The Peoples' Bank of Arlington Heights. With the acquisition, the Company acquired all assets and assumed all liabilities of Peoples, which included two banking offices in Arlington Heights, Illinois, at a purchase price of $16.8 million paid in cash. The Company recorded goodwill of $7.5 million associated with the acquisition. 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.
The following table presents the assets acquired and liabilities assumed, net of the fair value adjustments, in the NI Bancshares and Peoples transactions as of the acquisition date. The assets acquired and liabilities assumed, both intangible and tangible, were recorded at their estimated fair values as of the acquisition date and have been accounted for under the acquisition method of accounting.
Acquisition Activity
(Amounts in thousands, except share and per share data)
 
 
NI Bancshares
 
Peoples
 
 
March 8, 2016
 
December 3, 2015
Assets
 
 
 
 
Cash and due from banks and interest-bearing deposits in other banks
 
$
72,533

 
$
781

Securities available-for-sale
 
125,843

 
41,492

Securities held-to-maturity
 
1,864

 

FHLB and FRB stock
 
1,549

 
558

Loans
 
397,018

 
53,917

OREO
 
2,863

 
515

Investment in BOLI
 
8,384

 

Goodwill
 
20,762

 
7,544

Other intangible assets
 
10,925

 
580

Premises, furniture, and equipment
 
20,019

 
2,215

Accrued interest receivable and other assets
 
16,004

 
2,911

Total assets
 
$
677,764

 
$
110,513

Liabilities
 
 
 
 
Noninterest-bearing deposits
 
$
130,909

 
$
15,869

Interest-bearing deposits
 
464,012

 
75,944

Total deposits
 
594,921

 
91,813

Borrowed funds
 
2,416

 
1,200

Intangible liabilities
 
230

 

Accrued interest payable and other liabilities
 
10,115

 
672

Total liabilities
 
607,682

 
93,685

Consideration Paid
 
 
 
 
Common stock (2016 - 3,042,494 shares issued at $18.059 per share), net of
  $48,000 in issuance costs
 
54,896

 

Cash paid
 
15,186

 
16,828

Total consideration paid
 
70,082

 
16,828

 
 
$
677,764

 
$
110,513

Expenses related to the acquisition and integration of the transactions above and pending transactions totaled $1.2 million and $6.8 million during the quarter and nine months ended September 30, 2016, respectively, and are reported as a separate component within noninterest expense in the Condensed Consolidated Statements of Income. There were no acquisition and integration related expenses for the quarter and nine months ended September 30, 2015. The completed acquisitions were not considered material to the Company's financial statements; therefore, pro forma financial data and related disclosures are not included.

14




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, 2016
 
As of December 31, 2015
 
 
Amortized Cost
 
Gross Unrealized
 
Fair
 Value
 
Amortized Cost
 
Gross Unrealized
 
Fair
 Value
 
 
 
Gains
 
Losses
 
 
 
Gains
 
Losses
 
Securities Available-for-Sale
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. treasury securities
 
$
43,593

 
$
212

 
$
(8
)
 
$
43,797

 
$
17,000

 
$
15

 
$
(35
)
 
$
16,980

U.S. agency securities
 
190,821

 
2,159

 
(49
)
 
192,931

 
86,461

 
351

 
(169
)
 
86,643

Collateralized mortgage
  obligations ("CMOs")
 
1,074,736

 
8,759

 
(2,236
)
 
1,081,259

 
695,198

 
1,072

 
(9,085
)
 
687,185

Other mortgage-backed
  securities ("MBSs")
 
319,964

 
4,641

 
(121
)
 
324,484

 
152,481

 
1,920

 
(871
)
 
153,530

Municipal securities
 
280,884

 
5,959

 
(130
)
 
286,713

 
321,437

 
6,443

 
(310
)
 
327,570

Trust-preferred
  collateralized debt
  obligations ("CDOs")
 
47,893

 
73

 
(16,067
)
 
31,899

 
48,287

 
34

 
(16,792
)
 
31,529

Equity securities
 
3,075

 
110

 
(238
)
 
2,947

 
3,282

 
86

 
(169
)
 
3,199

Total securities
  available-for-sale
 
$
1,960,966

 
$
21,913

 
$
(18,849
)
 
$
1,964,030

 
$
1,324,146

 
$
9,921

 
$
(27,431
)
 
$
1,306,636

Securities Held-to-Maturity
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Municipal securities
 
$
20,337

 
$

 
$
(2,227
)
 
$
18,110

 
$
23,152

 
$

 
$
(3,098
)
 
$
20,054

Trading Securities
 
 
 
 
 
 
 
$
18,351

 
 
 
 
 
 
 
$
16,894


Remaining Contractual Maturity of Securities
(Dollar amounts in thousands)
 
 
As of September 30, 2016
 
 
Available-for-Sale
 
Held-to-Maturity
 
 
Amortized
Cost
 
Fair
Value
 
Amortized
Cost
 
Fair
Value
One year or less
 
$
75,444

 
$
74,392

 
$
3,218

 
$
2,866

After one year to five years
 
433,027

 
426,991

 
7,560

 
6,732

After five years to ten years
 
6,827

 
6,732

 
2,340

 
2,084

After ten years
 
47,893

 
47,225

 
7,219

 
6,428

Securities that do not have a single contractual maturity date
 
1,397,775

 
1,408,690

 

 

Total
 
$
1,960,966

 
$
1,964,030

 
$
20,337

 
$
18,110

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 $1.3 billion at September 30, 2016 and $856.9 million at December 31, 2015. No securities held-to-maturity were pledged as of September 30, 2016 or December 31, 2015.

15




Purchases and sales of securities are recognized on a trade date basis. Realized securities gains or losses are reported in net securities gains in the Condensed Consolidated Statements of Income. The cost of securities sold is based on the specific identification method. During the quarters and nine months ended September 30, 2016 and 2015 there were no material gross trading gains or losses. The following table presents net realized gains on securities available-for-sale for the quarters and nine months ended September 30, 2016 and 2015.
Securities Available-for-Sale Gains
(Dollar amounts in thousands)
 
 
Quarters Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
 
2016
 
2015
 
2016
 
2015
Gains on sales of securities:
 
 
 
 
 
 
 
 
Gross realized gains
 
$
187

 
$
524

 
$
1,266

 
$
1,689

Gross realized losses
 

 

 
(169
)
 
(138
)
Net realized gains on sales of securities
 
187

 
524

 
1,097

 
1,551

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

 

 

 

Net realized gains
 
$
187

 
$
524

 
$
1,097

 
$
1,551

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 securities available-for-sale held by the Company for the quarters and nine months ended September 30, 2016 and 2015. 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,
 
 
2016
 
2015
 
2016
 
2015
Beginning balance
 
$
23,709

 
$
23,709

 
$
23,709

 
$
23,880

OTTI included in earnings (1):
 
 
 
 
 
 
 
 
Reduction for sales of securities (2)
 

 

 

 
(171
)
Ending balance
 
$
23,709

 
$
23,709

 
$
23,709

 
$
23,709


(1) 
Included in net securities gains in the Condensed Consolidated Statements of Income.
(2) 
This reduction was driven by the sale of one CMO with a carrying value of $1.3 million during the nine months ended September 30, 2015.

16




The following table presents the aggregate amount of unrealized losses and the aggregate related fair values of securities with unrealized losses as of September 30, 2016 and December 31, 2015.
Securities in an Unrealized Loss Position
(Dollar amounts in thousands)
 
 
 
 
Less Than 12 Months
 
12 Months or Longer
 
Total
 
 
Number of
Securities
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
As of September 30, 2016
 
 
 
 
 
 
 
 
 
 
 
 
Securities Available-for-Sale
 
 
 
 
 
 
 
 
 
 
 
 
U.S. treasury securities
 
5

 
$
10,049

 
$
7

 
$
1,999

 
$
1

 
$
12,048

 
$
8

U.S. agency securities
 
12

 
23,394

 
49

 

 

 
23,394

 
49

CMOs
 
64

 
180,572

 
717

 
119,934

 
1,519

 
300,506

 
2,236

MBSs
 
15

 
45,686

 
89

 
6,573

 
32

 
52,259

 
121

Municipal securities
 
49

 
18,615

 
112

 
2,307

 
18

 
20,922

 
130

CDOs
 
9

 
1,218

 
9

 
29,398

 
16,058

 
30,616

 
16,067

Equity securities
 
2

 
379

 
226

 
2,379

 
12

 
2,758

 
238

Total
 
156

 
$
279,913

 
$
1,209

 
$
162,590

 
$
17,640

 
$
442,503

 
$
18,849

Securities Held-to-Maturity
 
 
 
 
 
 
 
 
 
 
 
 
Municipal securities
 
16

 
$
18,110

 
$
2,227

 
$

 
$

 
$
18,110

 
$
2,227

As of December 31, 2015
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Securities Available-for-Sale
 
 
 
 
 
 
 
 
 
 
 
 
U.S. treasury securities
 
4

 
$
7,946

 
$
35

 
$

 
$

 
$
7,946

 
$
35

U.S. agency securities
 
10

 
30,620

 
169

 

 

 
30,620

 
169

CMOs
 
133

 
309,787

 
3,110

 
257,362

 
5,975

 
567,149

 
9,085

MBSs
 
27

 
63,028

 
427

 
31,980

 
444

 
95,008

 
871

Municipal securities
 
68

 
8,135

 
65

 
24,227

 
245

 
32,362

 
310

CDOs
 
8

 
8,034

 
971

 
21,642

 
15,821

 
29,676

 
16,792

Equity securities
 
2

 
485

 
120

 
2,305

 
49

 
2,790

 
169

Total
 
252

 
$
428,035

 
$
4,897

 
$
337,516

 
$
22,534

 
$
765,551

 
$
27,431

Securities Held-to-Maturity
 
 
 
 
Municipal securities
 
19

 
$
20,054

 
$
3,098

 
$

 
$

 
$
20,054

 
$
3,098

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, 2016 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, 2016 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 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. For a detailed discussion of the CDO valuation methodology, see Note 14, "Fair Value."

17




5. LOANS
Loans Held-for-Investment
The following table presents the Company's loans held-for-investment by class.
Loan Portfolio
(Dollar amounts in thousands)
 
 
As of
 
 
September 30,
2016
 
December 31,
2015
Commercial and industrial
 
$
2,849,399

 
$
2,524,726

Agricultural
 
409,571

 
387,440

Commercial real estate:
 
 
 
 
Office, retail, and industrial
 
1,537,038

 
1,395,454

Multi-family
 
625,305

 
528,324

Construction
 
401,857

 
216,882

Other commercial real estate
 
970,855

 
931,190

Total commercial real estate
 
3,535,055

 
3,071,850

Total corporate loans
 
6,794,025

 
5,984,016

Home equity
 
733,260

 
653,468

1-4 family mortgages
 
388,145

 
355,854

Installment
 
232,030

 
137,602

Total consumer loans
 
1,353,435

 
1,146,924

Covered loans
 
24,322

 
30,775

Total loans
 
$
8,171,782

 
$
7,161,715

Deferred loan fees included in total loans
 
$
4,034

 
$
5,191

Overdrawn demand deposits included in total loans
 
3,428

 
2,810

The Company primarily lends to community-based and mid-sized businesses, commercial real estate customers, and consumers in its markets. Within these areas, the Company diversifies its loan portfolio by loan type, industry, and borrower.
It is the Company's policy to review each prospective credit to determine the appropriateness and the adequacy of security or collateral prior to making a loan. In the event of borrower default, the Company seeks recovery in compliance with state lending laws, the Company's lending standards, and credit monitoring and remediation procedures. A discussion of risk characteristics relevant to each portfolio segment is presented in Note 5, "Loans" to the Consolidated Financial Statements in the Company's 2015 10-K.

18




Loan Sales
The following table presents loan sales for the quarters and nine months ended September 30, 2016 and 2015.
Loan Sales
(Dollar amounts in thousands)
 
 
Quarters Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
 
2016
 
2015
 
2016
 
2015
Corporate loan sales
 
 
 
 
 
 
 
 
Proceeds from sales
 
$
12,223

 
$
10,226

 
$
36,082

 
$
19,649

Less book value of loans sold
 
11,828

 
9,771

 
34,718

 
18,780

Net gains on corporate loan sales (1)
 
395

 
455

 
1,364

 
869

1-4 family mortgage loan sales
 
 
 
 
 
 
 
 
Proceeds from sales
 
110,167

 
43,340

 
202,932

 
132,367

Less book value of loans sold
 
107,255

 
42,189

 
198,024

 
128,634

Net gains on 1-4 family mortgage loan sales (2)
 
2,912

 
1,151

 
4,908

 
3,733

Total net gains on loan sales
 
$
3,307

 
$
1,606

 
$
6,272

 
$
4,602


(1) 
Net gains on corporate loan sales are included in other service charges, commissions, and fees in the Condensed Consolidated Statements of Income.
(2) 
Net gains on 1-4 family mortgage loan sales are included in mortgage banking income in the Condensed Consolidated Statements of Income.
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 1-4 family mortgage loans. A description of the recourse obligation is presented in Note 13, "Commitments, Guarantees, and Contingent Liabilities."

19




6. ACQUIRED AND COVERED LOANS
The significant accounting policies related to acquired and covered loans, which are classified as PCI and Non-PCI, 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, 2016 and December 31, 2015.
Acquired and Covered Loans
(Dollar amounts in thousands)
 
 
As of September 30, 2016
 
As of December 31, 2015
 
 
PCI
 
Non-PCI
 
Total
 
PCI
 
Non-PCI
 
Total
Acquired loans
 
$
57,777

 
$
686,427

 
$
744,204

 
$
50,286

 
$
534,506

 
$
584,792

Covered loans
 
8,228

 
16,094

 
24,322

 
9,919

 
20,856

 
30,775

Total acquired and covered loans
 
$
66,005

 
$
702,521

 
$
768,526

 
$
60,205

 
$
555,362

 
$
615,567

Acquired Non-PCI loans that are renewed are no longer classified as acquired loans. These loans totaled $101.5 million and $61.6 million as of September 30, 2016 and December 31, 2015, respectively.
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, 2016 and December 31, 2015.
Rollforwards of the carrying value of the FDIC indemnification asset for the quarters and nine months ended September 30, 2016 and 2015 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,
 
 
2016
 
2015
 
2016
 
2015
Beginning balance
 
$
5,171

 
$
7,335

 
$
3,903

 
$
8,452

Amortization
 
(302
)
 
(321
)
 
(884
)
 
(1,174
)
Change in expected reimbursements from the FDIC for
  changes in expected credit losses
 
(228
)
 
487

 
(487
)
 
2,207

Net payments to (from) the FDIC
 
191

 
(1,395
)
 
2,300

 
(3,379
)
Ending balance