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EX-99 - EXHIBIT 99 - FIRST MIDWEST BANCORP INCfmbi03312017ex99.htm
EX-32.2 - EXHIBIT 32.2 - FIRST MIDWEST BANCORP INCfmbi03312017ex322.htm
EX-32.1 - EXHIBIT 32.1 - FIRST MIDWEST BANCORP INCfmbi03312017ex321.htm
EX-31.2 - EXHIBIT 31.2 - FIRST MIDWEST BANCORP INCfmbi03312017ex312.htm
EX-31.1 - EXHIBIT 31.1 - FIRST MIDWEST BANCORP INCfmbi03312017ex311.htm
EX-15 - EXHIBIT 15 - FIRST MIDWEST BANCORP INCfmbi03312017ex15.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 March 31, 2017
 
 
 
 
 
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
______________________
 
a3282014fmbilogoa03a06.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, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer [X]
 
Accelerated filer [ ]
Non-accelerated filer [ ]
 
Smaller reporting company [ ]
(Do not check if a smaller reporting company)
 
Emerging growth company [ ]
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ] 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X].
As of May 5, 2017, there were 112,345,301 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)
 
 
 
 
 
March 31,
2017
 
December 31,
2016
Assets
 
 
 
 
(Unaudited)
 
 
Cash and due from banks
 
$
174,268

 
$
155,055

Interest-bearing deposits in other banks
 
74,892

 
107,093

Trading securities, at fair value
 
19,130

 
17,920

Securities available-for-sale, at fair value
 
1,937,124

 
1,919,450

Securities held-to-maturity, at amortized cost
 
17,742

 
22,291

Federal Home Loan Bank ("FHLB") and Federal Reserve Bank ("FRB") stock, at cost
 
46,306

 
59,131

Loans
 
10,054,370

 
8,254,145

Allowance for loan losses
 
(88,163
)
 
(86,083
)
Net loans
 
9,966,207

 
8,168,062

Other real estate owned ("OREO")
 
29,140

 
26,083

Premises, furniture, and equipment, net
 
140,653

 
82,577

Investment in bank-owned life insurance ("BOLI")
 
276,960

 
219,746

Goodwill and other intangible assets
 
754,621

 
366,876

Accrued interest receivable and other assets
 
336,428

 
278,271

Total assets
 
$
13,773,471

 
$
11,422,555

Liabilities
 
 
 
 
Noninterest-bearing deposits
 
$
3,492,987

 
$
2,766,748

Interest-bearing deposits
 
7,463,554

 
6,061,855

Total deposits
 
10,956,541

 
8,828,603

Borrowed funds
 
547,923

 
879,008

Senior and subordinated debt
 
194,745

 
194,603

Accrued interest payable and other liabilities
 
269,529

 
263,261

Total liabilities
 
11,968,738

 
10,165,475

Stockholders' Equity
 
 
 
 
Common stock
 
1,123

 
913

Additional paid-in capital
 
1,022,417

 
498,937

Retained earnings
 
1,030,403

 
1,016,674

Accumulated other comprehensive loss, net of tax
 
(40,264
)
 
(40,910
)
Treasury stock, at cost
 
(208,946
)
 
(218,534
)
Total stockholders' equity
 
1,804,733

 
1,257,080

Total liabilities and stockholders' equity
 
$
13,773,471

 
$
11,422,555

 
 
 
 
 
 
 
 
 
March 31, 2017
 
December 31, 2016
 
(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

 
112,343

 

 
91,284

Shares outstanding

 
102,757

 

 
81,325

Treasury shares

 
9,586

 

 
9,959

 
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 
 March 31,
 
 
2017
 
2016
Interest Income
 
 
 
 
Loans
 
$
112,365

 
$
78,455

Investment securities
 
10,484

 
8,558

Other short-term investments
 
850

 
535

Total interest income
 
123,699

 
87,548

Interest Expense
 
 
 
 
Deposits
 
3,209

 
2,385

Borrowed funds
 
2,194

 
1,316

Senior and subordinated debt
 
3,099

 
3,133

Total interest expense
 
8,502

 
6,834

Net interest income
 
115,197

 
80,714

Provision for loan losses
 
4,918

 
7,593

Net interest income after provision for loan losses
 
110,279

 
73,121

Noninterest Income
 
 
 
 
Service charges on deposit accounts
 
11,365

 
9,473

Wealth management fees
 
9,660

 
7,559

Card-based fees
 
8,116

 
6,718

Mortgage banking income
 
1,888

 
1,368

Capital market products income
 
1,376

 
3,215

Other service charges, commissions, and fees
 
5,442

 
5,261

Net securities gains
 

 
887

Other income
 
2,104

 
1,445

Total noninterest income
 
39,951

 
35,926

Noninterest Expense
 
 
 
 
Salaries and employee benefits
 
55,772

 
44,594

Net occupancy and equipment expense
 
12,325

 
9,697

Professional services
 
8,463

 
5,920

Technology and related costs
 
4,433

 
3,701

Net OREO expense
 
1,700

 
664

Other expenses
 
15,384

 
12,993

Acquisition and integration related expenses
 
18,565

 
5,020

Total noninterest expense
 
116,642

 
82,589

Income before income tax expense
 
33,588

 
26,458

Income tax expense
 
10,733

 
8,496

Net income
 
$
22,855

 
$
17,962

Per Common Share Data
 
 
 
 
Basic earnings per common share
 
$
0.23

 
$
0.23

Diluted earnings per common share
 
$
0.23

 
$
0.23

Dividends declared per common share
 
$
0.09

 
$
0.09

Weighted-average common shares outstanding
 
100,411

 
77,980

Weighted-average diluted common shares outstanding
 
100,432

 
77,992

 
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 
 March 31,
 
 
2017
 
2016
Net income
 
$
22,855

 
$
17,962

Securities Available-for-Sale
 
 
 
 
Unrealized holding gains:
 
 
 
 
Before tax
 
3,298

 
18,873

Tax effect
 
(1,321
)
 
(7,546
)
Net of tax
 
1,977

 
11,327

Reclassification of net gains included in net income:
 
 
Before tax
 

 
887

Tax effect
 

 
(355
)
Net of tax
 

 
532

Net unrealized holding gains
 
1,977

 
10,795

Derivative Instruments
 
 
 
 
Unrealized holding gains:
 
 
 
 
Before tax
 
(2,220
)
 
4,275

Tax effect
 
889

 
(1,722
)
Net of tax
 
(1,331
)
 
2,553

Total other comprehensive income
 
646

 
13,348

Total comprehensive income
 
$
23,501

 
$
31,310



 
 
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, 2015
 
$
(10,271
)
 
$
(2,468
)
 
$
(15,650
)
 
$
(28,389
)
Other comprehensive income
 
10,795

 
2,553

 

 
13,348

Balance at March 31, 2016
 
$
524

 
$
85

 
$
(15,650
)
 
$
(15,041
)
Balance at December 31, 2016
 
$
(22,645
)
 
$
(1,176
)
 
$
(17,089
)
 
$
(40,910
)
Other comprehensive income
 
1,977

 
(1,331
)
 

 
646

Balance at March 31, 2017
 
$
(20,668
)
 
$
(2,507
)
 
$
(17,089
)
 
$
(40,264
)
 
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, 2015
 
77,952

 
$
882

 
$
446,672

 
$
953,516

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

Net income
 

 

 

 
17,962

 

 

 
17,962

Other comprehensive income
 

 

 

 

 
13,348

 

 
13,348

Common dividends declared
  ($0.09 per common share)
 

 

 

 
(7,228
)
 

 

 
(7,228
)
Acquisition, net of issuance costs
 
3,042

 
31

 
54,865

 

 

 

 
54,896

Common stock issued
 
4

 

 
59

 

 

 

 
59

Restricted stock activity
 
303

 

 
(10,282
)
 

 

 
7,736

 
(2,546
)
Treasury stock issued to
benefit plans
 
(3
)
 

 

 

 

 
(33
)
 
(33
)
Share-based compensation expense
 

 

 
1,839

 

 

 

 
1,839

Balance at March 31, 2016
 
81,298

 
$
913

 
$
493,153

 
$
964,250

 
$
(15,041
)
 
$
(218,710
)
 
$
1,224,565

Balance at December 31, 2016
 
81,325

 
$
913

 
$
498,937

 
$
1,016,674

 
$
(40,910
)
 
$
(218,534
)
 
$
1,257,080

Net income
 

 

 

 
22,855

 

 

 
22,855

Other comprehensive income
 

 

 

 

 
646

 

 
646

Common dividends declared
  ($0.09 per common share)
 

 

 

 
(9,126
)
 

 

 
(9,126
)
Acquisitions, net of issuance costs
 
21,078

 
210

 
533,322

 

 

 
558

 
534,090

Common stock issued
 
2

 

 
53

 

 

 

 
53

Restricted stock activity
 
355

 

 
(12,860
)
 

 

 
9,108

 
(3,752
)
Treasury stock issued to
  benefit plans
 
(3
)
 

 

 

 

 
(78
)
 
(78
)
Share-based compensation expense
 

 

 
2,965

 

 

 

 
2,965

Balance at March 31, 2017
 
102,757

 
$
1,123

 
$
1,022,417

 
$
1,030,403

 
$
(40,264
)
 
$
(208,946
)
 
$
1,804,733

 
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)
 
 
Three Months Ended 
 March 31,
 
 
2017
 
2016
Net cash provided by operating activities
 
$
8,201

 
$
10,232

Investing Activities
 
 
 
 
Proceeds from maturities, repayments, and calls of securities available-for-sale
 
80,060

 
68,235

Proceeds from sales of securities available-for-sale
 
210,154

 
31,453

Purchases of securities available-for-sale
 
(94,766
)
 
(276,265
)
Proceeds from maturities, repayments, and calls of securities held-to-maturity
 
4,549

 
3,973

Purchases of securities held-to-maturity
 

 
(8
)
Purchases (sales) of FHLB stock
 
16,072

 
(61
)
Net increase in loans
 
(43,771
)
 
(268,179
)
Proceeds from claims on BOLI, net of premiums paid
 
(24
)
 
(22
)
Proceeds from sales of OREO
 
5,364

 
1,640

Proceeds from sales of premises, furniture, and equipment
 
404

 
675

Purchases of premises, furniture, and equipment
 
(2,891
)
 
(2,921
)
Net cash received from acquisitions
 
41,717

 
57,347

Net cash provided by (used in) investing activities
 
216,868

 
(384,133
)
Financing Activities
 
 
 
 
Net increase in deposit accounts
 
104,064

 
88,159

Net (decrease) increase in borrowed funds
 
(331,085
)
 
219,899

Cash dividends paid
 
(7,206
)
 
(6,885
)
Restricted stock activity
 
(3,830
)
 
(2,113
)
Net cash (used in) provided by financing activities
 
(238,057
)
 
299,060

Net decrease in cash and cash equivalents
 
(12,988
)
 
(74,841
)
Cash and cash equivalents at beginning of period
 
262,148

 
381,202

Cash and cash equivalents at end of period
 
$
249,160

 
$
306,361

 
 
 
 
 
Supplemental Disclosures of Cash Flow Information:
 
 
 
 
Income taxes (refunded) paid
 
$
(1,259
)
 
$
2,421

Interest paid to depositors and creditors
 
9,354

 
3,563

Dividends declared, but unpaid
 
9,163

 
7,593

Stock issued for acquisitions, net of issuance costs
 
534,090

 
54,896

Non-cash transfers of loans to OREO
 
683

 
942

Non-cash transfers of loans held-for-investment to loans held-for-sale
 
13,136

 
25,125

 
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 ended March 31, 2017 are not necessarily indicative of the results that may be expected for the year ending December 31, 2017.
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 2016 Annual Report on Form 10-K ("2016 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 2016 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. During 2015, certain covered loans were no longer covered under the FDIC Agreements, and are included in acquired loans and no longer classified as covered loans. 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 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 generally 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 collateral 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
Contingent Put and Call Options in Debt Instruments: In March of 2016, the Financial Accounting Standards Board ("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. The adoption of this guidance on January 1, 2017 did not 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. The adoption of this guidance on January 1, 2017 did not 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. The adoption of this guidance on January 1, 2017 resulted in a $638,000 tax benefit recorded in the Company's results of operations. The Company elected to estimate forfeitures, which is consistent with the Company's practice before the adoption of this guidance.
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 but was deferred to 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. The Company's revenue is comprised of net interest income on financial assets and liabilities, which are excluded from the scope of this guidance, and noninterest income. The Company expects that this guidance will change how revenue from certain revenue streams is recognized within wealth management fees but does not expect these changes to have a significant impact on the Company's financial condition, results of operations, or liquidity. The Company continues to evaluate the impact of this guidance on other components of noninterest income. The Company will adopt this guidance on January 1, 2018, with a cumulative effect adjustment to opening retained earnings, if an adjustment is deemed to be significant.
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 2016, the Company entered into a sale-leaseback transaction that resulted in a deferred gain of $82.5 million, with $79.5 million remaining as of March 31, 2017. 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

12




"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.
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.
Income Taxes: In October of 2016, the FASB issued guidance that requires an entity to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. 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.
Clarifying the Definition of a Business: In January of 2017, the FASB issued guidance that clarifies the definition of a business to assist entities with evaluating whether transactions should be accounted for as acquisitions or disposals of assets or businesses. 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.
Accounting for Goodwill Impairment: In January of 2017, the FASB issued guidance that simplifies the accounting for goodwill impairment for all entities. The new guidance eliminates the requirement to calculate the implied fair value of goodwill using the second step of the quantitative two-step goodwill impairment model prescribed under current accounting guidance. Under the new guidance, if a reporting unit's carrying amount exceeds its fair value, an entity will record an impairment charge based on that difference. This guidance is effective for annual and interim goodwill impairment testing dates beginning after December 15, 2019. Early adoption is permitted for annual and interim goodwill impairment testing dates after January 1, 2017. Management does not expect the adoption of this guidance will materially impact the Company's financial condition, results of operations, or liquidity.
Presentation of Defined Benefit Retirement Plan Costs: In March of 2017, the FASB issued guidance that changes how employers that sponsor defined pension and or other postretirement benefit plans present the net periodic benefit cost in the income statement. Employers will present the service cost component of net periodic benefit cost in the same income statement line item as other employee compensation costs arising from services rendered during the period. Other components of net periodic benefit cost will be presented separately from the line item(s) that includes the service cost. 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.
Premium Amortization on Purchased Callable Debt Securities: In March of 2017, the FASB issued guidance that shortens the amortization period for the premium on certain purchased callable debt securities to the earliest call date. This guidance is effective for annual and interim periods beginning after December 15, 2018. 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.

13




3. ACQUISITIONS
Completed Acquisitions
Standard Bancshares, Inc.
On January 6, 2017, the Company completed the acquisition of Standard Bancshares, Inc. ("Standard"), the holding company for Standard Bank and Trust Company. Pursuant to the terms of the merger agreement, on January 6, 2017, each outstanding share of Standard common stock was canceled and converted into the right to receive 0.4350 of a share of Company common stock. Based on the closing trading price of shares of Company common stock on the NASDAQ on that date of $25.34, the value of the merger consideration per share of Standard common stock was $11.02. Each outstanding Standard stock settled right was redeemed for cash, and each outstanding Standard stock option and each share of Standard phantom stock was cancelled and terminated in exchange for the right to receive cash, in each case, pursuant to the terms of the merger agreement. This resulted in an overall transaction value of approximately $580.7 million, which consisted of 21,057,085 shares of Company common stock and $47.1 million in cash. Goodwill of $339.3 million associated with the acquisition was recorded by the Company. All operating systems were converted during the first quarter of 2017. The fair value adjustments associated with these accounts and goodwill remain preliminary and may change as the Company continues to finalize the fair value of the assets and liabilities acquired.
Premier Asset Management LLC
On February 28, 2017, the Company completed the acquisition of Premier Asset Management LLC ("Premier"), a registered investment advisor based in Chicago, Illinois. At the close of the acquisition, the Company acquired approximately $550.0 million of trust assets under management.
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 $22.2 million associated with the acquisition was recorded by the Company.
During the first quarter of 2017, the Company finalized the fair value adjustments associated with the NI Bancshares transaction, which required a measurement period adjustment of $423,000 to increase goodwill. This adjustment was recognized in the current period in accordance with accounting guidance applicable to business combinations.

14




The following table presents the assets acquired and liabilities assumed, net of the fair value adjustments, in the Standard and NI Bancshares 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)
 
Standard
 
NI Bancshares
 
January 6, 2017
 
March 8, 2016
Assets
 
 
 
Cash and due from banks and interest-bearing deposits in other banks
$
102,149

 
$
72,533

Securities available-for-sale
214,107

 
125,843

Securities held-to-maturity

 
1,864

FHLB and FRB stock
3,247

 
1,549

Loans
1,769,709

 
396,181

OREO
8,427

 
2,863

Investment in BOLI
55,629

 
8,384

Goodwill
339,298

 
22,174

Other intangible assets
31,072

 
10,408

Premises, furniture, and equipment
59,163

 
19,636

Accrued interest receivable and other assets
56,077

 
16,453

Total assets
$
2,638,878

 
$
677,888

Liabilities
 
 
 
Noninterest-bearing deposits
$
675,354

 
$
130,909

Interest-bearing deposits
1,348,520

 
464,012

Total deposits
2,023,874

 
594,921

Borrowed funds

 
2,416

Intangible liabilities

 
230

Accrued interest payable and other liabilities
34,289

 
10,239

Total liabilities
2,058,163

 
607,806

Consideration Paid
 
 
 
Common stock (2017 - 21,057,085 shares issued at $25.34 per share,
  2016 - 3,042,494 shares issued at $18.059 per share), net of issuance costs
533,590

 
54,896

Cash paid
47,125

 
15,186

Total consideration paid
580,715

 
70,082

 
$
2,638,878

 
$
677,888

Expenses related to the acquisition and integration of the transactions above totaled $18.6 million and $5.0 million during the quarters ended March 31, 2017 and 2016, respectively, and are reported as a separate component within noninterest expense in the Condensed Consolidated Statements of Income. The acquisition of Standard was considered material to the Company's financial statements; therefore, pro forma financial data and related disclosures are included in the following tables.


15




The unaudited pro forma combined results of operations for the quarters ended March 31, 2017 and 2016 are presented as if the Standard acquisition had occurred on January 1, 2016, the first day of the Company's 2016 fiscal year. The unaudited pro forma combined results of operations are presented for illustrative purposes only and do not necessarily indicate the financial results of the combined companies had the companies actually been combined at the beginning of the period presented. Fair value adjustments included in the following table are preliminary and may be revised. The unaudited pro forma results of operations also does not consider any potential impacts of potential revenue enhancements, anticipated cost savings and expense efficiencies, or asset dispositions, among other factors. Acquisition and integration related expenses directly attributable to the Standard acquisition have been excluded from the following table and are estimated to total $27.0 million, of which $17.5 million was expensed during the quarter ended March 31, 2017.
Unaudited Pro Forma Combined Results of Operations
(Dollar amounts in thousands)
 
 
Quarters Ended
March 31,
 
 
2017
 
2016
Total revenues (1)
 
$
156,757

 
$
143,345

Net income
 
32,734

 
22,950


(1) 
Includes net interest income and total noninterest income.
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. Acquired loans are separated into (i) non-PCI and (ii) 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. PCI loans are accounted for based on estimates of expected future cash flows. 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. For additional discussion regarding significant accounting policies on acquired loans see Note 1, "Summary of Significant Accounting Policies."
The following table presents additional detail for loans acquired in the Standard transaction at the acquisition date.
Standard Acquired Loans
(Dollar amounts in thousands)
 
 
January 6, 2017
 
 
PCI Loans
 
Non-PCI Loans
Fair value
 
$
123,643

 
$
1,646,066

Contractually required principal and interest payments
 
208,586

 
1,940,459

Best estimate of contractual cash flows not expected to be collected (1)
 
57,626

 
100,918

Best estimate of contractual cash flows expected to be collected
 
150,960

 
1,839,541

(1) 
Includes interest payments not expected to be collected due to loan prepayments as well as principal and interest payments not expected to be collected due to customer default.


16




4. SECURITIES
The significant accounting policies related to securities are presented in Note 1, "Summary of Significant Accounting Policies" to the Consolidated Financial Statements in the Company's 2016 10-K.
A summary of the Company's securities portfolio by category and maturity is presented in the following tables.
Securities Portfolio
(Dollar amounts in thousands)
 
 
As of March 31, 2017
 
As of December 31, 2016
 
 
Amortized Cost
 
Gross Unrealized
 
Fair
 Value
 
Amortized Cost
 
Gross Unrealized
 
Fair
 Value
 
 
 
Gains
 
Losses
 
 
 
Gains
 
Losses
 
Securities Available-for-Sale
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. treasury securities
 
$
48,574

 
$
23

 
$
(81
)
 
$
48,516

 
$
48,581

 
$
26

 
$
(66
)
 
$
48,541

U.S. agency securities
 
180,894

 
518

 
(382
)
 
181,030

 
183,528

 
519

 
(410
)
 
183,637

Collateralized mortgage
  obligations ("CMOs")
 
1,066,439

 
1,039

 
(16,114
)
 
1,051,364

 
1,064,130

 
969

 
(17,653
)
 
1,047,446

Other mortgage-backed
  securities ("MBSs")
 
357,473

 
1,230

 
(5,737
)
 
352,966

 
337,139

 
1,395

 
(5,879
)
 
332,655

Municipal securities
 
263,606

 
2,092

 
(2,988
)
 
262,710

 
273,319

 
1,245

 
(3,718
)
 
270,846

Trust-preferred
  collateralized debt
  obligations ("CDOs")
 
47,728

 
260

 
(14,552
)
 
33,436

 
47,681

 
261

 
(14,682
)
 
33,260

Equity securities
 
7,246

 
148

 
(292
)
 
7,102

 
3,206

 
147

 
(288
)
 
3,065

Total securities
  available-for-sale
 
$
1,971,960

 
$
5,310

 
$
(40,146
)
 
$
1,937,124

 
$
1,957,584

 
$
4,562

 
$
(42,696
)
 
$
1,919,450

Securities Held-to-Maturity
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Municipal securities
 
$
17,742

 
$

 
$
(2,624
)
 
$
15,118

 
$
22,291

 
$

 
$
(4,079
)
 
$
18,212

Trading Securities
 
 
 
 
 
 
 
$
19,130

 
 
 
 
 
 
 
$
17,920


Remaining Contractual Maturity of Securities
(Dollar amounts in thousands)
 
 
As of March 31, 2017
 
 
Available-for-Sale
 
Held-to-Maturity
 
 
Amortized
Cost
 
Fair
Value
 
Amortized
Cost
 
Fair
Value
One year or less
 
$
90,123

 
$
87,605

 
$
1,926

 
$
1,641

After one year to five years
 
399,483

 
388,321

 
6,834

 
5,823

After five years to ten years
 
3,470

 
3,373

 
2,975

 
2,535

After ten years
 
47,726

 
46,393

 
6,007

 
5,119

Securities that do not have a single contractual maturity date
 
1,431,158

 
1,411,432

 

 

Total
 
$
1,971,960

 
$
1,937,124

 
$
17,742

 
$
15,118

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 $1.1 billion for both March 31, 2017 and December 31, 2016. No securities held-to-maturity were pledged as of March 31, 2017 or December 31, 2016.

17




During the quarters ended March 31, 2017 and 2016 there were no material gross trading gains/(losses). The following table presents net realized gains on securities available-for-sale for the quarters ended March 31, 2017 and 2016.
Securities Available-for-Sale Gains
(Dollar amounts in thousands)
 
 
Quarters Ended 
 March 31,
 
 
2017
 
2016
Gains on sales of securities:
 
 
 
 
Gross realized gains
 
$

 
$
930

Gross realized losses
 

 
(43
)
Net realized gains on sales of securities
 

 
887

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

 

Net realized gains
 
$

 
$
887

There were no net securities gains recognized during the first quarter of 2017. Securities of $214.1 million were acquired in the Standard transaction during the first quarter of 2017, of which $210.2 million were sold shortly after the acquisition and resulted in no gains or losses as they were recorded at fair value upon acquisition.
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 ended March 31, 2017 and 2016. The majority of the beginning and ending balance of OTTI relates to CDOs currently held by the Company.
Changes in OTTI Recognized in Earnings
(Dollar amounts in thousands)
 
 
Quarters Ended 
 March 31,
 
 
2017
 
2016
Beginning balance
 
$
23,345

 
$
23,709

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

 

Ending balance
 
$
23,345

 
$
23,709


(1) 
Included in net securities gains in the Condensed Consolidated Statements of Income.

18




The following table presents the aggregate amount of unrealized losses and the aggregate related fair values of securities with unrealized losses as of March 31, 2017 and December 31, 2016.
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 March 31, 2017
 
 
 
 
 
 
 
 
 
 
 
 
Securities Available-for-Sale
 
 
 
 
 
 
 
 
 
 
 
 
U.S. treasury securities
 
17

 
$
35,481

 
$
75

 
$
3,995

 
$
6

 
$
39,476

 
$
81

U.S. agency securities
 
30

 
70,426

 
358

 
6,928

 
24

 
77,354

 
382

CMOs
 
196

 
781,003

 
12,259

 
128,464

 
3,855

 
909,467

 
16,114

MBSs
 
73

 
290,278

 
5,180

 
17,013

 
557

 
307,291

 
5,737

Municipal securities
 
272

 
94,694

 
2,371

 
21,520

 
617

 
116,214

 
2,988

CDOs
 
7

 

 

 
30,762

 
14,552

 
30,762

 
14,552

Equity securities
 
2

 

 

 
6,687

 
292

 
6,687

 
292

Total
 
597

 
$
1,271,882

 
$
20,243

 
$
215,369

 
$
19,903

 
$
1,487,251

 
$
40,146

Securities Held-to-Maturity
 
 
 
 
 
 
 
 
 
 
 
 
Municipal securities
 
13

 
$

 
$

 
$
15,118

 
$
2,624

 
$
15,118

 
$
2,624

As of December 31, 2016
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Securities Available-for-Sale
 
 
 
 
 
 
 
 
 
 
 
 
U.S. treasury securities
 
16

 
$
33,505

 
$
61

 
$
3,995

 
$
5

 
$
37,500

 
$
66

U.S. agency securities
 
28

 
62,064

 
364

 
11,814

 
46

 
73,878

 
410

CMOs
 
194

 
523,233

 
10,309

 
411,758

 
7,344

 
934,991

 
17,653

MBSs
 
68

 
221,174

 
4,726

 
77,780

 
1,154

 
298,954

 
5,880

Municipal securities
 
380

 
133,957

 
3,059

 
29,280

 
659

 
163,237

 
3,718

CDOs
 
7

 

 

 
30,592

 
14,682

 
30,592

 
14,682

Equity securities
 
2

 
404

 
201

 
2,319

 
86

 
2,723

 
287

Total
 
695

 
$
974,337

 
$
18,720

 
$
567,538

 
$
23,976

 
$
1,541,875

 
$
42,696

Securities Held-to-Maturity
 
 
 
 
Municipal securities
 
14

 
$

 
$

 
$
18,212

 
$
4,079

 
$
18,212

 
$
4,079

Substantially all of the Company's CMOs and other MBSs are either backed by U.S. government-owned agencies or issued by U.S. government-sponsored enterprises. Municipal securities are issued by municipal authorities, and the majority are supported by third party insurance or some other form of credit enhancement. Management does not believe any of these securities with unrealized losses as of March 31, 2017 represent OTTI related to credit deterioration. These unrealized losses are attributed to changes in interest rates and temporary market movements. The Company does not intend to sell these securities and it is not more likely than not that the Company will be required to sell them before recovery of their amortized cost basis, which may be at maturity.
The unrealized losses on CDOs as of March 31, 2017 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."

19




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
 
 
March 31,
2017
 
December 31,
2016
Commercial and industrial
 
$
3,370,780

 
$
2,827,658

Agricultural
 
422,784

 
389,496

Commercial real estate:
 
 
 
 
Office, retail, and industrial
 
1,988,979

 
1,581,967

Multi-family
 
671,710

 
614,052

Construction
 
568,460

 
451,540

Other commercial real estate
 
1,357,781

 
979,528

Total commercial real estate
 
4,586,930

 
3,627,087

Total corporate loans
 
8,380,494

 
6,844,241

Home equity
 
880,667

 
747,983

1-4 family mortgages
 
540,148

 
423,922

Installment
 
253,061

 
237,999

Total consumer loans
 
1,673,876

 
1,409,904

Total loans
 
$
10,054,370

 
$
8,254,145

Deferred loan fees included in total loans
 
$
4,429

 
$
3,838

Overdrawn demand deposits included in total loans
 
6,303

 
7,836

The increase in total loans for the quarter ended March 31, 2017 includes loans acquired in the Standard acquisition. For additional disclosure related to the Standard transaction, see note 3, "Acquisitions."
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 2016 10-K.

20




Loan Sales
The following table presents loan sales for the quarters ended March 31, 2017 and 2016.
Loan Sales
(Dollar amounts in thousands)
 
 
Quarters Ended 
 March 31,
 
 
2017
 
2016
Corporate loan sales
 
 
 
 
Proceeds from sales
 
$
15,368

 
$
9,588

Less book value of loans sold
 
15,117

 
9,130

Net gains on corporate loan sales (1)
 
$
251

 
$
458

1-4 family mortgage loan sales
 
 
 
 
Proceeds from sales
 
$
55,761

 
$
39,507

Less book value of loans sold
 
54,598

 
38,680

Net gains on 1-4 family mortgage loan sales (2)
 
1,163

 
827

Total net gains on loan sales
 
$
1,414

 
$
1,285


(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."
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 the carrying amount of acquired and covered PCI and non-PCI loans as of March 31, 2017 and December 31, 2016.
Acquired and Covered Loans (1) 
(Dollar amounts in thousands)
 
 
As of March 31, 2017
 
As of December 31, 2016
 
 
PCI
 
Non-PCI
 
Total
 
PCI
 
Non-PCI
 
Total
Acquired loans
 
$
169,961

 
$
2,101,985

 
$
2,271,946

 
$
53,772

 
$
613,339

 
$
667,111

Covered loans
 
7,746

 
14,712

 
22,458

 
7,895

 
15,379

 
23,274

Total acquired and covered loans
 
$
177,707

 
$
2,116,697

 
$
2,294,404

 
$
61,667

 
$
628,718

 
$
690,385


(1) 
Included in loans in the Consolidated Statements of Condition.
The outstanding balance of PCI loans was $251.2 million and $84.8 million as of March 31, 2017 and December 31, 2016, respectively.
The increase in acquired loans for the quarter ended March 31, 2017 includes loans acquired in the Standard acquisition. For additional disclosure related to the Standard transaction, see note 3, "Acquisitions."
Acquired non-PCI loans that are renewed are no longer classified as acquired loans. These loans totaled $170.9 million and $117.6 million as of March 31, 2017 and December 31, 2016, respectively.

21




In connection with the FDIC Agreements, the Company recorded an indemnification asset. To maintain eligibility for the loss share reimbursement, the Company is required to follow certain servicing procedures as specified in the FDIC Agreements. The Company was in compliance with those requirements as of March 31, 2017 and December 31, 2016.
Rollforwards of the carrying value of the FDIC indemnification asset for the quarters ended March 31, 2017 and 2016 are presented in the following table.
Changes in the FDIC Indemnification Asset
(Dollar amounts in thousands)
 
 
Quarters Ended 
 March 31,
 
 
2017
 
2016
Beginning balance
 
$
4,522

 
$
3,903

Amortization
 
(302
)
 
(280
)
Change in expected reimbursements from the FDIC for changes in expected credit losses
 
(328
)
 
216

Net payments to the FDIC
 
328

 
1,841

Ending balance
 
$
4,220

 
$
5,680

Changes in the accretable yield for acquired and covered PCI loans were as follows.
Changes in Accretable Yield
(Dollar amounts in thousands)
 
 
Quarters Ended 
 March 31,
 
 
2017
 
2016
Beginning balances
 
$
19,385

 
$
24,912

Additions
 
27,316

 
3,981

Accretion
 
(3,955
)
 
(1,546
)
Other (1)
 
(1,497
)
 
(89
)
Ending balance
 
$
41,249

 
$
27,258


(1) 
Decreases result from the resolution of certain loans occurring earlier than anticipated while increases represent a rise in the expected future cash flows to be collected over the remaining estimated life of the underlying portfolio.
Total accretion on acquired and covered PCI and non-PCI loans for March 31, 2017 and 2016 was $11.3 million and $2.4 million, respectively.

22




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 March 31, 2017 and December 31, 2016. 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 (1)
 
30-89 Days
Past Due
 
90 Days or
More Past
Due
 
Total
Past Due
 
Total
Loans
 
 
Non-
accrual (2)
 
90 Days or More Past Due, Still Accruing Interest
As of March 31, 2017
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial and industrial
 
$
3,359,919

 
$
7,165

 
$
3,696

 
$
10,861

 
$
3,370,780

 
 
$
21,514

 
$
1,251

Agricultural
 
420,692

 
1,434

 
658

 
2,092

 
422,784

 
 
1,283

 

Commercial real estate:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Office, retail, and industrial
 
1,971,050

 
1,281

 
16,648

 
17,929

 
1,988,979

 
 
19,505

 
52

Multi-family
 
666,914

 
4,782

 
14

 
4,796

 
671,710

 
 
163

 
14

Construction
 
565,710

 
2,556

 
194

 
2,750

 
568,460

 
 
198

 

Other commercial real estate
 
1,352,633

 
3,563

 
1,585

 
5,148

 
1,357,781

 
 
3,858

 
1

Total commercial real
  estate
 
4,556,307

 
12,182

 
18,441

 
30,623

 
4,586,930

 
 
23,724

 
67

Total corporate loans
 
8,336,918

 
20,781

 
22,795

 
43,576

 
8,380,494

 
 
46,521

 
1,318

Home equity
 
874,810

 
3,045

 
2,812

 
5,857

 
880,667

 
 
4,799

 
864

1-4 family mortgages
 
538,177

 
1,254

 
717

 
1,971

 
540,148

 
 
2,974

 
41

Installment
 
250,952

 
1,699

 
410

 
2,109

 
253,061

 
 

 
410

Total consumer loans
 
1,663,939

 
5,998

 
3,939

 
9,937

 
1,673,876

 
 
7,773

 
1,315

Total loans
 
$
10,000,857

 
$
26,779

 
$
26,734

 
$
53,513

 
$
10,054,370

 
 
$
54,294

 
$
2,633