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EX-99 - EXHIBIT 99 - FIRST MIDWEST BANCORP INCfmbi03312018ex99.htm
EX-32.2 - EXHIBIT 32.2 - FIRST MIDWEST BANCORP INCfmbi03312018ex322.htm
EX-32.1 - EXHIBIT 32.1 - FIRST MIDWEST BANCORP INCfmbi03312018ex321.htm
EX-31.2 - EXHIBIT 31.2 - FIRST MIDWEST BANCORP INCfmbi03312018ex312.htm
EX-31.1 - EXHIBIT 31.1 - FIRST MIDWEST BANCORP INCfmbi03312018ex311.htm
EX-15 - EXHIBIT 15 - FIRST MIDWEST BANCORP INCfmbi03312018ex15.htm
EX-10.2 - EXHIBIT 10.2 - FIRST MIDWEST BANCORP INCfmbi03312018ex102.htm
EX-10.1 - EXHIBIT 10.1 - FIRST MIDWEST BANCORP INCfmbi03312018ex101.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, 2018
 
 
 
 
 
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
______________________
 
a3282014fmbilogoa03a09.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 4, 2018, there were 103,084,699 shares of common stock, $.01 par value, outstanding.
 




FIRST MIDWEST BANCORP, INC.
FORM 10-Q
TABLE OF CONTENTS



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,
2018
 
December 31,
2017
Assets
 
 
 
 
(Unaudited)
 
 
Cash and due from banks
 
$
150,138

 
$
192,800

Interest-bearing deposits in other banks
 
84,898

 
153,770

Trading securities, at fair value
 

 
20,447

Equity securities, at fair value
 
28,513

 

Securities available-for-sale, at fair value
 
2,040,950

 
1,884,209

Securities held-to-maturity, at amortized cost
 
13,400

 
13,760

Federal Home Loan Bank ("FHLB") and Federal Reserve Bank ("FRB") stock, at cost
 
80,508

 
69,708

Loans
 
10,676,774

 
10,437,812

Allowance for loan losses
 
(94,854
)
 
(95,729
)
Net loans
 
10,581,920

 
10,342,083

Other real estate owned ("OREO")
 
17,472

 
20,851

Premises, furniture, and equipment, net
 
126,348

 
123,316

Investment in bank-owned life insurance ("BOLI")
 
281,285

 
279,900

Goodwill and other intangible assets
 
754,814

 
754,757

Accrued interest receivable and other assets
 
219,725

 
221,451

Total assets
 
$
14,379,971

 
$
14,077,052

Liabilities
 
 
 
 
Noninterest-bearing deposits
 
$
3,527,081

 
$
3,576,190

Interest-bearing deposits
 
7,618,941

 
7,477,135

Total deposits
 
11,146,022

 
11,053,325

Borrowed funds
 
950,688

 
714,884

Senior and subordinated debt
 
195,312

 
195,170

Accrued interest payable and other liabilities
 
218,662

 
248,799

Total liabilities
 
12,510,684

 
12,212,178

Stockholders' Equity
 
 
 
 
Common stock
 
1,123

 
1,123

Additional paid-in capital
 
1,021,923

 
1,031,870

Retained earnings
 
1,103,840

 
1,074,990

Accumulated other comprehensive loss, net of tax
 
(57,531
)
 
(33,036
)
Treasury stock, at cost
 
(200,068
)
 
(210,073
)
Total stockholders' equity
 
1,869,287

 
1,864,874

Total liabilities and stockholders' equity
 
$
14,379,971

 
$
14,077,052

 
 
 
 
 
 
 
 
 
March 31, 2018
 
December 31, 2017
 
(Unaudited)
 
 
 
 
 
Preferred
 
Common
 
Preferred
 
Common
 
Shares
 
Shares
 
Shares
 
Shares
Par value
$

 
$
0.01

 
$

 
$
0.01

Shares authorized
1,000

 
250,000

 
1,000

 
250,000

Shares issued

 
112,353

 

 
112,351

Shares outstanding

 
103,092

 

 
102,717

Treasury shares

 
9,261

 

 
9,634

 
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,
 
 
2018
 
2017
Interest Income
 
 
 
 
Loans
 
$
118,686

 
$
112,365

Investment securities
 
11,756

 
10,484

Other short-term investments
 
903

 
850

Total interest income
 
131,345

 
123,699

Interest Expense
 
 
 
 
Deposits
 
6,179

 
3,209

Borrowed funds
 
3,479

 
2,194

Senior and subordinated debt
 
3,124

 
3,099

Total interest expense
 
12,782

 
8,502

Net interest income
 
118,563

 
115,197

Provision for loan losses
 
15,181

 
4,918

Net interest income after provision for loan losses
 
103,382

 
110,279

Noninterest Income
 
 
 
 
Service charges on deposit accounts
 
11,652

 
11,365

Wealth management fees
 
10,958

 
9,660

Card-based fees, net
 
3,933

 
8,116

Mortgage banking income
 
2,397

 
1,888

Capital market products income
 
1,558

 
1,376

Other service charges, commissions, and fees
 
2,548

 
5,442

Other income
 
2,471

 
2,104

Total noninterest income
 
35,517

 
39,951

Noninterest Expense
 
 
 
 
Salaries and employee benefits
 
56,787

 
55,772

Net occupancy and equipment expense
 
13,773

 
12,325

Professional services
 
7,580

 
8,463

Technology and related costs
 
4,771

 
4,433

Net OREO expense
 
1,068

 
1,700

Other expenses
 
11,603

 
15,384

Acquisition and integration related expenses
 

 
18,565

Total noninterest expense
 
95,582

 
116,642

Income before income tax expense
 
43,317

 
33,588

Income tax expense
 
9,807

 
10,733

Net income
 
$
33,510

 
$
22,855

Per Common Share Data
 
 
 
 
Basic earnings per common share
 
$
0.33

 
$
0.23

Diluted earnings per common share
 
$
0.33

 
$
0.23

Dividends declared per common share
 
$
0.11

 
$
0.09

Weighted-average common shares outstanding
 
101,922

 
100,411

Weighted-average diluted common shares outstanding
 
101,938

 
100,432

 
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,
 
 
2018
 
2017
Net income
 
$
33,510

 
$
22,855

Securities Available-for-Sale
 
 
 
 
Unrealized holding (losses) gains:
 
 
 
 
Before tax
 
(25,153
)
 
3,298

Tax effect
 
6,972

 
(1,321
)
Net of tax
 
(18,181
)
 
1,977

Derivative Instruments
 
 
 
 
Unrealized holding gains (losses):
 
 
 
 
Before tax
 
522

 
(2,220
)
Tax effect
 
(147
)
 
889

Net of tax
 
375

 
(1,331
)
Total other comprehensive (loss) income
 
(17,806
)
 
646

Total comprehensive income
 
$
15,704

 
$
23,501



 
 
Accumulated
Unrealized
Loss on
Securities
Available-
for-Sale
 
Accumulated Unrealized
Loss on Derivative Instruments
 
Unrecognized
Net Pension
Costs
 
Total
Accumulated
Other
Comprehensive
Loss
Balance at December 31, 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
)
Balance at December 31, 2017
 
$
(13,976
)
 
$
(3,763
)
 
$
(15,297
)
 
$
(33,036
)
Adjustment to apply recent accounting pronouncements(1)
 
(2,864
)
 
(784
)
 
(3,041
)
 
(6,689
)
Other comprehensive loss
 
(18,181
)
 
375

 

 
(17,806
)
Balance at March 31, 2018
 
$
(35,021
)
 
$
(4,172
)
 
$
(18,338
)
 
$
(57,531
)
(1) 
As a result of accounting guidance adopted in the first quarter of 2018, certain reclassifications were made from accumulated other comprehensive loss to retained earnings as of January 1, 2018. For further discussion of this guidance, see Note 2, "Recent Accounting Pronouncements."
 
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, 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
)
Acquisition, 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

Balance at December 31, 2017
 
102,717

 
$
1,123

 
$
1,031,870

 
$
1,074,990

 
$
(33,036
)
 
$
(210,073
)
 
$
1,864,874

Adjustment to apply recent accounting
  pronouncements(1)
 

 

 

 
6,689

 
(6,689
)
 

 

Net income
 

 

 

 
33,510

 

 

 
33,510

Other comprehensive income
 

 

 

 

 
(17,806
)
 

 
(17,806
)
Common dividends declared
  ($0.11 per common share)
 

 

 

 
(11,349
)
 

 

 
(11,349
)
Common stock issued
 
1

 

 
94

 

 

 
667

 
761

Restricted stock activity
 
377

 

 
(13,430
)
 

 

 
9,432

 
(3,998
)
Treasury stock issued to benefit plans
 
(3
)
 

 
22

 

 

 
(94
)
 
(72
)
Share-based compensation expense
 

 

 
3,367

 

 

 

 
3,367

Balance at March 31, 2018
 
103,092

 
$
1,123

 
$
1,021,923

 
$
1,103,840

 
$
(57,531
)
 
$
(200,068
)
 
$
1,869,287

(1) 
As a result of accounting guidance adopted in the first quarter of 2018, certain reclassifications were made from accumulated other comprehensive loss to retained earnings as of January 1, 2018. For further discussion of this guidance, see Note 2, "Recent Accounting Pronouncements."
 
See accompanying unaudited notes to the condensed consolidated financial statements.

6




FIRST MIDWEST BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollar amounts in thousands)
(Unaudited)
 
 
Three Months Ended 
 March 31,
 
 
2018
 
2017
Operating Activities
 
 
 
 
Net income
 
$
33,510

 
$
22,855

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
Provision for loan losses
 
15,181

 
4,918

Depreciation of premises, furniture, and equipment
 
3,606

 
3,461

Net amortization of premium on securities
 
3,848

 
4,284

Gains on sales of 1-4 family mortgages and corporate loans held-for-sale
 
(1,625
)
 
(1,414
)
Net losses on sales and valuation adjustments of OREO
 
440

 
689

Amortization of the FDIC indemnification asset
 
302

 
302

Net losses on sales and valuation adjustments of premises, furniture, and equipment
 
60

 
113

BOLI income
 
(1,373
)
 
(1,260
)
Share-based compensation expense
 
3,367

 
2,965

Tax benefit related to share-based compensation
 
51

 
29

Amortization of other intangible assets
 
1,802

 
1,541

Originations of mortgage loans held-for-sale
 
(49,535
)
 
(43,132
)
Proceeds from sales of mortgage loans held-for-sale
 
65,185

 
55,761

Net increase in equity securities
 
(658
)
 

Net increase in trading securities
 

 
(1,210
)
Net increase in accrued interest receivable and other assets
 
(7,309
)
 
(6,767
)
Net decrease in accrued interest payables and other liabilities
 
(31,120
)
 
(34,934
)
Net cash provided by operating activities
 
35,732

 
8,201

Investing Activities
 
 
 
 
Proceeds from maturities, repayments, and calls of securities available-for-sale
 
70,236

 
80,060

Proceeds from sales of securities available-for-sale
 

 
210,154

Purchases of securities available-for-sale
 
(263,386
)
 
(94,766
)
Proceeds from maturities, repayments, and calls of securities held-to-maturity
 
360

 
4,549

Net purchases of FHLB stock
 
(10,800
)
 
16,072

Net increase in loans
 
(255,057
)
 
(43,771
)
Premiums paid on BOLI, net of proceeds from claims
 
(12
)
 
(24
)
Proceeds from sales of OREO
 
3,876

 
5,364

Proceeds from sales of premises, furniture, and equipment
 
146

 
404

Purchases of premises, furniture, and equipment
 
(6,844
)
 
(2,891
)
Net cash received from acquisitions
 

 
41,717

Net cash (used in) provided by investing activities
 
(461,481
)
 
216,868

Financing Activities
 
 
 
 
Net increase in deposit accounts
 
92,697

 
104,064

Net increase (decrease) in borrowed funds
 
235,804

 
(331,085
)
Cash dividends paid
 
(10,288
)
 
(7,206
)
Restricted stock activity
 
(3,998
)
 
(3,830
)
Net cash provided by (used in) financing activities
 
314,215

 
(238,057
)
Net decrease in cash and cash equivalents
 
(111,534
)
 
(12,988
)
Cash and cash equivalents at beginning of period
 
346,570

 
262,148

Cash and cash equivalents at end of period
 
$
235,036

 
$
249,160


7




FIRST MIDWEST BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS - (Continued)
(Dollar amounts in thousands)
(Unaudited)
 
 
Three Months Ended 
 March 31,
 
 
2018
 
2017
Supplemental Disclosures of Cash Flow Information:
 
 
 
 
Income taxes paid
 
$
116

 
$
(1,259
)
Interest paid to depositors and creditors
 
13,379

 
9,354

Dividends declared, but unpaid
 
11,246

 
9,163

Stock issued for acquisitions, net of issuance costs
 

 
534,090

Non-cash transfers of loans to OREO
 
937

 
683

Non-cash transfers of loans held-for-investment to loans held-for-sale
 
905

 
13,136

Non-cash transfer of equity securities previously classified as trading securities and
  securities available-for-sale
 
27,855

 

 
See accompanying unaudited notes to the condensed consolidated financial statements.

8




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, 2018 are not necessarily indicative of the results that may be expected for the year ending December 31, 2018.
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 2017 Annual Report on Form 10-K ("2017 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 2017 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. Certain loans that were previously classified as covered loans are no longer covered under the FDIC Agreements, and are included in acquired 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

9




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.

10




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

11




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, 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 in the same income statement line item as the earnings effect of the hedged item. 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.
2. RECENT ACCOUNTING PRONOUNCEMENTS
Adopted Accounting Pronouncements
Revenue from Contracts with Customers: In May of 2014, the Financial Accounting Standards Board ("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 is 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.
The Company's revenue is comprised of net interest income on financial assets and liabilities, which is excluded from the scope of this guidance, and noninterest income. The primary sources of revenue within noninterest income are service charges on deposit accounts, wealth management fees, card-based fees, and merchant servicing fees. The adoption of this guidance on January 1, 2018, using the modified retrospective approach, affected how the Company presents merchant servicing fees, merchant card expenses, card-based fees, and cardholder expenses, which are presented on a gross basis within noninterest income and noninterest expense for the prior period and are presented on a net basis within noninterest income for the current period. Total expenses of $3.7 million for the quarter ended March 31, 2018 were netted in noninterest income. The adoption of this guidance did not impact net income, therefore, a cumulative effect adjustment to opening retained earnings was not deemed necessary. Consistent with the modified retrospective approach, the Company did not adjust prior period amounts for the reclassification of merchant card expenses and cardholder expenses.
A description of the Company's revenue streams accounted for under the scope of this guidance follows:
Service Charges on Deposit Accounts – Service charges on deposit accounts consist of account analysis fees (net fees earned on analyzed business and public checking accounts), monthly service fees, and other deposit account related fees. The Company's performance obligation for account analysis fees and monthly service fees is generally satisfied, and the related revenue recognized, over the period in which the service is provided. Other deposit account related fees are largely transactional based and therefore, the Company's performance obligation is satisfied, and related revenue recognized, at a point in time. Payment for service charges

12




on deposit accounts is primarily received as a direct charge to customers' accounts. As a result of the adoption of this guidance, there was no impact to the method of recognizing revenue related to service charges on deposit accounts for the quarter ended March 31, 2018.
Wealth management fees – Wealth management fees represents quarterly fees due from wealth management customers as consideration for managing the customers' assets. Wealth management services include custody of assets, investment management, escrow services, fees for trust services and similar fiduciary activities. Revenue is recognized when our performance obligation is completed each quarter, which is generally the time that payment is received. Also included are fees received from a third-party broker-dealer as part of a revenue-sharing agreement. These fees are paid to us by the third-party on a quarterly basis and recognized ratably throughout the quarter as our performance obligation is satisfied. As a result of the adoption of this guidance, there was no impact to the method of recognizing revenue related to wealth management fees for the quarter ended March 31, 2018.
Card-based fees, net – Card-based fees, net consists of debit and credit card interchange fees for processing transactions, as well as, various fees for automated teller machine ("ATM") and point-of-sale transactions processed through the related networks. Interchange, ATM, and point-of-sale fees from cardholder transactions represent a percentage of the underlying transaction value or a flat fee and are recognized daily, in connection with the transaction processing services provided to the cardholder. Card-based fees are presented net of certain contract costs associated with the debit, credit and ATM card interchange networks. As a result of the adoption of this guidance, $1.8 million of cardholder expenses are netted against card-based fees for the quarter ended March 31, 2018.
Merchant servicing fees, net – Merchant servicing fees, net is included in other service charges, commissions, and fees in the Consolidated Statements of Income. The Company acts in an agency capacity with respect to its merchants to process their debit and credit card transactions, deriving revenue from assisting another entity in transactions with our customers. Merchant servicing fees represent a percentage of the underlying net transaction volume or a flat fee and are recognized monthly. Merchant servicing fees are presented net of certain contract costs associated with the third-party merchant processing. As a result of the adoption of this guidance, $1.9 million of merchant card expenses are netted against merchant servicing fees for the quarter ended March 31, 2018.
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 subsequent changes in fair value will be recognized in net income unless the investments qualify for a new practicability exception. Equity securities totaling $27.9 million are no longer classified as trading securities or securities available-for-sale. This guidance also requires entities to adjust the fair value disclosures for financial instruments carried at amortized cost from an entry price to an exit price. No changes were made to the guidance for classifying and measuring investments in debt securities and loans. Except as discussed above, the adoption of this guidance on January 1, 2018 did not materially impact the Company's financial condition, results of operations, or 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. The adoption of this guidance on January 1, 2018 did not materially impact the Company's financial condition, results of operations, or liquidity.
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. The adoption of this guidance on January 1, 2018 did not 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. The adoption of this guidance on January 1, 2018 did not 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 are required to 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 are required to be presented separately from the line item(s) that includes the service cost. The adoption of this guidance on January 1, 2018 did not materially impact the Company's financial condition, results of operations, or liquidity.
Share-based Payment Award Modifications: In May of 2017, the FASB issued guidance to reduce diversity in practice by clarifying when changes to the terms or conditions of a share-based payment award must be accounted for as a modification. The adoption of this guidance on January 1, 2018 did not materially impact the Company's financial condition, results of operations, or liquidity.

13




Derivatives and Hedging: In August of 2017, the FASB issued guidance to better align the financial reporting related to hedging activities with the economic objectives of those activities and to simplify the application of current hedge accounting guidance. Entities are required to apply the guidance using a modified retrospective method as of the period of adoption. This guidance is effective for annual and interim periods beginning after December 31, 2018. Early adoption is permitted, and the Company elected to do so on January 1, 2018, which did not materially impact the Company's financial condition, results of operations, or liquidity.
Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income: In February of 2018, the FASB issued guidance that requires a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act of 2017. Entities electing the reclassification are required to apply the guidance either at the beginning of the period of adoption or retrospectively for all periods impacted. This guidance is effective for annual and interim periods beginning after December 15, 2018. Early adoption is permitted and the Company elected to do so on January 1, 2018, which resulted in the reclassification of $6.8 million of stranded tax effects from accumulated other comprehensive loss to retained earnings as of the beginning of the period of adoption.
Accounting Pronouncements Pending Adoption
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, First Midwest Bank (the "Bank") entered into a sale-leaseback transaction that resulted in a deferred gain of $82.5 million, with $73.1 million remaining as of March 31, 2018. 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" to the Consolidated Financial Statements in the Company's 2017 10-K. 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.
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.
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.

14




3. ACQUISITIONS
Completed Acquisitions
Standard Bancshares, Inc.
On January 6, 2017, the Company completed its 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 price of shares of Company common stock of $25.34 on that date, as reported by NASDAQ, 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 canceled 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 $345.3 million associated with the acquisition was recorded by the Company. All operating systems were converted during the first quarter of 2017.
During 2017, the Company finalized the fair value adjustments associated with the Standard transactions.
Premier Asset Management LLC
On February 28, 2017, the Company completed its 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.
During the first quarter of 2018, the Company finalized the fair value adjustments associated with the Premier transaction, which required a measurement period adjustment of $1.9 million to increase goodwill. This adjustment was recognized in the current period in accordance with accounting guidance applicable to business combinations.

15




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 2017 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, 2018
 
As of December 31, 2017
 
 
Amortized Cost
 
Gross Unrealized
 
Fair
 Value
 
Amortized Cost
 
Gross Unrealized
 
Fair
 Value
 
 
 
Gains
 
Losses
 
 
 
Gains
 
Losses
 
Securities Available-for-Sale
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. treasury securities
 
$
50,487

 
$

 
$
(296
)
 
$
50,191

 
$
46,529

 
$

 
$
(184
)
 
$
46,345

U.S. agency securities
 
160,936

 
146

 
(1,544
)
 
159,538

 
157,636

 
197

 
(986
)
 
156,847

Collateralized mortgage
  obligations ("CMOs")
 
1,213,796

 
147

 
(32,208
)
 
1,181,735

 
1,113,019

 
121

 
(17,954
)
 
1,095,186

Other mortgage-backed
  securities ("MBSs")
 
434,485

 
191

 
(11,314
)
 
423,362

 
373,676

 
201

 
(4,334
)
 
369,543

Municipal securities
 
217,855

 
170

 
(4,041
)
 
213,984

 
209,558

 
693

 
(1,260
)
 
208,991

Corporate debt securities
 
12,161

 

 
(21
)
 
12,140

 

 

 

 

Equity securities(1)
 

 

 

 

 
7,408

 
194

 
(305
)
 
7,297

Total securities
  available-for-sale
 
$
2,089,720

 
$
654

 
$
(49,424
)
 
$
2,040,950

 
$
1,907,826

 
$
1,406

 
$
(25,023
)
 
$
1,884,209

Securities Held-to-Maturity
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Municipal securities
 
$
13,400

 
$

 
$
(2,113
)
 
$
11,287

 
$
13,760

 
$

 
$
(1,747
)
 
$
12,013

Equity Securities(1)
 
 
 
 
 
 
 
$
28,513

 
 
 
 
 
 
 
$

Trading Securities(1)
 
 
 
 
 
 
 
$

 
 
 
 
 
 
 
$
20,447

(1) 
As a result of accounting guidance adopted in the first quarter of 2018, equity securities are no longer presented within trading securities or securities available-for-sale and are now presented within equity securities in the Consolidated Statements of Financial Condition for the current period. For further discussion of this guidance, see Note 2, "Recent Accounting Pronouncements."
Remaining Contractual Maturity of Securities
(Dollar amounts in thousands)
 
 
As of March 31, 2018
 
 
Available-for-Sale
 
Held-to-Maturity
 
 
Amortized
Cost
 
Fair
Value
 
Amortized
Cost
 
Fair
Value
One year or less
 
$
130,003

 
$
128,358

 
$
1,611

 
$
1,357

After one year to five years
 
184,271

 
181,940

 
5,459

 
4,598

After five years to ten years
 
127,155

 
125,546

 
2,195

 
1,849

After ten years
 
10

 
9

 
4,135

 
3,483

Securities that do not have a single contractual maturity date
 
1,648,281

 
1,605,097

 

 

Total
 
$
2,089,720

 
$
2,040,950

 
$
13,400

 
$
11,287

The carrying value of securities available-for-sale that were pledged to secure deposits or for other purposes as permitted or required by law totaled $1.0 billion for March 31, 2018 and $1.1 billion for December 31, 2017. No securities held-to-maturity were pledged as of March 31, 2018 or December 31, 2017.

16




During the quarters ended March 31, 2018 and 2017 there were no material gross trading gains (losses) and there were no realized gains (losses) on securities available-for-sale.
Accounting guidance requires that the credit portion of an other-than-temporary impairment ("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.
There was no outstanding balance of OTTI previously recognized on securities available-for-sale as of both March 31, 2018 and December 31, 2017. During the quarters ended March 31, 2018 and 2017 there were no changes to the balance of OTTI related to securities available-for-sale.
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, 2018 and December 31, 2017.
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, 2018
 
 
 
 
 
 
 
 
 
 
 
 
Securities Available-for-Sale
 
 
 
 
 
 
 
 
 
 
 
 
U.S. treasury securities
 
22

 
$
32,744

 
$
222

 
$
60,664

 
$
74

 
$
93,408

 
$
296

U.S. agency securities
 
77

 
69,433

 
519

 
17,446

 
1,025

 
86,879

 
1,544

CMOs
 
238

 
524,167

 
9,432

 
621,039

 
22,776

 
1,145,206

 
32,208

MBSs
 
98

 
190,166

 
3,677

 
212,297

 
7,637

 
402,463

 
11,314

Municipal securities
 
447

 
74,891

 
1,210

 
103,638

 
2,831

 
178,529

 
4,041

Corporate debt securities
 
3

 
8,985

 
21

 

 

 
8,985

 
21

Total
 
885

 
$
900,386

 
$
15,081

 
$
1,015,084

 
$
34,343

 
$
1,915,470

 
$
49,424

Securities Held-to-Maturity
 
 
 
 
 
 
 
 
 
 
 
 
Municipal securities
 
8

 
$

 
$

 
$
11,287

 
$
2,113

 
$
11,287

 
$
2,113

As of December 31, 2017
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Securities Available-for-Sale
 
 
 
 
 
 
 
 
 
 
 
 
U.S. treasury securities
 
20

 
$
19,918

 
$
87

 
$
26,427

 
$
97

 
$
46,345

 
$
184

U.S. agency securities
 
72

 
66,899

 
300

 
58,021

 
686

 
124,920

 
986

CMOs
 
211

 
365,131

 
3,265

 
633,227

 
14,689

 
998,358

 
17,954

MBSs
 
86

 
126,136

 
902

 
210,017

 
3,432

 
336,153

 
4,334

Municipal securities
 
265

 
35,500

 
479

 
81,360

 
781

 
116,860

 
1,260

Equity securities(1)
 
2

 
391

 
214

 
6,386

 
91

 
6,777

 
305

Total
 
656

 
$
613,975

 
$
5,247

 
$
1,015,438

 
$
19,776

 
$
1,629,413

 
$
25,023

Securities Held-to-Maturity
 
 
 
 
Municipal securities
 
8

 
$

 
$

 
$
12,013

 
$
1,747

 
$
12,013

 
$
1,747

(1) 
As a result of accounting guidance adopted in the first quarter of 2018, equity securities are no longer presented within securities available-for-sale and are now presented within equity securities in the Consolidated Statements of Financial Condition for the current period. For further discussion of this guidance, see Note 2, "Recent Accounting Pronouncements."
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, 2018 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

17




likely than not that the Company will be required to sell them before recovery of their amortized cost basis, which may be at maturity.
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,
2018
 
December 31,
2017
Commercial and industrial
 
$
3,659,066

 
$
3,529,914

Agricultural
 
435,734

 
430,886

Commercial real estate:
 
 
 
 
Office, retail, and industrial
 
1,931,202

 
1,979,820

Multi-family
 
695,830

 
675,463

Construction
 
585,766

 
539,820

Other commercial real estate
 
1,363,238

 
1,358,515

Total commercial real estate
 
4,576,036

 
4,553,618

Total corporate loans
 
8,670,836

 
8,514,418

Home equity
 
881,534

 
827,055

1-4 family mortgages
 
798,902

 
774,357

Installment
 
325,502

 
321,982

Total consumer loans
 
2,005,938

 
1,923,394

Total loans
 
$
10,676,774

 
$
10,437,812

Deferred loan fees included in total loans
 
$
5,349

 
$
4,986

Overdrawn demand deposits included in total loans
 
6,302

 
8,587

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 2017 10-K.

18




Loan Sales
The following table presents loan sales for the quarters ended March 31, 2018 and 2017.
Loan Sales
(Dollar amounts in thousands)
 
 
Quarters Ended 
 March 31,
 
 
2018
 
2017
Corporate loan sales
 
 
 
 
Proceeds from sales
 
$
8,321

 
$
15,368

Less book value of loans sold
 
8,123

 
15,117

Net gains on corporate loan sales(1)
 
198

 
251

1-4 family mortgage loan sales
 
 
 
 
Proceeds from sales
 
$
65,185

 
$
55,761

Less book value of loans sold
 
63,758

 
54,598

Net gains on 1-4 family mortgage loan sales(2)
 
1,427

 
1,163

Total net gains on loan sales
 
$
1,625

 
$
1,414

(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. For additional disclosure related to the Company's obligations resulting from the sale of certain 1-4 family mortgage loans, see Note 10, "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, 2018 and December 31, 2017.
Acquired and Covered Loans(1) 
(Dollar amounts in thousands)
 
 
As of March 31, 2018
 
As of December 31, 2017
 
 
PCI
 
Non-PCI
 
Total
 
PCI
 
Non-PCI
 
Total
Acquired loans
 
$
122,071

 
$
1,361,055

 
$
1,483,126

 
$
130,694

 
$
1,512,664

 
$
1,643,358

Covered loans
 
6,635

 
9,863

 
16,498

 
6,759

 
11,789

 
18,548

Total acquired and covered loans
 
$
128,706

 
$
1,370,918

 
$
1,499,624

 
$
137,453

 
$
1,524,453

 
$
1,661,906

(1) 
Included in loans in the Consolidated Statements of Condition.
The outstanding balance of PCI loans was $188.1 million and $210.7 million as of March 31, 2018 and December 31, 2017, respectively.
Acquired non-PCI loans that are renewed are no longer classified as acquired loans. These loans totaled $404.2 million and $366.0 million as of March 31, 2018 and December 31, 2017, 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 March 31, 2018 and December 31, 2017.

19




Rollforwards of the carrying value of the FDIC indemnification asset for the quarters ended March 31, 2018 and 2017 are presented in the following table.
Changes in the FDIC Indemnification Asset
(Dollar amounts in thousands)
 
 
Quarters Ended 
 March 31,
 
 
2018
 
2017
Beginning balance
 
$
3,314

 
$
4,522

Amortization
 
(302
)
 
(302
)
Change in expected reimbursements from the FDIC for changes in expected credit
  losses
 
146

 
(328
)
Net payments (from) to the FDIC
 
(146
)
 
328

Ending balance
 
$
3,012

 
$
4,220

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,
 
 
2018
 
2017
Beginning balances
 
$
32,957

 
$
19,385

Additions
 

 
27,316

Accretion
 
(3,618
)
 
(3,955
)
Other(1)
 
7,204

 
(1,497
)
Ending balance
 
$
36,543

 
$
41,249

(1) 
Increases represent a rise in the expected future cash flows to be collected over the remaining estimated life of the underlying portfolio while decreases result from the resolution of certain loans occurring earlier than anticipated.
Total accretion on acquired and covered PCI and non-PCI loans for the quarters ended March 31, 2018 and 2017 was $5.1 million and $11.3 million, respectively.

20




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, 2018 and December 31, 2017. 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, 2018
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial and industrial
 
$
3,612,554

 
$
11,412

 
$
35,100

 
$
46,512

 
$
3,659,066

 
 
$
43,974

 
$
1,963

Agricultural
 
430,903

 
264

 
4,567

 
4,831

 
435,734

 
 
4,086

 
489

Commercial real estate:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Office, retail, and industrial
 
1,915,943

 
5,926

 
9,333

 
15,259

 
1,931,202

 
 
12,342

 
476

Multi-family
 
680,557

 
15,249

 
24

 
15,273

 
695,830

 
 
144

 
24

Construction
 
584,607

 
35

 
1,124

 
1,159

 
585,766

 
 
208

 
916

Other commercial real estate
 
1,356,320

 
4,083

 
2,835

 
6,918

 
1,363,238

 
 
4,088

 
64

Total commercial real estate
 
4,537,427

 
25,293

 
13,316

 
38,609

 
4,576,036

 
 
16,782

 
1,480

Total corporate loans
 
8,580,884

 
36,969

 
52,983

 
89,952

 
8,670,836

 
 
64,842

 
3,932

Home equity
 
875,789

 
3,399

 
2,346

 
5,745

 
881,534

 
 
5,780

 
44

1-4 family mortgages
 
794,212

 
2,608

 
2,082

 
4,690

 
798,902

 
 
4,393

 
132

Installment
 
322,797

 
2,180

 
525

 
2,705

 
325,502

 
 

 
525

Total consumer loans
 
1,992,798

 
8,187

 
4,953

 
13,140

 
2,005,938

 
 
10,173

 
701

Total loans
 
$
10,573,682

 
$
45,156

 
$
57,936

 
$
103,092

 
$
10,676,774

 
 
$
75,015

 
$
4,633

As of December 31, 2017
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial and industrial
 
$
3,490,783

 
$
34,620

 
$
4,511

 
$
39,131

 
$
3,529,914

 
 
$
40,580

 
$
1,830

Agricultural
 
430,221

 
280

 
385

 
665

 
430,886

 
 
219

 
177

Commercial real estate:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Office, retail, and industrial
 
1,970,564

 
3,156

 
6,100

 
9,256

 
1,979,820

 
 
11,560

 
345

Multi-family
 
672,098

 
3,117

 
248

 
3,365

 
675,463

 
 
377

 
20

Construction
 
539,043

 
198

 
579

 
777

 
539,820

 
 
209

 
371

Other commercial real estate
 
1,353,263

 
2,545

 
2,707

 
5,252

 
1,358,515

 
 
3,621

 
317

Total commercial real estate
 
4,534,968

 
9,016

 
9,634

 
18,650

 
4,553,618

 
 
15,767

 
1,053

Total corporate loans
 
8,455,972

 
43,916

 
14,530

 
58,446

 
8,514,418

 
 
56,566