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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

(Mark One)

[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the fiscal year-endedDecember 31, 20112014
or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period fromto



Commission File Number 0-10967

Commission File Number 0-10967
FIRST MIDWEST BANCORP, INC.
(Exact name of registrant as specified in its charter)

Delaware
(State
 (State or other jurisdiction of
incorporation or organization)
 
36-3161078
(IRS
 (IRS Employer Identification No.)

One Pierce Place, Suite 1500
Itasca, Illinois 60143-9768
(Address60143-1254
 (Address of principal executive offices) (zip code)
Registrant's telephone number, including area code:(630) 875-7450

Securities registered pursuant to Section 12(b) of the Act:


Title of each class  Name of each exchange on which registered 
Common Stock,stock, $.01 Par Value
Preferred Share Purchase Rights
 
The NasdaqNASDAQ Stock Market
The NasdaqNASDAQ Stock Market

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [X] No [ ].

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes [ ] No [X].

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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ].

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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§232.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X].
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer, (as definedor a smaller reporting company. See definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act). Large accelerated filer [X] Accelerated filer [ ] Non-accelerated filer [ ].

Act.

Large accelerated filer [X]Accelerated filer [ ]
Non-accelerated filer [ ]Smaller reporting company [ ]
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell Company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X].

The aggregate market value of the registrant's outstanding voting common stock held by non-affiliates on June 30, 2011,2014, determined using a per share closing price on that date of $12.29,$17.03, as quoted on The Nasdaqthe NASDAQ Stock Market, was $849,084,552.

$1,226,970,577.

As of February 28, 2011,26, 2015, there were 74,693,95077,958,815 shares of common stock, $.01$0.01 par value, outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant's Proxy Statement for the 20112015 Annual Stockholders' Meeting -are incorporated by reference into Part III

III.


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FORM 10-K

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FIRST MIDWEST BANCORP, INC.
FORM 10-K
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Page
Glossary of Terms 3Page
 5

 




 



Risk Factors


19

ITEM 1B.

 


 


 


 


Part II

 

 


 

 


 


 


 


 


 


 


 


Part III

 

 


 

 


 


 


 


 


Part IV

 

 


 

 

 

Incorporation by Reference

Certain items in Part III of this report are incorporated by reference to portions of the Company's definitive 2012 Annual Meeting Proxy Statement to be filed within 120 days after the end of the year covered by this Annual Report on Form 10-K, pursuant to Regulation 14A (the "Proxy").



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PART I

GLOSSARY OF TERMS

ITEM 1. BUSINESS
First Midwest Bancorp, Inc. provides the following list of acronyms as a tool for the reader. The acronyms identified below are used in Management's Discussion and Analysis of Financial Condition & Results of Operations and in the Notes to Consolidated Financial Statements.

2012 Proxy Statementthe Company's definitive Proxy Statement for our 2012 Annual Meeting of Stockholders to be held on May 16, 2012
ActBank Holding Company Act of 1956, as amended
ALCOAsset Liability Committee
AMTalternative minimum tax under the Internal Revenue Code of 1986, as amended
ARRAAmerican Recovery and Reinvestment Act of 2009
ATMautomated teller machine
BankFirst Midwest Bank (one of the Company's two wholly owned subsidiaries)
BIABanking on Illinois Act
Boardthe Board of Directors of First Midwest Bancorp, Inc.
BOLIbank-owned life insurance
CAMELS ratinga bank's capital level and supervisory rating
CatalystCatalyst Asset Holdings, LLC (one of the Company's three wholly owned subsidiaries)
CDOscollateralized debt obligations
CFPBConsumer Financial Protection Bureau
CMOscollateralized mortgage obligations
Codethe Code of Ethics and Standards of Conduct of First Midwest Bancorp, Inc.
Committeethe Company's Retirement Plans Committee
Common Stockshares of common stock of First Midwest Bancorp, Inc. $0.01 par value per share, which is traded on the Nasdaq Stock Market under the symbol "FMBI"
CompanyFirst Midwest Bancorp, Inc.
CPPCapital Purchase Program enacted under TARP and the EESA
CRACommunity Reinvestment Act of 1977
CSVcash surrender value
DIFthe FDIC's Deposit Insurance Fund
Directors PlanNonemployees Directors Stock Plan that provides for the granting of equity awards to the Company's non-management Board Members
EESAEmergency Economic Stabilization Act of 2008
Dodd-Frank Actthe Dodd-Frank Wall Street Reform and Consumer Protection Act
EPSearnings per share
Fannie MaeFederal National Mortgage Association
FASBFinancial Accounting Standards Board
FDICFederal Deposit Insurance Corporation
FDIC AgreementsPurchase and Assumption Agreements and Loss Share Agreements between the Bank and the FDIC
Federal ReserveBoard of Governors of the Federal Reserve system
FHCa financial holding company
FHLBFederal Home Loan Bank
FICOcredit score created by Fair Isaac Corporation
FinCENFinancial Crimes Enforcement Network
First DuPagethe former First DuPage Bank, acquired by the Company in an FDIC-assisted transaction
First MidwestFirst Midwest Bancorp, Inc.
FMCTFirst Midwest Capital Trust I
Freddie MacFederal Home Loan Mortgage Corporation
GAAPU.S. generally accepted accounting principles
GLBGramm-Leach-Bliley Act of 1999
IBAIllinois Banking Act

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IDFPRIllinois Department of Financial and Professional Regulation
LIBORLondon Interbank Offered Rate
NOLnet operating loss
OFACOffice of Foreign Assets Control Regulation
Old NationalOld National Bank of Evansville, Indiana
Omnibus PlanOmnibus Stock and Incentive Plan that permits the granting of long-term incentives to certain key employees of the Company
OREOOther real estate owned, or properties acquired through foreclosure in partial or total satisfaction of certain loans as a result of borrower defaults
OTTIother-than-temporary impairment
Palosthe former Palos Bank and Trust Company, acquired by the Company in an FDIC-assisted transaction
ParasolParasol Investment Management, LLC (one of the Company's three wholly owned subsidiaries)
Parent CompanyFirst Midwest Bancorp, Inc. on an unconsolidated basis
Pension Planthe Company-sponsored noncontributory defined benefit retirement plan
Peotonethe former Peotone Bank and Trust Company, acquired by the Company in an FDIC-assisted transaction
Preferred SharesFixed Rate Cumulative Perpetual Preferred Stock, Series B, liquidation preference of $1,000 per share and an initial fixed dividend rate of 5%, issued to the U.S. Department of the Treasury under the Treasury's Capital Purchase Program enacted under TARP and the EESA
Profit Sharing Planthe Company's defined contribution retirement savings plan
PSLRASafe Harbor Provisions of the Private Securities Litigation Reform Act of 1995
RestorationRestoration Asset Management, LLC (a wholly owned subsidiary of Catalyst)
Riegle-NealRiegle-Neal Interstate Banking and Branching Efficiency Act of 1994
S&P 500Standard & Poor's 500 Stock Index
S&P SmallCap 600 BanksStandard & Poor's SmallCap 600 Banks Index
SAFEthe Secure and Fair Enforcement for Mortgage Licensing Act
Sarbanes-OxleySarbanes-Oxley Act of 2002
SECU.S. Securities and Exchange Commission
TARPTroubled Asset Relief Program
TDRTroubled debt restructuring
TLGPTemporary Liquidity Guarantee Program
TreasuryU.S. Department of the Treasury
VIEvariable interest entity
WarrantA 10-year warrant issued to the U.S. Department of the Treasury to purchase up to 1,305,230 shares of the Company's $0.01 par value per share common stock at an exercise price of $22.18 per share subject to anti-dilution adjustments

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INTRODUCTION

First Midwest Bancorp, Inc. (the "Company", "we","Company," "we," "us," or "our") is a single bank holding companyDelaware corporation incorporated in 1982 and headquartered in the Chicago suburb of Itasca, IllinoisIllinois. The Company is one of Illinois' largest independent publicly-traded banking companies, with operations throughout the greater Chicago metropolitan area as well as central and western Illinois and eastern Iowa. Our principal subsidiary is First Midwest Bank, which provides a broad rangeassets of commercial and retail banking and wealth management services to consumer, commercial and industrial, and public or governmental customers. We are committed to meeting the financial needs of the people and businesses in the communities where we live and work by providing customized banking solutions, quality products, and innovative services that fulfill those financial needs.

AVAILABLE INFORMATION

We file annual, quarterly, and current reports; proxy statements; and other information with the U.S. Securities and Exchange Commission ("SEC"), and we make this information available free of charge on or through the investor relations section of our web site atwww.firstmidwest.com/aboutinvestor_overview.asp. You may read and copy materials we file with the SEC from its Public Reference Room at 100 F. Street, NE, Washington, DC 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains an Internet site athttp://www.sec.gov that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. The following documents are also posted on our web site or are available in print upon the request of any stockholder to our Corporate Secretary:

Certificate of Incorporation,
Company By-laws,
Charters for our Audit, Compensation, and Nominating and Corporate Governance Committees,
Related Person Transaction Policies and Procedures,
Corporate Governance Guidelines,
Code of Ethics and Standards of Conduct (the "Code"), which governs our directors, officers, and employees, and
Code of Ethics for Senior Financial Officers.

Within the time period required by the SEC and the Nasdaq Stock Market, we will post on our web site any amendment to the Code and any waiver applicable to any executive officer, director, or senior financial officer (as defined in the Code). In addition, our web site includes information concerning purchases and sales of our securities by our executive officers and directors. The Company's accounting and reporting policies conform to U.S. generally accepted accounting principles ("GAAP") and general practice within the banking industry. We post on our website any disclosure relating to certain non-GAAP financial measures (as defined in the SEC's Regulation G) that we may make public orally, telephonically, by webcast, by broadcast, or by similar means from time to time.

Our Corporate Secretary can be contacted by writing to First Midwest Bancorp, Inc., One Pierce Place, Itasca, Illinois 60143, attention: Corporate Secretary. The Company's Investor Relations Department can be contacted by telephone at (630) 875-7533 or by e-mail atinvestor.relations@firstmidwest.com.

CAUTIONARY STATEMENT PURSUANT TO THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995

We include or incorporate by reference in this Annual Report on Form 10-K, and from time to time our management may make, statements that may constitute "forward-looking statements" within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements are not historical facts, but instead represent only management's beliefs regarding future events, many of which, by their nature, are inherently uncertain and outside our control. Although we believe the expectations reflected in any forward-looking statements are reasonable, it is possible that our actual results and financial condition may differ, possibly materially, from the anticipated results and financial condition indicated in such statements. In some cases, you can identify these statements by forward-looking words such as "may," "might," "will," "should," "expect," "plan," "anticipate," "believe," "estimate," "predict," "probable," "potential," or "continue," and the negative of these terms and other comparable terminology. We caution you not to place undue reliance on forward-looking statements, which speak only$9.4 billion as of the date of this report or when made.


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Forward-looking statements are subject to knownDecember 31, 2014, and unknown risks, uncertainties, and assumptions and may contain projections relating to our future financial performance including our growth strategies and anticipated trends in our business. For a detailed discussion of these and other risks and uncertainties that could cause actual results and events to differ materially from such forward-looking statements, you should refer to the sections entitled "Risk Factors" in Part 1 Item 1A and "Management's Discussion and Analysis of Financial Condition and Results of Operations," in Part II Item 7 of this Annual Report on Form 10-K as well as our subsequent periodic and current reports filed with the SEC. However, these risks and uncertainties are not exhaustive. Other sections of this report describe additional factors that could adversely impact our business and financial performance.


PART I

ITEM 1. BUSINESS

First Midwest Bancorp, Inc.

First Midwest Bancorp, Inc. ("First Midwest" or the "Company") is a single bank holding company incorporated in Delaware in 1982 for the purpose of becoming a holding company registered under the Bank Holding Company Act of 1956, as amended (the "Act""BHC Act"). The Company is one of Illinois' largest publicly traded banking companies with assets of $8.0 billion as of December 31, 2011 and is headquartered in the Chicago suburb of Itasca, Illinois. The Company's common stock, $0.01 par value per share par value common stock("Common Stock"), is listed on the NasdaqNASDAQ Stock Market and trades under the symbol FMBI ("Common Stock")"FMBI".

History

Our principal subsidiary, First Midwest commenced business in MarchBank (the "Bank"), is an Illinois state-chartered bank and provides a broad range of banking and wealth management services to commercial and industrial, commercial real estate, municipal, and consumer customers primarily throughout the greater Chicago metropolitan area as well as northwest Indiana, central and western Illinois, and eastern Iowa through 109 banking locations. At December 31, 2014, the Company and its subsidiaries employed a total of 1,788 full-time equivalent employees.
History
In 1983, afterthe Company became a multi-institutionbank holding company through the simultaneous acquisition of over 20 affiliated financial institutions. At the time, this transaction was the largest simultaneous acquisition of banks ever approved by the Board of Governors of the Federal Reserve System ("Federal Reserve")The Bank, through its predecessors, has provided banking and involvedtrust services for over 70 years. Since becoming a re-organization of existing ownership interest, as the acquired entities were under some form of common control. Since 1983,bank holding company, the Company has completed approximately 20 acquisitions ofgrown organically and expanded its market footprint by opening new locations, growing existing locations, and acquiring financial institutions, branches, and branches representing over $4 billion in assets, including the following recent Federal Deposit Insurance Corporation ("FDIC')-assisted transactions:

non-banking organizations.
Institution AcquiredDate AcquiredAssets of Former
Institution (1)

First DuPage Bank ("First DuPage")

October 23, 2009$261 million

Peotone Bank and Trust Company ("Peotone")

April 23, 2010$129 million

Palos Bank and Trust Company ("Palos")

August 13, 2010$485 million

For more information regarding the FDIC-assisted transactions, please refer to Note 5 of "Notes to Financial Statements" in Item 8 of this Form 10-K.

In the normal course of business, the Company may, from time to time, exploreexplores potential opportunities for expansion in core market and adjacent areas through organic growth and the acquisition of banking institutions.and non-banking organizations. As a matter of policy, the Company generally does not comment on any dialogue or negotiations with potential targets or possible acquisitions until a definitive acquisition agreement has been signed.

Subsidiaries

is signed and publicly announced. The Company's ability to engage in certain merger or acquisition transactions, whether or not any regulatory approval is required, will depend on the bank regulators' views at the time as to the capital levels, quality of management, and overall condition of the Company, in addition to their assessment of a variety of other factors.

During 2014, the Bank completed the acquisitions of the Chicago area banking operations of Banco Popular North America ("Popular"), doing business as Popular Community Bank, the equipment lessor National Machine Tool Financial Corporation ("National Machine Tool"), now known as First Midwest Equipment Finance Co., and the south suburban Chicago-based Great Lakes Financial Resources, Inc. ("Great Lakes"), the holding company for Great Lakes Bank, National Association. Additional detail regarding these recent acquisitions is contained in Note 3 of "Notes to the Consolidated Financial Statements" in Item 8 of this Form 10-K.
Subsidiaries
The Company is responsible for the overall conduct, direction, and performance of its subsidiaries. TheIn addition, the Company provides various services to its subsidiaries, establishes Company-wide policies and procedures, and provides other resources as needed, including capital. From time to time, the Company or the Bank has acquired or operated


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subsidiaries that only hold other real estate owned ("OREO") until such properties are sold. As of December 31, 2011,2014, the following were the Company's primary subsidiaries of First Midwest:

First Midwest Bank (the "Bank")

The Bank conducts the majority of the Company's operations primarily throughout the greater Chicago metropolitan area, in communities in metropolitan Chicago,addition to northwest Indiana, central and western Illinois, and eastern Iowa. The following table presents key figures for the Bank.

(Dollar amounts in thousands) December 31,
2011
  December 31, 2014

Total assets

 $7,848,012  $9,314,575

Total deposits

 $6,529,235  $7,933,652

Banking offices

 102 

Full-time equivalent employees

 1,768 
Bank branches 103
Bank offices 6


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The Bank operates the following wholly owned subsidiaries:

Calumet Investment Corporation
First Midwest Equipment Finance Co. is an Illinois corporation that provides equipment leasing and commercial financing alternatives to traditional bank financing.
First Midwest Securities Management, LLC is a Delaware agreementlimited liability company that manages investment securities.
LIH Holdings, LLC is an Illinois limited liability company that holds an equity interest in a Section 8 housing venture.
Synergy Property Holdings, LLC is an Illinois limited liability company that manages the majority of the Bank's OREO properties.
First Midwest Holdings, Inc. is a Delaware corporation that manages investment securities, principally municipal obligations, and provides corporate management services to its wholly owned subsidiary, CalumetFMB Investments Ltd., a Bermuda corporation. CalumetFMB Investments Ltd. manages investment securities and is largely inactive.

LIH
Catalyst Asset Holdings, LLC is a limited liability company that holds an equity interest in a Section 8 housing venture.

Synergy Property Holdings, LLC is a limited liability company that manages several of the Bank's OREO properties.
Catalyst Asset Holdings, LLC, an Illinois limited liability company ("Catalyst")

Catalyst operates in the same offices as the Bank and, manages a portion of the Company's non-performing assets. The Company established Catalyst in first quarter 2010. In March of 2010, the Company purchased $168.1 million of non-performing assets from the Bank and transferred them to Catalyst in the form of a capital injection. Catalyst had $6.7 million in non-performing assets totaling $45.2 millionremaining as of December 31, 2011 and $93.1 million as of December 31, 2010. This transaction did not change the presentation of these non-performing assets in the Company's consolidated financial statements and did not impact the Company's consolidated financial position, results of operations, or regulatory capital ratios. However, the transaction improved the Bank's asset quality ratios, capital ratios, and liquidity.

2014.

Catalyst has one wholly owned subsidiary, Restoration Asset Management, LLC ("Restoration"), aan Illinois limited liability company that manages Catalyst's OREO properties. The Bank provides certain administrative and management services to Catalyst and Restoration pursuant to a services agreement. The amounts charged under this services agreement are intended to reflect the actual costs to the Bank for providing such services.

Parasol Investment Management, LLC
Parasol Investment Management, LLC, a Delaware limited liability company ("Parasol")

Parasol, began operations in 2011 and is a registered investment advisor under the Investment Advisors Act of 1940 (the "IAA"), which began operations on July 1, 2011.1940. Parasol conducts its business in one of the Bank's offices and provides wealth management services to the Bank's trustwealth management division and to individual and institutional clients, such as corporate and public retirement plans, foundations and endowments, high net worth individuals, and multi-employer trust funds. A description of the IAA can be found in the section titled "Supervision and Regulation" of this Item 1.

First Midwest Capital Trust I, ("FMCT")

FMCT isGreat Lakes Statutory Trust II, and Great Lakes Statutory Trust III

First Midwest Capital Trust I, a Delaware statutory business trust ("FMCT"), was formed in 20032003. Great Lakes Statutory Trust II ("GLST II") and Great Lakes Statutory Trust III ("GLST III") are Delaware statutory business trusts formed in 2005 and 2007, respectively, and were acquired in the Great Lakes acquisition. These trusts were established for the purpose of issuing trust-preferred securities and lending the proceeds to the Company in return for junior subordinated debentures of the Company. The


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Company guarantees payments of distributions on the trust-preferred securities and payments on redemption of the trust-preferred securities on a limited basis.

FMCT, qualifiesGLST II, and GLST III qualify as a variable interest entityentities for which the Company is not the primary beneficiary. Consequently, itsthe accounts of those entities are not consolidated in the Company's financial statements. However, the currently outstanding $87.4combined $50.7 million in trust-preferred securities issuedheld by FMCT isthe three trusts at December 31, 2014 are included in the Tier 1 capital of the Company for regulatory capital purposes. For a further description of FMCT, refer to Note 11 of "Notes to Consolidated Financial Statements" in Item 8 of this Form 10-K. For a discussion
Segments
The Company has one reportable segment. The Company's chief operating decision maker evaluates the operations of the potential impactCompany using consolidated information for purposes of the provisions of the recently enacted the Dodd-Frank Wall Street Reformallocating resources and Consumer Protection Act (the "Dodd-Frank Act") on the Company's ability to continue to include the trust-preferred securities in its Tier 1 capital, see the heading "Capital Guidelines" appearing later in this section.

assessing performance.

Market Area

The Bank operates in the most active and diverse markets in Illinois, the largest of which is the suburban metropolitan Chicago market, which includes the counties surrounding Cook County,as well as central and western Illinois. This area extends from the cities of Zion and Waukegan, Illinois into northwest Indiana to the cities of Crown Point and St. John, Indiana. The Bank's other service areas are located primarily in western Illinoisnorthwestern Indiana and eastern Iowa (including the cities of Galesburg, Moline, and East Moline, Illinois and Davenport and Bettendorf, Iowa) and central Illinois (including the cities of Champaign and Danville, Illinois).Iowa. These service areas include a mixture of urban, suburban, and rural markets and contain a diversified mix of industry groups, including manufacturing, health care, pharmaceutical, higher education, wholesale and retail trade, service, and agricultural. The Bank's business of attracting deposits and making loans is primarily conducted within its service areas and may be affected by significant changes in their economies.

When comparing large national metropolitan areas (defined as metropolitan areas with populations exceeding one million), the Chicago metropolitan area currently ranks as follows:

Third in the nation with respect to total businesses,
Third in total population,
Twelfth in average household income, and
Eleventh in median income producing assets.

Competition

The banking and financial services industry in the markets in which the Bank operates (and particularly the Chicago metropolitan areaarea) is highly competitive, and the Company expects it to remain so in the future.competitive. Generally, the Bank competes for banking customers and deposits with other local, regional, national, and internet banks and savings and loan associations; personal loan and finance companies andcompanies; credit unions; and mutual fundsfunds; and investment brokers. The Company faces intense competition from local and out of state institutions within its service areas.


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Competition is based ondriven by a number of factors, including interest rates charged on loans and paid on deposits; the ability to attract new deposits; the scope and type of banking and financial services offered; the hours during which business can be conducted; the location of bank branches and automated teller machines ("ATMs"); the availability, ease of use, and range of banking services on the internet; the availability of related services; and a variety of additional services, such as wealth management services.

In providing investment advisory services, the Bank also competes with retail and discount stockbrokers, investment advisors, mutual funds, insurance companies, and other financial institutions for wealth management clients. Competition is generally based on the variety of products and services offered to clients and the performance of funds under management. The Company's main competitors are financial service providers both within and outside of the geographic areas in which the Bank maintains offices.

The Company faces intense competition in attracting and retaining qualified employees. Its ability to continue to compete effectively will depend uponon its ability to attract new employees and retain and motivate existing employees.


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Our Business

The Bank offers a variety of traditional financial products and services that are designed to meet the financial needs of the customers and communities it serves. For over 60 years, theThe Bank has been in the basic business of commercial and communityretail banking for over 70 years, namely attracting deposits and making loans, as well as providing wealth management services. The Company does not engage in any sub-prime lending, nor does it engage in non-commercial banking activities, such as investment banking services.

Deposit and Retail Services

The Bank offers a full range of deposit services that are typically available inat most commercial banks and financial institutions, including checking accounts, NOW accounts, money market accounts, savings accounts, and time deposits of various types ranging from shorter-term to longer-term certificates of deposit. The transaction accounts and time deposits are tailored to our primary service area at competitive rates. The Company also offers certain retirement account services, including individual retirement accounts.

Lending Activities

The Bank originates commercial and industrial, agricultural, commercial real estate, and consumer loans. Substantially all of the Company's borrowers are businesses and residents ofin the Bank's service areas. The Company's largest category of lending is commercial real estate, (including construction loans), followed by commercial and industrial. The mix of properties securing the loans in our commercial real estate portfolio are balanced between owner-occupied and investor categories and are diverse in terms of type and geographic location within the Company's markets. Generally, real estate loans are secured by the land and any improvements to, or developments on, the land. Generally, loan-to-value ratios at time of issuanceorigination are capped at 50% for unimproved land and 65% for developed land. The Company's consumer loans consist primarily of home equity loans and lines of credit and 1-4 family mortgages.

No individual or single group of related accounts is considered material in relation to the assets or deposits of the Bank or in relation to the overall business of the Company. However, 65.7%60% of our loan portfolio at December 31, 2011 consisted of real estate-related loans including residential mortgage loans, and commercial mortgage loans.

at December 31, 2014.

For detailed information regarding the Company's loan portfolio, see the "Loan Portfolio and Credit Quality" section of "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Item 7 of this Form 10-K.

Sources of Funds

The Bank'sCompany's ability to maintain affordable funding sources allows the CompanyBank to meet the credit needs of its customers and the communities it serves. The Bank maintains a relatively stable base of core deposits that are the primary source of the Company's funds for lending and other investment purposes. Deposits funded 81.3%84% of the Company's assets at the end of 20112014 with a net loans-to-deposits ratio of 78.5%85%. Consumer, commercial, and public deposits come from the Company's primary service areas through a broad selection of deposit products. By maintaining core deposits, the Company both controls its funding costs and builds client relationships.


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In addition to deposits the Company obtains, or has the ability to obtain, funds from the amortization, repayment, and prepayment of loans; the sale or maturity of investment securities; certificates of deposits; advances from the Federal Home Loan Bank of Chicago ("FHLB"), brokered repurchase; securities sold under agreements and certificates of deposits, andto repurchase; federal funds purchased; revolving lines of credit from unaffiliated banks; cash flows generated by operations; and proceeds from the issuance of debt and sales of the Company's Common Stock. For detailed information regarding the Company's funding sources, see the "Funding and Liquidity Management" section of "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Item 7 of this Form 10-K.

Investment Activities

The Bank maintains a sizeable securities portfolio in order to provide the Company with financial stability, asset diversification, income, and collateral for borrowing. The Company administers thisits securities portfolio in accordance with an investment policy that has beenwas approved and adopted by the Board of Directors of the Bank.


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The Company'sBank's Asset Liability Committee implements the investment policy based on the established guidelines within the written policy.

The basic objectives of the Bank's investment activities are to enhance the profitability of the Company by keeping its investablefully investing available funds, fully employed, provide adequate regulatory and operational liquidity, minimize and/or adjust the interest rate risk position of the Company, minimizediversify and mitigate the Company's exposure to credit risk, and provide collateral for pledging requirements. For detailed information regarding the Company's securities portfolio, see the "Investment Portfolio Management" section of "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Item 7 of this Form 10-K.

Intellectual Property
Intellectual property is important to the success of our business. We own a variety of trademarks, service marks, trade names, and logos and spend time and resources maintaining our intellectual property portfolio. We control access to our intellectual property through license agreements, confidentiality procedures, non-disclosure agreements with third parties, employment agreements, and other contractual rights to protect our intellectual property.
Supervision and Regulation

The Bank is an Illinois state-chartered bank and a member of the Federal Reserve whichSystem, and the Board of Governors of the Federal Reserve System (the "Federal Reserve") has the primary federal authority to examine and supervise the Bank in coordination with the Illinois Department of Financial and Professional Regulation (the "IDFPR"). The Company is a single bank holding company and is also subject to the primary federal bank regulatory authority of the Federal Reserve. The Company and its subsidiaries are also subject to extensive secondary regulation and supervision by various state and federal governmental regulatory authorities, including the FDIC,Federal Deposit Insurance Corporation ("FDIC"), which oversees insured deposits and assets covered by Purchase and Assumption Agreements and Loss Share Agreementsloss share agreements with the FDIC (the "FDIC("the FDIC Agreements"), and the U.S. Department of the Treasury ("Treasury"(the "Treasury"), which enforces money laundering and currency transaction regulations. In addition to banking regulations, asAs a public company, the Company is underalso subject to the jurisdictionregulatory authority of the SECU.S. Securities and Exchange Commission (the "SEC") and the disclosure and regulatory requirements of the Securities Act of 1933, as amended (the "Securities Act"), and the Securities Exchange Act of 1934.

1934, as amended (the "Exchange Act").

Federal and state laws and regulations generally applicable to financial institutions includingregulate the CompanyCompany's and its subsidiaries, regulate the subsidiaries' scope of business, investments, reserves against deposits, capital levels, the nature and amount of collateral for loans, the establishment of branches, mergers, consolidations,acquisitions, dividends, and other things.matters. This supervision and regulation is intended primarily for the protection of the FDIC's deposit insurance fund ("DIF"), a bank's depositors, and the depositors,stability of the U.S financial system, rather than the stockholders of a financial institution.

The following sections describe the significant elements of the material statutes and regulations affecting the Company and its subsidiaries, many of which are the subject of ongoing revision and legislative rulemaking as a result of the federal government's long-term regulatory reform of the financial markets and the implementation of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act"), which is discussed in more detail later in this report.Form 10-K. In some cases, the new proposalsrevisions and rulemaking may include a radicalsignificant overhaul of the regulation of financial institutions or limitations on the products they may offer.

The final regulations, or regulatory policies, that areand regulatory and supervisory guidance applicable to the Company and its subsidiaries, and eventually adopted by the U.S. government may be disruptive tomanner in which market practices and structures develop around the Company's business andregulations, could have a material adverse effect on itsour business, financial condition, and results of operations. The Company cannot accurately predict the nature or the extent of the effects that any such changes woulddevelopments will have on its business and earnings. The following discussionsThese and other risks are summariesdiscussed in more detail in Item 1A, "Risk Factors" of the material statutes and regulations currently affecting the Company and its subsidiaries and are qualified in their entirety by reference to such statutes and regulations.

The Federal Reserve System serves as the nation's central bank and is responsible for monetary policy. It consists of a seven member Board of Governors in Washington, D.C. and twelve reserve banks located in major cities throughout the U.S. Through the Federal Reserve Act and the this Form 10-K.


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Bank Holding Company Act of 1956 as amended (described below),
Generally, the Federal Reserve has regulatory and supervisory responsibilities over its member banks, bank holding companies, and Edge Act and agreement corporations. The Federal Reserve also sets margin requirements, which limit the use of credit for purchasing or carrying securities, and develops and administers regulations that implement major federal laws governing consumer credit such as the Truth in Lending Act, the Equal Credit Opportunity Act, the Home Mortgage Disclosure Act, and the Truth in Savings Act.

Generally, theBHC Act governs the acquisition and control of banks and non-banking companies by bank holding companies and requires bank holding companies to register with the Federal Reserve. The BHC Act requires a bank


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holding company to file an annual report of its operations and such additional information as the Federal Reserve may require. A bank holding company and its subsidiaries are subject to examination by the Federal Reserve.

The Act's principal areasBHC Act, the Bank Merger Act, and other federal and state statutes regulate acquisitions of concern include:

commercial banks. The Federal Reserve's jurisdiction to regulate the terms of certain debt issues of bank holding companies, including the authority to impose reserve requirements.
The acquisition of 5% or more of the voting shares of any bank or bank holding company, which generallyBHC Act requires the prior approval of the Federal Reserve for the direct or indirect acquisition by a bank holding company of more than 5.0% of the voting shares of a commercial bank or its parent holding company. Under the Bank Merger Act, the prior approval of the Federal Reserve or other appropriate bank regulatory authority is required for a member bank to merge with another bank or purchase the assets or assume the deposits of another bank. In reviewing applications seeking approval of merger and is subjectacquisition transactions, the bank regulatory authorities will consider, among other things, the competitive effect and public benefits of the transactions, the capital position of the combined organization, the risks to applicable federalthe stability of the U.S. banking or financial system, the applicant's managerial and state law, includingfinancial resources, the Riegle-Neal Interstate Bankingapplicant's performance record under the Community Reinvestment Act and Branching Efficiencyfair housing laws, and the effectiveness of the banks in combating money laundering activities.
In addition, the BHC Act of 1994 ("Riegle-Neal") for interstate transactions.
Prohibitingprohibits (with certain exceptions) a bank holding company from acquiring direct or indirect control or ownership, or control of more than 5%5.0% of the voting shares of any "non-banking" company unless the non-banking activities are found by the Federal Reserve to be "so closely related to banking as to be a proper incident thereto." Under current regulations of the Federal Reserve, a bank holding company and its non-bank subsidiaries are permitted to engage in such banking-related business ventures as consumer finance, equipment leasing, data processing, mortgage banking, financial and investment advice, securities brokerage services, and other activities.
Acquisition of "control" (10% of the outstanding shares of any class of voting stock) of a bank or bank holding company without prior notice to certain federal bank regulators.

Transactions with Affiliates
Any transactions between the Bank and the Company and their respective subsidiaries are regulated by the Federal Reserve Act, including Sections 23AReserve. The Federal Reserve's regulations limit the types and 23B. These regulations place restrictionsamounts of covered transactions engaged in by the Bank and generally require those transactions to be on loansterms at least as favorable to the Bank as if the transaction were conducted with an unaffiliated third party. Covered transactions are defined by statute to include:
A loan or extension of credit, as well as a bank topurchase of securities issued by an affiliate, asset purchases by a bankaffiliate.
The purchase of assets from an affiliate, and otherunless otherwise exempted by the Federal Reserve.
Certain derivative transactions betweenthat create a bank and its affiliates. Thesecredit exposure to an affiliate.
The acceptance of securities issued by an affiliate as collateral for a loan.
The issuance of a guarantee, acceptance, or letter of credit on behalf of an affiliate.
In general, these regulations limit credit transactions between a bank and its affiliates, prescribe terms and conditions for bank affiliate transactions deemed to be consistent with safe and sound banking practices, require arms-length transactions between affiliates, and restrict the types of collateral security permitted in connection with a bank'sthat any extension of credit by the Bank (or its subsidiaries) with an affiliate must be secured by designated amounts of specified collateral and must be limited to affiliates. Section 22(h) of the Federal Reserve Act limitscertain thresholds on an individual and aggregate basis.
The Bank is also limited as to how much and on what terms a bankit may lend to its insiders and the insiders of its affiliates, including executive officers and directors.

Bank

Source of Strength
Federal Reserve policy and federal law require bank holding companies to act as a source of financial and managerial strength to their subsidiary banks. Under this policy, therequirement, a holding company is expected to commit resources to support its bank subsidiary even at times when the holding company may not be in a financial position to provide it.such resources. Any capital loans by a bank holding company to its subsidiary bank are subordinate in right of payment to deposits and to certain other indebtedness of such subsidiary bank. In the event of a bank holding company's bankruptcy, the Act provides that any commitment by the bank holding company to a federal bank regulatory agency to maintain the capital of a bank subsidiary will be assumed by the bankruptcy trustee and entitled to priority of payment.

Community Reinvestment Act of 1977
The Community Reinvestment Act of 1977, as amended (the "CRA")

The CRA, requires depository institutions to assist in meeting the credit needs of their market areas consistent with safe and sound banking practices. Under the CRA, each depository institution is required to help meet the credit needs of its market areas by, among other things, providing credit to low-income and moderate-income individuals and communities. The applicable federalFederal regulators regularly conduct CRA examinations on a regular basis to assess the performance of financial institutions and assign one of four ratings to the institution's record of meeting the credit needs of its community. Banking regulators take into account CRA ratings when considering approval of a proposed transaction. During its last examination in August of 2012, the Bank received a rating of "outstanding," the highest rating available.


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Gramm-Leach-Bliley Act of 1999
The Gramm-Leach-Bliley Act of 1999, as amended (the "GLB""GLB Act")

The GLB, allows for banks and certain otherbank holding companies to elect to be treated as a financial institutions to enter into combinationsholding company (an "FHC") that permit a single financial services organization tomay offer customers a more comprehensive array of financial products and services. Such products and services may include insurance and securities underwriting and agency activities, merchant banking, and insurance company portfolio investment activities. Activities that are "complementary" to financial activities are also authorized. Under the GLB Act, the Federal Reserve may not permit a company to form a financial holdingregister or maintain status as an FHC if the company ifor any of its insured depository institution subsidiaries (i) are not well-capitalized and well managedmanaged. The Federal Reserve may prohibit an FHC from engaging in otherwise permissible activities at its supervisory discretion. In addition, for an FHC to commence any new activity permitted by the BHC Act or (ii) did not receiveto acquire a company engaged in any new activity permitted by the BHC Act, each insured depository institution subsidiary of the FHC must have received a rating of at least a satisfactory rating"satisfactory" in theirits most recent CRA exam.


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Alsoexamination under the GLB,CRA.

In addition, a financial institution may not disclose non-public personal information about a consumer to unaffiliated third parties unless the institution satisfies various disclosure requirements and the consumer has not elected to opt out of the information sharing. Under the GLB Act, a financial institution must provide its customers with a notice of its privacy policies and practices. The Federal Reserve, the FDIC, and other financial regulatory agencies have issued regulations implementing notice requirements and restrictions on a financial institution's ability to disclose non-public personal information about consumers to unaffiliated third parties.

Bank Secrecy Act and USA PATRIOT Act

The Bank Secrecy and USA PatriotPATRIOT Acts require financial institutions to develop programs to prevent them from being used for money laundering, terrorist, and terroristother illegal activities. If such activities are detected or suspected, financial institutions are obligated to file suspicious activity reports with the Treasury's Office of Financial Crimes Enforcement Network ("FinCEN").Network. These rules require financial institutions to establish procedures for identifying and verifying the identity of customers seeking to open new accounts. Failure to comply with these regulationssanctions could result in sanctionshave serious legal and possible fines.

Office of Foreign Assets Control Regulation ("OFAC")

The Treasury established the OFAC to imposeUnited States imposes economic sanctions that affect transactions with designated foreign countries, nationals, and others. These sanctions are administered by the Treasury's Office of Foreign Assets Control ("OFAC"). These sanctions include: (i) restrictions on trade with or investment in a sanctioned country, including prohibitions against direct or indirect imports from and exports to a sanctioned country and prohibitions on "U.S. persons" engaging in financial transactions relating to making investments in, or providing investment-related advice or assistance to, a sanctioned country; and (ii) a blocking of assets in which the government or specially designated nationals of the sanctioned country have an interest by prohibiting transfers of property subject to U.S. jurisdiction (including property in the possession or control of U.S. persons). Blocked assets (e.g., property and bank deposits) cannot be paid out, withdrawn, set off, or transferred in any manner without a license from OFAC. Failure to comply with these sanctions could have serious legal and reputational consequences.

Dodd-Frank Wall Street Reform and Consumer Protection Act

On July 21, 2010, President Obama signed the Dodd-Frank Act into law.

The Dodd-Frank Act has resulted in and will likely result in sweeping changessignificantly restructured the financial regulatory regime in the regulation of financial institutions aimed at strengtheningUnited States. Although the operation of the financial services sector. The Dodd-Frank Act's provisions that have received the most public attention generally have been those applying to or more likely to affect larger institutions. However,institutions, such as bank holding companies and banks with total consolidated assets of $10 billion or more, it contains numerous other provisions that will affect all banks and bank holding companies that will fundamentally change the system of bank oversight. The Dodd-Frank Act includes provisions that:

Change the assessment base for federal deposit insurance from the amount of insured deposits to consolidated assets less tangible capital, eliminate the ceiling on the size of the DIF, and increase the floor on the size of the DIF. This change generally requires an increase in the level of assessments for financial institutions with assets in excess of $10 billion effective April 1, 2011.
Make permanent the $250,000 limit for federal deposit insurance and provide unlimited federal deposit insurance until January 1, 2013 for non-interest bearing demand transaction accounts at all insured depository institutions.
Repeal the federal prohibitions on the ability of financial institutions to pay interest on business demand deposit accounts, thereby permitting depository institutions to pay interest on business transactional and other accounts effective July 21, 2011. As a result,banks, including the Company beganand the Bank, some of which are described in more detail below. We are monitoring developments with respect to pay interest on a limited number of business checking accounts in December 2011.
Centralize responsibility for consumer financial protection (discussed below) by creating a new agency within the Federal Reserve.
Apply the same leverage and risk-based capital requirements that applyprovisions applicable to insured depository institutions to most bank holding companies. One of these requirements will preclude financial institutions from including in Tier 1 capital any trust-preferred securities or cumulative preferred stock, issued on or after May 19, 2010. The Company's currently outstanding trust-preferred securities were grandfatheredcompanies and continue to qualify as Tier 1 capital. Therefore, this portion of the Dodd-Frank Act is not applicable to the Company as of December 31, 2011.

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Amend the Electronic Fund Transfer Act to give the Federal Reserve the authority to establish rules regarding interchange fees charged for electronic debit transactions by payment card issuers having assets over $10 billion (discussed below).
Establish enhanced prudential standards for risk-based capital, leverage limits, stress testing, liquidity, risk management, and concentration/credit exposure limits for institutionsbanks with total consolidated assets of $50$10 billion or more.
In February 2012, regulatory agencies issued proposed rules to implement requirements undermore in the Dodd-Frank Actevent that will require banks with assets over $10 billion to conduct annual stress tests under regulations prescribed by the FDIC. The stress tests will be used to assess the potential impact of economic and financial conditions on the earnings, losses, and capital of a bank over a nine-quarter planning horizon, taking into account the current condition of the bank and its risks, exposures, strategies, and activities.

Company or Bank reaches that size.

Some of these provisions may have the consequence of increasing the Company's expenses, decreasing the Company's revenues, and changing the activities in which itthe Company chooses to engage. Many aspects of the Dodd-Frank Act are still subject to future rulemaking, implementation, and guidance that will take effectoccur over several years, making it difficult to anticipate the overall financial impact on the Company, its customers, or the financial industry in general.


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Consumer Financial Protection

The Dodd-Frank Act created the Consumer Financial Protection Bureau ("CFPB") as a new and independent unit within the Federal Reserve System. With certain exceptions, the CFPB has authority to regulate any person or entity that engages in offering or providing a "consumer financial product or service" and has rulemaking, examination, and enforcement powers over financial institutions. With respect toFor primary examination and enforcement authority of financial entities, however, the CFPB's authority is limited to institutions with assets of $10 billion or more. Existing regulators retain this authority over institutions with assets of $10 billion or less, such as First Midwest.

the Company.

The powers of the CFPB currently include:

The ability to prescribe consumer financial laws and rules that regulate all institutions that engage in offering or providing a consumer financial product or service.
Primary enforcement and exclusive supervision authority with respect tofor federal consumer financial laws over "very large" insured institutions with assets of $10 billion or more. This includes the right to obtain information about an institution's activities and compliance systems and procedures and to detect and assess risks to consumers and markets.
The ability to require reports from institutions with assets under $10 billion, such as First Midwest,the Bank, to support the CFPB in implementing federal consumer financial laws, supporting examination activities, and assessing and detecting risks to consumers and financial markets.
Examination authority (limited to assessing compliance with federal consumer financial law) with respect tolaws) over institutions with assets under $10 billion, such as First Midwest.the Bank. Specifically, a CFPB examiner may be included on a sampling basis in the examinations performed by the institution's primary regulator.

The CFPB officially commenced operations on July 21, 2011 and engagedengages in several activities throughout the remainder of the year including (i) investigating consumer complaints about credit cards and mortgages, (ii) launching a supervision program,supervisory programs, (iii) conducting research for and developing mandatory financial product disclosures, and (iv) engaging in consumer financial protection rulemaking.

Some uncertainty has arisen related to confidential treatment and privilege and the CFPB's ability to require reports from financial institutions. Banks currently have express legal protection that gives them the confidence and legal certainty to provide confidential "privileged" documents at the request of the federal banking agencies, and the current law provides that a bank does not "waive" confidentiality and risk disclosure of the information to an outside party, potentially involved in litigation with the bank, by providing the information to its regulator. The CFPB does not have the same express statutory protections relating to privilege that the other banking agencies are given.

The full extent of the CFPB's authority and potential impact on the Company is unclear at this time, but the Company continues to monitor the CFPB's activities on an ongoing basis.


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The Bank is alreadyalso subject to a number of regulations intended to protect consumers in various areas, such as equal credit opportunity, fair lending, customer privacy, identity theft, and fair credit reporting. For example, deposit activities arethe Bank is subject to such acts as the Federal Truth in Savings Act, the Home Mortgage Disclosure Act, and the Real Estate Settlement Procedures Act, and the Illinois Consumer Deposit Account Act. Electronic banking activities are subject to federal law, including the Electronic Funds Transfer Act, and state laws.Act. Wealth management activities of the Bank are subject to the Illinois Corporate Fiduciaries Act. Loans made by the Bank are subject to applicable provisions of the Illinois Interest Act, the Federal Truth in Lending Act, and the Illinois Financial Services Development Act. Other consumer financial regulationslaws include the Equal Credit Opportunity Act, Fair Credit Reporting Act, and Fair Debt Collection Practices Act.

Act, and applicable state laws.

The Federal Reserve is responsiblehas primary responsibility for examination and enforcement of federal consumer financial laws with respect to the Company, and state authorities are responsible for monitoring the Company's compliance with all state consumer lawslaws. Failure to comply with respectthese requirements could have serious legal and reputational consequences for the institution, including causing applicable bank regulatory authorities not to the Company.

The SAFE Act requires the registration of residential mortgage loan originators employed by banks, savings associations, credit unions, Farm Credit System institutions, and certain subsidiaries of these financial institutionsapprove merger or acquisition transactions when regulatory approval is required or to register with the Nationwide Mortgage Licensing System and Registry, obtain a unique identifier from the registry, and maintain this registration.

Interchange Fees

On June 29, 2011, the Federal Reserve adopted a final rule with respect to

Under the Durbin Amendment of the Dodd-Frank Act, effective on October 1, 2011, which establishesthe Federal Reserve established a maximum permissible interchange fee for many types of debit interchange transactionsequal to equal no more than 21 cents plus five basis points of the transaction value. Furthermore, thevalue for many types of debit interchange transactions. The Federal Reserve also adopted a rule to allow a debit card issuer to recover one cent per transaction for fraud prevention purposes if the issuer complies with certain fraud-related requirements promulgatedrequired by the Federal Reserve. The Company intends to complyis in compliance with these fraud-related requirements. The Federal Reserve also approvedhas rules governing routing and exclusivity that require issuers to offer two unaffiliated networks for routing transactions on each debit or prepaid product, which will be effective April 1, 2012.

product.

Currently, the Company is exempt from the interchange fee cap under the "small issuer" exemption, which applies to any debit card issuer with total worldwide assets of less than $10 billion as of the end of the previous calendar year. In the event the Company's assets reach $10 billion or more, it will become subject to the interchange fee limitations beginning July 1 of the following year, and the fees the Company may receive for an electronic debit transaction will be capped at the statutory limit.


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Capital Guidelines

Requirements

The Federal Reserve and other federal bank regulators have established risk-based capital guidelines to provide a framework for assessing the adequacy of the capital of national and state banks, thrifts, and their holding companies (collectively, "banking institutions"). These guidelines apply to all banking institutions, regardless of size, and are used in the examination and supervisory process and in the analysis of applications to be acted upon by the regulatory authorities. These guidelines require banking institutions to maintain capital based uponon the 1988 capital accord ("Basel I") of the Basel Committee on Banking Supervision (the "Basel Committee"). The name comes from Basel, Switzerland, the city in which the main international organization, The Bank for International Settlements, is located.

The Basel Committee is a committee of central banks and bank supervisors/regulators from the major industrialized countries that develops broad policy guidelines for use by each country's supervisors in determining the supervisory policies they apply. The requirements are intended to ensure that banking organizations have adequate capital given the risk levels of assets and off-balance sheet financial instruments ("risk-weighted assets").


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Capital is classified in one of the following three tiers:

Core Capital (Tier 1).  Tier 1 capital includes common equity, retained earnings, qualifying non-cumulative perpetual preferred stock, a limited amount of qualifying cumulative perpetual stock at the holding company level, minority interests in equity accounts of consolidated subsidiaries, and qualifying trust-preferred securities, less goodwill, most intangible assets, and certain other assets.
Supplementary Capital (Tier 2).  Tier 2 capital includes perpetual preferred stock and trust-preferred securities not meeting the Tier 1 definition, qualifying mandatory convertible debt securities, qualifying subordinated debt, and the allowance for credit losses, subject to limitations.
Market Risk Capital (Tier 3).  Tier 3 capital includes qualifying unsecured subordinated debt.

Regulatory requirements also establish quantitative measures to ensure capital adequacy for banking institutions as follows:


 Adequately
Capitalized
Requirement
 "Well-Capitalized"
Requirement
 
Adequately
 Capitalized
 Requirement
 Well-Capitalized Requirement

Tier 1 capital to risk-weighted assets

 4.00% 6.00% 4.00% 6.00%

Total capital to risk-weighted assets

 8.00% 10.00% 8.00% 10.00%
Tier 1 capital to average assets 4.00% 5.00%

Bank holding companies and banks subject to


Basel III Capital Rules

In July 2013, the market riskFederal Reserve published final rules (the "Basel III Capital Rules") establishing a new comprehensive capital guidelines are required to incorporate market and interest rate risk components into their risk-based capital standards.

Inframework for U.S. banking organizations. The rules implement the Basel Committee’s December 2010 the Basel Committee released its final framework commonly known as "Basel III" for strengthening international capital and liquidity regulation, now officially identified bystandards as well as certain provisions of the Basel Committee as "Basel III".Dodd-Frank Act. The Basel III replaces Basel II, which was introduced byCapital Rules substantially revise the Basel Committee in 2004 and did not impact the Company. Basel III, when implemented by the U.S. banking agencies and fully phased-in, will requirerisk-based capital requirements applicable to bank holding companies and their bank subsidiariesdepository institutions, including the Company and the Bank, compared to maintain substantially morethe current U.S. risk-based capital with a greater emphasis on common equity.rules. The Basel III finalCapital Rules define the components of capital framework, amongand address other things:

Introducesissues impacting the numerator in banks’ regulatory capital ratios. The Basel III Capital Rules also address risk weights and other issues impacting the denominator in regulatory capital ratios and replace the existing risk-weighting approach with a more risk-sensitive approach. In addition, the Basel III Capital Rules implement the requirements of Section 939A of the Dodd-Frank Act to remove references to credit ratings from the federal banking agencies’ rules. The Basel III Capital Rules became effective for the Company and the Bank on January 1, 2015 (subject to a phase-in period).

The Basel III Capital Rules (i) introduce a new capital measure called "Common Equity Tier 1" ("CET1") as a new capital measure,
Specifies, (ii) specify that Tier 1 capital consistsconsist of CET1 and "Additional Tier 1 capital"Capital" instruments meeting specified requirements,
Defines (iii) narrowly define CET1 narrowly by requiring that most deductions/adjustments to regulatory capital measures be made to CET1 and not to the other components of capital,
Expands and (iv) expand the scope of the deductions/adjustments compared to existing regulations,regulations. Bank holding companies with less than $15 billion in consolidated assets as of December 31, 2009, such as the Company, are permitted to include trust-preferred securities in Additional Tier 1 Capital on a permanent basis and
Adopts an international standard for a leverage ratio calculated as without any phase-out. As of December 31, 2014, the Company had $50.7 million of trust-preferred securities included in Tier I capital to adjusted average assets plus certain off-balance sheet exposures.

The implementation of1 capital.


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When fully phased in on January 1, 2019, the Basel III final frameworkCapital Rules will commence on Januaryrequire the Company and the Bank to maintain the following:
A minimum ratio of CET1 to risk-weighted assets of at least 4.5%, plus a 2.5% "capital conservation buffer" (resulting in a minimum ratio of CET1 to risk-weighted assets of at least 7% upon full implementation).
A minimum ratio of Tier 1 2013. On that date, banking institutions will be requiredcapital to meetrisk-weighted assets of at least 6.0%, plus the capital conservation buffer (resulting in a minimum Tier 1 capital ratios. ratio of 8.5% upon full implementation).
A 2.5%minimum ratio of total capital conversion(Tier 1 capital plus Tier 2 capital) to risk-weighted assets of at least 8.0%, plus the capital conservation buffer will be added(resulting in a minimum total capital ratio of 10.5% upon full implementation).
A minimum leverage ratio of 4%, calculated as the ratio of Tier 1 capital to each ratio as it is phased in beginning January 1, 2016 until full implementation on January 1, 2019. A number of new deductions from and additions to CET1 will be phased in over a five-year period. The minimum capital ratios are as follows:

average assets.
 
 Minimum Required
on January 1, 2013
 Capital Conversion
Buffer
 Minimum Required
on January 1, 2019

CET1 to risk-weighted assets

 4.5% 2.5% 7.0%

Tier 1 capital to risk-weighted assets

 6.0% 2.5% 8.5%

Total capital to risk-weighted assets

 8.0% 2.5% 10.5%

Leverage ratio

 N/A N/A 3.0%

Basel III also provides for a "countercyclical capital buffer" generally to be imposed when national regulators determine that excess aggregate credit growth becomes associated with a buildup of systemic risk.

The capital conservation buffer is designed to absorb losses during periods of economic stress. Banking institutions with a ratio of CET1 to risk-weighted assets above the minimum, but below the conservation buffer, (or below the combined


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capital conservation buffer and countercyclical capital buffer, when the latter is applied) will face constraints on dividends, equity repurchases, and compensation based on the amount of the shortfall.

Effective July 28, 2011, federal banking regulatory agencies adopted The implementation of the capital conservation buffer will begin on January 1, 2016 at the 0.625% level and be phased in over a final rulefour-year period (increasing by that establishesamount on each subsequent January 1 until it reaches 2.5% on January 1, 2019).


The Basel III Capital Rules also provide for a floornumber of deductions from and adjustments to CET1 to be phased-in over a four-year period through January 1, 2019 (beginning at 40% on January 1, 2015 and an additional 20% per year thereafter). Examples of these include the requirement that mortgage servicing rights, deferred tax assets depending on future taxable income, and significant investments in non-consolidated financial entities be deducted from CET1 to the extent that any one such category exceeds 10% of CET1 or all such categories in the aggregate exceed 15% of CET1. Under current capital standards, the effects of accumulated other comprehensive income items included in capital are excluded for the risk-basedpurposes of determining regulatory capital requirements applicable to the largest, internationally active banking organizations. Thus, each organization implementing Basel III will continue to calculate its risk-based capital requirements under general risk-based capital rules, and the capital requirement it computes under those rules will serve as a floor for its risk-based requirement computed under Basel III. In practice, the rule will not have an immediate effect on banking organizations' capital requirements because all organizations subject to Basel III are currently computing their capital requirements under the general risk-based capital rules. This rule does not currently impact the Company, nor is it expected to impact the Company in the near future.

The U.S. banking agencies have indicated informally that they expect to implement regulations in mid-2012. Notwithstanding its release ofratios. Under the Basel III framework as a final framework,Capital Rules, the Basel Committee is considering further amendments to Basel III.

Given the many ongoing regulatory initiatives related to capital requirements, the regulations ultimately applicable toeffects of certain accumulated other comprehensive items are not excluded; however, the Company and the Bank, may be substantially differentmake a one-time permanent election to continue to exclude these items, and the Company and the Bank expect to make such an election.


Finally, the Basel III Capital Rules prescribe a standardized approach for risk weightings that expand the risk-weighting categories from the current four Basel I-derived categories (0%, 20%, 50%, and 100%) to a much larger and more risk-sensitive number of categories depending on the nature of the assets, generally ranging from 0% for U.S. government and agency securities to 600% for certain equity exposures, resulting in higher risk weights for a variety of asset categories.

Management believes that as of December 31, 2014, the Company and the Bank would meet all capital adequacy requirements discussed above. Requirements to maintain higher levels of capital or liquid assets could adversely impactunder the Company's net income and return on equity.

The proposed Basel III Capital Rules on a fully phased-in basis as if such requirements were currently in effect.

Liquidity Requirements
Historically, the regulation and monitoring of bank and bank holding company liquidity was addressed as a supervisory matter, without required formulaic measures. Liquidity risk management has become increasingly important since the financial crisis. The Basel III liquidity framework also will requireputs forth regulatory requirements that banks and bank holding companies to measure their liquidity against specific tests, specifically:

Liquidity Coverage Ratio Testliquidity tests. One test, referred to as the liquidity coverage ratio ("LCR"): The LCR, is designed to ensure that the banking entity maintains an adequate level of unencumbered high-quality liquid assets equal to the greater of (i) the entity's expected net cash outflow for a 30-day time horizon or (ii)(or, if greater, 25% of its expected total cash outflowoutflow) under an acute liquidity stress scenario.
Net Stable Funding Ratio Test The other test, referred to as the net stable funding ratio ("NSFR"): The NSFR, is designed to promote more medium- and long-term funding of the assets and activities of banking entities over a one-year time horizon.

If adopted in their current form, these These requirements would incentwill provide an incentive for banking entities to dramatically increase their holdings of U.S. Treasury securities and other sovereign debt as a component of assets and increase the use of long-term debt as a funding source.

In September of 2014, the federal banking agencies approved final rules implementing the LCR for advanced approaches banking organizations (which includes banking organizations with $250 billion or more in total consolidated assets or $10 billion or more in total on-balance sheet foreign exposure) and a modified version of the LCR for bank holding companies with at least $50 billion in total consolidated assets that are not advanced approach banking organizations, neither of which would apply to the Company or the Bank. The federal banking agencies have not yet proposed rules to implement the NSFR or addressed the scope of bank organizations to which it will apply.

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Prompt Corrective Action
The Federal Deposit Insurance Act, as amended ("FDIA"), requires the federal banking agencies to take "prompt corrective action" for depository institutions that do not meet the minimum capital requirements. The FDIA includes the following five capital tiers: "well capitalized," "adequately capitalized," "undercapitalized," "significantly undercapitalized" and "critically undercapitalized." A depository institution's capital tier will depend on how its capital levels compare with various relevant capital measures and certain other factors, as established by regulation. The relevant capital measures are the total capital ratio, the Tier 1 capital ratio, and the leverage ratio.
A bank will be:
"Well capitalized" if the institution has a total risk-based capital ratio of 10.0% or greater, a Tier 1 risk-based capital ratio of 6.0% or greater, and a leverage ratio of 5.0% or greater, and is not subject to any order or written directive by any such regulatory authority to meet and maintain a specific capital level for any capital measure.
"Adequately capitalized" if the institution has a total risk-based capital ratio of 8.0% or greater, a Tier 1 risk-based capital ratio of 4.0% or greater, and a leverage ratio of 4.0% or greater and is not "well capitalized."
"Undercapitalized" if the institution has a total risk-based capital ratio that is less than 8.0%, a Tier 1 risk-based capital ratio of less than 4.0% or a leverage ratio of less than 4.0%.
"Significantly undercapitalized" if the institution has a total risk-based capital ratio of less than 6.0%, a Tier 1 risk-based capital ratio of less than 3.0% or a leverage ratio of less than 3.0%.
"Critically undercapitalized" if the institution's tangible equity is equal to or less than 2.0% of average quarterly tangible assets.
An institution may be downgraded to, or deemed to be in, a capital category that is lower than indicated by its capital ratios if it is determined to be in an unsafe or unsound condition or if it receives an unsatisfactory examination rating for certain matters. A bank's capital category is determined solely for the purpose of applying prompt corrective action regulations, and the capital category may not constitute an accurate representation of the bank's overall financial condition or prospects for other purposes. As of December 31, 2014, the Company believes the Bank was "well capitalized" based on its ratios as defined above.
The FDIA generally prohibits a depository institution from making any capital distributions (including payment of a dividend) or paying any management fee to its parent holding company if the depository institution would thereafter be "undercapitalized." "Undercapitalized" institutions are subject to growth limitations and are required to submit a capital restoration plan. The agencies may not accept such a plan without determining that the plan is based on realistic assumptions and is likely to succeed in restoring the depository institution's capital. In addition, the depository institution's parent holding company must guarantee that the institution will comply with the capital restoration plan and must also provide appropriate assurances of performance for a plan to be acceptable. The aggregate liability of the parent holding company is limited to the lesser of an amount equal to 5.0% of the depository institution's total assets at the time it became undercapitalized and the amount which is necessary (or would have been necessary) to bring the institution into compliance with all capital standards applicable to the institution as of the time it fails to comply with the plan. If a depository institution fails to submit an acceptable plan, it is treated as if it is "significantly undercapitalized."
"Significantly undercapitalized" depository institutions may be subject to a number of requirements and restrictions, including orders to sell sufficient voting stock to become "adequately capitalized," requirements to reduce total assets, and cessation of receipt of deposits from correspondent banks. "Critically undercapitalized" institutions are subject to the appointment of a receiver or conservator.
The Basel III liquidity framework currently contemplates thatCapital Rules revised the LCR will be subject to an observation period continuing through mid-2013 and implemented as a minimum standard onformer prompt corrective action requirements effective January 1, 2015 subjectby (i) introducing a CET1 ratio requirement at each level (other than critically undercapitalized), with the required CET1 ratio being 6.5% for well-capitalized status; (ii) increasing the minimum Tier 1 capital ratio requirement for each category (other than critically undercapitalized), with the minimum Tier 1 capital ratio for well-capitalized status being 8% (as compared to any revisions resulting from the analyses conductedcurrent 6%); and data collected during(iii) eliminating the observation period. Similarly, the NSFR willcurrent provision that provides that a bank with a composite supervisory rating of 1 may have a 3% leverage ratio and still be subject to an observation period through mid-2016 and implemented as a minimum standard by January 1, 2018 subject to any revisions resulting from the analyses conducted and data collected during the observation period.

adequately capitalized. The Basel III liquidity standards are subjectCapital Rules do not change the total risk-based capital requirement for any prompt corrective action category.


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Volcker Rule
The so-called "Volcker Rule" issued under the Dodd-Frank Act restricts the ability of the Company and its subsidiaries, including the Bank, to sponsor or invest in private funds or to engage in certain types of proprietary trading. The Federal Reserve adopted final rules implementing the Volcker Rule on December 10, 2013. Although the Volcker Rule became effective on July 21, 2012 and the final rules became effective April 1, 2014, the Federal Reserve issued an order extending the transition period to July 21, 2015. In December 2014, the Federal Reserve further rulemaking,extended the transition period as to the restrictions on sponsoring or investing in private funds to 2017. Banks, such as the Bank, with less than $10 billion in total consolidated assets that do not engage in any covered activities other than trading in certain government, agency, state or municipal obligations, do not have any significant compliance obligations under the final rules. Although the Company is continuing to evaluate the impact of the Volcker Rule, it generally does not engage in the businesses prohibited by the Volcker Rule; therefore, management does not currently anticipate that the Volcker Rule will have a material effect on the operations of the Company and their terms may change before implementation.

Illinois Banking Law

The Illinois Banking Act ("IBA") governs the activities of the Bank as an Illinois banking corporation. Thestate-chartered bank. Among other things, the IBA (i) defines the powers and permissible activities of an Illinois state-chartered bank, (ii) prescribes corporate governance standards, (iii) imposes approval requirements on mergersmerger and acquisition activity of Illinois state banks, (iv) prescribes lending limits, and (v) provides for the examination of state banks by the IDFPR. The Banking on Illinois Act ("BIA") became effective in mid-1999 and amended the IBA to provide a wide range of new activities allowed for Illinois state-chartered banks, including the Bank. The provisions of the BIA are to be construed liberally in order to create a favorable business climate for banks in Illinois. The main features of the BIA are to expand bank powers through a "wild card" provision that authorizes Illinois state-chartered banks to offer virtually any product or service that any bank or thrift may offer


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anywhere in the country, subject to restrictions imposed on those other banks and thrifts, certain safety and soundness considerations, and prior notification to the IDFPR and the FDIC.

Dividends

The Company's primary source of liquidity is dividend payments from the Bank. In addition to requirements to maintain adequate capital guidelines,above regulatory minimums, the Bank is limited in the amount of dividends it can pay to the Company under the IBA. Under this law, the Bank is permitted to declare and pay dividends in amounts up to the amount of its accumulated net profits, provided that it retains in its surplus at least one-tenth of its net profits since the date of the declaration of its most recent dividend until those additions to surplus, in the aggregate, equal the paid-in capital of the Bank. While it continues its banking business, the Bank may not pay dividends in excess of its net profits then on hand (after deductions for losses and bad debts). In addition, the Bank is limited in the amount of dividends it can pay under the Federal Reserve Act and Regulation H. For example, dividends cannot be paid that would constitute a withdrawal of capital; dividends cannot be declared or paid if they exceed a bank's undivided profits; and a bank may not declare or pay a dividend if all dividends declared during the calendar year are greater than current year net income plus retained net income of the prior two years without Federal Reserve approval.

Since the Company is a legal entity, separate and distinct from the Bank, its dividends to stockholders are not subject to the bank dividend guidelines discussed above. However, the Company is subject to other regulatory policies and requirements related to the payment of dividends, including requirements to maintain adequate capital above regulatory minimums. The Federal Reserve and the IDFPR isare authorized to determine under certain circumstances relating to the financial condition of a bank or bank holding company, that the payment of dividends by the Company would be an unsafe or unsound practice and to prohibit payment thereof.under certain circumstances related to the financial condition of a bank or bank holding company. The Federal Reserve has taken the position that dividends that would create pressure or undermine the safety and soundness of a subsidiary bank are inappropriate.

Bank holding companies and banks with average total consolidated assets greater than $10 billion must conduct an annual stress test of capital and consolidated earnings and losses under one base, both of which are provided by the federal banking agencies. Capital ratios reflected in required stress test calculations will most likely be an important factor considered by the federal banking agencies in evaluating whether proposed payments of dividends or stock repurchases may be an unsafe or unsound practice. In the event that the Company or the Bank grows to assets of $10 billion or more, the Company will be subject to these stress test requirements.

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FDIC Insurance Premiums

The Bank's deposits are insured through the DIF, which is administered by the FDIC. As insurer, the FDIC imposes deposit insurance premiums and is authorized to conduct examinations of, and to require reporting by, FDIC-insured institutions. It may also prohibit any FDIC-insured institution from engaging in any activity the FDIC determines by regulation or order to pose a serious risk to the DIF. Insurance of deposits may be terminated by the FDIC upon a finding that the institution has engaged or is engaging in unsafe and unsound practices; is in an unsafe or unsound condition to continue operations; or has violated any applicable law, regulation, rule, order, or condition imposed by the FDIC or written agreement entered into with the FDIC. The Company is not aware of any practice, condition, or violation that might lead to termination of FDIC deposit insurance.

The FDIC utilizes a risk-based assessment system that imposes insurance premiums based uponon a risk matrix that takes into account a bank's capital level and supervisory rating ("CAMELS rating").rating. The risk matrix utilizes four risk categories, which are distinguished by capital levels and supervisory ratings. For deposit insurance assessment purposes, an insured depository institution is placed into one of the four risk categories each quarter. An institution's assessment is determined by multiplying its assessment rate by its assessment base.

In past years and in early 2011, the

The total base assessment rates that could be levied on banks ranged from 7 basis points for Risk Category I institutions to 77.5 basis points for Risk Category IV institutions. The assessment base was historically domestic deposits with some adjustments.

Under a new rule mandated by the Dodd-Frank Act, the total base assessment rates now range from 2.5 basis points to 45 basis points. The assessment base is now based oncalculated using average consolidated total assets minus average tangible equity rather than domestic deposits. In addition,equity. At least semi-annually, the rule adopts a "scorecard" assessment schemeFDIC will update its loss and income projections for larger banks and suspends dividend payments if the DIF reserve ratio exceeds 1.5 percent but provides for decreasingand, if needed, will increase or decrease assessment rates, when the DIF reserve ratio reaches certain thresholds. The rule took effect during the quarter beginning April 1, 2011 and was first reflected in the invoices for assessments due September 30, 2011. following notice-and-comment rulemaking, if required.

In addition, institutions with deposits insured by the FDIC are required to pay assessments to fund interest payments on bonds issued by the Financing Corporation, a U.S. Government-Sponsored Enterprisegovernment-sponsored enterprise established in 1987 to serve as a financing vehicle for the failed Federal Savings and Loan Association, ("Financing Corporation").Association. These assessments will continue until the Financing Corporation bonds mature in 2019.


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The SEC regulates investment advisers through the IAA. With certain exceptions, the IAA requires entities that are compensated for advising others about securities investments to register with the SEC and conform to regulations designed to protect investors. Generally, only advisers who have at least $100 million of assets under management or advise a registered investment company must register with the SEC. Although the Bank is exempt from registration as a financial institution, Parasol is subject to the IAA because it has over $100 million of assets under management and provides advice to investment company clients.

The IAA is a "principles-based" regulatory scheme that requires advisors to adhere to strict disclosure requirements and certain recordkeeping standards and gives the SEC the authority at any time to inspect those books and records. Investment advisors are subject to a substantial number of standards of conduct under the IAA including a prohibition from: (i) employing any device, scheme, or artifice to defraud any client and (ii) engaging in any transaction, practice, or course of business that operates as a fraud upon any client. In enforcing these rules, the SEC does not need to prove that an investment adviser intended to commit fraud against its client. It is sufficient that the advisor acted recklessly or negligently, and the conduct operated as a fraud. The IAA also prohibits any investment adviser from making a false or misleading statement to prospective or existing investors in a pooled investment vehicle managed by the adviser or otherwise defrauding an investor.

The Sarbanes-Oxley Act of 2002 ("Sarbanes-Oxley") implemented a broad range of corporate governance and accounting measures to increase corporate responsibility, provide for enhanced penalties for accounting and auditing improprieties at publicly traded companies, and protect investors by improving the accuracy and reliability of disclosures under federal securities laws. The Company is subject to Sarbanes-Oxley because it is required to file periodic reports with the SEC under the Securities and Exchange Act of 1934. Sarbanes-Oxley has established new membership requirements and additional responsibilities for the Company's audit committee, imposed restrictions on the relationship between the Company and its outside auditors (including restrictions on the types of non-audit services its auditors may provide to the Company), imposed additional responsibilities for external financial statements on the Company's chief executive officer and chief financial officer, expanded the disclosure requirements for corporate insiders, required management to evaluate the Company's disclosure controls and procedures and its internal control over financial reporting, and required auditors to issue a report on the Company's internal control over financial reporting.

For most of 2011, the Company was subject to regulation relating to economic recovery programs. In response to the financial market crisis and continuing economic uncertainty, the U.S. government took a variety of extraordinary measures designed to restore confidence in the financial markets and to strengthen financial institutions, including measures available under the Emergency Economic Stabilization Act of 2008 ("EESA"), as amended by the American Recovery and Reinvestment Act of 2009 ("ARRA"), which included the Troubled Asset Relief Program ("TARP"). Under the EESA, the Treasury may take a range of actions to provide liquidity to the U.S. financial markets, including the direct purchase of equity of financial institutions through the Treasury's Capital Purchase Program ("CPP").

The Company elected to participate in the CPP, and on December 5, 2008, First Midwest issued to the Treasury, in exchange for aggregate consideration of $193.0 million, (i) 193,000 shares of the Company's Fixed Rate Cumulative Perpetual Preferred Stock, Series B ("Preferred Shares") and (ii) a ten-year warrant ("Warrant") to purchase up to 1,305,230 shares of the Company's Common Stock at an exercise price of $22.18 per share subject to anti-dilution adjustments. In November 2011, the Company redeemed the Preferred Shares, and in December 2011, the Company redeemed the Warrant, which concluded the Company's participation in the CPP. No Preferred Shares or Warrant were outstanding as of December 31, 2011.

In 2010, the Federal Reserve, along with the other federal banking agencies, issued guidance applying to all banking organizations that requires that their incentive compensation policies be consistent with safety and


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soundness principles. Under these rules, financial organizations must review their compensation programs to insureensure that they: (i) provide employees with incentives that appropriately balance risk and reward and that do not encourage imprudent risk; (ii) are compatible with effective controls and risk management; and (iii) are supported by strong corporate governance including active and effective oversight by the banking organization's board of directors. Monitoring methods and processes used by a banking organization should be commensurate with the size and complexity of the organization and its use of incentive compensation.

In addition, the Dodd-Frank Act requires that the federal bank regulatory agencies and the SEC establish joint regulations or guidelines prohibiting incentive-based payment arrangements at specified regulated entities, such as the Company and the Bank, having at least $1 billion in total assets that encourage inappropriate risks by providing an executive officer, employee, director, or principal shareholder with excessive compensation, fees, or benefits or that could lead to material financial loss to the entity. In addition, these regulators must establish regulations or guidelines requiring enhanced disclosure to regulators of incentive-based compensation arrangements. In 2011, the Federal Reserve, along with other federal banking agencies, the National Credit Union Administration, the SEC, and the Federal Housing Finance Agency, established a rule that regulates incentive-based compensation for entities deemed to be a "covered financial institution",proposed such rules, which includes both the Company and the Bank.have not yet been finalized. These proposed rules incorporate many of the executive compensation principles described above, including a prohibition on compensation practices that encourage covered persons to take inappropriate risks by providing such person with excessive compensation.

Future Legislation

and Regulation

In addition to the specific legislation described above, various legislation is currentlylaws and regulations are being considered by Congress. This legislationCongress and regulatory agencies that may change banking statutes and the Company's operating environment in substantial and unpredictable ways and may increase reporting requirements and governance. If enacted, such legislationcompliance costs. These changes could increase or decrease the cost of doing business, limit or expand permissible activities, or affect the competitive balance among banks, savings associations, credit unions, and other financial institutions.

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AVAILABLE INFORMATION
We file annual, quarterly, and current reports; proxy statements; and other information with the SEC, and we make this information available free of charge on the investor relations section of our website at www.firstmidwest.com/investorrelations. You may read and copy materials we file with the SEC from its Public Reference Room at 100 F. Street, NE, Washington, DC 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains an internet site at http://www.sec.gov that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. The Company cannot predict whetherfollowing documents are also posted on our website or are available in print upon the request of any potential legislationstockholder to our Corporate Secretary:
Certificate of Incorporation.
By-Laws.
Charters for our Audit, Compensation, and Nominating and Corporate Governance Committees.
Related Person Transaction Policies and Procedures.
Corporate Governance Guidelines.
Code of Ethics and Standards of Conduct (the "Code"), which governs our directors, officers, and employees.
Code of Ethics for Senior Financial Officers.
Within the time period required by the SEC and the NASDAQ Stock Market, we will post on our website any amendment to the Code and any waiver applicable to any executive officer, director, or senior financial officer (as defined in the Code). In addition, our website includes information concerning purchases and sales of our securities by our executive officers and directors. The Company's accounting and reporting policies conform to U.S. generally accepted accounting principles ("GAAP") and general practice within the banking industry. We post on our website any disclosure relating to certain non-GAAP financial measures (as defined in the SEC's Regulation G) that we may make public orally, telephonically, by webcast, by broadcast, or by similar means from time to time.
Our Corporate Secretary can be enacted and, if enacted, the effect that it,contacted by writing to First Midwest Bancorp, Inc., One Pierce Place, Itasca, Illinois 60143, attention: Corporate Secretary. The Company's Investor Relations Department can be contacted by telephone at (630) 875-7533 or any implementing regulations, would have on its business, financial condition, results of operations, or liquidity.

by e-mail at investor.relations@firstmidwest.com.


ITEM 1A. RISK FACTORS

An investment in First Midwestour Common Stock is subject to risks inherent in the Company's business. The material risks and uncertainties that management believes affect the Company are described below. Before making an investment decision with respect to any of the Company's securities, you should carefully consider the risks and uncertainties as described below, together with all of the information included herein. The risks and uncertainties described below are not the only risks and uncertainties the Company faces. Additional risks and uncertainties not presently known or currently deemed immaterial also may have a material adverse effect on the Company's results of operations and financial condition. If any of the following risks actually occur, the Company's business, financial condition, and results of operations and financial condition could suffer,be adversely affected, possibly materially. In that event, the trading price of the Company's Common Stock or other securities could decline. The risks discussed below also include forward-looking statements, and actual results may differ substantially from those discussed or implied in these forward-looking statements.

Risks Related to the Company's Business

Interest Rate and Credit Risks

The Company is subject to interest rate risk.

The Company's earnings and cash flows are largely dependent upondepend on its net interest income. Net interest income equals the difference between interest income and fees earned on interest-earning assets (such as loans and securities) and interest expense incurred on interest-bearing liabilities (such as deposits and borrowed funds). Interest rates are highly sensitive to many factors that are beyond the Company's control, including general economic conditions and policies of various governmental and regulatory agencies, particularly the Federal Reserve. Changes in monetary policy, including changes in interest rates, could influence the amount of interest the Company earns on loans and securities and the amount of interest it incurspays on deposits and borrowings. SuchThese changes could also affect (i) the Company's ability to originate loans and obtain deposits, (ii) the fair value of the Company's financial assets and liabilities, and (iii) the average duration of the Company's securities portfolio. If the interest rates paid on deposits and other borrowings increase at a faster rate than the interest rates received on loans and other investments, the Company's net interest income, and therefore earnings, could be adversely affected. Earnings could also be adversely affected if the interest rates received on loans and other investments fall more quickly than the interest rates paid on deposits and other borrowings.


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Although management believes it has implementedimplements effective asset and liability management strategies to reduce the potential effects of changes in interest rates on the Company's results of operations, any substantial, unexpected, or prolonged change in market interest rates could have a material adverse effect on the Company's business, financial condition, and results of operations. See the section captioned "Net Interest Income" in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," located elsewhere in this reportForm 10-K for further discussion related to the Company's management of interest rate risk.

The Company is subject to lending risk.

There are inherent risks associated with the Company's lending activities. Underwriting and documentation controls cannot mitigate all credit risk,risks, especially those outside the Company's control. These risks include the impact of changes in interest rates, and changes in the economic conditions in the markets in which the Company operates as well as thoseand across the U.S., and the ability of borrowers to repay loans based on their respective circumstances. Increases in interest rates and/or continuing weakening economic conditions could adversely impact the ability of borrowers to repay outstanding loans or the value of the collateral securing those loans.

In particular, continuing economic weakness in real estate and related markets could further increase the Company's lending risk as it relates to its commercial real estate loan portfolio and the value of the underlying collateral. The Company is also subject to various laws and regulations that affect its lending activities. Failure to comply with applicable laws and regulations could subject the Company to regulatory enforcement action that could result in the assessment of significant civil monetary penalties against the Company.

Company and other actions.

As of December 31, 2011, 82.2% of2014, the Company's loan portfolio consisted of commercial and industrial and86.3% of corporate loans, the majority of which were secured by commercial real estate, and 13.7% of consumer loans. The deterioration of one or a few of these loans could cause a significant increase in non-performing loans. An increase in non-performing loans could result in a net loss of earnings from these loans, an increase in the provision for loan and covered loan losses, and an increase in loan charge-offs, all of which could have a material adverse effect on the Company's business, financial condition, and results of operations. See the section captioned "Loan Portfolio and Credit Quality" in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," located elsewhere in this reportForm 10-K for further discussion related to commercialcorporate and industrial and commercial real estateconsumer loans.

Real estate market volatility and future changes in disposition strategies could result in net proceeds that differ significantly from fair value appraisals of loan collateral and OREO and could negatively impact the Company's operating performance.

business, financial condition, and results of operations.

Many of the Company's non-performing real estate loans are collateral-dependent, meaningand the repayment of the loan is largely dependent upondepends on the value of the collateral securing the loan and the successful operation of the property securing the loan.property. For collateral-dependent loans, the Company estimates the value of the loan based on the appraised value of the underlying collateral less costs to sell. The Company's OREO portfolio consists of properties acquired through foreclosure in partial or total satisfaction of certain loans as a result of borrower defaults. OREO is recorded at the lower of the recorded investment in the loans for which the property served as collateral or estimated fair value, less estimated selling costs.

In determining the value of OREO properties and other loan collateral, an orderly disposition of the property is generally assumed, except where a different disposition strategy is expected. The disposition strategy the Company has in place for a non-performing loan will determine the appraised value it uses (e.g., "as-is", "orderly liquidation", or "forced liquidation"). Significant judgment is required in estimating the fair value of property, and the period of time within which such estimates can be considered current is significantly shortened during periods of market volatility.

In response to market conditions and other economic factors, the Company may utilize alternative sale strategies other than orderly dispositions as part of its disposition strategy, such as immediate liquidation sales. In this event, the net proceeds realized could differ significantly from estimates used to determine the fair value of the properties as a result of the significant judgments required in estimating fair value and the variables involved in different methods of disposition, the net proceeds realized from such sales transactions could differ significantly from estimates used to determine the fair value of the properties.disposition. This could have a material adverse effect on the Company's business, financial condition, and results of operations.


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The Company's lending activities are subject to strict regulations.

The Company is subject to various laws and regulations that affect its lending activities. Failure to comply with applicable laws and regulations could subject the Company to regulatory enforcement action that could result in the assessment of significant civil monetary penalties against the Company and other actions, and could have a material adverse effect on the Company's business, financial condition, and results of operations.

The Company's allowance for credit losses may be insufficient.

The Company maintains an allowance for credit losses ("allowance") at a level believed adequate to absorb estimated losses inherent in theits existing loan portfolio. The level of the allowance for credit losses reflects management's continuing evaluation of industry concentrations; specific credit risks; credit loss experience; current loan portfolio quality; present economic political,and business conditions; changes in competitive, legal, and regulatory conditions; and unidentified losses inherent in the current loan portfolio. Determination

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of the allowance for credit losses is inherently subjective since it requires significant estimates and management judgment of credit risks and future trends, all of which may undergoare subject to material changes. Continuing deteriorationDeterioration in economic conditions affecting borrowers, new information regarding existing loans, identification of additional problem loans, changes in accounting principles, and other factors, both within and outside of the Company's control, may require an increase in the allowance for credit losses. In addition, bank regulatory agencies periodically review the Company's allowance for credit losses and may require an increase in the provision for loan and covered loan losses or the recognition of additional loan charge-offs based on judgments different from those of management. In addition,Furthermore, if charge-offs in future periods exceed the allowance for credit losses, the Company will need additional provisions to increase the allowance. Any increases in the allowance for credit losses will result in a decrease in net income and capital and may have a material adverse effect on the Company's financial condition and results of operations. See Note 1 of "Notes to the section captioned "Allowance for Credit Losses"Consolidated Financial Statements" in Item 7, "Management's Discussion and Analysis8 of Financial Condition and Results of Operations," located elsewhere in this reportForm 10-K for further discussion related to the Company's process for determining the appropriate level of the allowance for credit losses.

Financial services companies depend on the accuracy and completeness of information about customers and counterparties.

The Company may rely on information furnished by or on behalf of customers and counterparties in deciding whether to extend credit or enter into other transactions. This information could include financial statements, credit reports, business plans, and other financial information. The Company may also rely on representations of those customers, counterparties, or other third parties, such as independent auditors, as to the accuracy and completeness of that information. Reliance on inaccurate or misleading financial statements, credit reports, or other financial information could have a material adverse impact on the Company's business, financial condition, and results of operations.

Funding Risks

The Company is a bank holding company and its sources of funds are limited.

The Company is a bank holding company, and its operations are primarily conducted by the Bank, which is subject to significant federal and state regulation. Cash available to pay dividends to stockholders of the Company is derived primarily from dividends received from the Bank. The Company's ability to receive dividends or loans from its subsidiaries is restricted.restricted by law. Dividend payments by the Bank to the Company in the future will require generation of future earnings by the Bank and could require regulatory approval if the proposed dividend is in excess of prescribed guidelines. Further, the Company's right to participate in the assets of the Bank upon its liquidation, reorganization, or otherwise will be subject to the claims of the Bank's creditors, including depositors, which will take priority except to the extent the Company may be a creditor with a recognized claim. As of December 31, 2011,2014, the Company's subsidiaries had deposits and other liabilities of $6.8$8.1 billion.

The Company could experience an unexpected inability to obtain needed liquidity.

Liquidity measures the ability to meet current and future cash flow needs as they become due. The liquidity of a financial institution reflects its ability to meet loan requests, to accommodate possible outflows in deposits, and to take advantage of interest rate market opportunities. The ability of a financial institution to meet its current


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financial obligations is a function of its balance sheet structure, its ability to liquidate assets, and its access to alternative sources of funds. The Company seeks to ensure its funding needs are met by maintaining aan adequate level of liquidity through asset and liability management. If the Company becomes unable to obtain funds when needed, it could have a material adverse effect on the Company's business, financial condition, and results of operations.

Loss of customer deposits could increase the Company's funding costs.

The Company relies on bank deposits to be a low cost and stable source of funding. The Company competes with banks and other financial services companies for deposits. If the Company's competitors raise the rates they pay on deposits, the Company's funding costs may increase, either because the Company raises its rates to avoid losing deposits or because the Company loses deposits and must rely on more expensive sources of funding. Higher funding costs could reduce the Company's net interest margin and net interest income and could have a material adverse effect on the Company's business, financial condition, and results of operations.

Any reduction in the Company's credit ratings could increase its financing costs.

Various rating agencies publish credit ratings for the Company's debt obligations, based on their evaluations of a number of factors, some of which relate to Company performance and some of which relate to general industry conditions. Management routinely communicates with each rating agency and anticipates the rating agencies will closely monitor the Company's performance and update their ratings from time to time during the year.


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The Company cannot give any assurance that its current credit ratings will remain in effect for any given period of time or that a rating will not be lowered or withdrawn entirely by a rating agency if, in its judgment, circumstances in the future so warrant. Downgrades in the Company's credit ratings may adversely affect its borrowing costs and its ability to borrow or raise capital, and may adversely affect the Company's reputation.

If the Company's debt ratings are downgraded below investment grade, the interest rate applicable to the Company's senior notes will be increased ratably depending upon each agency's rating, however, the aggregate amount of any increase shall not exceed 2.00 percentage points.

The Company's current credit ratings are as follows:

Rating AgencyRating

Standard & Poor's Rating Group, a division of the McGraw-Hill Companies, Inc. 

 BBB-

Moody's Investor Services, Inc. 

 Baa1 Baa2

Fitch, Inc. 

 BBB-

Regulatory requirements, future growth, or operating results may require the Company to raise additional capital, but that capital may not be available or be available on favorable terms, or it may be dilutive.

The Company is required by federal and state regulatory authorities to maintain adequate levels of capital to support its operations. The Company may be required to raise capital if regulatory requirements change, the Company's future operating results erode capital, or the Company elects to expand through loan growth or acquisition.

The Company's ability to raise capital will depend uponon conditions in the capital markets, which are outside of its control, and on the Company's financial performance. Accordingly, the Company cannot be assured of its ability to raise capital when needed or on favorable terms. If the Company cannot raise additional capital when needed, it will be subject to increased regulatory supervision and the imposition of restrictions on its growth and business. These could negatively impact the Company's ability to operate or further expand its operations through acquisitions or the establishment of additional branches and may result in increases in operating expenses and reductions in revenues that could have a material adverse effect on its business, financial condition, and results of operations.


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The Company and its subsidiaries are subject to changes in accounting principles, policies, or guidelines.

The Company's financial performance is impacted by accounting principles, policies, and guidelines. Some of these policies require the use of estimates and assumptions that may affect the value of the Company's assets or liabilities and financial results. Some of the Company's accounting policies are critical because they require management to make difficult, subjective and complex judgments about matters that are inherently uncertain and because it is likely that materially different amounts would be reported under different conditions or using different assumptions. If such estimates or assumptions underlying the Company's financial statements are incorrect, itthe Company may experience material losses. See the section captioned "Critical Accounting Policies"Estimates" in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," located elsewhere inof this reportForm 10-K for further discussion related to the Company's critical accounting policies.

discussion.

From time to time, the Financial Accounting Standards Board ("FASB") and the SEC change the financial accounting and reporting standards, or the interpretation of those standards, that govern the preparation of the Company's external financial statements. These changes are beyond the Company's control, can be difficult to predict, and could materially impact how the Company reports its results of operations and financial condition.

Changes in these

These standards are continuously occurring,updated and given the current economic environment, more drasticrefined and new standards are developed resulting in changes may occur. The implementation of such changesthat could have a material adverse effect on the Company's business, financial condition, and results of operations.

The Company's controls and procedures may fail or be circumvented.

Management regularly reviews and updates the Company's loan underwriting and monitoring process, internal controls, disclosure controls and procedures, compliance controls and procedures, and corporate governance policies and procedures. Any system of controls, however well designed and operated, is based in part on certain assumptions and can provide only reasonable, not absolute, assurances that the objectives of the system are met. Any failure or circumvention of the Company's controls and procedures or failure to comply with regulations related to controls and procedures could have a material adverse effect on the Company's business, financial condition, and results of operations.

The Company's accounting estimates and risk management processes rely on analytical and forecasting models.
The processes the Company uses to estimate its loan losses and to measure the fair value of financial instruments, as well as the processes used to estimate the effects of changing interest rates and other market measures on the Company's financial condition and results of operations, depend on the use of analytical and forecasting models. These models reflect assumptions that may not be accurate, particularly in times of market stress or other unforeseen circumstances. Even if these assumptions are adequate, the

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models may prove to be inadequate or inaccurate because of other flaws in their design or their implementation. If the models the Company uses for interest rate risk and asset-liability management are inadequate, the Company may incur increased or unexpected losses resulting from changes in market interest rates or other market measures. If the models the Company uses for estimating its loan losses are inadequate, the allowance for credit losses may not be sufficient to support future charge-offs. If the models the Company uses to measure the fair value of financial instruments are inadequate, the fair value of these financial instruments may fluctuate unexpectedly or may not accurately reflect what the Company could realize on the sale or settlement. Any failure in the Company's analytical or forecasting models could have a material adverse effect on the Corporation's business, financial condition, and results of operations.
The Company may not be able to attract and retain skilled people.

The Company's success depends in large part, on its ability to attract and retain skilled people. Competition for the best people in most activities in which the Company engages can be intense, and the Company may not be able to hire people or retain them.

The unexpected loss of services of certain of the Company's skilled personnel could have a material adverse impact on the Company's business because of their skills, knowledge of the Company's market, years of industry experience, customer relationships, and the difficulty of promptly finding qualified replacement personnel.

Loss of key employees may disrupt relationships with certain customers.

The Company's business is primarily relationship-driven in that manycustomer relationships are critical to the success of its key employees have extensive customer relationships. Lossbusiness, and loss of key employees with suchsignificant customer relationships may lead to the loss of business if the customers were to follow that employee to a competitor. While the Company believes its relationships with its key personnel are strong, it cannot guarantee that all of its key personnel will remain with the organization. Loss of such key personnel, should they enter into an employment relationship with one of the Company's competitors,organization, which could result in the loss of some of its customers whichand could have a negativean adverse impact on the company'sCompany's business, financial condition, and results of operations.

The Company's information systems may experience an interruption or breach in security.

The Company relies heavily on internal and outsourced digital technologies, communications, and information systems to conduct its business. As the Company's reliance on technology systems has increased, so haveincreases, the potential risks of a technology-related operation interruption (such as disruptionsinterruptions in the Company's customer


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relationship management, general ledger, deposit, loan, or other systems)systems or the occurrence of a cyber incident (such as unauthorized access to the Company's systems).incidents also increases. Cyber incidents can result from deliberate attacks or unintentional events including, among other things, (i) gaining unauthorized access to digital systems for purposes of misappropriating assets or sensitive information, corrupting data, or causing potentially debilitating operational disruptions; (ii) causing denial-of-service attacks on websites; or (iii) intelligence gathering and social engineering aimed at obtaining information. The occurrence of operational interruption, cyber incident, or a deficiency in the cyber security of the Company's technology systems (internal or outsourced) could negatively impact the Company's financial condition or results of operations.

The Company has policies and procedures expressly designed to prevent or limit the effect of a failure, interruption, or security breach of its systems and maintains cyber security insurance. Significant interruptions to the Company's business from technology issues could result in expensive remediation efforts and distraction of management. TheDuring the year, the Company has experienced certain immaterial cyber attackscyber-attacks or breaches (such as phishing and ATM skimming) and continues to invest in security and controls to prevent and mitigate furtherfuture incidents. Although the Company has not experienced any material losses relatingrelated to a technology-related operational interruption or cyber attack,cyber-attack, there can be no assurance that such failures, interruptions, or security breaches will not occur in the future or, if they do occur, that the impact will not be substantial.

The occurrence of any failures, interruptions, or security breaches of the Company's technology systems (internal or outsourced) could damage the Company's reputation, result in a loss of customer business, result in the unauthorized release, gathering, monitoring, misuse, loss, or destruction of proprietary information, subject the Company to additional regulatory scrutiny, or expose the Company to civil litigation and possible financial liability, any of which could have a material adverse effect on the Company's business, financial condition, and results of operations, as well as its reputation or stock price. As cyber threats continue to evolve, the Company may alsoexpects it will be required to spend significant additional resources on an ongoing basis to continue to modify orand enhance its protective measures orand to investigate and remediate any information security vulnerabilities.

The Company is dependent upondepends on outside third parties for processing and handling of Company records and data.

The Company relies on software developed by third party vendors to process various Company transactions. In some cases, the Company has contracted with third parties to run itstheir proprietary software on behalf of the Company.its behalf. These systems include, but are not limited to, general ledger, payroll, employee benefits, wealth management record keeping, loan and deposit processing, merchant processing, and securities portfolio management. While the Company performs a review of controls instituted by the vendorvendors over these programs in accordance with industry standards and performs its own testing of user controls, the Company must rely on the continued maintenance of these controls by the outside party, including safeguards over the security of customer data. In

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addition, the Company maintains backups of key processing output daily in the event of a failure on the part of any of these systems. Nonetheless, the Company may incur a temporary disruption in its ability to conduct its business or process its transactions or incur damage to its reputation if the third party vendor fails to adequately maintain internal controls or institute necessary changes to systems. Such disruption or breach of security may have a material adverse effect on the Company's financial condition and results of operations.

Improper and fraudulent mortgage servicing and foreclosure documentation could result in liability for losses.

The financial industry has identified circumstances of improper and fraudulent mortgage servicing and foreclosure practices and documentation, such as "robo signing," among some of the nation's largest lenders. This has resulted in lengthy legal investigations and lawsuits brought by the various state attorneys general relating to the foreclosure practices of several financial institutions and their service providers and the suspension of foreclosures of single-family homes nationwide, including the Bank's service areas. Federal National Mortgage Association ("Fannie Mae") and Federal Home Loan Mortgage Corporation ("Freddie Mac") also have stated that their mortgage servicers will be held liable for losses incurred by the government-sponsored enterprises as a result of flawed foreclosure processes. Further, the SEC has issued a request for information about accounting and disclosure issues related to potential risks and costs associated with mortgage and foreclosure related activities.

In February 2012, these lenders entered into a $25 billion joint state-federal agreement under which the lenders promise to send direct payments to people who were victims of foreclosure servicing abuse and adhere to certain servicing processes and procedures going forward. Homeowners that borrowed through Fannie Mae and Freddie


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Mac, however, are not covered under the settlement. The Company was not a party to this litigation and is not a party to the joint settlement agreement.

The Company has a centralized foreclosure process within a single department of the Bank, including foreclosures relating to all residential, home equity, commercial, and serviced loans. As of December 31, 2011, the Bank serviced $78.5 million in loans guaranteed by Fannie Mae or Freddie Mac as part of various securitization transactions. In addition, the Company engages a loan servicer to support the administration and the resolution of certain covered assets, including single-family covered assets acquired by the Bank in FDIC-assisted transactions. Failure to comply with the applicable mortgage servicing and foreclosure requirements could have an adverse impact on the Company's reputation and results of operations.

New lines of business or new products and services may subject the Company to additional risks.

From time to time, the Company may implement new lines of business or offer new products or services within existing lines of business. There can be substantial risks and uncertainties associated with these efforts, particularly in instances where the markets are not fully developed. In developing and marketing new lines of business and/or new products or services, the Company may invest significant time and resources. Initial timetables for the introduction and development of new lines of business and/or new products or services may not be achieved, and price and profitability targets may not prove feasible. External factors, such as compliance with regulations, competitive alternatives, and shifting market preferences, may also impact the successful implementation of a new line of business or a new product or service. Furthermore, any new line of business and/or new product or service could have a significant impact on the effectiveness of the Company's system of internal controls. Failure to successfully manage these risks in the development and implementation of new lines of business or new products or services could have a material adverse effect on the Company's business, financial condition, and results of operations.

The Company continually encounters technological change.

The banking and financial services industry continually undergoes technological changes, with frequent introductions of new technology-driven products and services. In addition to better meeting customer needs, the effective use of technology increases efficiency and enables financial institutions to reduce costs. The Company's future success will depend, in part, on its ability to address the needs of its customers by using technology to provide products and services that enhance customer convenience and that create additional efficiencies in the Company's operations. Many of the Company's competitors have greater resources to invest in technological improvements, and the Company may not effectively implement new technology-driven products and services or do so as quickly as its competitors, which could reduce its ability to effectively compete. Failure to successfully keep pace with technological change affecting the financial services industry could have a material adverse effect on the Company's business, financial condition, and results of operations.

New lines of business or new products and services may subject the Company to additional risks.
From time to time, the Company may implement new lines of business or offer new products or services within existing lines of business. There can be substantial risks and uncertainties associated with these efforts, particularly in instances where the markets are not fully developed. In developing and marketing new lines of business and/or new products or services, the Company may invest significant time and resources. Initial timetables for the introduction and development of new lines of business and new products or services may not be achieved, and price and profitability targets may not prove feasible. External factors, such as compliance with regulations, competitive alternatives, and shifting market preferences, may also impact the successful implementation of a new line of business or a new product or service. Furthermore, any new line of business and new product or service could have a significant impact on the effectiveness of the Company's system of internal controls. Failure to successfully manage these risks in the development and implementation of new lines of business or new products or services could have a material adverse effect on the Company's business, financial condition, and results of operations.
The Company's estimate of fair values for its investments may not be realizable if it were to sell these securities today.

The Company's available-for-sale securities are carried at fair value. Accounting standards require the Company to categorizedisclose these securities according to a fair value hierarchy. Less than one percent of the Company's available-for-sale securities were categorized in level 1 of the fair value hierarchy (meaning that the fair values were based on quoted market prices).hierarchy. Over 98%97% of the Company's available-for-sale securities were categorized in level 2 of the fair value hierarchy (meaning that their fair values were determined by quoted prices for similar instruments or other observable inputs). Theand the remaining securities were categorized as level 3 (meaning that their3. See Note 22 of "Notes to the Consolidated Financial Statements" in Item 8 of this Form 10-K for a detailed description of the fair values were determined by inputs that are unobservable in the market and therefore require a greater degree of management judgment).

value hierarchies.

The determination of fair value for securities categorized in level 3 involves significant judgment due to the complexity of factors contributing to the valuation, many of which are not readily observable in the market. The market disruptions in recent years made the valuation process even more difficult and subjective.

Due to the illiquidity in the secondary market for the Company's level 3 securities, the Company estimates the value of these securities using discounted cash flow analyses with the assistance of a structured credit valuation firm.


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Third-party sources also use assumptions, judgments, and estimates in determining securities values, and different third parties use different methodologies or provide different prices for similar securities. In addition, the nature of the business of the third party source that is valuing the securities at any given time could impact the valuation of the securities.

Consequently, the ultimate sales price for any of these securities could vary significantly from the recorded fair value at December 31, 2011,2014, especially if the security is sold during a period of illiquidity or market disruption or as part of a large block of securities under a forced transaction. Any resulting write-downs of the fair value of the Company's available-for-sale securities would reduce earnings in the period in which it is recorded and could have a material adverse effect on the Company's business, financial condition, and results of operations.

The Company's investment in bank-owned life insurance ("BOLI") may decline in value.

The Company has bank-owned life insurance contracts with a cash surrender value ("CSV") of $206.2 million as of December 31, 2011. A majority of these contracts are separate account contracts. These contracts are supported by underlying investments whose fair values are subject to volatility in the market. The Company has limited its risk of loss in value of the securities through the use of stable value contracts that provide protection from a decline in fair value down to 80% of the CSV of the insurance policies. To the extent fair values on individual contracts fall below 80% of book value, the CSV of specific contracts may be reduced or the underlying assets transferred to short-duration investments, resulting in lower earnings. As of December 31, 2011, the fair value for all contracts exceeded 80% of book value, but turmoil in the market could result in declines that could have a material adverse effect on the Company's financial condition and results of operations.

The value of the Company's goodwill and other intangible assets may decline in the future.

As of December 31, 2011,2014, the Company had $283.7$334.2 million of goodwill and other intangible assets. If the Company's stock price declines and remains low for an extended period of time, the Company could be required to write off all or a portion of its goodwill, which represents the value in excess of the Company's tangible book value.goodwill. The Company's stock price is subject to market conditions that can be impacted by forces outside of the control of management, such as a perceived weakness in financial institutions in general, and may not be a direct result of the Company's performance. In addition, a significant decline in the Company's expected future cash flows, a significant adverse change in the business climate,

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or slower growth rates may necessitate taking future charges related to the impairment of the Company's goodwill and other intangible assets. A write-down of goodwill and/orand other intangible assets would reduce earnings in the period in which it is recorded and could have a material adverse effect on the Company's business, financial condition, and results of operations.

External Risks

The Company operates in a highly competitive industry and market area.

The Company faces substantial competition in all areas of its operations from a variety of different competitors, many of which are larger and may have more financial resources. SuchThese competitors primarily include national, regional, and community banks within the markets in which the Company operates. The Company also faces competition from many other types of financial institutions, including savings and loan associations, credit unions, personal loan and finance companies, retail and discount stockbrokers, investment advisors, mutual funds, insurance companies, and other financial intermediaries. The financial services industry could become even more competitive as a result of legislative, regulatory, and technological changes; further illiquidity in the credit markets; and continued consolidation. Banks, securities firms, and insurance companies can merge under the umbrella of a financial holding company,an FHC, which can offer virtually any type of financial service, including banking, securities underwriting, insurance, and merchant banking. Also, technology has lowered barriers to entry and made it possible for non-banks to offer products and services traditionally provided by banks, such as automatic funds transfer and automatic payment systems. Many of the Company's competitors have fewer regulatory constraints and may have lower cost structures. In addition, dueDue to their size, many competitors may be able to achieve economies of scale and, as a result, may offer a broader range of products and services, as well as better pricing for those products and services than the Company can offer.


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The Company's ability to compete successfully depends on a number of factors, including:

Developing, maintaining, and building long-term customer relationships;
relationships.
Expanding the Company's market position;
position.
Offering products and services at prices and with the features that meet customers' needs and demands;
demands.
Introducing new products and services;
services.
Maintaining a satisfactory level of customer service; and
service.
Anticipating and adjusting to changes in industry and general economic trends.

Continued development and support of internet-based services.
Failure to perform in any of these areas could significantly weaken the Company's competitive position, which could adversely affect the Company's growth and profitability. This, in turn, could have a material adverse effect on the Company's business, financial condition, and results of operations.

The Company's business may be adversely affected by conditions in the financial markets and economic conditions generally.

The Company's financial performance generally is dependent upondepends to a large extent on the business environment in the suburban metropolitan Chicago market, the statestates of Illinois, Indiana, and Iowa, and the U.S. as a whole. In particular, the currentbusiness environment impacts the ability of borrowers to pay interest on and repay principal of outstanding loans as well as the value of collateral securing those loans. A favorable business environment is generally characterized by economic growth, low unemployment, efficient capital markets, low inflation, high business and investor confidence, strong business earnings, and other factors. Unfavorable or uncertain economic and market conditions can be caused by declines in economic growth, business activity, or investor or business confidence; limitations on the availability or increases in the cost of credit and capital; increases in inflation or interest rates; high unemployment; natural disasters; or a combination of these or other factors.

In recent years, the suburban metropolitan Chicago market, the statestates of Illinois, Indiana, and Iowa, and the U.S. as a whole experienced a downward economic cycle. Significant weakness in market conditions adversely impacted all aspects of the economycycle, including the Company's business. In particular, dramatic declines in the housing market, with decreasing home prices and increasing delinquencies and foreclosures, negatively impacted the credit performance of construction loans,a significant recession from which resulted in significant write-downs of assets by many financial institutions.it is slowly recovering. Business activitygrowth across a wide range of industries and regions was greatlyin the United States remains reduced, and local governments and many businesses experienced serious difficulty duecontinue to experience financial difficulty. Since the recession, economic growth has been slow and uneven, unemployment levels generally remain elevated and there are continuing concerns related to the lacklevel of consumer spendingU.S. government debt and the lack of liquidity in the credit markets. In addition, unemployment increased significantly duringfiscal actions that period. The business environment was adverse for many households and businesses in the suburban metropolitan Chicago market, the state of Illinois, the U.S., and worldwide.

While economic conditions beganmay be taken to improve in 2011, the recent depressed business environment had an adverse effect on the Company's business.address that debt. There can be no assurance that the current improvementeconomic conditions will continue to improve, and future economic deterioration would likely exacerbate the adverse effectsthese conditions could worsen. Periods of recent difficult market conditionsincreased volatility in financial and other markets, such as those experienced recently with regard to oil and other commodity prices and current rates, and those that may arise from global political tensions and re-emerging concerns over European sovereign debt risk, can have a direct or indirect negative impact on the Company and othersour customers and introduce greater uncertainty into credit evaluation decisions and prospects for growth. Economic pressure on consumers and uncertainty regarding continuing economic improvement may also result in the financial institutions industry. Market stresschanges in consumer and business spending, borrowing and saving habits.



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Such conditions could have a material adverse effect on the credit quality of the Company's loans and therefore,or its business, financial condition, andor results of operations, as well as other potential adverse impacts, including:

There could be an increased level of commercial and consumer delinquencies, lack of consumer confidence, increased market volatility, and widespread reduction of business activity generally.
There could be an increase in write-downs of asset values by financial institutions, such as the Company.
The Company's ability to assess the creditworthiness of customers could be impaired if the models and approaches it uses to select, manage, and underwrite credits become less predictive of future performance.
The process the Company uses to estimate losses inherent in the Company's loan portfolio requires difficult, subjective, and complex judgments. This process includes forecastsanalysis of economic conditions and the impact of these economic conditions on borrowers' ability to repay their loans. The process could no longer be capable of accurate estimation and may, in turn, impact its reliability.
The Bank could be required to pay significantly higher FDIC premiums in the future if losses further deplete the DIF.
The Company could face increased competition due to intensified consolidation of the financial services industry.
If current levelsperiods of market disruption and volatility continue or worsen, there can be no assurance

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Concerns about the European Union's sovereign debt crisis have also caused uncertainty for financial markets globally. Although the Company does not have direct exposure to European sovereign debt, these circumstances could indirectly affect the Company through general disruption in the global markets and the related effects on national and local economies, perceived weakness or market concerns about bank stocks generally, the Bank's hedging activities, customers with European businesses or assets denominated in the Euro, or companies in the Company's market with European businesses or affiliates.

Turmoil in the financial markets could result in lower fair values for the company'sCompany's investment securities.

Major disruptions in the capital markets experienced in recent years have adversely affected investor demand for all classes of securities, excluding U.S. Treasury securities, and resulted in volatility in the fair values of the Company's investment securities. Significant prolonged reduced investor demand could manifest itself in lower fair values for these securities and may result in recognition of an other-than-temporary impairment ("OTTI"), which could have a material adverse effect on the Company's business, financial condition, and results of operations.

Municipal securities can also be impacted by the business environment of their geographic location. Although this type of security has historically experienced extremely low default rates, municipal securities are subject to systemic risk since cash flows are generally dependent upondepend on (i) the ability of the issuing authority to levy and collect taxes or (ii) the ability of the issuer to charge for and collect payment for essential services rendered. If the issuer defaults on its payments, it may result in the recognition of OTTI or total loss, which could have a material adverse effect on the Company's business, financial condition, and results of operations.

Managing reputational risk is important to attracting and maintaining customers, investors, and employees.

Threats to the Company's reputation can come from many sources, including adverse sentiment about financial institutions generally, unethical practices, employee misconduct, failure to deliver minimum standards of service or quality, compliance deficiencies, and questionable or fraudulent activities of the Company's customers. The Company has policies and procedures in place that seek to protect its reputation and promote ethical conduct. Nonetheless, negative publicity may arise regarding the Company's business, employees, or customers, with or without merit, and could result in the loss of customers, investors, and employees; costly litigation; a decline in revenues; and increased governmental oversight. Negative publicity could have a material adverse impact on the Company's reputation, business, financial condition, results of operations, and liquidity.

The Company may be adversely affected by the soundness of other financial institutions.

Financial services institutions are interrelated as a result of trading, clearing, counterparty, or other relationships. The Company has exposure to many different industries and counterparties and routinely executes transactions with counterparties in the financial services industry, including commercial banks, brokers and dealers, investment banks, and other institutional clients. Many of these transactions expose the Company to credit risk in the event of a default by a counterparty or client. In addition, the Company's credit risk may be exacerbated when the collateral held by the Company cannot be realized upon liquidation or is liquidated at prices not sufficient to recover the full amount of the credit or derivative exposure due to the Company. Any such losses could have a material adverse effect on the Company's business, financial condition, results of operations, and liquidity.

The Company is subject to environmental liability risk associated with lending activities.

A significant portion of the Company's loan portfolio is secured by real property. During the ordinary course of business, the Company may foreclose on and take title to properties securing certain loans. In doing so, there is a risk that hazardous or toxic substances could be found on these properties. If hazardous or toxic substances are found, the Company may be liable for remediation costs, as well as for personal injury and property damage. Environmental laws may require the Company to incur substantial expenses and could materially reduce the affected property's value or limit the Company's ability to use or sell the affected property or to repay the indebtedness secured by the property. In addition, future laws or more stringent interpretations or enforcement policies

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with respect to existing laws may increase the Company's exposure to environmental liability. Although the Company has policies and procedures to perform an


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environmental review before initiating any foreclosure action on real property, these reviews may not be sufficient to detect all potential environmental hazards. The remediation costs and any other financial liabilities associated with an environmental hazard could have a material adverse effect on the Company's business, financial condition, results of operations, and liquidity.

Severe weather, natural disasters, health emergencies, acts of war or terrorism, and other external events could significantly impact the Company's business.

Severe weather, natural disasters, pandemics and other health emergencies, acts of war or terrorism, and other adverse external events could have a significant impact on the Company's ability to conduct business. SuchThese events could affect the stability of the Company's deposit base, impair the ability of borrowers to repay outstanding loans, reduce the value of collateral securing loans, cause significant property damage, result in loss of revenue, and/or cause the Company to incur additional expenses. Although management has established disaster recovery policies and procedures, the occurrence of any such event could have a material adverse effect on the Company's business, which, in turn, could have a material adverse effect on its financial condition, and results of operations.

Recent and/or future

U.S. credit downgrades or changes in outlook by the major credit rating agencies may have an adverse effect on financial markets, including financial institutions and the financial industry.

Despite

During the recent actions taken by the U.S. governmentpast several years, due to raiseconcerns over the U.S. debt limit and address budget deficit, concerns, Standard & Poor's Rating Services ("S&P")the major ratings agencies have downgraded or lowered their outlooks for the U.S.'s credit rating from AAA to AA+ in 2011. It is difficult to predict the effect of this action, or of any futurerating. Further downgrades or changes in outlook by S&P or either of the other two majorU.S. federal government's sovereign credit rating, agencies. However, these eventsand the perceived creditworthiness of U.S. government-backed obligations, could impact the trading market forCompany's ability to obtain funding that is collateralized by affected instruments and to access capital markets on favorable terms. Such downgrades could also affect the pricing of funding, when funding is available. A downgrade of the credit rating of the U.S. government, securities, including agency securities, and the securities markets more broadly, and, consequently, could impact the value and liquidityor of financial assets, including assets in the Company's investment and bank-owned life insurance portfolios. These actions couldits agencies, government-sponsored enterprises or related institutions, agencies or instrumentalities, may also create broader financial turmoil and uncertainty, which may negativelyadversely affect the global banking systemmarket value of such instruments and, limitfurther, exacerbate the availability of funding, including borrowings under repurchase arrangements, at reasonable terms. In turn, thisother risks to which the Company is subject. These events could have a material adverse effect on the Company's financial condition, results of operations, and liquidity.

The Company's business, may be adversely affected by the impact of uncertainty about the financial stability of troubled European Union member economies.

Certain European Union member countries have fiscal obligations greater than their fiscal revenue, which has caused investor concern over such countries' ability to continue to service their debt and foster economic growth. Federal regulators are closely monitoring U.S. money market funds' exposure to commercial paper issued by European banks. Approximately one-half of all prime money market funds are invested in European bank commercial paper and those European banks are heavily invested in government bonds issued by the troubled economies of Greece, Portugal, and Spain. A default by any of those countries could have a broad negative effect on U.S. and world economies.

In addition, the European debt crisis has caused credit spreads to widen in the fixed income debt markets and liquidity to be less abundant. A weaker European economy may transcend Europe, cause investors to lose confidence in the safety and soundness of European financial institutions and the stability of European member economies, and likewise impact U.S.-based financial institutions, the stability of the global financial markets, and the economic recovery underway in the U.S. The Company cannot predict the current or future impact this uncertainty may have on its financial condition, or results of operations.

Legal/Compliance Risks

The Company is subject to extensive government regulation and supervision.

The Company and the Bank are subject to extensive federal and state regulations and supervision. Banking regulations are primarily intended to protect depositors' funds, FDIC funds, and the banking system as a whole, not security holders. These regulations affect the Company's lending practices, capital structure, investment practices, dividend policy, and growth. Congress and federal regulatory agencies continually review banking laws, regulations, policies, and policiesother supervisory guidance for possible changes.


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Changes to statutes, regulations, or regulatory policies, or other supervisory guidance, including changes in the interpretation or implementation of those regulations or policies, could affect the Company in substantial and unpredictable ways and could have a material adverse effect on the Company's business, financial condition, and results of operations. SuchThese changes could subject the Company to additional costs, limit the types of financial services and products the Company may offer, and/orlimit the activities it is permitted to engage in, and increase the ability of non-banks to offer competing financial services and products. Failure to comply with laws, regulations, policies, or policiesother regulatory guidance could result in civil or criminal sanctions by regulatory agencies, civil monetary penalties, and/orand damage to the Company's reputation, whichreputation. Government authorities, including the bank regulatory agencies, are pursuing aggressive enforcement actions with respect to compliance and other legal matters involving financial activities. Any of these actions could have a material adverse effect on the Company's business, financial condition, and results of operations. While the Company has policies and procedures designed to prevent any such violations, there can be no assurance that such violations will not occur. See the section captioned "Supervision and Regulation" in Item 1, "Business," and Note 1819 of "Notes to the Consolidated Financial Statements" included in Item 8 "Financial Statements and Supplementary Data," of this Form 10-K.

Rapidly implemented legislative and regulatory actions could have an unanticipated and adverse effect on the Company.

In response to the recent financial market crisis, the U.S. government, specifically the Treasury, Federal Reserve, and FDIC, working in cooperation with foreign governments and other central banks, has takentook a variety of extraordinary measures designed to restore confidence in the financial markets and to strengthen financial institutions. The rulemaking relating to these measures was accomplished on an emergency basis in order to address immediate concerns about the stability and continued existence of the global financial system. Recovery programs were rapidly proposed, adopted, and sometimes quickly abandoned in response to changing market conditions and other concerns. The speed of market developments required the government to abandon its traditional pattern and timeline of legislative and regulatory rulemaking, and issue rules on an interim basis without prior notice and comment. Rulemaking in this manner, rather than through the traditional legislative practice, does not allow for input by regulated financial institutions, such as the Company, and could lead to uncertainty in the financial markets, disruption to the Company's business, increased costs, and material adverse effects on the Company's business, financial condition, and results of operations.


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The Company's business may be adversely affected in the future by the implementation of ongoing regulations regarding banks and financial institutions under the Dodd-Frank Act.

On July 21, 2010, President Obama signed into law the

The Dodd-Frank Act which significantly changeschanged the current bank regulatory structure and affects the lending, deposit, investment, trading, and operating activities of financial institutions and their holding companies. The Dodd-Frank Act requires various federal agencies to adopt a broad range of new rules and regulations and to prepare numerous studies and reports for Congress. The federal agencies are given significant discretion in drafting and implementing rules and regulations and, consequently, many of the details and much of the impact of portions of the Dodd-Frank Act that remain to be implemented may not be known for many months oruntil final rules are adopted and market practices and structures develop around the rules, which may take several years. See the section titled "Supervision and RegulationRegulation" in Item 1"1 of this Form 10-K for a discussion of several significant provisions of the Dodd-Frank Act.

Act, including the Volcker Rule.

The Dodd-Frank Act is intended to address specific issues that are believed to have contributed to the financial crisis and is heavily remedial in nature. Several provisions in the Act are applicable to larger institutions (greater than $10 billion in assets). Many aspects of the Dodd-Frank Act that are applicable to the Company are subject to rulemaking, implementation, and regulatory and supervisory guidance, and the development of related market structures and practices, that will take effectoccur over several years, making it difficult to anticipate the overall financial impact on the Company. However, compliance with this new lawlaws and its regulations likely will result in additional operating costs that could have a material adverse effect on the Company's business, financial condition, and results of operations.

The Company will be subject to heightened regulatory requirements if it exceeds $10 billion in total consolidated assets.
At December 31, 2014, the Company and the Bank had approximately $9.4 billion in total consolidated assets. The Company and the Bank may exceed $10 billion in total consolidated assets in the future if it continues to grow. Any additional acquisitions could significantly accelerate the time when the Company exceeds this threshold.
The Dodd-Frank Act and its implementing regulations impose various additional requirements on bank holding companies with $10 billion or more in total consolidated assets, including compliance with portions of the Federal Reserve's enhanced prudential oversight requirements and annual stress testing requirements. In addition, banks with $10 billion or more in total consolidated assets are primarily examined by the CFPB with respect to various federal consumer financial protection laws and regulations. As a relatively new agency with evolving regulations and practices, there is uncertainty as to how the CFPB's examination and regulatory authority might impact the Company's and the Bank's business.
Compliance with these requirements may cause the Company to hire additional compliance or other personnel, design and implement additional internal controls, or incur other significant expenses, any of which could have a material adverse effect on the Company's business, financial condition, or results of operations. Compliance with the annual stress testing requirements, part of which must be publicly disclosed, may also be misinterpreted by the market generally or the Company's customers and, as a result, may adversely affect the Company's stock price or the Company's ability to retain its customers or effectively compete for new business opportunities. To ensure compliance with these heightened requirements when effective, the Company's regulators may require it to fully comply with these requirements or take actions to prepare for compliance even before the Company's or the Bank's total consolidated assets equal or exceed $10 billion. As a result, the Company may incur compliance-related costs before it might otherwise be required, including if the Company does not continue to grow at the rate it expects or at all. The Company's regulators may also consider its preparation for compliance with these regulatory requirements when examining its operations generally or considering any request for regulatory approval the Company may make, even requests for approvals on unrelated matters.
The Company's business may be adversely affected in the future by the implementation of rules establishing standards for debit card interchange fees.

On June 29, 2011, the

The Federal Reserve approvedhas implemented final rules establishing standards for debit card interchange fees and prohibiting network exclusivity arrangements and routing restrictions as required by the Dodd-Frank Act. A debit card interchange fee is a fee paid by a merchant's bank to the customer's bank for the use of the debit card.

Under the final rule, which is currently subject to litigation, the maximum permissible interchange fee that an issuer may receive for an electronic debit transaction is 21 cents plus an amount equal to five basis points of the transaction value. In addition, under an interim final rule issued concurrently with the final rule, an additional one cent per transaction "fraud prevention


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adjustment" to the interchange fee is available to those issuers that comply with certain standards outlined by the Federal Reserve. The effective date for the cap on interchange fees was October 1, 2011.

Currently, the Company is exempt from the interchange fee cap under the "small issuer" exemption, which applies to any debit card issuer with total worldwide assets of less than $10 billion as of the end of the previous calendar year. In the event the Company's assets reach $10 billion or more, it will become subject to the interchange fee limitations beginning July 1 of the following year, and the fees the Company may receive for an electronic debit transaction will be capped at the statutory limit.


24




Although the rule applies only to larger institutions and does not currently apply to the Company, future industry responses and developments relating to this rule that are currently unknown may affect the Company's business, financial condition, and results of operations in ways and to a degree that it cannot currently predict, including any impact on its future revenue.

The short-term and long-term impact of the new Basel III final framework on capital and liquidity ratio requirements is uncertain.

The Basel III final framework introduces a new capital measure and specifies adjustments to the instruments that comprise Tier 1 capital. In addition, the Basel III final framework requires banks and bank holding companies to measure their liquidity against specific liquidity tests that, although similar in some respects to liquidity measures historically applied by banks and regulators for management and supervisory purposes, going forward will be required by regulation. For a more detailed description of this proposal, refer to the section titled "Supervision and Regulation" in Item 1, "Business" of this Form 10-K. The U.S. banking agencies have indicated informally that they expect to implement regulations in mid-2012. These new standards are subject to further rulemaking and their terms may well change before implementation. The resulting impact of Basel III on the Company's capital and liquidity ratios and compliance costs is unknown, and could negatively affect the costs and availability of capital alternatives. In addition, requirements to maintain higher levels of capital or liquid assets could adversely impact the Company's net income and return on equity.

The level of the commercial real estate loan portfolio may subject the Company to additional regulatory scrutiny.

The FDIC, the Federal Reserve, and the Office of the Comptroller of the Currency have promulgatedissued joint guidance on sound risk management practices for financial institutions with concentrations in commercial real estate lending. Under the guidance, a financial institution that is actively involved in commercial real estate lending should perform a risk assessment to identify concentrations. A financial institution may have a concentration in commercial real estate lending if (i) total reported loans for construction, land development, and other land represent 100% or more of total capital or (ii) total reported loans secured by multi-family and non-farm residential properties, loans for construction, land development, and other land loans otherwise sensitive to the general commercial real estate market, including loans to commercial real estate related entities, represent 300% or more of total capital. The joint guidance requires heightened risk management practices including board and management oversight and strategic planning, development of underwriting standards, risk assessment, and monitoring through market analysis and stress testing. The Company is currently in compliance with these regulations. If regulators determine the Company is in violation of these restrictions or has not adequately implemented risk management practices, they could impose additional regulatory restrictions against the Company, which could have a material negativeadverse impact on the Company's business, financial condition, and results of operations.


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The Company and its subsidiaries are subject to examinations and challenges by taxing authorities.

In the normal course of business, the Company and its subsidiaries are routinely subjected to examinations and challenges from federal and state taxing authorities regarding tax positions taken by the Company and the determination of the amount of tax due. These examinations may relate to income, franchise, gross receipts, payroll, property, sales and use, or other tax returns filed, or not filed, by the Company. The challenges made by taxing authorities may result in adjustments to the amount of taxes due, and may result in the imposition of penalties and interest. If any such challenges are not resolved in the Company's favor, they could have a material adverse effect on the Company's financial condition, results of operations, and liquidity.

The Company and its subsidiaries are subject to changes in federal and state tax laws and changes in interpretation of existing laws.

The Company's financial performance is impacted by federal and state tax laws. Given the current economic and political environment, and ongoing budgetary pressures, the enactment of new federal or state tax legislation may occur. The enactment of such legislation, or changes in the interpretation of existing law, including provisions impacting income tax rates, apportionment, consolidation or combination, income, expenses, and credits, may have a material adverse effect on the Company's financial condition, results of operations, and liquidity.

The Company and its subsidiaries may not be able to realize the benefit of deferred tax assets.

The Company records deferred tax assets and liabilities for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. basis.
Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in years in which those temporary differences are expected to be recovered or settled. The deferred tax assets can be recognized in future periods dependent upondepending on a number of factors, including the ability to realize the asset through carryback or carryforward to taxable income in prior or future years, the future reversal of existing taxable temporary differences, future taxable income, and the possible application of future tax planning strategies. A valuation allowance is established for any deferred tax asset for which recovery or settlement is not more likely than not.

Each quarter, the Company assesses its deferred tax asset position, including the recoverability of this asset or the need for a valuation allowance. This assessment takes into consideration positive and negative evidence to determine whether it is more likely than not that a portion of the asset will not be realized. If the Company is not able to recognize deferred tax assets in future periods, it could have a material adverse effect on the Company's business, financial condition, and results of operations.

The Company is subject to claims and litigation pertaining to fiduciary responsibility.

From time to time, customers make claims and take legal action pertaining to the Company's performance of its fiduciary responsibilities. Whether customer claims and legal action related to the Company's performance of its fiduciary responsibilities are founded or unfounded, if such claims and legal action are not resolved in a manner favorable to the Company, they may result in significant financial liability and/or adversely affect the market perception of the Company and its products and services as well as impact customer demand for those products and services. Any financial liability or reputational damage could have a material adverse effect on the Company's business, which, in turn, could have a material adverse impact on its financial condition and results of operations.

The Company is a defendant in a variety of litigation and other actions.

In August 2011, the Bank was named in a purported class action lawsuit filed in the Circuit Court of Cook County, Illinois on behalf of certain of the Bank's customers who incurred overdraft fees. The lawsuit is based on the Bank's practices pursuant to debit card transactions, and alleges, among other things, that these practices have resulted in customers being unfairly assessed overdraft fees. The lawsuit seeks an unspecified amount of damages and other relief, including restitution.

The Company believes that the complaint contains significant inaccuracies and factual misstatements and that the Bank has meritorious defenses. As a result, the Bank intends to vigorously defend itself against the allegations in


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the lawsuit. The Bank filed a motion to dismiss this claim in November 2011, and the plaintiff filed an amended complaint in February 2012.

Currently, there are certain other legal proceedings pending against the Company and its subsidiaries in the ordinary course of business. While the outcome of any legal proceeding is inherently uncertain, based on information currently available, the Company's management believes that any liabilities arising from pending legal matters would be immaterial.immaterial based on information currently available. However, if actual results differ from management's expectations, it could have a material adverse effect on the Company's financial condition, results of operations, or cash flows.

Future acquisitions may disrupt the Company's business and dilute stockholder value.

In the past, the

The Company has strategically acquiredlooks to acquire whole banks, or branches of other banks.banks, and non-banking organizations. The Company may consider future acquisitions of banks and non-banks to supplement internal growth opportunities.opportunities, as permitted by regulators. The Company seeks merger or acquisition partners that are culturally similar and possess either significant market presence or have potential for improved profitability through financial management, economies of scale, or expanded services. Acquiring other banks, branches, or branchesnon-banks involves potential risks that could have a material adverse impact on the Company's business, financial condition, orand results of operations, including:

Exposure to unknown or contingent liabilities of acquired banks;
Exposure to asset quality issues of acquired banks;
banks.
Disruption of the Company's business;
business.
Loss of key employees and customers of acquired banks;
banks.
Short-term decrease in profitability;
profitability.
Diversion of management's time and attention;
attention.
Issues arising during transition and integration;
integration.
Dilution in the ownership percentage of holdingsholders of the Company's Common Stock;
Stock.
Difficulty in estimating the value of the target company;
company.
Payment of a premium over book and market values that may dilute the Company's tangible book value and earnings per share in the short and long-term;
long-term.
Volatility in reported income as goodwill impairment losses could occur irregularly and in varying amounts;
amounts.
Inability to realize the expected revenue increases, cost savings, increases in geographic or product presence, and/or other projected benefits; and
benefits.
Changes in banking or tax laws or regulations.

From time to time, the Company may evaluate merger and acquisition opportunities and conduct due diligence activities related to possible transactions with other financial institutions and financial services companies. As a result, merger or acquisition discussions and negotiations may take place and future mergers or acquisitions involving cash, debt, or equity securities may occur at any time. Acquisitions typicallymay involve the payment of a premium over book and market values, and therefore, some dilution of the Company's tangible book value and net income per common share may occur in connection with any future transaction. Furthermore, failure to realize the expected revenue increases, cost savings, increases in geographic or product presence, and/or other projected benefits from an acquisition could have a material adverse effect on the Company's financial condition and results of operations.

In addition, from time to time, banking regulators may restrict the Company from making acquisitions. See "History" and "Supervision and Regulation" in Item 1, "Business," of this Form 10-K for additional detail and further discussion of these matters.

Competition for acquisition candidates is intense.

Competition for acquisitions is intense.

Numerous potential acquirers compete with the Company for acquisition candidates. The Company may not be able to successfully identify and acquire suitable targets, which could slow the Company's growth rate and have a material adverse effect on its ability to compete in its markets.

The Company has engaged in FDIC-assisted transactions and may engage in future FDIC-assisted transactions, which could present additional risks to its business.

In the current economic environment, the Company may be presented with opportunities to acquire the assets and liabilities of failed banks in FDIC-assisted transactions. These acquisitions involve risks similar to acquiring


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existing banks even though the FDIC might provide assistance to mitigate certain risks, such as sharing in exposure to credit losses and providing indemnification against certain liabilities of the failed institution. However, because these acquisitions involve failing banks and are structured in a manner that do not allow the Company the time normally associated with preparing for and evaluating an acquisition (including preparing for integration of an acquired institution), the Company may face additional risks if it engages in FDIC-assisted transactions. The assets the Company would acquire would be more troubled than in a typical acquisition. The deposits the Company would assume would generally be higher priced than in a typical acquisition and, therefore, subject to higher attrition. Integration could be more difficult in this type of acquisition than in a typical acquisition since key staff would have departed. Any inability to overcome these risks could have an adverse effect on the Company's ability to achieve its business strategy and maintain its market value and profitability.

Moreover, even if the Company is inclined to participate in additional FDIC-assisted transactions, the Company can only participate in the bid process if it receives approval of bank regulators. There can be no assurance that the Company will be allowed to participate in the bid process, or what the terms of such transaction might be or whether the Company would be successful in acquiring the bank or targeted assets. The Company may be required to raise additional capital as a condition to, or as a result of, participation in an FDIC-assisted transaction. Any such transactions and related issuances of stock may have a dilutive effect on earnings per common share and share ownership.

Furthermore, assuming the Company is allowed to and chooses to participate in FDIC-assisted transactions, the Company may face competition from other financial institutions. To the extent that our competitors are selected to participate in FDIC-assisted transactions, our ability to identify and attract acquisition candidates and/or make acquisitions on favorable terms may be adversely affected.

Failure to comply with the terms of loss share agreements with the FDIC may result in significant losses, and thepotential losses.

The Company may become dependent upon third party vendors in connection with FDIC-assisted transactions.

In 2009 and 2010, the Company acquired the majority of the assets of three financial institutions inhas completed four FDIC-assisted transactions. MostIn three of those transactions, most loans and OREO acquired in the acquisitions are covered by the FDIC Agreements. Under the FDIC Agreements, under which the FDIC will reimburse the Bank for a portion of the losses and eligible expenses arising from certain assets of the acquired institutions.

The FDIC Agreements have specific and detailed compliance, servicing, notification, and reporting requirements. The Company has engaged a third party loan servicing vendor to administer a portion of the assets subject to the FDIC Agreements, and may engage this or another vendor to provide similar services in the future if the Company engages in future FDIC-assisted transactions. As a result, the Company is, and may increasingly become, dependent upon this vendor to provide key services to the Bank. While the Company carefully selected this vendor, the Company may not control the vendor's actions. Any failure by the vendor to complyNon-compliance with the terms of any loss share arrangement the Bank has with the FDIC or to properly serviceAgreements could result in the loans and OREO covered by any loss share arrangement, may causeof reimbursement on individual loans, or large pools of loans, to lose eligibility for reimbursement to the Bank from the FDIC. Thisor OREO and could result in material losses that are currently not anticipated and could adversely affect the Company's business or financial condition.

Furthermore,


26




The valuations of acquired loans and OREO, including those acquired in the event the Bank engages in additional FDIC-assisted transactions with loss share arrangements,and the Company's dependencerelated FDIC indemnification asset, rely on this vendor could increase. The services provided by this vendor are unique and not provided by many vendors either locally or nationwide. As a result, the Company's ability to replace this vendor could entail significant delay, expense, and risk to the Company, its business operations, and financial condition.

The Companyestimates that may not realize all of the expected benefits of its FDIC-assisted transactions.

be inaccurate.

The Company performs a valuation of acquired loans and OREO acquired in FDIC-assisted transactions.acquired. Although management makes various assumptions and judgments about the collectability of the acquired loans, including the creditworthiness of borrowers and the value of the real estate and other assets serving as collateral for the repayment of secured loans associated with these transactions, its estimates of the fair value of assets acquired could be inaccurate. Valuing these assets using inaccurate assumptions could materially and adversely affect the Company's business, financial condition, and results of operations, and future prospects.

operations.

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InFor loans acquired in FDIC-assisted transactions that include loss-share agreements,FDIC Agreements, the Company records an FDIC indemnification asset that reflects its estimate of the timing and amount of reimbursements for future losses that are anticipated to occur. In determining the size of the FDIC indemnification asset, the Company analyzes the loan portfolio based on historical loss experience, volume and classification of loans, volume and trends in delinquencies and non-accruals, local economic conditions, and other pertinent information. Changes in the Company's estimate of the timing of those losses, specifically if those losses are to occur beyond the applicable loss-share periods, may result in impairments of the FDIC indemnification asset, which would have a material adverse effect on the Company's financial condition and results of operations. If the assumptions related to the timing or amount of expected losses are incorrect, there could be a negative impact on the Company's operating results. Increases in the amount of future losses in response to different economic conditions or adverse developments in the acquired loan portfolio may result in increased charge-offs, which would also negatively impact the Company's business, financial condition, and results of operations.

Risks Associated with the Company's Common Stock

An investment in the Company's Common Stock is not an insured deposit.

The Company's Common Stock is not a bank deposit and, therefore, is not insured against loss by the FDIC, any other deposit insurance fund, or by any other public or private entity. Investment in the Company's Common Stock is inherently risky for the reasons described in this "Risk Factors" section and elsewhere in this reportForm 10-K and is subject to the same market forces that affect the price of common stock in any public company. As a result, if you acquire the Company's Common Stock, you could lose some or all of your investment.

The Company's stock price can be volatile.

Stock price volatility may make it more difficult for you to resell your Common Stock when you want and at prices you find attractive. The Company's Common Stock price can fluctuate significantly in response to a variety of factors including:

Actual or anticipated variations in quarterly results of operations;
operations.
Recommendations by securities analysts;
analysts.
Operating and stock price performance of other companies that investors deem comparable to the Company;
Company.
News reports relating to trends, concerns, and other issues in the financial services industry;
industry.
Perceptions in the marketplace regarding the Company and/or its competitors;
competitors.
New technology used or services offered by competitors;
competitors.
Significant acquisitions or business combinations, strategic partnerships, joint venture, or capital commitments by or involving the Company or its competitors;
competitors.
Failure to integrate acquisitions or realize anticipated benefits from acquisitions;
acquisitions.
Changes in government regulations; and
regulations.
Geopolitical conditions, such as acts or threats of terrorism or military conflicts.

General market fluctuations, industry factors, and general economic and political conditions and events, such as economic slowdowns or recessions, interest rate changes, or credit loss trends, could also cause the Company's stockCommon Stock price to decrease regardless of operating results.


27




The trading volume in the Company's Common Stock is less than that of other larger financial services institutions.

Although the Company's Common Stock is listed for trading on the NasdaqNASDAQ Stock Market, Exchange, theits trading volume in its Common Stock may be less than that of other, larger financial services companies. A public trading market having the desired characteristics of depth, liquidity, and orderliness depends on the presence in the marketplace of willing buyers and sellers of the Company's Common Stock at any given time. This presence depends on the individual decisions of investors and general economic and market conditions over which the Company has no control. During any period of lower trading volume of the Company's Common Stock, significant sales of shares of the Company's Common Stock, or the expectation of these sales could cause the Company's Common Stock price to fall.


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The Company's Restated Certificate of Incorporation, Amended and Restated By-laws, and Amended and Restated Rights Agreement, as well as certain banking laws, may have an anti-takeover effect.

Provisions of the Company's Restated Certificate of Incorporation and Amended and Restated By-laws, federal banking laws, including regulatory approval requirements, and the Company's Amended and Restated Rights Plan could make it more difficult for a third party to acquire the Company, even if doing so would be perceived to be beneficial by the Company's stockholders. The combination of these provisions effectively inhibits a non-negotiated merger or other business combination, which, in turn, could adversely affect the market price of the Company's Common Stock.

The Company may issue additional securities, which could dilute the ownership percentage of holders of the Company's Common Stock.

The Company may issue additional securities to raise additional capital, or finance acquisitions, or upon the exercisefor other corporate purposes, or conversion of outstanding options,in connection with its share-based compensation plans or retirement plans, and, if it does, the ownership percentage of holders of the Company's Common Stock could be diluted, potentially materially.

The Company has not established a minimum dividend payment level, and it cannot ensure its ability to pay dividends in the future.

On March 16, 2009, the Board of Directors of First Midwest Bancorp, Inc. ("the Board") announced a reduction in the

The Company's quarterly Common Stockfourth quarter 2014 cash dividend from $0.225was $0.08 per share to $0.01 per share. While the Company considers future capital strategies, including an increase in quarterly dividends, any increase will be subject to regulatory review. The Company has not established a minimum dividend payment level, and the amount of its dividend may fluctuate. All dividends will be made at the discretion of the Board of Directors of First Midwest Bancorp, Inc. (the "Board") and will depend uponon the Company's earnings, financial condition, and such other factors as the Board may deem relevant from time to time. The Board may, at its discretion, further reduce or eliminate dividends or change its dividend policy in the future.

In addition, the Federal Reserve has issued Federal Reserve Supervision and Regulation Letter SR-09-4, which requires bank holding companies to inform and consult with Federal Reserve supervisory staff prior to declaring and paying a dividend that exceeds earnings for the period for which the dividend is being paid. Under this regulation, if the Company experiences losses in a series of consecutive quarters, it may be required to inform and consult with the Federal Reserve supervisory staff prior to declaring or paying any dividends. In this event, there can be no assurance that the Company's regulators will approve the payment of such dividends.

Offerings of debt, which would be senior to the Company's Common Stock upon liquidation, and/or preferred equity securities, which may be senior to the Company's Common Stock for purposes of dividend distributions or upon liquidation, may adversely affect the market price of the Company's Common Stock.

The Company may attempt to increase the Company's capital or raise additional capital by making additional offerings of debt or preferred equity securities, including trust-preferred securities, senior or subordinated notes, and preferred stock. UponIn the event of liquidation, holders of the Company's debt securities and shares of preferred stock and lenders with respect to other borrowings will receive distributions of the Company's available assets prior to the holders of the Company's Common Stock. Additional equity offerings may dilute the holdings of the Company's existing stockholders or reduce the market price of the Company's Common Stock, or both. Holders of the Company's Common Stock are not entitled to preemptive rights or other protections against dilution.

The Board is authorized to issue one or more classes or series of preferred stock from time to time without any action on the part of the Company's stockholders. The Board also has the power, without stockholder approval, to set the terms of any such classes or series of preferred stock that may be issued, including voting rights, dividend rights, and preferences over the Company's Common Stock with respect to dividends or upon the Company's dissolution, winding-up, liquidation, and other terms. If the Company issues preferred stock in the future that has a preference over the Company's Common Stock with respect to the payment of dividends or upon liquidation, or if the Company issues preferred stock with voting rights that dilute the voting power of the Company's Common Stock, the rights of holders of the Company's Common Stock or the market price of the Company's Common Stock could be adversely affected.


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ITEM 1B. UNRESOLVED STAFF COMMENTS

The Company does not have any unresolved comments pending with the SEC staff.

None.

ITEM 2. PROPERTIES

The executive offices of the Company the Bank, and certain subsidiary operational facilities are located in a 16-story office building inat One Pierce Place, Itasca, Illinois, which isand are leased from an unaffiliated third party. The Company occupies a total of 102 facilities as presented in the following table.


December 31,
2011

Bank offices:

Executive office in Itasca, Illinois

1

Bank branches

98

Operational facility in Joliet, Illinois

1

Dedicated lending office in Champaign, Illinois

1

Dedicated commercial banking office in Chicago, Illinois

1

Total bank offices

102

Bank offices owned and not subject to any material liens

79

Leased bank offices

23

Total bank offices

102

Total ATMs

132

Theconducts business through 109 banking offices arelocations largely located in various communities throughout northern Illinois and northwestern Indiana, primarily the greater Chicago metropolitan suburban area. The Company also has banking offices inarea, as well as northwest Indiana, central and western Illinois, and eastern Iowa. At certain Bank locations, excess space is leased to third parties. MostThe majority, approximately 80%, of the Company's banking locations are owned and 20% are leased.

The Company owns 145 ATMs, most of which are housed at banking locations, and some of themlocations. Some ATMs are independently located. In addition, the Company owns other real property that, when considered individually or in the aggregate, is not material to the Company's financial position.

The Company believes its facilities in the aggregate are suitable and adequate to operate its banking business. Additional information with respect to premises and equipment is presented in Note 78 of "Notes to the Consolidated Financial Statements" in Item 8 of this Form 10-K.


ITEM 3. LEGAL PROCEEDINGS

The nature

In the ordinary course of the business, of the Bank and the Company's other subsidiaries ordinarily results in athere were certain amount of claims, litigation, investigations, and legal and administrative cases and proceedings, all of which are considered incidental to the normal conduct of business. In managing such matters, management considers the merits and feasibility of all options and strategies available to the Company, including litigation prosecution, arbitration, insurance coverage, and settlement. Generally, if the Company determines it has meritorious defenses to a matter, it vigorously defends itself.

In August 2011, the Bank was named in a purported class action lawsuit filed in the Circuit Court of Cook County, Illinois on behalf of certain of the Bank's customers who incurred overdraft fees. The lawsuit is based on the Bank's practices pursuant to debit card transactions, and alleges, among other things, that these practices have resulted in customers being unfairly assessed overdraft fees. The lawsuit seeks an unspecified amount of damages and other relief, including restitution.

The Company believes that the complaint contains significant inaccuracies and factual misstatements and that the Bank has meritorious defenses. As a result, the Bank intends to vigorously defend itself against the allegations in


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the lawsuit. The Bank filed a motion to dismiss this claim in November 2011, and the plaintiff filed an amended complaint in February 2012.

Currently, there are certain other legal proceedings pending against the Company and its subsidiaries in the ordinary course of business.at December 31, 2014. While the outcome of any legal proceeding is inherently uncertain, based on information currently available, the Company's management believes thatdoes not expect any liabilities arising from pending legal matters are not expected to have a material adverse effect on the Company's business, financial position,condition, results of operations, or cash flows.



ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.


29




PART II

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY,
RELATED STOCKHOLDER MATTERS, AND
ISSUER PURCHASES OF EQUITY SECURITIES

The Company's Common Stock is traded under the symbol "FMBI" in the NasdaqNASDAQ Global Select marketMarket tier of the NasdaqNASDAQ Stock Market. As of December 31, 2011,2014, there were 2,1351,960 stockholders of record, a number that does not include beneficial owners who hold shares in "street name" or shareholders(or stockholders from previously acquired companies that havedid not exchangedexchange their stock.

stock).


 2011  
 2010  2014 2013

 Fourth Third Second First  
 Fourth Third Second First  Fourth Third Second First  Fourth Third Second First

Market price of Common Stock

                     
  
  
  
   
  
  
  

High

 $10.31 $12.72 $13.48 $13.07   $13.13 $13.43 $17.95 $14.43  $17.99
 $17.77
 $18.19
 $17.83
  $18.49
 $16.20
 $13.87
 $13.60

Low

 $6.89 $7.22 $11.05 $10.79   $9.26 $10.72 $12.10 $10.37  15.01
 15.64
 15.49
 15.36
  14.90
 13.81
 11.57
 12.11

Quarter-end

 $10.13 $7.32 $12.29 $11.79   $11.52 $11.53 $12.16 $13.55 

Cash dividends declared per common share

 
$

0.01
 
$

0.01
 
$

0.01
 
$

0.01
   
$

0.01
 
$

0.01
 
$

0.01
 
$

0.01
  0.08
 0.08
 0.08
 0.07
  0.07
 0.04
 0.04
 0.01

Dividend yield at quarter-end (1)

 
0.39%
 
0.55%
 
0.33%
 
0.34%
   
0.35%
 
0.35%
 
0.33%
 
0.30%
 

Book value per common share at quarter-end

 $12.93 $12.88 $12.74 $12.49   $12.40 $13.06 $13.00 $12.84 

Payment of future dividends is within the discretion of the Board and will depend on earnings, capital requirements, the operating and financial condition of the Company, and other factors the Board deems relevant from time to time. The Board makes the dividend determination on a quarterly basis. A furtherFurther discussion of the Company's philosophy regarding the payment of dividends is included in the "Management of Capital" section of "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Item 7 of this Form 10-K.

A discussion regarding the regulatory restrictions applicable to the Bank's ability to pay dividends to the Company is included in the "Supervision and Regulation – Dividends" and "Risk Factors – Risks Associated with the Company's Common Stock" sections underin Items 1 and 1A of this Form 10-K.

For a description of the securities authorized for issuance under equity compensation plans, please refer tosee Item 12, "Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters," of this Form 10-K.


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Stock Performance Graph

The graph below illustrates the cumulative total return (defined as stock price appreciation or depreciation andassuming the reinvestment of all dividends) to stockholders fromof the Company's Common Stock compared against a broad-market total return equity index, (the Standard & Poor's 500 Stock Index (the "S&P 500"))the NASDAQ Composite, and a published industry total return equity index, (the Standard & Poor's SmallCap 600the NASDAQ Banks, Index ("S&P SmallCap 600 Banks")) over a five yearfive-year period.

Comparison of Five-Year Cumulative Total Return Among
First Midwest Bancorp, Inc., the S&P 500,NASDAQ Composite, and the S&P SmallCap 600NASDAQ Banks(1)

 
 2006 2007 2008 2009 2010 2011 

First Midwest

 $100.00 $81.92 $56.17 $30.77 $32.66 $28.84 

S&P 500

  100.00  105.49  66.46  84.05  96.71  98.75 

S&P SmallCap 600 Banks

  100.00  76.87  77.83  53.46  63.38  62.32 
  2009 2010 2011 2012 2013 2014
First Midwest Bancorp, Inc. $100.00
 $106.14
 $93.72
 $116.22
 $164.43
 $163.45
NASDAQ Composite 100.00
 117.61
 118.70
 139.00
 196.83
 223.74
NASDAQ Banks 100.00
 115.72
 104.50
 122.51
 173.89
 182.21


(1)
Assumes $100 invested on December 31, 2009 with the reinvestment of all related dividends.
To the extent this Form 10-K is incorporated by reference into any other filing by the Company under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, the foregoing "Stock Performance Graph" will not be deemed incorporated, unless specifically provided otherwise in such filing and shall not otherwise be deemed filed under such Acts.


31


Table of Contents



Issuer Purchases of Equity Securities

The following table summarizes the Company's monthly Common Stock purchases during the fourth quarter 2011.of 2014. The Board approved a stock repurchase program on November 27, 2007. Up to 2.5 million shares of the Company's Common Stock may be repurchased, and the total remaining authorization under the program was 2,494,747 shares as of December 31, 2011.2014. The repurchase program has no set expiration or termination date.

Issuer Purchases of Equity Securities
(Number of shares in thousands)

 
 Total
Number of
Shares
Purchased (1)
 Average
Price
Paid per
Share
 Total Number
of Shares
Purchased as
Part of a
Publicly
Announced
Plan or
Program
 Maximum
Number of
Shares that
May Yet Be
Purchased
Under the
Plan or
Program
 

October 1 – October 31, 2011

  - $-  -  2,494,747 

November 1 – November 30, 2011

  -  -  -  2,494,747 

December 1 – December 31, 2011

  14,053  9.91  -  2,494,747 
           

Total

  14,053 $9.91  -    
           
  
Total
Number
of Shares
Purchased (1)
 Average Price Paid per Share 
Total Number
of Shares
Purchased as
Part of a
Publicly
Announced
Plan or
Program
 
Maximum
Number of
Shares that
May Yet Be
Purchased
Under the
Plan or
Program
October 1 – October 31, 2014 1,519
 $16.10
 
 2,494,747
November 1 – November 30, 2014 
 
 
 2,494,747
December 1 – December 31, 2014 1,024
 16.87
 
 2,494,747
Total 2,543
 $16.41
 
  

The table above does not include the fourth quarter 2011 redemption of 193,000 Preferred Shares at $1,000 per share. For further details regarding the redemption of the Preferred Shares and the Company's stock repurchase programs, refer to the section titled "Management of Capital" in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," of this Form 10-K.

Equity Securities

None.


32

Table of Contents




ITEM 6. SELECTED FINANCIAL DATA

Consolidated financial information reflecting a summary of the operating results and financial condition of the Company for each of the five years in the period ended December 31, 20112014 is presented in the following table. This summary should be read in conjunction with the consolidated financial statements and accompanying notes included in Item 8, "Financial Statements and Supplementary Data," of this Form 10-K. A more detailed discussion and analysis of the factors affecting the Company's financial condition and operating results is presented in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," of this Form 10-K.


 Years ended December 31,  As of or for the years ended December 31,

 2011 2010 2009 2008 2007  2014 2013 2012 2011 2010

Operating Results (Amounts in thousands, except per share data)

Operating Results (Amounts in thousands, except per share data)

 Operating Results (Amounts in thousands, except per share data)      

Net income (loss)

 $36,563 $(9,684)$(25,750)$49,336 $80,159  $69,306
 $79,306
 $(21,054) $36,563
 $(9,684)

Net income (loss) applicable to common shares

 25,437 (19,717) (35,551) 48,482 80,094  68,470
 78,199
 (20,748) 25,437
 (19,717)

Per Common Share Data

           

Basic earnings (loss) per common share

 $0.35 $(0.27)$(0.71)$1.00 $1.62  $0.92
 $1.06
 $(0.28) $0.35
 $(0.27)

Diluted earnings (loss) per common share

 0.35 (0.27) (0.71) 1.00 1.62  0.92
 1.06
 (0.28) 0.35
 (0.27)

Common dividends declared

 0.040 0.040 0.040 1.155 1.195  0.31
 0.16
 0.04
 0.04
 0.04

Book value at year end

 12.93 12.40 13.66 14.72 14.94  14.17
 13.34
 12.57
 12.93
 12.40

Market price at year end

 10.13 11.52 10.89 19.97 30.60  17.11
 17.53
 12.52
 10.13
 11.52

Performance Ratios

           

Return on average common equity

 2.69% (2.06%) (4.84%) 6.46% 10.68%  6.56% 8.04% (2.14)% 2.69% (2.06)%
Return on average tangible common equity (1)
 10.29% 11.29% (3.07)% 3.86% (3.15)%

Return on average assets

 0.45% (0.12%) (0.32%) 0.60% 0.99%  0.80% 0.96% (0.26)% 0.45% (0.12)%

Net interest margin — tax-equivalent

 4.04% 4.13% 3.72% 3.61% 3.58% 

Dividend payout ratio

 11.43% (14.81%) (5.63%) 115.50% 73.77% 

Average equity to average assets ratio

 13.72% 14.31% 11.50% 9.30% 9.27% 
Net interest margin – tax-equivalent 3.69% 3.68% 3.86 % 4.04% 4.13 %
Non-performing loans to total loans (2)
 1.00% 1.14% 1.80 % 3.86% 4.24 %
Non-performing assets to total loans plus OREO (2)
 1.49% 2.13% 2.68 % 4.85% 5.25 %



 As of December 31,  As of or for the years ended December 31,

 2011 2010 2009 2008 2007  2014 2013 2012 2011 2010

Balance Sheet Highlights (Amounts in thousands)

Balance Sheet Highlights (Amounts in thousands)

 Balance Sheet Highlights (Amounts in thousands)        

Total assets

 $7,973,594 $8,138,302 $7,710,672 $8,528,341 $8,091,518  $9,445,139
 $8,253,407
 $8,099,839
 $7,973,594
 $8,138,302

Total loans, excluding covered loans

 5,088,113 5,100,560 5,203,246 5,360,063 4,963,672 

Total loans, including covered loans

 5,348,615 5,472,289 5,349,565 5,360,063 4,963,672 
Total loans 6,736,853
 5,714,360
 5,387,570
 5,348,615
 5,472,289

Deposits

 6,479,175 6,511,476 5,885,279 5,585,754 5,778,861  7,887,758
 6,766,101
 6,672,255
 6,479,175
 6,511,476

Senior and subordinated debt

 252,153 137,744 137,735 232,409 230,082  200,869
 190,932
 214,779
 252,153
 137,744

Long-term portion of Federal Home Loan Bank advances

 75,000 112,500 147,418 736 136,064 
Long-term portion of FHLB advances 
 114,550
 114,581
 75,000
 112,500

Stockholders' equity

 962,587 1,112,045 941,521 908,279 723,975  1,100,775
 1,001,442
 940,893
 962,587
 1,112,045

Financial Ratios

           

Allowance for credit losses as a percent of loans, excluding covered loans

 2.40% 2.84% 2.78% 1.75% 1.25% 
Allowance for credit losses to loans,
excluding acquired loans, including covered loans
 1.24% 1.52% 1.91% 2.28% 2.65%
Net loan charge-offs to average loans,
excluding acquired loans, including covered loans
 0.54% 0.55% 3.26% 1.91% 2.70%

Total capital to risk-weighted assets

 13.68% 16.27% 13.94% 14.36% 11.58%  11.23% 12.39% 11.90% 13.68% 16.27%

Tier 1 capital to risk-weighted assets

 11.61% 14.20% 11.88% 11.60% 9.03%  10.19% 10.91% 10.28% 11.61% 14.20%

Tier 1 leverage to average assets

 9.28% 11.21% 10.18% 9.41% 7.46%  9.03% 9.18% 8.40% 9.28% 11.21%

Tangible common equity to tangible assets

 8.83% 8.06% 6.29% 5.23% 5.58%  8.41% 9.09% 8.44% 8.83% 8.06%
Dividend payout ratio 33.70% 15.09% N/M
 11.43% N/M
Average equity to average assets ratio 12.03% 11.74% 11.93% 13.72% 14.31%
N/M – Not meaningful.
(1)
See the "Performance Overview" section of "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Item 7 of this Form 10-K for detail regarding the calculation of this performance metric.
(2)
Due to the impact of business combination accounting and protection provided by the FDIC Agreements, acquired loans and covered loans and covered OREO are excluded from these metrics to provide for improved comparability to prior periods and better perspective into asset quality trends. For a discussion of acquired and covered loans, see Notes 1 and 6 of "Notes to the Consolidated Financial Statements" in Item 8 of this Form 10-K.

33



Table of Contents


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

INTRODUCTION

First Midwest Bancorp, Inc. is a bank holding company headquartered in the Chicago suburb of Itasca, Illinois with operations throughout the greater Chicago metropolitan area as well as northwest Indiana, central and western Illinois, and eastern Iowa. Our principal subsidiary is First Midwest Bank (the "Bank"), which provides a broad range of banking and wealth management services to commercial and industrial, commercial real estate, municipal, and consumer customers through 109 banking locations. We are committed to meeting the financial needs of the people and businesses in the communities where we live and work by providing customized banking solutions, quality products, and innovative services that fulfill those financial needs.
The following discussion and analysis is intended to address the significant factors affecting our Consolidated Statements of Income for the three years 2009 through 2011ended December 31, 2014 and Consolidated Statements of Financial Condition as of December 31, 20102014 and 2011.2013. When we use the terms "First Midwest," the "Company," "we," "us," and "our," we mean First Midwest Bancorp, Inc., a Delaware corporation, and its consolidated subsidiaries. When we use the term "Bank," we are referring to our wholly owned banking subsidiary, First Midwest Bank. For your reference, a glossary of certain terms is presented on pages 3Management's discussion and 4 of this Form 10-K. The discussion is designed to provide stockholders with a comprehensive review of our operating results and financial condition andanalysis should be read in conjunction with the consolidated financial statements, accompanying notes thereto, and other financial information presented in Item 8 of this Form 10-K.

Our results of operations are affected by various factors, many of which are beyond our control, including interest rates, generallocal and national economic conditions, (nationallybusiness spending, consumer confidence, legislative and in our service areas), legislativeregulatory changes, and changes in real estate and securities markets. Our management evaluates performance using a variety of qualitative and quantitative metrics. The primary quantitative metrics whichused by management include:

Pre-Tax Pre-Provision Operating Earnings – Pre-tax pre-provision operating earnings (which reflect our operating performance before the effects of credit-related charges and other unusual, infrequent, or non-recurring revenues and expenses) is a non-GAAP financial measure, which we believe is useful because it helps investors to assess the Company's operating performance. A reconciliation of pre-tax, pre-provision operating earnings to GAAP can be found in Table 1.
Net Interest Income – Net interest income, is our primary source of revenue. Net interest incomerevenue, equals the difference between interest income and fees earned on interest-earning assets (such as loans and securities) and interest expense incurred on interest-bearing liabilities (such as deposits and borrowed funds).liabilities.
Net Interest Margin – – Net interest margin equals net interest income divided by total average interest-earning assets.
Noninterest Income – Noninterest income is the income we earn from fee-based revenues, (such as service charges on deposit accounts and wealth management fees), BOLIinvestment in bank-owned life insurance ("BOLI") and other income, and non-operating revenues (such as securities gainsrevenues.
Noninterest Expense – Noninterest expense is the expense we incur to operate the Company, which includes salaries and losses).employee benefits, net occupancy and equipment, professional services, and other costs.
Asset Quality – Asset quality isrepresents an estimation of the quality of our loan portfolio, including an assessment of the credit risk related to existing and potential loss exposure, and incorporates an evaluationcan be evaluated using a number of a variety of factors,quantitative measures, such as non-performing loans to total loans.
Regulatory Capital – Our regulatory capital is classified in one of the following two tiers: (i) Tier 1 capital consists of common equity, retained earnings, qualifying non-cumulative perpetual preferred stock, and qualifying trust-preferred securities, less goodwill and most intangible assets and (ii) Tier 2 capital includes qualifying subordinated debt and the allowance for credit losses, subject to limitations.

A condensed reviewquarterly summary of operations for the fourth quarter of 2011years ended December 31, 2014 and 2013 is included in the section titled "Fourth Quarter 2011 vs. 2010""Quarterly Earnings" of this Item 7. The summary provides an analysis of the quarterly earnings performance for the fourth quarter of 2011 compared to the same period in 2010.

Unless otherwise stated, all earnings per common share data included in this section and throughout the remainder of this discussion are presented on a fully diluted basis.

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This Form 10-K may contain certain "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. In some cases, forward-looking statements can be identified by the use of words such as "may," "might," "will," "would," "should," "could," "expect," "plan," "intend," "anticipate," "believe," "estimate," "predict," "probable," "potential," "possible," "target," or "continue" and words of similar import. Forward-looking statements are not historical facts but instead express only management’s beliefs regarding future results or events, many of which, by their nature, are inherently uncertain and outside of management’s control. It is possible that actual results and events may differ, possibly materially, from the anticipated results or events indicated in these forward-looking statements. Forward-looking statements are not guarantees of future performance, and we caution you not to place undue reliance on these statements. Forward-looking statements are made only as of the date of this report, and we undertake no obligation to update any forward-looking statements contained in this report to reflect new information or events or conditions after the date hereof.
Forward-looking statements may be deemed to include, among other things, statements relating to our future financial performance, the performance of our loan or securities portfolio, the expected amount of future credit reserves or charge-offs, corporate strategies or objectives, anticipated trends in our business, regulatory developments, acquisition transactions, including estimated synergies,

34


Table



cost savings and financial benefits of Contents

PERFORMANCE OVERVIEW

Table 1
Selected Financial Data
(Dollar amountspending or consummated transactions, and growth strategies, including possible future acquisitions. These statements are subject to certain risks, uncertainties and assumptions. These risks, uncertainties and assumptions include, among other things, the following:

Management's ability to reduce and effectively manage interest rate risk and the impact of interest rates in thousands, except per share data)

general on the volatility of our net interest income.
 
 Years ended December 31, % Change 
 
 2011 2010 2009 2011-2010 2010-2009 

Operating Results

                

Interest income

 $321,511 $328,867 $341,751  (2.2) (3.8)

Interest expense

  (39,891) (49,518) (90,219) (19.4) (45.1)
            

Net interest income

  281,620  279,349  251,532  0.8  11.1 

Fee-based revenues

  94,182  86,762  85,168  8.6  1.9 

Other noninterest income

  4,269  5,270  7,395  (19.0) (28.7)

Noninterest expense, excluding losses realized on OREO, integration costs associated with FDIC-assisted transactions, severance-related costs, and an FDIC special assessment (1)

  (250,218) (234,975) (212,734) 6.5  10.5 
            

Pre-tax, pre-provision operating earnings (2)

  129,853  136,406  131,361  (4.8) 3.8 

Provision for loan losses

  (80,582) (147,349) (215,672) (45.3) (31.7)

Gains on securities sales, net

  3,346  17,133  26,726  (80.5) (35.9)

Securities impairment losses

  (936) (4,917) (24,616) (81.0) (80.0)

Gains on FDIC-assisted transactions

  -  4,303  13,071  -  (67.1)

Gains on early extinguishment of debt

  -  -  15,258  -  (100.0)

Gain on acquisition of deposits

  1,076  -  -  100.0  - 

Write-downs of OREO (1)

  (3,785) (23,367) (12,584) (83.8) 85.7 

Losses on sales of OREO, net (1)

  (5,901) (17,113) (5,970) (65.5) 186.6 

Integration costs associated with FDIC-assisted transactions (1)

  -  (3,324) -  (100.0) 100.0 

Severance-related costs (1)

  (2,000) -  -  100.0  - 

FDIC special deposit insurance assessment (1)

  -  -  (3,500) -  (100.0)
            

Income (loss) before income tax (expense) benefit

  41,071  (38,228) (75,926) 207.4  49.7 

Income tax (expense) benefit

  (4,508) 28,544  50,176  (115.8) (43.1)
            

Net income (loss)

  36,563  (9,684) (25,750) 477.6  62.4 

Preferred dividends and accretion on preferred stock

  (10,776) (10,299) (10,265) 4.6  0.3 

Net (income) loss applicable to non-vested restricted shares

  (350) 266  464  (231.6) (42.7)
            

Net income (loss) applicable to common shares

 $25,437 $(19,717)$(35,551) 229.0  44.5 
            

Diluted earnings (loss) per common share

 $0.35 $(0.27)$(0.71) 229.6  62.0 

Performance Ratios

                

Return on average common equity

  2.69%  (2.06%) (4.84%)      

Return on average assets

  0.45%  (0.12%) (0.32%)      

Net interest margin – tax equivalent

  4.04%  4.13%  3.72%       

Efficiency ratio

  62.12%  58.84%  57.86%       
Asset and liability matching risks and liquidity risks.
The Company's accounting and reporting policies conform to U.S. generally accepted accounting principles ("GAAP")GAAP and general practice within the banking industry. As a supplement to GAAP, the Company has provided thisprovides non-GAAP performance result. Theresults, which the Company believes that this non-GAAP financial measure isare useful because it helpsthey assist investors to assessin assessing the Company's operating performance. This includes, but is not limited to, earnings per share, excluding acquisition and integration related expenses, total non-interest expense, excluding acquisition and integration related expenses, tax-equivalent net interest income (including its individual components), tax-equivalent net interest margin, the efficiency ratio, tier 1 common capital to risk-weighted assets, tangible common equity to tangible assets, tangible common equity, excluding accumulated other comprehensive loss, to tangible assets, tangible common equity to risk-weighted assets, and return on average tangible common equity. Although this non-GAAP financial measure is intended to enhance investors' understanding of the Company's business and performance, thisthese non-GAAP financial measuremeasures should not be considered an alternative to GAAP.


35




PERFORMANCE OVERVIEW
TableAcquisitions
On August 8, 2014, the Bank completed the acquisition of Contents

 
 December 31,
2011
 December 31,
2010
 Dollar
Change
 %
Change
 

Balance Sheet Highlights

             

Total assets

 $7,973,594 $8,138,302 $(164,708) (2.0)

Total loans, excluding covered loans

  5,088,113  5,100,560  (12,447) (0.2)

Total loans, including covered loans

  5,348,615  5,472,289  (123,674) (2.3)

Total deposits

  6,479,175  6,511,476  (32,301) (0.5)

Transactional deposits

  4,820,058  4,519,492  300,566  6.7 

Loans, excluding covered loans, to deposits ratio

  78.5%  78.3%       

Transactional deposits to total deposits

  74.4%  69.4%       

Asset Quality Highlights (1)

             

Non-accrual loans

 $187,325 $211,782 $(24,457) (11.5)

90 days or more past due loans (still accruing interest)

  9,227  4,244  4,983  117.4 
          

Total non-performing loans

  196,552  216,026  (19,474) (9.0)

Troubled debt restructurings ("TDRs") (still accruing interest)

  17,864  22,371  (4,507) (20.1)

Other real estate owned

  33,975  31,069  2,906  9.4 
          

Total non-performing assets

 $248,391 $269,466 $(21,075) (7.8)
          

30-89 days past due loans

 $27,495 $23,646 $3,849  16.3 

Allowance for credit losses

  121,962  145,072  (23,110) (15.9)

Allowance for credit losses as a percent of loans

  2.40%  2.84%       

On September 26, 2014, the Bank completed the acquisition of National Machine Tool Financial Corporation ("National Machine Tool"). In business for more than 28 years and a discussioncustomer of coveredthe Bank for more than 15 years, National Machine Tool, now known as First Midwest Equipment Finance Co., provides equipment leasing and financing alternatives to traditional commercial bank financing.

On December 2, 2014, the Company completed the acquisition of the south suburban Chicago-based Great Lakes Financial Resources, Inc. ("Great Lakes"), the holding company for Great Lakes Bank, National Association. As part of the transaction, the Company acquired seven full-service retail banking offices, one drive-up location, $223 million in loans, and covered OREO, refer to$464 million in deposits on the date of acquisition.

For additional detail regarding these acquisitions, see Note 53 of "Notes to the Consolidated Financial Statements" in Item 8 of this Form 10-K. Asset quality, including covered loansThe conversion and covered OREO, is includedintegration of these transactions were substantially complete as of December 31, 2014.

Table 1
Selected Financial Data
(Dollar amounts in the section titled "Loan Portfolio and Credit Quality" of this Item 7.

In a challenged business environment, consistent sales focus helped us to hold loan balances steady as we significantly reduced our exposure to troubled real estate lending categories. Our overall credit metrics significantly improved from 2010 as we reduced potential problem credits by almost 30% during this period. At the same time, transactional deposit growth helped our margins remain over 4% and our fee-based revenues expand. Our net interest margin performance in 2012 will depend, to a large extent, on our ability to redeploy excess cash from lower-yielding, shorter-term investments to higher-yielding loans, as well as maintain transactional deposits.

Over the course of 2011, we significantly invested in our businesses, aligned our sales resources to areas of growth and opportunity, and continued to implement operating efficiencies that will help prepare us to benefit from an improving credit environment and economy. These actions, coupled with the redemption of the Preferred Shares in the fourth quarter of 2011, better position us to pursue opportunities for growth.

thousands, except per share data)

  Years ended December 31,
  2014 2013 2012
Operating Results      
Interest income $299,864
 $287,247
 $300,569
Interest expense 23,012
 27,115
 34,901
Net interest income 276,852
 260,132

265,668
Provision for loan and covered loan losses 19,168
 16,257
 158,052
Noninterest income 126,618
 140,883
 109,948
Noninterest expense 283,826
 256,737
 267,500
Income (loss) before income tax expense (benefit) 100,476
 128,021
 (49,936)
Income tax expense (benefit) 31,170
 48,715
 (28,882)
Net income (loss) $69,306
 $79,306
 $(21,054)
Weighted-average diluted common shares outstanding 74,496
 73,994
 73,666
Diluted earnings (loss) per common share $0.92
 $1.06
 $(0.28)
Performance Ratios      
Return on average common equity 6.56% 8.04% (2.14)%
Return on average tangible common equity (1)
 10.29% 11.29% (3.07)%
Return on average assets 0.80% 0.96% (0.26)%
Net interest margin - tax equivalent (2)
 3.69% 3.68% 3.86 %
Efficiency ratio (3)
 64.57% 64.19% 67.14 %

(1)
Tangible common equity ("TCE") represents common stockholders’ equity less goodwill and identifiable intangible assets. Acquisition and integration related expenses of $13.9 million for the year ended December 31, 2014 are excluded from the return on average tangible common equity ratio. See the "Management of Capital" section of this Item 7 for the detailed calculation of TCE.
(2)
See the section titled "Earnings Performance" of this Item 7 for the calculation of this metric.
(3)
The efficiency ratio expresses noninterest expense, excluding other real estate owned ("OREO") expense, as a percentage of tax-equivalent net interest income plus total fee-based revenues, other income, net trading gains, and tax-equivalent adjusted BOLI income. In addition, acquisition and integration related expenses of $13.9 million are excluded from the efficiency ratio for the year ended December 31, 2014.

36




  As of December 31,    
  2014 2013 $ Change % Change
Balance Sheet Highlights        
Total assets $9,445,139
 $8,253,407
 $1,191,732
 14.4
Total loans, excluding covered loans 6,657,418
 5,580,005
 1,077,413
 19.3
Total loans, including covered loans 6,736,853
 5,714,360
 1,022,493
 17.9
Total deposits 7,887,758
 6,766,101
 1,121,657
 16.6
Core deposits 6,616,200
 5,558,318
 1,057,882
 19.0
Loans-to-deposits ratio 85.4% 84.5%  
  
Core deposits to total deposits 83.9% 82.1%  
  

  As of December 31,    
  2014 2013 $ Change % Change
Asset Quality Highlights (1)
        
Non-accrual loans $58,853
 $59,798
 $(945) (1.6)
90 days or more past due loans (still accruing interest) 771
 3,708
 (2,937) (79.2)
Total non-performing loans 59,624
 63,506
 (3,882) (6.1)
Accruing trouble debt restructuring ("TDRs") 3,704
 23,770
 (20,066) (84.4)
OREO 25,779
 32,473
 (6,694) (20.6)
Total non-performing assets 
 $89,107
 $119,749
 $(30,642) (25.6)
30-89 days past due loans (still accruing interest) $13,473
 $20,742
 $(7,269) (35.0)
Allowance for Credit Losses        
Allowance for credit losses 74,510
 87,121
 (12,611) (14.5)
Allowance for credit losses to loans, excluding acquired loans, including covered loans 1.24% 1.52%  
  
Allowance for credit losses to non-accrual loans, excluding acquired and covered loans 114.33% 124.69%    

(1)
Due to the impact of business combination accounting and protection provided by the FDIC Agreements, acquired loans and covered loans and covered OREO are excluded from these metrics to provide for improved comparability to prior periods and better perspective into asset quality trends. For a discussion of acquired and covered loans, see Notes 1 and 6 of "Notes to the Consolidated Financial Statements" in Item 8 of this Form 10-K. Asset quality, including acquired loans, covered loans, and covered OREO, is included in the "Loan Portfolio and Credit Quality" section below.
Performance Overview for 20112014 Compared with 2010

2013

Net income for 20112014 was $36.6 million, before adjustments for preferred dividends and accretion and non-vested restricted shares, and $25.4$69.3 million, or $0.35$0.92 per share, applicablecompared to common shareholders after such adjustments. This compares to a net lossincome of $9.7 million and a net loss applicable to common shareholders of $19.7$79.3 million, or $0.27$1.06 per share, for 2010. Net2013. The reduction in earnings per share was driven primarily by acquisition and integration related expenses of $13.9 million related to the Popular, National Machine Tool, and Great Lakes acquisitions. Excluding these acquisition and integration related expenses, earnings per share was $1.03 for the year ended December 31, 2014. In addition, net income for 2011 improved2013 was impacted by $46.2certain significant transactions including a $34.0 million from 2010, reflectinggain on the steady advancementsale of our strategic priorities as we benefited from continued, solid earningsan equity investment and substantially lower credit costs.

Pre-tax, pre-provision operating earningsa $7.8 million gain on the termination of $129.9 million for 2011 were down $6.6 million, or 4.8%, compared to 2010 primarily as a result of a $15.2 million, or 6.5%, increasetwo FHLB forward commitments, offset in noninterest expense, excluding losses on sales and


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write-downs of OREO, integration costs, and severance-related costs. This was partially offsetpart by a $7.4$13.3 million increase in fee-based revenues with such increase spread across all categories.

non-deductible write-down of the cash surrender values ("CSV") of certain BOLI policies. Excluding these transactions, 2013 earnings per share was $0.90.

Tax-equivalent net interest margin of 3.69% for 20112014 was 4.04%,in line with 2013 despite continued pressure on loan margins and investment portfolio yields as we improved the mix of earning assets and liabilities through organic loan growth and acquisitions, employed certain loan hedging strategies, and prepaid $114.6 million of FHLB advances.
Total noninterest income was $126.6 million for 2014 compared to $140.9 million for 2013. Total fee-based revenues were $111.1 million, increasing 4.5% compared to 2013. Total noninterest income was elevated in 2013 driven primarily by certain significant transactions including a decline$34.0 million gain on the sale of 9 basis points from 4.13% in 2010. The reduction in margin resulted from a 23 basis point decrease in the average yield on interest-earning assets, largely due to the cumulative effect of prior year securities salesan equity investment and a lower yield$7.8 million gain on securities as cash flows from securities paydowns and maturities repriced at lower interest rates. While loans also repriced at lower ratesthe termination of two FHLB forward commitments, offset in 2011, the reduction was more than offset by an increase in the yield on covered loans. This effect was partially offsetpart by a 16 basis point drop$13.3 million non-deductible write-down of the CSV of certain BOLI policies.

37




Total noninterest expense increased 10.6% compared to 2013, due primarily to $13.9 million in acquisition and integration related expenses and approximately $5.5 million in recurring costs associated with operating the average rate paid for interest-bearing liabilities, driven by a 14 basis point decline in the average rate paid for time depositsnewly acquired locations. The conversion and a 16 basis point reduction in the aggregate rate paid on interest-bearing transaction accounts. Asintegration of these transactions was substantially complete as of December 31, 2011, our loan-to-deposit ratio was 78.5%,2014, with 74.4%certain remaining efficiencies to be implemented in the first half of our customer deposits consisting of demand, NOW, money market, and savings transactional accounts.

The rise in noninterest expense was a result of higher loan remediation costs; increased salaries related to the expansion of commercial, retail, and wealth management sales staff; and a $1.3 million correction of a 2010 actuarial pension expense calculation related to the valuation of future early retirement benefits recorded in fourth quarter 2011. 2015.

A detailed discussion of net interest income and noninterest income and expense is presented in the following section titled "Earnings Performance" of this Item 7.

In December 2011, we completed the purchase of certain Chicago-market deposits from Old National Bank of Evansville, Indiana ("Old National") and recorded a gain of $1.1 million. The transaction included $106.7 million in deposits (comprised of $70.6 million in transactional deposits and $36.1 million in time deposits) and one banking facility.

As of December 31, 2011,2014 our securities portfolio totaled $1.1$1.2 billion, decreasing 5.8%rising $56.5 million, or 4.9%, from December 31, 2010, following a 15.6% decrease from December 31, 2009. Our2013. The addition of $219.3 million of securities portfolio declined over the past three years as we took advantage of opportunitiesacquired in the market to sell securities at a gain given the low interest rate environment.Great Lakes transaction was substantially offset by maturities, calls, and prepayments during 2014. For a detailed discussion of our securities portfolio, refer tosee the section titled "Investment Portfolio Management" of this Item 7.

Total loans, includingexcluding covered loans, of $5.3 billion as of December 30, 2011 declined $123.7 million, or 2.3%, from $5.5$6.7 billion as of December 31, 2010. The natural decline2014 reflects growth of $1.1 billion, or 19.3%, from December 31, 2013. Excluding loans acquired in covered loan balances accounted for the majorityPopular and Great Lakes transactions of this reduction.

Total$718.3 million, total loans, excluding covered loans, as of December 31, 2011 were stable compared to December 31, 2010. The office, retail, and industrial and other commercial real estate portfolios exhibited 6.2% growth during this period, substantially in the form of owner-occupied business relationships. Offsetting this progress, we continued to reduce our exposure to more troubled construction and multi-family real estate categories during 2011.

Non-performing assets, excluding covered loans and covered OREO, were $248.4 million at December 31, 2011, decreasing $21.1grew $359.2 million, or 7.8%6.4%, from December 31, 2010. The reduction2013. This growth was substantially due to management's remediation activities, dispositions, charge-offs,driven by solid performance from our legacy sales platform and the returncontinued impact of accruing TDRs to performing status, partially offset by loans downgraded to non-accrual status.greater resource investments and expansion into certain sector-based lending areas, such as agri-business, asset-based lending, and healthcare. For a detailed discussion of non-performing assets, refer toour loan portfolio, see the section titled "Loan Portfolio and Credit Quality" of this Item 7.

As of December 31, 2014, non-performing assets, excluding acquired and covered loans and covered OREO, decreased by $30.6 million, or 25.6%, from December 31, 2013 and represented 1.49% of total loans plus OREO compared to 2.13% as of December 31, 2013. The continued improvement in non-performing assets and the related credit metrics reflects management's ongoing commitment to credit remediation. See the section titled "Loan Portfolio and Credit Quality" of this Item 7 for additional discussion of non-performing assets.
Total average funding sources of $7.5 billion for 20112014 increased $152.4$330.2 million from 2013, driven primarily by deposits assumed in the Popular and Great Lakes acquisitions which further strengthened our core deposit base. Growth in average demand deposits of $248.5 million, or 2.2%13.2%, from 2010 resulting from a $433.0 million, or 10.0%, increaseDecember 31, 2013 led the rise in average transactionalcore deposits and a $12.5 million, or 9.1%, increasemore than offset the reduction in higher-costing time deposits, borrowed funds, and senior and subordinated debt. These increases were partially offset by declines in higher-costing time deposits of $199.6 million, or 10.0%, and borrowed funds of $93.5 million, or 26.0%. The rise in demand deposits and drop in time deposits resulted inFor a more favorable product mix. For adetailed discussion of our funding sources see the section titled "Funding and Liquidity Management" of this Item 7.

In fourth quarter 2011, we redeemed all of the $193.0 million of Preferred Shares issued to the Treasury, resulting in the recognition of $1.5 million in accelerated accretion. We funded the redemption through a combination of existing liquid assets and proceeds from a $115.0 million senior debt offering. The notes, which have an interest rate of 5.875%, payable semi-annually, will mature in November 2016. In a related transaction, we redeemed the Treasury's associated Warrant. We paid $900,000 to the Treasury to redeem the Warrant, which concluded our


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participation in the CPP. For a discussion of our capital position, see the section titled "Management of Capital" of this Item 7.

Performance Overview for 20102013 Compared with 2009

2012

Net loss in 2010income for 2013 was $9.7$79.3 million, before adjustment for preferred dividends and non-vested restricted shares, with a $19.7 million loss, or $0.27$1.06 per share, applicable to common shareholders after such adjustments. This comparescompared to a net loss of $25.8 million, before adjustment for preferred dividends and non-vested restricted shares and net loss applicable to common shareholders of $35.6$21.1 million, or $0.71$0.28 per share, for 2009. The year-over-year improvement was largely due to higher2012.
Tax-equivalent net interest income and fee-based revenues and lower provisionmargin declined 18 basis points to 3.68% for loan losses, which more than offset higher noninterest expense, including losses recognized2013 from 3.86% for 2012. The reduction in margin reflected a 30 basis point decrease in the average yield on the sale and write-down of OREO.

Pre-tax, pre-provision operating earnings for 2010 were $136.4 million, an increase of 3.8% from 2009. The increase over 2009 was primarily driven by higher average interest-earning assets improved net interest margins,due primarily to a lower yield earned on new and renewing loans as a result of greater fee-based revenues, whichcustomer preference for floating rate loans, as well as the reinvestment of cash flows from the investment portfolio into lower yielding securities. These lower yields were partially offset higher costs related to FDIC-assisted transactions and loan remediation activities.

Our 2010 tax-equivalent net interest income increased $24.5 million compared to 2009. Interest expense declined $40.7 million, reflecting bothby a decline in total interest-bearing liabilities and the rates paid for those liabilities. Tax-equivalent interest income declined $16.2 million compared to 2009 due tointerest-bearing liabilities, including a 142 basis point decline in tax-equivalent yield. on interest-bearing core deposits, a 28 basis point decline on time deposits, and a 3 basis point decline on senior and subordinated debt.

The netprovision for loan and covered loan losses was $16.3 million for 2013 compared to $158.1 million for 2012. The higher provision for loan and covered loan losses for the year ended December 31, 2012 resulted from the additional provision of $62.3 million recorded as a result of these changes was an increaseselling $172.5 million of non-performing and performing potential problem loans and recording charge-offs of $80.3 million.
Total noninterest income for 2013 rose 28.1% compared to 2012, driven primarily by certain balance sheet repositioning activities, which mainly impacted the securities and BOLI portfolios. These activities were completed to take advantage of changing market conditions, strengthen capital, and better position the Company to benefit from a rising interest rate environment. These activities included:
The sale of our $4.2 million investment in tax-equivalent net interest income.

Fee-based revenuesTextura Corporation ("Textura") for $38.2 million, resulting in a gain of $86.8$34.0 million. The Company has no other similar investments. We hold a warrant to purchase 20,000 shares of Textura common stock.

The termination of two forward commitments with the FHLB to borrow a total of $250 million for 2010 grew by 1.9% compareda 5-year period beginning in 2014 at a weighted average interest rate of approximately 2.0% resulting in a gain of $7.8 million. This termination was executed to 2009. Service charge fees declinedtake advantage of a temporary rise in interest rates and an expectation that future liquidity needs could be better managed through maturities of securities, continued growth in our deposit base, and other similar low rate borrowings.


38




The voluntary modification of crediting rate terms and the underlying CSV of approximately $100 million of lower yielding BOLI policies, resulting in a $13.3 million write-down. This write-down represents the difference between the book value and the fair value of the underlying investments and was previously being amortized in other noninterest income, offsetting BOLI income and any insurance proceeds received. This action gave the Company the flexibility to reinvest these assets in longer duration securities at higher yields to enhance BOLI income.
As of December 31, 2013, our securities portfolio totaled $1.2 billion, rising 3.4% from December 31, 2012. This growth resulted primarily from lower overdraftthe redeployment of cash and non-sufficient fund fees. However, this decline was more than offset by increases in other service charges, commissions, and fees (primarily merchant fee income), card-based fees, and wealth management fees.

Noninterest expense rose by 18.7% for 2010 compared to 2009. The increase was attributed to higher losses and write-downs on OREO and increases in loan remediation costs (including costs to service certain assets acquired in FDIC-assisted transactions), other professional services fees from the valuation and integrationcash equivalents into purchases of FDIC-acquired assets, and compensation expense. We recorded integration expenses associated with our FDIC-assisted transactions of $3.3 million in 2010.

In 2010, we sold $390.2 million in collateralized mortgage obligations ("CMOs"), and other mortgage-backed securities ("MBSs"). These increases were partially offset by maturities and calls of municipal securities, and corporate bonds for a gain of $17.1 million. Net securities gains were $12.2 million for 2010 and were net of other-than-temporary impairment charges of $4.9 million. Impairment charges were primarily related to our collateralized debt obligations ("CDOs").

Outstandingsecurities.

Total loans, excluding covered loans, of $5.1$5.6 billion as of December 31, 2010 declined $102.72013 reflected growth of $390.3 million, or 2.0%7.5%, from December 31, 2009 as we charged-off $147.1 million in loans in 2010. Growth2012. The loan portfolio benefited from well-balanced corporate loan growth reflecting credits of 1.9% in commercialvarying size and industrial loans, 4.8% in multi-family loans, and 7.2% in other commercial real estate lending more than offset a 37.8% decline in the commercial and residential construction loan portfolios.

Excludingdiverse geographic locations within our markets.

As of December 31, 2013, non-performing assets, excluding covered loans and covered OREO, non-performing assets as of December 31, 2010 were $269.5 million, down $66.5 million, or 19.8%,declined by 14.5% compared to December 31, 2009. Non-performing loans, excluding covered loans, represented 4.24% of total loans at December 31, 2010, compared to 4.77% at December 31, 2009. Loans 30-89 days delinquent totaled $23.6 million at December 31, 2010 down $14.3 million from December 31, 2009. The improvement2012. Improvement in asset quality was substantially driven by loan charge-offs, OREO write-downs, and disposals of non-performing assets, partly offset by loans downgraded to non-accrual status.

In fourth quarter 2010, the lagging market recovery for real estate in the suburban Chicago market warranted a reassessment of the existing disposition strategies for certain non-performing assets and related credit metrics resulted primarily from management's continued focus on credit remediation.

Average funding sources for 2013 increased $156.7 million compared to the year ended December 31, 2012, primarily from growth in core deposits, which more than offset a shift to more aggressively pursue remediation. In selecting non-performing assets for disposition strategy reassessment, we specifically targeted construction-related loansreduction in higher-costing time deposits. Average senior and OREO that we believed were subject to longer estimated recovery periods and a higher likelihood of further declines in value due to their geographic locations. Our determinationssubordinated debt decreased $18.4 million from 2012 driven by the full-year impact of the underlying collateral values were based on current offers. If offers were not available, we relied upon current offers


Tablerepurchase and retirement of Contents

for similar properties located in similar geographic areas. As a result, we wrote down selected non-performing construction loans$4.3 million of junior subordinated debentures and OREO to better reflect expected proceeds from disposition and recorded additional$12.0 million of subordinated notes during the fourth quarter loan charge-offs and OREO write-downs of $47.7 million.

We completed three FDIC-assisted transactions in 2009 and 2010. For a discussion of these transactions, refer to Note 5 of "Notes to Consolidated Financial Statements" in Item 8 of this Form 10-K.

Average core transactional deposits for 2010 were $4.3 billion, an increase of $587.2 million, or 15.7%, from 2009. Contributing to this increase was approximately $325 million in core transactional deposits acquired through FDIC-assisted transactions.

During 2010, we improved the quality of our capital composition through the issuance of Common Stock, resulting in a $196.0 million increase in stockholders' equity, net of underwriting discount and related expenses.

2012.

EARNINGS PERFORMANCE

Net Interest Income

Net interest income is our primary source of revenue. Net interest income equals the difference between interest incomerevenue and fees earned on interest-earning assets (such as loans and securities) and interest expense incurred on interest-bearing liabilities (such as deposits and borrowed funds). The level ofis impacted by interest rates and the volume and mix of interest-earning assets and interest-bearing liabilities impact net interest income. Net interest margin represents net interest income as a percentage of total average interest-earning assets.liabilities. The accounting policies underlyingfor the recognition of interest income on loans, securities, and other interest-earning assets are presented in Note 1 of "Notes to the Consolidated Financial Statements" in Item 8 of this Form 10-K.

Our accounting and reporting policies conform to U.S. generally accepted accounting principles ("GAAP")GAAP and general practice within the banking industry. For purposes of this discussion, both net interest income and net interest margin have been adjusted to a fully tax-equivalent basis to more appropriately compare the returns on certain tax-exempt loans and securities to those on taxable interest-earning assets. Although we believe that these non-GAAP financial measures enhance investors' understanding of our business and performance, these non-GAAP financial measuresthey should not be considered an alternative to GAAP. The effect of suchthis adjustment is shown at the bottom of Table 2.

Table 2 summarizes our average interest-earning assets and interest-bearing liabilities for the years ended December 31, 2011, 2010,2014, 2013, and 2009,2012, the related interest income and interest expense for each earning asset category and funding source, and the average interest rates earned and paid. Table 3 details changesdifferences in interest income and expense from prior years and analyzes the extent to which any changes are attributable to volume and rate changes.

fluctuations.

39


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Table 2
Net Interest Income and Margin Analysis
(Dollar amounts in thousands)

 
 2011  
 2010  
 2009 
 
 Average
Balance
 Interest Yield/
Rate
(%)
  
 Average
Balance
 Interest Yield/
Rate
(%)
  
 Average
Balance
 Interest Yield/
Rate
(%)
 

Assets:

                                

Federal funds sold and other short-term investments

 $624,663 $1,546  0.25   $368,172 $933  0.25   $90,531 $199  0.22 

Securities:

                                

Trading - taxable

  15,321  168  1.10    13,851  181  1.51    12,270  227  1.85 

Investment securities - taxable

  561,799  14,115  2.51    538,208  22,116  4.11    899,368  42,392  4.71 

Investment securities - nontaxable(1)

  548,820  34,694  6.52    668,828  42,506  6.56    847,844  53,339  6.29 
                        

Total securities

  1,125,940  48,977  4.55    1,220,887  64,803  5.51    1,759,482  95,958  5.45 
                        

FHLB and Federal Reserve Bank stock

  59,352  1,369  2.51    60,249  1,349  2.24    55,081  1,199  2.18 

Loans, excluding covered loans(1)(2)

  5,101,621  254,533  4.99    5,191,154  260,809  5.02    5,348,979  262,634  4.91 

Covered loans(3)

  398,559  28,904  7.25    323,595  17,285  5.54    28,049  1,419  5.06 
                        

Total loans

  5,500,180  283,437  5.15    5,514,749  278,094  5.04    5,377,028  264,053  4.91 
                        

Total interest-earning assets(1)(2)

  7,310,135  335,329  4.59    7,164,057  345,179  4.82    7,282,122  361,409  4.96 
                           

Cash and due from banks

  119,709          125,273          119,469       

Allowance for credit losses

  (143,314)         (154,634)         (127,037)      

Other assets

  873,376          889,958          789,555       
                              

Total assets

 $8,159,906         $8,024,654         $8,064,109       
                              

Liabilities and Stockholders' Equity:

                                

Savings deposits

 $934,937  1,615  0.17   $815,371  2,295  0.28   $751,386  3,024  0.40 

NOW accounts

  1,091,184  1,130  0.10    1,082,774  1,895  0.18    984,529  3,102  0.52 

Money market deposits

  1,230,090  2,891  0.24    1,199,362  6,019  0.50    937,766  9,213  0.98 
                        

Total interest-bearing transactional deposits

  3,256,211  5,636  0.17    3,097,507  10,209  0.53    2,673,681  15,339  0.57 

Time deposits

  1,792,009  21,620  1.21    1,991,637  26,918  1.55    2,001,207  48,838  2.44 
                        

Total interest-bearing deposits

  5,048,220  27,256  0.54    5,089,144  37,127  0.73    4,674,888  64,177  1.57 

Borrowed funds

  265,702  2,743  1.03    359,174  3,267  0.91    1,118,792  12,569  1.12 

Senior and subordinated debt

  150,285  9,892  6.58    137,739  9,124  6.52    208,621  13,473  6.46 
                        

Total interest-bearing liabilities

  5,464,207  39,891  0.73    5,586,057  49,518  0.89    6,002,301  90,219  1.50 
                           

Demand deposits

  1,498,900          1,224,629          1,061,208       

Other liabilities

  77,276          65,749          72,927       

Stockholders' equity - common

  947,145          955,219          734,673       

Stockholders' equity - preferred

  172,378          193,000          193,000       
                              

Total liabilities and stockholders' equity

 $8,159,906         $8,024,654         $8,064,109       
                              

Net interest income/margin(1)

    $295,438  4.04      $295,661  4.13      $271,190  3.72 
                           

Net interest income (GAAP)

    $281,620         $279,349         $251,532    

Tax-equivalent adjustment

     13,818          16,312          19,658    
                              

Tax equivalent net interest income

    $295,438         $295,661         $271,190    
                              
  Years Ended December 31,
  2014  2013  2012
  
Average
Balance
 Interest Yield/
Rate (%)
  
Average
Balance
 Interest Yield/
Rate (%)
  
Average
Balance
 Interest Yield/
Rate (%)
Assets:  
  
     
  
         
Other interest-earning assets $543,056
 $1,591
 0.29  $633,050
 $1,819
 0.29  $470,069
 $1,143
 0.24
Securities:  
  
     
  
         
Trading - taxable 17,964
 174
 0.97  15,526
 161
 1.04  15,415
 181
 1.17
Investment securities - taxable 649,161
 14,516
 2.24  713,237
 12,249
 1.72  679,753
 12,670
 1.86
Investment securities -
  nontaxable (1)
 461,571
 25,705
 5.57  510,412
 28,636
 5.61  512,136
 31,231
 6.10
Total securities 1,128,696
 40,395
 3.58  1,239,175
 41,046
 3.31  1,207,304
 44,082
 3.65
FHLB and Federal Reserve
  Bank stock
 35,622
 1,366
 3.83  39,593
 1,346
 3.40  48,400
 1,374
 2.84
Loans (1)(2)(3)
 6,121,326
 268,249
 4.38  5,498,788
 255,333
 4.64  5,506,394
 267,219
 4.85
Total interest-earning
  assets (1)(2)
 7,828,700
 311,601
 3.98  7,410,606
 299,544
 4.04  7,232,167
 313,818
 4.34
Cash and due from banks 120,358
  
    121,564
  
    120,757
  
  
Allowance for loan and
  covered loan losses
 (79,482)  
    (95,698)  
    (117,121)  
  
Other assets 808,136
  
    841,967
  
    873,923
  
  
Total assets $8,677,712
  
    $8,278,439
  
    $8,109,726
  
  
Liabilities and Stockholders' Equity:  
     
  
         
Savings deposits $1,222,292
 904
 0.07  $1,126,561
 844
 0.07  $1,038,379
 1,055
 0.10
NOW accounts 1,243,186
 673
 0.05  1,170,928
 676
 0.06  1,090,446
 747
 0.07
Money market deposits 1,392,367
 1,784
 0.13  1,306,625
 1,735
 0.13  1,216,173
 1,934
 0.16
Total interest-bearing
  core deposits
 3,857,845
 3,361
 0.09  3,604,114
 3,255
 0.09  3,344,998
 3,736
 0.11
Time deposits 1,211,882
 7,016
 0.58  1,306,888
 8,646
 0.66  1,529,006
 14,316
 0.94
Total interest-bearing
  deposits
 5,069,727
 10,377
 0.20  4,911,002
 11,901
 0.24  4,874,004
 18,052
 0.37
Borrowed funds 149,559
 573
 0.38  205,461
 1,607
 0.78  193,643
 2,009
 1.04
Senior and subordinated debt 191,776
 12,062
 6.29  212,896
 13,607
 6.39  231,273
 14,840
 6.42
Total interest-bearing
  liabilities
 5,411,062
 23,012
 0.43  5,329,359
 27,115
 0.51  5,298,920
 34,901
 0.66
Demand deposits 2,137,778
  
    1,889,247
  
    1,762,968
  
  
Other liabilities 85,306
  
    87,550
  
    80,075
  
  
Stockholders' equity - common 1,043,566
  
    972,283
  
    967,763
  
  
Total liabilities and
  stockholders' equity
 $8,677,712
  
    $8,278,439
  
    $8,109,726
  
  
Net interest income/margin (1)
  
 $288,589
 3.69   
 $272,429
 3.68   
 $278,917
 3.86
Net interest income (GAAP)  
 $276,852
     
 $260,132
     
 $265,668
  
Tax-equivalent adjustment  
 11,737
     
 12,297
     
 13,249
  
Tax-equivalent net interest
   income
  
 $288,589
     
 $272,429
     
 $278,917
  

(1)
Interest income and yields are presented on a tax-equivalent basis, assuming a federal income tax rate of 35%.
(2)
Non-accrual loans, including acquired and covered non-accrual loans, which totaled $66.2 million as of December 31, 2014, $80.7 million as of December 31, 2013, and $98.7 million as of December 31, 2012, are included in loans for purposes of this analysis. Additional detail regarding non-accrual loans is presented in the following section titled "Non-Performing Asset and Performing Potential Problem Loans" of this Item 7.
(3)
This item includes covered interest-earning assets consisting of loans acquired through the Company's FDIC-assisted transactions with loss share agreements and the related FDIC indemnification asset. For additional discussion, please see Note 6 of "Notes to the Consolidated Financial Statements" in Item 8 of this Form 10-K.

40




2014 Compared to 2013
Total average interest-earning assets were $7.8 billion for 2014, an increase of $418.1 million, or 5.6%, from 2013, driven by solid organic loan growth and loans acquired in the Popular and Great Lakes acquisitions during the second half of 2014. Overall, organic loan growth was funded by cash flows from maturities of investment securities, a reduction in other interest-earning assets, and higher core deposits.
Compared to 2013, total average interest-bearing liabilities rose $81.7 million to $5.4 billion for 2014. Higher levels of interest-bearing core deposits, which were partially driven by acquisition activity, more than offset the decline in time deposits. The decline in borrowed funds from 2013 resulted from the prepayment of $114.6 million of FHLB advances with a weighted-average rate of 1.08% during the second quarter of 2014, which is net of the yield earned on the cash used for the prepayment.
Tax-equivalent net interest income was $288.6 million for 2014 compared to $272.4 million for 2013, an increase of 5.9%. Interest income rose $12.1 million from 2013 due primarily to strong loan growth, which more than offset the decline in loan yields, lower levels of income on covered interest-earning assets, and a decrease in the interest income on investment securities. The decline in interest expense of $4.1 million was driven by growth in lower-costing interest-bearing core deposits and the continued reduction of higher-costing time deposits, borrowed funds, and senior and subordinated debt. Net accretion resulting from the fair value adjustments on acquired assets and assumed liabilities contributed $2.3 million, which offset lower levels of interest earned on covered loans.
Tax-equivalent net interest margin was in line with 2013 despite continued pressure on loan margins and investment portfolio yields as we improved the mix of earning assets and liabilities through organic loan growth and acquisitions, employed certain loan hedging strategies, and prepaid FHLB advances.
2013 Compared to 2012
Average interest-earning assets were $7.4 billion for purposes2013, an increase of this analysis. There$178.4 million, or 2.5%, from 2012, driven primarily by a rise in other interest-earning assets. Proceeds from bulk loan sales of $172.5 million in original carrying value of non-performing and performing potential problem loans during 2012 drove a significant portion of the increase in average other interest earning assets. Growth in average loans, excluding covered loans, of $102.8 million was offset by decreases of $93.8 million in average covered interest-earning assets.
Average interest-bearing liabilities of $5.3 billion for 2013 were no covered non-accrualcomparable to 2012. Higher levels of interest-bearing core deposits more than offset the decline in time deposits.
Tax-equivalent net interest income was $272.4 million for 2013 compared to $278.9 million for 2012. The $14.3 million reduction in interest income was driven by a decrease in the yield on loans and investment securities. Interest expense declined $7.8 million due to the reduction of higher-costing time deposits and senior and subordinated debt.
Tax-equivalent net interest margin declined 18 basis points to 3.68% for 2013 from 3.86% for 2012. The reduction in margin reflected a 30 basis point decrease in the average yield on interest-earning assets driven by a lower yield earned on new and renewing loans as well as the reinvestment of December 31, 2010 or 2009.cash flows from the investment portfolio into lower yielding securities due to the low interest rate environment. In addition, a greater customer preference for floating rate loans during the third and fourth quarters of 2013 contributed to the decrease. The lower yields on interest-earning assets were partially offset by a decline in the rates paid for interest-bearing liabilities, including a 2 basis point decline on interest-bearing core deposits, a 28 basis point decline on time deposits, and a 3 basis point decline on senior and subordinated debt.


41




Table of Contents

Table 3
Changes in Net Interest Income Applicable to Volumes and Interest Rates
(1)

(Dollar amounts in thousands)


 2011 compared to 2010  
 2010 compared to 2009 

 Volume Rate Total  
 Volume Rate Total  2014 compared to 2013 2013 compared to 2012

Federal funds sold and other short-term investments

 $471 $142 $613   $700 $34 $734 
 Volume Rate Total  Volume Rate Total
Other interest-earning assets $(265) $37
 $(228)  $443
 $233
 $676

Securities:

                 
  
  
   
  
  

Trading – taxable

 25 (38) (13)  35 (81) (46) 23
 (10) 13
  1
 (21) (20)

Investment securities – taxable

 1,017 (9,018) (8,001)  (15,322) (4,954) (20,276) (959) 3,226
 2,267
  706
 (1,127) (421)

Investment securities – nontaxable (2)

 (7,587) (225) (7,812)  (11,182) 349 (10,833) (2,721) (210) (2,931)  (105) (2,490) (2,595)
               

Total securities

 (6,545) (9,281) (15,826)  (26,469) (4,686) (31,155) (3,657) 3,006
 (651)  602
 (3,638) (3,036)
               

FHLB and Federal Reserve Bank stock

 (19) 39 20   115 35 150  (73) 93
 20
  (250) 222
 (28)

Loans, excluding covered loans (2)

 (4,827) (1,449) (6,276)  (6,924) 5,099 (1,825)

Covered loans

 4,567 7,052 11,619   15,783 83 15,866 
               

Total loans

 (260) 5,603 5,343   8,859 5,182 14,041 
               
Loans (2)(3)
 22,638
 (9,722) 12,916
  (3,829) (8,057) (11,886)

Total interest income (2)

 (6,353) (3,497) (9,850)  (16,795) 565 (16,230) 18,643
 (6,586) 12,057
  (3,034) (11,240) (14,274)
               

Savings deposits

 417 (1,097) (680)  289 (1,018) (729) 71
 (11) 60
  102
 (313) (211)

NOW accounts

 15 (780) (765)  350 (1,557) (1,207) 39
 (42) (3)  64
 (135) (71)

Money market deposits

 158 (3,286) (3,128)  4,238 (7,432) (3,194) 105
 (56) 49
  164
 (363) (199)
               

Total interest-bearing transactional deposits

 590 (5,163) (4,573)  4,877 (10,007) (5,130)
Total interest-bearing core deposits 215
 (109) 106
  330
 (811) (481)

Time deposits

 (2,558) (2,740) (5,298)  (233) (21,687) (21,920) (600) (1,030) (1,630)  (1,877) (3,793) (5,670)
               

Total interest-bearing deposits

 (1,968) (7,903) (9,871)  4,644 (31,694) (27,050) (385) (1,139) (1,524)  (1,547) (4,604) (6,151)

Borrowed funds

 (1,089) 565 (524)  (7,265) (2,037) (9,302) (359) (675) (1,034)  132
 (534) (402)

Senior and subordinated debt

 826 (58) 768   (4,705) 356 (4,349) (1,331) (214) (1,545)  (1,175) (58) (1,233)
               

Total interest expense

 (2,231) (7,396) (9,627)  (7,326) (33,375) (40,701) (2,075) (2,028) (4,103)  (2,590) (5,196) (7,786)
               

Net interest income (2)

 $(4,122)$3,899 $(223)  $(9,469)$33,940 $24,471  $20,718
 $(4,558) $16,160
  $(444) $(6,044) $(6,488)
               

Average interest-earning assets of $7.3 billion for 2011 rose $146.1 million, or 2.0%, from 2010, with the increase primarily resulting from the short-term investment of additional customer deposits and the full year impact of additional assets acquired in an FDIC-assisted transaction in August 2010. This increase was partially offset by a decline in non-taxable investment securities as we sold securities at a gain to take advantage of opportunities in the market. We are maintaining an elevated level of short-term investments as we manage our liquidity within the current low-yield environment.

Tax-equivalent net interest income for 2011 was relatively unchanged compared to 2010, as lower tax-equivalent interest income was offset by a decline in interest expense. A $9.9 million reduction in tax-equivalent interest income resulted from a 23 basis point decrease in tax-equivalent yield discussed below and the impact of securities sales. Interest expense declined $9.6 million, as we used proceeds from securities sales and maturities to reduce higher-costing time deposits and borrowed funds.


(1)
For purposes of this table, changes which are not due solely to volume changes or rate changes are allocated to each category on the basis of the percentage relationship of each to the sum of the two.
(2)
Interest income is presented on a tax-equivalent basis, assuming a federal income tax rate of 35%.
(3)
This item includes covered interest-earning assets consisting of loans acquired through the Company's FDIC-assisted transactions with loss share agreements and the related FDIC indemnification asset. For additional discussion, please see Note 6 of "Notes to the Consolidated Financial Statements" in Item 8 of this Form 10-K.

42

Table of Contents

Tax-equivalent net interest margin for 2011 was 4.04%, a decline of 9 basis points from 4.13% in 2010. The reduction in margin resulted from a 23 basis point decrease in the average yield on interest-earning assets, largely due to the cumulative effect of prior year securities sales and a lower yield on securities as cash flows from securities paydowns and maturities repriced at lower interest rates. While loans also repriced at lower rates in 2011, the reduction was more than offset by an increase in the yield on covered loans (discussed below). This effect was partially offset by a 16 basis point drop in the average rate paid for interest-bearing liabilities, driven by a 14 basis point decline in the average rate paid for time deposits and a 16 basis point reduction in the aggregate rate paid on interest-bearing transaction accounts. As of December 31, 2011, our loan-to-deposit ratio was 78.5%, with 74.4% of our customer deposits consisting of demand, NOW, money market, and savings transactional accounts.

Interest earned on covered loans is generally recognized through the accretion of the discount taken on expected future cash flows. The increase in the yield on covered interest-earning assets for 2011 compared to 2010 resulted from adjustments in accretable income based upon (i) revised cash flow estimates subsequent to acquisition and (ii) actual cash realized in excess of estimates upon final settlement of certain covered loans.

Average interest-earning assets were $7.2 billion for 2010, a decrease of $118.1 million, or 1.6%, from 2009. Average securities decreased $538.6 million in 2010 compared to 2009 as we sold securities to realize gains available in the low interest rate environment. Average loans, excluding covered loans, were impacted by the charge-off of $147.1 million in loans in 2010. These decreases were partially offset by increases in covered assets acquired in FDIC-assisted transactions and short-term investments.

Tax-equivalent net interest margin improved 41 basis points to 4.13% for 2010 from 3.72% for 2009. The improvement reflected a 61 basis point decline in the average rate paid for interest-bearing liabilities, led by a 109 basis point decline in the average rate paid for time deposits. The reduction in rates paid on deposits reflected the decline in the yield curve over the period. Over the same period, maturities and proceeds from sales of securities, coupled with the acquisition of deposits from FDIC-assisted transactions, reduced the need for higher cost wholesale funds.

Our 2010 tax-equivalent net interest income increased $24.5 million compared to 2009. Interest expense declined $40.7 million, reflecting both a decrease in total interest-bearing liabilities and the rates paid for these liabilities. Tax-equivalent interest income was lower by $16.2 million compared to 2009 due to a 14 basis point decline in tax-equivalent yield. The net result of these changes was an increase in tax-equivalent net interest income.


Table of Contents



Noninterest Income

A summary of noninterest income for the three years 2009 through 2011ended December 31, 2014 is presented in the following table.

Table 4
Noninterest Income Analysis
(Dollar amounts in thousands)

 
 Years ended December 31, % Change 
 
 2011 2010 2009 2011-2010 2010-2009 

Service charges on deposit accounts

 $37,879 $35,884 $38,754  5.6  (7.4)

Wealth management fees

  16,224  15,063  14,059  7.7  7.1 

Other service charges, commissions, and fees

  20,486  18,238  16,529  12.3  10.3 

Card-based fees(1)

  19,593  17,577  15,826  11.5  11.1 
            

Total fee-based revenues

  94,182  86,762  85,168  8.6  1.9 

BOLI income(2)

  2,231  1,560  2,263  43.0  (31.1)

Other income(3)

  2,729  2,180  2,590  25.2  (15.8)
            

Total operating revenues

  99,142  90,502  90,021  9.5  0.5 

Trading (losses) gains, net(4)

  (691) 1,530  2,542  (145.2) (39.8)

Gains on securities sales, net(5)

  3,346  17,133  26,726  (80.5) (35.9)

Securities impairment losses(5)

  (936) (4,917) (24,616) (81.0) (80.0)

Gains on FDIC-assisted
transactions(6)

  -  4,303  13,071  (100.0) (67.1)

Gains on early extinguishment of debt

  -  -  15,258  -  (100.0)

Gain on acquisition of deposits

  1,076  -  -  100.0  - 
            

Total noninterest income

 $101,937 $108,551 $123,002  (6.1) (11.7)
            
  Years Ended December 31, % Change
  2014 2013 2012 2014-2013 2013-2012
Service charges on deposit accounts $36,910
 $36,526
 $36,699
 1.1
 (0.5)
Wealth management fees 26,474
 24,185
 21,791
 9.5
 11.0
Card-based fees (1)
 24,340
 21,649
 20,852
 12.4
 3.8
Merchant servicing fees 11,260
 10,953
 10,806
 2.8
 1.4
Mortgage banking income 4,011
 5,306
 2,689
 (24.4) 97.3
Other service charges, commissions, and fees 8,086
 7,663
 4,486
 5.5
 70.8
Total fee-based revenues 111,081
 106,282
 97,323
 4.5
 9.2
Net securities gains (losses) (2)
 8,097
 34,164
 (921) (76.3) N/M
Gains on sales of properties (3)
 3,954
 
 
 100.0
 
BOLI income (loss) 2,873
 (11,844) 1,307
 N/M
 N/M
Loss on early extinguishment of debt (3)
 (2,059) (1,034) (558) 99.1
 85.3
Net trading gains (3)(4)
 677
 3,189
 1,627
 (78.8) 96.0
Other income (3)(5)
 1,995
 2,297
 2,728
 (13.1) (15.8)
Gain on termination of FHLB forward
  commitments
 
 7,829
 
 (100.0) 100.0
Gain on bulk loan sales 
 
 5,153
 
 (100.0)
Gains on FDIC-assisted transactions (3)(6)
 
 
 3,289
 
 (100.0)
Total noninterest income $126,618
 $140,883
 $109,948
 (10.1) 28.1

2013

Total noninterest income declined 6.1%was $126.6 million for 2011the year ended December 31, 2014, decreasing 10.1% from 2013. Total fee-based revenues were $111.1 million, increasing 4.5% compared to 2010. The decrease reflects lower net securities gains, a trading loss in 2011 following a trading gain in 2010, and a gain on an FDIC-assisted transaction in 2010, all of which more than offset increases in operating revenues.


Table of Contents

Fee-based revenues, which comprise the majority of2013. Total noninterest income of $94.2 million for 2011 rose 8.6% compared to 2010 asduring 2013 was impacted by certain significant transactions, including a result of increases in all categories.

The growth in service charges on deposit accounts was due primarily to a combination of higher volumes of non-sufficient-funds fees (including transactions generated by customers obtained in a 2010 FDIC-assisted transaction) and more fees earned on business and personal checking accounts resulting from market-driven pricing increases.

Average assets under management for 2011 totaled $4.4 billion, a $346.5 million increase from 2010, with such growth derived equally from improved equity market performance and new sales initiatives. The increase in average assets under management fueled the year-over-year growth in wealth management fees.

A rise in merchant fees, miscellaneous loan fees, and investment revenue led to the increase in other service charges, commissions, and fees. The year-over-year increase in merchant fees was due primarily to a volume increase resulting from customers acquired in an FDIC-assisted transaction.

We experienced continued growth in card-based fees resulting from both greater volumes and higher average rates per transaction. The increase in rates earned on card-based fees resulted from the migration in late 2010 from multi-merchant networks to an exclusive MasterCard network in most areas, which drove higher transaction yields and incentives.

The $1.1$34.0 million gain on acquisitionthe sale of deposits related to our purchasean equity investment and a $7.8 million gain on the termination of two FHLB forward commitments, offset in part by a $13.3 million write-down of the CSV of certain Chicago-market deposits from Old National. The transaction closed in December 2011 and included $106.7 million in deposits (comprised of $70.6 million in core transactional deposits and $36.1 in time deposits) and one banking facility.

Total noninterest income decreased 11.7% for 2010 compared to 2009. The decline from 2009 resulted from changes in gains realized from net securities sales, early extinguishment of debt, and FDIC-assisted transactions and the fair value adjustment related to our non-qualified deferred compensation plan, which is reflected in trading (losses) gains, net.

Fee-based revenues of $86.8 million for 2010 grew by 1.9% compared to 2009. BOLI policies.

Service charges on deposit accounts declined primarily duewere in line with 2013, as charges for services to lower overdraftnew customers acquired in the Popular and Great Lakes transactions offset the continued decline in revenue from non-sufficient funds fees. However, this decline was more than offset by increasestransactions.
Growth in other service charges, commissions, and fees (primarily merchant fee income), card-based fees, and wealth management fees.

The majorityfees of the decline in service charges on deposit accounts resulted from a $2.5 million decline in fees charged to customers with insufficient funds. The decrease was driven by (i) regulatory changes that require customers to affirmatively consent to our overdraft services for automated teller machine9.5% reflect new customer relationships and one-time debit card transactions before overdraft fees may be assessed and (ii) a change from a tiered rate to a flat rate.

Wealth management fees improved from 2009 to 2010 primarily due to a $666.3 million, or 17.5%,an overall increase in assets under management during this period. Approximately $102.7to $7.2 billion, a rise of $544.1 million, or 8.1%, from 2013.

The rise in card-based fees mainly reflects higher transaction volumes along with incentives from a renewed vendor contract.
During 2014, we sold $144.9 million of 1-4 family mortgage loans in the $666.3secondary market compared to sales of $147.4 million increase was attributableduring 2013. Lower market pricing contributed to managed assets acquiredthe decline in an FDIC-assisted transaction.

Higher retail investment advisory feesmortgage banking income compared to 2013.


43




Gains realized on the sale of certain equipment leasing contracts and merchant processingcheck printing fees drove the increase in other service charges, commissions, and fees, which were partially offset by a decrease in sales of capital market products to commercial clients. The sales of leasing contracts were generated from 2009a new commercial product offering introduced with the acquisition of National Machine Tool in the third quarter of 2014.
Net securities gains were driven by the sale of municipal securities, other investments, and longer-duration corporate bonds, resulting in pre-tax gains of $4.6 million and the sale of a non-accrual trust-preferred collateralized debt obligation ("CDO") at a pre-tax gain of $3.5 million.
During 2014, we completed the disposition of two branch properties at pre-tax gains of $4.0 million as part of multi-year efforts to 2010. Merchant processing fees improved 18.5%, andoptimize our retail investment advisory fees increased 9.9%distribution.
The loss on early extinguishment of debt resulted from the prepayment of $114.6 million in FHLB advances.
2013 Compared to 2012
Total noninterest income of $140.9 million for 20102013 rose 28.1% compared to 2009.

2012 driven primarily by the $34.0 million gain on the sale of our investment in Textura, and a $7.8 million gain on the termination of two FHLB forward commitments, offset in part by a $13.3 million write-down of the CSV related to the modification of approximately $100 million of certain lower-yielding BOLI policies.
Fee-based revenues increased 9.2% from 2012, resulting from growth in core business activities, specifically wealth management fees, mortgage banking income, and sales of capital market products to commercial clients.
The 11.0% increase in wealth management fees compared to 2012 was driven by new customer relationships and improved market performance. Average trust assets under management increased 17.0% during 2013.
The significant rise in mortgage banking income compared to 2012 resulted from recognizing a full year of mortgage banking activity. During 2013, $147.4 million of mortgage loans were sold compared to $50.3 million in 2012.
Sales of capital market products to commercial clients drove the rise in other service charges, commissions, and fees.
During the fourth quarter of 2013, we repurchased and retired $24.0 million of 6.95% junior subordinated debentures, resulting in a pre-tax loss of $1.0 million.

44


Table of Contents



Noninterest Expense

The following table presents the components of noninterest expense for the three years ended December 31, 2011, 2010, and 2009.

2014.

Table 5
Noninterest Expense Analysis
(Dollar amounts in thousands)

 
 Years ended December 31, % Change 
 
 2011 2010 2009 2011-2010 2010-2009 

Compensation expense:

                

Salaries and wages

 $101,703 $94,361 $82,640  7.8  14.2 

Retirement and other employee benefits

  27,071  20,017  23,908  35.2  (16.3)
            

Total compensation expense

  128,774  114,378  106,548  12.6  7.3 
            

OREO expense:

                

Write-downs of OREO

  3,785  23,367  12,584  (83.8) 85.7 

Losses on the sales of OREO, net

  5,901  17,113  5,970  (65.5) 186.6 

OREO operating expense, net (1)

  6,607  9,554  4,905  (30.8) 94.8 
            

Total OREO expense

  16,293  50,034  23,459  (67.4) 113.3 
            

Loan remediation costs

  15,210  11,020  7,458  38.0  47.8 

Other professional services

  11,146  11,883  8,338  (6.2) 42.5 
            

Total professional services

  26,356  22,903  15,796  15.1  45.0 
            

FDIC premiums:

                

FDIC special assessment

  -  -  3,500  -  (100.0)

FDIC insurance premiums

  7,990  10,880  10,173  (26.6) 6.9 
            

Total FDIC premiums

  7,990  10,880  13,673  (26.6) (20.4)
            

Net occupancy expense

  23,850  23,274  22,762  2.5  2.2 

Equipment expense

  9,103  8,944  8,962  1.8  (0.2)

Technology and related costs

  10,905  11,070  8,987  (1.5) 23.2 

Advertising and promotions

  6,198  6,642  7,313  (6.7) (9.2)

Merchant card expense

  8,643  7,882  6,453  9.7  22.1 

Other expenses

  23,792  22,772  20,835  4.5  9.3 
            

Total noninterest expense

 $261,904 $278,779 $234,788  (6.1) 18.7 
            

Average full-time equivalent employees

  1,831  1,790  1,766       

Efficiency ratio(2)

  62.12%  58.84%  57.86%       
  Years Ended December 31, % Change
  2014 2013 2012 2014-2013 2013-2012
Salaries and employee benefits:          
Salaries and wages $115,763
 $108,932
 $103,245
 6.3
 5.5
Nonqualified plan expense (1)
 815
 3,699
 1,986
 (78.0) 86.3
Retirement and other employee benefits 27,245
 26,119
 25,524
 4.3
 2.3
Total salaries and employee benefits 143,823
 138,750
 130,755
 3.7
 6.1
Net occupancy and equipment expense 35,181
 31,832
 32,699
 10.5
 (2.7)
Professional services 23,436
 21,922
 29,614
 6.9
 (26.0)
Technology and related costs 12,875
 11,335
 11,846
 13.6
 (4.3)
Merchant card expense 
 9,195
 8,780
 8,584
 4.7
 2.3
Advertising and promotions 8,159
 7,754
 5,073
 5.2
 52.8
Net OREO expense 7,075
 8,547
 10,521
 (17.2) (18.8)
FDIC premiums 5,824
 6,438
 6,926
 (9.5) (7.0)
Cardholder expenses (2)
 4,251
 4,021
 3,939
 5.7
 2.1
Other expenses (2)
 20,135
 15,858
 20,838
 27.0
 (23.9)
Acquisition and integration related expenses 13,872
 
 
 100.0
 
Adjusted amortization of FDIC
  indemnification asset
 
 1,500
 6,705
 (100.0) (77.6)
Total noninterest expense $283,826
 $256,737
 $267,500
 10.6
 (4.0)

N/M – Not meaningful.

Total2013

Excluding acquisition and integration related expenses of $13.9 million and approximately $5.5 million in recurring operating costs of the newly acquired Popular, National Machine Tool, and Great Lakes locations, total noninterest expense for 2011 decreased 6.1% from 2010. Excluding losses on sales and write-downs of OREO, integration costs, and severance-related costs, noninterest expense increased $15.22014 was $264.5 million, increasing $7.7 million, or 6.5%3.0%, as a result offrom 2013. This increase was primarily due to higher loan remediationsalaries and employee benefits and professional services expenses associated with growth and organizational needs.
Recurring operating costs increased salaries related toassociated with the expansion of commercial, retail,Popular, National Machine Tool, and wealth


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management sales staff and a $1.3 million correction of a 2010 actuarial pension expense calculation related to the valuation of future early retirement benefits recorded in fourth quarter 2011.

In 2011, we recorded a $2.0 million charge for severance-related costs stemming from an organizational realignment implemented in December 2011. This charge includes $1.6 millionGreat Lakes locations were primarily concentrated in salaries and wages, $96,000 in retirementemployee benefits, net occupancy and equipment expense, professional services, and other employee benefits,expenses. The conversion and $274,000 in other professional services. The organizational realignment eliminated approximately 50 open positions and another 50 filled positions. The annual savings in future years is estimatedintegration of these transactions was substantially complete as of December 31, 2014, with certain remaining efficiencies to be $5.0 million.

implemented in the first half of 2015.

The increase in salaries and wages from 2013 reflects a rise in certain incentive compensation accruals and commissions due to growth and organizational needs as well as annual salary increases.
Retirement and other employee benefits increased from 2013 due to a rise in profit sharing expenses and higher premiums paid for 2011 compared to 2010 reflected the full year impact of additional staff employedemployee insurance. A reduction in pension expense as a result of a third quarter 2010 FDIC-assisted transaction,changes to the expansion of commercial sales staff, annual meritCompany’s defined benefit pension plan in 2013 partially offset these increases higher incentive compensation,during 2014.
Professional services expense rose in 2014 due to general costs, such as personnel recruitment and severance-related costs stemming from theconsulting fees, which were driven by growth and organizational realignment.needs. These increases were partially offset by a $2.5 million variance related to changeslower servicing costs for our covered loan portfolio.

45




The 17.2% decline in the obligations to participants in deferred compensation plans resulting from fluctuations in the fair value of trading securities held on behalf of plan participants.

The variance in retirement and other employee benefits for 2011 compared to 2010 was driven by a $2.0 million increase in profit sharing expense, a one-time $1.3 million correction of the 2010 actuarial pension expense calculation, the impact of changes in overall staffing levels, and costs stemming from the organizational realignment.

net OREO expense for 2011 declined 67.4%resulted from 2010. Prior year OREO expense was elevated due to higher levels of write-downs, lossesnet gains on sales of OREO andproperties in 2014 compared to net losses on sales in 2013, which was partially offset by a $1.6 million valuation adjustment on an OREO property during the fourth quarter of 2014. In addition, lower levels of OREO operating expenses, incurred to maintainconsistent with the reduction in OREO properties (including costs to service certain assets acquired in FDIC-assisted transactions). For a discussion of sales of OREO properties, referbalances, contributed to the section titled "Disposalsdecrease.

Other expenses were lower in 2013 due to a $1.8 million reduction in the reserve for unfunded commitments.
2013 Compared to 2012
Total noninterest expense for 2013 was $256.7 million, decreasing 4.0% from 2012 driven by a decline in net OREO expense, professional services expenses, and lower levels of Non-Performing Assets"adjusted amortization of this Item 7.

Loan remediation costs rose as a result ofthe FDIC indemnification asset, which were partially offset by an increase in real estate taxes paidtotal compensation expense and advertising and promotions expense.

Compared to preserve our rights to collateral associated with problem loans as well as higher legal fees incurred to remediate problem credits.

Additional property tax expense from higher assessments and costs associated with operating branches acquired through FDIC-assisted transactions accounted for2012, the increase in occupancy and equipment expense for 2011 compared to 2010.

FDIC premiums decreased for 2011 compared to 2010 primarily due to a regulatory change in calculating the premium. Specifically, the assessment base is now based on average consolidated total assets minus average tangible equity rather than domestic deposits.

The increase in merchant cardcompensation expense was due primarily to higher transaction volumes, including the full year impact of transactions generated by customers acquiredincentive compensation and commissions and a decrease in deferred salaries related to loan originations.

Professional services expense decreased 26.0% from an FDIC-assisted transaction.

The increase in other noninterest expense for 2011 compared to 20102012. This decline was due primarily to losses ona $6.4 million reduction in loan remediation costs including legal expenses, appraisal costs, and real estate taxes, as a result of management's accelerated credit remediation actions that occurred in 2012, including the salebulk loan sales. In addition, a decrease in covered loan servicing costs contributed to the variance. Lower levels of personnel recruitment expenses, attorney fees related to an FDIC-assisted acquisition, and write-down of certain fixed assets moved to held-for-sale.

The efficiency ratio increasedvarious legal proceedings in 2012 also drove the decline in professional service expense from 58.84%2012.

Net OREO expense for 2010 to 62.12% for 2011, resulting2013 declined 18.8% from 2012 primarily from an increase$1.8 million in noninterest expense, excluding OREO expense,lower valuation adjustments and a $1.0 million decrease in expenses, partially offset by an increase in fee-based revenues.

Lower FDIC premiums reflect a reduced assessment rate due primarily to 2009

Noninterest expense rose by $44.0 million for 2010 compared to 2009. improved asset quality resulting from the bulk loan sales completed during the fourth quarter of 2012.

The increase was attributed to higher lossesin advertising and write-downs on OREO and increases in loan remediation costs, other professional servicespromotions expense from the valuation and integration of FDIC-acquired assets, and compensation expense. We recorded valuation and integration expenses associated with our FDIC-assisted transactions of $3.3 million in 2010.

The 14.2% increase in salaries and wages for 2010 compared to 20092012 was driven by the additionlaunch of employees, primarily retail and commercial sales staff,our "Bank with Momentum" branding campaign during the second quarter of 2013.

Adjusted amortization of the FDIC indemnification asset results from our three FDIC-assisted transactions, as well as standard merit increases and higher incentive and share-based compensation expense.


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The 16.3% decline in retirement and other employee benefits for 2010 compared to 2009 resulted from reductionschanges in the costtiming and amount of pension and profit sharing plans partially offset by an increase in payroll taxes.

Losses during 2010 on sales and write-downs of OREO properties, as well as related operating costs, increased substantiallyexpected future cash flows expected to be received from 2009 and reflected continued weakness in the real estate market.

In May 2009, the FDIC levied a special assessment upon all insured depository institutions to rebuildunder the FDIC's Deposit Insurance Fund. FDIC Agreements based on management's periodic estimates of expected future cash flows from covered loans.

The Company's special assessment was $3.5 million in 2009. There were no special assessments in 2010 or 2011.

The increase in loan remediation expenses for 2010 compared to 2009 reflects the additional costs incurred to integrate and remediate covered loans acquired through FDIC-assisted transactions, as well as increased legal fees, appraisals, real estate tax redemptions, and utilities associated with non-performing loans.

The majority of the 23.2% increase in technology and related costs for 2010 compared to 2009 was driven by system conversion costs related to FDIC-assisted transactions, as well as additional costs for servicing acquired customers and higher monthly fees for improved network access.

Merchant card expense increased from 2009 to 2010 in line with the increased merchant fee income previously described. The increasedecline in other expenses was spread across several categories.

The efficiency ratio increased from 57.86%2012 reflects a $1.8 million reduction in the reserve for 2009unfunded commitments. In addition, other expenses were elevated in 2012 from valuation adjustments of $2.6 million on a property held-for-sale and a former banking office transferred to 58.84% for 2010, resulting primarily from the increase in staffing and professional expenses incurred to remediate problem assets.

OREO.

Income Taxes

Our provision for income taxes includes both federal and state income tax expense.expense (benefit). An analysis of the provision for income taxes for the periods 2009 through 2011three years ended December 31, 2014 is detailed in the following table.

Table 6
Income Tax Expense (Benefit) Analysis
(Dollar amounts in thousands)


 Years ended December 31,  Years Ended December 31,

 2011 2010 2009  2014 2013 2012

Income (loss) before income tax expense (benefit)

 $41,071 $(38,228)$(75,926) $100,476
 $128,021
 $(49,936)

Income tax expense (benefit):

       

Federal income tax expense (benefit)

 $3,534 $(23,821)$(39,106) $24,244
 $36,316
 $(23,728)

State income tax expense (benefit)

 974 (4,723) (11,070) 6,926
 12,399
 (5,154)
       

Total income tax expense (benefit)

 $4,508 $(28,544)$(50,176) $31,170
 $48,715
 $(28,882)
       

Effective income tax rate

 11.0% 74.7% 66.1%  31.0% 38.1% 57.8%

Federal income tax expense and the related effective income tax rate are primarily influenced by the amount of tax-exempt income derived from investment securities and bank-owned life insurance in relation to pre-tax income and state income taxes. State income tax expense(benefit) and the related effective income tax rate are influenced by the amount of tax-exempt income derived from investment securities and BOLI in relation to pre-tax income (loss) and state income taxes. State income tax expense (benefit) and the related effective income tax rate are driven by the amount of state tax-exempt income in relation to pre-tax income (loss) and state tax rules related to consolidated/combined reporting and sourcing of income and expense.


46




Income tax expense totaled $4.5$31.2 million in 2011 following income tax benefits of $28.5 million in 2010 and $50.2 million in 2009. The variance from 2010 to 2011 was primarily attributable to an increase in pre-tax income in 2011for the year ended December 31, 2014 compared to $48.7 million for the prior year as well as a decrease in tax-exempt incomeended December 31, 2013 and the impact of the Illinois tax law change described below.

Effective January 1, 2011, the Illinois corporate income tax rate increased from 7.3% to 9.5%. This rate increase resulted in additional state income tax expense, net of federal income tax, of $418,000 for 2011. We recorded a $1.6 millionan income tax benefit in first quarter 2011 related toof $28.9 million for the resulting increase in our deferred tax asset driven by this rate change.

year ended December 31, 2012. The decrease in income tax benefitsexpense from 20092013 to 20102014 was driven primarily attributableby a decline in income subject to a decreasetax at statutory rates. The increase in pre-tax loss in 2010 and the recording of $5.4 million in state income tax benefitsexpense from 2012 to 2013 resulted from a rise in 2009.

income subject to tax at statutory rates and a non-deductible BOLI modification loss recorded in the third quarter of 2013.

Our accounting policies underlyingfor the recognition of income taxes in the Consolidated Statements of Financial Condition and Income are included in Notes 1 and 1415 of "Notes to the Consolidated Financial Statements" in Item 8 of this Form 10-K.


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FINANCIAL CONDITION

INVESTMENT PORTFOLIO MANAGEMENT

Securities that we have the positive intent and ability to hold until maturity are classified as securities held-to-maturity and are accounted for using historical cost, adjusted for amortization of premiums and accretion of discounts. Trading securities are carried at fair value with changes in fair value included in other noninterest income. Our trading securities relate toconsist of securities held in a rabbigrantor trust for our nonqualified deferred compensation plan and are not considered part of the traditional investment portfolio. All other securities are classified as securities available-for-sale and are carried at fair value.

value with unrealized gains and losses, net of related deferred income taxes, recorded in stockholders' equity as a separate component of accumulated other comprehensive loss.

We manage our investment portfolio to maximize the return on invested funds within acceptable risk guidelines, to meet pledging and liquidity requirements, and to adjust balance sheet interest rate sensitivity to mitigate the impact of changes in interest rates on net interest income.

We

From time to time, we adjust the size and composition of our securities portfolio according to a number of factors, including expected loan growth, anticipated changes in collateralized public funds on account, the interest rate environment, and the related value of various segments of the securities markets.
The following table provides a valuation summary of our investment portfolio.

portfolio for the three years ended December 31, 2014.

Table 7
Investment Portfolio Valuation Summary
(Dollar amounts in thousands)


 As of December 31, 2011 As of December 31, 2010 As of December 31, 2009 

 Fair Value Amortized
Cost
 % of
Total
 Fair Value Amortized
Cost
 % of
Total
 Fair Value Amortized
Cost
 % of
Total
  As of December 31,

Available-for-Sale

 
 2014 2013 2012
 Amortized Cost Fair Value % of Total Amortized Cost Fair Value % of Total Amortized Cost Fair Value % of Total
Securities Available-for-SaleSecurities Available-for-Sale                

U.S. agency securities

 $5,035 $5,060 0.5 $17,886 $18,000 1.5 $756 $756 -  $30,297
 $30,431
 2.5 $500
 $500
  $508
 $508
 

CMOs

 384,104 383,828 35.7 379,589 377,692 32.3 307,921 299,920 21.8  538,882
 534,156
 44.0 490,962
 475,768
 41.2 397,146
 400,383
 35.8

Other mortgage-backed securities

 87,691 81,982 7.7 106,451 100,780 8.6 249,282 239,567 17.5 
MBSs 155,443
 159,765
 13.1 135,097
 136,164
 11.8 117,785
 122,900
 11.0

Municipal securities

 490,071 464,282 43.2 503,991 512,063 43.7 651,680 649,269 47.3  414,255
 423,820
 34.9 457,318
 461,393
 39.9 495,906
 520,043
 46.5

CDOs

 13,394 48,759 4.5 14,858 49,695 4.2 11,728 54,359 4.0  48,502
 33,774
 2.8 46,532
 18,309
 1.6 46,533
 12,129
 1.1

Corporate debt securities

 30,014 27,511 2.6 32,345 29,936 2.6 37,551 36,571 2.7  1,719
 1,802
 0.1 12,999
 14,929
 1.3 13,006
 15,339
 1.4

Equity securities

 2,697 2,189 0.2 2,682 2,134 0.2 7,842 7,667 0.6  3,224
 3,261
 0.3 3,706
 5,662
 0.5 9,690
 11,101
 1.0
                   

Total available-for- sale

 1,013,006 1,013,611 94.4 1,057,802 1,090,300 93.1 1,266,760 1,288,109 93.9 
                   

Held-to-Maturity

 
Total available-for-
sale securities
 1,192,322
 1,187,009
 97.7 1,147,114
 1,112,725
 96.3 1,080,574
 1,082,403
 96.8
Securities Held-to-MaturitySecurities Held-to-Maturity                

Municipal securities

 61,477 60,458 5.6 82,525 81,320 6.9 84,496 84,182 6.1  26,555
 27,670
 2.3 44,322
 43,387
 3.7 34,295
 36,023
 3.2
                   

Total securities

 $1,074,483 $1,074,069 100.0 $1,140,327 $1,171,620 100.0 $1,351,256 $1,372,291 100.0  $1,218,877
 $1,214,679
 100.0 $1,191,436
 $1,156,112
 100.0 $1,114,869
 $1,118,426
 100.0
                   


47

 
 As of December 31, 2011 As of December 31, 2010 
 
 Effective
Duration (1)
 Average
Life (2)
 Yield to
Maturity
 Effective
Duration (1)
 Average
Life (2)
 Yield to
Maturity
 

Available-for-Sale

                   

U.S. agency securities

  0.85%  0.53  4.01%  1.91%  0.58  3.22% 

CMOs

  0.92%  2.19  1.57%  0.74%  2.52  2.31% 

Other mortgage-backed securities

  1.96%  3.91  4.50%  2.36%  3.85  4.62% 

Municipal securities

  3.84%  3.77  6.13%  5.35%  8.01  6.15% 

CDOs

  0.25%  8.57  0.00%  0.25%  8.78  0.00% 

Other securities

  6.07%  10.29  6.45%  6.58%  11.18  6.85% 
              

Total available-for-sale

  2.45%  3.57  3.98%  3.22%  5.72  4.37% 
              

Held-to-Maturity

                   

Municipal securities

  5.31%  9.33  5.91%  5.78%  9.99  6.61% 
              

Total securities

  2.61%  3.90  4.08%  3.40%  6.02  4.52% 
              

Refer to the following page for footnotes.



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As of December 31, 2011,2014, our securities portfolio totaled $1.1$1.2 billion, decreasing 5.8%rising $56.5 million, or 4.9%, from December 31, 2010,2013, following a 15.6% decrease3.4% increase from December 31, 2009. Our2012. During the fourth quarter of 2014, we acquired $219.3 million of securities in the Great Lakes transaction which consisted of $31.8 million in U.S. agency securities, $137.7 million in CMOs, $39.7 million in MBSs, $2.8 million in municipal securities, $6.6 million in CDOs, and $690,000 in equity securities. These securities were recorded at fair value as of the acquisition date. In addition to the acquired securities portfolio, declined over the past three years as we took advantageyear end balance was impacted by purchases of opportunities in the market to sell securities at a gain given the low interest rate environment.

Approximately 95%$28.5 million, maturities, calls, and prepayments of $176.7 million, and sales of $27.8 million.

As of December 31, 2014, approximately 96.7% of our $1.0$1.2 billion available-for-sale portfolio iswas comprised of U.S. agency securities, municipals, CMOs, and other mortgage-backed securities as of December 31, 2011.MBSs. The remainder consists of seventhe portfolio was comprised of eleven CDOs with a fair value of $13.4$33.8 million and an aggregate unrealized loss of $35.4$14.7 million, and miscellaneous other securities totaling $32.7with fair values of $5.1 million.

Investments in municipal securities comprised 48.4%35.7%, or $490.1$423.8 million, of the total available-for-sale securities portfolio as of December 31, 2011. This type2014. The majority consists of securitygeneral obligations of local municipalities in various states. Our municipal securities portfolio has historically experienced very low default rates and providedprovides a predictable cash flow. Available-for-sale municipal securities declined 2.8% from $504.0 million at December 31, 2010. The decline was driven by sales, maturities, and paydowns.

Table 8
Securities Effective Duration Analysis
(Dollar amounts in thousands)
  As of December 31,
  2014 2013
  Effective Average Yield to Effective Average Yield to
  
Duration (1)
 
Life (2)
 
Maturity (3)
 
Duration (1)
 
Life (2)
 
Maturity (3)
Securities Available-for-Sale            
U.S. agency securities 3.32% 3.72
 2.98% 2.23% 2.25
 0.49%
CMOs 3.45% 3.67
 1.91% 4.48% 4.26
 1.86%
Other MBSs 2.88% 4.18
 2.77% 3.93% 4.85
 2.45%
Municipal securities 2.89% 2.37
 5.50% 5.11% 3.27
 5.53%
CDOs N/M
 N/M
 N/M
 N/M
 N/M
 N/M
Corporate debt securities 0.45% 0.50
 6.72% 4.86% 7.18
 6.39%
Equity securities N/M
 N/M
 N/M
 N/M
 N/M
 N/M
Total available-for-sale securities 3.16% 3.26
 3.37% 4.68% 3.95
 3.52%
Securities Held-to-Maturity            
Municipal securities 5.64% 7.85
 4.60% 6.50% 11.84
 5.47%
Total securities 3.21% 3.37
 3.40% 4.75% 4.26
 3.60%
N/M – Not meaningful.
(1)
The effective duration represents the estimated percentage change in the fair value of the securities portfolio given a 100 basis point increase or decrease in interest rates. This measure is used to evaluate the portfolio's price volatility at a single point in time and is not intended to be a precise predictor of future fair values since those values will be influenced by a number of factors.
(2)
Average life is presented in years and represents the weighted-average time to receive all expected future cash flows using the dollar amount of principal paydowns, including estimated principal prepayments, as the weighting factor.
(3)
Yields on municipal securities are reflected on a tax-equivalent basis, assuming a federal income tax rate of 35%.
Effective Duration
The average life and effective duration of our investmentavailable-for-sale securities portfolio declined from 6.02were both lower than the prior year at 3.26 years as of December 31, 2010 to 3.90 years as of December 31, 2011 driven primarilyand 3.16%, respectively. These decreases, which were partially offset by a decrease in the average life of our municipal securities. This decline reflected the impact of a higher probability of calls at December 31, 2011 compared to December 31, 2010 givensecurities acquired in the lower interest rate environmentGreat Lakes transaction, resulted mainly from maturities and improved economic outlook for municipalities, as well as sales of longer-term municipalinvestment securities duringthat were not reinvested in the period.

securities portfolio.


48




Realized Gains and Losses
Net securities gains were $2.4of $8.1 million for 2011 compared to $12.2 million for 2010 and $2.1 million for 2009. Gains on sales of securities of $3.3 million for 20112014 resulted from the sale of $188.6a non-accrual CDO at a gain of $3.5 million, sales of certain longer-duration corporate bonds at gains of $2.0 million, sales of municipal securities at gains of $468,000, and the sale of certain other investments at gains of $2.1 million. In addition, four CDOs totaling $2.9 million acquired in the Great Lakes transaction were sold during the fourth quarter of 2014. These securities were recorded at fair value at the acquisition date, therefore, no gain or loss was recognized on the sale.
Net securities gains of $34.2 million for 2013 were driven by the sale of our investment in Textura. In addition, net securities gains for the year included OTTI charges of $408,000 on four municipal securities and two CMOs.
Net securities losses were $921,000 for 2012, which included OTTI charges of $3.7 million on two CDOs and several CMOs and net gains of $2.7 million from the sale of $153.7 million in CMOs, municipal securities, and corporate debt securities. We sold these shorter-term investments in order to take advantage of opportunities in the market. These gains were partially offset by OTTI charges of $936,000 on two CDOs in 2011.

In 2010, we sold $390.9 million in CMOs, other mortgage-backed securities, municipal securities, and corporate bonds for a gain of $17.1 million. Net securities gains were $12.2 million for 2010 and were net of OTTI charges of $4.9 million. Impairment charges were primarily related to our CDOs.

Unrealized Gains and Losses

Unrealized gains and losses on securities available-for-sale represent the difference between the aggregate cost and fair value of the portfolioportfolio. These amounts are presented in the Consolidated Statements of Comprehensive Income and are reported on an after-tax basis, as a separate component of stockholders' equity in accumulated other comprehensive loss and presented in the Consolidated Statements of Comprehensive Income (Loss).on an after-tax basis. This balance sheet component will fluctuatefluctuates as current market interest rates and conditions change thereby affectingand affect the aggregate fair value of the portfolio. Net unrealized losses at December 31, 20112014 were $605,000, down from $32.5$5.3 million compared to $34.4 million at December 31, 2010, reflecting2013.
Net unrealized losses in the impact of lower interest rates and a tightening of credit spreads on our municipal securities.

CMO portfolio totaled $4.7 million at December 31, 2014 compared to $15.2 million at December 31, 2013. CMOs and other mortgage-backed securities are either backed by U.S. government-owned agencies or issued by U.S. government-sponsored enterprises. We do not believe any individual unrealized loss on these types of securities as of December 31, 20112014 represents OTTI since the unrealized losses associated with these securities are not believed to be attributablerelated to credit quality, but rather to changes in interest rates and temporary market movements.

As of December 31, 2011, gross unrealized gains in the municipal securities portfolio totaled $26.2 million, and gross unrealized losses were $366,000 resulting in a net unrealized gain of $25.8 million compared to a net


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unrealized loss of $8.1 million as of December 31, 2010. The change in fair value of municipal securities reflects the impact of the change in market interest rates on these fixed-rate investments as well as an improved economic outlook for municipalities since December 31, 2010, which reduced credit spreads on these securities. Substantially all of these securities carry investment grade ratings, with the majority of them supported by the general revenues of the issuing governmental entity and supported by third-party insurance. We do not believe the unrealized loss on any of these securities is OTTI.

Our investments in CDOs are supported by the credit of the underlying banks and insurance companies. The unrealized loss on these securities increased $528,000 since December 31, 2010. The unrealized loss reflects the difference between amortized cost and fair value that we determined did not relate to credit and reflects the market's unfavorable bias against these investments. We do not believe the unrealized losses on the CDOs as of December 31, 2011 represent OTTI. We currently have no evidence that would suggest further reductions in net cash flows on these investments from what has already been recognized.deterioration. In addition, we do not intend to sell the CDOsCMOs with unrealized losses within a short period of time, and we do not believe it is more likely than not that we will be required to sell them before recovery of their amortized cost bases,basis, which may be at maturity.

As of December 31, 2014, net unrealized gains in the municipal securities portfolio totaled $9.6 million compared to $4.1 million as of December 31, 2013. Net unrealized gains on municipal securities include unrealized losses of $1.0 million at December 31, 2014 and $5.6 million at December 31, 2013. Substantially all of these securities carry investment grade ratings with the majority supported by the general revenues of the issuing governmental entity and are supported by third-party bond insurance or other types of credit enhancement. We do not believe the unrealized loss on any of these securities represents an OTTI.
Our investments in CDOs are supported by the credit of the underlying banks and insurance companies. The unrealized loss on these securities declined from $28.2 million at December 31, 2013 to $14.9 million at December 31, 2014. An increase in market activity, primarily due to improvement in the underlying issuers and other market conditions, led to the decrease. We do not believe the unrealized losses on the CDOs as of December 31, 2014 represent OTTI related to credit deterioration. In addition, we do not intend to sell the CDOs with unrealized losses within a short period of time, and we do not believe it is more likely than not that we will be required to sell them before recovery of their amortized cost basis, which may be at maturity. Our estimation of cash flows for these investments and resulting fair values were based upon cash flow modeling, asfor the CDOs is described in Note 22 of "Notes to the Condensed Consolidated Financial Statements," in Item 8 of this Form 10-K.

The effective duration of the securities available-for-sale portfolio was 2.45% as of December 31, 2011 compared to 3.22% as of December 31, 2010 and 3.88% as of December 31, 2009. The effective duration as of December 31, 2011 decreased across almost all categories as a result of falling interest rates and a higher probability of calls on municipal securities since December 31, 2010. The effective duration on the aggregate investment portfolio declined in 2010 compared to 2009 due to a reduction in the securities portfolio through sales of longer-term securities and a strategy to not reinvest cash flows from security sales and maturities.


49




Table 8
9
Repricing Distribution and Portfolio Yields
(Dollar amounts in thousands)


 As of December 31, 2011 

 One Year or Less One Year to Five Years Five Years to Ten Years After 10 years  As of December 31, 2014

 Amortized
Cost
 Yield to
Maturity (1)
 Amortized
Cost
 Yield to
Maturity (1)
 Amortized
Cost
 Yield to
Maturity (1)
 Amortized
Cost
 Yield to
Maturity (1)
  One Year or Less One Year to Five Years Five Years to Ten Years After 10 years

Available-for-Sale

 
 Amortized Cost 
Yield to Maturity (1)
 Amortized Cost 
Yield to Maturity (1)
 Amortized Cost 
Yield to Maturity (1)
 Amortized Cost 
Yield to Maturity (1)
Securities Available-for-SaleSecurities Available-for-Sale              

U.S. agency securities

 $- - $- - $5,060 4.01% $- -  $
 % $4,496
 2.49% $23,825
 3.09% $1,976
 2.80%

CMOs (2)

 221,193 1.77% 139,082 1.21% 11,763 2.91% 11,790 0.53%  179,667
 1.97% 285,350
 1.90% 67,259
 1.78% 6,606
 1.78%

Other mortgage-backed securities (2)

 20,970 4.53% 27,578 4.52% 10,711 4.89% 22,723 4.25% 
Other MBSs (2)
 38,113
 2.82% 81,559
 2.80% 28,161
 2.66% 7,610
 2.58%

Municipal securities (3)

 5,493 6.85% 332,943 6.06% 93,912 6.30% 31,934 6.28%  67,900
 6.10% 71,948
 6.01% 190,182
 4.88% 84,225
 6.00%

CDOs

 - - - - - - 48,759 -  
 
 
 
 
 
 48,502
 N/M

Other securities (4)

 1,834 5.35% 3,783 4.36% 13,644 7.09% 10,439 6.55% 
                 

Total available-for-sale

 249,490 2.14% 503,386 4.62% 135,090 5.89% 125,645 2.96% 
                 

Held-to-Maturity

 
Corporate debt securities (4)
 
 
 1,688
 6.47% 
 
 31
 20.00%
Equity securities (4)
 
 
 
 
 3,224
 N/M
 
 N/M
Total available-for-sale
securities
 285,680
 3.07% 445,041
 2.75% 312,651
 3.83% 148,950
 3.64%
Securities Held-to-Maturity                

Municipal securities (3)

 4,301 5.94% 20,582 5.86% 13,081 6.23% 22,494 5.77%  3,505
 5.27% 8,727
 4.61% 5,404
 5.16% 8,919
 4.00%
                 

Total securities

 $253,791 2.20% $523,968 4.67% $148,171 5.92% $148,139 3.39%  $289,185
 3.10% $453,768
 2.79% $318,055
 3.85% $157,869
 3.66%
                 
N/M – Not meaningful.
(1)
Based on amortized cost.
(2)
The repricing distributions and yields to maturity of CMOs and other MBSs are based on estimated expected future cash flows and prepayment assumptions. Actual repricings and yields of the securities may differ from those reflected in the table depending on actual interest rates and prepayment speeds.
(3)
Yields on municipal securities are reflected on a tax-equivalent basis, assuming a federal income tax rate of 35%. The maturity date of bonds is based on contractual maturity, unless the bond, based on current market prices, is deemed to have a high probability that the call will be exercised, in which case the call date is used as the maturity date.
(4)
Yields on corporate debt and equity securities are reflected on a tax-equivalent basis, assuming a federal income tax rate of 35%. Maturity dates are based on contractual maturity or repricing characteristics.

50


Table of Contents



LOAN PORTFOLIO AND CREDIT QUALITY

Our principal source of revenue arises fromis generated by our lending activities and is composed primarily composed of interest income and, to a lesser extent, fromas well as loan origination and commitment fees (net of related costs). The accounting policies underlyingfor the recording of loans in the Consolidated Statements of Financial Condition and the recognition and/or deferral of interest income and fees (netin the Consolidated Statements of costs) arising from lending activitiesIncome are included in Note 1 of "Notes to the Consolidated Financial Statements" in Item 8 of this Form 10-K.

Portfolio Composition

Our loan portfolio is comprised of both corporate and consumer loans with corporate loans representing 87.0%86.3% of total loans, outstandingexcluding covered loans, at December 31, 2011. The corporate loan component consists of commercial and industrial, agricultural, and commercial real estate lending categories with a small portion consisting of loans to small businesses.2014. Consistent with our emphasis on relationship banking, the majority of our corporate loans are made to our core, multi-relationship customers. TheThese customers usually maintain deposit relationships and utilize our other banking services, such as cash management or wealth management services.

We

To maximize loan income with an acceptable level of risk, we have certain lending policies and procedures in place that are designed to maximize loan income within an acceptable level of risk. Managementmanagement reviews and modifies these policies and procedures on a regular basis. The review process is supplemented by providingIn addition, management with frequent reportsreceives periodic reporting related to loan production, loan quality, credit concentrations, of credit, loan delinquencies, and non-performing and performing potential problem loans.loans to monitor and mitigate potential and current risks in the portfolio. We do not offer any sub-prime products and we have policies to limit our exposure to any single borrower.

Table 9
10
Loan Portfolio
(Dollar amounts in thousands)


 As of December 31,  As of December 31,

 2011 % of Total 2010 % of Total 2009 % of Total 2008 % of Total 2007 % of Total  2014 
% of
Total
 2013 
% of
Total
 2012 
% of
Total
 2011 
% of
Total
 2010 
% of
Total

Commercial and industrial

 $1,458,446 28.7 $1,465,903 28.7 $1,438,063 27.6 $1,490,101 27.8 $1,347,481 27.1  $2,253,556
 33.9 $1,830,638
 32.8 $1,631,474
 31.5 $1,458,446
 28.7 $1,465,903
 28.7

Agricultural

 243,776 4.8 227,756 4.5 209,945 4.0 216,814 4.1 235,498 4.8  358,249
 5.4 321,702
 5.8 268,618
 5.2 243,776
 4.8 227,756
 4.5

Commercial real estate:

                   

Office

 444,368 8.7 396,836 7.8 394,228 7.6 339,912 6.3 256,211 5.2  494,637
 7.4 459,202
 8.2 474,717
 9.1 444,368
 8.7 396,836
 7.8

Retail

 334,034 6.6 328,751 6.4 331,803 6.4 265,568 5.0 193,581 3.9  452,225
 6.8 392,576
 7.0 368,796
 7.1 334,034
 6.6 328,751
 6.4

Industrial

 520,680 10.2 478,026 9.4 486,934 9.3 419,761 7.8 374,286 7.5  531,517
 8.0 501,907
 9.0 489,678
 9.4 520,680
 10.2 478,026
 9.4

Multi-family

 288,336 5.7 349,862 6.9 333,961 6.4 286,963 5.4 217,266 4.4  564,421
 8.4 332,873
 6.0 285,481
 5.5 288,336
 5.7 349,862
 6.9

Residential construction

 105,836 2.1 174,690 3.4 313,919 6.0 509,059 9.5 505,194 10.2 

Commercial construction

 144,909 2.8 164,472 3.2 231,518 4.5 356,575 6.6 388,193 7.8 
Construction 204,236
 3.1 186,197
 3.3 186,416
 3.6 250,745
 4.9 339,162
 6.6

Other commercial real estate

 888,146 17.4 856,357 16.8 798,983 15.4 729,329 13.6 661,480 13.3  887,897
 13.3 807,071
 14.5 773,121
 14.9 888,146
 17.4 856,357
 16.8
                     

Total commercial real estate

 2,726,309 53.5 2,748,994 53.9 2,891,346 55.6 2,907,167 54.2 2,596,211 52.3  3,134,933
 47.0 2,679,826
 48.0 2,578,209
 49.6 2,726,309
 53.5 2,748,994
 53.9
                     

Total corporate loans

 4,428,531 87.0 4,442,653 87.1 4,539,354 87.2 4,614,082 86.1 4,179,190 84.2  5,746,738
 86.3 4,832,166
 86.6 4,478,301
 86.3 4,428,531
 87.0 4,442,653
 87.1
                     

Home equity

 416,194 8.2 445,243 8.7 470,523 9.1 477,105 8.9 464,981 9.4  543,185
 8.2 427,020
 7.7 390,033
 7.5 416,194
 8.2 445,243
 8.7

1-4 family mortgages

 201,099 4.0 160,890 3.2 139,983 2.7 198,197 3.7 220,741 4.4  291,463
 4.4 275,992
 4.9 282,948
 5.5 201,099
 4.0 160,890
 3.2

Installment loans

 42,289 0.8 51,774 1.0 53,386 1.0 70,679 1.3 98,760 2.0 
                     
Installment 76,032
 1.1 44,827
 0.8 38,394
 0.7 42,289
 0.8 51,774
 1.0

Total consumer loans

 659,582 13.0 657,907 12.9 663,892 12.8 745,981 13.9 784,482 15.8  910,680
 13.7 747,839
 13.4 711,375
 13.7 659,582
 13.0 657,907
 12.9
                     

Total loans, excluding covered loans

 5,088,113 100.0 5,100,560 100.0 5,203,246 100.0 5,360,063 100.0 4,963,672 100.0  6,657,418
 100.0 5,580,005
 100.0 5,189,676
 100.0 5,088,113
 100.0 5,100,560
 100.0
                   

Covered loans(1)

 260,502   371,729   146,319         
                     
Covered loans 79,435
   134,355
   197,894
   260,502
   371,729
  

Total loans

 $5,348,615   $5,472,289   $5,349,565   $5,360,063   $4,963,672    $6,736,853
   $5,714,360
   $5,387,570
   $5,348,615
   $5,472,289
  
                     

portfolio.

Total loans, including covered loans of $5.3 billion as of December 30,31, 2011 declined $123.7 million, or 2.3%, from $5.5 billion as of December 31, 2010. The naturalcontinued decline in covered loan balances accounted for the majority of this reduction.


Table of Contents

Total loans, excluding covered loans, as of December 31, 2011 were stable compared to December 31, 2010. Excluding 2011 net charge-offs of $103.7 million, total loans (excluding covered loans) would have increased 1.8%. The office, retail, and industrial, and other commercial real estate portfolios exhibited 6.2% growth during this period, substantially in the form of owner-occupied business relationships. Offsetting this progress,growth, we continued to reduce our exposure to more troubledthe higher risk construction and multi-family real estate categoriescategory during 2011.

Acquired Loans
During the third and fourth quarters of 2014, we acquired loans in the Popular and Great Lakes transactions which contributed to 2009

Totaloverall loan growth and expanded our market footprint. For a detailed discussion of these transactions, refer to the section titled "Performance Overview" of this Item 7.


52




The following table summarizes loans including covered loans, were $5.5 billionby category as of December 31, 2010, an increase2014 between legacy and loans acquired in the Popular and Great Lakes transactions, compared to loans as of $122.7 million, or 2.3%, from December 31, 2009. The increase was driven by the addition2013.
Table 11
Legacy and Acquired Loan Portfolio Composition
(Dollar amounts in thousands)
  As of As of  
  December 31, 2014 December 31, 2013 Legacy %
  Legacy Acquired Total Total Change
Commercial and industrial $2,148,858
 $104,698
 $2,253,556
 $1,830,638
 17.4
Agricultural 356,395
 1,854
 358,249
 321,702
 10.8
Commercial real estate:          
Office 389,348
 105,289
 494,637
 459,202
 (15.2)
Retail 372,311
 79,914
 452,225
 392,576
 (5.2)
Industrial 486,420
 45,097
 531,517
 501,907
 (3.1)
Multi-family 367,995
 196,426
 564,421
 332,873
 10.6
Construction 196,387
 7,849
 204,236
 186,197
 5.5
Other commercial real estate 804,294
 83,603
 887,897
 807,071
 (0.3)
Total commercial real estate 2,616,755
 518,178
 3,134,933
 2,679,826
 (2.4)
Total corporate loans 5,122,008
 624,730
 5,746,738
 4,832,166
 6.0
Home equity 499,088
 44,097
 543,185
 427,020
 16.9
1-4 family mortgages 247,359
 44,104
 291,463
 275,992
 (10.4)
Installment 70,701
 5,331
 76,032
 44,827
 57.7
Total consumer loans 817,148
 93,532
 910,680
 747,839
 9.3
Total loans, excluding covered loans 5,939,156
 718,262
 6,657,418
 5,580,005
 6.4
Covered loans 79,435
 
 79,435
 134,355
 (40.9)
Total loans $6,018,591
 $718,262
 $6,736,853
 $5,714,360
 5.3

Commercial, Industrial, and Agricultural Loans
Commercial, industrial, and agricultural loans represent 39.3% of covered loans acquired through FDIC-assisted transactions, which more than offset declines in the residential and commercial construction categories.

Outstandingtotal loans, excluding covered loans, of $5.1and totaled $2.6 billion as ofat December 31, 2010 declined $102.72014, an increase of $459.5 million, or 2.0%,21.3% from December 31, 2009 as we charged-off $147.12013. Loans acquired in the Popular and Great Lakes transactions during the third and fourth quarters of 2014 contributed $106.6 million in loans in 2010. Excluding these charge-offs, total loans (excluding covered loans) would have increased 0.9%. Growth of 1.9% inthis growth. Our commercial and industrial loans 4.8% in multi-family loans, and 7.2% in other commercial real estate lending more than offset the 37.8% decline in the commercial and residential construction loan portfolios that resulted from our continued efforts to remediate and reduce exposure to these lending categories.

Covered loans grew to $371.7 million at December 31, 2010 compared to $146.3 million at December 31, 2009 from the completion of two FDIC-assisted transactions.

Outstanding loans, excluding covered loans, totaled $5.2 billion as of December 31, 2009,are a decrease of 2.9% from December 31, 2008. During 2009, extensions of new credit were more than offset by paydowns, net charge-offs, conversiondiverse group of loans to OREO, and the securitization of 1-4 family mortgages, which are includedmiddle market businesses generally located in the securities available-for-sale portfolio.

OutstandingChicago metropolitan area with purposes that range from supporting seasonal working capital needs to term financing of equipment. The underwriting for these loans increased 8.0% from December 31, 2007 to December 31, 2008. The increase was led by growth in commercial real estate, specifically office, retail, and industrial, and commercial and industrial lending. The decline in consumer loans wasis based primarily due to continued run-off of indirect loans and the paydown in traditional home mortgages.

The decline in our total loans outstanding from December 31, 2006 to December 31, 2007 reflected the combined impact of the payoff of loan participations, rapid prepayment of multi-family loan portfolios, which occurred primarily in the first half of 2007, and the continued paydown of our indirect auto loan portfolio. As of the same dates, corporate loans remained relatively unchanged at $4.2 billion.

Commercial, Industrial, and Agricultural Loans

Each commercial and industrial loan is underwritten after evaluating and understanding the borrower's ability to operate profitably. Underwriting standards are designed to ensure repayment of loans and mitigate loss exposure. As part of the underwriting process, we examine current and projected cash flows to determine the ability of the borrower to repay his obligation as agreed. Commercial and industrial loans are primarily made based on the identified cash flows of the borrower and secondarily on the underlying collateral provided by the borrower. The cash flows of the borrower, however, may not be as expected, and the collateral securing these loans may fluctuate in value. Most commercial and industrial loans are secured by the assets being financed or other business assets, such as accounts receivable or inventory, and usuallymay incorporate a personal guarantee. However, some short-term

Agricultural loans may be made on an unsecured basis. In the caseare generally provided to meet seasonal production, equipment, and farm real estate borrowing needs of loans secured by accounts receivable, the availability of funds for the repayment of these loans may be substantially dependent upon the abilityindividual and corporate crop and livestock producers. As part of the borrower to collect amounts due from its customers.

Commercial, industrial,underwriting process, the Company examines projected future cash flows, financial statement stability, and agricultural loans increased $8.6 million from $1.69 billion at December 31, 2010 to $1.70 billion at December 31, 2011. Our commercial and industrialthe value of the underlying collateral. Seasonal crop production loans are a diverse grouprepaid by the liquidation of the financed crop that is typically covered by crop insurance. Equipment and real estate term loans to small,


Tableare repaid through cash flows of Contents

medium, and large businesses. The purpose of these loans varies from supporting seasonal working capital needs to term financing of equipment.

Table 10
Commercial, Industrial, and Agricultural Loans
(Dollar amounts in thousands)

the farming operation.
 
 As of December 31, 
 
 2011 2010 2009 
 
 Amount % of Total Amount % of Total Amount % of Total 

Commercial and industrial

 $1,237,097  72.7 $1,226,398  72.4 $1,213,277  73.6 

Small business

  114,546  6.7  140,854  8.3  150,824  9.2 

Tax-exempt loans(1)

  96,328  5.7  84,496  5.0  63,724  3.9 

Overdrawn demand deposits

  2,850  0.2  4,281  0.3  4,837  0.3 

Loan payment control and other(2)

  7,625  0.4  9,874  0.6  5,401  0.3 
              

Total commercial and industrial

  1,458,446  85.7  1,465,903  86.6  1,438,063  87.3 
              

Agricultural – operating

  133,136  7.8  131,855  7.8  128,555  7.8 

Agricultural – farmland

  110,640  6.5  95,901  5.6  81,390  4.9 
              

Total agricultural

  243,776  14.3  227,756  13.4  209,945  12.7 
              

Total commercial, industrial, and agricultural loans

 $1,702,222  100.0 $1,693,659  100.0 $1,648,008  100.0 
              

Commercial, industrial, and agricultural loans as a percent of loans, excluding covered loans

  33.5%     33.2%     31.6%    

Commercial Real Estate Loans

Commercial real estate loans are subject to underwriting standards and processes similar to commercial and industrial loans, in addition to those standards and processes specific toloans. The repayment of commercial real estate loans. Commercial real estate lending typically involves higher loan principal amounts, and the repayment of these loans is largely dependent upondepends on the successful operation of the property securing the loan or the business conducted on the property securing the loan. Commercial real estateThis category of loans may be more adversely affected by conditions in the real estate market or in the general economy. The properties securing our commercial real estate portfolio are diverse in terms of type and geographic location within the greater suburban metropolitan Chicago market and contiguous markets.market. Management monitors and evaluates commercial real estate loans based on cash flow, collateral, geography, and risk graderating criteria.

Commercial real estate The properties securing the loans represent 53.5% of loans, excluding covered loans, and totaled $2.7 billion at December 31, 2011, a decrease of $22.7 million, or 0.8%, from December 31, 2010. Our primary focus for thein our commercial real estate portfolio has been growth inare diversified between owner-occupied and investor categories and represent varying types across our market footprint.


53




Construction loans secured by owner-occupied real estate. These loans are


Table generally based on estimates of Contents

viewed primarily as cash flow loans (similar to commercialcosts and industrial loans) and secondarily as loans secured by real estate.

Nearly half of our commercial real estate loans consist of loans for industrial buildings, office buildings, and retail shopping centers. Approximately 40% ofvalue associated with the office, retail, and industrial loans were owner-occupied as of December 31, 2011.

Other types of commercial real estate loans include construction loans for single-family and multi-family dwellings, residentialcompleted projects and commercial projects and loans for various types of other commercial properties, such as land for future commercial development, multi-unit residential mortgages, service stations, and hotels.

Construction loans are underwritten utilizing feasibility studies, independent appraisal reviews, sensitivity analyses of absorption and lease rates, and financial analyses of the developers and property owners. Construction loans are generally based upon estimates of costs and value associated with the completed projects. Construction loans often involve the disbursement of substantial funds with repayment primarily dependent upon the success of the completed project. Sources of repayment for these types of loans may be permanent loans from long-term lenders, sales of developed property, or an interim loan commitment until permanent financing is obtained. Generally, theseconstruction loans have a higher risk profile than other real estate loans due to theirsince repayment being sensitive tois impacted by real estate values, interest rate changes, governmental regulation of real property, demand and supply of alternative real estate, the availability of long-term financing, and changes in general economic conditions.

We typically underwrite construction loans as combination construction and post-construction loans secured by the underlying real estate. These loans are reported as construction loans until construction is completed or principal amortization payments begin, and then are reclassified to the loan category appropriate to the nature of the underlying collateral or purpose of the completed project. Since these types of loans are initially underwritten to consider both construction and post-construction financing, no additional underwriting takes place at the time the completed construction loan migrates to other loan categories. Upon completion of the construction project and transfer into other loan categories, these loans retain their performance status and risk rating. For example, if a construction loan was on non-accrual at the time of completion, it would be transferred to the appropriate loan category as a non-accrual loan.

Construction loans account for 9.2% of our

The following table provides commercial real estate portfolioloan detail as of December 31, 2011. Total construction loans of $250.7 million consist of $105.8 million of residential construction2014, 2013, and $144.9 million of commercial construction.

The following table provides details on the nature of our construction loan portfolios.

2012.

Table of Contents

Table 11
Construction12

Commercial Real Estate Loans by Type
(Dollar amounts in thousands)

 
 Residential
Construction
 Commercial
Construction
 Combined 
 
 Amount % of
Total
 Amount % of
Total
 Amount % of
Total
 

As of December 31, 2011

                   

Raw land

 $24,981  23.6 $42,768  29.5 $67,749  27.0 

Developed land

  55,501  52.4  57,949  40.0  113,450  45.3 

Construction

  12,133  11.5  14,415  9.9  26,548  10.6 

Substantially completed structures

  12,195  11.5  27,221  18.8  39,416  15.7 

Mixed and other

  1,026  1.0  2,556  1.8  3,582  1.4 
              

Total

 $105,836  100.0 $144,909  100.0 $250,745  100.0 
              

Weighted-average maturity (in years)

  0.63     0.74     0.69    

Construction loans as a percent of loans, excluding covered loans

  2.1%     2.8%     4.9%    

Construction loans as a percent of commercial real estate loans

  3.9%     5.3%     9.2%    

As of December 31, 2010

                   

Raw land

 $35,401  20.3 $46,995  28.6 $82,396  24.3 

Developed land

  83,229  47.6  71,856  43.7  155,085  45.7 

Construction

  14,077  8.1  22,882  13.9  36,959  10.9 

Substantially completed structures

  32,538  18.6  22,284  13.5  54,822  16.2 

Mixed and other

  9,445  5.4  455  0.3  9,900  2.9 
              

Total

 $174,690  100.0 $164,472  100.0 $339,162  100.0 
              

Weighted-average maturity (in years)

  0.49     0.68     0.58    

Construction loans as a percent of loans, excluding covered loans

  3.4%     3.2%     6.6%    

Construction loans as a percent of commercial real estate loans

  6.3%     6.0%     12.3%    
  As of December 31,
  2014 % of
Total
 2013 % of
Total
 2012 % of
Total
Office, retail, and industrial:            
Office $494,637
 15.8 $459,202
 17.1 $474,717
 18.4
Retail 452,225
 14.4 392,576
 14.7 368,796
 14.3
Industrial 531,517
 17.0 501,907
 18.7 489,678
 19.0
Total office, retail, and industrial 1,478,379
 47.2 1,353,685
 50.5 1,333,191
 51.7
Multi-family 564,421
 18.0 332,873
 12.4 285,481
 11.1
Construction 204,236
 6.5 186,197
 7.0 186,416
 7.2
Other commercial real estate:            
Rental properties 123,627
 3.9 112,887
 4.2 121,174
 4.7
Service stations and truck stops 84,108
 2.7 83,237
 3.1 114,521
 4.4
Warehouses and storage 128,396
 4.1 122,325
 4.6 110,367
 4.3
Hotels 46,409
 1.5 62,451
 2.3 74,098
 2.9
Restaurants 74,490
 2.4 79,809
 3.0 80,430
 3.1
Automobile dealers 53,221
 1.7 37,504
 1.4 45,121
 1.8
Recreational 48,718
 1.5 56,327
 2.1 41,058
 1.6
Religious 36,427
 1.2 32,614
 1.2 29,196
 1.1
Multi-use properties 191,011
 6.1 118,351
 4.4 63,120
 2.4
Other 101,490
 3.2 101,566
 3.8 94,036
 3.7
Total other commercial real estate 887,897
 28.3 807,071
 30.1 773,121
 30.0
Total commercial real estate $3,134,933
 100.0 $2,679,826
 100.0 $2,578,209
 100.0
Owner-occupied commercial real estate loans,
  excluding multi-family and construction loans
 $959,635
   $933,151
   $963,375
  
Owner-occupied as a percent of total,
  excluding multi-family and construction loans
 40.6%   43.2%   45.7%  

Total construction

Commercial real estate loans decreased by $88.4represent 47.1% of total loans, excluding covered loans, and totaled $3.1 billion at December 31, 2014, an increase of $455.1 million, or 26.1%,17.0% from December 31, 2010 to2013. Overall, growth was driven by loans acquired in the Popular and Great Lakes transactions, which totaled $518.2 million at December 31, 2011. The decline in the portfolio was due to principal paydowns, charge-offs, reclassification2014.
Consumer Loans
Consumer loans represent 13.7% of completed construction projects into other loan categories,total loans, excluding covered loans, and transfers of loans to OREO as we continued to reduce our exposure to this lending category.


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Other commercial real estate totaled $888.1$910.7 million as ofat December 31, 2011. The properties securing other commercial real estate are diverse in terms of type and geographic location. The following table summarizes this category by product type.

Table 12
Other Commercial Real Estate Loan Detail by Product Type
(Dollar amounts in thousands)

 
 As of December 31, 
 
 2011 2010 2009 
 
 Amount % of
Total
 Amount % of
Total
 Amount % of
Total
 

Service stations and truck stops

 $128,931  14.5 $140,774  16.4 $146,887  18.4 

Investor-owned rental properties

  127,085  14.3  124,671  14.6  119,132  14.9 

Warehouses and storage

  129,491  14.6  112,064  13.1  108,039  13.5 

Hotels

  73,889  8.3  84,513  9.9  76,815  9.6 

Restaurants

  78,867  8.9  57,786  6.7  55,262  6.9 

Automobile dealers

  35,777  4.0  37,318  4.4  39,846  5.0 

Medical

  20,859  2.3  37,074  4.3  39,158  4.9 

Religious

  24,097  2.7  20,528  2.4  14,652  1.8 

Mobile home parks

  30,071  3.5  18,192  2.1  19,367  2.4 

Recreational

  34,708  3.9  9,659  1.1  13,344  1.7 

Other(1)

  204,371  23.0  213,778  25.0  166,481  20.9 
              

Total other commercial real estate

 $888,146  100.0 $856,357  100.0 $798,983  100.0 
              

Maturity and Interest Rate Sensitivity of Corporate Loans

The following table summarizes the maturity distribution of our corporate loan portfolio as of December 31, 2011, as well as the interest rate sensitivity of the loans that have maturities in excess of one year. For additional discussion of interest rate sensitivity, refer to Item 7A, "Quantitative and Qualitative Disclosures about Market Risk," of this Form 10-K.


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Table 13
Maturities and Sensitivities of Corporate Loans to Changes in Interest Rates
(Dollar amounts in thousands)

 
 As of December 31, 2011 
 
 Due in 1 year
or less
 Due after
1 year
through
5 years
 Due after
5 years
 Total 

Commercial, industrial, and agricultural

 $1,014,746 $561,328 $126,148 $1,702,222 

Commercial real estate

  873,225  1,703,078  150,006  2,726,309 
          

Total

 $1,887,971 $2,264,406 $276,154 $4,428,531 
          

Loans maturing after one year:

             

Predetermined (fixed) interest rates

    $2,101,826 $243,357    

Floating interest rates

     162,580  32,797    
            

Total

    $2,264,406 $276,154    
            

Consumer Loans

2014. Consumer loans are centrally underwritten utilizingusing a credit scoring model developed by the Fair Isaac Corporation ("FICO") credit scoring. This is a credit score, with a scale that ranges from 300 to 850, developed by Fair Isaac Corporation that is used by many lenders.. It uses a risk-based system to determine the probability that a borrower may default on financial obligations.obligations to the lender. Underwriting standards for home equity loans are heavily influenced by statutory requirements, which include loan-to-value and affordability ratios, risk-based pricing strategies, and documentation requirements.

As of December 31, 2011, consumer loans represented 13.0% of loans, excluding covered loans.

Table 14
Consumer Loans
(Dollar amounts in thousands)

 
 As of December 31, 
 
 2011 2010 2009 
 
 Amount % of
Total
 Amount % of
Total
 Amount % of
Total
 

Home equity

 $416,194  63.1 $445,243  67.7 $470,523  70.9 

1-4 family mortgages

  201,099  30.5  160,890  24.5  139,983  21.1 

Installment loans

  42,289  6.4  51,774  7.8  53,386  8.0 
              

Total consumer loans

 $659,582  100.0 $657,907  100.0 $663,892  100.0 
              


 
 As of December 31, 2011 
 
 Average
FICO Score
 Median
FICO Score
 % of Loans
with a Score
of 650 or
Above
 

Home equity loans

  741  751  83.5% 

1-4 family mortgages

  729  751  80.7% 

The home equity category consists mainly of revolving lines of credit secured by junior liens on owner-occupied real estate. Loan-to-value ratios on home equity loans and 1-4 family mortgages are based on the collateralcurrent appraised value at origination for these creditsof the collateral.


54




Maturity and generally range from 50%Interest Rate Sensitivity of Corporate Loans
The following table summarizes the maturity distribution of our corporate loan portfolio as of December 31, 2014, as well as the interest rate sensitivity of the loans that have maturities in excess of one year. For additional discussion of interest rate sensitivity, see Item 7A, "Quantitative and Qualitative Disclosures about Market Risk," of this Form 10-K.
Table 13
Maturities and Sensitivities of Corporate Loans to 80%.

Changes in Interest Rates
(Dollar amounts in thousands)
  Maturity Due In
  One Year or Less Greater Than One to Five Years Greater Than Five Years Total
As of December 31, 2014        
Commercial, industrial, and agricultural $1,211,466
 $1,176,627
 $223,712
 $2,611,805
Commercial real estate 753,480
 2,046,340
 335,113
 3,134,933
Total corporate loans $1,964,946
 $3,222,967
 $558,825
 $5,746,738
Loans by interest rate type:        
Fixed interest rates $702,476
 $1,946,905
 $270,024
 $2,919,405
Floating interest rates 1,262,470
 1,276,062
 288,801
 2,827,333
Total corporate loans $1,964,946
 $3,222,967
 $558,825
 $5,746,738
As of December 31, 2014, the composition of our corporate loans between fixed and floating interest rates was 50.8% and 49.2%, respectively. As of December 31, 2013, the composition of our corporate loans between fixed and floating interest rates was 53.5% and 46.5%, respectively.

55


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Non-Performing Assets and Performing Potential Problem Loans

The following table presents our loan portfolio by performing and non-performing status.

A discussion of our accounting policies for non-accrual loans, TDRs, and loans 90 days or more past due can be found in Note 1 of "Notes to the Consolidated Financial Statements" in Item 8 of this Form 10-K.

Table 15
14
Loan Portfolio by Performing/Non-Performing Status
(Dollar amounts in thousands)

 
  
  
 Past Due  
  
 
 
 Total Loans Current 30-89 Days
Past Due
 90 Days
Past Due
 Non-accrual TDRs 

As of December 31, 2011

                   

Commercial and industrial

 $1,458,446 $1,397,569 $10,283 $4,991 $44,152 $1,451 

Agricultural

  243,776  242,727  30  -  1,019  - 

Commercial real estate:

                   

Office

  444,368  436,881  -  -  7,487  - 

Retail

  334,034  326,922  395  52  4,923  1,742 

Industrial

  520,680  501,674  385  988  17,633  - 

Multi-family

  288,336  270,138  604  -  6,487  11,107 

Residential construction

  105,836  87,482  278  -  18,076  - 

Commercial construction

  144,909  121,562  -  -  23,347  - 

Other commercial real estate

  888,146  829,492  5,273  1,707  51,447  227 
              

Total commercial real estate

  2,726,309  2,574,151  6,935  2,747  129,400  13,076 
              

Total corporate loans

  4,428,531  4,214,447  17,248  7,738  174,571  14,527 
              

Home equity

  416,194  400,570  5,986  1,138  7,407  1,093 

1-4 family mortgages

  201,099  190,052  3,636  -  5,322  2,089 

Installment loans

  42,289  41,133  625  351  25  155 
              

Total consumer loans

  659,582  631,755  10,247  1,489  12,754  3,337 
              

Total loans, excluding covered loans

  5,088,113  4,846,202  27,495  9,227  187,325  17,864 

Covered loans

  260,502  195,289  4,232  43,347  19,879  - 
              

Total loans

 $5,348,615 $5,041,491 $31,727 $52,574 $207,204 $17,864 
              



  
  
 Past Due  
  
 

 Total Loans Current 30-89 Days
Past Due
 90 Days
Past Due
 Non-accrual TDRs    Accruing  

As of December 31, 2010

 
 
Total
Loans
 Current 30-89 Days Past Due 90 Days Past Due TDRs Non-accrual
As of December 31, 2014            

Commercial and industrial

 $1,465,903 $1,403,409 $5,398 $1,552 $50,088 $5,456  $2,253,556
 $2,225,507
 $4,882
 $205
 $269
 $22,693

Agricultural

 227,756 223,021 65 187 2,497 1,986  358,249
 355,955
 1,934
 
 
 360

Commercial real estate:

             

Office

 396,836 389,936 1,671 - 5,087 142  494,637
 489,915
 939
 
 
 3,783

Retail

 328,751 320,477 447 - 7,827 -  452,225
 446,702
 288
 76
 413
 4,746

Industrial

 478,026 468,995 461 - 6,659 1,911  531,517
 525,955
 979
 
 173
 4,410

Multi-family

 349,862 343,070 486 - 6,203 103  564,421
 561,436
 1,261
 83
 887
 754

Residential construction

 174,690 122,317 51 200 52,122 - 

Commercial construction

 164,472 135,787 - - 28,685 - 
Construction 204,236
 197,255
 
 
 
 6,981

Other commercial real estate

 856,357 802,461 8,115 345 40,605 4,831  887,897
 875,080
 4,976
 438
 433
 6,970
             

Total commercial real estate

 2,748,994 2,583,043 11,231 545 147,188 6,987  3,134,933
 3,096,343
 8,443
 597
 1,906
 27,644
             

Total corporate loans

 4,442,653 4,209,473 16,694 2,284 199,773 14,429  5,746,738
 5,677,805
 15,259
 802
 2,175
 50,697
             

Home equity

 445,243 428,726 4,055 1,870 7,948 2,644  543,185
 533,738
 2,361
 145
 651
 6,290

1-4 family mortgages

 160,890 149,419 2,267 4 3,902 5,298  291,463
 285,531
 1,947
 166
 878
 2,941

Installment loans

 51,774 50,899 630 86 159 - 
             
Installment 76,032
 75,423
 506
 60
 
 43

Total consumer loans

 657,907 629,044 6,952 1,960 12,009 7,942  910,680
 894,692
 4,814
 371
 1,529
 9,274
             

Total loans, excluding covered loans

 5,100,560 4,838,517 23,646 4,244 211,782 22,371  6,657,418
 6,572,497
 20,073
 1,173
 3,704
 59,971

Covered loans

 371,729 268,934 18,445 84,350 - -  79,435
 65,682
 2,565
 5,002
 
 6,186
             

Total loans

 $5,472,289 $5,107,451 $42,091 $88,594 $211,782 $22,371  $6,736,853
 $6,638,179
 $22,638
 $6,175
 $3,704
 $66,157
             
As of December 31, 2013            
Commercial and industrial $1,830,638
 $1,805,516
 $6,424
 $393
 $6,538
 $11,767
Agricultural 321,702
 321,123
 60
 
 
 519
Commercial real estate:            
Office 459,202
 455,547
 1,200
 731
 
 1,724
Retail 392,576
 385,234
 939
 272
 624
 5,507
Industrial 501,907
 481,766
 337
 312
 9,647
 9,845
Multi-family 332,873
 329,669
 318
 
 1,038
 1,848
Construction 186,197
 179,877
 23
 
 
 6,297
Other commercial real estate 807,071
 789,517
 4,817
 258
 4,326
 8,153
Total commercial real estate 2,679,826
 2,621,610
 7,634
 1,573
 15,635
 33,374
Total corporate loans 4,832,166
 4,748,249
 14,118
 1,966
 22,173
 45,660
Home equity 427,020
 413,912
 4,355
 1,102
 787
 6,864
1-4 family mortgages 275,992
 267,497
 1,939
 548
 810
 5,198
Installment 44,827
 42,329
 330
 92
 
 2,076
Total consumer loans 747,839
 723,738
 6,624
 1,742
 1,597
 14,138
Total loans, excluding covered loans 5,580,005
 5,471,987
 20,742
 3,708
 23,770
 59,798
Covered loans 134,355
 93,100
 2,232
 18,081
 
 20,942
Total loans $5,714,360
 $5,565,087
 $22,974
 $21,789
 $23,770
 $80,740


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The following table provides a comparison of our non-performing assets and past due loans for the past five years.

to prior periods.

Table 16
15
Non-Performing Assets and Past Due Loans
(Dollar amounts in thousands)


 As of December 31, 

 2011 2010 2009 2008 2007  As of December 31,

Non-performing assets, excluding covered loans and covered OREO

 
 2014 2013 2012 2011 2010
Non-performing assets, excluding acquired and covered loans and covered OREO (1)
Non-performing assets, excluding acquired and covered loans and covered OREO (1)
    

Non-accrual loans

 $187,325 $211,782 $244,215 $127,768 $18,447  $58,853
 $59,798
 $84,534
 $187,325
 $211,782

90 days or more past due loans

 9,227 4,244 4,079 36,999 21,149  771
 3,708
 8,689
 9,227
 4,244
           

Total non-performing loans

 196,552 216,026 248,294 164,767 39,596  59,624
 63,506
 93,223
 196,552
 216,026

TDRs (still accruing interest)

 17,864 22,371 30,553 7,344 7,391 

Other real estate owned

 33,975 31,069 57,137 24,368 6,053 
           
Accruing TDRs 3,704
 23,770
 6,867
 17,864
 22,371
OREO 25,779
 32,473
 39,953
 33,975
 31,069

Total non-performing assets

 $248,391 $269,466 $335,984 $196,479 $53,040  $89,107
 $119,749
 $140,043
 $248,391
 $269,466
           

30-89 days past due loans

 $27,495 $23,646 $37,912 $116,206 $100,820  $13,473
 $20,742
 $22,666
 $27,495
 $23,646

Non-accrual loans to total loans

 3.68% 4.15% 4.69% 2.38% 0.37%  0.99% 1.07% 1.63% 3.68% 4.15%

Non-performing loans to total loans

 3.86% 4.24% 4.77% 3.07% 0.80%  1.00% 1.14% 1.80% 3.86% 4.24%

Non-performing assets to loans plus OREO

 4.85% 5.25% 6.39% 3.65% 1.07%  1.49% 2.13% 2.68% 4.85% 5.25%

Covered loans and covered OREO (1)

 
Non-performing acquired loans and OREO (1)
Non-performing acquired loans and OREO (1)
        

Non-accrual loans

 $19,879 $- $- $- $-  $1,118
 $
 $
 $
 $

90 days or more past due loans

 43,347 84,350 30,286 - -  402
 
 
 
 
           

Total non-performing loans

 63,226 84,350 30,286 - -  1,520
 
 
 
 

TDRs (still accruing interest)

 - - - - - 

Other real estate owned

 23,455 22,370 8,981 - - 
           
OREO 1,119
 
 
 
 

Total non-performing assets

 $86,681 $106,720 $39,267 $- $-  $2,639
 $
 $
 $
 $
           

30-89 days past due loans

 $4,232 $18,445 $22,988 $- $-  $6,600
 $
 $
 $
 $

Non-performing assets, including covered loans and covered OREO

 
Non-performing covered loans and covered OREO (1)
Non-performing covered loans and covered OREO (1)
        

Non-accrual loans

 $207,204 $211,782 $244,215 $127,768 $18,447  $6,186
 $20,942
 $14,182
 $19,879
 $

90 days or more past due loans

 52,574 88,594 34,365 36,999 21,149  5,002
 18,081
 31,447
 43,347
 84,350
           

Total non-performing loans

 259,778 300,376 278,580 164,767 39,596  11,188
 39,023
 45,629
 63,226
 84,350

TDRs (still accruing interest)

 17,864 22,371 30,553 7,344 7,391 

Other real estate owned

 57,430 53,439 66,118 24,368 6,053 
           
OREO 8,068
 8,863
 13,123
 23,455
 22,370

Total non-performing assets

 $335,072 $376,186 $375,251 $196,479 $53,040  $19,256
 $47,886
 $58,752
 $86,681
 $106,720
           
30-89 days past due loans $2,565
 $2,232
 $6,514
 $4,232
 $18,445
Total non-performing assetsTotal non-performing assets      
Non-accrual loans $66,157
 $80,740
 $98,716
 $207,204
 $211,782
90 days or more past due loans 6,175
 21,789
 40,136
 52,574
 88,594
Total non-performing loans 72,332
 102,529
 138,852
 259,778
 300,376
Accruing TDRs 3,704
 23,770
 6,867
 17,864
 22,371
OREO 34,966
 41,336
 53,076
 57,430
 53,439
Total non-performing assets $111,002
 $167,635
 $198,795
 $335,072
 $376,186

30-89 days past due loans

 $31,727 $42,091 $60,900 $116,206 $100,820  $22,638
 $22,974
 $29,180
 $31,727
 $42,091

Non-accrual loans to total loans

 3.87% 3.87% 4.57% 2.38% 0.37%  0.98% 1.41% 1.83% 3.87% 3.87%

Non-performing loans to total loans

 4.86% 5.49% 5.21% 3.07% 0.80%  1.07% 1.79% 2.58% 4.86% 5.49%

Non-performing assets to loans plus OREO

 6.20% 6.81% 6.93% 3.65% 1.07%  1.64% 2.91% 3.65% 6.20% 6.81%

The effect of non-accrual loans on interest income for 2011 is presented below:

 

Interest which would have been included at the contract rates

 $13,262 

Less: Interest included in income during the year

 5,884 
   

Interest income not recognized in the financial statements

 $7,378 
   
Interest income not recognized in the financial statements related to non-accrual loans for 2014Interest income not recognized in the financial statements related to non-accrual loans for 2014 $3,057

Table of Contents

Non-performing covered loans and covered OREO were recorded at their estimated fair values at the time of acquisition. These assets are covereddecreased by $30.6 million, or 25.6%, from December 31, 2013. This decrease was driven primarily by the FDIC Agreements that substantially mitigate the riskreturn of loss. Generally, covered loans are considered accruing loans. However, the timingthree TDRs totaling $20.7 million to performing status, sales of OREO properties, and amount of future cash flows for some loans may not be reasonably estimable. Those loans were classified as non-accrual loans as of December 31, 2011, and interest income will not be recognized until the timing and amount of the future cash flows can be reasonably estimated. Past due covered loans area decline in 90 days or more past due based on contractual terms but continue to perform in accordance with our expectations of cash flows.

loans. Non-performing assets, excluding acquired and covered loans and covered OREO, represented 4.85%1.49% of total loans plus OREO as of December 31, 20112014 compared to 5.25%2.13% as of December 31, 20102013 and 6.39%2.68% as of December 31, 2009.

2012. The continued improvement in non-performing assets and the related credit metrics reflects management's ongoing commitment to credit remediation.

Non-performing assets, excluding covered loans and covered OREO, were $248.4 million as ofdeclined 14.5% from December 31, 2012 to December 31, 2013. Improvement in non-performing assets and related credit metrics resulted primarily from management's focus on credit remediation.
The significant decrease in non-performing assets, excluding covered loans and covered OREO, from December 31, 2011 declining by $21.1 million, or 7.8%, compared to December 31, 2010. The reduction in non-performing assets from December 31, 20102012 was due mainly to December 31, 2011 was largely due to management's remediation activities and the return of accruing TDRs to performing status. During 2011, we had gross reductions of non-performing assets totaling $110.8 million, consisting of $80.3 milliona decline in non-accrual loans, that were sold, paid off, or transferred to held-for-sale and $30.5 million in OREO properties that were sold. For additional details, please refer towhich reflects the section titled "Disposals of Non-performing Assets" of this Item 7.

The improvement inaggressive remediation actions taken by management during 2012, including the asset quality measures from December 31, 2009 to December 31, 2010 was substantially due tobulk loan charge-offs, OREO write-downs, and disposals of non-performing assets, partially offset by loans downgraded to non-accrual status. For additional details, please refer to the section titled "Credit Actions Taken in Fourth Quarter 2010" of this Item 7.

Non-accrual Loans

Non-accrual loans, excluding covered loans, declined to $187.3$58.9 million as of December 31, 20112014 from $211.8$59.8 million as of December 31, 2010 following a decline2013.
The reclassification of two corporate loan relationships totaling $19.3 million from $244.2 million as of December 31, 2009. Thenon-accrual to accruing TDR status drove the decline in non-accrual loans from December 31, 20102012 to December 31, 2013.
The decrease in non-accrual loans from December 31, 2011 to December 31, 2012 resulted from the bulk loan sales, payments, charge-offs, and transfers to OREO, which in aggregate exceededmore than offset the amount of loans downgraded from performing to non-accrual status during 2011.

The amount of loans downgraded from performing to non-accrual during 2011 totaled $194.3 million (including a commercial borrowing relationship totaling $33.9 million) falling from $214.5 million in 2010 and $365.3 million during 2009, and reflects significantly fewer downgrades of construction loans and other commercial loan categories from prior years.

A discussion of our accounting policies for non-accrual loans is contained in Note 1 of "Notes to Consolidated Financial Statements" in Item 8 of this Form 10-K.

Table 17
Non-Performing Construction Loans
(Dollar amounts in thousands)

 
 December 31, 2011 December 31, 2010 
 
 Total
Loans
 Non-
Performing
Loans
 Non-
Performing
Loans as a
% of Loans
 Total
Loans
 Non-
Performing
Loans
 Non-
Performing
Loans as a
% of Loans
 

Residential construction

 $105,836 $18,076  17.1% $174,690 $52,322  30.0% 

Commercial construction

  144,909  23,347  16.1%  164,472  28,685  17.4% 
              

Total construction loans

 $250,745 $41,423  16.5% $339,162 $81,007  23.9% 
              

Non-accrual loans

    $41,423       $80,807    

90 days or more past due loans

     -        200    
                  

Total non-performing loans

    $41,423       $81,007    
                  
2012.


58

Table of Contents

Non-performing construction loans totaled $41.4 million as of December 31, 2011, a 48.9% decline compared to December 31, 2010, and represented 16.5% of total construction loans as of December 31, 2011 compared to 23.9% as of December 31, 2010.

Six construction credits primarily in the raw land category represent 63.1% of the $41.4 million in non-performing construction loans as of December 31, 2011, with the largest single loan totaling $14.0 million. Life-to-date charge-offs on these six credits totaled $5.7 million. We had valuation allowances related to two of these loans totaling $1.7 million as of December 31, 2011.

Of the $81.0 million in non-performing construction loans as of December 31, 2010, 51.7% was comprised of six credits. Life-to-date charge-offs on those six credits totaled $7.9 million as of December 31, 2010. We did not have a valuation allowance related to these loans as of December 31, 2010.

Loan modifications are generallymay be performed at the request of the individual borrower and may include reductionreductions in interest rates, changes in payments, and extensions of maturity date extensions. A discussion of our accounting policies for TDRs is contained in Note 1 of "Notes to Consolidated Financial Statements" in Item 8 of this Form 10-K.

Table 18
TDRs by Type
(Dollar amounts in thousands)

 
 December 31, 2011 December 31, 2010 December 31, 2009 
 
 Number of
Loans
 Amount Number of
Loans
 Amount Number of
Loans
 Amount 

Commercial and industrial

  20 $2,348  46 $23,404  28 $4,062 

Agricultural

  -  -  1  1,986  -  - 

Commercial real estate:

                   

Office

  -  -  1  142  -  - 

Retail

  2  1,742  -  -  1  91 

Industrial

  -  -  2  1,911  -  - 

Multi-family

  9  12,865  9  3,193  10  11,462 

Residential construction

  -  -  4  8,323  1  1,423 

Commercial construction

  1  14,006  -  -  -  - 

Other commercial real estate

  9  11,644  13  7,229  11  13,852 
              

Total commercial real estate

  21  40,257  29  20,798  23  26,828 
              

Home equity loans

  25  1,564  50  3,233  34  1,724 

1-4 family mortgages

  26  3,382  49  6,703  51  7,953 

Installment loan

  1  155  -  -  -  - 
              

Total consumer

  52  5,101  99  9,936  85  9,677 
              

Total TDRs

  93 $47,706  175 $56,124  136 $40,567 
              

TDRs, still accruing interest

  57 $17,864  120 $22,371  108 $30,553 

TDRs included in non-accrual

  36  29,842  55  33,753  28  10,014 
              

Total TDRs

  93 $47,706  175 $56,124  136 $40,567 
              

Year-to-date charge-offs on restructured loans

    $8,890    $11,534    $4,993 

Valuation allowance related to restructured loans

    $94    $-    $- 

At December 31, 2011, we had TDRs totaling $47.7 million, a decrease of $8.4 million, or 15.0%, from December 31, 2010. The December 31, 2011 total includes $17.9 million in loans that were restructured at market terms and are accruing interest. After a sufficient period of performance under the modified terms, these loans will be reclassified to performing status.

We have other TDRs totaling $29.8 million as of December 31, 2011, which are reported as non-accrual because they are not performing in accordance with their modified terms or there has not been sufficient performance under


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the modified terms.dates. We occasionally restructure loans at other than market rates or terms to enable the borrower to work through financial difficulties for a set period of time.

Table 16
TDRs by Type
(Dollar amounts in thousands)
  As of December 31,
  2014 2013 2012
  Number of Loans Amount Number of Loans Amount Number of Loans Amount
Commercial and industrial 7
 $19,068
 10
 $8,659
 6
 $3,064
Agricultural 
 
 
 
 
 
Commercial real estate:            
Office 
 
 
 
 
 
Retail 1
 413
 2
 624
 
 
Industrial 1
 173
 3
 9,647
 2
 2,407
Multi-family 5
 1,119
 5
 1,291
 1
 150
Construction 
 
 
 
 
 
Other commercial real estate 5
 616
 7
 4,617
 7
 9,855
Total commercial real estate loans 12
 2,321
 17
 16,179
 10
 12,412
Total corporate loans 19
 21,389
 27
 24,838
 16
 15,476
Home equity 17
 1,157
 18
 1,299
 7
 274
1-4 family mortgages 10
 1,062
 14
 1,716
 16
 2,041
Installment 
 
 
 
 
 
Total consumer loans 27
 2,219
 32
 3,015
 23
 2,315
Total TDRs 46
 $23,608
 59
 $27,853
 39
 $17,791
Accruing TDRs 29
 $3,704
 39
 $23,770
 19
 $6,867
Non-accrual TDRs 17
 19,904
 20
 4,083
 20
 10,924
Total TDRs 46
 $23,608
 59
 $27,853
 39
 $17,791
Year-to-date charge-offs on TDRs  
 $8,457
  
 $1,880
  
 $10,003
Specific reserves related to TDRs  
 1,765
  
 1,952
  
 2,794
At December 31, 2014, TDRs totaled $23.6 million, decreasing $4.2 million, or 15.2%, from December 31, 2013. The December 31, 2014 total includes $3.7 million in loans that are accruing interest, with the majority restructured at market terms. After a sufficient period of performance under the modified terms, the loans restructured at market rates will be reclassified to performing status.
Accruing TDRs decreased $20.1 million from December 31, 2013 due primarily to the return of three TDRs totaling $20.7 million to performing status during 2014 after sustained payment performance in accordance with their modified terms, which represent market rates at the time of restructuring.
At December 31, 2014, non-accrual TDRs totaled $19.9 million compared to $4.1 million at December 31, 2013. The increase was due to the restructure of one non-accrual credit totaling $15.5 million, net of related charge-offs, during 2014. TDRs are reported as non-accrual if they are not performing in accordance with their modified terms or they have not yet exhibited sufficient performance under their modified terms.

59




Performing Potential Problem Loans

Potential

Performing potential problem loans consist of special mention loans and substandard loans. These loans are performing in accordance with contractual terms, but management haswe have concerns about the ability of the obligorborrower to continue to comply with repaymentloan terms because ofdue to the obligor'sborrower's potential operating or financial difficulties.

Table 19
17
Performing Potential Problem Loans
(Dollar amounts in thousands)
  December 31, 2014 December 31, 2013
  
Special
Mention
(1)
 
Substandard (2)
 
Total (3)
 
Special
Mention
(1)
 
Substandard (2)
 
Total (3)
Commercial and industrial $84,615
 $30,809
 $115,424
 $23,679
 $14,135
 $37,814
Agricultural 294
 
 294
 344
 
 344
Commercial real estate:            
Office, retail, and industrial 38,718
 32,251
 70,969
 27,871
 23,538
 51,409
Multi-family 5,951
 3,774
 9,725
 2,794
 499
 3,293
Construction 5,776
 12,487
 18,263
 8,309
 17,642
 25,951
Other commercial real estate 32,225
 19,407
 51,632
 14,567
 22,576
 37,143
Total commercial real estate 82,670
 67,919
 150,589
 53,541
 64,255
 117,796
Total performing potential
  problem loans
 167,579
 98,728
 266,307
 77,564
 78,390
 155,954
Less: acquired performing
  potential problem loans (4)
 10,024
 29,751
 39,775
 
 
 
Total performing potential
  problem loans, excluding
  acquired loans (4)
 $157,555
 $68,977
 $226,532
 $77,564
 $78,390
 $155,954
Performing potential problem
  loans to corporate loans
 2.92% 1.72% 4.63% 1.61% 1.62% 3.23%
Performing potential problem
  loans to corporate loans,
  excluding acquired loans (4)
 3.08% 1.35% 4.42% 1.61% 1.62% 3.23%

(1)
Loans categorized as special mention exhibit potential weaknesses that require the close attention of management since these potential weaknesses may result in the deterioration of repayment prospects in the future.
(2)
Loans categorized as substandard exhibit a well-defined weakness or weaknesses that may jeopardize the liquidation of the debt. These loans continue to accrue interest because they are well secured and collection of principal and interest is expected within a reasonable time.
(3)
Total performing potential problem loans excludes $1.8 million of accruing TDRs as of December 31, 2014 and $2.8 million of accruing TDRs as of December 31, 2013.
(4)
Due to the impact of business combination accounting, acquired performing potential problem loans are separated in this table and excluded from these metrics to provide for improved comparability to prior periods and better perspective into trends. For a discussion of acquired loans, see Notes 1 and 6 of "Notes to the Consolidated Financial Statements" in Item 8 of this Form 10-K.

Performing potential problem loans totaled $266.3 million as of December 31, 2014, compared to $156.0 million as of December 31, 2013. The increase was impacted by the Popular and Great Lakes acquisitions, which added $39.8 million of performing potential problem loans as of December 31, 2014. Acquired loans are recorded at fair value, which incorporates credit risk, at the date of acquisition.

Performing potential problem loans, excluding acquired loans, were 4.42% of corporate loans at December 31, 2014 compared to 3.23% at December 31, 2013. This level reflects a greater proportion of loans classified as special mention compared to December 31, 2013. Special mention loans, excluding acquired loans, increased by $80.0 million from December 31, 2013, driven primarily by the downgrade of five corporate loan relationships totaling $66.3 million for which management has specific monitoring plans.

60




Loan Sales
The following table summarizes loan sales for the three years ended December 31, 2014.
Table 18
Loan Sales
(Dollar amounts in thousands)

 
 As Of December 31, 
 
 2011 2010 2009 

Special mention loans (1)

 $276,577 $404,316 $373,735 

Substandard loans (2)

  126,657  151,651  150,289 
        

Total potential problem loans

 $403,234 $555,967 $524,024 
        
  Proceeds Book Value 
Charge-offs (1)
 
Net Gains (2)
Loan sales in 2014 by class:        
Commercial and industrial $650
 $650
 $
 $
Office, retail, and industrial 17,100
 20,550
 (3,450) 
1-4 family mortgages 148,680
 144,909
 
 3,771
Total loan sales in 2014 $166,430
 $166,109
 $(3,450) $3,771
Loan sales in 2013 by class:        
Commercial and industrial $469
 $1,044
 $(575) $
Office, retail, and industrial 806
 1,791
 (985) 
1-4 family mortgages 152,130
 147,413
 
 4,717
Total loan sales in 2013 $153,405
 $150,248
 $(1,560) $4,717
Loan sales in 2012 by class:        
Commercial and industrial $19,705
 $47,225
 $(22,508) $(5,012)
Agricultural 3,605
 8,720
 (4,356) (759)
Commercial real estate:       

Office, retail, and industrial 35,488
 49,345
 (23,696) 9,839
Multi-family 3,151
 4,043
 (1,859) 967
Construction 9,074
 18,274
 (7,540) (1,660)
Other commercial real estate 26,664
 46,838
 (21,825) 1,651
Total commercial real estate 74,377
 118,500
 (54,920) 10,797
Home equity 829
 1,561
 (773) 41
1-4 family mortgages 52,749
 50,484
 (90) 2,355
Total consumer loans 53,578
 52,045
 (863) 2,396
Total loan sales in 2012 $151,265
 $226,490
 $(82,647) $7,422

Potential problem loans totaled $403.2for accelerated disposition through multiple bulk loan sales and recorded charge-offs of $80.3 million. The bulk loan sales of $172.5 million asin original carrying value resulted in proceeds of December 31, 2011, down $152.7$94.5 million or 27.5%, from $556.0and a gain of $5.2 million. In addition to the bulk loan sales, we sold $50.3 million as of December 31, 2010. The decline from December 31, 2010 reflects management's efforts to remediate problemmortgage loans, and the improvementresulting in the overall credit metricsgains of the loan portfolio.



61




OREO

OREO consists of properties acquired as the result of borrower defaults on loans. OREO, excluding covered OREO, was $26.9 million at December 31, 2014, a $5.6 million decrease from December 31, 2013. A discussion of our accounting policies for non-accrual loansOREO is contained in Note 1 of "Notes to the Consolidated Financial Statements" in Item 8 of this Form 10-K. OREO, excluding covered OREO, was $34.0 million at December 31, 2011, a $2.9 million increase from December 31, 2010.

Table 20
19
OREO Properties by Type
(Dollar amounts in thousands)


 December 31, 2011 December 31, 2010 December 31, 2009  As of December 31,

 Number
of
Properties
 Amount Number
of
Properties
 Amount Number
of
Properties
 Amount  2014 2013 2012

Single-family homes

 5 $985 6 $1,113 50 $9,245  $2,433
 $2,257
 $2,054

Land parcels:

       

Raw land

 8 8,316 5 7,467 4 9,658  1,917
 4,037
 3,244

Farm land

 - - 2 4,657 3 11,787  923
 
 207

Commercial lots

 19 5,944 14 4,096 1 620  9,295
 11,649
 12,355

Single-family lots

 25 7,677 27 7,564 27 16,092  1,279
 3,101
 4,970
             

Total land parcels

 52 21,937 48 23,784 35 38,157  13,414
 18,787
 20,776
             

Multi-family units

 4 3,083 4 714 12 2,450  758
 346
 796

Commercial properties

 16 7,970 12 5,458 15 7,285  10,293
 11,083
 16,327
             

Total OREO properties

 77 33,975 70 31,069 112 57,137 
Total OREO, excluding covered OREO 26,898
 32,473
 39,953

Covered OREO

 46 23,455 44 22,370 9 8,981  8,068
 8,863
 13,123
             

Total OREO properties

 123 $57,430 114 $53,439 121 $66,118 
             
Total OREO $34,966
 $41,336
 $53,076

OREO Activity

Table

A rollforward of Contents

DuringOREO balances for the year ended December 31, 2011, we had gross reductions of non-performing assets totaling $110.8 million, comprised of $80.3 million2014 and 2013 is presented in non-accrual loans that were sold, paid off, or transferred to held-for-sale and $30.5 million in the following table.


Table 20
OREO properties that were sold. The following tables summarize disposals of non-performing assets for the years ended December 31, 2011 and 2010.

Table 21
Disposals of Loans
Rollforward

(Dollar amounts in thousands)

 
 Proceeds Book Value Charge-offs 

Loans sold or identified as held-for-sale in 2011

          

Commercial and industrial

 $3,120 $4,226 $(1,106)

Commercial real estate:

          

Office retail, and, industrial

  2,051  2,987  (936)

Residential construction

  4,891  7,864  (2,973)

Commercial construction

  3,800  4,000  (200)

Other commercial real estate

  2,700  2,700  - 
        

Total commercial real estate

  13,442  17,551  (4,109)
        

Total loans sold or transferred to held-for-sale

  16,562  21,777  (5,215)

Partial sales and paydowns

  58,549  58,549  - 
        

Total loans sold, paid off, or transferred to held-for-sale in 2011

 $75,111 $80,326 $(5,215)
        

Loans sold in 2010

          

Bulk sale of non-accrual loans (1)

 $12,540 $19,088 $(6,548)

Sale of potential problem loans (2)

  4,000  11,138  (7,138)
        

Total loans sold in 2010

 $16,540 $30,226 $(13,686)
        

Proceeds from disposals of non-accrual loans represented 93.5% of carrying value for 2011 and 54.7% for 2010. Included in the totals are two loans held-for-sale totaling $4.2 million as of December 31, 2011.

Table 22
Disposals of OREO Properties
(Dollar amounts in thousands)

 
 Year Ended December 31, 2011 Year Ended December 31, 2010 
 
 OREO Covered
OREO
 Total OREO Covered
OREO
 Total 

OREO sales

                   

Proceeds from sales

 $24,622 $13,109 $37,731 $47,418 $9,062 $56,480 

Less: Basis of properties sold

  30,485  13,147  43,632  64,456  9,137  73,593 
              

Losses on sales of OREO, net

 $(5,863)$(38)$(5,901)$(17,038)$(75)$(17,113)
              

OREO transfers and write-downs

                   

OREO transferred to premises, furniture, and equipment (at fair value)

 $841 $- $841 $9,455 $- $9,455 

OREO write-downs

 $2,388 $1,397 $3,785 $23,196 $171 $23,367 
  Years Ended December 31,
  2014 2013
  OREO Covered OREO Total OREO Covered OREO Total
Beginning balance $32,473
 $8,863
 $41,336
 $39,953
 $13,123
 $53,076
Transfers from loans 8,145
 9,934
 18,079
 11,545
 6,420
 17,965
Acquired 1,244
 
 1,244
 
 
 
Proceeds from sales (11,513) (10,855) (22,368) (15,274) (10,523) (25,797)
Gains (losses) on sales of OREO 1,051
 186
 1,237
 (1,531) 30
 (1,501)
OREO valuation adjustments (4,502) (60) (4,562) (2,220) (187) (2,407)
Ending Balance $26,898
 $8,068
 $34,966
 $32,473
 $8,863
 $41,336


62

Table of Contents

OREO sales, excluding covered OREO, for 2011 consisted of 122 properties, comprised primarily of farmland, residential lots, and 1-4 family. In 2010, OREO sales consisted of over 200 properties with most of the sales in 1-4 family and residential lots.

In evaluating whether to enter into these transactions, management assessed current collateral values, projected cash flows, long-term costs to remediate and/or maintain collateral, current disposition strategies, and other unique circumstances specific to these loans. We continue to pursue the remediation of non-performing assets. Our efforts will likely be impacted by a number of factors, including but not limited to, the pace and timing of the overall recovery of the economy, illiquidity in the real estate market, and higher levels of foreclosed real estate coming into the market.

In fourth quarter 2010, the lagging market recovery for real estate in the suburban Chicago market warranted a reassessment of the existing disposition strategies for our non-performing assets and a shift to more aggressively pursue remediation. In selecting non-performing assets for disposition strategy reassessment, we specifically targeted approximately $115.0 million of construction-related loans and OREO that we believed were subject to longer estimated recovery periods and had a higher likelihood of further declines in value due to their geographic location. Our determination of the underlying collateral values was based on current offers. If offers were not available, we relied upon current offers for similar properties located in similar geographic areas. As a result, we wrote down selected non-performing construction loans and OREO to better reflect expected proceeds from disposition and recorded additional fourth quarter loan charge-offs and OREO write-downs of $47.7 million. Of these assets, approximately 20% remain at December 31, 2011.




Allowance for Credit Losses

Methodology for the Allowance for Credit Losses

The allowance for credit losses is comprised of the allowance for loan and covered loan losses and the reserve for unfunded commitments and is maintained by management at a level believed adequate to absorb estimated losses inherent in the existing loan portfolio. Determination of the allowance for credit losses is inherently subjective since it requires significant estimates and management judgment, including the amounts and timing of expected future cash flows on impaired loans, estimated losses on pools of homogeneous loans, and consideration of current economic trends, and other factors.

trends.

Acquired loans are recorded at fair value, which incorporates credit risk, at the date of acquisition. No allowance for credit losses is recorded on the acquisition date. As the acquisition adjustment is accreted into income over future periods, an allowance for credit losses will be established as necessary to reflect credit deterioration.
While management utilizes its best judgment and information available, the ultimate adequacy of the allowance for credit losses is dependent upondepends 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 by regulatory authorities of loan risk classifications.ratings by regulatory authorities. Management believes that the allowance for credit losses of $122.0 million is an appropriate estimate of credit losses inherent in the loan portfolio as of December 31, 2011.

2014.

The accounting policies underlying the establishment and maintenance ofpolicy for the allowance for credit losses are discussedcan be found in Note 1 of "Notes to the Consolidated Financial Statements" in Item 8 of this Form 10-K.

An allowance for credit losses is established on legacy loans, which consist of loans originated by the Bank, acquired loans, and covered loans. Additional discussion regarding acquired and covered loans can be found in Note 1 and Note 6 of "Notes to the Consolidated Financial Statements" in Item 8 of this Form 10-K. The following table provides additional details related to the legacy, covered, and acquired components of the allowance for credit losses and the remaining acquisition adjustment associated with acquired loans for the year ended December 31, 2014.

Table of Contents

Table 23
21

Allowance for Credit Losses and Acquisition Adjustment
(Dollar amounts in thousands)
  Legacy and
Covered Loans
 Acquired Loans Total
Year ended December 31, 2014      
Beginning balance $87,121
 $
 $87,121
Net charge-offs (31,979) 
 (31,979)
Provision for loan and covered loan losses and other expense 19,368
 
 19,368
Ending balance $74,510
 $
 $74,510
Total loans $6,018,591
 $718,262
 $6,736,853
Remaining acquisition adjustment N/A
 24,737
 24,737
Allowance for credit losses as a percent of total loans 1.24% N/A
 1.11%
Remaining acquisition adjustment as a percent of acquired loans N/A
 3.44% N/A

N/A - Not applicable.
Excluding acquired loans, the total allowance for credit losses to total loans is 1.24%. Accretion of the loan acquisition adjustment into interest income totaled $1.8 million during the year ended December 31, 2014, resulting in a remaining acquisition adjustment as a percent of acquired loans of 3.44%.

63




Table 22
Allowance for Credit Losses and
Summary of Credit Loss Experience
(Dollar amounts in thousands)

 
 Years ended December 31, 
 
 2011 2010 2009 2008 2007 

Change in allowance for credit losses:

                

Balance at beginning of year

 $145,072 $144,808 $93,869 $61,800 $62,370 

Loans charged-off:

                

Commercial and industrial

  (31,180) (35,829) (56,903) (14,557) (6,424)

Agricultural

  (1,570) (1,301) (180) (42) (15)

Office, retail, and industrial

  (8,193) (10,322) (7,869) (852) - 

Multi-family

  (14,584) (2,788) (3,485) (1,801) (491)

Residential construction

  (13,895) (55,611) (63,045) (15,780) (231)

Commercial construction

  (6,316) (8,356) (3,620) -  - 

Other commercial real estate

  (15,396) (28,869) (18,413) (1,253) (161)

Consumer

  (9,411) (9,609) (13,589) (5,476) (2,599)

1-4 family mortgages

  (1,120) (1,031) (934) (576) (145)
            

Total loans charged-off

  (101,665) (153,716) (168,038) (40,337) (10,066)
            

Recoveries on loans previously charged-off:

                

Commercial and industrial

  3,392  5,227  1,899  1,531  1,499 

Agricultural

  101  -  -  4  5 

Office, retail, and industrial

  79  612  13  120  - 

Multi-family

  410  363  2  5  1 

Residential construction

  2,830  770  403  -  - 

Commercial construction

  134  -  400  -  - 

Other commercial real estate

  508  494  116  5  195 

Consumer

  412  691  468  487  563 

1-4 family mortgages

  18  49  4  -  - 
            

Total recoveries on loans previously charged-off

  7,884  8,206  3,305  2,152  2,263 
            

Net loans charged-off, excluding covered loans and covered OREO

  (93,781) (145,510) (164,733) (38,185) (7,803)

Net charge-offs on covered loans

  (9,911) (1,575) -  -  - 
            

Net loans charged-off

  (103,692) (147,085) (164,733) (38,185) (7,803)
            

Provision charged to operating expense:

                

Provision, excluding provision for covered loans

  69,682  145,774  215,672  70,254  7,233 

Provision for covered loans

  51,267  27,009  -  -  - 

Less: expected reimbursement from the FDIC

  (40,367) (25,434) -  -  - 
            

Net provision for covered loans

  10,900  1,575  -  -  - 
            

Total provision charged to operating expense

  80,582  147,349  215,672  70,254  7,233 
            

Balance at end of year

 $121,962 $145,072 $144,808 $93,869 $61,800 
            

Allowance for loan losses

 $119,462 $142,572 $144,808 $93,869 $61,800 

Reserve for unfunded commitments

  2,500  2,500  -  -  - 
            

Total allowance for credit losses

 $121,962 $145,072 $144,808 $93,869 $61,800 
            
  Years ended December 31,
  2014 2013 2012 2011 2010
Change in allowance for credit losses          
Beginning balance $87,121
 $102,812
 $121,962
 $145,072
 $144,808
Loan charge-offs:          
Commercial, industrial, and agricultural 17,424
 12,094
 64,668
 32,750
 37,130
Office, retail, and industrial 7,345
 4,744
 34,968
 8,193
 10,322
Multi-family 943
 1,029
 3,361
 14,584
 2,788
Construction 1,052
 1,916
 27,811
 20,211
 63,967
Other commercial real estate 4,834
 4,784
 36,474
 15,396
 28,869
Consumer 7,574
 9,414
 10,910
 10,531
 10,640
Total loan charge-offs 39,172
 33,981
 178,192
 101,665
 153,716
Recoveries of loan charge-offs:          
Commercial, industrial, and agricultural 3,800
 3,797
 3,393
 3,493
 5,227
Office, retail, and industrial 497
 228
 577
 79
 612
Multi-family 87
 584
 275
 410
 363
Construction 166
 1,032
 451
 2,964
 770
Other commercial real estate 1,727
 1,646
 125
 508
 494
Consumer 729
 1,071
 784
 430
 740
Total recoveries of loan charge-offs 7,006
 8,358
 5,605
 7,884
 8,206
Net loan charge-offs, excluding
covered loan charge-offs
 32,166
 25,623
 172,587
 93,781
 145,510
Net covered loan (recoveries) charge-offs (187) 4,575
 4,615
 9,911
 1,575
Net loan and covered loan charge-offs 31,979
 30,198
 177,202
 103,692
 147,085
Provision for loan and covered loan losses:          
Provision for loan losses 24,688
 11,185
 142,364
 69,682
 145,774
Provision for covered loan losses (3,643) 5,222
 24,945
 51,267
 27,009
Less: expected reimbursement from the
  FDIC
 (1,877) (150) (9,257) (40,367) (25,434)
Net provision for covered loan losses (5,520) 5,072
 15,688
 10,900
 1,575
Total provision for loan and covered
  loan losses
 19,168
 16,257
 158,052
 80,582
 147,349
Increase (reduction) in reserve for unfunded
  commitments (1)
 200
 (1,750) 
 
 
Total provision for loan and covered
  loan losses and other expense
 19,368
 14,507
 158,052
 80,582
 147,349
Ending balance $74,510
 $87,121
 $102,812
 $121,962
 $145,072

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


64

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 Years ended December 31, 
 
 2011 2010 2009 2008 2007 

Average loans, excluding covered loans

 $5,101,621 $5,191,154 $5,348,979 $5,149,879 $4,943,479 

Net loans charged-off to average loans, excluding covered loans

  1.84%  2.80%  3.08%  0.74%  0.16% 

Allowance for credit losses at end of period as a percent of:

                

Total loans, excluding covered loans

  2.40%  2.84%  2.78%  1.75%  1.25% 

Non-performing loans, excluding covered loans

  62%  67%  58%  57%  156% 

Average loans, including covered loans

 
$

5,421,943
 
$

5,440,752
 
$

5,377,028
 
$

5,149,879
 
$

4,943,479
 

Net loans charged-off to average loans

  1.91%  2.70%  3.06%  0.74%  0.16% 

Allowance for credit losses at end of period as a percent of:

                

Total loans

  2.28%  2.65%  2.71%  1.75%  1.25% 

Non-performing loans

  47%  48%  52%  57%  156% 
  Years ended December 31,
  2014 2013 2012 2011 2010
Allowance for credit losses          
Allowance for loan losses $65,468
 $72,946
 $87,384
 $118,473
 $142,572
Allowance for covered loan losses 7,226
 12,559
 12,062
 989
 
Total allowance for loan and
  covered loan losses
 72,694
 85,505
 99,446
 119,462
 142,572
Reserve for unfunded commitments 1,816
 1,616
 3,366
 2,500
 2,500
Total allowance for credit losses $74,510
 $87,121
 $102,812
 $121,962
 $145,072
Amounts and ratios, excluding acquired loans, including covered loans (1)
     
Average loans $5,882,859
 $5,475,110
 $5,435,670
 $5,421,943
 $5,440,752
Net loan charge-offs to average loans 0.54% 0.55% 3.26% 1.91% 2.70%
Allowance for credit losses at end of
  period as a percent of:
          
Total loans 1.24% 1.52% 1.91% 2.28% 2.65%
Non-accrual loans 114.56% 107.90% 104.15% 58.86% 68.50%
Non-performing loans 105.22% 84.97% 74.00% 46.95% 48.30%

The allowance for credit losses was $74.5 million as of December 31, 2014, a decline of $12.6 million from December 31, 2013. The allowance for credit losses represented 2.40%1.24% of total loans, excluding acquired loans, including covered loans, at December 31, 20112014 compared to 2.84%1.52% at December 31, 2010. The allowance for credit losses as a percentage of non-performing loans, excluding covered loans, was 62% at December 31, 2011, down from 67% at December 31, 2010. An analysis of changes in the allowance for loan losses by portfolio segment is presented on the following pages.

2013.

The provision for loan and covered loan losses was $80.6$19.2 million for 20112014 compared to $147.3$16.3 million for 20102013 and $215.7$158.1 million for 2009. Net2012. The provision for loan and covered loan losses was elevated for the year ended December 31, 2012 due primarily to additional provision of $62.3 million recorded as a result of selling $172.5 million of non-performing and performing potential problem loans and recording charge-offs excludingof $80.3 million.
Excluding acquired loans, including covered loans, net loan charge-offs to average loans declined from 3.26% for 2011 were $93.8 million compared2012, to $145.5 million0.55% for 20102013, and $164.7 millionto 0.54% for 2009.

2014. The elevated level ofsignificant improvement since 2012 reflects management's continued efforts to remediate problem credits, which includes the bulk loan sales completed in 2012.

Covered loan charge-offs in 2010 related to our shift in disposition strategy primarily for certain construction loans to more aggressively pursue disposition. This resulted in further charge-offs in addition to the charge-offs we had already taken under our previous disposition strategy.

Charge-offs related to covered loans for 2011 and 2010 reflect the decline, and recoveries reflect the increase, in estimatedexpected future cash flows of certain acquired loans, net of the reimbursement from the FDIC under the FDIC Agreements.loans. Management re-estimates expected future cash flows periodically, and the present value of any declinesdecreases in estimatedexpected future cash flows onfrom the FDIC is recorded as either a present value basis, net of loss share, are reflected as charge-offscharge-off in that period. Conversely, anyperiod or an allowance for covered loan losses is established. Any increases in estimatedexpected future cash flows net of loss share, are recorded through prospective yield adjustments over the remaining lives of the specific loans. To date, cumulative increases in estimated cash flows have exceeded cumulative declines.


65


Table of Contents


Allocation of the Allowance for Credit Losses

Table 24
23
Allocation of Allowance for Credit Losses
(Dollar amounts in thousands)

 
 As of December 31, 
 
 2011 2010 2009 2008 2007 

Commercial, industrial, and agricultural

 $46,017 $49,545 $54,452 $22,189 $27,380 

Commercial real estate:

                

Office, retail, and industrial

  16,012  20,758  20,164  22,048  (1) 

Multi-family

  5,067  3,996  4,555  2,680  (1) 

Residential construction

  14,563  27,933  33,078  32,910  (1) 

Other commercial real estate(2)

  24,471  29,869  21,084  7,927  (1) 
            

Total commercial real estate

  60,113  82,556  78,881  65,565  29,404 
            

Consumer

  14,843  12,971  11,475  6,115  5,016 
            

Total, excluding allowance for covered loans

  120,973  145,072  144,808  93,869  61,800 

Covered loans

  989  -  -  -  - 
            

Total

 $121,962 $145,072 $144,808 $93,869 $61,800 
            

Total loans, excluding covered loans

 $5,088,113 $5,100,560 $5,203,246 $5,360,063 $4,963,672 

Total loans

 $5,348,615 $5,472,289 $5,349,565 $5,360,063 $4,963,672 

Allowance for credit losses as a percent of:

                

Loans:

                

Commercial, industrial, and agricultural

  2.70%  2.93%  3.30%  1.30%  1.73% 

Commercial real estate:

                

Office, retail, and industrial

  1.23%  1.72%  1.66%  2.15%  (1) 

Multi-family

  1.76%  1.14%  1.36%  0.93%  (1) 

Residential construction

  13.76%  15.99%  10.54%  6.46%  (1) 

Other commercial real estate

  2.37%  2.93%  2.05%  0.73%  (1) 

Total commercial real estate

  2.20%  3.00%  2.73%  2.26%  1.13% 

Consumer

  2.25%  1.97%  1.73%  0.82%  0.64% 

Total, excluding covered loans

  2.40%  2.84%  2.78%  1.75%  1.25% 
  As of December 31,
  2014 
% of Total Loans (1)
 2013 
% of Total Loans (1)
 2012 
% of Total Loans (1)
 2011 
% of Total Loans (1)
 2010 
% of Total Loans (1)
Commercial, industrial, and
  agricultural
 $29,458
 39.3 $30,381
 38.6 $36,761
 36.7 $46,017
 33.5 $49,545
 33.2
Commercial real estate:                    
Office, retail, and
  industrial
 10,992
 22.2 10,405
 24.2 11,432
 25.6 16,012
 25.5 20,758
 23.6
Multi-family 2,249
 8.4 2,017
 6.0 3,575
 5.5 5,067
 5.7 3,996
 6.9
Construction 2,769
 3.1 6,712
 3.3 10,241
 3.6 17,935
 4.9 32,624
 6.6
Other commercial real
  estate
 8,841
 13.3 11,187
 14.5 14,699
 14.9 21,099
 17.4 25,178
 16.8
Total commercial
  real estate
 24,851
 47.0 30,321
 48.0 39,947
 49.6 60,113
 53.5 82,556
 53.9
Consumer 12,975
 13.7 13,860
 13.4 14,042
 13.7 14,843
 13.0 12,971
 12.9
Total, excluding
  allowance for covered
  loan losses
 67,284
 100.0 74,562
 100.0 90,750
 100.0 120,973
 100.0 145,072
 100.0
Covered loans 7,226
   12,559
   12,062
   989
   
  
Total allowance for
credit losses
 $74,510
   $87,121
   $102,812
   $121,962
   $145,072
  


The allowance for credit losses declined $23.1 millionby 14.5% from $145.1$87.1 million as of December 31, 20102013 to $122.0$74.5 million as of December 31, 2011. 2014, reflecting reductions across most categories. This decrease in the allowance for credit losses reflects the continued improvement in our non-performing loan levels and the related credit metrics, resulting from management's ongoing credit remediation focus. In addition, a decrease in the allowance for covered loans losses contributed to the variance, consistent with the wind-down of the covered loan portfolio.
The reduction in the allowance for credit losses of 15.3% from December 31, 2012 to December 31, 2013 reflects the significant improvement in non-performing loans, performing potential problem loans, and credit metrics driven by management’s focus on credit remediation.
During 2011, we saw2012, declines in non-accrual non-performing, and performing potential problem loans as well as a shift away from construction loans, allaccelerated credit remediation actions, including the impact of which drovethe bulk loan sales, resulted in improved credit metrics and a decreasedecline in our estimate of credit losses inherent in the loan portfolio and the amount of allowance for credit losses deemed appropriate to cover those losses.

In 2011, we decreased our allowance for loan losses for all categories of loans, excluding multi-family loans and covered loans. The increase in the allowance for loan losses allocated to multi-family loans reflects management's estimate of potential losses on smaller-sized loans in this portfolio. The allowance for covered loan losses on covered loans is allocatedincreased $11.1 million from 2011 to open-ended consumer loans that are not categorized as impaired loans.

In 2010, we maintainedreflect the allowance for credit losses consistent withdifference between the December 31, 2009 level with a decrease in the allowance allocated to commercial, industrial, and agricultural loans offset by an increase in the amount allocated to other commercial real estate loans. We also reduced the allowance allocated to residential construction


Table of Contents

loans in 2010. Due to the level of charge-offs on these loans in 2009 and 2010carrying value and the level of risk associated with the remaining loans, we estimated that a lower level of inherent losses remained in that portfolio as of December 31, 2010.

We increased our allowance for credit losses by $50.9 million from December 31, 2008 to December 31, 2009 based in large part on higher charge-offs in each loan category.

In 2008, we more than doubled the allowance for credit losses allocated to commercial real estate loans, increasing it from $29.4 million as of December 31, 2007 to $65.6 million as of December 31, 2008. The 2008 increase was the direct resultdiscounted present value of the economic decline and resulting impact on real estate and related markets, which was reflected in lower collateral values.

expected future cash flows of the covered impaired loans.


66




INVESTMENT IN BANK-OWNED LIFE INSURANCE

We purchasepreviously purchased life insurance policies on the lives of certain directors and officers and are the sole owner and beneficiary of the policies. We investinvested in these BOLI policies known as BOLI, to provide an efficient form of funding for long-term retirement and other employee benefit costs. Therefore, our BOLI policies are intended to be long-term investments to provide funding for long-term liabilities. We record these BOLI policies as a separate line item in the Consolidated Statements of Financial Condition at each policy's respective CSV with changes recorded inas a component of noninterest income in the Consolidated Statements of Income. As of December 31, 2011,2014, the CSV of BOLI assets totaled $206.2 million.

$206.5 million, which includes $10.4 million acquired in the Great Lakes transaction.

As of December 31, 2011, 28.6%2014, 35.5% of our total BOLI portfolio is invested in general account life insurance distributed between nineamong eleven insurance carriers, all of which carry investment grade ratings. This general account life insurance typically includes a feature guaranteeing minimum returns. The remaining 71.4%64.5% is in separate account life insurance, which is managed by third party investment advisors under pre-determined investment guidelines. Stable value protection is a feature available for separate account life insurance policies that is designed to protect within limits, a policy's CSV from market fluctuations, within limits, on underlying investments. Our entire separate account portfolio has stable value protection purchased from a highly rated financial institution. To the extent fair values on individual contracts fall below 80%, the CSV of the specific contracts may be reduced or the underlying assets may be transferred to short-duration investments, resulting in lower earnings.

For the year ended December 31, 2014, we had BOLI income for 2011 increased 43.0% from 2010. Since fourth quarter 2008, management electedof $2.9 million compared to accept lower market returnsa prior year BOLI loss of $11.8 million. During 2013, we voluntarily modified approximately $100 million of certain lower-yielding BOLI policies, which resulted in ordera $13.3 million write-down of the CSV. This action gave us the flexibility to reduce our risk to market volatility through investment in shorter-duration, lower yielding money market instruments. This strategy also had the effect of improving our regulatory capital ratios by reducing risk-weighted assets.

GOODWILL

Goodwill is included in goodwill and other intangiblereinvest these assets in the Consolidated Statements of Financial Condition. longer duration securities at higher yields to enhance future BOLI income.

GOODWILL
The carrying valueamount of goodwill was $265.5$310.6 million as of bothat December 31, 20112014 and $264.1 million at December 31, 2010. As described in2013. Goodwill increased by $46.5 million from December 31, 2013 as a result of the Popular, Great Lakes, and National Machine Tool acquisitions completed during the third and fourth quarters of 2014. For additional detail regarding the goodwill impact for each acquisition, see Note 89 of "Notes to the Consolidated Financial Statements" in Item 8 of this Form 10-K, goodwill10-K.
Goodwill is tested at least annually for impairment or when events or circumstances indicate a need to perform interim tests. Impairment testing is performed by comparingtests, as described in Note 1 of "Notes to the carrying valueConsolidated Financial Statements" in Item 8 of the reporting unit with management's estimate of the fair value of the reporting unit, which is based on a discounted cash flow analysis.this Form 10-K. During 2011,2014, we performed an analysisour annual impairment test of goodwill at September 30, 2011October 1, 2014 and updated that assessment during fourth quarter 2011. We determined that goodwill was not impaired at either date.

DEFFEREDthat date and there was no indication that goodwill was impaired at December 31, 2014.

DEFERRED TAX ASSETS

Deferred tax assets and liabilities are recognized for the future tax consequences attributableattributed to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases.basis. For additional discussion of income taxes, see Notes 1 and 1415 of "Notes to the Consolidated Financial Statements" in Item 8 of this Form 10-K. Income tax expense and benefits recorded due to changes in uncertain tax positions are also described in Note 14.

15.

Table of Contents

Table 25
24

Deferred Tax Assets
(Dollar amounts in thousands)

 
 December 31, % Change 
 
 2011 2010 2009 2011-2010 2010-2009 

Deferred tax assets

 $102,624 $113,353 $92,479  (9.5) 22.6 

Valuation allowance

  -  30  2,503  (100.0) (98.8)
  As of December 31, % Change
  2014 2013 2012 2014-2013 2013-2012
Net deferred tax assets $91,685
 $107,624
 $133,605
 (14.8) (19.4)

The decrease in deferred tax assets in 2011 was primarily attributable to a reduction in the allowance for loan losses for which there is a zero tax basis.

Management assessed whether it is more likely than not that all or some portion of the deferred tax assets will not be realized. This assessment considered whether in the periods of reversal, the deferred tax assets can be realized through carryback to income in prior years, future reversals of existing deferred tax liabilities, and future taxable income, including taxable income resulting from the application of future tax planning strategies. The assessment also considered positive and negative evidence, including pre-tax income and loss during the current and prior two years, pre-tax pre-provision operating earnings during that period,actual performance versuscompared to budget, trends in non-performing assets and performing potential problem loans, the Company's capital position, and trends in non-performing assets and adversely rated loans. Managementany unsettled circumstances that could impact future earnings. Based on this assessment, management determined that it is more likely than not that our deferred tax assets as of December 31, 2011 will be fully realized and no valuation allowance is required.

required as of December 31, 2014.

Deferred tax assets decreased in 2014 compared to 2013, resulting primarily from the utilization of federal and state net operating losses.

67




The increasedecrease in deferred tax assets in 20102013 was primarily attributableattributed to utilization of federal net operating losses, which was partially offset by an increase in federal and state loss andalternative minimum tax credit carryforwards and the tax effects of securities valuation adjustments recorded in other comprehensive income (loss).

The valuation allowance at December 31, 2010 and December 31, 2009 related to certain state deferred tax assets, including net operating loss and credit carryforwards, which were not expected to be fully realized. In 2010, the valuation allowance was reduced to a nominal amount. The decrease resulted from certain statutory and structural changes that made it more likely than not that the referenced state deferred tax assets would be realized in full.

carryforwards.

FUNDING AND LIQUIDITY MANAGEMENT

Liquidity measures the ability to meet current and future cash flows as they become due. Our approach to liquidity management is to obtain funding sources at a minimum cost to meet fluctuating deposit, withdrawal, and loan demand needs. Our liquidity policy establishes parameters as to how liquidity should be managed to maintain flexibility in responding to changes in liquidity needs over a 12-month forward-looking period, including the requirement to formulate a quarterly liquidity compliance plan for review by the Bank's Board of Directors. The compliance plan includes an analysis that measures projected needs to purchase and sell funds. The analysis incorporates a set of projected balance sheet assumptions that are updated at least quarterly. Based on these assumptions, we determine our total cash liquidity on hand and excess collateral capacity from pledging, unused federal funds purchased lines, and other unused borrowing capacity, such as FHLB advances, resulting in a calculation of our total liquidity capacity. Our total policy-directed liquidity requirement is to have funding sources available to cover 66.7% of non-collateralized, non-FDIC insured, non-maturity deposits. Based on our projections as of December 31, 2011,2014, we expect to have liquidity capacity in excess of policy guidelines for the forward twelve-month period.

The liquidity needs of First Midwest Bancorp, Inc. on an unconsolidated basis (the "Parent Company") consist primarily of operating expenses, debt service payments, and dividend payments to our stockholders.stockholders, which totaled $54.0 million for the year ended December 31, 2014. The primary source of liquidity for the Parent Company is dividends from subsidiaries. The Parent Company had $87.3$47.6 million in junior subordinated debentures, related to trust-preferred securities, $50.5$38.5 million in other subordinated debt outstanding, $114.4notes, $114.8 million in senior debt,notes, and cash and equivalent short-term investmentsinterest-bearing deposits of $47.1$43.5 million at December 31, 2011.2014. At December 31, 2011,the end of 2014, the Parent Company did not have any unusedhad a $35.0 million short-term, unsecured revolving line of credit facilities availablewith a correspondent bank that we allowed to fund cash flows.expire on January 20, 2015. As of December 31, 2014, no amount was outstanding. The Parent Company has the ability to enhance its liquidity position by raising capital or incurring debt.


Table of Contents

Total deposits and borrowed funds as of December 31, 20112014 are summarized in Notes 910 and 1011 of "Notes to the Consolidated Financial Statements" in Item 8 of this Form 10-K. The following table provides a comparison of average funding sources over the last three years. We believe that average balances, rather than period-end balances, are more meaningful in analyzing funding sources because of the inherent fluctuations that may occur on a monthly basis within most funding categories.

Table 26
25
Funding Sources - Average Balances
(Dollar amounts in thousands)


 Years Ended December 31, % Change  Years Ended December 31, % Change

 2011 % of
Total
 2010 % of
Total
 2009 % of
Total
 2011-2010 2010-2009  2014 
% of
Total
 2013 
% of
Total
 2012 
% of
Total
 2014-2013 2013-2012

Demand deposits

 $1,498,900 21.5 $1,224,629 18.0 $1,061,208 15.0 22.4 15.4  $2,137,778
 28.3 $1,889,247
 26.2 $1,762,968
 25.0 13.2
 7.2

Savings deposits

 934,937 13.4 815,371 12.0 751,386 10.7 14.7 8.5  1,222,292
 16.2 1,126,561
 15.6 1,038,379
 14.7 8.5
 8.5

NOW accounts

 1,091,184 15.7 1,082,774 15.9 984,529 13.9 0.8 10.0  1,243,186
 16.5 1,170,928
 16.2 1,090,446
 15.4 6.2
 7.4

Money market accounts

 1,230,090 17.7 1,199,362 17.6 937,766 13.3 2.6 27.9  1,392,367
 18.5 1,306,625
 18.1 1,216,173
 17.2 6.6
 7.4
                 

Transactional deposits

 4,755,111 68.3 4,322,136 63.5 3,734,889 52.9 10.0 15.7 
                 
Core deposits 5,995,623
 79.5 5,493,361
 76.1 5,107,966
 72.3 9.1
 7.5

Time deposits

 1,773,188 25.4 1,971,684 28.9 1,961,244 27.8 (10.1) 0.5  1,195,796
 15.8 1,286,700
 17.8 1,502,230
 21.3 (7.1) (14.3)

Brokered deposits

 18,821 0.3 19,953 0.3 39,963 0.5 (5.7) (50.1) 16,086
 0.2 20,188
 0.3 26,776
 0.4 (20.3) (24.6)
                 

Total time deposits

 1,792,009 25.7 1,991,637 29.2 2,001,207 28.3 (10.0) (0.5) 1,211,882
 16.0 1,306,888
 18.1 1,529,006
 21.7 (7.3) (14.5)
                 

Total deposits

 6,547,120 94.0 6,313,773 92.7 5,736,096 81.2 3.7 10.1  7,207,505
 95.5 6,800,249
 94.2 6,636,972
 94.0 6.0
 2.5
                 

Securities sold under agreements to repurchase

 117,065 1.7 191,826 2.8 398,062 5.6 (39.0) (51.8) 106,072
 1.4 90,891
 1.3 79,924
 1.1 16.7
 13.7

Federal funds purchased and other borrowed funds

 148,637 2.1 167,348 2.5 720,730 10.2 (11.2) (76.8)
                 
Federal funds purchased 82
  5
  
  N/M
 100.0
FHLB advances 43,405
 0.6 114,565
 1.6 113,719
 1.6 (62.1) 0.7

Total borrowed funds

 265,702 3.8 359,174 5.3 1,118,792 15.8 (26.0) (67.9) 149,559
 2.0 205,461
 2.9 193,643
 2.7 (27.2) 6.1
                 

Senior and subordinated debt

 150,285 2.2 137,739 2.0 208,621 3.0 9.1 (34.0) 191,776
 2.5 212,896
 2.9 231,273
 3.3 (9.9) (7.9)
                 

Total funding sources

 $6,963,107 100.0 $6,810,686 100.0 $7,063,509 100.0 2.2 (3.6) $7,548,840
 100.0 $7,218,606
 100.0 $7,061,888
 100.0 4.6
 2.2
                 

N/M – Not meaningful.

68




Average Funding Sources

Total average funding sources of $7.5 billion for 20112014 increased $152.4$330.2 million from 2013, due primarily to deposits assumed in the Popular and Great Lakes acquisitions, further strengthening our core deposit base. Growth in average demand deposits of $248.5 million, or 2.2%13.2%, from 2010 resulting from a $433.0 million, or 10.0%, increaseDecember 31, 2013, led the rise in average transactionalcore deposits and a $12.5 million, or 9.1%, increase in senior and subordinated debt. These increases were partiallymore than offset by declinesthe reduction in higher-costing time deposits, of $199.6 million, or 10.0%, and borrowed funds, of $93.5and senior and subordinated debt.
For 2013, the $156.7 million or 26.0%. The riseincrease in demand deposits and drop in time deposits resulted in a more favorable product mix.

Total average funding sources for 2010 decreased 3.6%, or $252.8 million, from 2009 with most2012 resulted mainly from a rise in core deposits, which more than offset a reduction in higher-costing time deposits.

Time Deposits
Table 26
Maturities of the increaseTime Deposits Greater Than $100,000
(Dollar amounts in thousands)
  Total
Three months or less $80,613
Greater than three months to six months 81,415
Greater than six months to twelve months 109,789
Greater than twelve months 140,300
Total $412,117
Borrowed Funds
A discussion of borrowed funds (discussed below). is presented in the next table.
Table 27
Borrowed Funds
(Dollar amounts in thousands)
  2014  2013  2012
  Amount 
Weighted-
Average
Rate %
  Amount 
Weighted-
Average
Rate %
  Amount 
Weighted-
Average
Rate %
At period-end:  
  
   
  
   
  
Securities sold under agreements to
  repurchase
 $137,994
 0.03
  $109,792
 0.03
  $71,403
 0.02
Federal funds purchased 
 
  
 
  
 
FHLB advances 
 
  114,550
 1.34
  114,581
 1.72
Total borrowed funds $137,994
 0.03
  $224,342
 0.70
  $185,984
 1.06
Average for the year-to-date period:  
  
   
  
   
  
Securities sold under agreements to
  repurchase
 $106,072
 0.04
  $90,891
 0.03
  $79,924
 0.02
Federal funds purchased 82
 
  5
 
  
 
FHLB advances 43,405
 1.23
  114,565
 1.38
  113,719
 1.76
Total borrowed funds $149,559
 0.38
  $205,461
 0.78
  $193,643
 1.04
Maximum amount outstanding at the end of any day during the period:   
  
     
Securities sold under agreements to
  repurchase
 $149,067
  
  $110,797
  
  $103,591
  
Federal funds purchased 25,000
  
  2,000
  
  
  
FHLB advances 114,550
  
  114,581
  
  114,593
  
Average transactional depositsborrowed funds totaled $149.6 million for 2010 were $4.3 billion, an increase of $587.22014, decreasing $55.9 million, or 15.7%27.2%, from 2009. Contributing2013 due to this increasethe prepayment of $114.6 million of FHLB advances with a weighted-average rate of 1.33% during the second quarter of 2014. This decline was approximately $325 million in core transactional deposits acquired through FDIC-assisted transactions.

partially offset by higher levels of securities sold under agreements to repurchase.

69


Table



We make interchangeable use of Contents

Borrowed Funds

repurchase agreements, FHLB advances, and federal funds purchased to supplement deposits. Securities sold under agreements to repurchase and federal funds purchased generally mature within 1 to 90 days from the transaction date. Other borrowed funds consist of term auction facilities issued by the Federal Reserve that mature within 90 days. Federal term auction facilities were discontinued during 2010. A discussion of borrowed funds is presented in the next table.

Table 27
Borrowed Funds
(Dollar amounts in thousands)

 
 2011  
 2010  
 2009 
 
 Amount Rate (%)  
 Amount Rate (%)  
 Amount Rate (%) 

At year-end:

                       

Securities sold under agreements to repurchase

 $92,871  0.02   $166,474  0.04   $238,390  0.38 

Federal funds purchased

  -  -    -  -    -  - 

FHLB advances

  112,500  2.13    137,500  1.95    152,786  2.03 

Federal term auction facilities

  -  -    -  -    300,000  0.25 
                  

Total borrowed funds

 $205,371  1.17   $303,974  0.90   $691,176  0.69 
                  

Average for the year:

                       

Securities sold under agreements to repurchase

 $117,065  0.02   $191,826  0.14   $398,062  1.40 

Federal funds purchased

  603  0.22    4,371  0.15    164,627  0.22 

FHLB advances

  148,034  1.84    142,703  2.06    174,643  3.21 

Federal term auction facilities

  -  -    20,274  0.25    381,460  0.27 
                  

Total borrowed funds

 $265,702  1.03   $359,174  0.91   $1,118,792  1.12 
                  

Maximum amount outstanding at any day during the year:

                       

Securities sold under agreements to repurchase

 $174,810      $683,685      $920,955    

Federal funds purchased

  175,000       60,000       630,000    

FHLB advances

  302,500       272,802       585,736    

Federal term auction facilities

  1       300,000       750,000    

Weighted-average maturity of FHLB advances

  19.3 months       27.6 months       37.5 months    

Average borrowed funds totaled $265.7 million for 2011, decreasing $93.5 million, or 26.0%, from 2010, following a decrease of $759.6 million, or 67.9%, from 2009 to 2010. Since the last half of 2009, we reduced funding costs by using the proceeds from securities sales and maturities to reduce our level of borrowed funds and time deposits, resulting in an increase in our net interest margins.

For 2011, the maximum daily balance in securities sold under agreements to repurchase occurred in January 2011. The increased funding was required to temporarily obtain collateral to pledge increased balances on our public accounts due to seasonal trends. For federal funds purchased, the maximum daily balance of 2011 occurred in April 2011 as a result of a test of the federal funds line. We test this line occasionally throughout the year to ensure availability. With the exception of two such tests, we did not have any federal funds purchased during the year. The maximum daily balance in FHLB advances occurred in September 2011 when we obtained a short-term $165.0 million FHLB advance with an interest rate of 6 basis points. The proceeds were used to purchase short-term investments, which earned a higher interest rate than the advance. The advance was paid off in October 2011.

We make interchangeable use of repurchase agreements, FHLB advances, federal funds purchased, and, prior to March 2010, federal term auction facilities to supplement deposits and leverage the interest yields produced through our securities portfolio.


Table of Contents

Senior and Subordinated Debt

Average senior and subordinated debt increased $12.5decreased $21.1 million, or 9.1%9.9%, in 2011 comparedfrom 2013 to 2010 following a $70.92014. This decline resulted from the full-year impact of the repurchase and retirement of $24.0 million or 34.0%, decline from 2009 to 2010.

As further explainedof junior subordinated debentures during the fourth quarter of 2013. The addition of $14.4 million of junior subordinated debentures acquired in the section titled "ManagementGreat Lakes transaction during the fourth quarter of Capital"2014 partially offset the decrease. See Note 12 of "Notes to the Consolidated Financial Statements" in Item 8 of this Item 7,Form 10-K for additional discussion regarding these transactions.

The $18.4 million decline in November 2011, we redeemed $193.0average senior and subordinated debt from 2012 to 2013 reflects the full-year impact of the repurchase and retirement of $4.3 million of Preferred Shares issued to the Treasury. The redemption was funded through a combination of existing liquid assetsjunior subordinated debentures and the proceeds from a $115.0 senior debt issuance. Interest paid on the new senior debt in 2011 reduced net interest margin by one basis point.

In 2009, we completed an offer to exchange approximately one-third each of our subordinated notes and trust-preferred subordinated debt for newly issued shares of Common Stock. The exchanges strengthened the composition of our capital base by increasing our Tier 1 common and tangible common equity ratios, while also reducing the interest expense associated with the debt securities.

As a result of the exchange offers, $39.3 million of 6.95% trust-preferred subordinated debt was retired at a discount of 20% in exchange for 3,058,410 shares of Common Stock, and $29.5 million of 5.85% subordinated debt was retired at a discount of 10% in exchange for 2,584,695 shares of Common Stock. Subsequent to the exchanges, we retired an additional $1.0 million of trust-preferred subordinated debt at a discount of 20% for cash and $20.0$12.0 million of subordinated notes at a discountduring the fourth quarter of 7% for cash. In the aggregate, the exchange offers and the subsequent retirement of debt for cash resulted in the recognition of $15.3 million in pre-tax gains in 2009.

2012.

CONTRACTUAL OBLIGATIONS, COMMITMENTS, OFF-BALANCE SHEET RISK, AND CONTINGENT LIABILITIES

Through our normal course of operations, we enter into certain contractual obligations and other commitments. SuchThese obligations generally relate to the funding of operations through deposits or debt issuances, as well as leases for premises and equipment. As a financial services provider, we routinely enter into commitments to extend credit. While contractual obligations represent our future cash requirements, a significant portion of commitments to extend credit may expire without being drawn upon. Suchdrawn. These commitments are subject to the same credit policies and approval process as all comparable loans we make.

used for our loans.

Table of Contents

The following table presents our significant fixed and determinable contractual obligations and significant commitments as of December 31, 2011.2014. Further discussion of the nature of each obligation is included in the referenced note of "Notes to the Consolidated Financial Statements" in Item 8 of this Form 10-K.

Table 28
Contractual Obligations, Commitments, Contingencies, and Off-Balance Sheet Items
(Dollar amounts in thousands)


  
 Payments Due In  
 

 Note Reference Less Than
One Year
 One to
Three Years
 Three to
Five Years
 Over Five Years Total    Payments Due In  

Transactional deposits (no stated maturity)

   9 $4,820,058 $- $- $- $4,820,058 
 
Note
Reference
 One Year or Less Greater Than One to Three Years 
Greater Than Three to
Five Years
 Greater Than Five Years Total
Core deposits (no stated maturity) 10 $6,616,200
 $
 $
 $
 $6,616,200

Time deposits

   9 1,227,564 323,914 107,072 567 1,659,117  10 865,149
 300,557
 105,584
 268
 1,271,558

Borrowed funds

 10 55,824 126,656 22,891 - 205,371  11 137,994
 
 
 
 137,994

Subordinated debt

 11 - - - 252,153 252,153  12 
 153,263
 
 47,606
 200,869

Operating leases

   7 3,627 6,299 4,398 5,552 19,876  8 5,071
 9,289
 5,955
 13,031
 33,346

Pension liability

 15 5,276 10,078 10,386 26,124 51,864  16 5,298
 10,283
 8,409
 17,518
 41,508

Uncertain tax positions liability

 14 N/A N/A N/A N/A 346  15 N/M
 N/M
 N/M
 N/M
 912

Commitments to extend credit

 20 N/A N/A N/A N/A 1,348,761  21 N/M
 N/M
 N/M
 N/M
 1,982,595

Letters of credit

 20 N/A N/A N/A N/A 116,566  21 N/M
 N/M
 N/M
 N/M
 110,639
N/M – Not meaningful.

70



Table of Contents


MANAGEMENT OF CAPITAL

Capital Measurements

A strong capital structure is required under applicable banking regulations and is crucial in maintaining investor confidence, accessing capital markets, and enabling us to take advantage of future profitable growth opportunities. Our capital policy requires that the Company and the Bank maintain capital ratios in excess of the minimum regulatory guidelines. It serves as an internal discipline in analyzing business risks and internal growth opportunities and sets targeted levels of return on equity. Under regulatory capital adequacy guidelines, the Company and the Bank are subject to various capital requirements set and administered by the federal banking agencies. These requirements specify minimum capital ratios, defined as Tier 1 and total capital as a percentage of assets and off-balance sheet items that have beenwere weighted according to broad risk categories and a leverage ratio calculated as Tier 1 capital as a percentage of adjusted average assets. We manage our capital ratios for both the Company and the Bank to consistently maintain suchthese measurements in excess of the Federal Reserve's minimum levels considered to be "well-capitalized," which is the highest capital category established.

Capital resources of financial institutions are also regularly measured by tangible equity ratios, which are non-GAAP measures. Tangible common equity equals total shareholders' equity as defined by GAAP less goodwill and other intangible assets and preferred stock, which does not benefit common shareholders. Tangible assets equal total assets as defined by GAAP less goodwill and other intangible assets. The tangible equity ratios are a valuable indicator of a financial institution's capital strength since they eliminate intangible assets from shareholders' equity.

The following table presents our consolidated measures of capital as of the dates presented and the capital guidelines established by the Federal Reserve for the Bank to be categorized as "well-capitalized." All regulatory mandated ratios for characterization as "well-capitalized" were exceeded as of December 31, 20112014 and 2010.


Table of Contents

Table 29
Capital Measurements

 
 December 31, Regulatory
Minimum For
"Well-
Capitalized"
 Excess Over
Required Minimums
at December 31,
2011
 
 2011 2010
 
  
  
  
 (Dollar amounts in millions)

Regulatory capital ratios:

               

Total capital to risk-weighted assets

  13.68%  16.27%  10.00%  37% $230

Tier 1 capital to risk-weighted assets

  11.61%  14.20%    6.00%  94% $350

Tier 1 leverage to average assets

  9.28%  11.21%    5.00%  86% $334

Regulatory capital ratios, excluding preferred stock (1):

               

Total capital to risk-weighted assets

  13.68%  13.21%  10.00%  37% $230

Tier 1 capital to risk-weighted assets

  11.61%  11.15%    6.00%  94% $350

Tier 1 leverage to average assets

  9.28%  8.80%    5.00%  86% $334

Tier 1 common capital to risk-weighted assets (2)(3)

  10.26%  9.81%  N/A (3)  N/A (3)  N/A (3)

Tangible common equity ratios:

               

Tangible common equity to tangible assets

  8.83%  8.06%  N/A (3)  N/A (3)  N/A (3)

Tangible common equity, excluding other comprehensive loss, to tangible assets

  9.00%  8.41%  N/A (3)  N/A (3)  N/A (3)

Tangible common equity to risk-weighted assets

  10.88%  10.02%  N/A (3)  N/A (3)  N/A (3)

Regulatory capital ratios, Bank only:

               

Total capital to risk-weighted assets

  14.37%  13.87%  10.00%  44% $268

Tier 1 capital to risk-weighted assets

  13.11%  12.61%    6.00%  119% $436

Tier 1 leverage to average assets

  10.37%  9.88%    5.00%  107% $416

All regulatory mandated ratios10-K for characterization as "well-capitalized" were exceeded as of December 31, 2011.

information on our minimum capital requirements.


71




All other ratios presented in the table abovebelow are capital adequacy metrics used and relied uponon by investors and industry analysts; however, they are non-GAAP financial measures for SEC purposes. These non-GAAP measures are valuable indicators of a financial institution's capital strength since they eliminate intangible assets from stockholders' equity and retain the effect of accumulated other comprehensive loss in stockholders' equity. Reconciliations of the components of those ratios to GAAP are also presented in the table below.


Table of Contents

Table 30
Reconciliation of 29

Capital Components to Regulatory Requirements and GAAP
Measurements
(Dollar amounts in thousands)

 
 December 31, 
 
 2011 2010 

Reconciliation of Capital Components to Regulatory Requirements

       

Total regulatory capital, as defined in federal regulations

 $853,961 $1,027,761 

Preferred equity

  -  (193,000)
      

Total regulatory capital, excluding preferred stock

 $853,961 $834,761 
      

Tier 1 capital, as defined in federal regulations

 $724,863 $897,410 

Preferred equity

  -  (193,000)
      

Tier 1 regulatory capital, excluding preferred stock

  724,863  704,410 

Trust preferred securities included in Tier 1 capital

  (84,730) (84,730)
      

Tier 1 common capital

 $640,133 $619,680 
      

Risk-weighted assets, as defined in federal regulations

 $6,241,191 $6,317,744 

Average assets, as defined in federal regulations

 $7,813,637 $8,002,186 

Total capital to risk-weighted assets

  13.68%  16.27% 

Total capital, excluding preferred stock, to risk-weighted assets

  13.68%  13.21% 

Tier 1 capital to risk-weighted assets

  11.61%  14.20% 

Tier 1 capital, excluding preferred stock, to risk-weighted assets

  11.61%  11.15% 

Tier 1 common capital to risk-weighted assets

  10.26%  9.81% 

Tier 1 leverage to average assets

  9.28%  11.21% 

Tier 1 leverage, excluding preferred stock, to average assets

  9.28%  8.80% 

Reconciliation of Capital Components to GAAP

       

Total stockholder's equity

 $962,587 $1,112,045 

Preferred equity

  -  (193,000)
      

Common equity

  962,587  919,045 

Goodwill and other intangible assets

  (283,650) (286,033)
      

Tangible common equity

  678,937  633,012 

Accumulated other comprehensive loss

  13,276  27,739 
      

Tangible common equity, excluding accumulated other comprehensive loss

 $692,213 $660,751 
      

Total assets

 $7,973,594 $8,138,302 

Goodwill and other intangible assets

  (283,650) (286,033)
      

Tangible assets

 $7,689,944 $7,852,269 
      

Tangible common equity to tangible assets

  8.83%  8.06% 

Tangible common equity, excluding accumulated other comprehensive loss, to tangible assets

  9.00%  8.41% 

Tangible common equity to risk-weighted assets

  10.88%  10.02% 
  As of December 31, 
Regulatory
Minimum For
Well-
Capitalized
 
Excess Over
Required Minimums
at December 31, 2014
  2014 2013
Bank regulatory capital ratios:          
Total capital to risk-weighted assets 12.30% 13.86% 10.00% 23% $174,282
Tier 1 capital to risk-weighted assets 11.32% 12.61% 6.00% 89% $402,834
Tier 1 leverage to average assets 9.76% 10.24% 5.00% 95% $418,334
Company regulatory capital ratios (1):
          
Total capital to risk-weighted assets 11.23% 12.39% N/A
 N/A
 N/A
Tier 1 capital to risk-weighted assets 10.19% 10.91% N/A
 N/A
 N/A
Tier 1 leverage to average assets 9.03% 9.18% N/A
 N/A
 N/A
Company tier 1 common capital to risk-weighted
  assets (1)(2)
 9.54% 10.37% N/A
 N/A
 N/A
Reconciliation of Company capital components to GAAP:        
Total stockholder's equity $1,100,775
 $1,001,442
    
  
Goodwill and other intangible assets (334,199) (276,366)    
  
Tangible common equity 766,576
 725,076
    
  
Accumulated other comprehensive loss 15,855
 26,792
    
  
Tangible common equity, excluding accumulated
  other comprehensive loss
 $782,431
 $751,868
    
  
Total assets $9,445,139
 $8,253,407
    
  
Goodwill and other intangible assets (334,199) (276,366)    
  
Tangible assets $9,110,940
 $7,977,041
    
  
Risk-weighted assets $7,879,366
 $6,794,666
      
Company tangible common equity ratios (1)(3):
          
Tangible common equity to tangible assets 8.41% 9.09% N/A 
 N/A 
 N/A 
Tangible common equity, excluding accumulated
  other comprehensive loss, to tangible assets
 8.59% 9.43% N/A 
 N/A 
 N/A 
Tangible common equity to risk-weighted assets 9.73% 10.67% N/A
 N/A 
 N/A 

N/A - Not applicable.
(1)
Ratio is not subject to formal Federal Reserve regulatory guidance.
(2)
Excludes the impact of trust-preferred securities.
(3)
Tangible common equity represents common stockholders’ equity less goodwill and identifiable intangible assets. In management’s view, Tier 1 common capital and TCE measures are meaningful to the Company, as well as analysts and investors, in assessing the Company’s use of equity and in facilitating comparisons with competitors.

72




The decline in regulatory capital ratios from December 31, 2013 resulted from the addition of risk-weighted and average assets, including goodwill and other intangible assets, related to the Popular and Great Lakes acquisitions. These declines were partially offset by strong earnings, the $38.3 million of common stock issued as consideration for the Great Lakes acquisition, and an increase in allowable deferred tax assets. The Bank's regulatory ratios exceeded all regulatory mandated ratios for characterization as "well-capitalized" as of December 31, 2014.
The Board reviews the Company's capital plan each quarter, giving consideration toconsidering the current and expected operating environment as well as an evaluation of various capital deployment alternatives.

For further details of the regulatory capital requirements and ratios as of December 31, 20112014 and 20102013 for the Company and the Bank, see Note 1819 of "Notes to the Consolidated Financial Statements" in Item 8 of this Form 10-K.


Basel III Capital Rules

Table

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Redemption of Preferred Shares

In December 2008, we received $193.0 million from the sale of Preferred Shares to the Treasury as part of its CPP. In connection with the CPP, we issued to the Treasury (i) a total of 193,000 Preferred Shares and (ii) a Warrant to purchase up to 1,305,230 shares of2013, the Company's Common Stock. Both the Preferred Shares and the Warrant were accountedBank's primary federal regulator, the Federal Reserve, published final rules establishing a new comprehensive capital framework for as components of our regulatory Tier 1 capital.

In November 2011, we redeemed all of the $193.0 million of Preferred Shares.U.S. banking organizations. The redemption was funded through a combination of existing liquid assets and the proceeds from a senior debt issuance. In December 2011, we paid $900,000 to the Treasury to redeem the Warrant, which concluded our participationBasel III Capital Rules are discussed in the CPP.

Common Shares Issued

In January 2010, we issued a total"Supervision and Regulation" section in Item 1, "Business" of 18,818,183 shares of Common Stock at a price of $11.00 per share, which resulted in a $196.0 million increase in stockholders' equity, net of the underwriting discount and related expenses. We used the proceeds to improve the quality of our capital position and for general operating purposes.

We had 85,787,354 shares issuedthis Form 10-K.

Management believes that as of December 31, 20112014 the Company and 2010. Therethe Bank would meet all capital adequacy requirements under the Basel III Capital Rules on a fully phased-in basis as if such requirements were 74,435,004 shares outstanding as of December 31, 2011 and 74,095,695 shares outstanding as of December 31, 2010.

currently in effect.

Stock Repurchase Programs

Shares repurchased are held as treasury stock and are available for issuance in conjunctionconnection with our Dividend Reinvestment Plan, qualified and nonqualified retirement plans, share-based compensation plans, and other general corporate purposes. We reissued 103,770165,104 treasury shares in 20112014 and 18,845125,901 treasury shares in 20102013 to fund suchthese plans.

Dividends

The Board declared quarterly Common Stockcash dividends of $0.010$0.01 per common share forfrom 2012 through the past twelve quarters.

Other Transactions

In January 2010, the Company made a $100.0 million capital contribution to the Bank. In addition, the Bank sold $168.1 millionfirst quarter of non-performing assets to the Company in March 2010. On the date of the sale, the Company recorded the assets at fair value. Since the majority of the assets were collateral-dependent loans, fair value was determined based on the lower of the recorded book value of the loan or the estimated fair value of the underlying collateral less costs to sell. No allowance for credit losses was recorded by the Company on the date of the purchase of these assets.2013. The Company had non-performing assets totaling $45.2 million asincreased the dividend to $0.04 per common share during the second quarter of December 31, 20112013, $0.07 per common share during the fourth quarter of 2013, and $93.1 million as of December 31, 2010. This transaction did not change the presentation of these non-performing assetsapproved another increase in the consolidated financial statements and did not impact the Company's consolidated financial position, resultssecond quarter of operations, or regulatory ratios. However, these two transactions improved the Bank's asset quality, capital ratios, and liquidity.

2014 to $0.08 per common share.

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QUARTERLY EARNINGS
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30

QUARTERLY REVIEW

Table 31
Quarterly Earnings Performance
(1)

(Dollar amounts in thousands, except per share data)

 
 2011 2010 
 
 Fourth Third (2) Second (2) First (2) Fourth Third Second First 

Interest income

 $78,757 $80,175 $81,296 $81,283 $82,476 $82,338 $82,274 $81,779 

Interest expense

  (9,679) (9,640) (9,935) (10,637) (10,897) (12,125) (12,655) (13,841)
                  

Net interest income

  69,078  70,535  71,361  70,646  71,579  70,213  69,619  67,938 
                  

Provision for loan losses

  (21,902) (20,425) (18,763) (19,492) (73,897) (33,576) (21,526) (18,350)

Noninterest income

  25,669  24,142  24,963  23,677  24,505  24,377  21,886  21,264 

Gains on securities sales, net

  649  626  1,531  540  1,718  7,340  2,255  5,820 

Securities impairment losses

  (759) (177) -  -  (56) (964) (1,134) (2,763)

Gain on FDIC-assisted transactions

  -  -     -  -  -  4,303  - 

Gain on acquisition of deposits

  1,076  -  -  -  -  -  -  - 

Noninterest expense

  (66,591) (64,176) (65,719) (65,418) (77,074) (68,777) (67,455) (65,473)
                  

Income (loss) before income tax (expense) benefit

  7,220  10,525  13,373  9,953  (53,225) (1,387) 7,948  8,436 

Income tax benefit (expense)

  (296) (1,583) (2,720) 91  25,066  3,972  (139) (355)
                  

Net income (loss)

  6,924  8,942  10,653  10,044  (28,159) 2,585  7,809  8,081 

Preferred dividends and accretion on preferred stock

  (3,027) (2,586) (2,582) (2,581) (2,579) (2,575) (2,573) (2,572)

Net loss (income) applicable to non-vested restricted shares

  (20) (93) (100) (137) 411  1  (65) (81)
                  

Net income (loss) applicable to common shares

 $3,877 $6,263 $7,971 $7,326 $(30,327)$11 $5,171 $5,428 
                  

Basic earnings (loss) per common share

 $0.05 $0.09 $0.11 $0.10 $(0.41)$- $0.07 $0.08 

Diluted earnings (loss) per common share

 $0.05 $0.09 $0.11 $0.10 $(0.41)$- $0.07 $0.08 

Dividends declared per common share

 $0.01 $0.01 $0.01 $0.01 $0.01 $0.01 $0.01 $0.01 

Return on average common equity

  1.60%  2.60%  3.39%  3.20%  (12.49%) 0.00%  2.16%  2.38% 

Return on average assets

  0.34%  0.43%  0.52%  0.50%  (1.34%) 0.13%  0.40%  0.43% 

Net interest margin – tax-equivalent

  3.95%  3.97%  4.10%  4.15%  4.02%  4.05%  4.21%  4.28% 
  2014 2013
  Fourth Third Second First Fourth Third Second First
Interest income $81,309
 $76,862
 $72,003
 $69,690
 $72,120
 $72,329
 $71,753
 $71,045
Interest expense (5,490) (5,831) (5,696) (5,995) (6,432) (6,663) (6,823) (7,197)
Net interest income 75,819
 71,031
 66,307
 63,695
 65,688
 65,666
 64,930
 63,848
Provision for loan and
  covered loan losses
 (1,659) (10,727) (5,341) (1,441) 
 (4,770) (5,813) (5,674)
Fee-based revenues 29,364
 29,660
 27,008
 25,049
 26,712
 27,804
 26,008
 25,758
Net securities gains (losses) (63) 2,570
 4,517
 1,073
 147
 33,801
 216
 
Other noninterest income 1,767
 4,877
 (332) 1,128
 920
 (3,517) 1,217
 1,817
Noninterest expense (84,828) (70,313) (65,017) (63,668) (64,794) (64,702) (62,427) (64,814)
Income before income
  tax expense
 20,400
 27,098
 27,142
 25,836
 28,673
 54,282
 24,131
 20,935
Income tax expense (5,807) (8,549) (8,642) (8,172) (9,508) (24,959) (7,955) (6,293)
Net income $14,593
 $18,549
 $18,500
 $17,664
 $19,165
 $29,323
 $16,176
 $14,642
Basic earnings per
 common share
 $0.19
 $0.25
 $0.25
 $0.24
 $0.26
 $0.39
 $0.22
 $0.20
Diluted earnings per
  common share
 $0.19
 $0.25
 $0.25
 $0.24
 $0.26
 $0.39
 $0.22
 $0.20
Dividends declared per
  common share
 $0.08
 $0.08
 $0.08
 $0.07
 $0.07
 $0.04
 $0.04
 $0.01
Return on average common equity 5.35% 6.91% 7.08% 6.97% 7.53% 11.66% 6.66% 6.17%
Return on average assets 0.63% 0.84% 0.88% 0.86% 0.91% 1.38% 0.79% 0.74%
Net interest margin –
  tax-equivalent
 3.76% 3.72% 3.65% 3.61% 3.62% 3.63% 3.70% 3.77%

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FOURTH QUARTER 2011 vs. 2010

(1)
All ratios are presented on an annualized basis.

Net income for the fourth, third, and second quarters of 2014 was impacted by acquisition and integration related expenses totaling $9.3 million, $3.7 million, and $830,000, respectively. Excluding acquisition and integration related expenses, earnings per share was $0.27 for the fourth quarter 2011 was $6.9 million, before adjustmentsof 2014 and $0.28 for preferred dividends and non-vested restricted shares, with a net incomethe third quarter of $3.9 million, or $0.05 per share, available to common shareholders after such adjustments. This compares to a net loss available to common shareholders of $30.3 million, or $0.41 per share, for fourth quarter 2010.

Table 32
Quarterly Operating Earnings(1)
(Dollar amounts in thousands)

 
 2011 2010 
 
 Fourth Third Second First Fourth Third Second First 

Income (loss) before taxes

 $7,220 $10,525 $13,373 $9,953 $(53,225)$(1,387)$7,948 $8,436 

Provision for loan losses

  21,902  20,425  18,763  19,492  73,897  33,576  21,526  18,350 
                  

Pre-tax, pre-provision earnings

  29,122  30,950  32,136  29,445  20,672  32,189  29,474  26,786 
                  

Non-operating items

                         

Securities gains, net

  (110) 449  1,531  540  1,662  6,376  1,121  3,057 

Gain on FDIC-assisted transactions

  -  -  -  -  -  -  4,303  - 

Severance-related costs

  (2,000) -  -  -  -  -  -  - 

Integration costs associated with FDIC- assisted transactions

  -  -  -  -  (576) (847) (1,772) (129)

Gain on acquisition of deposits

  1,076  -  -  -  -  -  -  - 

Losses realized on OREO

  (1,425) (2,611) (3,423) (2,227) (15,412) (8,265) (8,924) (7,879)
                  

Total non-operating items

  (2,459) (2,162) (1,892) (1,687) (14,326) (2,736) (5,272) (4,951)
                  

Pre-tax, pre-provision core operating earnings

 $31,581 $33,112 $34,028 $31,132 $34,998 $34,925 $34,746 $31,737 
                  

Pre-tax, pre-provision operating earnings decreased by $3.4 million from fourth quarter 2010 to fourth quarter 2011 driven by a decline in net interest income and a $1.3 million correction of a 2010 actuarial pension expense calculation related to the valuation of future early retirement benefits recorded in fourth quarter 2011.

Average interest-earning assets for fourth quarter 2011 decreased $156.9 million, or 2.1%, from fourth quarter 2010. The decline was due to a reduction in average loans and covered interest-earning assets.

Tax-equivalent net interest margin for fourth quarter 2011 was 3.95%, a decline of 7 basis points from fourth quarter 2010. The drop from the prior year was primarily due to the impact of the additional senior debt issued in November 2011 related to the redemption of Preferred Shares, lower average loans, and deposits invested in low-yielding short-term investments.

Fee-based revenues for fourth quarter 2011 grew 6.6% compared to fourth quarter 2010. Net securities gains were $110,000 for fourth quarter 2011 and were net of other-than-temporary impairment charges of $759,000 related to two CDOs.

Total noninterest expense for fourth quarter 2011 declined 13.6% from fourth quarter 2010. Fourth quarter 2011 salaries and wages increased 4.0% compared to fourth quarter 2011 as a result of severance2014. In addition, recurring costs stemming from an organizational realignment, partially offset by reductions in short-term incentive and share-based compensation. Retirement and other employee benefits rose from fourth quarter 2010 to fourth quarter 2011 and were impacted by higher profit sharing expense, employee insurance, and payroll taxes attributed to increased sales staff, and the correction of the 2010 actuarial pension expense calculation.


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OREO expenses for fourth quarter 2011 declined 83.4% from fourth quarter 2010 due to continued remediation efforts. Fourth quarter 2010 OREO expenses were elevated due to higher levels of write-downs and losses on sales of OREO and related operating expenses.

An increase in real estate taxes paid to preserve our rights to collateral associated with problem loans,operating the newly acquired Popular, National Machine Tool, and Great Lakes locations of approximately $3.5 million and $2.0 million for the fourth and third quarters of 2014 impacted net income. The conversion and integration of these transactions was substantially complete as well as higher legal fees incurredof December 31, 2014, with certain remaining efficiencies to remediate problem credits, drove higher levelsbe implemented in the first half of loan remediation costs compared to fourth quarter 2010.

FDIC premiums decreased compared to fourth quarter 2010 primarily due to a change in regulatory requirements for calculating the premium.

Average funding sources for fourth quarter 2011 were $82.6 million, or 1.2%, lower than fourth quarter 2010 resulting from a drop in average time deposits. However, demand deposits increased from fourth quarter 2010 to fourth quarter 2011, including approximately $23 million of average deposits acquired in a December 2011 transaction, which resulted in a more favorable product mix.

Table 33
Borrowed Funds – Quarterly Comparison
(Dollar amounts in thousands)

2015.

 
  
  
  
  
  
 
 
 Fourth Quarter 2011  
 Fourth Quarter 2010 
 
 Amount Rate
(%)
 

 Amount Rate
(%)
 

Average for the quarter:

               

Securities sold under agreements to repurchase

 $87,893  0.02   $143,549  0.06 

Federal funds purchased

  -  -    1  - 

FHLB advances

  164,946  1.60    137,500  1.99 
            

Total borrowed funds

 $252,839  1.05   $281,050  1.00 
            

Maximum amount outstanding at any day during the quarter:

               

Securities sold under agreements to repurchase

 $97,383      $186,602    

Federal funds purchased

  -       125    

FHLB advances

  302,500       137,500    

CRITICAL ACCOUNTING POLICIES

ESTIMATES

Our consolidated financial statements are prepared in accordance with GAAP and are consistent with predominant practices in the financial services industry. Critical accounting policies are those policies that management believes are the most important to our financial position and results of operations. Application of critical accounting policiesGAAP requires management to make estimates, assumptions, and judgments based on information available as of the date of the financial statements that affect the amounts reported in the financial statements and accompanying notes. Critical accounting estimates are those estimates that management believes are the most important to our financial position and results of operations. Future changes in information may affectimpact these estimates, assumptions, and judgments, which in turn, may have a material affect the amounts reported in the financial statements.

We have numerous

The most significant of our accounting policies of which the most significantand estimates are presented in Note 1 of "Notes to the Consolidated Financial Statements" in Item 8 of this Form 10-K. These policies, alongAlong with the disclosures presented in the other financial statement notes and in this discussion, these policies provide information on how significant assets and liabilities are valued in the financial statements and how those values are determined. Based on the valuation techniques used and the sensitivity of financial statement amounts to the methods, estimates, assumptions, and estimates underlying those amounts,judgments management determined that our accounting policies with respect toestimates for the allowance for credit losses, evaluation of impairmentvaluation of securities, and income taxes, are the accounting areas requiring subjective or complex judgments that are most important to our financial position and results of operations,goodwill and therefore,other intangible assets are considered to be our critical accounting policies, as discussed below.

estimates.

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Allowance for Credit Losses

Determination

The determination of the allowance for credit losses is inherently subjective since it requires significant estimates and management judgment, including the amounts and timing of expected future cash flows on impaired loans, estimated losses on pools of homogeneous loans, actual loss experience, and consideration of current economic trends and conditions, and other factors, all of which may beare susceptible to significant change. Credit exposures deemed to be uncollectible are charged-off against the allowance for loan and covered loan losses, while recoveries of amounts previously charged-off are credited to the allowance for loan and covered loan losses. Additions to the allowance for loan and covered loan losses are established through the provision for loan and covered loan losses charged to expense. The amount charged to operating expense is dependent upondepends on a number of factors, including historic loan growth, changes in the composition of the loan portfolio, net charge-off levels, and our assessment of the allowance for loan and covered loan losses. For a full discussion of our methodology for determining the allowance for credit losses, see Note 1 of "Notes to the Consolidated Financial Statements" in Item 8 of this Form 10-K.

Evaluation

Valuation of Securities for Impairment

The fair values of securities are based on quoted prices obtained from third party pricing services or dealer market participants where a ready market for such securities exists. Where an activeIn the absence of quoted prices or where a market for the security does not exist, as for our CDOs, we have estimated fair value using a cash flow model withmanagement judgment and estimation is used, which may include modeling-based techniques. The use of different judgments and estimates to determine the assistance of a structured credit valuation firm. The valuation for each of the CDOs relies on independently verifiable historical financial data. The valuation firm performs a credit analysis of each of the entities comprising the collateral underlying each CDO in order to estimate the likelihood of default by any of these entities on their trust-preferred obligation. Cash flows are modeled based upon the contractual terms of the CDO and discounted to their present values to derive the estimated fair value of the individual CDO, as well as any credit loss or impairment. We believe the model uses reasonable assumptions to estimatesecurities could result in a different fair values where no market exists for these investments.

value estimate.

On a quarterly basis, we make an assessmentassess securities with unrealized losses to determine whether there have been any events or circumstances to indicate that a security with an unrealized loss is other-than-temporarily impaired.OTTI has occurred. In evaluating other-than-temporary impairment, the CompanyOTTI, management considers many factors including the severity and duration of the impairment; the financial condition and near-term prospects of the issuer, which for debt securities considersincluding external credit ratings and recent downgrades;downgrades for debt securities; intent to hold the security until its value recovers; and the likelihood that the Company would be required to sell themthe securities before a recovery of their amortized cost bases.in value, which may be at maturity. The term other-than-temporary"other-than-temporary" is not intended to indicate that the decline is permanent. It indicates that the prospects for near-term recovery are not necessarily favorable or that there is a lack of evidence to support fair values greater than or equal to the carrying value of the investment. Securities for which there is an unrealized loss that is deemed to be other-than-temporary are written down to fair value with the write-down recorded as a realized loss and included in net securities gains net,(losses), but only to the extent the impairment is related to credit deterioration. The amount of the impairment related to other factors is recognized in other comprehensive income (loss) unless management intends to sell the security in a short period of time or believes it is more likely than not that it will be required to sell the security prior to full recovery. The determination of OTTI is subjective and different judgments and assumptions could affect the timing and amount of loss realization. For additional discussion on securities, see Notes 1 and 34 of "Notes to the Consolidated Financial Statements" in Item 8 of this Form 10-K.

Income Taxes

We determine our income tax expense based on management's judgments and estimates regarding permanent differences in the treatment of specific items of income and expense for financial statement and income tax purposes. These permanent differences result in an effective tax rate that differs from the federal statutory rate. In addition, we recognize deferred tax assets and liabilities in the Consolidated Statements of Financial Condition based on management's judgment and estimates regarding timing differences in the recognition of income and expenses for financial statement and income tax purposes.

We also assess the likelihood that any deferred tax assets will be realized through the reduction or refund of taxes in future periods and establish a valuation allowance for those assets for which recovery is not more likely than not. In making this assessment, management makes judgments and estimates regarding the ability to realize the asset through carryback to taxable income in prior years, the future reversal of existing taxable temporary differences, future taxable income, and the possible application of future tax planning strategies. Management believes that it is more likely than not that deferred tax assets included in the accompanying Consolidated Statements of Financial Condition will be fully realized, although there is no guarantee that those assets will be recognizable in future periods.
Management also makes certain interpretations of federal and state income tax laws for which the outcome of the tax position may not be certain. Uncertain tax positions are periodically evaluated and we may establish tax reserves for benefits that may not be realized. For additional discussion of income taxes, see Notes 1 and 15 of "Notes to the Consolidated Financial Statements" in Item 8 of this Form 10-K.


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Goodwill and Other Intangible Assets
Goodwill represents the excess of Contents

FORWARD-LOOKING STATEMENTS

purchase price over the fair value of net assets acquired using the acquisition method of accounting. This method requires that all identifiable assets acquired and liabilities assumed in the transaction, both intangible and tangible, be recorded at their estimated fair value upon acquisition. Determining the fair value often involves estimates based on third-party valuations, such as appraisals, or internal valuations based on discounted cash flow analyses or other valuation techniques. Goodwill is not amortized, instead, we assess the potential for impairment on an annual basis or more frequently if events and circumstances indicate that goodwill might be impaired.

Other intangible assets represent purchased assets that lack physical substance, but can be distinguished from goodwill because of contractual or other legal rights or because the asset is capable of being sold or exchanged either on its own or in combination with a related contract, asset, or liability. The following is a statement under the Safe Harbor Provisionsdetermination of the Private Securities Litigation Reform Act of 1995 (the "PSLRA"): We and our representatives may, from timeuseful lives over which an intangible asset will be amortized is subjective. Intangible assets are also reviewed at least annually for impairment to time, make written or oral statements that are intended to qualify as "forward-looking" statements under the PSLRA and provide information other than historical information, including statements contained in this Form 10-K, our other filings with the Securities and Exchange Commission, or in communications to our stockholders. These statements involve known and unknown risks, uncertainties, and other factors that may cause actual results to be materially different fromdetermine whether there were any results, levels of activity, performance, or achievements expressed or implied by any forward-looking statement. These factors include, among other things, the factors listed below.

In some cases, we have identified forward-looking statements by such words or phrases as "will likely result," "is confident that," "remains optimistic about," "expects," "should," "could," "seeks," "may," "will continue to," "believes," "anticipates," "predicts," "forecasts," "estimates," "projects," "potential," "intends," or similar expressions identifying forward-looking statements within the meaning of the PSLRA, including the negative of those words and phrases. These forward-looking statements are based on management's current views and assumptions regarding future events, future business conditions, and our outlook for the Company based on currently available information. We wish to caution readers not to place undue reliance on any such forward-looking statements, which speak only at the date made.

In connection with the safe harbor provisions of the PSLRA, we are hereby identifying important factors that could affect our financial performance and could cause our actual results for future periods to differ materially from any opinions or statements expressed with respect to future periods in any forward-looking statements.

Among the factors that could have an impact on our ability to achieve operating results, growth plan goals, and the beliefs expressed or implied in forward-looking statements are:

Management's ability to reduce and effectively manage interest rate risk and the impact of interest rates in general on the volatility of our net interest income;
Asset and liability matching risks and liquidity risks;
Fluctuations in the value of our investment securities;
The ability to attract and retain senior management experienced in banking and financial services;
The sufficiency of the allowance for credit losses to absorb the amount of actual losses inherent in the existing portfolio of loans;
The failure of assumptions underlying the establishment of the allowance for credit losses and estimation of values of collateral and various financial assets and liabilities;
Credit risks and risks from concentrations (by geographic area and by industry) within our loan portfolio;
The effects of competition from other commercial banks, thrifts, mortgage banking firms, consumer finance companies, credit unions, securities brokerage firms, insurance companies, money market and other mutual funds, and other financial institutions operating in our markets or elsewhere providing similar services;
Changes in the economic environment, competition, or other factors that may influence the anticipated growth rate of loans and deposits, the quality of the loan portfolio, and loan and deposit pricing;
Changes in general economic or industry conditions, nationally or in the communities in which we conduct business;
Volatility of rate sensitive deposits;
Our ability to adapt successfully to technological changes to compete effectively in the marketplace;
Operational risks, including data processing system failures or fraud;
Our ability to successfully pursue acquisition and expansion strategies and integrate any acquired companies;
The impact of liabilities arising from legal or administrative proceedings, enforcement of bank regulations, and enactment or application of securities regulations;
Governmental monetary and fiscal policies and legislative and regulatory changes that may result in the imposition of costs and constraints through higher FDIC insurance premiums, significant fluctuations in market interest rates, increases in capital requirements, or operational limitations;
Changes in federal and state tax laws or interpretations, including changes affecting tax rates, income not subject to tax under existing law and interpretations, income sourcing, or consolidation/combination rules;

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Changes in accounting principles, policies, or guidelines affecting the businesses we conduct;
Acts of war or terrorism; and
Other economic, competitive, governmental, regulatory, and technological factors affecting our operations, products, services, and prices.

The foregoing list of important factors may not be all-inclusive, and we specifically decline to undertake any obligation to publicly revise any forward-looking statements that have been made to reflect events or circumstances afterthat indicate the daterecorded amount is not recoverable from projected undiscounted net operating cash flows. For additional discussion of such statements orgoodwill and other intangible assets, see Notes 1 and 9 of "Notes to reflect the occurrenceConsolidated financial Statements" in Item 8 of anticipated or unanticipated events.

With respect to forward-looking statements set forth in the notes to consolidated financial statements, including those relating to contingent liabilities and legal proceedings, some of the factors that could affect the ultimate disposition of those contingencies are changes in applicable laws, the development of facts in individual cases, settlement opportunities, and the actions of plaintiffs, judges, and juries.

this Form 10-K.


ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK

The disclosures set forth in this item are qualified by Item 1A. Risk Factors and the section captioned "Forward-Looking"Cautionary Statement Regarding Forward-Looking Statements" included in Item 7. Management's7 "Management's Discussion and Analysis of Financial Condition and Results of Operations," of this report, and other cautionary statements set forth elsewhere in this report.

Market risk is the risk of loss arising from adverse changes in the fair value of financial instruments due to changes in interest rates, exchange rates, and equity prices. Interest rate risk is our primary market risk and is the result of repricing, basis, and option risk. Repricing risk represents timing mismatches in our ability to alter contractual rates earned on interest-earning assets or paid on interest-bearing liabilities in response to changes in market interest rates. Basis risk refers to the potential for changes in the underlying relationship between market rates or indices, which subsequently result in a narrowing of the spread between the rate earned on a loan or investment and the rate paid to fund that investment. Option risk arises from the "embedded options" present in many financial instruments, such as loan prepayment options or deposit early withdrawal options. These provide customers opportunities to take advantage of directional changes in interest rates and could have an adverse impact on our margin performance.

We seek to achieve consistent growth in net interest income and net income while managing volatility that arises from shifts in interest rates. The Bank's Asset and Liability Committee ("ALCO") oversees financial risk management by developing programs to measure and manage interest rate risks within authorized limits set by the Bank's Board of Directors. ALCO also approves the Bank's asset and liability management policies, oversees the formulation and implementation of strategies to improve balance sheet positioning and earnings, and reviews the Bank's interest rate sensitivity position. Management uses net interest income and economic value of equity simulation modeling tools to analyze and capture short-term and long-termexposure of earnings to changes in interest rate exposures.

rates.

Net Interest Income Sensitivity

The analysis of net interest income sensitivitiessensitivity assesses the magnitude of changes in net interest income over a twelve-month measurement period resulting from immediate changes in interest rates over a 12-month horizon using multiple rate scenarios. These scenarios include, but are not limited to, a most likely forecast, a flat to inverted or unchanged rate environment, a gradual increase and decrease of 200 basis points that occur in equal steps over a six-month time horizon, and immediate increases and decreases of 100, 200, and 300 basis points, and an immediate decrease of 100 basis points.

Due to the low interest rate environment as of December 31, 2014 and 2013, management determined that an immediate decrease in interest rates greater than 100 basis points was not meaningful for this analysis.

This simulation analysis is based on actualexpected future cash flows and repricing characteristics for balance sheet and off-balance sheet instruments and incorporates market-based assumptions regarding the effect of changing interest rates on the prepayment rates of certain assets and liabilities. This simulationIn addition, this sensitivity analysis includes management's projections for activity levels in eachexamines assets and liabilities at the beginning of the product lines we offer.measurement period and does not assume any changes from growth or business plans over the next twelve months. Interest-earning assets and interest-bearing liabilities are assumed to re-price based on contractual terms over the twelve-month measurement period assuming an instantaneous parallel shift in interest rates in effect at the beginning of the measurement period. The simulation analysis also incorporates assumptions based on the historical behavior of deposit rates and balances in relation to interest rates. Because these assumptions are inherently uncertain, the simulation analysis cannot definitively measure net interest income or predict the impact of the fluctuation in interest rates on net interest income.income, but does provide an indication of the Company's sensitivity to changes in interest rates. Actual results may differ from


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simulated results due to timing, magnitude, and frequency of interest rate changes as well as changes in market conditions and management strategies.

We monitor


76




Our balance sheet is asset sensitive based on repricing and managematurity characteristics and simulation analysis assumptions. The Bank’s current simulation analysis indicates we would benefit from rising interest rates. Interest-earning assets consist of short and long-term products. Excluding non-accrual loans, 49% of the loan portfolio consisted of fixed rate loans and 51% were floating rate loans as of December 31, 2014. Investments, consisting of securities and interest-bearing deposits in other banks, are more heavily weighted toward fixed rate securities at 67% of the total compared to 33% for floating rate interest-bearing deposits in other banks. Fixed rate loans are most sensitive to the 3-5 year portion of the yield curve and the Bank limits its loans with maturities that extend beyond 5 years. The majority of floating rate loans are indexed to the short-term Prime or LIBOR rates. The amount of floating rate loans in the money with interest rate risk within approved policy limits. Our currentfloors was $644.6 million, or 25%, of the floating rate loan portfolio as of December 31, 2014. On the liability side of the balance sheet, 84% of deposits are demand deposits and interest-bearing transactional deposits, which either do not pay interest rate risk policy limitsor the interest rates are determined by measuring the change in netexpected to rise at a slower pace than short-term interest income over a 12-month horizon.

rates.

Analysis of Net Interest Income Sensitivity
(Dollar amounts in thousands)


 Gradual Change in Rates(1) Immediate Change in Rates 

 -200 +200 -200 +200 -300(2) +300  Immediate Change in Rates

December 31, 2011:

 
 +300 +200 +100 -100
December 31, 2014:        

Dollar change

 $(8,457)$13,392 $(13,983)$19,209 N/M $36,576  $42,922
 $27,471
 $12,707
 $(12,748)

Percent change

 -3.1% +4.9% -5.2% +7.1% N/M +13.5%  14.3% 9.2% 4.2% (4.3)%

December 31, 2010:

 
December 31, 2013:        

Dollar change

 $(13,609)$7,393 $(18,736)$10,072 N/M $21,148  $45,209
 $28,307
 $11,925
 $(11,791)

Percent change

 -4.7% +2.5% -6.4% +3.4% N/M +7.2%  17.3% 10.8% 4.6% (4.5)%

Overall, inrates. This same measure was $28.3 million, or 10.8%, as of December 31, 2013.

In rising interest rate scenarios, interest rate risk volatility is morewas less positive at December 31, 2011 than at December 31, 2010 and in declining interest rate scenarios, interest rate risk volatility is less negative at December 31, 20112014 compared to December 31, 2010. The2013. During 2014, growth in floating rate loans were funded by the rise in core deposits, which are less rate sensitive. Overall, this increase in positiverate sensitive assets was offset by the prepayment of $114.6 million of FHLB advances at fixed rates and the hedging of $325.0 million of certain corporate variable rate loans using interest rate volatility assuming rising rates is due to a shortening ofswaps through which we receive fixed amounts and pay variable amounts. The rise in fixed rate loans, driven primarily by acquisition activity, was offset by the average life of investmentreduction in securities as cash flows from maturities, calls, and a lengthening of the aggregate maturity of liabilities through an increaseprepayments were not reinvested in the volume of transaction accounts and the issuance of senior debt. As our interest-earning assets continueportfolio. While net interest income is projected to repricedecline in the lowa decreasing interest rate environment, we believe the exposure to further declinesrisk of a significant decrease in interest rates is reduced and drives the decrease in net interest income volatility under falling interest rate scenarios.

Economic Value of Equity

In addition to the simulation analysis, management uses an economic value of equity sensitivity technique to understand the risk in both shorter-term and longer-term positions and to study the impact of longer-term cash flows on earnings and capital. In determining the economic value of equity, we discount present values of expected cash flows on all assets, liabilities, and off-balance sheet contracts under different interest rate scenarios. The discounted present value of all cash flows represents our economic value of equity. Economic value of equity does not represent the true fair value of asset, liability, or derivative positions because certain factors are not considered, such as credit risk, liquidity risk, and the impact of future changes to the balance sheet.

Analysis of Economic Value of Equityminimal.


(Dollar amounts in thousands)

77

 
 Immediate Change in Rates 
 
 -200 +200 -300(1) +300 

December 31, 2011:

             

Dollar change

 $(168,853)$148,369  N/M $221,525 

Percent change

  -13.3%  +11.7%  N/M  +17.4% 

December 31, 2010:

             

Dollar change

 $(148,859)$61,708  N/M $93,682 

Percent change

  -9.2%  +3.8%  N/M  +5.8% 

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As of December 31, 2011, the estimated sensitivity of the economic value of equity to changes in rising interest rates is more positive compared to December 31, 2010, and the estimated sensitivity to falling rates is more negative compared to December 31, 2010. The duration of the investment portfolio is lower at December 31, 2011 compared to December 31, 2010 due to (i) balance sheet strategies implemented during 2011, (ii) an increase in short-term investments, and (iii) a lengthening of liabilities through an increase in transaction accounts and the issuance of senior debt. The impact of these factors resulted in a reduction of the amount of negative price volatility as interest rates rise and reduced the amount of positive price volatility as rates decline.

Interest Rate Derivatives

As part of our approach to controlling the interest rate risk within our balance sheet, we use derivative instruments (specifically interest rate swaps with third parties) to limit volatility in net interest income. The advantages of using such interest rate derivatives include minimization of balance sheet leverage resulting in lower capital requirements compared to cash instruments, the ability to maintain or increase liquidity, and the opportunity to customize the interest rate swap to meet desired risk parameters. The accounting policies underlying the treatment of derivative financial instruments in the Consolidated Statements of Financial Condition and Income of the Company are described in Note 1 of "Notes to Consolidated Financial Statements" in Item 8 of this Form 10-K.

We had total interest rate swaps in place with an aggregate notional amount of $16.9 million at December 31, 2011 and $18.0 million at December 31, 2010, hedging various balance sheet categories. The specific terms of the interest rate swaps outstanding as of December 31, 2011 and 2010 are discussed in Note 19 of "Notes to Consolidated Financial Statements" in Item 8 of this Form 10-K.


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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Management's Responsibility for Financial Statements

To Our Stockholders:

The accompanying consolidated financial statements were prepared by management, which is responsible for the integrity and objectivity of the data presented. In the opinion of management, the financial statements, which necessarily include amounts based on management's estimates and judgments, have been prepared in conformity with U.S. generally accepted accounting principles.

Ernst & Young LLP, an independent registered public accounting firm, has audited these consolidated financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States) and has expressed its unqualified opinion on these financial statements.

The Audit Committee of the Board of Directors, which oversees the Company's financial reporting process on behalf of the Board of Directors, is composed entirely of independent directors (as defined by the listing standards of Nasdaq)NASDAQ). The Audit Committee meets periodically with management, the independent accountants, and the internal auditors to review matters relating to the Company's financial statements, compliance with legal and regulatory requirements relating to financial reporting and disclosure, annual financial statement audit, engagement of independent accountants, internal audit function, and system of internal controls. The internal auditors and the independent accountants periodically meet alone with the Audit Committee and have access to the Audit Committee at any time.

/s/ MICHAEL L. SCUDDER

   /s/ PAUL F. CLEMENS
Michael L. Scudder
President and
Chief Executive Officer
   Paul F. Clemens
President and
Chief Executive Officer
Executive Vice President and
Chief Financial Officer
March 2, 2015

February 28, 2012


78


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Report of Independent Registered Public Accounting Firm

The Board of Directors and Shareholders of First Midwest Bancorp, Inc.


We have audited the accompanying consolidated statements of financial condition of First Midwest Bancorp, Inc. (the “Company”) as of December 31, 20112014 and 2010,2013, and the related consolidated statements of income, comprehensive income, (loss), changes in stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2011.2014. These financial statements are the responsibility of the Company'sCompany’s management. Our responsibility is to express an opinion on these financial statements based on our audits.


We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.


In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of First Midwest Bancorp, Inc.the Company at December 31, 20112014 and 2010,2013, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2011,2014, in conformity with U.S. generally accepted accounting principles.


We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), First Midwest Bancorp, Inc.'sthe Company’s internal control over financial reporting as of December 31, 2011,2014, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 28, 2012March 2, 2015 expressed an unqualified opinion thereon.


/s/ ERNST & YOUNG LLP

Chicago, Illinois
March 2, 2015

79





FIRST MIDWEST BANCORP, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Amounts in thousands, except per share data)

  As of December 31,
  2014 2013
Assets    
Cash and due from banks $117,315
 $110,417
Interest-bearing deposits in other banks 488,947
 476,824
Trading securities, at fair value 17,460
 17,317
Securities available-for-sale, at fair value 1,187,009
 1,112,725
Securities held-to-maturity, at amortized cost (fair value 2014 – $27,670; 2013 – $43,387) 26,555
 44,322
Federal Home Loan Bank ("FHLB") and Federal Reserve Bank ("FRB") stock, at cost 37,558
 35,161
Loans, excluding covered loans 6,657,418
 5,580,005
Covered loans 79,435
 134,355
Allowance for loan and covered loan losses (72,694) (85,505)
Net loans 6,664,159
 5,628,855
Other real estate owned ("OREO"), excluding covered OREO 26,898
 32,473
Covered OREO 8,068
 8,863
Federal Deposit Insurance Corporation ("FDIC") indemnification asset 8,452
 16,585
Premises, furniture, and equipment, net 131,109
 120,204
Investment in bank-owned life insurance ("BOLI") 206,498
 193,167
Goodwill and other intangible assets 334,199
 276,366
Accrued interest receivable and other assets 190,912
 180,128
Total assets $9,445,139
 $8,253,407
Liabilities    
Noninterest-bearing deposits $2,301,757
 $1,911,602
Interest-bearing deposits 5,586,001
 4,854,499
Total deposits 7,887,758
 6,766,101
Borrowed funds 137,994
 224,342
Senior and subordinated debt 200,869
 190,932
Accrued interest payable and other liabilities 117,743
 70,590
Total liabilities 8,344,364
 7,251,965
Stockholders' Equity    
Common stock 882
 858
Additional paid-in capital 449,798
 414,293
Retained earnings 899,516
 853,740
Accumulated other comprehensive loss, net of tax (15,855) (26,792)
Treasury stock, at cost (233,566) (240,657)
Total stockholders' equity 1,100,775
 1,001,442
Total liabilities and stockholders' equity $9,445,139
 $8,253,407

  December 31, 2014 December 31, 2013
  
Preferred
Shares
 
Common
Shares
 
Preferred
Shares
 
Common
Shares
Par value $
 $0.01
 $
 $0.01
Shares authorized 1,000
 150,000
 1,000
 100,000
Shares issued 
 88,228
 
 85,787
Shares outstanding 
 77,695
 
 75,071
Treasury shares 
 10,533
 
 10,716
See accompanying notes to the consolidated financial statements.

80




FIRST MIDWEST BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Amounts in thousands, except per share data)
  Years Ended December 31,
  2014 2013 2012
Interest Income      
Loans, excluding covered loans $256,842
 $239,224
 $248,752
Covered loans 8,659
 13,804
 15,873
Investment securities – taxable 14,516
 12,249
 12,670
Investment securities – tax-exempt 16,716
 18,644
 20,253
Other short-term investments 3,131
 3,326
 3,021
Total interest income 299,864
 287,247
 300,569
Interest Expense      
Deposits 10,377
 11,901
 18,052
Borrowed funds 573
 1,607
 2,009
Senior and subordinated debt 12,062
 13,607
 14,840
Total interest expense 23,012
 27,115
 34,901
Net interest income 276,852
 260,132
 265,668
Provision for loan and covered loan losses 19,168
 16,257
 158,052
Net interest income after provision for loan and covered loan losses 257,684
 243,875
 107,616
Noninterest Income      
Service charges on deposit accounts 36,910
 36,526
 36,699
Wealth management fees 26,474
 24,185
 21,791
Card-based fees 24,340
 21,649
 20,852
Merchant servicing fees 11,260
 10,953
 10,806
Mortgage banking income 4,011
 5,306
 2,689
Other service charges, commissions, and fees 8,086
 7,663
 4,486
Net securities gains (losses) 8,097
 34,164
 (921)
BOLI income (loss) 2,873
 (11,844) 1,307
Other income 4,567
 4,452
 7,086
Gain on termination of FHLB forward commitments 
 7,829
 
Gain on bulk loan sales 
 
 5,153
Total noninterest income 126,618
 140,883
 109,948
Noninterest Expense      
Salaries and wages 116,578
 112,631
 105,231
Retirement and other employee benefits 27,245
 26,119
 25,524
Net occupancy and equipment expense 35,181
 31,832
 32,699
Professional services 23,436
 21,922
 29,614
Technology and related costs 12,875
 11,335
 11,846
Merchant card expense 9,195
 8,780
 8,584
Advertising and promotions 8,159
 7,754
 5,073
Net OREO expense 7,075
 8,547
 10,521
FDIC premiums 5,824
 6,438
 6,926
Other expenses 24,386
 19,879
 24,777
Acquisition and integration related expenses 13,872
 
 
Adjusted amortization of FDIC indemnification asset 
 1,500
 6,705
Total noninterest expense 283,826
 256,737
 267,500
Income (loss) before income tax expense (benefit) 100,476
 128,021
 (49,936)
Income tax expense (benefit) 31,170
 48,715
 (28,882)
Net income (loss) $69,306
 $79,306
 $(21,054)
Per Common Share Data      
Basic earnings (loss) per common share $0.92
 $1.06
 $(0.28)
Diluted earnings (loss) per common share 0.92
 1.06
 (0.28)
Weighted-average common shares outstanding 74,484
 73,984
 73,665
Weighted-average diluted common shares outstanding 74,496
 73,994
 73,666
See accompanying notes to the consolidated financial statements.

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FIRST MIDWEST BANCORP, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Dollar amounts in thousands)
  Years Ended December 31,
  2014 2013 2012
Net income (loss) $69,306
 $79,306
 $(21,054)
Securities available-for-sale      
Unrealized holding gains (losses):      
Before tax 37,173
 (2,054) 1,513
Tax effect (14,918) 711
 (588)
Net of tax 22,255
 (1,343) 925
Reclassification of net gains (losses) included in net income (loss):    
Before tax 8,097
 34,164
 (921)
Tax effect (3,311) (13,973) 377
Net of tax 4,786
 20,191
 (544)
Net unrealized holding gains (losses) 17,469
 (21,534) 1,469
Derivative instruments      
Unrealized holding losses:      
Before tax (1,930) 
 
Tax effect 792
 
 
Net of tax (1,138) 
 
Unrecognized net pension costs      
Unrealized holding (losses) gains:      
Before tax (9,127) 17,600
 (6,520)
Tax effect 3,733
 (7,198) 2,667
Net of tax (5,394) 10,402
 (3,853)
Total other comprehensive income (loss) 10,937
 (11,132) (2,384)
Total comprehensive income (loss) $80,243
 $68,174
 $(23,438)
  
Accumulated
Unrealized
(Loss) Gain on
Securities
Available-
for-Sale
 Accumulated Unrealized Loss on Derivative Instruments 
Unrecognized
Net Pension
Costs
 
Total
Accumulated
Other
Comprehensive Loss
Balance at December 31, 2011 $(354) $
 $(12,922) $(13,276)
Other comprehensive income (loss) 1,469
 
 (3,853) (2,384)
Balance at December 31, 2012 1,115
 
 (16,775) (15,660)
Other comprehensive (loss) income (21,534) 
 10,402
 (11,132)
Balance at December 31, 2013 (20,419) 
 (6,373) (26,792)
Other comprehensive income (loss) 17,469
 (1,138) (5,394) 10,937
Balance at December 31, 2014 $(2,950) $(1,138) $(11,767) $(15,855)
See accompanying notes to the consolidated financial statements.

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FIRST MIDWEST BANCORP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(Amounts in thousands, except per share data)
  
Common
Shares
Outstanding
 
Common
Stock
 
Additional
Paid-in
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Loss
 
Treasury
Stock
 Total
Balance at December 31, 2011 74,435
 $858
 $428,001
 $810,487
 $(13,276) $(263,483) $962,587
Comprehensive loss 
 
 
 (21,054) (2,384) 
 (23,438)
Common dividends declared
  ($0.04 per common share)
 
 
 
 (2,980) 
 
 (2,980)
Share-based compensation expense 
 
 6,004
 
 
 
 6,004
Restricted stock activity 408
 
 (15,604) 
 
 14,284
 (1,320)
Treasury stock issued to benefit plans (3) 
 (83) 
 
 123
 40
Balance at December 31, 2012 74,840
 858
 418,318
 786,453
 (15,660) (249,076) 940,893
Comprehensive income (loss) 
 
 
 79,306
 (11,132) 
 68,174
Common dividends declared
  ($0.16 per common share)
 
 
 
 (12,019) 
 
 (12,019)
Share-based compensation expense 
 
 5,903
 
 
 
 5,903
Restricted stock activity 234
 
 (9,814) 
 
 8,276
 (1,538)
Treasury stock issued to benefit plans (3) 
 (114) 
 
 143
 29
Balance at December 31, 2013 75,071
 858
 414,293
 853,740
 (26,792) (240,657) 1,001,442
Comprehensive income 
 
 
 69,306
 10,937
 
 80,243
Common dividends declared
  ($0.31 per common share)
 
 
 
 (23,530) 
 
 (23,530)
Common stock issued, net of issuance costs 2,441
 24
 38,276
 
 
 
 38,300
Share-based compensation expense 
 
 5,926
 
 
 
 5,926
Restricted stock activity 176
 
 (8,560) 
 
 6,585
 (1,975)
Treasury stock issued to benefit plans 7
 
 (137) 
 
 506
 369
Balance at December 31, 2014 77,695
 $882
 $449,798
 $899,516
 $(15,855) $(233,566) $1,100,775
  
  

Chicago, Illinois
February 28, 2012


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FIRST MIDWEST BANCORP, INC.

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(Amounts in thousands, except per share data)

 
 December 31, 
 
 2011 2010 

Assets

       

Cash and due from banks

 $123,354 $102,495 

Interest-bearing deposits in other banks

  518,176  483,281 

Trading securities, at fair value

  14,469  15,282 

Securities available-for-sale, at fair value

  1,013,006  1,057,802 

Securities held-to-maturity, at amortized cost (fair value 2011 – $61,477; 2010 – $82,525)

  60,458  81,320 

Federal Home Loan Bank and Federal Reserve Bank stock, at cost

  58,187  61,338 

Loans, excluding covered loans

  5,088,113  5,100,560 

Covered loans

  260,502  371,729 

Allowance for loan losses

  (119,462) (142,572)
      

Net loans

  5,229,153  5,329,717 

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

  33,975  31,069 

Covered OREO

  23,455  22,370 

Federal Deposit Insurance Corporation ("FDIC") indemnification asset

  65,609  95,899 

Premises, furniture, and equipment

  134,977  140,907 

Accrued interest receivable

  29,826  29,953 

Investment in bank-owned life insurance ("BOLI")

  206,235  197,644 

Goodwill and other intangible assets

  283,650  286,033 

Other assets

  179,064  203,192 
      

Total assets

 $7,973,594 $8,138,302 
      

Liabilities

       

Noninterest-bearing deposits

 $1,593,773 $1,329,505 

Interest-bearing deposits

  4,885,402  5,181,971 
      

Total deposits

  6,479,175  6,511,476 

Borrowed funds

  205,371  303,974 

Senior and subordinated debt

  252,153  137,744 

Accrued interest payable and other liabilities

  74,308  73,063 
      

Total liabilities

  7,011,007  7,026,257 
      

Stockholders' Equity

       

Preferred stock

  -  190,882 

Common stock

  858  858 

Additional paid-in capital

  428,001  437,550 

Retained earnings

  810,487  787,678 

Accumulated other comprehensive loss, net of tax

  (13,276) (27,739)

Treasury stock, at cost

  (263,483) (277,184)
      

Total stockholders' equity

  962,587  1,112,045 
      

Total liabilities and stockholders' equity

 $7,973,594 $8,138,302 
      


 
 December 31, 2011 December 31, 2010 
 
 Preferred
Shares
 Common
Shares
 Preferred
Shares
 Common
Shares
 

Par value

  None $0.01  None $0.01 

Shares authorized

  1,000  100,000  1,000  100,000 

Shares issued

  -  85,787  193  85,787 

Shares outstanding

  -  74,435  193  74,096 

Treasury shares

  -  11,352  -  11,691 
              

See accompanying notes to the consolidated financial statements.


83


Table of Contents



FIRST MIDWEST BANCORP, INC.

CONSOLIDATED STATEMENTS OF INCOME

(Amounts in thousands, except per share data)

 
 Years ended December 31, 
 
 2011 2010 2009 

Interest Income

          

Loans

 $252,865 $259,318 $261,221 

Investment securities – taxable

  14,115  22,116  42,392 

Investment securities – tax-exempt

  22,544  27,685  35,094 

Covered loans

  28,904  17,285  1,419 

Federal funds sold and other short-term investments

  3,083  2,463  1,625 
        

Total interest income

  321,511  328,867  341,751 
        

Interest Expense

          

Deposits

  27,256  37,127  64,177 

Borrowed funds

  2,743  3,267  12,569 

Senior and subordinated debt

  9,892  9,124  13,473 
        

Total interest expense

  39,891  49,518  90,219 
        

Net interest income

  281,620  279,349  251,532 

Provision for loan losses

  80,582  147,349  215,672 
        

Net interest income after provision for loan losses

  201,038  132,000  35,860 
        

Noninterest Income

          

Service charges on deposit accounts

  37,879  35,884  38,754 

Wealth management fees

  16,224  15,063  14,059 

Other service charges, commissions, and fees

  20,486  18,238  16,529 

Card-based fees

  19,593  17,577  15,826 
        

Total fee-based revenues

  94,182  86,762  85,168 

Securities gains, net (reclassified from other comprehensive income (loss))

  2,410  12,216  2,110 

Gains on FDIC-assisted transactions

    4,303  13,071 

Gains on early extinguishment of debt

      15,258 

Other

  5,345  5,270  7,395 
        

Total noninterest income

  101,937  108,551  123,002 
        

Noninterest Expense

          

Salaries and wages

  101,703  94,361  82,640 

Retirement and other employee benefits

  27,071  20,017  23,908 

OREO expense, net

  16,293  50,034  23,459 

Net occupancy and equipment expense

  32,953  32,218  31,724 

Technology and related costs

  10,905  11,070  8,987 

Professional services

  26,356  22,903  15,796 

FDIC premiums

  7,990  10,880  13,673 

Advertising and promotions

  6,198  6,642  7,313 

Merchant card expense

  8,643  7,882  6,453 

Other expenses

  23,792  22,772  20,835 
        

Total noninterest expense

  261,904  278,779  234,788 
        

Income (loss) before income tax expense (benefit)

  41,071  (38,228) (75,926)

Income tax expense (benefit)

  4,508  (28,544) (50,176)
        

Net income (loss)

  36,563  (9,684) (25,750)

Preferred dividends and accretion on preferred stock

  (10,776) (10,299) (10,265)

Net (income) loss applicable to non-vested restricted shares

  (350) 266  464 
        

Net income (loss) applicable to common shares

 $25,437 $(19,717)$(35,551)
        

Per Common Share Data

          

Basic earnings (loss) per common share

 $0.35 $(0.27)$(0.71)

Diluted earnings (loss) per common share

 $0.35 $(0.27)$(0.71)

Weighted-average common shares outstanding

  73,289  72,422  50,034 

Weighted-average diluted common shares outstanding

  73,289  72,422  50,034 
           

See accompanying notes to consolidated financial statements.


Table of Contents

FIRST MIDWEST BANCORP, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Amounts in thousands)

 
 Years Ended December 31, 
 
 2011 2010 2009 

Net income (loss)

 $36,563 $(9,684)$(25,750)

Available-for-sale securities

          

Unrealized holding gains:

          

Before tax

 $34,303 $1,067 $2,556 

Tax effect

  (13,427) (406) (986)
        

Net of tax

  20,876  661  1,570 
        

Reclassification of net gains included in net income:

          

Before tax

  2,410  12,216  2,110 

Tax effect

  (986) (4,764) (824)
        

Net of tax

  1,424  7,452  1,286 
        

Net unrealized holding gains (losses)

  19,452  (6,791) 284 
        

Unrecognized net pension costs

          

Unrealized holding (losses) gains:

          

Before tax

  (8,860) (3,740) 16,988 

Tax effect

  3,871  1,458  (6,625)
        

Net of tax

  (4,989) (2,282) 10,363 
        

Total other comprehensive income (loss)

  14,463  (9,073) 10,647 
        

Comprehensive income (loss)

 $51,026 $(18,757)$(15,103)
        


 
 Accumulated
Unrealized
Loss on
Securities
Available-
for-Sale
 Unrecognized
Net Pension
Costs
 Total
Accumulated
Other
Comprehensive
Loss
 

Balance at January 1, 2009

 $(2,028)$(16,014)$(18,042)

Cumulative effect of change in accounting for other-than- temporary impairment

  (11,271) -  (11,271)
        

Adjusted balance at January 1, 2009

  (13,299) (16,014) (29,313)

2009 other comprehensive income

  284  10,363  10,647 
        

Balance at December 31, 2009

  (13,015) (5,651) (18,666)

2010 other comprehensive loss

  (6,791) (2,282) (9,073)
        

Balance at December 31, 2010

  (19,806) (7,933) (27,739)

2011 other comprehensive income (loss)

  19,452  (4,989) 14,463 
        

Balance at December 31, 2011

 $(354)$(12,922)$(13,276)
        
           

See accompanying notes to consolidated financial statements.


Table of Contents

FIRST MIDWEST BANCORP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(Amounts in thousands, except per share data)

 
 Common
Shares
Out-
Standing
 Preferred
Stock
 Common
Stock
 Additional
Paid-in
Capital
 Retained
Earnings
 Accumulated
Other
Comprehensive
(Loss)
Income
 Treasury
Stock
 Total 

Balance at January 1, 2009

  48,630 $189,617 $613 $210,698 $837,390 $(18,042)$(311,997)$908,279 

Cumulative effect of change in accounting for other-than- temporary impairment

  -  -  -  -  11,271  (11,271) -  - 
                  

Adjusted beginning balance

  48,630  189,617  613  210,698  848,661  (29,313) (311,997) 908,279 

Comprehensive (loss) income

  -  -  -  -  (25,750) 10,647  -  (15,103)

Common dividends declared ($0.04 per common share)

  -  -  -  -  (2,019) -  -  (2,019)

Preferred dividends declared ($50.00 per preferred share)

  -  -  -  -  (9,650) -  -  (9,650)

Accretion on preferred stock

  -  616  -  -  (616) -  -  - 

Issuance of Common Stock

  5,643  -  57  56,560  -  -  -  56,617 

Share-based compensation expense

  -  -  -  3,516  -  -  -  3,516 

Restricted stock activity

  539  -  -  (18,341) -  -  18,366  25 

Treasury stock purchased for benefit plans

  (19) -  -  (111) -  -  (33) (144)
                  

Balance at December 31, 2009

  54,793  190,233  670  252,322  810,626  (18,666) (293,664) 941,521 

Comprehensive loss

  -  -  -  -  (9,684) (9,073) -  (18,757)

Common dividends declared ($0.04 per common share)

  -  -  -  -  (2,965) -  -  (2,965)

Preferred dividends declared ($50.00 per preferred share)

  -  -  -  -  (9,650) -  -  (9,650)

Accretion on preferred stock

  -  649  -  -  (649) -  -  - 

Issuance of Common Stock

  18,818  -  188  195,847  -  -  -  196,035 

Share-based compensation expense

  -  -  -  5,638  -  -  -  5,638 

Restricted stock activity

  460  -  -  (15,864) -  -  15,624  (240)

Treasury stock issued to benefit plans

  25  -  -  (393) -  -  856  463 
                  

Balance at December 31, 2010

  74,096  190,882  858  437,550  787,678  (27,739) (277,184) 1,112,045 

Comprehensive income

  -  -  -  -  36,563  14,463  -  51,026 

Common dividends declared ($0.04 per common share)

  -  -  -  -  (2,978) -  -  (2,978)

Preferred dividends declared ($44.86 per preferred share)

  -  -  -  -  (8,658) -  -  (8,658)

Accretion on Preferred Shares

  -  2,118  -  -  (2,118) -  -  - 

Redemption of Preferred Shares

  -  (193,000) -  -  -  -  -  (193,000)

Redemption of Warrant

  -  -  -  (910) -  -  -  (910)

Share-based compensation expense

  -  -  -  6,362  -  -  -  6,362 

Restricted stock activity

  335  -  -  (14,895) -  -  13,507  (1,388)

Treasury stock issued to benefit plans

  4  -  -  (106) -  -  194  88 
                  

Balance at December 31, 2011

  74,435 $- $858 $428,001 $810,487 $(13,276)$(263,483)$962,587 
                  
                          

See accompanying notes to consolidated financial statements.


Table of Contents

FIRST MIDWEST BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollar amounts in thousands)

 
 Years ended December 31, 
 
 2011 2010 2009 

Operating Activities

          

Net income (loss)

 $36,563 $(9,684)$(25,750)

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

          

Provision for loan losses

  80,582  147,349  215,672 

Depreciation of premises, furniture, and equipment

  10,995  11,397  10,917 

Net amortization of premium on securities

  10,314  2,404  1,527 

Net gains on securities

  (2,410) (12,216) (2,110)

Gains on FDIC-assisted transactions

  -  (4,303) (13,071)

Gains on early extinguishment of debt

  -  -  (15,258)

Net losses on sales and write-downs of OREO

  9,686  17,113  5,970 

Net losses (gains) on sales of premises, furniture, and equipment

  1,252  (92) (6)

BOLI income

  (2,231) (1,560) (2,263)

Net pension cost

  3,911  872  4,076 

Share-based compensation expense

  6,362  5,638  3,516 

Tax (expense) benefit related to share-based compensation

  (179) 350  581 

Deferred income taxes

  2,160  (15,057) (34,458)

Net amortization of other intangible assets

  3,802  4,279  3,929 

Originations and purchases of mortgage loans held-for-sale

  -  (7,612) - 

Proceeds from sales of mortgage loans held-for-sale

  236  8,531  - 

Net decrease (increase) in trading account securities

  813  (1,046) (1,878)

Net decrease in accrued interest receivable

  127  3,195  10,728 

Net decrease in accrued interest payable

  (633) (1,531) (6,047)

Net decrease (increase) in other assets

  7,674  31,130  (22,945)

Net (decrease) increase in other liabilities

  (1,903) 14,412  (48,589)
        

Net cash provided by operating activities

  167,121  193,569  84,541 
        

Investing Activities

          

Proceeds from maturities, repayments, and calls of securities available-for-sale

  271,511  257,934  314,601 

Proceeds from sales of securities available-for-sale

  188,556  390,217  855,405 

Purchases of securities available-for-sale

  (391,282) (375,342) (187,412)

Proceeds from maturities, repayments, and calls of securities held-to-maturity

  83,113  70,194  80,511 

Purchases of securities held-to-maturity

  (62,251) (62,326) (80,335)

Redemption (purchase) of FHLB and Federal Reserve Bank stock

  3,151  (2,301) - 

Net increase in loans

  (14,297) (23,957) (113,088)

Proceeds from claims on BOLI

  2,588  1,878  2,834 

Proceeds from sales of OREO

  37,731  56,480  19,331 

Proceeds from sales of premises, furniture, and equipment

  5,542  354  24 

Purchases of premises, furniture, and equipment

  (11,018) (22,265) (4,682)

Net cash proceeds received in FDIC-assisted transactions

  -  122,329  28,585 
        

Net cash provided by investing activities

  113,344  413,195  915,774 
        

Financing Activities

          

Net cash proceeds received in acquisition of deposits

  106,499  -  - 

Net (decrease) increase in deposit accounts

  (139,037) 80,076  67,164 

Net (decrease) in borrowed funds

  (98,603) (411,466) (1,022,029)

Proceeds (payments) for the issuance (retirement) of subordinated debt

  114,387  -  (19,400)

Redemption of Preferred Shares and related Warrant

  (193,910) -  - 

Proceeds from the issuance of Common Stock

  -  196,035  - 

Cash dividends paid

  (12,838) (12,422) (12,423)

Restricted stock activity

  (1,256) (401) (379)

Excess tax benefit (expense) related to share-based compensation

  47  (189) (177)
        

Net cash used in financing activities

  (224,711) (148,367) (987,244)
        

Net increase in cash and cash equivalents

  55,754  458,397  13,071 

Cash and cash equivalents at beginning of year

  585,776  127,379  114,308 
        

Cash and cash equivalents at end of year

 $641,530 $585,776 $127,379 
        
           
  Years Ended December 31,
  2014 2013 2012
Operating Activities      
Net income (loss) $69,306
 $79,306
 $(21,054)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:    
Provision for loan and covered loan losses 19,168
 16,257
 158,052
Depreciation of premises, furniture, and equipment 12,224
 11,038
 10,874
Net amortization of premium on securities 8,218
 9,174
 22,433
Net securities (gains) losses (8,097) (34,164) 921
Gains on loan sales (3,771) (4,717) (7,422)
Gain on termination of FHLB forward commitments 
 (7,829) 
Gain on FDIC-assisted transaction 
 
 (3,289)
Net losses on early extinguishment of debt 2,059
 1,034
 558
Net losses on sales and valuation adjustments of OREO 3,325
 3,908
 4,886
Net (gains) losses on sales and valuation adjustments of premises,
  furniture, and equipment
 (3,277) (79) 2,695
BOLI (income) loss (2,873) 11,844
 (1,307)
Net pension (income) cost (959) 2,169
 2,813
Share-based compensation expense 5,926
 5,903
 6,004
Tax (expense) benefit related to share-based compensation (106) (10) 170
Net decrease (increase) in net deferred tax assets 8,851
 33,467
 (29,279)
Amortization of other intangible assets 2,889
 3,278
 3,372
Originations of mortgage loans held-for-sale (97,535) (40,681) 
Proceeds from sales of mortgage loans held-for-sale 96,006
 37,788
 
Net (increase) decrease in trading securities (143) (3,155) 307
Net (increase) decrease in accrued interest receivable and other assets (10,651) 30,696
 10,117
Net increase (decrease) in accrued interest payable and other liabilities 22,367
 (21,859) 8,973
Net cash provided by operating activities 122,927
 133,368
 169,824
Investing Activities      
Proceeds from maturities, repayments, and calls of securities available-for-sale 172,001
 219,458
 362,481
Proceeds from sales of securities available-for-sale 27,805
 78,636
 153,668
Purchases of securities available-for-sale (25,856) (335,442) (588,429)
Proceeds from maturities, repayments, and calls of securities held-to-maturity 4,675
 7,043
 66,215
Purchases of securities held-to-maturity (2,638) (17,070) (48,999)
Net (purchases) redemption of FHLB stock (427) 12,071
 11,918
Proceeds from bulk loan sales 
 
 94,470
Net increase in loans (276,637) (351,616) (272,618)
Premiums paid for BOLI, net of claims (85) 1,394
 1,137
Proceeds from sales of OREO 22,368
 25,797
 50,566
Proceeds from sales of premises, furniture, and equipment 3,906
 1,463
 6,768
Purchases of premises, furniture, and equipment (14,085) (11,030) (8,764)
Cash received from acquisitions, net of cash paid 200,645
 
 
Cash received in FDIC-assisted transactions 
 
 26,980
Net cash provided by (used in) investing activities 111,672
 (369,296) (144,607)
Financing Activities      
Net (decrease) increase in deposit accounts (73,244) 93,846
 120,362
Net (decrease) increase in borrowed funds (1,288) 38,358
 (29,343)
Payments for the retirement of subordinated debt 
 (24,094) (37,033)
(Payment for) proceeds from the termination of FHLB advances and forward
  commitments
 (116,609) 7,829
 
Cash dividends paid (22,568) (7,508) (2,977)
Restricted stock activity (2,781) (1,607) (1,469)
Excess tax benefit (expense) related to share-based compensation 912
 79
 (21)
Net cash (used in) provided by financing activities (215,578) 106,903
 49,519
Net increase (decrease) in cash and cash equivalents 19,021
 (129,025) 74,736
Cash and cash equivalents at beginning of year 587,241
 716,266
 641,530
Cash and cash equivalents at end of year $606,262
 $587,241
 $716,266
       


84




FIRST MIDWEST BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS - (Continued)
(Dollar amounts in thousands)
  Years Ended December 31,
  2014 2013 2012
Supplemental Disclosures of Cash Flow Information:      
Income taxes paid (refunded) $16,375
 $4,945
 $(6,845)
Interest paid to depositors and creditors 23,088
 27,599
 36,036
Dividends declared, but unpaid 6,222
 5,260
 749
Common stock issued for acquisitions, net of issuance costs 38,300
 
 
Non-cash transfers of loans to OREO 18,079
 17,965
 47,628
Non-cash transfers of loans held-for-investment to loans held-for-sale 71,272
 1,925
 93,714
Non-cash transfers of loans held-for-sale to loans held-for-investment 
 
 1,957
Non-cash transfer of an investment from other assets to securities
  available-for-sale
 
 2,787
 
Non-cash transfers of premises, furniture, and equipment to OREO 
 
 1,833
       
See accompanying notes to the consolidated financial statements.



85

Table of Contents




NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Operations – First Midwest Bancorp, Inc. (the "Company") is a bank holding company that was incorporated in Delaware in 1982 and began operations on March 31, 1983. The Company is headquartered in Itasca, Illinois and has operations located primarily located in northern Illinois, principally inthroughout the suburbangreater Chicago metropolitan Chicago area, as well as central and western Illinois, eastern Iowa, and eastern Iowa.northwestern Indiana. The Company operates three wholly owned subsidiaries: First Midwest Bank (the "Bank"), Catalyst Asset Holdings, LLC ("Catalyst"), and Parasol Investment Management, LLC ("Parasol"). The Bank conducts the majority of the Company's operations. Catalyst operates in the same offices of the Bank and manages a portion of the Company's non-performing assets. Parasol conducts its business in one of the Bank's offices and serves in an advisory capacity to certain wealth management accounts with the Bank. For your reference, a glossary of certain terms is presented on pages 3 and 4 of this Form 10-K.

The Company is engaged in commercial and retail banking and offers a comprehensive selection of financial products and services, including lending, depository, wealth management, and other related financial services tailored to the needs of its individual, business, institutional, and governmental customers.

Principles of Consolidation – The accompanying consolidated financial statements include the accountsfinancial 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 accordingly, are not included in the consolidated financial statements.

Basis of Presentation – The accounting and reporting policies of the Company and its subsidiaries conform to U.S. generally accepted accounting principles ("GAAP") and general practice within the banking industry. The Company uses the accrual basis of accounting for financial reporting purposes. Certain reclassifications have beenwere made to prior year amounts to conform to the current year presentation.

In the third quarter 2010,of 2014, the CompanyBank acquired the majority of the assets and assumed the deposits of a former bankliabilities in an FDIC-assisted transaction.two separate transactions. The fair values initially assigned to thethese assets acquired and liabilities assumed were preliminary and subject to refinement after the closingacquisition date of the acquisition as new information related to closingacquisition date fair values became available. During secondthe fourth quarter 2011,of 2014, the CompanyBank obtained specific information (including the completion of appraisals or other valuations) relating to the acquisition-dateacquisition date fair valuevalues of certain assets and liabilities acquired and finalized its purchase price allocation, which required an adjustment to those assets and liabilities and to goodwill. After considering this additional information, the estimated fair value of covered loans decreased $2.9 million, covered OREO decreased $7.3 million, the FDIC indemnification asset increased $6.9 million, and accrued interest payable and other liabilities decreased $8.7 million from that originally reported in the quarter ended September 30, 2010.a retrospective adjustment. These revised estimates resulted in a $5.4 million decrease in goodwill and other intangible assets. In accordance with accounting guidance applicable to business combinations, these adjustments were recognized as if they had happened as of the acquisition date.

date in accordance with accounting guidance applicable to business combinations. See Note 3, "Acquisitions" for additional discussion related to these fair value adjustments.

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.
Segment Disclosures – The Company has one reportable segment. The Company's chief operating decision maker evaluates the operations of the Company using consolidated information for purposes of allocating resources and assessing performance. Therefore, segment disclosures are not required.
The following is a summary of the Company's significant accounting policies adhered to in the preparation of the consolidated financial statements.

policies.

Business Combinations – Business combinations are accounted for under the purchaseacquisition method of accounting. Under the purchase method, net assets of the businessAssets acquired and liabilities assumed are recorded at their estimated fair values as of the date of acquisition, with any excess of the costpurchase price of the acquisition over the fair value of the net tangible and identifiable intangible assets acquired recorded as goodwill. ResultsAlternatively, 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 Consolidated Statements of Income from the effective date of the acquisition.


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Cash and Cash Equivalents – For purposes of the Consolidated Statements of Cash Flows, management has defineddefines cash and cash equivalents to include cash and due from banks, interest-bearing deposits in other banks, and other short-term investments, if any, such as federal funds sold and securities purchased under agreements to resell.

Securities – Securities are classified as held-to-maturity, available-for-sale,trading, or tradingavailable-for-sale at the time of purchase.

Securities held-to-maturityHeld-to-Maturity – Securities classified as held-to-maturity are securities for which management has the positive intent and ability to hold to maturity andmaturity. These securities are stated at cost and adjusted for amortization of premiums and accretion of discounts over the estimated lifelives of the securitysecurities using the effective interest method.


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Trading account securitiesSecurities – TradingThe Company's trading securities held by the Company representconsist of diversified investment securities held in a grantor trust ("rabbi trust") under deferred compensation arrangements in which plan participants may direct amounts earned to be invested in securities other than Company stock. The accounts of the rabbigrantor trust are consolidated with the accounts of the Company in its consolidated financial statements. Trading securities are reported at fair value. TradingNet trading gains (losses) gains, net, represent changes in the fair value of the trading securities portfolio and are included in other noninterest income in the Consolidated Statements of Income. The corresponding deferred compensation obligation is also reported at fair value with unrealized gains and losses recognized as a component of compensation expense. Other than the securities held in the rabbigrantor trust, the Company does not carry any securities for trading purposes.

Securities available-for-saleAvailable-for-Sale – All other securities are classified as available-for-sale. Available-for-sale securitiesSecurities available-for-sale are carried at fair value with unrealized gains and losses, net of related deferred income taxes, recorded in stockholders' equity as a separate component of accumulated other comprehensive loss.

The historical cost of debt securities is adjusted for amortization of premiums and accretion of discounts over the estimated life of the security using the effective interest method. Amortization of premiumpremiums and accretion of discountdiscounts are included in interest income from the related security.

income.

Purchases and sales of securities are recognized on a trade date basis. Realized securities gains or losses are reported in net securities gains net(losses) in the Consolidated Statements of Income. The cost of securities sold is based on the specific identification method. On a quarterly basis, the Company makes an assessment (at the individual security level)individually assesses securities with unrealized losses to determine whether there have beenwere any events or circumstances indicating that a security with an unrealized loss is other-than-temporarily impaired.other-than-temporary impairment ("OTTI") has occurred. In evaluating OTTI, the Company considers many factors, including (i) the severity and duration of the impairment;impairment, (ii) the financial condition and near-term prospects of the issuer, which for debt securities considersincluding external credit ratings and recent downgrades;downgrades for debt securities, (iii) its intent to hold the security for a period of time sufficient for a recovery in value;until its value recovers, and (iv) the likelihood that it will be required to sell the security before a recovery in value, which may be at maturity. Accounting guidance requires that only the credit portion of an OTTI charge be recognized through income with the write-down recorded as a realized loss and included in securities gains, net in the Consolidated Statements of Income. The amount of the impairment related to other factors is recognized in other comprehensive income (loss) unlessIf management intends to sell the security or believes it is more likely than not that it will be required to sell the security prior to full recovery.

recovery, an OTTI charge will be recognized through income as a realized loss and included in net securities gains (losses) in the Consolidated Statements of Income. If management does not expect to sell the security or believes it is not more likely than not that it will be required to sell the security prior to full recovery, the OTTI is separated into the amount related to credit deterioration, which is recognized through income as a realized loss, and the amount resulting from other factors, which is recognized in other comprehensive income (loss).

FHLB and FRB Stock – The Company, as a member of the FHLB and FRB, is required to maintain an investment in the capital stock of the FHLB and FRB. No ready market exists for these stocks, and they have no quoted market values. The stock is redeemable at par by the FRB and FHLB and is, therefore, carried at cost and periodically evaluated for impairment.
Loans – Loans held-for-investment are loans that the Company intends to hold until they are paid in full and are carried at the principal amount outstanding, including certain net deferred loan origination fees. Interest income on loans is accrued based on principal amounts outstanding. Loan origination fees, commitment fees, and certain direct loan origination costs are deferred, and the net amount is amortized as a yield adjustment over the contractual life of the related loans or commitments and included in interest income. Fees related to standby letters of credit are amortized into fee income over the contractual life of the commitment. Other credit-related fees are recognized as fee income when earned. Loans held-for-sale are carried at the lower of aggregate cost or fair value and included in other assets in the Consolidated Statements of Financial Condition. Interest income on
Acquired and Covered Loans – Covered loans is accrued based on principal amounts outstanding. Loanconsist of loans acquired by the Company in FDIC-assisted transactions, the majority of which are covered by loss share agreements with the FDIC (the "FDIC Agreements"), under which the FDIC reimburses the Company for the majority of the losses and lease origination fees, fees for commitmentseligible expenses related to these assets. Acquired loans consist of all other loans that were acquired in business combinations that are expected to be exercised, and certain direct loan origination costs are deferred, and the net amount is amortized over the estimated life of the related loans or commitments as a yield adjustment. Fees related to standby letters of credit, whose ultimate exercise is remote, are amortized into fee income over the estimated life of the commitment. Other credit-related fees are recognized as fee income when earned.

Purchased Impaired Loans – Purchased impaired loans are recorded at their estimated fair values on the respective purchase dates and are accounted for prospectively based on expected cash flows.not covered by FDIC Agreements. No allowance for credit losses is recorded on theseacquired and covered loans at the acquisition date. In determiningdate since business combination accounting requires that they are recorded at fair value.

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 datedate. PCI loans include loans that had evidence of credit deterioration since origination and for which it was probable at acquisition that the Company would not collect all contractually required principal and interest payments. Evidence of credit deterioration was evaluated using various indicators, such as past due and non-accrual status. Other key considerations included past performance of the institutions' credit underwriting standards, completeness and accuracy of credit files, maintenance of risk ratings, and age of appraisals. Leases and revolving loans do not qualify to be accounted for as PCI loans.
The acquisition adjustment related to Non-PCI loans is amortized into interest income over the contractual life of the related loans. As the acquisition adjustment is accreted into income over future periods, an allowance for credit losses will be established as necessary to reflect credit deterioration since the acquisition date.

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PCI loans are accounted for prospectively based on estimates of expected future cash flows. To estimate the fair value, of purchased impaired loans, and in subsequent accounting, the Company generally aggregates purchased consumer loans and certain smaller balance commercial loans into pools of loans with common risk characteristics, such as delinquency status, credit score, and internal risk rating. LargerThe fair values of larger balance commercial loans are usually accounted forestimated on an individual


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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 estimated losses in the portfolio and is equal to the difference between contractually required payments and the expected future cash flows expected to be collecteddetermined at acquisition.

Subsequent to the purchase date, increases in expected future cash flows over those expected at the purchase date are recognized as interest income prospectively. The present value of any decreases in expected future cash flows after the purchase date is recognized by recording a charge-off through the allowance for loan and covered loan losses or providing an allowance for loan and covered loan losses.

90-Days Past Due Loans – The Company’s accrual of interest on loans is discontinued at the time the loan is 90 days past due unless the credit is sufficiently collateralized and in the process of renewal or collection.
Non-accrual loansLoans – Generally, commercialcorporate loans and loans secured by real estate are placed on non-accrual status:status (i) when either principal or interest payments become 90 days or more past due based on contractual terms unless the loancredit is sufficiently collateralized such that full repayment of both principal and interest is expected and is in the process of renewal or collection within a reasonable period; or (ii) when an individual analysis of a borrower'sborrower’s creditworthiness indicateswarrants a credit should be placed ondowngrade to non-accrual status whether or not the loan is 90 days or moreregardless of past due.due status. When a loan is placed on non-accrual status, unpaid interest credited to income in the current year is reversed, and unpaid interest accrued in prior years is charged against the allowance for loan losses. After the loan is placed on non-accrual, all debt service payments are applied to the principal on the loan. Future interest income may only be recorded on a cash basis after recovery of principal is reasonably assured. Non-accrual loans are returned to accrual status when the financial position of the borrower and other relevant factors indicate there is no longer doubt that the Company will collect all principal and interest due.interest.

Commercial loans and loans secured by real estate are generally charged-off when deemed uncollectible. A loss is recorded at that time if the net realizable value can be quantified and itof the underlying collateral is less than the associatedoutstanding principal and interest outstanding.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 generallyusually charged-off in full no later than the end of the month in which the loan becomes 120 days past due.

Generally, purchased impaired


PCI loans are generally considered accruing loans unless reasonable estimates of the timing and amount of expected future cash flows cannot be determined. Those loans wereLoans without reasonable cash flow estimates are classified as non-accrual loans, as of December 31, 2011, and interest income willis not be recognized on those loans until the timing and amount of the expected future cash flows can be reasonably estimated.

determined.

Troubled Debt Restructurings ("TDRs") – TDRs are loans for which the original contractual terms of the loans have been modified and both of the following conditions exist:A restructuring is considered a TDR when (i) the restructuring constitutes a concession (including forgiveness of principal or interest) and (ii) the borrower is experiencing financial difficulties.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 only an insignificant delay or shortfall in the payments to be received.payments. The Company'sCompany’s TDRs are determined on a case-by-case basis in connection with ongoing loan collection processes.basis.

The Company does not accrue interest on any TDRsa 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 both some level of past performance and the future capacity to perform under the modified terms. Generally, six months of consecutive payment performance by the borrower under the restructured terms is required before a TDR is returned to accrual status. However, the period could vary depending uponon the individual facts and circumstances of the loan. An evaluation of the borrower'sborrower’s current creditworthiness is used to assess whether the borrower has theborrower’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. However,For TDRs to be removed from TDR status in accordancethe 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 industry regulation, suchthe modified terms. If the loan was restructured loans continueat below market rates and terms, it continues to be separately reported as restructured until after the calendar yearit is paid in which the restructuring occurred if the loan was restructured at reasonable market rates and terms.

full or charged-off.

Impaired Loans – Impaired loans consist of corporate non-accrual loans and TDRs.

With the exception of loans that were restructured and still accruing interest, a

A loan is considered impaired when it is probable that the Company will be unable tonot collect all contractual principal and interest due according tointerest. With the termsexception of the loan agreement based on current information and events. Loans deemed to beaccruing TDRs, impaired loans are classified as non-accrual and are exclusive of smaller homogeneous loans, such as home equity, 1-4 family mortgages, and


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installment loans. When a loan is designated as impaired, any subsequent principal and interest payments received 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.

Certain impairedImpaired loans with balances under a specified threshold are not individually evaluated for impairment. For all other impaired loans, impairment is measured by comparing the estimated value of the loan to the recorded book value. The value of collateral-dependent loans is based on the loanfair value of the underlying collateral, less costs to sell. The value of other loans is measured based onusing the present value of expected future cash flows discounted at the loan'sloan’s initial effective interest rate, or the fair value of the underlying collateral less costs to sell if repayment of the loan is collateral-dependent. All impaired loans are included in non-performing assets. Purchased credit impaired loans are not reported as impaired loans provided that estimates of the timing and amount of future cash flows can be reasonably determined.

90-Day Past Due Loans – 90 days or more past due loans are loans for which principal or interest payments become three months or more past due, but that still accrue interest. The Company continues to accrue interest if it determines these loans are well secured and in the process of collection within a reasonable time period.

rate.


Allowance for Credit Losses – The allowance for credit losses is comprised of the allowance for loan losses, the allowance for covered loan losses, and the reserve for unfunded commitments, and is maintained by management at a level believed adequate to absorb estimated losses inherent in the existing loan portfolio. Determination of the allowance for credit losses is inherently subjective

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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, based on a migration analysis that uses historical loss experience, consideration of current economic trends, and other factors.

The allowance for loan losses takes into consideration such internal and external qualitative factors as changes in the nature, volume, size and current risk characteristics of the loan portfolio; an assessment of individual problem loans; actual and anticipated loss experience; current economic conditions that affect the borrower's ability to pay; and other pertinent factors. Credit exposures


Loans deemed to be uncollectible are charged-off against the allowance for loan and covered loan losses, while recoveries of amounts previously charged-off are credited to the allowance for loan and covered loan losses. Additions to the allowance for loan and covered loan losses are establishedcharged to expense through the provision for loan losses charged to expense.and covered loan losses. The amount charged to operating expense is dependent uponof provision depends on a number of factors, including historicnet charge-off levels, loan growth, changes in the composition of the loan portfolio, net charge-off levels, and the Company'sCompany’s assessment of the allowance for loan and covered loan losses based on the methodology discussed below.


Allowance for Loan LossesThe allowance for loan losses consists of (i) specific reserves established for probable losses on individual loans for whichwhere the recorded investment in the loan exceeds the value, of the loan, (ii) an allowance based on a loss migration analysis that uses historical credit loss experience for each loan category, and (iii) the impact ofand 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 whereamount. If the internal credit rating is at or below a predetermined classification and other loans that management believes are subject to a higher risk of loss, regardless of internal credit rating. The value of thean impaired loan is measured using the present value of expected future cash flows discounted at the loan's initial effective interest rate or the fair value of the underlying collateral less costs to sell if repayment of the loan is collateral-dependent. If the resulting amount is less than the recorded book value, the Company either establishes a valuation allowance (i.e., a specific reserve) equal to the excess of the book value over the value of the loan as a component of the allowance for loan losses or charges off the amount if it is a confirmed loss.


The general reserve component of the allowance for loan lossesis 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 of loans charged-off for corporate loans. The loss migration analysis is performedupdated quarterly andusing actual loss factors are updated regularly based on actual experience. The lossThis component derived from a migration analysis is then adjusted for management's estimatebased on management’s consideration of losses inherent in the loan portfolio that have yet to be manifested in historical charge-off experience. Management takes into consideration many internal and external qualitative factors, when estimating this adjustment, including:


Changes in the composition of the loan portfolio, and trends in the volume and terms of loans, as well asand trends in delinquent and non-accrual loans that could indicate that historical trends do not reflect current conditions;conditions.

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Changes in credit policies and procedures, includingsuch as underwriting standards and collection, charge-off, and recovery practices not considered elsewhere in estimating credit losses;
practices.
Changes in the experience, ability, and depth of credit management and other relevant staff;
staff.
Changes in the quality of the Company'sCompany’s loan review system and Board oversight;
of Directors oversight.
The existence and effect of any concentration of credit and changes in the level of concentrations, such as market, loan type or risk rating;
rating.
Changes in the value of the underlying collateral for collateral-dependent loans;
loans.
Changes in the national and local economy that affect the collectability of various segments of the portfolio, including the condition of various market segments; and
portfolio.
The effect of other external factors, such as competition and legal and regulatory requirements, on the levelCompany’s loan portfolio.

Allowance for Covered Loan Losses The Company’s allowance for covered loan losses reflects the difference between the carrying value and the discounted expected future cash flows of estimated credit losses in the Company's existing portfolio.

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 covered PCI loans using either a probability of default/loss given default ("PD/LGD") methodology or a specific review methodology. The PD/LGD model is a loss model that estimates expected future cash flows using a probability of default curve and loss given default estimates.


Reserve for Unfunded CommitmentsThe Company also maintains a reserve for unfunded credit commitments, including letters of credit, to provide for the risk of loss inherent in these arrangements. The reserve for unfunded credit commitments is computed based on aestimated using the loss migration analysis similar to that used to determinefrom the allowance for loan losses, taking into considerationadjusted for probabilities of future funding requirements. ThisThe 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 and includes a level of imprecision given the difficulty of identifying all ofassessing the factors impacting loan repayment and estimating the timing and amount of when losses actually occur.losses. While management utilizes its best judgment and information available, the ultimate adequacy of the allowance for credit losses is dependent upondepends on a variety of factors beyond the Company'sCompany’s control, including the performance of its loan portfolio, the economy, changes in interest rates and property values, and the interpretation by regulatory authorities of loan risk classifications. While each component of the allowance for credit losses is determined separately, the entire balance is available for the entire loan portfolio.

classifications by regulatory authorities.

Other Real Estate Owned ("OREO")OREO – OREO consists of properties acquired through foreclosure in partial or total satisfaction of certain loans as a result of borrower defaults.defaulted loans. At initial transfer into OREO, isproperties are recorded at the lower of the recorded investment in the loan(s) for which the property served as collateral or its estimated fair value, less estimated selling costs. Write-downsSubsequently, OREO is carried at the lower of the cost basis or fair value, less estimated selling costs. OREO also includes excess properties that the Company no longer intends to utilize. Those properties are transferred to OREO at the lower of their historical cost, less accumulated depreciation, or fair value, which represents the current appraised value of the properties, less selling costs. OREO write-downs occurring at foreclosurethe

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transfer date are charged against the allowance for loan and covered loan losses. On a periodic basis,Subsequent to the initial transfer, the carrying values of OREO may be adjusted to reflect reductions in value resulting from new appraisals, new list prices, changes in market conditions, or changes in disposition strategies. These valuation adjustments, are included in OREO expense, net in the Consolidated Statements of Income, along with expenses related to maintenance of the properties.

properties, are included in net OREO expense in the Consolidated Statements of Income.

Federal Deposit Insurance Corporation ("FDIC")FDIC Indemnification Asset – MostThe majority of loans and OREO acquired through FDIC-assisted transactions are covered by loss share agreements with the FDIC (the "FDIC Agreements"), wherebyAgreements, under which the FDIC reimburses the Company for the majority of the losses incurred. Accordingly,and eligible expenses related to these assets during the indemnification period. The FDIC indemnification asset represents the fairpresent value of expected future expected reimbursements from the FDIC. Since the indemnified items are covered loans and covered OREO, which are initially measured at fair value, the FDIC indemnification asset is also initially measured at fair value by discounting the expected future cash flows expected to be received from the FDIC. These expected future cash flows are estimated by multiplying estimated losses on purchased impairedcovered PCI loans and covered OREO by the reimbursement rates set forth in the FDIC Agreements.

The balance of the FDIC indemnification asset is adjusted periodically to reflect changes in expectations of discounted estimatedexpected future cash flows. As described above, increasesDecreases in expected cash flows on covered loansestimated reimbursements from the FDIC are recorded prospectively through interest incomeamortization and decreasesincreases in expected cash flows on covered loans are recorded as a charge-off through the allowance for loan losses. These adjustments are recorded net of a corresponding increase or decrease toestimated reimbursements from the FDIC indemnification asset forare recognized by an increase in the covered portioncarrying value of the loan.indemnification asset. Payments from the FDIC for reimbursement of losses are accounted for asresult in a reduction inof the FDIC indemnification asset.

Depreciable Assets – Premises, furniture, equipment, and leasehold improvementsequipment are stated at cost, less accumulated depreciation. Depreciation expense is determined by the straight-line method over the estimated useful lives of the assets. Useful lives range from 3 to 10 years for furniture and equipment and 25 to 40 years for premises. Leasehold improvements are amortized on a straight-line basis over the shorter of the life of the asset or the lease term. Rates of depreciation are generally based on the following useful lives: buildings, 25 to 40 years; building improvements, 3 to 15 years but longer under limited circumstances; and furniture and equipment, 3 to 10 years. Gains on dispositions are included in other noninterest income, and losses on dispositions


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are included in other noninterest expense in the Consolidated Statements of Income. Maintenance and repairs are charged to operating expenses as incurred, while improvements that extend the useful life of assets are capitalized and depreciated over the estimated remaining life.

Long-lived depreciable assets are evaluated periodically for impairment when events or changes in circumstances indicate the carrying amount may not be recoverable. Impairment exists when the undiscounted expected undiscounted future cash flows of a long-lived asset are less than its carrying value. In that event, the Company recognizes a loss for the difference between the carrying amount and the estimated fair value of the asset based on a quoted market price, if applicable, or a discounted cash flow analysis. Impairment losses are recorded in other noninterest expense in the Consolidated Statements of Income.

Bank-Owned Life Insurance ("BOLI")BOLI – BOLI represents life insurance policies on the lives of certain Company directors and officers for which the Company is the sole owner and beneficiary. These policies are recorded as an asset onin the Consolidated Statements of Financial Condition at their CSVcash surrender value ("CSV") or the current amount that could be realized currently.if settled. The change in CSV and insurance proceeds received are recordedincluded as BOLIa component of noninterest income in the Consolidated Statements of Income in noninterest income.Income.

Goodwill and Other Intangible Assets – Goodwill represents the excess of the purchase price of the acquisition over the fair value of the net tangible and intangible assets acquired using the purchaseacquisition method of accounting. Goodwill is not amortized butamortized. Instead, impairment testing is tested at leastconducted annually for impairment or more often if events or circumstances between annual tests indicate that there may be impairment.

Impairment testing is performed using a two-step process. Thequantitative approach. In the first step, of the goodwill impairment testmanagement compares management'sits estimate of the fair value of a reporting unit, (whichwhich is based on a discounted cash flow analysis)analysis, with its carrying amount, including goodwill. If the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is not impaired and the second step of the impairment test is not required. If necessary, the second step of the goodwill impairment test compares the implied fair value of the reporting unit goodwill with the carrying amount of that goodwill. The implied fair value of goodwill is determined in the same manner as the amount of goodwill recognized in a business combination by assigning the fair value of a reporting unit to all of the assets and liabilities of that unit, (includingincluding any other identifiable intangible assets) as if the reporting unit had been acquired in a business combination.assets. An impairment loss would beis recognized if the carrying amount of the reporting unit goodwill exceeds the implied fair value of that goodwill.

Other intangible assets represent purchased assets that also lack physical substance, but can be distinguished from goodwill because of contractual or other legal rights or because the asset is capable of being sold or exchanged either on its own or in combination with a related contract, asset, or liability. Identified intangible assets that have a finite useful life are amortized over that life in a manner that reflects the estimated decline in the economic value of the identified intangible asset. All of the Company's other intangible assets have finite lives and are amortized over varying periods not exceeding 13 years.

These intangible

Intangible assets are reviewed at least annually to determine whether there have beenwere any events or circumstances tothat indicate that the recorded amount is not recoverable from projected undiscounted net operating cash flows. If the projected undiscounted net operating cash flows are less than the carrying amount, a loss is recognized to reduce the carrying amount to fair value and when appropriate, the amortization period ismay also be reduced. Unamortized intangible assets associated with disposed assets are included in the determination of the gain or loss on the sale of the disposed assets.


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Wealth Management – Assets held in a fiduciary or agency capacity for customers are not included in the consolidated financial statements as they are not assets of the Company or its subsidiaries. Fee income is recognized on an accrual basis and is included as a component of noninterest income in the Consolidated Statements of Income.

Derivative Financial Instruments and Hedging Activities – InTo 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


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Condition. Subsequent changes in a derivative'sderivative’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, as well asincluding its risk management objective and strategy for undertaking each hedge transaction.

at inception.

At the hedge'shedge’s inception and at least 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 tointo 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, or the forecasted transaction is no longer probable, any fair value adjustments are included in the gain or loss from the disposition of the hedged item. InIf the case of a forecasted transaction that is no longer probable, the gain or loss is included in earnings immediately.

For effective fair value hedges, changes in the fair value of the derivative instruments, as well as the changes in the fair value of the hedged item, attributable to the hedged risk, are recognized in current 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. The unrealized gain or loss and is reclassified intoto earnings in the same periodwhen the hedged transaction affects earnings (for example, when a hedged item is terminated or redesignated).

The Company uses the dollar-offset method to measure ineffectiveness for its derivatives. 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.

Advertising CostsComprehensive Income (Loss) – All advertising costs incurred byComprehensive income (loss) is the total of reported net income (loss) and other comprehensive income (loss) ("OCI"). OCI includes all other revenues, expenses, gains, and losses that are not reported in net income under GAAP. The Company are expensedincludes the following items, net of tax, in other comprehensive income (loss) in the Consolidated Statements of Comprehensive Income: (i) changes in unrealized gains or losses on securities available-for-sale, (ii) changes in the fair value of derivatives designated as cash flow hedges, and (iii) changes in unrecognized net pension costs related to the Company's pension plan.
Treasury Stock – Treasury stock acquired is recorded at cost and is carried as a reduction of stockholders' equity in the Consolidated Statements of Financial Condition. Treasury stock issued is valued based on the "last in, first out" inventory method. The difference between the consideration received on issuance and the carrying value is charged or credited to additional paid-in capital.
Share-Based Compensation – The Company recognizes share-based compensation expense based on the estimated fair value of the award at the grant or modification date over the period during which an employee is required to provide service in which they are incurred.exchange for such award. Share-based compensation expense is included in salaries and wages in the Consolidated Statements of Income.

Income Taxes – The Company files U.S. federal income tax returns and state income tax returns in the U.S. federal jurisdiction and in Illinois, Indiana, Iowa, and Wisconsin.various states. The provision for income taxes is based on income in the consolidated financial statements, rather than amounts reported on the Company's income tax return.

Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases.basis. Deferred tax assets and liabilities are measured using the enacted tax rates that are expected to apply to taxable income in years in which those temporary differences are expected to be recovered or settled. A valuation allowance is established for any deferred tax asset for which recovery or settlement is not more likely than not. The effect of a change in tax rates on deferred tax assets and liabilities is recognized as income or expense in the period that includes the enactment date.


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Earnings Perper Common Share ("EPS") – EPS is computed using the two-class method. Basic EPS is computed by dividing net income (loss) applicable to common shares by the weighted-average number of common shares outstanding during the applicable period, excluding outstanding participating securities. Participating securities include non-vested restricted stock awards and restricted stock units, which contain nonforfeitable rights to dividends or dividend equivalents. Diluted earnings per common share is computed using the weighted-average number of shares determined for the period. The basic EPSearnings per common share computation excludesplus the dilutive effect of all Common Stock equivalents. Diluted EPS is computed by dividing net income applicable to common shares by the weighted-average number of common shares outstanding plus all potential common shares. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue Common Stock were exercised or converted into Common Stock. The Company's potential common shares represent shares issuable under its long-term incentivestock compensation plans and under the Warrant. Such Common Stock equivalents are computed based onusing the treasury stock method using the average market price for the period.method.

Treasury Stock – Treasury stock acquired is recorded at cost and is carried as a reduction of stockholders' equity in the Consolidated Statements of Financial Condition. Treasury stock issued is valued based on the "last in, first out" inventory method. The difference between the consideration received upon issuance and the carrying value is charged or credited to additional paid-in capital.


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Share-Based Compensation – The Company accounts for share-based compensation using the modified prospective transition method and recognizes share-based compensation expense based on the estimated fair value of the option or award at the date of grant or modification. Share-based compensation expense is included in "salaries and wages" in the Consolidated Statements of Income.

Comprehensive Income (Loss) – Comprehensive income (loss) is the total of reported net income and other comprehensive income (loss) ("OCI"). OCI includes all other revenues, expenses, gains, and losses that are not reported in net income under GAAP. The Company includes the following items, net of tax, in other comprehensive income (loss) in the Consolidated Statements of Comprehensive Income (Loss): (i) changes in unrealized gains or losses on securities available-for-sale, (ii) changes in the fair value of derivatives designated under cash flow hedges (when applicable), and (iii) changes in unrecognized net pension costs related to the Company's pension plan.

Segment Disclosures – An operating segment is a component of a business that (i) engages in business activities to earn revenues and incur expenses; (ii) has operating results that are reviewed regularly by the entity's chief operating decision maker to make decisions about resources to be allocated to the segment and assess its performance; and (iii) has discrete financial information. The Company's chief operating decision maker evaluates the operations of the Company as one operating segment (commercial banking) for purposes of allocating resources and assessing performance. Therefore, segment disclosures are not required. The Company offers the following products and services to external customers: deposits, loans, and wealth management services. Revenues for each of these products and services are disclosed separately in the Consolidated Statements of Income.

2.  RECENT ACCOUNTING PRONOUNCEMENTS

Recently

Adopted Accounting Guidance

Credit Quality and Allowance for Credit Losses Disclosures:Income Taxes: In July 2010,January of 2014, the FASBFinancial Accounting Standards Board ("FASB") issued guidance that requires companiesan entity to provide more information aboutpresent an unrecognized tax benefit, or a portion of an unrecognized tax benefit, as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward. To the extent a net operating loss carryforward, a similar tax loss, or a tax credit risks inherent in their loan and lease portfolios and how management considers those credit risks in determiningcarryforward is not available at the allowance for credit losses. A company is required to disclose its accounting policies,reporting date or, if the methods it uses to determine the componentstax law of the allowance for credit losses, and qualitative and quantitative information about the credit quality of its loan portfolio, such as aging information and credit quality indicators. Both new and existing disclosures are required, either by portfolio segment or class, based on how a company develops its allowance for credit losses and how it manages its credit exposure. The guidance is effective for all financing receivables, including loans and trade accounts receivables. However, short-term trade accounts receivables, receivables measured at fair value or lower of cost or fair value, and debt securities are exempt from these disclosure requirements. The Company adopted the period end disclosure requirements on December 31, 2010, disclosure requirements pertaining to period activity on January 1, 2011, and disclosure requirements related to TDRs on July 1, 2011. These disclosures are presented in Note 1, "Summary of Significant Accounting Policies," and Note 6, "Past Due Loans, Allowance for Credit Losses, and Impaired Loans." As this guidance affected only disclosures, its adoption did not impact the Company's financial position, results of operations, or liquidity.

Clarification to Accounting for Troubled Debt Restructurings:    In April 2011, the FASB issued guidance to clarify the accounting for TDRs. Given the recent economic downturn, many banks have experienced an increase in the number of loan modifications. This new guidance was developed to assist creditors in determining whether a loan modification meets the criteria to be considered a TDR for recording impairment and for disclosure. In evaluating whether a restructuring constitutes a TDR, the amendment specifies that both of the following conditions exist: (i) the restructuring constitutes a concession and (ii) the borrower is experiencing financial difficulties. The Company adopted this guidance effective July 1, 2011, and applied this guidance to restructurings occurring on or after January 1, 2011. The new guidance did not impact the Company's financial position, results of operations, or liquidity.

Statement of Comprehensive Income:    In April 2011, the FASB issued accounting guidance requiring companies to include a statement of comprehensive income as part of its interim and annual financial statements. The new guidance gives companies the option to present net income and comprehensive income either in one continuous statement or in two separate, but consecutive statements. This approach represents a change from previous standards, which allowed companies to report OCI and its components in the statement of shareholder's equity. The guidance also allows companies to present OCI either net of tax with details in the notes or shown gross


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of tax (with tax effects shown parenthetically). This guidance is effective for fiscal years beginning after December 15, 2011, but early adoption is permitted. The Company elected to adopt this guidance in 2011 and presented the disclosure requirements in its new Consolidated Statements of Comprehensive Income. Since the new guidance impacted disclosures only, it did not have an impact on the Company's financial position, results of operations, or liquidity.

Recently Issued Accounting Guidance

Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and International Financial Reporting Standards ("IFRS"): In April 2011, the FASB issued guidance that clarifies the wording used to describe many of the requirements in GAAP for measuring fair value and for disclosing information about fair value measurements. The guidanceapplicable jurisdiction does not extendrequire the entity to use, of fair value accounting, but clarifiesand the wording on how it should be applied to be consistent with IFRS and expands certain disclosure requirements relating to Level 3 fair value measurements. For many of the requirements, the FASBentity does not intend to use, the deferred tax asset for such purpose, the amendments to resultunrecognized tax benefit should be presented in the financial statements as a change in application from current guidance. This guidance is toliability and should not be applied prospectively for interim and annual periods beginning after December 15, 2011. Since the guidance only relates to disclosure, thecombined with deferred tax assets. The adoption of this guidance ison January 1, 2014 did not expected tomaterially impact the Company's financial condition, results of operations, or liquidity.

Recently Issued Accounting Guidance
ReconsiderationReceivables - Troubled Debt Restructurings by Creditors: In January of Effective Control for Repurchase Agreements:    In April 2011,2014, the FASB issued guidance to clarify when an in substance repossession or foreclosure occurs and an entity is considered to have received physical possession of the residential real estate property such that improvesa loan receivable should be derecognized and the accounting for repurchase agreementsreal estate property recognized. Additionally, the guidance requires interim and other similar agreementsannual disclosure of the amount of foreclosed residential real estate property held by the entity and the recorded investment in consumer mortgage loans collateralized by residential real estate property that both entitle and obligate a transferorare in the process of foreclosure according to redeem financial assets before maturity.local requirements of the applicable jurisdiction. The guidance modifies the criteriais effective for determining when these transactions would be recorded as financing agreements as opposed to purchase or sale agreements with a commitment to resell. This is accomplished by removing (i) the criterion requiring the transferor to have the ability to repurchase or redeem the consolidated financial assets on substantially the agreed terms, even in the event of default by the transfereeannual and (ii) the collateral maintenance implementation guidance related to that criterion. This guidance is to be applied prospectively for interim and annual periods beginning after December 15, 2011. The2014 and can be applied retrospectively or prospectively. Management does not expect the adoption of this guidance is not expected towill materially impact the Company's financial condition, results of operations, or liquidity.

Testing Goodwill for Impairment:Reporting Discontinued Operations: In September 2011,April of 2014, the FASB issued new guidance that givesrequires an entity the option to first assess qualitative factors to determine whether the existence of events or circumstances leads toreport a determination that it is more likely than not that the fair valuedisposal of a reporting unit is less than its carrying amount. If, after assessing those events or circumstances,component of an entity determines it is not more likely than not that the fair valueor a group of a reporting unit is less than its carrying amount, then performing the two-step impairment test is not necessary. However, ifcomponents of an entity concludes otherwise, then it is required to performin discontinued operations if the first stepdisposal represents a strategic shift that has (or will have) a major effect on an entity's operations and financial results when the component of the two-step impairment test by calculating the fair value of the reporting unit and comparing the fair value with the carrying amount of the reporting unit. If the carrying amount of a reporting unit exceeds its fair value, then the entity is required to perform the second step of the goodwill impairment test to measure the amount of the impairment loss, if any. Under the amendments in this guidance, an entity hasor group of components of an entity (i) meets the optioncriteria to bypass the qualitative assessmentbe classified as held for any reporting unit in any period and proceed directly to performing the first stepsale, (ii) is disposed of the two-step goodwill impairment test. An entity may resume performing the qualitative assessment in any subsequent period.by sale, or (iii) is disposed of other than by sale. The amendments do not change the current guidance for testing other indefinite lived intangible assets for impairment. The amendments areis effective for annual and interim goodwill impairment tests performed for fiscal yearsreporting periods beginning on or after December 15, 2011. Early adoption is permitted. The2014, and must be applied prospectively. Management does not expect the adoption of this guidance is not expected to have a materialwill materially impact on the Company's financial condition, results of operation,operations, or liquidity.

Revenue from Contracts with Customers: In May of 2014, the FASB issued guidance that requires an entity to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance is effective for annual and interim reporting periods beginning on or after December 15, 2016, and must be applied either retrospectively or using the modified retrospective approach. Management is evaluating the new guidance, but does not expect the adoption of this guidance will materially impact the Company's financial condition, results of operations, or liquidity.
Transfers and Servicing: In June of 2014, the FASB issued guidance that requires repurchase-to-maturity transactions to be accounted for as secured borrowings. The guidance also requires separate accounting for a transfer of a financial asset executed contemporaneously with a repurchase agreement with the same counterparty. If the derecognition criteria are met as outlined in the guidance, the initial transfer will generally be accounted for as a sale and the repurchase agreement will generally be accounted for as a secured borrowing. The guidance is effective for annual and interim reporting periods beginning after December 15, 2014. Management is evaluating the new guidance, but does not expect the adoption of this guidance will materially impact the Company's financial condition, results of operations, or liquidity.
Receivables - Troubled Debt Restructurings by Creditors: In August of 2014, the FASB issued guidance that requires an entity to derecognize a mortgage loan and recognize a separate other receivable upon foreclosure if (i) the loan has a government guarantee that is not separable from the loan before foreclosure, (ii) at the time of foreclosure, the creditor has the intent to convey the real estate property to the guarantor and make a claim on that guarantee, and the creditor has the ability to recover under that claim, and (iii) at the time of foreclosure, any amount of the claim that is determined on the basis of the fair value of the real estate is fixed. The separate other receivable is to be measured based on the amount of the loan balance (principal and interest) expected to be recovered from the guarantor. The guidance is effective for annual and interim reporting periods beginning after December

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15, 2014. Management is evaluating the new guidance, but does not expect the adoption of this guidance will materially impact the Company's financial condition, results of operations, or liquidity.
Disclosure of Uncertainties about an Entity's Ability to Continue as a Going Concern: In August of 2014, the FASB issued guidance that requires management to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity's ability to continue as a going concern within one year after the date that the financial statements are issued. The guidance is effective for the annual period ending after December 15, 2016, and for annual and interim periods thereafter. Management does not expect the adoption of this guidance will materially impact the Company's financial condition, results of operations, or liquidity.

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3.  ACQUISITIONS
2014 Acquisitions
Popular Community Bank
On August 8, 2014, the Bank completed the acquisition of Contentsthe Chicago area banking operations of Banco Popular North America ("Popular"), doing business as Popular Community Bank, which is a subsidiary of Popular, Inc. The acquisition included Popular’s twelve full-service retail banking offices and its small business and middle market commercial lending activities in the Chicago metropolitan area at a purchase price of $19.0 million paid in cash. The Company recorded goodwill of $32.2 million associated with the acquisition.
The assets acquired and liabilities assumed, both intangible and tangible, were recorded at their estimated fair values as of the August 8, 2014 acquisition date and have been accounted for under the acquisition method of accounting. During the fourth quarter of 2014, the Company identified differences in the book and tax basis of certain categories of intangibles which required a retrospective adjustment of $4.7 million to reduce goodwill and increase deferred tax assets, a component of other assets. Other retrospective adjustments may be deemed necessary as the Company continues to finalize the fair values of loans and intangible assets and liabilities. As a result, the fair value adjustments associated with these accounts and goodwill are preliminary and may change.
Great Lakes Financial Resources, Inc.
On December 2, 2014, the Company completed the acquisition of the south suburban Chicago-based Great Lakes Financial Resources, Inc. ("Great Lakes"), the holding company for Great Lakes Bank, National Association. The Company acquired all assets and assumed all liabilities of Great Lakes, which included seven full-service retail banking offices and one drive-up location, at a purchase price of approximately $55.8 million. Consideration consisted of $38.3 million in Company common stock and $17.5 million in cash. The Company recorded goodwill of $10.3 million associated with the acquisition.
The assets acquired and liabilities assumed, both intangible and tangible, were recorded at their estimated fair values as of the December 2, 2014 acquisition date and have been accounted for under the acquisition method of accounting. The Company is finalizing the fair values of the assets and liabilities acquired. As a result, the fair value adjustments associated with these accounts and goodwill are preliminary and may change.

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The following table presents the assets acquired and liabilities assumed, net of the fair value adjustments, in the Popular and Great Lakes transactions as of the acquisition date.
Acquisition Activity
(Dollar amounts in thousands)
  Popular Great Lakes
  August 8, 2014 December 2, 2014
Assets    
Cash and due from banks and
  interest-bearing deposits in other banks
 $161,276
 $78,609
Securities available-for-sale 
 219,279
FHLB and FRB stock 
 1,970
Loans 549,386
 223,169
OREO 
 1,244
Investment in BOLI 
 10,373
Goodwill 32,181
 10,339
Other intangible assets 8,003
 6,192
Premises, furniture, and equipment 4,647
 5,011
Accrued interest receivable and other assets 6,574
 10,059
Total assets $762,067
 $566,245
Liabilities    
Deposits:    
Noninterest-bearing deposits $163,299
 $110,885
Interest-bearing deposits 568,573
 353,424
Total deposits 731,872
 464,309
Intangible liabilities 10,631
 
Borrowed funds 
 29,490
Senior and subordinated debt 
 9,809
Accrued interest payable and other liabilities 564
 6,887
Total liabilities 743,067
 510,495
Consideration Paid    
Common stock (2,440,754 shares issued at $15.737 per share),
  net of $110,000 in issuance costs
 
 38,300
Cash paid 19,000
 17,450
Total consideration paid 19,000
 55,750
  $762,067
 $566,245
National Machine Tool Financial Corporation
On September 26, 2014, the Bank completed the acquisition of National Machine Tool Financial Corporation ("National Machine Tool"), now known as First Midwest Equipment Finance Co., which provides equipment leasing and commercial financing alternatives to traditional bank financing. On the date of acquisition, the Bank acquired approximately $5.9 million in assets, excluding goodwill, which primarily consisted of direct financing leases, lease loans, and other assets, at a purchase price of $3.1 million paid in cash. Goodwill recorded as a result of the acquisition totaled $4.0 million.
The assets acquired and liabilities assumed, both intangible and tangible, were recorded at their estimated fair values as of the September 26, 2014 acquisition date and have been accounted for under the acquisition method of accounting. During the fourth quarter of 2014, the Company obtained specific information relating to the acquisition date fair value of certain acquired assets which required a retrospective adjustment of $572,000 to increase goodwill and reduce other assets. Other retrospective adjustments may be deemed necessary as the Company continues to finalize the fair values of assets and liabilities acquired. As a result, the fair value adjustments associated with these accounts and goodwill are preliminary and may change.
Expenses related to the acquisition and integration of the Popular, Great Lakes, and National Machine Tool transactions totaled $13.9 million during the year ended December 31, 2014, and are reported as a separate component within noninterest expense.

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These acquisitions were not considered material to the Company’s financial statements; therefore, pro forma financial data and related disclosures are not included.
2012 Acquisition
On August 3, 2012, the Company acquired substantially all of the assets of the former Waukegan Savings Bank in an FDIC-assisted transaction generating a pre-tax gain of $3.3 million. The $46.3 million of acquired loans are not subject to FDIC Agreements. The transaction also included $72.7 million in deposits, which were comprised of $41.5 million in core deposits and $31.2 million in time deposits. As a result of the transaction, the Company recorded $781,000 in core deposit intangibles.

3.

4.  SECURITIES

A summary of the Company's securities portfolio by category and maturity is presented in the following table.

tables.

Securities Portfolio
(Dollar amounts in thousands)

 
 December 31, 
 
 2011 2010 
 
  
 Gross Unrealized  
  
 Gross Unrealized  
 
 
 Amortized
Cost
 Fair
Value
 Amortized
Cost
 Fair
Value
 
 
 Gains Losses Gains Losses 

Securities
Available-for-Sale

                         

U.S. agency

 $5,060 $- $(25)$5,035 $18,000 $7 $(121)$17,886 

CMOs

  383,828  2,622  (2,346) 384,104  377,692  4,261  (2,364) 379,589 

Other residential mortgage-backed securities

  81,982  5,732  (23) 87,691  100,780  5,732  (61) 106,451 

Municipal securities

  464,282  26,155  (366) 490,071  512,063  4,728  (12,800) 503,991 

CDOs

  48,759  -  (35,365) 13,394  49,695  -  (34,837) 14,858 

Corporate debt securities

  27,511  2,514  (11) 30,014  29,936  2,409  -  32,345 

Equity securities:

                         

Hedge fund investment

  1,231  385  -  1,616  1,245  438  -  1,683 

Other equity securities

  958  123  -  1,081  889  110  -  999 
                  

Total equity securities

  2,189  508  -  2,697  2,134  548  -  2,682 
                  

Total

 $1,013,611 $37,531 $(38,136)$1,013,006 $1,090,300 $17,685 $(50,183)$1,057,802 
                  

Securities Held-to-Maturity

                         

Municipal
securities

 $60,458 $1,019 $- $61,477 $81,320 $1,205 $- $82,525 
                  

Trading Securities

          $14,469          $15,282 
                        
  As of December 31,
  2014 2013
  
Amortized
Cost
 Gross Unrealized 
Fair
Value
 
Amortized
Cost
 Gross Unrealized Fair
Value
  Gains Losses Gains Losses 
Securities Available-for-Sale              
U.S. agency securities $30,297
 $144
 $(10) $30,431
 $500
 $
 $
 $500
Collateralized mortgage
obligations ("CMOs")
 538,882
 2,256
 (6,982) 534,156
 490,962
 1,427
 (16,621) 475,768
Other mortgage-backed
securities ("MBSs")
 155,443
 4,632
 (310) 159,765
 135,097
 3,349
 (2,282) 136,164
Municipal securities 414,255
 10,583
 (1,018) 423,820
 457,318
 9,673
 (5,598) 461,393
Trust preferred
  collateralized debt
  obligations ("CDOs")
 48,502
 152
 (14,880) 33,774
 46,532
 
 (28,223) 18,309
Corporate debt securities 1,719
 83
 
 1,802
 12,999
 1,930
 
 14,929
Equity securities 3,224
 72
 (35) 3,261
 3,706
 2,046
 (90) 5,662
Total available-
  for-sale securities
 $1,192,322
 $17,922
 $(23,235) $1,187,009
 $1,147,114
 $18,425
 $(52,814) $1,112,725
Securities Held-to-Maturity              
Municipal securities $26,555
 $1,115
 $
 $27,670
 $44,322
 $
 $(935) $43,387
Trading Securities  
  
  
 $17,460
  
  
  
 $17,317


Remaining Contractual Maturity of Securities
(Dollar amounts in thousands)

 
 December 31, 2011 
 
 Available-for-Sale Held-to-Maturity 
 
 Amortized
Cost
 Fair
Value
 Amortized
Cost
 Fair
Value
 

One year or less

 $7,327 $7,232 $4,301 $4,374 

One year to five years

  336,726  332,345  20,582  20,929 

Five years to ten years

  111,698  110,245  13,081  13,302 

After ten years

  89,861  88,692  22,494  22,872 

CMOs

  383,828  384,104  -  - 

Other residential mortgage-backed securities

  81,982  87,691  -  - 

Equity securities

  2,189  2,697  -  - 
          

Total

 $1,013,611 $1,013,006 $60,458 $61,477 
          
  As of December 31, 2014
  Available-for-Sale Held-to-Maturity
  
Amortized
Cost
 
Fair
Value
 
Amortized
Cost
 
Fair
Value
One year or less $67,900
 $67,221
 $3,504
 $3,651
After one year to five years 78,132
 77,351
 8,727
 9,093
After five years to ten years 214,007
 211,868
 5,404
 5,631
After ten years 134,734
 133,387
 8,920
 9,295
Securities that do not have a single contractual maturity date 697,549
 697,182
 
 
Total $1,192,322
 $1,187,009
 $26,555
 $27,670


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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 $592.7$779.4 million at December 31, 20112014 and $808.3$755.3 million at December 31, 2010.2013. No securities held-to-maturity were pledged as of December 31, 20112014 or 2010.

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Excluding securities issued or backed by the U.S. government and its agencies and U.S. government-sponsored enterprises, there were no investments in securities from one issuer that exceeded 10% of total stockholders' equity onas of December 31, 20112014 or 2010.

2013.

The following table presents net realized gains (losses) on securities.
Securities Gains
(Losses)
(Dollar amounts in thousands)

 
 Years ended December 31, 
 
 2011 2010 2009 

Proceeds from sales

 $188,556 $390,217 $855,405 

Gains (losses) on sales of securities:

          

Gross realized gains

 $4,103 $18,444 $26,735 

Gross realized losses

  (757) (1,311) (9)
        

Net realized gains on securities sales

  3,346  17,133  26,726 
        

Non-cash impairment charges:

          

Other-than-temporary securities impairment

  (1,464) (5,364) (48,928)

Portion of other-than-temporary impairment recognized in other comprehensive income (loss)

  528  447  24,312 
        

Net non-cash impairment charges

  (936) (4,917) (24,616)
        

Net realized gains

 $2,410 $12,216 $2,110 
        

Income tax expense on net realized gains

 $986 $4,764 $824 

Trading (losses) gains, net(1)

 $(691)$1,530 $2,542 

Net non-cash impairment charges:

          

CDOs

 $936 $4,664 $24,509 

Whole loan mortgage-backed security included in CMOs

  -  86  - 

Equity securities

  -  167  107 
        

Total

 $936 $4,917 $24,616 
        
  Years Ended December 31,
  2014 2013 2012
Gains (losses) on sales of securities:      
Gross realized gains $8,188
 $34,572
 $3,045
Gross realized losses (63) 
 (297)
Net realized gains on sales of securities 8,125
 34,572
 2,748
Non-cash impairment charges:      
OTTI (28) (408) (3,728)
Portion of OTTI recognized in other comprehensive income (loss) 
 
 59
Net non-cash impairment charges (28) (408) (3,669)
Net realized gains (losses) $8,097
 $34,164
 $(921)
Net trading gains (1)
 $677
 $3,189
 $1,627
Net non-cash impairment charges:      
CMOs $28
 $6
 $1,443
Municipal securities 
 402
 
CDOs 
 
 2,226
Total $28
 $408
 $3,669
(1)
All net trading (losses) gains relate to trading securities still held as of December 31, 2014, 2013, and 2012 and are included in other income in the Consolidated Statements of Income.
Net gains realized on securities sales for the years ended December 31, 2011.

The non-cash impairment charges2014, 2013, and 2012 were $8.1 million, $34.6 million, and $2.7 million, respectively. During 2014, net securities gains consisted of the sale of a non-accrual CDO at a gain of $3.5 million, sales of corporate bonds at gains of $2.0 million, sales of municipal securities at gains of $468,000, and sales of certain other investments at gains of $2.1 million. In addition, four CDOs totaling $2.9 million acquired in the table above primarily relate toGreat Lakes transaction were sold during the fourth quarter of 2014. These securities were recorded at fair value at the acquisition date, therefore, no gain or loss was recognized on the sale. During 2013, the Company sold its investment in an equity security which resulted in a $34.0 million gain.

Accounting guidance requires that the credit portion of an OTTI charges on CDOs that ischarge be recognized in current operations. In deriving the credit component of the impairment on the CDOs, projected cash flows were discounted at the contractual rate ranging from the London Interbank Offered Rate ("LIBOR") plus 125 basis points to LIBOR plus 160 basis points. Fair values are computed by discounting future projected cash flows at higher rates, ranging from LIBOR plus 1,300 basis points to LIBOR plus 1,500 basis points. The higher rates are used to account for other market factors, such as liquidity.through income. If a decline in fair value below carrying value is not attributable to credit lossdeterioration 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 (loss).

Changes in the amount


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The following table presents a rollforward of credit losseslife-to-date OTTI recognized in earnings onrelated to all available-for-sale securities held by the Company for the years ended December 31, 2014, 2013, and 2012. The majority of the beginning and ending balance of OTTI relates to CDOs and other securities are summarized incurrently held by the following table.

Company.

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Changes in Credit LossesOTTI Recognized in Earnings

(Dollar amounts in thousands)

 
 Years Ended December 31, 
 
 2011 2010 2009 

Cumulative amount recognized at beginning of year

 $35,589 $30,839 $6,330 

Credit losses included in earnings(1):

          

Losses recognized on securities that previously had credit losses

  936  4,421  11,797 

Losses recognized on securities that did not previously have credit losses

  -  329  12,712 
        

Cumulative amount recognized at end of year

 $36,525 $35,589 $30,839 
        
  Years Ended December 31,
  2014 2013 2012
Beginning balance $32,422
 $38,803
 $36,525
OTTI included in earnings (1):
      
Losses on securities that previously had OTTI 28
 
 2,278
Losses on securities that did not previously have OTTI 
 408
 1,391
Reduction for securities sales (2)
 (8,570) (6,789) (1,391)
Ending balance $23,880
 $32,422
 $38,803

(1)
Included in net securities gains (losses) in the Consolidated Statements of Income.
(2)
During the year ended December 31, 2014, one CDO with a carrying value of $1.3 million was sold. In addition, one CDO with a carrying value of zero was sold during the year ended December 31, 2013. These CDOs had OTTI of $8.6 million and $6.8 million, respectively, that were previously recognized in earnings.

The following table presents the aggregate amount of unrealized losses and the aggregate related fair values of securities with unrealized losses as of December 31, 20112014 and 2010.

2013.

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
    Less Than 12 Months Greater Than 12 Months Total

As of December 31, 2011

 

U.S. agency security

 2 $- $- $5,035 $25 $5,035 $25 
 
Number of
Securities
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
As of December 31, 2014              
U.S. agency securities 1
 $1,943
 $10
 $
 $
 $1,943
 $10

CMOs

 30 163,819 1,818 12,628 528 176,447 2,346  87
 61,321
 559
 284,327
 6,423
 345,648
 6,982

Other residential mortgage- backed securities

 4 182 17 1,072 6 1,254 23 
Other MBSs 11
 1,113
 1
 39,043
 309
 40,156
 310

Municipal securities

 19 934 2 7,857 364 8,791 366  91
 1,317
 9
 53,987
 1,009
 55,304
 1,018

CDOs

 6 - - 13,394 35,365 13,394 35,365  4
 
 
 22,791
 14,880
 22,791
 14,880

Corporate debt securities

 1 2,157 11 - - 2,157 11 
               
Equity securities 1
 
 
 2,270
 35
 2,270
 35

Total

 62 $167,092 $1,848 $39,986 $36,288 $207,078 $38,136  195
 $65,694
 $579
 $402,418
 $22,656
 $468,112
 $23,235
               

As of December 31, 2010

 

U.S. agency securities

 4 $9,096 $120 $- $1 $9,096 $121 
As of December 31, 2013              

CMOs

 19 131,056 1,727 7,843 637 138,899 2,364  67
 $338,064
 $14,288
 $57,269
 $2,333
 $395,333
 $16,621

Other residential mortgage- backed securities

 5 6,084 51 159 10 6,243 61 
Other MBSs 19
 57,311
 2,281
 356
 1
 57,667
 2,282

Municipal securities

 479 99,537 3,142 166,403 9,658 265,940 12,800  154
 65,370
 3,245
 27,565
 2,353
 92,935
 5,598

CDOs

 6 - - 14,858 34,837 14,858 34,837  6
 
 
 18,309
 28,223
 18,309
 28,223
               
Equity securities 1
 2,168
 90
 
 
 2,168
 90

Total

 513 $245,773 $5,040 $189,263 $45,143 $435,036 $50,183  247
 $462,913
 $19,904
 $103,499
 $32,910
 $566,412
 $52,814
               

Approximately 99%

Substantially all of the Company's CMOs and other mortgage-backed securitiesMBSs 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 isare supported by third-party insurance or some other form of credit enhancement. Management does not believe any individual unrealized loss as of December 31, 20112014 represents OTTI.an OTTI related to credit deterioration. The unrealized losses associated with these securities are not believed to be attributed to credit quality, but rather to changes in interest rates and temporary market movements. In addition, the Company does not intend to sell the securities with unrealized losses, 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 loss on the corporate debt security is not believed to be attributed to credit quality, but rather to changes in interest rates and temporary market movements. The Company does not intend to sell this security before recovery of its amortized cost basis, which may be at maturity.


Table of Contents

The unrealized losses on CDOs as of December 31, 20112014 reflect the market's unfavorable view of structured investment vehicles given the current interest rate and liquidity environment.changes in market activity for these securities. Management does not believe thethese unrealized losses on the CDOs represent OTTI related to credit deterioration. In addition, the Company does not intend to sell the CDOs with unrealized losses within a short period of time, and the Company does not believe it is more likely than not that

97




it will be required to sell them before recovery of their amortized cost basis, which may be at maturity. As of December 31, 2011, the portion of OTTI recognized in accumulated other comprehensive loss (i.e., not related to credit) totaled $35.4 million.

Significant judgment is required to calculate the fair value of the CDOs, all of which are pooled. Generally, fair value determinations are based on several factors regarding current market and economic conditions relating to such securities and the underlying collateral. For these reasons, and due to the illiquidity in the secondary market for these CDOs, the Company estimates the fair value of these securities using discounted cash flow analyses with the assistance of a structured credit valuation firm.

Prepayment assumptions are a key factor in estimating the cash flows of CDOs. Prepayments may occur on the collateral underlying the Company's CDOs based on call options or other factors. Mostdetailed discussion of the collateral underlying the CDOs have a 5-year call option (on the fifth anniversary of issuance, the issuer has the right to call the security at par). In addition, most underlying indentures trigger an issuer call right if a capital treatment event occurs, such as a regulatory change that affects its status as Tier 1 capital (as defined in federal regulations). The Dodd-Frank Act constituted such an event for certain holding companies. Specifically, companies with $15 billion or more in consolidated assets can no longer include hybrid capital instruments, such as trust-preferred securities, in Tier 1 capital beginning January 1, 2013. As of December 31, 2011, the Company assumed a 15% prepayment rate for those banks with greater than $15 billion in assets in year 2 (the start of the phase out period for Tier 1 capital treatment), followed by an annual prepayment rate of 1%.

For additional discussion of thisCDO valuation methodology, refer tosee Note 22, "Fair Value."

Certain Characteristics and Metrics of the CDOs as of December 31, 2011
(Dollar amounts in thousands)

5.  LOANS
 
  
  
  
  
  
  
  
  
  
 Actual
Deferrals and
Defaults as a
% of the
Original
Collateral(1)
 Expected
Deferrals and
Defaults as a
% of the
Remaining
Performing
Collateral(1)
 Excess
Subordination
as a % of the
Remaining
Performing
Collateral(2)
 
 
  
  
  
  
  
 Lowest Credit
Rating Assigned
to the Security
  
  
 
 
  
  
  
  
  
  
 % of Banks/
Insurers
Currently
Performing
 
 
  
  
 Original
Par
 Amortized
Cost
 Fair
Value
 Number
of Banks/
Insurers
 
 
 Number Class Moody's Fitch 
   1 C-1 $17,500 $7,140 $3,000 Ca C  34  73.9%  15.8%  24.5%  0.0% 
   2 C-1  15,000  7,132  1,494 Ca C  47  82.5%  16.1%  23.5%  0.0% 
   3 C-1  15,000  13,069  3,080 Ca C  48  77.4%  9.0%  16.8%  7.2% 
   4 B1  15,000  13,922  3,900 Ca C  35  55.6%  37.3%  32.3%  0.0% 
   5 C  10,000  1,317  303 C C  33  58.9%  45.4%  31.3%  0.0% 
   6 C  6,500  6,179  1,617 Ca C  54  68.4%  24.3%  12.7%  9.8% 
   7(3)A-3L  6,750  -  - N/A N/A  N/A  N/A  N/A  N/A  N/A 
                                
       $85,750 $48,759 $13,394                    
                                

Table of Contents

Credit-Related CDO Impairment Losses
(Dollar amounts in thousands)

Loans Held-for-Investment
 
 Years Ended December 31,  
 
 
 Life-to-
Date
 
Number
 2011 2010 2009 2008 (1) 

1

 $- $- $8,474 $1,886 $10,360 

2

  525  794  6,549  -  7,868 

3

  411  142  1,017  -  1,570 

4

  -  684  394  -  1,078 

5

  -  2,801  5,769  -  8,570 

6

  -  243  -  -  243 

7

  -  -  2,306  4,444  6,750 
            

 $936 $4,664 $24,509 $6,330 $36,439 
            

4.   LOANS

The following table presents the Company's loan portfolioloans held-for-investment by category.

class.

Loan Portfolio
(Dollar amounts in thousands)


 December 31,  As of December 31,

 2011 2010  2014 2013

Commercial and industrial

 $1,458,446 $1,465,903  $2,253,556
 $1,830,638

Agricultural

 243,776 227,756  358,249
 321,702

Commercial real estate:

     

Office, retail, and industrial

 1,299,082 1,203,613  1,478,379
 1,353,685

Multi-family

 288,336 349,862  564,421
 332,873

Residential construction

 105,836 174,690 

Commercial construction

 144,909 164,472 
Construction 204,236
 186,197

Other commercial real estate

 888,146 856,357  887,897
 807,071
     

Total commercial real estate

 2,726,309 2,748,994  3,134,933
 2,679,826
     

Total corporate loans

 4,428,531 4,442,653  5,746,738
 4,832,166
     

Home equity

 416,194 445,243  543,185
 427,020

1-4 family mortgages

 201,099 160,890  291,463
 275,992

Installment loans

 42,289 51,774 
     
Installment 76,032
 44,827

Total consumer loans

 659,582 657,907  910,680
 747,839
     

Total loans, excluding covered loans

 5,088,113 5,100,560  6,657,418
 5,580,005

Covered loans(1)

 260,502 371,729  79,435
 134,355
     

Total loans

 $5,348,615 $5,472,289  $6,736,853
 $5,714,360
     

Deferred loan fees included in total loans

 $7,828 $8,042  $3,922
 $4,656

Overdrawn demand deposits included in total loans

 $2,850 $4,281  3,438
 5,047

Table of Contents

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

The Company primarily lends to smallcommunity-based and mid-sized businesses, commercial real estate customers, and consumers in the markets in which the Company operates.its markets. Within these areas, the Company diversifies its loan portfolio by loan type, industry, and borrower.

It is

Commercial and industrial loans are underwritten after evaluating and understanding the Company's policyborrower's ability to review each prospective credit in orderoperate its business. As part of the underwriting process, the Company examines current and expected future cash flows to determine the appropriatenessability of the borrower to repay its obligation. Commercial and industrial loans are primarily made based on the identified cash flows of the borrower and secondarily on the underlying collateral provided by the borrower. The cash flows of the borrower may not be as expected, and the adequacy of securitycollateral securing these loans may fluctuate in value due to economic or collateral prior to makingother factors. Most commercial and industrial loans are secured by the assets being financed or other business assets, such as accounts receivable or inventory, and may incorporate a loan.personal guarantee. Some short-term loans may be made on an unsecured basis. In the eventcase of loans secured by accounts receivable, the availability of funds for the repayment of these loans substantially depend on the ability of the borrower default,to collect amounts due from its customers.
Agricultural loans are generally provided to meet seasonal production, equipment, and farm real estate borrowing needs of individual and corporate crop and livestock producers. As part of the underwriting process, the Company seeks recoveryexamines expected future cash flows, financial statement stability, and the value of the underlying collateral. Seasonal crop production loans are repaid by the liquidation of the financed crop that is typically covered by crop insurance. Equipment and real estate term loans are repaid through cash flows of the farming operation.
Commercial real estate loans are subject to underwriting standards and processes similar to commercial and industrial loans. The repayment of commercial real estate loans depends on the successful operation of the property securing the loan or the business conducted on the property securing the loan. This category of loans may be more adversely affected by conditions in compliancethe real estate

98




market. Management monitors and evaluates commercial real estate loans based on cash flow, collateral, geography, and risk rating criteria. The mix of properties securing the loans in our commercial real estate portfolio are further classified into owner-occupied and investor categories and are diverse in terms of type and geographic location within the Company's markets.
Construction loans are underwritten utilizing feasibility studies, independent appraisal reviews, sensitivity analyses of absorption and lease rates, and financial analyses of the developers and property owners. Construction loans are generally based on estimates of costs and value associated with state lending lawsthe completed project. Sources of repayment for these loans may be permanent loans from long-term lenders, sales of developed property, or an interim loan commitment until permanent financing is obtained. Generally, construction loans have a higher risk profile than other real estate loans since repayment is impacted by real estate values, interest rate changes, governmental regulation of real property, demand and supply of alternative real estate, the availability of long-term financing, and changes in general economic conditions.
Consumer loans are centrally underwritten using a credit monitoringscoring model developed by the Fair Isaac Corporation ("FICO"). It uses a risk-based system to determine the probability that a borrower may default on financial obligations to the lender. Underwriting standards for home equity loans are heavily influenced by statutory requirements, which include loan-to-value and remediation procedures.

Bookaffordability ratios, risk-based pricing strategies, and documentation requirements. The home equity category consists mainly of revolving lines of credit secured by junior liens on owner-occupied real estate. Loan-to-value ratios on home equity loans and 1-4 family mortgages are based on the current appraised value of the collateral.

The carrying value of loans that were pledged to secure liabilities as of December 31, 2014 and 2013 are presented below.
Carrying Value of Loans Pledged
(Dollar amounts in thousands)


 December 31,  As of December 31

 2011 2010  2014 2013

Loans pledged to secure:

     

Federal Home Loan Bank advances

 $694,944 $573,743 

Federal term auction facilities

 1,971,801 1,968,947 
     
FHLB advances $1,952,736
 $1,632,069
FRB's Discount Window Primary Credit Program 845,974
 766,870

Total

 $2,666,745 $2,542,690  $2,798,710
 $2,398,939
     

5.    COVERED ASSETS

In 2009

Loan Sales
The following table presents loan sales for the years ended December 31, 2014, 2013, and 2010,2012.
Loan Sales
(Dollar amounts in thousands)
  Proceeds Book Value 
Charge-offs (1)
 
Net Gains (2)
Loan sales in 2014        
Mortgage loans $148,680
 $144,909
 $
 $3,771
Non-performing loans 17,750
 21,200
 (3,450) 
Total loan sales in 2014 $166,430
 $166,109
 $(3,450) $3,771
Loan sales in 2013        
Mortgage loans $152,130
 $147,413
 $
 $4,717
Non-performing loans 1,275
 2,835
 (1,560) 
Total loan sales in 2013 $153,405
 $150,248
 $(1,560) $4,717
Loan sales in 2012        
Bulk loan sales $94,470
 $169,577
 $(80,260) $5,153
Mortgage loans 52,595
 50,326
 
 2,269
Non-performing loans 4,200
 6,587
 (2,387) 
Total loan sales in 2012 $151,265
 $226,490
 $(82,647) $7,422

(1)
Amount represents charge-offs to the allowance for loan and covered loan losses at the time the loans were identified for sale.
(2)
The net gains on the bulk loan sales represent gains realized subsequent to the transfer to held-for-sale and are included as a separate component of noninterest income in the Consolidated Statements of Income. Net gains on mortgage loan sales are included in mortgage banking income in the Consolidated Statements of Income.

99




Mortgage Loan Sales
During the year ended December 31, 2014, a gain of $3.8 million was recognized on the sale of $144.9 million of mortgage loans, of which $92.5 million were originated with the intent to sell. For the year ended December 31, 2013, the Company acquiredsold $147.4 million of mortgage loans, resulting in a gain of $4.7 million. The Company retained servicing responsibilities on the majority of mortgages sold and collects servicing fees equal to a percentage of the assetsoutstanding principal balance of the loans being serviced. The Company also retained limited recourse for credit losses on the sold loans. A description of the recourse obligation is presented in Note 21, "Commitments, Guarantees, and assumedContingent Liabilities."
Bulk Loan Sales
During the depositsthird quarter of three financial institutions2012, the Company identified certain non-performing and performing potential problem loans for accelerated disposition through bulk loan sales and transferred them into the held-for-sale category at the lower of the recorded investment or the estimated fair value, which resulted in charge-offs of $80.3 million and a provision for loan and covered loan losses of $62.3 million. The fair value was determined by the estimated bid price of the potential sale. The bulk loan sales were completed in the fourth quarter of 2012, and net gains realized on the sales are included as a separate component of noninterest income in the Consolidated Statements of Income.
6.  ACQUIRED AND COVERED LOANS
Acquired loans consist primarily of loans that were acquired in business combinations that are not covered by the FDIC Agreements. These loans are included in loans, excluding covered loans, in the Consolidated Statements of Financial Condition. Covered loans consist of loans acquired by the Company in multiple FDIC-assisted transactions. Most loans and OREO acquired in thesethose transactions are covered by the FDIC Agreements, whereby the FDIC will reimburse the Company for the majority of the losses incurred on these assets.Agreements. The significant accounting policies related to purchased impairedacquired and covered loans, which are classified as PCI and theirNon-PCI, and the related FDIC indemnification assetsasset are presented in Note 1, "Summary of Significant Accounting Policies."

Effective January 1, 2015, the losses on non-residential mortgage loans and OREO related to one FDIC-assisted transaction will no longer be covered under the FDIC Agreements. These non-residential loans and OREO totaled $10.1 million at December 31, 2014. The losses on residential mortgage loans and OREO will continue to be covered under the FDIC Agreements through December 31, 2019. Losses related to non-residential mortgage loans and OREO in two other FDIC-assisted transactions will no longer be covered under the FDIC Agreements effective on July 1, 2015 and October 1, 2015, and residential mortgage loans and OREO will continue to be covered through June 30, 2020 and September 30, 2020.
The following table presents certain key data related to the Company's FDIC-assisted transactions.

FDIC-Assisted Transactions
PCI and Non-PCI loans as of December 31, 2014 and 2013.

Acquired and Covered Loans
(Dollar amounts in thousands)

 
 First DuPage
Bank
 Peotone Bank
and Trust Company
 Palos Bank and
Trust Company (1)
 

Acquisition date

  October 23, 2009  April 23, 2010  August 13, 2010 

Total assets of acquired institution at acquisition date

 $261,422 $129,447 $484,764 

Bargain-purchase gains

 $13,071 $4,303 $- 

Goodwill

 $- $- $2,591 

Stated loss threshold

 $65,000  N/A $117,000 

Reimbursement rate (2):

          

Before stated loss threshold

  80%  80%  70% 

After stated loss threshold

  95%  N/A  80% 

Table of Contents

Total covered assets as of December 31, 2011 and 2010 were as follows.

Covered Assets
(Dollar amounts in thousands)

  As of December 31,
  2014 2013
  PCI Non-PCI Total PCI Non-PCI Total
Acquired loans $28,712
 $714,836
 $743,548
 $15,608
 $17,024
 $32,632
Covered loans 54,682
 24,753
 79,435
 103,525
 30,830
 134,355
Total acquired and covered loans $83,394
 $739,589
 $822,983
 $119,133
 $47,854
 $166,987
 
 December 31, 
 
 2011 2010 

Home equity lines(1)

 $45,451 $52,980 

Covered impaired loans

  178,025  281,893 

Other covered loans(2)

  37,026  36,856 
      

Total covered loans

  260,502  371,729 

FDIC indemnification asset

  65,609  95,899 

Covered other real estate owned

  23,455  22,370 
      

Total covered assets

 $349,566 $489,998 
      

Covered non-accrual loans

 $19,879 $- 

Covered loans past due 90 days or more and still accruing interest

 $43,347 $84,350 

The loans purchased in the three FDIC-assisted transactions were recorded at their estimated fair values on the respective purchase dates and are accounted for prospectively based on expected cash flows. An allowance for loan losses was not recorded on these loans at the acquisition date. Except for leases and revolving loans, including lines of credit and credit card loans, management determined that a significant portion of the acquired loans ("purchased impaired loans") had evidence of credit deterioration since origination, and it was probable at the date of acquisition that the Company would not collect all contractually required principal and interest payments. Evidence of credit quality deterioration included such factors as past due and non-accrual status. Other key considerations and indicators include the past performance of the troubled institutions' credit underwriting standards, completeness and accuracy of credit files, maintenance of risk ratings, and age of appraisals.

Although some loans were contractually 90 days or more past due at the acquisition date, most of the purchased impaired loans at December 31, 2011 and December 31, 2010 were not classified as non-performing loans since the loans continued to perform substantially in accordance with the Company's expectations of cash flows. Interest income is recognized on all purchased impaired loans through accretion of the difference between the carrying amount of the loans and the expected cash flows.

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 December 31, 2014, 2013, and 2012.
100


Table



A rollforward of Contents

the carrying value of the FDIC indemnification asset for the years ended December 31, 2014, 2013, and 2012 is presented in the following table.

Changes in the FDIC Indemnification Asset

(Dollar amounts in thousands)

 
 Years Ended December 31, 
 
 2011 2010 2009 

Balance at beginning of year

 $95,899 $67,945 $- 

Additions

  -  58,868  67,945 

Accretion (amortization)

  (11,495) (4,596) - 

Expected reimbursements from the FDIC for changes in expected credit losses(1)

  39,096  30,982  - 

Payments received from the FDIC

  (57,891) (57,300) - 
        

Balance at end of year

 $65,609 $95,899 $67,945 
        
  Years Ended December 31,
  2014 2013 2012
Beginning balance $16,585
 $37,051
 $65,609
Amortization (3,315) (2,984) (14,098)
Change in expected reimbursements from the FDIC for changes in
  expected credit losses
 (481) (1,242) 3,338
Payments received from the FDIC (4,337) (16,240) (17,798)
Ending balance $8,452
 $16,585
 $37,051

Changes in the accretable balanceyield for purchased impairedacquired and covered PCI loans were as follows.

Changes in Accretable Yield
(Dollar amounts in thousands)

 
 Years Ended December 31, 
 
 2011 2010 2009 

Balance at beginning of year

 $63,616 $9,298 $- 

Additions

  -  41,592  10,717 

Accretion

  (36,827) (24,804) (1,419)

Reclassifications (to) from non-accretable difference, net(1)

  25,358  37,530  - 
        

Balance at end of year

 $52,147 $63,616 $9,298 
        
  Years Ended December 31,
  2014 2013 2012
Beginning balance $36,792
 $51,498
 $52,147
Additions 3,517
 
 7,224
Accretion (12,535) (15,016) (20,632)
Other (1)
 470
 310
 12,759
Ending balance $28,244
 $36,792
 $51,498

6.


(1)
Increases represent a rise in the expected future cash flows to be collected over the remaining estimated life of the underlying portfolio.

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7.  PAST DUE LOANS, ALLOWANCE FOR CREDIT LOSSES, AND 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 December 31, 20112014 and 2010.2013. The aging is determined without regard to accrual status. The table also presents non-performing loans, consisting of non-accrual loans (most(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.


Table of Contents

Aging Analysis of Past Due Loans and Non-Performing Loans by Class

(Dollar amounts in thousands)


 Aging Analysis (Accruing and Non-accrual)  
 Non-performing Loans 

 Current 30-89 Days
Past Due
 90 Days or
More Past
Due
 Total
Past Due
 Total
Loans
  
 Non-accrual
Loans
 90 Days Past
Due Loans,
Still Accruing
Interest
  Aging Analysis (Accruing and Non-accrual) Non-performing Loans

December 31, 2011

                 
 Current 
30-89 Days
Past Due
 
90 Days or
More Past
Due
 
Total
Past Due
 
Total
Loans
  
Non-accrual
Loans
 90 Days Past Due Loans, Still Accruing Interest
As of December 31, 2014  
  
  
  
  
   
  

Commercial and industrial

 $1,415,165 $13,731 $29,550 $43,281 $1,458,446   $44,152 $4,991  $2,230,947
 $19,505
 $3,104
 $22,609
 $2,253,556
  $22,693
 $205

Agricultural

 242,727 30 1,019 1,049 243,776   1,019 -  355,982
 1,934
 333
 2,267
 358,249
  360
 

Commercial real estate:

                   
  
  
  
  
   
  

Office, retail, and industrial

 1,276,920 2,931 19,231 22,162 1,299,082   30,043 1,040  1,463,724
 2,340
 12,315
 14,655
 1,478,379
  12,939
 76

Multi-family

 281,943 1,121 5,272 6,393 288,336   6,487 -  562,625
 1,261
 535
 1,796
 564,421
  754
 83

Residential construction

 87,606 2,164 16,066 18,230 105,836   18,076 - 

Commercial construction

 129,310 320 15,279 15,599 144,909   23,347 - 
Construction 197,255
 
 6,981
 6,981
 204,236
  6,981
 

Other commercial real estate

 849,066 6,372 32,708 39,080 888,146   51,447 1,707  876,609
 5,412
 5,876
 11,288
 887,897
  6,970
 438
                 

Total commercial real estate

 2,624,845 12,908 88,556 101,464 2,726,309   129,400 2,747  3,100,213
 9,013
 25,707
 34,720
 3,134,933
  27,644
 597
                 

Total corporate loans

 4,282,737 26,669 119,125 145,794 4,428,531   174,571 7,738  5,687,142
 30,452
 29,144
 59,596
 5,746,738
  50,697
 802
                 

Home equity

 402,842 6,112 7,240 13,352 416,194   7,407 1,138  535,587
 3,216
 4,382
 7,598
 543,185
  6,290
 145

1-4 family mortgages

 192,646 3,712 4,741 8,453 201,099   5,322 -  287,892
 2,246
 1,325
 3,571
 291,463
  2,941
 166

Installment loans

 41,288 625 376 1,001 42,289   25 351 
                 
Installment 75,428
 506
 98
 604
 76,032
  43
 60

Total consumer loans

 636,776 10,449 12,357 22,806 659,582   12,754 1,489  898,907
 5,968
 5,805
 11,773
 910,680
  9,274
 371
                 

Total loans, excluding covered loans

 4,919,513 37,118 131,482 168,600 5,088,113   187,325 9,227  6,586,049
 36,420
 34,949
 71,369
 6,657,418
  59,971
 1,173

Covered loans

 195,289 7,853 57,360 65,213 260,502   19,879 43,347  66,331
 2,714
 10,390
 13,104
 79,435
  6,186
 5,002
                 

Total loans

 $5,114,802 $44,971 $188,842 $233,813 $5,348,615   $207,204 $52,574  $6,652,380
 $39,134
 $45,339
 $84,473
 $6,736,853
  $66,157
 $6,175
                 

December 31, 2010

                 
As of December 31, 2013  
  
  
  
  
   
  

Commercial and industrial

 $1,428,841 $7,706 $29,356 $37,062 $1,465,903   $50,088 $1,552  $1,814,660
 $6,872
 $9,106
 $15,978
 $1,830,638
  $11,767
 $393

Agricultural

 225,007 65 2,684 2,749 227,756   2,497 187  321,156
 134
 412
 546
 321,702
  519
 

Commercial real estate:

                   
  
  
  
  
   
  

Office, retail, and industrial

 1,183,952 4,009 15,652 19,661 1,203,613   19,573 -  1,335,027
 2,620
 16,038
 18,658
 1,353,685
  17,076
 1,315

Multi-family

 345,018 2,811 2,033 4,844 349,862   6,203 -  330,960
 318
 1,595
 1,913
 332,873
  1,848
 

Residential construction

 139,499 1,320 33,871 35,191 174,690   52,122 200 

Commercial construction

 140,044 4,000 20,428 24,428 164,472   28,685 - 
Construction 180,083
 23
 6,091
 6,114
 186,197
  6,297
 

Other commercial real estate

 813,333 9,091 33,933 43,024 856,357   40,605 345  795,462
 5,365
 6,244
 11,609
 807,071
  8,153
 258
                 

Total commercial real estate

 2,621,846 21,231 105,917 127,148 2,748,994   147,188 545  2,641,532
 8,326
 29,968
 38,294
 2,679,826
  33,374
 1,573
                 

Total corporate loans

 4,275,694 29,002 137,957 166,959 4,442,653   199,773 2,284  4,777,348
 15,332
 39,486
 54,818
 4,832,166
  45,660
 1,966
                 

Home equity

 431,446 4,715 9,082 13,797 445,243   7,948 1,870  415,791
 4,830
 6,399
 11,229
 427,020
  6,864
 1,102

1-4 family mortgages

 154,999 2,523 3,368 5,891 160,890   3,902 4  268,912
 2,046
 5,034
 7,080
 275,992
  5,198
 548

Installment loans

 50,899 742 133 875 51,774   159 86 
                 
Installment 42,350
 330
 2,147
 2,477
 44,827
  2,076
 92

Total consumer loans

 637,344 7,980 12,583 20,563 657,907   12,009 1,960  727,053
 7,206
 13,580
 20,786
 747,839
  14,138
 1,742
                 

Total loans, excluding covered loans

 4,913,038 36,982 150,540 187,522 5,100,560   211,782 4,244  5,504,401
 22,538
 53,066
 75,604
 5,580,005
  59,798
 3,708

Covered loans

 268,934 18,445 84,350 102,795 371,729   - 84,350  94,211
 2,232
 37,912
 40,144
 134,355
  20,942
 18,081
                 

Total loans

 $5,181,972 $55,427 $234,890 $290,317 $5,472,289   $211,782 $88,594  $5,598,612
 $24,770
 $90,978
 $115,748
 $5,714,360
  $80,740
 $21,789
                 

102



Table of Contents


Allowance for Credit Losses

The Company maintains an allowance for credit losses at a level believeddeemed adequate by management to absorb probable losses inherent in the loan portfolio.

Allowance See Note 1, "Summary of Significant Accounting Policies," for Credit Losses
(Dollar amountsthe accounting policy for the allowance for credit losses. A rollforward of the allowance for credit losses by portfolio segment for the years ended December 31, 2014, 2013, and 2012 is presented in thousands)

the table below.
 
 Years Ended December 31, 
 
 2011 2010 2009 

Balance at beginning of year

 $145,072 $144,808 $93,869 

Loans charged-off

  (111,576) (155,330) (168,038)

Recoveries of loans previously charged-off

  7,884  8,245  3,305 
        

Net loans charged-off

  (103,692) (147,085) (164,733)

Provision for loan losses

  80,582  147,349  215,672 
        

Balance at end of year

 $121,962 $145,072 $144,808 
        

Allowance for loan losses

 $119,462 $142,572 $144,808 

Reserve for unfunded commitments

  2,500  2,500  - 
        

Total allowance for credit losses

 $121,962 $145,072 $144,808 
        

Table of Contents

Allowance for Credit Losses by Portfolio Segment

(Dollar amounts in thousands)

 
 Commercial, Industrial, and Agricultural Office, Retail, and Industrial Multi-Family Residential Construction Other Commercial Real Estate Consumer Covered Loans Total Allowance 

Balance at January 1, 2009

 $22,189 $22,048 $2,680 $32,910 $7,927 $6,115 $- $93,869 

Loans charged-off

  (57,083) (7,869) (3,485) (63,045) (22,033) (14,523) -  (168,038)

Recoveries of loans previously charged-off

  1,899  13  2  403  516  472  -  3,305 
                  

Net loans charged-off

  (55,184) (7,856) (3,483) (62,642) (21,517) (14,051) -  (164,733)

Provision for loan losses

  87,447  5,972  5,358  62,810  34,674  19,411  -  215,672 
                  

Balance at December 31, 2009

  54,452  20,164  4,555  33,078  21,084  11,475  -  144,808 

Loans charged-off

  (37,130) (10,322) (2,788) (55,611) (37,225) (10,640) (1,614) (155,330)

Recoveries of loans previously charged-off

  5,227  612  363  770  494  740  39  8,245 
                  

Net loans charged-off

  (31,903) (9,710) (2,425) (54,841) (36,731) (9,900) (1,575) (147,085)

Provision for loan losses

  26,996  10,304  1,866  49,696  45,516  11,396  1,575  147,349 
                  

Balance at December 31, 2010

  49,545  20,758  3,996  27,933  29,869  12,971  -  145,072 

Loans charged-off

  (32,750) (8,193) (14,584) (13,895) (21,712) (10,531) (9,911) (111,576)

Recoveries of loans previously charged-off

  3,493  79  410  2,830  642  430  -  7,884 
                  

Net loans charged-off

  (29,257) (8,114) (14,174) (11,065) (21,070) (10,101) (9,911) (103,692)

Provision for loan losses

  25,729  3,368  15,245  (2,305) 15,672  11,973  10,900  80,582 
                  

Balance at December 31, 2011

 $46,017 $16,012 $5,067 $14,563 $24,471 $14,843 $989 $121,962 
                  
  Commercial, Industrial, and Agricultural Office, Retail, and Industrial Multi-family Construction Other Commercial Real Estate Consumer Covered Loans Reserve for Unfunded Commitments Total Allowance
As of December 31, 2014                
Beginning balance $30,381
 $10,405
 $2,017
 $6,316
 $10,817
 $13,010
 $12,559
 $1,616
 $87,121
Charge-offs (17,424) (7,345) (943) (1,052) (4,834) (7,574) (1,012) 
 (40,184)
Recoveries 3,800
 497
 87
 166
 1,727
 729
 1,199
 
 8,205
Net charge-offs (13,624) (6,848) (856) (886) (3,107) (6,845) 187
 
 (31,979)
Provision for loan
and covered loan
losses and other
 12,701
 7,435
 1,088
 (3,133) 617
 5,980
 (5,520) 200
 19,368
Ending Balance $29,458
 $10,992
 $2,249
 $2,297
 $8,327
 $12,145
 $7,226
 $1,816
 $74,510
As of December 31, 2013                
Beginning balance $36,761
 $11,432
 $3,575
 $9,223
 $13,531
 $12,862
 $12,062
 $3,366
 $102,812
Charge-offs (12,094) (4,744) (1,029) (1,916) (4,784) (9,414) (4,599) 
 (38,580)
Recoveries 3,797
 228
 584
 1,032
 1,646
 1,071
 24
 
 8,382
Net charge-offs (8,297) (4,516) (445) (884) (3,138) (8,343) (4,575) 
 (30,198)
Provision for loan
and covered loan
losses and other
 1,917
 3,489
 (1,113) (2,023) 424
 8,491
 5,072
 (1,750) 14,507
Ending balance $30,381
 $10,405
 $2,017
 $6,316
 $10,817
 $13,010
 $12,559
 $1,616
 $87,121
As of December 31, 2012                
Beginning balance $46,017
 $16,012
 $5,067
 $17,795
 $19,451
 $14,131
 $989
 $2,500
 $121,962
Charge-offs (64,668) (34,968) (3,361) (27,811) (36,474) (10,910) (4,615) 
 (182,807)
Recoveries 3,393
 577
 275
 451
 125
 784
 
 
 5,605
Net charge-offs (61,275) (34,391) (3,086) (27,360) (36,349) (10,126) (4,615) 
 (177,202)
Provision for loan
and covered loan
losses and other
 52,019
 29,811
 1,594
 18,788
 30,429
 8,857
 15,688
 866
 158,052
Ending balance $36,761
 $11,432
 $3,575
 $9,223
 $13,531
 $12,862
 $12,062
 $3,366
 $102,812


103

Table of Contents

Impaired Loans

A portion of the Company's allowance for credit losses is allocated to loans deemed impaired. Impaired loans consist of corporate non-accrual loans and TDRs. Smaller homogeneous loans, such as home equity, 1-4 family mortgages, and installment loans, are not individually assessed for impairment.

Impaired Loans


(Dollar amounts in thousands)



 
  
 December 31, 
 
  
 2011 2010 

Impaired loans individually evaluated for impairment:

          

Impaired loans with a specific reserve for credit losses(1)

 $76,397 $13,790 

Impaired loans with no specific reserve(2)

  83,090  173,534 
         

Total impaired loans individually evaluated for impairment

  159,487  187,324 

Corporate non-accrual loans not individually evaluated for impairment(3)

  15,084  12,449 
         

Total corporate non-accrual loans

  174,571  199,773 

TDRs, still accruing interest

  17,864  22,371 
         

Total impaired loans

 $192,435 $222,144 
         

Valuation allowance related to impaired loans

 $26,095 $6,343 


 
 Years Ended December 31, 
 
 2011 2010 2009 

Average recorded investment in impaired loans

 $172,314 $203,118 $217,872 

Interest income recognized on impaired loans(4)

 $596 $244 $157 

The table below provides a break-downbreakdown of loans and the related allowance for credit losses by portfolio segment. Loans individually evaluated for impairment include corporate non-accrual loans with the exception of certain loans with balances under a specified threshold.

The present value of any decreases in expected cash flows of covered loans after the purchase date is recognized by recording a charge-off through the allowance for loan losses. Since most covered loans are accounted for as purchased impaired loans and the carrying values of those loans are periodically adjusted for any changes in expected future cash flows, they are not included in the calculation of the allowance for credit losses and are not displayed in this table.


Table of Contents

Loans and Related Allowance for Credit Losses by Portfolio Segment

(Dollar amounts in thousands)


 Loans Allowance For Credit Losses 

 Individually
Evaluated
For
Impairment
 Collectively
Evaluated
For
Impairment
 Total Individually
Evaluated
For
Impairment
 Collectively
Evaluated
For
Impairment
 Total  Loans Allowance for Credit Losses

December 31, 2011

 
 
Individually
Evaluated for
Impairment
 
Collectively
Evaluated for
Impairment
 PCI Total 
Individually
Evaluated for
Impairment
 
Collectively
Evaluated for
Impairment
 PCI Total
As of December 31, 2014                

Commercial, industrial, and agricultural

 $37,385 $1,664,837 $1,702,222 $14,827 $31,190 $46,017  $19,796
 $2,588,141
 $3,868
 $2,611,805
 $2,249
 $27,209
 $
 $29,458

Commercial real estate:

                 

Office, retail, and industrial

 28,216 1,270,866 1,299,082 1,507 14,505 16,012  12,332
 1,458,918
 7,129
 1,478,379
 271
 10,721
 
 10,992

Multi-family

 5,589 282,747 288,336 20 5,047 5,067  939
 561,400
 2,082
 564,421
 
 2,249
 
 2,249

Residential construction

 17,378 88,458 105,836 2,502 12,061 14,563 
Construction 6,671
 195,094
 2,471
 204,236
 
 2,297
 
 2,297

Other commercial real estate

 70,919 962,136 1,033,055 7,239 17,232 24,471  3,266
 880,087
 4,544
 887,897
 11
 8,316
 
 8,327
             

Total commercial real estate

 122,102 2,604,207 2,726,309 11,268 48,845 60,113  23,208
 3,095,499
 16,226
 3,134,933
 282
 23,583
 
 23,865
             

Total corporate loans

 159,487 4,269,044 4,428,531 26,095 80,035 106,130  43,004
 5,683,640
 20,094
 5,746,738
 2,531
 50,792
 
 53,323

Consumer

 - 659,582 659,582 - 14,843 14,843  
 902,062
 8,618
 910,680
 
 11,822
 323
 12,145
             

Total loans, excluding covered loans

 159,487 4,928,626 5,088,113 26,095 94,878 120,973  43,004
 6,585,702
 28,712
 6,657,418
 2,531
 62,614
 323
 65,468

Covered loans(1)

 - 45,451 45,451 - 989 989 
             

Total loans included in the calculation of the allowance for credit losses

 $159,487 $4,974,077 $5,133,564 $26,095 $95,867 $121,962 
             

December 31, 2010

 
Covered loans 
 24,753
 54,682
 79,435
 
 488
 6,738
 7,226
Reserve for unfunded
commitments
 
 
 
 
 
 1,816
 
 1,816
Total loans $43,004
 $6,610,455
 $83,394
 $6,736,853
 $2,531
 $64,918
 $7,061
 $74,510
As of December 31, 2013                

Commercial, industrial, and agricultural

 $43,365 $1,650,294 $1,693,659 $2,650 $46,895 $49,545  $13,178
 $2,137,440
 $1,722
 $2,152,340
 $4,046
 $26,335
 $
 $30,381

Commercial real estate:

                 

Office, retail, and industrial

 18,076 1,185,537 1,203,613 - 20,758 20,758  26,348
 1,327,337
 
 1,353,685
 214
 10,191
 
 10,405

Multi-family

 5,696 344,166 349,862 497 3,499 3,996  1,296
 331,445
 132
 332,873
 18
 1,999
 
 2,017

Residential construction

 51,269 123,421 174,690 - 27,933 27,933 
Construction 5,712
 180,485
 
 186,197
 178
 6,138
 
 6,316

Other commercial real estate

 68,918 951,911 1,020,829 3,196 26,673 29,869  9,298
 793,703
 4,070
 807,071
 704
 10,113
 
 10,817
             

Total commercial real estate

 143,959 2,605,035 2,748,994 3,693 78,863 82,556  42,654
 2,632,970
 4,202
 2,679,826
 1,114
 28,441
 
 29,555
             

Total corporate loans

 187,324 4,255,329 4,442,653 6,343 125,758 132,101  55,832
 4,770,410
 5,924
 4,832,166
 5,160
 54,776
 
 59,936

Consumer

 - 657,907 657,907 - 12,971 12,971  
 738,155
 9,684
 747,839
 
 13,010
 
 13,010
             

Total

 $187,324 $4,913,236 $5,100,560 $6,343 $138,729 $145,072 
             
Total loans, excluding
covered loans
 55,832
 5,508,565
 15,608
 5,580,005
 5,160
 67,786
 
 72,946
Covered loans 
 30,830
 103,525
 134,355
 
 702
 11,857
 12,559
Reserve for unfunded
commitments
 
 
 
 
 
 1,616
 
 1,616
Total loans $55,832
 $5,539,395
 $119,133
 $5,714,360
 $5,160
 $70,104
 $11,857
 $87,121


104

Table of Contents




Loans are analyzed on an individual basis when the internal credit rating is at or below a predetermined classification and the loan exceeds a fixed dollar amount. Individually Evaluated for Impairment
The following table presents loans individually evaluated for impairment by class of loan as of December 31, 20112014 and December 31, 2010.

2013. PCI loans are excluded from this disclosure.

Impaired Loans Individually Evaluated by Class
(Dollar amounts in thousands)


  
  
  
  
  
  
  
 

 December 31, 2011  
 Year Ended December 31, 2011  As of December 31,

 Recorded Investment In  
  
  
  
  
  2014 2013

  
 Allowance
for Credit
Losses
Allocated
  
 Average
Recorded
Investment
Balance
  
  Recorded Investment In      Recorded Investment In    

 Loans with
No Specific
Reserve
 Loans with
a Specific
Reserve
 Unpaid
Principal
Balance
 


 Interest
Income
Recognized(1)
  
Loans with
 No Specific
Reserve
 
Loans
 with
a Specific
Reserve
 
Unpaid
Principal
Balance
 
Specific
Reserve
  
Loans with
No
 Specific
Reserve
 
Loans
 with
a Specific
Reserve
 
Unpaid
Principal
Balance
 
Specific
Reserve

Commercial and industrial

 $10,801 $26,028 $58,591 $14,827   $44,449 $326  $666
 $19,130
 $35,457
 $2,249
  $10,047
 $3,131
 $25,887
 $4,046

Agricultural

 556 - 556 -   1,515 -  
 
 
 
  
 
 
 

Commercial real estate:

                 
  
  
  
   
  
  
  

Office, retail, and industrial

 11,897 16,319 33,785 1,507   33,038 81  9,623
 2,709
 18,340
 271
  23,872
 2,476
 35,868
 214

Multi-family

 5,072 517 11,265 20   13,619 44  939
 
 1,024
 
  1,098
 198
 1,621
 18

Residential construction

 9,718 7,660 33,124 2,502   31,068 69 

Commercial construction

 19,019 3,790 28,534 758   31,445 - 
Construction 6,671
 
 7,731
 
  4,586
 1,126
 10,037
 178

Other commercial real estate

 26,027 22,083 70,868 6,481   17,180 76  2,752
 514
 4,490
 11
  7,553
 1,745
 11,335
 704
               

Total commercial real estate

 71,733 50,369 177,576 11,268   126,350 270  19,985
 3,223
 31,585
 282
  37,109
 5,545
 58,861
 1,114
               

Total impaired loans individually evaluated for impairment

 $83,090 $76,397 $236,723 $26,095   $172,314 $596  $20,651
 $22,353
 $67,042
 $2,531
  $47,156
 $8,676
 $84,748
 $5,160
               


 
  
  
  
  
  
  
  
 
 
 December 31, 2010  
 Year Ended December 31, 2010 
 
 Recorded Investment In  
  
  
  
  
 
 
  
 Allowance
for Credit
Losses
Allocated
  
 Average
Recorded
Investment
Balance
  
 
 
 Loans with
No Specific
Reserve
 Loans with
a Specific
Reserve
 Unpaid
Principal
Balance
  
 Interest
Income
Recognized(1)
 

Commercial and industrial

 $40,715 $2,650 $53,353 $2,650   $37,502 $67 

Agricultural

  2,447  -  2,982  -    2,098  1 

Commercial real estate:

                     

Office, retail, and industrial

  18,076  -  26,193  -    26,517  - 

Multi-family

  4,565  1,131  7,322  497    8,068  - 

Residential construction

  51,269  -  129,698  -    83,189  119 

Commercial construction

  28,685  -  38,404  -    28,709  - 

Other commercial real estate

  27,777  10,009  60,465  3,196    17,035  57 
                

Total commercial real estate

  130,372  11,140  262,082  3,693    163,518  176 
                

Total impaired loans individually evaluated for impairment

 $173,534 $13,790 $318,417 $6,343   $203,118 $244 
                

Table of Contents

TDRs

TDRs

The following table presents the average recorded investment and interest income recognized on impaired loans by class for the years ended December 31, 2014, 2013, and 2012. PCI loans are loans for which the original contractual terms of the loans have been modifiedexcluded from this disclosure.
Average Recorded Investment and both of the following conditions exist: (i) the restructuring constitutes a concession (including forgiveness of principal or interest) and (ii) the borrower is experiencing financial difficulties.Interest Income Recognized on Impaired Loans are not classified as TDRs when the modification is short-term or results in only an insignificant delay or shortfall in the payments to be received. The Company's TDRs are determined on a case-by-case basis in connection with ongoing loan collection processes.

TDRs by Class

(Dollar amounts in thousands)

 
 As of December 31, 2011 As of December 31, 2010 
 
 Accruing(1) Non-accrual(2) Total Accruing(1) Non-accrual(2) Total 

Commercial and industrial

 $1,451 $897 $2,348 $5,456 $17,948 $23,404 

Agricultural

  -  -  -  1,986  -  1,986 

Commercial real estate:

                   

Office, retail, and industrial

  1,742  -  1,742  2,053  -  2,053 

Multi-family

  11,107  1,758  12,865  103  3,090  3,193 

Residential construction

  -  -  -  -  8,323  8,323 

Commercial construction

  -  14,006  14,006  -  -  - 

Other commercial real estate

  227  11,417  11,644  4,831  2,398  7,229 
              

Total commercial real estate

  13,076  27,181  40,257  6,987  13,811  20,798 
              

Total corporate loans

  14,527  28,078  42,605  14,429  31,759  46,188 
              

Home equity

  1,093  471  1,564  2,644  589  3,233 

1-4 family mortgages

  2,089  1,293  3,382  5,298  1,405  6,703 

Installment loans

  155  -  155  -  -  - 
              

Total consumer loans

  3,337  1,764  5,101  7,942  1,994  9,936 
              

Total loans

 $17,864 $29,842 $47,706 $22,371 $33,753 $56,124 
              
  Years Ended December 31,
  2014 2013 2012
  
Average
Recorded
Balance
 
Interest
Income
Recognized (1)
 
Average
Recorded
Balance
 
Interest
Income
Recognized (1)
 Average
Recorded
Balance
 
Interest
Income
Recognized
(1)
Commercial and industrial $16,137
 $371
 $20,925
 $205
 $45,101
 $94
Agricultural 
 
 
 
 1,138
 
Commercial real estate:  
  
  
  
  
  
Office, retail, and industrial 19,003
 245
 24,802
 18
 32,439
 2
Multi-family 1,245
 5
 1,116
 8
 6,226
 
Construction 5,764
 
 5,932
 
 31,202
 1
Other commercial real estate 6,014
 138
 13,141
 31
 35,715
 38
Total commercial real estate 32,026
 388
 44,991
 57
 105,582
 41
Total impaired loans $48,163
 $759
 $65,916
 $262
 $151,821
 $135

(1)
Recorded using the cash basis of accounting.

105

Table of Contents

Loan modifications are generally performed at the request of the individual borrower and may include reduction in interest rates, changes in payments, and maturity date extensions. The following table presents a summary of loans that were restructured during the year ended December 31, 2011.

TDRs Restructured During the Year
(Dollar amounts in thousands)

 
 Year Ended December 31, 2011 
 
 Number of
Loans
 Pre-Modification
Recorded
Investment
 Principal
Charged-off(1)
 Funds
Disbursed
 Interest
and Escrow
Capitalized
 Post-Modification
Recorded
Investment
 

Commercial and industrial

  10 $886 $- $- $7 $893 

Agricultural

  -  -  -  -  -  - 

Commercial real estate:

                 0 

Office, retail and industrial

  3  3,407  -  293  9  3,709 

Multi-family

  1  14,107  (3,000) -  -  11,107 

Residential construction

  -  -  -  -  -  - 

Commercial construction

  1  17,508  -  -  -  17,508 

Other commercial real estate

  1  174  -  -  74  248 
              

Total commercial real estate

  6  35,196  (3,000) 293  83  32,572 
              

Total corporate loans

  16  36,082  (3,000) 293  90  33,465 
              

Home equity

  9  523  -  -  15  538 

1-4 family mortgages

  11  1,440  -  -  79  1,519 

Installment loans

  1  151  -  -  4  155 
              

Total consumer loans

  21  2,114  -  -  98  2,212 
              

Total loans restructured

  37 $38,196 $(3,000)$293 $188 $35,677 
              

TDRs, still accruing interest(2)

  34 $20,446 $(3,000)$293 $111 $17,850 

TDRs included in non-accrual(3)

  3  17,750  -  -  77  17,827 
              

Total

  37 $38,196 $(3,000)$293 $188 $35,677 
              

The specific reserve portion of the allowance for loan losses on TDRs for all segments of loans is determined by estimating the value of the loan. This is determined by discounting the restructured cash flows at the original effective rate of the loan before modification or is based on the fair value of the underlying collateral less costs to sell, if repayment of the loan is collateral-dependent. If the resulting amount is less than the recorded book value, the Company either establishes a valuation allowance (i.e. specific reserve) as a component of the allowance for loan losses or charges off the impaired balance if it determines that such amount is a confirmed loss. As of December 31, 2011, one of the restructured loans had a $94,000 valuation reserve. No restructured loans had valuation reserves as of December 31, 2010.

The allowance for loan losses also includes an allowance based on a loss migration analysis for each loan category for loans that are not individually evaluated for impairment. All loans charged-off, including TDRs charged-off, are factored into this calculation by portfolio segment.


Table of Contents

The following table presents TDRs that had charge-offs during the year ended December 31, 2011. These loans defaulted within twelve months of being restructured, resulting in a principal charge-off during 2011. None of these loans accrued interest during the year ended December 31, 2011.

TDRs That Defaulted Within Twelve Months of Being Restructured


(Dollar amounts in thousands)


 
 Year Ended December 31, 2011 
 
 Number of
Loans
 Pre-Charge-off
Recorded
Investment
 Principal
Charged-off
 Post-Charge-off
Recorded
Investment
 

Commercial and industrial

  7 $1,163 $(552)$611 

Agricultural

  -  -  -  - 

Commercial real estate:

             

Office, retail and industrial

  1  397  (397) - 

Multi-family

  13  4,590  (1,324) 3,266 

Residential construction

  4  4,295  (2,106) 2,189 

Commercial construction

  1  17,508  (3,502) 14,006 

Other commercial real estate

  2  823  (435) 388 
          

Total commercial real estate

  21  27,613  (7,764) 19,849 
          

Total corporate loans

  28  28,776  (8,316) 20,460 
          

Home equity

  6  430  (333) 97 

1-4 family mortgages

  4  482  (241) 241 

Installment loans

  -  -  -  - 
          

Total consumer loans

  10  912  (574) 338 
          

Total TDRs with charge-offs

  38 $29,688 $(8,890)$20,798 
          

TDRs, still accruing interest

  - $- $- $- 

TDRs included in non-accrual

  38  29,688  (8,890) 20,798 
          

Total

  38 $29,688 $(8,890)$20,798 
          

There were no commitments to lend additional funds to borrowers with TDRs as of December 31, 2011.

Credit Quality Indicators

Corporate loans and commitments are assessed for credit risk and assigned ratings based on various characteristics, such as the borrower's cash flow, leverage, collateral, management characteristics, and other factors.collateral. Ratings for commercial credits are reviewed periodically. Consumer loans are assessed forThe following tables present credit quality based on the delinquency status of the loan. The assessment ofindicators by class for corporate and consumer loans, is completed at the endexcluding covered loans, as of each reporting period.

December 31, 2014 and 2013.

Table of Contents

Corporate Credit Quality Indicators by Class, Excluding Covered Loans

(Dollar amounts in thousands)
  Pass 
Special
Mention
(1)(4)
 
Substandard (2)(4)
 
Non-Accrual (3)
 Total
As of December 31, 2014          
Commercial and industrial $2,115,170
 $84,615
 $31,078
 $22,693
 $2,253,556
Agricultural 357,595
 294
 
 360
 358,249
Commercial real estate:          
Office, retail, and industrial 1,393,885
 38,891
 32,664
 12,939
 1,478,379
Multi-family 553,255
 6,363
 4,049
 754
 564,421
Construction 178,992
 5,776
 12,487
 6,981
 204,236
Other commercial real estate 829,003
 32,517
 19,407
 6,970
 887,897
Total commercial real estate 2,955,135
 83,547
 68,607
 27,644
 3,134,933
Total corporate loans $5,427,900
 $168,456
 $99,685
 $50,697
 $5,746,738
As of December 31, 2013          
Commercial and industrial $1,780,194
 $23,806
 $14,871
 $11,767
 $1,830,638
Agricultural 320,839
 344
 
 519
 321,702
Commercial real estate:          
Office, retail, and industrial 1,284,394
 28,677
 23,538
 17,076
 1,353,685
Multi-family 326,901
 3,214
 910
 1,848
 332,873
Construction 153,949
 8,309
 17,642
 6,297
 186,197
Other commercial real estate 761,465
 14,877
 22,576
 8,153
 807,071
Total commercial real estate 2,526,709
 55,077
 64,666
 33,374
 2,679,826
Total corporate loans $4,627,742
 $79,227
 $79,537
 $45,660
 $4,832,166

(1)
Loans categorized as special mention exhibit potential weaknesses that require the close attention of management since these potential weaknesses may result in the deterioration of repayment prospects in the future.
(2)
Loans categorized as substandard exhibit a well-defined weakness or weaknesses that may jeopardize the liquidation of the debt. These loans continue to accrue interest because they are well secured and collection of principal and interest is expected within a reasonable time.
(3)
Loans categorized as non-accrual exhibit a well-defined weakness or weaknesses that may jeopardize the liquidation of the debt or result in a loss if the deficiencies are not corrected.
(4)
Total special mention and substandard loans includes accruing TDRs of $1.8 million as of December 31, 2014 and $2.8 million as of December 31, 2013.


106





Consumer Credit Quality Indicators by Class, Excluding Covered Loans
(Dollar amounts in thousands)
  Performing Non-accrual Total
As of December 31, 2014      
Home equity $536,895
 $6,290
 $543,185
1-4 family mortgages 288,522
 2,941
 291,463
Installment 75,989
 43
 76,032
Total consumer loans $901,406
 $9,274
 $910,680
As of December 31, 2013      
Home equity $420,156
 $6,864
 $427,020
1-4 family mortgages 270,794
 5,198
 275,992
Installment 42,751
 2,076
 44,827
Total consumer loans $733,701
 $14,138
 $747,839
TDRs
TDRs are generally performed at the request of the individual borrower and may include forgiveness of principal, reduction in interest rates, changes in payments, and maturity date extensions. The table below presents TDRs by class as of December 31, 2014 and 2013. See Note 1, "Summary of Significant Accounting Policies," for the accounting policy for TDRs.
TDRs by Class
(Dollar amounts in thousands)
  As of December 31,
  2014 2013
  Accruing 
Non-accrual (1)
 Total Accruing 
Non-accrual (1)
 Total
Commercial and industrial $269
 $18,799
 $19,068
 $6,538
 $2,121
 $8,659
Agricultural 
 
 
 
 
 
Commercial real estate:            
Office, retail, and industrial 586
 
 586
 10,271
 
 10,271
Multi-family 887
 232
 1,119
 1,038
 253
 1,291
Construction 
 
 
 
 
 
Other commercial real estate 433
 183
 616
 4,326
 291
 4,617
Total commercial real estate 1,906
 415
 2,321
 15,635

544
 16,179
Total corporate loans 2,175
 19,214
 21,389
 22,173
 2,665
 24,838
Home equity 651
 506
 1,157
 787
 512
 1,299
1-4 family mortgages 878
 184
 1,062
 810
 906
 1,716
Installment 
 
 
 
 
 
Total consumer loans 1,529
 690
 2,219
 1,597
 1,418
 3,015
Total loans $3,704
 $19,904
 $23,608
 $23,770
 $4,083
 $27,853

(1)
These TDRs are included in non-accrual loans in the preceding tables.

TDRs are included in the calculation of the allowance for credit losses in the same manner as impaired loans. There were $1.8 million in specific reserves related to TDRs as of December 31, 2014, and there were $2.0 million in specific reserves related to TDRs as of December 31, 2013.

107




The following table presents a summary of loans that were restructured during the years ended December 31, 2014, 2013, and 2012.
Loans Restructured During the Period
(Dollar amounts in thousands)
  
Number
of
Loans
 
Pre-Modification
Recorded
Investment
 
Funds
Disbursed
 
Interest
and Escrow
Capitalized
 Charge-offs 
Post-Modification
Recorded
Investment
Year Ended December 31, 2014            
Commercial and industrial 7
 $23,852
 $
 $
 $
 $23,852
Office, retail, and industrial 1
 417
 
 
 
 417
Multi-family 1
 275
 
 
 
 275
Home equity 1
 75
 
 
 
 75
Total TDRs restructured during the period 10
 $24,619
 $
 $
 $
 $24,619
Year Ended December 31, 2013            
Commercial and industrial 7
 $14,439
 $
 $2
 $
 $14,441
Office, retail, and industrial 6
 2,275
 30
 
 
 2,305
Multi-family 5
 1,274
 
 57
 
 1,331
Construction 2
 508
 
 
 
 508
Other commercial real estate 5
 526
 
 
 
 526
Home equity 13
 1,189
 
 
 
 1,189
1-4 family mortgages 1
 132
 
 4
 
 136
Total TDRs restructured during the period 39
 $20,343
 $30
 $63
 $
 $20,436
Year Ended December 31, 2012            
Commercial and industrial 5
 $3,277
 $
 $
 $170
 $3,107
Office, retail, and industrial 2
 2,416
 
 
 
 2,416
Other commercial real estate 5
 1,070
 
 
 125
 945
Home equity 1
 19
 
 
 
 19
1-4 family mortgages 4
 563
 
 4
 
 567
Total TDRs restructured during the period 17
 $7,345
 $
 $4
 $295
 $7,054
Accruing TDRs that do not perform in accordance with their modified terms are transferred to non-accrual. The following table presents TDRs that had payment defaults during the years ended December 31, 2014, 2013, and 2012 where the default occurred within twelve months of the restructure date.
TDRs That Defaulted Within Twelve Months of the Restructured Date
(Dollar amounts in thousands)
  Years Ended December 31,
  2014 2013 2012
  
Number
of
Loans
 
Recorded
Investment
 
Number
of
Loans
 
Recorded
Investment
 
Number
of
Loans
 
Recorded
Investment
Commercial and industrial 2
 $125
 1
 $350
 
 $
Office, retail, and industrial 
 
 
 
 2
 837
Other commercial real estate 
 
 3
 354
 2
 717
Home equity 1
 77
 
 
 
 
1-4 family mortgages 
 
 
 
 1
 62
Total 3
 $202
 4
 $704
 5
 $1,616

108





A rollforward of the carrying value of TDRs for the years ended December 31, 2014, 2013, and 2012 is presented in the following table.

TDR Rollforward
(Dollar amounts in thousands)

 
 Pass Special
Mention(1)
 Substandard(2) Non-accrual(3) Total 

December 31, 2011

                

Commercial and industrial

 $1,308,812 $57,866 $47,616 $44,152 $1,458,446 

Agricultural

  232,270  10,487  -  1,019  243,776 

Commercial real estate:

                

Office, retail, and industrial

  1,147,026  78,578  43,435  30,043  1,299,082 

Multi-family

  275,031  5,803  1,015  6,487  288,336 

Residential construction

  48,806  27,198  11,756  18,076  105,836 

Commercial construction

  92,568  23,587  5,407  23,347  144,909 

Other commercial real estate

  746,213  73,058  17,428  51,447  888,146 
            

Total commercial real estate

  2,309,644  208,224  79,041  129,400  2,726,309 
            

Total corporate loans

 $3,850,726 $276,577 $126,657 $174,571 $4,428,531 
            

December 31, 2010

                

Commercial and industrial

 $1,303,142 $83,259 $29,414 $50,088 $1,465,903 

Agricultural

  209,317  15,667  275  2,497  227,756 

Commercial real estate:

                

Office, retail, and industrial

  1,026,124  123,800  34,116  19,573  1,203,613 

Multi-family

  307,845  20,643  15,171  6,203  349,862 

Residential construction

  57,209  35,950  29,409  52,122  174,690 

Commercial construction

  85,305  35,750  14,732  28,685  164,472 

Other commercial real estate

  697,971  89,247  28,534  40,605  856,357 
            

Total commercial real estate

  2,174,454  305,390  121,962  147,188  2,748,994 
            

Total corporate loans

 $3,686,913 $404,316 $151,651 $199,773 $4,442,653 
            


  Years Ended December 31,
  2014 2013 2012
Accruing      
Beginning balance $23,770
 $6,867
 $17,864
Additions 804
 4,847
 2,504
Net payments (1,440) (723) (205)
Returned to performing status (20,656) (5,529) (16,619)
Net transfers from non-accrual 1,226
 18,308
 3,323
Ending balance 3,704
 23,770
 6,867
Non-accrual      
Beginning balance 4,083
 10,924
 29,842
Additions 23,815
 15,589
 4,550
Net advances (payments) 1,991
 (1,359) (1,761)
Charge-offs (8,457) (1,880) (10,003)
Transfers to OREO (302) (77) (6,778)
Loans sold 
 (806) (1,603)
Net transfers to accruing (1,226) (18,308) (3,323)
Ending balance 19,904
 4,083
 10,924
Total TDRs $23,608
 $27,853
 $17,791
 
 Performing Non-accrual Total 

December 31, 2011

          

Home equity

 $408,787 $7,407 $416,194 

1-4 family mortgages

  195,777  5,322  201,099 

Installment loans

  42,264  25  42,289 
        

Total consumer loans

 $646,828 $12,754 $659,582 
        

December 31, 2010

          

Home equity

 $437,295 $7,948 $445,243 

1-4 family mortgages

  156,988  3,902  160,890 

Installment loans

  51,615  159  51,774 
        

Total consumer loans

 $645,898 $12,009 $657,907 
        

    (1)
    Loans categorized as special mention exhibit potential weaknesses that require the close attention of management. If left uncorrected, these potential weaknesses may resultFor TDRs to be removed from TDR status in the deteriorationcalendar year after the restructuring, the loans must (i) have an interest rate and terms that reflect market conditions at the time of repayment prospectsrestructuring, and (ii) be in compliance with the modified terms. TDRs that were returned to performing status totaled $20.7 million, $5.5 million and $16.6 million for the years ended December 31, 2014, 2013, and 2012, respectively. Loans that were not restructured at some future date.
    (2)
    Loans categorized as substandard continue to accrue interest, but exhibit a well-defined weakness or weaknessesmarket rates and terms, that may jeopardize the liquidation of the debt. The loans continue to accrue interest because they are well secured and collection of principal and interest is expected within a reasonable time.
    (3)
    Loans categorized as non-accrual exhibit a well-defined weakness or weaknesses that may jeopardize the liquidation of the debt and are characterized by the distinct possibility that the Company could sustain some loss if the deficiencies are not corrected. These loans have been placed on non-accrual status.

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Commercial and industrial loans are underwritten after evaluating and understandingin compliance with the borrower's ability to operate profitably and prudently expand its business. Underwriting standards are designed to ensure repayment of loans and mitigate loss exposure. As part ofmodified terms, or for which there is a concern about the underwriting process, the Company examines current and projected cash flows to determine thefuture ability of the borrower to repay his obligationmeet its obligations under the modified terms, continue to be separately reported as agreed. Commercialrestructured until paid in full or charged-off.

There were $666,000 and industrial loans are primarily made based on the identified cash flows$180,000 in commitments to lend additional funds to borrowers with TDRs as of the borrowerDecember 31, 2014 and secondarily on the underlying collateral provided by the borrower. The cash flows of the borrower, however, may not be as expected, and the collateral securing these loans may fluctuate in value. Most commercial and industrial loans are secured by the assets being financed or other business assets, such as accounts receivable or inventory, and usually incorporate a personal guarantee. However, some short-term loans may be made on an unsecured basis. In the case of loans secured by accounts receivable, the availability of funds for the repayment of these loans may be substantially dependent upon the ability of the borrower to collect amounts due from its customers.

Commercial real estate loans are subject to underwriting standards and processes similar to commercial and industrial loans, in addition to those standards and processes specific to real estate loans. Except for construction loans, these loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate. Commercial real estate lending typically involves higher loan principal amounts, and the repayment of these loans is largely dependent upon the successful operation of the property securing the loan or the business conducted on the property securing the loan. Commercial real estate loans may be more adversely affected by conditions in the real estate market or in the general economy. The properties securing the Company's commercial real estate portfolio are diverse in terms of type and geographic location within the greater suburban metropolitan Chicago market and contiguous markets. Management monitors and evaluates commercial real estate loans based on cash flow, collateral, geography, and risk grade criteria.

Construction loans are underwritten utilizing feasibility studies, independent appraisal reviews, sensitivity analyses of absorption and lease rates, and financial analyses of the developers and property owners. Construction loans are generally based upon estimates of costs and value associated with the completed project. Construction loans often involve the disbursement of substantial funds with repayment primarily dependent upon the success of the completed project. Sources of repayment for these types of loans may be permanent loans from long-term lenders, sales of developed property, or an interim loan commitment until permanent financing is obtained. Generally, these loans have a higher risk profile than other real estate loans due to their repayment being sensitive to real estate values, interest rate changes, governmental regulation of real property, demand and supply of alternative real estate, the availability of long-term financing, and changes in general economic conditions.

Consumer loans are centrally underwritten utilizing the FICO credit scoring. This is a credit score developed by Fair Isaac Corporation that is used by many mortgage lenders. It uses a risk-based system to determine the probability that a borrower may default on financial obligations to the lender. Underwriting standards for home equity loans are heavily influenced by statutory requirements, which include, but are not limited to, loan-to-value and affordability ratios, risk-based pricing strategies, and documentation requirements.

2013, respectively.

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7.



8.  PREMISES, FURNITURE, AND EQUIPMENT

The following table summarizes the Company's premises, furniture, and equipment by category.

Premises, Furniture, and Equipment
(Dollar amounts in thousands)

 
 December 31, 
 
 2011 2010 

Land

 $50,895 $48,506 

Premises

  147,065  158,889 

Furniture and equipment

  72,279  76,734 
      

Total cost

  270,239  284,129 

Accumulated depreciation

  (143,195) (143,222)
      

Net book value of premises, furniture, and equipment held-for-investment

  127,044  140,907 

Assets held-for-sale

  7,933  - 
      

Total premises, furniture, and equipment

 $134,977 $140,907 
      


  As of December 31,
  2014 2013
Land $51,104
 $48,590
Premises 148,963
 139,336
Furniture and equipment 85,489
 81,002
Total cost 285,556
 268,928
Accumulated depreciation (156,473) (152,751)
Net book value of premises, furniture, and equipment 129,083
 116,177
Assets held-for-sale 2,026
 4,027
Total premises, furniture, and equipment $131,109
 $120,204
 
 Years Ended December 31, 
 
 2011 2010 2009 

Depreciation expense on premises, furniture, and equipment

 $10,995 $11,397 $10,917 

Depreciation on premises, furniture, and equipment totaled $12.2 million in 2014, $11.0 million in 2013, and $10.9 million in 2012.
Operating Leases

As of December 31, 2011,2014, the Company was obligated to utilize certain premises and equipment under certain non-cancelable operating leases, for premises and equipment, which expire at various dates through the year 2024.ended December 31, 2030. Many of these leases contain renewal options and certain leases provide options to purchase the leased property during or at the expiration of the lease period at specific prices. Some leases contain escalation clauses calling for rentals to be adjusted for increased real estate taxes and other operating expenses or proportionately adjusted for increases in consumer or other price indices. The following summary reflects the future minimum rental payments by year required under operating leases that have initial or remaining non-cancelable lease terms in excess of one year as of December 31, 2011.

2014.

Future Minimum Operating Leases
Lease Payments
(Dollar amounts in thousands)

 
 Total 

Year ending December 31,

    

2012

 $3,627 

2013

  3,858 

2014

  2,441 

2015

  2,214 

2016

  2,184 

2017 and thereafter

  5,552 
    

Total minimum lease payments

 $19,876 
    


  Total
Year ending December 31,  
2015 $5,071
2016 4,697
2017 4,592
2018 3,873
2019 2,082
2020 and thereafter 13,031
Total minimum lease payments $33,346
 
 Years Ended December 31, 
 
 2011 2010 2009 

Rental expense charged to operations(1)

 $4,193 $3,244 $3,314 

Rental income from premises leased to others(2)

 $1,136 $1,144 $533 

Financial Condition.


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The following table presents the remaining scheduled accretion of Contentsthe intangible liability by year.
Scheduled Accretion of Operating Lease Intangible
(Dollar amounts in thousands)
  Total
Year ending December 31,  
2015 $1,144
2016 1,144
2017 1,144
2018 900
2019 651
2020 and thereafter 5,195
Total accretion $10,178

The following table presents net operating lease expense for the years ended December 31, 2014, 2013, and 2012.
Net Operating Lease Expense
(Dollar amounts in thousands)
  Years Ended December 31,
  2014 2013 2012
Lease expense charged to operations (1)
 $4,216
 $3,123
 $3,379
Rental income from premises leased to others (2)
 541
 531
 931
Net operating lease expense $3,675
 $2,592
 $2,448

(1)
Includes amounts paid under short-term cancelable leases and included in net occupancy and equipment expense in the Consolidated Statements of Income. As of December 31, 2014, lease expense is net of $453,000 in accretion related to the intangible liability.
(2)
Included as a reduction to net occupancy and equipment expense in the Consolidated Statements of Income.

8.

9.  GOODWILL AND OTHER INTANGIBLE ASSETS

The Company's annual goodwill impairment test was performed as of October 1, 2014. It was determined that no impairment existed as of that date. Goodwill is tested for impairment at the reporting unit level. All of our goodwill is allocated to First Midwest Bancorp, Inc., which is the Company's only applicable reporting unit for purposes of testing goodwill impairment. For a discussion of the accounting policies for goodwill and other intangible assets, see Note 1, "Summary of Significant Accounting Policies."
The following table presents changes in the carrying amount of goodwill for the three-year periodyears ended December 31, 2011.

2014, 2013, and 2012.

Changes in the Carrying Amount of Goodwill
(Dollar amounts in thousands)

Balance at December 31, 2008

 $262,886 

2009 activity

  - 
    

Balance at December 31, 2009

  262,886 

Goodwill acquired through FDIC-assisted transaction

  7,941 
    

Balance at December 31, 2010

  270,827 

Adjustment to goodwill recorded in 2010 (1)

  (5,350)
    

Adjusted balance at January 1, 2011

  265,477 

2011 activity

  - 
    

Balance at December 31, 2011

 $265,477 
    
  Years Ended December 31,
  2014 2013 2012
Beginning balance $264,062
 $265,477
 $265,477
Acquisitions 46,527
 
 
Sale of equity method investment 
 (1,415) 
Ending balance $310,589
 $264,062
 $265,477

Goodwill is not amortized but is subject to impairment testing on an annual basis or more often if events or circumstances indicate the potential for impairment. Due to volatile market conditions and a decline in the Company's market capitalization, management determined that an interim impairment test of goodwill as of September 30, 2011 was appropriate. The testing was performed by comparing the carrying value of the reporting unit with management's estimate of the fair value of the reporting unit, which was based on a discounted cash flow analysis. Step 1 of the interim test indicated that management's estimate of the fair value of the reporting unit exceeded the carrying value of the reporting unit; therefore, no impairment existed, and Step 2 of the impairment test was not required.

The Company's annual impairment test date is October 1. Given the proximity of the interim test to the annual test date and management's evaluation of market conditions, no additional goodwill impairment testing was deemed necessary during the fourth quarter of 2011.

detail regarding these transactions.

The Company's other intangible assets are core deposit premiums,intangibles, which are being amortized over their estimated useful lives. The Company reviews intangible assets at least annually for possible impairment or more often if events or changes in circumstances between tests indicate that carrying amounts may not be recoverable. The Company's annual impairment testing was performed as of November 30, 20112014 by comparing the carrying value of intangiblesother intangible assets with our anticipated discounted expected future cash flows, and it was determined that no impairment existed as of that date.

In December 2011, the Company completed the purchase of certain Chicago-market deposits from Old National. The transaction included $106.7 million in deposits (comprised of $70.6 million in core transactional deposits and $36.1 in time deposits) and one banking facility located in the market in which the Company operates. As a result of the transaction, the Company recorded $1.4 million in core deposit intangibles and a net gain of $1.1 million.


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Core Deposit Intangibles



Other Intangible Assets
(Dollar amounts in thousands)

 
 Years Ended December 31, 
 
 2011 2010 2009 
 
 Gross Accumulated
Amortization
 Net Gross Accumulated
Amortization
 Net Gross Accumulated
Amortization
 Net 

Balance at beginning of year

 $42,832 $22,276 $20,556 $36,591 $17,998 $18,593 $35,731 $14,069 $21,662 

Additions

  1,419  -  1,419  6,242  -  6,242  860  -  860 

Amortization expense

  -  3,802  (3,802) -  4,279  (4,279) -  3,929  (3,929)

Fully amortized assets/other

  (9,933) (9,933) -  (1) (1) -  -  -  - 
                    

Balance at end of year

 $34,318 $16,145 $18,173 $42,832 $22,276 $20,556 $36,591 $17,998 $18,593 
                    

Weighted-average remaining life (in years)

        6.9        7.3        7.0 

Estimated useful lives (in years)

        3.3 to 12.6        3.3 to 12.6        5.5 to 11.8 
  Years Ended December 31,
  2014 2013 2012
  Gross 
Accumulated
Amortization
 Net Gross 
Accumulated
Amortization
 Net Gross 
Accumulated
Amortization
 Net
Beginning balance $33,775
 $21,471
 $12,304
 $33,775
 $18,193
 $15,582
 $34,318
 $16,145
 $18,173
Additions 14,195
 
 14,195
 
 
 
 781
 
 781
Amortization expense 
 2,889
 (2,889) 
 3,278
 (3,278) 
 3,372
 (3,372)
Fully amortized assets 
 
 
 
 
 
 (1,324) (1,324) 
Ending balance $47,970
 $24,360
 $23,610
 $33,775
 $21,471
 $12,304
 $33,775
 $18,193
 $15,582
Weighted-average remaining life (in years) 8.0
  
  
 5.9
  
  
 6.4
Estimated remaining useful lives (in years) 0.3 to 10.3
  
  
 0.2 to 11.3
  
  
 0.7 to 12.3


Scheduled Amortization of Other Intangible Assets
(Dollar amounts in thousands)


 Total  Total

Year ending December 31,

   

2012

 $3,336 

2013

 3,192 

2014

 2,603 

2015

 2,414  $3,920

2016

 2,337  3,843

2017 and thereafter

 4,291 
   
2017 3,063
2018 2,138
2019 2,073
2020 and thereafter 8,573

Total

 $18,173  $23,610
   

9.

10.  DEPOSITS

The following table presents the Company's deposits by type of account.

type.

Summary of Deposits
(Dollar amounts in thousands)


 December 31,  As of December 31,

 2011 2010  2014 2013

Demand deposits

 $1,593,773 $1,329,505  $2,301,757
 $1,911,602

Savings deposits

 970,016 871,166  1,391,444
 1,135,155

NOW accounts

 1,057,887 1,073,211  1,413,973
 1,220,693

Money market deposits

 1,198,382 1,245,610  1,509,026
 1,290,868

Time deposits less than $100,000

 1,126,462 1,330,733  859,441
 820,925

Time deposits of $100,000 or more

 532,655 661,251 
     
Time deposits greater than $100,000 412,117
 386,858

Total deposits

 $6,479,175 $6,511,476  $7,887,758
 $6,766,101
     

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The following tables providetable provides maturity information related to the Company's time deposits.

Scheduled Maturities of Time Deposits
(Dollar amounts in thousands)

 
 Total 

Year ending December 31,

    

2012

 $1,227,564 

2013

  228,049 

2014

  95,865 

2015

  56,861 

2016

  50,211 

2017 and thereafter

  567 
    

Total

 $1,659,117 
    

Maturities of Time Deposits of $100,000 or More
(Dollar amounts in thousands)

  Total
Year ending December 31,  
2015 $865,149
2016 211,496
2017 89,061
2018 38,623
2019 66,961
2020 and thereafter 268
Total $1,271,558
 
 Total 

Maturing within 3 months

 $135,029 

After 3 but within 6 months

  108,518 

After 6 but within 12 months

  148,477 

After 12 months

  140,631 
    

Total

 $532,655 
    

10.

11.  BORROWED FUNDS

The following table summarizes the Company's borrowed funds by funding source.

Summary of Borrowed Funds
(Dollar amounts in thousands)


 December 31,  As of December 31,

 2011 2010  2014 2013

Securities sold under agreements to repurchase

 $92,871 $166,474  $137,994
 $109,792

FHLB advances

 112,500 137,500  
 114,550
     

Total borrowed funds

 $205,371 $303,974  $137,994
 $224,342
     

Securities sold under agreements to repurchase generally mature within 1 to 90 days from the transaction date. They are treated as financings and the obligations to repurchase securities sold are included as a liability in the Consolidated Statements of Financial Condition. Repurchase agreements are secured by U.S.the Treasury and U.S. agency securities and if required, are held in third party pledge accounts.accounts, if required. The securities underlying the agreements remain in the respective asset accounts. As of December 31, 2011,2014, the Company did not have amounts at risk under repurchase agreements with any individual counterparty or group of counterparties that exceeded 10% of stockholders' equity.


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The Bank is a member of the FHLB and has access to term financing from the FHLB. These advances are secured by designated assets that may include qualifying residential and multi-family mortgages, home equity loans, and municipal and mortgage-backed securities. During 2014, the Company prepaid $114.6 million of FHLB advances. This transaction resulted in a $2.1 million pre-tax loss on the early extinguishment of debt and is included in other noninterest income in the Consolidated Statements of Income. At December 31, 2011, all2013, FHLB advances fromtotaled $114.6 million with a weighted average interest rate of 1.34%.

The following table presents short-term credit lines available for use, for which the FHLBCompany did not have a fixed rate with interest payable monthly.

Maturityan outstanding balance as of December 31, 2014 and Rate Schedule for FHLB Advances
(Dollar amounts in thousands)

2013.
 
 December 31, 2011 December 31, 2010 
Maturity Date Advance
Amount
 Rate (%) Advance
Amount
 Rate (%) 

December 1, 2011

 $-  - $25,000  1.15 

December 4, 2012

  37,500  1.70  37,500  1.70 

December 4, 2013

  25,000  2.28  25,000  2.28 

December 18, 2013

  50,000  2.37  50,000  2.37 
          

 $112,500  2.13 $137,500  1.95 
          

Unused Short-Term Credit Lines Available for Use

(Dollar amounts in thousands)

 
 December 31, 
 
 2011 2010 

Available federal funds lines (1)

 $528,000 $650,000 

Federal Reserve Bank Discount Window's primary credit program

  1,460,313  1,467,052 
  As of December 31,
  2014 2013
Available federal funds lines $685,500
 $681,100
FRBs Discount Window Primary Credit Program 675,507
 632,498
Correspondent bank line of credit 35,000
 

None of the Company's borrowings have any related compensating balance requirements that restrict the use of Company assets.

At December 31, 2014, the Company had a $35.0 million short-term, unsecured revolving line of credit with a correspondent bank that it allowed to expire on January 20, 2015.

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11.



12.  SENIOR AND SUBORDINATED DEBT

The following table presents the Company's senior and subordinated debt by issuance.

Senior and Subordinated Debt
(Dollar amounts in thousands)

 
 December 31, 
 
 2011 2010 

5.875% senior notes due in 2016

       

Principal amount

 $115,000 $- 

Discount

  (600) - 
      

Total senior notes due in 2016

  114,400  - 
      

5.85% subordinated notes due in 2016

       

Principal amount

  50,500  50,500 

Discount

  (24) (29)
      

Total subordinated notes due in 2016

  50,476  50,471 
      

6.95% junior subordinated debentures due in 2033

       

Principal amount

  87,351  87,351 

Discount

  (74) (78)
      

Total junior subordinated debentures

  87,277  87,273 
      

Total long-term debt

 $252,153 $137,744 
      
    As of December 31,
  Interest Rate 2014 2013
Senior notes due in 2016 5.875% $114,768
 $114,645
Subordinated notes due in 2016 5.850% 38,495
 38,491
Junior subordinated debentures:      
First Midwest Capital Trust I ("FMCT") due in 2033 6.950% 37,797
 37,796
Great Lakes Statutory Trust II ("GLST II") due in 2035 3 month LIBOR + 1.400% 4,202
 
Great Lakes Statutory Trust III ("GLST III") due in 2037 3 month LIBOR + 1.700% 5,607
 
Total junior subordinated debentures   47,606
 37,796
Total senior and subordinated debt   $200,869
 $190,932

In November 2011, the Company issued $115.0 million of 5-year senior notes. The notes were issued at

Junior Subordinated Debentures
FMCT is a discount and have a fixed coupon interest rate of 5.875% per annum, payable semi-annually. The notes are redeemable prior to maturity only at the Company's option and are unsecured, senior obligations of the Company. The proceeds were primarily used to fund the redemption of preferred stock. For details relating to the redemption of preferred stock, refer to Note 12, "Material Transactions Affecting Stockholders' Equity." The notes contain provisions that require the Company's debt to remain above a certain credit rating by each of the major credit rating agencies. If the Company's debt were to fall below that credit rating, it would be in violation of those provisions and the interest rate would be increased.

In 2006, the Company issued $99.9 million of 10-year subordinated notes (the "Notes"). The notes were issued at a discount and have a fixed coupon interest rate of 5.85% per annum, payable semi-annually. The notes are redeemable prior to maturity only at the Company's option and are junior and subordinate to the Company's senior indebtedness. For regulatory capital purposes, the notes qualify as Tier 2 Capital.

In 2003, the Company formed First Midwest Capital Trust I ("FMCT"), aDelaware statutory business trust organizedthat was formed in 2003. During the fourth quarter of 2014, the Company acquired two Delaware statutory business trusts, GLST II and GLST III, in the Great Lakes transaction. These trusts were established for the sole purpose of issuing trust-preferred securities to third party investors. FMCT issued $125.0 million in preferred securities and 3,866 shares of common stock and usedlending the proceeds to purchasethe Company in return for junior subordinated debentures issued by the Company ("Subordinated Debentures"). The trust-preferred securities of the trust represent preferred beneficial interests in the assets of the trust and are subject to mandatory redemption, in whole or in part, upon payment of the junior subordinated debentures held by the trust. The common securities of the trust are wholly owned by the Company. The trust's ability to pay amounts dueCompany guarantees payments of distributions on the trust-preferred securities is solely dependent upon the Company making payment on the related junior subordinated debentures. The Company's obligations under the junior subordinated debentures and other relevant trust agreements, in aggregate, constitute a full and unconditional guarantee by the Company of the trust's obligations under the trust-preferred securities issued by the trust. The guarantee covers the distributions and payments on liquidation or redemption of the trust-preferred securities but only to the extent of funds held by the trust.

FMCT qualifieson a limited basis. The statutory trusts qualify as a variable interest entityentities for which the Company is not the primary beneficiary; therefore,beneficiary. Consequently, the trust isaccounts of those entities are not consolidated in the Company's financial statements.

Debt Retirement
The subordinated debentures issued by the Company to the trust are included in seniorrepurchased and subordinated debt in the Company's Consolidated Statements of Financial Condition with the corresponding interest distributions recorded as interest expense in the Company's


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Consolidated Statements of Income. The common shares issued by the trust are included in other assets in the Company's Consolidated Statements of Financial Condition.

In 2009, the Company completed an offer to exchange a portion of the notes and a separate offer to exchange a portion of the subordinated debentures for newly issued shares of Common Stock. The exchanges strengthened the composition of First Midwest's capital base by increasing its Tier 1 common and tangible common equity ratios, while also reducing the interest expense associated with the debt securities. As a result of the exchange offers, $39.3retired $24.0 million of subordinated debentures were retired at a discount of 20% in exchange for 3,058,410 shares of Common Stock, and $29.5 million of notes were retired at a discount of 10% in exchange for 2,584,695 shares of Common Stock. In 2009, the Company also retired an additional $1.0 million ofjunior subordinated debentures at a discountpremium of 20% for cash and $20.0 million of notes at a discount of 7% for cash. In the aggregate, the exchange offers and the subsequent retirement of debt for cash3.5% during 2013. This transaction resulted in the recognition of $15.3a pre-tax loss of $1.0 million and is included in pre-tax gains in 2009. These gains are shown as a separate component ofother noninterest income in the Consolidated Statements of Income.

12.

13.  MATERIAL TRANSACTIONS AFFECTING STOCKHOLDERS' EQUITY

Redemption of Preferred Shares

In 2008, in response to the financial crises affecting the financial markets and the banking system, the Treasury announced several initiatives under the Troubled Asset Relief Program ("TARP") intended to help stabilize the banking industry. One of these initiatives was the voluntary CPP designed to encourage qualifying financial institutions to build capital. Under the CPP, the Company received $193.0 million from the sale of preferred shares to the Treasury.

In exchange for the $193.0 million,

Issued Common Stock
On December 2, 2014, the Company issued 2,440,754 shares of its $0.01 par value common stock at a price of $15.737 as part of the consideration in the Great Lakes acquisition. Additional information regarding the acquisition is presented in Note 3, "Acquisitions."
Authorized Common Stock
On May 21, 2014, the stockholders of the Company approved an amendment to the TreasuryCompany's Restated Certificate of Incorporation. The amendment increased the Company's authorized common stock by 50,000,000 shares. Following this amendment, the Company is now authorized to issue a total of 193,000 Preferred Shares and a Warrant to purchase up to 1,305,230151,000,000 shares, including 1,000,000 shares of Common Stock. Both the Preferred SharesStock, without a par value, and the Warrant were accounted for as components of the Company's regulatory Tier 1 capital.

In November 2011, the Company redeemed all of the $193.0 million of Preferred Shares issued to the Treasury. The redemption was funded through a combination of existing liquid assets and the proceeds from the senior debt issuance.

In connection with the redemption, the Company accelerated the accretion of the remaining issuance discount on the Preferred Shares and recorded a corresponding reduction to retained earnings of $1.5 million. This resulted in a one-time, non-cash reduction in net income available to common shareholders and related basic and diluted earnings per share.

Dividends of $214,000 were paid to the Treasury on November 23, 2011 when the Preferred Shares were redeemed. The Company paid total dividends on Preferred Shares of $8.7 million in 2011 and $9.7 million in 2010 and 2009.

In December 2011, the Company redeemed the Treasury's Warrant for $900,000, which concluded the Company's participation in the CPP.

Common Shares Issued

On January 13, 2010, the Company sold 18,818,183150,000,000 shares of Common Stock, in an underwritten public offering. The price to the public was $11.00$0.01 par value per share, and the proceeds to the Company, net of the underwriters' discount, were $196.0 million, or $10.45 per share, net of related expenses. The net proceeds were used to improve the quality of the Company's capital composition and for general operating purposes.

The Company had 85,787,354 shares issued as of December 31, 2011 and 2010. There were 74,435,004 and 74,095,695 shares outstanding as of December 31, 2011 and December 31, 2010, respectively.

share.

Quarterly Dividend on Common Shares

The Board of Directors of First Midwest Bancorp, Inc. ("the Board") declared quarterly stock dividends of $0.01 per share forfrom 2012 through the past twelve quarters.


Tablefirst quarter of Contents

Transactions with2013. The Company increased the Bank

In January 2010,quarterly dividend to $0.04 per share during the Company made a $100.0 million capital contributionsecond quarter of 2013, to $0.07 per share during the Bank. In addition,fourth quarter of 2013, and to $0.08 per share during the Bank sold $168.1 millionsecond quarter of non-performing assets to the Company in March 2010. On the date of the sale, the Company recorded the assets at fair value and transferred them to Catalyst in the form of a capital injection. Since the majority of the assets were collateral-dependent loans, fair value was determined based on the lower of the recorded book value of the loan or the estimated fair value of the underlying collateral less costs to sell. No allowance for credit losses was recorded at the Company on the date of the purchase of these assets. Catalyst had non-performing assets totaling $45.2 million as of December 31, 2011 and $93.1 million as of December 31, 2010. This transaction did not change the presentation of these non-performing assets in the consolidated financial statements and did not impact the Company's consolidated financial position, results of operations, or regulatory ratios. However, these two transactions improved the Bank's asset quality, capital ratios, and liquidity.

2014.

There were no additional material transactions that affected stockholders' equity during the three years ended December 31, 2011 and December 31, 2010.

13.2014.


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14.  EARNINGS PER COMMON SHARE

The table below displays the calculation of basic and diluted earnings (loss) per share.

Basic and Diluted Earnings (Loss) per Common Share
(Amounts in thousands, except per share data)


 Years Ended December 31,  Years Ended December 31,

 2011 2010 2009  2014 2013 2012

Net income (loss)

 $36,563 $(9,684)$(25,750) $69,306
 $79,306
 $(21,054)

Preferred dividends

 (8,658) (9,650) (9,650)

Accretion on preferred stock (1)

 (2,118) (649) (615)

Net (income) loss applicable to non-vested restricted shares

 (350) 266 464  (836) (1,107) 306
       

Net income (loss) applicable to common shares

 $25,437 $(19,717)$(35,551) $68,470
 $78,199
 $(20,748)
       

Weighted-average common shares outstanding:

       

Weighted-average common shares outstanding (basic)

 73,289 72,422 50,034  74,484
 73,984
 73,665

Dilutive effect of Common Stock equivalents

 - - - 
       
Dilutive effect of common stock equivalents 12
 10
 1

Weighted-average diluted common shares outstanding

 73,289 72,422 50,034  74,496
 73,994
 73,666
       

Basic earnings (loss) per common share

 $0.35 $(0.27)$(0.71) $0.92
 $1.06
 $(0.28)

Diluted earnings (loss) per common share

 $0.35 $(0.27)$(0.71) 0.92
 1.06
 (0.28)

Anti-dilutive shares not included in the computation of diluted earnings per common share (2)

 3,511 3,823 3,993 
Anti-dilutive shares not included in the computation of
diluted earnings per common share (1)
 1,198
 1,462
 1,759

(1)
This amount represents outstanding stock options for which the exercise price is greater than the average market price of the Company's common stock.

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14.

15.  INCOME TAXES

Components of Income Tax Expense (Benefit)
(Dollar amounts in thousands)


 Years Ended December 31, 

 2011 2010 2009  Years Ended December 31,

Current tax expense (benefit):

 
 2014 2013 2012
Current income tax expense:      

Federal

 $1,929 $(14,926)$(10,298) $16,343
 $4,744
 $

State

 419 1,439 (5,420) (1,388) 10,504
 1
       

Total

 2,348 (13,487) (15,718) 14,955
 15,248
 1
       

Deferred tax expense (benefit):

 
Deferred income tax expense (benefit):      

Federal

 1,605 (8,895) (28,808) 7,901
 31,572
 (23,728)

State

 555 (6,162) (5,650) 8,314
 1,895
 (5,155)
       

Total

 2,160 (15,057) (34,458) 16,215
 33,467
 (28,883)
       

Total income expense (benefit)

 $4,508 $(28,544)$(50,176) $31,170
 $48,715
 $(28,882)
       

Federal income tax expense (benefit) and the related effective income tax rate are primarily influenced by the amount of tax-exempt income derived from investment securities and bank-owned life insuranceBOLI in relation to pre-tax income (loss) and state income taxes. State income tax expense (benefit) and the related effective income tax rate are influenceddriven by the amount of state tax-exempt income in relation to pre-tax income (loss) and state tax rules relating tofor consolidated/combined reporting and sourcing of income and expense.

Income tax expense totaled $4.5$31.2 million in 2011 following for the year ended December 31, 2014 compared to income tax expense of $48.7 million for the year ended December 31, 2013 and an income tax benefit of $28.5$28.9 million for the year ended December 31, 2012. The decrease in 2010.income tax expense in 2014 was driven primarily by a decrease in income subject to tax at statutory rates. The varianceincrease in income tax expense from 2012 to 2013 was primarily attributable tothe result of an increase in pre-tax income subject to tax at statutory rates and to a non-deductible BOLI modification loss recorded in 2011 compared to the prior year, as well as a decrease in tax-exempt income and the impact of the Illinois tax law change described below.

Effective January 1, 2011, the Illinois corporate income tax rate increased from 7.3% to 9.5%. This rate increase resulted in additional state tax expense, net of federal tax, of $418,000 for 2011. The Company recorded a $1.6 million income tax benefit in first quarter 2011 related to the resulting increase in the Company's deferred tax asset. The rate will decline to 7.75% in 2015 and return to 7.3% in 2025. The legislation also suspends net operating loss utilization in 2011 and limits the amount of utilization to $100,000 per year in 2012 and 2013.

Differences between the amounts reported in the consolidated financial statements and the tax basesbasis of assets and liabilities result in temporary differences for which deferred tax assets and liabilities have beenwere recorded.


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Deferred Tax Assets and Liabilities
(Dollar amounts in thousands)


 December 31,  As of December 31,

 2011 2010  2014 2013

Deferred tax assets:

     

Alternative minimum tax ("AMT") and other credit carryforwards

 $12,798 $8,185  $29,007
 $19,184

Federal net operating loss ("NOL") carryforwards

 16,962 7,299  
 14,579

Allowance for credit losses

 42,687 50,775  26,078
 30,492

Unrealized losses

 22,940 24,610 
Unrealized losses on securities 18,527
 21,374

OREO

 5,376 8,490  3,480
 6,541

State NOL carryforwards

 11,456 11,776  11,917
 15,859

Other state tax benefits

 8,150 8,221 

Other

 10,783 10,191  18,390
 19,049
     

Total deferred tax assets

 131,152 129,547  107,399
 127,078
     

Deferred tax liabilities:

     

Purchase accounting adjustments and intangibles

 (10,278) (12,569) (11,181) (16,977)

Deferred loan fees

 (3,215) (3,441)

Accrued retirement benefits

 (6,681) (2,354) (6,732) (7,095)

Depreciation

 (2,843) (2,063) (845) (2,111)

Cancellation of indebtedness income

 (5,340) (5,340) (4,272) (5,340)

Other

 (9,365) (8,160) (3,978) (6,313)
     

Total deferred tax liabilities

 (37,722) (33,927) (27,008) (37,836)
     

Deferred tax valuation allowance

 - (30) 
 
     

Net deferred tax assets

 93,430 95,590  80,391
 89,242

Tax effect of adjustments related to other comprehensive income (loss)

 9,194 17,763  11,294
 18,382
     

Net deferred tax assets including adjustments

 $102,624 $113,353  $91,685
 $107,624
     

Net operating loss carryforwards available to offset future taxable income:

     

Federal gross NOL carryforwards, begin to expire in 2030

 $48,463 $20,856 

Illinois gross NOL carryforwards, begin to expire in 2018

 $220,101 $225,027 

Indiana gross NOL carryforwards, begin to expire in 2021

 $23,872 $19,872 

Wisconsin gross NOL carryforwards, begin to expire in 2025

 $229 $- 

Other credits (1)

 $12,798 $8,185 
Federal gross NOL carryforwards, begin to expire in 2032 $
 $41,654
Illinois gross NOL carryforwards, begin to expire in 2021 232,834
 290,076
Indiana gross NOL carryforwards, begin to expire in 2022 17,192
 16,112
Alternative minimum tax credits 25,739
 16,090
Other credits, begin to expire in 2028 3,268
 3,094

net deferred tax assets acquired from the Popular, National Machine Tool, and Great Lakes transactions.

Net deferred tax assets are included in other assets in the accompanying Consolidated Statements of Financial Condition. Management believes that it is more likely than not that net deferred tax assets will be fully realized and no valuation allowance is required.

Components of Effective Tax Rate


 Years Ended December 31, Years Ended December 31,

 2011 2010 2009 2014 2013 2012

Statutory federal income tax rate

 35.0% 35.0% 35.0% 35.0 % 35.0 % 35.0 %

Tax-exempt income, net of interest expense disallowance

 (21.3%) 27.0% 16.5% (7.5)% (6.2)% 16.8 %

State income tax, net of federal income tax effect

 (0.3%) 9.5% 12.1% 4.5 % 6.4 % 7.0 %

Other, net

 (2.4%) 3.2% 2.5%
      
Net other (1.0)% 2.9 % (1.0)%

Effective tax rate

 11.0% 74.7% 66.1% 31.0 % 38.1 % 57.8 %
      

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The change in effective income tax rate from 2010the year ended December 31, 2013 to 2011the year ended December 31, 2014 was primarily attributable tothe result of a decrease in tax-exempt income as a percent of total pre-tax income or loss and,subject to a lesser extent, by an increase in the Illinois income tax rate.

at statutory rates. The change in effective income tax rate from 2009the year ended December 31, 2012 to 2010the year ended December 31, 2013 was primarily attributable tothe result of an increase in tax-exempt interest asincome subject to tax at statutory rates and a percent of the pre-tax loss.

non-deductible BOLI modification loss recorded in 2013.

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As of December 31, 2011, 2010,2014, 2013, and 2009,2012, the Company's retained earnings included an appropriation for an acquired thrift's tax bad debt reserves of approximately $2.5 million for which no provision for federal or state income taxes has been made. If, in the future, this portion of retained earnings waswere distributed as a result of the liquidation of the Company or its subsidiaries, federal and state income taxes would be imposed at the then applicable rates.

Uncertainty in Income Taxes

The Company files a U.S. federal income tax return and state income tax returns in various states. In 2012, the U.S. federal jurisdiction and in Illinois, Indiana, Iowa, and Wisconsin. Audits of the Company's 2002-2005 Illinois income tax returns were closed during 2010 without significant adjustments. Audits of the Company's 2006-2007 Illinois income tax returns were closed in 2011 without significant adjustments. The Internal Revenue Service initiatedcompleted audits of the Company's 2006, 2007, and 20092006-2010 federal income tax returns and Illinois completed audits of the Company's 2008-2009 Illinois income tax returns. No significant adjustments were proposed in these audits.
Federal income tax returns filed by the Company are no longer subject to examination by federal income tax authorities for years prior to 2011. The Company believes it is reasonably possible that these audits will be resolved in 2012 without significant changes to the returns as filed.

The Company is no longer subject to examination by federalIllinois, Indiana, Iowa and Wisconsin tax authorities for years prior to 2006; by Indiana and Iowa tax authorities for years prior to 2008; and Illinois tax authorities for years prior to 2008, except with respect to an amended 2006 Illinois return for which the statute of limitations remains open. The Company began filing in Wisconsin in 2009 as a result of changes in the Wisconsin tax law.

2011.

Rollforward of Unrecognized Tax Benefits
(Dollar amounts in thousands)


 Years Ended December 31, 

 2011 2010 2009  Years Ended December 31,

Balance at beginning of year

 $429 $314 $5,751 
 2014 2013 2012
Beginning balance $279
 $
 $368

Additions for tax positions relating to the current year

 - 2 9  635
 279
 

Additions for tax positions relating to prior years

 226 263 - 

Reductions for tax positions relating to prior years

 (80) (72) (5,446) (2) 
 

Reductions for settlements with taxing authorities

 (207) - -  
 
 (368)

Lapse in statute of limitations

 - (78) - 
       

Balance at end of year

 $368 $429 $314 
       
Ending balance $912
 $279
 $

Interest and penalties not included above (1):

       

Interest expense (benefit), net of tax effect, and penalties

 $44 $(21)$(556)
Interest (benefit) expense, net of tax effect, and penalties $4
 $
 $(52)

Accrued interest and penalties, net of tax effect, at end of year

 $52 $8 $29  4
 
 

The reductions in uncertain tax positions in 2011 compared to 2010 are a result of the resolution of certain tax authority examinations, partially offset by a change in exposure as a result of the prior year settlement with taxing authorities. The increase in uncertain tax positions in 2010 compared to 2009 resulted from additions for tax positions relating to prior years.


(1)
Included in income tax expense (benefit) in the Consolidated Statements of Income.
The Company does not anticipate that the amount of uncertain tax positions will significantly increase or decrease in the next 12 months. Included in the balance at December 31, 20112014 and 2013 are tax positions totaling $269,000$597,000 and $181,000, respectively, that would favorably affect the Company's effective tax rate if recognized in future periods.


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15.



16.  EMPLOYEE BENEFIT PLANS

Savings and

Profit Sharing Plan

The Company has a defined contribution retirement savings plan (the "Profit Sharing Plan"), which allows that covers qualified employees at theirwho meet certain eligibility requirements. During 2014, the Profit Sharing Plan was amended to give qualified employees the option to makeincrease contributions up tofrom 45% of their pre-tax base salary (15% for certain highly compensated employees) to 100% (including certain highly compensated employees) of their pre-tax base salary through salary deductions under Section 401(k) of the Internal Revenue Code. At the employees' direction, employee contributions are invested among a variety of investment alternatives. ForThe amendment also increased the Company’s matching contribution from a maximum of 2% to 4% of the eligible employee's compensation. In addition, pursuant to the amendment, the Company makes certain automatic and transition contributions. On an annual basis, the Company automatically contributes 2% of the employee's eligible compensation regardless of voluntary contributions made by the employee. Transition contributions of up to 4% will be made through December 31, 2015 for certain employees who make voluntary contributions towere active participants in the defined benefit retirement plan (the "Pension Plan"), which was frozen in 2013. The amendment did not change the discretionary profit sharing component of the Profit Sharing Plan, the Company contributes an amount equal to 2% of the employee's compensation. The Profit Sharing Plan alsowhich permits the Company to distribute a discretionary profit-sharing component up to 15% of the employee's compensation. The Company's matching contribution vestsand transition contributions vest immediately, while the automatic and discretionary component vestscomponents vest over a period of six years.

Savings and


Profit Sharing Plan
(Dollar amounts in thousands)


 Years Ended December 31, 

 2011 2010 2009  Years Ended December 31,

Profit sharing expense

 $2,897 $859 $2,454 
 2014 2013 2012
Profit sharing expense (1)
 $6,354
 $2,914
 $2,532

Company dividends received by the Profit Sharing Plan

 $72 $72 $452  $428
 $159
 $71

Company shares held by the Profit Sharing Plan at year end:

 
Company shares held by the Profit Sharing Plan at the end of the year:      

Number of shares

 1,806,262 2,752,521 2,916,152  1,364,558
 1,426,708
 1,743,085

Fair value

 $18,297 $31,709 $31,757  $23,348
 $25,010
 $21,823


(1)
Included in retirement and other employee benefits in the Consolidated Statements of Income.
Pension Plan

The Company sponsors a noncontributory defined benefit retirement plan (the "Pension Plan") thatthe Pension Plan which provides for retirement benefits based on years of service and compensation levels of the participants. The Pension Plan covers a majority of employees who met certain eligibility requirements and were hired before April 1, 2007, whenthe date it was amended to eliminate new enrollment of employees. new participants. During 2013, the Board of Directors approved an amendment to freeze benefit accruals under the Pension Plan effective on January 1, 2014. Based on December 31, 2013 actuarial assumptions, the amendment decreased the pension obligation by $9.9 million and increased other comprehensive income (loss) by $5.9 million, after tax. These actions reduced 2013 pension expense by approximately $1.0 million.
Actuarially determined pension costs are charged to current operations.operations and included in retirement and other employee benefits in the Consolidated Statements of Income. The Company's funding policy is to contribute amounts to its planthe Pension Plan that are sufficient to meet the minimum funding requirements of the Employee Retirement Income Security Act of 1974 plus such additional amounts as the Company deems appropriate.


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Pension Plan'sPlan Cost and Obligations
(Dollar amounts in thousands)


 December 31,  As of December 31,

 2011 2010  2014 2013

Accumulated benefit obligation

 $55,782 $43,889  $67,283
 $61,292
     

Change in benefit obligation:

 

Projected benefit obligation at beginning of year

 $51,963 $43,671 
Change in projected benefit obligation:    
Beginning balance $61,292
 $72,855

Service cost

 2,725 2,352  
 2,600

Interest cost

 3,032 2,665  2,346
 2,414

Actuarial losses

 8,067 4,957 
Curtailment 
 (9,947)
Settlements (6,502) 
Actuarial loss (gain) 10,508
 (1,494)

Benefits paid

 (2,776) (1,682) (361) (5,136)
     

Projected benefit obligation at end of year

 $63,011 $51,963 
     

Change in plan assets:

 

Fair value of plan assets at beginning of year

 $54,713 $51,033 
Ending balance $67,283
 $61,292
Change in fair value of plan assets:    
Beginning balance $74,370
 $63,501

Actual return on plan assets

 1,053 5,362  4,686
 9,005

Benefits paid

 (2,776) (1,682) (361) (5,136)

Employer contributions

 10,000 -  
 7,000
     

Fair value of plan assets at end of year

 $62,990 $54,713 
     
Settlements (6,502) 
Ending balance $72,193
 $74,370

Funded status recognized in the Consolidated Statements of Financial Condition:

     

Noncurrent prepaid pension

 $- $2,750 

Noncurrent liabilities

 (21) - 
Noncurrent asset $4,910
 $13,078

Amounts recognized in accumulated other comprehensive loss:

     

Prior service cost

 $4 $8  $
 $

Net loss

 21,860 12,996  19,911
 10,784
     

Net amount recognized

 $21,864 $13,004  $19,911
 $10,784
     

Actuarial losses included in accumulated other comprehensive loss as a percent of:

     

Accumulated benefit obligation

 39.2% 29.6%  29.6% 17.6%

Fair value of plan assets

 34.7% 23.8%  27.6% 14.5%

Amounts expected to be amortized from accumulated other comprehensive loss into net periodic benefit cost in the next fiscal year:

     

Prior service cost

 $3 $3  $
 $

Net loss

 1,336 525  401
 215
     

Net amount expected to be recognized

 $1,339 $528  $401
 $215
     

Weighted-average assumptions at the end of the year used to determine the actuarial present value of the projected benefit obligation:

     

Discount rate

 4.40% 5.50%  3.60% 4.30%

Rate of compensation increase

 2.50% 3.00% 
Rate of compensation increase (1)
 N/A
 N/A

N/A – Not applicable.
(1)
The rate of compensation increase is no longer applicable in determining the present value of the projected benefit obligation due to the amendment to freeze benefit accruals, which is discussed above.
Expected amortization of net actuarial losses – To the extent the cumulative actuarial losses included in accumulated other comprehensive loss exceed 10% of the greater of the accumulated benefit obligation or the market-related value of the Pension Plan assets, it is the Company's policy to amortize the Pension Plan's net actuarial losses into income over the future working life of the Pension Plan participants. In connection with the freeze of benefit accruals under the Pension Plan in 2013, the Company changed its policy to amortize net actuarial losses into income over the average remaining life expectancy of the Pension Plan participants. Actuarial losses included in accumulated other comprehensive loss as of December 31, 20112014 exceeded 10% of the accumulated benefit obligation and the fair value of planPension Plan assets. The amortization of net actuarial losses is a component

119




of the net periodic benefit cost. Amortization of the net actuarial losses and prior service cost included in other comprehensive income (loss) is not expected to have a material impact on the Company's future results of operations, financial position, or liquidity.


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Net Periodic Benefit Pension Cost

(Dollar amounts in thousands)
  Years Ended December 31,
  2014 2013 2012
Components of net periodic benefit cost:      
Service cost $
 $2,600
 $2,862
Interest cost 2,346
 2,414
 2,720
Expected return on plan assets (4,931) (4,299) (4,456)
Recognized net actuarial loss 249
 1,453
 1,684
Amortization of prior service cost 
 1
 3
Recognized settlement loss 1,377
 
 
Net periodic (income) cost (959) 2,169
 2,813
Other changes in plan assets and benefit obligations recognized as
  a charge to other comprehensive income (loss):
      
Net (loss) gain for the period (10,752) 16,146
 (8,207)
Amortization of prior service cost 
 1
 4
Amortization of net loss 1,625
 1,453
 1,683
Total unrealized (loss) gain (9,127) 17,600
 (6,520)
Total recognized in net periodic pension cost and other
  comprehensive income (loss)
 $(8,168) $15,431
 $(9,333)
Weighted-average assumptions used to determine the net periodic
  cost:
      
Discount rate 4.30% 3.40% 4.40%
Expected return on plan assets 7.25% 7.25% 7.25%
Rate of compensation increase N/A
(1) 
2.50% 2.50%
N/A – Not applicable.
(1)
The rate of compensation increase is no longer applicable in determining the net periodic cost due to the amendment to freeze benefit accruals, which is discussed above.

Pension Plan Asset Allocation
(Dollar amounts in thousands)

 
 Years Ended December 31, 
 
 2011 2010 2009 

Components of net periodic benefit cost:

          

Service cost

 $2,725 $2,352 $3,404 

Interest cost

  3,032  2,665  3,337 

Expected return on plan assets

  (4,110) (4,150) (4,558)

Recognized net actuarial loss

  976  2  1,153 

Amortization of prior service cost

  3  3  3 

Other (1)

  1,285  -  737 
        

Net periodic cost

  3,911  872  4,076 
        

Other changes in plan assets and benefit obligations recognized as a charge to other comprehensive income (loss):

          

Net loss (gain) for the period

  11,124  3,746  (15,830)

Amortization of prior service cost

  (4) (4) (4)

Amortization of net loss

  (2,260) (2) (1,154)
        

Total

  8,860  3,740  (16,988)
        

Total recognized in net periodic pension cost and other comprehensive loss

 $12,771 $4,612 $(12,912)
        

Weighted-average assumptions used to determine the net periodic cost:

          

Discount rate

  5.50%  6.00%  6.25% 

Expected return on plan assets

  7.50%  7.50%  8.50% 

Rate of compensation increase

  3.00%  3.00%  4.50% 

Pension Plan Asset Allocation
(Dollar amounts in thousands)

      
Percentage of Plan Assets
as of December 31,
  Target Allocation 
Fair Value of Plan Assets (1)
 
  2014 2013
Asset Category:        
Equity securities 50 - 60% $42,826
 59% 63%
Fixed income 30 - 48% 25,832
 36% 30%
Cash equivalents 2 - 10% 3,535
 5% 7%
Total   $72,193
 100% 100%
 
  
  
 Percentage of Plan Assets 
 
 Target Allocation 2011 Fair Value of
Plan Assets (1)
 
 
 2011 2010 

Asset Category:

            

Equity securities

 50 - 60% $32,360  51%  61% 

Fixed income

 30 - 48%  18,937  30%  33% 

Cash equivalents

 2 - 10%  11,693  19%  6% 
          

Total

   $62,990  100%  100% 
          

As of December 31, 2011, asset category allocations were outside the target range due to a December 2011 employer contribution included in cash equivalents. On January 31, 2012, subsequent to investing this contribution, allocations were 55% equity, 35% fixed income, and 10% cash equivalents.

(1)
Additional information regarding the fair value of Pension Plan assets at December 31, 2014 can be found in Note 22, "Fair Value."

Expected long-term rate of return – The expected long-term rate of return on Pension Plan assets represents the average rate of return expected to be earned over the period the benefits included in the benefit obligation are to be paid. In developing the expected rate of return, the Company considers long-term returns of historical market data and projections of future returns for each asset category, as well as historical actual returns on the Pension Plan assets with the assistance of its independent actuarial consultant. Using this reference data, the Company develops a forward-looking return expectation for each asset category and a weighted-average expected long-term rate of return based on the target assets allocation is developed.asset allocation.


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Investment policy and strategy – The investment objective of the Pension Plan is to maximize the return on Pension Plan assets over a long-term horizon to satisfy the Pension Plan obligations. In establishing its investment policies and asset allocation strategies, the Company considers expected returns and the volatility associated with different strategies. The policy established by the Company's Retirement Plan Committee provides for growth of capital with a moderate level of volatility by investing assets according to the target allocations stated above. As a strategyabove and reallocating those assets as needed to mitigate volatility, investmentsstay within those allocations. Investments are weighted toward publicly traded securities, andsecurities. Investment strategies that include alternative asset classes, such as private equity hedge funds and real estate, are generally avoided. The assets are reallocated as needed by the fund manager to meet the above target allocations. Under the advisement of a certified investment advisor, the Committee reviews the investment policy on a quarterly basis to determine if any adjustments to the policy or investment strategy are necessary.

Based on the actuarial assumptions, the Company does not anticipate making a contribution to the Pension Plan in 2012.

Estimated future pension benefit payments which reflect expected future service, for fiscal years 2012ending December 31, 2015 through 2021,2024 are as follows.

Estimated Future Pension Benefit Payments
(Dollar amounts in thousands)

 
 Total 

Year ending December 31,

    

2012

 $5,276 

2013

  4,944 

2014

  5,134 

2015

  5,146 

2016

  5,240 

2017-2021

  26,124 
  Total
Year ending December 31,  
2015 $5,298
2016 5,397
2017 4,886
2018 4,324
2019 4,085
2020-2024 17,518

16.

17.  SHARE-BASED COMPENSATION

Share-Based Plans

Omnibus Stock and Incentive Plan (the "Omnibus Plan") – In 1989, the Board adopted the Omnibus Plan, which allows for the grantinggrant of both incentive and non-statutory ("nonqualified") stock options, stock appreciation rights, restricted stock, awards, restricted stock units, performance units, and performance shares to certain key employees.

In August 2006, as an enhancement to the current compensation program, the Board approved the granting of restricted stock awards and restricted stock units to certain key officers. These awards are restricted to transfer, but are not restricted to dividend payment and voting rights.

Since

From the inception of the Omnibus Plan through the end of 2008, certain key employees were granted nonqualified stock options in February of each year.options. The option exercise price is set at the fair value of the Company's Common Stock on the date the options are granted. The fair value is defined as the average of the high and low price of the Company's common stock price on the date of grant.grant date. All options have a term of ten years from the grant date, of grant, include reload features, and are non-transferable except to immediate family members, family trusts, or partnerships.

Since 2008, the Company grantshas granted restricted stock and restricted stock unit awards instead of nonqualified stock options to certain key employees, typically in February of each year.employees. Both restricted stock options and restricted stock unit awards vest over three years, with 50% vesting after two years fromon the datesecond anniversary of the grant date and the remaining 50% vesting three years afteron the datethird anniversary of the grant date, provided the employee remains employed by the Company during this period (subject to accelerated vesting in the event of a change-in-control or upon terminationcertain terminations of employment, as set forth in the applicable award agreement).

The fair value of the awards is determined based on the average of the high and low price of the Company's common stock on the grant date.

Since 2013, the Company has also granted performance shares to certain key employees. Recipients will earn performance shares totaling between 0% and 200% of the number of performance shares granted based on achieving certain performance metrics. Performance shares may be earned based on achieving an internal metric (core return on average tangible common equity) and an external metric (relative total shareholder return) over a three year period. Each metric is weighted at 50% of the total award opportunity. If earned, and assuming continued employment, the performance shares vest one-third at the completion of the three-year performance period and one-third at the end of the first and second years thereafter. The fair value of the performance shares that are dependent on the internal metric is determined based on the average of the high and low stock price on the grant date. An estimate is made as to the number of shares expected to vest as a result of actual performance against the internal metric to determine the amount of compensation expense to be recognized, which is re-evaluated quarterly. The fair value of the performance shares that are dependent on the external metric is determined using a Monte Carlo simulation model on the grant date assuming 100% of the shares are earned and issued.
Nonemployee Directors Stock Plan (the "Directors Plan") – In 1997, the Board adopted the Directors Plan, which provides for the grant of equity awards to non-management Board members. Until 2008, only non-qualifiednonqualified stock options were issued under the Directors Plan. The exercise price of the options is equal to the fair valueaverage of the Common Stockhigh and low price of the Company's common stock on the date of grant.grant date. All options have a term of ten10 years from the date of grant.grant date.


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In 2008, the Company amended the Directors Plan to allow for the grant of restricted stock awards.awards, among other items. The awards are restricted as to transfer, but are not restricted as to dividend payment and voting rights. Dividends accrue and are paid at the vesting date. Both the options and the restricted stock awards vest one year from the grant date of grant subject to accelerated vesting in the event of retirement, death, disability, or change-in-control, as defined in the Directors Plan.

Options or restricted stock awards are granted annually at the first regularly scheduled Board meeting in each calendar year (generally in February). Directors elected during the service year are granted equity awards on a pro-rata basis.

Both the Omnibus Plan and the Directors Plan, have beenand material amendments, were submitted to and approved by the stockholders of the Company. The Company issues treasury shares to satisfy stock option exercises and the vesting of restricted stock, award releases.

restricted stock units, and performance share awards.

Shares of Common Stock Available Under Share-Based Plans


 December 31, 2011  As of December 31, 2014

 Shares
Authorized
 Shares Available
For Grant
  
Shares
Authorized
 
Shares Available
For Grant

Omnibus Plan

 8,631,641 2,474,769  8,631,641
 2,237,337

Directors Plan

 481,250 98,026  481,250
 75,294

Salary Stock Awards – In October 2009, the Board approved adjustmentsThe Company also periodically issues salary stock awards to the 2010 base salaries of certain of its executive officers, as permitted by the executive compensation provisions of TARP. The approved adjustments became effective on January 1, 2010 and modified the mix between the fixed and variable components of compensation to be paid to these officers during 2010 and 2011. The salary adjustments were paid in accordance with the Company's standard payroll procedures with 25% paid in cash and 75% paid inofficers. This stock is fully vested shares of Common Stock. The number of shares of Common Stock granted as of each payroll period end date to each executive officer is determined by dividing that portion of the executive officer's salary adjustment payable for the period by the closing price of the Common Stock on the date prior to the applicable payrollgrant date.

In 2011, 45,889 shares were granted at a weighted-average price of $10.10 per share, and in 2010, 49,569 shares were granted at a weighted-average price of $12.30 per share. The issuance of these sharessalary stock awards is included in share-based compensation expense, but does not reduce the number of shares issued and outstanding under the Omnibus Plan as the issuance is not considered part of the share-based plans referenced above.

Since

Salary Stock Awards Granted
  Years ended December 31,
  2014 2013 2012
Shares granted 
 8,693
 10,983
Weighted-average price $
 $14.30
 $11.51
Stock Options
Nonqualified Stock Option Transactions
(Amounts in thousands, except per share data)
  Year Ended December 31, 2014
  Number of Options 
Weighted Average
Exercise
Price
 
Weighted
Average
Remaining
Contractual
Term (1)
 
Aggregate
Intrinsic
Value (2)
Options outstanding beginning balance 1,436
 $32.99
    
Expired (283) 33.23
    
Options outstanding ending balance 1,153
 $32.93
 1.62 $215
Exercisable at the end of the year 1,153
 $32.93
 1.62 $215

(1)
Represents the average remaining contractual life in years.
(2)
Aggregate intrinsic value represents the total pre-tax intrinsic value that would have been received by the option holders if they had exercised their options on December 31, 2014. Intrinsic value equals the difference between the Company's average of the high and low stock price on the last trading day of the year and the option exercise price, multiplied by the number of shares. This amount will fluctuate with changes in the fair value of the Company's common stock.
Stock Option Valuation Assumptions – The Company estimates the Company's participationfair value of stock options at the grant date using a Black-Scholes option-pricing model. No stock options were granted or exercised and no stock option award modifications were made during the three years ended December 31, 2014.

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Restricted Stock, Restricted Stock Unit, and Performance Share Awards
Restricted Stock, Restricted Stock Unit, and Performance Share Award Transactions
(Amounts in thousands, except per share data)
  Year Ended December 31, 2014
  Restricted Stock/Unit Awards Performance Shares
  
Number of
Shares/Units
 
Weighted
Average
Grant Date
Fair Value
 
Number of
Shares
 
Weighted
Average
Grant Date
Fair Value
Non-vested awards beginning balance 1,123
 $12.10
 127
 $12.68
Granted 417
 16.13
 118
 16.13
Vested (474) 11.79
 
 11.79
Forfeited (69) 13.53
 (7) 13.53
Non-vested awards ending balance 997
 $13.79
 238
 $14.36

Other Restricted Stock, Restricted Stock Unit, and Performance Share Award Information
(Amounts in thousands, except per share data)
  Years Ended December 31,
  2014 2013 2012
Weighted-average grant date fair value of restricted stock, restricted stock unit, and
  performance share awards granted during the year
 $16.13
 $13.01
 $11.35
Total fair value of restricted stock and restricted stock unit awards vested during
  the year
 7,546
 4,917
 4,921
Income tax benefit realized from the vesting/release of restricted stock and
  restricted stock unit awards
 2,939
 1,966
 1,884
There were no performance shares that vested during the CPP was concluded in December 2011,periods presented. No restricted stock, restricted stock unit, and performance share award modifications were made during the Company is no longer subject to the executive compensation provisions of TARP.

Accounting Treatment

periods presented.

Compensation Expense
The Company recognizes share-based compensation expense based on the estimated fair value of the option or award at the date of grant or modification.modification date. Share-based compensation expense is included in salaries and wages in the Consolidated Statements of Income.


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Effect of Recording Share-Based Compensation Expense
(Dollar amounts in thousands, except per share data)

 
 Years ended December 31, 
 
 2011 2010 2009 

Stock option expense

 $291 $317 $785 

Restricted stock/unit award expense

  5,607  4,712  2,731 

Salary stock award expense

  464  609  - 
        

Total share-based compensation expense

  6,362  5,638  3,516 

Income tax benefit

  2,602  2,199  1,371 
        

Share-based compensation expense, net of tax

 $3,760 $3,439 $2,145 
        

Basic earnings per common share

 $0.05 $0.05 $0.04 

Diluted earnings per common share

 $0.05 $0.05 $0.04 

Cash flows (used in) provided by operating activities

 $(47)$189 $177 

Cash flows provided by (used in) financing activities (1)

 $47 $(189)$(177)

Stock Options

Nonqualified Stock Option Transactions
(Amounts in thousands, except per share data)

 
 Year Ended December 31, 2011 
 
 Options Average
Exercise
Price
 Weighted Average Remaining Contractual Term (1) Aggregate Intrinsic Value (2) 

Outstanding at beginning of year

  2,492 $32.23       

Granted

  42  12.17       

Expired

  (560) 30.62       
            

Outstanding at end of period

  1,974 $32.25  3.60 $- 
          

Ending vested and expected to vest

  1,974 $32.25  3.60 $- 

Exercisable at end of period

  1,974 $32.25  3.60 $- 

Stock Option Valuation Assumptions – The Company estimates the fair value of stock options at the date of grant using a Black-Scholes option-pricing model that utilizes the assumptions outlined in the following table. No stock options were granted in 2009 or 2010.

Stock Option Valuation Assumptions

 
 Years Ended December 31, 
 
 2011 2010 2009 

Expected life of the option (in years)

  5.3  -  - 

Expected stock volatility

  42%  -  - 

Risk-free interest rate

  2%  -  - 

Expected dividend yield

  0.33%  -  - 

Weighted-average fair value of options at their grant date

 $4.72 $- $- 

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Expected life is based on historical exercise and termination behavior. Expected stock price volatility is derived from historical volatility of the Common Stock over the expected life of the options. The risk-free interest rate is based on the implied yield currently available on U.S. Treasury zero-coupon issues with a remaining term equal to the expected life of the option. The expected dividend yield represents the three-year historical average of the annual dividend yield as of the date of grant. Management reviews and adjusts the assumptions used to calculate the fair value of an option on a periodic basis to better reflect expected trends.

Other Stock Option Information
(Dollar amounts in thousands)


 Years Ended December 31, 

 2011 2010 2009  Years ended December 31,

Share-based compensation expense

 $291 $317 $785 
 2014 2013 2012
Restricted stock, restricted unit, and performance share
award expense
 $5,926
 $5,779
 $5,877
Salary stock award expense 
 124
 127
Total share-based compensation expense 5,926
 5,903
 6,004
Income tax benefit 2,424
 2,414
 2,456
Share-based compensation expense, net of tax $3,502
 $3,489
 $3,548

Unrecognized compensation expense

 $- $23 $283  $6,937
 $6,327
 $5,674

Weighted-average amortization period remaining (in years)

 - 0.1 0.4  1.3
 1.2
 1.1

No stock options were exercised during the three years ended December 31, 2011. No stock option award modifications were made during 2009, 2010, or 2011.

Restricted Stock and Restricted Stock Unit Awards

Restricted Stock Award Transactions
(Amounts in thousands, except per share data)

 
 Years Ended December 31, 
 
 2011 2010 
 
 Number of
Shares/Units
 Weighted
Average
Grant Date
Fair Value
 Number of
Shares/Units
 Weighted
Average
Grant Date
Fair Value
 

Restricted Stock Awards

             

Non-vested awards at beginning of year

  978 $11.99  653 $11.94 

Granted

  490  12.08  448  13.26 

Vested

  (358) 11.77  (108) 16.90 

Forfeited

  (99) 13.95  (15) 11.99 
          

Non-vested awards at end of year

  1,011 $11.92  978  11.99 
          

Restricted Stock Units

             

Non-vested awards at beginning of year

  - $-  - $- 

Granted

  26  12.08  -  - 
          

Non-vested awards at end of year

  26 $12.08  -  - 
          

The fair value of restricted stock/unit awards is determined based on the average of the high and low stock price on the date of grant and is recognized as compensation expense over the vesting period.



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Other Restricted Stock Award/Unit Information


(Dollar amounts in thousands)



 
 Years Ended December 31, 
 
 2011 2010 2009 

Share-based compensation expense

 $5,607 $4,712 $2,731 

Unrecognized compensation expense

 $4,784 $5,248 $4,489 

Weighted-average amortization period remaining (in years)

  0.95  1.1  1.6 

Total fair value of vested restricted stock awards/unit, at end of period

 $10,264 $11,421 $7,205 

Income tax benefit realized from vesting/release of restricted stock awards/unit

 $1,828 $724 $258 

No restricted stock unit award modifications were made during 2009, 2010, or 2011.

17.18.  STOCKHOLDER RIGHTS PLAN

On February 15, 1989, the Board adopted a Stockholder Rights Plan. Pursuant to that plan, the Company declared a dividend, paid March 1, 1989, of one right ("Right") for each outstanding share of Common StockCompany common stock held on record on March 1, 1989 pursuant to a Rights Agreement dated February 15, 1989. The Rights Agreement was amended and restated on November 15, 1995 and again on June 18, 1997 to exclude an acquisition. The Rights Agreement was further amended on December 9, 2008 to clarify certain items. As amended, each rightRight entitles the registered holder to purchase from the Company 1/100 of a share of Series A Preferred Stock for a price of $150, subject to adjustment. The Rights will be exercisable only if a person or group has acquired,acquires, or announces the intention to acquire, 10% or more of the Company's outstanding shares of Common Stock.common stock. The Company is entitled to redeem each Right for $0.01, subject to adjustment, at any time prior to the earlier of the tenth business day following the acquisition by any person or group of 10% or more of the outstanding shares of the Common Stockcommon stock or the expiration date of the Rights. The Rights Agreement will expire on November 15, 2015.

As a result of the Rights distribution,Agreement, 600,000 of the 1,000,000 shares of authorized preferred stock were reserved for issuance as Series A Preferred Stock.

18.

19.  REGULATORY AND CAPITAL MATTERS

The Company and its subsidiaries are subject to various regulatory requirements that impose restrictions on cash, loans or advances, and dividends. The Bank is also required to maintain reserves against deposits. Reserves are held either in the form of vault cash or noninterest-bearing balances maintained with the Federal Reserve BankFRB and are based on the average daily balances and statutory reserve ratios prescribed by the type of deposit account. Reserve balances totaling $18.3$60.0 million at December 31, 20112014 and $19.3$68.7 million at December 31, 20102013 were maintained in fulfillment ofaccordance with these requirements.

Under current Federal Reserve regulations, the Bank is limited in the amount it may loan or advance to the Parent CompanyFirst Midwest Bancorp, Inc. on an unconsolidated basis (the "Parent Company") and its non-bank subsidiaries. Loans or advances to a single subsidiary may not exceed 10%, and loans to all subsidiaries may not exceed 20% of the Bank's capital stock and surplus, as defined. Loans from subsidiary banks to non-bank subsidiaries, including the Parent Company, are also required to be collateralized.

The principal source of cash flow for the Parent Company is dividends from the Bank. Various federal and state banking regulations and capital guidelines limit the amount of dividends that the Bank may be paidpay to the Parent Company by the Bank.Company. Without prior regulatory approval and while maintaining its well-capitalized status, the Bank can initiate aggregate dividend payments in 20122015 of $48.8$61.2 million plus an additional amount equal to its net profits for 2012,2015, as defined by statute, up to the date of any such dividend declaration. Future payment of dividends by the Bank is dependent upondepends on individual regulatory capital requirements and levels of profitability.

The Company and the Bank are also subject to various capital requirements set up and administered by federal banking agencies. Under capital adequacy guidelines, the Company and the Bank must meet specific guidelines that involve quantitative measures given the risk levels of assets and certain off-balance sheet items calculated


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under regulatory accounting practices ("risk-weighted assets"). The capital amounts and classification are also subject to qualitative judgments by the regulators regarding components of capital and assets, risk weightings, and other factors.

The Federal Reserve, the primary regulator of the Company and the Bank, establishes minimum capital requirements that must be met by member institutions. As defined in the regulations, quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios of total and Tier 1 capital to risk-weighted assets and of Tier 1 capital to adjusted average assets. Failure to meet minimum capital requirements could result in actions by regulators that could have a material adverse effect on the Company's financial statements.

As of December 31, 2011,2014, the Company and the Bank met all capital adequacy requirements to which they are subject.requirements. As of December 31, 2011,2014, the most recent regulatory notification classified the Bank as "well-capitalized" under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes would change the Bank's classification.

The following table outlines the Company's and the Bank's measures of capital as of the dates presented and the capital guidelines established by the Federal Reserve for the Company and the Bank to be categorized as adequately capitalized and the Bank to be categorized as "well-capitalized."


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Summary of Capital Ratios
(Dollar amounts in thousands)


 Actual Adequately
Capitalized
 "Well-Capitalized"
for FDICIA

 Capital Ratio Capital Ratio Capital Ratio Actual 
Adequately
Capitalized
 To Be Well-Capitalized Under Prompt Corrective Action Provisions

As of December 31, 2011:

 
 Capital Ratio % Capital Ratio % Capital Ratio %
As of December 31, 2014            

Total capital (to risk-weighted assets):

             

First Midwest Bancorp, Inc.

 $853,961 13.68% $499,295 8.00% $624,119 10.00% $884,692
 11.23 $630,140
 8.00 N/A
 N/A

First Midwest Bank

 880,223 14.37 489,968 8.00 612,459 10.00 931,829
 12.30 606,038
 8.00 $757,547
 10.00

Tier 1 capital (to risk-weighted assets):

         

First Midwest Bancorp, Inc.

 724,863 11.61 249,648 4.00 374,471 6.00 802,483
 10.19 315,070
 4.00 N/A
 N/A

First Midwest Bank

 803,054 13.11 244,984 4.00 367,476 6.00 857,362
 11.32 303,019
 4.00 454,528
 6.00

Tier 1 leverage (to average assets):

         

First Midwest Bancorp, Inc.

 724,863 9.28 234,409 3.00 390,682 5.00 802,483
 9.03 355,362
 4.00 N/A
 N/A

First Midwest Bank

 803,054 10.37 232,370 3.00 387,284 5.00 857,362
 9.76 351,222
 4.00 439,028
 5.00

As of December 31, 2010:

 
As of December 31, 2013            

Total capital (to risk-weighted assets):

             

First Midwest Bancorp, Inc.

 $1,027,761 16.27% $505,420 8.00% $631,774 10.00% $841,787
 12.39 $543,573
 8.00 N/A
 N/A

First Midwest Bank

 856,027 13.87 493,622 8.00 617,027 10.00 897,255
 13.86 517,721
 8.00 $647,152
 10.00

Tier 1 capital (to risk-weighted assets):

        

First Midwest Bancorp, Inc.

 897,410 14.20 252,710 4.00 379,065 6.00 741,414
 10.91 271,787
 4.00 N/A
 N/A

First Midwest Bank

 778,008 12.61 246,811 4.00 370,216 6.00 816,286
 12.61 258,861
 4.00 388,291
 6.00

Tier 1 leverage (to average assets):

        

First Midwest Bancorp, Inc.

 897,410 11.21 240,066 3.00 400,107 5.00 741,414
 9.18 242,277
 4.00 N/A
 N/A

First Midwest Bank

 778,008 9.88 236,253 3.00 393,755 5.00 816,286
 10.24 239,065
 4.00 398,442
 5.00

In July of 2013, the Federal Reserve published final rules (the "Basel III Capital Rules") that revise the regulatory capital rules to incorporate certain revisions by the Basel Committee on Banking Supervision. The phase-in period for the final rules began for the Company on January 1, 2015, with full compliance with the final rules entire requirement phased in on January 1, 2019.

The Basel III Capital Rules (i) introduce a new capital measure called "Common Equity Tier 1" ("CET1"), (ii) specify that Tier 1 capital consists of CET1 and "Additional Tier 1 Capital" instruments meeting specified requirements, (iii) narrowly define CET1 by requiring that most deductions/adjustments to regulatory capital measures be made to CET1 and not to the other components of capital, and (iv) expand the scope of the deductions/adjustments compared to existing regulations. Bank holding companies with less than $15 billion in consolidated assets as of December 31, 2009, such as the Company, are permitted to include trust-preferred securities in Additional Tier 1 Capital on a permanent basis and without any phase-out. As of December 31, 2014, the Company had $50.7 million of trust-preferred securities included in Tier 1 capital.

When fully phased in on January 1, 2019, the Basel III Capital Rules will require the Company and the Bank to maintain the following:
A minimum ratio of CET1 to risk-weighted assets of at least 4.5%, plus a 2.5% "capital conservation buffer" (resulting in a minimum ratio of CET1 to risk-weighted assets of at least 7% upon full implementation).
A minimum ratio of Tier 1 capital to risk-weighted assets of at least 6.0%, plus the capital conservation buffer (resulting in a minimum Tier 1 capital ratio of 8.5% upon full implementation).
A minimum ratio of total capital (Tier 1 capital plus Tier 2 capital) to risk-weighted assets of at least 8.0%, plus the capital conservation buffer (resulting in a minimum total capital ratio of 10.5% upon full implementation).
A minimum leverage ratio of 4%, calculated as the ratio of Tier 1 capital to average assets.


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The Basel III Capital Rules also provide for a number of deductions from and adjustments to CET1 to be phased-in over a four-year period through January 1, 2019 (beginning at 40% on January 1, 2015 and an additional 20% per year thereafter). Examples of these include the requirement that mortgage servicing rights, deferred tax assets depending on future taxable income, and significant investments in non-consolidated financial entities be deducted from CET1 to the extent that any one such category exceeds 10% of CET1 or all such categories in the aggregate exceed 15% of CET1. Under current capital standards, the effects of accumulated other comprehensive income items included in capital are excluded for the purposes of determining regulatory capital ratios. Under the Basel III Capital Rules, the effects of certain accumulated other comprehensive items are not excluded; however, the Company and the Bank, may make a one-time permanent election to continue to exclude these items, and the Company and the Bank expect to make such an election.

Finally, the Basel III Capital Rules prescribe a standardized approach for risk weightings that expand the risk-weighting categories from the current four Basel I-derived categories (0%, 20%, 50%, and 100%) to a much larger and more risk-sensitive number of categories depending on the nature of the assets, generally ranging from 0% for U.S. government and agency securities to 600% for certain equity exposures, resulting in higher risk weights for a variety of asset categories.

The Company and the Bank believe they would meet all capital adequacy requirements under the Basel III Capital Rules on a fully phased-in basis as if such requirements were currently in effect as of December 31, 2014.

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19.

20.  DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

In the ordinary course of business, the Company enters into derivative transactions as part of its overall interest rate risk management strategy to minimize significant unplanned fluctuations in earnings and cash flows caused by interest rate volatility.strategy. The significant accounting policies related to derivative instruments and hedging activities are presented in Note 1, "Summary of Significant Accounting Policies."

During 2010 and 2011, the

Fair Value Hedges
The Company hedgedhedges the fair value of fixed rate commercial real estate loans through the use of pay fixed, receive variableusing interest rate swaps.swaps through which the Company pays fixed amounts and receives variable amounts. These derivative contracts wereare designated as fair value hedges and are valued using observable market prices, if available, or third party cash flow projection models. The valuations and expected lives presented in the following table are based on yield curves, forward yield curves, and implied volatilities that were observable in the cash and derivatives markets as of December 31, 2011 and December 31, 2010.

Interest Rate Derivatives Portfolio
hedges.

Fair Value Hedges
(Dollar amounts in thousands)

 
 December 31, 
 
 2011 2010 

Fair Value Hedges

       

Related to fixed rate commercial loans

       

Notional amount outstanding

 $16,947 $17,994 

Weighted-average interest rate received

  2.19%  2.17% 

Weighted-average interest rate paid

  6.39%  6.40% 

Weighted-average maturity (in years)

  5.76  6.76 

Derivative liability fair value

 $(2,459)$(1,833)

Cash pledged to collateralize net unrealized losses with counterparties (1)

 $2,516 $1,836 

Aggregate fair value of assets needed to settle the instruments immediately (if the credit risk-related contingent features were triggered)

 $2,492 $1,868 
  As of December 31,
  2014 2013
Gross notional amount outstanding $12,793
 $14,730
Derivative liability fair value (1,032) (1,472)
Weighted-average interest rate received 2.07% 2.08%
Weighted-average interest rate paid 6.37% 6.39%
Weighted-average maturity (in years) 2.95
 3.76
Fair value of assets needed to settle derivative transactions (1)
 1,057
 1,502


(1)
This amount represents the fair value if credit risk related contingent features were triggered.

Hedge Ineffectiveness and Gains Recognized
(Dollar amounts in thousands)

 
 Years ended December 31, 
 
 2011 2010 2009 

Net hedge ineffectiveness recognized in noninterest income:

          

Change in fair value of swaps

 $(626)$(588)$1,383 

Change in fair value of hedged items

  624  585  (1,389)
        

Net hedge ineffectiveness (1)

 $(2)$(3)$(6)
        

Gains recognized in net interest income (2)

 $- $- $120 
Cash Flow Hedges
During the year ended December 31, 2014, the Company hedged $325.0 million of certain corporate variable rate loans using interest rate swaps through which the Company receives fixed amounts and pays variable amounts. The Company also hedged $325.0 million of borrowed funds using four forward starting interest rate swaps through which the Company receives variable amounts and pays fixed amounts. The four forward starting interest rate swaps begin in 2015 and 2016 and mature in 2019. These derivative contracts are designated as cash flow hedges.

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Cash Flow Hedges
(Dollar amounts in thousands)
  As of December 31,
  2014 2013
Gross notional amount outstanding $650,000
 $
Derivative asset fair value 1,166
 
Derivative liability fair value (3,096) 
Weighted-average interest rate received 1.63% 
Weighted-average interest rate paid 0.16% 
Weighted-average maturity (in years) 4.52
 
The effective portion of gains or losses on cash flow hedges is recorded in accumulated other comprehensive loss on an after-tax basis and is subsequently reclassified to interest income or expense in the period that the forecasted hedge impacts earnings. Hedge ineffectiveness is determined using a regressionanalysis at the inception of the hedge relationship and on an ongoing basis. For the year ended December 31, 2014, there were no gains or losses related to cash flow hedge ineffectiveness. As of December 31, 2014, the Company estimates that $5.0 million will be reclassified from accumulated other comprehensive loss as an increase to interest income over the next twelve months.
Other Derivative Instruments
The Company also enters into derivative transactions with its commercial customers and simultaneously enters into an offsetting interest rate derivative transaction with a third party. This transaction allows the Company’s customers to effectively convert a variable rate loan into a fixed rate loan. Due to the offsetting nature of these transactions, the Company does not apply hedge accounting treatment. Transaction fees related to commercial customer derivative instruments of $2.2 million and $2.8 million were recorded in noninterest income for the years ended December 31, 2014 and 2013, respectively. There were no transaction fees related to commercial customer derivative instruments for the year ended December 31, 2012.
Other Derivative Instruments
(Dollar amounts in thousands)
  As of December 31,
  2014 2013
Gross notional amount outstanding $527,893
 $256,638
Derivative asset fair value 7,852
 2,235
Derivative liability fair value (7,852) (2,235)
Fair value of assets needed to settle derivative transactions (1)
 8,130
 1,305

(1)
This amount represents the fair value if credit risk related contingent factors were triggered.
The Company’s derivative portfolio also includes other derivative instruments that were excluded fromdo not receive hedge accounting treatment consisting of commitments to originate 1-4 family mortgage loans and foreign exchange contracts. In addition, the assessment of hedge ineffectiveness during the years presented.
(2)
The gain represents the fair value on discontinued fair value hedges in connectionCompany occasionally enters into risk participation agreements with our subordinated fixed rate debt that were being amortized through earnings over the remaining lifecounterparty banks to transfer or assume a portion of the hedged item (debt). In additioncredit risk related to customer transactions. The amounts of these amounts, interest accruals on fair value hedges are also reported in net interest income.

instruments were not material for any period presented. The Company had no other derivative instruments as of December 31, 2014 and 2013. The Company does not enter into derivative transactions for purely speculative purposes.

Credit Risk
Derivative instruments are inherently subject to credit risk. Credit risk, occurswhich represents the Company’s risk of loss when the counterparty to a derivative contract fails to perform according to the terms of the agreement. Credit risk is managed by limiting and collateralizing the aggregate amount of net unrealized gains in agreements,losses by transaction, monitoring the size and the maturity structure of the derivatives, and applying uniform credit standards for all activities with credit risk. Understandards. Company


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policy establishes limits on credit exposure to any single counterparty cannot exceed 2.5% of stockholders' equity.counterparty. In addition, the Company established bilateral collateral agreements with its primary derivative counterparties that provide for exchanges of marketable securities or cash to collateralize either party'sparty’s net gainslosses above an agreed-upona stated minimum threshold. In determining the amount of collateral required, gains and losses on derivative instruments are netted with the same counterparty. OnAt December 31, 2011,2014 and 2013, these collateral agreements covered 100% of the fair value of the Company'sCompany’s outstanding interest rate swaps. Net losses with counterparties must be collateralized with either cash or U.S. government or U.S. government-sponsored agency securities.fair value hedges. Derivative assets and liabilities are presented gross, rather than net, of pledged collateral amounts.

Certain derivative instruments are subject to master netting agreements with counterparties. The Company records these transactions at their gross fair values and does not offset derivative assets and liabilities in the Consolidated Statements of Financial

127




Condition. The following table presents the fair value of the Company's derivatives and offsetting positions as of December 31, 2014 and 2013.
Offsetting Derivatives
(Dollar amounts in thousands)
 Derivative Assets Derivative Liabilities
 As of December 31, As of December 31,
 2014 2013 2014 2013
Gross amounts recognized$9,018
 $2,235
 $11,980
 $3,707
Less: amounts offset in the Consolidated Statements of
  Financial Condition

 
 
 
Net amount presented in the Consolidated Statements of
  Financial Condition (1)
9,018
 2,235
 11,980
 3,707
Gross amounts not offset in the Consolidated Statements of Financial Condition    
Offsetting derivative positions(1,195) (704) (1,195) (704)
Cash collateral pledged
 
 (10,785) (3,003)
Net credit exposure$7,823
 $1,531
 $
 $

(1)
Included in other assets or other liabilities in the Consolidated Statements of Financial Condition.
As of December 31, 20112014 and December 31, 2010, all of2013, the Company'sCompany’s derivative instruments generally contained provisions that require the Company'sCompany’s debt to remain above a certain credit rating by each of the major credit rating agencies.agencies or that the Company maintain certain capital levels. If the Company'sCompany’s debt were to fall below that credit rating or the Company's capital were to fall below the required levels, it would be in violation of those provisions, and the counterparties to the derivative instruments could terminate the swap transaction and demand cash settlement of the derivative instrument in an amount equal to the derivative liability fair value. For the year endedAs of December 31, 2011,2014 and 2013, the Company was not in violation of these provisions.

The Company's derivative portfolio also includes derivative instruments not designated in a hedge relationship consisting of commitments to originate 1-4 family mortgage loans and foreign exchange contracts. The amount of these instruments was not material for any period presented. The Company had no other derivative instruments as of December 31, 2011 or December 31, 2010. The Company does not enter into derivative transactions for purely speculative purposes.

20.

21.  COMMITMENTS, GUARANTEES, AND CONTINGENT LIABILITIES

Credit Commitments and Guarantees

In the normal course of business, the Company enters into a variety of financial instruments with off-balance sheet risk to meet the financing needs of its customers and to conduct lending activities. These instruments includeactivities, including commitments to extend credit and standby and commercial letters of credit. These instruments involve to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the Consolidated Statements of Financial Condition.


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Contractual or Notional Amounts of Financial Instruments

(Dollar amounts in thousands)

 
 December 31, 
 
 2011 2010 

Commitments to extend credit:

       

Home equity lines

 $257,315 $275,826 

Credit card lines

  21,257  26,376 

1-4 family real estate construction

  13,300  26,682 

Commercial real estate

  139,574  175,608 

Commercial and industrial

  609,601  553,168 

Overdraft protection program (1)

  178,699  169,824 

All other commitments

  129,015  97,299 
      

Total commitments

 $1,348,761 $1,324,783 
      

Letters of credit:

       

1-4 family real estate construction

 $8,661 $10,551 

Commercial real estate

  49,373  54,896 

All other

  58,532  74,594 
      

Total letters of credit

 $116,566 $140,041 
      

Unamortized fees associated with letters of credit (2) (3)

 $668 $696 

Remaining weighted-average term, in months

  9.62  12.2 

Remaining lives, in years

  0.1 to 12.6  0.1 to 9.5 

Recourse on assets securitized:

       

Unpaid principal balance of assets securitized

 $- $7,424 

Cap on recourse obligation

 $- $2,208 

Carrying value of recourse obligation (2)

 $- $148 
  As of December 31,
  2014 2013
Commitments to extend credit:    
Commercial, industrial, and agricultural $1,299,683
 $1,077,201
Commercial real estate 170,573
 133,867
Home equity 317,783
 268,311
Other commitments (1)
 194,556
 181,702
Total commitments to extend credit $1,982,595
 $1,661,081
Standby letters of credit $110,639
 $110,453
Recourse on assets sold:    
Unpaid principal balance of loans sold $185,910
 $170,330
Carrying value of recourse obligation (2)
 155
 162


(1)
Other commitments includes installment and overdraft protection program commitments.
(2)
Included in other liabilities in the Consolidated Statements of Financial Condition.

128




Commitments to extend credit are agreements to lend funds to a customer, as long as there is no violation of any condition in the contract.subject to contractual terms and covenants. Commitments generally have fixed expiration dates or other termination clauses, and variable interest rates, and may require payment of a fee.fee requirements, when applicable. Since many of the commitments are expected to expire without being drawn, upon, the total commitment amounts do not necessarily represent future cash-flowcash flow requirements.

In the event of a customer's non-performance, the Company's credit loss exposure is equal to the contractual amount of thosethe commitments. The credit risk is essentially the same as that involved in extending loans to customers and is subject to standard credit policies.customers. The Company uses the same credit policies in makingfor credit commitments as it does for on-balance sheetits loans and minimizes exposure to credit loss through various collateral requirements.

Letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Standby letters of credit generally are contingent uponon the failure of the customer to perform according to the terms of the underlying contract with the third party and are most often issued in favor of a municipality where construction is taking place to ensure the borrower adequately completes the construction.

The maximum potential future payments guaranteed by the Company under standby letters of credit arrangements are equal to the contractual amount of the commitment. If a commitment is funded, the Company may seek recourse through the liquidation of the underlying collateral, including real estate, production plants and property, marketable securities, or receipt of cash.


TableAs a result of Contents

Pursuant to the securitizationsale of certain 1-4 family mortgage loans, in 2004, the Company wasis contractually obligated to repurchase at recorded value any non-performing loans defined asor loans past due greater than 90 days.that do not meet underwriting requirements at recorded value. In accordance with the securitization agreement,sales agreements, there is no limitation to the maximum potential future payments or expiration of the Company's recourse obligationobligation. There were no material loan repurchases during the years ended on November 30, 2011.

Repurchases and Charge-OffsDecember 31, 2014 or 2013.

During 2012, the Company entered into two forward commitments with the FHLB to borrow $250 million for a five year period beginning in 2014 at a weighted average interest rate of Recourse Loans
(Dollar amounts in thousands)

 
 Years ended December 31, 
 
 2011 2010 2009 

Recourse loans repurchased during the year

 $- $241 $767 

Recourse loans charged-off during the year

  -  174  73 

In August 2011, the Bank was named2.0%. The Company terminated these forward commitments during 2013, resulting in a purported class action lawsuit filedgain of $7.8 million recorded as a component of noninterest income in the Circuit CourtConsolidated Statement of Cook County, Illinois on behalfIncome.

Legal Proceedings
In the ordinary course of certain of the Bank's customers who incurred overdraft fees. The lawsuit is based on the Bank's practices pursuant to debit card transactions, and alleges, among other things, that these practices have resulted in customers being unfairly assessed overdraft fees. The lawsuit seeks an unspecified amount of damages and other relief, including restitution.

The Company believes that the complaint contains significant inaccuracies and factual misstatements and that the Bank has meritorious defenses. As a result, the Bank intends to vigorously defend itself against the allegations in the lawsuit. The Bank filed a motion to dismiss this claim in November 2011, and the plaintiff filed an amended complaint in February 2012.

As of December 31, 2011,business, there were certain other legal proceedings pending against the Company and its subsidiaries inat December 31, 2014. While the ordinary courseoutcome of business. The Companyany legal proceeding is inherently uncertain, based on information currently available, the Company's management does not believeexpect that any liabilities individually or in the aggregate, potentially arising from any of these proceedings wouldpending legal matters will not have a material adverse effect on the consolidated financial condition of the Company as of December 31, 2011.

21.   VARIABLE INTEREST ENTITIES ("VIE"s)

A VIE is a partnership, limited liability company, trust, or other legal entity that does not have sufficient equity to finance its activities without additional subordinated financial support from other parties, or whose investors lack one of three characteristics associated with owning a controlling financial interest. Those characteristics are: (i) the direct or indirect ability to make decisions about an entity's activities through voting rights or similar rights; (ii) the obligation to absorb the expected losses of an entity, if they occur; and (iii) the right to receive the expected residual returns of the entity, if they occur.

GAAP requires VIEs to be consolidated by the party that has both (i) the ability to direct the VIE's activities that most impact the entity's economic performance and (ii) the exposure to a majority of the VIE's expected losses and/or residual returns (i.e., meets the definition of the primary beneficiary). The following table summarizes the VIEs in which the Company has an interest.

 
 December 31, 2011 December 31, 2010 
 
 Number
of
VIEs
 Carrying
Amount
of Assets
 Maximum
Exposure
to Loss
 Number
of
VIEs
 Carrying
Amount
of Assets
 Maximum
Exposure
to Loss
 

FMCT:

                   

Principal balance of debentures issued by the Company

    $87,277 $87,277    $87,273 $87,273 

Related interest receivable

     506  506     506  506 
                

Total FMCT assets

  1 $87,783 $87,783  1 $87,779 $87,779 
                

Interest in trust-preferred capital securities issuances

  1 $32 $31  1 $32 $31 

Investment in low-income housing tax credit partnerships

  12 $1,066 $1,011  12 $1,546 $1,222 

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The Company owns 100% of the common stock of FMCT, a business trust that was formed in November 2003 to issue trust-preferred securities to third party investors. FMCT issued preferred securities and common stock and used the proceeds to purchase junior subordinated debentures issued by the Company. FMCT's only assets as of December 31, 2011 and 2010 were the principal balance of the debentures and the related interest receivable. FMCT meets the definition of a VIE, but the Company is not the primary beneficiary of FMCT. Accordingly, FMCT is not consolidated in the Company's financial statements. The subordinated debentures issued by the Company to FMCT are included in senior and subordinated debt in the Company's Consolidated Statementsposition, results of Financial Condition.

The Company holds an interest in one trust-preferred capital securities issuance. Although this investment may meet the definition of a VIE, the Company is not the primary beneficiary. The Company accounts for its interest in this investment as an available-for-sale security.

The Company has limited partner interests in low-income housing tax credit partnerships and limited liability corporations, which were acquired at various times from 1997 to 2004. These entities meet the definition of a VIE. Since the Company is not the primary beneficiary of the entities, it accounts for its investment using the cost method. The carrying amount of the Company's investment in these partnerships is included in other assets in the Consolidated Statements of Financial Condition.

operations, or cash flows.

22.  FAIR VALUE

The Company measures, monitors, and discloses certain of its assets and liabilities at fair value in accordance with fair value accounting guidance.

Fair value is defined asrepresents the price that wouldamount expected to be received to sell an asset or paid to transfer a liability in theits principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. In accordance with fair value accounting guidance, the Company measures, records, and reports various types of assets and liabilities at fair value on either a recurring or non-recurring basis in the Consolidated Statements of Financial Condition. Those assets and liabilities are presented below in the sections titled "Assets and Liabilities Required to be Measured at Fair value is usedValue on a recurring basisRecurring Basis" and "Assets and Liabilities Required to account for trading securities, securities available-for-sale, mortgage servicing rights, derivativebe Measured at Fair Value on a Non-Recurring Basis."
Other assets and derivative liabilities. It is also used on an annual basisliabilities are not required to disclose thebe measured at fair value in the Consolidated Statements of pension plan assets. In addition,Financial Condition, but must be disclosed at fair value. Refer to the "Fair Value Measurements of Other Financial Instruments" section of this footnote. Any aggregation of the estimated fair values presented in this footnote does not represent the value is usedof the Company.
Depending on a non-recurring basis (i) to apply lower-of-cost-or-market accounting to OREO, loans held-for-sale (excluding mortgage loans held-for-sale), and assets held-for-sale; (ii) to evaluate assets or liabilities for impairment, including collateral-dependent impaired loans, goodwill, and other intangible assets; and (iii) for disclosure purposes.

Depending upon the nature of the asset or liability, the Company uses various valuation techniquesmethodologies and assumptions when estimating fair value. The Company maximizes the use of observable inputs and minimizes the use of unobservable inputs when measuringto estimate fair value. GAAP establishesprovides a three-tiered fair value hierarchy that prioritizesbased on the inputs used to measure fair value into three levels.value. The three levels of the fair value hierarchy areis defined as follows:

Level 1 – Quoted prices in active markets for identical assets or liabilities.

Level 2 – Observable inputs other than level 1 prices, such as quoted prices for similar instruments, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the asset or liability.

data.
Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

The categorization These inputs require significant management judgment or estimation, some of an asset or liabilitywhich use model-based techniques and may be internally developed.

Assets and liabilities are assigned to a level within the fair value hierarchy is based on the lowest level of significant input that is significantused to themeasure fair value measurement. Transfers betweenvalue. Assets and liabilities may change levels ofwithin the fair value hierarchy due to market conditions or other circumstances. Those transfers are recognized on the actual date of circumstancethe event that resulted inprompted the transfer. There were no transfers of assets or liabilities between levels of the fair value hierarchy during 2010 or 2011. In 2009, there was a transfer of certain mortgage-backed securities from level 3 to level 2. The transfer out of level 3 represents securities that were manually priced using broker quotes (a level 3 input) at the beginning of the year, but valued by an external pricing service using level 2 inputs at the end of the year.

periods presented.

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Assets and Liabilities Required to be Measured at Fair Value

on a Recurring Basis

The following table provides the hierarchy level and fair value for each class of assets and liabilities required to be measured at fair value.

Fair Value Measurements
(Dollar amounts in thousands)

 
 December 31, 2011 
 
 Level 1 Level 2 Level 3 Total 

Assets and liabilities measured at fair value on a recurring basis

             

Assets:

             

Trading securities:

             

Money market funds

 $1,565 $- $- $1,565 

Mutual funds

  12,904  -  -  12,904 
          

Total trading securities

  14,469  -  -  14,469 
          

Securities available-for-sale:

             

U.S. agency securities

  -  5,035  -  5,035 

CMOs

  -  384,104  -  384,104 

Other residential mortgage-backed securities

  -  87,691  -  87,691 

Municipal securities

  -  490,071  -  490,071 

CDOs

  -  -  13,394  13,394 

Corporate debt securities

  -  30,014  -  30,014 

Hedge fund investment

  -  1,616  -  1,616 

Other equity securities

  41  1,040  -  1,081 
          

Total securities available-for-sale

  41  999,571  13,394  1,013,006 
          

Mortgage servicing rights (1)

  -  -  929  929 
          

Total assets

 $14,510 $999,571 $14,323 $1,028,404 
          

Liabilities:

             

Derivative liabilities (1)

 $- $2,459 $- $2,459 
          

Assets measured at fair value on an annual basis

             

Pension plan assets:

             

Mutual funds (2)

 $17,970 $- $- $17,970 

U.S. government and government agency securities

  5,954  7,029  -  12,983 

Corporate bonds

  -  5,954  -  5,954 

Common stocks

  16,537  -  -  16,537 

Common trust funds

  -  9,546  -  9,546 
          

Total pension plan assets

 $40,461 $22,529 $- $62,990 
          

Assets measured at fair value on a non-recurring basis

             

Collateral-dependent impaired loans (3)

 $- $- $96,220 $96,220 

OREO (4)

  -  -  57,430  57,430 

Loans held-for-sale (5)

  -  -  4,200  4,200 

Assets held-for-sale (6)

  -  -  7,933  7,933 
          

Total assets

 $- $- $165,783 $165,783 
          

Refer to the following page for footnotes.


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 December 31, 2010 
 
 Level 1 Level 2 Level 3 Total 

Assets and liabilities measured at fair value on a recurring basis

             

Assets:

             

Trading securities:

             

Money market funds

 $1,196 $- $- $1,196 

Mutual funds

  14,086  -  -  14,086 
          

Total trading securities

  15,282  -  -  15,282 
          

Securities available-for-sale:

             

U.S. agency securities

  -  17,886  -  17,886 

CMOs

  -  379,589  -  379,589 

Other residential mortgage-backed securities

  -  106,451  -  106,451 

Municipal securities

  -  503,991  -  503,991 

CDOs

  -  -  14,858  14,858 

Corporate debt securities

  -  32,345  -  32,345 

Hedge fund investment

  -  1,683  -  1,683 

Other equity securities

  38  961  -  999 
          

Total securities available-for-sale

  38  1,042,906  14,858  1,057,802 
          

Mortgage servicing rights (1)

  -  -  942  942 
          

Total assets

 $15,320 $1,042,906 $15,800 $1,074,026 
          

Liabilities:

             

Derivative liabilities (1)

 $- $1,833 $- $1,833 
          

Assets measured at fair value on an annual basis

             

Pension plan assets:

             

Mutual funds (2)

 $8,995 $- $- $8,995 

U.S. government and government agency securities

  2,670  4,950  -  7,620 

Corporate bonds

  -  10,500  -  10,500 

Common stocks

  16,155  -  -  16,155 

Common trust funds

  -  11,443  -  11,443 
          

Total pension plan assets

 $27,820 $26,893 $- $54,713 
          

Assets measured at fair value on a non-recurring basis

             

Collateral-dependent impaired loans (3)

 $- $- $125,258 $125,258 

OREO (4)

  -  -  53,439  53,439 
          

Total assets

 $- $- $178,697 $178,697 
          
Recurring Fair Value Measurements
(Dollar amounts in other assets in the Consolidated Statements of Financial Condition.
(6)
Included in premises, furniture, and equipment in the Consolidated Statements of Financial Condition.

Valuation Methodology

thousands)

  As of December 31, 2014 As of December 31, 2013
  Level 1 Level 2 Level 3 Level 1 Level 2 Level 3
Assets:            
Trading securities:            
Money market funds $1,725
 $
 $
 $1,847
 $
 $
Mutual funds 15,735
 
 
 15,470
 
 
Total trading securities 17,460
 
 
 17,317
 
 
Securities available-for-sale:            
U.S. Agency securities 
 30,431
 
 
 500
 
CMOs 
 534,156
 
 
 475,768
 
Other MBSs 
 159,765
 
 ��
 136,164
 
Municipal securities 
 423,820
 
 
 461,393
 
CDOs 
 
 33,774
 
 
 18,309
Corporate debt securities 
 1,802
 
 
 14,929
 
Equity securities 
 3,261
 
 44
 5,618
 
Total securities available-for-
  sale
 
 1,153,235
 33,774
 44
 1,094,372
 18,309
Mortgage servicing rights (1)
 
 
 1,728
 
 
 1,893
Derivative assets (1)
 
 9,018
 
 
 2,235
 
Liabilities:            
Derivative liabilities (2)
 $
 $11,980
 $
 $
 $3,707
 $

(1)
Included in other assets in the Consolidated Statements of Financial Condition.
(2)
Included in other liabilities in the Consolidated Statements of Financial Condition.
The following describessections describe the specific valuation methodologiestechniques and inputs used by the Company forto measure financial assets and liabilities measured at fair value.


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Trading Securities – Trading

The Company's trading securities representconsist of diversified investment securities held in a rabbigrantor trust and are invested in money market and mutual funds. The fair value of these money market and mutual funds is based on quoted market prices in active exchange markets and is classified in level 1 of the fair value hierarchy. All trading securities are reported at fair value with changes in the fair value included in other noninterest income.

Securities Available-for-Sale – Securities
The Company’s available-for-sale securities are primarily fixed income instruments that are not quoted on an exchange, but may be traded in active markets. The fair value of these securities isvalues are based on quoted prices in active markets or market prices for similar securities obtained from external pricing services or dealer market participants and isare classified in level 2 ofin the fair value hierarchy. TheQuarterly, the Company has evaluatedevaluates the methodologies used by its external pricing services to developestimate the fair valuesvalue of these securities to determine whether suchthe valuations are representative ofrepresent an exit price in the Company'sCompany’s principal markets. Examples of such securities measured at fair value
CDOs are U.S. agency securities, municipal bonds, CMOs, and other mortgage-backed securities.

The following table provides inputs used in the evaluation of the Company's CMOs and other mortgage-backed securities.

 
 Collateralized
Mortgage
Obligations
 Other
Mortgage-Backed
Securities

Weighted-average coupon rate

 4.5% 1.8%

Weighted-average maturity, in years

 2.2 3.9

Information on underlying residential mortgages:

    

Origination dates

 2000 to 2010 2000 to 2010

Weighted-average coupon rate

 5.7% 5.8%

Weighted-average maturity, in years

 8.3 9.2

The Company's hedge fund investment is also classified in level 2 of3 in the fair value hierarchy. The fair value is derived from monthly and annual financial statements provided by hedge fund management. The majority of the hedge fund's investment portfolio is held in securities that are freely tradable and are listed on national securities exchanges.

In certain cases, where there is limited market activity or less transparent inputs to the valuation, securities are classified in level 3 of the fair value hierarchy. For instance, in the valuation of CDOs, the determination of fair value requires benchmarking to similar instruments or analyzing default and recovery rates. Due to the illiquidity in the secondary market for the Company's CDOs, the Company estimates the value of these securitiesfair values for each CDO using discounted cash flow analyses with the assistance of a structured credit valuation firm. The valuationThis methodology is based on a credit analysis and historical financial data for each of the issuers underlying the CDOs relies on historical financial data(the "Issuers"). These estimates are highly subjective and sensitive to several significant, unobservable inputs. The cash flows for the obligors of the underlying collateral. The valuation firm performs a credit analysis of each of the entities comprising the collateral underlying each CDO in order to estimate the entities' likelihood of default on their trust-preferred obligations. Cash flowsIssuer are modeled according to the contractual terms of the CDO,then discounted to their present values andusing LIBOR plus an adjustment to reflect the impact of market factors. Finally, the discounted cash flows for each Issuer are usedaggregat


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ed to derive the estimated fair value for the specific CDO. The following table presents the ranges of unobservable inputs used by the Company as of December 31, 2014.
Unobservable Inputs Used in the Valuation of CDOs
As of December 31,
2014
Probability of prepayment2.9% - 15.2%
Probability of default18.4% - 57.7%
Loss given default83.8% - 97.0%
Probability of deferral cure6.7% - 75.0%
Most Issuers have the right to prepay the securities on the fifth anniversary of issuance and under other limited circumstances. To estimate prepayments, a credit analysis of each Issuer is performed to estimate its ability and likelihood to fund a prepayment. If a prepayment occurs, the Company receives cash equal to the par value for the portion of the individual CDO. CDO associated with that Issuer.
The discount rates used inlikelihood that an Issuer who is currently deferring payment on the discounted cash flow analyses range from LIBOR plus 1,300 to LIBOR plus 1,500 basis points depending uponsecurities will pay all deferred amounts and remain current thereafter is based on an analysis of the specific CDOIssuer's asset quality, leverage ratios, and reflects the higher risk inherent in these securities given the current market environment. other measures of financial viability.
Changes in the assumptions used to valueany of these securitieskey inputs could result in a significantly higher or lower estimate of fair value measurement.


Tablefor each CDO. The timing of Contents

the default, the magnitude of the default, and the timing and magnitude of the cure probability are directly interrelated. Defaults that occur sooner and/or are greater than anticipated have a negative impact on the valuation. In addition, a high cure probability assumption has a positive effect on the fair value, and, if a cure event takes place sooner than anticipated, the impact on the valuation is also favorable.

During the year ended December 31, 2014, the Company observed market activity for similar CDO securities. This increase in market activity allowed the Company to obtain market prices from dealer market participants that were used in management's valuation process as of December 31, 2014.
Management monitors the valuation results of each CDO on a quarterly basis, which includes an analysis of historical pricing trends and market activity for similar securities, consideration of overall economic conditions (such as movements in LIBOR curves), and the performance in the Issuers' industries. Annually, management validates significant assumptions by reviewing detailed back-testing performed by the structured credit valuation firm.
A rollforward of the carrying value of CDOs for the three years ended December 31, 2014 is presented in the following table.
Rollforward of Carrying Value of Level 3 Securities Available-for-Sale
CDOs
(Dollar amounts in thousands)

 
 Years Ended December 31, 
 
 2011  
 2010  
 2009 
 
 Collateralized
Debt
Obligations
  
 Collateralized
Debt
Obligations
  
 Mortgage-
Backed
Securities
 Collateralized
Debt
Obligations
 Total 

Balance at beginning of year

 $14,858   $11,728   $16,632 $42,086 $58,718 

Total income (loss):

                    

Included in earnings (1)

  (936)   (4,664)   -  (24,509) (24,509)

Included in other comprehensive income (loss)

  (528)   7,794    566  (5,834) (5,268)

Principal paydowns

  -    -    (1,590) (22) (1,612)

Accretion

  -    -    (2) 7  5 

Transfer out of Level 3 (2)

  -    -    (15,606) -  (15,606)
                

Balance at end of year

 $13,394   $14,858   $- $11,728 $11,728 
                

Change in unrealized losses recognized in earnings relating to securities still held at end of period

 $(936)  $(4,664)  $- $(24,509)$(24,509)
                
  Years Ended December 31,
  2014 2013 2012
Beginning balance $18,309
 $12,129
 $13,394
Additions 6,549
 
 
Total income (loss):      
OTTI included in earnings (1)
 
 
 (2,226)
Change in other comprehensive income (loss) (2)
 13,495
 6,180
 961
Sales and paydowns (3) 
 (4,579) 
 
Ending balance $33,774
 $18,309
 $12,129
Change in unrealized losses recognized in earnings related to securities still
  held at end of period
 $
 $
 $(2,226)


(1)
Included in net securities gains (losses) in the Consolidated Statements of Income and related to securities still held at the end of the period.
(2)
Included in unrealized holding gains (losses) in the Consolidated Statements of Comprehensive Income.
(3)
During the year ended December 31, 2014, one CDO with a carrying value of $1.3 million and four CDOs totaling $2.9 million, which were acquired in the Great Lakes transaction, were sold. In addition, one CDO with a carrying value of zero was sold during the year ended December 31, 2013.

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Mortgage Servicing Rights – In 2009, the Company securitized $25.7 million of 1-4 family mortgages, converting the loans into mortgage-backed securities issued through the Federal National Mortgage Association.
The Company retained servicing responsibilities for the mortgages supporting these securitiesservices mortgage loans owned by third parties and collects servicing fees equal to a percentage of the outstanding principal balance of the loans being serviced. The Company also services loans from prior securitizations and loans for which theMortgage servicing was acquired as part of a 2006 bank acquisition. As of December 31, 2011, the Company had no recourse for credit losses on loans being serviced.

The Company records its mortgage servicing rights are recorded at fair value and includes themare included in other assets in the Consolidated Statements of Financial Condition. Mortgage servicing rights do not trade in an active market with readily observable prices. Accordingly,Therefore, the Company determines the fair value of mortgage servicing rights by estimating the present value of theexpected future cash flows associated with the mortgage loans being serviced. Key economic assumptions used in measuring the fair value of mortgage servicing rights at December 31, 20112014 included prepayment speeds, maturities, and discount rates. While market-based data is used to determine the assumptions, the Company incorporates its own estimates of the assumptions market participants would use in determining the fair value of mortgage servicing rights, which results in a level 3 classification in the fair value hierarchy. Changes in

A rollforward of the assumptions used tocarrying value theof mortgage servicing rights could resultfor the three years ended December 31, 2014 is presented in a higher or lower fair value measurement.

the following table.

Table of Contents

Carrying Value of Mortgage Servicing Rights

(Dollar amounts in thousands)

 
 Years Ended December 31, 
 
 2011 2010 2009 

Balance at beginning of year

 $942 $1,238 $1,461 

New servicing assets

  -  -  237 

Total gains (losses) included in earnings (1):

          

Due to changes in valuation inputs and assumptions (2)

  179  (28) (145)

Other changes in fair value (3)

  (192) (268) (315)
        

Balance at end of year

 $929 $942 $1,238 
        

Key economic assumptions used in measuring fair value, at end of year:

          

Weighted-average prepayment speed

  12.4%  17.3%  20.1% 

Weighted-average discount rate

  11.6%  11.5%  11.4% 

Weighted-average maturity, in months

  199.7  202.2  210.7 

Contractual servicing fees earned during the year (1)

 $235 $301 $324 

Total amount of loans being serviced for the benefit of others, at end of year (4)

 $78,594 $114,720 $123,842 
  Years Ended December 31,
  2014 2013 2012
Beginning balance $1,893
 $985
 $929
New mortgage servicing rights 315
 1,060
 347
Total (losses) gains included in earnings (1):
      
Changes in valuation inputs and assumptions (480) 63
 (72)
Other changes in fair value (2)
 
 (215) (219)
Ending balance $1,728
 $1,893
 $985
Contractual servicing fees earned during the year (1)
 $520
 $418
 $209
Total amount of loans being serviced for the benefit of
  others at the end of the year
 220,372
 214,458
 109,730


(1)
Included in mortgage banking income in the Consolidated Statements of Income and relate to assets still held at the end of the year.
(2)
Primarily represents changes in expected future cash flows over time due to payoffs and paydowns.
Derivative Assets and Derivative Liabilities – 
The Company enters into interest rate swaps entered into by the Companyand derivative transactions with commercial customers. These derivative transactions are executed in the dealer market, and pricing is based on market quotes obtained from the counterparty that transacted the derivative contract.counterparties. The market quotes were developed by the counterparty using market observable inputs, which primarily include LIBOR for swaps.LIBOR. Therefore, derivatives are classified in level 2 of the fair value hierarchy. For its derivative assets and liabilities, the Company also considers non-performance risk, including the likelihood of default by itself and its counterparties, when evaluating whether the market quotes from the counterpartycounterparties are representative of an exit price. The Company has a policy of executing derivative transactions only with counterparties above a certain credit rating. Credit risk is also mitigated through the pledging of collateral when certain thresholds are reached.


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Pension Plan Assets – Mutual
Although Pension Plan assets are not consolidated in the Company's Consolidated Statements of Financial Condition, they are required to be measured at fair value on an annual basis. The fair value of Pension Plan assets is presented in the following table by level in the fair value hierarchy.
Annual Fair Value Measurements for Pension Plan Assets
(Dollar amounts in thousands)
  As of December 31, 2014 As of December 31, 2013
  Level 1 Level 2 Total Level 1 Level 2 Total
Pension plan assets:            
Mutual funds (1)
 $25,499
 $
 $25,499
 $23,896
 $
 $23,896
U.S. government and government
  agency securities
 7,879
 8,063
 15,942
 7,261
 8,930
 16,191
Corporate bonds 
 6,599
 6,599
 
 5,984
 5,984
Common stocks 14,149
 
 14,149
 17,261
 
 17,261
Common trust funds 
 10,004
 10,004
 
 11,038
 11,038
Total pension plan assets $47,527
 $24,666
 $72,193
 $48,418
 $25,952
 $74,370

(1)
Includes mutual funds, money market funds, cash, cash equivalents, and accrued interest.
Mutual funds, certain U.S. government agency securities, and common stocks are based on quoted market prices in active exchange markets and classified in level 1 of the fair value hierarchy. Corporate bonds, certain U.S. Treasury securities,government agency, and U.S. government agencyTreasury securities are valued at quoted prices from independent sources that are based on observable market trades or observable prices for similar bonds where a price for the identical bond is not observable and, therefore, are classified asin level 2 of the fair value hierarchy. Common trust funds are valued at quoted redemption values on the last business day of the Pension Plan's year end and are classified asin level 2 of the fair value hierarchy. There were no Pension Plan assets classified in level 3 of the fair value hierarchy.
Assets and Liabilities Required to be Measured at Fair Value on a Non-Recurring Basis
The following table provides the fair value for each class of assets and liabilities required to be measured at fair value on a non-recurring basis in the Consolidated Statements of Financial Condition by level in the fair value hierarchy.

Non-Recurring Fair Value Measurements
(Dollar amounts in thousands)
  As of December 31, 2014 As of December 31, 2013
  Level 1 Level 2 Level 3 Level 1 Level 2 Level 3
Collateral-dependent impaired loans (1)
 $
 $
 $23,799
 $
 $
 $13,103
OREO (2)
 
 
 22,760
 
 
 13,347
Loans held-for-sale (3)
 
 
 9,459
 
 
 4,739
Assets held-for-sale (4)
 
 
 2,026
 
 
 4,027

(1)
Includes impaired loans with charge-offs and impaired loans with a specific reserve during the periods presented.
(2)
Includes OREO and covered OREO with fair value adjustments subsequent to initial transfer that occurred during the periods presented.
(3)
Included in other assets in the Consolidated Statements of Financial Condition.
(4)
Included in premises, furniture, and equipment in the Consolidated Statements of Financial Condition.
Collateral-Dependent Impaired Loans – The
Certain collateral-dependent impaired loans are subject to fair value adjustments to reflect the difference between the carrying value of impaired loans is disclosed in Note 6, "Past Due Loans, Allowance for Credit Losses,the loan and Impaired Loans." The Company does not record loans at fair value on a recurring basis. However, from time to time, fair value adjustments are recorded in the form of specific reserves or charge-offs on these loans to reflect (i) specific reserves or partial charge-offs that are based on the current appraised value of the underlying collateral or (ii) the full charge-off of the loan's carrying value.collateral. The fair value adjustmentsvalues of collateral-dependent impaired loans are primarily determined by current appraised values of the underlying collateral, net of estimated selling costs. For collateral-dependent impaired loans, newcollateral. Based on the age and/or type, appraisals are generally required every annually for construction loans and every two years for all other commercial real estate loans. In limited circumstances, such as cases of outdated appraisals, the appraised values may be reduced by aadjusted in the range of 0% - 15%. In certain percentage depending upon the specific facts and circumstances, orcases, an internal valuation may be used when the underlying collateral is located in areas where comparable sales data is limited outdated, or unavailable. Accordingly, collateral-dependent impaired loans are classified in level 3 of the fair value hierarchy.


Table of Contents

Other Real Estate Owned – OREO consists of properties acquired through foreclosure in partial or total satisfaction of certain loans. Upon initial transfer into OREO, a current appraisal is required (generally less than six months old for residential and commercial land and less than one year old for all other commercial property). Properties are recorded at the lower of the recorded investment in the

Collateral-dependent impaired loans for which the properties previously served as collateral or the fair value which representsis greater than the recorded investment are not measured at fair value in the Consolidated Statements of Financial Condition and are not included in this disclosure.

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OREO
The fair value of OREO is measured using the current appraised value of the properties, less estimated selling costs. Fair value assumes an orderly disposition except where a specific disposition strategy is expected, which would require the use of other appraised values, such as forced liquidation or as-completed/stabilized values.

properties. In certain circumstances, thea current appraised valueappraisal may not be available or may not represent an accurate measurement of the property's current fair value due to imprecision, subjectivity, outdated market information or other factors. In these cases, the fair value is determined based on the lower of the (i) currentmost recent appraised value, (ii) internal valuation,broker price opinion, (iii) current listing price, or (iv) signed sales contract. Any appraisal that is greater than twelve months old is adjusted to account for estimated declines in the real estate market until an updated appraisal can be obtained. Given these valuation methods, OREO is classified in level 3 of the fair value hierarchy. Any write-downs in

Loans Held-for-Sale
Loans held-for-sale consisted of 1-4 family mortgage loans, which were originated with the carrying value of a property at the time of initial transfer into OREO are charged against the allowance for credit losses.

Subsequentintent to the initial transfer, periodic impairment analyses of OREO are performed,sell, and new appraisals are obtained annually unless circumstances warrant an earlier appraisal. Periodic impairment analyses take into consideration current real estate market trends and adjustments to listing prices. Any write-downs of the properties subsequent to initial transfer, as well as gains or losses on disposition and income or expense from the operations of OREO, are recognized in operating results in the period in which they occur.

Loans Held-for-Sale – The loans held-for-sale consist of one office, retail, and industrial loan and one other commercial real estate loan. During the last halfloan as of 2011, the Company determined that theboth December 31, 2014 and 2013. These loans met the held-for-sale criteria andwere transferred them intoto the held-for-sale category at the lower of the recorded investment in the loan or the estimated fair value, less costs to sell. The fair value was determined by the sales contract price. Accordingly, the loans held-for-saleprice and, accordingly, are classified in level 3 of the fair value hierarchy.

Assets Held-for-Sale – In second quarter 2011,
Assets held-for-sale consist of former branches that are no longer in operation, which were transferred into the Company entered into an agreement to sell property held for expansion and classified itheld-for-sale category at the lower of their fair value as held-for-sale.determined by a current appraisal or their recorded investment. Based on the sales contract price, the Company wrote-down the book value of the property andthese valuation methods, they are classified it in level 3 of the fair value hierarchy. The sale of the property is expected to close in early 2012.

Fair Value Measurements Recorded for
Assets Measured at Fair Value on a Non-Recurring Basis
(Dollar amounts in thousands)

 
 Year Ended December 31, 2011 
 
 Charged to
Allowance for
Loan Losses
 Charged to
Earnings
 

Collateral-dependent impaired loans

 $88,017 $- 

OREO

  -  3,785 

Loans held-for-sale

  2,191  - 

Assets held-for-sale

  -  671 

Goodwill and Other Intangible Assets – Goodwill represents the excess of purchase price over the fair value of net assets acquired using the purchase method of accounting. Other intangible assets represent purchased assets that also lack physical substance but can be distinguished from goodwill because of contractual or other legal rights or because the asset is capable of being sold or exchanged either on its own or in combination with a related contract, asset, or liability.

Goodwill and other intangible assets are subject to annual impairment testing, which requires a significant degree of management judgment. Goodwill is tested at least annually for impairment or more often if events or circumstances between annual tests indicate that there may be impairment.

judgment and the use of significant unobservable inputs. As discussed in Note 8,9, "Goodwill and Other Intangible Assets," the annual impairment tests indicated no impairment existed.

If the testing had resulted in impairment, the Company would have classified goodwill and other intangible assets subjected to nonrecurring fair value adjustments as a level 3 nonrecurringnon-recurring fair value measurement. Additional information regarding goodwill, other intangible assets, and impairment policies can be found in Note 1, "Summary of Significant Accounting Policies," and Note 8,9, "Goodwill and Other Intangible Assets."


Financial Instruments Not Required to be Measured at Fair Value

Table

For certain financial instruments that are not required to be measured at fair value in the Consolidated Statements of Contents

Financial Condition, the Company must disclose the estimated fair values and the level within the fair value hierarchy as shown in the following table.

Fair Value DisclosureMeasurements of Other AssetsFinancial Instruments
(Dollar amounts in thousands)
    As of December 31, 2014 As of December 31, 2013
  Fair Value Hierarchy
Level
 Carrying
Amount
 Fair Value Carrying
Amount
 Fair Value
Assets:          
Cash and due from banks 1 $117,315
 $117,315
 $110,417
 $110,417
Interest-bearing deposits in other banks 2 488,947
 488,947
 476,824
 476,824
Securities held-to-maturity 2 26,555
 27,670
 44,322
 43,387
FHLB and FRB stock 2 37,558
 37,558
 35,161
 35,161
Net loans 3 6,664,159
 6,532,622
 5,628,855
 5,544,146
FDIC indemnification asset 3 8,452
 3,626
 16,585
 7,829
Investment in BOLI 3 206,498
 206,498
 193,167
 193,167
Accrued interest receivable 3 27,506
 27,506
 25,735
 25,735
Other interest-earning assets 3 3,799
 3,904
 6,550
 6,809
Liabilities:    
  
  
  
Deposits 2 $7,887,758
 $7,879,413
 $6,766,101
 $6,765,404
Borrowed funds 2 137,994
 137,994
 224,342
 226,839
Senior and subordinated debt 1 200,869
 199,226
 190,932
 201,147
Accrued interest payable 2 2,324
 2,324
 2,400
 2,400

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Management uses various methodologies and Liabilities

GAAP requires disclosure ofassumptions to determine the estimated fair values of certainthe financial instruments both assets and liabilities, on and off-balance sheet, for which it is practical to estimatein the fair value. Since the estimated fair values provided herein exclude disclosure of the fair value of certain other financial instruments and all non-financial instruments, any aggregation of the estimated fair value amounts presented would not represent the underlying value of the Company. Examples of non-financial instruments having significant value include the future earnings potential of significant customer relationships and the value of the Company's wealth management operations and other fee-generating businesses. In addition, other significant assets including premises, furniture, and equipment and goodwill and other intangible assets are not considered financial instruments and, therefore, have not been valued.

Various methodologies and assumptions have been utilized in management's determination of the estimated fair value of the Company's financial instruments, which are detailed below.table above. The fair value estimates are made at a discrete point in time based on relevant market information. Since no market exists for a significant portion of these financial instruments, fair value estimates are based oninformation and consider management's judgments regarding future expected economic conditions, loss experience, and specific risk characteristics of the financial instruments. These estimates are subjective, involve uncertainties, and cannot be determined with precision. Changes in assumptions could significantly affect the estimates.

In addition to the valuation methodology explained above for financial instruments recorded at fair value, the following methods and assumptions were used in estimating the fair value of financial instruments that are carried at cost in the Consolidated Statements of Financial Condition.

Short-Term Financial Assets and Liabilities – For financial instruments with a shorter-term or with no stated maturity, prevailing market rates, and limited credit risk, the carrying amounts approximate fair value. Those financial instruments include cash and due from banks, interest-bearing deposits in other banks, federal funds sold and other short-term investments, mortgages held-for-sale, accrued interest receivable, and accrued interest payable.

Securities Held-to-Maturity – The fair value of securities held-to-maturity is based on quoted market prices or dealer quotes. If a quoted market price is not available,estimated using the present value of expected future cash flows of the remaining maturities of the securities.
FHLB and FRB Stock –The carrying amounts approximate fair value as the stock is estimated using quoted market pricesnon-marketable.
Net Loans– Net loans includes loans held-for-investment, acquired loans, covered loans, and the allowance for similar securities.loan and covered loan losses.

Loans, net of Allowance for Loan Losses – The fair value of loans is estimated using the present value techniques by discountingof the expected future cash flows of the remaining maturities of the loans. Prepayment assumptions were considered based onthat consider the Company’s historical experience and current economic and lending conditions.conditions were included. The discount rate was based on the LIBOR yield curve with rate adjustments for liquidity and credit risk.

Covered Loans (includedrisk inherent in Loans, net of Allowance for Loan Losses)the loans. – 

The fair value of the covered loan portfolio is determined by discounting the expected future cash flows at a market interest rate, based on certain input assumptions. The market interest rate (discount rate)which is derived from LIBOR swap rates over the expected weighted-average life of thethose loans. The expected future cash flows are based onderived from the contractual terms of the covered loans, net of any projected credit losses. For valuation purposes, these loans are placed into groups with similar characteristics and defaultrisk factors, where appropriate. The timing and amount of credit losses for each group are estimated using historical default and loss given default assumptions.

experience, current collateral valuations, borrower credit scores, and internal risk ratings. For individually significant loans or credit relationships, the estimated fair value is determined by a specific loan level review utilizing appraised values for collateral and projections of the timing and amount of expected future cash flows.

FDIC Indemnification Asset – The fair value of the FDIC indemnification asset is calculated by discounting the expected future cash flows expected to be received from the FDIC. TheseThe expected future cash flows are estimated by multiplying expectedanticipated losses on covered loans and covered OREO by the reimbursement rates set forth in the FDIC Agreements.

Investment in Bank-Owned Life InsuranceBOLI – The fair value of investments in bank-owned life insurance isBOLI approximates the carrying amount as both are based on each policy's respective CSV.CSV, which is the amount the Company would receive from liquidation of these investments. The CSV is derived from monthly reports provided by the managing brokers and is determined using the Company's initial insurance premium and earnings of the underlying assets, offset by management fees.

Deposit LiabilitiesOther Interest-Earning Assets – The fair value of other interest-earning assets is estimated using the present value of the expected future cash flows of the remaining maturities of the assets.
Deposits – The fair values disclosed for demand deposits, savings deposits, NOW accounts, and money market deposits are by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts). The fair value for fixed-rate time deposits was estimated using present value techniques by discounting the expected future cash flows discounted based on the LIBOR yield curve, plus or minus the spread associated with current pricing.


Table of Contents

Borrowed Funds – The fair value of repurchase agreements and FHLB advances is estimated by discounting the agreements based on maturities using the rates currently offered for repurchase agreementsFHLB advances of similar remaining maturities.maturities adjusted for prepayment penalties that would be incurred if the borrowings were paid off on the measurement date. The carrying amounts of federal funds purchased, federal term auction facilities, and other borrowed fundssecurities sold under agreements to repurchase approximate their fair value due to their short-term nature.

Senior and Subordinated Debt – The fair value of senior and subordinated debt was determined using availablequoted market quotes.prices.

StandbyCommitments to Extend Credit and Letters of Credit – The fair value of standby letters of credit represent deferred fees arising from the related off-balance sheet financial instruments. These deferred fees approximateCompany estimated the fair value of these instruments and are based on several factors, including the remaining terms of the agreement and the credit standing of the customer.

Commitments – The Company has estimated the fair value oflending commitments outstanding to be immaterial based on the following factors: (i) the limited interest rate exposure posed byof the commitments outstanding due to their variable nature, (ii) the general short-term nature of the commitment periods, entered into, (iii) termination clauses provided in the agreements, and (iv) the market rate of fees charged.

Financial Instruments


(Dollar amounts in thousands)

135

 
 December 31, 
 
 2011 2010 
 
 Carrying
Amount
 Estimated
Fair Value
 Carrying
Amount
 Estimated
Fair Value
 

Financial Assets:

             

Cash and due from banks

 $123,354 $123,354 $102,495 $102,495 

Interest-bearing deposits in other banks

  518,176  518,176  483,281  483,281 

Loans held-for-sale

  4,200  4,200  236  236 

Trading securities

  14,469  14,469  15,282  15,282 

Securities available-for-sale

  1,013,006  1,013,006  1,057,802  1,057,802 

Securities held-to-maturity

  60,458  61,477  81,320  82,525 

Loans, net of allowance for loan losses

  5,229,153  5,224,254  5,329,717  5,323,830 

FDIC indemnification asset

  65,609  65,609  95,899  95,899 

Accrued interest receivable

  29,826  29,826  29,953  29,953 

Investment in bank-owned life insurance

  206,235  206,235  197,644  197,644 

Financial Liabilities:

             

Deposits

 $6,479,175 $6,479,309 $6,511,476 $6,512,626 

Borrowed funds

  205,371  208,728  303,974  306,703 

Senior and subordinated debt

  252,153  237,393  137,744  122,261 

Accrued interest payable

  4,019  4,019  4,557  4,557 

Derivative liabilities

  2,459  2,459  1,833  1,833 

Standby letters of credit

  668  668  696  696 


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23.   SUPPLEMENTARY CASH FLOW INFORMATION

Supplemental Disclosures to the Consolidated Statements of Cash Flows
(Dollar amounts in thousands)

 
 Years Ended December 31, 
 
 2011 2010 2009 

Income taxes refunded

 $(12,388)$(7,676)$(1,378)

Interest paid to depositors and creditors

  40,429  50,069  95,661 

Dividends declared but unpaid

  746  742  549 

Non-cash transfers of securities available-for-sale to securities held-to-maturity

  -  5,120  - 

Non-cash transfer of securities available-for-sale to other assets

  -  2,744  - 

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

  12,320  -  - 

Non-cash transfers of loans to OREO

  52,249  76,804  79,430 

Non-cash transfer of loans to securities available-for-sale

  -  -  25,742 

Non-cash exchange of non-performing loans for performing loans

  -  19,088  - 

Non-cash transfers of OREO to premises, furniture, and equipment

  841  9,455  6,860 

Issuance of Common Stock in exchange for the extinguishment of subordinated debt

  -  -  57,966 

24.  RELATED PARTY TRANSACTIONS

The Company, through the Bank, has mademakes loans and hadhas transactions with certain of its directors and executive officers. However, all suchAll of these loans and transactions were made in the ordinary course of business on substantially the same terms, including interest rates and collateral requirements, as those prevailing at the time for comparable transactions with other unrelated persons and did not involve more than the normal risk of collectability or present other unfavorable features. The SecuritiesFor the years ended December 31, 2014 and Exchange Commission has determined that disclosure of borrowings by2013, loans to directors and executive officers totaled $31.8 million and certain of their related interests should be made if the loans are greater than 5% of stockholders' equity in the aggregate. These loans totaled $4.0$27.6 million, at December 31, 2011 and $927,000 at December 31, 2010respectively, and were not greater than 5% of stockholders' equity at either December 31, 2011 or 2010.


equity.

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25.

24.  CONDENSED PARENT COMPANY FINANCIAL STATEMENTS

The following represents the condensed financial statements of First Midwest Bancorp, Inc., the Parent Company.

Statements of Financial Condition
(Parent Company only)
(Dollar amounts in thousands)


 December 31,  As of December 31,

 2011 2010  2014 2013

Assets

     

Cash and interest-bearing deposits

 $47,101 $51,442  $43,546
 $13,071

Investments in and advances to subsidiaries

 1,135,930 1,173,342  1,211,244
 1,120,745

Goodwill

 10,358 10,358  13,625
 8,943

Other assets

 45,592 35,582  79,468
 77,948
     

Total assets

 $1,238,981 $1,270,724  $1,347,883
 $1,220,707
     

Liabilities and Stockholders' Equity

     

Senior and subordinated debt

 $252,153 $137,744  $200,869
 $190,932

Accrued expenses and other liabilities

 24,241 20,935  46,239
 28,333

Stockholders' equity

 962,587 1,112,045  1,100,775
 1,001,442
     

Total liabilities and stockholders' equity

 $1,238,981 $1,270,724  $1,347,883
 $1,220,707
     


Statements of Income
(Parent Company only)
(Dollar amounts in thousands)


 Years ended December 31,  Years ended December 31,

 2011 2010 2009  2014 2013 2012

Income

       

Dividends from subsidiaries

 $104,000 $- $750  $56,881
 $54,200
 $38,000

Interest income

 259 518 1,596  1,502
 1,067
 619

Gains on early extinguishment of debt

 - - 15,258 
Net losses on early extinguishment of debt 
 (1,034) (558)

Securities transactions and other

 (189) 1,950 3,157  6,451
 37,485
 1,982
       

Total income

 104,070 2,468 20,761  64,834
 91,718
 40,043
       

Expenses

       

Interest expense

 9,892 9,124 13,592  12,062
 13,607
 14,840

Salaries and employee benefits

 10,865 11,056 8,308  12,589
 15,198
 13,232

Other expenses

 4,756 6,178 4,715  5,867
 5,792
 5,740
       

Total expenses

 25,513 26,358 26,615  30,518
 34,597
 33,812
       

Income (loss) before income tax benefit and equity in undistributed (loss) income of subsidiaries

 78,557 (23,890) (5,854)

Income tax benefit

 10,414 9,388 2,617 
       

Income (loss) before undistributed (loss) income of subsidiaries

 88,971 (14,502) (3,237)

Equity in undistributed (loss) income of subsidiaries

 (52,408) 4,818 (22,513)
       
Income before income tax benefit (expense) and equity in undistributed
income (loss) of subsidiaries
 34,316
 57,121
 6,231
Income tax benefit (expense) 8,710
 (962) 13,070
Income before undistributed income (loss) of subsidiaries 43,026
 56,159
 19,301
Equity in undistributed income (loss) of subsidiaries 26,280
 23,147
 (40,355)

Net income (loss)

 36,563 (9,684) (25,750) 69,306
 79,306
 (21,054)

Preferred dividends and accretion on preferred stock

 (10,776) (10,299) (10,265)

Net (income) loss applicable to non-vested restricted shares

 (350) 266 464  (836) (1,107) 306
       

Net income (loss) applicable to common shares

 $25,437 $(19,717)$(35,551) $68,470
 $78,199
 $(20,748)
       

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Statements of Cash Flows
(Parent Company only)
(Dollar amounts in thousands)


 Years ended December 31,  Years ended December 31,

 2011 2010 2009  2014 2013 2012

Operating Activities

       

Net income (loss)

 $36,563 $(9,684)$(25,750) $69,306
 $79,306
 $(21,054)

Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:

 

Equity in undistributed loss (income) of subsidiaries

 52,408 (4,818) 22,513 
Adjustments to reconcile net income (loss) income to net cash provided
by operating activities:
      
Equity in undistributed (income) loss of subsidiaries (26,280) (23,147) 40,355

Depreciation of premises, furniture, and equipment

 9 10 8  6
 7
 6

Net losses on securities

 - 110 - 

Gains on early extinguishment of debt

 - - (15,258)
Net gains on sales of securities (5,702) (34,119) 
Net losses on early extinguishment of debt 
 1,034
 558

Share-based compensation expense

 6,362 5,638 3,516  5,926
 5,903
 6,004

Tax (expense) benefit related to share-based compensation

 (179) 350 581  (106) (10) 170

Net (increase) decrease in other assets

 (10,290) 4,053 (10,370)
Net decrease (increase) in other assets 4,599
 1,084
 (6,207)

Net increase (decrease) in other liabilities

 4,618 (263) (9,850) 14,063
 (1,624) 1,366
       

Net cash provided by (used in) operating activities

 89,491 (4,604) (34,610)
       
Net cash provided by operating activities 61,812
 28,434
 21,198

Investing Activities

       

Purchases of securities available-for-sale

 - - (1,050) 
 (46,532) (5,811)

Proceeds from sales and maturities of securities available-for-sale

 14 16 800  8,540
 43,329
 

Proceeds from sales of premises, furniture, and equipment

 103     

Purchase of premises, furniture, and equipment

 (16) (96) (15) 
 
 (18)

Capital injection into subsidiary bank

 - (100,000) - 

Capital injection into non-bank subsidiary

 (363) (750) - 

Purchase of non-performing assets from subsidiary bank (1)

 - (168,088) - 
       
Cash received from acquisitions, net of cash paid (15,809) 
 

Net cash used in investing activities

 (262) (268,918) (265) (7,269) (3,203) (5,829)
       

Financing Activities

       

Proceeds (payments) for the issuance (retirement) of subordinated debt

 114,387 - (19,400)

Redemption of Preferred Shares and related Warrant

 (193,910) - - 

Proceeds from the issuance of Common Stock

 - 196,035 - 
Payments for retirement of subordinated debt 
 (24,094) (37,033)
Treasury stock activity 369
 
 

Cash dividends paid

 (12,838) (12,422) (12,423) (22,568) (7,508) (2,977)

Exercise of stock options and restricted stock activity

 (1,256) (401) (379)
Restricted stock activity (2,781) (1,607) (1,469)

Excess tax benefit (expense) related to share-based compensation

 47 (189) (177) 912
 79
 (21)
       

Net cash (used in) provided by financing activities

 (93,570) 183,023 (32,379)
       

Net decrease in cash and cash equivalents

 (4,341) (90,499) (67,254)
Net cash used in financing activities (24,068) (33,130) (41,500)
Net increase (decrease) in cash and cash equivalents 30,475
 (7,899) (26,131)

Cash and cash equivalents at beginning of year

 51,442 141,941 209,195  13,071
 20,970
 47,101
       

Cash and cash equivalents at end of year

 $47,101 $51,442 $141,941  $43,546
 $13,071
 $20,970
             
Supplemental Disclosures of Cash Flow Information:      
Common stock issued for acquisitions, net of issuance costs $38,300
 $
 $

26.   SUBSEQUENT EVENTS

The Company has evaluated the impact of events that have occurred subsequent to December 31, 2011 through the date its consolidated financial statements were issued. Based on the evaluation, management does not believe any subsequent events have occurred that would require further disclosure or adjustment to the consolidated financial statements.



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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

Not applicable.


ITEM 9A. CONTROLS AND PROCEDURES

As of the end of the period covered by this report (the "Evaluation Date"), the Company carried out an evaluation, under the supervision and with the participation of the Company's management, including the Company's President and Chief Executive Officer and its Executive Vice President and Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures pursuant to Rule 13a-15 and 15d-15 of the Securities and Exchange Act of 1934 (the "Exchange Act"). Based on that evaluation, the President and Chief Executive Officer and Executive Vice President and Chief Financial Officer concluded that as of the Evaluation Date, the Company's disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in Securities and Exchange Commission rules and forms. There were no changes in the Company's internal control over financial reporting during the quarter ended December 31, 20112014 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.

Management's Report on Internal Control overOver Financial Reporting

Management of the Company is responsible for establishing and maintaining effective internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934.Act. The Company's internal control over financial reporting is designed to provide reasonable assurance to the Company's management and Board of Directors regarding the preparation and fair presentation of published financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Accordingly, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.

Management assessed the effectiveness of the Company's internal control over financial reporting as of December 31, 2011.2014. In making this assessment, management used the criteria set forth in "Internal Control – Integrated Framework" issued by the Committee of Sponsoring Organizations of the Treadway Commission.Commission (2013 framework) (the COSO criteria). Based on this assessment, management has determined that the Company's internal control over financial reporting as of December 31, 20112014 is effective based on the specified criteria.

Ernst & Young LLP, the independent registered public accounting firm that audited the Company's consolidated financial statements included in this Annual Report on Form 10-K, has issued an attestation report on the Company's internal control over financial reporting as of December 31, 2011.2014. The report, which expresses an unqualified opinion on the Company's internal control over financial reporting as of December 31, 2011,2014, is included in this Item under the heading "Attestation Report of Independent Registered Public Accounting Firm."


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Attestation Report of Independent Registered Public Accounting Firm

Report of Independent Registered Public Accounting Firm

The Board of Directors and Shareholders of First Midwest Bancorp, Inc.


We have audited First Midwest Bancorp, Inc.'s’s (the “Company”) internal control over financial reporting as of December 31, 2011,2014, based on criteria established in Internal Control – IntegratedControl-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). First Midwest Bancorp Inc.'sThe Company’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management'sManagement’s Report on Internal Control overOver Financial Reporting. Our responsibility is to express an opinion on the company'sCompany’s internal control over financial reporting based on our audit.


We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.


A company'scompany’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company'scompany’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company'scompany’s assets that could have a material effect on the financial statements.


Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.


In our opinion, First Midwest Bancorp, Inc.the Company maintained in all material respects, effective internal control over financial reporting as of December 31, 2011,2014, based on the COSO criteria.


We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated statements of financial condition of First Midwest Bancorp, Inc.the Company as of December 31, 20112014 and 2010,2013, and the related consolidated statements of income, comprehensive income, (loss), changes in stockholders'stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 20112014 of First Midwest Bancorp, Inc.the Company and our report dated February 28, 2012March 2, 2015 expressed an unqualified opinion thereon.


/s/ ERNST & YOUNG LLP

Chicago, Illinois
March 2, 2015

February 28, 2012

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ITEM 9B. OTHER INFORMATION

None.


PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, AND
CORPORATE GOVERNANCE

The Company's executive officers are elected annually by the Board, and the Bank's executive officers are elected annually by the Bank's Board of Directors. Certain information regarding the Company's and the Bank's executive officers is set forth below.

Name (Age)Position or Employment for Past Five Years
Executive
Officer
Since
Michael L. Scudder (51)(54)President and Chief Executive Officer of the Company since 20082008; Chairman since 2011 and Vice Chairman from 2010 to 2011 of the Bank's Board of Directors andDirectors; Chief Executive Office of the Bank since 2011. Previously, since 2010, Mr. Scudder served as the Vice Chairman of the Bank's Board of Directors and since 2007, Mr. Scudder served as the Company's President and Chief Operating Officer as well as Group Executive Vice President of the Bank, before which he served as the Company's Executive Vice President and Chief Financial Officer of the Company and Group Executive Vice President and Chief Financial Officer of the Bank.2002
Kent S. Belasco (60)Executive Vice President and Chief Information and Operations Officer of the Bank since 2011; prior thereto, Executive Vice President2010 and Chief Information Officer of the Bank.2004

Victor P. Carapella (62)


Executive Vice President and Director of Commercial Banking since 2011; prior thereto, Executive Vice President and Commercial Banking Group Manager of the Bank since 2008; prior thereto, Sales Manager.



2008


Paul F. Clemens (59)


Executive Vice President and Chief Financial Officer of the Company and the Bank since 2008; prior thereto, Senior Vice President, Chief Accounting Officer, and Principal Accounting Officer of the Company.



2006


Robert P. Diedrich (48)


Executive Vice President and Director of Wealth Management of the Bank since 2011; prior thereto, President, of the Wealth Management Division of First Midwest Bank.



2004


James P. Hotchkiss (55)


Executive Vice President and Treasurer of the Company and the Bank.



2004


Michael J. Kozak (60)


Executive Vice President and Chief Credit Officer of the Bank.



2004


Cynthia A. Lance (43)


Executive Vice President and Corporate Secretary since 2007; prior thereto, Assistant General Counsel of CBOT Holdings, Inc. and NYSE Group, Inc. and corporate attorney for Sonnenschein, Nath & Rosenthal.



2007


Table of Contents

Name (Age)Position or Employment for Past Five YearsExecutive
Officer
Since
Kevin L. Moffitt (52)Executive Vice President and Chief Risk Officer of the Company and the Bank since 2011; prior thereto, Executive Vice President and Audit Services Director of the Company since 2009; prior thereto, Vice President and Head of Internal Audit at Nuveen Investments, Inc. since 2007; and prior thereto, Group Senior Vice President and Compliance Regional Chief Operating Officer of ABN AMRO North America, Inc.and various other senior management positions with the Bank.20092002

Mark G. Sander (53)(56)


President and Chief Operating Officer of the Bank and Senior Executive Vice President and Chief Operating Officer of the Company since 2011; prior thereto, Executive Vice President and head of Commercial Banking for Associated Banc-Corp and its subsidiary, Associated Bank, since 2009;from 2009 to 2011, and prior thereto, leader of Commercial Banking for the Midwest Regionbefore that in numerous leadership positions in commercial banking at Bank of America since 2007.and LaSalle Bank.



2011


JanetKent S. Belasco (64)
Executive Vice President and Chief Information and Operations Officer of the Bank since 2011; prior thereto, Executive Vice President and Chief Information Officer of the Bank.2004
Nicholas J. Chulos (55)Executive Vice President, Corporate Secretary, and General Counsel since 2012; prior thereto, Partner of Krieg DeVault, LLP.2012
Paul F. Clemens (62)Executive Vice President and Chief Financial Officer of the Company and the Bank.2006
Robert P. Diedrich (51)Executive Vice President and Director of Wealth Management of the Bank since 2011; prior thereto, President of the Wealth Management Division of First Midwest Bank.2004
Caryn J. Guinta (64)Executive Vice President and Director of Employee Resources of the Bank since 2005.2013
James P. Hotchkiss (58)Executive Vice President and Treasurer of the Company and the Bank since 2004.2004
Kevin L. Moffitt (55)Executive Vice President and Chief Risk Officer of the Company and the Bank since 2011; prior thereto, Executive Vice President and Audit Services Director of the Company since 2009.2009
Thomas M. Viano (56)Prame (45)

Executive Vice President and Director of Retail Sales and ServicesBanking of the Bank since 2011;2012; prior thereto, Group President, Retail Banking of the Bank.



2002


Stephanie R. Wise (44)


Executive Vice President, DirectorSales and Service at RBS/Citizen's Bank.
2012
Angela L. Putnam (36)Senior Vice President of Strategic Planningthe Company and ExecutionBank and Chief Accounting Officer of the Bank since 2011;2014; prior thereto. thereto, Vice President and Financial Reporting Manager for the Company since 2013; prior thereto, Director in the Assurance Services practice of McGladrey LLP.2015
Michael C. Spitler (61)Executive Vice President Business and Institutional Services.Chief Credit Officer of the Bank since 2013; prior thereto, Executive Vice President and Commercial Chief Credit Officer for Busey Bank since 2011; and prior thereto, Senior Vice President and Managing Senior Credit Officer for Fifth Third Bank, Chicago affiliate, West Region and Structured Finance Group.


2004

2013

Information relating

Additional information required in response to our directors, including our audit committee and audit committee financial experts and the procedures by which stockholders can recommend director nominees,this item will be contained in ourthe Company’s definitive Proxy Statement for our 2012relating to its 2015 Annual Meeting of Stockholders to be held on May 16, 2012, which will be filed within 120 days of the end of our fiscal year ended December 31, 2011 (the "2012 Proxy Statement")20, 2015 and is incorporated herein by reference.

Exhibit 3.2 contains the Company's Revised By-Laws, which were modified February 22, 2012, reflecting the addition of Section 6.11, which states the Company's continuing obligations with respect to director indemnification.



140




ITEM 11. EXECUTIVE COMPENSATION

Information

The information required in response to this item will be contained in the Company’s definitive Proxy Statement relating to our executive officer and director compensation willits 2015 Annual Meeting of Stockholders to be in the 2012 Proxy Statementheld on May 20, 2015 and is incorporated herein by reference.


ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

Information

The information required in response to this item, in addition to the information presented below under "Equity Compensation Plans," will be contained in the Company’s definitive Proxy Statement relating to security ownershipits 2015 Annual Meeting of certain beneficial owners of Common Stock and information relatingStockholders to the security ownership of our management will be in the 2012 Proxy Statementheld on May 20, 2015 and is incorporated herein by reference.


Table of Contents

Equity Compensation Plans

The following table sets forth information, as of December 31, 2011,2014, relating to equity compensation plans of the Company pursuant to which options, restricted stock, restricted stock units, performance shares, or other rights to acquire shares may be granted from time to time.


 Equity Compensation Plan Information  Equity Compensation Plan Information
Equity Compensation Plan Category Number of securities to be issued upon exercise of outstanding options, warrants, and rights
(a)
 Weighted-average exercise price of outstanding options, warrants, and rights
(b)
 Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))
(c)
  
Number of securities to
be issued
upon exercise of
outstanding options,
warrants, and rights
(a)
 
Weighted-average
exercise price of
outstanding options,
warrants, and rights
(b)
 
Number of securities
remaining available for
future issuance under
equity compensation plans
excluding securities
reflected in column (a)
(c)

Approved by security holders (1)

 1,973,915 $32.25 2,572,795  1,153,213
 $32.93
 2,312,631

Not approved by security holders (2)

 5,188 17.73 -  5,337
 17.67
 
       

Total

 1,979,103 $32.21 2,572,795  1,158,550
 32.86
 2,312,631
       


(1)
Includes all outstanding options and restricted stock, restricted stock unit, and performance share awards under the Company's Omnibus Stock and Incentive Plan and the Non-Employee Directors' Stock Plan (the "Plans"). Additional information and details about the Plans are also disclosed in Notes 1 and 17 of "Notes to the Consolidated Financial Statements" in Item 8 of this Form 10-K. Restricted stock, restricted stock units, and performance shares that do not vest or are not earned, as well as the shares underlying options that expire unexercised, are added to the number of securities available for future issuance.
(2)
Represents shares underlying deferred stock units credited under the Company's Nonqualified Retirement Plan ("NQ Plan"), payable on a one-for-one basis in shares of common stock.
The NQ Plan is a defined contribution deferred compensation plan under which participants are credited with deferred compensation equal to contributions and benefits that would have accrued to the participant under the Company's tax-qualified retirement plans, but for limitations under the Internal Revenue Code, and to amounts of salary and annual bonus that the participant has elected to defer. Participant accounts are deemed to be invested in separate investment accounts under the NQ Plan with similar investment alternatives as those available under the Company's tax-qualified savings and profit sharing plan, including an investment account deemed invested in shares of Common Stock.common stock. The accounts are adjusted to reflect the investment return related to such deemed investments. Except for the 5,1885,337 shares set forth in the table above, all amounts credited under the NQ Plan are paid in cash.


ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE

Information regarding certain relationships and related transactions and director independence

The information required in response to this item will be contained in the 2012Company’s definitive Proxy Statement relating to its 2015 Annual Meeting of Stockholders to be held on May 20, 2015 and is incorporated herein by reference.


ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

Information regarding principal accountant fees and services

The information required in response to this item will be contained in the 2012Company's definitive Proxy Statement relating to its 2015 Annual Meeting of Stockholders to be held on May 20, 2015 and is incorporated herein by reference.


141




PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a)
(1)   Financial Statements


(a)
(1)   Financial Statements
The following consolidated financial statements of the Registrant and its subsidiaries are filed as a part of this document under Item 8, "FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA."


Report of Independent Registered Public Accounting Firm.


Consolidated Statements of Financial Condition as of December 31, 20112014 and 2010.2013.

Table of Contents


Consolidated Statements of Income for the years ended December 31, 2011, 2010,2014, 2013, and 2009.


2012.
Consolidated Statements of Comprehensive Income for the years ended December 31, 2011, 2010,2014, 2013, and 2009.


2012.
Consolidated Statements of Changes in Stockholders' Equity for the years ended December 31, 2011, 2010,2014, 2013, and 2009.


2012.
Consolidated Statements of Cash Flows for the years ended December 31, 2011, 2010,2014, 2013, and 2009.


2012.
Notes to the Consolidated Financial Statements.

(a)
(2)   Financial Statement Schedules


(a)
(2)   Financial Statement Schedules
The schedules for the Registrant and its subsidiaries are omitted because of the absence of conditions under which they are required, or because the information is set forth in the consolidated financial statements or the notes thereto.

(a)
(3)   Exhibits


(a)
(3)   Exhibits
See Exhibit Index beginning on the following page.

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EXHIBIT INDEX


Exhibit
Number
Description of Documents
  
Exhibit NumberDescription of Documents
3.1 Restated Certificate of Incorporation of First Midwest Bancorp, Inc.the Company is incorporated herein incorporated by reference to Exhibit 3.1 to the Company's Annual Report on Form 10-K filed with the Securities and Exchange Commission on February 27, 2009.
3.2 Certificate of Amendment of Restated By-lawsCertificate of First Midwest Bancorp, Inc.Incorporation of the Company is incorporated herein by reference to Exhibit 3.2 to the Company's Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on August 4, 2014

3.3

 

Amended and Restated By-Laws of the Company is incorporated herein by reference to Exhibit 3.2 to the Company's Annual Report on Form 10-K filed with the Securities and Exchange Commission on February 28, 2012.
4.1
 

Amended and Restated Rights Agreement dated November 15, 1995, is incorporated herein by reference to Exhibits (1) through (3) of the Company's Registration Statement on Form 8-A filed with the Securities and Exchange Commission on November 21, 1995.

4.2

 

4.2


First Amendment to Rights AgreementsAgreement dated June 18, 1997, is incorporated herein by reference to Exhibit 4 of the Company's Amendment No. 2 to the Registration Statement on Form 8-A filed with the Securities and Exchange Commission on June 30, 1997.

4.3

 

4.3


Second Amendment No. 2 to Rights Agreements dated November 14, 2005, is incorporated herein by reference to Exhibit 4.1 of the Company's Amendment No. 3 to the Registration Statement on Form 8-A filed with the Securities and Exchange Commission on November 17, 2005.

4.4

 

4.4


Third Amendment No. 3 to Rights Agreements dated December 3, 2008, is incorporated herein by reference to Exhibit 4.4 of the Company's Amendment No. 4 to the Registration Statement on Form 8-A filed with the Securities and Exchange Commission on December 9, 2008.

4.5

 

4.5


Form of Common Stock Certificate, incorporated by reference to Exhibit 1 of the Registrant's Form 8-A Registration Statement, filed with the Securities and Exchange Commission on March 7, 1983.Certificate.

4.6

 

4.6


Certificate of Designation for Fixed Rate Cumulative Perpetual Preferred Stock Series B dated December 5, 2008 is incorporated herein by reference to Exhibit 4.1 to the Company's Current Report on Form 8-K filed with the Securities and Exchange Commission on December 9, 2008.

4.7

 

4.7


Senior Debt Indenture dated as of November 22, 2011, by and between the RegistrantCompany and U.S. Bank National Association, as trustee, incorporated herein by reference to Exhibit 4.1 of the Registrant's Current Report on Form 8-K, filed with the Securities and Exchange Commission on November 22, 2011.

4.8

 

4.8


Subordinated Debt Indenture dated as of March 1, 2006, by and between the RegistrantCompany and U.S. Bank National Association, as trustee, incorporated herein by reference to Exhibit 4.1 of the Registrant'sCompany's Current Report on Form 8-K filed with the Securities and Exchange Commission on April 3, 2006.

4.9

 

4.9


Amended and Restated Declaration of Trust of First Midwest Capital Trust I dated August 21, 2009 is incorporated herein by reference to Exhibit 4.2 to the Company's Current Report on Form 8-K filed with the Securities and Exchange Commission on August 27, 2009.

4.10

 

4.10


Supplemental Indenture between the Company and Wilmington Trust Company, as trustee, dated August 21, 2009 is incorporated herein by reference to Exhibit 4.1 to the Company's Current Report on Form 8-K filed with the Securities and Exchange Commission on August 27, 2009.

4.11

 

4.11


Series A Capital Securities Guarantee Agreement dated November 18, 2003 is incorporated herein by reference to Exhibit 4.6 to the Company's Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 9, 2004.

10.1

 

10.1


Senior Executive Letter Agreement under the TARP Capital Purchase Program by and between First Midwest Bancorp, Inc. and the United States Department of the Treasury dated December 5, 2008,Short-term Incentive Compensation Plan is incorporated herein by reference to Exhibit 10.2 to the Company's Current Report on Form 8-K filed with the Securities and Exchange Commission on December 9, 2008.



10.2


First Midwest Savings and Profit Sharing Plan as Amended and Restated effective January 1, 2008 is herein incorporated by reference to Exhibit 10.3 to the Company's Annual Report on Form 10-K filed with the Securities and Exchange Commission on February 27, 2009.28, 2012.



10.3


Short-term Incentive Compensation Plan.

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10.410.2 First Midwest Bancorp, Inc. Omnibus Stock and Incentive Plan is incorporated herein by reference to AddendumAnnex A to the Company's Proxy Statement filed with the Securities and Exchange Commission on April 8, 2009.9, 2013.

10.3

 

10.5Amendment to the First Midwest Bancorp, Inc. Omnibus Stock and Incentive Plan is incorporated herein by reference to Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on May 12, 2014.
10.4
 

First Midwest Bancorp, Inc. Amended and Restated Non-Employee Directors Stock Plan dated May 21, 2008 is incorporated herein incorporated by reference to Exhibit 10.7 to the Company's Annual Report on Form 10-K filed with the Securities and Exchange Commission on February 27, 2009.

10.5

 

10.6


Restated First Midwest Bancorp, Inc. Nonqualified Stock Option-Gain Deferral Plan effective January 1, 2008 is incorporated herein by reference to Exhibit 10.12 to the Company's Annual Report on Form 10-K filed with the Securities and Exchange Commission on February 28, 2008.

143







10.7
10.6
 

Restated First Midwest Bancorp, Inc. Deferred Compensation Plan for Non-employee Directors effective January 1, 2008, is incorporated herein by reference to Exhibit 10.13 to the Company's Annual Report on Form 10-K filed with the Securities and Exchange Commission on February 28, 2008.

10.7

 

10.8


Restated First Midwest Bancorp, Inc. Nonqualified Retirement Plan effective January 1, 2008, is incorporated herein by reference to Exhibit 10.14 to the Company's Annual Report on Form 10-K filed with the Securities and Exchange Commission on February 28, 2008.

10.8

 

10.9


Form of Non-Employee Director Restricted Stock grantAward Agreement between the Company and non-employee directors of the Company pursuant to the First Midwest Bancorp, Inc. Amended and Restated Non-Employee Directors Stock Plan is incorporated herein by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed with the Securities Exchange Commission on May 28, 2008.

10.9

 

10.10


Form of Nonqualified Stock Option grantAward Agreement between the Company and directors of the Company pursuant to the First Midwest Bancorp, Inc. Non-Employee Directors Stock Option Plan is incorporated herein by reference to Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q filed with the Securities Exchange Commission on May 12, 2008.

10.10

 

10.11


Form of Nonqualified Stock Option grantAward Agreement between the Company and certain officers of the Company pursuant to the First Midwest Bancorp, Inc. Omnibus Stock and Incentive Plan is incorporated herein by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on May 12, 2008.

10.11

 

10.12


Form of Restricted Stock Unit grantAward Agreement between the Company and certain officers of the Company pursuant to the First Midwest Bancorp, Inc. Omnibus Stock and Incentive Plan is incorporated herein by reference to Exhibit 10.1710.11 to the Company's Annual Report on Form 10-K filed with the Securities and Exchange Commission on February 28, 2008.March 3, 2014.

10.12

 

10.13


Form of Restricted Stock grantAward Agreement between the Company and certain officers of the Company pursuant to the First Midwest Bancorp, Inc. Omnibus Stock and Incentive Plan is incorporated herein by reference to Exhibit 10.1810.12 to the Company's Annual Report on Form 10-K filed with the Securities and Exchange Commission on February 28, 2008.March 3, 2014.

10.13

 

10.14


Form of TARP Compliant Restricted ShareIndemnification Agreement between the Company and certain officers and directors of the Company is incorporated herein by reference to Exhibit 4.1 to the Company's Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on August 3, 2012.
10.14Employment Agreement between the Company and its highly compensated executivesChief Executive Officer is incorporated herein by reference to Exhibit 10.16 to the Company's Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 1, 2013.
10.15Employment Agreement between the Company and its Chief Operating Officer is incorporated herein by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on August 9, 2011.
10.16Employment Agreement between the Company and its Retail Banking Director is incorporated herein by reference to Exhibit 10.4 to the Company's Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on August 3, 2012.
10.17Form of Class II Employment Agreement between the Company and certain of its officers is incorporated herein by reference to Exhibit 10.17 to the Company's Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 1, 2010.2013.

10.18

 

10.15


Form of IndemnificationClass III Employment Agreement executed between the Company and certain officers and directors of the Company is incorporated herein by reference to Exhibit 10.4 to the Company's Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on May 9, 2007.



10.16


Form of Class IA Employment Agreement is incorporated herein by reference to Exhibit 10.19 to the Company's Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 1, 2010.



10.17


Form of Class II Employment Agreement is incorporated herein by reference to Exhibit 10.20 to the Company's Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 1, 2010.



10.18


Form of Class III Agreement is incorporated herein by reference to Exhibit 10.21 to the Company's Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 1, 2010.
10.19Form of Tier II Employment Agreement between the Company and certain officers of the Company is incorporated herein by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on August 3, 2012.
10.20Form of Tier III Employment Agreement between the Company and certain officers of the Company is incorporated herein by reference to Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on August 3, 2012.
10.21Form of Commission Tier III Employment Agreement between the Company and certain officers of the Company is incorporated herein by reference to Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on August 3, 2012.
10.22Form of Amendment to the Employment Agreement between the Company and its Chief Executive Officer and to the Class II Employment Agreements between the Company and certain of its officers is incorporated herein by reference to Exhibit 10.22 to the Company's Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 1, 2013.
10.23Amendment to the Employment Agreement between the Company and its Chief Operating Officer is incorporated herein by reference to Exhibit 10.23 to the Company's Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 1, 2013.

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10.24 10.19Form of Confidentiality and Restrictive Covenants Agreement between the Company and its Chief Executive Officer and its Chief Operating Officer is incorporated herein by reference to Exhibit 10.24 to the Company's Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 1, 2013.
10.25Form of Confidentiality and Restrictive Covenants Agreement between the Company and certain of its officers of the Company is incorporated herein by reference to Exhibit 10.25 to the Company's Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 1, 2013.
10.26 Form of Restricted Stock Unit grant between the Company and certain retirement-eligible officers of the Company pursuant to the First Midwest Bancorp, Inc. Omnibus Stock and Incentive Plan is incorporated herein by reference to Exhibit 10.21 to the Company's Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 1, 2011.

10.27

 

10.20


Retirement and Consulting Agreement and Continuing Participant Agreement to the First Midwest Bancorp, Inc. Omnibus Stock and Incentive Plan executed between the Company and a former executive of the Company is incorporated herein by reference to Exhibit 10.2 to the Company's Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 7, 2003.



10.21


Retirement and Consulting Agreements executed between the Company and a former executive of the Company is incorporated herein by reference to Exhibit 10.8 to the Company's Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on May 9, 2007.



10.22


Employment Agreement between the Company and its Chief Operating Officer is incorporated herein by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on August 9, 2011.



10.23


Grant of Nonqualified Stock Option Letter Agreement between the Company and its Chief Operating Officer is incorporated herein by reference to Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on August 9, 2011.

10.28

 

10.24


Grant of Restricted Stock Letter Agreement between the Company and its Chief Operating Officer is incorporated herein by reference to Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on August 9, 2011.

10.29

 

10.25


Supplemental Salary Stock Compensation Award Agreement between the Company and its Chief Operating Officer is incorporated herein by reference to Exhibit 10.4 to the Company's Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on August 9, 2011.

10.30

 

10.26


Compensation Award Agreement between the Company and its Chief Operating Officer is incorporated herein by reference to Exhibit 10.5 to the Company's Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on August 9, 2011.

10.31

 

10.27


OutsourcingLoan Agreement by and between the Company and Metavante CorporationU.S. Bank National Association dated July 1, 1999January 21, 2014 is incorporated herein by reference to Exhibit 10.2410.1 to the Company's Current Report on Form 8-K filed with the Securities and Exchange Commission on January 27, 2014.
10.32First Midwest Bancorp, Inc. Savings and Profit Sharing Plan as Amended and Restated effective January 1, 2014 is incorporated herein by reference to Exhibit 10.33 to the Company's Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on May 12, 2014.
10.33Form of Performance Share Award Agreement between the Company and certain officers of the Company pursuant to the First Midwest Bancorp, Inc. Omnibus Stock and Incentive Plan is incorporated herein by reference to Exhibit 10.34 to the Company's Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 1, 2011.3, 2014.

11

 

10.28


Amendment to the Outsourcing Agreement by and between the Company and Metavante Corporation dated April 28, 2004 is incorporated herein by reference to Exhibit 10.25 to the Company's Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 1, 2011.



10.29


Amendment to the Outsourcing Agreement by and between the Company and Metavante Corporation dated July 1, 2006 is incorporated herein by reference to Exhibit 10.26 to the Company's Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 1, 2011.



10.30


Information Technology Services Agreement by and between the Company and Fidelity Information Services, LLC dated November 30, 2011.



10.31


Summary of Executive Compensation.



10.32


Summary of Director Compensation.



11


Statement re: Computation of Per Share Earnings – The computation of basic and diluted earnings per common share is included in Note 1314 of the Company's Notes to the Consolidated Financial Statements included in "ITEM"Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA"Financial Statements and Supplementary Data" on Form 10-K for the year ended December 31, 2011.2014.

12

 

12


Statement re: Computation of Ratio of Earnings to Fixed Charges.



14.1


Code of Ethics and Standards of Conduct is incorporated herein by reference to Exhibit 14.1 to the Company's Annual Report on Form 10-K filed with the Securities and Exchange Commission on February 28, 2008.

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21 14.2Code of Ethics for Senior Financial Officers is incorporated herein by reference to Exhibit 14.2 to the Company's Annual Report on Form 10-K filed with the Securities and Exchange Commission on February 28, 2008.



21


Subsidiaries of the Registrant.

23

 

23


Consent of Independent Registered Public Accounting Firm.

31.1

 

31.1


Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 for the Company's Annual Report on Form 10-K for the year ended December 31, 2010.2014.

31.2

 

31.2


Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 for the Company's Annual Report on Form 10-K for the year ended December 31, 2010.2014.



32.1 (1)

 

Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 for the Company's Annual Report on Form 10-K for the year ended December 31, 2010.2014.



32.2 (1)

 

Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 for the Company's Annual Report on Form 10-K for the year ended December 31, 2010.2014.

101

 






99.1


Certification of Chief Executive Officer pursuant to Section 111(b)(4) of the Emergency Economic Stabilization Act of 2008.



99.2


Certification of Chief Financial Officer pursuant to Section 111(b)(4) of the Emergency Economic Stabilization Act of 2008.



101 (1)


Interactive Data File.


(1)  Furnished, not filed.


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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

FIRST MIDWEST BANCORP, INC.
Registrant

By/S/s/ MICHAEL L. SCUDDER

Michael L. Scudder
President, Chief Executive Officer, and Director
  

February 28, 2012

March 2, 2015
Pursuant to the requirements of the Securities Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in their capacities indicated on February 28, 2012.

March 2, 2015.

Signatures
Signatures

/S/s/ ROBERT P. O'MEARA

Robert P. O'Meara

 

Chairman of the Board

Robert P. O'Meara
/s/ MICHAEL L. SCUDDER

Michael L. Scudder

 

President, Chief Executive Officer, and Director

Michael L. Scudder
/S/s/ PAUL F. CLEMENS

Paul F. Clemens

 

Executive Vice President, Chief Financial Officer, and Principal Accounting Officer

Paul F. Clemens
/S/s/ BARBARA A. BOIGEGRAIN

Director
Barbara A. Boigegrain

Director

/S/ BRUCE S. CHELBERG

Bruce S. Chelberg


Director

/S/s/ JOHN F. CHLEBOWSKI, JR.

Director
John F. Chlebowski, Jr.

Director

/S/ JOSEPH W. ENGLAND

Joseph W. England


Director

/S/s/ BROTHER JAMES GAFFNEY, FSC

Director
Brother James Gaffney, FSC

Director

/S/s/ PHUPINDER S. GILL

Director
Phupinder S. Gill

Director

/S/s/ PETER J. HENSELER

Director
Peter J. Henseler

Director

/S/s/ PATRICK J. MCDONNELL

Director
Patrick J. McDonnell

Director

/S/s/ ELLEN A. RUDNICK

Director
Ellen A. Rudnick

Director

/S/s/ MARK G. SANDER
Director
Mark G. Sander
/s/ MICHAEL J. SMALL

Director
Michael J. Small

Director

/S/s/ JOHN L. STERLING

Director
John L. Sterling

Director

/S/s/ J. STEPHEN VANDERWOUDE

Director
J. Stephen Vanderwoude

Director


146