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FORM 10-K TABLE OF CONTENTS

Table of Contents



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, 20132014
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 60143-1254
(Address
 (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 NASDAQ Stock Market
The NASDAQ 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 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, a non-accelerated filer, or 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 [ ]
(Do not check if a
smaller reporting company)		 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, 2013,2014, determined using a per share closing price on that date of $13.72,$17.03, as quoted on the NASDAQ Stock Market, was $983,311,289.

$1,226,970,577.

As of March 3, 2014,February 26, 2015, there were 75,271,08777,958,815 shares of common stock, $0.01 par value, outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant's Proxy Statement for the 20142015 Annual Stockholders' Meeting are incorporated by reference into Part III.

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FORM 10-K

TABLE OF CONTENTS


1



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


Page
Part I
ITEM 1.
Business
3
ITEM 1A.
Risk Factors
15
ITEM 1B.
Unresolved Staff Comments
29
ITEM 2.
Properties
29
ITEM 3.
Legal Proceedings
29
ITEM 4.
Mine Safety Disclosures
29
    

ITEM 1.Part II

 
Business

3

ITEM 1A.


Risk Factors

16

ITEM 1B.

Unresolved Staff Comments

32

ITEM 2.

Properties

32

ITEM 3.

Legal Proceedings

32

ITEM 4.

Mine Safety Disclosures

33


Part II








ITEM 5.
 

Market for the Registrant's Common Equity, Related Stockholder Matters,
and Issuer Purchases of Equity Securities


3330

ITEM 6.

 

Selected Financial Data


3633

ITEM 7.

 

Management's Discussion and Analysis of Financial Condition and Results of Operations


3734

ITEM 7A.

 

Quantitative and Qualitative Disclosures about Market Risk


8276

ITEM 8.

 

Financial Statements and Supplementary Data


8578

ITEM 9.

 

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure


147138

ITEM 9A.

 

Controls and Procedures


147138

ITEM 9B.

 

Other Information


149140


Part III

 

 



 

Part III
ITEM 10.

 

Directors, Executive Officers, and Corporate Governance


149140

ITEM 11.

 

Executive Compensation


150141

ITEM 12.

 

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters


150141

ITEM 13.

 

Certain Relationships and Related Transactions and Director Independence


151141

ITEM 14.

 

Principal Accountant Fees and Services


151141


Part IV

 

 



 

Part IV
ITEM 15.

 

Exhibits and Financial Statement Schedules


151142

 
 

Signatures


156146


2

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PART I

ITEM 1. BUSINESS

First Midwest Bancorp, Inc.

First Midwest Bancorp, Inc. (the "Company""Company," "we," "us," or "our") is a Delaware corporation incorporated in 1982 and headquartered in the Chicago suburb of Itasca, Illinois. The Company is one of Illinois' largest independent publicly-traded banking companies, with assets of $9.4 billion as of December 31, 2014, and is registered under the Bank Holding Company Act of 1956, as amended (the "BHC Act"). The Company is one of Illinois' largest independent publicly-traded banking companies with assets of $8.3 billion as of December 31, 2013 and is headquartered in the Chicago suburb of Itasca, Illinois. The Company's common stock, $0.01 par value per share ("Common Stock"), is listed on the NASDAQ Stock Market and trades under the symbol FMBI ("Common Stock")"FMBI".

Our principal subsidiary, First Midwest Bank (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 approximately 90109 banking offices.

locations. At December 31, 2014, the Company and its subsidiaries employed a total of 1,788 full-time equivalent employees.

History

In 1983, the Company became a bank holding company through athe simultaneous acquisition of over 20 affiliated financial institutions. This transaction involved a re-organization of existing ownership interests as the acquired banks were under some form of common control. The Bank, through its predecessors, has provided banking and trust services for over 70 years. Since becoming a bank holding company, the Company has completed 21 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.

non-banking organizations.

In the normal course of business, the Company explores potential opportunities for expansion in core market and adjacent areas through organic growth and the acquisition of banking and non-banking institutions.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 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. In addition, the Company provides various services to its subsidiaries, establishes Company-wide policies and procedures, and provides other resources as needed, including capital. As of December 31, 2013,2014, the following were the Company's primary subsidiaries:


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The Bank conducts the majority of the Company's operations primarily throughout the greater Chicago metropolitan area, in 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,
2013		  December 31, 2014

Total assets

 $8,122,963  $9,314,575

Total deposits

 $6,783,730  $7,933,652

Bank branches

 86  103

Bank offices

 5  6

Full-time equivalent employees

 1,647 


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The Bank operates the following wholly owned subsidiaries:

•
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 limited 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, FMB Investments Ltd., a Bermuda corporation. FMB Investments Ltd. manages investment securities and is largely inactive.
Catalyst Asset Holdings, LLC ("Catalyst")

Catalyst isAsset Holdings, LLC, an Illinois limited liability company that("Catalyst"), manages a portion of the Company's non-performing assets. 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 $9.5$6.7 million in non-performing assets remaining as of December 31, 2013.

2014.

Catalyst has one wholly owned subsidiary, Restoration Asset Management, LLC ("Restoration"), an 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. Parasol conducts its business in one of the Bank's offices and provides wealth management services to the Bank's wealth 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.

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 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 $36.7combined $50.7 million in trust-


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preferredtrust-preferred securities held by FMCTthe three trusts at December 31, 2013 is2014 are included in Tier 1 capital of the Company for regulatory capital purposes.

Segments

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.

Market Area

The Bank operates in the most active and diverse markets in Illinois, the largest of which is the suburban metropolitan Chicago market, as well as central and western Illinois. The Bank's other service areas are located primarily in northwestern Indiana and eastern 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.

Competition

The banking and financial services industry in the markets in which the Bank operates (and particularly the Chicago metropolitan area) is highly 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; credit unions; mutual funds; and investment brokers.


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Competition is driven 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 competition in attracting and retaining qualified employees. Its ability to continue to compete effectively will depend on its ability to attract new employees and retain and motivate existing employees.

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. The Bank has been in the basic business of commercial and retail 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 at 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.


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The Bank originates commercial and industrial, agricultural, commercial real estate, and consumer loans. Substantially all of the Company's borrowers are businesses and residents in the Bank's service areas. The Company's largest category of lending is commercial real estate, 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 origination 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, 61%60% of our loan portfolio consisted of real estate-related loans at December 31, 2013.

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 Company's ability to maintain affordable funding sources allows the Bank to meet the credit needs of its customers and the communities it serves. The Bank maintains a relatively stable base of transactionalcore deposits that are the primary source of the Company's funds for lending and other investment purposes. Deposits funded 82%84% of the Company's assets at the end of 20132014 with a loans-to-deposits ratio of 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"); securities sold under agreements to repurchase; federal funds purchased; revolving linelines of credit;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 securities portfolio to provide the Company with financial stability, asset diversification, income, and collateral for borrowing. The Company administers its securities portfolio in accordance with an investment policy that was approved and adopted by the Board of Directors of the Bank. The Bank'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 fully investing available funds, provide adequate regulatory and operational liquidity, minimize and/or adjust the interest rate risk position of the Company, diversify 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 System, and the Board of Governors of the Federal Reserve System ("Federal(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


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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 loss share agreements with the FDIC Agreements,("the FDIC Agreements"), and the U.S. Department of the Treasury ("Treasury"(the "Treasury"), which enforces money laundering and currency transaction regulations. As a public company, the Company is also undersubject to the jurisdictionregulatory authority of the U.S. Securities and Exchange Commission ("SEC"(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, as amended.

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, acquisitions, dividends, and other matters. This supervision and regulation is intended primarily for the protection of the FDIC's deposit insurance fund ("DIF"), thea bank's depositors, and the 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, regulatory policies, and regulatory and supervisory guidance applicable to the Company and its subsidiaries, and the manner in which market practices and structures develop around the regulations, could have a material adverse effect on our business, financial condition, and results of operations. The Company cannot accurately predict the nature or the extent of the effects that any such developments will have on its business and earnings.


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Bank Holding Company Act of 1956 As Amended

Generally, the BHC 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 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 BHC Act, the Bank Merger Act, and other federal and state statutes regulate acquisitions of commercial banks. The BHC 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 acquisition 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 the stability of the U.S. banking or financial system, the applicant's managerial and financial resources, the applicant's performance record under the Community Reinvestment Act and fair housing laws, and the effectiveness of the banks in combating money laundering activities.

In addition, the BHC Act prohibits (with certain exceptions) a bank holding company from acquiring direct or indirect control or ownership, or control of more than 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.


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Any transactions between the Bank and the Company and their respective subsidiaries are regulated by the Federal Reserve. The Federal Reserve's regulations limit the types and amounts of covered transactions engaged in by the Bank and generally require those transactions to be on terms at least as favorable to the Bank as if the transaction were conducted with an arm's-length basis.unaffiliated third party. Covered transactions are defined by statute to include:

•
A loan or extension of credit, as well as a purchase of securities issued by an affiliate.
•
The purchase of assets from an affiliate, unless otherwise exempted by the Federal Reserve.
•
Certain derivative transactions that create a credit 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 require that 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 certain thresholds on an individual and aggregate basis.

The Bank is also limited as to how much and on what terms it may lend to its insiders and the insiders of its affiliates, including executive officers and directors.

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 requirement, 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, 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. Federal regulators 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 Act")

The GLB Act, allows certain bank holding companies to elect to be treated as a financial holding company (an "FHC") that may 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 register or maintain status as an FHC if the company or any of its insured depository institution subsidiaries are not well-capitalized and well managed. 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 to 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 "satisfactory" in its most recent examination under the 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


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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 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 PATRIOT Acts require financial institutions to develop programs to prevent them from being used for money laundering, terrorist, and other 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. 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 sanctions could have serious legal and reputational consequences, including causing applicable bank regulatory authorities not to approve merger or acquisition transactions when regulatory approval is required or to prohibit such transactions even if approval is not required.

Office of Foreign Assets Control Regulation ("OFAC")

The United States imposes economic sanctions that affect transactions with designated foreign countries, nationals, and others. These sanctions are administered by OFAC, an agencythe Treasury's Office of the Treasury.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 for the institution, including causing applicable bank regulatory authorities not to approve merger or acquisition transactions when regulatory approval is required or to prohibit such transactions even if approval is not required.

Dodd-Frank Wall Street Reform and Consumer Protection Act

The Dodd-Frank Act significantly restructured the financial regulatory regime in the United States. Although 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, such as bank holding companies and banks with total consolidated assets of $10 billion or more, it contains numerous other provisions that affect all bank holding companies and banks, including the Company and the Bank, some of which are described in more detail below. We are monitoring developments with respect to the provisions applicable to bank holding companies and banks with total consolidated assets of $10 billion or more in the event that the 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 the Company chooses to engage. Many aspects of the Dodd-Frank Act are still subject to future rulemaking, implementation, and guidance that will occur 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. For 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 the Company.


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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 for 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 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 laws) over institutions with assets under $10 billion, such as 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 which commenced operations on July 21, 2011, engages in several activities 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.

The Bank is also 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, the 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. Electronic banking activities are subject to federal law, including the Electronic Funds Transfer 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 Federal Truth in Lending Act. Other consumer financial laws include the Equal Credit Opportunity Act, Fair Credit Reporting Act, Fair Debt Collection Practices Act, and applicable state laws.

The Federal Reserve has 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 laws. Failure to comply with these requirements could have serious legal and reputational consequences for the institution, including causing applicable bank regulatory authorities not to approve merger or acquisition transactions when regulatory approval is required or to prohibit such transactions even if approval is not required.

Interchange Fees

Under the Durbin Amendment of the Dodd-Frank Act, the Federal Reserve established a maximum permissible interchange fee equal to no more than 21 cents plus five basis points of the transaction value 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 required by the Federal Reserve. The Company is in compliance with these fraud-related requirements. The Federal Reserve also has rules governing routing and exclusivity that require issuers to offer two unaffiliated networks for routing transactions on each debit or prepaid 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.

On July 31, 2013, the U.S. District Court for the District of Columbia found the interchange fee cap and the exclusivity provision adopted by the Federal Reserve to be invalid. The Federal Reserve has appealed this decision, and it is currently uncertain whether the Federal Reserve's original rule will ultimately be upheld or whether the Federal Reserve will be required to revise the rule.


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Capital Requirements

The Federal Reserve and other federal bank regulators 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 by the regulatory authorities. These guidelines require banking institutions to maintain capital based on the 1988 capital accord ("Basel I") of the Basel Committee on Banking Supervision (the "Basel Committee").

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").

Capital is classified in one of the following 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.

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

 3.00% 5.00% 4.00% 5.00%


In July 2013, the Federal Reserve published final rules (the "Basel III Capital Rules") establishing a new comprehensive capital framework for U.S. banking organizations. The rules implement the Basel Committee'sCommittee’s December 2010 framework commonly known as "Basel III" for strengthening international capital standards as well as certain provisions of the Dodd-Frank Act. The Basel III Capital Rules substantially revise the risk-based capital requirements applicable to bank holding companies and depository institutions, including the Company and the Bank, compared to the current U.S. risk-based capital rules. The Basel III Capital Rules define the components of capital and address other issues impacting the numerator in banks'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'agencies’ rules. The Basel III Capital Rules will bebecame 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"), (ii) specify that Tier 1 capital consist 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


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Additional Tier 1 Capital on a permanent basis and without any phase-out. As of December 31, 2013,2014, the Company had $36.7$50.7 million of trust-preferred securities included in Tier 1 capital.


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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 Totaltotal 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.


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, will face constraints on dividends, equity repurchases, and compensation based on the amount of the shortfall. The implementation of the capital conservation buffer will begin on January 1, 2016 at the 0.625% level and be phased in over a four-year period (increasing by that amount on each subsequent January 1 until it reaches 2.5% on January 1, 2019).


The Basel III Capital Rules also provide for a number of deductions from and adjustments to CET1 beginning on January 1, 2015 and willto 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.


Management believes that as of December 31, 2013,2014, the Company and the Bank 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.

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 puts forth regulatory requirements that banks and bank holding companies measure their liquidity against specific liquidity tests. One test, referred to as the liquidity coverage ratio ("LCR"), is designed to ensure that the banking entity maintains an adequate level of unencumbered high-quality liquid assets equal to the entity's expected net cash outflow for a 30-day time horizon (or, if greater, 25% of its expected total cash outflow) under an acute liquidity stress scenario. The other test, referred to as the net stable funding ratio ("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. These requirements will provide an incentive for banking entities to increase their holdings of Treasury securities and other sovereign debt as a component of assets and increase the use of long-term debt as a funding source.


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In October of 2013,2014, the federal banking agencies proposedapproved 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.

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, 2013,2014, 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.


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The Basel III Capital Rules reviserevised the currentformer prompt corrective action requirements effective January 1, 2015 by (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 the current 6%); and (iii) eliminating the current provision that provides that a bank with a composite supervisory rating of 1 may have a 3% leverage ratio and still be adequately capitalized. The Basel III Capital Rules do not change the total risk-based capital requirement for any prompt corrective action category.

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 arebecame 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 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 its subsidiaries.

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") 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 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 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 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 are authorized to determine that the payment of dividends by the Company would be an unsafe or unsound practice and to prohibit payment 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. Due to the current financial and economic environment, the Federal Reserve indicated that bank


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holding companies should carefully review their dividend policy and discourage payment ratios that are at maximum allowable levels unless both asset quality and capital are very strong.

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 engaged or is engaging in unsafe and unsound practices; is in an unsafe or unsound condition to continue operations; or violated any applicable law, regulation, rule, order, or condition imposed by the FDIC or written agreement entered into with the FDIC.

The FDIC utilizes a risk-based assessment system that imposes insurance premiums based on a risk matrix that takes into account a bank's capital level and supervisory 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.

The total base assessment rates range from 2.5 basis points to 45 basis points. The assessment base is calculated using average consolidated total assets minus average tangible equity. At least semi-annually, the FDIC will update its loss and income projections for the DIF and, if needed, will increase or decrease assessment rates, 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 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.

Employee Incentive Compensation

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 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, proposed such rules, which 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.


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and Regulation

In addition to the specific legislation described above, various legislationlaws and regulation isregulations are being considered by Congress 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 compliance 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 atwww.firstmidwest.com/aboutinvestor_overview.aspinvestorrelations. 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 website or are available in print upon the request of any stockholder 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 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.


ITEM 1A. RISK FACTORS

An investment in our 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 occurs,occur, the Company's business, financial condition, and results of operations and financial condition could 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.


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Risks Related to the Company's Business

The Company is subject to interest rate risk.

The Company's earnings and cash flows largely depend 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 pays on deposits and borrowings. These 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 implements 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 repeal of federal prohibitions on payment of interest on demand deposits could increase the Company's interest expense.

All federal prohibitions on the ability of financial institutions to pay interest on demand deposit accounts were repealed as part of the Dodd-Frank Act beginning in July 2011. As a result, some financial institutions, including the Company, now offer interest on demand deposits to compete for customers. The Company's interest expense will increase and its net interest margin will decrease if it offers higher interest on demand deposits to attract additional customers or maintain current customers, which could have a material adverse effect on the Company's business, financial condition and results of operations.

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, 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 as well as continuing weakenedor 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 and other actions.

As of December 31, 2013,2014, the Company's loan portfolio consisted of 86.3% of corporate loans, totaling 86.6%, the majority of which iswere secured by commercial real estate, and 13.4%13.7% of consumer loans. The deterioration 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


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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 corporate and consumer 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, and the repayment of the loan largely depends on the value of the collateral securing the loan and the successful operation of the 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.

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. This could have a material adverse effect on the Company's business, financial condition, and results of operations.

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 at a level believed adequate to absorb estimated losses inherent in its 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 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, which are 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. 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. Refer toSee Note 1 of "Notes to the Consolidated Financial Statements" in Item 8 of this Form 10-K for further discussion related to the Company's process for determining the appropriate level of the allowance for credit losses.


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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 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 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, 2013,2014, the Company's subsidiaries had deposits and other liabilities of $7.1$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 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 an 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.


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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. 

 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 on 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.

Operational Risks

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 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 are incorrect, the 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," of this Form 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.

These standards are continuously updated and refined and new standards are developed resulting in changes that 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 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.


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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 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 customer relationships are critical to the success of its business, and loss of key employees with significant 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, which could result in the loss of some of its customers and could have a negativean adverse impact on the Company'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 increases, the potential risks of technology-related operation interruptions in the Company's customer relationship management, general ledger, deposit, loan, or other systems or the occurrence of cyber 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. During the year, the Company experienced certain immaterial cyber-attacks or breaches and continues to invest in security and controls to prevent and mitigate future incidents. Although the Company has not experienced any material losses related to a technology-related operational interruption or 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.


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The occurrence of any failures, interruptions, or security breaches of the Company's technology systems 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 depends 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 their proprietary software on 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 vendors 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 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 disclose 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. Over 98%97% of the Company's


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available-for-sale securities were categorized in level 2 of the fair value hierarchy and the remaining securities were categorized as level 3. Refer toSee Note 2122 of "Notes to the Consolidated Financial Statements" in Item 8 of this Form 10-K for a detailed description of the fair 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. 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, 2013,2014, 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 value of the Company's goodwill and other intangible assets may decline in the future.

As of December 31, 2013,2014, the Company had $276.4$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. 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 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. These 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 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. Due 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.
•
Expanding the Company's market position.
•
Offering products and services at prices and with the features that meet customers' needs and demands.
•
Introducing new products and services.
•
Maintaining a satisfactory level of customer 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 depends 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 economy,cycle, 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, which further contributedmay be taken to the adverse business environment for households and businesses. Concerns over U.S. fiscal policy, budget deficit issues, and political debate over the debt ceiling, including the related government shutdown in October of 2013, have created additional economic and market uncertainty.

While economic conditions have shown signs of improvement through 2013, thereaddress that debt. There can be no assurance that economic recoveryconditions will continue to improve, and future 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 analysis 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.

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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 that the Company will not experience an adverse effect, which may be material, on its ability to access capital and on the Company's business, financial condition, and results of operations.

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 financial institutions 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'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 historically experienced extremely low default rates, municipal securities are subject to systemic risk since cash flows generally depend 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 sell the affected property or to repay the indebtedness


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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 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. These 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, 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.

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.

Due

During the past several years, due to concerns over the U.S. debt limit and budget deficit, 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, and other majorrating. Further downgrades of the U.S. federal government's sovereign credit rating, agencies have made statements suggestingand the possibilityperceived creditworthiness of similar downgrades. Any future downgrades or changes in outlook by the major credit rating agenciesU.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 BOLI 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 business, financial condition, or results of operations, and liquidity.

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 other supervisory guidance for possible changes.

Changes to statutes, regulations, 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. These changes could subject the Company to additional costs, limit the types of financial services and products the Company may offer, limit 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 other regulatory guidance could result in civil or criminal sanctions by regulatory agencies, civil monetary penalties, and damage to the Company's reputation. 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.


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

In response to the financial market crisis, the U.S. government, specifically the Treasury, Federal Reserve, and FDIC, working in cooperation with foreign governments and other central banks, took 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 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.

The Dodd-Frank Act which became law in 2010, significantly changed the 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 until final rules are adopted and market practices and structures develop around the rules, which may take several years. See the section titled "Supervision and Regulation" in Item 1 of this Form 10-K for a discussion of several significant provisions of the Dodd-Frank 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 occur over several years, making it difficult to anticipate the overall financial impact on the Company. However, compliance with new laws and 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.

The Federal Reserve has 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 adjustment" to the interchange fee is available to those issuers that comply with certain standards outlined by the Federal Reserve.

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

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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 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 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.

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 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 depending 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


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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 a defendant in a variety of litigation and other actions.

Currently, there are certain 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, the Company's management believes that any liabilities arising from pending legal matters would be 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. For a detailed discussion on current legal proceedings, refer tosee Item 3, "Legal Proceedings," and Note 2021 of "Notes to the Consolidated Financial Statements" in Item 8 of this Form 10-K.


25



Risks Related to Acquisition Activity

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

In the past, the

The Company 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, 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.
•
Disruption of the Company's business.
•
Loss of key employees and customers of acquired banks.
•
Short-term decrease in profitability.
•
Diversion of management's time and attention.
•
Issues arising during transition and integration.
•
Dilution in the ownership percentage of holdingsholders of the Company's Common Stock.
•
Difficulty in estimating the value of the target 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.
•
Volatility in reported income as goodwill impairment losses could occur irregularly and in varying amounts.
•
Inability to realize the expected revenue increases, cost savings, increases in geographic or product presence, and/or other projected 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 may 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, 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 the sections captioned "History" and "Supervision and Regulation" included in Item 1, "Business""Business," of this Form 10-K for additional detail and further discussion of these matters.

Competition for acquisition candidates 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.


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If the Company is inclined to participate in 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.

Failure to comply with the terms of loss share agreements with the FDIC may result in potential losses.

The Company has completed four FDIC-assisted transactions. In three of those transactions, most loans and OREO acquired are covered by 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. Non-compliance with the terms of the FDIC Agreements could result in the loss of reimbursement on individual loans, large pools of loans, or OREO and could result in material losses that adversely affect the Company's business or financial condition.


26



The valuations of acquired loans and OREO, including those acquired in FDIC-assisted transactions and the related FDIC indemnification asset, rely on estimates that may 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.

Inoperations.

For loans acquired in FDIC-assisted transactions that include 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.
•
Recommendations by securities analysts.
•
Operating and stock price performance of other companies that investors deem comparable to the Company.
•
News reports relating to trends, concerns, and other issues in the financial services industry.

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•
Perceptions in the marketplace regarding the Company and/or its competitors.
•
New technology used or services offered by competitors.
•
Significant acquisitions or business combinations, strategic partnerships, joint venture, or capital commitments by or involving the Company or its competitors.
•
Failure to integrate acquisitions or realize anticipated benefits from acquisitions.
•
Changes in government 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 Common 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 NASDAQ Stock Market, 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.

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.

The Company's current quarterlyfourth quarter 2014 cash dividend is $0.07was $0.08 per share. 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 on 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 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.


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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 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. In 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 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.


28



ITEM 1B. UNRESOLVED STAFF COMMENTS

None.


ITEM 2. PROPERTIES

The executive offices of the Company are located at One Pierce Place, Itasca, Illinois, and are leased from an unaffiliated third party. The Company conducts business through 91109 banking officeslocations largely located in various communities throughout the suburbangreater Chicago metropolitan Chicago market,area, as well as northwest Indiana, central and western Illinois. The Company also has banking offices in northwestern IndianaIllinois, and eastern Iowa. The majority, approximately 80%, of the Company's banking officeslocations are owned and excess space is20% are leased.

The Company owns 124 automated teller machines ("ATMs"),145 ATMs, most of which are housed at banking locations. 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

In the ordinary course of business, there were certain legal proceedings pending against the Company and its subsidiaries are parties to pending or threatened legal proceedings or actions arising 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 that none of thedoes not expect any liabilities arising from pending legal proceedings are expectedmatters to have a material adverse effect on the Company's business, financial position,condition, results of operations, or cash flows.

In 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 was based on the Bank's practices relating to debit card transactions, and alleged that these practices resulted in customers being assessed excessive overdraft fees. The plaintiffs sought an unspecified amount of damages and other relief, including restitution. No class was ever certified. The Bank filed a motion to dismiss the plaintiffs' complaint and, on January 23, 2013, the Circuit Court entered an order granting the Bank's motion and dismissed the complaint with


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prejudice. The plaintiffs appealed the Circuit Court's ruling. The plaintiffs subsequently filed a motion to dismiss their appeal, and the Appellate Court of Illinois entered an order dismissing the appeal on January 21, 2014.


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 NASDAQ Global Select Market tier of the NASDAQ Stock Market. As of December 31, 2013,2014, there were 1,9891,960 stockholders of record, a number that does not include beneficial owners who hold shares in "street name" (or shareholdersstockholders from previously acquired companies that did not exchange their stock).


 2013  
 2012  2014 2013

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

Market price of Common Stock

                      
  
  
  
   
  
  
  

High

 $18.49 $16.20 $13.87 $13.60   $13.57 $13.40 $12.25 $12.87  $17.99
 $17.77
 $18.19
 $17.83
  $18.49
 $16.20
 $13.87
 $13.60

Low

  14.90 13.81 11.57 12.11   11.62 10.43 9.42 10.25  15.01
 15.64
 15.49
 15.36
  14.90
 13.81
 11.57
 12.11

Cash dividends declared per common share

  0.07 0.04 0.04 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

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. Further 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.


30



Stock Performance Graph

The graph below illustrates the cumulative total return (defined as stock price appreciation or depreciation and dividends, including dividend reinvestment)assuming the reinvestment of all dividends) to stockholders of the Company's Common Stock compared against twoa broad-market total return equity indices, the S&P 500 andindex, the NASDAQ Composite, and twoa published industry total return equity indices, the S&P SmallCap 600 Banks andindex, the NASDAQ Bank,Banks, over a five-year period. The stock performance graph for the year ended December 31, 2012 included the S&P 500 and the S&P SmallCap 600 Banks indices. The Company believes that
Comparison of Five-Year Cumulative Total Return Among
First Midwest Bancorp, Inc., the NASDAQ Composite, and the NASDAQ Bank indices provide a more meaningful comparison since the Company's stock trades on the NASDAQ Stock Market Exchange and is included in both indices. Therefore, the S&P 500 and the S&P SmallCap 600 Banks indices will be removed from this graph in future Form 10-K filings.


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

 
 2008 2009 2010 2011 2012 2013 

First Midwest Bancorp, Inc. 

 $100.00 $54.79 $58.15 $51.35 $63.67 $90.08 

S&P 500

  100.00  126.46  145.51  148.59  172.37  228.19 

NASDAQ Composite

  100.00  144.88  170.58  171.30  199.99  283.39 

NASDAQ Bank

  100.00  84.86  97.62  87.11  102.06  144.32 

S&P SmallCap 600 Banks

  100.00  69.96  81.60  80.53  95.08  143.55 
  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, as amended, 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



Issuer Purchases of Equity Securities

The following table summarizes the Company's monthly Common Stock purchases during the fourth quarter of 2013.2014. 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, 2013.2014. The repurchase program has no set expiration or termination date.


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Issuer Purchases of Equity Securities

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

October 1 – October 31, 2013

  1,281 $15.17  -  2,494,747 

November 1 – November 30, 2013

  -  -  -  2,494,747 

December 1 – December 31, 2013

  -  -  -  2,494,747 
           

Total

  1,281 $15.17  -    
           
  
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
 —
  

(1)
Consists of shares acquired pursuant to the Company's share-based compensation plans and not the Company's Board-approved stock repurchase program. Under the terms of the Company's share-based compensation plans, the Company accepts previously owned shares of Common Stock surrendered by option holders upon exercise to cover the exercise price of the stock options or to satisfy tax withholding obligations associated with the vesting of restricted shares.


Unregistered Sales of Equity Securities

None.


None.


32

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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, 20132014 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.


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

 2013 2012 2011 2010 2009 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)

 $79,306 $(21,054) $36,563 $(9,684) $(25,750) $69,306
 $79,306
 $(21,054) $36,563
 $(9,684)

Net income (loss) applicable to common shares

 78,199 (20,748) 25,437 (19,717) (35,551) 68,470
 78,199
 (20,748) 25,437
 (19,717)

Per Common Share Data

 
 		 
 		 
 		 
 		 
 		          

Basic earnings (loss) per common share

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

Diluted earnings (loss) per common share

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

Common dividends declared

 0.16 0.04 0.04 0.04 0.04 0.31
 0.16
 0.04
 0.04
 0.04

Book value at year end

 13.34 12.57 12.93 12.40 13.66 14.17
 13.34
 12.57
 12.93
 12.40

Market price at year end

 17.53 12.52 10.13 11.52 10.89 17.11
 17.53
 12.52
 10.13
 11.52

Performance Ratios

 
 		 
 		 
 		 
 		 
 		          

Return on average common equity

 8.04% (2.14)% 2.69% (2.06)% (4.84)% 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

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

Net interest margin – tax-equivalent

 3.68% 3.86% 4.04% 4.13% 3.72% 3.69% 3.68% 3.86 % 4.04% 4.13 %

Non-performing loans to total loans(1)

 1.14% 1.80% 3.86% 4.24% 4.77%

Non-performing assets to total loans plus OREO(1)

 2.13% 2.68% 4.85% 5.25% 6.39%
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 or for the years ended December 31, As of or for the years ended December 31,

 2013 2012 2011 2010 2009 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

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

Total loans

 5,714,360 5,387,570 5,348,615 5,472,289 5,349,565 6,736,853
 5,714,360
 5,387,570
 5,348,615
 5,472,289

Deposits

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

Senior and subordinated debt

 190,932 214,779 252,153 137,744 137,735 200,869
 190,932
 214,779
 252,153
 137,744

Long-term portion of FHLB advances

 114,550 114,581 75,000 112,500 147,418 —
 114,550
 114,581
 75,000
 112,500

Stockholders' equity

 1,001,442 940,893 962,587 1,112,045 941,521 1,100,775
 1,001,442
 940,893
 962,587
 1,112,045

Financial Ratios

 
 		 
 		 
 		 
 		 
 		          

Allowance for credit losses as a percent of loans

 1.52% 1.91% 2.28% 2.65% 2.71%

Net loan charge-offs to average loans, annualized(1)

 0.48% 3.32% 1.84% 2.80% 3.08%
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

 12.39% 11.90% 13.68% 16.27% 13.94% 11.23% 12.39% 11.90% 13.68% 16.27%

Tier 1 capital to risk-weighted assets

 10.91% 10.28% 11.61% 14.20% 11.88% 10.19% 10.91% 10.28% 11.61% 14.20%

Tier 1 leverage to average assets

 9.18% 8.40% 9.28% 11.21% 10.18% 9.03% 9.18% 8.40% 9.28% 11.21%

Tangible common equity to tangible assets

 9.09% 8.44% 8.83% 8.06% 6.29% 8.41% 9.09% 8.44% 8.83% 8.06%

Dividend payout ratio

 15.09% (14.29)% 11.43% (14.81)% (5.63)% 33.70% 15.09% N/M
 11.43% N/M

Average equity to average assets ratio

 11.74% 11.93% 13.72% 14.31% 11.50% 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.

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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 commercial and retail banking and wealth management services to consumer, commercial and industrial, commercial real estate, municipal, and municipalconsumer customers through approximately 90109 banking offices.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 2011 through 2013ended December 31, 2014 and Consolidated Statements of Financial Condition as of December 31, 20122014 and 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. Management's discussion and analysis 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, local and national economic conditions, business spending, consumer confidence, legislative and regulatory changes, and changes in real estate and securities markets. Our management evaluates performance using a variety of qualitative and quantitative metrics. The primary quantitative metrics used by management include:

•
Pre-Tax, Pre-Provision Operating Earnings –Pre-tax, pre-provision operating earnings, a non-GAAP financial measure, reflects our operating performance before the effects of credit-related charges, securities gains, losses, and impairments, and certain unusual, infrequent, or non-recurring revenues and expenses. We believe this metric 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, our primary source of revenue, equals the difference between interest income and fees earned on interest-earning assets and interest expense incurred on interest-bearing liabilities.
•
Net Interest Margin –Net interest margin equals net interest income divided by total average interest-earning assets.
•
Noninterest Income – Noninterest income is the income we earn from fee-based revenues, investment in bank-owned life insurance ("BOLI") and other income, and non-operating revenues.
•
Noninterest Expense – Noninterest expense is the expense we incur to operate the Company, which includes salaries and employee benefits, net occupancy and equipment, professional services, and other costs.
Asset Quality – Asset quality represents an estimation of the quality of our loan portfolio, including an assessment of the credit risk related to existing and potential loss exposure, and can be evaluated using a number of quantitative measures, such as non-performing loans to total loans.
•
Regulatory Capital – Our regulatory capital is currently 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 ofyears ended December 31, 2014 and 2013 is included in the section titled "Fourth Quarter 2013 vs. Fourth Quarter 2012""Quarterly Earnings" of this Item 7. The summary provides an analysis of the quarterly earnings performance for the fourth quarter of 2013 compared to the same period in 2012.

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.


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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

This report, as well as our other filings with the SEC or our communications with stockholders,Form 10-K may contain forward-looking statementscertain "forward-looking statements" within the safe harbor provisionsmeaning of the Private Securities Litigation Reform Act of 1995 ("PSLRA"). These statements involve known and unknown risks, uncertainties, and other factors that may cause actual results to be materially different from 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.

1995. In some cases, we identified forward-looking statements can be identified by the use of words such words or phrases as "will likely result,"may," "is confident that,"might," "remains optimistic about,"will," "expects,"would," "should," "could," "seeks,"expect," "may,"plan," "will continue to,"intend," "believes,"anticipate," "anticipates,"believe," "predicts,"estimate," "forecasts,"predict," "estimates," "projects,"probable," "potential," "intends,"possible," "target," or "continue" and words of similar expressions identifying forward-looking statements within the meaning of the PSLRA, including the negative of those words and phrases. These forward-lookingimport. Forward-looking statements are not historical facts but instead are based on management's current views and assumptionsexpress 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 business conditions, outcomes,performance, and our outlook for the Company based on currently available information. We wish towe caution readersyou not to place undue reliance on any such forward-lookingthese statements. Forward-looking statements are made only as of the date of this report, and we do not undertake anyno obligation to update themany forward-looking statements contained in this report to reflect circumstancesnew information or events that occuror conditions after the date on which the forward-looking statement is made.

In connection with the safe harbor provisions of the PSLRA, we are hereby identifying important factors that could affecthereof.

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



cost savings and could cause our actual results forfinancial benefits of pending or consummated transactions, and growth strategies, including possible future periodsacquisitions. These statements are subject to differ materially from any opinions or statements expressed with respect to future periods in any forward-looking statements.

Amongcertain risks, uncertainties and assumptions. These risks, uncertainties and assumptions include, among other things, 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:

•
following:
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 loan portfolio.
•
The models and assumptions underlying the establishment of the allowance for credit losses and estimation of values of collateral and various financial assets and liabilities may be inadequate.
•
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, fraud, or breaches.
•
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 laws or regulations.
•
Governmental monetary and fiscal policies and legislative and regulatory changes (including those implementing provisions of the Dodd Frank Act) that may result in the imposition of costs and constraints through higher FDIC insurance premiums, significant fluctuations in market interest rates, increases in capital or liquidity requirements, operational limitations, or compliance costs.
•
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.
•
terrorism, natural disasters, and other external events.
Other economic, competitive, governmental, regulatory, and technological factors affecting our operations, products, services, and prices.

The foregoing list

For a discussion of important factors may not be all-inclusive,these risks, uncertainties and we specifically decline to undertake any obligation to publicly revise any forward-looking statements that were made to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events.

With respect to forward-looking statements set forth in the notesassumptions, you should refer to the consolidated financial statements, including those relating to contingent liabilitiessections entitled "Risk Factors" and legal proceedings, some"Management’s Discussion and Analysis of Financial Condition and Results of Operations" in this report, as well as our subsequent filings made with the SEC. However, these risks and uncertainties are not exhaustive. Other sections of this report describe additional factors that could affect the ultimate disposition of those contingencies are changes in applicable laws, the development of facts in individual cases, settlement opportunities,adversely impact our business and the actions of plaintiffs, defendants, judges, and juries.

financial performance.
NON-GAAP FINANCIAL INFORMATION

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PERFORMANCE OVERVIEW

Table 1
Selected Financial Data
(Dollar amounts in thousands, except per share data)

 
 Years ended December 31, 
 
 2013 2012 2011 

Operating Results

          

Interest income

 $287,247 $300,569 $321,511 

Interest expense

  (27,115) (34,901) (39,891)
        

Net interest income

  260,132  265,668  281,620 

Fee-based revenues

  106,282  97,323  94,182 

Other noninterest income (1)

  6,954  5,662  4,269 

Noninterest expense (1)

  (249,122) (248,349) (248,838)
        

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

  124,246  120,304  131,233 

Provision for loan and covered loan losses

  (16,257) (158,052) (80,582)

Net securities gains (losses)

  34,164  (921) 2,410 

Net losses on sales and valuation adjustments of OREO, excess properties, and assets held-for-sale

  (3,908) (7,974) (10,797)

Severance-related costs

  (2,207) (1,155) (2,269)

Adjusted amortization of FDIC indemnification asset

  (1,500) (6,705) - 

Net losses on early extinguishment of debt

  (1,034) (558) - 

BOLI modification loss

  (13,312) -  - 

Gain on termination of FHLB forward commitments

  7,829  -  - 

Gains on acquisitions, net of integration costs

  -  2,486  1,076 

Net gain on bulk loan sales

  -  2,639  - 
        

Income (loss) before income tax

  128,021  (49,936) 41,071 

Income tax expense (benefit)

  48,715  (28,882) 4,508 
        

Net income (loss)

  79,306  (21,054) 36,563 

Preferred dividends and accretion on preferred stock

  -  -  (10,776)

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

  (1,107) 306  (350)
        

Net income (loss) applicable to common shares

 $78,199 $(20,748)$25,437 
        

Diluted earnings (loss) per common share

 $1.06 $(0.28)$0.35 

Performance Ratios

  
 		  
 		  
 		 

Return on average common equity

  8.04%  (2.14%) 2.69% 

Return on average assets

  0.96%  (0.26%) 0.45% 

Net interest margin – tax equivalent

  3.68%  3.86%  4.04% 

Efficiency ratio (3)

  64.19%  67.14%  62.12% 


35



PERFORMANCE OVERVIEW
Acquisitions
On August 8, 2014, the Bank completed the acquisition of the Chicago area banking operations of Banco Popular North America, ("Popular"), doing business as Popular Community Bank. The acquisition included Popular's twelve full-service retail banking offices and may not be comparableits small business and middle market commercial lending activities in the Chicago metropolitan area. On the date of acquisition, the Bank acquired $549 million in loans and $732 million in deposits.

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 customer of the Bank for more than 15 years, National Machine Tool, now known as First Midwest Equipment Finance Co., provides equipment leasing and financing alternatives to similar non-GAAP measures used by other companies.
(3)
The efficiency ratio expresses noninterest expense, excluding OREO expense, as a percentagetraditional commercial bank financing.

On December 2, 2014, the Company completed the acquisition of tax-equivalent net interest income plus total fee-based revenues, other income, net trading gains (losses)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 the tax-equivalent adjustment on BOLI income. The $7.8$464 million gainin deposits on the terminationdate of FHLB forward commitments and the $13.3 million BOLI modification loss are non-recurring items excluded from the efficiency ratio for the year ended December 31, 2013.acquisition.

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 December 31,
2013		 December 31,
2012		 $ Change % Change 

Balance Sheet Highlights

             

Total assets

 $8,253,407 $8,099,839 $153,568  1.9 

Total loans, excluding covered loans

  5,580,005  5,189,676  390,329  7.5 

Total loans, including covered loans

  5,714,360  5,387,570  326,790  6.1 

Total deposits

  6,766,101  6,672,255  93,846  1.4 

Transactional deposits

  5,558,318  5,272,307  286,011  5.4 

Loans-to-deposits ratio

  84.5%  80.7%       

Transactional deposits to total deposits

  82.1%  79.0%       

Asset Quality Highlights

             

Non-accrual loans (1)

 $59,798 $84,534 $(24,736) (29.3)

90 days or more past due loans (still accruing interest) (1)

  3,708  8,689  (4,981) (57.3)
          

Total non-performing loans (1)

  63,506  93,223  (29,717) (31.9)

Accruing troubled debt restructurings ("TDRs") (1)

  23,770  6,867  16,903  N/M 

OREO (1)

  32,473  39,953  (7,480) (18.7)
          

Total non-performing assets (1)

 $119,749 $140,043 $(20,294) (14.5)
          

30-89 days past due loans (still accruing interest) (1)

 $20,742 $22,666 $(1,924) (8.5)

Performing potential problem loans (1)(2)

  155,954  218,599  (62,645) (28.7)

Allowance for credit losses

  87,121  102,812  (15,691) (15.3)

Allowance for credit losses as a percent of loans

  1.52%  1.91%       

Allowance for credit losses to non-accrual loans

  107.90%  104.15%       

N/M – Not meaningful.

2013 led the rise in average core deposits and more than offset the reduction in higher-costing time deposits, borrowed funds, and senior and subordinated debt. For a detailed discussion of our funding sources see the section titled "Funding and Liquidity Management" of this Item 7.

Performance Overview for 2013 Compared with 2012

Net income applicable to common shares for 2013 was $78.2$79.3 million, or $1.06 per share, compared to a net loss applicable to common shares of $20.7$21.1 million, or $0.28 per share, for 2012.

Pre-tax, pre-provision operating earnings of $124.2 million for 2013 increased $3.9 million compared to 2012, resulting primarily from growth in wealth management fees, gains on mortgage loan sales, and fees from sales of capital market products to commercial clients, which more than offset a decrease in net interest income.

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 due primarily to a lower yield earned on new and renewing loans as a result of greater customer 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 by a decline in the rates paid for interest-bearing liabilities, including a 2 basis point decline on


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interest-bearing transactionalcore deposits, a 28 basis point decline on time deposits, and a 3 basis point decline on senior and subordinated debt.

The provision 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 movingselling $172.5 million of non-performing and performing potential problem loans to held-for-sale status in anticipation of the bulk loan sales and the relatedrecording charge-offs of $80.3 million. Refer to the section titled "Loan Portfolio and Credit Quality" of this Item 7 for additional discussion of the provision for loan and covered loan losses.

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 executedcompleted 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 Textura Corporation ("Textura") for $38.2 million, resulting in a gain of $34.0 million. Textura completed an initial public offering ("IPO") of common stock during the second quarter of 2013. At June 30, 2013, we reclassified our investment in Textura's common stock from an equity investment to available-for-sale and valued it using the closing stock price reported by the New York Stock Exchange. Initially, we were restricted from selling any of our shares for six months following the completion of the IPO. During the third quarter of 2013, Textura completed a secondary offering and certain stockholders, including the Company, were permitted to sell their shares. Therefore, we sold all of our common shares in Textura. 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 a 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 take 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 cash surrender value ("CSV")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 givesgave the Company the flexibility to reinvest these assets in longer duration securities at higher yields to enhance BOLI income.

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

As of December 31, 2013, our securities portfolio totaled $1.2 billion, rising 3.4% from December 31, 2012. The current yearThis growth resulted primarily from the redeployment of cash and cash equivalents into purchases of collateralized mortgage obligations ("CMOs") and other mortgage-backed securities ("MBSs"). These increases were partially offset by maturities and calls of municipal securities. For a detailed discussion of our securities portfolio, refer to the section titled "Investment Portfolio Management" of this Item 7.

Total loans, excluding covered loans, of $5.6 billion as of December 31, 2013 reflected growth of $390.3 million, or 7.5%, from December 31, 2012. The loan portfolio benefited from well-balanced corporate loan growth reflecting credits of varying size and diverse geographic locations within our markets. For a discussion of our loan portfolio, see the section titled "Loan Portfolio and Credit Quality" of this Item 7.

As of December 31, 2013, non-performing assets, excluding covered loans and covered OREO, declined by 14.5% compared to December 31, 2012. Improvement in non-performing assets and related credit metrics resulted primarily from management's continued focus on credit remediation. Refer to the section titled "Loan Portfolio and Credit Quality" of this Item 7 for additional discussion of non-performing assets.

Average funding sources for 2013 increased $156.7 million compared to the year ended December 31, 2012, primarily from growth in transactionalcore deposits, which more than offset a reduction in higher-costing time deposits.


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Average senior and subordinated debt decreased $18.4 million from 2012 driven by the repurchase and retirementfull-year impact of $24.0 million of junior subordinated debentures during the fourth quarter of 2013. For a discussion of our funding sources, see the section titled "Funding and Liquidity Management" of this Item 7.

Performance Overview for 2012 Compared with 2011

The net loss applicable to common shareholders for 2012 was $20.7 million, or $0.28 per share. This compared to net income applicable to common shareholders of $25.4 million, or $0.35 per share, for 2011. The net loss for 2012 was driven primarily by accelerated credit remediation actions during the third quarter of 2012.

Pre-tax, pre-provision operating earnings of $120.3 million for 2012 were down $10.9 million, or 8.3%, compared to 2011, resulting primarily from a reduction in net interest income, which was partly mitigated by an increase in fee-based revenues and gains on mortgage loan sales.

Tax-equivalent net interest margin declined 18 basis points to 3.86% for 2012 from 4.04% for 2011. The reduction in margin reflected a 25 basis point decrease in the average yield on interest-earning assets due primarily to a lower yield earned on new and renewing loans in the low interest rate environment as well as the reinvestment of cash flows from the investment portfolio into lower yielding securities. These lower yields were partially offset by a decline in the rates paid for interest-bearing liabilities, including a 6 basis point decline on interest-bearing transactional deposits, a 27 basis point decline on time deposits, and a 16 basis point decline on senior and subordinated debt.

Total noninterest income increased from 2011 as a result of higher fee-based revenues, which were partially offset by securities losses compared to securities gains in the prior year. The gain on the bulk loan sales and a gain on an FDIC-assisted acquisition also contributed to the increase from 2011.

The rise in noninterest expense resulted primarily from higher compensation expense, increased professional services, $6.7 million of adjusted amortization of the FDIC indemnification asset, and valuation adjustments of assets held-for-sale.

As of December 31, 2012, our securities portfolio totaled $1.1 billion, increasing 4.1% from December 31, 2011. This growth was driven by an increase in CMOs and MBSs. In the first quarter of 2012, deposits acquired in the fourth quarter of 2011 that had previously been held in short-term investments were redeployed into these types of securities.

During the third quarter of 2012, we identified certain non-performing and performing potential problem loans totaling $172.5 million in original carrying value for accelerated disposition through multiple bulk loan sales and recorded charge-offs of $80.3 million. The bulk loan sales were completed in the fourth quarter of 2012, resulting in proceeds of $94.5 million and a gain, less commissions and other selling expenses, of $2.6 million.

Total loans of $5.4 billion as of December 31, 2012 grew $39.0 million from December 31, 2011. Excluding covered loans, net charge-offs, loans disposed of through bulk loan sales, and loans acquired in an FDIC-assisted transaction, our loan portfolio increased by approximately 6.5% from December 31, 2011. The loan portfolio benefitted from growth in commercial and industrial loans, agricultural loans, office and retail loans, and 1-4 family mortgages.

The improvement in non-performing assets, excluding covered loans and covered OREO, from December 31, 2011 to December 31, 2012 reflected aggressive remediation actions taken by management during the year and, in particular, the bulk loan sales discussed above.

For 2012, total average funding sources increased $98.8 million, or 1.4%, from 2011 driven primarily by growth of $352.9 million, or 7.4%, in average transactional deposits, partially offset by reductions in higher-costing time deposits of $263.0 million and borrowed funds of $72.1 million, resulting in a more favorable funding mix. The rise in average senior and subordinated debt reflected the issuance of $115.0 million of senior debt in the fourth quarter of 2011, less the repurchase and retirement of $37.4$4.3 million of junior subordinated debentures and $12.0 million of subordinated notes during 2012.


Tablethe fourth quarter of Contents

2012.

EARNINGS PERFORMANCE

Net Interest Income

Net interest income is our primary source of revenue and is impacted by interest rates and the volume and mix of interest-earning assets and interest-bearing liabilities. The accounting policies for the recognition of interest income on loans, securities, and other interest-earning assets are presented in Note 1 of "Notes to the Consolidated Financial Statements" in Item 8 of this Form 10-K.

Our accounting and reporting policies conform to 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, they should not be considered an alternative to GAAP. The effect of this 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, 2014, 2013, 2012, and 2011,2012, 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 fluctuations.


39

Table of Contents



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

 Years Ended December 31,

 2013  
 2012  
 2011  2014 2013 2012

 Average
Balance		 Interest
Earned/Paid		 Yield/
Rate
%		  
 Average
Balance		 Interest
Earned/Paid		 Yield/
Rate
%		  
 Average
Balance		 Interest
Earned/Paid		 Yield/
Rate
%		  
Average
Balance
 Interest Yield/
Rate (%)		  
Average
Balance
 Interest Yield/
Rate (%)		  
Average
Balance
 Interest Yield/
Rate (%)

Assets:

                         
  
     
  
         

Other interest-earning assets

 $633,050 $1,819 0.29   $470,069 $1,143 0.24   $624,663 $1,546 0.25  $543,056
 $1,591
 0.29  $633,050
 $1,819
 0.29  $470,069
 $1,143
 0.24

Securities:

                         
  
     
  
         

Trading - taxable

 15,526 161 1.04   15,415 181 1.17   15,321 168 1.10  17,964
 174
 0.97  15,526
 161
 1.04  15,415
 181
 1.17

Investment securities - taxable

 713,237 12,249 1.72   679,753 12,670 1.86   561,799 14,115 2.51  649,161
 14,516
 2.24  713,237
 12,249
 1.72  679,753
 12,670
 1.86

Investment securities - nontaxable (1)

 510,412 28,636 5.61   512,136 31,231 6.10   548,820 34,694 6.32  461,571
 25,705
 5.57  510,412
 28,636
 5.61  512,136
 31,231
 6.10
                       

Total securities

 1,239,175 41,046 3.31   1,207,304 44,082 3.65   1,125,940 48,977 4.35  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

 39,593 1,346 3.40   48,400 1,374 2.84   59,352 1,369 2.31  35,622
 1,366
 3.83  39,593
 1,346
 3.40  48,400
 1,374
 2.84

Loans (1)(2)(3)

 5,498,788 255,333 4.64   5,506,394 267,219 4.85   5,500,180 283,437 5.15  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)

 7,410,606 299,544 4.04   7,232,167 313,818 4.34   7,310,135 335,329 4.59  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

 121,564       120,757       119,709      120,358
  
    121,564
  
    120,757
  
  

Allowance for loan and covered loan losses

 (95,698)       (117,121)       (143,314)      (79,482)  
    (95,698)  
    (117,121)  
  

Other assets

 841,967       873,923       873,376      808,136
  
    841,967
  
    873,923
  
  
                     

Total assets

 $8,278,439       $8,109,726       $8,159,906      $8,677,712
  
    $8,278,439
  
    $8,109,726
  
  
                     

Liabilities and Stockholders' Equity:

                       Liabilities and Stockholders' Equity:  
     
  
         

Savings deposits

 $1,126,561 844 0.07   $1,038,379 1,055 0.10   $934,937 1,615 0.17  $1,222,292
 904
 0.07  $1,126,561
 844
 0.07  $1,038,379
 1,055
 0.10

NOW accounts

 1,170,928 676 0.06   1,090,446 747 0.07   1,091,184 1,130 0.10  1,243,186
 673
 0.05  1,170,928
 676
 0.06  1,090,446
 747
 0.07

Money market deposits

 1,306,625 1,735 0.13   1,216,173 1,934 0.16   1,230,090 2,891 0.24  1,392,367
 1,784
 0.13  1,306,625
 1,735
 0.13  1,216,173
 1,934
 0.16
                       

Total interest-bearing transactional deposits

 3,604,114 3,255 0.09   3,344,998 3,736 0.11   3,256,211 5,636 0.17 
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

 1,306,888 8,646 0.66   1,529,006 14,316 0.94   1,792,009 21,620 1.21  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

 4,911,002 11,901 0.24   4,874,004 18,052 0.37   5,048,220 27,256 0.54  5,069,727
 10,377
 0.20  4,911,002
 11,901
 0.24  4,874,004
 18,052
 0.37

Borrowed funds

 205,461 1,607 0.78   193,643 2,009 1.04   265,702 2,743 1.03  149,559
 573
 0.38  205,461
 1,607
 0.78  193,643
 2,009
 1.04

Senior and subordinated debt

 212,896 13,607 6.39   231,273 14,840 6.42   150,285 9,892 6.58  191,776
 12,062
 6.29  212,896
 13,607
 6.39  231,273
 14,840
 6.42
                       

Total interest-bearing liabilities

 5,329,359 27,115 0.51   5,298,920 34,901 0.66   5,464,207 39,891 0.73  5,411,062
 23,012
 0.43  5,329,359
 27,115
 0.51  5,298,920
 34,901
 0.66
                       

Demand deposits

 1,889,247       1,762,968       1,498,900      2,137,778
  
    1,889,247
  
    1,762,968
  
  

Other liabilities

 87,550       80,075       77,276      85,306
  
    87,550
  
    80,075
  
  

Stockholders' equity - common

 972,283       967,763       947,145      1,043,566
  
    972,283
  
    967,763
  
  

Stockholders' equity - preferred

 —       —       172,378     
                     

Total liabilities and stockholders' equity

 $8,278,439       $8,109,726       $8,159,906      $8,677,712
  
    $8,278,439
  
    $8,109,726
  
  
                     

Net interest income/margin (1)

   $272,429 3.68     $278,917 3.86     $295,438 4.04   
 $288,589
 3.69   
 $272,429
 3.68   
 $278,917
 3.86
                       

Net interest income (GAAP)

   $260,132       $265,668       $281,620     
 $276,852
     
 $260,132
     
 $265,668
  

Tax-equivalent adjustment

   12,297       13,249       13,818     
 11,737
     
 12,297
     
 13,249
  
                       

Tax equivalent net interest income

   $272,429       $278,917       $295,438   
                       
Tax-equivalent net interest
income
  
 $288,589
     
 $272,429
     
 $278,917
  

Average interest-earning assets were $7.4 billion for 2013, an increase of $178.4 million, or 2.5%, from 2012, driven primarily by a rise in other interest-earning assets. The completion of theProceeds from bulk loan sales of $172.5 million in the fourth quarteroriginal 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 earninginterest-earning assets.

Average interest-bearing liabilities of $5.3 billion for 2013 were comparable to 2012. Higher levels of interest-bearing transactioncore deposits more than offset the decline in time deposits. Overall, growth of $126.3 million in demand deposits funded the increase in average interest-earning assets from 2012.


Table of Contents

Tax-equivalent net interest income was $272.4 million for 2013 compared to $278.9 million for 2012. The 2.3% decline from 2012 resulted from lower interest income, partially mitigated by a decrease in interest expense. 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 our continuedthe 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 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 transactionalcore deposits, a 28 basis point decline on time deposits, and a 3 basis point decline on senior and subordinated debt.

Average interest-earning assets were $7.2 billion for 2012, a decrease of $78.0 million from 2011, driven substantially by a decline in other interest-earning assets, which was partially offset by an increase in securities.

Average interest-earning liabilities were $5.3 billion for 2012, a decrease of $165.3 million from 2011 due primarily to a decline in time deposits.

The growth in senior and subordinated debt for 2012 compared to 2011 is attributed to the issuance of $115.0 million of senior debt during the fourth quarter of 2011, which was used to redeem the preferred stock issued to the Treasury in combination with excess cash. Interest paid on the senior debt reduced our net interest margin by 10 basis points. This increase was offset, in part, by the repurchase and retirement of $25.4 million of junior subordinated debentures and $12.0 million of subordinated notes during 2012.

Tax-equivalent net interest income was $278.9 million for 2012 compared to $295.4 million for 2011. The $21.5 million reduction in interest income was due primarily to a decrease in the yield on investment securities and loans. Interest expense declined $5.0 million due to the continued reduction of higher-costing time deposits and borrowed funds.

Tax-equivalent net interest margin declined 18 basis points to 3.86% for 2012 from 4.04% for 2011. The reduction in margin reflected a 25 basis point decrease in the average yield on interest-earning assets driven primarily by a lower yield earned on new and renewing loans and the reinvestment of cash flows from the investment portfolio into lower yielding securities due to the low interest rate environment. These lower yields were partially offset by a decline in the rates paid for interest-bearing liabilities, including a 6 basis point decline on interest-bearing transactional deposits, a 27 basis point decline on time deposits, and a 16 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)


 2013 compared to 2012  
 2012 compared to 2011  2014 compared to 2013 2013 compared to 2012

 Volume Rate Total  
 Volume Rate Total  Volume Rate Total  Volume Rate Total

Other interest-earning assets

 $443 $233 $676   $(376)$(27)$(403) $(265) $37
 $(228)  $443
 $233
 $676

Securities:

                 
  
  
   
  
  

Trading – taxable

 1 (21) (20)  1 12 13  23
 (10) 13
  1
 (21) (20)

Investment securities – taxable

 706 (1,127) (421)  6,299 (7,744) (1,445) (959) 3,226
 2,267
  706
 (1,127) (421)

Investment securities – nontaxable(2)

 (105) (2,490) (2,595)  (2,265) (1,198) (3,463) (2,721) (210) (2,931)  (105) (2,490) (2,595)
               

Total securities

 602 (3,638) (3,036)  4,035 (8,930) (4,895) (3,657) 3,006
 (651)  602
 (3,638) (3,036)
               

FHLB and Federal Reserve Bank stock

 (250) 222 (28)  (20) 25 5  (73) 93
 20
  (250) 222
 (28)

Loans(2)(3)

 (3,829) (8,057) (11,886)  (1,641) (14,577) (16,218) 22,638
 (9,722) 12,916
  (3,829) (8,057) (11,886)
               

Total interest income(2)

 (3,034) (11,240) (14,274)  1,998 (23,509) (21,511) 18,643
 (6,586) 12,057
  (3,034) (11,240) (14,274)
               

Savings deposits

 102 (313) (211)  206 (766) (560) 71
 (11) 60
  102
 (313) (211)

NOW accounts

 64 (135) (71)  (1) (382) (383) 39
 (42) (3)  64
 (135) (71)

Money market deposits

 164 (363) (199)  (33) (924) (957) 105
 (56) 49
  164
 (363) (199)
               

Total interest-bearing transactional deposits

 330 (811) (481)  172 (2,072) (1,900)
Total interest-bearing core deposits 215
 (109) 106
  330
 (811) (481)

Time deposits

 (1,877) (3,793) (5,670)  (2,892) (4,412) (7,304) (600) (1,030) (1,630)  (1,877) (3,793) (5,670)
               

Total interest-bearing transactional deposits

 (1,547) (4,604) (6,151)  (2,720) (6,484) (9,204)
Total interest-bearing deposits (385) (1,139) (1,524)  (1,547) (4,604) (6,151)

Borrowed funds

 132 (534) (402)  (748) 14 (734) (359) (675) (1,034)  132
 (534) (402)

Senior and subordinated debt

 (1,175) (58) (1,233)  5,190 (242) 4,948  (1,331) (214) (1,545)  (1,175) (58) (1,233)
               

Total interest expense

 (2,590) (5,196) (7,786)  1,722 (6,712) (4,990) (2,075) (2,028) (4,103)  (2,590) (5,196) (7,786)
               

Net interest income (2)

 $(444)$(6,044)$(6,488)  $276 $(16,797)$(16,521) $20,718
 $(4,558) $16,160
  $(444) $(6,044) $(6,488)
               

(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




Noninterest Income

A summary of noninterest income for the three years ended December 31, 20132014 is presented in the following table.


Table 4
Noninterest Income Analysis
(Dollar amounts in thousands)


 Years ended December 31, % Change  Years Ended December 31, % Change

 2013 2012 2011 2013-2012 2012-2011  2014 2013 2012 2014-2013 2013-2012

Service charges on deposit accounts

 $36,526 $36,699 $37,879 (0.5) (3.1) $36,910
 $36,526
 $36,699
 1.1
 (0.5)

Wealth management fees

 24,185 21,791 20,324 11.0 7.2  26,474
 24,185
 21,791
 9.5
 11.0

Card-based fees(1)

 21,649 20,852 19,593 3.8 6.4  24,340
 21,649
 20,852
 12.4
 3.8

Merchant servicing fees

 10,953 10,806 10,911 1.4 (1.0) 11,260
 10,953
 10,806
 2.8
 1.4

Mortgage banking income

 5,306 2,689 454 97.3 N/M  4,011
 5,306
 2,689
 (24.4) 97.3

Other service charges, commissions, and fees

 7,663 4,486 5,021 70.8 (10.7) 8,086
 7,663
 4,486
 5.5
 70.8
           

Total fee-based revenues

 106,282 97,323 94,182 9.2 3.3  111,081
 106,282
 97,323
 4.5
 9.2

Net securities gains (losses)(2)

 34,164 (921) 2,410 N/M N/M  8,097
 34,164
 (921) (76.3) N/M

BOLI (loss) income

 (11,844) 1,307 2,231 N/M (41.4)
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(6)(5)

 1,995
 2,297
 2,728
 (13.1) (15.8)

Gain on termination of FHLB forward commitments

 7,829 - - N/M N/M  —
 7,829
 —
 (100.0) 100.0

Net trading gains (losses)(3)(6)

 3,189 1,627 (691) 96.0 N/M 

Net losses on early extinguishment of debt(6)

 (1,034) (558) - 85.3 N/M 

Other income(6)(5)

 2,297 2,728 2,729 (15.8) - 

Gain on bulk loan sales

 - 5,153 - N/M N/M  —
 —
 5,153
 —
 (100.0)

Gains on FDIC-assisted transactions(5)(6)

 - 3,289 - N/M N/M 

Gain on acquisition of deposits(6)

 - - 1,076 N/M N/M 
           
Gains on FDIC-assisted transactions (3)(6)
 —
 —
 3,289
 —
 (100.0)

Total noninterest income

 $140,883 $109,948 $101,937 28.1 7.9  $126,618
 $140,883
 $109,948
 (10.1) 28.1
           

N/M – Not meaningful.

(1)
Card-based fees consist of debit and credit card interchange fees for processing transactions as well as various fees on both customer and non-customer automated teller machine ("ATM") and point-of-sale transactions processed through the ATM and point-of-sale networks.
(2)
For a discussion of these items, see the section titled "Investment Portfolio Management" of this Item 7.
(3)
These items are included in other income in the Consolidated Statements of Income.
(4)
Net trading gains (losses) result from changes in the fair value of diversified investment securities held in a grantor trust under deferred compensation arrangements and are substantially offset by nonqualified plan expense for each period presented.
(5)
Other income consists of various items, including safe deposit box rentals, miscellaneous recoveries, and gains on the sales of various assets.
(6)
For a discussion of the 2012 gain on an FDIC-assisted transaction, see Note 3 of "Notes to the Consolidated Financial Statements" in Item 8 of this Form 10-K.
2014 Compared to 2013
Total noninterest income was $126.6 million for the year ended December 31, 2014, decreasing 10.1% from 2013. Total fee-based revenues were $111.1 million, increasing 4.5% compared to 2013. Total noninterest income during 2013 was impacted by certain significant transactions, including a $34.0 million gain on the sale of an 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 BOLI policies.
Service charges on deposit accounts were in line with 2013, as charges for services to new customers acquired in the fair valuePopular and Great Lakes transactions offset the continued decline in revenue from non-sufficient funds transactions.
Growth in wealth management fees of diversified investment securities held9.5% reflect new customer relationships and an overall increase in assets under management to $7.2 billion, a grantor trust under deferred compensation arrangementsrise 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 secondary market compared to sales of $147.4 million during 2013. Lower market pricing contributed to the decline in mortgage banking income compared to 2013.

43



Gains realized on the sale of certain equipment leasing contracts and are substantiallycheck printing fees drove the increase in other service charges, commissions, and fees, which were partially offset by nonqualified plan expense for each period presented.
(4)
Other income consists of various items, including safe deposit box rentals, miscellaneous recoveries, and gains on thea decrease in sales of various assets.
(5)
Forcapital market products to commercial clients. The sales of leasing contracts were generated from a discussionnew commercial product offering introduced with the acquisition of the 2012 gain on an FDIC-assisted transaction, refer to Note 2 of "Notes to the Consolidated Financial Statements" in Item 8 of this Form 10-K.
(6)
These items are included in other incomeNational Machine Tool in the Consolidated Statementsthird quarter of Income.
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 optimize our retail 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 2013 rose 28.1% compared to 2012 driven primarily by the $34.0 million gain on the sale of our investment in Textura. In addition, theTextura, and a $7.8 million gain on the termination of two FHLB forward commitments, contributedoffset in part by a $13.3 million write-down of the CSV related to the positive variance. These gains were partially offset by the


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modification of approximately $100 million of certain lower-yielding BOLI policies, which resulted in a $13.3 million write-down of the CSV.

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 salesbanking activity. During 2013, $147.4 million of mortgage loans were sold compared to $50.3 million in 2012.

Compared to 2012, sales

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, which resultedresulting in a pre-tax loss of $1.0 million.

Total noninterest income increased 7.9% for 2012 compared to 2011 driven by higher fee-based revenues, slightly offset by securities losses compared to securities gains in the prior year. Gains on the bulk loan sales and an FDIC-assisted acquisition also contributed to the increase.

Fee-based revenues of $97.3 million for 2012 rose 3.3% compared to 2011, resulting from increases in wealth management fees and mortgage banking income. These increases were partially offset by lower non-sufficient fund fees, which drove the decline in service charges on deposit accounts.

The growth in wealth management fees compared to 2011 was due primarily to higher account and sales activity, a 6.1% increase in average trust assets under management, and a one-time, court approved estate fee.

Mortgage banking income increased during 2012 from gains of $2.3 million on the mortgage loan sales during 2012.

Higher processing volumes on debit cards fueled the growth in card-based fees compared to 2011.

BOLI and other income was elevated in 2011 due to a $1.2 million benefit settlement received during the third quarter of 2011.

We completed the bulk loan sales during the fourth quarter of 2012, which resulted in a gain, before commissions and other selling expenses, of $5.2 million.


44

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Noninterest Expense

The following table presents the components of noninterest expense for the three years ended December 31, 2013.


2014.

Table 5
Noninterest Expense Analysis
(Dollar amounts in thousands)


 Years ended December 31, % Change 

 2013 2012 2011 2013-2012 2012-2011  Years Ended December 31, % Change

Compensation expense:

           

Salaries and wages (1)

 $108,932 $103,245 $102,349 5.5 0.9 
 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)

 3,699 1,986 (646) 86.3 N/M  815
 3,699
 1,986
 (78.0) 86.3

Retirement and other employee benefits

 26,119 25,524 27,071 2.3 (5.7) 27,245
 26,119
 25,524
 4.3
 2.3
           

Total compensation expense

 138,750 130,755 128,774 6.1 1.5 

Net occupancy expense (2)

 22,596 23,742 23,850 (4.8) (0.5)
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

 21,922 29,614 26,356 (26.0) 12.4  23,436
 21,922
 29,614
 6.9
 (26.0)

Equipment expense (2)

 9,236 8,957 9,103 3.1 (1.6)

Technology and related costs

 11,335 11,846 10,905 (4.3) 8.6  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

 8,547 10,521 16,293 (18.8) (35.4) 7,075
 8,547
 10,521
 (17.2) (18.8)

FDIC premiums

 6,438 6,926 7,990 (7.0) (13.3) 5,824
 6,438
 6,926
 (9.5) (7.0)

Advertising and promotions

 7,754 5,073 6,198 52.8 (18.2)

Merchant card expense

 8,780 8,584 8,643 2.3 (0.7)
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 - (77.6) N/M  —
 1,500
 6,705
 (100.0) (77.6)

Other expenses (3)

 19,879 22,180 22,681 (10.4) (2.2)

Valuation adjustments of assets held-for-sale (3)

 - 2,597 1,111 N/M N/M 
           

Total noninterest expense

 $256,737 $267,500 $261,904 (4.0) 2.1  $283,826
 $256,737
 $267,500
 10.6
 (4.0)
           

N/M – Not meaningful.

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 adjusted amortization of the FDIC indemnification asset, which were partially offset by an increase in total compensation expense and advertising and promotions expense.

Compared to 2012, the increase in total compensation expense was due primarily to higher levels of incentive compensation accruals, a rise inand commissions and a decrease in deferred salaries related to loan originations.

Professional services expense decreased 26.0% from 2012. This decline was drivendue primarily byto a $6.4 million reduction in loan remediation costs including legal expenses, appraisal costs, and real estate taxes, due toas a result of management's accelerated credit remediation actions that occurred in 2012, including the bulk loan sales. In addition, lowera decrease in covered loan servicing costs associated with our covered loan portfolio contributed to the variance. Lower levels of personnel recruitment expenses, attorney fees related to an FDIC-assisted acquisition, and various legal proceedings in 2012 also drove the decline in professional service expense from 2012.


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Net OREO expense for 2013 declined 18.8% from 2012 primarily from $1.8 million in lower valuation adjustments and a $1.0 million decrease in expenses, partially offset by an increase in losses on sales of OREO.

Lower FDIC premiums decreased asreflect a result ofreduced assessment rate due primarily to improved asset quality resulting from the bulk loan sales completed during the fourth quarter of 2012, which lowered our assessment rate.

2012.

The increase in advertising and promotions expense from 2012 was driven by the launch of our "Bank with Momentum" branding campaign during the second quarter of 2013, and reflects a more normalized level of expense.

2013.

Adjusted amortization of the FDIC indemnification asset results from changes in the timing and amount of expected future cash flows expected to be received from the FDIC under the FDIC Agreements based on management's periodic estimates of expected future cash flows from covered loans.

The decline in other expenses from 2012 reflects a $1.8 million reduction in the reserve for unfunded 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 OREO.

Total noninterest expense for 2012 was $267.5 million, increasing 2.1% from 2011 due primarily to $6.7 million of adjusted amortization of the FDIC indemnification asset and higher compensation expense, professional services, and valuation adjustments of assets held-for-sale.

The increase in total compensation expense was mainly driven by a rise in nonqualified plan expense. The increase in salaries and wages for 2012 compared to 2011 was due primarily to annual merit increases, the accrual of certain severance benefits, lower levels of deferred salaries from comparatively lower loan originations, and additional retail banking staff related to an FDIC-assisted acquisition. These increases were partially offset by a decline in share-based compensation.

Compared to 2011, retirement and other employee benefits declined $1.5 million primarily from lower pension and profit sharing expenses. Retirement and other employee benefits were elevated in 2011 as a result of a $1.3 million correction of the 2010 actuarial pension expense calculation related to the valuation of future early retirement benefits.

Higher professional services expense in 2012 related to increased personnel recruitment expenses, the reclassification of certain director fees from salaries and wages expense, and increased attorney fees related to the FDIC-assisted acquisition, the bulk loan sales, and various legal proceedings.

Conversion costs associated with the FDIC-assisted acquisition drove the increase in technology and related costs compared to 2011.

OREO expense for 2012 declined 35.4% from 2011, largely driven by lower net operating expenses and a $5.3 million reduction in net losses on the sales of OREO.

Income Taxes

Our provision for income taxes includes both federal and state income tax expense (benefit). An analysis of the provision for income taxes for the three years ended December 31, 20132014 is detailed in the following table.


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Table 6

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


 Years ended December 31,  Years Ended December 31,

 2013 2012 2011  2014 2013 2012

Income (loss) before income tax expense (benefit)

 $128,021 $(49,936)$41,071  $100,476
 $128,021
 $(49,936)

Income tax expense (benefit):

             

Federal income tax expense (benefit)

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

State income tax expense (benefit)

 12,399 (5,154) 974  6,926
 12,399
 (5,154)
       

Total income tax expense (benefit)

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

Effective income tax rate

 38.1% 57.8% 11.0%  31.0% 38.1% 57.8%

Federal 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 $31.2 million for the year ended December 31, 2014 compared to $48.7 million for the year ended December 31, 2013 compared toand an income tax benefit of $28.9 million for the year ended December 31, 2012 and2012. The decrease in income tax expense of $4.5 million for the year ended December 31, 2011.from 2013 to 2014 was driven primarily by a decline in income subject to tax at statutory rates. The increase in income tax expense infrom 2012 to 2013 resulted from an increasea rise in income subject to tax at statutory rates and a non-deductible BOLI modification loss recorded in the third quarter of 2013. The decrease in income tax expense from 2011 to 2012 was driven primarily by a decline in income subject to tax at statutory rates and to a $1.6 million tax benefit recorded in the first quarter of 2011 related to changes in the Illinois tax rate.

Our accounting policies for 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.

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 consist of securities held in a grantor trust for our nonqualified deferred compensation plan and are not considered part of the traditional investment portfolio. All other securities are classified as securities available-for-sale and are carried at fair value with unrealized gains and losses, net of related deferred income taxes, recorded in stockholders' equity as a separate component of accumulated other comprehensive loss.

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

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 for the three years ended December 31, 2013.

2014.

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Table 7

Investment Portfolio Valuation Summary
(Dollar amounts in thousands)

 As of December 31,

 As of December 31, 2013 As of December 31, 2012 As of December 31, 2011  2014 2013 2012

 Amortized
Cost		 Fair Value % of
Total		 Amortized
Cost		 Fair Value % of
Total		 Amortized
Cost		 Fair Value % of
Total		  Amortized Cost Fair Value % of Total Amortized Cost Fair Value % of Total Amortized Cost Fair Value % of Total

Securities Available-for-Sale

                   Securities Available-for-Sale                

U.S. agency securities

 $500 $500 - $508 $508 - $5,060 $5,035 0.5  $30,297
 $30,431
 2.5 $500
 $500
 — $508
 $508
 —

CMOs

 490,962 475,768 41.2 397,146 400,383 35.8 383,828 384,104 35.7  538,882
 534,156
 44.0 490,962
 475,768
 41.2 397,146
 400,383
 35.8

Other MBSs

 135,097 136,164 11.8 117,785 122,900 11.0 81,982 87,691 8.2 
MBSs 155,443
 159,765
 13.1 135,097
 136,164
 11.8 117,785
 122,900
 11.0

Municipal securities

 457,318 461,393 39.9 495,906 520,043 46.5 464,282 490,071 45.6  414,255
 423,820
 34.9 457,318
 461,393
 39.9 495,906
 520,043
 46.5

Trust preferred collateralized debt obligations ("CDOs")

 46,532 18,309 1.6 46,533 12,129 1.1 48,759 13,394 1.2 
CDOs 48,502
 33,774
 2.8 46,532
 18,309
 1.6 46,533
 12,129
 1.1

Corporate debt securities

 12,999 14,929 1.3 13,006 15,339 1.4 27,511 30,014 2.8  1,719
 1,802
 0.1 12,999
 14,929
 1.3 13,006
 15,339
 1.4

Equity securities

 3,706 5,662 0.5 9,690 11,101 1.0 2,189 2,697 0.3  3,224
 3,261
 0.3 3,706
 5,662
 0.5 9,690
 11,101
 1.0
                   

Total available-for-sale securities

 1,147,114 1,112,725 96.3 1,080,574 1,082,403 96.8 1,013,611 1,013,006 94.3 
                   
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-Maturity

                   Securities Held-to-Maturity                

Municipal securities

 44,322 43,387 3.7 34,295 36,023 3.2 60,458 61,477 5.7  26,555
 27,670
 2.3 44,322
 43,387
 3.7 34,295
 36,023
 3.2
                   

Total securities

 $1,191,436 $1,156,112 100.0 $1,114,869 $1,118,426 100.0 $1,074,069 $1,074,483 100.0  $1,218,877
 $1,214,679
 100.0 $1,191,436
 $1,156,112
 100.0 $1,114,869
 $1,118,426
 100.0
                   

As of December 31, 2013,2014, our securities portfolio totaled $1.2 billion, rising 3.4%$56.5 million, or 4.9%, from December 31, 2012,2013, following a 4.1%3.4% increase from December 31, 2011. The current2012. 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, the year growth resulted primarily from the redeployment of cash and cash equivalents intoend balance was impacted by purchases of CMOs$28.5 million, maturities, calls, and other MBSs, netprepayments of maturities$176.7 million, and callssales of municipal securities.

$27.8 million.

As of December 31, 2013,2014, approximately 96%96.7% of our $1.1$1.2 billion available-for-sale portfolio was comprised of U.S. agency securities, municipals, CMOs, and other MBSs. The remainder of the portfolio was comprised of sixeleven CDOs with a fair value of $18.3$33.8 million and an aggregate unrealized loss of $28.2$14.7 million, and miscellaneous other securities with a fair valuevalues of $20.6$5.1 million.

Investments in municipal securities comprised 43.6%35.7%, or $504.8$423.8 million, of the total available-for-sale securities portfolio as of December 31, 2013.2014. The majority consists of general obligations of local municipalities compared to state issued debt.in various states. Our municipal securities portfolio has historically experienced very low default rates and provides a predictable cash flow.


Table 8
Securities Effective Duration Analysis
(Dollar amounts in thousands)

 As of December 31,
 2014 2013

 As of December 31, 2013 As of December 31, 2012  Effective Average Yield to Effective Average Yield to

 Effective
Duration(1)		 Average
Life(2)		 Yield to
Maturity(3)		 Effective
Duration(1)		 Average
Life(2)		 Yield to
Maturity(3)		  
Duration (1)
 
Life (2)
 
Maturity (3)
 
Duration (1)
 
Life (2)
 
Maturity (3)

Securities Available-for-Sale

                         

U.S. agency securities

 2.23% 2.25 0.49% 0.90% 0.92 0.20%  3.32% 3.72
 2.98% 2.23% 2.25
 0.49%

CMOs

 4.48% 4.26 1.86% 2.22% 2.93 1.19%  3.45% 3.67
 1.91% 4.48% 4.26
 1.86%

Other MBSs

 3.93% 4.85 2.45% 1.97% 3.62 2.79%  2.88% 4.18
 2.77% 3.93% 4.85
 2.45%

Municipal securities

 5.11% 3.27 5.53% 4.49% 3.69 5.56%  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  N/M
 N/M
 N/M
 N/M
 N/M
 N/M
             

Corporate debt securities

 4.86% 7.18 6.39% 5.51% 8.09 6.37%  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  N/M
 N/M
 N/M
 N/M
 N/M
 N/M
             

Total available-for-sale securities

 4.68% 3.95 3.52% 3.33% 3.44 3.56%  3.16% 3.26
 3.37% 4.68% 3.95
 3.52%
             

Securities Held-to-Maturity

                         

Municipal securities

 6.50% 11.84 5.47% 6.30% 10.53 5.26%  5.64% 7.85
 4.60% 6.50% 11.84
 5.47%
             

Total securities

 4.75% 4.26 3.60% 3.43% 3.67 3.61%  3.21% 3.37
 3.40% 4.75% 4.26
 3.60%
             
(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%.

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The average life and effective duration of our available-for-sale securities portfolio was 3.95 years and 4.7%, respectively, higherwere both lower than the prior year metrics. This increase was due primarily to slower prepayment speeds resultingat 3.26 years and 3.16%, respectively. These decreases, which were partially offset by the impact of securities acquired in the Great Lakes transaction, resulted mainly from maturities and sales of investment securities that were not reinvested in the current market environment in combination with purchases of CMOs and other MBSs.


48



Realized Gains and Losses

Net securities gains of $8.1 million for 2014 resulted from the sale of a 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 includeincluded 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 bonds.

Gains on sales of securities of $3.3 million for 2011 resulted from the sale of $188.6 million in CMOs, municipal securities, and corporate debt securities. We sold these shorter-term investments to take advantage of opportunities in the market. These gains were partially offset by OTTI charges of $936,000 on two 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 portfolio. These amounts are presented in the Consolidated Statements of Comprehensive Income and reported as a separate component of stockholders' equity in accumulated other comprehensive loss on an after-tax basis. This balance sheet component will fluctuatefluctuates as current market interest rates and conditions change and affect the aggregate fair value of the portfolio. Net unrealized losses at December 31, 20132014 were $34.4$5.3 million compared to net unrealized gains of $1.8$34.4 million at December 31, 2012.

2013.

Net unrealized losses in the CMO portfolio totaled $4.7 million at December 31, 2014 compared to $15.2 million at December 31, 2013 compared to net unrealized gains of $3.2 million at December 31, 2012.2013. CMOs are either backed by U.S. government-owned agencies or issued by U.S. government-sponsored enterprises. We do not believe any individual unrealized loss on these securities as of December 31, 20132014 represents OTTI sincerelated to credit deterioration. In addition, we do not intend to sell the CMOs with unrealized losses associated with these securities arewithin a short period of time, and we do not believedbelieve it is more likely than not that we will be required to sell them before recovery of their amortized cost basis, which may be attributed to credit quality.

at maturity.

As of December 31, 2013,2014, net unrealized gains in the municipal securities portfolio totaled $4.1$9.6 million compared to $24.1$4.1 million as of December 31, 2012.2013. 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 $34.4 million at December 31, 2012 to $28.2 million at December 31, 2013.2013 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, 20132014 represent OTTI related to credit deterioration. In addition, we do not intend to sell the CDOs with unrealized losses within a short period of time, and we do not believe it is more likely than not that we will be required to sell them before recovery of their amortized cost basis, which may be at maturity. Our estimation of fair values for the CDOs was based on discounted cash flow analyses asis described in Note 2122 of "Notes to the Consolidated Financial Statements," in Item 8 of this Form 10-K.


49

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


 As of December 31, 2013  As of December 31, 2014

 One Year or Less One Year to Five Years Five Years to Ten Years After 10 years  One Year or Less One Year to Five Years Five Years to Ten Years After 10 years

 Amortized
Cost		 Yield to
Maturity (1)		 Amortized
Cost		 Yield to
Maturity (1)		 Amortized
Cost		 Yield to
Maturity (1)		 Amortized
Cost		 Yield to
Maturity (1)		  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-Sale

                 Securities Available-for-Sale              

U.S. agency securities

 $500 0.49% $- - $- - $- -  $—
 —% $4,496
 2.49% $23,825
 3.09% $1,976
 2.80%

CMOs (2)

 151,951 1.86% 278,813 1.86% 54,495 1.81% 5,703 1.90%  179,667
 1.97% 285,350
 1.90% 67,259
 1.78% 6,606
 1.78%

Other MBSs (2)

 34,374 2.43% 73,940 2.44% 20,595 2.47% 6,188 2.56%  38,113
 2.82% 81,559
 2.80% 28,161
 2.66% 7,610
 2.58%

Municipal securities (3)

 12,379 6.17% 78,087 5.99% 232,362 5.19% 134,490 5.81%  67,900
 6.10% 71,948
 6.01% 190,182
 4.88% 84,225
 6.00%

CDOs

 - - - - - - 46,532 N/M  —
 —
 —
 —
 —
 —
 48,502
 N/M

Corporate debt securities (4)

 - - 8,640 5.65% - - 4,359 7.86%  —
 —
 1,688
 6.47% —
 —
 31
 20.00%

Equity securities (4)

 - - - - 1,203 N/M 2,503 N/M  —
 —
 —
 —
 3,224
 N/M
 —
 N/M

Total available-for-sale securities

 199,204 2.22% 439,480 2.77% 308,655 4.39% 199,775 4.22%  285,680
 3.07% 445,041
 2.75% 312,651
 3.83% 148,950
 3.64%
                 

Held-to-Maturity

                 
Securities Held-to-Maturity                

Municipal securities (3)

 3,366 5.08% 10,950 4.97% 8,041 5.16% 21,965 5.89%  3,505
 5.27% 8,727
 4.61% 5,404
 5.16% 8,919
 4.00%
                 

Total securities

 $202,570 2.27% $450,430 2.82% $316,696 4.41% $221,740 4.38%  $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



LOAN PORTFOLIO AND CREDIT QUALITY

Our principal source of revenue is generated by our lending activities and is composed primarily of interest income as well as loan origination and commitment fees (net of related costs). The accounting policies for the recording of loans in the Consolidated Statements of Financial Condition and the recognition and/or deferral of interest income and fees in the Consolidated Statements of Income 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 86.6%86.3% of total loans, outstandingexcluding covered loans, at December 31, 2013. The corporate loan component consists of commercial and industrial, agricultural, and commercial real estate lending categories.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.

To maximize loan income withinwith an acceptable level of risk, we have certain lending policies and procedures that management reviews on a regular basis. In addition, management is provided with frequent reportsreceives periodic reporting related to loan production, loan quality, credit concentrations, loan delinquencies, and non-performing and performing potential problem loans to mitigatemonitor and monitormitigate 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 10
Loan Portfolio
(Dollar amounts in thousands)
  As of December 31,
  2014 
% of
Total
 2013 
% of
Total
 2012 
% of
Total
 2011 
% of
Total
 2010 
% of
Total
Commercial and industrial $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 358,249
 5.4 321,702
 5.8 268,618
 5.2 243,776
 4.8 227,756
 4.5
Commercial real estate:                    
Office 494,637
 7.4 459,202
 8.2 474,717
 9.1 444,368
 8.7 396,836
 7.8
Retail 452,225
 6.8 392,576
 7.0 368,796
 7.1 334,034
 6.6 328,751
 6.4
Industrial 531,517
 8.0 501,907
 9.0 489,678
 9.4 520,680
 10.2 478,026
 9.4
Multi-family 564,421
 8.4 332,873
 6.0 285,481
 5.5 288,336
 5.7 349,862
 6.9
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
 887,897
 13.3 807,071
 14.5 773,121
 14.9 888,146
 17.4 856,357
 16.8
Total commercial
  real estate
 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 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 543,185
 8.2 427,020
 7.7 390,033
 7.5 416,194
 8.2 445,243
 8.7
1-4 family mortgages 291,463
 4.4 275,992
 4.9 282,948
 5.5 201,099
 4.0 160,890
 3.2
Installment 76,032
 1.1 44,827
 0.8 38,394
 0.7 42,289
 0.8 51,774
 1.0
Total consumer loans 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
 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 79,435
   134,355
   197,894
   260,502
   371,729
  
Total loans $6,736,853
   $5,714,360
   $5,387,570
   $5,348,615
   $5,472,289
  
2014 Compared to 2013
Total loans, excluding covered loans, of $6.7 billion as of December 31, 2014 reflects growth of $1.1 billion, or 19.3%, from December 31, 2013. Excluding loans acquired in the Popular and Great Lakes transactions of $718.3 million, total loans, excluding covered loans, grew $359.2 million, or 6.4%, from December 31, 2013. This organic growth was driven primarily by an increase of 17.4% in commercial and industrial loans, 10.8% in agricultural, and 10.6% in multi-family loans. Solid performance from our legacy sales platform concentrated within our commercial and industrial and agricultural loan categories reflects the continued impact of greater resource investments and expansion into certain sector-based lending areas, such as agri-business, asset-based lending, and healthcare.

51



Consumer loans totaled $910.7 million as of December 31, 2014 and represented 13.7% of loans, excluding covered loans, increasing $162.8 million, or 21.8% from December 31, 2013. Loans acquired in the Popular and Great Lakes transactions contributed $93.5 million of this growth. Excluding acquired loans, consumer loans increased $69.3 million, or 9.3%, which reflects the purchase of $48.7 million of high-quality, shorter duration home equity loans and the sale of $144.9 million of 1-4 family mortgage loans during 2014.
Covered loans decreased $54.9 million, or 40.9%, from December 31, 2013, reflecting the expected decline in this portfolio.
For additional detail regarding acquired loans refer to the section below titled "Acquired Loans" of this Item 7.
2013 Compared to 2012
Total loans, excluding covered loans, of $5.6 billion as of December 31, 2013 reflected growth of $390.3 million, or 7.5%, from December 31, 2012. The loan portfolio benefited from well-balanced corporate loan growth reflecting credits of varying size and diverse geographic locations within our markets and includes an increase in commercial and industrial loans, agricultural loans, multi-family loans, and retail loans.
Consumer loans represented 13.4% of loans, excluding covered loans, and increased $36.5 million. This growth reflects the purchase of $51.9 million of high-quality, shorter duration home equity loans and the sale of $147.4 million of 1-4 family mortgage loans during 2013.
Covered loans decreased $63.5 million, or 32.1%, from December 31, 2012, reflecting the expected decline in this portfolio.
Comparisons of Prior Years (2012, 2011, and 2010)
Total loans of $5.4 billion as of December 31, 2012 grew $39.0 million from December 31, 2011. Excluding covered loans, net charge-offs, loans disposed through bulk loan sales, and loans acquired in an FDIC-assisted transaction, our loan portfolio increased by approximately 6.5% from December 31, 2011. The increase in commercial and industrial loans was driven by the targeted redistribution of the loan portfolio from commercial real estate into this category, significant investments in sales staff, and refocusing current staff away from remediation activities, subsequent to the bulk loan sales. Strong origination efforts primarily contributed to growth in 1-4 family mortgages, in addition to loans acquired in an FDIC-assisted transaction. A decrease in the construction portfolio was driven by efforts to reduce lending exposure to this category. The decrease in covered loans of $62.6 million, or 24.0%, from December 31, 2011 reflects the continued decline in this portfolio.
Total loans of $5.3 billion as of December 31, 2011 declined $123.7 million, or 2.3%, from $5.5 billion as of December 31, 2010. The continued decline in covered loan balances accounted for the majority of this reduction. Total loans, excluding covered loans, as of December 31, 2011 were stable compared to December 31, 2010. The office, retail, 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 growth, we continued to reduce our exposure to the higher risk construction category 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 overall 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 by category as of December 31, 2014 between legacy and loans acquired in the Popular and Great Lakes transactions, compared to loans as of December 31, 2013.
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 total loans, excluding covered loans, and totaled $2.6 billion at December 31, 2014, an increase of $459.5 million, or 21.3% from December 31, 2013. Loans acquired in the Popular and Great Lakes transactions during the third and fourth quarters of 2014 contributed $106.6 million of this growth. Our commercial and industrial loans are a diverse group of loans to middle market businesses generally located in the Chicago metropolitan area with purposes that range from supporting seasonal working capital needs to term financing of equipment. The underwriting for these loans is based primarily on the identified cash flows of the borrower and secondarily on the underlying collateral provided by the borrower. Most commercial and industrial loans are secured by the assets being financed or other business assets, such as accounts receivable or inventory, and may incorporate a personal guarantee.


Table of Contents

Agricultural loans are generally provided to meet seasonal production, equipment, and farm real estate borrowing needs of individual and corporate crop and livestock producers. As part of the underwriting process, the Company examines projected future cash flows, financial statement stability, and the value of the underlying collateral. Seasonal crop production loans are repaid by the liquidation of the financed crop that is typically covered by crop insurance. Equipment and real estate term loans are repaid bythrough cash flows of the farming operation.

Commercial Real Estate Loans

Commercial real estate loans are subject to underwriting standards and processes similar to commercial and industrial loans. The repayment of commercial real estate loans depends on the successful operation of the property securing the loan or the business conducted on the property securing the loan. This category of loans may be more adversely affected by conditions in the real estate market. Management monitors and evaluates commercial real estate loans based on cash flow, collateral, geography, and risk rating criteria. The mix of properties securing the loans in our commercial real estate portfolio are balanceddiversified between owner-occupied and investor categories and are diverse in terms of type and geographic location within the Company's markets.

represent varying types across our market footprint.


53



Construction loans are generally based on estimates of costs and value associated with the completed projects and are underwritten utilizing feasibility studies, independent appraisal reviews, sensitivity analyses of absorption and lease rates, and financial analyses of the developers and property owners. Sources of repayment may be permanent loans from long-term lenders, sales of developed property, or an interim loan commitment until permanent financing is obtained. Generally, construction loans have a higher risk profile than other real estate loans since repayment is impacted by real estate values, interest rate changes, governmental regulation of real property, demand and supply of alternative real estate, the availability of long-term financing, and changes in general economic conditions.

The following table provides commercial real estate loan detail as of December 31, 2014, 2013, and 2012.
Table 12
Commercial Real Estate Loans
(Dollar amounts in thousands)
  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%  
Commercial real estate loans represent 47.1% of total loans, excluding covered loans, and totaled $3.1 billion at December 31, 2014, an increase of $455.1 million, or 17.0% from December 31, 2013. Overall, growth was driven by loans acquired in the Popular and Great Lakes transactions, which totaled $518.2 million at December 31, 2014.
Consumer Loans

Consumer loans represent 13.7% of total loans, excluding covered loans, and totaled $910.7 million at December 31, 2014. Consumer loans are centrally underwritten using a credit scoring 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 affordability ratios, risk-based pricing strategies, and documentation requirements. The home equity category consists mainly of revolving lines of credit secured by junior liens on owner-occupied real estate. Loan-to-value ratios on home equity loans and 1-4 family mortgages are based on the current appraised value of the collateral.


54

Table of Contents


Table 10
Loan Portfolio
(Dollar amounts in thousands)

 
 As of December 31, 
 
 2013 % of
Total		 2012 % of
Total		 2011 % of
Total		 2010 % of
Total		 2009 % of
Total		 

Commercial and industrial

 $1,830,638  32.8 $1,631,474  31.5 $1,458,446  28.7 $1,465,903  28.7 $1,438,063  27.6 

Agricultural

  321,702  5.8  268,618  5.2  243,776  4.8  227,756  4.5  209,945  4.0 

Commercial real estate:

                               

Office

  459,202  8.2  474,717  9.1  444,368  8.7  396,836  7.8  394,228  7.6 

Retail

  392,576  7.0  368,796  7.1  334,034  6.6  328,751  6.4  331,803  6.4 

Industrial

  501,907  9.0  489,678  9.4  520,680  10.2  478,026  9.4  486,934  9.3 

Multi-family

  332,873  6.0  285,481  5.5  288,336  5.7  349,862  6.9  333,961  6.4 

Construction

  186,197  3.3  186,416  3.6  250,745  4.9  339,162  6.6  545,437  10.5 

Other commercial real estate

  807,071  14.5  773,121  14.9  888,146  17.4  856,357  16.8  798,983  15.4 
                      

Total commercial real estate

  2,679,826  48.0  2,578,209  49.6  2,726,309  53.5  2,748,994  53.9  2,891,346  55.6 
                      

Total corporate loans

  4,832,166  86.6  4,478,301  86.3  4,428,531  87.0  4,442,653  87.1  4,539,354  87.2 
                      

Home equity

  427,020  7.7  390,033  7.5  416,194  8.2  445,243  8.7  470,523  9.1 

1-4 family mortgages

  275,992  4.9  282,948  5.5  201,099  4.0  160,890  3.2  139,983  2.7 

Installment

  44,827  0.8  38,394  0.7  42,289  0.8  51,774  1.0  53,386  1.0 
                      

Total consumer loans

  747,839  13.4  711,375  13.7  659,582  13.0  657,907  12.9  663,892  12.8 
                      

Total loans, excluding covered loans

  5,580,005  100.0  5,189,676  100.0  5,088,113  100.0  5,100,560  100.0  5,203,246  100.0 
                           

Covered loans

  134,355     197,894     260,502     371,729     146,319    
                           

Total loans

 $5,714,360    $5,387,570    $5,348,615    $5,472,289    $5,349,565    
                           

Total loans, excluding covered loans, of $5.6 billion as of December 31, 2013 reflected growth of $390.3 million, or 7.5%, from December 31, 2012. The loan portfolio benefited from well-balanced corporate loan growth reflecting credits of varying size and diverse geographic locations within our markets and includes an increase of 12.2% in commercial and industrial loans, 19.8% in agricultural loans, 16.6% in multi-family loans, and 6.4% in retail loans. The 13.3% increase in commercial and industrial and agricultural loan categories reflects the impact of greater resource investments and expansion into specialized lending areas, such as agri-business and asset-based lending.

Consumer loans represented 13.4% of loans, excluding covered loans. In response to market conditions, we purchased $51.9 million of high-quality, shorter duration home equity loans and sold $147.4 million of 1-4 family mortgage loans during 2013.

Covered loans decreased $63.5 million, or 32.1%, from December 31, 2012, reflecting the expected decline in this portfolio.

Total loans of $5.4 billion as of December 31, 2012 grew $39.0 million from December 31, 2011. Excluding covered loans, net charge-offs, loans disposed through bulk loan sales, and loans acquired in an FDIC-assisted transaction, our loan portfolio increased by approximately 6.5% from December 31, 2011. The increase in commercial and industrial loans was driven by the targeted redistribution of the loan portfolio from commercial real estate into this category, significant investments in high level sales staff, and refocusing current staff away from remediation activities. Strong origination efforts primarily contributed to growth in 1-4 family mortgages, in addition to loans acquired in an FDIC-assisted transaction. A decrease in the construction portfolio was driven by efforts to reduce lending exposure to this category.

The decrease in covered loans of $62.6 million, or 24.0%, from December 31, 2011 reflects the continued decline in this portfolio.


Table of Contents

Total loans of $5.3 billion as of December 31, 2011 declined $123.7 million, or 2.3%, from $5.5 billion as of December 31, 2010. The continued decline in covered loan balances accounted for the majority of this reduction. Total loans, excluding covered loans, as of December 31, 2011 were stable compared to December 31, 2010. The office, retail, 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 growth, we continued to reduce our exposure to the higher risk construction category during 2011.

Total loans were $5.5 billion as of December 31, 2010, an increase of $122.7 million, or 2.3%, from December 31, 2009. The increase was driven by the addition of covered loans acquired through FDIC-assisted transactions, which more than offset declines in the construction category. Total loans, excluding covered loans, of $5.1 billion as of December 31, 2010 declined $102.7 million, or 2.0%, from December 31, 2009, reflecting charge-offs of $147.1 million and the stressed economic conditions of 2010. Growth of 1.9% in 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 construction portfolio that resulted from our continued efforts to remediate problem credits in this category.

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.

The following table provides commercial real estate loan detail for the three years ended December 31, 2013.


Table 11
Commercial Real Estate Loans
(Dollar amounts in thousands)

 
 As of December 31, 
 
 2013 % of Total 2012 % of Total 2011 % of Total 

Office, retail, and industrial:

                   

Office

 $459,202  17.1 $474,717  18.4 $444,368  16.3 

Retail

  392,576  14.7  368,796  14.3  334,034  12.3 

Industrial

  501,907  18.7  489,678  19.0  520,680  19.1 
              

Total office, retail, and industrial

  1,353,685  50.5  1,333,191  51.7  1,299,082  47.7 
              

Multi-family

  332,873  12.4  285,481  11.1  288,336  10.5 

Construction

  186,197  7.0  186,416  7.2  250,745  9.2 

Other commercial real estate:

                   

Rental properties

  112,887  4.2  121,174  4.7  127,085  4.7 

Service stations and truck stops

  83,237  3.1  114,521  4.4  128,931  4.7 

Warehouses and storage

  122,325  4.6  110,367  4.3  129,491  4.7 

Hotels

  62,451  2.3  74,098  2.9  73,889  2.7 

Restaurants

  79,809  3.0  80,430  3.1  78,867  2.9 

Automobile dealers

  37,504  1.4  45,121  1.8  35,777  1.3 

Recreational

  56,327  2.1  41,058  1.6  34,708  1.3 

Religious

  32,614  1.2  29,196  1.1  24,097  0.9 

Multi-use properties

  118,351  4.4  63,120  2.4  155,585  5.7 

Other

  101,566  3.8  94,036  3.7  99,716  3.7 
              

Total other commercial real estate

  807,071  30.1  773,121  30.0  888,146  32.6 
              

Total commercial real estate

 $2,679,826  100.0 $2,578,209  100.0 $2,726,309  100.0 
              

Owner occupied commercial real estate loans, excluding multi-family and construction loans

 $933,151    $963,375    $988,587    

Owner occupied as a percent of total

  43.2%     45.7%     45.2%    

Commercial real estate loans represent 48.0% of loans, excluding covered loans, and totaled $2.7 billion at December 31, 2013, an increase of $101.6 million, or 3.9%, from December 31, 2012, due primarily to an increase in the multi-family and multi-use properties portfolios.


Table of Contents

Over half of our commercial real estate loans consist of loans for industrial buildings, office buildings, and retail shopping centers. The mix of properties securing the loans in our commercial real estate portfolio continue to be balanced between owner-occupied and investor categories as of December 31, 2013.

Maturity and Interest Rate Sensitivity of Corporate Loans

The following table summarizes the maturity distribution of our corporate loan portfolio as of December 31, 2013,2014, 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, refer tosee Item 7A, "Quantitative and Qualitative Disclosures about Market Risk," of this Form 10-K.


Table 12
13
Maturities and Sensitivities of Corporate Loans to 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  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

 $1,036,248 $958,941 $157,151 $2,152,340  $1,211,466
 $1,176,627
 $223,712
 $2,611,805

Commercial real estate

 753,207 1,682,040 244,579 2,679,826  753,480
 2,046,340
 335,113
 3,134,933
         

Total corporate loans

 $1,789,455 $2,640,981 $401,730 $4,832,166  $1,964,946
 $3,222,967
 $558,825
 $5,746,738
         

Loans by interest rate type:

                 

Fixed interest rates

 $634,426 $1,703,024 $246,034 $2,583,484  $702,476
 $1,946,905
 $270,024
 $2,919,405

Floating interest rates

 1,155,029 937,957 155,696 2,248,682  1,262,470
 1,276,062
 288,801
 2,827,333
         

Total corporate loans

 $1,789,455 $2,640,981 $401,730 $4,832,166  $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

Table of Contents



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 13
14
Loan Portfolio by Performing/Non-Performing Status
(Dollar amounts in thousands)

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

As of 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 
              



  
 Accruing  
 

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

As of December 31, 2012

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

Commercial and industrial

 $1,631,474 $1,598,342 $4,534 $2,138 $519 $25,941  $2,253,556
 $2,225,507
 $4,882
 $205
 $269
 $22,693

Agricultural

 268,618 266,991 79 375 — 1,173  358,249
 355,955
 1,934
 —
 —
 360

Commercial real estate:

                         

Office

 474,717 471,242 871 197 — 2,407  494,637
 489,915
 939
 —
 —
 3,783

Retail

 368,796 358,945 2,415 626 — 6,810  452,225
 446,702
 288
 76
 413
 4,746

Industrial

 489,678 475,416 255 — — 14,007  531,517
 525,955
 979
 —
 173
 4,410

Multi-family

 285,481 283,415 479 153 — 1,434  564,421
 561,436
 1,261
 83
 887
 754

Construction

 186,416 180,931 — — — 5,485  204,236
 197,255
 —
 —
 —
 6,981

Other commercial real estate

 773,121 749,114 1,053 1,534 5,206 16,214  887,897
 875,080
 4,976
 438
 433
 6,970
             

Total commercial real estate

 2,578,209 2,519,063 5,073 2,510 5,206 46,357  3,134,933
 3,096,343
 8,443
 597
 1,906
 27,644
             

Total corporate loans

 4,478,301 4,384,396 9,686 5,023 5,725 73,471  5,746,738
 5,677,805
 15,259
 802
 2,175
 50,697
             

Home equity

 390,033 375,804 6,349 1,651 40 6,189  543,185
 533,738
 2,361
 145
 651
 6,290

1-4 family mortgages

 282,948 270,784 4,241 1,947 1,102 4,874  291,463
 285,531
 1,947
 166
 878
 2,941

Installment

 38,394 35,936 2,390 68 — —  76,032
 75,423
 506
 60
 —
 43
             

Total consumer loans

 711,375 682,524 12,980 3,666 1,142 11,063  910,680
 894,692
 4,814
 371
 1,529
 9,274
             

Total loans, excluding covered loans

 5,189,676 5,066,920 22,666 8,689 6,867 84,534  6,657,418
 6,572,497
 20,073
 1,173
 3,704
 59,971

Covered loans

 197,894 145,751 6,514 31,447 — 14,182  79,435
 65,682
 2,565
 5,002
 —
 6,186
             

Total loans

 $5,387,570 $5,212,671 $29,180 $40,136 $6,867 $98,716  $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


56

Table of Contents




The following table provides a comparison of our non-performing assets and past due loans for the five years ended December 31, 2013.


to prior periods.

Table 14
15
Non-Performing Assets and Past Due Loans
(Dollar amounts in thousands)


 As of December 31, 

 2013 2012 2011 2010 2009  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

 $59,798 $84,534 $187,325 $211,782 $244,215  $58,853
 $59,798
 $84,534
 $187,325
 $211,782

90 days or more past due loans

 3,708 8,689 9,227 4,244 4,079  771
 3,708
 8,689
 9,227
 4,244
           

Total non-performing loans

 63,506 93,223 196,552 216,026 248,294  59,624
 63,506
 93,223
 196,552
 216,026

Accruing TDRs

 23,770 6,867 17,864 22,371 30,553  3,704
 23,770
 6,867
 17,864
 22,371

OREO

 32,473 39,953 33,975 31,069 57,137  25,779
 32,473
 39,953
 33,975
 31,069
           

Total non-performing assets

 $119,749 $140,043 $248,391 $269,466 $335,984  $89,107
 $119,749
 $140,043
 $248,391
 $269,466
           

30-89 days past due loans

 $20,742 $22,666 $27,495 $23,646 $37,912  $13,473
 $20,742
 $22,666
 $27,495
 $23,646

Non-accrual loans to total loans

 1.07% 1.63% 3.68% 4.15% 4.69%  0.99% 1.07% 1.63% 3.68% 4.15%

Non-performing loans to total loans

 1.14% 1.80% 3.86% 4.24% 4.77%  1.00% 1.14% 1.80% 3.86% 4.24%

Non-performing assets to loans plus OREO

 2.13% 2.68% 4.85% 5.25% 6.39%  1.49% 2.13% 2.68% 4.85% 5.25%
Non-performing acquired loans and OREO (1)
Non-performing acquired loans and OREO (1)
        
Non-accrual loans $1,118
 $—
 $—
 $—
 $—
90 days or more past due loans 402
 —
 —
 —
 —
Total non-performing loans 1,520
 —
 —
 —
 —
OREO 1,119
 —
 —
 —
 —
Total non-performing assets $2,639
 $—
 $—
 $—
 $—
30-89 days past due loans $6,600
 $—
 $—
 $—
 $—

Non-performing covered loans and covered OREO(1)

Non-performing covered loans and covered OREO(1)

 
 		 
 		 
Non-performing covered loans and covered OREO (1)
        

Non-accrual loans

 $20,942 $14,182 $19,879 $— $—  $6,186
 $20,942
 $14,182
 $19,879
 $—

90 days or more past due loans

 18,081 31,447 43,347 84,350 30,286  5,002
 18,081
 31,447
 43,347
 84,350
           

Total non-performing loans

 39,023 45,629 63,226 84,350 30,286  11,188
 39,023
 45,629
 63,226
 84,350

OREO

 8,863 13,123 23,455 22,370 8,981  8,068
 8,863
 13,123
 23,455
 22,370
           

Total non-performing assets

 $47,886 $58,752 $86,681 $106,720 $39,267  $19,256
 $47,886
 $58,752
 $86,681
 $106,720
           

30-89 days past due loans

 $2,232 $6,514 $4,232 $18,445 $22,988  $2,565
 $2,232
 $6,514
 $4,232
 $18,445

Non-performing assets, including covered loans and covered OREO

 
 		 
 		 
Total non-performing assetsTotal non-performing assets      

Non-accrual loans

 $80,740 $98,716 $207,204 $211,782 $244,215  $66,157
 $80,740
 $98,716
 $207,204
 $211,782

90 days or more past due loans

 21,789 40,136 52,574 88,594 34,365  6,175
 21,789
 40,136
 52,574
 88,594
           

Total non-performing loans

 102,529 138,852 259,778 300,376 278,580  72,332
 102,529
 138,852
 259,778
 300,376

Accruing TDRs

 23,770 6,867 17,864 22,371 30,553  3,704
 23,770
 6,867
 17,864
 22,371

OREO

 41,336 53,076 57,430 53,439 66,118  34,966
 41,336
 53,076
 57,430
 53,439
           

Total non-performing assets

 $167,635 $198,795 $335,072 $376,186 $375,251  $111,002
 $167,635
 $198,795
 $335,072
 $376,186
           

30-89 days past due loans

 $22,974 $29,180 $31,727 $42,091 $60,900  $22,638
 $22,974
 $29,180
 $31,727
 $42,091

Non-accrual loans to total loans

 1.41% 1.83% 3.87% 3.87% 4.57%  0.98% 1.41% 1.83% 3.87% 3.87%

Non-performing loans to total loans

 1.79% 2.58% 4.86% 5.49% 5.21%  1.07% 1.79% 2.58% 4.86% 5.49%

Non-performing assets to loans plus OREO

 2.91% 3.65% 6.20% 6.81% 6.93%  1.64% 2.91% 3.65% 6.20% 6.81%

Interest income not recognized in the financial statements related to non-accrual loans for 2013

 $4,046 
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

As ofdecreased by $30.6 million, or 25.6%, from December 31, 2013, non-performing2013. This decrease was driven primarily by the return of three TDRs totaling $20.7 million to performing status, sales of OREO properties, and a decline in 90 days or more past due loans. Non-performing assets, excluding covered loansacquired and covered OREO, were $119.7 million, declining by 14.5% compared to December 31, 2012. Non-performing assets, excluding covered loans and covered OREO, represented 2.13%1.49% of total loans plus OREO as of December 31, 20132014 compared to 2.13% as of December 31, 2013 and 2.68% as of December 31, 20122012. The continued improvement in non-performing assets and 4.85% as ofthe related credit metrics reflects management's ongoing commitment to credit remediation.

Non-performing assets, excluding covered loans and covered OREO, declined 14.5% from December 31, 2011.2012 to December 31, 2013. Improvement in non-performing assets and related credit metrics resulted primarily from management's continued focus on credit remediation.


Table of Contents

The significant decrease in non-performing assets, excluding covered loans and covered OREO, from December 31, 2011 to December 31, 2012 was drivendue mainly byto a decline in non-accrual loans, which reflects the aggressive remediation actions taken by management during 2012, including the bulk loan sales. In addition, the return of accruing TDRs to performing status contributed to the positive variance.

From December 31, 2010 to December 31, 2011, gross reductions of non-performing assets resulted primarily from non-accrual loans that were sold, paid-off, or transferred to held-for-sale and OREO properties sold during 2011.

Non-accrual loans, excluding covered loans, declined by 29.3% to $58.9 million as of December 31, 2014 from $59.8 million as of December 31, 2013 from $84.5 million as of December 31, 2012. 2013.
The improvement in non-performing loans was driven primarily by the reclassification of two corporate loan relationships totaling $19.3 million from non-accrual to accruing TDR status. Thesestatus drove the decline in non-accrual loans continuefrom December 31, 2012 to perform in accordance with their modified terms, which are at market rates, and are expected to move to the performing loan portfolio by the end of the first quarter of 2014.

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 more than offset the amount of loans downgraded from performing to non-accrual status during 2012.

A discussion of our accounting policies for non-accrual loans is contained in Note 1 of "Notes to the Consolidated Financial Statements" in Item 8 of this Form 10-K.



58



TDRs

Loan modifications may be performed at the request of the individual borrower and may include reductions in interest rates, changes in payments, and extensions of maturity dates. We occasionally restructure loans at other than market rates or terms to enable the borrower to work through financial difficulties for a period of time, and these restructures remain classified as TDRs for the remaining terms of the loans. A discussion of our accounting policies for TDRs is containedcan be found in Note 1 of "Notes to the Consolidated Financial Statements" in Item 8 of this Form 10-K.


Table of Contents


Table 15
16

TDRs by Type
(Dollar amounts in thousands)

 As of December 31,

 December 31, 2013 December 31, 2012 December 31, 2011  2014 2013 2012

 Number of
Loans		 Amount Number of
Loans		 Amount Number of
Loans		 Amount  Number of Loans Amount Number of Loans Amount Number of Loans Amount

Commercial and industrial

 10 $8,659 6 $3,064 20 $2,348  7
 $19,068
 10
 $8,659
 6
 $3,064

Agricultural

 - - - - - -  —
 —
 —
 —
 —
 —

Commercial real estate:

                         

Office

 - - - - - -  —
 —
 —
 —
 —
 —

Retail

 2 624 - - 2 1,742  1
 413
 2
 624
 —
 —

Industrial

 3 9,647 2 2,407 - -  1
 173
 3
 9,647
 2
 2,407

Multi-family

 5 1,291 1 150 9 12,865  5
 1,119
 5
 1,291
 1
 150

Construction

 - - - - 1 14,006  —
 —
 —
 —
 —
 —

Other commercial real estate

 7 4,617 7 9,855 9 11,644  5
 616
 7
 4,617
 7
 9,855
             

Total commercial real estate loans

 17 16,179 10 12,412 21 40,257  12
 2,321
 17
 16,179
 10
 12,412
             

Total corporate loans

 27 24,838 16 15,476 41 42,605  19
 21,389
 27
 24,838
 16
 15,476
     ��       

Home equity

 18 1,299 7 274 25 1,564  17
 1,157
 18
 1,299
 7
 274

1-4 family mortgages

 14 1,716 16 2,041 26 3,382  10
 1,062
 14
 1,716
 16
 2,041

Installment

 - - - - 1 155  —
 —
 —
 —
 —
 —
             

Total consumer loans

 32 3,015 23 2,315 52 5,101  27
 2,219
 32
 3,015
 23
 2,315
             

Total TDRs

 59 $27,853 39 $17,791 93 $47,706  46
 $23,608
 59
 $27,853
 39
 $17,791
             

Accruing TDRs

 39 $23,770 19 $6,867 57 $17,864  29
 $3,704
 39
 $23,770
 19
 $6,867

Non-accrual TDRs

 20 4,083 20 10,924 36 29,842  17
 19,904
 20
 4,083
 20
 10,924
             

Total TDRs

 59 $27,853 39 $17,791 93 $47,706  46
 $23,608
 59
 $27,853
 39
 $17,791
             

Charge-offs on TDRs

   $1,880   $10,003   $8,890 
Year-to-date charge-offs on TDRs  
 $8,457
  
 $1,880
  
 $10,003

Specific reserves related to TDRs

   1,952   2,794   94   
 1,765
  
 1,952
  
 2,794

At December 31, 2013,2014, TDRs totaled $27.9$23.6 million, increasing $10.1decreasing $4.2 million, or 56.6%15.2%, from December 31, 2012.2013. The December 31, 20132014 total includes $23.8$3.7 million in loans that are accruing interest, andwith the majority were 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 rose $16.9decreased $20.1 million from December 31, 2012 driven2013 due primarily by the reclassification of two corporate loan relationships totaling $19.3 million from non-accrual TDR to accruing TDR status based on restructuring actions and continued performance of these loans in accordance with their modified terms. New accruing loan restructures of $4.8 million also contributed to the variance. These increases were partially offset by the transfer of $1.1 million from accruing TDRs to non-accrual TDR status, and the return of $5.5three TDRs totaling $20.7 million of accruing TDRs to performing status in the calendar year subsequent to restructure due to restructuring at market terms andduring 2014 after sustained payment performance in accordance with their modified terms, which represent market rates at the modified terms.

time of restructuring.

At December 31, 2013,2014, non-accrual TDRs totaled $4.1$19.9 million compared to $10.9$4.1 million at December 31, 2012.2013. 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 yet performing in accordance with their modified terms or they have not yet exhibited sufficient performance under their modified terms. The decrease in non-accrual TDRs from December 31, 2012 was driven by the reclassification of non-accrual TDRs to accruing TDR status discussed above, which was offset by $15.6 million of new non-accrual loan restructures.


59



Performing Potential Problem Loans

Performing potential problem loans consist of special mention loans and substandard loans. These loans are performing in accordance with contractual terms, but we have concerns about the ability of the borrower to continue to comply with loan terms due to the borrower's potential operating or financial difficulties.


Table of Contents


Table 16
17

Performing Potential Problem Loans
(Dollar amounts in thousands)


 December 31, 2013 December 31, 2012  December 31, 2014 December 31, 2013

 Special
Mention (1)		 Substandard (2) Total (3) Special
Mention (1)		 Substandard (2) Total (3)  
Special
Mention (1)
 
Substandard (2)
 
Total (3)
 
Special
Mention (1)
 
Substandard (2)
 
Total (3)

Commercial and industrial

 $23,679 $14,135 $37,814 $37,833 $8,418 $46,251  $84,615
 $30,809
 $115,424
 $23,679
 $14,135
 $37,814

Agricultural

 344 - 344 331 - 331  294
 —
 294
 344
 —
 344

Commercial real estate:

                         

Office, retail, and industrial

 27,871 23,538 51,409 57,271 16,746 74,017  38,718
 32,251
 70,969
 27,871
 23,538
 51,409

Multi-family

 2,794 499 3,293 1,921 - 1,921  5,951
 3,774
 9,725
 2,794
 499
 3,293

Construction

 8,309 17,642 25,951 26,210 25,762 51,972  5,776
 12,487
 18,263
 8,309
 17,642
 25,951

Other commercial real estate

 14,567 22,576 37,143 14,056 30,051 44,107  32,225
 19,407
 51,632
 14,567
 22,576
 37,143
             

Total commercial real estate

 53,541 64,255 117,796 99,458 72,559 172,017  82,670
 67,919
 150,589
 53,541
 64,255
 117,796
             

Total performing potential problem corporate loans

 $77,564 $78,390 $155,954 $137,622 $80,977 $218,599 
             
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, down $62.62013. The increase was impacted by the Popular and Great Lakes acquisitions, which added $39.8 million or 28.7%, from $218.6 million as of December 31, 2012, reflecting management's proactive focus on credit remediation. As of December 31, 2013, approximately 45% of performing potential problem loans was comprisedas of 9December 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 each having balances greater than $5.0 million. Managementtotaling $66.3 million for which management has specific monitoring plans for each of these corporate loan relationships.

plans.

60

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Loan Sales

The following table summarizes loan sales for the three years ended December 31, 2013.

2014.

Table 17
18
Loan Sales
(Dollar amounts in thousands)


 Proceeds Book Value Charge-offs (1) Net Gains (2) 
 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 $(575)$-  $469
 $1,044
 $(575) $—

Office, retail, and industrial

 806 1,791 (985) -  806
 1,791
 (985) —

1-4 family mortgages

 152,130 147,413 - 4,717  152,130
 147,413
 —
 4,717
         

Total loan sales in 2013

 $153,405 $150,248 $(1,560)$4,717  $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) $19,705
 $47,225
 $(22,508) $(5,012)

Agricultural

 3,605 8,720 (4,356) (759) 3,605
 8,720
 (4,356) (759)

Commercial real estate:

                

Office, retail, and industrial

 35,488 49,345 (23,696) 9,839  35,488
 49,345
 (23,696) 9,839

Multi-family

 3,151 4,043 (1,859) 967  3,151
 4,043
 (1,859) 967

Construction

 9,074 18,274 (7,540) (1,660) 9,074
 18,274
 (7,540) (1,660)

Other commercial real estate

 26,664 46,838 (21,825) 1,651  26,664
 46,838
 (21,825) 1,651
         

Total commercial real estate

 74,377 118,500 (54,920) 10,797  74,377
 118,500
 (54,920) 10,797
         

Home equity

 829 1,561 (773) 41  829
 1,561
 (773) 41

1-4 family mortgages

 52,749 50,484 (90) 2,355  52,749
 50,484
 (90) 2,355
         

Total consumer loans

 53,578 52,045 (863) 2,396  53,578
 52,045
 (863) 2,396
         

Total loan sales in 2012

 $151,265 $226,490 $(82,647)$7,422  $151,265
 $226,490
 $(82,647) $7,422
         

Loan sales in 2011 by class:

         

Commercial and industrial

 $3,120 $4,226 $(1,106)$- 

Commercial real estate:

         

Office, retail, and industrial

 551 997 (446) - 

Construction

 8,691 11,864 (3,173) - 
         

Total commercial real estate

 9,242 12,861 (3,619) - 
         

Total loan sales in 2011

 $12,362 $17,087 $(4,725)$- 
         

(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.

We recognized gains of $4.7$3.8 million on the sale of $147.4$144.9 million of 1-4 family mortgage loans during the year ended December 31, 2014. Additionally, we sold $21.2 million of other non-performing loans and recorded charge-offs of $3.5 million.
During the year ended December 31, 2013, we sold $147.4 million of which $36.61-4 family mortgage loans at gains of $4.7 million were originated with the intent to sell. Additionally,and we sold $2.8 million of other non-performing loans and recorded charge-offs of $1.6 million.

During the third quarter of 2012, we identified certain non-performing and performing potential problem loans for accelerated disposition through multiple bulk loan sales and recorded charge-offs of $80.3 million. The bulk loan sales of $172.5 million in original carrying value were completed in the fourth quarter of 2012, resultingresulted in proceeds of $94.5 million and a gain of $5.2 million. In addition to the bulk loan sales, we sold $50.3 million of mortgage loans, during 2012, resulting in gains of $2.3 million.

During the year ended December 31, 2011, we sold $17.1 million of non-performing loans and recorded charge-offs of $4.7 million.



61

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OREO consists of properties acquired as the result of borrower defaults on loans. OREO, excluding covered OREO, was $32.5$26.9 million at December 31, 2013,2014, a $7.5$5.6 million decrease from December 31, 2012.2013. A discussion of our accounting policies for OREO is contained in Note 1 of "Notes to the Consolidated Financial Statements" in Item 8 of this Form 10-K.


Table 18
19
OREO Properties by Type
(Dollar amounts in thousands)


 December 31, 2013 December 31, 2012 December 31, 2011  As of December 31,

 Number
of
Properties		 Amount Number
of
Properties		 Amount Number
of
Properties		 Amount  2014 2013 2012

Single-family homes

 29 $2,257 15 $2,054 5 $985  $2,433
 $2,257
 $2,054

Land parcels:

                   

Raw land

 6 4,037 5 3,244 8 8,316  1,917
 4,037
 3,244

Farm land

 - - 1 207 - -  923
 —
 207

Commercial lots

 17 11,649 22 12,355 19 5,944  9,295
 11,649
 12,355

Single-family lots

 22 3,101 29 4,970 25 7,677  1,279
 3,101
 4,970
             

Total land parcels

 45 18,787 57 20,776 52 21,937  13,414
 18,787
 20,776
             

Multi-family units

 4 346 10 796 4 3,083  758
 346
 796

Commercial properties

 23 11,083 32 16,327 16 7,970  10,293
 11,083
 16,327
             

Total OREO properties, excluding covered OREO

 101 32,473 114 39,953 77 33,975 
Total OREO, excluding covered OREO 26,898
 32,473
 39,953

Covered OREO

 48 8,863 62 13,123 46 23,455  8,068
 8,863
 13,123
             

Total OREO properties

 149 $41,336 176 $53,076 123 $57,430 
             
Total OREO $34,966
 $41,336
 $53,076

The following table summarizes disposals

A rollforward of OREO for the two years ended December 31, 2013.

Table 19
OREO Disposals, Transfers, and Write-Downs
(Dollar amounts in thousands)

 
 Year Ended December 31, 2013 Year Ended December 31, 2012 
 
 OREO Covered
OREO		 Total OREO Covered
OREO		 Total 

OREO sales

                   

Proceeds from sales

 $15,274 $10,523 $25,797 $26,792 $23,774 $50,566 

Less: Basis of properties sold

  (16,805) (10,493) (27,298) (27,907) (23,301) (51,208)
              

Net losses (gains) on sales of OREO

 $1,531 $(30)$1,501 $1,115 $(473)$642 
              

OREO transfers and write-downs

                   

Premises transferred to OREO at fair value

 $- $- $- $1,833 $- $1,833 

OREO valuation adjustments

  2,220  187  2,407  3,945  299  4,244 

OREO sales, excluding covered OREO, totaled $16.8 millionbalances for the year ended December 31, 2013. These sales consisted of 74 properties with2014 and 2013 is presented in the majority classified as single-family homes and commercial properties. Net losses on sales of OREO in 2013, excluding covered OREO, were impacted by a $1.2 million loss on the sale of a special-purpose property. In 2012, OREO sales, excluding covered OREO, represented 103 properties, comprised primarily of single family homes, residential lots, and commercial properties.

following table.

Table 20
OREO Rollforward
(Dollar amounts in thousands)
  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




Allowance for Credit Losses

Methodology for the Allowance for Credit Losses

The allowance for credit losses is comprised of the allowance for loan and covered loan losses and the reserve for unfunded commitments and is maintained by management at a level believed adequate to absorb estimated losses inherent in the existing loan portfolio. Determination of the allowance for credit losses is inherently subjective since it requires significant estimates and management judgment, including the amounts and timing of expected future cash flows on impaired loans, estimated losses on pools of homogeneous loans, and consideration of current economic trends.

Acquired loans are recorded at fair value, which incorporates credit risk, at the date of acquisition. No allowance for credit losses is recorded on the acquisition date. As the acquisition adjustment is accreted into income over future periods, an allowance for credit losses 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 depends on a variety of factors beyond the Company's control, including the performance of its loan portfolio, the economy, changes in interest rates and property values, and the interpretation of loan risk ratings by regulatory authorities. Management believes that the allowance for credit losses of $87.1 million is an appropriate estimate of credit losses inherent in the loan portfolio as of December 31, 2013.

2014.

The accounting policy for the allowance for credit losses is 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 20
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,  Years ended December 31,

 2013 2012 2011 2010 2009  2014 2013 2012 2011 2010

Change in allowance for credit losses

                     

Beginning balance

 $102,812 $121,962 $145,072 $144,808 $93,869  $87,121
 $102,812
 $121,962
 $145,072
 $144,808

Loan charge-offs:

                     

Commercial, industrial, and agricultural

 12,094 64,668 32,750 37,130 57,083  17,424
 12,094
 64,668
 32,750
 37,130

Office, retail, and industrial

 4,744 34,968 8,193 10,322 7,869  7,345
 4,744
 34,968
 8,193
 10,322

Multi-family

 1,029 3,361 14,584 2,788 3,485  943
 1,029
 3,361
 14,584
 2,788

Construction

 1,916 27,811 20,211 63,967 66,665  1,052
 1,916
 27,811
 20,211
 63,967

Other commercial real estate

 4,784 36,474 15,396 28,869 18,413  4,834
 4,784
 36,474
 15,396
 28,869

Consumer

 9,414 10,910 10,531 10,640 14,523  7,574
 9,414
 10,910
 10,531
 10,640
           

Total loan charge-offs

 33,981 178,192 101,665 153,716 168,038  39,172
 33,981
 178,192
 101,665
 153,716
           

Recoveries of loan charge-offs:

                     

Commercial, industrial, and agricultural

 3,797 3,393 3,493 5,227 1,899  3,800
 3,797
 3,393
 3,493
 5,227

Office, retail, and industrial

 228 577 79 612 13  497
 228
 577
 79
 612

Multi-family

 584 275 410 363 2  87
 584
 275
 410
 363

Construction

 1,032 451 2,964 770 803  166
 1,032
 451
 2,964
 770

Other commercial real estate

 1,646 125 508 494 116  1,727
 1,646
 125
 508
 494

Consumer

 1,071 784 430 740 472  729
 1,071
 784
 430
 740
           

Total recoveries of loan charge-offs

 8,358 5,605 7,884 8,206 3,305  7,006
 8,358
 5,605
 7,884
 8,206
           

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

 25,623 172,587 93,781 145,510 164,733  32,166
 25,623
 172,587
 93,781
 145,510

Net covered loan charge-offs

 4,575 4,615 9,911 1,575 - 
           
Net covered loan (recoveries) charge-offs (187) 4,575
 4,615
 9,911
 1,575

Net loan and covered loan charge-offs

 30,198 177,202 103,692 147,085 164,733  31,979
 30,198
 177,202
 103,692
 147,085
           

Provision for loan and covered loan losses:

                     

Provision for loan losses

 11,185 142,364 69,682 145,774 215,672  24,688
 11,185
 142,364
 69,682
 145,774

Provision for covered loan losses

 5,222 24,945 51,267 27,009 -  (3,643) 5,222
 24,945
 51,267
 27,009

Less: expected reimbursement from the FDIC

 (150) (9,257) (40,367) (25,434) -  (1,877) (150) (9,257) (40,367) (25,434)
           

Net provision for covered loan losses

 5,072 15,688 10,900 1,575 -  (5,520) 5,072
 15,688
 10,900
 1,575
           

Total provision for loan and covered loan losses

 16,257 158,052 80,582 147,349 215,672  19,168
 16,257
 158,052
 80,582
 147,349
           

Reduction in reserve for unfunded commitments(1)

 (1,750) - - - - 
           

Total provision for loan and covered loan losses and other

 14,507 158,052 80,582 147,349 215,672 
           
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

 $87,121 $102,812 $121,962 $145,072 $144,808  $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,  Years ended December 31,

 2013 2012 2011 2010 2009  2014 2013 2012 2011 2010

Allowance for credit losses

                     

Allowance for loan losses

 $72,946 $87,384 $118,473 $142,572 $144,808  $65,468
 $72,946
 $87,384
 $118,473
 $142,572

Allowance for covered loan losses

 12,559 12,062 989 - -  7,226
 12,559
 12,062
 989
 —
           

Total allowance for loan and covered loan losses

 85,505 99,446 119,462 142,572 144,808  72,694
 85,505
 99,446
 119,462
 142,572

Reserve for unfunded commitments

 1,616 3,366 2,500 2,500 -  1,816
 1,616
 3,366
 2,500
 2,500
           

Total allowance for credit losses

 $87,121 $102,812 $121,962 $145,072 $144,808  $74,510
 $87,121
 $102,812
 $121,962
 $145,072
           

Amounts and ratios, excluding covered loans

           

Average loans

 $5,307,493 $5,204,718 $5,101,621 $5,191,154 $5,348,979 

Net loan charge-offs to average loans, annualized

 0.48% 3.32% 1.84% 2.80% 3.08% 

Allowance for credit losses at end of period as a percent of:

           

Total loans

 1.34% 1.75% 2.38% 2.84% 2.78% 

Non-accrual loans

 124.69% 107.35% 64.58% 68.50% 59.30% 

Non-performing loans

 117.41% 97.35% 61.55% 67.15% 58.32% 

Amounts and ratios, including covered loans

           
Amounts and ratios, excluding acquired loans, including covered loans (1)
Amounts and ratios, excluding acquired loans, including covered loans (1)
     

Average loans

 $5,475,110 $5,435,670 $5,421,943 $5,440,752 $5,377,028  $5,882,859
 $5,475,110
 $5,435,670
 $5,421,943
 $5,440,752

Net loan charge-offs to average loans

 0.55% 3.26% 1.91% 2.70% 3.06%  0.54% 0.55% 3.26% 1.91% 2.70%

Allowance for credit losses at end of period as a percent of:

                     

Total loans

 1.52% 1.91% 2.28% 2.65% 2.71%  1.24% 1.52% 1.91% 2.28% 2.65%

Non-accrual loans

 107.90% 104.15% 58.86% 68.50% 59.30%  114.56% 107.90% 104.15% 58.86% 68.50%

Non-performing loans

 84.97% 74.00% 46.95% 48.30% 51.98%  105.22% 84.97% 74.00% 46.95% 48.30%

The allowance for credit losses was $87.1$74.5 million as of December 31, 2013,2014, a decline of $15.7$12.6 million from December 31, 2012.2013. The allowance for credit losses represented 1.52%1.24% of total loans, excluding acquired loans, including covered loans, at December 31, 20132014 compared to 1.91%1.52% at December 31, 2012.

2013.

The provision for loan and covered loan losses was $19.2 million for 2014 compared to $16.3 million for 2013 compared toand $158.1 million for 2012 and $80.6 million for 2011.2012. The provision for loan and covered loan losses was elevated for the year ended December 31, 2012 due primarily to the additional provision of $62.3 million recorded as a result of movingselling $172.5 million of non-performing and performing potential problem loans to held-for-sale status and recording charge-offs of $80.3 million in anticipation ofmillion.
Excluding acquired loans, including covered loans, net loan charge-offs to average loans declined from 3.26% for 2012, to 0.55% for 2013, and to 0.54% for 2014. The significant improvement since 2012 reflects management's continued efforts to remediate problem credits, which includes the bulk loan sales.

Net loan charge-offs, excluding covered loan charge-offs, during the year ended December 31, 2013, decreased significantly compared to the prior periods presented. The $147.0 million declinesales completed in net charge-offs from the year ended December 31, 2012 reflected improved credit quality due to management's accelerated credit remediation actions that occurred during the third and fourth quarters of 2012, including the bulk loan sales. Net loan charge-offs, excluding covered loan charge-offs, of $25.6 million at December 31, 2013 are at the lowest level in over five years.

2012.

Covered loan charge-offs reflect the decline, and recoveries reflect the increase, in estimatedexpected future cash flows of certain acquired loans. Management re-estimates expected future cash flows periodically, and the present value of any decreases in expected future cash flows from the FDIC is recorded as either a charge-off in that period or an allowance for covered loan losses is established. Any increases in expected future cash flows are recorded through prospective yield adjustments over the remaining lives of the specific loans.


65

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Allocation of the Allowance for Credit Losses

Table 21
23
Allocation of Allowance for Credit Losses
(Dollar amounts in thousands)

 
 As of December 31, 
 
 2013 % of
Total
Loans(1)		 2012 % of
Total
Loans(1)		 2011 % of
Total
Loans(1)		 2010 % of
Total
Loans(1)		 2009 % of
Total
Loans(1)		 

Commercial, industrial, and agricultural

 $30,381  38.6 $36,761  36.7 $46,017  33.5 $49,545  33.2 $54,452  31.6 

Commercial real estate:

                               

Office, retail, and industrial

  10,405  24.2  11,432  25.6  16,012  25.5  20,758  23.6  20,164  23.3 

Multi-family

  2,017  6.0  3,575  5.5  5,067  5.7  3,996  6.9  4,555  6.4 

Construction

  6,712  3.3  10,241  3.6  17,935  4.9  32,624  6.6  37,468  10.5 

Other commercial real estate

  11,187  14.5  14,699  14.9  21,099  17.4  25,178  16.8  16,694  15.4 
                      

Total commercial real estate

  30,321  48.0  39,947  49.6  60,113  53.5  82,556  53.9  78,881  55.6 
                      

Consumer

  13,860  13.4  14,042  13.7  14,843  13.0  12,971  12.9  11,475  12.8 
                      

Total, excluding allowance for covered loan losses

  74,562  100.0  90,750  100.0  120,973  100.0  145,072  100.0  144,808  100.0 
                           

Covered loans

  12,559     12,062     989     -     -    
                           

Total allowance for credit losses

 $87,121    $102,812    $121,962    $145,072    $144,808    
                           
  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
  
(1)
Percentages represent total loans in each category to total loans, excluding covered loans.


The allowance for credit losses declined by 15.3%14.5% from $102.8 million as of December 31, 2012 to $87.1 million as of December 31, 2013 to $74.5 million as of December 31, 2014, reflecting reductions across allmost categories. During 2013, the lower level ofThis 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 continued proactivemanagement’s focus on credit remediation.

During 2012, declines in non-accrual and performing potential problem loans from accelerated credit remediation actions, including the impact of the bulk loan sales, resulted in improved credit metrics and a decline in our estimate of credit losses inherent in the loan portfolio. The allowance for covered loan losses increased $11.1 million from 2011 to reflect the difference between the carrying value and the discounted present value of the estimatedexpected future cash flows of the covered impaired loans.

In 2011, we decreased our allowance for loan and covered 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 reflected management's estimate of potential losses on smaller-balance loans in this portfolio.


66



INVESTMENT IN BANK-OWNED LIFE INSURANCE

We previously purchased life insurance policies on the lives of certain directors and officers and are the sole owner and beneficiary of the policies. We invested in these BOLI policies 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 as a component of noninterest income in the Consolidated Statements of Income. As of December 31, 2013,2014, the CSV of BOLI assets totaled $193.2 million.

$206.5 million, which includes $10.4 million acquired in the Great Lakes transaction.

As of December 31, 2013, 31.6%2014, 35.5% of our total BOLI portfolio is invested in general account life insurance distributed among teneleven insurance carriers, all of which carry investment grade ratings. This general account life insurance typically includes a feature guaranteeing minimum returns. The remaining 68.4%64.5% is in separate account


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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 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, 2013,2014, we had BOLI income of $2.9 million compared to a prior year BOLI loss of $11.8 million compared to prior year BOLI income of $1.3 million. During 2013, we voluntarily modified approximately $100 million of certain lower-yielding BOLI policies, which resulted in a $13.3 million write-down of the CSV. This action givesgave us the flexibility to reinvest these assets in longer duration securities at higher yields to enhance future BOLI income.

GOODWILL

Goodwill is included in goodwill and other intangible assets in the Consolidated Statements of Financial Condition.

The carrying amount of goodwill was $310.6 million at December 31, 2014 and $264.1 million at December 31, 2013 and $265.5 million at December 31, 2012.2013. Goodwill decreased $1.4increased by $46.5 million from December 31, 20122013 as a result of the sale of our investment in Textura, which wasPopular, Great Lakes, and National Machine Tool acquisitions completed during the year ended December 31, 2013.third and fourth quarters of 2014. For a detailed discussionadditional detail regarding the goodwill impact for each acquisition, see Note 9 of the sale, refer"Notes to the section titled "Performance Overview"Consolidated Financial Statements" in Item 8 of this Item 7. Form 10-K.
Goodwill is tested annually for impairment or when events or circumstances indicate a need to perform interim tests, as described in Note 1 of "Notes to the Consolidated Financial Statements" in Item 8 of this Form 10-K. During 2013,2014, we performed our annual impairment test of goodwill at October 1, 20132014 and determined that goodwill was not impaired at that date.

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 attributed to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax 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 22
24
Deferred Tax Assets
(Dollar amounts in thousands)

 
 December 31, % Change 
 
 2013 2012 2011 2013-2012 2012-2011 

Net deferred tax assets

 $107,624 $133,605 $102,624  (19.4) 30.2 
  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)

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 compared to budget, trends in non-performing assets and performing potential problem loans, the Company's capital position, and any 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 will be fully realized and no valuation allowance is required as of December 31, 2013.

2014.

Deferred tax assets decreased in 20132014 compared to 2012,2013, resulting primarily from the utilization of federal and state net operating losses.

67



The decrease in deferred tax assets in 2013 was attributed to utilization of federal net operating losses, which was partially offset by an increase in alternative minimum tax credit carryforwards.


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The increase in deferred tax assets in 2012 was attributed primarily to higher federal and state net operating loss carry forwards, offset partially by a reduction in the allowance for loan and covered loan losses for which there is a zero tax basis.

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 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, 2013,2014, 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, which totaled $46.6$54.0 million for the year ended December 31, 2013.2014. The primary source of liquidity for the Parent Company is dividends from subsidiaries. The Parent Company had $37.8$47.6 million in junior subordinated debentures, $38.5 million in subordinated notes, $114.6$114.8 million in senior notes, and cash and interest-bearing deposits of $13.1$43.5 million at December 31, 2013.2014. At the end of 2013,2014, 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.

Total deposits and borrowed funds as of December 31, 20132014 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.


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Table 23
25

Funding Sources - Average Balances
(Dollar amounts in thousands)


 Years Ended December 31, % Change  Years Ended December 31, % Change

 2013 % of
Total		 2012 % of
Total		 2011 % of
Total		 2013-2012 2012-2011  2014 
% of
Total
 2013 
% of
Total
 2012 
% of
Total
 2014-2013 2013-2012

Demand deposits

 $1,889,247 26.2 $1,762,968 25.0 $1,498,900 21.5 7.2 17.6  $2,137,778
 28.3 $1,889,247
 26.2 $1,762,968
 25.0 13.2
 7.2

Savings deposits

 1,126,561 15.6 1,038,379 14.7 934,937 13.4 8.5 11.1  1,222,292
 16.2 1,126,561
 15.6 1,038,379
 14.7 8.5
 8.5

NOW accounts

 1,170,928 16.2 1,090,446 15.4 1,091,184 15.7 7.4 (0.1) 1,243,186
 16.5 1,170,928
 16.2 1,090,446
 15.4 6.2
 7.4

Money market accounts

 1,306,625 18.1 1,216,173 17.2 1,230,090 17.7 7.4 (1.1) 1,392,367
 18.5 1,306,625
 18.1 1,216,173
 17.2 6.6
 7.4
                 

Transactional deposits

 5,493,361 76.1 5,107,966 72.3 4,755,111 68.3 7.5 7.4 
                 
Core deposits 5,995,623
 79.5 5,493,361
 76.1 5,107,966
 72.3 9.1
 7.5

Time deposits

 1,286,700 17.8 1,502,230 21.3 1,773,188 25.4 (14.3) (15.3) 1,195,796
 15.8 1,286,700
 17.8 1,502,230
 21.3 (7.1) (14.3)

Brokered deposits

 20,188 0.3 26,776 0.4 18,821 0.3 (24.6) 42.3  16,086
 0.2 20,188
 0.3 26,776
 0.4 (20.3) (24.6)
                 

Total time deposits

 1,306,888 18.1 1,529,006 21.7 1,792,009 25.7 (14.5) (14.7) 1,211,882
 16.0 1,306,888
 18.1 1,529,006
 21.7 (7.3) (14.5)
                 

Total deposits

 6,800,249 94.2 6,636,972 94.0 6,547,120 94.0 2.5 1.4  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

 90,891 1.3 79,924 1.1 117,065 1.7 13.7 (31.7) 106,072
 1.4 90,891
 1.3 79,924
 1.1 16.7
 13.7

Federal funds purchased

 5 - - - 603 - 100.0 (100.0) 82
 — 5
 — —
 — N/M
 100.0

FHLB advances

 114,565 1.6 113,719 1.6 148,034 2.1 0.7 (23.2) 43,405
 0.6 114,565
 1.6 113,719
 1.6 (62.1) 0.7
                 

Total borrowed funds

 205,461 2.9 193,643 2.7 265,702 3.8 6.1 (27.1) 149,559
 2.0 205,461
 2.9 193,643
 2.7 (27.2) 6.1
                 

Senior and subordinated debt

 212,896 2.9 231,273 3.3 150,285 2.2 (7.9) 53.9  191,776
 2.5 212,896
 2.9 231,273
 3.3 (9.9) (7.9)
                 

Total funding sources

 $7,218,606 100.0 $7,061,888 100.0 $6,963,107 100.0 2.2 1.4  $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

Average

Total average funding sources totaled $7.2of $7.5 billion for 2014 increased $330.2 million from 2013, increasingdue 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 13.2%, from December 31, 2013, led the rise in average core deposits and more than offset the reduction in higher-costing time deposits, borrowed funds, and senior and subordinated debt.
For 2013, the $156.7 million increase in average funding sources from 2012. This growth2012 resulted primarilymainly from a rise in transactionalcore deposits, which more than offset a reduction in higher-costing time deposits.

For 2012, average funding sources increased $98.8 million from 2011 driven primarily by growth in transactional deposits and the issuance of senior debt, which was partially offset by reductions in higher-costing time deposits and borrowed funds.

Time Deposits

Table 24
26
Maturities of Time Deposits Greater Than $100,000
(Dollar amounts in thousands)


 Total  Total

Three months or less

 $66,342  $80,613

Greater than three months to six months

 64,609  81,415

Greater than six months to twelve months

 102,646  109,789

Greater than twelve months

 153,261  140,300
   

Total

 $386,858  $412,117
   

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Borrowed Funds

A discussion of borrowed funds is presented in the next table.


Table 25
27
Borrowed Funds
(Dollar amounts in thousands)


 2013  
 2012  
 2011 

 Amount Weighted-
Average
Rate %		  
 Amount Weighted-
Average
Rate %		  
 Amount Weighted-
Average
Rate %		  2014 2013 2012

At December 31:

                 
 Amount 
Weighted-
Average
Rate %
  Amount 
Weighted-
Average
Rate %
  Amount 
Weighted-
Average
Rate %
At period-end:  
  
   
  
   
  

Securities sold under agreements to repurchase

 $109,792 0.03   $71,403 0.02   $92,871 0.02  $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   112,500 2.13  —
 —
  114,550
 1.34
  114,581
 1.72
                 

Total borrowed funds

 $224,342 0.70   $185,984 1.06   $205,371 1.17  $137,994
 0.03
  $224,342
 0.70
  $185,984
 1.06
                 

Average for the year:

                 
Average for the year-to-date period:  
  
   
  
   
  

Securities sold under agreements to repurchase

 $90,891 0.03   $79,924 0.02   $117,065 0.02  $106,072
 0.04
  $90,891
 0.03
  $79,924
 0.02

Federal funds purchased

 5 -   - -   603 0.22  82
 —
  5
 —
  —
 —

FHLB advances

 114,565 1.38   113,719 1.76   148,034 1.84  43,405
 1.23
  114,565
 1.38
  113,719
 1.76
                 

Total borrowed funds

 $205,461 0.78   $193,643 1.04   $265,702 1.03  $149,559
 0.38
  $205,461
 0.78
  $193,643
 1.04
                 

Maximum amount outstanding at any day during the year:

                 
Maximum amount outstanding at the end of any day during the period:Maximum amount outstanding at the end of any day during the period:   
  
     

Securities sold under agreements to repurchase

 $110,797     $103,591     $174,810    $149,067
  
  $110,797
  
  $103,591
  

Federal funds purchased

 2,000     -     175,000    25,000
  
  2,000
  
  —
  

FHLB advances

 114,581     114,593     302,500    114,550
  
  114,581
  
  114,593
  

Weighted-average maturity of FHLB advances

 29.3 months     20.8 months     19.3 months   

Average borrowed funds totaled $205.5$149.6 million for 2013, increasing $11.82014, decreasing $55.9 million, or 6.1%27.2%, from 2012 following2013 due to the prepayment of $114.6 million of FHLB advances with a decreaseweighted-average rate of $72.1 million, or 27.1%, from 2011 to 2012. In 2012, we reduced funding costs1.33% during the second quarter of 2014. This decline was partially offset by using the proceeds from securities sales and maturities to reduce our levelhigher levels of borrowed funds and time deposits, resulting in a more favorable product mix.

The average and maximum daily balances for securities sold under agreements to repurchase and FHLB advances were consistent with 2012. In 2011, the maximum daily balance for federal funds purchased resulted from a test of the federal funds line, which may be done occasionally to ensure availability.

repurchase.


69



We make interchangeable use of repurchase agreements, FHLB advances, and federal funds purchased to supplement deposits.

Securities sold under agreements to repurchase generally mature within 1 to 90 days from the transaction date.

Senior and Subordinated Debt

Average senior and subordinated debt decreased $18.4$21.1 million, or 7.9%9.9%, infrom 2013 compared to 2012 as a result2014. This decline resulted from the full-year impact of the repurchase and retirement of $24.0 million of junior subordinated debentures. Refer todebentures during the fourth quarter of 2013. The addition of $14.4 million of junior subordinated debentures acquired in the Great Lakes transaction during the fourth quarter of 2014 partially offset the decrease. See Note 1112 of "Notes to the Consolidated Financial Statements" in Item 8 of this Form 10-K for additional discussion regarding this transaction.

these transactions.

The $81.0$18.4 million increasedecline in average senior and subordinated debt from 20112012 to 2012 was driven by2013 reflects the senior debt issuancefull-year impact of $115.0 million in the fourth quarter of 2011, which was used, in combination with existing liquid assets, to fund the redemption of the Series B preferred stock issued to the Treasury. This increase was partially offset by the repurchase and retirement of $25.4$4.3 million of junior subordinated debentures and $12.0 million of subordinated notes during the fourth quarter of 2012.


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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. These 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. These commitments are subject to the same credit policies and approval process used for our loans.

The following table presents our significant fixed and determinable contractual obligations and significant commitments as of December 31, 2013.2014. 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 26
28
Contractual Obligations, Commitments, Contingencies, and Off-Balance Sheet Items
(Dollar amounts in thousands)


  
 Payments Due In  
 

 Note
Reference		 One Year
or Less		 Greater Than
One to
Three Years		 Greater Than
Three to
Five Years		 Greater Than
Five Years		 Total    Payments Due In  

Transactional deposits (no stated maturity)

   9 $5,558,318 $- $- $- $5,558,318 
 
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

   9 785,458 338,466 83,545 314 1,207,783  10 865,149
 300,557
 105,584
 268
 1,271,558

Borrowed funds

 10 109,792 39,550 75,000 - 224,342  11 137,994
 —
 —
 —
 137,994

Subordinated debt

 11 - 153,136 - 37,796 190,932  12 —
 153,263
 —
 47,606
 200,869

Operating leases

   7 3,774 7,156 5,920 4,059 20,909  8 5,071
 9,289
 5,955
 13,031
 33,346

Pension liability

 15 5,857 10,408 9,044 18,450 43,759  16 5,298
 10,283
 8,409
 17,518
 41,508

Uncertain tax positions liability

 14 N/M N/M N/M N/M 279  15 N/M
 N/M
 N/M
 N/M
 912

Commitments to extend credit

 20 N/M N/M N/M N/M 1,661,081  21 N/M
 N/M
 N/M
 N/M
 1,982,595

Letters of credit

 20 N/M N/M N/M N/M 110,453  21 N/M
 N/M
 N/M
 N/M
 110,639

N/M – Not meaningful.


70

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MANAGEMENT OF CAPITAL

Capital Measurements

A strong capital structure is required under applicable banking regulations and is crucial in maintaining investor confidence, accessing capital markets, and enabling us to take advantage of future growth opportunities. Our capital policy requires that the Company and the Bank maintain capital ratios in excess of the minimum regulatory guidelines. It serves as an internal discipline in analyzing business risks and internal growth opportunities and sets targeted levels of return on equity. Under regulatory capital adequacy guidelines, the Company and the Bank are subject to various capital requirements set and administered by the federal banking agencies. These requirements specify minimum capital ratios, defined as Tier 1 and total capital as a percentage of assets and off-balance sheet items that were 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 these measurements in excess of the Federal Reserve's minimum levels considered to be "well-capitalized," which is the highest capital category established.

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, 20132014 and 2012.2013. See the "Supervision and Regulation" section included in Item 1, "Business," of this Form 10-K for information on our minimum capital requirements.


71



All other ratios presented in the table below are capital adequacy metrics used and relied on by investors and industry analysts; however, they are non-GAAP financial measures 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.


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Table 27
29

Capital Measurements
(Dollar amounts in thousands)

 
 December 31, Regulatory
Minimum For
Well-
Capitalized		 Excess Over
Required Minimums
at December 31,
2013
 
 2013 2012

Reconciliation of capital components to regulatory requirements:

               

Total regulatory capital, as defined in federal regulations

 $841,787 $755,264         

Tier 1 capital, as defined in federal regulations

 $741,414 $652,480         

Trust preferred securities included in Tier 1 capital

  (36,690) (59,965)        
              

Tier 1 common capital

 $704,724 $592,515         
              

Risk-weighted assets, as defined in federal regulations

 $6,794,666 $6,348,523         

Average assets, as defined in federal regulations

  8,075,888  7,768,967         

Regulatory capital ratios:

  
 		  
 		  

 

  
 		  
 

Total capital to risk-weighted assets

  12.39%  11.90%  10.00%  24% $162,321

Tier 1 capital to risk-weighted assets

  10.91%  10.28%  6.00%  82%  333,734

Tier 1 leverage to average assets

  9.18%  8.40%  5.00%  84%  337,620

Tier 1 common capital to risk-weighted assets (1)

  10.37%  9.33%  N/A(2)  N/A(2)  N/A(2)

Reconciliation of capital components to GAAP:

  
 		  
 		  

 

  
 		  
 

Total stockholder's equity

 $1,001,442 $940,893         

Goodwill and other intangible assets

  (276,366) (281,059)        
              

Tangible common equity

  725,076  659,834         

Accumulated other comprehensive loss

  26,792  15,660         
              

Tangible common equity, excluding accumulated other comprehensive loss

 $751,868 $675,494         
              

Total assets

 $8,253,407 $8,099,839         

Goodwill and other intangible assets

  (276,366) (281,059)        
              

Tangible assets

 $7,977,041 $7,818,780         
              

Tangible common equity ratios:

               

Tangible common equity to tangible assets

  9.09%  8.44%  N/A(2)  N/A(2)  N/A(2)

Tangible common equity, excluding other accumulated comprehensive loss, to tangible assets

  9.43%  8.64%  N/A(2)  N/A(2)  N/A(2)

Tangible common equity to risk-weighted assets

  10.67%  10.39%  N/A(2)  N/A(2)  N/A(2)
  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 improvementdecline in regulatory capital ratios from December 31, 20122013 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 the continuedan increase in allowable deferred tax assets, which more than offset the impactassets. The Bank's regulatory ratios exceeded all regulatory mandated ratios for characterization as "well-capitalized" as of loan growth, the increase in dividends paid, and the repurchase and retirement of $24.0 million of 6.95% junior subordinated debentures, which qualified as Tier 1 capital.

December 31, 2014.

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The Board reviews the Company's capital plan each quarter, considering the current and expected operating environment as well as an evaluation of various capital alternatives. For further details of the regulatory capital requirements and ratios as of December 31, 20132014 and 20122013 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

In July of 2013, the Company's and the Bank's primary federal regulator, the Federal Reserve, published final rules establishing a new comprehensive capital framework for U.S. banking organizations. The Basel III Capital Rules are discussed in the "Supervision and Regulation" section in Item 1, "Business" of this Form 10-K.

Management believes that as of December 31, 2014 the Company and the Bank 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.
Stock Repurchase Programs

Shares repurchased are held as treasury stock and are available for issuance in connection with our Dividend Reinvestment Plan, qualified and nonqualified retirement plans, share-based compensation plans, and other general corporate purposes. We reissued 165,104 treasury shares in 2014 and 125,901 treasury shares in 2013 and 133,560 treasury shares in 2012 to fund these plans.

Dividends

The Board declared quarterly stockcash dividends of $0.01 per common share from 20112012 through the first quarter of 2013. The Company increased the dividend to $0.04 per common share during the second quarter of 2013, $0.07 per common share during the fourth quarter of 2013, and approved another increase in the fourthsecond quarter of 20132014 to $0.07$0.08 per common share.


73



QUARTERLY EARNINGS
Table of Contents

30

FOURTH QUARTER 2013 vs. FOURTH QUARTER 2012


Table 28
Quarterly Earnings Performance(1)

(Dollar amounts in thousands, except per share data)

 
 2013 2012 
 
 Fourth Third Second First Fourth Third Second First 

Interest income

 $72,120 $72,329 $71,753 $71,045 $74,199 $75,584 $75,518 $75,268 

Interest expense

  (6,432) (6,663) (6,823) (7,197) (7,677) (8,324)  (8,814) (10,086)
                  

Net interest income

  65,688  65,666  64,930  63,848  66,522  67,260  66,704  65,182 
                  

Provision for loan and covered loan losses

  -  (4,770) (5,813) (5,674) (5,593) (111,791)  (22,458) (18,210)

Fee-based revenues

  26,712  27,804  26,008  25,758  26,846  25,035  23,076  23,993 

Net securities gains (losses)

  147  33,801  216  -  88  (217)  151  (943)

BOLI income (loss)

  584  (13,028) 319  281  355  300  404  248 

Gain on termination of FHLB forward commitments

  -  7,829  -  -  -  -  -  - 

Other income

  1,370  1,682  898  1,536  460  727  406  1,135 

(Losses) gains on early extinguishment of debt

  (1,034) -  -  -  (814) -  -  256 

Gain on bulk loan sales

  -  -  -  -  5,153  -  -  - 

Gain on acquisitions

  -  -  -  -  -  3,289  -  - 

Noninterest expense

  (64,794) (64,702) (62,427) (64,814) (73,607) (70,123)  (61,157) (62,613)
                  

Income (loss) before income tax (expense) benefit

  28,673  54,282  24,131  20,935  19,410  (85,520)  7,126  9,048 

Income tax (expense) benefit

  (9,508) (24,959) (7,955) (6,293) (6,194) 36,993  (761) (1,156)
                  

Net income (loss)

  19,165  29,323  16,176  14,642  13,216  (48,527)  6,365  7,892 

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

  (260) (416) (219) (212) (194) 715  (76) (139)
                  

Net income (loss) applicable to common shares

 $18,905 $28,907 $15,957 $14,430 $13,022 $(47,812) $6,289 $7,753 
                  

Basic earnings (loss) per common share

 $0.26 $0.39 $0.22 $0.20 $0.18 $(0.65) $0.09 $0.11 

Diluted earnings (loss) per common share

 $0.26 $0.39 $0.22 $0.20 $0.18 $(0.65) $0.09 $0.11 

Dividends declared per common share

 $0.07 $0.04 $0.04 $0.01 $0.01 $0.01 $0.01 $0.01 

Return on average common equity

  7.53%  11.66%  6.66%  6.17%  5.50%  (19.36)%  2.59%  3.21% 

Return on average assets

  0.91%  1.38%  0.79%  0.74%  0.65%  (2.35)%  0.32%  0.40% 

Net interest margin – tax-equivalent

  3.62%  3.63%  3.70%  3.77%  3.84%  3.83%  3.88%  3.88% 
  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%

(1)
All ratios are presented on an annualized basis.

Net income applicable to common sharesfor 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 of 2013 was $18.9 million, or $0.26 per share, compared to net income applicable to common shareholders of $13.0 million, or $0.18 per share,2014 and $0.28 for the fourththird quarter of 2012.

Compared to the fourth quarter of 2012, total fee-based revenues remained stable. Growth in fee income generated by sales of capital market products to commercial clients and wealth management fees resulting from new customer relationships and improved market performance were offset by lower levels of mortgage banking income.

2014. In addition, duringrecurring costs associated with operating the fourth quarternewly acquired Popular, National Machine Tool, and Great Lakes locations of 2013, the Company repurchasedapproximately $3.5 million and retired $24.0 million of 6.95% junior subordinated debentures, which resulted in a pre-tax loss of $1.0 million. This action will reduce future annual interest expense by $1.6 million.

Total noninterest expense for the fourth quarter of 2013 decreased 12.0% compared to the fourth quarter of 2012 driven primarily by declines in professional services expense and other expenses, which were partially offset by increases in net OREO expense and advertising and promotions expense. In addition, no adjusted amortization of the FDIC indemnification asset was required for the fourth quarter of 2013 compared to $2.7 million for the fourth


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quarter of 2012, which also contributed to the decrease. Adjusted amortization of the FDIC indemnification asset is based on management's current estimates of future cash flows on covered loans and OREO and expected reimbursements from the FDIC for covered losses.

During the fourth quarter of 2012, professional services were elevated due primarily to expenses related to the completion of the bulk loan sales, higher personnel recruitment expenses, and the accelerated recognition of certain capitalized consulting costs. The decline in other expenses compared to the fourth quarter of 2012 reflects a $770,000 reduction in the reserve for unfunded commitments in the fourth quarter of 2013. In addition, the fourth quarter of 2012 was elevated as a result of a $1.3 million valuation adjustment on a former banking office.

The fourth quarter of 2012 reflects higher gains on sales of OREO properties compared to the fourth quarter of 2013, driving higher net OREO expense. An increase in advertising and promotions expense from the fourth quarter of 2012 was driven by the launch of our "Bank with Momentum" branding campaign during the second quarter of 2013, and reflects the return to a more normalized level of expense.


Table 29
Quarterly Operating Earnings(1)
(Dollar amounts in thousands)

 
 2013 2012 
 
 Fourth Third Second First Fourth Third Second First 

Income (loss) before income taxes

 $28,673 $54,282 $24,131 $20,935 $19,410 $(85,520)$7,126 $9,048 

Provision for loan and covered loan losses

  -  4,770  5,813  5,674  5,593  111,791  22,458  18,210 
                  

Pre-tax, pre-provision earnings

  28,673  59,052  29,944  26,609  25,003  26,271  29,584  27,258 
                  

Adjustments to Pre-tax, Pre-Provision Earnings

                         

Net securities (gains) losses

  (147) (33,801) (216) -  (88) 217  (151) 943 

Net losses (gains) on sales and valuation adjustments of OREO, excess properties, and assets held-for-sale

  1,763  1,652  (288) 781  1,864  3,280  2,527  303 

Net losses (gains) on early extinguishment of debt

  1,034  -  -  -  814  -  -  (256)

Severance-related costs

  483  233  511  980  -  840     315 

BOLI modification loss

  -  13,312  -  -  -  -  -  - 

Gain on termination of FHLB forward commitments

  -  (7,829) -  -  -  -  -  - 

Net gain on bulk loan sales

  -  -  -  -  (2,639) -  -  - 

Losses (gains) on acquisitions, net of integration costs

  -  -  -  -  588  (3,074) -  - 

Adjusted amortization of FDIC indemnification asset

  -  -  750  750  2,705  4,000  -  - 
                  

Total adjustments

  3,133  (26,433) 757  2,511  3,244  5,263  2,376  1,305 
                  

Pre-tax, pre-provision operating earnings

 $31,806 $32,619 $30,701 $29,120 $28,247 $31,534 $31,960 $28,563 
                  

Pre-tax, pre-provision operating earnings of $31.8$2.0 million for the fourth quarterand third quarters of 2013 increased $3.6 million, or 12.6%, compared2014 impacted net income. The conversion and integration of these transactions was substantially complete as of December 31, 2014, with certain remaining efficiencies to the fourth quarter of 2012. This increase resulted primarily from lower noninterest expense, which was partially offset by a decrease in net interest income and noninterest income.

Compared to the fourth quarter of 2012, average interest-earning assets grew $316.2 million from an increase in loans, investment securities, and other interest-earning assets.


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Average funding sources for the fourth quarter of 2013 were $165.6 million higher than the fourth quarter of 2012, driven primarily by a 6.8% increase in average demand and interest-bearing transactional deposits, which more than offset lower levels of time deposits.

Tax-equivalent net interest margin for the current quarter was 3.62%, declining 22 basis points compared to the fourth quarter of 2012. Loan yields declined on new and renewing loans as a result of greater customer preference for floating rate loans. The decreasebe implemented in the loan yield during the fourth quarterfirst half of 2013 was mitigated by a higher rate earned on certain investment securities. Additionally, an improved funding mix and lower rates paid on time deposits offset the decline in the loan yield compared to the prior year period.

2015.

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 may have a material affect the amounts reported in the financial statements.

The most significant of our accounting policies and estimates are presented in Note 1 of "Notes to the Consolidated Financial Statements" in Item 8 of this Form 10-K. Along 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, judgments, and estimates,judgments management determined that our accounting policiesestimates for the allowance for credit losses, evaluation of impairmentvaluation of securities, and income taxes, and goodwill and other intangible assets are considered to be our critical accounting policies.

estimates.


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Allowance for Credit Losses

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 are 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 depends 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.

Valuation of Securities

The fair values of securities excluding CDOs, are based on quoted prices obtained from third party pricing services or dealer market participants where a ready market for such securities exists. We estimate fair value on CDOs usingIn the absence of quoted prices or where a cash flow model withmarket for the assistance of a structured credit valuation firm since an active marketsecurity does not exist, for these securities.management judgment and estimation is used, which may include modeling-based techniques. The valuation for eachuse 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 CDOdifferent judgments and estimates to estimatedetermine the entities' likelihood of default on their trust-preferred obligations. Cash flows are modeled based on 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.

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On a quarterly basis, we assess securities with unrealized losses to determine whether OTTI has occurred. In evaluating OTTI, the Companymanagement considers many factors including the severity and duration of the impairment; the financial condition and near-term prospects of the issuer, including external credit ratings and recent downgrades for debt securities; intent to hold the security until its value recovers; and the likelihood that the Company would be required to sell the securities before a recovery in value, which may be at maturity. The term "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 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 (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) income 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 1415 of "Notes to the Consolidated Financial Statements" in Item 8 of this Form 10-K.


75



Goodwill and Other Intangible Assets
Goodwill represents the excess of 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 determination of the useful lives over which an intangible asset will be amortized is subjective. Intangible assets are also reviewed at least annually for impairment to determine whether there were any events or circumstances that indicate the recorded amount is not recoverable from projected undiscounted net operating cash flows. For additional discussion of goodwill and other intangible assets, see Notes 1 and 9 of "Notes to the Consolidated financial Statements" in Item 8 of 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 "Cautionary Statement Regarding Forward-Looking Statements" included in Item 7 "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 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


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of Directors. ALCO also approves the Bank's asset and liability management policies, oversees the formulation and implementation of strategies to improve balance sheet positioning and earnings, and reviews the Bank's interest rate sensitivity position. Management uses net interest income simulation modeling to analyze and capture exposure of earnings to changes in interest rates.

Net Interest Income Sensitivity

The analysis of net interest income sensitivity assesses the magnitude of changes in net interest income over a twelve-month measurement period resulting from immediate changes in interest rates using multiple rate scenarios. These scenarios include, but are not limited to, a flat or unchanged rate environment, immediate increases of 100, 200, and 300 basis points, and an immediate decrease of 100 basis points. Due to the low interest rate environment as of December 31, 20132014 and 2012,2013, management determined that an immediate decrease in interest rates greater than 100 basis points was not meaningful.

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. In addition, this sensitivity analysis examines assets and liabilities at the beginning of the measurement period and does not assume any changes from growth or business plans over the next twelve months. Interest-earning assets and interest-bearing liabilities are assumed to re-price based on contractual terms over the twelve-month measurement period assuming an instantaneous parallel shift in interest rates in effect at the beginning of the measurement period. The simulation analysis also incorporates assumptions based on the historical behavior of deposit rates in relation to interest rates. Because these assumptions are inherently uncertain, the simulation analysis cannot definitively measure net interest income or predict the impact of the fluctuation in interest rates on net interest income.income, but does provide an indication of the Company's sensitivity to changes in interest rates. Actual results may differ from simulated results due to timing, magnitude, and frequency of interest rate changes as well as changes in market conditions and management strategies.


76



Our balance sheet is asset sensitive based on repricing and maturity characteristics and simulation analysis assumptions. The Bank'sBank’s current simulation analysis indicates we would benefit from rising interest rates. Interest-earning assets consist of short and long-term products. As of December 31, 2013, 53%Excluding non-accrual loans, 49% of the loan portfolio consisted of fixed rate loans and 47%51% were floating rate loans.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 72%67% of the total compared to 28%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 floors was $807.3$644.6 million, or 34%25%, of the floating rate loan portfolio as of December 31, 2013.2014. On the liability side of the balance sheet, 80%84% of deposits are demand deposits and interest-bearing transactional deposits, which either do not pay interest or the interest rates are expected to rise at a slower pace than short-term interest rates.


Analysis of Net Interest Income Sensitivity
(Dollar amounts in thousands)


 Immediate Change in Rates 

 +300 +200 +100 -100  Immediate Change in Rates
 +300 +200 +100 -100
December 31, 2014:        
Dollar change $42,922
 $27,471
 $12,707
 $(12,748)
Percent change 14.3% 9.2% 4.2% (4.3)%

December 31, 2013:

                 

Dollar change

 $45,209 $28,307 $11,925 $(11,791)  $45,209
 $28,307
 $11,925
 $(11,791)

Percent change

 17.3% 10.8% 4.6% (4.5)%  17.3% 10.8% 4.6% (4.5)%

December 31, 2012:

         

Dollar change

 $31,488 $18,351 $7,707 $(11,747) 

Percent change

 12.4% 7.2% 3.0% (4.6)% 

The sensitivity of estimated net interest income to an instantaneous parallel shift in interest rate changes is reflected as both dollar and percent changes. This table illustrates that an instantaneous 200 basis point rise in interest rates as


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of December 31, 20132014 would increase net interest income $28.3$27.5 million, or 10.8%9.2%, over the next twelve months compared to no change in interest rates. This same measure was $18.4$28.3 million, or 7.2%10.8%, as of December 31, 2012.

Overall, in2013.

In rising interest rate scenarios, interest rate risk volatility was moreless positive at December 31, 20132014 compared to December 31, 2012.2013. During 2013,2014, growth in floating rate loan balances increased,loans were funded through an increaseby the rise in interest-bearing transactionalcore deposits, which are less rate sensitive. In addition,Overall, this increase in rate sensitive assets was offset by the numberprepayment of commercial floating$114.6 million of FHLB advances at fixed rates and the hedging of $325.0 million of certain corporate variable rate loans with floors decreasedusing interest rate swaps 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 reduction in securities as a percentage ofcash flows from maturities, calls, and prepayments were not reinvested in the portfolio, resulting in loan yields that will increase more significantly with rising interest rates compared to the prior year.portfolio. While net interest income is projected to decline in a decreasing interest rate environment, we believe the risk of a significant decrease in interest rates is minimal.


77

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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). 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
Michael L. Scudder
President and
Chief Executive Officer		   /s/ PAUL F. CLEMENS
Michael L. ScudderPaul F. Clemens
President and
Chief Executive Officer
Executive Vice President and
Chief Financial Officer
March 2, 2015  

March 3, 2014


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"“Company”) as of December 31, 20132014 and 2012,2013, and the related consolidated statements of income, comprehensive income, changes in stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2013.2014. 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 the Company at December 31, 20132014 and 2012,2013, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2013,2014, 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), the Company'sCompany’s internal control over financial reporting as of December 31, 2013,2014, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (1992(2013 framework) and our report dated March 3, 20142, 2015 expressed an unqualified opinion thereon.


/s/ ERNST & YOUNG LLP


Chicago, Illinois
March 3, 2014

2, 2015

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FIRST MIDWEST BANCORP, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Amounts in thousands, except per share data)


 December 31,  As of December 31,

 2013 2012  2014 2013

Assets

         

Cash and due from banks

 $110,417 $149,420  $117,315
 $110,417

Interest-bearing deposits in other banks

 476,824 566,846  488,947
 476,824

Trading securities, at fair value

 17,317 14,162  17,460
 17,317

Securities available-for-sale, at fair value

 1,112,725 1,082,403  1,187,009
 1,112,725

Securities held-to-maturity, at amortized cost (fair value 2013 – $43,387; 2012 – $36,023)

 44,322 34,295 

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

 35,161 47,232 
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

 5,580,005 5,189,676  6,657,418
 5,580,005

Covered loans

 134,355 197,894  79,435
 134,355

Allowance for loan and covered loan losses

 (85,505) (99,446) (72,694) (85,505)
     

Net loans

 5,628,855 5,288,124  6,664,159
 5,628,855

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

 32,473 39,953  26,898
 32,473

Covered OREO

 8,863 13,123  8,068
 8,863

Federal Deposit Insurance Corporation ("FDIC") indemnification asset

 16,585 37,051  8,452
 16,585

Premises, furniture, and equipment

 120,204 121,596 
Premises, furniture, and equipment, net 131,109
 120,204

Investment in bank-owned life insurance ("BOLI")

 193,167 206,405  206,498
 193,167

Goodwill and other intangible assets

 276,366 281,059  334,199
 276,366

Accrued interest receivable and other assets

 180,128 218,170  190,912
 180,128
     

Total assets

 $8,253,407 $8,099,839  $9,445,139
 $8,253,407
     

Liabilities

         

Noninterest-bearing deposits

 $1,911,602 $1,762,903  $2,301,757
 $1,911,602

Interest-bearing deposits

 4,854,499 4,909,352  5,586,001
 4,854,499
     

Total deposits

 6,766,101 6,672,255  7,887,758
 6,766,101

Borrowed funds

 224,342 185,984  137,994
 224,342

Senior and subordinated debt

 190,932 214,779  200,869
 190,932

Accrued interest payable and other liabilities

 70,590 85,928  117,743
 70,590
     

Total liabilities

 7,251,965 7,158,946  8,344,364
 7,251,965
     

Stockholders' Equity

         

Common stock

 858 858  882
 858

Additional paid-in capital

 414,293 418,318  449,798
 414,293

Retained earnings

 853,740 786,453  899,516
 853,740

Accumulated other comprehensive loss, net of tax

 (26,792) (15,660) (15,855) (26,792)

Treasury stock, at cost

 (240,657) (249,076) (233,566) (240,657)
     

Total stockholders' equity

 1,001,442 940,893  1,100,775
 1,001,442
     

Total liabilities and stockholders' equity

 $8,253,407 $8,099,839  $9,445,139
 $8,253,407
     



 December 31, 2013 December 31, 2012  December 31, 2014 December 31, 2013

 Preferred
Shares		 Common
Shares		 Preferred
Shares		 Common
Shares		  
Preferred
Shares
 
Common
Shares
 
Preferred
Shares
 
Common
Shares

Par value

 None $0.01 None $0.01  $—
 $0.01
 $—
 $0.01

Shares authorized

 1,000 100,000 1,000 100,000  1,000
 150,000
 1,000
 100,000

Shares issued

 - 85,787 - 85,787  —
 88,228
 —
 85,787

Shares outstanding

 - 75,071 - 74,840  —
 77,695
 —
 75,071

Treasury shares

 - 10,716 - 10,947  —
 10,533
 —
 10,716
   

See accompanying notes to the consolidated financial statements.


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FIRST MIDWEST BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Amounts in thousands, except per share data)


 Years ended December 31,  Years Ended December 31,

 2013 2012 2011  2014 2013 2012

Interest Income

             

Loans, excluding covered loans

 $239,224 $248,752 $252,865  $256,842
 $239,224
 $248,752

Covered loans

 13,804 15,873 28,904  8,659
 13,804
 15,873

Investment securities – taxable

 12,249 12,670 14,115  14,516
 12,249
 12,670

Investment securities – tax-exempt

 18,644 20,253 22,544  16,716
 18,644
 20,253

Other short-term investments

 3,326 3,021 3,083  3,131
 3,326
 3,021
       

Total interest income

 287,247 300,569 321,511  299,864
 287,247
 300,569
       

Interest Expense

             

Deposits

 11,901 18,052 27,256  10,377
 11,901
 18,052

Borrowed funds

 1,607 2,009 2,743  573
 1,607
 2,009

Senior and subordinated debt

 13,607 14,840 9,892  12,062
 13,607
 14,840
       

Total interest expense

 27,115 34,901 39,891  23,012
 27,115
 34,901
       

Net interest income

 260,132 265,668 281,620  276,852
 260,132
 265,668

Provision for loan and covered loan losses

 16,257 158,052 80,582  19,168
 16,257
 158,052
       

Net interest income after provision for loan and covered loan losses

 243,875 107,616 201,038  257,684
 243,875
 107,616
       

Noninterest Income

             

Service charges on deposit accounts

 36,526 36,699 37,879  36,910
 36,526
 36,699
Wealth management fees 26,474
 24,185
 21,791

Card-based fees

 21,649 20,852 19,593  24,340
 21,649
 20,852

Wealth management fees

 24,185 21,791 20,324 
Merchant servicing fees 11,260
 10,953
 10,806

Mortgage banking income

 5,306 2,689 454  4,011
 5,306
 2,689

Merchant servicing fees

 10,953 10,806 10,911 

Other service charges, commissions, and fees

 7,663 4,486 5,021  8,086
 7,663
 4,486

Net securities gains (losses)

 34,164 (921) 2,410  8,097
 34,164
 (921)

BOLI (loss) income

 (11,844) 1,307 2,231 
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 - -  —
 7,829
 —

Gain on bulk loan sales

 - 5,153 -  —
 —
 5,153

Other income

 4,452 7,086 3,114 
       

Total noninterest income

 140,883 109,948 101,937  126,618
 140,883
 109,948
       

Noninterest Expense

             

Salaries and wages

 112,631 105,231 101,703  116,578
 112,631
 105,231

Retirement and other employee benefits

 26,119 25,524 27,071  27,245
 26,119
 25,524

Net occupancy and equipment expense

 31,832 32,699 32,953  35,181
 31,832
 32,699

Professional services

 21,922 29,614 26,356  23,436
 21,922
 29,614

Technology and related costs

 11,335 11,846 10,905  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

 8,547 10,521 16,293  7,075
 8,547
 10,521

FDIC premiums

 6,438 6,926 7,990  5,824
 6,438
 6,926

Advertising and promotions

 7,754 5,073 6,198 

Merchant card expense

 8,780 8,584 8,643 
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 -  —
 1,500
 6,705

Other expenses

 19,879 24,777 23,792 
       

Total noninterest expense

 256,737 267,500 261,904  283,826
 256,737
 267,500
       

Income (loss) before income tax expense (benefit)

 128,021 (49,936) 41,071  100,476
 128,021
 (49,936)

Income tax expense (benefit)

 48,715 (28,882) 4,508  31,170
 48,715
 (28,882)
       

Net income (loss)

 79,306 (21,054) 36,563  $69,306
 $79,306
 $(21,054)

Preferred dividends and accretion on preferred stock

 - - (10,776)

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

 (1,107) 306 (350)
       

Net income (loss) applicable to common shares

 $78,199 $(20,748)$25,437 
       

Per Common Share Data

             

Basic earnings (loss) per common share

 $1.06 $(0.28)$0.35  $0.92
 $1.06
 $(0.28)

Diluted earnings (loss) per common share

 1.06 (0.28) 0.35  0.92
 1.06
 (0.28)

Weighted-average common shares outstanding

 73,984 73,665 73,289  74,484
 73,984
 73,665

Weighted-average diluted common shares outstanding

 73,994 73,666 73,289  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
(AmountsDollar amounts in thousands)


 Years Ended December 31,  Years Ended December 31,

 2013 2012 2011  2014 2013 2012

Net income (loss)

 $79,306 $(21,054)$36,563  $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):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

 (2,054) 1,513 34,303  (9,127) 17,600
 (6,520)

Tax effect

 711 (588) (13,427) 3,733
 (7,198) 2,667
       

Net of tax

 (1,343) 925 20,876  (5,394) 10,402
 (3,853)
       

Reclassification of net gains (losses) included in net income (loss):

       

Before tax

 34,164 (921) 2,410 

Tax effect

 (13,973) 377 (986)
       

Net of tax

 20,191 (544) 1,424 
       

Net unrealized holding (losses) gains

 (21,534) 1,469 19,452 
       

Unrecognized net pension costs

       

Unrealized holding gains (losses):

       

Before tax

 17,600 (6,520) (8,860)

Tax effect

 (7,198) 2,667 3,871 
       

Net of tax

 10,402 (3,853) (4,989)
       

Total other comprehensive (loss) income

 (11,132) (2,384) 14,463 
       
Total other comprehensive income (loss) 10,937
 (11,132) (2,384)

Total comprehensive income (loss)

 $68,174 $(23,438)$51,026  $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)
 
 Accumulated
Unrealized
(Loss) Gain on
Securities
Available-
for-Sale		 Unrecognized
Net Pension
Costs		 Total
Accumulated
Other
Comprehensive
Loss		 

Balance at December 31, 2010

 $(19,806)$(7,933)$(27,739)

Other comprehensive income (loss)

  19,452  (4,989) 14,463 
        

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)
        
           
​​​​​​​​​​​

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
 
 Common
Shares
Out-
standing		 Preferred
Stock		 Common
Stock		 Additional
Paid-in
Capital		 Retained
Earnings		 Accumulated
Other
Comprehensive
Loss		 Treasury
Stock		 Total 

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 stock

  -  2,118  -  -  (2,118) -  -  - 

Redemption of preferred stock

  -  (193,000) -  -  -  -  -  (193,000)

Redemption of common stock 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 

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 (purchased for) 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 (purchased for) 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 
                  
                          
​​​​​​​​​​​​​​​​​​​​​​​​​​

See accompanying notes to the consolidated financial statements.


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FIRST MIDWEST BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollar amounts in thousands)


 Years ended December 31,  Years Ended December 31,

 2013 2012 2011  2014 2013 2012

Operating Activities

             

Net income (loss)

 $79,306 $(21,054)$36,563  $69,306
 $79,306
 $(21,054)

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

       Adjustments to reconcile net income (loss) to net cash provided by operating activities:    

Provision for loan and covered loan losses

 16,257 158,052 80,582  19,168
 16,257
 158,052

Depreciation of premises, furniture, and equipment

 11,038 10,874 10,995  12,224
 11,038
 10,874

Net amortization of premium on securities

 9,174 22,433 10,314  8,218
 9,174
 22,433

Net securities (gains) losses

 (34,164) 921 (2,410) (8,097) (34,164) 921

Gains on sales of loans

 (4,717) (7,422) - 
Gains on loan sales (3,771) (4,717) (7,422)

Gain on termination of FHLB forward commitments

 (7,829) - -  —
 (7,829) —

Gain on FDIC-assisted transaction

 - (3,289) -  —
 —
 (3,289)

Net losses on early extinguishment of debt

 1,034 558 -  2,059
 1,034
 558

Net losses on sales and valuation adjustments of OREO

 3,908 4,886 9,686  3,325
 3,908
 4,886

Net (gains) losses on sales and valuation adjustments of premises, furniture, and equipment

 (79) 2,695 1,252  (3,277) (79) 2,695

BOLI loss (income)

 11,844 (1,307) (2,231)

Net pension cost

 2,169 2,813 3,911 
BOLI (income) loss (2,873) 11,844
 (1,307)
Net pension (income) cost (959) 2,169
 2,813

Share-based compensation expense

 5,903 6,004 6,362  5,926
 5,903
 6,004

Tax (expense) benefit related to share-based compensation

 (10) 170 (179) (106) (10) 170

Net decrease (increase) in net deferred tax assets

 33,467 (29,279) 2,160  8,851
 33,467
 (29,279)

Amortization of other intangible assets

 3,278 3,372 3,802  2,889
 3,278
 3,372

Originations of mortgage loans held-for-sale

 (40,681) - -  (97,535) (40,681) —

Proceeds from sales of mortgage loans held-for-sale

 37,788 - 236  96,006
 37,788
 —

Net (increase) decrease in trading securities

 (3,155) 307 813  (143) (3,155) 307

Net decrease in accrued interest receivable and other assets

 30,696 10,117 7,801 

Net (decrease) increase in accrued interest payable and other liabilities

 (21,859) 8,973 (2,536)
       
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

 133,368 169,824 167,121  122,927
 133,368
 169,824
       

Investing Activities

             

Proceeds from maturities, repayments, and calls of securities available-for-sale

 219,458 362,481 271,511  172,001
 219,458
 362,481

Proceeds from sales of securities available-for-sale

 78,636 153,668 188,556  27,805
 78,636
 153,668

Purchases of securities available-for-sale

 (335,442) (588,429) (391,282) (25,856) (335,442) (588,429)

Proceeds from maturities, repayments, and calls of securities held-to-maturity

 7,043 66,215 83,113  4,675
 7,043
 66,215

Purchases of securities held-to-maturity

 (17,070) (48,999) (62,251) (2,638) (17,070) (48,999)

Redemption of FHLB stock

 12,071 11,918 3,151 
Net (purchases) redemption of FHLB stock (427) 12,071
 11,918

Proceeds from bulk loan sales

 - 94,470 -  —
 —
 94,470

Net increase in loans

 (351,616) (272,618) (14,297) (276,637) (351,616) (272,618)

Proceeds from claims on BOLI, net of purchases

 1,394 1,137 2,588 
Premiums paid for BOLI, net of claims (85) 1,394
 1,137

Proceeds from sales of OREO

 25,797 50,566 37,731  22,368
 25,797
 50,566

Proceeds from sales of premises, furniture, and equipment

 1,463 6,768 5,542  3,906
 1,463
 6,768

Purchases of premises, furniture, and equipment

 (11,030) (8,764) (11,018) (14,085) (11,030) (8,764)

Proceeds received from the FDIC in FDIC-assisted transactions

 - 21,996 - 

Other net cash proceeds received in FDIC-assisted transactions

 - 4,984 - 
       

Net cash (used in) provided by investing activities

 (369,296) (144,607) 113,344 
       
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 cash proceeds received in acquisition of deposits

 - - 106,499 

Net increase (decrease) in deposit accounts

 93,846 120,362 (139,037)

Net increase (decrease) in borrowed funds

 38,358 (29,343) (98,603)

(Payments for the retirement) proceeds from the issuance of subordinated debt

 (24,094) (37,033) 114,387 

Proceeds received from the termination of FHLB forward commitments

 7,829 - - 

Redemption of preferred stock and related common stock warrant

 - - (193,910)
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

 (7,508) (2,977) (12,838) (22,568) (7,508) (2,977)

Restricted stock activity

 (1,607) (1,469) (1,256) (2,781) (1,607) (1,469)

Excess tax benefit (expense) related to share-based compensation

 79 (21) 47  912
 79
 (21)
       

Net cash provided by (used in) financing activities

 106,903 49,519 (224,711)
       

Net (decrease) increase in cash and cash equivalents

 (129,025) 74,736 55,754 
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

 716,266 641,530 585,776  587,241
 716,266
 641,530
       

Cash and cash equivalents at end of year

 $587,241 $716,266 $641,530  $606,262
 $587,241
 $716,266
             

Supplemental Disclosures of Cash Flow Information:

 
 		 
 		 
 		 

Income taxes paid (refunded)

 $4,945 $(6,845)$(12,388)

Interest paid to depositors and creditors

 27,599 36,036 40,429 

Dividends declared, but unpaid

 5,260 749 746 

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

 1,925 93,714 12,320 

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

 - 1,957 - 

Non-cash transfers of loans to OREO

 17,965 47,628 52,249 

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 - 

Non-cash transfers of OREO to premises, furniture, and equipment

 - - 841 
       
​​​​​​​


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.



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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 inthroughout the suburbangreater Chicago metropolitan Chicago area, as well as central and western Illinois, eastern Iowa, and 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 manages a portion of the Company's non-performing assets. Parasol serves in an advisory capacity to certain wealth management accounts with the Bank.

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 financial position and results of operations of the Company and its subsidiaries after elimination of all significant intercompany accounts and transactions. Assets held in a fiduciary or agency capacity are not assets of the Company or its subsidiaries and are not included in the consolidated financial statements.

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 were made to prior year amounts to conform to the current year presentation.

In the third quarter of 2014, the Bank acquired assets and assumed liabilities in two separate transactions. The fair values assigned to these assets and liabilities were preliminary and subject to refinement after the acquisition date as new information related to acquisition date fair values became available. During the fourth quarter of 2014, the Bank obtained specific information relating to the acquisition date fair values of certain assets which required a retrospective adjustment. These adjustments were recognized as if they had happened as of the acquisition 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.

Business Combinations – Business combinations are accounted for under the purchaseacquisition method of accounting. The net assets of theAssets acquired businessand 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 identifiablenet tangible and intangible assets acquired recorded as goodwill. Alternatively, a gain is recorded if the fair value of assets purchased exceeds the fair value of liabilities assumed and consideration paid. The results of operations of the acquired business are included in the Consolidated Statements of Income from the effective date of the acquisition.

Cash and Cash Equivalents – For purposes of the Consolidated Statements of Cash Flows, management defines 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, trading, or available-for-sale at the time of purchase.

Securities Held-to-Maturity – Securities classified as held-to-maturity are securities for which management has the positive intent and ability to hold to maturity. These securities are stated at cost and adjusted for amortization of premiums and accretion of discounts over the estimated lives of the securities using the effective interest method.


86



Trading Securities – The Company's trading securities consist of diversified investment securities held in a grantor trust under deferred compensation arrangements in which plan participants may direct amounts earned to be invested in securities other than Company stock. The accounts of the grantor trust are consolidated with the accounts of the Company in its consolidated financial statements. Trading securities are reported at fair value. Net trading gains (losses) 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


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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 grantor trust, the Company does not carry any securities for trading purposes.

Securities Available-for-Sale – All other securities are classified as available-for-sale. Securities 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 premiums and accretion of discounts are included in interest income.

Purchases and sales of securities are recognized on a trade date basis. Realized securities gains or losses are reported in net securities gains (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 individually assesses securities with unrealized losses to determine whether there were any events or circumstances indicating that an 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, including external credit ratings and recent downgrades for debt securities;securities, (iii) its intent to hold the security until its value recovers;recovers, and (iv) the likelihood that it will be required to sell the security before a recovery in value, which may be at maturity. If 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, 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) income.

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FHLB and Federal Reserve BankFRB Stock – The Company, as a member of the FHLB and Federal Reserve Bank,FRB, is required to maintain an investment in the capital stock of the FHLB and Federal Reserve Bank.FRB. No ready market exists for these stocks, and they have no quoted market values. The stock is redeemable at par by the Federal Reserve BankFRB 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.

Purchased ImpairedAcquired and Covered Loans – PurchasedCovered loans consist of loans acquired by the Company in FDIC-assisted transactions, the majority of which are covered by loss share agreements with the FDIC (the "FDIC Agreements"), under which the FDIC reimburses the Company for the majority of the losses and eligible expenses related to these assets. Acquired loans consist of all other loans that were acquired in business combinations that are not covered by FDIC Agreements. No allowance for credit losses is recorded on acquired and covered loans at the acquisition date 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 acquiredloans that did not have evidence of credit deterioration since origination at the acquisition date. PCI loans include loans that had evidence of credit deterioration since origination and for which it was probable at acquisition that the Company would not collect all contractually required principal and interest payments. Evidence of credit deterioration was evaluated using various indicators, such as past due and non-accrual status. Other key considerations and indicators included past performance of the failed institutions' credit underwriting standards, completeness and accuracy of credit files, maintenance of risk ratings, and age of appraisals. LeaseLeases and revolving loans do not qualify to be accounted for as purchased impairedPCI loans.
The acquisition adjustment related to Non-PCI loans due to their nature. Purchased impaired loans are recorded at fair value onis amortized into interest income over the contractual life of the related loans. As the acquisition date, andadjustment 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. No allowance for credit losses is recorded on these loans at the acquisition date. To estimate the fair value, the Company generally aggregates purchased consumer loans and certain smaller balance commercial loans into pools of loans with common risk characteristics, such as delinquency status, credit score, and internal risk rating. The fair values of larger balance commercial loans are estimated on an individual basis. Expected future cash flows in excess of the fair value of loans at the purchase date ("accretable yield") are recorded as interest income over the life of the loans if the timing and amount of the expected future cash flows can be reasonably estimated. The non-accretable yield represents the difference between contractually required payments and the expected future cash flows expected to be collecteddetermined at acquisition.


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Subsequent increases in expected future cash flows are recognized as interest income prospectively. The present value of any decreases in expected future cash flows is recognized by recording a charge-off through the allowance for loan and covered loan losses or establishingproviding an allowance for loan and covered loan losses.

90-Days Past Due Loans – The Company’s accrual of interest on loans is discontinued at the time the loan is 90 days past due unless the credit is sufficiently collateralized and in the process of renewal or collection.
Non-accrual Loans – Generally, corporate loans are placed on non-accrual status (i) when either principal or interest payments become 90 days or more past due unless the 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 warrants a downgrade to non-accrual regardless of past due status. When a loan is placed on non-accrual status, unpaid interest credited to income in the current year is reversed, and unpaid interest accrued in prior years is charged against the allowance for loan losses. After the loan is placed on non-accrual, all debt service payments are applied to the principal on the loan. Future interest income may only be recorded on a cash basis after recovery of principal is reasonably assured. Non-accrual loans are returned to accrual status when the financial position of the borrower and other relevant factors indicate that the Company will collect all principal and interest.

Commercial loans and loans secured by real estate are charged-off when deemed uncollectible. A loss is recorded if the net realizable value of the underlying collateral is less than the outstanding principal and interest. Consumer loans that are not secured by real estate are subject to mandatory charge-off at a specified delinquency date and are usually not classified as non-accrual prior to being charged-off. Closed-end consumer loans, which include installment, automobile, and single payment loans, are usually charged-off no later than the end of the month in which the loan becomes 120 days past due.

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. Loans without reasonable cash flow estimates are classified as non-accrual loans, and interest income is not recognized on those loans until the timing and amount of the expected future cash flows can be reasonably determined.

Troubled Debt Restructurings ("TDRs") – A restructuring is considered a TDR when (i) the borrower is experiencing financial difficulties and (ii) the creditor grants a concession, such as forgiveness of principal, reduction of the interest rate, changes in payments, or extension of the maturity date. Loans are not classified as TDRs when the modification is short-term or results in an insignificant delay in payments. The Company'sCompany’s TDRs are determined on a case-by-case basis.

The Company does not accrue interest on a TDR unless it believes collection of all principal and interest under the modified terms is reasonably assured. For a TDR to begin accruing interest, the borrower must demonstrate both some level of past performance and the future capacity to perform under the modified terms. Generally, six months of consecutive payment performance under the restructured terms is required before a TDR is returned to accrual status. However, the period could vary depending on the individual facts and circumstances of the loan. An evaluation of the borrower'sborrower’s current creditworthiness is used to assess the borrower'sborrower’s capacity to repay the loan under the modified terms. This evaluation includes an estimate of expected future cash flows, evidence of strong financial position, and estimates of the value of collateral, if applicable. For TDRs to be removed from TDR status in the calendar year after the restructuring, the loans must (i) have an interest rate and terms that reflect market conditions at the time of restructuring, and (ii) be in compliance with the modified terms. If the loan was restructured at below market rates and terms, it continues to be separately reported as restructured until it is paid in full or charged-off.

Impaired Loans – Impaired loans consist of corporate non-accrual loans and TDRs.

A loan is considered impaired when it is probable that the Company will not collect all contractual principal and interest. With the exception of accruing TDRs, impaired loans are classified as non-accrual and are exclusive of smaller homogeneous loans, such as home equity, 1-4 family mortgages, and installment loans. Impaired loans with balances under a specified threshold are not individually evaluated for impairment. For all other impaired loans, impairment is measured by comparing the estimated value of the loan to the recorded book value. The value of collateral-dependent loans is based on the fair value of the underlying collateral, less costs to sell. The value of other loans is measured using the present value of expected future cash flows discounted at the loan'sloan’s initial effective interest rate. Purchased impaired loans are not reported as impaired loans provided that estimates of the timing and amount of future cash flows can be reasonably determined.


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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.

Allowance for Credit Losses – The allowance for credit losses is comprised of the allowance for loan losses, the allowance for covered loan losses, and the reserve for unfunded commitments, and is maintained by management at a level believed adequate to absorb estimated losses inherent in the existing loan portfolio. Determination of the allowance for credit losses is subjective

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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, consideration of current economic trends, and other factors.


Loans deemed to be uncollectible are charged-off against the allowance for loan and covered loan losses, while recoveries of amounts previously charged-off are credited to the allowance for loan and covered loan losses. Additions to the allowance for loan and covered loan losses are charged to expense through the provision for loan and covered loan losses. The amount of provision depends on a number of factors, including net charge-off levels, loan growth, changes in the composition of the loan portfolio, and the Company'sCompany’s assessment of the allowance for loan and covered loan losses based on the methodology discussed below.


Allowance for Loan Losses– – The allowance for loan losses consists of (i) specific reserves for individual loans where the recorded investment exceeds the value, (ii) an allowance based on a loss migration analysis that uses historical credit loss experience for each loan category, and (iii) and allowance based on other internal and external qualitative factors.


The specific reserves component of the allowance for loan losses is based on a periodic analysis of impaired loans exceeding a fixed dollar amount. If the value of an impaired loan is less than the recorded book value, the Company either establishes a valuation allowance (i.e., a specific reserve) equal to the excess of the book value over the value of the loan as a component of the allowance for loan losses or charges off the amount if it is a confirmed loss.


The general reserve component is based on a loss migration analysis, which examines actual loss experience by loan category for a rolling 8-quarter period and the related internal risk rating for corporate loans. The loss migration analysis is updated quarterly using actual loss experience. This component is then adjusted based on management'smanagement’s consideration of many internal and external qualitative factors, including:

•

Changes in the composition of the loan portfolio, trends in the volume of loans, and trends in delinquent and non-accrual loans that could indicate that historical trends do not reflect current conditions.
•
Changes in credit policies and procedures, such as underwriting standards and collection, charge-off, and recovery practices.
•
Changes in the experience, ability, and depth of credit management and other relevant staff.
•
Changes in the quality of the Company'sCompany’s loan review system and Board of Directors oversight.
•
The effect of any concentration of credit and changes in the level of concentrations, such as loan type or risk rating.
•
Changes in the value of the underlying collateral for collateral-dependent loans.
•
Changes in the national and local economy that affect the collectability of various segments of the portfolio.
•
The effect of other external factors, such as competition and legal and regulatory requirements, on the Company'sCompany’s loan portfolio.


Allowance for Covered Loan Losses– – The Company'sCompany’s allowance for covered loan losses reflects the difference between the carrying value and the discounted present value of the estimatedexpected future cash flows of the covered purchased impairedPCI 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 purchased impairedPCI loans using either a probability of default/loss given default ("PD/LGD") methodology or a specific review methodology. The PD/LGD model is an expecteda loss model that estimates expected future cash flows using a probability of default curve and loss given default estimates.


Reserve for Unfunded Commitments– – The Company also maintains a reserve for unfunded commitments, including letters of credit, for the risk of loss inherent in these arrangements. The reserve for unfunded commitments is estimated using the loss migration analysis from the allowance for loan losses, adjusted for probabilities of future funding requirements. The reserve for unfunded commitments is included in other liabilities in the Consolidated Statements of Financial Condition.


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The establishment of the allowance for credit losses involves a high degree of judgment given the difficulty of assessing the factors impacting loan repayment and estimating the timing and amount of losses. While management utilizes its best judgment and information available, the adequacy of the allowance for credit losses depends 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 of loan risk classifications by regulatory authorities.

OREO – OREO consists of properties acquired through foreclosure in partial or total satisfaction of defaulted loans. At initial transfer into OREO, properties are recorded at fair value, less estimated selling costs. Subsequently, 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 the

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transfer date are charged against the allowance for loan and covered loan losses. 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, along with expenses related to maintenance of the properties, are included in net OREO expense in the Consolidated Statements of Income.

FDIC Indemnification Asset – The majority of loans and OREO acquired through FDIC-assisted transactions are covered by loss share agreements with the FDIC (the "FDIC Agreements"),Agreements, under which the FDIC reimburses the Company for the majority of the losses and eligible expenses related to these assets.assets during the indemnification period. The FDIC indemnification asset represents the present 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 in the FDIC Agreements.

The balance of the FDIC indemnification asset is adjusted periodically to reflect changes in estimatedexpected future cash flows. Decreases in estimated reimbursements from the FDIC are recorded prospectively through amortization and increases in estimated reimbursements from the FDIC are recognized by an increase in the carrying value of the indemnification asset. Payments from the FDIC for reimbursement of losses result in a reduction of the FDIC indemnification asset.

Depreciable Assets – Premises, furniture, and equipment 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 over the shorter of the life of the asset or the lease term. Gains on dispositions are included in other noninterest income, and losses on dispositions 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.

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 in the Consolidated Statements of Financial Condition at their cash surrender value ("CSV") or the current amount that could be realized if settled. The change in CSV and insurance proceeds received are included as a component of noninterest income in the Consolidated Statements of 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. Instead, impairment


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testing is conducted annually 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. If, after assessing certain qualitative factors, the Company determines it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then the two-step impairment test is not necessary. If the Company concludes otherwise, then the first step is performed.quantitative approach. In the first step, management compares its estimate of the fair value of a reporting unit, which is based on a discounted cash flow 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 is not required. If necessary, the second step 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 by assigning the value of a reporting unit to all of the assets and liabilities of that unit, including any other identifiable intangible assets. An impairment loss is 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 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.

Intangible assets are reviewed at least annually to determine whether there were any events or circumstances that indicate 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 the amortization period may 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 – 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 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, including its risk management objective and strategy.

strategy at inception.

At the hedge'shedge’s inception and quarterly thereafter, a formal assessment is performed to determine the effectiveness of the derivative in offsetting changes in the fair values or expected future cash flows of the hedged items in the current period and prospectively. If a derivative instrument designated as a hedge is terminated or ceases to be highly effective, hedge accounting is discontinued prospectively, and the gain or loss is amortized into earnings. For fair value hedges, the gain or loss is amortized over the remaining life of the hedged asset or liability. For cash flow hedges, the gain or loss is amortized over the same period that the forecasted hedged transactions impact earnings. If the hedged item is disposed of, any fair value adjustments are included in the gain or loss from the disposition of the hedged item. If the forecasted transaction is no longer probable, the gain or loss is included in earnings immediately.


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For effective fair value hedges, changes in the fair value of the derivative instruments, as well as changes in the fair value of the hedged item, are recognized in earnings. For cash flow hedges, the effective portion of the change in fair value of the derivative instrument is reported as a component of accumulated other comprehensive loss. The unrealized gain or loss and is reclassified intoto earnings in the same periodwhen the hedged transaction affectsis 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.

Comprehensive Income (Loss) – Comprehensive income (loss) is the total of reported net income (loss) and other comprehensive income (loss) income ("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) income 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, (when applicable), 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 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 grant or modification date.date over the period during which an employee is required to provide service in 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 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 per 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 basic earnings per common share computation plus the dilutive effect of stock compensation using the treasury stock method.

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.


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2.  RECENT EVENTS

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 transactional deposits and $31.2 million in time deposits. As a result of the transaction, the Company recorded $781,000 in core deposit intangibles.

ACCOUNTING PRONOUNCEMENTS

Adopted Accounting Guidance

Disclosures about Offsetting Assets and Liabilities:Income Taxes: In DecemberJanuary of 2011,2014, the Financial Accounting Standards Board ("FASB") issued guidance on the presentation of offsetting assets and liabilities on the balance sheet, which was further clarified in January 2013. This guidance requires an entity to disclose both the gross information and net information regarding instruments and transactions eligible for offset, such as derivatives, sale and repurchase agreements, and securities borrowing and lending arrangements. The adoption of this guidance on January 1, 2013 did not impact the Company's financial condition, results of operations, or liquidity.

Technical Corrections and Improvements:    In October of 2012, the FASB issued guidance to update the Accounting Standards Codification (the "Codification") on a variety of topics, which include source literature amendments, guidance clarification and reference corrections, and relocated guidance. In addition, the standard includes amendments to conform terminology and clarifies certain fair value guidance in the Codification. Amendments that did not have transition guidance were effective immediately, and amendments subject to transition guidance were adopted on January 1, 2013. The adoption did not have a material impact on the Company's financial condition, results of operations, or liquidity.

Comprehensive Income:    In February of 2013, the FASB issued guidance to improve the reporting of reclassifications out of accumulated other comprehensive income. The amendments require an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component on either the face of the income statement or as a separate disclosure in the notes to the financial statements. The Company provides disclosures related to amounts reclassified out of accumulated other comprehensive loss in the Consolidated Statements of Comprehensive Income. The adoption of this guidance on January 1, 2013 did not impact the Company's financial condition, results of operations, or liquidity.

Derivatives and Hedging:    In July of 2013, the FASB issued guidance permitting the Federal Funds Effective Swap Rate, also known as the Overnight Index Swap ("OIS") rate, to be included as a benchmark interest rate for hedge accounting purposes. Previously, the United States Department of the Treasury ("Treasury") and the London Interbank Offered Rate ("LIBOR") were the only permitted benchmark interest rates. In addition, the standard eliminated the restriction on designating different benchmark interest rates for similar hedges. The adoption of this guidance on July 17, 2013 did not impact the Company's financial condition, results of operations, or liquidity.

Recently Issued Accounting Guidance

Income Taxes:    In January of 2014, the FASB issued guidance that requires an entity to present 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 carryforward is not available at the reporting date or, if the tax law of the applicable jurisdiction does not require the entity to use, and the entity does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. The guidance is effective for annual and interim reporting periods beginning on or after December 15, 2013, and must be applied prospectively. Management does not expect the adoption of this guidance willon January 1, 2014 did not materially impact the Company's financial condition, results of operations, or liquidity.

Recently Issued Accounting Guidance
Receivables –- Troubled Debt Restructurings by Creditors:In January of 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 a loan receivable should be derecognized and the


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real estate property recognized. Additionally, the guidance requires interim and annual disclosure of the amount of foreclosed residential real estate property held by the entity and the recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure according to local requirements of the applicable jurisdiction. The guidance is effective for annual and interim periods beginning after December 15, 2014 and can be applied retrospectively or prospectively. Management does not expect the adoption of this guidance will materially impact the Company's financial condition, results of operations, or liquidity.

Reporting Discontinued Operations: In April of 2014, the FASB issued guidance that requires an entity to report a disposal of a component of an entity or a group of components of an entity in discontinued operations if the disposal represents a strategic shift that has (or will have) a major effect on an entity's operations and financial results when the component of an entity or group of components of an entity (i) meets the criteria to be classified as held for sale, (ii) is disposed of by sale, or (iii) is disposed of other than by sale. The guidance is effective for annual and interim reporting periods beginning on or after December 15, 2014, and must be applied prospectively. Management does not expect the adoption of this guidance will materially impact the Company's financial condition, results of 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.
3.  ACQUISITIONS
2014 Acquisitions
Popular Community Bank
On August 8, 2014, the Bank completed the acquisition of the Chicago area banking operations of Banco Popular North America ("Popular"), doing business as Popular Community Bank, which is a subsidiary of Popular, Inc. The acquisition included Popular’s twelve full-service retail banking offices and its small business and middle market commercial lending activities in the Chicago metropolitan area at a purchase price of $19.0 million paid in cash. The Company recorded goodwill of $32.2 million associated with the acquisition.
The assets acquired and liabilities assumed, both intangible and tangible, were recorded at their estimated fair values as of the August 8, 2014 acquisition date and have been accounted for under the acquisition method of accounting. 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.
4.  SECURITIES

A summary of the Company's securities portfolio by category and maturity is presented in the following tables.


Securities Portfolio
(Dollar amounts in thousands)

 
 December 31, 
 
 2013 2012 
 
  
 Gross Unrealized  
  
 Gross Unrealized  
 
 
 Amortized
Cost		 Fair
Value		 Amortized
Cost		 Fair
Value		 
 
 Gains Losses Gains Losses 

Securities Available-for-Sale

                         

U.S. agency securities

 $500 $- $- $500 $508 $- $- $508 

Collateralized mortgage obligations ("CMOs")

  490,962  1,427  (16,621) 475,768  397,146  3,752  (515) 400,383 

Other mortgage-backed securities ("MBSs")

  135,097  3,349  (2,282) 136,164  117,785  5,183  (68) 122,900 

Municipal securities

  457,318  9,673  (5,598) 461,393  495,906  24,623  (486) 520,043 

Trust preferred collateralized debt obligations ("CDOs")

  46,532  -  (28,223) 18,309  46,533  -  (34,404) 12,129 

Corporate debt securities

  12,999  1,930  -  14,929  13,006  2,333  -  15,339 

Equity securities:

                         

Hedge fund investment

  1,208  1,971  -  3,179  1,231  385  -  1,616 

Other equity securities

  2,498  75  (90) 2,483  8,459  1,026  -  9,485 
                  

Total equity securities

  3,706  2,046  (90) 5,662  9,690  1,411  -  11,101 
                  

Total available- for-sale securities

 $1,147,114 $18,425 $(52,814)$1,112,725 $1,080,574 $37,302 $(35,473)$1,082,403 
                  

Securities Held-to-Maturity

                         

Municipal securities

 $44,322 $- $(935)$43,387 $34,295 $1,728 $- $36,023 
                  

Trading Securities

          $17,317          $14,162 
                        
  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

Table of Contents


Remaining Contractual Maturity of Securities
(Dollar amounts in thousands)


 December 31, 2013  As of December 31, 2014

 Available-for-Sale Held-to-Maturity  Available-for-Sale Held-to-Maturity

 Amortized
Cost		 Fair
Value		 Amortized
Cost		 Fair
Value		  
Amortized
Cost
 
Fair
Value
 
Amortized
Cost
 
Fair
Value

One year or less

 $12,879 $12,326 $3,366 $3,295  $67,900
 $67,221
 $3,504
 $3,651

After one year to five years

 86,727 83,002 10,950 10,719  78,132
 77,351
 8,727
 9,093

After five years to ten years

 232,362 222,383 8,041 7,871  214,007
 211,868
 5,404
 5,631

After ten years

 185,381 177,420 21,965 21,502  134,734
 133,387
 8,920
 9,295

Securities that do not have a single contractual maturity date

 629,765 617,594 - -  697,549
 697,182
 —
 —
         

Total

 $1,147,114 $1,112,725 $44,322 $43,387  $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 $779.4 million at December 31, 2014 and $755.3 million at December 31, 2013 and $675.3 million at December 31, 2012.2013. No securities held-to-maturity were pledged as of December 31, 20132014 or 2012.

2013.

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 as of December 31, 20132014 or 2012.

2013.

The following table presents net realized gains (losses) on securities.


Securities Gains (Losses)
(Dollar amounts in thousands)

 
 Years ended December 31, 
 
 2013 2012 2011 

Gains (losses) on sales of securities:

          

Gross realized gains

 $34,572 $3,045 $4,103 

Gross realized losses

  -  (297) (757)
        

Net realized gains on securities sales

  34,572  2,748  3,346 
        

Non-cash impairment charges:

          

OTTI

  (408) (3,728) (1,464)

Portion of OTTI recognized in other comprehensive (loss) income

  -  59  528 
        

Net non-cash impairment charges

  (408) (3,669) (936)
        

Net realized gains (losses)

 $34,164 $(921)$2,410 
        

Net trading gains (losses)(1)

 $3,189 $1,627 $(691)

Net non-cash impairment charges:

          

Municipal

 $402 $- $- 

CMOs

  6  1,443  - 

CDOs

  -  2,226  936 
        

Total

 $408 $3,669 $936 
        
  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

Table of Contents

(1)
All net trading 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, 2014, 2013, and 2012 and 2011 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 $3.3sales of certain other investments at gains of $2.1 million. In addition, four CDOs totaling $2.9 million respectively.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. 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 charge be recognized through income. If a decline in fair value below carrying value is not attributable to credit deterioration and the Company does not intend to sell the security or believe it would not be more likely than not required to sell the security prior to recovery, the Company records the non-credit related portion of the decline in fair value in other comprehensive income (loss) income.

In deriving the credit component of the impairment on the CDOs, projected cash flows were discounted at the contractual rate and compared to the fair values computed by discounting future projected cash flows at LIBOR plus an adjustment to reflect the higher risk inherent in these securities given their complex structures and the impact of market factors. The following table presents the cumulative amount of OTTI on CDOs related to credit deterioration recognized by year in earnings.

.


OTTI on CDOs
(Dollar amounts in thousands)

96
 
 Years Ended December 31,  
 
Number 2013 2012 2011 Life-to-Date 

1

 $- $- $- $10,360 

2

  -  1,534  525  9,402 

3

  -  692  411  2,262 

4

  -  -  -  1,078 

5

  -  -  -  8,570 

6

  -  -  -  243 

7

  -  -  -  6,750 
          

 $- $2,226 $936 $38,665 
          



The following table presents a rollforward of life-to-date OTTI recognized in earnings related to all available-for-sale securities held by the Company for the years ended December 31, 2014, 2013, 2012, and 2011.


2012. The majority of the beginning and ending balance of OTTI relates to CDOs currently held by the Company.

Changes in OTTI Recognized in Earnings
(Dollar amounts in thousands)

 
 Years Ended December 31, 
 
 2013 2012 2011 

Beginning balance

 $38,803 $36,525 $35,589 

OTTI included in earnings(1):

          

Losses on securities that previously had OTTI          

  -  2,278  936 

Losses on securities that did not previously have OTTI

  408  1,391  - 

Reduction for securities sales(2)

  (6,789) (1,391) - 
        

Ending balance

 $32,422 $38,803 $36,525 
        
  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

Table of Contents

(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, 20132014 and 2012.


2013.

Securities in an Unrealized Loss Position
(Dollar amounts in thousands)


  
 Less Than 12 Months Greater Than 12 Months Total 

 Number
of
Securities		 Fair
Value		 Unrealized
Losses		 Fair
Value		 Unrealized
Losses		 Fair
Value		 Unrealized
Losses		    Less Than 12 Months Greater Than 12 Months Total
 
Number of
Securities
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
As of December 31, 2014              
U.S. agency securities 1
 $1,943
 $10
 $—
 $—
 $1,943
 $10
CMOs 87
 61,321
 559
 284,327
 6,423
 345,648
 6,982
Other MBSs 11
 1,113
 1
 39,043
 309
 40,156
 310
Municipal securities 91
 1,317
 9
 53,987
 1,009
 55,304
 1,018
CDOs 4
 —
 —
 22,791
 14,880
 22,791
 14,880
Equity securities 1
 —
 —
 2,270
 35
 2,270
 35
Total 195
 $65,694
 $579
 $402,418
 $22,656
 $468,112
 $23,235

As of December 31, 2013

                             

CMOs

 67 $338,064 $14,288 $57,269 $2,333 $395,333 $16,621  67
 $338,064
 $14,288
 $57,269
 $2,333
 $395,333
 $16,621

Other MBSs

 19 57,311 2,281 356 1 57,667 2,282  19
 57,311
 2,281
 356
 1
 57,667
 2,282

Municipal securities

 154 65,370 3,245 27,565 2,353 92,935 5,598  154
 65,370
 3,245
 27,565
 2,353
 92,935
 5,598

CDOs

 6 - - 18,309 28,223 18,309 28,223  6
 —
 —
 18,309
 28,223
 18,309
 28,223

Equity securities

 1 2,168 90 - - 2,168 90  1
 2,168
 90
 —
 —
 2,168
 90
               

Total

 247 $462,913 $19,904 $103,499 $32,910 $566,412 $52,814  247
 $462,913
 $19,904
 $103,499
 $32,910
 $566,412
 $52,814
               

As of December 31, 2012

               

CMOs

 19 $102,939 $421 $12,796 $94 $115,735 $515 

Other MBSs

 6 ��7,210 55 176 13 7,386 68 

Municipal securities

 49 28,903 459 1,238 27 30,141 486 

CDOs

 6 - - 12,129 34,404 12,129 34,404 
               

Total

 80 $139,052 $935 $26,339 $34,538 $165,391 $35,473 
               

Substantially all of the Company's CMOs and other MBSs are either backed by U.S. government-owned agencies or issued by U.S. government-sponsored enterprises. Municipal securities are issued by municipal authorities, and the majority are supported by third-party insurance or some other form of credit enhancement. Management does not believe any individual unrealized loss as of December 31, 20132014 represents 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 losses on CDOs as of December 31, 20132014 reflect the illiquidity ofchanges in market activity for these structured investment vehicles.securities. Management does not believe these unrealized losses represent OTTI related to credit deterioration. In addition, the Company does not intend to sell the CDOs with unrealized losses within a short period of time, and the Company does not believe it is more likely than not that

97



it will be required to sell them before recovery of their amortized cost basis, which may be at maturity.

Significant judgment is required to calculate the fair value of the CDOs, all of which are pooled. The Company estimates the fair value of these securities using discounted cash flow analyses with the assistance ofFor a structured credit valuation firm. For additionaldetailed discussion of the CDO valuation methodology, refer tosee Note 21,22, "Fair Value."


Table of Contents

4.

5.  LOANS

Loans Held-for-Investment

The following table presents the Company's loans held-for-investment by class.


Loan Portfolio
(Dollar amounts in thousands)


 December 31,  As of December 31,

 2013 2012  2014 2013

Commercial and industrial

 $1,830,638 $1,631,474  $2,253,556
 $1,830,638

Agricultural

 321,702 268,618  358,249
 321,702

Commercial real estate:

         

Office, retail, and industrial

 1,353,685 1,333,191  1,478,379
 1,353,685

Multi-family

 332,873 285,481  564,421
 332,873

Construction

 186,197 186,416  204,236
 186,197

Other commercial real estate

 807,071 773,121  887,897
 807,071
     

Total commercial real estate

 2,679,826 2,578,209  3,134,933
 2,679,826
     

Total corporate loans

 4,832,166 4,478,301  5,746,738
 4,832,166
     

Home equity

 427,020 390,033  543,185
 427,020

1-4 family mortgages

 275,992 282,948  291,463
 275,992

Installment

 44,827 38,394  76,032
 44,827
     

Total consumer loans

 747,839 711,375  910,680
 747,839
     

Total loans, excluding covered loans

 5,580,005 5,189,676  6,657,418
 5,580,005

Covered loans (1)

 134,355 197,894  79,435
 134,355
     

Total loans

 $5,714,360 $5,387,570  $6,736,853
 $5,714,360
     

Deferred loan fees included in total loans

 $4,656 $5,941  $3,922
 $4,656

Overdrawn demand deposits included in total loans

 5,047 4,451  3,438
 5,047

(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 its markets. Within these areas, the Company diversifies its loan portfolio by loan type, industry, and borrower.

Commercial and industrial loans are underwritten after evaluating and understanding the borrower's ability to operate its business. As part of the underwriting process, the Company examines current and projectedexpected future cash flows to determine the ability 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 collateral securing these loans may fluctuate in value due to economic or other 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 personal guarantee. 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 substantially depend on the ability of the borrower 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 examines projectedexpected 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 by profits generated bythrough cash flows of the farming operation.


Table of Contents

Commercial real estate loans are subject to underwriting standards and processes similar to commercial and industrial loans. The repayment of commercial real estate loans largely depends on the successful operation of the property securing the loan or the business conducted on the property securing the loan. This category of loans may be more adversely affected by conditions in the real estate

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 balanced betweenfurther 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 the 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 scoring model developed by the Fair Isaac Corporation "FICO"("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 affordability ratios, risk-based pricing strategies, and documentation requirements. The home equity category consists mainly of revolving lines of credit secured by junior liens on owner-occupied real estate. Loan-to-value ratios on home equity loans and 1-4 family mortgages are based on the current appraised value of the appraised collateral.

The carrying value of loans that were pledged to secure liabilities as of December 31, 20132014 and 20122013 are presented below.


Carrying Value of Loans Pledged
(Dollar amounts in thousands)


 December 31,  As of December 31

 2013 2012  2014 2013

Loans pledged to secure:

         

FHLB advances

 $1,632,069 $721,141  $1,952,736
 $1,632,069

Federal Reserve Bank's Discount Window Primary Credit Program

 766,870 2,097,021 
     
FRB's Discount Window Primary Credit Program 845,974
 766,870

Total

 $2,398,939 $2,818,162  $2,798,710
 $2,398,939
     

Table of Contents

Loan Sales

The following table presents loan sales for the years ended December 31, 2014, 2013, 2012, and 2011.


2012.

Loan Sales
(Dollar amounts in thousands)


 Proceeds Book Value Charge-offs (1) Net Gains (2) 
 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  $152,130
 $147,413
 $—
 $4,717

Non-performing loans

 1,275 2,835 (1,560) -  1,275
 2,835
 (1,560) —
         

Total loan sales in 2013

 $153,405 $150,248 $(1,560)$4,717  $153,405
 $150,248
 $(1,560) $4,717
         

Loan sales in 2012

                 

Bulk loan sales

 $94,470 $169,577 $(80,260)$5,153  $94,470
 $169,577
 $(80,260) $5,153

Mortgage loans

 52,595 50,326 - 2,269  52,595
 50,326
 —
 2,269

Non-performing loans

 4,200 6,587 (2,387) -  4,200
 6,587
 (2,387) —
         

Total loan sales in 2012

 $151,265 $226,490 $(82,647)$7,422  $151,265
 $226,490
 $(82,647) $7,422
         

Loan sales in 2011

         

Non-performing loans

 $12,362 $17,087 $(4,725)$- 
         

During the year ended December 31, 2013,2014, a gain of $4.7$3.8 million was recognized on the sale of $147.4$144.9 million of mortgage loans, of which $36.6$92.5 million were originated with the intent to sell. For the year ended December 31, 2012,2013, the Company sold $50.3$147.4 million of mortgage loans, resulting in a gain of $2.3$4.7 million. The Company retained servicing responsibilities on the majority of mortgages sold and collects servicing fees equal to a percentage of the outstanding 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 20,21, "Commitments, Guarantees, and Contingent Liabilities."

Bulk Loan Sales

During the third quarter of 2012, 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.

5.

6.  ACQUIRED AND COVERED LOANS

Since 2009,

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 acquired the majority of the assets and assumed the deposits of four financial institutions in multiple FDIC-assisted transactions. In three of those transactions, mostMost loans and OREO acquired in those transactions are covered by the FDIC Agreements. The significant accounting policies related to purchased impairedacquired and covered loans, which are classified as PCI and Non-PCI, and the related FDIC indemnification asset are presented in Note 1, "Summary of Significant Accounting Policies."


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.

Table

The following table presents PCI and Non-PCI loans as of Contents


December 31, 2014 and 2013.

Acquired and Covered Loans
(Dollar amounts in thousands)

 
 December 31, 2013 December 31, 2012 
 
 Covered Non-
Covered		 Total Covered Non-
Covered		 Total 

Purchased impaired loans

 $103,525  (1)$15,608 $119,133 $154,762  (1)$18,198 $172,960 

Other loans (2)

  30,830  17,024  47,854  43,132  22,480  65,612 
              

Total acquired loans

 $134,355 $32,632 $166,987 $197,894 $40,678 $238,572 
              
  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

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 iswas in compliance with those requirements as of December 31, 2014, 2013, and 2012.

100



A rollforward of the carrying value of the FDIC indemnification asset for the years ended December 31, 2014, 2013, and 2012 and 2011.


is presented in the following table.

Changes in the FDIC Indemnification Asset
(Dollar amounts in thousands)


 Years Ended December 31,  Years Ended December 31,

 2013 2012 2011  2014 2013 2012

Beginning balance

 $37,051 $65,609 $95,899  $16,585
 $37,051
 $65,609

Amortization

 (2,984) (14,098) (11,495) (3,315) (2,984) (14,098)

Change in expected reimbursements from the FDIC for changes in expected credit losses

 (1,242) 3,338 39,096  (481) (1,242) 3,338

Payments received from the FDIC

 (16,240) (17,798) (57,891) (4,337) (16,240) (17,798)
       

Ending balance

 $16,585 $37,051 $65,609  $8,452
 $16,585
 $37,051
       

Changes in the accretable yield for purchased impairedacquired and covered PCI loans were as follows.


Changes in Accretable Yield
(Dollar amounts in thousands)

 
 Years Ended December 31, 
 
 2013 2012 2011 

Beginning balance

 $51,498 $52,147 $63,616 

Additions

  —  7,224  — 

Accretion

  (15,016) (20,632) (36,827)

Other(1)

  310  12,759  25,358 
        

Ending balance

 $36,792 $51,498 $52,147 
        
  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

(1)
Increases represent a rise in the expected future cash flows to be collected over the remaining estimated life of the underlying portfolio.

101

Table of Contents

6.




7.  PAST DUE LOANS, ALLOWANCE FOR CREDIT LOSSES, IMPAIRED LOANS, AND TDRS

Past Due and Non-accrual Loans

The following table presents an aging analysis of the Company's past due loans as of December 31, 20132014 and 2012.2013. The aging is determined without regard to accrual status. The table also presents non-performing loans, consisting of non-accrual loans (the majority of which are past due) and loans 90 days or more past due and still accruing interest, as of each balance sheet date.


Aging Analysis of Past Due Loans and Non-Performing Loans by Class
(Dollar amounts in thousands)


 Aging Analysis (Accruing and Non-accrual)  
 Non-performing Loans 

 Current 30-89 Days
Past Due		 90 Days or
More Past
Due		 Total
Past Due		 Total
Loans		  
 Non-accrual
Loans		 90 Days Past
Due Loans,
Still Accruing
Interest		  Aging Analysis (Accruing and Non-accrual) Non-performing Loans

December 31, 2013

                 
 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

 $1,814,660 $6,872 $9,106 $15,978 $1,830,638   $11,767 $393  $2,230,947
 $19,505
 $3,104
 $22,609
 $2,253,556
  $22,693
 $205

Agricultural

 321,156 134 412 546 321,702   519 —  355,982
 1,934
 333
 2,267
 358,249
  360
 —

Commercial real estate:

                   
  
  
  
  
   
  

Office, retail, and industrial

 1,335,027 2,620 16,038 18,658 1,353,685   17,076 1,315  1,463,724
 2,340
 12,315
 14,655
 1,478,379
  12,939
 76

Multi-family

 330,960 318 1,595 1,913 332,873   1,848 —  562,625
 1,261
 535
 1,796
 564,421
  754
 83

Construction

 180,083 23 6,091 6,114 186,197   6,297 —  197,255
 —
 6,981
 6,981
 204,236
  6,981
 —

Other commercial real estate

 795,462 5,365 6,244 11,609 807,071   8,153 258  876,609
 5,412
 5,876
 11,288
 887,897
  6,970
 438
                 

Total commercial real estate

 2,641,532 8,326 29,968 38,294 2,679,826   33,374 1,573  3,100,213
 9,013
 25,707
 34,720
 3,134,933
  27,644
 597
                 

Total corporate loans

 4,777,348 15,332 39,486 54,818 4,832,166   45,660 1,966  5,687,142
 30,452
 29,144
 59,596
 5,746,738
  50,697
 802
                 

Home equity

 415,791 4,830 6,399 11,229 427,020   6,864 1,102  535,587
 3,216
 4,382
 7,598
 543,185
  6,290
 145

1-4 family mortgages

 268,912 2,046 5,034 7,080 275,992   5,198 548  287,892
 2,246
 1,325
 3,571
 291,463
  2,941
 166

Installment

 42,350 330 2,147 2,477 44,827   2,076 92  75,428
 506
 98
 604
 76,032
  43
 60
                 

Total consumer loans

 727,053 7,206 13,580 20,786 747,839   14,138 1,742  898,907
 5,968
 5,805
 11,773
 910,680
  9,274
 371
                 

Total loans, excluding covered loans

 5,504,401 22,538 53,066 75,604 5,580,005   59,798 3,708  6,586,049
 36,420
 34,949
 71,369
 6,657,418
  59,971
 1,173

Covered loans

 94,211 2,232 37,912 40,144 134,355   20,942 18,081  66,331
 2,714
 10,390
 13,104
 79,435
  6,186
 5,002
                 

Total loans

 $5,598,612 $24,770 $90,978 $115,748 $5,714,360   $80,740 $21,789  $6,652,380
 $39,134
 $45,339
 $84,473
 $6,736,853
  $66,157
 $6,175
                 

December 31, 2012

                 
As of December 31, 2013  
  
  
  
  
   
  

Commercial and industrial

 $1,614,167 $4,883 $12,424 $17,307 $1,631,474   $25,941 $2,138  $1,814,660
 $6,872
 $9,106
 $15,978
 $1,830,638
  $11,767
 $393

Agricultural

 267,077 79 1,462 1,541 268,618   1,173 375  321,156
 134
 412
 546
 321,702
  519
 —

Commercial real estate:

                   
  
  
  
  
   
  

Office, retail, and industrial

 1,306,526 4,130 22,535 26,665 1,333,191   23,224 823  1,335,027
 2,620
 16,038
 18,658
 1,353,685
  17,076
 1,315

Multi-family

 283,634 761 1,086 1,847 285,481   1,434 153  330,960
 318
 1,595
 1,913
 332,873
  1,848
 —

Construction

 181,090 — 5,326 5,326 186,416   5,485 —  180,083
 23
 6,091
 6,114
 186,197
  6,297
 —

Other commercial real estate

 755,103 1,053 16,965 18,018 773,121   16,214 1,534  795,462
 5,365
 6,244
 11,609
 807,071
  8,153
 258
                 

Total commercial real estate

 2,526,353 5,944 45,912 51,856 2,578,209   46,357 2,510  2,641,532
 8,326
 29,968
 38,294
 2,679,826
  33,374
 1,573
                 

Total corporate loans

 4,407,597 10,906 59,798 70,704 4,478,301   73,471 5,023  4,777,348
 15,332
 39,486
 54,818
 4,832,166
  45,660
 1,966
                 

Home equity

 376,801 6,482 6,750 13,232 390,033   6,189 1,651  415,791
 4,830
 6,399
 11,229
 427,020
  6,864
 1,102

1-4 family mortgages

 272,270 4,472 6,206 10,678 282,948   4,874 1,947  268,912
 2,046
 5,034
 7,080
 275,992
  5,198
 548

Installment

 35,936 2,390 68 2,458 38,394   — 68  42,350
 330
 2,147
 2,477
 44,827
  2,076
 92
                 

Total consumer loans

 685,007 13,344 13,024 26,368 711,375   11,063 3,666  727,053
 7,206
 13,580
 20,786
 747,839
  14,138
 1,742
                 

Total loans, excluding covered loans

 5,092,604 24,250 72,822 97,072 5,189,676   84,534 8,689  5,504,401
 22,538
 53,066
 75,604
 5,580,005
  59,798
 3,708

Covered loans

 147,462 6,517 43,915 50,432 197,894   14,182 31,447  94,211
 2,232
 37,912
 40,144
 134,355
  20,942
 18,081
                 

Total loans

 $5,240,066 $30,767 $116,737 $147,504 $5,387,570   $98,716 $40,136  $5,598,612
 $24,770
 $90,978
 $115,748
 $5,714,360
  $80,740
 $21,789
                 


102



Allowance for Credit Losses

The Company maintains an allowance for credit losses at a level deemed adequate by management to absorb probable losses inherent in the loan portfolio. Refer toSee Note 1, "Summary of Significant Accounting Policies," for the accounting policy for the allowance for credit losses. A rollforward of the allowance for credit losses by portfolio segment for the years ended December 31, 2014, 2013, 2012, and 20112012 is presented in the table below.


Table of Contents


Allowance for Credit Losses by Portfolio Segment

(Dollar amounts in thousands)


 Commercial,
Industrial, and
Agricultural		 Office,
Retail, and
Industrial		 Multi-family Construction Other
Commercial
Real Estate		 Consumer Covered
Loans		 Reserve for
Unfunded
Commitments		 Total
Allowance		 

December 31, 2013

                   
 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, 2014As of December 31, 2014                

Beginning balance

 $36,761 $11,432 $3,575 $9,223 $13,531 $12,862 $12,062 $3,366 $102,812  $30,381
 $10,405
 $2,017
 $6,316
 $10,817
 $13,010
 $12,559
 $1,616
 $87,121

Charge-offs

 (12,094) (4,744) (1,029) (1,916) (4,784) (9,414) (4,599) — (38,580) (17,424) (7,345) (943) (1,052) (4,834) (7,574) (1,012) —
 (40,184)

Recoveries

 3,797 228 584 1,032 1,646 1,071 24 — 8,382  3,800
 497
 87
 166
 1,727
 729
 1,199
 —
 8,205
                   

Net charge-offs

 (8,297) (4,516) (445) (884) (3,138) (8,343) (4,575) — (30,198) (13,624) (6,848) (856) (886) (3,107) (6,845) 187
 —
 (31,979)

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  12,701
 7,435
 1,088
 (3,133) 617
 5,980
 (5,520) 200
 19,368
                   

Ending Balance

 $30,381 $10,405 $2,017 $6,316 $10,817 $13,010 $12,559 $1,616 $87,121  $29,458
 $10,992
 $2,249
 $2,297
 $8,327
 $12,145
 $7,226
 $1,816
 $74,510
                   

December 31, 2012

                   
As of December 31, 2013As of December 31, 2013                

Beginning balance

 $46,017 $16,012 $5,067 $17,795 $19,451 $14,131 $989 $2,500 $121,962  $36,761
 $11,432
 $3,575
 $9,223
 $13,531
 $12,862
 $12,062
 $3,366
 $102,812

Charge-offs

 (64,668) (34,968) (3,361) (27,811) (36,474) (10,910) (4,615) — (182,807) (12,094) (4,744) (1,029) (1,916) (4,784) (9,414) (4,599) —
 (38,580)

Recoveries

 3,393 577 275 451 125 784 — — 5,605  3,797
 228
 584
 1,032
 1,646
 1,071
 24
 —
 8,382
                   

Net charge-offs

 (61,275) (34,391) (3,086) (27,360) (36,349) (10,126) (4,615) — (177,202) (8,297) (4,516) (445) (884) (3,138) (8,343) (4,575) —
 (30,198)

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  1,917
 3,489
 (1,113) (2,023) 424
 8,491
 5,072
 (1,750) 14,507
                   

Ending balance

 $36,761 $11,432 $3,575 $9,223 $13,531 $12,862 $12,062 $3,366 $102,812  $30,381
 $10,405
 $2,017
 $6,316
 $10,817
 $13,010
 $12,559
 $1,616
 $87,121
                   

December 31, 2011

                   
As of December 31, 2012As of December 31, 2012                

Beginning balance

 $49,545 $20,758 $3,996 $32,140 $23,655 $12,478 $— $2,500 $145,072  $46,017
 $16,012
 $5,067
 $17,795
 $19,451
 $14,131
 $989
 $2,500
 $121,962

Charge-offs

 (32,750) (8,193) (14,584) (20,211) (15,396) (10,531) (9,911) — (111,576) (64,668) (34,968) (3,361) (27,811) (36,474) (10,910) (4,615) —
 (182,807)

Recoveries

 3,493 79 410 2,964 508 430 — — 7,884  3,393
 577
 275
 451
 125
 784
 —
 —
 5,605
                   

Net charge-offs

 (29,257) (8,114) (14,174) (17,247) (14,888) (10,101) (9,911) — (103,692) (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

 25,729 3,368 15,245 2,902 10,684 11,754 10,900 — 80,582  52,019
 29,811
 1,594
 18,788
 30,429
 8,857
 15,688
 866
 158,052
                   

Ending balance

 $46,017 $16,012 $5,067 $17,795 $19,451 $14,131 $989 $2,500 $121,962  $36,761
 $11,432
 $3,575
 $9,223
 $13,531
 $12,862
 $12,062
 $3,366
 $102,812
                   


103

Table of Contents




The table below provides a breakdown of loans and the related allowance for credit losses by portfolio segment.


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		 Purchased
Impaired		 Total 


 Individually
Evaluated for
Impairment		 Collectively
Evaluated for
Impairment		 Purchased
Impaired		 Total 

December 31, 2013

                           

Commercial, industrial, and agricultural

 $13,178 $2,137,440 $1,722 $2,152,340   $4,046 $26,335 $- $30,381 

Commercial real estate:

                           

Office, retail, and industrial

  26,348  1,327,337  -  1,353,685    214  10,191  -  10,405 

Multi-family

  1,296  331,445  132  332,873    18  1,999  -  2,017 

Construction

  5,712  180,485  -  186,197    178  6,138  -  6,316 

Other commercial real estate                

  9,298  793,703  4,070  807,071    704  10,113  -  10,817 
                    

Total commercial real estate                

  42,654  2,632,970  4,202  2,679,826    1,114  28,441  -  29,555 
                    

Total corporate loans

  55,832  4,770,410  5,924  4,832,166    5,160  54,776  -  59,936 

Consumer

  -  738,155  9,684  747,839    -  13,010  -  13,010 
                    

Total loans, excluding covered loans

  55,832  5,508,565  15,608  5,580,005    5,160  67,786  -  72,946 

Covered loans:

                           

Purchased impaired loans

  -  -  103,525  103,525    -  -  11,857  11,857 

Other loans

  -  30,830  -  30,830    -  702  -  702 
                    

Total 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 
                    

December 31, 2012

                           

Commercial, industrial, and agricultural

 $23,731 $1,874,464 $1,897 $1,900,092   $9,404 $27,357 $- $36,761 

Commercial real estate:

                           

Office, retail, and industrial

  21,736  1,311,455  -  1,333,191    971  10,461  -  11,432 

Multi-family

  642  284,718  121  285,481    -  3,575  -  3,575 

Construction

  4,916  181,500  -  186,416    90  9,133  -  9,223 

Other commercial real estate                

  15,284  753,671  4,166  773,121    1,157  12,374  -  13,531 
                    

Total commercial real estate                

  42,578  2,531,344  4,287  2,578,209    2,218  35,543  -  37,761 
                    

Total corporate loans

  66,309  4,405,808  6,184  4,478,301    11,622  62,900  -  74,522 

Consumer

  -  699,361  12,014  711,375    -  12,862  -  12,862 
                    

Total loans, excluding covered loans

  66,309  5,105,169  18,198  5,189,676    11,622  75,762  -  87,384 

Covered loans:

                           

Purchased impaired loans

  -  -  154,762  154,762    -  -  11,134  11,134 

Other loans

  -  43,132  -  43,132    -  928  -  928 
                    

Total covered loans

  -  43,132  154,762  197,894    -  928  11,134  12,062 
                    

Reserve for unfunded commitments

  -  -  -  -    -  3,366  -  3,366 
                    

Total loans

 $66,309 $5,148,301 $172,960 $5,387,570   $11,622 $80,056 $11,134 $102,812 
                    
  Loans Allowance for Credit Losses
  
Individually
Evaluated for
Impairment
 
Collectively
Evaluated for
Impairment
 PCI Total 
Individually
Evaluated for
Impairment
 
Collectively
Evaluated for
Impairment
 PCI Total
As of December 31, 2014                
Commercial, industrial, and
  agricultural		 $19,796
 $2,588,141
 $3,868
 $2,611,805
 $2,249
 $27,209
 $—
 $29,458
Commercial real estate:                
Office, retail, and industrial 12,332
 1,458,918
 7,129
 1,478,379
 271
 10,721
 —
 10,992
Multi-family 939
 561,400
 2,082
 564,421
 —
 2,249
 —
 2,249
Construction 6,671
 195,094
 2,471
 204,236
 —
 2,297
 —
 2,297
Other commercial real estate 3,266
 880,087
 4,544
 887,897
 11
 8,316
 —
 8,327
Total commercial
real estate		 23,208
 3,095,499
 16,226
 3,134,933
 282
 23,583
 —
 23,865
Total corporate loans 43,004
 5,683,640
 20,094
 5,746,738
 2,531
 50,792
 —
 53,323
Consumer —
 902,062
 8,618
 910,680
 —
 11,822
 323
 12,145
Total loans, excluding
covered loans		 43,004
 6,585,702
 28,712
 6,657,418
 2,531
 62,614
 323
 65,468
Covered loans —
 24,753
 54,682
 79,435
 —
 488
 6,738
 7,226
Reserve for unfunded
commitments		 —
 —
 —
 —
 —
 1,816
 —
 1,816
Total loans $43,004
 $6,610,455
 $83,394
 $6,736,853
 $2,531
 $64,918
 $7,061
 $74,510
As of December 31, 2013                
Commercial, industrial, and
  agricultural		 $13,178
 $2,137,440
 $1,722
 $2,152,340
 $4,046
 $26,335
 $—
 $30,381
Commercial real estate:                
Office, retail, and industrial 26,348
 1,327,337
 —
 1,353,685
 214
 10,191
 —
 10,405
Multi-family 1,296
 331,445
 132
 332,873
 18
 1,999
 —
 2,017
Construction 5,712
 180,485
 —
 186,197
 178
 6,138
 —
 6,316
Other commercial real estate 9,298
 793,703
 4,070
 807,071
 704
 10,113
 —
 10,817
Total commercial
real estate		 42,654
 2,632,970
 4,202
 2,679,826
 1,114
 28,441
 —
 29,555
Total corporate loans 55,832
 4,770,410
 5,924
 4,832,166
 5,160
 54,776
 —
 59,936
Consumer —
 738,155
 9,684
 747,839
 —
 13,010
 —
 13,010
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



Loans Individually Evaluated for Impairment

The following table presents loans individually evaluated for impairment by class of loan as of December 31, 20132014 and 2012. Purchased impaired2013. PCI loans are excluded from this disclosure.


Table of Contents


Impaired Loans Individually Evaluated by Class

(Dollar amounts in thousands)

 As of December 31,

 December 31, 2013  
 December 31, 2012  2014 2013

 Recorded Investment In  
  
  
 Recorded Investment In  
  
  Recorded Investment In      Recorded Investment In    

 Loans with
No Specific
Reserve		 Loans with
a Specific
Reserve		 Unpaid
Principal
Balance		 Specific
Reserve		 


 Loans with
No Specific
Reserve		 Loans with
a Specific
Reserve		 Unpaid
Principal
Balance		 Specific
Reserve		  
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

 $10,047 $3,131 $25,887 $4,046   $5,636 $18,095 $39,834 $9,404  $666
 $19,130
 $35,457
 $2,249
  $10,047
 $3,131
 $25,887
 $4,046

Agricultural

 - - - -   - - - -  —
 —
 —
 —
  —
 —
 —
 —

Commercial real estate:

                     
  
  
  
   
  
  
  

Office, retail, and industrial

 23,872 2,476 35,868 214   14,504 7,232 29,631 971  9,623
 2,709
 18,340
 271
  23,872
 2,476
 35,868
 214

Multi-family

 1,098 198 1,621 18   642 - 2,406 -  939
 —
 1,024
 —
  1,098
 198
 1,621
 18

Construction

 4,586 1,126 10,037 178   4,040 876 11,983 90  6,671
 —
 7,731
 —
  4,586
 1,126
 10,037
 178

Other commercial real estate

 7,553 1,745 11,335 704   5,218 10,066 23,907 1,157  2,752
 514
 4,490
 11
  7,553
 1,745
 11,335
 704
                   

Total commercial real estate

 37,109 5,545 58,861 1,114   24,404 18,174 67,927 2,218  19,985
 3,223
 31,585
 282
  37,109
 5,545
 58,861
 1,114
                   

Total impaired loans individually evaluated for impairment

 $47,156 $8,676 $84,748 $5,160   $30,040 $36,269 $107,761 $11,622  $20,651
 $22,353
 $67,042
 $2,531
  $47,156
 $8,676
 $84,748
 $5,160
                   


The following table presents the average recorded investment and interest income recognized on impaired loans by class for the three years ended December 31, 2014, 2013, is presented in the following table.


and 2012. PCI loans are excluded from this disclosure.

Average Recorded Investment and Interest Income Recognized on Impaired Loans by Class
(Dollar amounts in thousands)


 Years Ended December 31,  Years Ended December 31,

 2013  
 2012  
 2011  2014 2013 2012

 Average
Recorded
Balance		 Interest
Income
Recognized(1)		  
 Average
Recorded
Balance		 Interest
Income
Recognized(1)		  
 Average
Recorded
Balance		 Interest
Income
Recognized(1)		  
Average
Recorded
Balance
 
Interest
Income
Recognized (1)
 
Average
Recorded
Balance
 
Interest
Income
Recognized (1)
 Average
Recorded
Balance		 
Interest
Income
Recognized (1)

Commercial and industrial

 $20,925 $205   $45,101 $94   $44,449 $326  $16,137
 $371
 $20,925
 $205
 $45,101
 $94

Agricultural

 - -   1,138 -   1,515 -  —
 —
 —
 —
 1,138
 —

Commercial real estate:

                   
  
  
  
  
  

Office, retail, and industrial

 24,802 18   32,439 2   33,038 81  19,003
 245
 24,802
 18
 32,439
 2

Multi-family

 1,116 8   6,226 -   13,619 44  1,245
 5
 1,116
 8
 6,226
 —

Construction

 5,932 -   31,202 1   62,513 69  5,764
 —
 5,932
 —
 31,202
 1

Other commercial real estate

 13,141 31   35,715 38   17,180 76  6,014
 138
 13,141
 31
 35,715
 38
                 

Total commercial real estate

 44,991 57   105,582 41   126,350 270  32,026
 388
 44,991
 57
 105,582
 41
                 

Total impaired loans

 $65,916 $262   $151,821 $135   $172,314 $596  $48,163
 $759
 $65,916
 $262
 $151,821
 $135
                 

(1)
Recorded using the cash basis of accounting.

105



Credit Quality Indicators

Corporate loans and commitments are assessed for credit risk and assigned ratings based on various characteristics, such as the borrower's cash flow, leverage, and collateral. Ratings for commercial credits are reviewed periodically. The following tables present credit quality indicators by class for corporate and consumer loans, excluding covered loans, as of December 31, 20132014 and 2012.

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 

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 
            

December 31, 2012

                

Commercial and industrial

 $1,558,932 $37,833 $8,768 $25,941 $1,631,474 

Agricultural

  267,114  331  -  1,173  268,618 

Commercial real estate:

                

Office, retail, and industrial

  1,235,950  57,271  16,746  23,224  1,333,191 

Multi-family

  282,126  1,921  -  1,434  285,481 

Construction

  128,959  26,210  25,762  5,485  186,416 

Other commercial real estate

  712,702  14,056  30,149  16,214  773,121 
            

Total commercial real estate

  2,359,737  99,458  72,657  46,357  2,578,209 
            

Total corporate loans

 $4,185,783 $137,622 $81,425 $73,471 $4,478,301 
            
  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

Table of Contents





Consumer Credit Quality Indicators by Class, Excluding Covered Loans
(Dollar amounts in thousands)


 Performing Non-accrual Total 

December 31, 2013

       
 Performing Non-accrual Total
As of December 31, 2014      

Home equity

 $420,156 $6,864 $427,020  $536,895
 $6,290
 $543,185

1-4 family mortgages

 270,794 5,198 275,992  288,522
 2,941
 291,463

Installment

 42,751 2,076 44,827  75,989
 43
 76,032
       

Total consumer loans

 $733,701 $14,138 $747,839  $901,406
 $9,274
 $910,680
       

December 31, 2012

       
As of December 31, 2013      

Home equity

 $383,844 $6,189 $390,033  $420,156
 $6,864
 $427,020

1-4 family mortgages

 278,074 4,874 282,948  270,794
 5,198
 275,992

Installment

 38,394 - 38,394  42,751
 2,076
 44,827
       

Total consumer loans

 $700,312 $11,063 $711,375  $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, 20132014 and 2012. Refer to2013. 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,

 As of December 31, 2013 As of December 31, 2012  2014 2013

 Accruing Non-accrual(1) Total Accruing Non-accrual(1) Total  Accruing 
Non-accrual (1)
 Total Accruing 
Non-accrual (1)
 Total

Commercial and industrial

 $6,538 $2,121 $8,659 $519 $2,545 $3,064  $269
 $18,799
 $19,068
 $6,538
 $2,121
 $8,659

Agricultural

 - - - - - -  —
 —
 —
 —
 —
 —

Commercial real estate:

                         

Office, retail, and industrial

 10,271 - 10,271 - 2,407 2,407  586
 —
 586
 10,271
 —
 10,271

Multi-family

 1,038 253 1,291 - 150 150  887
 232
 1,119
 1,038
 253
 1,291

Construction

 - - - - - -  —
 —
 —
 —
 —
 —

Other commercial real estate

 4,326 291 4,617 5,206 4,649 9,855  433
 183
 616
 4,326
 291
 4,617
             

Total commercial real estate

 15,635 544 16,179 5,206 7,206 12,412  1,906
 415
 2,321
 15,635

544
 16,179
             

Total corporate loans

 22,173 2,665 24,838 5,725 9,751 15,476  2,175
 19,214
 21,389
 22,173
 2,665
 24,838
             

Home equity

 787 512 1,299 40 234 274  651
 506
 1,157
 787
 512
 1,299

1-4 family mortgages

 810 906 1,716 1,102 939 2,041  878
 184
 1,062
 810
 906
 1,716

Installment

 - - - - - -  —
 —
 —
 —
 —
 —
             

Total consumer loans

 1,597 1,418 3,015 1,142 1,173 2,315  1,529
 690
 2,219
 1,597
 1,418
 3,015
             

Total loans

 $23,770 $4,083 $27,853 $6,867 $10,924 $17,791  $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. TDRs had relatedThere were $1.8 million in specific reserves totaling $2.0 millionrelated to TDRs as of December 31, 20132014, and $2.8there were $2.0 million in specific reserves related to TDRs as of December 31, 2012.

2013.

107

Table of Contents



The following table presents a summary of loans that were restructured during the years ended December 31, 2014, 2013, 2012, and 2011.


TDRs2012.

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		 
 
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  7
 $14,439
 $—
 $2
 $—
 $14,441

Office, retail, and industrial

 6 2,275 30 - - 2,305  6
 2,275
 30
 —
 —
 2,305

Multi-family

 5 1,274 - 57 - 1,331  5
 1,274
 —
 57
 —
 1,331

Construction

 2 508 - - - 508  2
 508
 —
 —
 —
 508

Other commercial real estate

 5 526 - - - 526  5
 526
 —
 —
 —
 526

Home equity

 13 1,189 - - - 1,189  13
 1,189
 —
 —
 —
 1,189

1-4 family mortgages

 1 132 - 4 - 136  1
 132
 —
 4
 —
 136
             

Total TDRs restructured in 2013

 39 $20,343 $30 $63 $- $20,436 
             
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  5
 $3,277
 $—
 $—
 $170
 $3,107

Office, retail, and industrial

 2 2,416 - - - 2,416  2
 2,416
 —
 —
 —
 2,416

Other commercial real estate

 5 1,070 - - 125 945  5
 1,070
 —
 —
 125
 945

Home equity

 1 19 - - - 19  1
 19
 —
 —
 —
 19

1-4 family mortgages

 4 563 - 4 - 567  4
 563
 —
 4
 —
 567
             

Total TDRs restructured in 2012

 17 $7,345 $- $4 $295 $7,054 
             

Year Ended December 31, 2011

             

Commercial and industrial

 10 $886 $- $7 $- $893 

Office, retail, and industrial

 3 3,407 293 9 - 3,709 

Multi-family

 1 14,107 - - 3,000 11,107 

Construction

 1 17,508 - - - 17,508 

Other commercial real estate

 1 174 - 74 - 248 

Home equity

 9 523 - 15 - 538 

1-4 family mortgages

 11 1,440 - 79 - 1,519 

Installment

 1 151 - 4 - 155 
             

Total TDRs restructured in 2011

 37 $38,196 $293 $188 $3,000 $35,677 
             
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.


Table of Contents


TDRs That Defaulted Within Twelve Months of the Restructured Date

(Dollar amounts in thousands)


 Years Ended December 31,  Years Ended December 31,

 2013 2012 2011  2014 2013 2012

 Number of
Loans		 Recorded
Investment		 Number of
Loans		 Recorded
Investment		 Number of
Loans		 Recorded
Investment		  
Number
of
Loans
 
Recorded
Investment
 
Number
of
Loans
 
Recorded
Investment
 
Number
of
Loans
 
Recorded
Investment

Commercial and industrial

 1 $350 - $- 1 $128  2
 $125
 1
 $350
 —
 $—

Office, retail, and industrial

 - - 2 837 1 397  —
 —
 —
 —
 2
 837

Other commercial real estate

 3 354 2 717 - -  —
 —
 3
 354
 2
 717

Home equity

 - - - - 1 83  1
 77
 —
 —
 —
 —

1-4 family mortgages

 - - 1 62 2 331  —
 —
 —
 —
 1
 62
             

Total

 4 $704 5 $1,616 5 $939  3
 $202
 4
 $704
 5
 $1,616
             


108




A rollforward of the carrying value of TDRs for the years ended December 31, 2014, 2013, 2012, and 20112012 is presented in the following table.


TDR Rollforward
(Dollar amounts in thousands)


 Years Ended December 31,  Years Ended December 31,

 2013 2012 2011  2014 2013 2012

Accruing

             

Beginning balance

 $6,867 $17,864 $22,371  $23,770
 $6,867
 $17,864

Additions

 4,847 2,504 17,921  804
 4,847
 2,504

Net payments received

 (723) (205) (1,957)
Net payments (1,440) (723) (205)

Returned to performing status

 (5,529) (16,619) (25,697) (20,656) (5,529) (16,619)

Net transfers from non-accrual

 18,308 3,323 5,226  1,226
 18,308
 3,323
       

Ending balance

 23,770 6,867 17,864  3,704
 23,770
 6,867
       

Non-accrual

             

Beginning balance

 10,924 29,842 33,753  4,083
 10,924
 29,842

Additions

 15,589 4,550 17,756  23,815
 15,589
 4,550

Net payments received

 (1,359) (1,761) (7,123)
Net advances (payments) 1,991
 (1,359) (1,761)

Charge-offs

 (1,880) (10,003) (8,890) (8,457) (1,880) (10,003)

Transfers to OREO

 (77) (6,778) (428) (302) (77) (6,778)

Loans sold

 (806) (1,603) -  —
 (806) (1,603)

Net transfers to accruing

 (18,308) (3,323) (5,226) (1,226) (18,308) (3,323)
       

Ending balance

 4,083 10,924 29,842  19,904
 4,083
 10,924
       

Total TDRs

 $27,853 $17,791 $47,706  $23,608
 $27,853
 $17,791
       


For TDRs to be removed from TDR status in the calendar year after the restructuring, the loans must (i) have an interest rate and terms that reflect market conditions at the time of restructuring, and (ii) be in compliance with the modified terms. TDRs that were returned to performing status totaled $20.7 million, $5.5 million $16.6 million, and $25.7$16.6 million for the years ended December 31, 2014, 2013, 2012, and 2011,2012, respectively. Loans that were not restructured at market rates and terms, that are not in compliance with the modified terms, or for which there is a concern about the future ability of the borrower to meet its obligations under the modified terms, continue to be separately reported as restructured until paid in full or charged-off.

As of December 31, 2013, there

There were $666,000 and $180,000 in commitments to lend additional funds to borrowers with TDRs and there were no commitments as of December 31, 2012.

2014 and 2013, respectively.

109

Table of Contents

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, 
 
 2013 2012 

Land

 $48,590 $49,744 

Premises

  139,336  143,441 

Furniture and equipment

  81,002  75,481 
      

Total cost

  268,928  268,666 

Accumulated depreciation

  (152,751) (148,738)
      

Net book value of premises, furniture, and equipment

  116,177  119,928 

Assets held-for-sale

  4,027  1,668 
      

Total premises, furniture, and equipment

 $120,204 $121,596 
      


  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, 
 
 2013 2012 2011 

Depreciation expense on premises, furniture, and equipment

 $11,038 $10,874 $10,995 

Valuation adjustments on excess properties and assets held-for-sale

  -  2,597  1,111 

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, 2013,2014, the Company was obligated to utilize certain premises and equipment under certain non-cancelable operating leases, which expire at various dates through the year ended December 31, 2024.2030. 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 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, 2013.


2014.

Future Minimum Operating Lease Payments
(Dollar amounts in thousands)


 Total  Total

Year ending December 31,

     

2014

 $3,774 

2015

 3,592  $5,071

2016

 3,564  4,697

2017

 3,013  4,592

2018

 2,907  3,873

2019 and thereafter

 4,059 
   
2019 2,082
2020 and thereafter 13,031

Total minimum lease payments

 $20,909  $33,346
   



Table

As part of Contents

 
 Years Ended December 31, 
 
 2013 2012 2011 

Lease expense charged to operations(1)

 $3,123 $3,379 $4,193 

Rental income from premises leased to others(2)

  531  931  1,136 
Financial Condition.

8.



110



The following table presents the remaining scheduled accretion of the 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.
9.  GOODWILL AND OTHER INTANGIBLE ASSETS

The Company's annual goodwill impairment test was performed as of October 1, 2013.2014. 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. The carrying amount of goodwill was $264.1 million at December 31, 2013 and $265.5 million at December 31, 2012. Goodwill decreased $1.4 million from the prior year as a result of the sale of an equity method investment during the year ended December 31, 2013. For a discussion of the accounting policies for goodwill and other intangible assets, refer tosee Note 1, "Summary of Significant Accounting Policies."

The following table presents changes in the carrying amount of goodwill for the years ended December 31, 2014, 2013, and 2012.
Changes in the Carrying Amount of Goodwill
(Dollar amounts in thousands)
  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
During the year ended December 31, 2014, the increase in goodwill resulted from the Popular, Great Lakes, and National Machine Tool acquisitions. See Note 3, "Acquisitions," for additional detail regarding these transactions.
The Company's other intangible assets are core deposit intangibles, which are being amortized over their estimated useful lives. The Company's annual impairment testing was performed as of November 30, 20132014 by comparing the carrying value of other intangible assets with our anticipated discounted expected future cash flows, and it was determined that no impairment existed as of that date.


111



Other Intangible Assets
(Dollar amounts in thousands)


 Years Ended December 31,  Years Ended December 31,

 2013 2012 2011  2014 2013 2012

 Gross Accumulated
Amortization		 Net Gross Accumulated
Amortization		 Net Gross Accumulated
Amortization		 Net  Gross 
Accumulated
Amortization
 Net Gross 
Accumulated
Amortization
 Net Gross 
Accumulated
Amortization
 Net

Beginning balance

 $33,775 $18,193 $15,582 $34,318 $16,145 $18,173 $42,832 $22,276 $20,556  $33,775
 $21,471
 $12,304
 $33,775
 $18,193
 $15,582
 $34,318
 $16,145
 $18,173

Additions

 - - - 781 - 781 1,419 - 1,419  14,195
 —
 14,195
 —
 —
 —
 781
 —
 781

Amortization expense

 - 3,278 (3,278) - 3,372 (3,372) - 3,802 (3,802) —
 2,889
 (2,889) —
 3,278
 (3,278) —
 3,372
 (3,372)

Fully amortized assets

 - - - (1,324) (1,324) - (9,933) (9,933) -  —
 —
 —
 —
 —
 —
 (1,324) (1,324) —
                   

Ending balance

 $33,775 $21,471 $12,304 $33,775 $18,193 $15,582 $34,318 $16,145 $18,173  $47,970
 $24,360
 $23,610
 $33,775
 $21,471
 $12,304
 $33,775
 $18,193
 $15,582
                   

Weighted-average remaining life (in years)

     5.9     6.4     6.9 Weighted-average remaining life (in years) 8.0
  
  
 5.9
  
  
 6.4

Estimated useful lives (in years)

     3.3 to 12.8     3.3 to 12.8     3.3 to 12.6 
Estimated remaining useful lives (in years)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,

     

2014

 $2,689 

2015

 2,500  $3,920

2016

 2,424  3,843

2017

 1,643  3,063

2018

 719  2,138

2019 and thereafter

 2,329 
   
2019 2,073
2020 and thereafter 8,573

Total

 $12,304  $23,610
   

9.

10.  DEPOSITS

The following table presents the Company's deposits by type.


Table of Contents


Summary of Deposits

(Dollar amounts in thousands)


 December 31,  As of December 31,

 2013 2012  2014 2013

Demand deposits

 $1,911,602 $1,762,903  $2,301,757
 $1,911,602

Savings deposits

 1,135,155 1,092,545  1,391,444
 1,135,155

NOW accounts

 1,220,693 1,160,680  1,413,973
 1,220,693

Money market deposits

 1,290,868 1,256,179  1,509,026
 1,290,868

Time deposits less than $100,000

 820,925 963,850  859,441
 820,925

Time deposits greater than $100,000

 386,858 436,098  412,117
 386,858
     

Total deposits

 $6,766,101 $6,672,255  $7,887,758
 $6,766,101
     


112



The following table provides maturity information related to the Company's time deposits.


Scheduled Maturities of Time Deposits
(Dollar amounts in thousands)


 Total  Total

Year ending December 31,

     

2014

 $785,458 

2015

 232,131  $865,149

2016

 106,335  211,496

2017

 52,826  89,061

2018

 30,719  38,623

2019 and thereafter

 314 
   
2019 66,961
2020 and thereafter 268

Total

 $1,207,783  $1,271,558
   

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,

 2013 2012  2014 2013

Securities sold under agreements to repurchase

 $109,792 $71,403  $137,994
 $109,792

FHLB advances

 114,550 114,581  —
 114,550
     

Total borrowed funds

 $224,342 $185,984  $137,994
 $224,342
     

Securities sold under agreements to repurchase 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 the Treasury and U.S. agency securities and are held in third party pledge accounts, if required. The securities underlying the agreements remain in the respective asset accounts. As of December 31, 2013,2014, 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.

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, 2013, allFHLB 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.


Tablean outstanding balance as of Contents


MaturityDecember 31, 2014 and Rate Schedule for FHLB Advances
(Dollar amounts in thousands)

2013.
 
 December 31, 2013 December 31, 2012 
Maturity Date Advance
Amount		 Rate % Advance
Amount		 Rate % 

January 21, 2014

 $-  - $37,500  1.15 

January 20, 2015

  -  -  25,000  1.94 

January 20, 2015

  -  -  50,000  2.02 

February 23, 2015

  37,500  0.80  -  - 

August 20, 2015

  2,050  1.92  2,081  1.92 

February 22, 2017

  25,000  1.56  -  - 

February 22, 2017

  50,000  1.60  -  - 
          

 $114,550  1.34 $114,581  1.72 
          


Short-Term Credit Lines Available for Use

(Dollar amounts in thousands)

 
 December 31, 
 
 2013 2012 

Available federal funds lines(1)

 $681,100 $500,600 

Federal Reserve Bank's Discount Window Primary Credit Program

  632,498  1,625,826 
  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.

11. 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.

113



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, 
 
 2013 2012 

5.875% senior notes due in 2016

       

Principal amount

 $115,000 $115,000 

Discount

  (355) (477)
      

Total senior notes due in 2016

  114,645  114,523 
      

5.85% subordinated notes due in 2016

       

Principal amount

  38,500  38,500 

Discount

  (9) (14)
      

Total subordinated notes due in 2016

  38,491  38,486 
      

6.95% junior subordinated debentures due in 2033

       

Principal amount

  37,825  61,820 

Discount

  (29) (50)
      

Total junior subordinated debentures

  37,796  61,770 
      

Total senior and subordinated debt

 $190,932 $214,779 
      
    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

Junior Subordinated Debentures

Table of Contents

Debt Retirement

FMCT is a Delaware statutory business trust that was formed in 2003. During the fourth quarter of 2013,2014, the Company acquired two Delaware statutory business trusts, GLST II and GLST III, in the Great Lakes transaction. These trusts were established for the purpose of issuing trust-preferred securities and lending the proceeds to the Company in return for junior subordinated debentures of the Company. The Company guarantees payments of distributions on the trust-preferred securities and payments on redemption of the trust-preferred securities on a limited basis. The statutory trusts qualify as variable interest entities for which the Company is not the primary beneficiary. Consequently, the accounts of those entities are not consolidated in the Company's financial statements.
Debt Retirement
The Company repurchased and retired $24.0 million of junior subordinated debentures at a premium of 3.5%. during 2013. This transaction resulted in the recognition of a pre-tax loss of $1.0 million and is included in other noninterest income in the Consolidated Statements of Income.

During the first quarter of 2012, the Company repurchased and retired $21.1 million of junior subordinated debentures at a discount of 2.3%. During the fourth quarter of 2012, the Company repurchased and retired $4.3 million of junior subordinated debentures at a premium of 3.0% and $12.0 million of subordinated notes at a premium of 5.0%. Net pre-tax losses for these transactions totaled $558,000.

12.

13.  MATERIAL TRANSACTIONS AFFECTING STOCKHOLDERS' EQUITY

Redemption of Preferred Shares

In response to the financial crises affecting the financial markets and the banking system in 2008, the Treasury announced several initiatives under the Troubled Asset Relief Program ("TARP") intended to help stabilize the banking industry. As part of this program,

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 preferred151,000,000 shares, and a warrant to purchase up to 1,305,230including 1,000,000 shares of the Company's common stock in exchange for $193.0 million in cash.

In NovemberPreferred Stock, without a par value, and 150,000,000 shares of 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 a $115.0 million senior debt issuance. In December of 2011, the Company redeemed the Treasury's common stock warrant for $900,000, which concluded the Company's participation in the TARP.

The Company paid total dividends to the Treasury of $8.7 million in 2011.

Common Stock, $0.01 par value per 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 from 20112012 through the first quarter of 2013. The Company increased the quarterly dividend to $0.04 per share during the second quarter of 2013, and to $0.07 per share during the fourth quarter of 2013.

2013, and to $0.08 per share during the second quarter of 2014.

There were no additional material transactions that affected stockholders' equity during the three years ended December 31, 2013.

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.


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Basic and Diluted Earnings (Loss) per Common Share

(Amounts in thousands, except per share data)


 Years Ended December 31,  Years Ended December 31,

 2013 2012 2011  2014 2013 2012

Net income (loss)

 $79,306 $(21,054)$36,563  $69,306
 $79,306
 $(21,054)

Preferred dividends

 - - (8,658)

Accretion on preferred stock(1)

 - - (2,118)

Net (income) loss applicable to participating securities

 (1,107) 306 (350)
       
Net (income) loss applicable to non-vested restricted shares (836) (1,107) 306

Net income (loss) applicable to common shares

 $78,199 $(20,748)$25,437  $68,470
 $78,199
 $(20,748)
       

Weighted-average common shares outstanding:

             

Weighted-average common shares outstanding (basic)

 73,984 73,665 73,289  74,484
 73,984
 73,665

Dilutive effect of common stock equivalents

 10 1 -  12
 10
 1
       

Weighted-average diluted common shares outstanding

 73,994 73,666 73,289  74,496
 73,994
 73,666
       

Basic earnings (loss) per common share

 $1.06 $(0.28)$0.35  $0.92
 $1.06
 $(0.28)

Diluted earnings (loss) per common share

 1.06 (0.28) 0.35  0.92
 1.06
 (0.28)

Anti-dilutive shares not included in the computation of diluted earnings per common share(2)

 1,462 1,759 3,511 
Anti-dilutive shares not included in the computation of
diluted earnings per common share (1)
 1,198
 1,462
 1,759

14.
(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.


15.  INCOME TAXES

Components of Income Tax Expense (Benefit)
(Dollar amounts in thousands)


 Years Ended December 31,  Years Ended December 31,

 2013 2012 2011  2014 2013 2012

Current income tax expense:

             

Federal

 $4,744 $- $1,929  $16,343
 $4,744
 $—

State

 10,504 1 419  (1,388) 10,504
 1
       

Total

 15,248 1 2,348  14,955
 15,248
 1
       

Deferred income tax expense (benefit):

             

Federal

 31,572 (23,728) 1,605  7,901
 31,572
 (23,728)

State

 1,895 (5,155) 555  8,314
 1,895
 (5,155)
       

Total

 33,467 (28,883) 2,160  16,215
 33,467
 (28,883)
       

Total income expense (benefit)

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

Federal 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 tofor consolidated/combined reporting and sourcing of income and expense.

Income tax expense totaled $48.7$31.2 million for the year ended December 31, 2014 compared to income tax expense of $48.7 million for the year ended December 31, 2013 compared toand an income tax benefit of $28.9$28.9 million for the year ended December 31, 2012 and income tax expense of $4.5 million for the year ended


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December 31, 2011.2012. The risedecrease in income tax expense in 2014 was driven primarily by a decrease in income subject to tax at statutory rates. The increase in income tax expense from 2012 to 2013 was the result of an increase in income subject to tax at statutory rates and to a non-deductible BOLI modification loss recorded in the third quarter of 2013. The decrease in income tax expense from 2011 to 2012 was driven primarily by a decrease in income subject to tax at statutory rates and to a $1.6 million tax benefit recorded in first quarter 2011 related to changes in the Illinois tax rate.

Differences between the amounts reported in the consolidated financial statements and the tax basis of assets and liabilities result in temporary differences for which deferred tax assets and liabilities were recorded.


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Deferred Tax Assets and Liabilities
(Dollar amounts in thousands)


 December 31,  As of December 31,

 2013 2012  2014 2013

Deferred tax assets:

         

Alternative minimum tax ("AMT") and other credit carryforwards

 $19,184 $13,379  $29,007
 $19,184

Federal net operating loss ("NOL") carryforwards

 14,579 54,770  —
 14,579

Allowance for credit losses

 30,492 31,762  26,078
 30,492

Unrealized losses on securities

 21,374 23,737  18,527
 21,374

OREO

 6,541 4,949  3,480
 6,541

State NOL carryforwards

 15,859 17,287  11,917
 15,859

Other

 19,049 15,047  18,390
 19,049
     

Total deferred tax assets

 127,078 160,931  107,399
 127,078
     

Deferred tax liabilities:

         

Purchase accounting adjustments and intangibles

 (16,977) (15,402) (11,181) (16,977)

Deferred loan fees

 (1,984) (2,565)

Accrued retirement benefits

 (7,095) (5,151) (6,732) (7,095)

FHLB stock dividends

 (1,222) (2,167)

Depreciation

 (2,111) (2,049) (845) (2,111)

Cancellation of indebtedness income

 (5,340) (5,340) (4,272) (5,340)

Other

 (3,107) (5,548) (3,978) (6,313)
     

Total deferred tax liabilities

 (37,836) (38,222) (27,008) (37,836)
     

Deferred tax valuation allowance

 - -  —
 —
     

Net deferred tax assets

 89,242 122,709  80,391
 89,242

Tax effect of adjustments related to other comprehensive (loss) income

 18,382 10,896 
     
Tax effect of adjustments related to other comprehensive income (loss) 11,294
 18,382

Net deferred tax assets including adjustments

 $107,624 $133,605  $91,685
 $107,624
     

Net operating loss carryforwards available to offset future taxable income:

         

Federal gross NOL carryforwards, begin to expire in 2032

 $41,654 $156,486  $—
 $41,654

Illinois gross NOL carryforwards, begin to expire in 2018

 290,076 297,448 
Illinois gross NOL carryforwards, begin to expire in 2021 232,834
 290,076

Indiana gross NOL carryforwards, begin to expire in 2022

 16,112 31,170  17,192
 16,112

Other credits(1)

 19,184 13,379 
Alternative minimum tax credits 25,739
 16,090
Other credits, begin to expire in 2028 3,268
 3,094
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.


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Components of Effective Tax Rate


 Years Ended December 31, Years Ended December 31,

 2013 2012 2011 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

 (6.2)% 16.8% (21.3)% (7.5)% (6.2)% 16.8 %

State income tax, net of federal income tax effect

 6.4% 7.0% (0.3)% 4.5 % 6.4 % 7.0 %

Net other

 2.9% (1.0)% (2.4)% (1.0)% 2.9 % (1.0)%
      

Effective tax rate

 38.1% 57.8% 11.0% 31.0 % 38.1 % 57.8 %
      

The change in effective tax rate from the year ended December 31, 2013 to the year ended December 31, 2014 was the result of a decrease in income subject to tax at statutory rates. The change in effective tax rate from the year ended December 31, 2012 to the year ended December 31, 2013 was the result of an increase in income subject to tax at statutory rates and a non-deductible BOLI modification loss recorded in the third quarter of 2013. The change in effective tax rate from the year ended December 31, 2011 to the year ended December 31, 2012 was driven primarily by a decrease in income subject to tax at statutory rates and to a $1.6 million tax benefit recorded in the first quarter of 2011 related to changes in the Illinois tax rate.


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As of December 31, 2014, 2013, 2012, and 2011,2012, 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. The Internal Revenue Service completed audits of the Company's 2006-2010 federal income tax returns during 2012. Audits of the Company's 2006-2007and Illinois income tax returns were closed during 2011. Auditscompleted audits of the Company's 2008-2009 Illinois income tax returnsreturns. No significant adjustments were closed during 2012. None ofproposed in these audits resulted in significant adjustments.

audits.

Federal income tax returns filed by the Company for 2008, 2010, 2011 and 2012 are no longer subject to examination by federal income tax authorities.authorities for years prior to 2011. The Company is no longer subject to examination by Illinois, Indiana, Iowa and Wisconsin tax authorities for years prior to 2009.


2011.

Rollforward of Unrecognized Tax Benefits
(Dollar amounts in thousands)

 
 Years Ended December 31, 
 
 2013 2012 2011 

Beginning balance

 $- $368 $429 

Additions for tax positions relating to the current year

  279  -  - 

Additions for tax positions relating to prior years

  -  -  226 

Reductions for tax positions relating to prior years

  -  -  (80)

Reductions for settlements with taxing authorities

  -  (368) (207)
        

Ending balance

 $279 $- $368 
        

Interest and penalties not included above(1):

          

Interest (benefit) expense, net of tax effect, and penalties

 $- $(52)$44 

Accrued interest and penalties, net of tax effect, at end of year

  -  -  52 
  Years Ended December 31,
  2014 2013 2012
Beginning balance $279
 $—
 $368
Additions for tax positions relating to the current year 635
 279
 —
Reductions for tax positions relating to prior years (2) —
 —
Reductions for settlements with taxing authorities —
 —
 (368)
Ending balance $912
 $279
 $—
Interest and penalties not included above (1):
      
Interest (benefit) expense, net of tax effect, and penalties $4
 $—
 $(52)
Accrued interest and penalties, net of tax effect, at end of year 4
 —
 —

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(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, 2014 and 2013 are tax positions totaling $597,000 and $181,000, respectively, that would favorably affect the Company's effective tax rate if recognized in future periods.

15.


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16.  EMPLOYEE BENEFIT PLANS

Profit Sharing Plan

The Company has a defined contribution retirement savings plan (the "Profit Sharing Plan"), which gives that covers qualified employees who 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. For certain employees who make voluntary contributionsThe 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 Profit Sharing Plan,amendment, the Company contributesmakes certain automatic and transition contributions. On an amount annually equal toannual basis, the Company automatically contributes 2% of the employee's eligible compensation.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 were 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, 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 six years.


Profit Sharing Plan
(Dollar amounts in thousands)


 Years Ended December 31,  Years Ended December 31,

 2013 2012 2011  2014 2013 2012

Profit sharing expense(1)

 $2,914 $2,532 $2,897  $6,354
 $2,914
 $2,532

Company dividends received by the Profit Sharing Plan

 $159 $71 $72  $428
 $159
 $71

Company shares held by the Profit Sharing Plan at the end of the year:

             

Number of shares

 1,426,708 1,743,085 1,806,262  1,364,558
 1,426,708
 1,743,085

Fair value

 $25,010 $21,823 $18,297  $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 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 employees who met certain eligibility requirements and were hired before April 1, 2007, the date it was amended to eliminate new enrollment of new participants. During the second quarter of 2013, the Board of Directors approved an amendment to freeze benefit accruals under the Pension Plan effective on January 1, 2014. As a result of the Pension Plan amendment, the Company recorded an immaterial curtailment loss and remeasured the Pension Plan obligations and assets as of June 30, 2013. Based on December 31, 2013 actuarial assumptions, the amendment decreased the pension obligation by $9.9 million and increased other comprehensive income (loss) income 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 and included in retirement and other employee benefits in the Consolidated Statements of Income. The Company's funding policy is to contribute amounts to the Pension Plan that are sufficient to meet the minimum funding requirements of the Employee Retirement Income Security Act of 1974 plus additional amounts as the Company deems appropriate.


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Pension Plan Cost and Obligations
(Dollar amounts in thousands)


 December 31,  As of December 31,

 2013 2012  2014 2013

Accumulated benefit obligation

 $61,292 $62,326  $67,283
 $61,292
     

Change in projected benefit obligation:

         

Beginning balance

 $72,855 $63,011  $61,292
 $72,855

Service cost

 2,600 2,862  —
 2,600

Interest cost

 2,414 2,720  2,346
 2,414

Curtailment

 (9,947) -  —
 (9,947)

Actuarial (gain) loss

 (1,494) 9,331 
Settlements (6,502) —
Actuarial loss (gain) 10,508
 (1,494)

Benefits paid

 (5,136) (5,069) (361) (5,136)
     

Ending balance

 $61,292 $72,855  $67,283
 $61,292
     

Change in fair value of plan assets:

         

Beginning balance

 $63,501 $62,990  $74,370
 $63,501

Actual return on plan assets

 9,005 5,580  4,686
 9,005

Benefits paid

 (5,136) (5,069) (361) (5,136)

Employer contributions

 7,000 -  —
 7,000
     
Settlements (6,502) —

Ending balance

 $74,370 $63,501  $72,193
 $74,370
     

Funded status recognized in the Consolidated Statements of Financial Condition:

         

Noncurrent asset (liability)

 $13,078 $(9,354)
Noncurrent asset $4,910
 $13,078

Amounts recognized in accumulated other comprehensive loss:

         

Prior service cost

 $- $1  $—
 $—

Net loss

 10,784 28,383  19,911
 10,784
     

Net amount recognized

 $10,784 $28,384  $19,911
 $10,784
     

Actuarial losses included in accumulated other comprehensive loss as a percent of:

         

Accumulated benefit obligation

 17.6% 45.5%  29.6% 17.6%

Fair value of plan assets

 14.5% 44.7%  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

 $- $1  $—
 $—

Net loss

 215 2,358  401
 215
     

Net amount expected to be recognized

 $215 $2,359  $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

 4.30% 3.40%  3.60% 4.30%

Rate of compensation increase

 N/A(1) 2.50% 
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 in the second quarter of


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2013.participants. Actuarial losses included in accumulated other comprehensive loss as of December 31, 20132014 exceeded 10% of the accumulated benefit obligation and the fair value of Pension Plan assets. The amortization of net actuarial losses is a component


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of the net periodic benefit cost. Amortization of the net actuarial losses and prior service cost included in other comprehensive income (loss) income is not expected to have a material impact on the Company's future results of operations, financial position, or liquidity.


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, 
 
 2013 2012 2011 

Components of net periodic benefit cost:

          

Service cost

 $2,600 $2,862 $2,725 

Interest cost

  2,414  2,720  3,032 

Expected return on plan assets

  (4,299) (4,456) (4,110)

Recognized net actuarial loss

  1,453  1,684  976 

Amortization of prior service cost

  1  3  3 

Other (1)

  -  -  1,285 
        

Net periodic cost

  2,169  2,813  3,911 
        

Other changes in plan assets and benefit obligations recognized as a charge to other comprehensive (loss) income:

          

Net gain (loss) for the period

  16,146  (8,207) (11,124)

Amortization of prior service cost

  1  4  4 

Amortization of net loss

  1,453  1,683  2,260 
        

Total unrealized gain (loss)

  17,600  (6,520) (8,860)
        

Total recognized in net periodic pension cost and other comprehensive (loss) income

 $15,431 $(9,333)$(12,771)
        

Weighted-average assumptions used to determine the net periodic cost:

          

Discount rate

  3.40%  4.40%  5.50% 

Expected return on plan assets

  7.25%  7.25%  7.50% 

Rate of compensation increase

  2.50%  2.50%  3.00% 
      
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%


Pension Plan Asset Allocation
(Dollar amounts in thousands)

 
  
  
 Percentage of Plan Assets 
 
 Target
Allocation		 Fair Value of
Plan Assets (1)		 
 
 2013 2012 

Asset Category:

            

Equity securities

 50 - 60% $46,925  63%  59% 

Fixed income

 30 - 48%  22,175  30%  35% 

Cash equivalents

 2 - 10%  5,270  7%  6% 
          

Total

   $74,370  100%  100% 
          

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As of December 31, 2013, the equity securities category allocation was outside the target range due to improved market performance. Subsequent to December 31, 2013, the Pension Plan assets were rebalanced and all asset categories were within the target allocation.

(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 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 and reallocating those assets as needed to stay within those allocations. Investments are weighted toward publicly traded securities. Investment strategies that include alternative asset classes, such as private equity hedge funds and real estate, are generally avoided. 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 amendment to freeze benefit accruals under the Pension Plan effective January 1, 2014, the Company does not anticipate making a contribution to the Pension Plan in 2014.

Estimated future pension benefit payments for fiscal years ending December 31, 20142015 through 20232024 are as follows.


Estimated Future Pension Benefit Payments
(Dollar amounts in thousands)


 Total  Total

Year ending December 31,

     

2014

 $5,857 

2015

 5,333  $5,298

2016

 5,075  5,397

2017

 4,810  4,886

2018

 4,234  4,324

2019-2023

 18,450 
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 grant 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.

Since

From the inception of the Omnibus Plan through the end of 2008, certain key employees were granted nonqualified stock options. The option exercise price is set at the fair value of the Company's common stock on the grant date. The fair value is defined as the average of the high and low price of the Company's common stock price on the grant date. All options have a term of ten years from the grant date, 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. Both restricted stock options and restricted stock unit awards vest over three years, with 50% vesting after two years fromon the second anniversary of the grant date and the remaining 50% vesting three years afteron the third anniversary of the grant date, provided the employee remains


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employed by the Company during this period (subject to accelerated vesting in the event of a change-in-control or upon certain 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 high and low price of the Company's common stock on the grant date. All options have a term of 10 years from the 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 subject to accelerated vesting in the event of retirement, death, disability, or change-in-control, as defined in the Directors Plan.

Both the Omnibus Plan and the Directors Plan, and 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, 2013  As of December 31, 2014

 Shares
Authorized		 Shares Available
For Grant		  
Shares
Authorized
 
Shares Available
For Grant

Omnibus Plan

 8,631,641 2,254,022  8,631,641
 2,237,337

Directors Plan

 481,250 66,634  481,250
 75,294

Salary Stock Awards – The Company also periodically issues salary stock awards to certain executive officers. This stock is fully vested as of the grant date. The issuance of salary 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.


Salary Stock Awards Granted


 Years ended December 31,  Years ended December 31,

 2013 2012 2011  2014 2013 2012

Shares granted

 8,693 10,983 45,889  —
 8,693
 10,983

Weighted-average price

 $14.30 $11.51 $10.10  $—
 $14.30
 $11.51

Stock Options

Nonqualified Stock Option Transactions
(Amounts in thousands, except per share data)


 Year Ended December 31, 2013  Year Ended December 31, 2014

 Number of
Options		 Weighted
Average
Exercise
Price		 Weighted
Average
Remaining
Contractual
Term (1)		 Aggregate
Intrinsic
Value (2)		  Number of Options 
Weighted Average
Exercise
Price
 
Weighted
Average
Remaining
Contractual
Term (1)
 
Aggregate
Intrinsic
Value (2)

Options outstanding beginning balance

 1,718 $32.42      1,436
 $32.99
    

Expired

 (282) 29.49      (283) 33.23
    
       

Options outstanding ending balance

 1,436 $32.99 2.24 $230  1,153
 $32.93
 1.62 $215
         

Exercisable at the end of the year

 1,436 $32.99 2.24 $230  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.

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Stock Option Valuation Assumptions – The Company estimates the fair value of stock options at the grant date using a Black-Scholes option-pricing model that utilizes the assumptions outlined in the following table.model. No stock options were granted during the years ended December 31, 2013 or 2012. An immaterial amount of stock options were granted during the year ended December 31, 2011.

No stock options were exercised and no stock option award modifications were made during the three years ended December 31, 2013.

2014.


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Restricted Stock, Awards and Restricted Stock Units

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, 2013  Year Ended December 31, 2014

 Restricted Stock Awards Restricted Stock Units  Restricted Stock/Unit Awards Performance Shares

 Number of
Shares/Units		 Weighted
Average
Grant Date
Fair Value		 Number of
Shares/Units		 Weighted
Average
Grant Date
Fair Value		  
Number of
Shares/Units
 
Weighted
Average
Grant Date
Fair Value
 
Number of
Shares
 
Weighted
Average
Grant Date
Fair Value

Non-vested awards beginning balance

 1,087 $11.87 62 $11.69  1,123
 $12.10
 127
 $12.68

Granted

 428 13.01 159 13.01  417
 16.13
 118
 16.13

Vested

 (378) 12.50 (8) 12.50  (474) 11.79
 —
 11.79

Forfeited

 (90) 12.06 (10) 12.06  (69) 13.53
 (7) 13.53
         

Non-vested awards ending balance

 1,047 $12.10 203 $12.68  997
 $13.79
 238
 $14.36
         


Other Restricted Stock, Award/Restricted Stock Unit, and Performance Share Award Information

(Amounts in thousands, except per share data)
 
 Years Ended December 31, 
 
 2013 2012 2011 

Weighted-average grant date fair value of restricted stock awards/units granted during the year

 $13.01 $11.35 $12.08 

Total fair value of restricted stock awards/unit vested during the year

  4,917  4,921  4,268 

Income tax benefit realized from the vesting/release of restricted stock awards/units

  1,966  1,884  1,828 
  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 periods presented. No restricted stock, awards/restricted stock unit, and performance share award modifications were made during the periods presented.

Compensation Expense

The Company recognizes share-based compensation expense based on the estimated fair value of the option or award at the grant or 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)


 Years ended December 31, 

 2013 2012 2011  Years ended December 31,

Restricted stock award/unit expense

 $5,779 $5,877 $5,607 
 2014 2013 2012
Restricted stock, restricted unit, and performance share
award expense
 $5,926
 $5,779
 $5,877

Salary stock award expense

 124 127 464  —
 124
 127

Stock option expense

 — — 291 
       

Total share-based compensation expense

 5,903 6,004 6,362  5,926
 5,903
 6,004

Income tax benefit

 2,414 2,456 2,602  2,424
 2,414
 2,456
       

Share-based compensation expense, net of tax

 $3,489 $3,548 $3,760  $3,502
 $3,489
 $3,548
       

Unrecognized compensation expense

 $6,327 $5,674 $4,784  $6,937
 $6,327
 $5,674

Weighted-average amortization period remaining (in years)

 1.2 1.1 1.0  1.3
 1.2
 1.1

17.



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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 Company 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 Right 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 acquires, or announces the intention to acquire, 10% or more of the Company's outstanding shares of 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 stock or the expiration date of the Rights. The Rights Agreement will expire on November 15, 2015.

As a result of the Rights 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 $60.0 million at December 31, 2014 and $68.7 million at December 31, 2013 and $50.9 million at December 31, 2012 were maintained in accordance with these requirements.

Under current Federal Reserve regulations, the Bank is limited in the amount it may loan or advance to First 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 pay to the Parent Company. Without prior regulatory approval and while maintaining its well-capitalized status, the Bank can initiate aggregate dividend payments in 2014 equal to2015 of $61.2 million plus its net profits for 2014,2015, as defined by statute, less $7.4 million up to the date of any such dividend declaration. Future payment of dividends by the Bank depends 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


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that involve quantitative measures given the risk levels of assets and certain off-balance sheet items calculated 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, 2013,2014, the Company and the Bank met all capital adequacy requirements. As of December 31, 2013,2014, 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."


124



Summary of Capital Ratios
(Dollar amounts in thousands)


 Actual Adequately
Capitalized		 To Be Well-Capitalized
Under Prompt Corrective
Action Provisions

 Capital Ratio % Capital Ratio % Capital Ratio % Actual 
Adequately
Capitalized
 To Be Well-Capitalized Under Prompt Corrective Action Provisions

As of December 31, 2013:

            
 Capital Ratio % Capital Ratio % Capital Ratio %
As of December 31, 2014            

Total capital (to risk-weighted assets):

                        

First Midwest Bancorp, Inc.

 $841,787 12.39 $543,573 8.00 $679,467 10.00 $884,692
 11.23 $630,140
 8.00 N/A
 N/A

First Midwest Bank

 897,255 13.86 517,721 8.00 647,152 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.

 741,414 10.91 271,787 4.00 407,680 6.00 802,483
 10.19 315,070
 4.00 N/A
 N/A

First Midwest Bank

 816,286 12.61 258,861 4.00 388,291 6.00 857,362
 11.32 303,019
 4.00 454,528
 6.00

Tier 1 leverage (to average assets):

 
 		 
 		 
 		 
 		 
 		 
 		        

First Midwest Bancorp, Inc.

 741,414 9.18 242,277 3.00 403,794 5.00 802,483
 9.03 355,362
 4.00 N/A
 N/A

First Midwest Bank

 816,286 10.24 239,065 3.00 398,442 5.00 857,362
 9.76 351,222
 4.00 439,028
 5.00

As of December 31, 2012:

 
 		 
 		 
 		 
 		 
 		 
 
As of December 31, 2013            

Total capital (to risk-weighted assets):

                        

First Midwest Bancorp, Inc.

 $755,264 11.90 $507,882 8.00 $634,852 10.00 $841,787
 12.39 $543,573
 8.00 N/A
 N/A

First Midwest Bank

 859,018 13.76 499,390 8.00 624,237 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.

 652,480 10.28 253,941 4.00 380,911 6.00 741,414
 10.91 271,787
 4.00 N/A
 N/A

First Midwest Bank

 780,631 12.51 249,695 4.00 374,542 6.00 816,286
 12.61 258,861
 4.00 388,291
 6.00

Tier 1 leverage (to average assets):

 
 		 
 		 
 		 
 		 
 		 
 		       

First Midwest Bancorp, Inc.

 652,480 8.40 233,069 3.00 388,448 5.00 741,414
 9.18 242,277
 4.00 N/A
 N/A

First Midwest Bank

 780,631 10.09 232,071 3.00 386,785 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 will beginbegan for the Company on January 1, 2015, with full compliance with the final rules entire requirement phased in on January 1, 2019.


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The Basel III Capital Rules (i) introduce a new capital measure called "Common Equity Tier 1" ("CET1"), (ii) specify that Tier 1 capital consistconsists 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, 2013,2014, the Company had $36.7$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 Totaltotal 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.



125



The Basel III Capital Rules also provide for a number of deductions from and adjustments to CET1 beginning on January 1, 2015 and willto 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, 2013.

19.2014.

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. The significant accounting policies related to derivative instruments and hedging activities are presented in Note 1, "Summary of Significant Accounting Policies."

Fair Value Hedges
The Company hedges the fair value of fixed rate commercial real estate loans using interest rate swaps through which the Company pays fixed amounts and receives variable amounts. These derivative contracts are designated as fair value hedges.


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Fair Value Hedges

(Dollar amounts in thousands)


 December 31,
2013		 December 31,
2012		 

Notional amount outstanding

 $14,730 $15,860 
 As of December 31,
 2014 2013
Gross notional amount outstanding $12,793
 $14,730

Derivative liability fair value

 (1,472) (2,270) (1,032) (1,472)

Weighted-average interest rate received

 2.08% 2.12%  2.07% 2.08%

Weighted-average interest rate paid

 6.39% 6.39%  6.37% 6.39%

Weighted-average maturity (in years)

 3.76 4.76  2.95
 3.76

Cash pledged to collateralize net unrealized losses with counterparties(1)

 $1,583 $2,516 

Fair value of assets needed to settle derivative transactions(2)

 1,502 2,301 
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 is recognized in other noninterest income in the Consolidated Statements of Income. For the years ended December 31, 2014, 2013, 2012, and 2011,2012, gains or losses related to fair value hedge ineffectiveness were not material.

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.third party. This transaction allows the Company'sCompany’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 yearyears ended December 31, 2013.2014 and 2013, respectively. There were no transaction fees related to commercial customer derivative instruments for the yearsyear ended December 31, 2012 or 2011.


2012.

Other Derivative Instruments
(Dollar amounts in thousands)

 
 December 31,
2013		 December 31,
2012		 

Notional amount outstanding

 $128,319 $— 

Derivative asset fair value

  2,235  — 

Derivative liability fair value

  (2,235) — 

Cash pledged to collateralize net unrealized losses with counterparties(1)

  1,420  — 

Fair value of assets needed to settle derivative transactions(2)

  1,305  — 
  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 do not receive hedge accounting treatment consisting of commitments to originate 1-4 family mortgage loans and foreign exchange contracts. In addition, the Company occasionally enters into risk participation agreements with counterparty banks to transfer or assume a portion of the credit risk related contingent factorsto customer transactions. The amounts of these instruments were triggered.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, which represents the Company'sCompany’s risk of loss when the counterparty to a derivative contract fails to perform according to the terms of the agreement. Credit risk is managed by limiting and collateralizing the aggregate amount of net unrealized losses by transaction, monitoring the size and the maturity structure of the derivatives, and applying uniform credit standards. Company policy establishes limits on credit exposure to any single counterparty. In addition, the Company established bilateral collateral agreements with derivative counterparties that provide for exchanges of marketable securities or cash to collateralize either party'sparty’s net losses above a stated minimum threshold. At December 31, 20132014 and 2012,2013, these collateral agreements covered 100% of the fair value of the Company'sCompany’s outstanding 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

Table



Condition. The following table presents the fair value of Contents

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, 2014 and 2013, and 2012, 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 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. As of December 31, 20132014 and 2012,2013, the Company was not in violation of these provisions.

The Company's derivative portfolio also includes other derivative instruments that do not receive hedge accounting treatment consisting of commitments to originate 1-4 family mortgage loans and foreign exchange contracts. In addition, the Company occasionally enters into risk participation agreements with counterparty banks to transfer or assume a portion of the credit risk related to customer transactions. The amounts of these instruments were not material for any period presented. The Company had no other derivative instruments as of December 31, 2013 and 2012. 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, including commitments to extend credit and standby and commercial letters of credit. These instruments involve elements of credit and interest rate risk in excess of the amount recognized in the Consolidated Statements of Financial Condition.


Contractual or Notional Amounts of Financial Instruments
(Dollar amounts in thousands)

 
 December 31, 
 
 2013 2012 

Commitments to extend credit:

       

Commercial and industrial

 $897,483 $737,973 

Commercial real estate

  167,792  168,105 

Construction

  12,756  18,986 

Home equity lines

  270,230  258,156 

Credit card lines

  32,553  25,459 

Overdraft protection program(1)

  170,956  176,328 

All other commitments

  109,311  105,344 
      

Total commitments

 $1,661,081 $1,490,351 
      

Letters of credit:

       

Commercial real estate

 $39,275 $52,145 

Construction

  4,496  5,696 

All other

  66,682  57,996 
      

Total letters of credit

 $110,453 $115,837 
      

Unamortized fees associated with letters of credit(2)(3)

 $582 $740 

Remaining weighted-average term, in months

  9.83  13.20 

Remaining lives, in years

  0.1 to 14.7  0.1 to 11.6 

Recourse on assets sold:

       

Unpaid principal balance of assets sold

 $170,330 $50,110 

Carrying value of recourse obligation(2)

  162  55 
  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

Table of Contents

(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, subject to contractual terms and covenants. Commitments generally have fixed expiration dates or other termination clauses, variable interest rates, and fee requirements, when applicable. Since many of the commitments are expected to expire without being drawn, the total commitment amounts do not necessarily represent future cash flow requirements.

In the event of a customer's non-performance, the Company's credit loss exposure is equal to the contractual amount of the commitments. The credit risk is essentially the same as extending loans to customers. The Company uses the same credit policies for credit commitments as its loans and minimizes exposure to credit loss through various collateral requirements.

Letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Standby letters of credit generally are contingent on the failure of the customer to perform according to the terms of the contract with the third party and are often issued in favor of a municipality where construction is taking place to ensure the borrower adequately completes the construction.

The maximum potential future payments guaranteed by the Company under standby letters of credit arrangements are equal to the contractual amount of the commitment. If a commitment is funded, the Company may seek recourse through the liquidation of the underlying collateral, including real estate, production plants and property, marketable securities, or receipt of cash.

As a result of the sale of certain 1-4 family mortgage loans, the Company is contractually obligated to repurchase any non-performing loans or loans that do not meet underwriting requirements at recorded value. In accordance with the sales agreements, there is no limitation to the maximum potential future payments or expiration of the Company's recourse obligation. No loansThere were required to be repurchasedno material loan repurchases during the years ended December 31, 20132014 or 2012.

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 2.0%. The Company terminated these forward commitments during the third quarter of 2013, resulting in a gain of $7.8 million recorded as a component of noninterest income in the Consolidated Statement of Income.

Legal Proceedings

In 2011, the Bank was named in a purported class action lawsuit filed in the Circuit Courtordinary course of Cook County, Illinois on behalf ofbusiness, there were certain of the Bank's customers who incurred overdraft fees. The lawsuit was based on the Bank's practices relating to debit card transactions, and alleged that these practices resulted in customers being assessed excessive overdraft fees. The plaintiffs sought an unspecified amount of damages and other relief, including restitution. No class was ever certified. The Bank filed a motion to dismiss the plaintiffs' complaint and, on January 23, 2013, the Circuit Court entered an order granting the Bank's motion and dismissed the complaint with prejudice. The plaintiffs appealed the Circuit Court's ruling. The plaintiffs subsequently filed a motion to dismiss their appeal, and the Appellate Court of Illinois entered an order dismissing the appeal on January 21, 2014.

There are certain other legal proceedings pending or threatened against the Company and its subsidiaries.subsidiaries at December 31, 2014. While the outcome of any legal proceeding is inherently uncertain, based on information currently available, the Company's management believesdoes not expect that any liabilities arising from pending legal matters arewill not expected to have a material adverse effect on the Company's financial position, results of operations, or cash flows.

21.

22.  FAIR VALUE

Fair value represents the amount expected to be received to sell an asset or paid to transfer a liability in its principal or most advantageous market in an orderly transaction between market participants at the measurement date. In accordance with fair value accounting guidance, the Company measures, records, and reports various types of assets and liabilities at fair value on either a recurring or non-recurring basis in the Consolidated Statements of Financial Condition. Those assets and liabilities are presented below in the sections titled "Assets and Liabilities Required to be Measured at Fair Value on a Recurring Basis" and "Assets and Liabilities Required to be Measured at Fair Value on a Non-Recurring Basis."


Table of Contents

Other assets and liabilities are not required to be measured at fair value in the Consolidated Statements of Financial Condition, but must be disclosed at fair value. 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 of the Company.

Depending on the nature of the asset or liability, the Company uses various valuation methodologies and assumptions to estimate fair value. GAAP provides a three-tiered fair value hierarchy based on the inputs used to measure fair value. The hierarchy is defined as follows:

•
Level 1 – Quoted prices in active markets for identical assets or liabilities.

•
Level 2 – Observable inputs other than level 1 prices, such as quoted prices for similar instruments, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data.

•
Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. These inputs require significant management judgment or estimation, some of which use model-based techniques and may be internally developed.

Assets and liabilities are assigned to a level within the fair value hierarchy based on the lowest level of significant input used to measure fair value. Assets and liabilities may change levels within the fair value hierarchy due to market conditions or other circumstances. Those transfers are recognized on the date of the event that prompted the transfer. There were no transfers of assets or liabilities between levels of the fair value hierarchy during the periods presented.


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Assets and Liabilities Required to be Measured at Fair Value on a Recurring Basis

The following table provides the fair value for assets and liabilities required to be measured at fair value on a recurring basis in the Consolidated Statements of Financial Condition by level in the fair value hierarchy.


Recurring Fair Value Measurements
(Dollar amounts in thousands)


 December 31, 2013 December 31, 2012  As of December 31, 2014 As of December 31, 2013

 Level 1 Level 2 Level 3 Level 1 Level 2 Level 3  Level 1 Level 2 Level 3 Level 1 Level 2 Level 3

Assets:

                         

Trading securities:

                         

Money market funds

 $1,847 $- $- $1,554 $- $-  $1,725
 $—
 $—
 $1,847
 $—
 $—

Mutual funds

 15,470 - - 12,608 - -  15,735
 —
 —
 15,470
 —
 —
             

Total trading securities

 17,317 - - 14,162 - -  17,460
 —
 —
 17,317
 —
 —

Securities available-for-sale:

                         

U.S. agency securities

 - 500 - - 508 - 
U.S. Agency securities —
 30,431
 —
 —
 500
 —

CMOs

 - 475,768 - - 400,383 -  —
 534,156
 —
 —
 475,768
 —

Other MBSs

 - 136,164 - - 122,900 -  —
 159,765
 —
 ��
 136,164
 —

Municipal securities

 - 461,393 - - 520,043 -  —
 423,820
 —
 —
 461,393
 —

CDOs

 - - 18,309 - - 12,129  —
 —
 33,774
 —
 —
 18,309

Corporate debt securities

 - 14,929 - - 15,339 -  —
 1,802
 —
 —
 14,929
 —

Hedge fund investment

 - 3,179 - - 1,616 - 

Other equity securities

 44 2,439 - 43 9,442 - 
             

Total securities available-for-sale

 44 1,094,372 18,309 43 1,070,231 12,129 
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)

 - - 1,893 - - 985  —
 —
 1,728
 —
 —
 1,893

Derivative assets(1)

 - 2,235 - - - -  —
 9,018
 —
 —
 2,235
 —

Liabilities:

                         

Derivative liabilities(2)

 $- $3,707 $- $- $2,270 $-  $—
 $11,980
 $—
 $—
 $3,707
 $—

Table of Contents

(1)
Included in other assets in the Consolidated Statements of Financial Condition.
(2)
Included in other liabilities in the Consolidated Statements of Financial Condition.

The following sections describe the specific valuation techniques and inputs used to measure these financial assets and liabilities at fair value.

Trading Securities

The Company's trading securities consist of diversified investment securities held in a grantor trust and are invested in money market and mutual funds. The fair value of these money market and mutual funds is based on quoted market prices in active exchange markets and is classified in level 1 of the fair value hierarchy.

Securities Available-for-Sale

The Company'sCompany’s available-for-sale securities are primarily fixed income instruments that are not quoted on an exchange, but may be traded in active markets. The fair values are based on quoted prices in active markets or market prices for similar securities obtained from external pricing services or dealer market participants and are classified in level 2 ofin the fair value hierarchy. Quarterly, the Company evaluates the methodologies used by its external pricing services to developestimate the fair valuesvalue of these securities to determine whether the results of the valuations are representative ofrepresent an exit price in the Company'sCompany’s principal markets and an appropriate representation of fair value.

The Company's hedge fund investment is classified in level 2 of 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.

markets.

CDOs are classified in level 3 ofin the fair value hierarchy. The Company estimates the fair values for each CDO using discounted cash flow analyses with the assistance of a structured credit valuation firm. This methodology reliesis based on a credit analysis and review of historical financial data for each of the issuers of the securities underlying the individual CDOCDOs (the "Issuers") to estimate the cash flows.. These estimates are highly subjective and sensitive to several significant, unobservable inputs, including prepayment assumptions, default probabilities, loss given default assumptions, and deferral cure probabilities.inputs. The cash flows for each Issuer are then discounted to present values using LIBOR plus an adjustment to reflect the higher risk inherent in these securities given their complex structures and the impact of market factors. Finally, the discounted cash flows for each Issuer are aggregatedaggregat

130



ed to derive the estimated fair value for the specific CDO. Information for each CDO,The following table presents the ranges of unobservable inputs used by the Company as well as the significant unobservable assumptions, is presented in the following table.


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December 31, 2014.


Characteristics of CDOs and Significant Unobservable Inputs
Used in the Valuation of CDOs as of December 31, 2013
(Dollar amounts in thousands)

 
 CDO Number 
 
 1 2 3 4 5 6 

Characteristics:

                   

Class

  C-1  C-1  C-1  B1  C  C 

Original par

 $17,500 $15,000 $15,000 $15,000 $10,000 $6,500 

Amortized cost

  7,140  5,598  12,377  13,922  1,317  6,178 

Fair value

  4,499  480  4,233  5,351  1,626  2,120 

Lowest credit rating (Moody's)

  Ca  Ca  Ca  Ca  C  Ca 

Number of underlying Issuers

  43  55  59  59  55  77 

Percent of Issuers currently performing

  83.7%  80.0%  78.0%  54.2%  65.5%  68.8% 

Current deferral and default percent (1)

  8.7%  11.4%  11.3%  34.8%  36.1%  27.5% 

Expected future deferral and default percent (2)

  12.1%  12.9%  15.1%  28.2%  21.6%  14.1% 

Excess subordination percent (3)

  -  -  -  -  -  3.5% 

Discount rate risk adjustment (4)

  14.0%  15.0%  14.0%  13.0%  14.0%  12.5% 

Significant unobservable inputs, weighted average of Issuers:

  
 		  
 		  
 		  
 		  
 		  
 		 

Probability of prepayment

  15.4%  7.6%  4.8%  6.1%  5.3%  2.2% 

Probability of default

  18.2%  23.5%  21.7%  27.8%  38.2%  30.8% 

Loss given default

  88.0%  83.2%  88.9%  92.9%  92.9%  95.4% 

Probability of deferral cure

  50.6%  38.6%  26.3%  53.4%  39.2%  57.1% 
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 CDO associated with that Issuer.

The likelihood that an Issuer who is currently deferring payment on the securities will pay all deferred amounts and remain current thereafter is based on an analysis of the Issuer's asset quality, leverage ratios, and other measures of financial viability.

The impact

Changes in any of changes in these key inputs could result in a significantly higher or lower estimate of fair value measurement for each CDO. The timing of the default, the magnitude of the default, and the timing and magnitude of the cure probability are directly interrelated. Defaults that occur sooner and/or are greater than anticipated have a negative impact on the valuation. In addition, a high cure probability assumption has a positive effect on the fair value, and, if a cure event takes place sooner than anticipated, the impact on the valuation is also favorable.


TableDuring 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 Contents

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 these typessimilar securities, consideration of securities, overall economic conditions (such as trackingmovements in LIBOR curves), and the performance ofin the Issuers' industries. Management also reviews market activity for the same or similar tranches of the CDOs, when available. 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, 20132014 is presented in the following table.


Rollforward of Carrying Value of CDOs
(Dollar amounts in thousands)

 
 Years Ended December 31, 
 
 2013 2012 2011 

Beginning balance

 $12,129 $13,394 $14,858 

Total income (loss):

          

OTTI included in earnings(1)

  -  (2,226) (936)

Included in other comprehensive (loss) income(2)

  6,180  961  (528)
        

Ending balance(3)

 $18,309 $12,129 $13,394 
        

Change in unrealized losses recognized in earnings related to securities still held at end of period

 $- $(2,226)$(936)
        
  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)

The Company services mortgage loans owned by third parties and collects servicing fees equal to a percentage of the outstanding principal balance of the loans being serviced. Mortgage servicing rights are recorded at fair value and are included in other assets in the Consolidated Statements of Financial Condition. Therefore, the Company determines the fair value of mortgage servicing rights by estimating the present value of expected future cash flows associated with the mortgage loans being serviced. Key economic assumptions used in measuring the fair value of mortgage servicing rights at December 31, 20132014 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.

A rollforward of the carrying value of mortgage servicing rights for the three years ended December 31, 20132014 is presented in the following table.


Table of Contents


Carrying Value of Mortgage Servicing Rights

(Dollar amounts in thousands)


 Years Ended December 31,  Years Ended December 31,

 2013 2012 2011  2014 2013 2012

Beginning balance

 $985 $929 $942  $1,893
 $985
 $929

New mortgage servicing rights

 1,060 347 -  315
 1,060
 347

Total gains (losses) included in earnings(1):

       
Total (losses) gains included in earnings (1):
      

Changes in valuation inputs and assumptions

 63 (72) 179  (480) 63
 (72)

Other changes in fair value(2)

 (215) (219) (192) —
 (215) (219)
       

Ending balance

 $1,893 $985 $929  $1,728
 $1,893
 $985
       

Contractual servicing fees earned during the year(1)

 $418 $209 $235  $520
 $418
 $209

Total amount of loans being serviced for the benefit of others at the end of the year

 214,458 109,730 78,594  220,372
 214,458
 109,730

The Company enters into interest rate swaps thatand 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.counterparties. The market quotes were developed using market observable inputs, which primarily include 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 also enters into derivative transactions with commercial customers and simultaneously enters into an offsetting interest rate derivative transaction with a third party, which are valued using market consensus prices.


132



Pension Plan Assets

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)


 December 31, 2013 December 31, 2012  As of December 31, 2014 As of December 31, 2013

 Level 1 Level 2 Total Level 1 Level 2 Total  Level 1 Level 2 Total Level 1 Level 2 Total

Pension plan assets:

                         

Mutual funds (1)

 $23,896 $- $23,896 $16,009 $- $16,009  $25,499
 $—
 $25,499
 $23,896
 $—
 $23,896

U.S. government and government agency securities

 7,261 8,930 16,191 7,295 6,510 13,805  7,879
 8,063
 15,942
 7,261
 8,930
 16,191

Corporate bonds

 - 5,984 5,984 - 8,653 8,653  —
 6,599
 6,599
 —
 5,984
 5,984

Common stocks

 17,261 - 17,261 15,001 - 15,001  14,149
 —
 14,149
 17,261
 —
 17,261

Common trust funds

 - 11,038 11,038 - 10,033 10,033  —
 10,004
 10,004
 —
 11,038
 11,038
             

Total pension plan assets

 $48,418 $25,952 $74,370 $38,305 $25,196 $63,501  $47,527
 $24,666
 $72,193
 $48,418
 $25,952
 $74,370
             

Table of Contents

(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. government agency, and U.S. Treasury 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 in 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 in 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)

 
 December 31, 2013 December 31, 2012 
 
 Level 1 Level 2 Level 3 Level 1 Level 2 Level 3 

Collateral-dependent impaired loans

 $- $- $16,613 $- $- $61,454 

OREO (1)

  -  -  13,347  -  -  11,956 

Loans held-for-sale (2)

  -  -  4,739  -  -  - 

Assets held-for-sale (3)

  -  -  4,027  -  -  1,668 
  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

Certain collateral-dependent impaired loans are subject to fair value adjustments to reflect the difference between the carrying value of the loan and the value of the underlying collateral. The fair values of collateral-dependent impaired loans are primarily determined by current appraised values of the underlying collateral. Based on the age and/or type, appraisals may be adjusted in the range of 0% - 20%15%. In certain cases, an internal valuation may be used when the underlying collateral is located in areas where comparable sales data is limited or unavailable. Accordingly, collateral-dependent impaired loans are classified in level 3 of the fair value hierarchy.


Collateral-dependent impaired loans for which the fair value is greater than the recorded investment are not measured at fair value in the Consolidated Statements of Financial Condition and are not included in this disclosure.


133



OREO

The fair value of OREO is measured using the current appraised value of the properties. In certain circumstances, a current appraisal may not be available or may not represent an accurate measurement of the property's fair value due to outdated market information or other factors. In these cases, the fair value is determined based on the lower of the (i) most recent appraised value, (ii) broker price opinion, (iii) current listing price, or (iv) signed sales contract. Given these valuation methods, OREO is classified in level 3 of the fair value hierarchy. Any valuation adjustments for reductions in the fair value of OREO subsequent to initial transfer are recognized in the Company's operating results in the period in which they occur.

Loans Held-for-Sale

As of December 31, 2013, loans

Loans held-for-sale consisted of 1-4 family mortgage loans, which were originated with the intent to sell, and one commercial real estate loan.loan as of both December 31, 2014 and 2013. These loans were transferred to the held-for-sale category at the contract price and, accordingly, are classified in level 3 of the fair value hierarchy. The Company had no loans held-for-sale as of December 31, 2012.


Table of Contents

Assets held-for-sale consist of former branches that are no longer in operation, which were transferred into the held-for-sale category at the lower of their fair value as determined by a current appraisal or their recorded investment. Based on thethese valuation methods, used to determine the fair value of assets held-for-sale, they are classified in level 3 of the fair value hierarchy.

Goodwill and Other Intangible Assets

Goodwill and other intangible assets are subject to annual impairment testing, which requires a significant degree of management 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 as a level 3 non-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

For certain financial instruments that are not required to be measured at fair value in the Consolidated Statements of Financial Condition, the Company must disclose the estimated fair values and the level within the fair value hierarchy as shown in the following table.


Table of Contents


Fair Value Measurements of Other Financial Instruments

(Dollar amounts in thousands)


  
 December 31, 2013 December 31, 2012    As of December 31, 2014 As of December 31, 2013

 Fair Value
Hierarchy
Level		 Carrying
Amount		 Fair Value Carrying
Amount		 Fair Value  Fair Value Hierarchy
Level		 Carrying
Amount		 Fair Value Carrying
Amount		 Fair Value

Assets:

                     

Cash and due from banks

 1 $110,417 $110,417 $149,420 $149,420  1 $117,315
 $117,315
 $110,417
 $110,417

Interest-bearing deposits in other banks

 2 476,824 476,824 566,846 566,846  2 488,947
 488,947
 476,824
 476,824

Securities held-to-maturity

 2 44,322 43,387 34,295 36,023  2 26,555
 27,670
 44,322
 43,387

FHLB and Federal Reserve Bank stock

 2 35,161 35,161 47,232 47,232 
FHLB and FRB stock 2 37,558
 37,558
 35,161
 35,161

Net loans

 3 5,628,855 5,544,146 5,288,124 5,305,286  3 6,664,159
 6,532,622
 5,628,855
 5,544,146

FDIC indemnification asset

 3 16,585 7,829 37,051 27,040  3 8,452
 3,626
 16,585
 7,829

Investment in BOLI

 3 193,167 193,167 206,405 206,405  3 206,498
 206,498
 193,167
 193,167

Accrued interest receivable

 3 25,735 25,735 27,535 27,535  3 27,506
 27,506
 25,735
 25,735

Other interest-earning assets

 3 6,550 6,809 9,923 10,640  3 3,799
 3,904
 6,550
 6,809

Liabilities:

               
  
  
  

Deposits

 2 $6,766,101 $6,765,404 $6,672,255 $6,674,510  2 $7,887,758
 $7,879,413
 $6,766,101
 $6,765,404

Borrowed funds

 2 224,342 226,839 185,984 189,074  2 137,994
 137,994
 224,342
 226,839

Senior and subordinated debt

 1 190,932 201,147 214,779 216,686  1 200,869
 199,226
 190,932
 201,147

Accrued interest payable

 2 2,400 2,400 2,884 2,884  2 2,324
 2,324
 2,400
 2,400


134



Management uses various methodologies and assumptions to determine the estimated fair values of the financial instruments in the table above. The fair value estimates are made at a discrete point in time based on relevant market information and consider management's judgments regarding future expected economic conditions, loss experience, and specific risk characteristics of the financial instruments.

Short-Term Financial Assets and Liabilities – For financial instruments with a shorter-term or with no stated maturity, prevailing market rates, and limited credit risk, the carrying amounts approximate fair value. Those financial instruments include cash and due from banks, interest-bearing deposits in other banks, other short-term investments, accrued interest receivable, and accrued interest payable.

Securities Held-to-Maturity – The fair value of securities held-to-maturity is estimated using the present value of expected future cash flows of the remaining maturities of the securities.

FHLB and Federal Reserve BankFRB Stock –The carrying amounts approximate fair value.value as the stock is non-marketable.

Net Loans– Net loans includes loans held-for-investment, acquired loans, covered loans, and the allowance for loan and covered loan losses.The fair value of loans is estimated using the present value of the expected future cash flows of the remaining maturities of the loans. Prepayment assumptions that consider the Company'sCompany’s historical experience and current economic and lending conditions were included. The discount rate was based on the LIBOR yield curve with adjustments for liquidity and credit risk. The primary impact of credit risk oninherent in the fair value of the loan portfolio was accommodated through theloans.


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use of the allowance for loan and covered loan losses, which is believed to represent the current fair value of estimated inherent losses for purposes of the fair value calculation.

The fair value of the covered loan portfolio is determined by discounting the estimatedexpected future cash flows at a market interest rate, which is derived from LIBOR swap rates over the life of those loans. The estimatedexpected future cash flows are derived from the contractual terms of the covered loans, net of any projected credit losses. For valuation purposes, these loans are placed into groups with similar characteristics and risk factors, where appropriate. The timing and amount of credit losses for each group are estimated using historical default and loss experience, current collateral valuations, borrower credit scores, and internal risk ratings. For individually significant loans or credit relationships, the estimated fair value is determined by a specific loan level review utilizing appraised values for collateral and projections of the timing and amount of expected future cash flows.

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. The expected future cash flows are estimated by multiplying expectedanticipated losses on covered loans and covered OREO by the reimbursement rates in the FDIC Agreements.

Investment in BOLI – The fair value of BOLI approximates the carrying amount as both are based on each policy's respective CSV, which is the amount the Company would receive from liquidation of these investments. The CSV is derived from monthly reports provided by the managing brokers and is determined using the Company's initial insurance premium and earnings of the underlying assets, offset by management fees.

Other Interest-Earning Assets – The fair value of other interest-earning assets is estimated using the present value of the expected future cash flows of the remaining maturities of the assets.

Deposits – The fair values disclosed for demand deposits, savings deposits, NOW accounts, and money market deposits are equal to the amount payable on demand at the reporting date (i.e., their carrying amounts). The fair value for fixed-rate time deposits was estimated using the expected future cash flows discounted based on the LIBOR yield curve, plus or minus the spread associated with current pricing.

Borrowed Funds – The fair value of FHLB advances is estimated by discounting the agreements based on maturities using the rates currently offered for FHLB advances of similar remaining maturities adjusted for prepayment penalties that would be incurred if the borrowings were paid off on the measurement date. The carrying amounts of securities sold under agreements to repurchase approximate their fair value due to their short-term nature.

Senior and Subordinated Debt – The fair value of senior and subordinated debt was determined using quoted market prices.

Commitments to Extend Credit and Letters of Credit – The Company estimated the fair value of lending commitments outstanding to be immaterial based on the following factors: (i) the limited interest rate exposure of the commitments outstanding due to their variable nature, (ii) the short-term nature of the commitment periods, (iii) termination clauses provided in the agreements, and (iv) the market rate of fees charged.

22.


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23.  RELATED PARTY TRANSACTIONS

The Company, through the Bank, makes loans and has transactions with certain of its directors and executive officers. All of these loans and transactions were made in the ordinary course of business on substantially the same terms, including interest rates and collateral requirements, for comparable transactions with unrelated persons and did not involve more than the normal risk of collectability or present unfavorable features. For the years ended December 31, 20132014 and 2012,2013, loans to directors and executive officers totaled $27.6$31.8 million and $10.2$27.6 million, respectively, and were not greater than 5% of stockholders' equity.


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23.

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,

 2013 2012  2014 2013

Assets

         

Cash and interest-bearing deposits

 $13,071 $20,970  $43,546
 $13,071

Investments in and advances to subsidiaries

 1,120,745 1,092,681  1,211,244
 1,120,745

Goodwill

 8,943 10,358  13,625
 8,943

Other assets

 77,948 58,132  79,468
 77,948
     

Total assets

 $1,220,707 $1,182,141  $1,347,883
 $1,220,707
     

Liabilities and Stockholders' Equity

         

Senior and subordinated debt

 $190,932 $214,779  $200,869
 $190,932

Accrued expenses and other liabilities

 28,333 26,469  46,239
 28,333

Stockholders' equity

 1,001,442 940,893  1,100,775
 1,001,442
     

Total liabilities and stockholders' equity

 $1,220,707 $1,182,141  $1,347,883
 $1,220,707
     


Statements of Income
(Parent Company only)
(Dollar amounts in thousands)


 Years ended December 31,  Years ended December 31,

 2013 2012 2011  2014 2013 2012

Income

             

Dividends from subsidiaries

 $54,200 $38,000 $104,000  $56,881
 $54,200
 $38,000

Interest income

 1,067 619 259  1,502
 1,067
 619

Net losses on early extinguishment of debt

 (1,034) (558) -  —
 (1,034) (558)

Securities transactions and other

 37,485 1,982 (189) 6,451
 37,485
 1,982
       

Total income

 91,718 40,043 104,070  64,834
 91,718
 40,043
       

Expenses

             

Interest expense

 13,607 14,840 9,892  12,062
 13,607
 14,840

Salaries and employee benefits

 15,198 13,232 10,865  12,589
 15,198
 13,232

Other expenses

 5,792 5,740 4,756  5,867
 5,792
 5,740
       

Total expenses

 34,597 33,812 25,513  30,518
 34,597
 33,812
       

Income before income tax (expense) benefit and equity in undistributed income (loss) of subsidiaries

 57,121 6,231 78,557 

Income tax (expense) benefit

 (962) 13,070 10,414 
       
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

 56,159 19,301 88,971  43,026
 56,159
 19,301

Equity in undistributed income (loss) of subsidiaries

 23,147 (40,355) (52,408) 26,280
 23,147
 (40,355)
       

Net income (loss)

 79,306 (21,054) 36,563  69,306
 79,306
 (21,054)

Preferred dividends and accretion on preferred stock

 - - (10,776)

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

 (1,107) 306 (350) (836) (1,107) 306
       

Net income (loss) applicable to common shares

 $78,199 $(20,748)$25,437  $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,

 2013 2012 2011  2014 2013 2012

Operating Activities

             

Net income (loss)

 $79,306 $(21,054)$36,563  $69,306
 $79,306
 $(21,054)

Adjustments to reconcile net income (loss) income to net cash provided by operating activities:

             

Equity in undistributed (income) loss of subsidiaries

 (23,147) 40,355 52,408  (26,280) (23,147) 40,355

Depreciation of premises, furniture, and equipment

 7 6 9  6
 7
 6

Net gains on sales of securities

 (34,119) - -  (5,702) (34,119) —

Net losses on early extinguishment of debt

 1,034 558 -  —
 1,034
 558

Share-based compensation expense

 5,903 6,004 6,362  5,926
 5,903
 6,004

Tax (expense) benefit related to share-based compensation

 (10) 170 (179) (106) (10) 170

Net decrease (increase) in other assets

 1,084 (6,207) (10,290) 4,599
 1,084
 (6,207)

Net (decrease) increase in other liabilities

 (1,624) 1,366 4,618 
       
Net increase (decrease) in other liabilities 14,063
 (1,624) 1,366

Net cash provided by operating activities

 28,434 21,198 89,491  61,812
 28,434
 21,198
       

Investing Activities

             

Purchases of securities available-for-sale

 (46,532) (5,811) -  —
 (46,532) (5,811)

Proceeds from sales and maturities of securities available-for-sale

 43,329 - 14  8,540
 43,329
 —

Proceeds from sales of premises, furniture, and equipment

 - - 103 

Purchase of premises, furniture, and equipment

 - (18) (16) —
 —
 (18)

Capital injection into non-bank subsidiary

 - - (363)
       
Cash received from acquisitions, net of cash paid (15,809) —
 —

Net cash used in investing activities

 (3,203) (5,829) (262) (7,269) (3,203) (5,829)
       

Financing Activities

             

(Payments for retirement) proceeds from the issuance of subordinated debt

 (24,094) (37,033) 114,387 

Redemption of preferred stock and related common stock warrant

 - - (193,910)
Payments for retirement of subordinated debt —
 (24,094) (37,033)
Treasury stock activity 369
 —
 —

Cash dividends paid

 (7,508) (2,977) (12,838) (22,568) (7,508) (2,977)

Restricted stock activity

 (1,607) (1,469) (1,256) (2,781) (1,607) (1,469)

Excess tax benefit (expense) related to share-based compensation

 79 (21) 47  912
 79
 (21)
       

Net cash used in financing activities

 (33,130) (41,500) (93,570) (24,068) (33,130) (41,500)
       

Net decrease in cash and cash equivalents

 (7,899) (26,131) (4,341)
Net increase (decrease) in cash and cash equivalents 30,475
 (7,899) (26,131)

Cash and cash equivalents at beginning of year

 20,970 47,101 51,442  13,071
 20,970
 47,101
       

Cash and cash equivalents at end of year

 $13,071 $20,970 $47,101  $43,546
 $13,071
 $20,970
             
Supplemental Disclosures of Cash Flow Information:      
Common stock issued for acquisitions, net of issuance costs $38,300
 $—
 $—

24.   SUBSEQUENT EVENTS

On January 21, 2014, the Company entered into a $35.0 million short-term, unsecured revolving line of credit with a correspondent bank. Interest is payable at a rate equal to one-month LIBOR plus 1.75%, adjusted on a monthly basis. The line of credit will mature on January 20, 2015. No amount was outstanding through the date the consolidated financial statements were issued.

The Company evaluated the impact of events that occurred subsequent to December 31, 2013 through the date its consolidated financial statements were issued. Based on this evaluation, management does not believe there are any other subsequent events that 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, 20132014 that materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.

Management's Report on Internal Control Over 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, 2013.2014. 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 determined that the Company's internal control over financial reporting as of December 31, 20132014 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, 2013.2014. The report, which expresses an unqualified opinion on the Company's internal control over financial reporting as of December 31, 2013,2014, 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"“Company”) internal control over financial reporting as of December 31, 2013,2014, based on criteria established in Internal Control – IntegratedControl-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (1992(2013 framework) (the COSO criteria). The Company'sCompany’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, the Company maintained in all material respects, effective internal control over financial reporting as of December 31, 2013,2014, 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 the Company as of December 31, 20132014 and 2012,2013, and the related consolidated statements of income, comprehensive income, changes in stockholders'stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 20132014 of the Company and our report dated March 3, 20142, 2015 expressed an unqualified opinion thereon.


/s/ ERNST & YOUNG LLP


Chicago, Illinois
March 3, 2014

2, 2015

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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 (53)(54)President and Chief Executive Officer of the Company since 2008; Chairman since 2011 and Vice Chairman from 2010 to 2011 of the Bank's Board of Directors; Chief Executive Officer of the Bank since 2010 and prior thereto, President, Chief Operating Officer and various other senior management positions with the Bank.2002
Kent S. Belasco (63)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
Victor P. Carapella (64)Executive Vice President and Director of Commercial Banking since 2011; prior thereto, Executive Vice President and Commercial Banking Group Manager of the Bank.2008
Nicholas J. Chulos (54)Executive Vice President, Corporate Secretary, and General Counsel since 2012; prior thereto, Partner of Krieg DeVault, LLP.2012
Paul F. Clemens (61)Executive Vice President and Chief Financial Officer of the Company and the Bank.2006
Robert P. Diedrich (50)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 (63)Executive Vice President and Director of Employee Resources of the Bank since 2005.2013
James P. Hotchkiss (57)Executive Vice President and Treasurer of the Company and the Bank since 2004.2004
Kimberly J. McGarry (39)Senior Vice President and Chief Accounting Officer of the Company and Bank since 2010; prior thereto, Senior Manager in the Assurance Services practice of Ernst & Young LLP.2013
Kevin L. Moffitt (54)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.2009
Thomas M. Prame (44)Executive Vice President and Director of Retail Banking of the Bank since 2012; prior thereto, Executive Vice President, Sales and Service at RBS/Citizen's Bank.2012

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Name (Age)Position or Employment for Past Five YearsExecutive
Officer
Since
Mark G. Sander (55)(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.America and LaSalle Bank.2011
Kent 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. Prame (45)Executive Vice President and Director of Retail Banking of the Bank since 2012; prior thereto, Executive Vice President, Sales and Service at RBS/Citizen's Bank.2012
Angela L. Putnam (36)Senior Vice President of the Company and Bank and Chief Accounting Officer of the Bank since 2014; prior 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 (60)(61)Executive Vice President and 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;Bank, Chicago affiliate, West Region and prior thereto, Senior Vice President and Chief Credit Officer for Fifth Third Bank.Structured Finance Group.2013

Additional information required in response to this item will be contained in the Company’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.


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ITEM 11. EXECUTIVE COMPENSATION
The information required in response to this item will be contained in the Company'sCompany’s definitive Proxy Statement relating to its 20142015 Annual Meeting of Stockholders to be held on May 21, 201420, 2015 and is incorporated herein by reference.


ITEM 11. EXECUTIVE COMPENSATION

The information required in response to this item will be contained in the Company's definitive Proxy Statement relating to its 2014 Annual Meeting of Stockholders to be held on May 21, 2014 and is incorporated herein by reference.


ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

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'sCompany’s definitive Proxy Statement relating to its 20142015 Annual Meeting of Stockholders to be held on May 21, 201420, 2015 and is incorporated herein by reference.

Equity Compensation Plans

The following table sets forth information, as of December 31, 2013,2014, 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 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)		 

Approved by security holders (1)

  1,436,670 $32.99  2,320,656 

Not approved by security holders (2)

  5,241  17.69  - 
        

Total

  1,441,911  32.93  2,320,656 
        
  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)
Approved by security holders (1)
 1,153,213
 $32.93
 2,312,631
Not approved by security holders (2)
 5,337
 17.67
 —
Total 1,158,550
 32.86
 2,312,631

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(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 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. The accounts are adjusted to reflect the investment return related to such deemed investments. Except for the 5,2415,337 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

The information required in response to this item will be contained in the Company’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
The information required in response to this item will be contained in the Company's definitive Proxy Statement relating to its 20142015 Annual Meeting of Stockholders to be held on May 21, 201420, 2015 and is incorporated herein by reference.


141

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

The information required in response to this item will be contained in the Company's definitive Proxy Statement relating to its 2014 Annual Meeting of Stockholders to be held on May 21, 2014 and is incorporated herein by reference.


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, 20132014 and 2012.


2013.
Consolidated Statements of Income for the years ended December 31, 2014, 2013, 2012, and 2011.


2012.
Consolidated Statements of Comprehensive Income for the years ended December 31, 2014, 2013, 2012, and 2011.


2012.
Consolidated Statements of Changes in Stockholders' Equity for the years ended December 31, 2014, 2013, 2012, and 2011.


2012.
Consolidated Statements of Cash Flows for the years ended December 31, 2014, 2013, 2012, and 2011.


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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Table of Contents


EXHIBIT INDEX


Exhibit Number
Description of Documents
  
Exhibit NumberDescription of Documents
3.1 Restated Certificate of Incorporation of the Company is incorporated herein by reference to Exhibit 3.1 to the Company's Annual Report on Form 10-K filed with the Securities and Exchange Commission on February 27, 2009.

3.2
 
Certificate of Amendment of Restated Certificate of Incorporation of the Company is incorporated herein by reference to Exhibit 3.2 to the Company's Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on August 4, 2014
3.3
 
Amended and Restated By-Laws of the Company is incorporated herein by reference to Exhibit 3.2 to the Company's Annual Report on Form 10-K filed with the Securities and Exchange Commission on February 28, 2012.

4.1
 
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 Agreement 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 to Rights AgreementAgreements 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 to Rights AgreementAgreements 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 is incorporated herein by reference to Exhibit 1 of the Company's Registration Statement on Form 8-A, 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 November 22, 2011, by and between the Company and U.S. Bank National Association, as trustee, incorporated herein by reference to Exhibit 4.1 of the Company'sRegistrant'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 March 1, 2006, by and between the Company and U.S. Bank National Association, as trustee, incorporated herein by reference to Exhibit 4.1 of the Company'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.



4.12

Form of Indemnification 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.

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10.1 Form of Senior Executive Officer Letter Agreement under the Troubled Asset Relief Plan Capital Purchase Program by and between the Company and the United States Department of the Treasury dated December 5, 2008, 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

Short-term Incentive Compensation Plan is incorporated herein 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 28, 2012.

10.2
 
10.3

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 9, 2013.

10.3
 
Amendment 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 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
 
10.5

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






10.6
 
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
 
10.7

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
 
10.8

Form of Non-Employee Director Restricted Stock Award 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
 
10.9

Form of Nonqualified Stock Option Award 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
 
10.10

Form of Nonqualified Stock Option 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 10.1 to the Company's Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on May 12, 2008.

10.11
 
10.11

Form of Restricted Stock Unit Award Agreement between the Company and certain officers of the Company pursuant to the First Midwest Bancorp, Inc. Omnibus Stock and Incentive Plan.Plan is incorporated herein by reference to Exhibit 10.11 to the Company's Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 3, 2014.

10.12
 
10.12

Form of Restricted Stock Award Agreement between the Company and certain officers of the Company pursuant to the First Midwest Bancorp, Inc. Omnibus Stock and Incentive Plan.



10.13

Form of Troubled Asset Relief Plan Compliant Restricted Share Agreement between the Company and certain officers of the Company is incorporated herein by reference to Exhibit 10.1710.12 to the Company's Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 1, 2010.3, 2014.

10.13
 
10.14

Form of Indemnification Agreement between the Company and certain officers and directors of the Company is incorporated herein by reference to Exhibit 10.44.1 to the Company's Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on May 9, 2007.August 3, 2012.

10.14
 
10.15

Employment Agreement between the Company and its Chief 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.

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10.1610.15 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.

10.16
 
10.17

Employment 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.

10.17
 
10.18

Form 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, 2013.

10.18
 
10.19

Form of Class III Employment Agreement between the Company and certain officers of the Company 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.

10.19
 
10.20

Form 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.

10.20
 
10.21

Form 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.

10.21
 
10.22

Form 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.

10.22
 
10.23

Form 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.

10.23
 
10.24

Amendment 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.

144






10.25
10.24
 
Form 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.

10.25
 
10.26

Form 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
 
10.27

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
 
10.28

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
 
10.29

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
 
10.30

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.

Table of Contents

10.3110.30 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
 
10.32

Loan Agreement between the Company and U.S. Bank National Association dated January 21, 2014 is incorporated herein by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed with the Securities and Exchange Commission on January 27, 2014.

10.32
 
10.33

First Midwest Bancorp, Inc. Savings and Profit Sharing Plan as Amended and Restated effective January 1, 20082014 is incorporated herein by reference to Exhibit 10.310.33 to the Company's AnnualQuarterly Report on Form 10-K10-Q filed with the Securities and Exchange Commission on February 27, 2009.May 12, 2014.

10.33
 
10.34

Form of Performance SharesShare Award Agreement between the Company and certain officers of the Company pursuant to the First Midwest Bancorp, Inc. Omnibus Stock and Incentive Plan.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 3, 2014.

11
 
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 8. Financial Statements and Supplementary Data" on Form 10-K for the year ended December 31, 2013.2014.

12
 
12

Statement re: Computation of Ratio of Earnings to Fixed Charges.

21
 
14.1

Code of Ethics and Standards of Conduct of the Company 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.



14.2

Code of Ethics for Senior Financial Officers of the Company 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, 2013.2014.

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, 2013.2014.



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, 2013.2014.



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, 2013.2014.

101
 
101

Interactive Data File.


(1)  Furnished, not filed.


145

Table of Contents



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/ MICHAEL L. SCUDDER
Michael L. Scudder
President, Chief Executive Officer, and Director
  


March 3, 2014
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 March 3, 2014.

2, 2015.

Signatures
Signatures

/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/ PAUL F. CLEMENS
Paul F. Clemens
 
Executive Vice President, Chief Financial Officer, and Principal Accounting Officer

Paul F. Clemens
/s/ BARBARA A. BOIGEGRAIN
Director
Barbara A. Boigegrain

Director

/s/ JOHN F. CHLEBOWSKI, JR.
Director
John F. Chlebowski, Jr.

Director

/s/ BROTHER JAMES GAFFNEY, FSC
Director
Brother James Gaffney, FSC

Director

/s/ PHUPINDER S. GILL
Director
Phupinder S. Gill

Director

/s/ PETER J. HENSELER
Director
Peter J. Henseler

Director

/s/ PATRICK J. MCDONNELL
Director
Patrick J. McDonnell

Director

/s/ ELLEN A. RUDNICK
Director
Ellen A. Rudnick

Director

/s/ MARK G. SANDER		Director
Mark G. Sander
/s/ MICHAEL J. SMALL
Director
Michael J. Small

Director

/s/ JOHN L. STERLING
Director
John L. Sterling

Director

/s/ J. STEPHEN VANDERWOUDE
Director
J. Stephen Vanderwoude

Director


146