UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________________
 
FORM 10-Q
(Mark One)
[X]
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended June 30, 20172018
 
   
 or 
   
[ ]
Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from _________ to __________.
 

Commission File Number 0-10967
______________________
 
a3282014fmbilogoa03a12.jpg
(Exact name of registrant as specified in its charter)
Delaware 36-3161078
(State or other jurisdiction of incorporation or organization) (IRS Employer Identification No.)
One Pierce Place,8750 West Bryn Mawr Avenue, Suite 15001300
Itasca,Chicago, Illinois 60143-125460631-3655
(Address of principal executive offices) (zip code)
______________________
Registrant's telephone number, including area code: (630) 875-7463(708) 831-7563
______________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ].
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [X] No [ ].
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer [X] Accelerated filer [ ]
Non-accelerated filer [ ] Smaller reporting company [ ]
(Do not check if a smaller reporting company) Emerging growth company [ ]
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ] 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X].
As of August 4, 2017,3, 2018, there were 102,737,430103,054,177 shares of common stock, $.01 par value, outstanding.
 



FIRST MIDWEST BANCORP, INC.
FORM 10-Q
TABLE OF CONTENTS
   Page
Part I. FINANCIAL INFORMATION 
 
Item 1.
 Financial Statements (Unaudited) 
 
 
 
Consolidated Statements of Financial Condition
3
  
Condensed Consolidated Statements of Income
4
  
Consolidated Statements of Comprehensive Income
5
  
Consolidated Statements of Changes in Stockholders' Equity
6
  
Condensed Consolidated Statements of Cash Flows
7
  
Notes to the Condensed Consolidated Financial Statements
89
 
Item 2.
 
Management's Discussion and Analysis of Financial Condition and Results of Operations
4640
 
Item 3.
 
Quantitative and Qualitative Disclosures About Market Risk
7571
 
Item 4.
 
Controls and Procedures
7672
 
Part II.
 
OTHER INFORMATION
 
 
Item 1.
 
Legal Proceedings
7672
 
Item 1A.
 
Risk Factors
7672
 
Item 2.
 
Unregistered Sales of Equity Securities and Use of Proceeds
7773
 
Item 6.
 
Exhibits
7874


Table of Contents



PART I. FINANCIAL INFORMATION (Unaudited)
ITEM 1. FINANCIAL STATEMENTS (Unaudited)
FIRST MIDWEST BANCORP, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Amounts in thousands, except per share data)
    June 30,
2017		 December 31,
2016		    June 30,
2018		 December 31,
2017
Assets    (Unaudited)      (Unaudited)  
Cash and due from banksCash and due from banks $181,171
 $155,055
Cash and due from banks $181,482
 $192,800
Interest-bearing deposits in other banksInterest-bearing deposits in other banks 103,181
 107,093
Interest-bearing deposits in other banks 192,785
 153,770
Trading securities, at fair valueTrading securities, at fair value 19,545
 17,920
Trading securities, at fair value —
 20,447
Equity securities, at fair valueEquity securities, at fair value 28,441
 —
Securities available-for-sale, at fair valueSecurities available-for-sale, at fair value 1,908,248
 1,919,450
Securities available-for-sale, at fair value 2,142,865
 1,884,209
Securities held-to-maturity, at amortized costSecurities held-to-maturity, at amortized cost 17,353
 22,291
Securities held-to-maturity, at amortized cost 13,042
 13,760
Federal Home Loan Bank ("FHLB") and Federal Reserve Bank ("FRB") stock, at costFederal Home Loan Bank ("FHLB") and Federal Reserve Bank ("FRB") stock, at cost 66,333
 59,131
Federal Home Loan Bank ("FHLB") and Federal Reserve Bank ("FRB") stock, at cost 82,778
 69,708
LoansLoans 10,232,159
 8,254,145
Loans 10,891,565
 10,437,812
Allowance for loan lossesAllowance for loan losses (92,371) (86,083)Allowance for loan losses (96,691) (95,729)
Net loansNet loans 10,139,788
 8,168,062
Net loans 10,794,874
 10,342,083
Other real estate owned ("OREO")Other real estate owned ("OREO") 26,493
 26,083
Other real estate owned ("OREO") 12,892
 20,851
Premises, furniture, and equipment, netPremises, furniture, and equipment, net 135,745
 82,577
Premises, furniture, and equipment, net 127,024
 123,316
Investment in bank-owned life insurance ("BOLI")Investment in bank-owned life insurance ("BOLI") 278,353
 219,746
Investment in bank-owned life insurance ("BOLI") 282,664
 279,900
Goodwill and other intangible assetsGoodwill and other intangible assets 752,413
 366,876
Goodwill and other intangible assets 753,020
 754,757
Accrued interest receivable and other assetsAccrued interest receivable and other assets 340,517
 278,271
Accrued interest receivable and other assets 206,209
 221,451
Total assetsTotal assets $13,969,140
 $11,422,555
Total assets $14,818,076
 $14,077,052
LiabilitiesLiabilities    Liabilities    
Noninterest-bearing depositsNoninterest-bearing deposits $3,525,905
 $2,766,748
Noninterest-bearing deposits $3,667,847
 $3,576,190
Interest-bearing depositsInterest-bearing deposits 7,473,815
 6,061,855
Interest-bearing deposits 7,824,416
 7,477,135
Total depositsTotal deposits 10,999,720
 8,828,603
Total deposits 11,492,263
 11,053,325
Borrowed fundsBorrowed funds 639,333
 879,008
Borrowed funds 981,044
 714,884
Senior and subordinated debtSenior and subordinated debt 194,886
 194,603
Senior and subordinated debt 195,453
 195,170
Accrued interest payable and other liabilitiesAccrued interest payable and other liabilities 298,358
 263,261
Accrued interest payable and other liabilities 265,753
 248,799
Total liabilitiesTotal liabilities 12,132,297
 10,165,475
Total liabilities 12,934,513
 12,212,178
Stockholders' EquityStockholders' Equity    Stockholders' Equity    
Common stockCommon stock 1,123
 913
Common stock 1,124
 1,123
Additional paid-in capitalAdditional paid-in capital 1,025,607
 498,937
Additional paid-in capital 1,025,703
 1,031,870
Retained earningsRetained earnings 1,056,072
 1,016,674
Retained earnings 1,122,107
 1,074,990
Accumulated other comprehensive loss, net of taxAccumulated other comprehensive loss, net of tax (36,567) (40,910)Accumulated other comprehensive loss, net of tax (64,400) (33,036)
Treasury stock, at costTreasury stock, at cost (209,392) (218,534)Treasury stock, at cost (200,971) (210,073)
Total stockholders' equityTotal stockholders' equity 1,836,843
 1,257,080
Total stockholders' equity 1,883,563
 1,864,874
Total liabilities and stockholders' equityTotal liabilities and stockholders' equity $13,969,140
 $11,422,555
Total liabilities and stockholders' equity $14,818,076
 $14,077,052
              
June 30, 2017 December 31, 2016June 30, 2018 December 31, 2017
(Unaudited)    (Unaudited)    
Preferred Common Preferred CommonPreferred Common Preferred Common
Shares Shares Shares SharesShares Shares Shares Shares
       
Par value$—
 $0.01
 $—
 $0.01
Par value per share$—
 $0.01
 $—
 $0.01
Shares authorized1,000
 250,000
 1,000
 150,000
1,000
 250,000
 1,000
 250,000
Shares issued—
 112,345
 —
 91,284
—
 112,356
 —
 112,351
Shares outstanding—
 102,741
 —
 81,325
—
 103,059
 —
 102,717
Treasury shares—
 9,604
 —
 9,959
—
 9,297
 —
 9,634
 
See accompanying unaudited notes to the condensed consolidated financial statements.

3



Table of Contents



FIRST MIDWEST BANCORP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Amounts in thousands, except per share data)
(Unaudited)
 Quarters Ended 
 June 30,		 Six Months Ended 
 June 30,		 Quarters Ended 
 June 30,		 Six Months Ended 
 June 30,
 2017 2016 2017 2016 2018 2017 2018 2017
Interest Income                
Loans $114,820
 $86,526
 $227,185
 $164,981
 $127,737
 $114,820
 $246,423
 $227,185
Investment securities 10,527
 9,363
 21,011
 17,921
 13,010
 10,527
 24,766
 21,011
Other short-term investments 1,169
 661
 2,019
 1,196
 1,341
 1,169
 2,244
 2,019
Total interest income 126,516
 96,550
 250,215
 184,098
 142,088
 126,516
 273,433
 250,215
Interest Expense                
Deposits 3,729
 2,482
 6,938
 4,867
 8,032
 3,729
 14,211
 6,938
Borrowed funds 2,099
 1,499
 4,293
 2,815
 3,513
 2,099
 6,992
 4,293
Senior and subordinated debt 3,105
 2,588
 6,204
 5,721
 3,140
 3,105
 6,264
 6,204
Total interest expense 8,933
 6,569
 17,435
 13,403
 14,685
 8,933
 27,467
 17,435
Net interest income 117,583
 89,981
 232,780
 170,695
 127,403
 117,583
 245,966
 232,780
Provision for loan losses 8,239
 8,085
 13,157
 15,678
 11,614
 8,239
 26,795
 13,157
Net interest income after provision for loan losses 109,344
 81,896
 219,623
 155,017
 115,789
 109,344
 219,171
 219,623
Noninterest Income                
Service charges on deposit accounts 12,153
 10,169
 23,518
 19,642
 12,058
 12,153
 23,710
 23,518
Wealth management fees 10,525
 8,642
 20,185
 16,201
 10,981
 10,525
 21,939
 20,185
Card-based fees 8,832
 7,592
 16,948
 14,310
Card-based fees, net 4,394
 8,832
 8,327
 16,948
Capital market products income 2,217
 2,066
 3,593
 5,281
 2,819
 2,217
 4,377
 3,593
Mortgage banking income 1,645
 1,863
 3,533
 3,231
 1,736
 1,645
 4,133
 3,533
Other service charges, commissions, and fees 5,856
 5,602
 11,298
 10,863
 2,838
 5,856
 5,386
 11,298
Net securities gains 284
 23
 284
 910
 —
 284
 —
 284
Other income 3,433
 1,865
 5,537
 3,310
 2,121
 3,433
 4,592
 5,537
Total noninterest income 44,945
 37,822
 84,896
 73,748
 36,947
 44,945
 72,464
 84,896
Noninterest Expense                
Salaries and employee benefits 54,575
 46,267
 110,347
 90,861
 57,932
 54,575
 114,719
 110,347
Net occupancy and equipment expense 12,485
 9,928
 24,810
 19,625
 13,651
 12,485
 27,424
 24,810
Professional services 9,112
 5,292
 17,575
 11,212
 8,298
 9,112
 15,878
 17,575
Technology and related costs 4,485
 3,669
 8,918
 7,370
 4,837
 4,485
 9,608
 8,918
Net OREO expense 1,631
 1,122
 3,331
 1,786
 (256) 1,631
 812
 3,331
Other expenses 16,289
 14,458
 31,673
 27,451
 13,939
 16,289
 25,542
 31,673
Delivering Excellence implementation costs 15,015
 —
 15,015
 —
Acquisition and integration related expenses 1,174
 618
 19,739
 5,638
 —
 1,174
 —
 19,739
Total noninterest expense 99,751
 81,354
 216,393
 163,943
 113,416
 99,751
 208,998
 216,393
Income before income tax expense 54,538
 38,364
 88,126
 64,822
 39,320
 54,538
 82,637
 88,126
Income tax expense 19,588
 13,097
 30,321
 21,593
 9,720
 19,588
 19,527
 30,321
Net income $34,950
 $25,267
 $57,805
 $43,229
 $29,600
 $34,950
 $63,110
 $57,805
Per Common Share Data                
Basic earnings per common share $0.34
 $0.31
 $0.57
 $0.54
 $0.29
 $0.34
 $0.61
 $0.57
Diluted earnings per common share $0.34
 $0.31
 $0.57
 $0.54
 $0.29
 $0.34
 $0.61
 $0.57
Dividends declared per common share $0.10
 $0.09
 $0.19
 $0.18
 $0.11
 $0.10
 $0.22
 $0.19
Weighted-average common shares outstanding 101,743
 80,383
 101,081
 79,182
 102,159
 101,743
 102,041
 101,081
Weighted-average diluted common shares outstanding 101,763
 80,396
 101,101
 79,194
 102,159
 101,763
 102,049
 101,101
 
See accompanying unaudited notes to the condensed consolidated financial statements.

4



Table of Contents



FIRST MIDWEST BANCORP, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Dollar amounts in thousands)
(Unaudited)
 Quarters Ended 
 June 30,		 Six Months Ended 
 June 30,		 Quarters Ended 
 June 30,		 Six Months Ended 
 June 30,
 2017 2016 2017 2016 2018 2017 2018 2017
Net income $34,950
 $25,267
 $57,805
 $43,229
 $29,600
 $34,950
 $63,110
 $57,805
Securities Available-for-Sale                
Unrealized holding gains:        
Unrealized holding (losses) gains:        
Before tax 7,352
 9,493
 10,650
 28,366
 (8,980) 7,352
 (34,133) 10,650
Tax effect (2,941) (3,795) (4,262) (11,341) 2,535
 (2,941) 9,507
 (4,262)
Net of tax 4,411
 5,698
 6,388
 17,025
 (6,445) 4,411
 (24,626) 6,388
Reclassification of net gains included in net income:Reclassification of net gains included in net income:      Reclassification of net gains included in net income:      
Before tax 284
 23
 284
 910
 —
 284
 —
 284
Tax effect (114) (9) (114) (364) —
 (114) —
 (114)
Net of tax 170
 14
 170
 546
 —
 170
 —
 170
Net unrealized holding gains 4,241
 5,684
 6,218
 16,479
Net unrealized holding (losses) gains (6,445) 4,241
 (24,626) 6,218
Derivative Instruments                
Unrealized holding gains (losses):        
Unrealized holding losses:        
Before tax (905) 924
 (3,125) 5,199
 (590) (905) (68) (3,125)
Tax effect 361
 (370) 1,250
 (2,092) 166
 361
 19
 1,250
Net of tax (544) 554
 (1,875) 3,107
 (424) (544) (49) (1,875)
Total other comprehensive income 3,697
 6,238
 4,343
 19,586
Total other comprehensive (loss) income (6,869) 3,697
 (24,675) 4,343
Total comprehensive income $38,647
 $31,505
 $62,148
 $62,815
 $22,731
 $38,647
 $38,435
 $62,148


 
Accumulated
Unrealized
Gain (Loss) on
Securities
Available-
for-Sale
 Accumulated Unrealized Gain (Loss) on Derivative Instruments 
Unrecognized
Net Pension
Costs
 
Total
Accumulated
Other
Comprehensive
Loss
 
Accumulated
Unrealized
Loss on
Securities
Available-
for-Sale
 
Accumulated Unrealized
Loss on Derivative Instruments
 
Unrecognized
Net Pension
Costs
 
Total
Accumulated
Other
Comprehensive
Loss
Balance at December 31, 2015 $(10,271) $(2,468) $(15,650) $(28,389)
Other comprehensive income 16,479
 3,107
 —
 19,586
Balance at June 30, 2016 $6,208
 $639
 $(15,650) $(8,803)
Balance at December 31, 2016 $(22,645) $(1,176) $(17,089) $(40,910) $(22,645) $(1,176) $(17,089) $(40,910)
Other comprehensive income 6,218
 (1,875) —
 4,343
 6,218
 (1,875) —
 4,343
Balance at June 30, 2017 $(16,427) $(3,051) $(17,089) $(36,567) $(16,427) $(3,051) $(17,089) $(36,567)
Balance at December 31, 2017 $(13,976) $(3,763) $(15,297) $(33,036)
Adjustment to apply recent accounting pronouncements(1)
 (2,864) (784) (3,041) (6,689)
Other comprehensive loss (24,626) (49) —
 (24,675)
Balance at June 30, 2018 $(41,466) $(4,596) $(18,338) $(64,400)
(1)
As a result of accounting guidance adopted in the first quarter of 2018, certain reclassifications were made from accumulated other comprehensive loss to retained earnings as of January 1, 2018. For further discussion of this guidance, see Note 2, "Recent Accounting Pronouncements."
 
See accompanying unaudited notes to the condensed consolidated financial statements.


5



Table of Contents



FIRST MIDWEST BANCORP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(Amounts in thousands, except per share data)
(Unaudited)
 
Common
Shares
Outstanding
 
Common
Stock
 
Additional
Paid-in
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Loss
 
Treasury
Stock
 Total 
Common
Shares
Outstanding
 
Common
Stock
 
Additional
Paid-in
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Loss
 
Treasury
Stock
 Total
Balance at December 31, 2015 77,952
 $882
 $446,672
 $953,516
 $(28,389) $(226,413) $1,146,268
Net income —
 —
 —
 43,229
 —
 —
 43,229
Other comprehensive income —
 —
 —
 —
 19,586
 —
 19,586
Common dividends declared
($0.18 per common share)
 —
 —
 —
 (14,468) —
 —
 (14,468)
Acquisition, net of issuance costs 3,042
 31
 54,865
 —
 —
 —
 54,896
Common stock issued 7
 —
 112
 —
 —
 —
 112
Restricted stock activity 316
 —
 (10,319) —
 —
 7,819
 (2,500)
Treasury stock issued to
benefit plans		 (5) —
 (8) —
 —
 (63) (71)
Share-based compensation expense —
 —
 3,837
 —
 —
 —
 3,837
Balance at June 30, 2016 81,312
 $913
 $495,159
 $982,277
 $(8,803) $(218,657) $1,250,889
Balance at December 31, 2016 81,325
 $913
 $498,937
 $1,016,674
 $(40,910) $(218,534) $1,257,080
 81,325
 $913
 $498,937
 $1,016,674
 $(40,910) $(218,534) $1,257,080
Net income —
 —
 —
 57,805
 —
 —
 57,805
 —
 —
 —
 57,805
 —
 —
 57,805
Other comprehensive income —
 —
 —
 —
 4,343
 —
 4,343
 —
 —
 —
 —
 4,343
 —
 4,343
Common dividends declared
($0.19 per common share)
 —
 —
 —
 (18,407) —
 —
 (18,407) —
 —
 —
 (18,407) —
 —
 (18,407)
Acquisitions, net of issuance costs 21,078
 210
 533,322
 —
 —
 558
 534,090
 21,078
 210
 533,322
 —
 —
 558
 534,090
Common stock issued 5
 —
 110
 —
 —
 —
 110
 5
 —
 110
 —
 —
 —
 110
Restricted stock activity 340
 —
 (12,588) —
 —
 8,748
 (3,840) 340
 —
 (12,588) —
 —
 8,748
 (3,840)
Treasury stock issued to
benefit plans
 (7) —
 (1) —
 —
 (164) (165) (7) —
 (1) —
 —
 (164) (165)
Share-based compensation expense —
 —
 5,827
 —
 —
 —
 5,827
 —
 —
 5,827
 —
 —
 —
 5,827
Balance at June 30, 2017 102,741
 $1,123
 $1,025,607
 $1,056,072
 $(36,567) $(209,392) $1,836,843
 102,741
 $1,123
 $1,025,607
 $1,056,072
 $(36,567) $(209,392) $1,836,843
Balance at December 31, 2017 102,717
 $1,123
 $1,031,870
 $1,074,990
 $(33,036) $(210,073) $1,864,874
Adjustment to apply recent accounting
pronouncements(1)
 —
 —
 —
 6,689
 (6,689) —
 —
Net income —
 —
 —
 63,110
 —
 —
 63,110
Other comprehensive income —
 —
 —
 —
 (24,675) —
 (24,675)
Common dividends declared
($0.22 per common share)
 —
 —
 —
 (22,682) —
 —
 (22,682)
Common stock issued 5
 1
 161
 —
 —
 667
 829
Restricted stock activity 339
 —
 (12,558) —
 —
 8,511
 (4,047)
Treasury stock issued to benefit plans (2) —
 34
 —
 —
 (76) (42)
Share-based compensation expense —
 —
 6,196
 —
 —
 —
 6,196
Balance at June 30, 2018 103,059
 $1,124
 $1,025,703
 $1,122,107
 $(64,400) $(200,971) $1,883,563
(1)
As a result of accounting guidance adopted in the first quarter of 2018, certain reclassifications were made from accumulated other comprehensive loss to retained earnings as of January 1, 2018. For further discussion of this guidance, see Note 2, "Recent Accounting Pronouncements."
 
See accompanying unaudited notes to the condensed consolidated financial statements.

6



Table of Contents



FIRST MIDWEST BANCORP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollar amounts in thousands)
(Unaudited)
 Six Months Ended 
 June 30,		 Six Months Ended 
 June 30,
 2017 2016 2018 2017
Operating Activities    
Net income $63,110
 $57,805
Adjustments to reconcile net income to net cash provided by operating activities:    
Provision for loan losses 26,795
 13,157
Depreciation of premises, furniture, and equipment 7,584
 6,993
Net amortization of premium on securities 7,738
 8,327
Net securities gains —
 (284)
Gains on sales of 1-4 family mortgages and corporate loans held-for-sale (3,134) (3,293)
Net losses on sales and valuation adjustments of OREO 493
 1,520
Amortization of the FDIC indemnification asset 604
 604
Net losses (gains) on sales and valuation adjustments of premises, furniture, and equipment 5,449
 (391)
BOLI income (2,877) (2,671)
Share-based compensation expense 6,196
 5,827
Tax benefit (expense) related to share-based compensation 158
 (13)
Amortization of other intangible assets 3,596
 4,128
Originations of mortgage loans held-for-sale (114,142) (111,066)
Proceeds from sales of mortgage loans held-for-sale 130,900
 116,655
Net increase in equity securities (586) —
Net increase in trading securities —
 (1,625)
Net decrease (increase) in accrued interest receivable and other assets 8,072
 (7,481)
Net increase (decrease) in accrued interest payables and other liabilities 16,100
 (6,933)
Net cash provided by operating activities $81,423
 $59,238
 156,056
 81,259
Investing Activities        
Proceeds from maturities, repayments, and calls of securities available-for-sale 158,946
 174,937
 154,136
 158,946
Proceeds from sales of securities available-for-sale 241,137
 40,043
 —
 241,137
Purchases of securities available-for-sale (172,451) (532,934) (462,071) (172,451)
Proceeds from maturities, repayments, and calls of securities held-to-maturity 4,948
 4,360
 718
 4,948
Purchases of securities held-to-maturity (10) (16) —
 (10)
Net purchases of FHLB stock (3,955) (3,651) (13,070) (3,955)
Net increase in loans (225,537) (432,283) (479,514) (225,537)
Premiums paid on BOLI, net of proceeds from claims (6) 1,599
 113
 (6)
Proceeds from sales of OREO 8,476
 3,852
 8,638
 8,476
Proceeds from sales of premises, furniture, and equipment 7,056
 3,213
 150
 7,056
Purchases of premises, furniture, and equipment (6,619) (7,536) (16,891) (6,619)
Net cash received from acquisitions 41,717
 57,347
 —
 41,717
Net cash provided by (used in) investing activities 53,702
 (691,069)
Net cash (used in) provided by investing activities (807,791) 53,702
Financing Activities        
Net increase in deposit accounts 147,243
 278,657
 438,938
 147,243
Net (decrease) increase in borrowed funds (239,675) 282,232
Payments for the maturity of subordinated debt —
 (38,500)
Net increase (decrease) in borrowed funds 266,160
 (239,675)
Cash dividends paid (16,485) (14,123) (21,619) (16,485)
Restricted stock activity (4,004) (2,248) (4,047) (3,840)
Net cash (used in) provided by financing activities (112,921) 506,018
Net increase (decrease) in cash and cash equivalents 22,204
 (125,813)
Net cash provided by (used in) financing activities 679,432
 (112,757)
Net increase in cash and cash equivalents 27,697
 22,204
Cash and cash equivalents at beginning of period 262,148
 381,202
 346,570
 262,148
Cash and cash equivalents at end of period $284,352
 $255,389
 $374,267
 $284,352
    
Supplemental Disclosures of Cash Flow Information:    
Income taxes (refunded) paid $(958) $7,427
Interest paid to depositors and creditors 16,381
 13,269
Dividends declared, but unpaid 9,165
 7,595
Stock issued for acquisitions, net of issuance costs 534,090
 54,896
Non-cash transfers of loans to OREO 1,982
 3,675
Non-cash transfers of loans held-for-investment to loans held-for-sale 31,564
 63,709

7



Table of Contents



FIRST MIDWEST BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS – (Continued)
(Dollar amounts in thousands)
(Unaudited)
  Six Months Ended 
 June 30,
  2018 2017
Supplemental Disclosures of Cash Flow Information:    
Income taxes refunded $(18,898) $(958)
Interest paid to depositors and creditors 25,056
 16,381
Dividends declared, but unpaid 11,248
 9,165
Stock issued for acquisitions, net of issuance costs —
 534,090
Non-cash transfers of loans to OREO 1,172
 1,982
Non-cash transfers of loans held-for-investment to loans held-for-sale 9,546
 31,564
Non-cash transfer of trading securities and securities available-for-sale to equity securities 27,855
 —
 
See accompanying unaudited notes to the condensed consolidated financial statements.

78



Table of Contents



NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation – The accompanying unaudited condensed consolidated interim financial statements ("consolidated financial statements") of First Midwest Bancorp, Inc. (the "Company"), a Delaware corporation, were prepared in accordance with the rules and regulations of the Securities and Exchange Commission ("SEC") for quarterly reports on Form 10-Q and reflect all adjustments that management deems necessary for the fair presentation of the financial position and results of operations for the periods presented. The results of operations for the quarter and six months ended June 30, 20172018 are not necessarily indicative of the results that may be expected for the year ending December 31, 2017.2018.
The accounting and reporting policies of the Company and its subsidiaries conform to U.S. generally accepted accounting principles ("GAAP") and general practices within the banking industry. The accompanying consolidated financial statements do not include certain information and note disclosures required by GAAP for complete annual financial statements. Therefore, these financial statements should be read in conjunction with the Company's 20162017 Annual Report on Form 10-K ("20162017 10-K"). The Company uses the accrual basis of accounting for financial reporting purposes. Certain reclassifications were made to prior year amounts to conform to the current year presentation.
Use of Estimates – The preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Although these estimates and assumptions are based on the best available information, actual results could differ from those estimates.
Principles of Consolidation – The accompanying consolidated financial statements include the financial position and results of operations of the Company and its subsidiaries after elimination of all significant intercompany accounts and transactions. Assets held in a fiduciary or agency capacity are not assets of the Company or its subsidiaries and are not included in the consolidated financial statements.
The accounting policies related to business combinations, loans, the allowance for credit losses, and derivative financial instruments are presented below. For a summary of all other significant accounting policies, see Note 1, "Summary of Significant Accounting Policies," in the Company's 20162017 10-K.
Business Combinations – Business combinations are accounted for under the acquisition method of accounting. Assets acquired and liabilities assumed are recorded at their estimated fair values as of the date of acquisition, with any excess of the purchase price of the acquisition over the fair value of the identifiable net tangible and intangible assets acquired recorded as goodwill. Alternatively, a gain is recorded if the fair value of assets purchased exceeds the fair value of liabilities assumed and consideration paid. The results of operations of the acquired business are included in the Condensed Consolidated Statements of Income from the effective date of the acquisition.
Loans – Loans held-for-investment are loans that the Company intends to hold until they are paid in full and are carried at the principal amount outstanding, including certain net deferred loan origination fees. Loan origination fees, commitment fees, and certain direct loan origination costs are deferred, and the net amount is amortized as a yield adjustment over the contractual life of the related loans or commitments and included in interest income. Fees related to letters of credit are amortized into fee income over the contractual life of the commitment. Other credit-related fees are recognized as fee income when earned. The Company's net investment in direct financing leases is included in loans and consists of future minimum lease payments and estimated residual values, net of unearned income. Interest income on loans is accrued based on principal amounts outstanding. Loans held-for-sale are carried at the lower of aggregate cost or fair value and included in other assets in the Consolidated Statements of Financial Condition.
Acquired and Covered Loans – Covered loans consists of loans acquired by the Company in Federal Deposit Insurance Corporation ("FDIC")-assisted transactions, which are covered by loss share agreements with the FDIC (the "FDIC Agreements"), under which the FDIC reimburses the Company for the majority of the losses and eligible expenses related to these assets during the coverage period. Acquired loans consist of all other loans that were acquired in business combinations that are not covered by the FDIC Agreements. Certain loans that were previously classified as covered loans are no longer covered under the FDIC Agreements, and are included in acquired loans. Covered loans and acquired loans are included within loans held-for-investment.
Acquired and covered loans are separated into (i) non-purchased credit impaired ("non-PCI") and (ii) purchased credit impaired ("PCI") loans. Non-PCI loans include loans that did not have evidence of credit deterioration since origination at the acquisition date. PCI loans include loans that had evidence of credit deterioration since origination and for which it was probable at acquisition that the Company would not collect all contractually required principal and interest payments. Evidence of credit deterioration

89



Table of Contents



was evaluated using various indicators, such as past due and non-accrual status. Leases and revolving loans do not qualify to be accounted for as PCI loans and are accounted for as non-PCI loans.
The acquisition adjustment related to non-PCI loans is amortized into interest income over the contractual life of the related loans. If an acquired non-PCI loan is renewed subsequent to the acquisition date, any remaining acquisition adjustment is accreted into interest income and the loan is considered a new loan that is no longer classified as an acquired loan.
PCI loans are accounted for based on estimates of expected future cash flows. To estimate the fair value, the Company generally aggregates purchased consumer loans and commercial loans into pools of loans with common risk characteristics, such as delinquency status, credit score, and internal risk ratings. The fair values of larger balance commercial loans are estimated on an individual basis. Expected future cash flows in excess of the fair value of loans at the purchase date ("accretable yield") are recorded as interest income over the life of the loans if the timing and amount of the expected future cash flows can be reasonably estimated. The non-accretable yield represents the difference between contractually required payments and the expected future cash flows determined at acquisition. Subsequent increases in expected future cash flows are offset against the allowance for credit losses to the extent an allowance has been established or otherwise recognized as interest income prospectively. The present value of any decreases in expected future cash flows is recognized by recording a charge-off through the allowance for loan losses or providing an allowance for loan losses.
90-Days Past Due Loans –The– The Company's accrual of interest on loans is generally discontinued at the time the loan is 90 days past due unless the credit is sufficiently collateralized and in the process of renewal or collection.
Non-accrual Loans – Generally, corporate loans are placed on non-accrual status (i) when either principal or interest payments become 90 days or more past due unless the credit is sufficiently collateralized and in the process of renewal or collection, or (ii) when an individual analysis of a borrower's creditworthiness warrants a downgrade to non-accrual regardless of past due status. When a loan is placed on non-accrual status, unpaid interest credited to income in the current year is reversed, and unpaid interest accrued in prior years is charged against the allowance for loan losses. After the loan is placed on non-accrual status, all debt service payments are applied to the principal on the loan. Future interest income may only be recorded on a cash basis after recovery of principal is reasonably assured. Non-accrual loans are returned to accrual status when the financial position of the borrower and other relevant factors indicate that the Company will collect all principal and interest.
Commercial loans and loans secured by real estate are charged-off when deemed uncollectible. A loss is recorded if the net realizable value of the underlying collateral is less than the outstanding principal and interest. Consumer loans that are not secured by real estate are subject to mandatory charge-off at a specified delinquency date and are usually not classified as non-accrual prior to being charged-off. Closed-end consumer loans, which include installment, automobile, and single payment loans, are usually charged-off no later than the end of the month in which the loan becomes 120 days past due.
PCI loans are generally considered accruing loans unless reasonable estimates of the timing and amount of expected future cash flows cannot be determined. Loans without reasonable future cash flow estimates are classified as non-accrual loans, and interest income is not recognized on those loans until the timing and amount of the expected future cash flows can be reasonably determined.
Troubled Debt Restructurings ("TDRs") – A restructuring is considered a TDR when (i) the borrower is experiencing financial difficulties, and (ii) the creditor grants a concession, such as forgiveness of principal, reduction of the interest rate, changes in payments, or extension of the maturity date. Loans are not classified as TDRs when the modification is short-term or results in an insignificant delay in payments. The Company's TDRs are determined on a case-by-case basis.
The Company does not accrue interest on a TDR unless it believes collection of all principal and interest under the modified terms is reasonably assured. For a TDR to begin accruing interest, the borrower must demonstrate some level of past performance and the future capacity to perform under the modified terms. Generally, six months of consecutive payment performance under the restructured terms is required before a TDR is returned to accrual status. However, the period could vary depending on the individual facts and circumstances of the loan. An evaluation of the borrower's current creditworthiness is used to assess the borrower's capacity to repay the loan under the modified terms. This evaluation includes an estimate of expected future cash flows, evidence of strong financial position, and estimates of the value of collateral, if applicable. For TDRs to be removed from TDR status in the calendar year after the restructuring, the loans must (i) have an interest rate and terms that reflect market conditions at the time of restructuring, and (ii) be in compliance with the modified terms. If the loan was restructured at below market rates and terms, it continues to be separately reported as restructured until it is paid in full or charged-off.
Impaired Loans – Impaired loans consist of corporate non-accrual loans and TDRs. A loan is considered impaired when it is probable that the Company will not collect all contractual principal and interest. With the exception of accruing TDRs, impaired loans are classified as non-accrual and are exclusive of smaller homogeneous loans, such as home equity, 1-4 family mortgages, and installment loans. Impaired loans with balances under a specified threshold are not individually evaluated for impairment. For all other impaired loans, impairment is measured by comparing the estimated value of the loan to the recorded book value.

910



Table of Contents



The value of collateral-dependent loans is based on the fair value of the underlying collateral, less costs to sell. The value of other loans is measured using the present value of expected future cash flows discounted at the loan's initial effective interest rate.
Allowance for Credit Losses – The allowance for credit losses is comprised of the allowance for loan losses and the reserve for unfunded commitments, and is maintained by management at a level believed adequate to absorb estimated losses inherent in the existing loan portfolio. Determination of the allowance for credit losses is subjective since it requires significant estimates and management judgment, including the amounts and timing of expected future cash flows on impaired loans, estimated losses on pools of homogeneous loans, consideration of current economic trends, and other factors.
Loans deemed to be uncollectible are charged-off against the allowance for loan losses, while recoveries of amounts previously charged-off are credited to the allowance for loan losses. Additions to the allowance for loan losses are charged to expense through the provision for loan losses. The amount of provision depends on a number of factors, including net charge-off levels, loan growth, changes in the composition of the loan portfolio, and the Company's assessment of the allowance for loan losses based on the methodology discussed below.
Allowance for Loan Losses – The allowance for loan losses consists of (i) specific reserves for individual loans where the recorded investment exceeds the value, (ii) an allowance based on a loss migration analysis that uses historical credit loss experience for each loan category, and (iii) an allowance based on other internal and external qualitative factors.
The specific reserves component of the allowance for loan losses is based on a periodic analysis of impaired loans exceeding a fixed dollar amount. If the value of an impaired loan is less than the recorded book value, the Company either establishes a valuation allowance (i.e., a specific reserve) equal to the excess of the book value over the collateral value of the loan as a component of the allowance for loan losses or charges off the amount if it is a confirmed loss.
The general reserve component is based on a loss migration analysis, which examines actual loss experience by loan category for a rolling 8-quarter period and the related internal risk rating for corporate loans. The loss migration analysis is updated quarterly, primarily using actual loss experience. This component is then adjusted based on management's consideration of many internal and external qualitative factors, including:
Changes in the composition of the loan portfolio, trends in the volume of loans, and trends in delinquent and non-accrual loans that could indicate that historical trends do not reflect current conditions.
Changes in credit policies and procedures, such as underwriting standards and collection, charge-off, and recovery practices.
Changes in the experience, ability, and depth of credit management and other relevant staff.
Changes in the quality of the Company's loan review system and Board of Directors oversight.
The effect of any concentration of credit and changes in the level of concentrations, such as loan type or risk rating.
Changes in the value of the underlying collateral for collateral-dependent loans.
Changes in the national and local economy that affect the collectability of various segments of the portfolio.
The effect of other external factors, such as competition and legal and regulatory requirements, on the Company's loan portfolio.
The allowance for loan losses also consists of an allowance on acquired and covered non-PCI and PCI loans. No allowance for loan losses is recorded on acquired loans at the acquisition date. Subsequent to the acquisition date, an allowance for credit losses is established as necessary to reflect credit deterioration. The acquired non-PCI allowance is based on management's evaluation of the acquired non-PCI loan portfolio giving consideration to the current portfolio balance, including the remaining acquisition adjustments, maturity dates, and overall credit quality. The allowance for covered non-PCI loans is calculated in the same manner as the general reserve component based on a loss migration analysis as discussed above. The acquired and covered PCI allowance reflects the difference between the carrying value and the discounted expected future cash flows of the acquired and covered PCI loans. On a periodic basis, the adequacy of this allowance is determined through a re-estimation of expected future cash flows on all of the outstanding acquired and covered PCI loans using either a probability of default/loss given default ("PD/LGD") methodology or a specific review methodology. The PD/LGD model is a loss model that estimates expected future cash flows using a probability of default curve and loss given default estimates. Acquired non-PCI loans that have renewed subsequent to the respective acquisition dates are no longer classified as acquired loans. Instead, they are included in the general loan population and allocated an allowance based on a loss migration analysis.
Reserve for Unfunded Commitments – The Company also maintains a reserve for unfunded commitments, including letters of credit, for the risk of loss inherent in these arrangements. The reserve for unfunded commitments is estimated using the loss migration analysis from the allowance for loan losses, adjusted for probabilities of future funding requirements. The reserve for unfunded commitments is included in other liabilities in the Consolidated Statements of Financial Condition.
The establishment of the allowance for credit losses involves a high degree of judgment given the difficulty of assessing the factors impacting loan repayment and estimating the timing and amount of losses. While management utilizes its best judgment and

1011



Table of Contents



information available, the adequacy of the allowance for credit losses depends on a variety of factors beyond the Company's control, including the performance of its loan portfolio, the economy, changes in interest rates and property values, and the interpretation of loan risk classifications by regulatory authorities.
Derivative Financial Instruments – To provide derivative products to customers and in the ordinary course of business, the Company enters into derivative transactions as part of its overall interest rate risk management strategy to minimize significant unplanned fluctuations in earnings and expected future cash flows caused by interest rate volatility. All derivative instruments are recorded at fair value as either other assets or other liabilities in the Consolidated Statements of Financial Condition. Subsequent changes in a derivative's fair value are recognized in earnings unless specific hedge accounting criteria are met.
On the date the Company enters into a derivative contract, the derivative is designated as a fair value hedge, a cash flow hedge, or a non-hedge derivative instrument. Fair value hedges are designed to mitigate exposure to changes in the fair value of an asset or liability attributable to a particular risk, such as interest rate risk. Cash flow hedges are designed to mitigate exposure to variability in expected future cash flows to be received or paid related to an asset, liability, or other type of forecasted transaction. The Company formally documents all relationships between hedging instruments and hedged items, including its risk management objective and strategy at inception.
At the hedge's inception, and quarterly thereafter, a formal assessment is performed to determine the effectiveness of the derivative in offsetting changes in the fair values or expected future cash flows of the hedged items in the current period and prospectively. If a derivative instrument designated as a hedge is terminated or ceases to be highly effective, hedge accounting is discontinued prospectively, and the gain or loss is amortized into earnings. For fair value hedges, the gain or loss is amortized over the remaining life of the hedged asset or liability. For cash flow hedges, the gain or loss is amortized over the same period that the forecasted hedged transactions impact earnings. If the hedged item is disposed of, any fair value adjustments are included in the gain or loss from the disposition of the hedged item. If the forecasted transaction is no longer probable, the gain or loss is included in earnings immediately.
For fair value hedges, changes in the fair value of the derivative instruments, as well as changes in the fair value of the hedged item, are recognized in earnings.earnings in the same income statement line item as the earnings effect of the hedged item. For cash flow hedges, the effective portion of the change in fair value of the derivative instrument is reported as a component of accumulated other comprehensive loss and is reclassified to earnings when the hedged transaction is reflected in earnings.
Ineffectiveness is calculated based on the change in fair value of the hedged item compared with the change in fair value of the hedging instrument. For all types of hedges, any ineffectiveness in the hedging relationship is recognized in earnings during the period the ineffectiveness occurs.

11



Table of Contents



2. RECENT ACCOUNTING PRONOUNCEMENTS
Adopted Accounting Pronouncements
Contingent Put and Call Options in Debt Instruments: In March of 2016, the Financial Accounting Standards Board ("FASB") issued final guidance clarifying the requirements for assessing whether contingent call (put) options that can accelerate the payment of principal on debt instruments are clearly and closely related to their debt hosts. Entities are required to apply the guidance to existing debt instruments (or hybrid financial instruments that are determined to have a debt host) using a modified retrospective transition method as of the period of adoption. The adoption of this guidance on January 1, 2017 did not impact the Company's financial condition, results of operations, or liquidity.
Equity Method Accounting: In March of 2016, the FASB issued final guidance to simplify the equity method of accounting. The guidance eliminates the requirement to retrospectively apply equity method accounting in previous periods when an investor initially obtains significant influence over an investee. This guidance is effective for annual and interim periods beginning after December 15, 2016. The adoption of this guidance on January 1, 2017 did not impact the Company's financial condition, results of operations, or liquidity.
Accounting for Employee Share-based Payments: In March of 2016, the FASB issued guidance to simplify the accounting for employee share-based payment transactions. The guidance requires entities to recognize the income tax effects of awards in the income statement when the awards vest or are settled. In addition, the guidance allows entities to repurchase more of an employee's shares than it can under current guidance for tax withholding purposes without triggering liability accounting and to make a policy election to account for forfeitures as they occur. The adoption of this guidance on January 1, 2017 resulted in a $638,000 tax benefit to the provision for income tax expense for the six months ended June 30, 2017, recorded in the Company's results of operations. The Company elected to estimate forfeitures, which is consistent with the Company's practice before the adoption of this guidance.
Accounting Pronouncements Pending Adoption
Revenue from Contracts with Customers: In May of 2014, the FASBFinancial Accounting Standards Board ("FASB") issued guidance that requires an entity to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In March of 2016, the FASB issued an amendment to this guidance to clarify the implementation of guidance on principal versus agent consideration. Additional amendments to clarify the implementation guidance on the identification of performance obligations and licensing were issued in April of 2016 and narrow-scope improvements and practical expedients were issued in May of 2016.
The guidance was initiallyis effective for annual and interim reporting periods beginning on or after December 15, 2016 but was deferred to December 15, 2017, and must be applied either retrospectively or using the modified retrospective approach. Early adoption is permitted, but not before the original effective date.
The Company's revenue is comprised of net interest income on financial assets and liabilities, which areis excluded from the scope of this guidance, and noninterest income. The Company expects that this guidance will change howprimary sources of revenue from certain revenue streams is recognized within noninterest income are service charges on deposit accounts, wealth management fees, but does not expect these changes to have a significant impact on the Company's financial condition, resultscard-based fees, and merchant servicing fees. The adoption of operations, or liquidity. The Company continues to evaluate the impact of this guidance on other components of noninterest income. The Company will adopt this guidance on January 1, 2018, using the modified retrospective approach, withaffected how the Company presents merchant servicing fees, merchant card expenses, card-based fees, and cardholder expenses, which are presented on a gross basis within noninterest income and noninterest expense for the prior period and are presented on a net basis within noninterest income for the current period. Total expenses of $4.0 million and $7.7 million for the quarter and six months ended June 30, 2018 were netted in noninterest income. The adoption of this guidance did not impact net income; therefore, a cumulative effect adjustment to opening retained earnings ifwas not deemed necessary. Consistent with the modified retrospective approach, the Company did not adjust prior period amounts for the reclassification of merchant card expenses and cardholder expenses.
A description of the Company's revenue streams accounted for under the scope of this guidance follows:
Service charges on deposit accounts – Service charges on deposit accounts consist of account analysis fees (net fees earned on analyzed business and public checking accounts), monthly service fees, and other deposit account related fees. The Company's performance obligation for account analysis fees and monthly service fees is generally satisfied, and the related revenue recognized, over the period in which the service is provided. Other deposit account related fees are largely transactional based and, therefore, the Company's performance obligation is satisfied, and related revenue recognized, at a point in time. Payment for service charges

12



Table of Contents



on deposit accounts is primarily received as a direct charge to customers' accounts. As a result of the adoption of this guidance, there was no impact to the method of recognizing revenue related to service charges on deposit accounts for the quarter and six months ended June 30, 2018.
Wealth management fees – Wealth management fees represents quarterly fees due from wealth management customers as consideration for managing the customers' assets. Wealth management services include custody of assets, investment management, escrow services, fees for trust services and similar fiduciary activities. Revenue is recognized when our performance obligation is completed each quarter, which is generally the time that payment is received. Also included are fees received from a third-party broker-dealer as part of a revenue-sharing agreement. These fees are paid to us by the third-party on a quarterly basis and recognized ratably throughout the quarter as our performance obligation is satisfied. As a result of the adoption of this guidance, there was no impact to the method of recognizing revenue related to wealth management fees for the quarter and six months ended June 30, 2018.
Card-based fees, net – Card-based fees, net consists of debit and credit card interchange fees for processing transactions, as well as various fees for automated teller machine ("ATM") and point-of-sale transactions processed through the related networks. Interchange, ATM, and point-of-sale fees from cardholder transactions represent a percentage of the underlying transaction value or a flat fee and are recognized daily in connection with the transaction processing services provided to the cardholder. Card-based fees are presented net of certain contract costs associated with the debit, credit and ATM card interchange networks. As a result of the adoption of this guidance, $1.9 million and $3.6 million of cardholder expenses are netted against card-based fees for the quarter and six months ended June 30, 2018, respectively.
Merchant servicing fees, net – Merchant servicing fees, net is included in other service charges, commissions, and fees in the Consolidated Statements of Income. The Company acts in an adjustment is deemedagency capacity with respect to be significant.its merchants to process their debit and credit card transactions, deriving revenue from assisting another entity in transactions with the Company's customers. Merchant servicing fees represent a percentage of the underlying net transaction volume or a flat fee and are recognized monthly. Merchant servicing fees are presented net of certain contract costs associated with the third-party merchant processing. As a result of the adoption of this guidance, $2.1 million and $4.1 million of merchant card expenses are netted against merchant servicing fees for the quarter and six months ended June 30, 2018, respectively.
Amendments to Guidance on Classifying and Measuring Financial Instruments: In January of 2016, the FASB issued guidance that will require entities to measure equity investments that do not result in consolidation and are not accounted for under the equity method at fair value. Any subsequent changes in fair value will be recognized in net income unless the investments qualify for a new practicability exception. Equity securities totaling $28.4 million are no longer classified as trading securities or securities available-for-sale. This guidance also requires entities to recognize changes in instrument-specific credit risk related to financial liabilities measured underadjust the fair value option in other comprehensive income.disclosures for financial instruments carried at amortized cost from an entry price to an exit price. No changes were made to the guidance for classifying and measuring investments in debt securities and loans. Except as discussed above, the adoption of this guidance on January 1, 2018 did not materially impact the Company's financial condition, results of operations, or liquidity.
Classification of Certain Cash Receipts and Cash Payments: In August of 2016, the FASB issued guidance clarifying certain cash flow presentation and classification issues to reduce diversity in practice. The adoption of this guidance on January 1, 2018 did not materially impact the Company's financial condition, results of operations, or liquidity.
Income Taxes: In October of 2016, the FASB issued guidance that requires an entity to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. The adoption of this guidance on January 1, 2018 did not materially impact the Company's financial condition, results of operations, or liquidity.
Clarifying the Definition of a Business: In January of 2017, the FASB issued guidance that clarifies the definition of a business to assist entities with evaluating whether transactions should be accounted for as acquisitions or disposals of assets or businesses. The adoption of this guidance on January 1, 2018 did not impact the Company's financial condition, results of operations, or liquidity.
Presentation of Defined Benefit Retirement Plan Costs: In March of 2017, the FASB issued guidance that changes how employers that sponsor defined pension and or other postretirement benefit plans present the net periodic benefit cost in the income statement. Employers are required to present the service cost component of the net periodic benefit cost in the same income statement line item as other employee compensation costs arising from services rendered during the period. Other components of net periodic benefit cost are required to be presented separately from the line item(s) that includes the service cost. The adoption of this guidance on January 1, 2018 did not materially impact the Company's financial condition, results of operations, or liquidity.
Share-based Payment Award Modifications: In May of 2017, the FASB issued guidance to reduce diversity in practice by clarifying when changes to the terms or conditions of a share-based payment award must be accounted for as a modification. The adoption of this guidance on January 1, 2018 did not materially impact the Company's financial condition, results of operations, or liquidity.

13



Table of Contents



Derivatives and Hedging: In August of 2017, the FASB issued guidance to better align the financial reporting related to hedging activities with the economic objectives of those activities and to simplify the application of current hedge accounting guidance. Entities are required to apply the guidance using a modified retrospective method as of the period of adoption. This guidance is effective for annual and interim periods beginning after December 31, 2018. Early adoption is permitted, and the Company elected to do so on January 1, 2018, which did not materially impact the Company's financial condition, results of operations, or liquidity.
Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income: In February of 2018, the FASB issued guidance that requires a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act of 2017. Entities electing the reclassification are required to apply the guidance either at the beginning of the period of adoption or retrospectively for all periods impacted. This guidance is effective for annual and interim periods beginning after December 15, 2017.2018. Early adoption is permitted. Management does not expectpermitted and the adoptionCompany elected to do so on January 1, 2018, which resulted in the reclassification of this guidance will materially impact$6.8 million of stranded tax effects from accumulated other comprehensive loss to retained earnings as of the Company's financial condition, resultsbeginning of operations, or liquidity.the period of adoption.
Accounting Pronouncements Pending Adoption
Leases: In February of 2016, the FASB issued guidance to increase transparency and comparability across entities for leasing arrangements. This guidance requires lessees to recognize assets and liabilities for most leases. For lessors, this guidance modifies the lease classification criteria and the accounting for sales-type and direct financing leases. In addition, this guidance clarifies criteria for the determination of whether a contract is or contains a lease. This guidance is effective for annual and interim periods beginning after December 15, 2018. Early adoption is permitted.
During 2016, the CompanyFirst Midwest Bank (the "Bank") entered into a sale-leaseback transaction that resulted in a deferred gain of $82.5 million, with $78.1$71.7 million remaining as of June 30, 2017.2018. Upon adoption of this guidance, the remaining deferred gain will be recognized immediately

12



Table of Contents



as a cumulative-effect adjustment to equity. For additional discussion of the sale-leaseback transaction, see Note 8 "Premises, Furniture, and Equipment."Equipment" to the Consolidated Financial Statements in the Company's 2017 10-K. Management is evaluatingcompleting its evaluation of the new guidance and does not expect the additionaladoption of the guidance will materially impact to the Company's financial condition, results of operations or liquidity.liquidity, but anticipates a material increase in assets, liabilities, and equity.
Measurement of Credit Losses on Financial Instruments: In June of 2016, the FASB issued guidance that will require entities to present financial assets measured at amortized cost at the net amount expected to be collected, considering an entity's current estimate of all expected credit losses. In addition, credit losses relating to available-for-sale debt securities will be required to be recorded through an allowance for credit losses, with changes in credit loss estimates recognized through current earnings. This guidance is effective for annual and interim periods beginning after December 15, 2019. Early adoption is permitted, but not for periods beginning before December 15, 2018. Management is evaluating the new guidance and the impact to the Company's financial condition, results of operations, and liquidity.
Classification of Certain Cash Receipts and Cash Payments: In August of 2016, the FASB issued guidance clarifying certain cash flow presentation and classification issues to reduce diversity in practice. This guidance is effective for annual and interim reporting periods beginning on or after December 15, 2017. Early adoption is permitted. Management does not expect the adoption of this guidance will materially impact the Company's Consolidated Statement of Cash Flows.
Income Taxes: In October of 2016, the FASB issued guidance that requires an entity to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. This guidance is effective for annual and interim periods beginning after December 15, 2017. Early adoption is permitted. Management does not expect the adoption of this guidance will materially impact the Company's financial condition, results of operations, or liquidity.
Clarifying the Definition of a Business: In January of 2017, the FASB issued guidance that clarifies the definition of a business to assist entities with evaluating whether transactions should be accounted for as acquisitions or disposals of assets or businesses. This guidance is effective for annual and interim periods beginning after December 15, 2017. Early adoption is permitted. Management will apply this guidance to future transactions upon adoption.
Accounting for Goodwill Impairment: In January of 2017, the FASB issued guidance that simplifies the accounting for goodwill impairment for all entities. The new guidance eliminates the requirement to calculate the implied fair value of goodwill using the second step of the quantitative two-step goodwill impairment model prescribed under current accounting guidance. Under the new guidance, if a reporting unit's carrying amount exceeds its fair value, an entity will record an impairment charge based on that difference. This guidance is effective for annual and interim goodwill impairment testing dates beginning after December 15, 2019. Early adoption is permitted for annual and interim goodwill impairment testing dates after January 1, 2017. Management does not expect the adoption of this guidance will materially impact the Company's financial condition, results of operations, or liquidity.
Presentation of Defined Benefit Retirement Plan Costs: In March of 2017, the FASB issued guidance that changes how employers that sponsor defined pension and or other postretirement benefit plans present the net periodic benefit cost in the income statement. Employers will present the service cost component of net periodic benefit cost in the same income statement line item as other employee compensation costs arising from services rendered during the period. Other components of net periodic benefit cost will be presented separately from the line item(s) that includes the service cost. This guidance is effective for annual and interim periods beginning after December 15, 2017. Early adoption is permitted. Management does not expect the adoption of this guidance will materially impact the Company's financial condition, results of operations, or liquidity.
Premium Amortization on Purchased Callable Debt Securities: In March of 2017, the FASB issued guidance that shortens the amortization period for the premium on certain purchased callable debt securities to the earliest call date. This guidance is effective for annual and interim periods beginning after December 15, 2018. Early adoption is permitted. Management does not expect the adoption of this guidance will materially impact the Company's financial condition, results of operations, or liquidity.
Improvements to Nonemployee Share-based Payment Award Modifications:Accounting: In MayJune of 2017,2018, the FASB issued guidance that aligns the measurement and classification guidance for share-based payments to reduce diversity in practice by clarifying when changesnonemployees with the guidance for share-based payments to the terms or conditions of a share-based payment award must be accounted for as a modification.employees. This guidance is effective for annual and interim periods beginning after December 15, 2017.2018. Early adoption is permitted. Management does not expect the adoption of this guidance will materially impact the Company's financial condition, results of operations, or liquidity.

1314



Table of Contents



3. ACQUISITIONS
Pending Acquisition
Northern States Financial Corporation
On June 6, 2018, the Company entered into a definitive agreement to acquire Northern States Financial Corporation, ("Northern States"), the holding company for NorStates Bank, based in Waukegan, Illinois. As of June 30, 2018, Northern States had approximately $530 million in total assets, $450 million in deposits, and $310 million in loans. The merger agreement provides for an exchange ratio of 0.0369 shares of Company common stock for each share of Northern States common stock, subject to adjustment as set forth in the merger agreement. As of the date of the public announcement, the overall transaction was valued at approximately $91 million. The acquisition is expected to close in the fourth quarter of 2018, subject to customary regulatory approvals and closing conditions, as well as the approval of Northern States' stockholders.
Completed Acquisitions
Standard Bancshares, Inc.
On January 6, 2017, the Company completed theits acquisition of Standard Bancshares, Inc. ("Standard"), the holding company for Standard Bank and Trust Company. Pursuant to the terms of the merger agreement, on January 6, 2017, each outstanding share of Standard common stock was canceled and converted into the right to receive 0.4350 of a share of Company common stock. Based on the closing trading price of shares of Company common stock on the NASDAQof $25.34 on that date, of $25.34,as reported by NASDAQ, the value of the merger consideration per share of Standard common stock was $11.02. Each outstanding Standard stock settled right was redeemed for cash, and each outstanding Standard stock option and each share of Standard phantom stock waswere canceled and terminated in exchange for the right to receive cash, in each case, pursuant to the terms of the merger agreement. This resulted in an overall transaction value of approximately $580.7 million, which consisted of 21,057,085 shares of Company common stock and $47.1 million in cash. Goodwill of $339.3$345.3 million associated with the acquisition was recorded by the Company. All operating systems were converted during the first quarter of 2017.
During the second quarter of 2017, the Company updatedfinalized the fair value adjustments associated with the Standard transaction. The adjustments were recognized in the current period in accordance with accounting guidance applicable to business combinations. The fair value adjustments, including goodwill, remain preliminary and may change as the Company continues to finalize the fair value of the assets and liabilities acquired.
Premier Asset Management LLC
On February 28, 2017, the Company completed theits acquisition of Premier Asset Management LLC ("Premier"), a registered investment advisor based in Chicago, Illinois. At the close of the acquisition, the Company acquired approximately $550.0 million of trust assets under management. The fair value adjustments, including goodwill, remain preliminary and may change asDuring the first quarter of 2018, the Company continues to finalizefinalized the fair value of the assets and liabilities acquired.
NI Bancshares Corporation
On March 8, 2016, the Company completed the acquisition of NI Bancshares Corporation ("NI Bancshares"), the holding company for The National Bank & Trust Company of Sycamore. As part of the acquisition, the Company acquired all assets and assumed all liabilities of NI Bancshares, which included ten banking offices in northern Illinois and over $700.0 million in trust assets under management. The merger consideration was a combination of Company common stock and cash, at a purchase price of $70.1 million. Goodwill of $22.2 million associated with the acquisition was recorded by the Company. The fair value adjustments associated with this transaction were finalized during the first quarter of 2017.

14



Table of Contents



The following table presents the assets acquired and liabilities assumed, net of the fair value adjustments, in the Standard and NI Bancshares transactions as of the acquisition date. The assets acquired and liabilities assumed, both intangible and tangible, were recorded at their estimated fair values as of the acquisition date and have been accounted for under the acquisition method of accounting.
Acquisition Activity
(Amounts in thousands, except share and per share data)
 Standard NI Bancshares
 January 6, 2017 March 8, 2016
Assets   
Cash and due from banks and interest-bearing deposits in other banks$102,149
 $72,533
Securities available-for-sale214,107
 125,843
Securities held-to-maturity—
 1,864
FHLB and FRB stock3,247
 1,549
Loans1,769,655
 396,181
OREO8,424
 2,863
Investment in BOLI55,629
 8,384
Goodwill339,253
 22,174
Other intangible assets31,072
 10,408
Premises, furniture, and equipment60,207
 19,636
Accrued interest receivable and other assets56,036
 16,453
Total assets$2,639,779
 $677,888
Liabilities   
Noninterest-bearing deposits$675,354
 $130,909
Interest-bearing deposits1,348,520
 464,012
Total deposits2,023,874
 594,921
Borrowed funds—
 2,416
Intangible liabilities—
 230
Accrued interest payable and other liabilities35,190
 10,239
Total liabilities2,059,064
 607,806
Consideration Paid   
Common stock (2017 - 21,057,085 shares issued at $25.34 per share,
  2016 - 3,042,494 shares issued at $18.059 per share), net of issuance costs
533,590
 54,896
Cash paid47,125
 15,186
Total consideration paid580,715
 70,082
 $2,639,779
 $677,888
Expenses related to the acquisition and integration of the transactions above totaled $1.2 million and $19.7 million during the quarter and six months ended June 30, 2017, respectively, and are reported as a separate component within noninterest expense in the Condensed Consolidated Statements of Income. Expenses related to the acquisition and integration of the transactions above totaled $618,000 and $5.6 million during the quarter and six months ended June 30, 2016, respectively. The acquisition of Standard was considered material to the Company's financial statements; therefore, pro forma financial data and related disclosures are included in the following tables.Premier transaction.

15



Table of Contents



The unaudited pro forma combined results of operations for the quarters and six months ended June 30, 2017 and 2016 are presented as if the Standard acquisition had occurred on January 1, 2016, the first day of the Company's 2016 fiscal year. The unaudited pro forma combined results of operations are presented for illustrative purposes only and do not necessarily indicate the financial results of the combined companies had the companies actually been combined at the beginning of the period presented. Fair value adjustments included in the following table are preliminary and may be revised. The unaudited pro forma results of operations also does not consider any potential impacts of potential revenue enhancements, anticipated cost savings and expense efficiencies, or asset dispositions, among other factors. Acquisition and integration related expenses directly attributable to the Standard acquisition have been excluded from the following table and are estimated to total $27.0 million, of which $1.2 million and $18.7 million was expensed during the quarter and six months ended June 30, 2017, respectively.
Unaudited Pro Forma Combined Results of Operations
(Dollar amounts in thousands)
  Quarters Ended 
 June 30,		 Six Months Ended 
 June 30,
  2017 2016 2017 2016
Total revenues (1)
 $162,528
 $154,831
 $319,285
 $298,176
Net income 35,652
 29,304
 68,386
 52,465

(1)
Includes net interest income and total noninterest income.
Acquired loans are recorded at fair value, which incorporates credit risk, at the date of acquisition. No allowance for credit losses is recorded on the acquisition date. Acquired loans are separated into (i) non-PCI and (ii) PCI loans. Non-PCI loans include loans that did not have evidence of credit deterioration since origination at the acquisition date. PCI loans include loans that had evidence of credit deterioration since origination and for which it was probable at acquisition that the Company would not collect all contractually required principal and interest payments. PCI loans are accounted for based on estimates of expected future cash flows. Expected future cash flows in excess of the fair value of loans at the purchase date ("accretable yield") are recorded as interest income over the life of the loans if the timing and amount of the expected future cash flows can be reasonably estimated. The non-accretable yield represents the difference between contractually required payments and the expected future cash flows determined at acquisition. For additional discussion regarding significant accounting policies on acquired loans see Note 1, "Summary of Significant Accounting Policies."
The following table presents additional detail for loans acquired in the Standard transaction at the acquisition date.
Standard Acquired Loans
(Dollar amounts in thousands)
  January 6, 2017
  PCI Loans Non-PCI Loans
Fair value $125,492
 $1,644,163
Contractually required principal and interest payments 210,891
 1,938,100
Best estimate of contractual cash flows not expected to be collected (1)
 57,754
 100,791
Best estimate of contractual cash flows expected to be collected 153,137
 1,837,309
(1)
Includes interest payments not expected to be collected due to loan prepayments as well as principal and interest payments not expected to be collected due to customer default.

16



Table of Contents



4. SECURITIES
The significant accounting policies related to securities are presented in Note 1, "Summary of Significant Accounting Policies" to the Consolidated Financial Statements in the Company's 20162017 10-K.
A summary of the Company's securities portfolio by category and maturity is presented in the following tables.
Securities Portfolio
(Dollar amounts in thousands)
 As of June 30, 2017 As of December 31, 2016 As of June 30, 2018 As of December 31, 2017
 Amortized Cost Gross Unrealized 
Fair
 Value
 Amortized Cost Gross Unrealized 
Fair
 Value
 Amortized Cost Gross Unrealized 
Fair
 Value
 Amortized Cost Gross Unrealized 
Fair
 Value
 Gains Losses Gains Losses  Gains Losses Gains Losses 
Securities Available-for-SaleSecurities Available-for-Sale              Securities Available-for-Sale              
U.S. treasury securities $48,568
 $19
 $(104) $48,483
 $48,581
 $26
 $(66) $48,541
 $49,455
 $2
 $(299) $49,158
 $46,529
 $—
 $(184) $46,345
U.S. agency securities 174,757
 599
 (298) 175,058
 183,528
 519
 (410) 183,637
 150,443
 7
 (2,166) 148,284
 157,636
 197
 (986) 156,847
Collateralized mortgage
obligations ("CMOs")
 1,017,896
 1,086
 (12,818) 1,006,164
 1,064,130
 969
 (17,653) 1,047,446
 1,270,304
 368
 (38,242) 1,232,430
 1,113,019
 121
 (17,954) 1,095,186
Other mortgage-backed
securities ("MBSs")
 377,043
 1,261
 (4,644) 373,660
 337,139
 1,395
 (5,879) 332,655
 450,512
 229
 (13,105) 437,636
 373,676
 201
 (4,334) 369,543
Municipal securities 262,906
 2,446
 (950) 264,402
 273,319
 1,245
 (3,718) 270,846
 222,034
 152
 (3,841) 218,345
 209,558
 693
 (1,260) 208,991
Trust-preferred
collateralized debt
obligations ("CDOs")
 47,740
 279
 (14,565) 33,454
 47,681
 261
 (14,682) 33,260
Corporate debt securities 57,867
 2
 (857) 57,012
 —
 —
 —
 —
Equity securities(1) 7,106
 154
 (233) 7,027
 3,206
 147
 (288) 3,065
 —
 —
 —
 —
 7,408
 194
 (305) 7,297
Total securities
available-for-sale
 $1,936,016
 $5,844
 $(33,612) $1,908,248
 $1,957,584
 $4,562
 $(42,696) $1,919,450
 $2,200,615
 $760
 $(58,510) $2,142,865
 $1,907,826
 $1,406
 $(25,023) $1,884,209
Securities Held-to-MaturitySecurities Held-to-Maturity              Securities Held-to-Maturity              
Municipal securities $17,353
 $—
 $(2,454) $14,899
 $22,291
 $—
 $(4,079) $18,212
 $13,042
 $—
 $(2,124) $10,918
 $13,760
 $—
 $(1,747) $12,013
Trading Securities       $19,545
       $17,920
Equity Securities(1)
       $28,441
       $—
Trading Securities(1)
       $—
       $20,447
(1)
As a result of accounting guidance adopted in the first quarter of 2018, equity securities are no longer presented within trading securities or securities available-for-sale and are now presented within equity securities in the Consolidated Statements of Financial Condition for the current period. For further discussion of this guidance, see Note 2, "Recent Accounting Pronouncements."

Remaining Contractual Maturity of Securities
(Dollar amounts in thousands)
 As of June 30, 2017 As of June 30, 2018
 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 $94,163
 $91,946
 $1,935
 $1,661
 $120,038
 $118,287
 $1,626
 $1,361
After one year to five years 362,886
 354,341
 6,321
 5,427
 165,112
 162,703
 5,197
 4,350
After five years to ten years 2,595
 2,533
 2,259
 1,940
 194,649
 191,809
 2,177
 1,823
After ten years 74,327
 72,577
 6,838
 5,871
 —
 —
 4,042
 3,384
Securities that do not have a single contractual maturity date 1,402,045
 1,386,851
 —
 —
 1,720,816
 1,670,066
 —
 —
Total $1,936,016
 $1,908,248
 $17,353
 $14,899
 $2,200,615
 $2,142,865
 $13,042
 $10,918
The carrying value of securities available-for-sale that were pledged to secure deposits or for other purposes as permitted or required by law totaled $1.3 billion as of June 30, 2018 and $1.1 billion for both June 30, 2017 andas of December 31, 2016.2017. No securities held-to-maturity were pledged as of June 30, 20172018 or December 31, 2016.2017.

1716



Table of Contents



During the quarters and six months ended June 30, 2017 and 2016 there were no material gross trading gains (losses). The following table presents net realized gains on securities available-for-sale for the quarters and six months ended June 30, 2017 and 2016.
Securities Available-for-Sale Gains
(Dollar amounts in thousands)
  Quarters Ended 
 June 30,		 Six Months Ended 
 June 30,
  2017 2016 2017 2016
Gains on sales of securities:        
Gross realized gains $284
 $149
 $284
 $1,079
Gross realized losses —
 (126) —
 (169)
Net realized gains on sales of securities 284
 23
 284
 910
Non-cash impairment charges:        
Other-than-temporary securities impairment ("OTTI") —
 —
 —
 —
Net realized gains $284
 $23
 $284
 $910
Securities acquired in the Standard transaction in the first quarter of 2017 were sold shortly after the acquisition date for $210.2 million, resulting in no gains or losses as the securities were recorded at fair value upon acquisition.
  Quarters Ended 
 June 30,		 Six Months Ended 
 June 30,
  2018 2017 2018 2017
Gains on sales of securities:        
Gross realized gains $—
 $284
 $—
 $284
Gross realized losses —
 —
 —
 —
Net realized gains on sales of securities —
 284
 —
 284
Non-cash impairment charges:        
Other-than-temporary securities impairment ("OTTI") —
 —
 —
 —
Net realized gains $—
 $284
 $—
 $284
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.
TheThere was no outstanding balance of OTTI previously recognized on securities available-for-sale was $23.3 million for bothas of either June 30, 2017 and2018 or December 31, 2016.2017. During the quarters and six months ended June 30, 2018 and 2017 and 2016 there were no additions or reductions to the balance of OTTI related towas recognized on securities available-for-sale.

1817



Table of Contents



The following table presents the aggregate amount of unrealized losses and the aggregate related fair values of securities with unrealized losses as of June 30, 20172018 and December 31, 2016.2017.
Securities in an Unrealized Loss Position
(Dollar amounts in thousands)
   Less Than 12 Months 12 Months or Longer Total   Less Than 12 Months 12 Months or Longer Total
 
Number of
Securities
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
Number of
Securities
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
As of June 30, 2017            
As of June 30, 2018As of June 30, 2018            
Securities Available-for-SaleSecurities Available-for-Sale            Securities Available-for-Sale            
U.S. treasury securities 18
 $42,442
 $104
 $—
 $—
 $42,442
 $104
 22
 $32,699
 $252
 $14,459
 $47
 $47,158
 $299
U.S. agency securities 36
 68,096
 245
 13,235
 53
 81,331
 298
 78
 79,845
 1,138
 62,820
 1,028
 142,665
 2,166
CMOs 186
 737,140
 10,196
 87,787
 2,622
 824,927
 12,818
 242
 562,594
 13,295
 568,315
 24,947
 1,130,909
 38,242
MBSs 73
 287,409
 4,235
 21,101
 409
 308,510
 4,644
 107
 183,907
 3,910
 225,627
 9,195
 409,534
 13,105
Municipal securities 141
 58,746
 868
 3,623
 82
 62,369
 950
 451
 122,847
 1,872
 58,580
 1,969
 181,427
 3,841
CDOs 7
 —
 —
 30,744
 14,565
 30,744
 14,565
Equity securities 2
 —
 —
 6,778
 233
 6,778
 233
Corporate debt securities 8
 40,285
 857
 —
 —
 40,285
 857
Total 463
 $1,193,833
 $15,648
 $163,268
 $17,964
 $1,357,101
 $33,612
 908
 $1,022,177
 $21,324
 $929,801
 $37,186
 $1,951,978
 $58,510
Securities Held-to-MaturitySecurities Held-to-Maturity            Securities Held-to-Maturity            
Municipal securities 11
 $—
 $—
 $14,899
 $2,454
 $14,899
 $2,454
 8
 $—
 $—
 $10,918
 $2,124
 $10,918
 $2,124
As of December 31, 2016              
As of December 31, 2017              
Securities Available-for-SaleSecurities Available-for-Sale            Securities Available-for-Sale            
U.S. treasury securities 16
 $33,505
 $61
 $3,995
 $5
 $37,500
 $66
 20
 $19,918
 $87
 $26,427
 $97
 $46,345
 $184
U.S. agency securities 28
 62,064
 364
 11,814
 46
 73,878
 410
 72
 66,899
 300
 58,021
 686
 124,920
 986
CMOs 194
 523,233
 10,309
 411,758
 7,344
 934,991
 17,653
 211
 365,131
 3,265
 633,227
 14,689
 998,358
 17,954
MBSs 68
 221,174
 4,726
 77,780
 1,154
 298,954
 5,880
 86
 126,136
 902
 210,017
 3,432
 336,153
 4,334
Municipal securities 380
 133,957
 3,059
 29,280
 659
 163,237
 3,718
 265
 35,500
 479
 81,360
 781
 116,860
 1,260
CDOs 7
 —
 —
 30,592
 14,682
 30,592
 14,682
Equity securities 2
 404
 201
 2,319
 86
 2,723
 287
Equity securities(1)
 2
 391
 214
 6,386
 91
 6,777
 305
Total 695
 $974,337
 $18,720
 $567,538
 $23,976
 $1,541,875
 $42,696
 656
 $613,975
 $5,247
 $1,015,438
 $19,776
 $1,629,413
 $25,023
Securities Held-to-MaturitySecurities Held-to-Maturity    Securities Held-to-Maturity    
Municipal securities 14
 $—
 $—
 $18,212
 $4,079
 $18,212
 $4,079
 8
 $—
 $—
 $12,013
 $1,747
 $12,013
 $1,747
(1)
As a result of accounting guidance adopted in the first quarter of 2018, equity securities are no longer presented within securities available-for-sale and are now presented within equity securities in the Consolidated Statements of Financial Condition for the current period. For further discussion of this guidance, see Note 2, "Recent Accounting Pronouncements."
Substantially all of the Company's CMOs and other MBSs are either backed by U.S. government-owned agencies or issued by U.S. government-sponsored enterprises. Municipal securities are issued by municipal authorities, and the majority are supported by third partythird-party insurance or some other form of credit enhancement. Management does not believe any of these securities with unrealized losses as of June 30, 20172018 represent OTTI related to credit deterioration. These unrealized losses are attributed to changes in interest rates and temporary market movements. The Company does not intend to sell these securities and it is not more likely than not that the Company will be required to sell them before recovery of their amortized cost basis, which may be at maturity.
The unrealized losses on CDOs as of June 30, 2017 reflect changes in market activity for these securities. Management does not believe these unrealized losses represent OTTI related to credit deterioration. In addition, the Company does not intend to sell the CDOs with unrealized losses and the Company does not believe it is more likely than not that it will be required to sell them before recovery of their amortized cost basis, which may be at maturity. Significant judgment is required to calculate the fair value of the CDOs. For a detailed discussion of the CDO valuation methodology, see Note 15, "Fair Value."

1918



Table of Contents



5. LOANS
Loans Held-for-Investment
The following table presents the Company's loans held-for-investment by class.
Loan Portfolio
(Dollar amounts in thousands)
  As of
  June 30,
2017		 December 31,
2016
Commercial and industrial $3,410,748
 $2,827,658
Agricultural 433,424
 389,496
Commercial real estate:    
Office, retail, and industrial 1,983,802
 1,581,967
Multi-family 681,032
 614,052
Construction 543,892
 451,540
Other commercial real estate 1,383,937
 979,528
Total commercial real estate 4,592,663
 3,627,087
Total corporate loans 8,436,835
 6,844,241
Home equity 865,656
 747,983
1-4 family mortgages 614,818
 423,922
Installment 314,850
 237,999
Total consumer loans 1,795,324
 1,409,904
Total loans $10,232,159
 $8,254,145
Deferred loan fees included in total loans $4,375
 $3,838
Overdrawn demand deposits included in total loans 7,946
 7,836
The increase in total loans for the quarter ended June 30, 2017 includes loans acquired in the Standard acquisition. For additional disclosure related to the Standard transaction, see Note 3, "Acquisitions."
  As of
  June 30,
2018		 December 31,
2017
Commercial and industrial $3,844,067
 $3,529,914
Agricultural 433,175
 430,886
Commercial real estate:    
Office, retail, and industrial 1,834,918
 1,979,820
Multi-family 703,091
 675,463
Construction 633,601
 539,820
Other commercial real estate 1,337,396
 1,358,515
Total commercial real estate 4,509,006
 4,553,618
Total corporate loans 8,786,248
 8,514,418
Home equity 847,903
 827,055
1-4 family mortgages 880,181
 774,357
Installment 377,233
 321,982
Total consumer loans 2,105,317
 1,923,394
Total loans $10,891,565
 $10,437,812
Deferred loan fees included in total loans $5,444
 $4,986
Overdrawn demand deposits included in total loans 8,163
 8,587
The Company primarily lends to community-based and mid-sized businesses, commercial real estate customers, and consumers in its markets. Within these areas, the Company diversifies its loan portfolio by loan type, industry, and borrower.
It is the Company's policy to review each prospective credit to determine the appropriateness and the adequacy of security or collateral prior to making a loan. In the event of borrower default, the Company seeks recovery in compliance with state lending laws, the Company's lending standards, and credit monitoring and remediation procedures. A discussion of risk characteristics relevant to each portfolio segment is presented in Note 5, "Loans" to the Consolidated Financial Statements in the Company's 20162017 10-K.

2019



Table of Contents



Loan Sales
The following table presents loan sales for the quarters and six months ended June 30, 20172018 and 2016.2017.
Loan Sales
(Dollar amounts in thousands)
 Quarters Ended 
 June 30,		 Six Months Ended 
 June 30,		 Quarters Ended 
 June 30,		 Six Months Ended 
 June 30,
 2017 2016 2017 2016 2018 2017 2018 2017
Corporate loan sales                
Proceeds from sales $19,569
 $14,271
 $34,937
 $23,859
 $3,991
 $19,569
 $12,312
 $34,937
Less book value of loans sold 19,123
 13,760
 34,240
 22,890
 3,861
 19,123
 11,984
 34,240
Net gains on corporate loan sales (1)
 446
 511
 697
 969
 130
 446
 328
 697
1-4 family mortgage loan sales                
Proceeds from sales $60,894
 $53,258
 116,655
 92,765
 $65,715
 $60,894
 $130,900
 $116,655
Less book value of loans sold 59,461
 52,089
 114,059
 90,769
 64,336
 59,461
 128,094
 114,059
Net gains on 1-4 family mortgage loan sales (2)
 1,433
 1,169
 2,596
 1,996
 1,379
 1,433
 2,806
 2,596
Total net gains on loan sales $1,879
 $1,680
 $3,293
 $2,965
 $1,509
 $1,879
 $3,134
 $3,293
(1) 
Net gains on corporate loan sales are included in other service charges, commissions, and fees in the Condensed Consolidated Statements of Income.
(2) 
Net gains on 1-4 family mortgage loan sales are included in mortgage banking income in the Condensed Consolidated Statements of Income.
The Company retained servicing responsibilities for a portion of the 1-4 family mortgage loans sold and collects servicing fees equal to a percentage of the outstanding principal balance. For additional disclosure related to the Company's obligations resulting from the sale of certain 1-4 family mortgage loans, see Note 14,10, "Commitments, Guarantees, and Contingent Liabilities."
6. ACQUIRED AND COVERED LOANS
The significant accounting policies related to acquired and covered loans, which are classified as PCI and non-PCI, are presented in Note 1, "Summary of Significant Accounting Policies."
The following table presents the carrying amount of acquired and covered PCI and non-PCI loans as of June 30, 20172018 and December 31, 2016.2017.
Acquired and Covered Loans(1) 
(Dollar amounts in thousands)
 As of June 30, 2017 As of December 31, 2016 As of June 30, 2018 As of December 31, 2017
 PCI Non-PCI Total PCI Non-PCI Total PCI Non-PCI Total PCI Non-PCI Total
Acquired loans $161,222
 $1,871,576
 $2,032,798
 $53,772
 $613,339
 $667,111
 $106,218
 $1,243,420
 $1,349,638
 $130,694
 $1,512,664
 $1,643,358
Covered loans 7,387
 13,837
 21,224
 7,895
 15,379
 23,274
 6,138
 8,550
 14,688
 6,759
 11,789
 18,548
Total acquired and covered loans $168,609
 $1,885,413
 $2,054,022
 $61,667
 $628,718
 $690,385
 $112,356
 $1,251,970
 $1,364,326
 $137,453
 $1,524,453
 $1,661,906
(1) 
Included in loans in the Consolidated Statements of Condition.
The outstanding balance of PCI loans was $242.0$170.2 million and $84.8$210.7 million as of June 30, 20172018 and December 31, 2016,2017, respectively.
The increase in acquired loans compared to December 31, 2016 includes loans acquired in the Standard acquisition. For additional disclosure related to the Standard transaction, see Note 3, "Acquisitions."
Acquired non-PCI loans that are renewed are no longer classified as acquired loans. These loans totaled $233.6$419.8 million and $117.6$366.0 million as of June 30, 20172018 and December 31, 2016,2017, respectively.

21



Table of Contents



In connection with the FDIC Agreements, the Company recorded an indemnification asset. To maintain eligibility for the loss share reimbursement, the Company is required to follow certain servicing procedures as specified in the FDIC Agreements. The Company was in compliance with those requirements as of June 30, 20172018 and December 31, 2016.2017.

20



Table of Contents



Rollforwards of the carrying value of the FDIC indemnification asset for the quarters and six months ended June 30, 20172018 and 20162017 are presented in the following table.
Changes in the FDIC Indemnification Asset
(Dollar amounts in thousands)
 Quarters Ended 
 June 30,		 Six Months Ended 
 June 30,		 Quarters Ended 
 June 30,		 Six Months Ended 
 June 30,
 2017 2016 2017 2016 2018 2017 2018 2017
Beginning balance $4,220
 $5,680
 $4,522
 $3,903
 $3,012
 $4,220
 $3,314
 $4,522
Amortization (302) (302) (604) (582) (302) (302) (604) (604)
Change in expected reimbursements from the FDIC for
changes in expected credit losses
 (202) (475) (530) (259) 29
 (202) 175
 (530)
Net payments to the FDIC 202
 268
 530
 2,109
Net payments (from) to the FDIC (29) 202
 (175) 530
Ending balance $3,918
 $5,171
 $3,918
 $5,171
 $2,710
 $3,918
 $2,710
 $3,918
Changes in the accretable yield for acquired and covered PCI loans were as follows.
Changes in Accretable Yield
(Dollar amounts in thousands)
 Quarters Ended 
 June 30,		 Six Months Ended 
 June 30,		 Quarters Ended 
 June 30,		 Six Months Ended 
 June 30,
 2017 2016 2017 2016 2018 2017 2018 2017
Beginning balances $41,249
 $27,258
 $19,385
 $24,912
 $36,543
 $41,249
 $32,957
 $19,385
Additions —
 —
 27,316
 3,981
 —
 —
 —
 27,316
Accretion (3,888) (2,303) (7,843) (3,849) (2,922) (3,888) (6,540) (7,843)
Other (1)
 2,509
 127
 1,012
 38
 5,387
 2,509
 12,591
 1,012
Ending balance $39,870
 $25,082
 $39,870
 $25,082
 $39,008
 $39,870
 $39,008
 $39,870
(1) 
Increases represent a rise in the expected future cash flows to be collected over the remaining estimated life of the underlying portfolio.portfolio, while decreases result from the resolution of certain loans occurring earlier than anticipated.
Total accretion on acquired and covered PCI and non-PCI loans for the quarter and six months ended June 30, 20172018 was $4.4 million and $9.6 million, respectively, and $8.8 million and $20.1 million, respectively, and $4.9 million and $7.4 million, for the same periods in 2016.2017.

2221



Table of Contents



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 June 30, 20172018 and December 31, 2016.2017. The aging is determined without regard to accrual status. The table also presents non-performing loans, consisting of non-accrual loans (the majority of which are past due) and loans 90 days or more past due and still accruing interest, as of each balance sheet date.
Aging Analysis of Past Due Loans and Non-performing Loans by Class
(Dollar amounts in thousands)
 Aging Analysis (Accruing and Non-accrual) Non-performing Loans Aging Analysis (Accruing and Non-accrual) Non-performing Loans
 
Current (1)
 
30-89 Days
Past Due
 
90 Days or
More Past
Due
 
Total
Past Due
 
Total
Loans
  
Non-
accrual (2)
 90 Days or More Past Due, Still Accruing Interest 
Current(1)
 
30-89 Days
Past Due
 
90 Days or
More Past
Due
 
Total
Past Due
 
Total
Loans
  
Non-
accrual(2)
 90 Days or More Past Due, Still Accruing Interest
As of June 30, 2017               
As of June 30, 2018               
Commercial and industrial $3,399,763
 $8,282
 $2,703
 $10,985
 $3,410,748
  $51,400
 $1,550
 $3,807,618
 $18,230
 $18,219
 $36,449
 $3,844,067
  $22,672
 $1,544
Agricultural 432,672
 379
 373
 752
 433,424
  387
 —
 427,295
 1,477
 4,403
 5,880
 433,175
  2,992
 1,418
Commercial real estate:                              
Office, retail, and industrial 1,973,608
 1,847
 8,347
 10,194
 1,983,802
  15,031
 —
 1,820,408
 5,366
 9,144
 14,510
 1,834,918
  9,007
 1,402
Multi-family 679,795
 1,128
 109
 1,237
 681,032
  158
 109
 696,920
 3,530
 2,641
 6,171
 703,091
  3,551
 2,269
Construction 543,023
 675
 194
 869
 543,892
  197
 —
 633,043
 107
 451
 558
 633,601
  208
 243
Other commercial real estate 1,378,534
 2,363
 3,040
 5,403
 1,383,937
  3,736
 64
 1,326,694
 6,640
 4,062
 10,702
 1,337,396
  5,288
 591
Total commercial real
estate
 4,574,960
 6,013
 11,690
 17,703
 4,592,663
  19,122
 173
 4,477,065
 15,643
 16,298
 31,941
 4,509,006
  18,054
 4,505
Total corporate loans 8,407,395
 14,674
 14,766
 29,440
 8,436,835
  70,909
 1,723
 8,711,978
 35,350
 38,920
 74,270
 8,786,248
  43,718
 7,467
Home equity 859,362
 4,083
 2,211
 6,294
 865,656
  5,126
 41
 842,257
 4,048
 1,598
 5,646
 847,903
  5,399
 —
1-4 family mortgages 612,669
 1,149
 1,000
 2,149
 614,818
  3,161
 —
 876,045
 1,986
 2,150
 4,136
 880,181
  4,358
 41
Installment 312,132
 2,423
 295
 2,718
 314,850
  —
 295
 374,011
 2,776
 446
 3,222
 377,233
  —
 446
Total consumer loans 1,784,163
 7,655
 3,506
 11,161
 1,795,324
  8,287
 336
 2,092,313
 8,810
 4,194
 13,004
 2,105,317
  9,757
 487
Total loans $10,191,558
 $22,329
 $18,272
 $40,601
 $10,232,159
  $79,196
 $2,059
 $10,804,291
 $44,160
 $43,114
 $87,274
 $10,891,565
  $53,475
 $7,954
As of December 31, 2016               
As of December 31, 2017               
Commercial and industrial $2,816,442
 $6,426
 $4,790
 $11,216
 $2,827,658
  $29,938
 $374
 $3,490,783
 $34,620
 $4,511
 $39,131
 $3,529,914
  $40,580
 $1,830
Agricultural 388,596
 —
 900
 900
 389,496
  181
 736
 430,221
 280
 385
 665
 430,886
  219
 177
Commercial real estate:                              
Office, retail, and industrial 1,564,007
 5,327
 12,633
 17,960
 1,581,967
  17,277
 1,129
 1,970,564
 3,156
 6,100
 9,256
 1,979,820
  11,560
 345
Multi-family 612,446
 858
 748
 1,606
 614,052
  311
 604
 672,098
 3,117
 248
 3,365
 675,463
  377
 20
Construction 450,927
 332
 281
 613
 451,540
  286
 —
 539,043
 198
 579
 777
 539,820
  209
 371
Other commercial real estate 974,575
 1,307
 3,646
 4,953
 979,528
  2,892
 1,526
 1,353,263
 2,545
 2,707
 5,252
 1,358,515
  3,621
 317
Total commercial real
estate
 3,601,955
 7,824
 17,308
 25,132
 3,627,087
  20,766
 3,259
 4,534,968
 9,016
 9,634
 18,650
 4,553,618
  15,767
 1,053
Total corporate loans 6,806,993
 14,250
 22,998
 37,248
 6,844,241
  50,885
 4,369
 8,455,972
 43,916
 14,530
 58,446
 8,514,418
  56,566
 3,060
Home equity 740,919
 4,545
 2,519
 7,064
 747,983
  5,465
 109
 820,099
 4,102
 2,854
 6,956
 827,055
  5,946
 98
1-4 family mortgages 420,264
 2,652
 1,006
 3,658
 423,922
  2,939
 272
 770,120
 2,145
 2,092
 4,237
 774,357
  4,412
 —
Installment 236,264
 1,476
 259
 1,735
 237,999
  —
 259
 319,178
 2,407
 397
 2,804
 321,982
  —
 397
Total consumer loans 1,397,447
 8,673
 3,784
 12,457
 1,409,904
  8,404
 640
 1,909,397
 8,654
 5,343
 13,997
 1,923,394
  10,358
 495
Total loans $8,204,440
 $22,923
 $26,782
 $49,705
 $8,254,145
  $59,289
 $5,009
 $10,365,369
 $52,570
 $19,873
 $72,443
 $10,437,812
  $66,924
 $3,555
(1) 
PCI loans with an accretable yield are considered current.
(2) 
Includes PCI loans of $243,000$748,000 and $682,000$763,000 as of June 30, 20172018 and December 31, 2016,2017, respectively, which no longer have an accretable yield as estimates of expected future cash flows have decreased since the acquisition due to credit deterioration.



2322



Table of Contents



Allowance for Credit Losses
The Company maintains an allowance for credit losses at a level deemed adequate by management to absorb estimated losses inherent in the existing loan portfolio. See 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 quarters and six months ended June 30, 20172018 and 20162017 is presented in the table below.
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 
Reserve for
Unfunded
Commitments
 
Total
Allowance for Credit Losses
 
Commercial,
Industrial,
and
Agricultural
 
Office,
Retail, and
Industrial
 
Multi-
family
 Construction 
Other
Commercial
Real Estate
 Consumer 
Reserve for
Unfunded
Commitments
 
Total
Allowance for Credit Losses
Quarter ended June 30, 2018Quarter ended June 30, 2018              
Beginning balance $57,200
 $10,607
 $2,592
 $1,972
 $5,291
 $17,192
 $1,000
 $95,854
Charge-offs (8,662) (305) (4) —
 (1) (2,337) —
 (11,309)
Recoveries 753
 26
 —
 8
 359
 386
 —
 1,532
Net charge-offs (7,909) (279) (4) 8
 358
 (1,951) —
 (9,777)
Provision for loan
losses and other
 10,752
 (1,266) (413) 144
 (1,018) 3,415
 —
 11,614
Ending balance $60,043
 $9,062
 $2,175
 $2,124
 $4,631
 $18,656
 $1,000
 $97,691
Quarter ended June 30, 2017Quarter ended June 30, 2017              Quarter ended June 30, 2017              
Beginning balance $41,786
 $17,701
 $2,860
 $4,110
 $6,922
 $14,784
 $1,000
 $89,163
 $41,786
 $17,701
 $2,860
 $4,110
 $6,922
 $14,784
 $1,000
 $89,163
Charge-offs (2,957) —
 —
 (39) (307) (1,556) —
 (4,859) (2,957) —
 —
 (39) (307) (1,556) —
 (4,859)
Recoveries 400
 8
 6
 12
 79
 323
 —
 828
 400
 8
 6
 12
 79
 323
 —
 828
Net charge-offs (2,557) 8
 6
 (27) (228) (1,233) —
 (4,031) (2,557) 8
 6
 (27) (228) (1,233) —
 (4,031)
Provision for loan
losses and other
 7,042
 (2,701) 53
 11
 785
 3,049
 —
 8,239
 7,042
 (2,701) 53
 11
 785
 3,049
 —
 8,239
Ending balance $46,271
 $15,008
 $2,919
 $4,094
 $7,479
 $16,600
 $1,000
 $93,371
 $46,271
 $15,008
 $2,919
 $4,094
 $7,479
 $16,600
 $1,000
 $93,371
Quarter ended June 30, 2016              
Six months ended June 30, 2018Six months ended June 30, 2018            
Beginning balance $37,736
 $14,420
 $2,547
 $2,433
 $6,588
 $13,426
 $1,225
 $78,375
 $55,791
 $10,996
 $2,534
 $3,481
 $6,381
 $16,546
 $1,000
 $96,729
Charge-offs (2,026) (1,641) (84) (8) (879) (1,495) —
 (6,133) (23,332) (766) (4) —
 (70) (4,222) —
 (28,394)
Recoveries 576
 8
 1
 20
 69
 329
 —
 1,003
 1,291
 123
 —
 21
 398
 728
 —
 2,561
Net charge-offs (1,450) (1,633) (83) 12
 (810) (1,166) —
 (5,130) (22,041) (643) (4) 21
 328
 (3,494) —
 (25,833)
Provision for loan
losses and other
 3,798
 198
 469
 (206) 1,714
 2,112
 175
 8,260
 26,293
 (1,291) (355) (1,378) (2,078) 5,604
 —
 26,795
Ending balance $40,084
 $12,985
 $2,933
 $2,239
 $7,492
 $14,372
 $1,400
 $81,505
 $60,043
 $9,062
 $2,175
 $2,124
 $4,631
 $18,656
 $1,000
 $97,691
Six months ended June 30, 2017Six months ended June 30, 2017            Six months ended June 30, 2017            
Beginning balance $40,709
 $17,595
 $3,261
 $3,444
 $7,739
 $13,335
 $1,000
 $87,083
 $40,709
 $17,595
 $3,261
 $3,444
 $7,739
 $13,335
 $1,000
 $87,083
Charge-offs (7,031) (127) —
 (44) (715) (3,220) —
 (11,137) (7,031) (127) —
 (44) (715) (3,220) —
 (11,137)
Recoveries 2,066
 983
 34
 239
 180
 766
 —
 4,268
 2,066
 983
 34
 239
 180
 766
 —
 4,268
Net charge-offs (4,965) 856
 34
 195
 (535) (2,454) —
 (6,869) (4,965) 856
 34
 195
 (535) (2,454) —
 (6,869)
Provision for loan
losses and other
 10,527
 (3,443) (376) 455
 275
 5,719
 —
 13,157
 10,527
 (3,443) (376) 455
 275
 5,719
 —
 13,157
Ending balance $46,271
 $15,008
 $2,919
 $4,094
 $7,479
 $16,600
 $1,000
 $93,371
 $46,271
 $15,008
 $2,919
 $4,094
 $7,479
 $16,600
 $1,000
 $93,371
Six months ended June 30, 2016            
Beginning balance $37,074
 $13,124
 $2,469
 $1,440
 $6,109
 $13,414
 $1,225
 $74,855
Charge-offs (3,924) (2,165) (288) (134) (2,324) (2,487) —
 (11,322)
Recoveries 1,078
 111
 26
 35
 220
 649
 —
 2,119
Net charge-offs (2,846) (2,054) (262) (99) (2,104) (1,838) —
 (9,203)
Provision for loan
losses and other
 5,856
 1,915
 726
 898
 3,487
 2,796
 175
 15,853
Ending balance $40,084
 $12,985
 $2,933
 $2,239
 $7,492
 $14,372
 $1,400
 $81,505



2423



Table of Contents



The table below provides a breakdown of loans and the related allowance for credit losses by portfolio segment as of June 30, 20172018 and December 31, 2016.2017.
Loans and Related Allowance for Credit Losses by Portfolio Segment
(Dollar amounts in thousands)
 Loans Allowance for Credit Losses 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 
Individually
Evaluated
for
Impairment
 
Collectively
Evaluated
for
Impairment
 PCI Total 
Individually
Evaluated
for
Impairment
 
Collectively
Evaluated
for
Impairment
 PCI Total
As of June 30, 2017                
As of June 30, 2018                
Commercial, industrial, and
agricultural
 $50,521
 $3,763,526
 $30,125
 $3,844,172
 $4,859
 $40,922
 $490
 $46,271
 $23,598
 $4,248,880
 $4,764
 $4,277,242
 $2,884
 $56,725
 $434
 $60,043
Commercial real estate:                                
Office, retail, and industrial 13,781
 1,951,097
 18,924
 1,983,802
 379
 12,970
 1,659
 15,008
 7,642
 1,815,329
 11,947
 1,834,918
 792
 6,624
 1,646
 9,062
Multi-family 396
 666,237
 14,399
 681,032
 —
 2,833
 86
 2,919
 3,941
 686,136
 13,014
 703,091
 —
 1,998
 177
 2,175
Construction —
 528,570
 15,322
 543,892
 —
 3,945
 149
 4,094
 —
 628,649
 4,952
 633,601
 —
 1,968
 156
 2,124
Other commercial real estate 2,174
 1,314,977
 66,786
 1,383,937
 —
 6,225
 1,254
 7,479
 3,165
 1,276,791
 57,440
 1,337,396
 —
 3,823
 808
 4,631
Total commercial real estate 16,351
 4,460,881
 115,431
 4,592,663
 379
 25,973
 3,148
 29,500
 14,748
 4,406,905
 87,353
 4,509,006
 792
 14,413
 2,787
 17,992
Total corporate loans 66,872
 8,224,407
 145,556
 8,436,835
 5,238
 66,895
 3,638
 75,771
 38,346
 8,655,785
 92,117
 8,786,248
 3,676
 71,138
 3,221
 78,035
Consumer —
 1,772,271
 23,053
 1,795,324
 —
 15,173
 1,427
 16,600
 —
 2,085,078
 20,239
 2,105,317
 —
 17,167
 1,489
 18,656
Reserve for unfunded
commitments
 —
 —
 —
 —
 —
 1,000
 —
 1,000
 —
 —
 —
 —
 —
 1,000
 —
 1,000
Total loans $66,872
 $9,996,678
 $168,609
 $10,232,159
 $5,238
 $83,068
 $5,065
 $93,371
 $38,346
 $10,740,863
 $112,356
 $10,891,565
 $3,676
 $89,305
 $4,710
 $97,691
As of December 31, 2016                
As of December 31, 2017                
Commercial, industrial, and
agricultural
 $24,645
 $3,189,327
 $3,182
 $3,217,154
 $507
 $39,554
 $648
 $40,709
 $38,718
 $3,909,380
 $12,702
 $3,960,800
 $10,074
 $45,293
 $424
 $55,791
Commercial real estate:                                
Office, retail, and industrial 16,287
 1,553,234
 12,446
 1,581,967
 —
 16,148
 1,447
 17,595
 10,810
 1,954,435
 14,575
 1,979,820
 —
 9,333
 1,663
 10,996
Multi-family 398
 601,429
 12,225
 614,052
 —
 3,059
 202
 3,261
 621
 660,771
 14,071
 675,463
 —
 2,436
 98
 2,534
Construction 34
 447,058
 4,448
 451,540
 —
 3,280
 164
 3,444
 —
 530,977
 8,843
 539,820
 —
 3,331
 150
 3,481
Other commercial real estate 1,286
 965,900
 12,342
 979,528
 18
 6,613
 1,108
 7,739
 1,468
 1,291,723
 65,324
 1,358,515
 —
 5,415
 966
 6,381
Total commercial real estate 18,005
 3,567,621
 41,461
 3,627,087
 18
 29,100
 2,921
 32,039
 12,899
 4,437,906
 102,813
 4,553,618
 —
 20,515
 2,877
 23,392
Total corporate loans 42,650
 6,756,948
 44,643
 6,844,241
 525
 68,654
 3,569
 72,748
 51,617
 8,347,286
 115,515
 8,514,418
 10,074
 65,808
 3,301
 79,183
Consumer —
 1,392,880
 17,024
 1,409,904
 —
 12,210
 1,125
 13,335
 —
 1,901,456
 21,938
 1,923,394
 —
 15,533
 1,013
 16,546
Reserve for unfunded
commitments
 —
 —
 —
 —
 —
 1,000
 —
 1,000
 —
 —
 —
 —
 —
 1,000
 —
 1,000
Total loans $42,650
 $8,149,828
 $61,667
 $8,254,145
 $525
 $81,864
 $4,694
 $87,083
 $51,617
 $10,248,742
 $137,453
 $10,437,812
 $10,074
 $82,341
 $4,314
 $96,729

2524



Table of Contents



Loans Individually Evaluated for Impairment
The following table presents loans individually evaluated for impairment by class of loan as of June 30, 20172018 and December 31, 2016.2017. PCI loans are excluded from this disclosure.
Impaired Loans Individually Evaluated by Class
(Dollar amounts in thousands)
 As of June 30, 2017 As of December 31, 2016 As of June 30, 2018 As of December 31, 2017
 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 $16,215
 $34,027
 $53,545
 $4,859
  $11,579
 $13,066
 $29,514
 $507
 $5,777
 $14,919
 $40,033
 $2,683
  $4,234
 $34,484
 $53,192
 $10,074
Agricultural 279
 —
 1,629
 —
  —
 —
 —
 —
 —
 2,902
 4,672
 201
  —
 —
 —
 —
Commercial real estate:                                  
Office, retail, and industrial 10,125
 3,656
 16,966
 379
  16,287
 —
 21,057
 —
 3,303
 4,339
 8,125
 792
  7,154
 3,656
 14,246
 —
Multi-family 396
 —
 396
 —
  398
 —
 398
 —
 3,941
 —
 3,941
 —
  621
 —
 621
 —
Construction —
 —
 —
 —
  34
 —
 34
 —
 —
 —
 —
 —
  —
 —
 —
 —
Other commercial real estate 2,174
 —
 2,271
 —
  1,016
 270
 2,141
 18
 3,165
 —
 3,199
 —
  1,468
 —
 1,566
 —
Total commercial real estate 12,695
 3,656
 19,633
 379
  17,735
 270
 23,630
 18
 10,409
 4,339
 15,265
 792
  9,243
 3,656
 16,433
 —
Total impaired loans
individually evaluated
for impairment
 $29,189
 $37,683
 $74,807
 $5,238
  $29,314
 $13,336
 $53,144
 $525
 $16,186
 $22,160
 $59,970
 $3,676
  $13,477
 $38,140
 $69,625
 $10,074

2625



Table of Contents



The following table presents the average recorded investment and interest income recognized on impaired loans by class for the quarters and six months ended June 30, 20172018 and 2016.2017. PCI loans are excluded from this disclosure.
Average Recorded Investment and Interest Income Recognized on Impaired Loans by Class
(Dollar amounts in thousands)
 Quarters Ended June 30, Quarters Ended June 30,
 2017 2016 2018 2017
 Average
Recorded
Investment		 
Interest
Income
Recognized (1)
 Average
Recorded
Investment		 
Interest
Income
Recognized (1)
 Average
Recorded
Investment		 
Interest
Income
Recognized(1)
 Average
Recorded
Investment		 
Interest
Income
Recognized(1)
Commercial and industrial $33,648
 $342
 $3,236
 $12
 $31,787
 $14
 $33,648
 $342
Agricultural 697
 —
 —
 —
 3,386
 25
 697
 —
Commercial real estate:        
        
Office, retail, and industrial 13,612
 169
 12,712
 29
 9,509
 656
 13,612
 169
Multi-family 396
 —
 401
 —
 2,166
 48
 396
 —
Construction —
 —
 34
 —
 —
 —
 —
 —
Other commercial real estate 2,334
 8
 3,641
 53
 2,694
 61
 2,334
 8
Total commercial real estate 16,342
 177
 16,788
 82
 14,369
 765
 16,342
 177
Total impaired loans $50,687
 $519
 $20,024
 $94
 $49,542
 $804
 $50,687
 $519
                
 Six Months Ended June 30, Six Months Ended June 30,
 2017 2016 2018 2017
 Average
Recorded
Investment		 
Interest
Income
Recognized (1)
 Average
Recorded
Investment		 
Interest
Income
Recognized (1)
 Average
Recorded
Investment		 
Interest
Income
Recognized(1)
 Average
Recorded
Investment		 
Interest
Income
Recognized(1)
Commercial and industrial $30,647
 $556
 $3,114
 $50
 $34,097
 $36
 $30,647
 $556
Agricultural 464
 —
 —
 —
 2,257
 25
 464
 —
Commercial real estate:        
        
Office, retail, and industrial 14,503
 262
 10,529
 77
 9,942
 768
 14,503
 262
Multi-family 397
 28
 534
 1
 1,651
 55
 397
 28
Construction 11
 136
 82
 —
 —
 —
 11
 136
Other commercial real estate 1,984
 20
 3,649
 72
 2,285
 113
 1,984
 20
Total commercial real estate 16,895
 446
 14,794
 150
 13,878
 936
 16,895
 446
Total impaired loans $48,006
 $1,002
 $17,908
 $200
 $50,232
 $997
 $48,006
 $1,002
(1) 
Recorded using the cash basis of accounting.

2726



Table of Contents



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, as of June 30, 20172018 and December 31, 2016.2017.
Corporate Credit Quality Indicators by Class
(Dollar amounts in thousands)
 Pass 
Special
 Mention (1) (4)
 
Substandard (2) (4)
 
Non-accrual (3)
 Total Pass 
Special
 Mention(1)(4)
 
Substandard(2)(4)
 
Non-accrual(3)
 Total
As of June 30, 2017          
As of June 30, 2018          
Commercial and industrial $3,199,001
 $67,252
 $93,095
 $51,400
 $3,410,748
 $3,648,626
 $122,881
 $49,888
 $22,672
 $3,844,067
Agricultural 409,969
 14,464
 8,604
 387
 433,424
 415,043
 8,474
 6,666
 2,992
 433,175
Commercial real estate:                    
Office, retail, and industrial 1,896,327
 27,894
 44,550
 15,031
 1,983,802
 1,770,908
 23,602
 31,401
 9,007
 1,834,918
Multi-family 673,946
 5,051
 1,877
 158
 681,032
 687,065
 10,460
 2,015
 3,551
 703,091
Construction 523,046
 8,739
 11,910
 197
 543,892
 607,142
 18,915
 7,336
 208
 633,601
Other commercial real estate 1,338,382
 21,137
 20,682
 3,736
 1,383,937
 1,281,870
 32,137
 18,101
 5,288
 1,337,396
Total commercial real estate 4,431,701
 62,821
 79,019
 19,122
 4,592,663
 4,346,985
 85,114
 58,853
 18,054
 4,509,006
Total corporate loans $8,040,671
 $144,537
 $180,718
 $70,909
 $8,436,835
 $8,410,654
 $216,469
 $115,407
 $43,718
 $8,786,248
As of December 31, 2016          
As of December 31, 2017          
Commercial and industrial $2,638,833
 $92,340
 $66,547
 $29,938
 $2,827,658
 $3,388,133
 $70,863
 $30,338
 $40,580
 $3,529,914
Agricultural 366,382
 17,039
 5,894
 181
 389,496
 413,946
 10,989
 5,732
 219
 430,886
Commercial real estate:                    
Office, retail, and industrial 1,491,030
 34,007
 39,513
 17,277
 1,581,827
 1,903,737
 25,546
 38,977
 11,560
 1,979,820
Multi-family 607,324
 4,370
 2,029
 311
 614,034
 665,496
 7,395
 2,195
 377
 675,463
Construction 438,946
 111
 12,197
 286
 451,540
 521,911
 10,184
 7,516
 209
 539,820
Other commercial real estate 951,115
 11,808
 13,544
 2,892
 979,359
 1,304,337
 29,624
 20,933
 3,621
 1,358,515
Total commercial real estate 3,488,415
 50,296
 67,283
 20,766
 3,626,760
 4,395,481
 72,749
 69,621
 15,767
 4,553,618
Total corporate loans $6,493,630
 $159,675
 $139,724
 $50,885
 $6,843,914
 $8,197,560
 $154,601
 $105,691
 $56,566
 $8,514,418
(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 well-defined 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 well-defined 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 $669,000$645,000 as of June 30, 20172018 and $834,000$657,000 as of December 31, 2016.2017.
Consumer Credit Quality Indicators by Class
(Dollar amounts in thousands)
 Performing Non-accrual Total Performing Non-accrual Total
As of June 30, 2017      
As of June 30, 2018      
Home equity $860,530
 $5,126
 $865,656
 $842,504
 $5,399
 $847,903
1-4 family mortgages 611,657
 3,161
 614,818
 875,823
 4,358
 880,181
Installment 314,850
 —
 314,850
 377,233
 —
 377,233
Total consumer loans $1,787,037
 $8,287
 $1,795,324
 $2,095,560
 $9,757
 $2,105,317
As of December 31, 2016      
As of December 31, 2017      
Home equity $727,618
 $4,986
 $732,604
 $821,109
 $5,946
 $827,055
1-4 family mortgages 413,415
 2,939
 416,354
 769,945
 4,412
 774,357
Installment 237,999
 —
 237,999
 321,982
 —
 321,982
Total consumer loans $1,379,032
 $7,925
 $1,386,957
 $1,913,036
 $10,358
 $1,923,394

2827



Table of Contents



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 June 30, 20172018 and December 31, 2016.2017. See Note 1, "Summary of Significant Accounting Policies," for the accounting policy for TDRs.
TDRs by Class
(Dollar amounts in thousands)
 As of June 30, 2017 As of December 31, 2016 As of June 30, 2018 As of December 31, 2017
 Accruing 
Non-accrual (1)
 Total Accruing 
Non-accrual (1)
 Total Accruing 
Non-accrual(1)
 Total Accruing 
Non-accrual(1)
 Total
Commercial and industrial $273
 $891
 $1,164
 $281
 $150
 $431
 $255
 $6,845
 $7,100
 $264
 $18,959
 $19,223
Agricultural —
 —
 —
 —
 —
 —
 —
 —
 —
 —
 —
 —
Commercial real estate:                        
Office, retail, and industrial —
 860
 860
 155
 4,733
 4,888
 —
 501
 501
 —
 4,236
 4,236
Multi-family 579
 158
 737
 586
 168
 754
 566
 —
 566
 574
 149
 723
Construction —
 —
 —
 —
 —
 —
 —
 —
 —
 —
 —
 —
Other commercial real estate 197
 —
 197
 268
 48
 316
 187
 —
 187
 192
 —
 192
Total commercial real estate 776
 1,018
 1,794
 1,009
 4,949
 5,958
 753
 501
 1,254
 766
 4,385
 5,151
Total corporate loans 1,049
 1,909
 2,958
 1,290
 5,099
 6,389
 1,008
 7,346
 8,354
 1,030
 23,344
 24,374
Home equity 168
 771
 939
 177
 820
 997
 84
 470
 554
 86
 738
 824
1-4 family mortgages 812
 356
 1,168
 824
 378
 1,202
 668
 422
 1,090
 680
 451
 1,131
Installment —
 —
 —
 —
 —
 —
 —
 —
 —
 —
 —
 —
Total consumer loans 980
 1,127
 2,107
 1,001
 1,198
 2,199
 752
 892
 1,644
 766
 1,189
 1,955
Total loans $2,029
 $3,036
 $5,065
 $2,291
 $6,297
 $8,588
 $1,760
 $8,238
 $9,998
 $1,796
 $24,533
 $26,329
(1) 
These TDRs are included in non-accrual loans in the preceding tables.
TDRs are included in the calculation of the allowance for credit losses in the same manner as impaired loans. There were no$625,000 and $2.0 million specific reserves related to TDRs as of June 30, 20172018 and as of December 31, 2016.2017, respectively.
Accruing TDRs that do not perform in accordance with their modified terms are transferred to non-accrual. There were no material TDRs that defaulted within twelve months of the restructure date during the quarters and six months ended June 30, 20172018 and 2016.2017.

2928



Table of Contents



A rollforward of the carrying value of TDRs for the quarters and six months ended June 30, 20172018 and 20162017 is presented in the following table.
TDR Rollforward
(Dollar amounts in thousands)
 Quarters Ended 
 June 30,		 Six Months Ended 
 June 30,		 Quarters Ended 
 June 30,		 Six Months Ended 
 June 30,
 2017 2016 2017 2016 2018 2017 2018 2017
Accruing                
Beginning balance $2,112
 $2,702
 $2,291
 $2,743
 $1,778
 $2,112
 $1,796
 $2,291
Additions —
 —
 922
 —
 —
 —
 —
 922
Net payments received (83) (28) (107) (69)
Net transfers to non-accrual —
 (183) (1,077) (183)
Net payments (18) (83) (36) (107)
Net transfers from (to) non-accrual —
 —
 —
 (1,077)
Ending balance 2,029
 2,491
 2,029
 2,491
 1,760
 2,029
 1,760
 2,029
Non-accrual                
Beginning balance 3,112
 2,268
 6,297
 2,324
 20,466
 3,112
 24,533
 6,297
Net payments received (75) (522) (4,225) (578)
Additions —
 —
 355
 —
Net payments (9,865) (75) (12,978) (4,225)
Charge-offs (1) (239) (113) (239) (2,363) (1) (3,672) (113)
Net transfers from accruing —
 183
 1,077
 183
 —
 —
 —
 1,077
Ending balance 3,036
 1,690
 3,036
 1,690
 8,238
 3,036
 8,238
 3,036
Total TDRs $5,065
 $4,181
 $5,065
 $4,181
 $9,998
 $5,065
 $9,998
 $5,065
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. 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.
There were no material commitments to lend additional funds to borrowers with TDRs as of June 30, 2017 and2018 or December 31, 2016.
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)
  As of
  June 30,
2017		 December 31,
2016
Land $31,623
 $18,304
Premises 139,137
 94,369
Furniture and equipment 135,328
 105,859
Total cost 306,088
 218,532
Accumulated depreciation (182,075) (140,030)
Net book value of premises, furniture, and equipment 124,013
 78,502
Assets held-for-sale 11,732
 4,075
Total premises, furniture, and equipment $135,745
 $82,577
2017.

30



Table of Contents



During 2016, First Midwest Bank (the "Bank") completed a sale-leaseback transaction, whereby the Bank sold to a third party for an aggregate cash purchase price of $150.3 million, 55 properties with book values totaling $58.8 million, owned and operated by the Bank as branches. The Bank concurrently entered into triple net lease agreements with certain affiliates of the third party for each of the branches sold. Subject to the right of the Bank to terminate certain of the lease agreements at the end of the eleventh year, the lease agreements have initial terms of 14 years. Each lease agreement provides the Bank with five consecutive renewal options of five years each. The sale-leaseback transaction resulted in a pre-tax gain of $88.0 million, net of transaction related expenses, with $78.1 million of deferred pre-tax gains remaining as of June 30, 2017.
As of June 30, 2017 and December 31, 2016 assets held-for-sale consisted of former branches that are no longer in operation and parcels of land previously purchased for expansion.
Depreciation on premises, furniture, and equipment totaled $3.5 million and $7.0 million for the quarter and six months ended June 30, 2017, respectively. Depreciation on premises, furniture, and equipment totaled $3.4 million and $6.6 million for the same periods in 2016.
Operating Leases
As of June 30, 2017, the Company was obligated to utilize certain premises and equipment under certain non-cancelable operating leases, which expire at various dates through the year ending December 31, 2033. 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 June 30, 2017.
Future Minimum Operating Lease Payments
(Dollar amounts in thousands)
  Total
One year or less $18,383
After one year to two years 16,751
After two years to three years 16,606
After three years to four years 16,268
After four years to five years 16,119
After five years 120,356
Total minimum lease payments $204,483
As of June 30, 2017, deferred pre-tax gains of $78.1 million related to the sale-lease back transaction will be accreted as a reduction to lease expense in other expenses on the Condensed Consolidated Statements of Income on a straight-line basis over the initial terms of the leases.

31



Table of Contents



The Company assumed certain operating leases related to various branches in previous acquisitions. An intangible liability is recorded when the cash flows of a lease exceeds its fair market value. This intangible liability will be accreted into income as a reduction to net occupancy and equipment expense using the straight-line method over the initial term of each lease, which expire between 2018 and 2030. The intangible liability is included in accrued interest and other liabilities in the Consolidated Statements of Financial Condition.
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
One year or less $1,095
After one year to two years 791
After two years to three years 648
After three years to four years 648
After four years to five years 648
After five years 3,673
Total accretion $7,503
The following table presents net operating lease expense for the quarters and six months ended June 30, 2017 and 2016.
Net Operating Lease Expense
(Dollar amounts in thousands)
  Quarters Ended 
 June 30,		 Six Months Ended 
 June 30,
  2017 2016 2017 2016
Lease expense charged to operations $4,721
 $1,773
 $9,280
 $3,500
Accretion of operating lease intangible (1)
 (295) (295) (590) (581)
Accretion of deferred gain on sale-leaseback transaction (1)
 (1,473) —
 (2,946) —
Rental income from premises leased to others (1)
 (169) (128) (350) (286)
Net operating lease expense $2,784
 $1,350
 $5,394
 $2,633

(1)
Included as reductions to net occupancy and equipment expense in the Condensed Consolidated Statements of Income.


32



Table of Contents



9.  GOODWILL AND OTHER INTANGIBLE ASSETS
The Company's annual goodwill impairment test was performed as of October 1, 2016. It was determined that no impairment existed as of that date or as of June 30, 2017. For a discussion of the accounting policies for goodwill and other intangible assets, see Note 1, "Summary of Significant Accounting Policies" to the Consolidated Financial Statements in the Company's 2016 10-K.
The following table presents changes in the carrying amount of goodwill for the quarters and six months ended June 30, 2017 and 2016.
Changes in the Carrying Amount of Goodwill
(Dollar amounts in thousands)
  Quarters Ended 
 June 30,		 Six Months Ended 
 June 30,
  2017 2016 2017 2016
Beginning balance $691,572
 $339,768
 $340,879
 $319,007
Acquisitions (45) 1,745
 350,648
 22,506
Ending balance $691,527
 $341,513
 $691,527
 $341,513
         
The decrease in goodwill for the quarter ended June 30, 2017 resulted from measurement period adjustments associated with the Standard transaction. The increase for the six months ended June 30, 2017 resulted from the Standard and Premier acquisitions and measurement period adjustments related to finalizing the fair values of the assets acquired and liabilities assumed in the NI Bancshares acquisition. During the quarter and six months ended June 30, 2016, the increase in goodwill resulted from the NI Bancshares acquisition.
The Company's other intangible assets are core deposit intangibles and trust department customer relationship intangibles, which are being amortized over their estimated useful lives. Other intangible assets are subject to impairment testing when events or circumstances indicate that its carrying amount may not be recoverable. The increase in other intangible assets for the six months ended June 30, 2017 resulted from the Standard and Premier acquisitions. The increase in other intangible assets for the six months ended June 30, 2016 resulted from the NI Bancshares acquisition. During the quarters ended June 30, 2017 and June 30, 2016 there were no events or circumstances to indicate impairment.
Other Intangible Assets
(Dollar amounts in thousands)
  Six Months Ended June 30,
  2017 2016
  Gross 
Accumulated
Amortization
 Net Gross 
Accumulated
Amortization
 Net
Beginning balance $58,959
 $32,962
 $25,997
 $48,550
 $28,280
 $20,270
Additions 39,017
 —
 39,017
 10,409
 —
 10,409
Amortization expense —
 4,128
 (4,128) —
 2,230
 (2,230)
Ending balance $97,976
 $37,090
 $60,886
 $58,959
 $30,510
 $28,449
Scheduled Amortization of Other Intangible Assets
(Dollar amounts in thousands)
  Total
Year Ending June 30,  
2018 $7,332
2019 7,086
2020 7,055
2021 6,986
2022 6,908
2023 and thereafter 25,519
Total $60,886

3329



Table of Contents



10.  DEPOSITS
The following table presents the Company's deposits by type.
Summary of Deposits
(Dollar amounts in thousands)
  As of
  June 30,
2017		 December 31,
2016
Demand deposits $3,525,905
 $2,766,748
Savings deposits 2,059,833
 1,615,833
NOW accounts 1,970,036
 1,675,421
Money market deposits 1,905,402
 1,577,316
Time deposits less than $100,000 894,530
 755,558
Time deposits greater than $100,000 644,014
 437,727
Total deposits $10,999,720
 $8,828,603

The increase in total deposits for the six months ended June 30, 2017 includes deposits assumed in the Standard acquisition. For additional disclosure related to the Standard transaction, see Note 3, "Acquisitions."

11. MATERIAL TRANSACTIONS AFFECTING STOCKHOLDERS' EQUITY
On May 17, 2017, the Company's stockholders approved and adopted an amendment to the Company's Restated Certificate of Incorporation. The amendment increased the Company's authorized common stock by 100,000,000 shares. Following this amendment, the Company is now authorized to issue a total of 251,000,000 shares, including 1,000,000 shares of Preferred Stock, without a par value, and 250,000,000 shares of Common Stock, $0.01 par value per share.
12.8. EARNINGS PER COMMON SHARE
The table below displays the calculation of basic and diluted earnings per common share ("EPS").
Basic and Diluted EPS
(Amounts in thousands, except per share data)
 Quarters Ended 
 June 30,		 Six Months Ended 
 June 30,		 Quarters Ended 
 June 30,		 Six Months Ended 
 June 30,
 2017 2016 2017 2016 2018 2017 2018 2017
Net income $34,950
 $25,267
 $57,805
 $43,229
 $29,600
 $34,950
 $63,110
 $57,805
Net income applicable to non-vested restricted shares (336) (290) (570) (502) (240) (336) (551) (570)
Net income applicable to common shares $34,614
 $24,977
 $57,235
 $42,727
 $29,360
 $34,614
 $62,559
 $57,235
Weighted-average common shares outstanding:                
Weighted-average common shares outstanding (basic) 101,743
 80,383
 101,081
 79,182
 102,159
 101,743
 102,041
 101,081
Dilutive effect of common stock equivalents 20
 13
 20
 12
 —
 20
 8
 20
Weighted-average diluted common shares outstanding 101,763
 80,396
 101,101
 79,194
 102,159
 101,763
 102,049
 101,101
Basic EPS $0.34
 $0.31
 $0.57
 $0.54
 $0.29
 $0.34
 $0.61
 $0.57
Diluted EPS $0.34
 $0.31
 $0.57
 $0.54
 $0.29
 $0.34
 $0.61
 $0.57
Anti-dilutive shares not included in the computation of
diluted EPS (1)
 195
 469
 269
 539
 —
 195
 54
 269
(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. The final outstanding stock options were exercised during the first quarter of 2018.

34



Table of Contents



13.9. 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.
Fair Value Hedges
(Dollar amounts in thousands)
 As of As of
 June 30, 2017 December 31, 2016 June 30, 2018 December 31, 2017
Gross notional amount outstanding $5,708
 $5,958
 $5,208
 $5,458
Derivative liability fair value (186) (282)
Derivative liability fair value in other liabilities (33) (101)
Weighted-average interest rate received 3.08% 2.63% 4.00% 3.38%
Weighted-average interest rate paid 5.96% 5.96% 5.96% 5.96%
Weighted-average maturity (in years) 1.35
 1.84
 0.35
 0.84
Fair value of derivative (1)
 $197
 $296
 $40
 $110
(1) 
This amount represents the fair value if credit risk related contingent features were triggered.
Hedge ineffectiveness isChanges in the fair value of fair value hedges are recognized in other noninterest income in the Condensed Consolidated Statements of Income. For the quarters and six months ended June 30, 2017 and 2016, gains or losses related to fair value hedge ineffectiveness were not material.
Cash Flow Hedges
As of June 30, 2017,2018, the Company hedged $980.0 million$1.1 billion 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 $980.0 million$1.0 billion of borrowed funds using forward starting interest rate swaps through which the Company receives variable amounts and pays fixed amounts. These transactions allow the Company to add stability to net interest income and manage its exposure to interest rate movements.

30



Table of Contents



Forward starting interest rate swaps totaling $415.0$710.0 million began on various dates between June of 2015 and FebruaryMay of 2017,2018, and mature between June of 2019 and FebruaryMay of 2020. The remaining forward starting interest rate swaps totaling $565.0$320.0 million begin at various dates between FebruaryDecember of 2018 and February of 20202021 and mature between December of 2021 and February of 2020 and April of 2022.2023. The weighted-average fixed interest rate to be paid on these interest rate swaps that have not yet begun was 1.96%2.49% as of June 30, 2017.2018. These derivative contracts are designated as cash flow hedges.
Cash Flow Hedges
(Dollar amounts in thousands)
 As of As of
 June 30, 2017 December 31, 2016 June 30, 2018 December 31, 2017
Gross notional amount outstanding $1,960,000
 $1,470,000
 $2,170,000
 $1,960,000
Derivative asset fair value 3,528
 5,402
Derivative liability fair value (7,627) (7,390)
Derivative asset fair value in other assets(1)
 8,389
 3,989
Derivative liability fair value in other liabilities(1)
 (18,876) (10,219)
Weighted-average interest rate received 1.51% 1.37% 2.01% 1.58%
Weighted-average interest rate paid 1.40% 1.11% 1.97% 1.61%
Weighted-average maturity (in years) 2.75
 2.83
 2.01
 2.25
(1)
Certain cash flow hedges are transacted through a clearinghouse ("centrally cleared") and their change in fair value is settled by the counterparties to the transaction, which results in no fair value.
The effective portionChanges in the fair value of gains or losses on cash flow hedges isare recorded in accumulated other comprehensive loss on an after-tax basis and isare subsequently reclassified to interest income or expense in the period that the forecasted hedged item impacts earnings. Hedge effectiveness is determined using a regressionanalysis at the inception of the hedge relationship and on an ongoing basis. For the quarters and six months ended June 30, 2017 and 2016, there were no material gains or losses related to cash flow hedge ineffectiveness. As of June 30, 2017,2018, the Company estimates that $303,000$2.0 million will be reclassified from accumulated other comprehensive loss as a decrease to interest income over the next twelve months.

35



Table of Contents



Other Derivative Instruments
The Company also enters into derivative transactions through capital market products with its commercial customers and simultaneously enters into an offsetting interest rate derivative transaction with third-parties. This transaction allows the Company's customers to effectively convert a variable rate loan into a fixed rate loan. Due to the offsetting nature of these transactions, the Company does not apply hedge accounting treatment. The Company's credit exposure on these derivative transactions results primarily from counterparty credit risk. The credit valuation adjustment ("CVA") is a fair value adjustment to the derivative to account for this risk. As of June 30, 20172018 and December 31, 2016,2017, the Company's credit exposure was fully secured by the underlying collateral on customer loans and mitigated through netting arrangements with third-parties, therefore, no CVA was recorded. Capital market products income related to commercial customer derivative instruments of $2.2totaled $2.8 million and $3.6$4.4 million were recorded in noninterest income for the quartersquarter and six months ended June 30, 2017,2018, respectively. There were $2.1$2.2 million and $5.3$3.6 million of capital market products income recorded for quartersthe quarter and six months ended June 30, 2016,2017, respectively.
Other Derivative Instruments
(Dollar amounts in thousands)
 As of As of
 June 30, 2017 December 31, 2016 June 30, 2018 December 31, 2017
Gross notional amount outstanding $2,252,704
 $1,656,612
 $3,060,888
 $2,665,358
Derivative asset fair value 17,370
 13,478
Derivative liability fair value (15,347) (13,478)
Derivative asset fair value in other assets(1)
 26,691
 17,079
Derivative liability fair value in other liabilities(1)
 (29,131) (14,930)
Fair value of derivative (1)(2)
 15,605
 13,753
 29,141
 15,059
(1)
Certain other derivative instruments are centrally cleared and their change in fair value is settled by the counterparties to the transaction, which results in no fair value.
(2) 
This amount represents the fair value if credit risk related contingent features were triggered.
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 periods presented. The Company had no other derivative instruments as of June 30, 20172018 and December 31, 2016.2017. The Company does not enter into derivative transactions for purely speculative purposes.

31



Table of Contents



The following table presents the impact of derivative instruments on comprehensive income and the reclassification of gains (losses) from accumulated other comprehensive loss to net interest income for the quarters and six months ended June 30, 2018 and 2017.
Cash Flow Hedge Accounting on AOCI
(Dollar amounts in thousands)
  Quarters Ended 
 June 30,		 Six Months Ended 
 June 30,
  2018 2017 2018 2017
Gains (losses) recognized in other comprehensive income        
Interest rate swaps in interest income $3,577
 $3,541
 $10,573
 $5,352
Interest rate swaps in interest expense (2,860) (3,089) (10,043) (3,391)
Reclassification of gains (losses) included in net income        
Interest rate swaps in interest income $376
 $1,531
 $647
 $3,387
Interest rate swaps in interest expense (503) (1,078) (1,109) (2,223)
The following table presents the impact of derivative instruments on net interest income for the quarters and six months ended June 30, 2018 and 2017.
Hedge Income
(Dollar amounts in thousands)
  Quarters Ended 
 June 30,		 Six Months Ended 
 June 30,
  2018 2017 2018 2017
Fair Value Hedges        
Interest rate swaps in interest income $(18) $(56) $(59) $(90)
Cash Flow Hedges        
Interest rate swaps in interest income 376
 1,531
 647
 3,387
Interest rate swaps in interest expense (503) (1,078) (1,109) (2,223)
Total cash flow hedges (127) 453
 (462) 1,164
Total net (losses) gains on hedges $(145) $397
 $(521) $1,074
Credit Risk
Derivative instruments are inherently subject to credit risk, which represents the Company's risk of loss when the counterparty to a derivative contract fails to perform according to the terms of the agreement. Credit risk is managed by limiting and collateralizing the aggregate amount of net unrealized 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's net losses above a stated minimum threshold. As of June 30, 20172018 and December 31, 2016,2017, these collateral agreements covered 100% of the fair value of the Company's outstanding fair value hedges. Derivative assets and liabilities are presented gross, rather than net, of pledged collateral amounts.

3632



Table of Contents



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 Condition. The following table presents the fair value of the Company's derivatives and offsetting positions as of June 30, 20172018 and December 31, 2016.2017.
Fair Value of Offsetting Derivatives
(Dollar amounts in thousands)
 As of June 30, 2017 As of December 31, 2016 As of June 30, 2018 As of December 31, 2017
 Assets Liabilities Assets Liabilities Assets Liabilities Assets Liabilities
Gross amounts recognized $20,898
 $23,160
 $18,880
 $21,150
 $35,080
 $48,040
 $21,068
 $25,250
Less: amounts offset in the Consolidated Statements of
Financial Condition
 —
 —
 —
 —
 —
 —
 —
 —
Net amount presented in the Consolidated Statements of
Financial Condition (1)
 20,898
 23,160
 18,880

21,150
 35,080
 48,040
 21,068

25,250
Gross amounts not offset in the Consolidated Statements of
Financial Condition:
                
Offsetting derivative positions (8,646) (8,646) (10,889) (10,889) (14,704) (14,704) (16,880) (16,880)
Cash collateral pledged —
 (14,514) —
 (10,261) (17,360) (4,480) —
 (8,370)
Net credit exposure $12,252
 $—
 $7,991
 $—
 $3,016
 $28,856
 $4,188
 $—
(1) 
Included in other assets or other liabilities in the Consolidated Statements of Financial Condition.
As of June 30, 20172018 and December 31, 2016,2017, the Company's derivative instruments generally contained provisions that require the Company'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'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 June 30, 20172018 and December 31, 20162017 the Company was in compliance with these provisions.

3733



Table of Contents



14.10. 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)
 As of As of
 June 30, 2017 December 31, 2016 June 30, 2018 December 31, 2017
Commitments to extend credit:        
Commercial, industrial, and agricultural $1,750,477
 $1,522,152
 $1,656,372
 $1,729,426
Commercial real estate 347,330
 397,423
 349,861
 377,551
Home equity 508,295
 426,384
 546,600
 514,973
Other commitments (1)
 248,320
 214,943
 244,752
 244,222
Total commitments to extend credit $2,854,422
 $2,560,902
 $2,797,585
 $2,866,172
        
Letters of credit $137,913
 $100,430
 $119,941
 $128,801
Recourse on assets sold:    
Unpaid principal balance of loans sold $185,182
 $187,158
Carrying value of recourse obligation (2)
 153
 142
(1) 
Other commitments includes installment and overdraft protection program commitments.
(2)
Included in other liabilities in the Consolidated Statements of Financial Condition.
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.customers for the full contractual amount. 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.third-party. 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. Commercial letters of credit are issued to facilitate transactions between a customer and a third partythird-party based on agreed upon terms.
The maximum potential future payments guaranteed by the Company under 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-performingearly payment default 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. There were no material loan repurchases during the quarters and six months ended June 30, 20172018 and 2016.2017.
Legal Proceedings
In the ordinary course of business, there were certain legal proceedings pending against the Company and its subsidiaries at June 30, 2017.2018. While the outcome of any legal proceeding is inherently uncertain, based on information currently available, the Company's management does not expect that any liabilities arising from pending legal matters will have a material adverse effect on the Company's business, financial position, results of operations, or cash flows.

3834



Table of Contents



15.11. 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."
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. See the "Fair Value Measurements of Other Financial Instruments" section of this note. Any aggregation of the estimated fair values presented in this note 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 required to be measured at fair value on a recurring basis between levels of the fair value hierarchy during the periods presented.

3935



Table of Contents



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)
 As of June 30, 2017 As of December 31, 2016 As of June 30, 2018 As of December 31, 2017
 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:            
Assets            
Trading securities:                        
Money market funds $1,717
 $—
 $—
 $1,645
 $—
 $—
 $—
 $—
 $—
 $1,685
 $—
 $—
Mutual funds 17,828
 —
 —
 16,275
 —
 —
 —
 —
 —
 18,762
 —
 —
Total trading securities(1) 19,545
 —
 —
 17,920
 —
 —
 —
 —
 —
 20,447
 —
 —
Securities available-for-sale:            
Equity securities(1)
 21,333
 7,108
 —
 —
 —
 —
Securities available-for-sale(1)
            
U.S. treasury securities 48,483
 —
 —
 48,541
 —
 —
 49,158
 —
 —
 46,345
 —
 —
U.S. agency securities —
 175,058
 —
 —
 183,637
 —
 —
 148,284
 —
 —
 156,847
 —
CMOs —
 1,006,164
 —
 —
 1,047,446
 —
 —
 1,232,430
 —
 —
 1,095,186
 —
MBSs —
 373,660
 —
 —
 332,655
 —
 —
 437,636
 —
 —
 369,543
 —
Municipal securities —
 264,402
 —
 —
 270,846
 —
 —
 218,345
 —
 —
 208,991
 —
CDOs —
 —
 33,454
 —
 —
 33,260
Corporate debt securities —
 57,012
 —
 —
 —
 —
Equity securities —
 7,027
 —
 —
 3,065
 —
 —
 —
 —
 —
 7,297
 —
Total securities available-for-sale 48,483
 1,826,311
 33,454
 48,541
 1,837,649
 33,260
 49,158
 2,093,707
 —
 46,345
 1,837,864
 —
Mortgage servicing rights ("MSRs") (1)
 —
 —
 5,925
 

 

 6,120
Derivative assets (1)
 —
 20,898
 —
 —
 18,880
 —
Liabilities:            
Derivative liabilities (2)
 $—
 $23,160
 $—
 $—
 $21,150
 $—
Mortgage servicing rights ("MSRs")(2)
 —
 —
 6,671
 —
 —
 5,894
Derivative assets(2)
 —
 35,080
 —
 —
 21,068
 —
Liabilities            
Derivative liabilities(3)
 $—
 $48,040
 $—
 $—
 $25,250
 $—
(1)
As a result of recently adopted accounting guidance, equity securities are no longer presented within trading securities or securities available-for-sale for the prior period and are now presented within equity securities for the current period. For further discussion of this guidance, see Note 2 of "Notes to the Condensed Consolidated Financial Statements" in Item 1 of this Form 10-Q.
(2) 
Included in other assets in the Consolidated Statements of Financial Condition.
(2)(3) 
Included in other liabilities in the Consolidated Statements of Financial Condition.
The following sections describe the specific valuation techniques and inputs used to measure financial assets and liabilities at fair value.
TradingEquity Securities
The Company's tradingequity securities consist primarily of community development investments and certain diversified investment securities held in a grantor trust andfor participants in the Company's nonqualified deferred compensation plan that are invested in money market and mutual funds. The fair value of thesecommunity development investments is based on quoted prices in active markets or market prices for similar securities obtained from external pricing services or dealer market participants and is classified in level 2 of the fair value hierarchy. The fair value of the 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's securities available-for-sale are primarily fixed income instruments that are not quoted on an exchange, but may be traded in active markets. The fair values for these securities 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 of the fair value hierarchy. The fair value of U.S. treasury securities is based on quoted market prices in active exchange markets and is classified in level 1 of the fair value hierarchy. Quarterly, the Company evaluates the methodologies used by its external pricing services to estimate the fair value of these securities to determine whether the valuations represent an exit price in the Company's principal markets.
CDOs are classified in level 3 of 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 is based on credit analysis and historical financial data for each of the issuers underlying the CDOs (the "Issuers"). These estimates are highly subjective and sensitive to several significant, unobservable inputs. The cash flows for each Issuer are then discounted to present values using LIBOR plus an adjustment to reflect the impact of market factors. Finally, the discounted cash flows for each Issuer are aggregated to derive the estimated fair value for the specific CDO.

40



Table of Contents



The following table presents the ranges of significant, unobservable inputs calculated using the weighted-average of the Issuers used by the Company as of June 30, 2017 and December 31, 2016.
Significant Unobservable Inputs Used in the Valuation of CDOs
  As of
  June 30, 2017 December 31, 2016
Probability of prepayment 0.0% -10.9% 0.0% -10.9%
Probability of default 15.6% -44.1% 16.7% -46.8%
Loss given default 93.3% -99.2% 93.3% -98.9%
Probability of deferral cure 0.0% -100.0% 7.6% -100.0%
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 of changes in these key inputs could result in a significantly higher or lower 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.
Management monitors the valuation results of each CDO on a quarterly basis, which includes an analysis of historical pricing trends for these types of securities, overall economic conditions (such as tracking LIBOR curves), and the performance of the Issuers' industries. Annually, management validates significant assumptions by reviewing detailed back-testing performed by the structured credit valuation firm.
A rollforward of the carrying value of CDOs for the quarters and six months ended June 30, 2017 and 2016 is presented in the following table.
Carrying Value of CDOs
(Dollar amounts in thousands)
  Quarters Ended 
 June 30,		 Six Months Ended 
 June 30,
  2017 2016 2017 2016
Beginning balance $33,436
 $30,757
 $33,260
 $31,529
Change in other comprehensive income (1)
 6
 (244) 135
 (1,030)
Other 12
 (82) 59
 (68)
Ending balance $33,454
 $30,431
 $33,454
 $30,431

(1)
Included in unrealized holding gains in the Consolidated Statements of Comprehensive Income.

4136



Table of Contents



MSRs
The Company services loans for others totaling $626.5$617.5 million and $607.0 million as of June 30, 20172018 and $640.5 million as of December 31, 2016.2017, respectively. These loans are owned by third partiesthird-parties and are not included in the Consolidated Statements of Financial Condition. The Company determines the fair value of MSRs by estimating the present value of expected future cash flows associated with the mortgage loans being serviced and classifies them in level 3 of the fair value hierarchy. The following table presents the ranges of significant, unobservable inputs used by the Company to determine the fair value of MSRs as of June 30, 20172018 and December 31, 2016.2017.
Significant Unobservable Inputs Used in the Valuation of MSRs
 As of As of
 June 30, 2017 December 31, 2016 June 30, 2018 December 31, 2017
Prepayment speed 8.8% -25.3% 7.7% -22.8% 6.7% -13.5% 4.2% -13.1%
Maturity (months) 8
 -92 12
 -103 4
 -106 6
 -92
Discount rate 9.5% -13.0% 9.5% -13.0% 9.5% -12.0% 9.5% -12.0%
The impact of changes in these key inputs could result in a significantly higher or lower fair value measurement for MSRs. Significant increases in expected prepayment speeds and discount rates have negative impacts on the valuation. Higher maturity assumptions have a favorable effect on the estimated fair value.
A rollforward of the carrying value of MSRs for the quarters and six months ended June 30, 20172018 and 20162017 is presented in the following table.
Carrying Value of MSRs
(Dollar amounts in thousands)
 Quarters Ended 
 June 30,		 Six Months Ended 
 June 30,		 Quarters Ended 
 June 30,		 Six Months Ended 
 June 30,
 2017 2016 2017 2016 2018 2017 2018 2017
Beginning balance $6,245
 $5,022
 $6,120
 $1,853
 $6,468
 $6,245
 $5,894
 $6,120
Additions from acquisition —
 —
 —
 3,092
New MSRs 205
 162
 361
 347
 393
 205
 569
 361
Total gains (losses) included in earnings (1):
                
Changes in valuation inputs and assumptions (260) (132) (88) (172) 2
 (260) 562
 (88)
Other changes in fair value (2)
 (265) (114) (468) (182) (192) (265) (354) (468)
Ending balance $5,925
 $4,938
 $5,925
 $4,938
 $6,671
 $5,925
 $6,671
 $5,925
Contractual servicing fees earned (1)
 $384
 $366
 $779
 $549
 $369
 $384
 $747
 $779
(1) 
Included in mortgage banking income in the Condensed Consolidated Statements of Income and related to assets held as of June 30, 20172018 and 2016.2017.
(2) 
Primarily represents changes in expected future cash flows due to payoffs and paydowns.
Derivative Assets and Derivative Liabilities
The Company enters into interest rate swaps and derivative transactions with commercial customers. These derivative transactions are executed in the dealer market, and pricing is based on market quotes obtained from the 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 counterparty are representative of an exit price.

4237



Table of Contents



Assets and Liabilities Required to be Measured at Fair Value on a Non-Recurring Basis
The following table provides the fair value for each class of assets and liabilities required to be measured at fair value on a non-recurring basis in the Consolidated Statements of Financial Condition by level in the fair value hierarchy.
Non-Recurring Fair Value Measurements
(Dollar amounts in thousands)
  As of June 30, 2017 As of December 31, 2016
  Level 1 Level 2 Level 3 Level 1 Level 2 Level 3
Collateral-dependent impaired loans (1)
 $—
 $—
 $40,698
 $—
 $—
 $22,019
OREO (2)
 —
 —
 6,835
 —
 —
 8,624
Loans held-for-sale (3)
 —
 —
 16,922
 —
 —
 10,484
Assets held-for-sale (4)
 —
 —
 11,732
 —
 —
 4,075

  As of June 30, 2018 As of December 31, 2017
  Level 1 Level 2 Level 3 Level 1 Level 2 Level 3
Collateral-dependent impaired loans(1)
 $—
 $—
 $19,810
 $—
 $—
 $33,240
OREO(2)
 —
 —
 5,177
 —
 —
 12,340
Loans held-for-sale(3)
 —
 —
 6,030
 —
 —
 21,098
Assets held-for-sale(4)
 —
 —
 3,899
 —
 —
 2,208
(1) 
Includes impaired loans with charge-offs and impaired loans with a specific reserve during the periods presented.
(2) 
Includes OREO with fair value adjustments subsequent to initial transfer that occurred during the periods presented.
(3) 
Included in other assets in the Consolidated Statements of Financial Condition.
(4) 
Included in premises, furniture, and equipment in the Consolidated Statements of Financial Condition.
Collateral-Dependent Impaired Loans
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% to 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.
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.
Loans Held-for-Sale
As of June 30, 2018 and December 31, 2017, loans held-for-sale consists of 1-4 family mortgage loans, which were originated with the intent to sell. These loans were recorded in the held-for-sale category at the contract price and, accordingly, are classified in level 3 of the fair value hierarchy. As of December 31, 2016, loans held-for-sale consists of 1-4 family mortgage loans, which were originated with the intent to sell, and a corporate loan.
Assets Held-for-Sale
Assets held-for-sale as of June 30, 20172018 and December 31, 20162017 consists of former branches that are no longer in operation and parcels of land previously purchased for expansion. These properties are being actively marketed and were transferred into the held-for-sale category at their fair value as determined by current appraisals. Based on these valuation methods, they are classified in level 3 of the fair value hierarchy.

4338



Table of Contents



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.
Fair Value Measurements of Other Financial Instruments
(Dollar amounts in thousands)
 As of As of
 June 30, 2017 December 31, 2016 June 30, 2018 December 31, 2017
 
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:          
Assets          
Cash and due from banks 1 $181,171
 $181,171
 $155,055
 $155,055
 1 $181,482
 $181,482
 $192,800
 $192,800
Interest-bearing deposits in other banks 2 103,181
 103,181
 107,093
 107,093
 2 192,785
 192,785
 153,770
 153,770
Securities held-to-maturity 2 17,353
 14,899
 22,291
 18,212
 2 13,042
 10,918
 13,760
 12,013
FHLB and FRB stock 2 66,333
 66,333
 59,131
 59,131
 2 82,778
 82,778
 69,708
 69,708
Loans 3 10,143,706
 9,905,748
 8,172,584
 7,973,845
 3 10,797,584
 10,451,952
 10,345,397
 10,059,992
Investment in BOLI 3 278,353
 278,353
 219,746
 219,746
 3 282,664
 282,664
 279,900
 279,900
Accrued interest receivable 3 39,766
 39,766
 34,384
 34,384
 3 48,542
 48,542
 45,261
 45,261
Other interest-earning assets 3 454
 454
 834
 834
 3 78
 78
 228
 228
Liabilities:          
Liabilities          
Deposits 2 $10,999,720
 $10,989,384
 $8,828,603
 $8,820,572
 2 $11,492,263
 $11,470,263
 $11,053,325
 $11,038,819
Borrowed funds 2 639,333
 639,333
 879,008
 879,008
 2 981,044
 981,044
 714,884
 714,884
Senior and subordinated debt 2 194,886
 205,757
 194,603
 197,888
 2 195,453
 208,425
 195,170
 208,666
Accrued interest payable 2 4,470
 4,470
 3,416
 3,416
 2 7,115
 7,115
 4,704
 4,704
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 Loans include cash and due from banks, interest-bearing deposits in other banks, 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 FRB Stock - The carrying amounts approximate fair value as the stock is non-marketable.
Loans - Loans includes the FDIC indemnification asset and net loans, which consists of loans held-for-investment, acquired loans, and the allowance for loan losses. The fair valueAs of loans is estimated usingboth June 30, 2018 and December 31, 2017, the present value of the expected future cash flows of the remaining maturities of the loans. Prepayment assumptions that consider the Company'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 inherent in the loans.
Investment in BOLI - The fair value of BOLI approximates the carrying amount as both are based on each policy's respective cash surrender value ("CSV"), which is the amount the Company would receive from the 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

44



Table of Contents



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 values of senior and subordinated notes are estimated based on quoted market prices of similar instruments. The fair values of junior subordinated debentures are estimated based on quoted market prices of comparable securities when available, or by discounting the expected future cash flows at market interest rates.
Commitments to Extend Credit and Letters of Credit - The Company estimated the fair value of lending commitments outstanding to be immaterial based on (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.immaterial.

4539



Table of Contents



ITEM 2. 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 through over 130 locations throughout the Chicago metropolitan area, northwest Indiana, central and western Illinois, and eastern Iowa. Our principal subsidiary, is First Midwest Bank, which providesand other affiliates provide a broad range of commercial, retail, treasury andmanagement, equipment leasing, wealth management, trust, and private banking products and services to commercial and industrial, commercial real estate, municipal, and consumer customers. We are committed to meeting the financial needs of the people and businesses in the communities where we live and work by providing customized banking solutions, quality products, and innovative services that fulfill those financial needs.
The following discussion and analysis is intended to address the significant factors affecting our Condensed Consolidated Statements of Income for the quarters and six months ended June 30, 20172018 and 20162017 and Consolidated Statements of Financial Condition as of June 30, 20172018 and December 31, 2016.2017. When we use the terms "First Midwest," the "Company," "we," "us," and "our," we mean First Midwest Bancorp, Inc. 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 information presented in Item 1 of this Quarterly Report on Form 10-Q ("Form 10-Q"), as well as in our 20162017 Annual Report on Form 10-K ("20162017 10-K"). The results of operations for the quarter and six months ended June 30, 20172018 are not necessarily indicative of future results.
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, certain seasonal factors, 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:
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 tax-equivalent 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"), 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 classified in one of the following tiers: (i) Common Equity Tier 1 capital ("CET1"), which consists of common equity and retained earnings, less goodwill and other intangible assets and a portion of disallowed deferred tax assets, (ii) Tier 1 capital, which consists of CET1 and qualifying trust-preferred securities and the remaining portion of disallowed deferred tax assets, and (iii) Tier 2 capital, which includes qualifying subordinated debt and the allowance for credit losses, subject to limitations.
Some of these metrics may be presented on a non-U.S. generally accepted accounting principles ("non-GAAP") basis. For detail on our non-GAAP metrics, see the discussion in the section titled "Non-GAAP Financial Information and Reconciliations." 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.
As of June 30, 2017, the Company and the Bank each had total assets of approximately $14.0 billion. The Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act") and its implementing regulations impose various additional requirements on bank holding companies and banks with $10.0 billion or more in total consolidated assets. As a general matter, these requirements are phased in and become applicable to the Company and the Bank over various dates. For a discussion of the impact that the Dodd-Frank Act and its implementing regulations will have on the Company and the Bank now that they have each exceeded $10.0 billion in total consolidated assets, see the "Supervision and Regulation" section in Item 1, "Business" and Item 1A, "Risk Factors" in the Company's 2016 10-K, as well as our subsequent filings made with the Securities and Exchange Commission ("SEC").

46



Table of Contents



CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This Form 10-Q, as well as any oral statements made by or on behalf of First Midwest in connection herewith, may contain certain "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. In some cases, forward-looking statements can be identified by the use of words such as "may," "might," "will," "would," "should," "could," "expect," "plan," "intend," "anticipate," "believe," "estimate," "outlook," "predict," "project," "probable," "potential," "possible," "target," "continue," "look forward," or "assume,""assume" and words of similar import. Forward-looking statements are not historical facts or guarantees of future performance but instead express only management's beliefs regarding future results or events, many of which, by their nature, are inherently uncertain and outside of management's control. It is possible that actual results and events may differ, possibly materially, from the anticipated results or events indicated in these forward-looking statements. Forward-looking statements are not guarantees of future performance, and we cautionFirst Midwest cautions you not to place undue reliance on these statements. Forward-looking statements are made only as of the date of this report, and we undertake no obligation to update any forward-looking statements contained in this report to reflect new information or events or conditions after the date hereof.

40



Table of Contents



Forward-looking statements may be deemed to include, among other things, statements relating to our future financial performance, including the related outlook for 2018, the performance of our loan or securities portfolio, the expected amount of future credit reserves or charge-offs, corporate strategies or objectives, including the impact of strategic actions and initiatives, First Midwest's "Delivering Excellence" initiative, including actions, goals, and expectations, as well as costs and benefits therewith and the timing thereof, anticipated trends in our business, regulatory developments, the impact of the new federal income tax law, acquisition transactions, including estimated synergies, cost savings and financial benefits of pending or consummated transactions, including First Midwest's proposed acquisition of Northern States Financial Corporation ("Northern States"), and growth strategies, including possible future acquisitions. These statements are subject to certain risks, uncertainties and assumptions. For a discussion of these risks, uncertainties, and assumptions, you should refer to the sections entitled "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" in this report and in our 20162017 10-K, as well as our subsequent filings made with the SEC.Securities and Exchange Commission ("SEC"). However, these risks and uncertainties are not exhaustive. Other sections of this report describe additional factors that could adversely impact our business and financial performance.
CRITICAL ACCOUNTING ESTIMATES
Our consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles ("GAAP") and are consistent with general practicepractices within the banking industry. Application of GAAP 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 impact these estimates, assumptions, and judgments, which may have a material effect on the amounts reported in the financial statements.
For additional information regarding critical accounting estimates, see the "Summary of Significant Accounting Policies," presented in Note 1 to the Consolidated Financial Statements and the section titled "Critical Accounting Estimates" in Management's Discussion and Analysis of Financial Condition and Results of Operations included in the Company's 20162017 10-K. There have been no material changes in the Company's application of critical accounting estimates related to the allowance for credit losses, valuation of securities, income taxes, and goodwill and other intangible assets since December 31, 2016.2017.
SIGNIFICANT RECENT EVENTS
AcquisitionsDelivering Excellence Initiative
Standard Bancshares, Inc.During the second quarter of 2018, the Company initiated certain actions in connection with its previously announced Delivering Excellence initiative. This initiative further demonstrates the Company's ongoing commitment to providing service excellence to its clients, as well as maximizing both the efficiency and scalability of its operating platform. Components of Delivering Excellence include improved delivery of services to clients through streamlined processes, the consolidation or closing of 19 locations, organizational realignments, and several revenue growth opportunities.
The Company expects to incur total pre-tax implementation costs associated with Delivering Excellence of $25 million, the majority of which will be recognized in 2018. The Company began implementing this initiative in the second quarter of 2018, which resulted in pre-tax implementation costs of $15 million associated with property valuation adjustments on locations identified for closure, employee severance, and general restructuring and advisory services.
Pending Acquisition
Northern States Financial Corporation
On JanuaryJune 6, 2017,2018, the Company completed its acquisition of Standard Bancshares, Inc. ("Standard"),entered into a definitive agreement to acquire Northern States, the holding company for StandardNorStates Bank, and Trust Company. With the acquisition, the Company acquired 35 banking offices located primarilybased in the southwest Chicago suburbs and adjacent marketsWaukegan, Illinois. As of June 30, 2018, Northern States had approximately $530 million in northwest Indiana, and added approximately $2.0 billiontotal assets, $450 million in deposits, and $1.8 billion$310 million in loans. The merger consideration totaled $580.7 million and consistedagreement provides for an exchange ratio of $533.6 million in0.0369 shares of Company common stock and $47.1 millionfor each share of Northern States common stock, subject to adjustment as set forth in cash. All operating systems were converted during the firstmerger agreement. As of the date of the public announcement, the overall transaction was valued at approximately $91 million. The acquisition is expected to close in the fourth quarter of 2017.
Premier Asset Management LLC
On February 28, 2017,2018, subject to customary regulatory approvals and closing conditions, as well as the Company completed its acquisitionapproval of Premier Asset Management LLC ("Premier"), a registered investment advisor based in Chicago, Illinois. At the close of the acquisition, the Company acquired approximately $550.0 million of trust assets under management.Northern States' stockholders.

4741



Table of Contents



PERFORMANCE OVERVIEW
Table 1
Selected Financial Data
(Amounts in thousands, except per share data)
Quarters Ended 
 June 30,		 Six Months Ended 
 June 30,		Quarters Ended 
 June 30,		 Six Months Ended 
 June 30,
2017 2016 2017 20162018 2017 2018 2017
Operating Results              
Interest income$126,516
 $96,550
 $250,215
 $184,098
$142,088
 $126,516
 $273,433
 $250,215
Interest expense8,933
 6,569
 17,435
 13,403
14,685
 8,933
 27,467
 17,435
Net interest income117,583
 89,981
 232,780
 170,695
127,403
 117,583
 245,966
 232,780
Provision for loan losses8,239
 8,085
 13,157
 15,678
11,614
 8,239
 26,795
 13,157
Noninterest income44,945
 37,822
 84,896
 73,748
36,947
 44,945
 72,464
 84,896
Noninterest expense99,751
 81,354
 216,393
 163,943
113,416
 99,751
 208,998
 216,393
Income before income tax expense54,538
 38,364
 88,126

64,822
39,320
 54,538
 82,637

88,126
Income tax expense19,588
 13,097
 30,321
 21,593
9,720
 19,588
 19,527
 30,321
Net income$34,950
 $25,267
 $57,805
 $43,229
$29,600
 $34,950
 $63,110
 $57,805
Weighted-average diluted common shares outstanding101,763
 80,396
 101,101
 79,194
102,159
 101,763
 102,049
 101,101
Diluted earnings per common share$0.34
 $0.31
 $0.57
 $0.54
$0.29
 $0.34
 $0.61
 $0.57
Diluted earnings per common share, excluding certain significant transactions (1)(2)
$0.35
 $0.32
 $0.68
 $0.58
Diluted earnings per common share, adjusted(1)
$0.40
 $0.35
 $0.72
 $0.68
Performance Ratios              
Return on average common equity (3)(2)
7.58% 8.13% 6.42% 7.12%6.23% 7.58% 6.70% 6.42%
Return on average tangible common equity (3)
13.37% 11.94% 11.52% 10.44%
Return on average tangible common equity, excluding certain significant transactions (1) (2) (3)
13.64% 12.11% 13.81% 11.24%
Return on average assets (3)
1.00% 0.93% 0.84% 0.83%
Return on average assets, excluding certain significant transactions (1) (2) (3)
1.02% 0.94% 1.02% 0.89%
Tax-equivalent net interest margin (2)(3)(4)
3.88% 3.72% 3.88% 3.69%
Efficiency ratio (2)
58.67% 60.98% 59.80% 62.81%
Return on average common equity, adjusted(1)(2)
8.62% 7.74% 7.91% 7.75%
Return on average tangible common equity(2)
10.83% 13.37% 11.65% 11.52%
Return on average tangible common equity, adjusted(1)(2)
14.81% 13.64% 13.67% 13.81%
Return on average assets(2)(3)
0.81% 1.00% 0.88% 0.84%
Return on average assets, adjusted(1)(2)
1.12% 1.02% 1.04% 1.02%
Tax-equivalent net interest margin(1)(2)(3)
3.91% 3.88% 3.85% 3.88%
Efficiency ratio(1)
59.65% 59.01% 60.28% 60.13%
Efficiency ratio (prior presentation)(1)(4)
N/A
 58.67% N/A
 59.80%
(1)
Certain significant transactions include acquisition and integration related expenses associated with completed and pending acquisitions.
(2) 
This item is a non-GAAP financial measure. For a discussion of non-GAAP financial measures, see the section of this Item 2 titled "Non-GAAP Financial Information and Reconciliations."
(3)(2) 
These ratios are presented on an annualized basis.
(4)(3) 
See the section of this Item 2 titled "Earnings Performance" below for additional discussion and calculation of this financial measure.

(4)
Presented as calculated prior to March 31, 2018, which included a tax-equivalent adjustment for BOLI. Management believes that removing this adjustment from the current calculation of this metric enhances comparability for peer comparison purposes.

4842



Table of Contents



As of June 30, 2017 
 Change From		As of June 30, 2018 
 Change From
June 30,
2017		 December 31,
2016		 June 30,
2016		 December 31,
2016		 June 30,
2016		June 30,
2018		 December 31,
2017		 June 30,
2017		 December 31,
2017		 June 30,
2017
Balance Sheet Highlights                  
Total assets$13,969,140
 $11,422,555
 $10,995,810
 $2,546,585
 $2,973,330
$14,818,076
 $14,077,052
 $13,969,140
 $741,024
 $848,936
Total loans10,232,159
 8,254,145
 7,979,537
 1,978,014
 2,252,622
10,891,565
 10,437,812
 10,232,159
 453,753
 659,406
Total deposits10,999,720
 8,828,603
 8,971,316
 2,171,117
 2,028,404
11,492,263
 11,053,325
 10,999,720
 438,938
 492,543
Core deposits9,461,176
 7,635,318
 7,701,880
 1,825,858
 1,759,296
9,567,902
 9,406,542
 9,461,176
 161,360
 106,726
Loans to deposits93.0% 93.5% 88.9%    94.8% 94.4% 93.0%    
Core deposits to total deposits86.0% 86.5% 85.9%    83.3% 85.1% 86.0%    
Asset Quality Highlights                  
Non-accrual loans$79,196
 $59,289
 $37,312
 $19,907
 $41,884
$53,475
 $66,924
 $79,196
 $(13,449) $(25,721)
90 days or more past due loans, still
accruing interest (1)
2,059
 5,009
 5,406
 (2,950) (3,347)7,954
 3,555
 2,059
 4,399
 5,895
Total non-performing loans81,255
 64,298
 42,718
 16,957
 38,537
61,429
 70,479
 81,255
 (9,050) (19,826)
Accruing troubled debt
restructurings ("TDRs")		2,029
 2,291
 2,491
 (262) (462)1,760
 1,796
 2,029
 (36) (269)
Other real estate owned ("OREO")26,493
 26,083
 29,990
 410
 (3,497)12,892
 20,851
 26,493
 (7,959) (13,601)
Total non-performing assets$109,777
 $92,672
 $75,199
 $17,105
 $34,578
$76,081
 $93,126
 $109,777
 $(17,045) $(33,696)
30-89 days past due loans (1)
$19,081
 $21,043
 $23,380
 $(1,962) $(4,299)$39,171
 $39,725
 $19,081
 $(554) $20,090
Non-performing assets to total loans plus
OREO		1.07% 1.12% 0.94%    0.70% 0.89% 1.07%    
Allowance for Credit Losses                  
Allowance for credit losses$93,371
 $87,083
 $81,505
 $6,288
 $11,866
$97,691
 $96,729
 $93,371
 $962
 $4,320
Allowance for credit losses to
total loans (2)
0.91% 1.06% 1.02%    0.90% 0.93% 0.91%    
Allowance for credit losses to
total loans, excluding acquired loans(3)		1.10% 1.11% 1.11%    1.00% 1.07% 1.10%    
Allowance for credit losses to
non-accrual loans (2)
117.90% 146.88% 218.44%    182.69% 144.54% 117.90%    
(1) 
Purchased credit impaired ("PCI") loans with an accretable yield are considered current and are not included in past due loan totals.
(2) 
This ratio includes acquired loans that are recorded at fair value through an acquisition adjustment, which incorporates credit risk as of the acquisition date with no allowance for credit losses being established at that time. As the acquisition adjustment is accreted into income over future periods, an allowance for credit losses is established as necessary to reflect credit deterioration. A discussion of the allowance for acquired loan losses and the related acquisition adjustment is presented in the section titled "Loan Portfolio and Credit Quality."
(3)
This item is a non-GAAP financial measure. For a discussion of non-GAAP financial measures, see the section of this Item 2 titled "Non-GAAP Financial Information and Reconciliations."
Net income for the second quarter and first six months of 20172018 was $35.0$29.6 million, or $0.34$0.29 per share, and $57.8$63.1 million, or $0.57$0.61 per share, respectively. Performance for all periods presentedthe second quarter and first six months of 2018 was impacted by certain significant transactions, which include$15.0 million of pre-tax costs related to the implementation of the Delivering Excellence initiative. Performance for the second quarter and first six months of 2017 was impacted by acquisition and integration related pre-tax expenses of $1.2 million and $19.7 million, respectively. Excluding these expenses, net income for the second quarter and first six months of 2017,2018 increased to $40.9 million, or $0.40 per share, and $74.4 million, or $0.72 per share, respectively, compared to $35.7 million, or $0.35 per share, and $618,000 and $5.6$69.6 million, or $0.68 per share, for the same periods in 2016. Excluding these transactions, earnings per share was $0.35 for the second quarter of 2017 compared to $0.32 for the second quarter of 2016 and $0.68 for the first six months of 2017 compared to $0.58 for the same period in 2016.2017. The increase in net income, adjusted, and earnings per share, adjusted, compared to the second quarter and first six months of 2016, excluding certain significant transactions,2017 reflects the benefit of the Standardhigher net interest income, controlled noninterest expense, consistent noninterest income, and Premier acquisitions completed in the first quarter of 2017, loan growth, and increases in fee-based revenues, which werea lower effective income tax rate, partially offset by higher noninterest expense. In addition, the benefit of the NI Bancshares Corporation ("NI Bancshares") acquisition completed late in the first quarter of 2016 and lower provision for loan losses also contributed to the increase in net income and earnings per share compared to the first six months of 2016.losses. A discussion of net interest income, noninterest income, noninterest expense, and noninterestincome tax expense is presented in the following section titled "Earnings Performance."
Total loans of $10.2$10.9 billion grew by $2.0 billion,$453.8 million, or 24.0%,8.7% annualized, from December 31, 2016. The growth was driven primarily by the acquisition of Standard.2017.
Non-performing assets to total loans plus OREO was 1.07%0.70% at June 30, 2017,2018, down from 1.12%0.89% and 1.07% at December 31, 2016,2017 and up from 0.94% at June 30, 2016.2017, respectively. See the following "Loan Portfolio and Credit Quality" section for further discussion of our loan portfolio, non-accrual loans, 90 days or more past due loans, TDRs, and OREO.


49
43



Table of Contents



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 to the Consolidated Financial Statements included in our 20162017 10-K.
Our accounting and reporting policies conform to GAAP and general practices 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. The effect of this adjustment is shown at the bottom of Tables 2 and 3. 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. For a discussion of non-GAAP financial measures, see the section of this Item 2 titled "Non-GAAP Financial Information and Reconciliations."
Table 2 summarizes our average interest-earning assets and interest-bearing liabilities for the quarters ended June 30, 20172018 and 2016,2017, the related interest income and interest expense for each earning asset category and funding source, and the average interest rates earned and paid. Table 2 also details differences in interest income and expense from the prior quarter and the extent to which any changes are attributable to volume and rate fluctuations. Table 3 presents this same information for the six months ended June 30, 20172018 and 2016.2017.


5044



Table of Contents



Table 2
Net Interest Income and Margin Analysis
(Dollar amounts in thousands)
Quarters Ended June 30, 
Attribution of Change
in Net Interest Income
Quarters Ended June 30, 
Attribution of Change
in Net Interest Income
2017 2016 2018 2017 
Average
Balance
 Interest 
Yield/
Rate (%)
  
Average
Balance
 Interest 
Yield/
Rate (%)
  Volume 
Yield/
Rate
 Total
Average
Balance
 Interest 
Yield/
Rate (%)
  
Average
Balance
 Interest 
Yield/
Rate (%)
  Volume 
Yield/
Rate
 Total
Assets                                      
Other interest-earning assets$262,206
 $686
 1.05  $300,945
 $426
 0.57  $(47) $307
 $260
$147,996
 $519
 1.41  $262,206
 $686
 1.05  $(764) $597
 $(167)
Securities (1)
1,983,341
 11,482
 2.32  1,721,781
 10,636
 2.47  1,445
 (599) 846
2,165,091
 13,322
 2.46  1,983,341
 11,482
 2.32  957
 883
 1,840
Federal Home Loan Bank
("FHLB") and Federal Reserve
Bank ("FRB") stock
57,073
 441
 3.09  42,561
 200
 1.88  83
 158
 241
80,038
 864
 4.32  57,073
 441
 3.09  213
 210
 423
Loans (1)(2)
10,064,119
 115,949
 4.62  7,883,806
 87,481
 4.46  25,080
 3,388
 28,468
10,788,285
 128,422
 4.77  10,064,119
 115,949
 4.62  8,532
 3,941
 12,473
Total interest-earning assets (1)(2)
12,366,739
 128,558
 4.17  9,949,093
 98,743
 3.99  26,561
 3,254
 29,815
13,181,410
 143,127
 4.35  12,366,739
 128,558
 4.17  8,938
 5,631
 14,569
Cash and due from banks188,886
      154,693
           197,025
      188,886
           
Allowance for loan losses(92,152)      (80,561)           (99,469)      (92,152)           
Other assets1,497,370
      945,291
           1,326,749
      1,497,370
           
Total assets$13,960,843
      $10,968,516
           $14,605,715
      $13,960,843
           
Liabilities and Stockholders' EquityLiabilities and Stockholders' Equity                  Liabilities and Stockholders' Equity                  
Savings deposits$2,072,343
 394
 0.08  $1,655,566
 292
 0.07  75
 27
 102
$2,060,066
 373
 0.07  $2,072,343
 394
 0.08  (2) (19) (21)
NOW accounts2,010,152
 663
 0.13  1,615,677
 245
 0.06  72
 346
 418
2,065,530
 1,472
 0.29  2,010,152
 663
 0.13  18
 791
 809
Money market deposits1,942,672
 648
 0.13  1,670,536
 454
 0.11  81
 113
 194
1,759,313
 1,073
 0.24  1,942,672
 648
 0.13  (54) 479
 425
Time deposits1,538,845
 2,024
 0.53  1,277,694
 1,491
 0.47  328
 205
 533
1,871,666
 5,114
 1.10  1,538,845
 2,024
 0.53  517
 2,573
 3,090
Borrowed funds553,046
 2,099
 1.52  461,363
 1,499
 1.31  411
 189
 600
913,902
 3,513
 1.54  553,046
 2,099
 1.52  1,387
 27
 1,414
Senior and subordinated debt194,819
 3,105
 6.39  162,836
 2,588
 6.39  510
 7
 517
195,385
 3,140
 6.45  194,819
 3,105
 6.39  21
 14
 35
Total interest-bearing
liabilities
8,311,877
 8,933
 0.43  6,843,672
 6,569
 0.39  1,477
 887
 2,364
8,865,862
 14,685
 0.66  8,311,877
 8,933
 0.43  1,887
 3,865
 5,752
Demand deposits3,538,049
      2,771,813
           3,621,645
      3,538,049
           
Total funding sources11,849,926
    9,615,485
         12,487,507
   0.47  11,849,926
   0.30       
Other liabilities280,381
      117,534
           227,481
      280,381
           
Stockholders' equity - common1,830,536
      1,235,497
           
Stockholders' equity – common
1,890,727
      1,830,536
           
Total liabilities and
stockholders' equity
$13,960,843
      $10,968,516
           $14,605,715
      $13,960,843
           
Tax-equivalent net interest
income/margin (1)
  119,625
 3.88    92,174
 3.72  $25,084
 $2,367
 $27,451
  128,442
 3.91    119,625
 3.88  $7,051
 $1,766
 $8,817
Tax-equivalent adjustment  (2,042)      (2,193)           (1,039)      (2,042)         
Net interest income (GAAP)  $117,583
      $89,981
           $127,403
      $117,583
         
Impact of acquired loan
accretion (1)
  $8,757
 0.28    $4,927
 0.20         $4,445
 0.14    $8,757
 0.28       
Tax-equivalent net interest income/
margin, excluding the impact of
acquired loan accretion (1)
  $110,868
 3.60    $87,247
 3.52       
Tax-equivalent net interest income/
margin, adjusted(1)
  $123,997
 3.77    $110,868
 3.60       
(1) 
Interest income and yields on tax-exempt securities and loans are presented on a tax-equivalent basis, assuming athe applicable federal income tax rate for each period presented. As a result, interest income and yields on tax-exempt securities and loans subsequent to December 31, 2017 are presented at the current federal income tax rate of 21% and the prior period is presented using the federal income tax rate applicable at that time of 35%. The corresponding income tax impact related to tax-exempt items is recorded in income tax expense. These adjustments have no impact on net income. For further details on the calculationa discussion of tax-equivalent net interest income/margin, net interest income (GAAP), and tax-equivalent net interest income/margin, excluding the impact of acquired loan accretion,non-GAAP financial measures, see the section of this Item 2 titled "Non-GAAP Financial Information and Reconciliations."
(2) 
Non-accrual loans, which totaled $53.5 million as of June 30, 2018 and $79.2 million as of June 30, 2017, are included in loans for purposes of this analysis. Additional detail regarding non-accrual loans is presented in the following section of this Item 2 titled "Non-performing Assets and $37.3Corporate Performing Potential Problem Loans."

45



Table of Contents





Table 3
Net Interest Income and Margin Analysis
(Dollar amounts in thousands)
 Six Months Ended June 30,  Attribution of Change
in Net Interest Income
 2018  2017  
 Average
Balance		 Interest Yield/
Rate (%)		  Average
Balance		 Interest Yield/
Rate (%)		  Volume Yield/
Rate		 Total
Assets                   
Other interest-earning assets$130,166
 $942
 1.46  $239,189
 $1,128
 0.95  $(789) $603
 $(186)
Securities(1)
2,114,439
 25,464
 2.41  2,002,144
 23,016
 2.30  1,128
 1,320
 2,448
FHLB and FRB stock78,469
 1,302
 3.32  55,654
 809
 2.91  367
 126
 493
Loans(1)(2)
10,644,581
 247,739
 4.69  9,992,713
 229,358
 4.63  15,134
 3,247
 18,381
Total interest-earning assets(1)(2)
12,967,655
 275,447
 4.28  12,289,700
 254,311
 4.17  15,840
 5,296
 21,136
Cash and due from banks189,452
      182,952
           
Allowance for loan losses(99,352)      (90,617)           
Other assets1,339,785
      1,435,744
           
Total assets$14,397,540
      $13,817,779
           
Liabilities and Stockholders' Equity                  
Savings deposits$2,037,995
 742
 0.07  $2,051,105
 794
 0.08  (5) (47) (52)
NOW accounts2,029,303
 2,520
 0.25  1,963,742
 1,141
 0.12  39
 1,340
 1,379
Money market deposits1,786,534
 1,897
 0.21  1,916,831
 1,267
 0.13  (80) 710
 630
Time deposits1,803,787
 9,052
 1.01  1,527,285
 3,736
 0.49  781
 4,535
 5,316
Borrowed funds886,253
 6,992
 1.59  643,068
 4,293
 1.35  1,823
 876
 2,699
Senior and subordinated debt195,314
 6,264
 6.47  194,749
 6,204
 6.43  18
 42
 60
Total interest-bearing
liabilities		8,739,186
 27,467
 0.63  8,296,780
 17,435
 0.42  2,576
 7,456
 10,032
Demand deposits3,544,666
      3,447,365
           
Total funding sources12,283,852
   0.45  11,744,145
   0.30       
Other liabilities231,567
      276,412
           
Stockholders' equity – common
1,882,121
      1,797,222
           
Total liabilities and
stockholders' equity		$14,397,540
      $13,817,779
           
Tax-equivalent net interest
income/margin(1)
  247,980
 3.85    236,876
 3.88  $13,264
 $(2,160) $11,104
Tax-equivalent adjustment  (2,014)      (4,096)         
Net interest income (GAAP)  $245,966
      $232,780
         
Impact of acquired loan
accretion(1)
  $9,557
 0.15    $20,102
 0.33       
Tax-equivalent net interest income/
  margin, adjusted(1)
  $238,423
 3.70    $216,774
 3.55       
(1)
Interest income and yields on tax-exempt securities and loans are presented on a tax-equivalent basis, assuming the applicable federal income tax rate for each period presented. As a result, interest income and yields on tax-exempt securities and loans subsequent to December 31, 2017 are presented at the current federal income tax rate of 21% and the prior period is presented using the federal income tax rate applicable at that time of 35%. The corresponding income tax impact related to tax-exempt items is recorded in income tax expense. These adjustments have no impact on net income. For a discussion of non-GAAP financial measures, see the section of this Item 2 titled "Non-GAAP Financial Information and Reconciliations."
(2)
Non-accrual loans, which totaled $53.5 million as of June 30, 2016,2018 and $79.2 million as of June 30, 2017, are included in loans for purposes of this analysis. Additional detail regarding non-accrual loans is presented in the following section of this Item 2 titled "Non-performing Assets and Corporate Performing Potential Problem Loans."


5146



Table of Contents



Table 3
Net Interest Income and Margin Analysis
(Dollar amounts in thousands)
 Six Months Ended June 30,  Attribution of Change
in Net Interest Income
 2017  2016  
 Average
Balance		 Interest Yield/
Rate (%)		  Average
Balance		 Interest Yield/
Rate (%)		  Volume Yield/
Rate		 Total
Assets                   
Other interest-earning assets$239,189
 $1,128
 0.95  $271,295
 $768
 0.57  $(78) $438
 $360
Securities (1)
2,002,144
 23,016
 2.30  1,608,621
 20,634
 2.57  4,143
 (1,761) 2,382
FHLB and FRB stock55,654
 809
 2.91  41,167
 359
 1.74  155
 295
 450
Loans (1)(2)
9,992,713
 229,358
 4.63  7,614,920
 166,837
 4.41  54,447
 8,074
 62,521
Total interest-earning assets (1)(2)
12,289,700
 254,311
 4.17  9,536,003
 188,598
 3.97  58,667
 7,046
 65,713
Cash and due from banks182,952
      143,981
           
Allowance for loan losses(90,617)      (78,108)           
Other assets1,435,744
      910,804
           
Total assets$13,817,779
      $10,512,680
           
Liabilities and Stockholders' Equity                  
Savings deposits$2,051,105
 794
 0.08  $1,615,370
 575
 0.07  166
 53
 219
NOW accounts1,963,742
 1,141
 0.12  1,532,172
 445
 0.06  153
 543
 696
Money market deposits1,916,831
 1,267
 0.13  1,627,217
 919
 0.11  178
 170
 348
Time deposits1,527,285
 3,736
 0.49  1,230,578
 2,928
 0.48  724
 84
 808
Borrowed funds643,068
 4,293
 1.35  382,298
 2,815
 1.48  1,893
 (415) 1,478
Senior and subordinated debt194,749
 6,204
 6.43  182,044
 5,721
 6.32  432
 51
 483
Total interest-bearing
liabilities		8,296,780
 17,435
 0.42  6,569,679
 13,403
 0.41  3,546
 486
 4,032
Demand deposits3,447,365
      2,617,415
           
Total funding sources11,744,145
      9,187,094
           
Other liabilities276,412
      118,543
           
Stockholders' equity - common1,797,222
      1,207,043
           
Total liabilities and
stockholders' equity		$13,817,779
      $10,512,680
           
Tax-equivalent net interest
income/margin (1)
  236,876
 3.88    175,195
 3.69  $55,121
 $6,560
 $61,681
Tax-equivalent adjustment  (4,096)      (4,500)         
Net interest income (GAAP)  $232,780
      $170,695
         
Impact of acquired loan
accretion (1)
  $20,102
 0.33    $7,350
 0.15       
Tax-equivalent net interest income/
  margin, excluding the impact of
  acquired loan accretion (1)
  $216,774
 3.55    $167,845
 3.54       

(1)
Interest income and yields on tax-exempt securities and loans are presented on a tax-equivalent basis, assuming a federal income tax rate of 35%. The corresponding income tax impact related to tax-exempt items is recorded in income tax expense. These adjustments have no impact on net income. For further details on the calculation of tax-equivalent net interest income/margin, net interest income and margin (GAAP), and tax-equivalent net interest income/margin, excluding the impact of acquired loan accretion, see the section of this Item 2 titled "Non-GAAP Financial Information and Reconciliations."
(2)
Non-accrual loans, which totaled $79.2 million as of June 30, 2017 and $37.3 million as of June 30, 2016, are included in loans for purposes of this analysis. Additional detail regarding non-accrual loans is presented in the following section of this Item 2 titled "Non-performing Assets and Corporate Performing Potential Problem Loans."
Net interest income increased by 30.7%8.4% and 36.4%5.7% compared to the second quarter and first six months of 2016,2017, respectively. Compared to both prior periods, the increase in net interest income was driven primarily by the acquisition of interest-earning assets and acquired loan accretion from the Standard transaction early in the first quarter of 2017. Higher interest rates and loan growth also contributed to the increaseThe rise in net interest income compared to both prior periods.

52



Tableperiods resulted primarily from the impact of Contents



higher interest rates and growth in loans and securities, partially offset by lower acquired loan accretion and higher cost of funds.
Acquired loan accretion contributed $8.8$4.4 million and $20.1$9.6 million to net interest income for the second quarter and first six months of 2017,2018, respectively, higherlower than $4.9$8.8 million and $7.4$20.1 million for the same periods in 2016.2017.
Tax-equivalent net interest margin for the second quarter and first six months of 2018 was 3.91% and 3.85%, respectively, compared to 3.88% for both the second quarter and first six months of 2017 was 3.88%, increasing by 16 and 19 basis points from2017. Compared to the same periods in 2016. The rise2017, the benefit of higher interest rates and growth in interest-earning assets more than offset the 14 and 18 basis point decrease in acquired loan accretion. In addition, tax-equivalent net interest margin was impacted by an 8 and 18 basis point increase in acquired loan accretion compared tofor the second quarter and first six months of 2016, respectively, and higher interest rates. In addition,2018 was negatively impacted by a 3 basis point reduction in the tax-equivalent adjustment as a result of lower federal income tax rates compared to the first six months of 2016, the impact of adding a greater mix of higher-yielding fixed-rate loans acquired from Standard contributed to the increase, which was more than offset by growthsame periods in the securities portfolio and the continued shift of loan originations and mix to lower-yielding floating rate loans.2017.
Total average interest-earning assets rose by $2.4 billion$814.7 million and $2.8 billion$678.0 million from the second quarter and first six months of 2016,2017, respectively. Compared to both prior periods, theThe increase resulted primarily from interest-earning assets acquired in the Standard transaction, loan growth and security purchases. In addition, interest-earning assets acquired in the NI Bancshares transaction contributed to the increase compared to the first six months of 2016.
Compared to the second quarter and first six months of 2016,2017, total average funding sources increased by $2.2 billion$637.6 million and $2.6 billion,$539.7 million, respectively. The increase compared to both prior periods resulted primarily from an increase in core and time deposits acquired in the Standard transaction and the addition of FHLB advances. Deposits acquired in the NI Bancshares transaction also contributed to the increase compared to the first six months

47



Table of 2016.Contents



Noninterest Income
A summary of noninterest income for the quarters and six months ended June 30, 20172018 and 20162017 is presented in the following table.
Table 4
Noninterest Income Analysis
(Dollar amounts in thousands)
 Quarters Ended 
 June 30,		   Six Months Ended 
 June 30,		   Quarters Ended 
 June 30,		   Six Months Ended 
 June 30,		  
 2017 2016 % Change 2017 2016 % Change 2018 2017 % Change 2018 2017 % Change
Service charges on deposit accounts $12,153
 $10,169
 19.5
 $23,518
 $19,642
 19.7
 $12,058
 $12,153
 (0.8) $23,710
 $23,518
 0.8
Wealth management fees 10,525
 8,642
 21.8
 20,185
 16,201
 24.6
 10,981
 10,525
 4.3
 21,939
 20,185
 8.7
Card-based fees (1)
 8,832
 7,592
 16.3
 16,948
 14,310
 18.4
Merchant servicing fees (2)
 3,197
 3,170
 0.9
 6,332
 6,198
 2.2
Card-based fees, net(1)(2):
            
Card-based fees 6,270
 8,832
 (29.0) 11,962
 16,948
 (29.4)
Cardholder expenses (1,876) —
 —
 (3,635) —
 —
Card-based fees, net 4,394
 8,832
 (50.2) 8,327
 16,948
 (50.9)
Capital market products income 2,217
 2,066
 7.3
 3,593
 5,281
 (32.0) 2,819
 2,217
 27.2
 4,377
 3,593
 21.8
Mortgage banking income 1,645
 1,863
 (11.7) 3,533
 3,231
 9.3
 1,736
 1,645
 5.5
 4,133
 3,533
 17.0
Merchant servicing fees, net(1)(3):
     

     

Merchant servicing fees 2,553
 3,197
 (20.1) 4,790
 6,332
 (24.4)
Merchant card expenses (2,170) —
 —
 (4,077) —
 —
Merchant servicing fees, net 383
 3,197
 (88.0) 713
 6,332
 (88.7)
Other service charges, commissions, and
fees
 2,659
 2,432
 9.3
 4,966
 4,665
 6.5
 2,455
 2,659
 (7.7) 4,673
 4,966
 (5.9)
Total fee-based revenues 41,228
 35,934
 14.7
 79,075
 69,528
 13.7
 34,826
 41,228
 (15.5) 67,872
 79,075
 (14.2)
Net securities gains (3)
 284
 23
 N/M
 284
 910
 (68.8)
Other income (4)
 3,433
 1,865
 84.1
 5,537
 3,310
 67.3
 2,121
 3,433
 (38.2) 4,592
 5,537
 (17.1)
Net securities gains —
 284
 (100.0) —
 284
 (100.0)
Total noninterest income $44,945
 $37,822
 18.8
 $84,896
 $73,748
 15.1
 $36,947
 $44,945
 (17.8) $72,464
 $84,896
 (14.6)
N/M - Not meaningful.Noninterest Income, Adjusted(5)

(Dollar amounts in thousands)
  Quarters Ended 
 June 30,		   Six Months Ended 
 June 30,		  
  2018 2017 % Change 2018 2017 % Change
Total noninterest income $36,947
 $44,945
 (17.8) $72,464
 $84,896
 (14.6)
Accounting reclassification(1)
 4,046
 —
 —
 7,712
 —
 —
Durbin Amendment(6)
 —
 (3,100) (100.0) —
 (6,000) (100.0)
Net securities gains —
 (284) (100.0) —
 (284) (100.0)
Total noninterest income, adjusted(5)
 $40,993
 $41,561
 (1.4) $80,176
 $78,612
 2.0
(1) 
As a result of accounting guidance adopted in the first quarter of 2018 (the "accounting reclassification"), certain noninterest income line items and the related noninterest expense line items that are presented on a gross basis for prior year periods are presented on a net basis in noninterest income for current year periods. For further discussion of this guidance, see Note 2 of "Notes to the Condensed Consolidated Financial Statements" in Part I, Item 1 of this Form 10-Q.
(2)
Card-based fees, consistnet consists of debit and credit card interchange fees for processing transactions, as well as various fees on both customerconsumer and non-customer automated teller machine ("ATM") and point-of-sale transactions processed through the ATM and point-of-sale networks.networks, as well as the related cardholder expense.
(2)(3) 
Merchant servicing fees, net are included in other service charges, commissions, and fees in the Condensed Consolidated Statements of Income. The related merchant card expense is included in noninterest expense for each period presented.
(3)
For a discussion of this item, see the section of this Item 2 titled "Investment Portfolio Management."
(4) 
Other income consists of various items, including bank-owned life insurance ("BOLI")BOLI income, safe deposit box rentals, miscellaneous recoveries, and gains on the sales of various assets.
Total fee-based revenues grew by 14.7% and 13.7% compared to the second quarter and first six months of 2016, respectively. Compared to both prior periods, the increase in fee-based revenues resulted primarily from services provided to customers acquired in the Standard and Premier transactions completed in the first quarter of 2017, organic growth in treasury management services, and a rise in card-based fees resulting from higher transaction volumes. In addition, the full quarter impact of customers acquired
(5)
See the "Non-GAAP Financial Information" section presented later in this release for a discussion of this non-GAAP financial measure.
(6)
Amount represents the impact of the Durbin Amendment, which became effective for the Company in the third quarter of 2017.

5348



Table of Contents



Total noninterest income of $36.9 million and $72.5 million for the second quarter and first six months of 2018, respectively, was down by 17.8% and 14.6%, respectively, compared to the same periods in the NI Bancshares transaction late in2017. In the first quarter of 2016 contributed to2018, the increase in fee-based revenues compared toCompany adopted accounting guidance which impacted how cardholder and merchant card expenses are presented within noninterest income on a prospective basis. As a result, these expenses are presented on a net basis against the related noninterest income for the second quarter and first six months of 2016.
Growth2018 versus a gross basis within noninterest expense for the same periods in capital market products2017. In addition, the Durbin Amendment became effective for the Company in the third quarter of 2017. Excluding these items and net securities gains, noninterest income, compared toadjusted was $41.0 million and $80.2 million for the second quarter and first six months of 2018, respectively, down modestly from the second quarter of 2016 was driven by increased sales to commercial clients. The decline in capital market products income2017 and up 2.0% from the first six months of 20162017.
The increase in wealth management fees compared to both prior periods was consistent with loan production during the first six months of 2017.
Mortgage banking income resulteddriven primarily fromby continued sales of $59.5 millionfiduciary and $114.1 million of 1-4 family mortgage loans ininvestment advisory services. Net card-based fees, excluding the secondary market duringaccounting reclassification and the Durbin Amendment, were up by 8.5% and 11.0% compared to the second quarter and first six months of 2017, respectively, up from sales of $52.1 million and $90.8 million for the same periods in 2016. In addition, mortgagedue to higher transaction volumes.
Mortgage banking income for the second quarter of 2017 was impacted by a decrease in the fair value of mortgage servicing rights, which fluctuates from quarter to quarter.
Total noninterest income increased by 18.8% and 15.1% from the second quarter and first six months of 2016, respectively.2018 resulted from sales of $64.3 million and $128.1 million, respectively, of 1-4 family mortgage loans in the secondary market, compared to $59.5 million and $114.1 million in the same periods of 2017. Compared to both prior periods, mortgage banking income was positively impacted by fair value adjustments on mortgage servicing rights, which fluctuate from quarter to quarter, partially offset by decreases in market pricing on sales of 1-4 family mortgage loans.
Capital market products income increased compared to both prior periods, which fluctuates from quarter to quarter based on the size and frequency of sales to corporate clients. Other income was elevated in the second quarter and first six months of 2017 was elevated due to net gains from the disposition of branch properties and other miscellaneous items.

49



Table of Contents



Noninterest Expense
A summary of noninterest expense for the quarters and six months ended June 30, 20172018 and 20162017 is presented in the following table.
Table 5
Noninterest Expense Analysis
(Dollar amounts in thousands)
 Quarters Ended 
 June 30,		   Six Months Ended 
 June 30,		   Quarters Ended 
 June 30,		   Six Months Ended 
 June 30,		  
 2017 2016 % Change 2017 2016 % Change 2018 2017 % Change 2018 2017 % Change
Salaries and employee benefits:                        
Salaries and wages $44,194
 $37,916
 16.6
 $89,084
 $74,212
 20.0
 $46,256
 $44,194
 4.7
 $92,086
 $89,084
 3.4
Retirement and other employee
benefits
 10,381
 8,351
 24.3
 21,263
 16,649
 27.7
 11,676
 10,381
 12.5
 22,633
 21,263
 6.4
Total salaries and employee
benefits
 54,575
 46,267
 18.0
 110,347
 90,861
 21.4
 57,932
 54,575
 6.2
 114,719
 110,347
 4.0
Net occupancy and equipment expense 12,485
 9,928
 25.8
 24,810
 19,625
 26.4
 13,651
 12,485
 9.3
 27,424
 24,810
 10.5
Professional services 9,112
 5,292
 72.2
 17,575
 11,212
 56.8
 8,298
 9,112
 (8.9) 15,878
 17,575
 (9.7)
Technology and related costs 4,485
 3,669
 22.2
 8,918
 7,370
 21.0
 4,837
 4,485
 7.8
 9,608
 8,918
 7.7
Merchant card expense (1)
 2,632
 2,724
 (3.4) 5,217
 5,322
 (2.0)
Advertising and promotions 1,693
 1,927
 (12.1) 2,759
 3,516
 (21.5) 2,061
 1,693
 21.7
 3,711
 2,759
 34.5
Cardholder expenses 1,682
 1,512
 11.2
 3,446
 2,871
 20.0
Net OREO expense 1,631
 1,122
 45.4
 3,331
 1,786
 86.5
 (256) 1,631
 (115.7) 812
 3,331
 (75.6)
Other expenses 10,282
 8,295
 24.0
 20,251
 15,742
 28.6
 11,878
 10,282
 15.5
 21,831
 20,251
 7.8
Delivering Excellence implementation
costs
 15,015
 —
 —
 15,015
 —
 —
Acquisition and integration related
expenses
 1,174
 618
 90.0
 19,739
 5,638
 250.1
 —
 1,174
 (100.0) —
 19,739
 (100.0)
Total noninterest expense $99,751
 $81,354
 22.6
 $216,393
 $163,943
 32.0
Merchant card expenses(1)
 —
 2,632
 (100.0) —
 5,217
 (100.0)
Cardholder expenses(1)
 —
 1,682
 (100.0) —
 3,446
 (100.0)
Total noninterest expense(1)
 $113,416
 $99,751
 13.7
 $208,998
 $216,393
 (3.4)

Noninterest Expense, Adjusted(2)
(Dollar amounts in thousands)
  Quarters Ended 
 June 30,		   Six Months Ended 
 June 30,		  
  2018 2017 % Change 2018 2017 % Change
Total noninterest expense $113,416
 $99,751
 13.7
 $208,998
 $216,393
 (3.4)
Delivering Excellence implementation
  costs
 (15,015) —
 —
 (15,015) —
 —
Accounting reclassification(1)
 4,046
 —
 —
 7,712
 —
 —
Acquisition and integration related
  expenses
 —
 (1,174) (100.0) —
 (19,739) (100.0)
Total noninterest expense, adjusted(2)
 $102,447
 $98,577
 3.9
 $201,695
 $196,654
 2.6
(1) 
TheAs a result of accounting guidance adopted in the first quarter of 2018, certain noninterest income line items and the related merchant servicing feesnoninterest expense line items that are includedpresented on a gross basis for prior year periods are presented on a net basis in noninterest income for each period presented.current year periods. For further discussion of this guidance, see Note 2 of "Notes to the Condensed Consolidated Financial Statements" in Part I, Item 1 of this Form 10-Q.
(2)
See the "Non-GAAP Financial Information" section presented later in this release for a discussion of this non-GAAP financial measure.
Total noninterest expense increased by 22.6%13.7% and 32.0%decreased by 3.4% compared to the second quarter and first six months of 2016, respectively, and was impacted by certain significant transactions including acquisition and integration related expenses associated with completed and pending acquisitions. Excluding these certain significant transactions, total noninterest expense increased by 22.1% and 24.2% from2017, respectively. During the second quarter and first six months of 2016, respectively.
Compared to both prior periods, the increase in total2018, noninterest expense excluding certain significant transactions, resulted largely from operatingwas impacted by costs associated withrelated to the Standard transaction,implementation of the Delivering Excellence initiative, which include property valuation adjustments on locations identified for closure, employee severance, and general restructuring and advisory services. In the first quarter of 2018, the Company adopted accounting guidance which impacted most categories. The fullhow cardholder and merchant card expenses are presented within noninterest income on a prospective basis. As a result, these expenses are presented on a net basis against the related noninterest income for the second quarter impact of the NI Bancshares transaction also contributed to the increase compared to theand first six months of 2016.
Excluding operating costs associated with completed acquisitions,2018 versus a gross basis within noninterest expense for the rise in salariesprior periods. Expenses for the quarter and employee benefits compared to both prior periods was alsofirst six months of 2017 were impacted by merit increasesacquisition and investments in additional talent to support growth, partially offset by higher deferred salaries due to loan growth. Higher loan remediationintegration related expenses and certain costs associated with organizational growth contributedrelated to the increase in professional services compared to both prior periods presented. The decrease in advertising andacquisition of Standard

5450



Table of Contents



promotionsBancshares, Inc ("Standard"). Excluding these items, noninterest expense for the second quarter and first six months of 2018 was $102.4 million and $201.7 million, up by 3.9% and 2.6% from the same periods in 2017.
The increase in salaries and employee benefits compared to the second quarter and first six months of 2016 resulted from2017 was driven primarily by merit increases, the timingdistribution of certain advertising costs. Net OREO expense increased from both prior periods due primarilyhigher pension plan lump-sum payments to higher valuation adjustments.
Acquisitionretired employees, and integration relatedorganizational growth. Professional services expenses fordecreased compared to the second quarter and first six months of 2017 resulted fromas the acquisitions of Standardprior year was impacted by certain costs associated with organizational growth and Premier during the first quarter of 2017. Forhigher loan remediation expenses. Compared to the second quarter and first six months of 2016, acquisition2017, the rise in advertising and integration related expensespromotions expense resulted from the acquisitiontiming of NI Bancshares duringcertain advertising costs. The decrease in net OREO expense compared to both prior periods resulted primarily from higher levels of operating income and lower valuation adjustments. Other expenses increased compared to both prior periods as a result of property valuation adjustments related to the Company's corporate headquarters relocation and higher other miscellaneous expenses.
Compared to both prior periods, net occupancy and equipment expenses increased due largely to higher costs related to the Company's corporate headquarters relocation. In addition, net occupancy and equipment expenses compared to the first quartersix months of 2016. These expenses fluctuate based on the size and timing2017 increased as a result of each transaction.higher costs related to winter weather conditions.
Income Taxes
Our provision for income taxes includes both federal and state income tax expense. An analysis of the provision for income taxes for the quarters and six months ended June 30, 20172018 and 20162017 is detailed in the following table.
Table 6
Income Tax Expense Analysis
(Dollar amounts in thousands)
 Quarters Ended 
 June 30,		 Six Months Ended 
 June 30,		 Quarters Ended 
 June 30,		 Six Months Ended 
 June 30,
 2017 2016 2017 2016 2018 2017 2018 2017
Income before income tax expense $54,538
 $38,364
 $88,126
 $64,822
 $39,320
 $54,538
 $82,637
 $88,126
Income tax expense:                
Federal income tax expense $16,159
 $10,732
 $25,053
 $17,833
 $7,623
 $16,159
 $14,769
 $25,053
State income tax expense 3,429
 2,365
 5,268
 3,760
 2,097
 3,429
 4,758
 5,268
Total income tax expense $19,588
 $13,097
 $30,321
 $21,593
 $9,720
 $19,588
 $19,527
 $30,321
Effective income tax rate 35.9% 34.1% 34.4% 33.3% 24.7% 35.9% 23.6% 34.4%
Federal income tax expense 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 and state income taxes. State income tax expense and the related effective tax rate are driven by the amount of state tax-exempt income in relation to pre-tax income and state tax rules related to consolidated/combined reporting and sourcing of income and expense.
The increasedecrease in total income tax expense and the effective tax rate for the quarter and six months ended June 30, 20172018 compared to the same periods in 2016 resulted2017 was driven primarily by the reduction in the federal income tax rate from higher35% to 21%, which became effective in the first quarter of 2018 as a result of federal income tax reform. In addition, the first six months of 2018 and 2017 were impacted by income tax benefits of $1.0 million and $638,000, respectively, related to employee share-based payments.
Total income tax expense for the quarter and six months ended June 30, 2018 was down by 50.4% and 35.6%, respectively, compared to the same periods in the prior year. These decreases were driven primarily by the decrease in the federal income tax rate and lower levels of income subject to tax at statutory rates, andpartially offset by a decrease in tax-exempt income. For the six months ended June 30, 2017, this increase was partly offset by tax benefits of $638,000 related to the implementation of Financial Accounting Standards Board ("FASB") guidance on employee share-based payments recognized in the first quarter of 2017.
On July 6, 2017, Illinois enacted legislation increasing the overall corporate income and replacement tax rate from 7.75% to 9.50%. The rate increase, effective on July 1, 2017, will increase the Company's effective tax rate and expense in future quarters, which is not expected to be material, and will also result in a non-cash tax benefit related to the write-up of deferred tax assets in the third quarter of 2017.
Our accounting policies regarding the recognition of income taxes in the Consolidated Statements of Financial Condition and Income are described in Notes 1 and 15 to the Consolidated Financial Statements of our 20162017 10-K.

51



Table of Contents



FINANCIAL CONDITION
Investment Portfolio Management
Securities that we have the 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. TradingEquity securities are carried at fair value and consist primarily of community development investments and certain diversified investment securities held in a grantor trust for ourparticipants in the Company's nonqualified deferred compensation plan that are invested in money market and are not considered part of the traditional investment portfolio.mutual funds. 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.

55



Table of Contents



From time to time, we adjust the size and composition of our securities portfolio based on 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.
Table 7
Investment Portfolio
(Dollar amounts in thousands)
 As of June 30, 2017 As of December 31, 2016 As of June 30, 2018 As of December 31, 2017
 
Amortized
Cost
 
Net
Unrealized
Gains
(Losses)
 Fair Value % of Total 
Amortized
Cost
 
Net
Unrealized
Gains
(Losses)
 Fair Value % of Total 
Amortized
Cost
 
Net
Unrealized
Gains
(Losses)
 Fair Value % of Total 
Amortized
Cost
 
Net
Unrealized
Gains
(Losses)
 Fair Value % of Total
Securities Available-for-SaleSecurities Available-for-Sale              Securities Available-for-Sale              
U.S. treasury securities $48,568
 $(85) $48,483
 2.5 $48,581
 $(40) $48,541
 2.5 $49,455
 $(297) $49,158
 2.3 $46,529
 $(184) $46,345
 2.5
U.S. agency securities 174,757
 301
 175,058
 9.2 183,528
 109
 183,637
 9.6 150,443
 (2,159) 148,284
 6.9 157,636
 (789) 156,847
 8.3
Collateralized mortgage
obligations ("CMOs")
 1,017,896
 (11,732) 1,006,164
 52.7 1,064,130
 (16,684) 1,047,446
 54.6 1,270,304
 (37,874) 1,232,430
 57.5 1,113,019
 (17,833) 1,095,186
 58.1
Other mortgage-backed
securities ("MBSs")
 377,043
 (3,383) 373,660
 19.6 337,139
 (4,484) 332,655
 17.3 450,512
 (12,876) 437,636
 20.4 373,676
 (4,133) 369,543
 19.6
Municipal securities 262,906
 1,496
 264,402
 13.9 273,319
 (2,473) 270,846
 14.1 222,034
 (3,689) 218,345
 10.2 209,558
 (567) 208,991
 11.1
Trust-preferred
collateralized debt
obligations ("CDOs")
 47,740
 (14,286) 33,454
 1.7 47,681
 (14,421) 33,260
 1.7
Corporate debt securities 57,867
 (855) 57,012
 2.7 —
 —
 —
 —
Equity securities(1) 7,106
 (79) 7,027
 0.4 3,206
 (141) 3,065
 0.2 —
 —
 —
 — 7,408
 (111) 7,297
 0.4
Total securities
available-for-sale
 $1,936,016
 $(27,768) $1,908,248
 100.0 $1,957,584
 $(38,134) $1,919,450
 100.0 $2,200,615
 $(57,750) $2,142,865
 100.0 $1,907,826
 $(23,617) $1,884,209
 100.0
Securities Held-to-MaturitySecurities Held-to-Maturity           Securities Held-to-Maturity           
Municipal securities $17,353
 $(2,454) $14,899
 
 $22,291
 $(4,079) $18,212
  $13,042
 $(2,124) $10,918
 
 $13,760
 $(1,747) $12,013
 
Equity Securities(1)
     $28,441
     $—
 
Trading Securities(1)
     $—
     $20,447
 
(1)
As a result of accounting guidance adopted in the first quarter of 2018, equity securities are no longer presented within trading securities or securities available-for-sale and are now presented within equity securities in the Consolidated Statements of Financial Condition for the current period. For further discussion of this guidance, see Note 2 of "Notes to the Condensed Consolidated Financial Statements" in Part I, Item 1 of this Form 10-Q.
Portfolio Composition
As of June 30, 2017,2018, our securities available-for-sale portfolio totaled $1.9$2.1 billion, consistent withincreasing by $258.7 million, or 13.7%, from December 31, 2016.
Approximately 98%2017. The increase from December 31, 2017 was driven primarily by purchases of our securities available-for-sale portfolio is comprised of U.S. treasury securities, U.S. agency securities, CMOs, MBSs, and municipal securities. The remainder consistscorporate debt securities in light of eleven CDOs with a fair value of $33.5 million and miscellaneous other securities with a fair value of $7.0 million.current market conditions.
Investments in municipal securities comprised $264.4 million, or 13.9%, of the total securities available-for-sale portfolio at June 30, 2017. The majority consistsconsist of general obligations of local municipalities in various states. Our municipal securities portfolio has historically experienced very low default rates and provides a predictable cash flow.

5652



Table of Contents



Table 8
Securities Effective Duration Analysis
As of June 30, 2017 As of December 31, 2016As of June 30, 2018 As of December 31, 2017
Effective Average Yield to Effective Average Yield toEffective Average Yield to Effective Average Yield to
Duration (1)
 
Life (2)
 
Maturity (3)
 
Duration (1)
 
Life (2)
 
Maturity (3)
Duration(1)
 
Life(2)
 
Maturity(3)
 
Duration(1)
 
Life(2)
 
Maturity(3)
Securities Available-for-Sale                      
U.S. treasury securities0.90% 0.92
 1.00% 1.39% 1.42
 0.99%1.04% 1.07
 1.74% 1.01% 1.03
 1.30%
U.S. agency securities1.87% 3.28
 1.66% 2.65% 3.89
 1.55%1.81% 3.34
 2.09% 1.80% 3.22
 1.74%
CMOs3.46% 4.29
 2.08% 3.76% 4.49
 1.88%3.91% 4.86
 2.57% 3.36% 4.51
 2.35%
MBSs3.90% 5.29
 2.24% 4.15% 5.62
 2.07%4.31% 5.68
 2.56% 3.77% 5.29
 2.30%
Municipal securities4.17% 2.42
 3.39% 4.17% 2.51
 3.85%4.78% 5.15
 2.59% 4.47% 4.87
 3.04%
CDOsN/M
 N/M
 N/M
 N/M
 N/M
 N/M
Equity securitiesN/M
 N/M
 N/M
  N/M
  N/M
 N/M
Corporate debt securities0.03% 7.59
 3.36% N/M
 N/M
 N/M
Total securities available-for-sale3.43% 4.05
 2.23% 3.72% 4.27
 2.14%3.77% 4.94
 2.54% 3.38% 4.51
 2.34%
Securities Held-to-Maturity                      
Municipal securities5.93% 8.01
 4.42% 6.47% 9.08
 3.98%5.09% 6.98
 3.61% 5.33% 7.15
 4.55%
N/M -– Not meaningful.
(1) 
The effective duration represents the estimated percentage change in the fair value of the securities portfolio given a 100 basis point increase or decrease in interest rates. This measure is used to evaluate the portfolio's price volatility at a single point in time and is not intended to be a precise predictor of future fair values since those values will be influenced by a number of factors.
(2) 
Average life is presented in years and represents the weighted-average time to receive half of all 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 athe applicable federal income tax rate of 35%.for each period presented.
Effective Duration
The average life and effective duration of our securities available-for-sale portfolio was 4.054.94 years and 3.43%3.77%, respectively, as of June 30, 2017, down2018, up from 4.274.51 years and 3.72%3.38% as of December 31, 2016.2017. The decreaseincrease resulted primarily from maturitiespurchases of CMOs, MBSs, and sales of investmentcorporate debt securities, that were reinvested into lower-duration CMOs and MBSs.as well as higher rates.
Realized Gains and Losses
There were $284,000 ofno net securities gains or impairment charges recognized during the second quarter and first six months of 2018. For both the second quarter and first six months of 2017, there were $284,000 of net securities gains recognized on securities with carrying values of $30.7 million. In addition, $214.1 million of securities were acquired in the Standard transaction during the first quarter of 2017, of which $210.2 million of securities acquired in the Standard transaction were sold shortly after the acquisition date and resulted in no gains or losses as they were recorded at fair value upon acquisition. No impairment charges were recognized during the second quarter or first six months of 2017.
Net securities gains for the second quarter and first six months of 2016 were $23,000 and $910,000, respectively, on securities with carrying values of $8.0 million and $38.6 million for the same periods. No impairment charges were recognized during the second quarter or first six months of 2016.
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.net of deferred income taxes. This balance sheet component will fluctuate as current market interest rates and conditions change and affect the aggregate fair value of the portfolio. AsHigher market rates drove the rise in net unrealized losses to $57.8 million as of June 30, 2017, net unrealized losses totaled $27.8 million compared to net unrealized losses of $38.12018 from $23.6 million as of December 31, 2016.

57



Table of Contents



2017.
Net unrealized losses in the CMO and MBS portfolio totaled $11.7$37.9 million and $12.9 million, respectively, as of June 30, 20172018, compared to $16.7$17.8 million and $4.1 million for the same portfolios as of December 31, 2016.2017. CMOs and MBSs 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 June 30, 20172018 represents other-than-temporary securities impairment ("OTTI") related to credit deterioration. In addition, we do not intend to sell the CMOs or MBSs with unrealized losses 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 investments in CDOs are supported by the credit
53



Table of the underlying banks and insurance companies. The net unrealized losses on these securities were $14.3 million as of June 30, 2017 and $14.4 million as of December 31, 2016. We do not believe the unrealized losses on the CDOs as of June 30, 2017 represent OTTI related to credit deterioration. In addition, we do not intend to sell the CDOs with unrealized losses 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 is described in Note 15 of "Notes to the Condensed Consolidated Financial Statements," in Part I, Item 1 of this Form 10-Q.Contents



LOAN PORTFOLIO AND CREDIT QUALITY
Portfolio Composition
Our loan portfolio is comprised of both corporate and consumer loans, with corporate loans representing 82.4%80.7% of total loans atas of June 30, 2017.2018. Consistent with our emphasis on relationship banking, the majority of our corporate loans are made to our core, multi-relationship customers. The customers usually maintain deposit relationships and utilize our other banking services, such as treasury or wealth management services.
To maximize loan income within an acceptable level of risk, we have certain lending policies and procedures that management reviews on a regular basis. In addition, management receives periodic reporting related to loan production, loan quality, credit concentrations, loan delinquencies, and non-performing and corporate performing potential problem loans to monitor and mitigate potential and current risks in the portfolio.
Table 9
Loan Portfolio
(Dollar amounts in thousands)
 As of  
 June 30, 2017		 
% of
Total Loans
 
As of
December 31, 2016
 % of
Total Loans		 % Change As of  
 June 30, 2018		 
% of
Total Loans
 
As of
December 31, 2017
 % of
Total Loans		 % Change
Commercial and industrial $3,410,748
 33.3 $2,827,658
 34.3 20.6 $3,844,067
 35.3 $3,529,914
 33.8 8.9
Agricultural 433,424
 4.2 389,496
 4.7 11.3 433,175
 4.0 430,886
 4.1 0.5
Commercial real estate:                    
Office, retail, and industrial 1,983,802
 19.4 1,581,967
 19.2 25.4 1,834,918
 16.8 1,979,820
 19.0 (7.3)
Multi-family 681,032
 6.7 614,052
 7.4 10.9 703,091
 6.5 675,463
 6.5 4.1
Construction 543,892
 5.3 451,540
 5.4 20.5 633,601
 5.8 539,820
 5.2 17.4
Other commercial real estate 1,383,937
 13.5 979,528
 11.9 41.3 1,337,396
 12.3 1,358,515
 13.0 (1.6)
Total commercial real estate 4,592,663
 44.9 3,627,087
 43.9 26.6 4,509,006
 41.4 4,553,618
 43.7 (1.0)
Total corporate loans 8,436,835
 82.4 6,844,241
 82.9 23.3 8,786,248
 80.7 8,514,418
 81.6 3.2
Home equity 865,656
 8.5 747,983
 9.1 15.7 847,903
 7.8 827,055
 7.9 2.5
1-4 family mortgages 614,818
 6.0 423,922
 5.1 45.0 880,181
 8.1 774,357
 7.4 13.7
Installment 314,850
 3.1 237,999
 2.9 32.3 377,233
 3.4 321,982
 3.1 17.2
Total consumer loans 1,795,324
 17.6 1,409,904
 17.1 27.3 2,105,317
 19.3 1,923,394
 18.4 9.5
Total loans $10,232,159
 100.0 $8,254,145
 100.0 24.0 $10,891,565
 100.0 $10,437,812
 100.0 4.3
Total loans of $10.2$10.9 billion grewincreased by 24.0%8.8%, annualized, from December 31, 2016. Excluding loans acquired in the Standard transaction, total loans grew by 4.5% from December 31, 2016. The addition of 1-4 family mortgages, installment loans, and shorter-duration, floating rate home equity loans contributed to the increase in total loans. In addition, growth2017. Growth in commercial and industrial loans, primarily within our sector-based lending business units,businesses, multi-family, and multi-familyconstruction loans contributed todrove the increaserise in total corporate loans.

58



Table The rise in construction loans was due to line draws on existing credits. The overall decline in office, retail, and industrial and other commercial real estate loans resulted primarily from the decision of Contents



certain customers to opportunistically sell their commercial businesses and investment real estate properties, as well as expected payoffs. Growth in consumer loans compared to December 31, 2017 benefited from the impact of purchases of shorter-duration home equity loans, 1-4 family mortgages, and installment loans, as well as organic production.
Commercial, Industrial, and Agricultural Loans
Commercial, industrial, and agricultural loans represent 37.5%39.3% of total loans, and totaled $3.8$4.3 billion at June 30, 2017,2018, an increase of $627.0$316.4 million, or 19.5%8.0%, from December 31, 2016.2017. Our commercial and industrial loans are a diverse group of loans generally located in the Chicago metropolitan area with purposes that range frominclude supporting seasonal working capital needs, to termaccounts receivable financing, of equipment.inventory and equipment financing, and select sector-based lending, such as healthcare, asset-based lending, structured finance, and syndications. Our commercial and industrial portfolio does not have significant direct exposure to the oil and gas industry. Most commercial and industrial loans are secured by the assets being financed or other business assets, such as accounts receivable or inventory. The underlying collateral securing commercial and industrial loans may fluctuate in value due to the success of the business or economic conditions. For loans secured by accounts receivable, the availability of funds for repayment and economic conditions may impact the cash flow of the borrower. Accordingly, 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 and may incorporate a personal guarantee.

54



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. Seasonal crop production loans are repaid by the liquidation of the financed crop that is typically covered by crop insurance. Equipment and real estate term loans are repaid through cash flows of the farming operation. Risks uniquely inherent in agricultural loans relate to weather conditions, agricultural product pricing, and loss of crops or livestock due to disease or other factors. Therefore, as part of the underwriting process, the Company examines projected future cash flows, financial statement stability, and the value of the underlying collateral.
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. In addition, many commercial real estate loans do not fully amortize over the term of the loan, but have balloon payments due at maturity. The borrower's ability to make a balloon payment may depend on the availability of long-term financing or their ability to complete a timely sale of the underlying property. Management monitors and evaluates commercial real estate loans based on cash flow, collateral, geography, and risk rating criteria.
Construction loans are generally based on estimates of costs and values 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 financing from long-term lenders,financing, 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.

59



Table of Contents



The following table presents commercial real estate loan detail as of June 30, 20172018 and December 31, 2016.2017.
Table 10
Commercial Real Estate Loans
(Dollar amounts in thousands)
 As of  
 June 30, 2017		 % of
Total		 As of
December 31, 2016		 % of
Total		 As of  
 June 30, 2018		 % of
Total		 As of
December 31, 2017		 % of
Total
Office, retail, and industrial:          
Office $847,041
 18.4 $599,572
 16.5 $747,986
 16.6 $844,413
 18.5
Retail 465,459
 10.1 412,614
 11.4 466,480
 10.3 471,781
 10.4
Industrial 671,302
 14.6 569,781
 15.7 620,452
 13.8 663,626
 14.6
Total office, retail, and industrial 1,983,802
 43.1 1,581,967
 43.6 1,834,918
 40.7 1,979,820
 43.5
Multi-family 681,032
 14.8 614,052
 16.9 703,091
 15.6 675,463
 14.8
Construction 543,892
 11.8 451,540
 12.4 633,601
 14.0 539,820
 11.8
Other commercial real estate:          
Multi-use properties 337,913
 7.4 236,430
 6.5 327,210
 7.3 330,926
 7.3
Rental properties 205,056
 4.5 159,134
 4.4 181,478
 4.0 197,579
 4.3
Warehouses and storage 162,226
 3.5 136,853
 3.8 163,252
 3.6 172,505
 3.8
Hotels 128,673
 2.8 97,016
 2.1
Restaurants 127,945
 2.8 63,067
 1.7 115,908
 2.6 112,547
 2.5
Hotels 96,711
 2.1 41,780
 1.2
Service stations and truck stops 96,402
 2.1 51,403
 1.5 102,520
 2.3 107,834
 2.4
Recreational 85,319
 1.9 58,390
 1.6 81,090
 1.8 87,986
 1.9
Automobile dealers 50,481
 1.1 53,671
 1.4 35,737
 0.8 39,020
 0.9
Religious 36,108
 0.8 38,319
 1.1
Other 185,776
 4.1 140,481
 3.9 201,528
 4.5 213,102
 4.7
Total other commercial real estate 1,383,937
 30.3 979,528
 27.1 1,337,396
 29.7 1,358,515
 29.9
Total commercial real estate $4,592,663
 100.0 $3,627,087
 100.0 $4,509,006
 100.0 $4,553,618
 100.0
Commercial real estate loans represent 44.9%41.4% of total loans, and totaled $4.6$4.5 billion at June 30, 2017, increasing2018, decreasing by $965.6$44.6 million, or 26.6%1.0%, from December 31, 2016.2017.

55



Table of Contents



The mix of properties securing the loans in our commercial real estate portfolio is balanced between owner-occupied and investor categories and is diverse in terms of type and geographic location, generally within the Company's markets. Approximately 44%43% of the commercial real estate portfolio, excluding multi-family and construction loans, is owner-occupied as of June 30, 2017.2018. Using outstanding loan balances, non-owner occupiednon-owner-occupied commercial real estate loans to total capital was 217%210% and construction loans to total capital was 31%35% as of June 30, 2017.2018. Non-owner-occupied (investor) commercial real estate is calculated in accordance with federal banking agency guidelines and includes construction, multi-family, non-farm non-residential property, and commercial real estate loans that are not secured by real estate loans.collateral.
Consumer Loans
Consumer loans represent 17.6%19.3% of total loans, and totaled $1.8$2.1 billion at June 30, 2017,2018, an increase of $385.4$181.9 million, or 27.3%9.5%, from December 31, 2016.2017. Consumer loans are centrally underwritten using a credit scoring model developed by the Fair Isaac Corporation ("FICO"), which employs a risk-based system to determine the probability a borrower may default. 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. Repayment for these loans is dependent on the borrower's continued financial stability, and is more likely to be impacted by adverse personal circumstances.

6056



Table of Contents



Non-performing Assets and Corporate 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 Condensed Consolidated Financial Statements" in Part 1, Item 1 of this Form 10-Q.
Table 11
Loan Portfolio by Performing/Non-Performing Status
(Dollar amounts in thousands)
Accruing    Accruing    
PCI (1)
 Current 
30-89 Days
Past Due
 
90 Days
Past Due
 
Non-accrual (2)
 
Total
Loans
As of June 30, 2017           
��
PCI(1)
 Current 
30-89 Days
Past Due
 
90 Days
Past Due
 
Non-accrual(2)
 
Total
Loans
As of June 30, 2018           
Commercial and industrial$20,267
 $3,331,149
 $6,382
 $1,550
 $51,400
 $3,410,748
$2,234
 $3,799,454
 $18,163
 $1,544
 $22,672
 $3,844,067
Agricultural9,704
 422,954
 379
 —
 387
 433,424
2,481
 424,807
 1,477
 1,418
 2,992
 433,175
Commercial real estate:  
          
        
Office, retail, and industrial18,924
 1,948,347
 1,500
 —
 15,031
 1,983,802
11,947
 1,807,196
 5,366
 1,402
 9,007
 1,834,918
Multi-family14,399
 665,238
 1,128
 109
 158
 681,032
13,014
 683,906
 351
 2,269
 3,551
 703,091
Construction15,319
 527,701
 675
 —
 197
 543,892
4,888
 628,155
 107
 243
 208
 633,601
Other commercial real estate66,700
 1,311,176
 2,261
 64
 3,736
 1,383,937
56,805
 1,268,396
 6,316
 591
 5,288
 1,337,396
Total commercial real estate115,342
 4,452,462
 5,564
 173
 19,122
 4,592,663
86,654
 4,387,653
 12,140
 4,505
 18,054
 4,509,006
Total corporate loans145,313
 8,206,565
 12,325
 1,723
 70,909
 8,436,835
91,369
 8,611,914
 31,780
 7,467
 43,718
 8,786,248
Home equity2,779
 854,327
 3,383
 41
 5,126
 865,656
1,947
 837,412
 3,145
 —
 5,399
 847,903
1-4 family mortgages19,045
 591,662
 950
 —
 3,161
 614,818
17,296
 857,016
 1,470
 41
 4,358
 880,181
Installment1,229
 310,903
 2,423
 295
 —
 314,850
996
 373,015
 2,776
 446
 —
 377,233
Total consumer loans23,053
 1,756,892
 6,756
 336
 8,287
 1,795,324
20,239
 2,067,443
 7,391
 487
 9,757
 2,105,317
Total loans$168,366
 $9,963,457
 $19,081
 $2,059
 $79,196
 $10,232,159
$111,608
 $10,679,357
 $39,171
 $7,954
 $53,475
 $10,891,565
As of December 31, 2016           
As of December 31, 2017           
Commercial and industrial$2,167
 $2,788,891
 $6,288
 $374
 $29,938
 $2,827,658
$5,450
 $3,458,049
 $24,005
 $1,830
 $40,580
 $3,529,914
Agricultural512
 388,067
 —
 736
 181
 389,496
7,203
 423,007
 280
 177
 219
 430,886
Commercial real estate:  
          
        
Office, retail, and industrial12,398
 1,546,078
 5,085
 1,129
 17,277
 1,581,967
14,575
 1,950,564
 2,776
 345
 11,560
 1,979,820
Multi-family12,225
 600,054
 858
 604
 311
 614,052
14,071
 657,878
 3,117
 20
 377
 675,463
Construction4,442
 446,480
 332
 —
 286
 451,540
8,778
 530,264
 198
 371
 209
 539,820
Other commercial real estate12,219
 961,709
 1,182
 1,526
 2,892
 979,528
64,675
 1,287,522
 2,380
 317
 3,621
 1,358,515
Total commercial real estate41,284
 3,554,321
 7,457
 3,259
 20,766
 3,627,087
102,099
 4,426,228
 8,471
 1,053
 15,767
 4,553,618
Total corporate loans43,963
 6,731,279
 13,745
 4,369
 50,885
 6,844,241
114,752
 8,307,284
 32,756
 3,060
 56,566
 8,514,418
Home equity615
 738,213
 3,581
 109
 5,465
 747,983
2,745
 815,014
 3,252
 98
 5,946
 827,055
1-4 family mortgages14,949
 403,521
 2,241
 272
 2,939
 423,922
18,080
 750,555
 1,310
 —
 4,412
 774,357
Installment1,459
 234,805
 1,476
 259
 —
 237,999
1,113
 318,065
 2,407
 397
 —
 321,982
Total consumer loans17,023
 1,376,539
 7,298
 640
 8,404
 1,409,904
21,938
 1,883,634
 6,969
 495
 10,358
 1,923,394
Total loans$60,986
 $8,107,818
 $21,043
 $5,009
 $59,289
 $8,254,145
$136,690
 $10,190,918
 $39,725
 $3,555
 $66,924
 $10,437,812
(1) 
PCI loans with an accretable yield are considered current.
(2) 
Includes PCI loans of $243,000$748,000 and $682,000$763,000 as of June 30, 20172018 and December 31, 2016,2017, respectively, which no longer have an accretable yield as estimates of expected future cash flows have decreased since the acquisition date due to credit deterioration.


6157



Table of Contents



The following table provides a comparison of our non-performing assets and past due loans to prior periods.
Table 12
Non-Performing Assets and Past Due Loans
(Dollar amounts in thousands)
As ofAs of
June 30,
2017		 March 31,
2017		 December 31,
2016		 September 30,
2016		 June 30,
2016		June 30,
2018		 March 31,
2018		 December 31,
2017		 September 30,
2017		 June 30,
2017
Non-accrual loans$79,196
 $54,294
 $59,289
 $44,289
 $37,312
$53,475
 $75,015
 $66,924
 $65,176
 $79,196
90 days or more past due loans, still
accruing interest (1)
2,059
 2,633
 5,009
 4,318
 5,406
7,954
 4,633
 3,555
 2,839
 2,059
Total non-performing loans81,255
 56,927
 64,298
 48,607
 42,718
61,429
 79,648
 70,479
 68,015
 81,255
Accruing TDRs2,029
 2,112
 2,291
 2,368
 2,491
1,760
 1,778
 1,796
 1,813
 2,029
OREO26,493
 29,140
 26,083
 28,049
 29,990
12,892
 17,472
 20,851
 19,873
 26,493
Total non-performing assets$109,777
 $88,179
 $92,672
 $79,024
 $75,199
$76,081
 $98,898
 $93,126
 $89,701
 $109,777
30-89 days past due loans (1)
$19,081
 $23,641
 $21,043
 $26,140
 $23,380
$39,171
 $42,573
 $39,725
 $28,868
 $19,081
Non-accrual loans to total loans0.77% 0.54% 0.72% 0.54% 0.47%0.49% 0.70% 0.64% 0.63% 0.77%
Non-performing loans to total loans0.79% 0.57% 0.78% 0.59% 0.54%0.56% 0.75% 0.68% 0.65% 0.79%
Non-performing assets to total loans plus
OREO
1.07% 0.87% 1.12% 0.96% 0.94%0.70% 0.92% 0.89% 0.86% 1.07%
(1) 
PCI loans with an accretable yield are considered current and are not included in past due loan totals.
Total non-performing assets represented 1.07%0.70% of total loans and OREO at June 30, 2017,2018, down from 1.12%0.89% and 1.07% at December 31, 20162017 and up from 0.94% at June 30, 2016. Included in non-performing assets as of June 30, 2017, was $6.9 millionrespectively. The decline in OREO compared to prior periods resulted from sales of OREO acquired in the Standard transaction.
properties. Non-accrual loans increaseddecreased by $19.9$13.4 million from December 31, 2016,2017 due primarily to the transferfinal resolution of two corporate loan relationships to non-accrual status, which was driven by operating pressures unique to these borrowers. The Company has established specific reserves and implemented remediation plans associated with these borrowers.relationships.

6258



Table of Contents



TDRs
Loan modifications may be performed at the request of an 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 restructured loans remain classified as TDRs for the remaining term of these loans.
Table 13
TDRs by Type
(Dollar amounts in thousands)
As ofAs of
June 30, 2017 December 31, 2016 June 30, 2016June 30, 2018 December 31, 2017 June 30, 2017
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 industrial4
 $1,164
 3
 $431
 4
 $575
6
 $7,100
 11
 $19,223
 4
 $1,164
Commercial real estate:                      
Office, retail, and industrial2
 860
 3
 4,888
 1
 159
2
 501
 4
 4,236
 2
 860
Multi-family3
 737
 3
 754
 3
 768
2
 566
 3
 723
 3
 737
Other commercial real estate1
 197
 3
 316
 3
 329
1
 187
 1
 192
 1
 197
Total commercial real estate6
 1,794
 9
 5,958
 7
 1,256
5
 1,254
 8
 5,151
 6
 1,794
Total corporate loans10
 2,958
 12
 6,389
 11
 1,831
11
 8,354
 19
 24,374
 10
 2,958
Home equity16
 939
 16
 997
 16
 1,112
13
 554
 15
 824
 16
 939
1-4 family mortgages11
 1,168
 11
 1,202
 11
 1,238
11
 1,090
 11
 1,131
 11
 1,168
Total consumer loans27
 2,107
 27
 2,199
 27
 2,350
24
 1,644
 26
 1,955
 27
 2,107
Total TDRs37
 $5,065
 39
 $8,588
 38
 $4,181
35
 $9,998
 45
 $26,329
 37
 $5,065
Accruing TDRs16
 $2,029
 18
 $2,291
 20
 $2,491
13
 $1,760
 14
 $1,796
 16
 $2,029
Non-accrual TDRs21
 3,036
 21
 6,297
 18
 1,690
22
 8,238
 31
 24,533
 21
 3,036
Total TDRs37
 $5,065
 39

$8,588
 38
 $4,181
35
 $9,998
 45

$26,329
 37
 $5,065
Year-to-date charge-offs on TDRs  $113
   $1,492
   $239
  $3,672
   $6,345
   $113
Specific reserves related to TDRs  —
   —
   —
  625
   1,977
   —
As of June 30, 2017,2018, TDRs totaled $5.1$10.0 million, decreasing by $3.5$16.3 million or 41.0%, from December 31, 2016. This2017. The decrease resultedfrom December 31, 2017 was driven primarily fromby paydowns and the final resolution of aone non-accrual commercial loancorporate relationship during the first six months of 2017.2018.

6359



Table of Contents



Corporate Performing Potential Problem Loans
Corporate performing potential problem loans consist of special mention loans and substandard loans, excluding accruing TDRs. These loans are performing in accordance with their contractual terms, but we have concerns about the ability of the borrower to continue to comply with loan terms due to the borrower's operating or financial difficulties.
Table 14
Corporate Performing Potential Problem Loans
(Dollar amounts in thousands)
 As of June 30, 2017 As of December 31, 2016
 
Special
Mention (1)
 
Substandard (2)
 
Total (3)
 
Special
Mention (1)
 
Substandard (2)
 
Total (3)
Commercial and industrial$67,252
 $92,822
 $160,074
 $92,340
 $66,266
 $158,606
Agricultural14,464
 8,604
 23,068
 17,039
 5,894
 22,933
Commercial real estate:           
Office, retail, and industrial27,894
 44,550
 72,444
 33,852
 39,513
 73,365
Multi-family4,655
 1,877
 6,532
 3,972
 2,029
 6,001
Construction8,739
 11,910
 20,649
 111
 12,197
 12,308
Other commercial real estate21,137
 20,682
 41,819
 11,808
 13,544
 25,352
Total commercial real estate62,425
 79,019
 141,444
 49,743
 67,283
 117,026
Total corporate performing
  potential problem loans (4)
$144,141
 $180,445
 $324,586
 $159,122
 $139,443
 $298,565
Corporate performing potential
  problem loans to corporate
  loans
1.71% 2.14% 3.85% 2.33% 2.04% 4.36%
Corporate PCI performing
  potential problem loans
  included in the totals above
$12,298
 $39,949
 $52,247
 $1,868
 $13,598
 $15,466

 As of June 30, 2018 As of December 31, 2017
 
Special
Mention(1)
 
Substandard(2)
 
Total(3)
 
Special
Mention(1)
 
Substandard(2)
 
Total(3)
Commercial and industrial$122,881
 $49,633
 $172,514
 $70,863
 $30,074
 $100,937
Agricultural8,474
 6,666
 15,140
 10,989
 5,732
 16,721
Commercial real estate85,114
 58,463
 143,577
 72,749
 69,228
 141,977
Total corporate performing
  potential problem loans(4)
$216,469
 $114,762
 $331,231
 $154,601
 $105,034
 $259,635
Corporate performing potential
  problem loans to corporate
  loans
2.46% 1.31% 3.77% 1.82% 1.23% 3.05%
Corporate PCI performing
  potential problem loans
  included in the totals above
$14,546
 $22,022
 $36,568
 $17,685
 $26,635
 $44,320
(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 well-defined 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 corporate performing potential problem loans excludes accruing TDRs of $669,000$645,000 as of June 30, 20172018 and $834,000$657,000 as of December 31, 2016.2017.
(4) 
Includes corporate PCI performing potential problem loans.

Corporate performing potential problem loans were 3.9% ofto corporate loans was 3.77% at June 30, 2017, lower than 4.4%2018, increasing from 3.05% at December 31, 2016. The Standard acquisition added corporate performing potential problem2017, which resulted primarily from higher levels of commercial and industrial loans that were designatedclassified as PCI.

64



Table of Contents



special mention. Management has specific monitoring and remediation plans associated with these loans.
OREO
OREO consists of properties acquired as the result of borrower defaults on loans. OREO was $26.5 million at June 30, 2017, consistent with December 31, 2016 and down from $30.0 million at June 30, 2016. As of June 30, 2017, total OREO includes $6.9 million that was acquired in the Standard transaction.
Table 15
OREO by Type
(Dollar amounts in thousands)
 As of As of
 June 30, 2017 December 31, 2016 June 30, 2016 June 30, 2018 December 31, 2017 June 30, 2017
Single-family homes $1,243
 $2,595
 $4,200
 $633
 $837
 $1,243
Land parcels:            
Raw land 868
 1,464
 1,464
 148
 850
 868
Commercial lots 9,852
 8,176
 9,059
 5,006
 8,698
 9,852
Single-family lots 2,150
 947
 1,110
 1,962
 2,150
 2,150
Total land parcels 12,870
 10,587
 11,633
 7,116
 11,698
 12,870
Multi-family units 48
 48
 164
 225
 48
 48
Commercial properties 12,332
 12,853
 13,993
 4,918
 8,268
 12,332
Total OREO $26,493
 $26,083
 $29,990
 $12,892
 $20,851
 $26,493

60



Table of Contents



OREO Activity
A rollforward of OREO balances for the quarters and six months ended June 30, 20172018 and 20162017 is presented in the following table.
Table 16
OREO Rollforward
(Dollar amounts in thousands)
 Quarters Ended June 30, Six Months Ended June 30, Quarters Ended June 30, Six Months Ended June 30,
 2017 2016 2017 2016 2018 2017 2018 2017
Beginning balance $29,140
 $29,649
 $26,083
 $27,782
 $17,472
 $29,140
 $20,851
 $26,083
Transfers from loans 1,299
 2,733
 1,982
 3,675
 235
 1,299
 1,172
 1,982
Acquisitions (3) —
 8,424
 2,863
 —
 (3) —
 8,424
Proceeds from sales (3,112) (2,212) (8,476) (3,852) (4,762) (3,112) (8,638) (8,476)
Gains (losses) on sales of OREO 215
 28
 59
 (133)
Gains on sales of OREO 35
 215
 15
 59
OREO valuation adjustments (1,046) (208) (1,579) (345) (88) (1,046) (508) (1,579)
Ending balance $26,493
 $29,990
 $26,493
 $29,990
 $12,892
 $26,493
 $12,892
 $26,493
Allowance for Credit Losses
Methodology for the Allowance for Credit Losses
The allowance for credit losses is comprised of the allowance for loan losses and the reserve for unfunded commitments and is maintained by management at a level believed adequate to absorb estimated losses inherent in the existing loan portfolio. Determination of the allowance for credit losses is 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.date for such loans. As the acquisition adjustment is accreted into income over future periods, an allowance for credit losses is established as necessary to reflect credit deterioration. In addition, certain acquired loans that have renewed subsequent to their respective acquisition dates are no longer classified as acquired loans. Instead, they are included with our loan population that is allocated an allowance in accordance with our allowance for loan losses methodology.

65



Table of Contents



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 is an appropriate estimate of credit losses inherent in the loan portfolio as of June 30, 2017.2018.
The accounting policy for the allowance for credit losses is discussed in Note 1 of "Notes to the Condensed Consolidated Financial Statements" in Part I, Item 1 of this Form 10-Q.

61



Table of Contents



An allowance for credit losses is established on loans originated by the Bank, acquired loans, and covered loans. Additional discussion regarding acquired and covered loans can be found in NoteNotes 1 and 6 of "Notes to the Condensed Consolidated Financial Statements" in Part I, Item 1 of this Form 10-Q. The following table provides additional details related to acquired loans, the allowance for credit losses as related to acquired loans, and the remaining acquisition adjustment associated with acquired loans as of June 30, 20172018 and December 31, 2016.2017.
Table 17
Allowance for Credit Losses and Acquisition Adjustment
(Dollar amounts in thousands)
 Loans, Excluding Acquired Loans 
Acquired Loans (1)
 Total Loans, Excluding Acquired Loans 
Acquired Loans(1)
 Total
Six months ended June 30, 2017      
Six months ended June 30, 2018      
Beginning balance $84,217
 $2,866
 $87,083
 $94,123
 $2,606
 $96,729
Net charge-offs (6,390) (479) (6,869) (25,178) (655) (25,833)
Provision for loan losses and other expense 12,595
 562
 13,157
 26,795
 —
 26,795
Ending balance $90,422
 $2,949
 $93,371
 $95,740
 $1,951
 $97,691
As of June 30, 2017      
As of June 30, 2018      
Total loans $8,229,968
 $2,002,191
 $10,232,159
 $9,568,000
 $1,323,565
 $10,891,565
Remaining acquisition adjustment (2)
 N/A
 90,268
 90,268
 N/A
 66,083
 66,083
Allowance for credit losses to total loans (3)
 1.10% 0.15% 0.91% 1.00% 0.15% 0.90%
Remaining acquisition adjustment to acquired loans N/A
 4.51% N/A
 N/A
 4.99% N/A
As of December 31, 2016      
As of December 31, 2017      
Total loans $7,620,100
 $634,045
 $8,254,145
 $8,822,560
 $1,615,252
 $10,437,812
Remaining acquisition adjustment (2)
 N/A
 22,574
 22,574
 N/A
 74,677
 74,677
Allowance for credit losses to total loans (3)
 1.11% 0.45% 1.06% 1.07% 0.16% 0.93%
Remaining acquisition adjustment to acquired loans N/A
 3.56% N/A
 N/A
 4.62% N/A
N/A -– Not applicable.
(1) 
These amounts and ratios relate to the loans acquired in completed acquisitions.
(2) 
The remaining acquisition adjustment consists of $52.8$38.4 million and $37.5$27.7 million relating to PCI and non-purchased credit impaired ("Non-PCI") loans, respectively, as of June 30, 2017,2018, and $10.8$43.5 million and $11.8$31.2 million relating to PCI and Non-PCI loans, respectively, as of December 31, 2016.2017.
(3) 
The allowance for credit losses to total loans, excluding acquired loans is a non-GAAP financial measure. For a discussion of non-GAAP financial measures, see the section of this Item 2 titled "Non-GAAP Financial Information and Reconciliations."
Excluding acquired loans, the allowance for credit losses to total loans was 1.10%1.00% as of June 30, 2017.2018. The acquisition adjustment increaseddecreased by $67.7$8.6 million during the first six months of 2017,2018, driven primarily by the Standard transaction. This was partially offset by acquired loan accretion, resulting in a remaining acquisition adjustment as a percent of acquired loans of 4.51%4.99%. Acquired loans that are renewed are no longer classified as acquired loans. These loans totaled $233.6$419.8 million and $117.6$366.0 million as of June 30, 20172018 and December 31, 2016,2017, respectively, and are included in loans, excluding acquired loans, in the table above and allocated an allowance in accordance with our allowance for loan losses methodology. In addition, there is an allowance for credit losses of $2.9$2.0 million on acquired loans.

6662



Table of Contents



Table 18
Allowance for Credit Losses and
and Summary of Credit Loss Experience
(Dollar amounts in thousands)
 Quarters Ended
 June 30,
2017		 March 31,
2017		 December 31,
2016		 September 30,
2016		 June 30,
2016
Change in allowance for credit losses         
Beginning balance$89,163
 $87,083
 $86,308
 $81,505
 $78,375
Loan charge-offs:         
Commercial, industrial, and agricultural2,957
 4,074
 4,298
 1,760
 2,026
Office, retail, and industrial—
 127
 349
 2,193
 1,641
Multi-family—
 —
 19
 —
 84
Construction39
 5
 —
 —
 8
Other commercial real estate307
 408
 99
 509
 879
Consumer1,556
 1,664
 1,256
 1,488
 1,495
Total loan charge-offs4,859
 6,278
 6,021
 5,950
 6,133
Recoveries of loan charge-offs:         
Commercial, industrial, and agricultural400
 1,666
 758
 615
 576
Office, retail, and industrial8
 975
 184
 42
 8
Multi-family6
 28
 2
 69
 1
Construction12
 227
 12
 9
 20
Other commercial real estate79
 101
 210
 94
 69
Consumer323
 443
 323
 326
 329
Total recoveries of loan charge-offs828
 3,440
 1,489
 1,155
 1,003
Net loan charge-offs4,031
 2,838
 4,532
 4,795
 5,130
Provision for loan losses8,239
 4,918
 5,307
 9,998
 8,085
(Decrease) increase in reserve for unfunded
  commitments (1)
—
 —
 —
 (400) 175
Total provision for loan losses and other
  expense
8,239
 4,918
 5,307
 9,598
 8,260
Ending balance$93,371
 $89,163
 $87,083
 $86,308
 $81,505

(1)
Included in other noninterest income in the Condensed Consolidated Statements of Income.



67



Table of Contents



Quarters EndedQuarters Ended
June 30,
2017		 March 31,
2017		 December 31,
2016		 September 30,
2016		 June 30,
2016		June 30,
2018		 March 31,
2018		 December 31,
2017		 September 30,
2017		 June 30,
2017
Change in allowance for credit losses         
Beginning balance$95,854
 $96,729
 $95,814
 $93,371
 $89,163
Loan charge-offs:         
Commercial, industrial, and agricultural8,662
 14,670
 6,919
 8,935
 2,957
Office, retail, and industrial305
 461
 49
 14
 —
Multi-family4
 —
 —
 —
 —
Construction—
 —
 —
 (6) 39
Other commercial real estate1
 69
 34
 6
 307
Consumer2,337
 1,885
 2,118
 1,617
 1,556
Total loan charge-offs11,309
 17,085
 9,120
 10,566
 4,859
Recoveries of loan charge-offs:         
Commercial, industrial, and agricultural753
 538
 1,386
 698
 400
Office, retail, and industrial26
 97
 127
 1,825
 8
Multi-family—
 —
 3
 2
 6
Construction8
 13
 12
 19
 12
Other commercial real estate359
 39
 39
 25
 79
Consumer386
 342
 444
 331
 323
Total recoveries of loan charge-offs1,532
 1,029
 2,011
 2,900
 828
Net loan charge-offs9,777
 16,056
 7,109
 7,666
 4,031
Provision for loan losses11,614
 15,181
 8,024
 10,109
 8,239
Ending balance$97,691
 $95,854
 $96,729
 $95,814
 $93,371
Allowance for credit losses                  
Allowance for loan losses$92,371
 $88,163
 $86,083
 $85,308
 $80,105
$96,691
 $94,854
 $95,729
 $94,814
 $92,371
Reserve for unfunded commitments1,000
 1,000
 1,000
 1,000
 1,400
1,000
 1,000
 1,000
 1,000
 1,000
Total allowance for credit losses$93,371
 $89,163
 $87,083
 $86,308
 $81,505
$97,691
 $95,854
 $96,729
 $95,814
 $93,371
Allowance for credit losses to loans (1)
0.91% 0.89% 1.06% 1.06% 1.02%0.90% 0.90% 0.93% 0.92% 0.91%
Allowance for credit losses to loans, excluding
acquired loans (2)
1.10% 1.11% 1.11% 1.13% 1.11%1.00% 1.01% 1.07% 1.09% 1.10%
Allowance for credit losses to
non-accrual loans
117.90% 164.22% 146.88% 194.87% 218.44%182.69% 127.78% 144.54% 147.01% 117.90%
Allowance for credit losses to
non-performing loans
114.91% 156.63% 135.44% 177.56% 190.80%159.03% 120.35% 137.25% 140.87% 114.91%
Average loans$10,059,968
 $9,916,281
 $8,171,953
 $8,062,035
 $7,878,544
$10,785,341
 $10,496,089
 $10,380,689
 $10,273,630
 $10,059,968
Net loan charge-offs to average loans,
annualized
0.16% 0.12% 0.22% 0.24% 0.26%0.36% 0.62% 0.27% 0.30% 0.16%
(1) 
This ratio includes acquired loans that are recorded at fair value through an acquisition adjustment, which incorporates credit risk as of the acquisition date with no allowance for credit losses being established at that time. As the acquisition adjustment is accreted into income over future periods, an allowance for credit losses is established as necessary to reflect credit deterioration. See the Allowance for Credit Losses and Acquisition Adjustment table above for further discussion of the allowance for acquired loan losses and the related acquisition adjustment.
(2) 
The allowance for credit losses to total loans, excluding acquired loansThis item is a non-GAAP financial measure. For a discussion of non-GAAP financial measures, see the section of this Item 2 titled "Non-GAAP Financial Information and Reconciliations."
Activity in the Allowance for Credit Losses
The allowance for credit losses was $93.4$97.7 million as of June 30, 2017, an increase of $6.3 million from December 31, 2016,2018 and represents 0.91%0.90% of total loans compared to 1.06%0.93% at December 31, 2016.2017.
The provision for loan losses was $8.2$11.6 million for the quarter ended June 30, 2017, increasing2018, up from $5.3$8.0 million and consistent with $8.1$8.2 million for the quarters ended December 31, 20162017 and June 30, 2016,2017, respectively. The increase compared to the quarter ended December 31, 20162017 resulted primarily from higher levels of net charge-offs and loan growth.
Total net loan charge-offs to average loans for the second quarter of 2017 was 16 basis points, or $4.0 million, decreasing from 22 and 26 basis points for both the fourth and second quarters of 2016, respectively.

6863



Table of Contents



Net loan charge-offs to average loans, annualized, were 0.36%, or $9.8 million, for the second quarter of 2018, up from 0.27% and 0.16% for the fourth quarter of 2017 and second quarter of 2017, respectively. Charge-offs for the second quarter of 2018 include the final resolution of certain commercial and industrial relationships.
FUNDING AND LIQUIDITY MANAGEMENT
The following table provides a comparison of average funding sources. We believe that average balances, rather than period-end balances, are more meaningful in analyzing funding sources because of the normal fluctuations that may occur on a daily or monthly basis within funding categories.
Table 19
Funding Sources -– Average Balances
(Dollar amounts in thousands)
Quarters Ended June 30, 2017 % Change FromQuarters Ended June 30, 2018 % Change From
June 30,
2017		 December 31,
2016		 June 30,
2016		  December 31,
2016		 June 30,
2016		June 30,
2018		 December 31,
2017		 June 30,
2017		  December 31,
2017		 June 30,
2017
Demand deposits$3,538,049
 $2,803,016
 $2,771,813
  26.2
 27.6
$3,621,645
 $3,611,811
 $3,538,049
  0.3
 2.4
Savings deposits2,072,343
 1,633,010
 1,655,566
  26.9
 25.2
2,060,066
 2,017,489
 2,072,343
  2.1
 (0.6)
NOW accounts2,010,152
 1,715,228
 1,615,677
  17.2
 24.4
2,065,530
 1,992,150
 2,010,152
  3.7
 2.8
Money market accounts1,942,672
 1,623,392
 1,670,536
  19.7
 16.3
1,759,313
 1,938,195
 1,942,672
  (9.2) (9.4)
Core deposits9,563,216
 7,774,646
 7,713,592
  23.0
 24.0
9,506,554
 9,559,645
 9,563,216
  (0.6) (0.6)
Time deposits1,516,531
 1,196,243
 1,254,218
  26.8
 20.9
1,860,561
 1,613,681
 1,516,531
  15.3
 22.7
Brokered deposits22,314
 16,805
 23,476
  32.8
 (4.9)11,105
 6,077
 22,314
  82.7
 (50.2)
Total time deposits1,538,845
 1,213,048
 1,277,694
  26.9
 20.4
1,871,666
 1,619,758
 1,538,845
  15.6
 21.6
Total deposits11,102,061
 8,987,694
 8,991,286
  23.5
 23.5
11,378,220
 11,179,403
 11,102,061
  1.8
 2.5
Securities sold under agreements to
repurchase
122,961
 122,866
 118,232
  0.1
 4.0
114,726
 119,797
 122,961
  (4.2) (6.7)
Federal funds purchased714
 —
 —
  N/M
 N/M
FHLB advances430,085
 495,109
 342,445
  (13.1) 25.6
798,462
 434,837
 430,085
  83.6
 85.7
Other borrowings—
 —
 686
  N/M
 N/M
Total borrowed funds553,046
 617,975
 461,363
  (10.5) 19.9
913,902
 554,634
 553,046
  64.8
 65.2
Senior and subordinated debt194,819
 259,531
 162,836
  (24.9) 19.6
195,385
 195,102
 194,819
  0.1
 0.3
Total funding sources$11,849,926
 $9,865,200
 $9,615,485
  20.1
 23.2
$12,487,507
 $11,929,139
 $11,849,926
  4.7
 5.4
Average interest rate paid on
borrowed funds
1.52% 1.10% 1.31%     1.54% 1.62% 1.52%     
Weighted-average maturity of FHLB
advances
1.1 months
 0.9 months
 1.5 months
     1.1 months
 1.0 months
 1.1 months
     
Weighted-average interest rate of
FHLB advances
1.08% 0.60% 0.51%     2.05% 1.26% 1.08%     
N/M -– Not meaningful.
Total average funding sources for the second quarter of 20172018 increased by $2.0 billion,$558.4 million, or 20.1%4.7%, compared to the fourthfirst quarter of 20162018 and $2.2 billion,$637.6 million, or 23.2%5.4%, compared to the second quarter of 2016.2017. The rise in average core depositsincrease compared to both prior periods resulted primarily from $1.7 billionan increase in core deposits assumed in the Standard transaction, which contributed $1.6 billion to average core deposits in the second quarter of 2017, as well as organic growth. The addition of FHLB advances also contributedas related interest rate swaps became effective and a rise in time deposits due to the risecontinued success of promotions which started in average funding sources compared to the second quarter of 2016.2017.

6964



Table of Contents



Table 20
Borrowed Funds
(Dollar amounts in thousands)
As of June 30, 2017 As of June 30, 2016As of June 30, 2018 As of June 30, 2017
Amount 
Weighted-
Average
Rate (%)
  Amount 
Weighted-
Average
Rate (%)
Amount 
Weighted-
Average
Rate (%)
  Amount 
Weighted-
Average
Rate (%)
At period-end:                
Securities sold under agreements to repurchase$124,333
 0.08  $124,744
 0.06$111,044
 0.08  $124,333
 0.08
FHLB advances515,000
 1.08  325,000
 0.51870,000
 2.05  515,000
 1.08
Total borrowed funds$639,333
 0.89  $449,744
 0.39$981,044
 1.83  $639,333
 0.89
Average for the year-to-date period:                
Securities sold under agreements to repurchase$124,572
 0.06  $130,586
 0.10$117,275
 0.07  $124,572
 0.06
Federal funds purchased6,022
 1.64  —
 —
FHLB advances518,496
 1.66  251,066
 2.19762,956
 1.82  518,496
 1.66
Other borrowings—
 —  646
 3.74
Total borrowed funds$643,068
 1.35  $382,298
 1.48$886,253
 1.59  $643,068
 1.35
Maximum amount outstanding at the end of any day during the period: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$140,764
    $174,266
  $128,553
    $140,764
  
Federal funds purchased65,000
  —
 
FHLB advances940,000
    425,000
  945,000
    940,000
  
Other borrowings—
  2,400
 
Average borrowed funds totaled $643.1$886.3 million for the first six monthssecond quarter of 2017,2018, increasing by $260.8$243.2 million compared to the same period in 2016.2017. This increase was due primarily to higher levels of FHLB advances during the first six months of 2017.advances. The weighted-average rate on FHLB advances for both periods presented was impacted by the hedging of $415.0$710.0 million and $325.0$415.0 million in FHLB advances as of June 30, 20172018 and 2016,2017, respectively, using interest rate swaps through which the Company receives variable amounts and pays fixed amounts. The weighted-average interest rate paid on these interest rate swaps was 2.17%1.91% and 2.19%2.17% as of June 30, 20172018 and 2016,2017, respectively. For a detailed discussion of interest rate swaps, see Note 139 of "Notes to the Condensed Consolidated Financial Statements" in Part I, Item 1 of this Form 10-Q.
Securities sold under agreements to repurchase generally mature within 1 to 90 days from the transaction date.
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. On January 1, 2015, the Company and the Bank became subject to the Basel III Capital rules, a new comprehensive capital framework for U.S. banking organizations published by the Federal Reserve. These rules are discussed in the "Supervision and Regulation" section in Item 1, "Business" in the Company's 20162017 10-K. In addition, financial institutions, such as the Company and the Bank, with average total consolidated assets greater than $10 billion arewere previously required by the Dodd-Frank Act to conduct an annual company-run stress test of capital. Thecapital, report results to the Federal Reserve, and publicly disclose a summary of the results. As a result of regulatory reform signed into law during the second quarter of 2018, the Company submitted its first required stress test report for the July 31, 2017 reporting date and the Bank will become subjectare no longer required to perform these stress test requirements starting with the July 31, 2018 reporting date.actions.
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." We manage our capital levels for both the Company and the Bank to consistently maintain these measurements in excess of the Federal Reserve's minimum levels to be considered "well-capitalized," which is the highest capital category established. All regulatory mandated ratios for characterization as "well-capitalized" were exceeded as of June 30, 20172018 and December 31, 2016.2017.

7065



Table of Contents



The tangible common equity 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 a discussion of non-GAAP financial measures, see the section of this Item 2 titled "Non-GAAP Financial Information and Reconciliations."
Table 21
Capital Measurements
(Dollar amounts in thousands)
    As of June 30, 2017    As of June 30, 2018
As of 
Regulatory
Minimum
For
Well-
Capitalized
  As of 
Regulatory
Minimum
For
Well-
Capitalized
  
June 30, 
 2017		 December 31, 2016 Excess Over
Required Minimums		June 30, 
 2018		 December 31, 2017 Excess Over
Required Minimums
Bank regulatory capital ratios                  
Total capital to risk-weighted assets10.83% 10.73% 10.00% 8% $98,616
10.77% 10.95% 10.00% 8% $95,369
Tier 1 capital to risk-weighted assets10.04% 9.83% 8.00% 26% $242,451
9.98% 10.13% 8.00% 25% $243,907
Common equity Tier 1 to risk-weighted assets10.04% 9.83% 6.50% 55% $420,356
CET1 to risk-weighted assets9.98% 10.13% 6.50% 54% $428,578
Tier 1 capital to average assets9.12% 8.76% 5.00% 82% $538,054
8.86% 9.10% 5.00% 77% $534,989
Company regulatory capital ratios                  
Total capital to risk-weighted assets11.69% 12.23% N/A
 N/A
 N/A
12.07% 12.15% N/A
 N/A
 N/A
Tier 1 capital to risk-weighted assets9.71% 9.90% N/A
 N/A
 N/A
10.09% 10.10% N/A
 N/A
 N/A
Common equity Tier 1 to risk-weighted assets9.30% 9.39% N/A
 N/A
 N/A
CET1 to risk-weighted assets9.68% 9.68% N/A
 N/A
 N/A
Tier 1 capital to average assets8.93% 8.99% N/A
 N/A
 N/A
8.95% 8.99% N/A
 N/A
 N/A
Company tangible common equity ratios (1)(2)
                  
Tangible common equity to tangible assets8.20% 8.05% N/A
 N/A
 N/A
8.04% 8.33% N/A
 N/A
 N/A
Tangible common equity, excluding
accumulated other comprehensive loss, to
tangible assets
8.48% 8.42% N/A
 N/A
 N/A
8.50% 8.58% N/A
 N/A
 N/A
Tangible common equity to risk-weighted
assets
8.90% 8.88% N/A
 N/A
 N/A
9.16% 9.31% N/A
 N/A
 N/A
N/A -– Not applicable.
(1) 
Ratios are not subject to formal Federal Reserve regulatory guidance.
(2) 
Tangible common equity ratios are non-GAAP financial measures. For a discussion of non-GAAP financial measures, see the section of this Item 2 titled "Non-GAAP Financial Information and Reconciliations."
Overall, the Company's regulatory capital ratios decreased compared to December 31, 20162017, due primarily to the Standardimpact of loan growth on risk-weighted assets and Premier acquisitions, which was partlythe nearly 10 basis point impact of the phase-in of certain provisions related to regulatory capital ratio calculations, substantially offset by an increase in retained earnings over the first six months of 2017.earnings.
The Board of Directors reviews the Company's capital plan each quarter, considering the current and expected operating environment as well as an evaluation ofevaluating various capital alternatives.
Dividends
The Board of Directors approved a quarterly cash dividend of $0.10$0.11 per common share during the second quarter of 2017, an2018, which follows a dividend increase from $0.09$0.10 to $0.11 per common share during the first quarter of 2017.2018 and represents the 142nd consecutive quarterly cash dividend paid by the Company since its inception in 1983.

7166



Table of Contents



NON-GAAP FINANCIAL INFORMATION AND RECONCILIATIONS
The Company's accounting and reporting policies conform to GAAP and general practices within the banking industry. As a supplement to GAAP, the Company provides non-GAAP performance results, which the Company believes are useful because they assist investors in assessing the Company's operating performance. These non-GAAP financial measures include earnings per share ("EPS"), excluding certain significant transactions,adjusted, the efficiency ratio, return on average assets, excluding certain significant transactions,adjusted, tax-equivalent net interest income (including its individual components), tax-equivalent net interest margin, tax-equivalent net interest margin, excluding the impact of acquired loan accretion,adjusted, noninterest income, adjusted, noninterest expense, adjusted, tangible common equity to tangible assets, tangible common equity, excluding accumulated other comprehensive loss, to tangible assets, tangible common equity to risk-weighted assets, return on average common equity, adjusted, return on average tangible common equity, return on average tangible common equity, excluding certain significant transactions,adjusted, and allowance for credit losses to loans, excluding acquired loans.
The Company presents EPS, the efficiency ratio, return on average assets, return on average common equity, and return on average tangible common equity, all excludingadjusted for certain significant transactions. Certain significantThese transactions include Delivering Excellence implementation costs (second quarter and first six months of 2018) and acquisition and integration related expenses for all periods presented.(second quarter and first six months of 2017). Management believes excluding these transactions from EPS, the efficiency ratio, return on average assets, return on average common equity, and return on average tangible common equity are useful in assessing the Company's underlying operational performance since these transactions do not pertain to its core business operations and their exclusion facilitates better comparability between periods. Management believes that excluding acquisition and integration related expenses from these metrics is useful to the Company, as well as analysts and investors, since these expenses can vary significantly based on the size, type, and structure of each acquisition. Additionally, management believes excluding these transactions from these metrics enhances comparability for peer comparison purposes.
The Company presents noninterest income, adjusted, which excludes the accounting reclassification, the Durbin Amendment, and net securities gains, and noninterest expense, adjusted, which excludes the accounting reclassification, Delivering Excellence implementation costs, and acquisition and integration related expenses. Management believes that excluding these items from noninterest income and noninterest expense is useful in assessing the Company's underlying operational performance as these items either do not pertain to its core business operations or their exclusion facilitates better comparability between periods and for peer comparison purposes.
The tax-equivalent adjustment to net interest income and net interest margin recognizes the income tax savings when comparing taxable and tax-exempt assetsassets. Interest income and assumes ayields on tax-exempt securities and loans subsequent to December 31, 2017 are presented using the current federal income tax rate of 21% and prior periods are computed using the federal income tax rate applicable at that time of 35% tax rate.. Management believes that it is standard practice in the banking industry to present net interest income and net interest margin on a fully tax-equivalent basis and that it enhances comparability for peer comparison purposes. In addition, management believes that presenting the tax-equivalent net interest margin, excluding the impact of acquired loan accretion,adjusted, enhances comparability for peer comparison purposes and is useful to the Company, as well as analysts and investors, since acquired loan accretion income may fluctuate based on the size of each acquisition, as well as from period to period.
In management's view, tangible common equity measures are capital adequacy metrics meaningful to the Company, as well as analysts and investors, in assessing the Company's use of equity and in facilitating comparisons with peers. 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.
The Company presents the allowance for credit losses to total loans, excluding acquired loans. Management believes excluding acquired loans is useful as it facilitates better comparability between periods as these 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 is established as necessary to reflect credit deterioration. Additionally, management believes excluding these transactions from these metrics enhances comparability for peer comparison purposes. See Table 17 in the section of this Item 2 titled "Loan Portfolio and Credit Quality" for details on the calculation of this measure.
Although intended to enhance investors' understanding of the Company's business and performance, these non-GAAP financial measures should not be considered an alternative to GAAP. In addition, these non-GAAP financial measures may differ from those used by other financial institutions to assess their business and performance. See the previously provided tables and the following reconciliations for details on the calculation of these measures to the extent presented herein.

7267



Table of Contents



Non-GAAP Reconciliations
(Amounts in thousands, except per share data)
  Quarters Ended 
 June 30,		 Six Months Ended 
 June 30,
  2017 2016 2017 2016
Earnings Per Share        
Net income $34,950
 $25,267
 $57,805
 $43,229
Net income applicable to non-vested restricted shares (336) (290) (570) (502)
Net income applicable to common shares 34,614
 24,977
 57,235
 42,727
Acquisition and integration related expenses 1,174
 618
 19,739
 5,638
Tax effect of acquisition and integration related expenses (470) (247) (7,896) (2,255)
Net income applicable to common shares, excluding
certain significant transactions (1)
 $35,318
 $25,348
 $69,078
 $46,110
Weighted-average common shares outstanding:      
Weighted-average common shares outstanding (basic) 101,743
 80,383
 101,081
 79,182
Dilutive effect of common stock equivalents 20
 13
 20
 12
Weighted-average diluted common shares
outstanding		 101,763
 80,396
 101,101
 79,194
Basic EPS $0.34
 $0.31
 $0.57

$0.54
Diluted EPS $0.34
 $0.31
 $0.57

$0.54
Diluted EPS, excluding certain significant transactions (1)
 $0.35
 $0.32
 $0.68

$0.58
Tax-Equivalent Net Interest Income        
Net interest income $117,583
 $89,981
 $232,780
 $170,695
Tax-equivalent adjustment 2,042
 2,193
 4,096
 4,500
Tax-equivalent net interest income (2)
 119,625
 92,174
 236,876
 175,195
Less: acquired loan accretion (8,757) (4,927) (20,102) (7,350)
Tax-equivalent net interest income, excluding the
  impact of acquired loan accretion
 $110,868
 $87,247
 $216,774
 $167,845
Average interest-earning assets 12,366,739
 9,949,093
 12,289,700
 9,536,003
Net interest margin (GAAP) 3.81% 3.64% 3.82% 3.60%
Tax-equivalent net interest margin 3.88% 3.72% 3.88% 3.69%
Tax-equivalent net interest margin, excluding the impact of
  acquired loan accretion
 3.60% 3.52% 3.55% 3.54%
Efficiency Ratio Calculation        
Noninterest expense $99,751
 $81,354
 $216,393
 $163,943
Less:        
Net OREO expense (1,631) (1,122) (3,331) (1,786)
Acquisition and integration related expenses (1,174) (618) (19,739) (5,638)
Total $96,946
 $79,614
 $193,323
 $156,519
Tax-equivalent net interest income (2)
 $119,625
 $92,174
 $236,876
 $175,195
Fee-based revenues 41,228
 35,934
 79,075
 69,528
Add:        
Other income, excluding BOLI income 2,022
 984
 2,866
 1,563
BOLI income 1,411
 881
 2,671
 1,747
Tax-equivalent adjustment of BOLI income 941
 587
 1,781
 1,165
Total $165,227
 $130,560
 $323,269
 $249,198
Efficiency ratio 58.67% 60.98% 59.80% 62.81%
  Quarters Ended 
 June 30,		 Six Months Ended 
 June 30,
  2018 2017 2018 2017
Earnings Per Share        
Net income $29,600
 $34,950
 $63,110
 $57,805
Net income applicable to non-vested restricted shares (240) (336) (551) (570)
Net income applicable to common shares 29,360
 34,614
 62,559
 57,235
Adjustments to net income:        
Delivering Excellence implementation costs 15,015
 —
 15,015
 —
Tax effect of Delivering Excellence implementation costs (3,754) —
 (3,754) —
Acquisition and integration related expenses —
 1,174
 —
 19,739
Tax effect of acquisition and integration related expenses —
 (470) —
 (7,896)
Total adjustments to net income, net of tax 11,261
 704
 11,261
 11,843
Net income applicable to common shares, adjusted(1)
 $40,621
 $35,318
 $73,820
 $69,078
Weighted-average common shares outstanding:      
Weighted-average common shares outstanding (basic) 102,159
 101,743
 102,041
 101,081
Dilutive effect of common stock equivalents —
 20
 8
 20
Weighted-average diluted common shares outstanding 102,159
 101,763
 102,049
 101,101
Basic EPS $0.29
 $0.34
 $0.61

$0.57
Diluted EPS $0.29
 $0.34
 $0.61

$0.57
Diluted EPS, adjusted(1)
 $0.40
 $0.35
 $0.72

$0.68
Return on Average Assets      
Net income $29,600
 $34,950
 $63,110
 $57,805
Total adjustments to net income, net of tax 11,261
 704
 11,261
 11,843
Net income, adjusted(1)
 $40,861
 $35,654
 $74,371
 $69,648
Average assets $14,605,715
 $13,960,843
 $14,397,540
 $13,817,779
Return on average assets(3)
 0.81% 1.00% 0.88% 0.84%
Return on average assets, adjusted(1)(3)
 1.12% 1.02% 1.04% 1.02%
Return on Average Common and Tangible Common Equity      
Net income applicable to common shares $29,360
 $34,614
 $62,559
 $57,235
Intangibles amortization 1,794
 2,163
 3,596
 4,128
Tax effect of intangibles amortization (449) (865) (957) (1,651)
Net income applicable to common shares, excluding
intangibles amortization		 30,705
 35,912
 65,198
 59,712
Total adjustments to net income, net of tax 11,261
 704
 11,261
 11,843
Net income applicable to common shares, excluding
intangibles amortization, adjusted(1)
 $41,966
 $36,616
 $76,459
 $71,555
Average stockholders' common equity $1,890,727
 $1,830,536
 1,882,121
 $1,797,222
Less: average intangible assets (753,887) (753,521) (753,879) (752,063)
Average tangible common equity $1,136,840
 $1,077,015
 $1,128,242
 $1,045,159
Return on average common equity(3)
 6.23% 7.58% 6.70% 6.42%
Return on average common equity, adjusted(1)(3)
 8.62% 7.74% 7.91% 7.75%
Return on average tangible common equity(3)
 10.83% 13.37% 11.65% 11.52%
Return on average tangible common equity, adjusted(1)(3)
 14.81% 13.64% 13.67% 13.81%
         
Note: Non-GAAP Reconciliations footnotes are located at the end of this section.    

7368



Table of Contents



  Quarters Ended 
 June 30,		 Six Months Ended 
 June 30,
  2017 2016 2017 2016
Return on Average Common and Tangible Common Equity      
Net income applicable to common shares $34,614
 $24,977
 $57,235
 $42,727
Intangibles amortization 2,163
 1,245
 4,128
 2,230
Tax effect of intangibles amortization (865) (498) (1,651) (892)
Net income applicable to common shares, excluding
intangibles amortization		 35,912
 25,724
 59,712
 44,065
Acquisition and integration related expenses 1,174
 618
 19,739
 5,638
Tax effect of acquisition and integration related expenses (470) (247) (7,896) (2,255)
Net income applicable to common shares, excluding
intangibles amortization and certain significant
transactions (1)
 $36,616
 $26,095
 $71,555
 $47,448
Average stockholders' common equity $1,830,536
 $1,235,497
 1,797,222
 $1,207,043
Less: average intangible assets (753,521) (369,177) (752,063) (357,863)
Average tangible common equity $1,077,015
 $866,320
 $1,045,159
 $849,180
Return on average common equity (3)
 7.58% 8.13% 6.42% 7.12%
Return on average tangible common equity (3)
 13.37% 11.94% 11.52% 10.44%
Return on average tangible common equity, excluding
certain significant transactions (1) (3)
 13.64% 12.11% 13.81% 11.24%
Return on Average Assets      
Net income $34,950
 $25,267
 $57,805
 $43,229
Acquisition and integration related expenses 1,174
 618
 19,739
 5,638
Tax effect of acquisition and integration related expenses (470) (247) (7,896) (2,255)
Net income, excluding certain significant transactions (1)
 $35,654
 $25,638
 $69,648
 $46,612
Average assets $13,960,843
 $10,968,516
 $13,817,779
 $10,512,680
Return on average assets (3)
 1.00% 0.93% 0.84% 0.83%
Return on average assets, excluding certain significant
transactions (1) (3)
 1.02% 0.94% 1.02% 0.89%
  As of
  June 30, 2018 December 31, 2017
Tangible Common Equity    
Stockholders' equity $1,883,563
 $1,864,874
Less: goodwill and other intangible assets (753,020) (754,757)
Tangible common equity 1,130,543
 1,110,117
Less: accumulated other comprehensive income ("AOCI") 64,400
 33,036
Tangible common equity, excluding AOCI $1,194,943
 $1,143,153
Total assets $14,818,076
 $14,077,052
Less: goodwill and other intangible assets (753,020) (754,757)
Tangible assets $14,065,056
 $13,322,295
Risk-weighted assets $12,345,200
 $11,920,372
Tangible common equity to tangible assets 8.04% 8.33%
Tangible common equity, excluding AOCI, to tangible assets 8.50% 8.58%
Tangible common equity to risk-weighted assets 9.16% 9.31%
  As of
  June 30, 2017 December 31, 2016
Tangible Common Equity    
Stockholders' equity $1,836,843
 $1,257,080
Less: goodwill and other intangible assets (752,413) (366,876)
Tangible common equity 1,084,430
 890,204
Less: accumulated other comprehensive income ("AOCI") 36,567
 40,910
Tangible common equity, excluding AOCI $1,120,997
 $931,114
Total assets $13,969,140
 $11,422,555
Less: goodwill and other intangible assets (752,413) (366,876)
Tangible assets $13,216,727
 $11,055,679
Risk-weighted assets $12,180,416
 $10,019,434
Tangible common equity to tangible assets 8.20% 8.05%
Tangible common equity, excluding AOCI, to tangible assets 8.48% 8.42%
Tangible common equity to risk-weighted assets 8.90% 8.88%
  Quarters Ended 
 June 30,		 Six Months Ended 
 June 30,
  2018 2017 2018 2017
Efficiency Ratio Calculation      
Noninterest expense $113,416
 $99,751
 $208,998
 $216,393
Less:        
Net OREO expense 256
 (1,631) (812) (3,331)
Delivering Excellence implementation costs (15,015) —
 (15,015) —
Acquisition and integration related expenses —
 (1,174) —
 (19,739)
Total $98,657
 $96,946
 $193,171
 $193,323
Tax-equivalent net interest income(2)
 $128,442
 $119,625
 $247,980
 $236,876
Noninterest income 36,947
 44,945
 72,464
 84,896
Less: net securities gains —
 (284) —
 (284)
Total $165,389
 $164,286
 $320,444
 $321,488
Efficiency ratio 59.65% 59.01% 60.28% 60.13%
Efficiency ratio (prior presentation)(4)
 N/A
 58.67% N/A
 59.80%
         
Note: Non-GAAP Reconciliations footnotes are located at the end of this section.    





69



Table of Contents



Efficiency Ratio Calculation
(Dollar amounts in thousands)
  For the Years Ended December 31,
  2017 2016 2015 2014 2013
Efficiency Ratio
Noninterest expense $415,909
 $339,500
 $307,216
 $283,826
 $256,737
Less:          
Net OREO expense (4,683) (3,024) (5,281) (7,075) (8,547)
Special bonus (1,915) —
 —
 —
 —
Charitable contribution (1,600) —
 —
 —
 —
Acquisition and integration related expenses (20,123) (14,352) (1,389) (13,872) —
Lease cancellation fee —
 (950) —
 —
 —
Property valuation adjustments —
 —
 (8,581) —
 —
Total $387,588
 $321,174
 $291,965
 $262,879
 $248,190
Tax-equivalent net interest income(2)
 $479,965
 $358,334
 $322,277
 $288,589
 $272,429
Noninterest income 163,149
 159,312
 136,581
 126,618
 140,883
Less:          
Net securities gains (losses) 1,876
 (1,420) (2,373) (8,097) (34,164)
Net gain on sale-leaseback transaction —
 (5,509) —
 —
 —
Gains on sales of properties —
 —
 —
 (3,954)  
Loss on early extinguishment of debt —
 —
 —
 2,059
 —
Gain on termination of FHLB forward
  commitments
 —
 —
 —
 —
 (7,829)
Total $644,990
 $510,717
 $456,485
 $405,215
 $371,319
Efficiency ratio 60.09% 62.89% 63.96% 64.87% 66.84%
Efficiency ratio (prior presentation)(4)
 59.73% 62.59% 63.57% 64.57% 64.19%
           
Footnotes for non-GAAP reconciliations
(1) 
Certain significant transactions include acquisition and integration related expenses associated with completed and pending acquisitions.Adjustments to net income for each period presented are detailed in the EPS non-GAAP reconciliation above.
(2) 
Presented on a tax-equivalent basis, which reflectsassuming the applicable federal income tax rate for each period presented. As a result, interest income and stateyields on tax-exempt securities and loans subsequent to December 31, 2017 are presented using the current federal income tax benefits.rate of 21% and prior periods are computed using the federal income tax rate applicable at that time of 35%.
(3) 
Annualized based on the actual number of days for each period presented.

(4)
Presented as calculated prior to March 31, 2018, which included a tax-equivalent adjustment for BOLI. Management believes that removing this adjustment from the current calculation of this metric enhances comparability for peer comparison purposes.

7470



Table of Contents



ITEM 3. QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
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. A description and analysis of our interest rate risk management policies is included in Part II, Item 7A, "Quantitative and Qualitative Disclosures about Market Risk," in our 20162017 10-K.
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 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 June 30, 20172018 and December 31, 2016,2017, management determined that an immediate decrease in interest rates greater than 100 basis points was not meaningful for this analysis.
This simulation analysis is based on expected 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, but does provide an indication of the Company's sensitivity to changes in interest rates. Actual results may differ from simulated results due to the timing, magnitude, and frequency of interest rate changes as well as changes in market conditions and management strategies.
Our balance sheet is asset sensitive based on repricing and maturity characteristics and simulation analysis assumptions. The Bank'sCompany's current simulation analysis indicates we would benefit from rising interest rates. Interest-earning assets consist of short and long-term products. Excluding non-accrual loans, and including the impact of hedging certain corporate variable rate loans using interest rate swaps through which the Company receives fixed amounts and pays variable amounts, 50%49% of the loan portfolio consisted of fixed rate loans and 50%51% were floating rate loans as of June 30, 2017, compared to 48% and 52%, respectively, as of2018, consistent with December 31, 2016.2017. See Note 9 of "Notes to the CondensedConsolidated Financial Statements" in Part I, Item 1 of this Form 10-Q for additional detail regarding interest rate swaps.
As of June 30, 2017,2018, investments, consisting of securities and interest-bearing deposits in other banks, are more heavily weighted toward fixed rate securities at 95%92% of the total compared to 5%8% for floating rate interest-bearing deposits in other banks. This compares to investments comprising 95%93% of fixed rate securities and 5%7% of floating rate interest-bearing deposits in other banks as of December 31, 2016.2017. 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 PrimeLIBOR or LIBORPrime rates. The amount of floating rate loans with active interest rate floors was $122.0$9.0 million, or 2%,less than 1% of the floating rate loan portfolio, as of June 30, 2017,2018, compared to $271.5$60.0 million, or 5%,1% of the floating rate loan portfolio, as of December 31, 2016.2017. On the liability side of the balance sheet, 86%83% of deposits as of both June 30, 20172018 and December 31, 20162017 are demand deposits or interest-bearing core deposits, which either do not pay interest or the interest rates are expected to rise at a slower pace than short-term interest rates.

7571



Table of Contents



Analysis of Net Interest Income Sensitivity
(Dollar amounts in thousands)
 Immediate Change in Rates Immediate Change in Rates
 +300 +200 +100 -100 +300 +200 +100 -100
As of June 30, 2017        
As of June 30, 2018        
Dollar change $63,732
 $38,413
 $20,364
 $(43,532) $74,655
 $45,758
 $23,435
 $(50,182)
Percent change 14.1% 8.5% 4.5% (9.6)% 14.1% 8.7% 4.4% (9.5)%
As of December 31, 2016        
As of December 31, 2017        
Dollar change $44,092
 $25,412
 $12,763
 $(26,013) $70,999
 $44,733
 $33,099
 $(44,579)
Percent change 12.3% 7.1% 3.6% (7.2)% 14.8% 9.3% 6.9% (9.3)%
The sensitivity of estimated net interest income to an instantaneous parallel shift in interest rates is reflected as both dollar and percentage changes. This table illustrates that an instantaneous 200 basis point rise in interest rates as of June 30, 20172018 would increase net interest income by $38.4$45.8 million, or 8.5%8.7%, over the next twelve months compared to no change in interest rates. This same measure was $25.4$44.7 million, or 7.1%9.3%, as of December 31, 2016.2017.
Overall, positive interest rate risk volatility as of June 30, 2017 increased2018 decreased modestly compared to December 31, 2016.2017. This increasedecrease was driven primarily by a reduction in short-term FHLB advances, resulting from the sale of securities acquired in the Standard transaction. In addition,higher interest rates, partially offset by continued growth in floating rate loans funded with both core and time deposits contributed to the increase.and fixed rate FHLB advances.
ITEM 4. CONTROLS AND PROCEDURES
AtAs 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 Chairman of the Board, President and Chief Executive Officer and its Executive Vice President and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rules 13a-15(e) and 15d-15 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Based on that evaluation, the Chairman of the Board, 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 CommissionSEC rules and forms. There were no changes in the Company's internal control over financial reporting during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In the ordinary course of business, there were certain legal proceedings pending against the Company and its subsidiaries at June 30, 2017.2018. While the outcome of any legal proceeding is inherently uncertain, based on information currently available, the Company's management does not expect that any liabilities arising from pending legal matters will have a material adverse effect on the Company's business, financial condition, results of operations, or cash flows.
ITEM 1A. RISK FACTORS
The Company provided a discussion of certain risks and uncertainties faced by the Company in the section entitled "Risk Factors" in its 2016 Form2017 10-K. However, these factors mayThese risks and uncertainties are not beexhaustive. Additional risks and uncertainties are discussed in the only risks or uncertaintiessection entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations" in this report, our 2017 10-K, and our other filings made with the Company faces.SEC, as well as in other sections of such reports.

7672



Table of Contents



ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The following table summarizes the Company's monthly Common Stockcommon stock purchases during the second quarter of 2017.2018. The Board approved a stock repurchase program on November 27, 2007. Up to 2.5 million shares of the Company's Common Stockcommon stock may be repurchased, and the total remaining authorization under the program was 2,487,947 shares as of June 30, 2017.2018. The repurchase program has no set expiration or termination date.

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
April 1 - April 30, 2017 4,413
 $22.67
 —
 2,487,947
May 1 - May 31, 2017 451
 22.14
 —
 2,487,947
June 1 - June 30, 2017 1,384
 23.18
 —
 2,487,947
Total 6,248
 $22.75
 —
  
  
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
April 1 - April 30, 2018 2,562
 $24.81
 —
 2,487,947
May 1 - May 31, 2018 592
 25.72
 —
 2,487,947
June 1 - June 30, 2018 279
 26.58
 —
 2,487,947
Total 3,433
 $25.11
 —
  

(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 Stockcommon stock surrendered to satisfy tax withholding obligations associated with the vesting of restricted shares or by option holders upon exercise to cover the exercise price of the stock options.stock.


7773



Table of Contents



ITEM 6. EXHIBITS
Exhibit
Number
 Description of Documents
   
3.110.1(1)
Employment Agreement, dated as of June 18, 2018, between the Company and its Chief Executive Officer.
10.2
 CertificateConfidentiality and Restrictive Covenants Agreement, dated as of Amendment of Restated Certificate of Incorporation ofJune 18, 2018, between the Company and its Chief Executive Officer.
10.3(1)
First Midwest Bancorp, Inc. 2018 Stock and Incentive Plan is incorporated herein by reference to Exhibit 3.110.1 to the Company's Current Report on Form 8-K filed with the Securities and Exchange Commission on May 23, 2017.17, 2018.
11
 Statement re: Computation of Per Share Earnings -– The computation of basic and diluted earnings per common share is included in Note 128 of the Company's Notes to the Condensed Consolidated Financial Statements included in "ITEM 1. FINANCIAL STATEMENTS" of this document.
15
Acknowledgement of Independent Registered Public Accounting Firm.
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.
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.
32.1(1)(2)
 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.
32.2(1)(2)
 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.
99
Review Report of Independent Registered Public Accounting Firm.
101 Interactive Data File.

(1) 
Management contract or compensatory plan or arrangement.
(2)
Furnished, not filed.

7874



Table of Contents



SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, hereunto duly authorized.
                      First Midwest Bancorp, Inc.
 
 
                         /s/ PATRICK S. BARRETT
                               Patrick S. Barrett
    Executive Vice President and Chief Financial Officer*
Date: August 8, 20177, 2018
* Duly authorized to sign on behalf of the registrant.

7975