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FMBI First Midwest Bancorp

Filed: 4 Aug 21, 5:24pm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________________
 
FORM 10-Q
(Mark One)
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended June 30, 2021
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 001-39320
______________________
fmbi-20210630_g1.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.)
8750 West Bryn Mawr Avenue, Suite 1300
Chicago, Illinois 60631-3655
(Address of principal executive offices) (zip code)
______________________
Registrant's telephone number, including area code: (708) 831-7483
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Common stock, $0.01 par valueFMBIThe NASDAQ Stock Market
Depositary shares, each representing a 1/40th interest in a share of 7.000% Fixed Rate Non-Cumulative Perpetual Preferred Stock, Series AFMBIPThe NASDAQ Stock Market
Depositary shares, each representing a 1/40th interest in a share of 7.000% Fixed Rate Non-Cumulative Perpetual Preferred Stock, Series CFMBIOThe NASDAQ Stock Market
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 No .
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 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.
Large accelerated filer Accelerated filer
Non-accelerated filer 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 .
As of July 30, 2021, there were 114,298,897 shares of common stock, $0.01 par value, outstanding.




FIRST MIDWEST BANCORP, INC.
FORM 10-Q



PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (Unaudited)
FIRST MIDWEST BANCORP, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Amounts in thousands, except per share data)
 June 30,
2021
December 31,
2020
Assets(Unaudited) 
Cash and due from banks$232,989 $196,364 
Interest-bearing deposits in other banks1,312,412 920,880 
Equity securities, at fair value112,977 76,404 
Securities available-for-sale, at fair value3,156,194 3,096,408 
Securities held-to-maturity, at amortized cost, net11,593 12,071 
Federal Home Loan Bank ("FHLB") and Federal Reserve Bank ("FRB") stock, at cost106,890 117,420 
Loans15,035,219 14,751,232 
Allowance for loan losses(214,601)(239,017)
Net loans14,820,618 14,512,215 
Other real estate owned ("OREO")5,289 8,253 
Premises, furniture, and equipment, net125,837 132,045 
Investment in bank-owned life insurance ("BOLI")300,537 301,101 
Goodwill and other intangible assets926,176 932,764 
Accrued interest receivable and other assets513,912 532,753 
Total assets$21,625,424 $20,838,678 
Liabilities
Noninterest-bearing deposits$6,187,478 $5,797,899 
Interest-bearing deposits10,845,405 10,214,565 
Total deposits17,032,883 16,012,464 
Borrowed funds1,299,424 1,546,414 
Senior and subordinated debt235,178 234,768 
Accrued interest payable and other liabilities353,791 355,026 
Total liabilities18,921,276 18,148,672 
Stockholders' Equity
Preferred stock230,500 230,500 
Common stock1,254 1,254 
Additional paid-in capital1,269,192 1,275,492 
Retained earnings1,444,625 1,388,525 
Accumulated other comprehensive income (loss), net of tax(5,941)26,379 
Treasury stock, at cost(235,482)(232,144)
Total stockholders' equity2,704,148 2,690,006 
Total liabilities and stockholders' equity$21,625,424 $20,838,678 
June 30, 2021December 31, 2020
(Unaudited)
PreferredCommonPreferredCommon
SharesSharesSharesShares
Par value per share$— $0.01 $— $0.01 
Shares authorized1,000 250,000 1,000 250,000 
Shares issued231 125,376 231 125,367 
Shares outstanding231 114,177 231 114,296 
Treasury shares— 11,199 — 11,071 
See accompanying unaudited notes to the condensed consolidated financial statements.
3


FIRST MIDWEST BANCORP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Amounts in thousands, except per share data)
(Unaudited)
 Quarters Ended 
 June 30,
Six Months Ended 
 June 30,
 2021202020212020
Interest Income
Loans$136,104 $140,819 $269,878 $288,605 
Investment securities16,217 20,386 31,924 40,624 
Other short-term investments1,679 839 3,348 3,042 
Total interest income154,000 162,044 305,150 332,271 
Interest Expense  
Deposits3,131 10,077 6,588 27,194 
Borrowed funds3,112 3,156 6,219 8,997 
Senior and subordinated debt3,469 3,577 6,940 7,271 
Total interest expense9,712 16,810 19,747 43,462 
Net interest income144,288 145,234 285,403 288,809 
Provision for loan losses32,649 6,098 72,181 
Net interest income after provision for loan losses144,288 112,585 279,305 216,628 
Noninterest Income  
Wealth management fees14,555 11,942 28,704 24,303 
Service charges on deposit accounts10,778 9,125 20,758 20,906 
Mortgage banking income6,749 3,477 16,936 5,265 
Card-based fees4,764 3,180 9,320 7,148 
Capital market products income1,954 694 4,043 5,416 
Other service charges, commissions, and fees2,823 2,078 5,584 4,760 
Net securities losses(1,005)
Other income4,647 2,495 6,728 5,560 
Total noninterest income46,270 32,991 92,073 72,353 
Noninterest Expense
Salaries and employee benefits64,211 63,672 130,612 126,531 
Net occupancy and equipment expense13,654 15,116 28,406 29,343 
Technology and related costs10,453 9,853 20,737 18,401 
Professional services7,568 8,880 15,627 19,270 
Net OREO expense160 126 749 546 
Other expenses17,569 17,434 34,139 32,849 
Acquisition and integration related expenses7,773 5,249 8,018 10,721 
Optimization costs31 1,556 
Total noninterest expense121,419 120,330 239,844 237,661 
Income before income tax expense69,139 25,246 131,534 51,320 
Income tax expense18,018 6,182 35,390 12,650 
Net income$51,121 $19,064 $96,144 $38,670 
Preferred dividends(4,034)(1,037)(8,068)(1,037)
Net income applicable to unvested restricted shares(521)(187)(1,007)(379)
Net income applicable to common shareholders$46,566 $17,840 $87,069 $37,254 
Per Common Share Data  
Basic earnings per common share$0.41 $0.16 $0.77 $0.33 
Diluted earnings per common share$0.41 $0.16 $0.77 $0.33 
Dividends declared per common share$0.14 $0.14 $0.28 $0.28 
Weighted-average common shares outstanding112,865 113,145 112,980 111,533 
Weighted-average diluted common shares outstanding113,640 113,336 113,737 111,872 
See accompanying unaudited notes to the condensed consolidated financial statements.
4


FIRST MIDWEST BANCORP, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Dollar amounts in thousands)
(Unaudited)
 Quarters Ended 
 June 30,
Six Months Ended 
 June 30,
 2021202020212020
Net income$51,121 $19,064 $96,144 $38,670 
Securities Available-for-Sale  
Unrealized holding gains (losses):  
Before tax24,603 (1,719)(40,542)60,835 
Tax effect(6,793)381 11,180 (16,916)
Net of tax17,810 (1,338)(29,362)43,919 
Reclassification of net losses included in net income: 
Before tax(1,005)
Tax effect282 
Net of tax(723)
Net unrealized holding gains (losses)17,810 (1,338)(29,362)43,196 
Derivative Instruments
Unrealized holding losses:
Before tax(2,287)(7,300)(4,082)(17,340)
Tax effect632 2,042 1,124 4,825 
Net of tax(1,655)(5,258)(2,958)(12,515)
Total other comprehensive income (loss)16,155 (6,596)(32,320)30,681 
Total comprehensive income (loss)$67,276 $12,468 $63,824 $69,351 

 Accumulated
Unrealized
Gain (Loss) on
Securities
Available-
for-Sale
Accumulated Unrealized
Gain (Loss) on Derivative Instruments
Unrecognized
Net Pension
Costs
Total
Accumulated
Other
Comprehensive
Income (Loss)
Balance at December 31, 2019$15,808 $819 $(18,581)$(1,954)
Other comprehensive income43,196 (12,515)30,681 
Balance at June 30, 2020$59,004 $(11,696)$(18,581)$28,727 
Balance at December 31, 2020$38,328 $10,179 $(22,128)$26,379 
Other comprehensive loss(29,362)(2,958)(32,320)
Balance at June 30, 2021$8,966 $7,221 $(22,128)$(5,941)
See accompanying unaudited notes to the condensed consolidated financial statements.

5


FIRST MIDWEST BANCORP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(Amounts in thousands, except per share data)
(Unaudited)
 Common
Shares
Outstanding
Preferred
Stock
Common
Stock
Additional
Paid-in
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Income (Loss)
Treasury
Stock
Total
Quarter Ended June 30, 2020
Beginning balance114,213 $$1,253 $1,274,935 $1,357,395 $35,323 $(233,199)$2,435,707 
Net income— — — — 19,064 — — 19,064 
Other comprehensive loss— — — — — (6,596)— (6,596)
Preferred dividends— — — — (1,037)— — (1,037)
Common dividends declared
  ($0.14 per common share)
— — — — (16,015)— — (16,015)
Preferred stock issued— 230,500 — (9,188)— — — 221,312 
Common stock issued— — 79 — — — 79 
Restricted stock activity64 — — (912)— — 943 31 
Treasury stock issued to
  benefit plans
(7)— — (22)— — (67)(89)
Share-based compensation
  expense
— — — 3,755 — — — 3,755 
Balance at June 30, 2020114,276 $230,500 $1,253 $1,268,647 $1,359,407 $28,727 $(232,323)$2,656,211 
Quarter Ended June 30, 2021
Beginning balance114,196 $230,500 $1,254 $1,265,156 $1,413,517 $(22,096)$(235,016)$2,653,315 
Net income— — — — 51,121 — — 51,121 
Other comprehensive income— — — — — 16,155 — 16,155 
Preferred dividends— — — — (4,034)— — (4,034)
Common dividends declared
  ($0.14 per common share)
— — — — (15,979)— — (15,979)
Repurchases of common stock— — — — — — — 
Common stock issued— — 83 — — — 83 
Restricted stock activity(22)— — 347 — — (452)(105)
Treasury stock issued to
  benefit plans
(1)— — (2)— — (14)(16)
Share-based compensation
  expense
— — — 3,608 — — — 3,608 
Balance at June 30, 2021114,177 $230,500 $1,254 $1,269,192 $1,444,625 $(5,941)$(235,482)$2,704,148 
6


FIRST MIDWEST BANCORP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY – (Continued)
(Amounts in thousands, except per share data)
(Unaudited)
 Common
Shares
Outstanding
Preferred
Stock
Common
Stock
Additional
Paid-in
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Income (Loss)
Treasury
Stock
Total
Six Months Ended June 30, 2020
Beginning balance109,972 $$1,204 $1,211,274 $1,380,612 $(1,954)$(220,343)$2,370,793 
Adjustment to apply recent
  accounting pronouncements(1)
— — — — (26,821)— — (26,821)
Net income— — — — 38,670 — — 38,670 
Other comprehensive income— — — — — 30,681 — 30,681 
Preferred dividends— — — — (1,037)(1,037)
Common dividends declared
  ($0.28 per common share)
— — — — (32,017)— — (32,017)
Repurchases of common
  stock
(1,171)— — — — — (22,557)(22,557)
Acquisitions, net of issuance
  costs
4,930 — 49 71,834 — — — 71,883 
Preferred stock issued— 230,500 — (9,188)— — — 221,312 
Common stock issued43 — — 251 — — 679 930 
Restricted stock activity513 — — (13,180)— — 10,045 (3,135)
Treasury stock issued to
  benefit plans
(11)— — (21)— — (147)(168)
Share-based compensation
  expense
— — — 7,677 — — — 7,677 
Balance at June 30, 2020114,276 $230,500 $1,253 $1,268,647 $1,359,407 $28,727 $(232,323)$2,656,211 
Six Months Ended June 30, 2021
Beginning balance114,296 $230,500 $1,254 $1,275,492 $1,388,525 $26,379 $(232,144)$2,690,006 
Net income— — — — 96,144 — 96,144 
Other comprehensive loss— — — — — (32,320)— (32,320)
Preferred dividends— — — — (8,068)— — (8,068)
Common dividends declared
  ($0.28 per common share)
— — — — (31,976)— — (31,976)
Repurchases of common
  stock
(715)— — — (14,929)(14,929)
Common stock issued69 — 56 — — 1,043 1,099 
Restricted stock activity526 — — (14,534)— — 10,532 (4,002)
Treasury stock issued to
  benefit plans
— — 21 — — 16 37 
Share-based compensation
  expense
— — — 8,157 — — — 8,157 
Balance at June 30, 2021114,177 $230,500 $1,254 $1,269,192 $1,444,625 $(5,941)$(235,482)$2,704,148 

(1)As a result of accounting guidance adopted in the first quarter of 2020, a portion of the increase in allowance for credit losses, net of tax, was recognized as a cumulative-effect adjustment to retained earnings as of January 1, 2020.
See accompanying unaudited notes to the condensed consolidated financial statements.
7


FIRST MIDWEST BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollar amounts in thousands)
(Unaudited)
 Six Months Ended 
 June 30,
 20212020
Operating Activities
Net income$96,144 $38,670 
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses6,098 72,181 
Depreciation of premises, furniture, and equipment7,529 8,397 
Net amortization of premium on securities10,243 10,914 
Net securities losses1,005 
Gains on sales of 1-4 family mortgages and corporate loans held-for-sale(16,444)(7,230)
Net losses on sales and valuation adjustments of OREO67 128 
Amortization of the FDIC indemnification asset892 
Net (gains) losses on sales and valuation adjustments of premises, furniture, and equipment(731)213 
BOLI income(3,481)(3,798)
Share-based compensation expense8,157 7,677 
Tax benefit related to share-based compensation196 148 
Amortization of other intangible assets5,605 5,590 
Originations of mortgage loans held-for-sale(468,530)(297,019)
Proceeds from sales of mortgage loans held-for-sale508,076 292,410 
Net increase in equity securities(36,573)(1,818)
Net decrease (increase) in accrued interest receivable and other assets2,347 (124,850)
Net (decrease) increase in accrued interest payables and other liabilities(642)12,871 
Net cash provided by operating activities118,061 16,381 
Investing Activities  
Proceeds from maturities, repayments, and calls of securities available-for-sale561,493 497,430 
Proceeds from sales of securities available-for-sale39,095 
Purchases of securities available-for-sale(672,064)(914,234)
Proceeds from maturities, repayments, and calls of securities held-to-maturity478 2,467 
Purchases of securities held-to-maturity(18)
Net purchases of FHLB stock10,530 (33,103)
Net increase in loans(312,149)(1,360,147)
Premiums paid on BOLI, net of proceeds from claims4,045 2,997 
Proceeds from sales of OREO2,897 230 
Proceeds from sales of premises, furniture, and equipment2,757 
Purchases of premises, furniture, and equipment(3,347)(4,647)
Net cash received from acquisition142,282 
Net cash used in investing activities(405,360)(1,627,648)
Financing Activities  
Net increase in deposit accounts1,020,419 1,456,302 
Net (decrease) increase in borrowed funds(246,990)634,905 
Net proceeds from the issuance of preferred stock221,312 
Repurchases of common stock(14,929)(22,557)
Cash dividends paid(40,085)(32,480)
Restricted stock activity(2,959)(3,135)
Net cash provided by financing activities715,456 2,254,347 
Net increase in cash and cash equivalents428,157 643,080 
Cash and cash equivalents at beginning of period1,117,244 299,221 
Cash and cash equivalents at end of period$1,545,401 $942,301 
8


FIRST MIDWEST BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS – (Continued)
(Dollar amounts in thousands)
(Unaudited)
 Six Months Ended 
 June 30,
 20212020
Supplemental Disclosures of Cash Flow Information:
Income taxes paid$19,225 $587 
Interest paid to depositors and creditors20,000 46,331 
Dividends declared, but unpaid15,821 15,857 
Stock issued for acquisitions, net of issuance costs71,883 
Non-cash transfers of loans to OREO121 
Non-cash transfers of loans held-for-investment to loans held-for-sale(14,157)2,193 
See accompanying unaudited notes to the condensed consolidated financial statements.

9


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, 2021 are not necessarily indicative of the results that may be expected for the year ending December 31, 2021.
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 2020 Annual Report on Form 10-K ("2020 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 2020 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 Loans – Acquired loans consist of all loans acquired in business combinations and are included within loans held-for-investment. Acquired loans are separated into (i) non-purchased credit deteriorated ("non-PCD") loans and (ii) purchased credit deteriorated ("PCD") loans. Non-PCD loans include loans that did not have evidence of more-than-insignificant credit deterioration since origination at the acquisition date. PCD loans include loans that had evidence of more-than-insignificant credit deterioration since origination. Evidence of credit deterioration 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 PCD loans and are accounted for as non-PCD loans.
The acquisition adjustment related to non-PCD loans is amortized into interest income over the contractual life of the related loans. If an acquired non-PCD 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.
10


PCD loans are generally accounted for based on estimates of expected future cash flows. The Company uses a discounted cash flow analysis involving significant unobservable inputs and assumptions to measure the fair value of PCD loans. The significant assumptions utilized in the cash flow analysis include the probability of default ("PD"), loss given default ("LGD"), and discount rate. PCD loans are recorded at fair value, excluding credit-related adjustments, for which an allowance for loan losses is established at the acquisition date through purchase accounting adjustments. 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. Subsequent to the acquisition date, the allowance for loan losses on PCD loans is estimated as are the allowances for all other loans in the portfolio.
90-Days Past Due Loans – The Company's accrual of interest on loans is generally discontinued at the time the loan is 90 days past due unless the credit is sufficiently collateralized and in the process of renewal or collection.
Non-accrual Loans Generally, corporate loans are placed on non-accrual status (i) when either principal or interest payments become 90 days or more past due unless the credit is sufficiently collateralized and in the process of renewal or collection, or (ii) when an individual analysis of a borrower's creditworthiness warrants a downgrade to non-accrual regardless of past due status. When a loan is placed on non-accrual status, unpaid interest credited to income in the current year is reversed, and unpaid interest accrued in prior years is charged against the allowance for loan losses. After the loan is placed on non-accrual status, all debt service payments are applied to the principal on the loan. Future interest income may only be recorded on a cash basis after recovery of principal is reasonably assured. Non-accrual loans are returned to accrual status when the financial position of the borrower and other relevant factors indicate that the Company will collect all principal and interest.
Non-accrual loans with balances under a specified threshold are not individually evaluated for impairment. For all other non-accrual loans, impairment is measured by comparing the estimated value of the loan to the recorded book value. The value of collateral-dependent loans is based on the fair value of the underlying collateral, less costs to sell. The value of other loans is measured using the present value of expected future cash flows discounted at the loan's effective interest rate.
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, consumer secured, 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.
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.
Allowance for Credit Losses – The allowance for credit losses is comprised of the allowance for loan losses and the allowance for unfunded commitments and is maintained by management at a level believed adequate to absorb current expected credit losses 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, actual loss experience, consideration of current national, regional, and local economic trends and conditions, reasonable and supportable forecasts about the future, changes in interest rates and property values, various internal and external qualitative factors, 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,
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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 allowance for individual loans where the recorded investment exceeds the value, (ii) an allowance based on historical credit loss experience with consideration of reasonable and supportable forecasts of economic conditions for each loan category, and (iii) an allowance based on other internal and external qualitative factors.
The allowance for individual loans is based on a periodic analysis of non-accrual loans individually exceeding a specific dollar amount. If the estimated value of a non-accrual loan is less than its recorded book value, the Company either (i) provides an allowance in the amount of the excess of the book value over the estimated value of the related loan or, (ii) if the loss is confirmed, charges off the loss.
The allowance by loan category is based on a discounted cash flows analysis as future cash flows are discounted at an effective rate of return. In addition, estimates of losses on future cash flows is forecasted by applying probability of default and loss given default factors as well as prepayment and curtailment assumptions to cash flows that are adjusted to a present value. This discounted cash flow analysis is updated quarterly, primarily using actual loss experience adjusted for current reasonable and supportable forecasts of economic conditions over a one-year forecast period. After the one-year forecast period, a one-year reversion period adjusts loss experience to the historical average on a straight-line basis. These forecasts consider multiple scenarios of key assumptions including national unemployment rates, housing price indices, and gross domestic product.
This general allowance 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, regional, 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 includes an allowance on acquired non-PCD and PCD loans. An allowance for loan losses is recorded on acquired PCD loans at the acquisition date through purchase accounting adjustments. Subsequent to the acquisition date, the allowance for loan losses on PCD loans is estimated as are the allowances for all other loans in the portfolio. No allowance for loan losses is recorded on acquired non-PCD loans at the acquisition date through purchase accounting. Instead, an allowance is established on acquired non-PCD loans at the acquisition date in-line with all other loans in the portfolio as if the loans were originated at the acquisition date. On a periodic basis, the adequacy of this allowance is determined using either a PD/LGD methodology or a specific review methodology.
Allowance for Unfunded Commitments The Company also maintains an allowance for unfunded commitments, including letters of credit, for the risk of loss inherent in these arrangements. The allowance for unfunded commitments is estimated using the historical credit loss experience with consideration of reasonable and supportable forecasts of economic conditions for each loan category. The allowance for unfunded commitments is included in other liabilities in the Consolidated Statements of Financial Condition.
The establishment of the allowance for credit losses involves a high degree of judgment and estimation given the difficulty of assessing the factors impacting loan repayment and estimating the timing and amount of losses. While management utilizes its best judgment and information available, the adequacy of the allowance for credit losses depends on a variety of factors beyond the Company's control, including the performance of its loan portfolio, current national, regional, and local economic trends, reasonable and supportable forecasts about the future, changes in interest rates and property values, the amounts and timing of expected future cash flows on non-accrual loans, estimated losses on pools of homogenous loans, the interpretation of loan risk classifications by regulatory authorities, various internal and external qualitative factors, and other factors.
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
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are recorded at fair value as either other assets or other liabilities in the Consolidated Statements of Financial Condition. Subsequent changes in a derivative's fair value are recognized in earnings unless specific hedge accounting criteria are met.
On the date the Company enters into a derivative contract, the derivative is designated as a fair value hedge, a cash flow hedge, or a non-hedge derivative instrument. Fair value hedges are designed to mitigate exposure to changes in the fair value of an asset or liability attributable to a particular risk, such as interest rate risk. Cash flow hedges are designed to mitigate exposure to variability in expected future cash flows to be received or paid related to an asset, liability, or other type of forecasted transaction. The Company formally documents all relationships between hedging instruments and hedged items, including its risk management objective and strategy, at inception.
At the hedge's inception, a formal assessment is performed to determine the effectiveness of the derivative in offsetting changes in the fair values or expected future cash flows of the hedged items in the current period and prospectively. If a derivative instrument designated as a hedge is terminated or ceases to be highly effective, hedge accounting is discontinued prospectively, and the gain or loss is amortized into earnings. For fair value hedges, the gain or loss is amortized over the remaining life of the hedged asset or liability. For cash flow hedges, the gain or loss is amortized over the same period that the forecasted hedged transactions impact earnings. If the hedged item is disposed of, any fair value adjustments are included in the gain or loss from the disposition of the hedged item. If the forecasted transaction is no longer probable, the gain or loss is included in earnings immediately.
For fair value hedges, changes in the fair value of the derivative instruments, as well as changes in the fair value of the hedged item, are recognized in earnings in the same income statement line item as the earnings effect of the hedged item. For cash flow hedges, the effective portion of the change in fair value of the derivative instrument is reported as a component of accumulated other comprehensive income (loss) and is reclassified to earnings when the hedged transaction is reflected in earnings.
2. RECENT ACCOUNTING PRONOUNCEMENTS AND OTHER GUIDANCE
Adopted Accounting Pronouncements
Changes to the Disclosure Requirements for Defined Benefit Plans: In August of 2018, the Financial Accounting Standards Board ("FASB") issued Accounting Standard Update ("ASU") 2018-14 that makes minor changes and clarifications to the disclosure requirements for entities that sponsor defined benefit plans. This guidance is effective for annual and interim periods beginning after December 15, 2020. The adoption of this guidance on January 1, 2021 did not materially impact the Company's financial condition, results of operations, or liquidity.
Income Taxes: In December of 2019, the FASB issued ASU 2019-12 that removes certain exceptions to the general principles of accounting for income taxes. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. The adoption of this guidance on January 1, 2021 did not materially impact the Company's financial condition, results of operations, or liquidity.
Accounting Pronouncements Pending Adoption
Reference Rate Reform: In March of 2020, the FASB issued ASU 2020-04 and in January of 2021, the FASB issued 2021-01, both of which provide optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued by reference rate reform, if certain criteria are met. This guidance is effective upon issuance as of March 12, 2020 and generally can be applied through December 31, 2022. Management continues to monitor efforts and evaluate the impact of reference rate reform, including this guidance and determining its impact on the Company's financial condition, results of operations, and liquidity.
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3. ACQUISITIONS
Pending Merger of Equals
On June 1, 2021, the Company and Old National Bancorp ("Old National"), the holding company for Old National Bank, jointly announced they have entered into a definitive merger agreement to combine in an all-stock merger of equals transaction to create a premier Midwestern bank with approximately $45 billion in combined assets. The merger agreement, which has been unanimously approved by the boards of directors of both companies, provides for a fixed exchange ratio whereby holders of Company common stock will receive 1.1336 shares of Old National common stock for each share of Company common stock they own, other than certain shares held by the Company or Old National. In addition, the merger agreement provides that holders of Company depositary shares representing a 1/40th interest in a share of the Company's 7.000% Fixed Rate Non-Cumulative Perpetual Preferred Stock, Series A or Series C, will receive an equal amount of Old National depositary shares each representing a 1/40th interest in a share of a corresponding new series of Old National preferred stock having terms that are not materially less favorable than the Company preferred stock. The headquarters of the surviving corporation and the main office of the surviving bank will be located in Evansville, Indiana and the name of the surviving corporation and surviving bank will be Old National Bancorp and Old National Bank, respectively. The Commercial Banking and Consumer Banking operations of the surviving bank will be headquartered in Chicago, Illinois. Michael Scudder, Chairman and Chief Executive Officer ("CEO") of the Company, will serve as the Executive Chairman, and Jim Ryan, Chairman and CEO of Old National Bancorp, will maintain his role as CEO. As of the date of announcement, the overall transaction market value was approximately $6.5 billion. The transaction is subject to customary regulatory and shareholder approvals and the completion of various closing conditions and is anticipated to close in late 2021 or early 2022. The Company will hold a special meeting of its stockholders to vote on the merger on September 15, 2021.
Completed Acquisition
Park Bank
On March 9, 2020, the Company completed its acquisition of Bankmanagers Corp. ("Bankmanagers"), the holding company for Park Bank, based in Milwaukee, Wisconsin. At closing, the Company acquired $1.2 billion of assets, $1.0 billion of deposits, and $687.9 million of loans, net of fair value adjustments. Under the terms of the merger agreement, on March 9, 2020, each outstanding share of Bankmanagers common stock was exchanged for 29.9675 shares of Company common stock, plus $623.02 of cash (of which $346.00 per share was paid by Bankmanagers to its shareholders by a special cash dividend immediately prior to closing). This resulted in merger consideration of $174.4 million, which consisted of 4.9 million shares of Company common stock and $102.5 million of cash. Goodwill of $59.6 million associated with the acquisition was recorded by the Company. All Park Bank operating systems were converted to the Company's operating platform during the second quarter of 2020.
During the first quarter of 2021, the Company finalized the fair value adjustments associated with the Bankmanagers transaction, which required measurement period adjustments to goodwill. These adjustments were recognized in the current period in accordance with accounting guidance applicable to business combinations.
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The following table presents the assets acquired and liabilities assumed, net of the fair value adjustments, in the Park Bank transaction 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
(Dollar amounts in thousands, except share and per share data)
Park Bank
March 9, 2020
Assets
Cash and due from banks and interest-bearing deposits in other banks$244,781 
Securities available-for-sale136,856 
Securities held-to-maturity300 
Loans687,923 
OREO2,276 
Goodwill59,649 
Other intangible assets3,068 
Premises, furniture, and equipment2,550 
Accrued interest receivable and other assets13,502 
Total assets$1,150,905 
Liabilities
Noninterest-bearing deposits$356,050 
Interest-bearing deposits594,026 
Total deposits950,076 
Borrowed funds11,532 
Accrued interest payable and other liabilities14,915 
Total liabilities976,523 
Consideration Paid
Common stock (2020 – 4,930,231, shares issued at $14.58 per share)71,883 
Cash paid102,499 
Total consideration paid174,382 
$1,150,905 
Expenses related to the acquisition and integration of completed and pending transactions are reported as a separate component within noninterest expense in the Condensed Consolidated Statements of Income. For the quarter and six months ended June 30, 2021, these expenses totaled $7.8 million and $8.0 million, respectively, and, for the same periods in 2020, these expenses totaled $5.2 million and $10.7 million, respectively.
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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 2020 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, 2021As of December 31, 2020
 Amortized CostGross UnrealizedFair
 Value
Amortized CostGross UnrealizedFair
 Value
 GainsLossesGainsLosses
Securities Available-for-Sale      
U.S. treasury securities$1,000 $$$1,003 $12,001 $50 $$12,051 
U.S. agency securities612,173 1,996 (15,372)598,797 654,321 3,129 (4,976)652,474 
Collateralized mortgage obligations
  ("CMOs")
1,336,291 16,936 (13,601)1,339,626 1,415,312 27,529 (4,323)1,438,518 
Other mortgage-backed securities
  ("MBSs")
808,967 9,762 (4,368)814,361 566,830 14,650 (640)580,840 
Municipal securities212,308 9,822 (229)221,901 224,446 11,573 (4)236,015 
Corporate debt securities173,069 7,451 (14)180,506 170,570 6,210 (270)176,510 
Total securities available-for-sale$3,143,808 $45,970 $(33,584)$3,156,194 $3,043,480 $63,141 $(10,213)$3,096,408 
Securities Held-to-Maturity       
Municipal securities$11,593 $$(468)$11,125 $12,291 $$(385)$11,906 
Allowance for securities held-to-
  maturity
(220)$(220)(220)$(220)
Total securities held-to-maturity,
  net
$11,373 $$(468)$10,905 $12,071 $$(385)$11,686 
Equity Securities$112,977 $76,404 
Accrued interest receivable on the securities portfolio totaled $11.1 million and $11.9 million as of June 30, 2021 and December 31, 2020, respectively, and is included in accrued interest receivable and other assets in the Consolidated Statements of Financial Condition.
Accounting guidance requires that the credit portion of a decline in fair value be recognized as an allowance for credit losses, established as a charge to expense through income. If a decline in fair value below carrying value is not attributable to credit deterioration and the Company does not intend to sell the security or believe it would not be more likely than not required to sell the security prior to recovery, the Company records the non-credit related portion of the decline in fair value in other comprehensive income (loss). In determining whether a decline in fair value of a security is credit related, the Company considers adverse conditions specific to the security, deterioration in economic conditions or market environment that may affect the value of the securities and related collateral, if any, events of default, changes to the credit rating of the security by a rating agency, and guarantees applicable to the security, among other factors.
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Remaining Contractual Maturity of Securities
(Dollar amounts in thousands)
 As of June 30, 2021
 Available-for-SaleHeld-to-Maturity
 Amortized
Cost
Fair
Value
Amortized
Cost
Fair
Value
One year or less$94,281 $94,626 $1,971 $1,891 
After one year to five years176,306 176,952 4,335 4,160 
After five years to ten years727,963 730,629 2,658 2,551 
After ten years2,629 2,523 
Securities that do not have a single contractual maturity date2,145,258 2,153,987 
Total$3,143,808 $3,156,194 $11,593 $11,125 
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 $1.9 billion as of June 30, 2021 and $1.6 billion as of December 31, 2020. NaN securities held-to-maturity were pledged as of June 30, 2021 or December 31, 2020.
There were 0 realized gains (losses) on securities available-for-sale for the quarters ended June 30, 2021 and 2020. There were $1.0 million of realized losses for the six months ended June 30, 2020.
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, 2021 and December 31, 2020.
Securities in an Unrealized Loss Position
(Dollar amounts in thousands)
  Less Than 12 Months12 Months or LongerTotal
 Number of
Securities
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
As of June 30, 2021      
Securities Available-for-Sale
U.S. agency securities64 $376,464 $13,721 $51,780 $1,651 $428,244 $15,372 
CMOs150 568,946 12,450 26,307 1,151 595,253 13,601 
MBSs62 265,493 3,739 31,417 629 296,910 4,368 
Municipal securities12 10,929 229 10,929 229 
Corporate debt securities— 3,212 14 3,212 14 
Total289 $1,221,832 $30,139 $112,716 $3,445 $1,334,548 $33,584 
As of December 31, 2020       
Securities Available-for-Sale
U.S. agency securities48 $253,841 $4,764 $14,932 $212 $268,773 $4,976 
CMOs104 349,853 3,205 86,618 1,118 436,471 4,323 
MBSs19 69,838 550 12,307 90 82,145 640 
Municipal securities1,012 1,012 
Corporate debt securities8,100 105 9,513 165 17,613 270 
Total178 $682,644 $8,628 $123,370 $1,585 $806,014 $10,213 
Substantially all of the Company's CMOs and other MBSs are either backed by U.S. government-owned agencies or issued by U.S. government-sponsored enterprises. Municipal securities are issued by municipal authorities, and the majority are supported by third-party insurance or some other form of credit enhancement. Management does not believe any of these securities with unrealized losses as of June 30, 2021 represent impairment 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.
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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,
2021
December 31,
2020
Commercial and industrial$4,608,148 $4,578,254 
Agricultural342,834 364,038 
Commercial real estate:  
Office, retail, and industrial1,807,428 1,861,768 
Multi-family1,012,722 872,813 
Construction577,338 612,611 
Other commercial real estate1,461,370 1,481,976 
Total commercial real estate4,858,858 4,829,168 
Total corporate loans, excluding Paycheck Protection Program ("PPP") loans9,809,840 9,771,460 
PPP loans705,915 785,563 
Total corporate loans10,515,755 10,557,023 
Home equity629,367 761,725 
1-4 family mortgages3,287,773 3,022,413 
Installment602,324 410,071 
Total consumer loans4,519,464 4,194,209 
Total loans$15,035,219 $14,751,232 
Deferred loan fees included in total loans$8,812 $9,696 
Overdrawn demand deposits included in total loans9,582 8,444 
Accrued interest receivable on the loan portfolio totaled $51.8 million and $56.7 million as of June 30, 2021 and December 31, 2020, respectively and is included in accrued interest receivable and other assets in the Consolidated Statements of Financial Condition.
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 2020 10-K.
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Loan Sales
The following table presents loan sales and purchases for the quarters and six months ended June 30, 2021 and 2020.
Loan Sales and Purchases
(Dollar amounts in thousands)
 Quarters Ended 
 June 30,
Six Months Ended 
 June 30,
 2021202020212020
Corporate loan sales
Proceeds from sales$291 $295 $17,227 $4,598 
Less book value of loans sold286 289 17,177 4,477 
Net gains on corporate loan sales(1)
50 121 
1-4 family mortgage loan sales
Proceeds from sales214,246 173,251 508,076 292,410 
Less book value of loans sold207,784 168,656 491,682 285,301 
Net gains on 1-4 family mortgage loan sales(2)
6,462 4,595 16,394 7,109 
Total net gains on loan sales$6,467 $4,601 $16,444 $7,230 
Corporate loan purchases(3)
Commercial and industrial$80,679 $22,894 $234,075 $168,716 
Office, retail, and industrial7,438 
Multi-family11,880 26,129 
Construction894 3,258 1,036 3,897 
Other commercial real estate35,000 10,000 35,000 10,000 
Total corporate loan purchases$128,453 $36,152 $303,678 $182,613 
Consumer loan purchases
Home equity$$$$144,967 
1-4 family mortgages224,819 179,410 585,918 249,585 
Installment146,618 253,376 
Total consumer loan purchases$371,437 $179,410 $839,294 $394,552 
(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.
(3)Consists of the Company's portion of loan participations purchased.
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 12, "Commitments, Guarantees, and Contingent Liabilities."
6. ACQUIRED LOANS
The significant accounting policies related to acquired loans, which are classified as PCD and non-PCD at June 30, 2021 and December 31, 2020, are presented in Note 1, "Summary of Significant Accounting Policies."
The following table presents the carrying amount of acquired loans as of June 30, 2021 and December 31, 2020.
Acquired Loans(1)
(Dollar amounts in thousands)
 As of June 30, 2021As of December 31, 2020
 PCDNon-PCDTotalPCDNon-PCDTotal
Acquired loans$177,111 $916,633 $1,093,744 $212,021 $1,198,818 $1,410,839 
(1)Included in loans in the Consolidated Statements of Financial Condition.
The outstanding balance of PCD loans was $197.8 million as of June 30, 2021 and $247.3 million as of December 31, 2020.
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Total accretion on acquired loans for the quarter and six months ended June 30, 2021 was $6.0 million and $13.1 million, respectively, and $7.0 million and $13.9 million for the same periods in 2020.
7. PAST DUE LOANS, ALLOWANCE FOR CREDIT LOSSES, NON-ACCRUAL 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, 2021 and December 31, 2020 with balances presented on an amortized cost basis. 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
 Current30-89 Days
Past Due
90 Days or
More Past
Due
Total
Past Due
Total
Loans
Non-
accrual
90 Days or More Past Due, Still Accruing Interest
As of June 30, 2021       
Commercial and industrial$4,569,389 $8,168 $30,591 $38,759 $4,608,148 $45,158 $392 
Agricultural339,070 3,764 3,764 342,834 7,135 
Commercial real estate:  
Office, retail, and industrial1,788,557 2,368 16,503 18,871 1,807,428 19,484 
Multi-family1,009,401 3,321 3,321 1,012,722 3,415 
Construction574,329 40 2,969 3,009 577,338 2,969 
Other commercial real estate1,441,210 2,883 17,277 20,160 1,461,370 23,815 122 
Total commercial real estate4,813,497 5,291 40,070 45,361 4,858,858 49,683 122 
Total corporate loans,
  excluding PPP loans
9,721,956 13,459 74,425 87,884 9,809,840 101,976 514 
PPP loans705,915 705,915 
Total corporate loans10,427,871 13,459 74,425 87,884 10,515,755 101,976 514 
Home equity623,582 2,115 3,670 5,785 629,367 9,948 23 
1-4 family mortgages3,274,456 4,104 9,213 13,317 3,287,773 12,558 
Installment598,218 3,765 341 4,106 602,324 341 
Total consumer loans4,496,256 9,984 13,224 23,208 4,519,464 22,506 364 
Total loans$14,924,127 $23,443 $87,649 $111,092 $15,035,219 $124,482 $878 
As of December 31, 2020       
Commercial and industrial$4,530,546 $9,254 $38,454 $47,708 $4,578,254 $42,965 $591 
Agricultural359,373 705 3,960 4,665 364,038 10,719 
Commercial real estate:       
Office, retail, and industrial1,827,891 3,961 29,916 33,877 1,861,768 34,224 257 
Multi-family867,815 2,510 2,488 4,998 872,813 2,488 
Construction606,934 1,154 4,523 5,677 612,611 4,980 1,065 
Other commercial real estate1,448,258 15,015 18,703 33,718 1,481,976 25,824 434 
Total commercial real estate4,750,898 22,640 55,630 78,270 4,829,168 67,516 1,756 
Total corporate loans,
  excluding PPP loans
9,640,817 32,599 98,044 130,643 9,771,460 121,200 2,347 
PPP loans785,563 785,563 
Total corporate loans10,426,380 32,599 98,044 130,643 10,557,023 121,200 2,347 
Home equity750,263 5,563 5,899 11,462 761,725 10,795 956 
1-4 family mortgages3,009,564 5,296 7,553 12,849 3,022,413 10,530 115 
Installment404,831 4,263 977 5,240 410,071 977 
Total consumer loans4,164,658 15,122 14,429 29,551 4,194,209 21,325 2,048 
Total loans$14,591,038 $47,721 $112,473 $160,194 $14,751,232 $142,525 $4,395 

20


Allowance for Credit Losses
The Company maintains an allowance for credit losses at a level deemed adequate by management to absorb estimated losses expected 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, 2021 and 2020 is presented in the table below. PPP loans are excluded from this table as there is no allowance for credit losses associated with these loans because they are fully guaranteed by the U.S. Small Business Administration ("SBA").
Allowance for Credit Losses by Portfolio Segment
(Dollar amounts in thousands)
 Commercial,
Industrial, and
Agricultural
Office,
Retail, and
Industrial
Multi-
family
ConstructionOther
Commercial
Real Estate
ConsumerAllowance for
Unfunded
Commitments
Total
Allowance for Credit Losses
Quarter Ended June 30, 2021       
Beginning balance$125,798 $22,652 $3,570 $5,915 $21,205 $56,219 $8,025 $243,384 
Charge-offs(16,766)(3,898)(4)(218)(585)(2,156)(23,627)
Recoveries2,033 20 10 126 678 2,869 
Net charge-offs(14,733)(3,878)(2)(208)(459)(1,478)(20,758)
Provision for loan
  losses and other
5,331 (782)(109)(783)(688)(2,969)600 600 
Ending balance$116,396 $17,992 $3,459 $4,924 $20,058 $51,772 $8,625 $223,226 
Quarter Ended June 30, 2020       
Beginning balance$113,733 $25,856 $3,689 $11,297 $18,554 $46,819 $6,753 $226,701 
Allowance established
  for acquired PCD
  loans
378 872 1,250 
Charge-offs(5,673)(3,092)(9)(798)(31)(4,631)(14,234)
Recoveries820 12 473 1,311 
Net charge-offs(4,853)(3,086)(9)(798)(19)(4,158)(12,923)
Provision for loan
  losses and other
14,719 1,671 1,631 1,023 3,327 10,278 32,649 
Ending balance$123,977 $24,441 $5,311 $11,522 $21,862 $52,939 $7,625 $247,677 
Six Months Ended June 30, 2021      
Beginning balance$119,954 $24,078 $5,709 $6,674 $24,309 $58,293 $8,025 $247,042 
Charge-offs(19,607)(8,375)(4)(218)(1,071)(5,669)(34,944)
Recoveries2,771 120 10 241 1,281 4,430 
Net charge-offs(16,836)(8,255)(208)(830)(4,388)(30,514)
Provision for loan
  losses and other
13,278 2,169 (2,253)(1,542)(3,421)(2,133)600 6,698 
Ending balance$116,396 $17,992 $3,459 $4,924 $20,058 $51,772 $8,625 $223,226 
Six Months Ended June 30, 2020      
Beginning balance$62,830 $7,580 $2,950 $1,697 $6,408 $26,557 $1,200 $109,222 
Adjustment to apply
  recent accounting
  pronouncements(1)
20,159 11,686 397 10,300 11,427 16,235 5,553 75,757 
Allowance established
  for acquired PCD
  loans
12,640 2,003 39 872 15,554 
Charge-offs(12,739)(3,430)(19)(2,606)(339)(9,031)(28,164)
Recoveries1,979 15 156 972 3,127 
Net charge-offs(10,760)(3,415)(14)(2,606)(183)(8,059)(25,037)
Provision for loan
  losses and other
39,108 6,587 1,978 2,131 4,210 18,167 72,181 
Ending balance$123,977 $24,441 $5,311 $11,522 $21,862 $52,939 $7,625 $247,677 
(1) As a result of accounting guidance adopted in the first quarter of 2020, the increase in allowance for credit losses, net of tax, was recognized as a cumulative-effect adjustment to retained earnings as of January 1, 2020.
21


Determination of the allowance for credit losses considers multiple macroeconomic scenarios of stressed GDP, unemployment, and housing price index, detailed portfolio reviews of elevated risk sectors, and the effects of governmental responses to the pandemic. The allowance for credit losses increased from December 31, 2019 primarily due to the adoption of current expected credit losses ("CECL") and the estimated impact of the pandemic on the allowance for credit losses.
The table below provides a breakdown of loans and the related allowance for credit losses by portfolio segment as of June 30, 2021 and December 31, 2020.
Loans and Related Allowance for Credit Losses by Portfolio Segment
(Dollar amounts in thousands)
 LoansAllowance for Credit Losses
 Individually
Evaluated
Collectively
Evaluated
PCDTotalIndividually
Evaluated
Collectively
Evaluated
PCDTotal
As of June 30, 2021        
Commercial, industrial,
  agricultural
$46,178 $4,852,699 $52,105 $4,950,982 $5,406 $104,151 $6,839 $116,396 
Commercial real estate:       
Office, retail, and industrial16,353 1,755,614 35,461 1,807,428 324 14,042 3,626 17,992 
Multi-family2,171 1,003,921 6,630 1,012,722 3,382 77 3,459 
Construction1,154 562,129 14,055 577,338 3,483 1,441 4,924 
Other commercial real estate12,914 1,399,417 49,039 1,461,370 123 9,793 10,142 20,058 
Total commercial real estate32,592 4,721,081 105,185 4,858,858 447 30,700 15,286 46,433 
Total corporate loans,
  excluding PPP loans
78,770 9,573,780 157,290 9,809,840 5,853 134,851 22,125 162,829 
PPP loans705,915 705,915 
Total corporate loans78,770 10,279,695 157,290 10,515,755 5,853 134,851 22,125 162,829 
Consumer4,499,643 19,821 4,519,464 51,311 461 51,772 
Allowance for unfunded
  commitments
8,625 8,625 
Total loans$78,770 $14,779,338 $177,111 $15,035,219 $5,853 $194,787 $22,586 $223,226 
As of December 31, 2020        
Commercial, industrial, and
  agricultural
$45,650 $4,826,017 $70,625 $4,942,292 $3,536 $107,763 $8,655 $119,954 
Commercial real estate:       
Office, retail, and industrial26,384 1,792,618 42,766 1,861,768 1,123 15,106 7,849 24,078 
Multi-family1,279 864,677 6,857 872,813 5,438 271 5,709 
Construction1,154 595,550 15,907 612,611 4,535 2,139 6,674 
Other commercial real estate13,736 1,414,541 53,699 1,481,976 171 12,651 11,487 24,309 
Total commercial real estate42,553 4,667,386 119,229 4,829,168 1,294 37,730 21,746 60,770 
Total corporate loans,
  excluding PPP loans
88,203 9,493,403 189,854 9,771,460 4,830 145,493 30,401 180,724 
PPP loans785,563 785,563 
Total corporate loans88,203 10,278,966 189,854 10,557,023 4,830 145,493 30,401 180,724 
Consumer4,172,042 22,167 4,194,209 57,567 726 58,293 
Allowance for unfunded
  commitments
8,025 8,025 
Total loans$88,203 $14,451,008 $212,021 $14,751,232 $4,830 $211,085 $31,127 $247,042 
The following table presents collateral-dependent loans, including PCD loans, without regard to accrual status by primary collateral type and non-accrual loans with no related allowance as of June 30, 2021 and December 31, 2020. PPP loans are excluded from this table as there is no allowance for credit losses associated with these loans because they are fully guaranteed by the SBA.




22


Collateral-dependent Loans and Non-accrual Loans With No Related Allowance by Class
(Dollar amounts in thousands)
Type of CollateralNon-accrual Loans
With No Related
Allowance
Real
Estate
Blanket
Lien
Equipment
As of June 30, 2021
Commercial and industrial$21,132 $28,250 $1,053 $38,169 
Agricultural6,628 4,203 
Commercial real estate:
Office, retail, and industrial24,710 9,063 
Multi-family2,965 2,965 
Construction3,349 1,476 
Other commercial real estate36,660 10,582 
Total commercial real estate67,684 24,086 
Total corporate loans95,444 28,250 1,053 66,458 
Home equity102 102 
1-4 family mortgages1,208 
Installment
Total consumer loans1,310 102 
Total loans$96,754 $28,250 $1,053 $66,560 
As of December 31, 2020
Commercial and industrial$27,007 $35,632 $2,555 $36,686 
Agricultural8,583 1,737 5,213 
Commercial real estate:
Office, retail, and industrial42,790 23,508 
Multi-family2,097 1,279 
Construction5,370 1,831 
Other commercial real estate40,430 20,158 
Total commercial real estate90,687 46,776 
Total corporate loans126,277 37,369 2,555 88,675 
Home equity211 99 
1-4 family mortgages2,807 578 
Installment
Total consumer loans3,018 677 
Total loans$129,295 $37,369 $2,555 $89,352 











23


Loans Individually Evaluated
The following table presents loans individually evaluated by class of loan as of June 30, 2021 and December 31, 2020. PCD loans are excluded from this disclosure.
Loans Individually Evaluated by Class
(Dollar amounts in thousands)
 As of June 30, 2021As of December 31, 2020
 Recorded Investment In Recorded Investment In 
 Loans with
No Specific
Allowance
Loans with
a Specific
Allowance
Unpaid
Principal
Balance
Specific
Allowance
Loans with
No Specific
Allowance
Loans with
a Specific
Allowance
Unpaid
Principal
Balance
Specific
Allowance
Commercial and industrial$28,372 $11,178 $49,061 $4,276 $33,643 $1,687 $40,055 $398 
Agricultural4,203 2,425 11,097 1,130 5,213 5,107 14,972 3,138 
Commercial real estate:        
Office, retail, and industrial7,223 9,130 18,085 324 21,537 4,847 30,474 1,123 
Multi-family2,171 2,171 1,279 1,279 
Construction1,154 1,154 1,154 1,507 
Other commercial real estate3,514 9,400 13,629 123 12,822 914 14,240 171 
Total commercial real estate14,062 18,530 35,039 447 36,792 5,761 47,500 1,294 
Total corporate loans46,637 32,133 95,197 5,853 75,648 12,555 102,527 4,830 
Consumer
Total non-accrual loans
  individually evaluated
$46,637 $32,133 $95,197 $5,853 $75,648 $12,555 $102,527 $4,830 
Interest income recognized on non-accrual loans using the cash basis of accounting for the quarter and six months ended June 30, 2021 was $296,000 and $573,000, respectively, and $110,000 and $388,000 for the same periods in 2020.

24


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 at least annually or more often if events or circumstances arise that could impact the rating. The following tables present credit quality indicators for corporate and consumer loans on an amortized cost basis as of June 30, 2021 and net loan charge-offs for the six months ended June 30, 2021. PPP loans are excluded from this table as there is no allowance for credit losses associated with these loans because they are fully guaranteed by the SBA. For a summary of credit quality indicators as of December 31, 2020, see Note 7, "Past Due Loans, Allowance for Credit Losses, Impaired Loans, and TDRs," in the Company's 2020 10-K.
Corporate Loan Portfolio by Origination Year
(Dollar amounts in thousands)
 
2021(1)
2020201920182017Prior
Revolving
Loans
Total
Commercial, industrial, agricultural:    
Pass$447,821 $717,836 $732,743 $654,037 $363,744 $497,033 $1,189,785 $4,602,999 
Special Mention(2)
1,389 1,767 32,583 50,046 924 25,009 33,922 145,640 
Substandard(3)
399 625 18,209 61,422 15,454 35,961 17,980 150,050 
Non-accrual(4)
1,182 2,430 10,425 19,481 2,382 12,666 3,727 52,293 
Total commercial,
  industrial,
  agricultural
$450,791 $722,658 $793,960 $784,986 $382,504 $570,669 $1,245,414 $4,950,982 
Commercial, industrial,
  agricultural, net loan
  charge-offs
$$775 $752 $4,317 $9,775 $172 $1,045 $16,836 
Office, retail, and industrial:
Pass$87,564 $139,618 $227,270 $173,567 $244,300 $789,382 $10,689 $1,672,390 
Special Mention(2)
314 2,906 5,767 8,917 33,752 51,656 
Substandard(3)
632 21,325 2,465 39,476 63,898 
Non-accrual(4)
131 169 19,184 19,484 
Total office, retail,
  and industrial
$87,564 $140,564 $230,176 $200,790 $255,851 $881,794 $10,689 $1,807,428 
Office, retail, and
  industrial net loan
  charge-offs
$$$261 $3,899 $1,023 $3,072 $$8,255 
Multi-family:
Pass$131,931 $152,933 $160,428 $77,857 $125,443 $286,737 $17,976 $953,305 
Special Mention(2)
9,918 35,754 45,672 
Substandard(3)
380 71 9,879 10,330 
Non-accrual(4)
935 2,480 3,415 
Total multi-family$131,931 $152,933 $160,428 $88,155 $126,449 $334,850 $17,976 $1,012,722 
Multi-family net loan
  charge-offs
$$$$$$(7)$$(3)
Construction:
Pass$38,449 $113,848 $98,665 $135,066 $74,662 $77,655 $25,429 $563,774 
Special Mention(2)
40 72 112 
Substandard(3)
1,395 9,088 10,483 
Non-accrual(4)
1,154 1,815 2,969 
Total construction$38,449 $113,848 $98,665 $135,106 $77,211 $88,630 $25,429 $577,338 
Construction net loan
  charge-offs
$$$$$(10)$177 $41 $208 
Other commercial real estate:
Pass$154,306 $173,606 $149,218 $216,066 $143,310 $380,975 $28,641 $1,246,122 
Special Mention(2)
24,432 13,724 22,808 39,503 100,467 
Substandard(3)
1,919 17,101 20,747 50,957 242 90,966 
Non-accrual(4)
312 1,138 22,202 163 23,815 
Total other
  commercial real
  estate
$154,306 $173,606 $175,569 $247,203 $188,003 $493,637 $29,046 $1,461,370 
Other commercial real
  estate net loan charge-
  offs
$$$$246 $(62)$646 $$830 
(1)Represents year-to-date loans originated during 2021.
(2)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.
(3)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.
(4)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.
25


Consumer Loan Portfolio by Origination Year
(Dollar amounts in thousands)
 
2021(1)
2020201920182017Prior
Revolving
Loans
Total
Home equity:     
Performing$5,020 $11,149 $8,859 $11,199 $9,246 $53,069 $520,877 $619,419 
Non-accrual538 226 6,961 2,223 9,948 
Total home equity$5,020 $11,149 $8,859 $11,737 $9,472 $60,030 $523,100 $629,367 
Home equity net
  loan charge-offs
$$$$26 $(42)$(112)$(14)$(142)
1-4 family mortgages:
Performing$371,229 $1,696,057 $683,454 $141,720 $90,860 $291,895 $$3,275,215 
Non-accrual863 384 627 638 10,046 12,558 
Total 1-4 family
  mortgages
$371,229 $1,696,920 $683,838 $142,347 $91,498 $301,941 $$3,287,773 
1-4 family mortgages
  net loan charge-offs
$$$$$$208 $$210 
Installment:
Performing$138,273 $148,363 $126,842 $87,780 $37,576 $25,380 $38,110 $602,324 
Non-accrual
Total installment$138,273 $148,363 $126,842 $87,780 $37,576 $25,380 $38,110 $602,324 
Installment net loan
  charge-offs
$14 $959 $2,072 $1,170 $193 $(115)$27 $4,320 
(1)Represents year-to-date loans originated during 2021.
During the quarter and six months ended June 30, 2021, $9.7 million and $21.1 million, respectively, and $16.8 million and $23.8 million, for the same periods in 2020, of revolving loans converted to term loans.
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, 2021 and December 31, 2020. 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, 2021As of December 31, 2020
 Accruing
Non-accrual(1)
TotalAccruing
Non-accrual(1)
Total
Commercial and industrial$$6,923 $6,923 $$8,859 $8,859 
Agricultural
Commercial real estate:      
Office, retail, and industrial2,340 2,340 
Multi-family153 153 160 160 
Construction
Other commercial real estate164 164 184 184 
Total commercial real estate164 153 317 184 2,500 2,684 
Total corporate loans164 7,076 7,240 184 11,359 11,543 
Home equity30 108 138 31 116 147 
1-4 family mortgages588 219 807 598 228 826 
Installment
Total consumer loans618 327 945 629 344 973 
Total loans$782 $7,403 $8,185 $813 $11,703 $12,516 
(1)These TDRs are included in non-accrual loans in the preceding tables.
26


In March of 2020, the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act") was enacted by the U.S. government in response to the economic disruption caused by the pandemic. The Company's banking regulators issued the "Interagency Statement on Loan Modifications by Financial Institutions Working with Customers Affected by the Coronavirus" that encourages financial institutions to work prudently with borrowers who are or may be unable to meet their contractual payment obligations due to the effects of the pandemic. Additionally, the CARES Act as amended by the 2021 Consolidated Appropriations Act, which was signed into law in December 2020, provides that a qualified loan modification is exempt from classification as a TDR as defined by GAAP, from the period beginning March 1, 2020 until the earlier of January 1, 2022 or the date that is 60 days after the date on which the national emergency concerning the pandemic declared by the President of the United States terminates. As of June 30, 2021, the Company has eligible modifications with outstanding balances totaling $88.5 million, which are not classified as TDRs.
TDRs are included in the calculation of the allowance for credit losses in the same manner as non-accrual loans. As of June 30, 2021 and December 31, 2020 there were $252,000 and $140,000 of specific allowances, respectively, related to TDRs.
There were no material restructurings during the quarters and six months ended June 30, 2021 and 2020.
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, 2021 and 2020.
A rollforward of the carrying value of TDRs for the quarters and six months ended June 30, 2021 and 2020 is presented in the following table.
TDR Rollforward
(Dollar amounts in thousands)
Quarters Ended 
 June 30,
Six Months Ended 
 June 30,
2021202020212020
Accruing
Beginning balance$798 $1,216 $813 $1,233 
Additions
Net payments(16)(15)(31)(32)
Net transfers to non-accrual
Ending balance782 1,201 782 1,201 
Non-accrual
Beginning balance8,011 17,917 11,703 20,514 
Additions934 
Net payments(609)(2,595)(3,274)(3,253)
Charge-offs(3,229)(1,026)(6,102)
Net transfers from accruing
Ending balance7,403 12,093 7,403 12,093 
Total TDRs$8,185 $13,294 $8,185 $13,294 
There were 0 commitments to lend additional funds to borrowers with TDRs as of June 30, 2021 and December 31, 2020.
27


8. LEASE OBLIGATIONS
The significant accounting policies related to lease obligations are presented in Note 1, "Summary of Significant Accounting Policies" to the Consolidated Financial Statements in the Company's 2020 10-K.
The Company has the right to utilize certain premises under non-cancelable operating leases with varying maturity dates through the year ending December 31, 2059. As of June 30, 2021, the weighted-average remaining lease term on these leases was 9.4 years. Various leases contain renewal or termination options controlled by the Company or 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. Variable payments for real estate taxes and other operating expenses are considered to be non-lease components and are excluded from the determination of the lease liability. In addition, the Company leases or subleases certain real estate to third-parties. 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 and a reconciliation of those payments to the Company's lease liability as of June 30, 2021.
Lease Liability
(Dollar amounts in thousands)
 As of  
 June 30, 2021
Year Ending December 31,
2021$11,307 
202222,525 
202322,625 
202422,443 
202521,257 
2026 and thereafter96,135 
Total minimum lease payments196,292 
Discount(1)
(24,513)
Lease liability(2)
$171,779 
(1)Represents the net present value adjustment related to minimum lease payments.
(2)Included in accrued interest payable and other liabilities in the Consolidated Statements of Financial Condition.
The discount rate for the Company's operating leases is the rate implicit in the lease and, if that rate cannot be readily determined, the Company's incremental borrowing rate. The weighted-average discount rate on the Company's operating leases was 2.71% as of June 30, 2021.
As of June 30, 2021, right-of-use assets of $144.1 million associated with lease liabilities were included in accrued interest receivable and other assets in the Consolidated Statements of Financial Condition.
During 2020, the Company initiated certain actions that include optimizing its retail branch network and delivery model through the consolidation of 17 branches, or approximately 15% of its branch network, which were completed in the first quarter of 2021. These actions resulted in pre-tax costs of $19.9 million, including $9.1 million of right-of-use asset impairment charges and $8.9 million of impairment charges on branch locations, furniture, and equipment associated with valuation adjustments related to locations identified for closure, among other items, and were recorded within optimization costs within noninterest expense during the third and fourth quarters of 2020.
The following table presents net operating lease expense for the quarters and six months ended June 30, 2021 and 2020.
Net Operating Lease Expense
(Dollar amounts in thousands)
 Quarters Ended 
 June 30,
Six Months Ended 
 June 30,
 2021202020212020
Lease expense charged to operations$4,441 $4,839 $9,052 $9,514 
Rental income from premises leased to others (1)
(108)(183)(222)(398)
Net operating lease expense$4,333 $4,656 $8,830 $9,116 
(1)Included as reductions to net occupancy and equipment expense in the Condensed Consolidated Statements of Income.
28


9. MATERIAL TRANSACTIONS AFFECTING STOCKHOLDERS' EQUITY
Issuance of Common Stock
On March 9, 2020, the Company issued 4.9 million shares of its common stock with a market value of $14.58 per share at issuance as part of the consideration in the Park Bank acquisition. Additional information regarding the Park Bank acquisition is presented in Note 3, "Acquisitions."
Issuance of Preferred Stock
During the second quarter of 2020, the Company issued 4.3 million depositary shares, each representing a 1/40th interest in a share of the Company's 7.000% Fixed Rate Non-Cumulative Perpetual Preferred Stock, Series A, and 4.9 million depositary shares, each representing a 1/40th interest in a share of the Company's 7.000% Fixed Rate Non-Cumulative Perpetual Preferred Stock, Series C, for an aggregate of $230.5 million. The Company received proceeds of $221.2 million, net of underwriting discounts and commissions and issuance costs and expects to use the proceeds for general corporate purposes.
Stock Repurchases
On February 26, 2020, the Company announced a stock repurchase program authorizing the discretionary repurchase of up to $200 million of its outstanding common stock through December 31, 2021. This program replaced the Company's prior $180 million stock repurchase program, which expired in March 2020. The Company repurchased 715,000 shares of its common stock at a total cost of $14.9 million during the six months ended June 30, 2021. The Company did not repurchase any shares of its common stock during the second quarter of 2021.
10. 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,
 2021202020212020
Net income$51,121 $19,064 $96,144 $38,670 
Preferred dividends(4,034)(1,037)(8,068)(1,037)
Net income applicable to unvested restricted shares(521)(187)(1,007)(379)
Net income applicable to common shares$46,566 $17,840 $87,069 $37,254 
Weighted-average common shares outstanding:    
Weighted-average common shares outstanding (basic)112,865 113,145 112,980 111,533 
Dilutive effect of common stock equivalents775 191 757 339 
Weighted-average diluted common shares outstanding113,640 113,336 113,737 111,872 
Basic EPS$0.41 $0.16 $0.77 $0.33 
Diluted EPS$0.41 $0.16 $0.77 $0.33 

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11. 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."
Cash Flow Hedges
As of June 30, 2021, the Company hedged $430.0 million of certain corporate variable rate loans using interest rate swaps through which the Company receives fixed amounts and pays variable amounts. The Company also hedged $25.0 million of borrowed funds using 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.
The forward starting interest rate swaps totaling $25.0 million begin in January of 2023 and mature in January of 2026. The weighted-average fixed interest rate to be paid on these interest rate swaps that have not yet begun was 0.60% as of June 30, 2021. These derivative contracts are designated as cash flow hedges.
Cash Flow Hedges
(Dollar amounts in thousands)
As of
 June 30, 2021December 31, 2020
Gross notional amount outstanding$455,000 $455,000 
Derivative asset fair value in other assets(1)
1,410 3,707 
Derivative liability fair value in other liabilities(1)
(1)
Weighted-average interest rate received2.18 %2.18 %
Weighted-average interest rate paid0.11 %0.15 %
Weighted-average maturity (in years)1.001.50
(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.
Changes in the fair value of cash flow hedges are recorded in accumulated other comprehensive income (loss) on an after-tax basis and are subsequently reclassified to interest income or expense in the period that the forecasted hedged item impacts earnings. As of June 30, 2021, the Company estimates that $6.9 million will be reclassified from accumulated other comprehensive income (loss) as an increase to interest income over the next twelve months.
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, 2021 and December 31, 2020, 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 totaled $2.0 million and $4.0 million for the quarter and six months ended June 30, 2021, and were $694,000 and $5.4 million for the quarter and six months ended June 30, 2020.
Other Derivative Instruments
(Dollar amounts in thousands)
As of
 June 30, 2021December 31, 2020
Gross notional amount outstanding$4,674,616 $4,491,398 
Derivative asset fair value in other assets(1)
101,027 149,997 
Derivative liability fair value in other liabilities(1)
(33,528)(44,580)
Fair value of derivative(2)
34,527 46,018 
(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.
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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, 2021 and December 31, 2020. The Company does not enter into derivative transactions for purely speculative purposes.
The following table presents the impact of derivative instruments on comprehensive income (loss) and the reclassification of gains (losses) from accumulated other comprehensive income (loss) to net interest income for the quarters and six months ended June 30, 2021 and 2020.
Cash Flow Hedge Accounting on AOCI
(Dollar amounts in thousands)
Quarters Ended 
 June 30,
Six Months Ended 
 June 30,
2021202020212020
Gains (losses) recognized in other comprehensive income
Interest rate swaps in interest income$151 $5,951 $354 $27,955 
Interest rate swaps in interest expense(90)(1,276)(702)(13,685)
Reclassification of gains included in net income
Interest rate swaps in interest income$2,226 $2,624 $4,430 $3,069 
Interest rate swaps in interest expense
The following table presents the impact of derivative instruments on net interest income for the quarters and six months ended June 30, 2021 and 2020.
Hedge Income
(Dollar amounts in thousands)
 Quarters Ended 
 June 30,
Six Months Ended 
 June 30,
 2021202020212020
Cash Flow Hedges
Interest rate swaps in interest income$2,226 $2,624 $4,430 $3,069 
Interest rate swaps in interest expense
Total cash flow hedges$2,226 $2,624 $4,430 $3,069 
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, 2021 and December 31, 2020, these collateral agreements covered 100% of the fair value of the Company's outstanding derivatives. Derivative assets and liabilities are presented gross, rather than net, of pledged collateral amounts.
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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, 2021 and December 31, 2020.
Fair Value of Offsetting Derivatives
(Dollar amounts in thousands)
As of June 30, 2021As of December 31, 2020
 AssetsLiabilitiesAssetsLiabilities
Gross amounts recognized$102,437 $33,528 $153,704 $44,581 
Less: amounts offset in the Consolidated Statements of
  Financial Condition
Net amount presented in the Consolidated Statements of
  Financial Condition(1)
102,437 33,528 153,704 44,581 
Gross amounts not offset in the Consolidated Statements of
  Financial Condition:
Offsetting derivative positions(3,467)(3,467)(5,239)(5,239)
Cash collateral pledged(28,720)(39,970)
Net credit exposure$98,970 $1,341 $148,465 $(628)
(1)Included in other assets or other liabilities in the Consolidated Statements of Financial Condition.
As of June 30, 2021 and December 31, 2020, 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, 2021 and December 31, 2020 the Company was in compliance with these provisions.
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12. 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 as well as 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
 June 30, 2021December 31, 2020
Commitments to extend credit:  
Commercial, industrial, and agricultural$2,320,641 $2,318,346 
Commercial real estate449,176 378,282 
Home equity634,071 611,640 
Other commitments(1)
272,225 264,869 
Total commitments to extend credit$3,676,113 $3,573,137 
  
Letters of credit$115,722 $115,130 
(1)Other commitments includes installment and overdraft protection program commitments.
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 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. 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-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 early 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, 2021 and 2020.
Legal Proceedings
At June 30, 2021, there were certain legal proceedings pending against the Company and its subsidiaries in the ordinary course of business. While the outcome of any legal proceeding is inherently uncertain, based on information currently available, the Company's management does not expect that any potential liabilities arising from pending legal matters will have a material adverse effect on the Company's business, financial position, or results of operations.
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13. 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.
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Assets and Liabilities Required to be Measured at Fair Value on a Recurring Basis
The following table provides the fair value for assets and liabilities required to be measured at fair value on a recurring basis in the Consolidated Statements of Financial Condition by level in the fair value hierarchy.
Recurring Fair Value Measurements
(Dollar amounts in thousands)
 As of June 30, 2021As of December 31, 2020
 Level 1Level 2Level 3Level 1Level 2Level 3
Assets      
Equity securities$87,480 $20,497 $$52,888 $18,516 $
Securities available-for-sale      
U.S. treasury securities1,003 12,051 
U.S. agency securities598,797 652,474 
CMOs1,339,626 1,438,518 
MBSs814,361 580,840 
Municipal securities221,901 236,015 
Corporate debt securities180,506 176,510 
Total securities available-for-sale1,003 3,155,191 12,051 3,084,357 
Mortgage servicing rights ("MSRs")(1)
6,269 4,899 
Derivative assets(1)
102,437 153,704 
Liabilities      
Derivative liabilities(2)
$$33,528 $$$44,581 $
(1)Included in other assets in the Consolidated Statements of Financial Condition.
(2)Included in other liabilities in the Consolidated Statements of Financial Condition.
The following sections describe the specific valuation techniques and inputs used to measure financial assets and liabilities at fair value.
Equity Securities
The Company's equity securities consist primarily of community development investments and certain diversified securities held in a grantor trust for participants in the Company's nonqualified deferred compensation plan that are invested in money market and mutual funds, and various preferred equity investments. The fair value of certain community 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. As of June 30, 2021, the fair value of certain community development investments totaling $5.0 million was based on the net asset value per share ("NAV") practical expedient and can be redeemed at any month end with 30 days notice. Because these investments are measured at fair value using the NAV practical expedient, they are not classified in the fair value hierarchy. The fair value of the money market, mutual funds, and preferred equity investments 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 in order to determine whether the valuations represent an exit price in the Company's principal markets.
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MSRs
The Company services loans for others totaling $831.8 million and $766.1 million as of June 30, 2021 and December 31, 2020, respectively. These loans are owned by third-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, 2021 and December 31, 2020.
Significant Unobservable Inputs Used in the Valuation of MSRs
As of
June 30, 2021December 31, 2020
Prepayment speed7.7 % -15.3%5.3 % -16.3%
Maturity (months)22 -8313 -71
Discount rate9.5 % -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, 2021 and 2020 is presented in the following table.
Carrying Value of MSRs
(Dollar amounts in thousands)
 Quarters Ended 
 June 30,
Six Months Ended 
 June 30,
 2021202020212020
Beginning balance$6,361 $4,874 $4,899 $5,858 
New MSRs530 745 1,567 901 
Total gains (losses) included in earnings(1):
  
Changes in valuation inputs and assumptions(300)(750)466 (1,658)
Other changes in fair value(2)
(322)(405)(663)(637)
Ending balance(3)
$6,269 $4,464 $6,269 $4,464 
Contractual servicing fees earned(1)
$471 $394 $960 $797 
(1)Included in mortgage banking income in the Condensed Consolidated Statements of Income and related to assets held as of June 30, 2021 and 2020.
(2)Primarily represents changes in expected future cash flows due to payoffs and paydowns.
(3)Included in other assets in the Consolidated Statements of Financial Condition.
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.
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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, 2021As of December 31, 2020
 Level 1Level 2Level 3Level 1Level 2Level 3
Collateral-dependent non-accrual loans(1)
$$$46,614 $$$21,246 
OREO(2)
2,000 
Loans held-for-sale(3)
19,511 44,965 
Assets held-for-sale(4)
4,205 3,722 
(1)Includes non-accrual loans with charge-offs and non-accrual loans with a specific allowance 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 Non-accrual Loans
Certain collateral-dependent non-accrual loans are subject to fair value adjustments to reflect the difference between the carrying value of the loan and the fair value of the underlying collateral. The fair values of collateral-dependent non-accrual loans are primarily determined by current appraised values of the underlying collateral. Based on the age and/or type of collateral, 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 non-accrual loans are classified in level 3 of the fair value hierarchy.
Collateral-dependent non-accrual 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, all less estimated costs to sell. Given these valuation methods, OREO is classified in level 3 of the fair value hierarchy.
Loans Held-for-Sale
As of June 30, 2021 and December 31, 2020, 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.
Assets Held-for-Sale
Assets held-for-sale as of June 30, 2021 and December 31, 2020 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.
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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
 June 30, 2021December 31, 2020
 Fair Value Hierarchy
Level
Carrying
Amount
Fair ValueCarrying
Amount
Fair Value
Assets    
Cash and due from banks1$232,989 $232,989 $196,364 $196,364 
Interest-bearing deposits in other banks21,312,412 1,312,412 920,880 920,880 
Securities held-to-maturity211,593 11,125 12,071 11,686 
FHLB and FRB stock2106,890 106,890 117,420 117,420 
Loans314,820,618 14,672,973 14,512,215 14,614,029 
Investment in BOLI3300,537 300,537 301,101 301,101 
Accrued interest receivable362,964 62,964 68,390 68,390 
Liabilities     
Deposits2$17,032,883 $17,035,250 $16,012,464 $16,007,133 
Borrowed funds21,299,424 1,299,424 1,546,414 1,546,414 
Senior and subordinated debt2235,178 284,691 234,768 281,842 
Accrued interest payable24,573 4,573 4,826 4,826 
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. Loans include net loans, which consists of loans held-for-investment, acquired loans, and the allowance for loan losses. As of both June 30, 2021 and December 31, 2020, the Company estimated the fair value of lending commitments outstanding to be immaterial.
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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 Chicago, Illinois, with operations in metropolitan Chicago, southeast Wisconsin, northwest Indiana, central and western Illinois, eastern Iowa, and other markets in the Midwest. Our principal subsidiary, First Midwest Bank, and other affiliates provide a full range of commercial, treasury management, equipment leasing, consumer, wealth management, trust, and private banking products and services through 114 banking locations. We are committed to meeting the financial needs of the people and businesses in the communities where we live and work by providing banking and wealth management 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, 2021 and 2020 and Consolidated Statements of Financial Condition as of June 30, 2021 and December 31, 2020. Certain reclassifications were made to prior year amounts to conform to the current year presentation. 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 financial information presented in Item 1 of this Quarterly Report on Form 10-Q ("Form 10-Q"), as well as in our 2020 Annual Report on Form 10-K ("2020 10-K"). The results of operations for the quarter and six months ended June 30, 2021 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, regional, 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 ("NPLs") 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 ("DTAs"), (ii) Tier 1 capital, which consists of CET1 and the remaining portion of disallowed DTAs, and (iii) Tier 2 capital, which includes qualifying subordinated debt, qualifying trust-preferred securities, and the allowance for credit losses, subject to limitations.
Some of these metrics may be presented on a basis not in accordance with U.S. generally accepted accounting principles ("non-GAAP"). For detail on our non-GAAP metrics, see the discussion in the section of this Item 2 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.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This Form 10-Q, as well as any oral statements made by or on behalf of First Midwest, 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" 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. We caution
39


you not to place undue reliance on these statements. Forward-looking statements speak only as of the date made, and we undertake no obligation to update any forward-looking statements.
Forward-looking statements may be deemed to include, among other things, statements relating to our future financial performance, including the related outlook for 2021, the performance of our loan or securities portfolio, the expected amount of future credit allowances or charge-offs, delays in completing the pending merger of First Midwest and Old National, the failure to obtain necessary regulatory approvals and shareholder approvals or to satisfy any of the other conditions to the merger on a timely basis or at all, the possibility that the anticipated benefits of the merger are not realized when expected or at all, corporate strategies or objectives, including the impact of certain actions and initiatives, anticipated trends in our business, regulatory developments, estimated synergies, cost savings and financial benefits of completed transactions, growth strategies, the inability to realize cost savings or improved revenues or to implement integration plans and other consequences associated with the proposed merger, and the continued or potential effects of the COVID-19 pandemic (the "pandemic") and related variants and mutations on our business, financial condition, liquidity, capital, loans, asset quality and results of operations. These statements are subject to certain risks, uncertainties and assumptions, including the duration, extent and severity of the pandemic and related variants and mutations, including the continued effects on our business, operations and employees, as well as on our customers and service providers, and on economies and markets more generally and other risks, uncertainties and assumptions that are discussed under the sections entitled "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" in this report and in First Midwest's 2020 10-K, and in First Midwest's subsequent filings made with the Securities and Exchange Commission ("SEC"). These risks and uncertainties are not exhaustive, and other sections of these reports describe additional factors that could adversely impact First Midwest's 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 practices within the banking industry. Application of GAAP requires management to make estimates, assumptions, and judgments based on the best available information as of the date of the financial statements that affect the amounts reported in the consolidated 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 our 2020 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, 2020.
COVID-19 PANDEMIC
The pandemic and the resulting governmental responses continue to impact our business and operations, as well as the business and operations of our clients. A variety of restrictions have been placed on companies and individuals throughout our primary operating footprint of Illinois, Wisconsin, Indiana and Iowa at various times during the pandemic. In Illinois, where we are headquartered and conduct the substantial majority of our operations, business restrictions were in place during the quarter. Although these restrictions have been relaxed, new restrictions may go into effect as the pandemic, including variants and mutations, continues to evolve. The pandemic and these governmental measures have created and may continue to create significant economic disruption and decreased economic activity.
We have experienced, and may continue to experience in the future, a number of financial impacts as a result of the pandemic and governmental responses to it, including a higher provision for loan losses and lower net interest and noninterest income. Additionally, we are actively participating in the U.S. Small Business Administration's ("SBA's") Paycheck Protection Program ("PPP"), and have $705.9 million of these loans as of June 30, 2021. PPP loans have been funded by a combination of deposits and borrowings, with the related processing fees earned being recognized as a yield adjustment over the terms of these loans. We are also committed to using our strong capital levels and ample liquidity to support our clients and communities as they navigate the pandemic. We are temporarily offering several programs and services to support our clients, including:
Consumer, mortgage, and auto loan payment deferrals;
Small business payment deferrals; and
A suspension of foreclosure and repossession actions.
We have included additional disclosure throughout this Item 2 in this Form 10-Q regarding the impact of the pandemic, including with respect to our loan portfolio, income, and funding and liquidity.
40


We have modified our operations to comply with governmental restrictions and public health authority guidelines. Starting in the third quarter of 2021, the majority of our colleagues are working on-site and are subject to enhanced health and safety protocols. All of our branches are open for business through drive-up services and walk-in lobby traffic. We are monitoring current developments, including the Delta variant, and its potential impact and implications.
Additionally, we have implemented a variety of policies and programs to support our colleagues during the pandemic. As of June 30, 2021, we continue to provide additional health and welfare benefits, for all colleagues, including emergency medical loans, enhanced health insurance programs, and access to retirement benefits under certain pandemic-related circumstances.
Consistent with our long-standing emphasis on community engagement, we are actively supporting the communities we serve during the pandemic. We have committed $2.5 million from the First Midwest Charitable Foundation to support the immediate and long-term needs of our communities. This commitment does not impact the Company's current or future expense as the foundation is a separate entity that is not included in our consolidated financial statements. We also offer enhanced matching gift programs to support colleague donations to eligible 501(c)(3) organizations.
For additional information regarding the risks associated with the pandemic and its expected impact on the Company, refer to the section entitled "Risk Factors" in Part I, Item 1A of our 2020 Form 10-K.
PENDING MERGER OF EQUALS
Old National Bank
On June 1, 2021, the Company and Old National Bancorp ("Old National"), the holding company for Old National Bank, jointly announced they have entered into a definitive merger agreement to combine in an all-stock merger of equals transaction to create a premier Midwestern bank with approximately $45 billion in combined assets. The merger agreement, which has been unanimously approved by the boards of directors of both companies, provides for a fixed exchange ratio whereby holders of Company common stock will receive 1.1336 shares of Old National common stock for each share of Company common stock they own, other than certain shares held by the Company or Old National. In addition, the merger agreement provides that holders of Company depositary shares representing a 1/40th interest in a share of the Company's 7.000% Fixed Rate Non-Cumulative Perpetual Preferred Stock, Series A or Series C, will receive an equal amount of Old National depositary shares each representing a 1/40th interest in a share of a corresponding new series of Old National preferred stock having terms that are not materially less favorable than the Company preferred stock. The headquarters of the surviving corporation and the main office of the surviving bank will be located in Evansville, Indiana and the name of the surviving corporation and surviving bank will be Old National Bancorp and Old National Bank, respectively. The Commercial Banking and Consumer Banking operations of the surviving bank will be headquartered in Chicago, Illinois. Michael Scudder, Chairman and Chief Executive Officer ("CEO") of the Company, will serve as the Executive Chairman, and Jim Ryan, Chairman and CEO of Old National Bancorp, will maintain his role as CEO. As of the date of announcement, the overall transaction market value was approximately $6.5 billion. The transaction is subject to customary regulatory and shareholder approvals and the completion of various closing conditions and is anticipated to close in late 2021 or early 2022. The Company will hold a special meeting of its stockholders to vote on the merger on September 15, 2021.
41


PERFORMANCE OVERVIEW
Table 1
Selected Financial Data
(Amounts in thousands, except per share data)
 Quarters Ended 
 June 30,
Six Months Ended 
 June 30,
 2021202020212020
Operating Results    
Interest income$154,000 $162,044 $305,150 $332,271 
Interest expense9,712 16,810 19,747 43,462 
Net interest income144,288 145,234 285,403 288,809 
Provision for loan losses— 32,649 6,098 72,181 
Noninterest income46,270 32,991 92,073 72,353 
Noninterest expense121,419 120,330 239,844 237,661 
Income before income tax expense69,139 25,246 131,534 51,320 
Income tax expense18,018 6,182 35,390 12,650 
Net income$51,121 $19,064 $96,144 $38,670 
Preferred dividends(4,034)(1,037)(8,068)(1,037)
Net income applicable to non-vested restricted shares(521)(187)(1,007)(379)
Net income applicable to common shares$46,566 $17,840 $87,069 $37,254 
Weighted-average diluted common shares outstanding113,640 113,336 113,737 111,872 
Diluted earnings per common share$0.41 $0.16 $0.77 $0.33 
Diluted earnings per common share, adjusted(1)
$0.46 $0.19 $0.83 $0.41 
Performance Ratios    
Return on average common equity(2)
7.60 %2.94 %7.15 %3.08 %
Return on average common equity, adjusted(1)(2)
8.56 %3.58 %7.74 %3.81 %
Return on average tangible common equity(2)
12.77 %5.32 %12.07 %5.49 %
Return on average tangible common equity, adjusted(1)(2)
14.31 %6.37 %13.02 %6.65 %
Return on average assets(2)
0.95 %0.37 %0.91 %0.40 %
Return on average assets, adjusted(1)(2)
1.06 %0.44 %0.98 %0.49 %
Tax-equivalent net interest margin(1)(2)(3)
2.96 %3.13 %2.99 %3.32 %
Tax-equivalent net interest margin, adjusted(1)(2)(3)
2.84 %2.98 %2.86 %3.16 %
Efficiency ratio(1)
59.24 %64.08 %60.49 %62.12 %
(1)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."
(2)These ratios are presented on an annualized basis.
(3)See the section of this Item 2 titled "Earnings Performance" below for additional discussion and calculation of this financial measure.
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 As ofJune 30, 2021 
 Change From
June 30,
2021
December 31,
2020
June 30,
2020
December 31,
2020
June 30,
2020
Balance Sheet Highlights     
Total assets$21,625,424 $20,838,678 $21,244,881 $786,746 $380,543 
Total loans15,035,219 14,751,232 14,933,658 283,987 101,561 
Total deposits17,032,883 16,012,464 15,657,656 1,020,419 1,375,227 
Core deposits15,200,924 14,002,139 13,301,389 1,198,785 1,899,535 
Loans to deposits88.3 %92.1 %95.4 %  
Core deposits to total deposits89.2 %87.4 %85.0 %  
Asset Quality Highlights     
Non-accrual loans, excluding purchased
  credit deteriorated ("PCD") loans(1)
$101,381 $109,957 $94,044 $(8,576)$7,337 
Non-accrual PCD loans23,101 32,568 45,116 (9,467)(22,015)
Total non-accrual loans124,482 142,525 139,160 (18,043)(14,678)
90 days or more past due loans, still
  accruing interest
878 4,395 3,241 (3,517)(2,363)
Total NPLs125,360 146,920 142,401 (21,560)(17,041)
Accruing troubled debt
  restructurings ("TDRs")
782 813 1,201 (31)(419)
Foreclosed assets(2)
26,732 16,671 19,024 10,061 7,708 
Total non-performing assets ("NPAs")$152,874 $164,404 $162,626 $(11,530)$(9,752)
30-89 days past due loans$21,051 $40,656 $36,342 $(19,605)$(15,291)
NPAs to total loans plus foreclosed assets1.01 %1.11 %1.09 %
NPAs to total loans plus foreclosed assets, excluding PCD and PPP loans(1)(3)
0.92 %0.96 %0.87 %
Allowance for Credit Losses
Allowance for credit losses$223,226 $247,042 $247,677 $(23,816)$(24,451)
Allowance for credit losses to total loans1.48 %1.67 %1.66 %
Allowance for credit losses to
  total loans, excluding PPP loans(3)
1.56 %1.77 %1.80 %
Allowance for credit losses to
  non-accrual loans
179.32 %173.33 %177.98 %  
(1)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."
(2)Foreclosed assets consists of other real estate owned ("OREO") and other foreclosed assets acquired in partial or total satisfaction of defaulted loans. Other foreclosed assets are included in other assets in the Consolidated Statements of Financial Condition.
(3)This ratio excludes PPP loans that are fully guaranteed by the SBA. As a result, no allowance for credit losses is associated with these loans. See the "Non-GAAP Financial Information" section presented later in this release for a discussion of this non-GAAP financial measure.
43


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 2020 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 Table 2. 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, 2021 and 2020, 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 below presents this same information for the six months ended June 30, 2021 and 2020.

44


Table 2
Net Interest Income and Margin Analysis
(Dollar amounts in thousands)
 Quarters Ended June 30,Attribution of Change
in Net Interest Income
 20212020
 Average
Balance
InterestYield/
Rate (%)
Average
Balance
InterestYield/
Rate (%)
VolumeYield/
Rate
Total
Assets         
Other interest-earning assets$1,185,187 $745 0.25 $646,887 $471 0.29 $328 $(54)$274 
Securities(1)
3,226,974 16,752 2.08 3,357,984 21,040 2.51 (216)(4,072)(4,288)
Federal Home Loan Bank
  ("FHLB") and Federal Reserve
  Bank ("FRB") stock
106,330 934 3.51 154,678 368 0.95 (74)640 566 
Loans, excluding PPP loans(1)
14,095,989 125,264 3.56 13,729,250 135,952 3.98 3,763 (14,451)(10,688)
PPP loans(1)
1,035,386 11,258 4.36 887,997 5,368 2.43 1,014 4,876 5,890 
Total loans(1)(2)
15,131,375 136,522 3.62 14,617,247 141,320 3.89 4,777 (9,575)(4,798)
Total interest-earning assets(1)(2)
19,649,866 154,953 3.16 18,776,796 163,199 3.49 4,815 (13,061)(8,246)
Cash and due from banks268,450   275,696      
Allowance for loan losses(235,770)  (224,519)     
Other assets1,850,663   2,040,133      
Total assets$21,533,209   $20,868,106      
Liabilities and Stockholders' Equity        
Savings deposits$2,740,893 121 0.02 $2,246,643 99 0.02 22 — 22 
NOW accounts3,048,990 261 0.03 2,549,088 637 0.10 160 (536)(376)
Money market deposits3,055,420 559 0.07 2,663,622 1,157 0.17 1,005 (1,603)(598)
Time deposits1,876,216 2,190 0.47 2,539,996 8,184 1.30 (654)(5,340)(5,994)
Borrowed funds1,288,107 3,112 0.97 2,466,300 3,156 0.51 (1,535)1,491 (44)
Senior and subordinated debt235,080 3,469 5.92 234,259 3,577 6.14 63 (171)(108)
Total interest-bearing
  liabilities
12,244,706 9,712 0.32 12,699,908 16,810 0.53 (939)(6,159)(7,098)
Demand deposits6,254,791   5,305,109     
Total funding sources18,499,497 0.21 18,005,017 0.38 
Other liabilities347,178   361,311      
Stockholders' equity2,686,534   2,501,778      
Total liabilities and
  stockholders' equity
$21,533,209   $20,868,106      
Tax-equivalent net interest
  income/margin(1)
 145,241 2.96  146,389 3.13 $5,754 $(6,902)$(1,148)
Tax-equivalent adjustment (953)  (1,155)    
Net interest income (GAAP) $144,288   $145,234     
Impact of acquired loan accretion$5,975 0.12 $6,999 0.15 
Tax-equivalent net interest income/
  margin, adjusted(1)
$139,266 2.84 $139,390 2.98 
(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 21%. The corresponding income tax impact related to tax-exempt items is recorded in income tax expense. These adjustments have no impact on net income. See the section of this Item 2 titled "Non-GAAP Financial Information and Reconciliations" for a discussion of this non-GAAP financial measure.
(2)Non-accrual loans, which totaled $124.5 million as of June 30, 2021 and $139.2 million as of June 30, 2020, 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 Performing Loans Classified as Substandard and Special Mention."

45


Table 3
Net Interest Income and Margin Analysis
(Dollar amounts in thousands)
 Six Months Ended June 30,Attribution of Change
in Net Interest Income
 20212020
 Average
Balance
InterestYield/
Rate (%)
Average
Balance
InterestYield/
Rate (%)
VolumeYield/
Rate
Total
Assets
Other interest-earning assets$973,917 $1,425 0.30 $405,619 $1,287 0.64 $224 $(86)$138 
Securities(1)
3,179,300 33,016 2.08 3,212,279 41,797 2.60 (579)(8,202)(8,781)
FHLB and FRB stock106,959 1,923 3.60 140,661 1,755 2.50 (199)367 168 
Loans, excluding PPP loans(1)
14,044,931 250,572 3.60 13,401,500 284,372 4.27 14,592 (48,391)(33,799)
PPP loans(1)
1,025,149 20,150 3.96 443,999 5,368 2.43 10,001 4,781 14,782 
Total loans(1)(2)
15,070,080 270,722 3.62 13,845,499 289,740 4.21 24,593 (43,610)(19,017)
Total interest-earning assets(1)(2)
19,330,256 307,086 3.20 17,604,058 334,579 3.82 24,039 (51,531)(27,492)
Cash and due from banks252,784 268,516 
Allowance for loan losses(237,775)(201,956)
Other assets1,882,556 1,965,845 
Total assets$21,227,821 $19,636,463 
Liabilities and Stockholders' Equity
Savings deposits$2,657,656 234 0.02 $2,157,903 262 0.02 43 (71)(28)
NOW accounts2,926,460 512 0.04 2,411,122 2,267 0.19 625 (2,380)(1,755)
Money market deposits3,032,138 1,193 0.08 2,445,664 4,257 0.35 1,376 (4,440)(3,064)
Time deposits1,927,317 4,649 0.49 2,736,231 20,408 1.50 (4,792)(10,967)(15,759)
Borrowed funds1,308,637 6,219 0.96 2,237,000 8,997 0.81 (4,939)2,161 (2,778)
Senior and subordinated debt234,977 6,940 5.96 234,157 7,271 6.24 26 (357)(331)
Total interest-bearing
  liabilities
12,087,185 19,747 0.33 12,222,077 43,462 0.72 (7,661)(16,054)(23,715)
Demand deposits6,087,314 4,594,562   
Total funding sources18,174,499 0.22 16,816,639 0.52 
Other liabilities368,171 361,357   
Stockholders' equity2,685,151 2,429,184   
Total liabilities and
  stockholders' equity
$21,227,821 $19,607,180   
Tax-equivalent net interest
  income/margin(1)
287,339 2.99 291,117 3.32 $31,700 $(35,477)$(3,777)
Tax-equivalent adjustment (1,936)(2,308)
Net interest income (GAAP) $285,403 $288,809 
Impact of acquired loan
  accretion
$13,140 0.14 $13,945 0.16 
Tax-equivalent net interest income/
  margin, adjusted(1)
$274,199 2.85 $277,172 3.16 
(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 21%. The corresponding income tax impact related to tax-exempt items is recorded in income tax expense. These adjustments have no impact on net income. See the section of this Item 2 titled "Non-GAAP Financial Information and Reconciliations" for a discussion of this non-GAAP financial measure.
(2)Non-accrual loans, which totaled $124.5 million as of June 30, 2021 and $139.2 million as of June 30, 2020, 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 Performing Loans Classified as Substandard and Special Mention."
Net interest income for the second quarter and first six months of 2021 was down 0.7% and 1.2% compared to the same periods in 2020. The decrease in net interest income resulted primarily from lower interest rates, partially offset by growth in loans and an increase in interest income and fees on PPP loans. In addition, net interest income compared to the first six months of 2020 was impacted by the acquisition of interest-earning assets from the Park Bank transaction that closed in March 2020.
46


Acquired loan accretion contributed $6.0 million and $13.1 million for the second quarter and first six months of 2021, respectively, and $7.0 million and $13.9 million to net interest income for the same periods in 2020.
Tax-equivalent net interest margin for the second quarter and first six months of 2021 was 2.96% and 2.99%, decreasing 17 and 33 basis points from the same periods in 2020. Excluding the impact of acquired loan accretion, tax-equivalent net interest margin was 2.84% and 2.85% for the second quarter and first six months of 2021, down 14 and 31 basis points from the same periods of 2020. The decrease compared to both prior periods was driven primarily by lower interest rates on loans and securities, as well as a higher balance of other interest-earning assets due to higher demand deposits as a result of PPP loan funds and other government stimuli, partially offset by lower cost of funds and higher yields on PPP loans.
For the second quarter and first six months of 2021, total average interest-earning assets rose by $873.1 million and $1.7 billion from the same periods in 2020. The increase compared to both prior periods was driven primarily by a higher balance of other interest-earning assets due to higher demand deposits as a result of PPP loan funds and other government stimuli, as well as loan growth. In addition, the increase compared to the first six months of 2020 was impacted by assets acquired in the Park Bank transaction,
Total average funding sources for the second quarter and first six months of 2021 increased by $494.5 million and $1.4 billion from the same periods in 2020, driven primarily by deposit growth due to higher customer balances resulting from PPP funds and other government stimuli, partially offset by a decrease in FHLB advances. In addition, the increase compared to the first six months of 2020 was impacted by deposits assumed in the Park Bank transaction.
Noninterest Income
A summary of noninterest income for the quarters and six months ended June 30, 2021 and 2020 is presented in the following table.
Table 4
Noninterest Income Analysis
(Dollar amounts in thousands)
 Quarters Ended 
 June 30,
 Six Months Ended 
 June 30,
 
 20212020% Change20212020% Change
Wealth management fees$14,555 $11,942 21.9 $28,704 $24,303 18.1 
Service charges on deposit accounts10,778 9,125 18.1 20,758 20,906 (0.7)
Mortgage banking income6,749 3,477 94.1 16,936 5,265 221.7 
Card-based fees, net(1)
4,764 3,180 49.8 9,320 7,148 30.4 
Capital market products income1,954 694 181.6 4,043 5,416 (25.4)
Other service charges, commissions, and
  fees
2,823 2,078 35.9 5,584 4,760 17.3 
Total fee-based revenues41,623 30,496 36.5 85,345 67,798 25.9 
Other income(2)
4,647 2,495 86.3 6,728 5,560 21.0 
Net securities losses— — N/M— (1,005)N/M
Total noninterest income$46,270 $32,991 40.3 $92,073 $72,353 27.3 
N/M – Not meaningful
(1)Card-based fees, net consists of debit and credit card interchange fees for processing transactions, various fees on both customer and non-customer automated teller machine ("ATM") and point-of-sale transactions processed through the ATM and point-of-sale networks, as well as the related cardholder expense.
(2)Other income consists of various items, including BOLI income, safe deposit box rentals, miscellaneous recoveries, and gains on the sales of various assets.
Total noninterest income of $46.3 million for the second quarter and first six months of 2021 was up 40.3% and 27.3% from the same periods in 2020. Record wealth management fees resulted from a higher market environment and continued sales of fiduciary and investment advisory services to new and existing customers. The increase in net card-based fees and other service charges, commissions and fees compared to the second quarter and first six months of 2020, as well as service charges on deposit accounts compared to the second quarter of 2020 resulted from the impact of higher transaction volumes due to economic recovery since the onset of the pandemic. Capital market products income resulted from levels of sales to corporate clients in light of market conditions that were higher than the second quarter of 2020 and lower than the first six months of 2020.
47


Mortgage banking income for the second quarter and first six months of 2021 resulted from sales of $207.8 million and $491.7 million of 1-4 family mortgage loans in the secondary market compared to $168.7 million and $285.3 million in the second quarter and first six months of 2020.
Other income increased compared to the second quarter and first six months of 2020 as a result of fair value adjustments on equity securities.
Net securities losses of $1.0 million were recognized during the first six months of 2020 as a result of repositioning of the Company's securities portfolio due to market conditions.
Noninterest Expense
A summary of noninterest expense for the quarters and six months ended June 30, 2021 and 2020 is presented in the following table.
Table 5
Noninterest Expense Analysis
(Dollar amounts in thousands)
 Quarters Ended 
 June 30,
 Six Months Ended 
 June 30,
 
 20212020% Change20212020% Change
Salaries and employee benefits:
Salaries and wages$51,887 $52,592 (1.3)$105,580 $102,582 2.9 
Retirement and other employee benefits12,324 11,080 11.2 25,032 23,949 4.5 
Total salaries and employee benefits64,211 63,672 0.8 130,612 126,531 3.2 
Net occupancy and equipment expense13,654 15,116 (9.7)28,406 29,343 (3.2)
Technology and related costs10,453 9,853 6.1 20,737 18,401 12.7 
Professional services7,568 8,880 (14.8)15,627 19,270 (18.9)
Advertising and promotions2,899 2,810 3.2 4,734 5,571 (15.0)
Net OREO expense160 126 (27.0)749 546 37.2 
Other expenses14,670 14,624 0.3 29,405 27,278 7.8 
Acquisition and integration related
  expenses
7,773 5,249 48.1 8,018 10,721 (25.2)
Optimization costs31 — N/M1,556 — — 
Total noninterest expense$121,419 $120,330 0.9 $239,844 $237,661 0.9 
Acquisition and integration related
  expenses
(7,773)(5,249)48.1 (8,018)(10,721)(25.2)
Optimization costs(31)— N/M(1,556)— N/M
Total noninterest expense, adjusted(1)
$113,615 $115,081 (1.3)$230,270 $226,940 1.5 
N/M – Not meaningful
(1)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."
Total noninterest expense was stable compared to the second quarter and first six months of 2020. Noninterest expense for all periods was impacted by acquisition and integration related expenses and both periods in 2021 were impacted by optimization costs. Excluding these items, noninterest expense for the second quarter and first six months of 2021 was $113.6 million and $230.3 million, down 1.3% and up 1.5% from the same periods in 2020. Overall, noninterest expense, adjusted, to average assets, excluding PPP loans, was 2.22% and 2.30% for the second quarter and first six months of 2021, down 10 and 8 basis points from the same periods in 2020.
Operating costs associated with the Park Bank transaction contributed to the increase in noninterest expense compared to the first six months of 2020. These costs primarily occurred in salaries and employee benefits, net occupancy and equipment expense, technology and related costs, and other expenses.
Salaries and employee benefits increased compared to both prior periods primarily due to higher equity compensation accruals and pension plan lump-sum payments to retired employees, as well as merit increases, partially offset by the ongoing benefits of optimization strategies. Net occupancy and equipment expense decreased compared to both prior periods due to ongoing benefits of optimization strategies and lower levels of expense associated with the pandemic. The increase in technology and related costs for the first six months of 2021 was impacted by investments in technology, including the origination of PPP
48


loans. Professional services expenses were elevated for the second quarter and first six months of 2020 due to process enhancements and expenses associated with higher capital market products income. Other expenses for the first six months of 2021 was impacted by a valuation adjustment on a foreclosed asset.
Optimization costs primarily include advisory fees, employee severance, and other expenses associated with locations identified for closure.
Acquisition and integration related expenses for second quarter and first six months of 2021 resulted from the pending merger with Old National and for the same periods in 2020, resulted from the acquisition of Park Bank.
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, 2021 and 2020 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,
 2021202020212020
Income before income tax expense$69,139 $25,246 $131,534 $51,320 
Income tax expense:
Federal income tax expense$12,941 $4,963 $25,572 $10,300 
State income tax expense5,077 1,219 9,818 2,350 
Total income tax expense$18,018 $6,182 $35,390 $12,650 
Effective income tax rate26.1 %24.5 %26.9 %24.6 %
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 as well as state income taxes. State income tax expense and the related effective income 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 increase in income tax expense for the second quarter of 2021 and the first six months of 2021 was driven primarily by higher levels of income subject to tax at statutory rates and a decrease in federal and state tax exempt income. The increase compared to the first six months of 2020 was also impacted by $1.1 million in income tax expense related to share-based payments.
Our accounting policies regarding the recognition of income taxes in the Consolidated Statements of Financial Condition and Income are described in Notes 1 and 16 to the Consolidated Financial Statements of our 2020 10-K.
49


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. Equity securities are carried at fair value and consist primarily of community development investments, certain diversified securities held in a grantor trust for participants in the Company's nonqualified deferred compensation plan that are invested in money market and mutual funds, and various preferred equity investments. 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 income (loss) ("AOCI").
We manage our investment portfolio to maximize the return on invested funds within acceptable risk guidelines, to meet pledging and liquidity requirements, and to adjust balance sheet interest rate sensitivity to mitigate the impact of changes in interest rates on net interest income.
From time to time, we adjust the size and composition of our securities portfolio 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, 2021As of December 31, 2020
 Amortized
Cost
Net
Unrealized
Gains
(Losses)
Fair Value% of TotalAmortized
Cost
Net
Unrealized
Gains
(Losses)
Fair Value% of Total
Securities Available-for-Sale       
U.S. treasury securities$1,000 $$1,003 — $12,001 $50 $12,051 0.4 
U.S. agency securities612,173 (13,376)598,797 19.0 654,321 (1,847)652,474 21.1 
Collateralized mortgage
  obligations ("CMOs")
1,336,291 3,335 1,339,626 42.4 1,415,312 23,206 1,438,518 46.5 
Other mortgage-backed
  securities ("MBSs")
808,967 5,394 814,361 25.8 566,830 14,010 580,840 18.8 
Municipal securities212,308 9,593 221,901 7.0 224,446 11,569 236,015 7.6 
Corporate debt securities173,069 7,437 180,506 5.7 170,570 5,940 176,510 5.7 
Total securities
  available-for-sale
$3,143,808 $12,386 $3,156,194 100.0 $3,043,480 $52,928 $3,096,408 100.0 
Securities Held-to-Maturity    
Municipal securities(1)
$11,593 $(468)$11,125 $12,071 $(385)$11,686 
Equity Securities$112,977 $76,404 
(1)Net of $220,000 of allowance for securities held-to-maturity as of June 30, 2021 and December 31, 2020.
Portfolio Composition
As of June 30, 2021, our securities available-for-sale portfolio totaled $3.2 billion, increasing $59.8 million, or 1.9%, from December 31, 2020. The increase was driven primarily by purchases of MBSs, partially offset by sales, maturities, calls, and prepayments, as well as a change in unrealized gains (losses) resulting from higher market interest rates.
Investments in municipal securities consist of general obligations of local municipalities in multiple states. Our municipal securities portfolio has historically experienced very low default rates and provides a predictable cash flow.
50


The following table presents the effective duration, average life, and yield to maturity for the Company's securities portfolio by category as of June 30, 2021 and December 31, 2020.
Table 8
Securities Effective Duration Analysis
 As of June 30, 2021As of December 31, 2020
EffectiveAverageYield toEffectiveAverageYield to
 
Duration(1)
Life(2)
Maturity(3)
Duration(1)
Life(2)
Maturity(3)
Securities Available-for-Sale      
U.S. treasury securities0.13 %0.17 2.09 %0.20 %0.23 2.45 %
U.S. agency securities6.41 %12.72 2.20 %5.07 %7.29 2.31 %
CMOs3.82 %4.87 1.92 %3.19 %3.84 1.99 %
MBSs3.46 %4.88 1.92 %2.68 %3.65 2.13 %
Municipal securities4.82 %5.10 2.80 %4.66 %4.84 2.81 %
Corporate debt securities2.20 %3.98 2.78 %2.27 %4.48 2.78 %
Total securities available-for-sale4.21 %6.37 2.08 %3.54 %4.64 2.19 %
Securities Held-to-Maturity      
Municipal securities4.55 %5.69 4.71 %6.81 %9.14 4.75 %
(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 expected future cash flows using the dollar amount of principal paydowns, including estimated principal prepayments, as the weighting factor.
(3)Yields on municipal securities are reflected on a tax-equivalent basis, assuming the applicable federal income tax rate for each period presented.
Effective Duration
The average life and effective duration of our securities available-for-sale portfolio was 6.37 years and 4.21%, respectively, as of June 30, 2021, up from 4.64 years and 3.54% as of December 31, 2020. The increase resulted primarily from purchases of MBSs in a higher market interest rate environment during the first six months of 2021.
Realized Gains and Losses
There were no securities gains (losses) or impairment charges recognized during the second quarter and first six months of 2021. There were no securities gains (losses) for the second quarter of 2020 and $1.0 million of net securities losses for the first six months of 2020 as a result of repositioning of the securities portfolio due to market conditions.
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 AOCI, net of deferred income taxes. This balance sheet component will fluctuate as interest rates and conditions change and affect the aggregate fair value of the portfolio. Higher market interest rates drove the change to $12.4 million of unrealized gains as of June 30, 2021 compared to $52.9 million of unrealized gains as of December 31, 2020.
LOAN PORTFOLIO AND CREDIT QUALITY
Portfolio Composition
Our loan portfolio is comprised of both corporate and consumer loans, with corporate loans representing 69.9% of total loans as of June 30, 2021. 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 certain of 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 performing loans classified as substandard and special mention to monitor and mitigate potential and current risks in the portfolio.
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Table 9
Loan Portfolio
(Dollar amounts in thousands)
As of  
 June 30, 2021
% of
Total Loans
As of
December 31, 2020
% of
Total Loans
% Change
Commercial and industrial$4,608,148 30.6 $4,578,254 31.0 0.7 
Agricultural342,834 2.3 364,038 2.5 (5.8)
Commercial real estate:     
Office, retail, and industrial1,807,428 12.0 1,861,768 12.6 (2.9)
Multi-family1,012,722 6.7 872,813 5.9 16.0 
Construction577,338 3.9 612,611 4.2 (5.8)
Other commercial real estate1,461,370 9.7 1,481,976 10.0 (1.4)
Total commercial real estate4,858,858 32.3 4,829,168 32.7 0.6 
Total corporate loans, excluding PPP loans9,809,840 65.2 9,771,460 66.2 0.4 
PPP loans705,915 4.7 785,563 5.3 (10.1)
Total corporate loans10,515,755 69.9 10,557,023 71.5 (0.4)
Home equity629,367 4.2 761,725 5.2 (17.4)
1-4 family mortgages3,287,773 21.9 3,022,413 20.5 8.8 
Installment602,324 4.0 410,071 2.8 46.9 
Total consumer loans4,519,464 30.1 4,194,209 28.5 7.8 
Total loans$15,035,219 100.0 $14,751,232 100.0 1.9 
Total loans includes loans originated under the PPP loan program beginning in the second quarter of 2020, which totaled $705.9 million and $785.6 million as of June 30, 2021 and December 31, 2020, respectively. Excluding these loans, total loans were up 5% annualized from December 31, 2020. Strong production and line usage within our middle market and sector-based lending businesses drove growth in corporate loans, excluding PPP loans, which was partially offset by excess borrower liquidity and paydowns as a result of the pandemic.
Growth in consumer loans compared to December 31, 2020 resulted primarily from purchases of 1-4 family mortgages and installment loans, as well as strong production in the 1-4 family mortgages portfolio, which more than offset higher prepayments.
Commercial, Industrial, and Agricultural Loans
Commercial, industrial, and agricultural loans represented 32.9% of total loans, and totaled $5.0 billion at June 30, 2021, a decrease of $8.7 million, or 0.2%, from December 31, 2020. Our commercial and industrial loans are a diverse group of loans generally located in the Chicago metropolitan area with purposes that include supporting working capital needs, accounts receivable financing, inventory and equipment financing, and select sector-based lending, such as healthcare, asset-based lending, structured finance, and syndications. 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.
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.
52


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 real estate markets. 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 made 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 long-term 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.
The following table presents commercial real estate loan detail as of June 30, 2021 and December 31, 2020.
Table 10
Commercial Real Estate Loans
(Dollar amounts in thousands)
As of  
 June 30, 2021
% of
Total
As of  
 December 31, 2020
% of
Total
Office, retail, and industrial:  
Office$594,253 12.2 $626,641 13.0 
Retail559,573 11.5 579,700 12.0 
Industrial653,602 13.5 655,427 13.6 
Total office, retail, and industrial1,807,428 37.2 1,861,768 38.6 
Multi-family1,012,722 20.8 872,813 18.1 
Construction577,338 11.9 612,611 12.7 
Other commercial real estate:  
Multi-use properties443,771 9.1 324,291 6.7 
Rental properties250,468 5.2 295,232 6.1 
Warehouses and storage162,722 3.3 173,837 3.6 
Hotels154,203 3.2 156,971 3.3 
Service stations and truck stops99,978 2.1 103,077 2.1 
Restaurants95,701 2.0 104,508 2.2 
Recreational72,958 1.5 87,283 1.8 
Other181,569 3.7 236,777 4.8 
Total other commercial real estate1,461,370 30.1 1,481,976 30.6 
Total commercial real estate$4,858,858 100.0 $4,829,168 100.0 
Commercial real estate loans represent 32.3% of total loans, and totaled $4.9 billion at June 30, 2021, decreasing $29.7 million, or 0.6%, from December 31, 2020.
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 48% of the commercial real estate portfolio, excluding multi-family and construction loans, is owner-occupied as of June 30, 2021. Using outstanding loan balances, non-owner-occupied commercial real estate loans to total capital was 161% and construction loans to total capital was 23% as of June 30, 2021. 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 collateral.
53


As a result of the Company's review of its loan portfolio in connection with the pandemic, certain elevated risk segments were identified in the corporate loan portfolio including recreation and entertainment, hotels, and restaurants, which are included in commercial and industrial loans in addition to commercial real estate loans detailed above. As of June 30, 2021, these elevated risk segments totaled $468 million, 3.3% of our granular and diverse total loan portfolio, excluding PPP loans.
PPP Loans
The Company began originating PPP loans during the second quarter of 2020 as a part of the SBA's program established by the CARES Act. These loans are fully guaranteed by the SBA and are expected to be forgiven by the SBA if the applicable criteria are met.
Consumer Loans
Consumer loans represented 30.1% of total loans, and totaled $4.5 billion at June 30, 2021, an increase of $325.3 million, or 7.8%, from December 31, 2020. 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 that 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.
As a result of the Company's review of its loan portfolio in connection with the pandemic, unsecured installment loans were identified as an elevated risk segment in the consumer loan portfolio, which totaled approximately $204 million and was 1.4% of our total loan portfolio, excluding PPP loans, as of June 30, 2021. These loans are high credit quality, geographically dispersed, high-yielding, have average loan sizes of less than $9,000, and do not include any sub-prime loans, which reduces our risk exposure.
Allowance for Credit Losses
Methodology for the Allowance for Credit Losses
On January 1, 2020, the Company adopted current expected credit losses ("CECL"), which requires the Company 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. Prior to the adoption of CECL, the allowance for credit losses ("ACL") was estimated using an incurred loss model based on historical loss experience. The adoption of CECL impacted both the level of ACL reserves as well as other asset quality metrics due to the change in accounting for acquired PCD loans. As a result, certain metrics are presented excluding PCD loans to provide comparability to prior periods.
The ACL is comprised of the allowance for loan losses and the allowance for unfunded commitments and is maintained by management at a level believed adequate to absorb current expected credit losses in the existing loan portfolio. The determination of the ACL is inherently subjective since it requires significant estimates and management judgment, including the amounts and timing of expected future cash flows on non-accrual loans, actual loss experience, consideration of current national, regional, and local economic trends and conditions, reasonable and supportable forecasts about the future, changes in interest rates and property values, various internal and external qualitative factors, and other factors.
While management utilizes its best judgment and information available, the ultimate adequacy of the ACL 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 ACL is an appropriate estimate of current expected credit losses in the existing loan portfolio as of June 30, 2021.
The accounting policy for the ACL is discussed in Note 1 of "Notes to the Condensed Consolidated Financial Statements" in Part I, Item 1 of this Form 10-Q.
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Table 11
Allowance for Credit Losses and
Summary of Credit Loss Experience
(Dollar amounts in thousands)
Quarters Ended
June 30,
2021
March 31, 
 2021
December 31, 
 2020
September 30,
2020
June 30,
2020
Change in ACL    
Beginning balance$243,384 $247,042 $246,873 $247,677 $226,701 
Allowance established for acquired PCD loans— — (1,188)1,250 
Loan charge-offs:
Commercial, industrial, and agricultural16,766 2,841 7,279 6,853 5,673 
Office, retail, and industrial3,898 4,477 1,706 1,344 3,092 
Multi-family— 19 — 
Construction218 — 140 4,889 798 
Other commercial real estate585 486 1,006 1,823 31 
Consumer2,156 3,513 2,977 2,629 4,631 
Total loan charge-offs23,627 11,317 13,127 17,538 14,234 
Recoveries of loan charge-offs:  
Commercial, industrial, and agricultural2,033 738 1,964 1,118 820 
Office, retail, and industrial20 100 
Multi-family— — — 
Construction10 — — — — 
Other commercial real estate126 115 90 70 12 
Consumer678 603 529 602 473 
Total recoveries of loan charge-offs2,869 1,561 2,588 1,795 1,311 
Net loan charge-offs20,758 9,756 10,539 15,743 12,923 
Provision for loan losses— 6,098 10,507 15,927 32,649 
Increase in allowance for unfunded
  commitments
600 — 200 200 — 
Ending balance$223,226 $243,384 $247,042 $246,873 $247,677 
Total net loan charge-offs, excluding
  PCD loans
$16,421 $7,649 $4,051 $8,820 $9,090 
ACL
Allowance for loan losses$214,601 $235,359 $239,017 $239,048 $240,052 
Allowance for unfunded commitments8,625 8,025 8,025 7,825 7,625 
Total ACL$223,226 $243,384 $247,042 $246,873 $247,677 
ACL to loans1.48 %1.60 %1.67 %1.68 %1.66 %
ACL to loans, excluding PPP loans(1)
1.56 %1.73 %1.77 %1.83 %1.80 %
ACL to non-accrual loans179.32 %153.67 %173.33 %171.95 %177.98 %
Net loan charge-offs to average loans,
  annualized
0.55 %0.26 %0.29 %0.42 %0.36 %
Net loan charge-offs to average loans, excluding
  PCD and PPP loans, annualized(1)
0.47 %0.22 %0.12 %0.26 %0.27 %
(1)This ratio excludes PPP loans that are fully guaranteed by the SBA. As a result, no allowance for credit losses is associated with these loans. See the "Non-GAAP Financial Information" section presented later in this release for a discussion of this non-GAAP financial measure.
Activity in the Allowance for Credit Losses
The ACL was $223.2 million or 1.48% of total loans as of June 30, 2021, decreasing $23.8 million and $24.5 million compared to December 31, 2020 and June 30, 2020, respectively. Excluding the impact of PPP loans, ACL to total loans was 1.56% as of June 30, 2021, compared to 1.77% and 1.80% as of December 31, 2020 and June 30, 2020, respectively. The decrease from both prior periods reflects net charge-offs on PCD loans that previously had an ACL established upon acquisition, net charge-offs resulting from the final resolution of certain corporate credits, and an improving credit environment.
Net loan charge-offs to average loans, annualized, was 0.55%, or $20.8 million, for the second quarter of 2021, compared to 0.29% and 0.36% for the fourth and second quarters of 2020, respectively. Excluding charge-offs on PCD loans, net loan
55


charge-offs to average loans was 0.47% for the second quarter of 2021 compared to 0.12% and 0.27% for the fourth and second quarters of 2020, respectively. The increase in net loan charge-offs compared to both prior periods resulted largely from net charge-offs resulting from the final resolution of certain corporate credits.
Non-performing Assets and Performing Loans Classified as Substandard and Special Mention
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 12
Loan Portfolio by Performing/Non-performing Status
(Dollar amounts in thousands)
 Accruing  
 Current30-89 Days
Past Due
90 Days
Past Due
Non-accrualTotal
Loans
As of June 30, 2021     
Commercial and industrial$4,554,725 $7,873 $392 $45,158 $4,608,148 
Agricultural335,699 — — 7,135 342,834 
Commercial real estate:   
Office, retail, and industrial1,786,230 1,714 — 19,484 1,807,428 
Multi-family1,009,307 — — 3,415 1,012,722 
Construction574,329 40 — 2,969 577,338 
Other commercial real estate1,434,943 2,490 122 23,815 1,461,370 
Total commercial real estate4,804,809 4,244 122 49,683 4,858,858 
Total corporate loans, excluding
  PPP loans
9,695,233 12,117 514 101,976 9,809,840 
PPP loans705,915 — — — 705,915 
Total corporate loans10,401,148 12,117 514 101,976 10,515,755 
Home equity617,965 1,431 23 9,948 629,367 
1-4 family mortgages3,271,477 3,738 — 12,558 3,287,773 
Installment598,218 3,765 341 — 602,324 
Total consumer loans4,487,660 8,934 364 22,506 4,519,464 
Total loans$14,888,808 $21,051 $878 $124,482 $15,035,219 
As of December 31, 2020  </