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FIRST MIDWEST BANCORP, INC.
2012 ANNUAL REPORT FIRST MIDWEST BANCORP, INC.
One Pierce Place, Suite 1500, Itasca, IL 60143 | 630.875.7450 | FirstMidwest.com
FIRST MIDWEST BANCORP, INC.
STOCKHOLDER INFORMATION
COMMON STOCK
First Midwest Bancorp, Inc. common stock is traded in the Nasdaq Global Select Market tier
of the Nasdaq Stock Market under the symbol FMBI.
DIVIDEND PAYMENTS
Anticipated dividend payable dates are in January, April, July, and October subject to the
approval by the Board of Directors.
DIRECT DEPOSIT
Stockholders may have their dividends deposited directly to their savings, checking, or
money market account at any financial institution. Information concerning Dividend Direct
Deposit may be obtained from the Company or our transfer agent.
DIVIDEND REINVESTMENT/
STOCK PURCHASE
Stockholders may fully or partially reinvest dividends and invest up to $5,000 quarterly
in First Midwest Bancorp, Inc. common stock without incurring any brokerage fees.
Information concerning Dividend Reinvestment may be obtained from the Company or our
transfer agent.
TRANSFER AGENT/
STOCKHOLDER SERVICES
Stockholders with inquiries regarding stock accounts, dividends, change of ownership or
address, lost certificates, consolidation of accounts, or registering shares electronically
through the Direct Registration System should contact our transfer agent via the following:
Phone: (888) 581-9376
Correspondence:
Mail:
Computershare
P.O. Box 43006
Providence, RI 02940-3006
Overnight:
Computershare
250 Royal Street
Canton, MA 02021
Web:
www.computershare.com/investor
Online Inquiries:
https:// /investor/Contact
INVESTOR AND
STOCKHOLDER CONTACT
Investor Relations
First Midwest Bancorp, Inc.
One Pierce Place, Suite 1500
Itasca, Illinois 60143
(630) 875-7533
investor.relations@firstmidwest.com
SEC REPORTS AND
GENERAL INFORMATION
First Midwest Bancorp, Inc. files an annual report with the Securities and Exchange
Commission on Form 10-K and three quarterly reports on Form 10-Q. Requests for such
reports and general inquiries regarding stock and dividend information, quarterly earnings,
and news releases may be directed to Investor Relations at the above address or can be
obtained through the Investor Relations section of the Company’s website,
www.firstmidwest.com/investorrelations.
FORWARD-LOOKING
STATEMENTS
In this document we have included statements that may constitute “forward-looking
statements” within the meaning of the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995. These statements are not historical facts but instead
represent only our beliefs regarding future events or outcomes, many of which, by their
nature, are inherently uncertain and outside of our control. We are alerting you to the
possibility that our actual results and financial condition may differ, possibly materially,
from the anticipated results and financial condition indicated in these forward-looking
statements. Important factors that could cause our results to differ, possibly materially from
those in the forward-looking statements, are discussed in the Section entitled “Risk Factors”
in the enclosed Annual Report on Form 10-K for the fiscal year ended December 31, 2012
and our other reports filed with the Securities and Exchange Commission from time to time.
Forward-looking statements represent our management’s best judgment as of the date hereof
based on currently available information. Except as required by law, we undertake no duty to
update the contents of this document after the date hereof.
COMPANY PROFILE
First Midwest Bancorp, Inc. is a bank holding company
headquartered in the Chicago suburb of Itasca, Illinois with
operations throughout the greater Chicago metropolitan area
including northwest Indiana, as well as central and western
Illinois and eastern Iowa.
We are one of the Chicago metropolitan area’s largest
independent bank holding companies and our principal
subsidiary, First Midwest Bank, provides a broad range
of commercial and retail banking services to consumer,
commercial and industrial, and public or governmental
customers, and wealth management services through
approximately 95 offices. First Midwest Bank has more
than $8 billion in assets and $5.7 billion in wealth
management assets.
We are committed to meeting the financial needs of the
individuals and businesses in the communities where we
live and work by providing customized banking solutions,
quality products, and innovative services that fulfill those
financial needs.
First Midwest has been recognized by
the Chicago Tribune as one of Chicago’s
Top Workplaces for the third consecutive
year by being named a National
Standard Top Workplace. Additionally,
Forbes has recognized First Midwest
as one of America’s Most Trustworthy
Companies for 2012.
ADDITIONAL INFORMATION
Visit the Investor Relations section of our website,
www.firstmidwest.com/investorrelations, for stock
and dividend information, quarterly earnings and news
releases, on-line annual report, links to SEC filings and
other Company information.
1
STOCKHOLDERS LETTER 4.2.2013
To Our Stockholders,
We are pleased to report that in 2012 we made significant progress on a number of strategic fronts. We strengthened our
sales and leadership teams to broaden our product offerings and more efficiently allocate our resources to areas of growth. At
the same time, we significantly improved our credit quality through decisive remediation actions. Balanced execution on these
fronts has created growing business momentum, positioning us well for 2013 and beyond. As a result, I firmly believe First
Midwest is a much stronger company, positioned to produce more reliable and attractive returns for our stockholders.
OUR 2012 PERFORMANCE
Our strategic priorities guided our efforts to proactively improve our credit risk profile, manage our capital and strengthen
and grow our business. For the year, we reported an operating loss of $20.7 million reflective of strong underlying growth in
our lending and fee-based business lines but offset by the negative impact of the low interest rate environment and elevated
credit costs incurred in the third quarter of the year.
Leveraging the strength of our operating earnings and capital foundation we targeted some $225 million of select problem
loans for accelerated remediation, $172 million of which were sold in bulk through a formal auction process. In doing so, loan
losses incurred for the year were substantially elevated, reducing our level of nonperforming and performing potential problem
loans and, by extension, future workout and related costs. We undertook these actions only after careful consideration of the
operating environment and the potential costs and benefits of continuing the workout process versus accelerated resolution.
As we closed 2012, our level of nonperforming and performing potential problem loans was reduced by half from 2011 while
our loan loss reserves and capital levels remain robust. These same actions will help stabilize future earnings and quickly
replenish capital as our performance benefits from lower credit costs. Confirming our expectations, earnings for the fourth
quarter improved to $13 million, 2.5 times higher than this same quarter a year ago.
Performance for 2012 can be further grounded in the context of those actions taken to build business momentum through the
enhancement of our core business capabilities. Specifically, I would highlight certain actions undertaken to build and diversify
our lending platforms, expand our fee-based lines of business, maximize our operating efficiency and invest in our business.
BUILDING AND DIVERSIFYING OUR LENDING PLATFORMS
In 2012, we expanded our lending team and loan capabilities, focusing on diversifying the composition of our loan portfolio.
Our legacy lending business was enhanced through targeted market and product expansion, including areas such as asset
based lending, agri-business and residential mortgage. Importantly, these efforts increased our loan portfolio to $5.2 billion,
up $100 million or 2% from 2011 while concurrently shifting a greater percentage of our loan mix to commercial and
industrial lending. Allowing for the offsetting impact of the accelerated remediation of problem credits, year over year growth
approximated 6%, reflecting strong sales performance.
GROWING OUR FEE-BASED BUSINESS LINES
Our fee-based revenues totaled $97 million, and reflected the increasing strength of our wealth management, treasury
management, retail and mortgage business lines. Closer alignment of sales resources and incentives between these business
lines has produced greater referral activity, generating both growth and stronger client relationships. I would further highlight
the following areas of business momentum:
Our retail and business deposit service charges and card-based fees increased 9% from the prior year, reflecting the
benefits of growth in retail checking households and more effective cross-selling of services to our business customers.
Assets managed by our wealth management team grew to $5.7 billion, making this business line the 4th largest of any
Illinois-based bank. Wealth management revenue totaled $22 million, up 7% for the year and now constitutes 22% of all
fee-based revenues.
Our mortgage production has expanded and continues to grow through the addition of dedicated mortgage originators who,
together with our banking center sales staff, originated $150 million in new loans. Approximately two-thirds of this growth
was generated in the second half of the year. Investor appetite for higher yielding assets enabled the Company to sell
approximately $50 million of these loans and generate over $2 million in fees in the fourth quarter alone.
2
MAXIMIZING OUR EFFICIENCY, INVESTING IN OUR BUSINESS
Away from certain nonrecurring costs, our core operating expense remained stable. Recognizing shifting technologies
and consumer preferences, we reduced our retail sales and support workforce by 6% while closing six underperforming
branch locations. Cost savings from these and other initiatives were, in part, reallocated to support growth in our
commercial and mortgage lending businesses and strengthen our risk management team, in response to growing
consumer regulation.
As we look to 2013, operational efficiency will remain an area of
focus as our credit related costs align with our lower risk profile and
customer utilization evolves as we expand our internet and mobile
banking capabilities.
. . . I firmly believe First Midwest is a
much stronger company, positioned to
produce more reliable and attractive
returns for our stockholders.
LOOKING FORWARD
Looking ahead, the operating environment for the industry remains difficult given the inherent challenges of continued
low interest rates, growing regulatory compliance, and general uncertainties surrounding evolving regulatory and
fiscal policy. Changes in customer preferences and technology will add further strategic complexity as product and
distribution usage evolves.
These challenges, however, will be even greater for those banks operating in our markets that do not have our financial
and organizational strength. It is widely expected that these conditions will drive further consolidation in our markets,
creating opportunities for us to benefit from this dynamic as well as accompanying market disruption.
The actions undertaken in 2012 to reduce our credit risk profile combined with building business momentum leave
us well positioned to navigate these challenges, produce stronger earnings, and enhance shareholder returns in 2013.
As always, our focus will remain centered on meeting the financial needs of our clients. As we do so, our focus will
remain on the prudent leveraging of our capital and liquidity to strengthen our business, remediating our problem
assets and maximizing our operating efficiency.
BOARD TRANSITIONS
We say thank you to Bruce Chelberg who retired from the board after completing more than 20 years of service to First
Midwest last May. His contributions to the board were numerous, meaningful and greatly valued. We again take the
opportunity to thank Bruce for his service and wish him the very best.
During 2012, we mourned the passing of Joe England, who provided some 26 years of service as a member of our board.
Joe’s sage counsel and contributions over these many years were significant and appreciated. He will be missed by all.
IN CLOSING
Though our community roots run some 70 years deep, 2013 will mark the 30th anniversary
of the formation of First Midwest Bancorp, Inc. As we celebrate this point in our history, we
do so well positioned to embrace the future. As I reflect on our past, I take confidence in our
demonstrated ability to successfully navigate and adapt as market conditions evolve. This
ingrained organizational strength is grounded in our focus on the needs of our clients and
the engagement of our colleagues. We enter 2013 with confidence, momentum, and capital
strength, and are well positioned to build stronger performance and provide greater returns to
you, our stockholders.
I would also acknowledge and offer my thanks to all of my colleagues here at First Midwest.
It is their commitment, dedication and focus that drive our ongoing success.
Sincerely,
Michael L. Scudder
President and Chief Executive Officer
First Midwest Bancorp, Inc.
3
BOARD OF DIRECTORS
FIRST MIDWEST BANCORP, INC.
Barbara A. Boigegrain (2)
General Secretary and
Chief Executive Officer
General Board of Pension and Health
Benefits of The United Methodist Church
(Pension, Health and Welfare Benefit
Trustee and Administrator)
John F. Chlebowski, Jr. (1, 4)
Retired President and
Chief Executive Officer
Lakeshore Operating Partners, LLC
(Bulk Liquid Distribution Firm)
Brother James Gaffney, FSC (2, 3, 4)
President
Lewis University
(Leading Catholic and Lasallian University)
Phupinder S. Gill (1)
Chief Executive Officer
CME Group Inc.
(Global Derivatives Marketplace
and Exchange)
EXECUTIVE MANAGEMENT GROUP
FIRST MIDWEST BANCORP, INC.
Michael L. Scudder
President and Chief Executive Officer
Nicholas J. Chulos
Executive Vice President,
Corporate Secretary and General Counsel
EXECUTIVE MANAGEMENT GROUP
FIRST MIDWEST BANK
Michael L. Scudder
Chairman of the Board and
Chief Executive Officer
Michael J. Small (1, 3)
President and Chief Executive Officer
Gogo, Inc.
(Airborne Communications Service
Provider)
John L. Sterling (2)
Director
Sterling Lumber Company
(Hardwood Lumber Supplier
and Distributor)
J. Stephen Vanderwoude (2, 3, 4)
Retired Chairman and
Chief Executive Officer
Madison River Communications Corp.
(Operator of Rural Telephone Companies)
Peter J. Henseler (2)
President
Wise Consulting Group Inc.
(a Strategy and Management
Consulting Firm)
Patrick J. McDonnell (1, 3, 4)
President and Chief Executive Officer
The McDonnell Company LLC
(Business Consulting Company)
Robert P. O’Meara (1, 3, 4)
Chairman of the Board
First Midwest Bancorp, Inc.
Ellen A. Rudnick (1, 3, 4)
Executive Director
Polsky Center for Entrepreneurship
University of Chicago Booth
School of Business
(Graduate School of Business)
Michael L. Scudder (4)
President and Chief Executive Officer
First Midwest Bancorp, Inc.
Mark G. Sander
Senior Executive Vice President
and Chief Operating Officer
James P. Hotchkiss
Executive Vice President
and Treasurer
Paul F. Clemens
Executive Vice President and
Chief Financial Officer
Kevin L. Moffitt
Executive Vice President and
Chief Risk Officer
Paul F. Clemens
Executive Vice President and
Chief Financial Officer
Mark G. Sander
President and Chief Operating Officer
and Director
Robert P. Diedrich
Executive Vice President,
Director of Wealth Management
Kent S. Belasco
Executive Vice President,
Chief Information and Operations Officer
Caryn J. Guinta
Executive Vice President,
Director of Employee Resources
Victor P. Carapella
Executive Vice President,
Director of Commercial Banking
Nicholas J. Chulos
Executive Vice President and
Corporate Secretary
James P. Hotchkiss
Executive Vice President
and Treasurer
Michael J. Kozak
Executive Vice President,
Senior Credit Officer
Kimberly J. McGarry
Senior Vice President,
Chief Accounting Officer
Kevin L. Moffitt
Executive Vice President and
Chief Risk Officer
Thomas M. Prame
Executive Vice President,
Director of Retail Banking
BOARD COMMITTEES
(1) Audit Committee
(2) Compensation Committee
(3) Nominating & Corporate
Governance Committee
(4) Advisory Committee
4
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X]
Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the fiscal year-ended December 31, 2012
or
[ ]
Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from
to
Commission File Number 0-10967
FIRST MIDWEST BANCORP, INC.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
36-3161078
(IRS Employer Identification No.)
One Pierce Place, Suite 1500
Itasca, Illinois 60143-9768
(Address of principal executive offices) (zip code)
Registrant’s telephone number, including area code: (630) 875-7450
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common stock, $.01 Par Value
Preferred Share Purchase Rights
Name of each exchange on which registered
The Nasdaq Stock Market
The Nasdaq Stock Market
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes [X] No [ ].
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the
Act. Yes [ ] No [X].
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ].
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every
Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter)
during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such
files). Yes [X] No [ ].
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will
not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in
Part III of this Form 10-K or any amendment to this Form 10-K. [X].
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Large accelerated filer [X] Accelerated filer [ ] Non-accelerated filer [ ] Smaller
reporting company [ ].
Indicate by check mark whether the registrant is a shell Company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X].
The aggregate market value of the registrant’s outstanding voting common stock held by non-affiliates on June 30, 2012,
determined using a per share closing price on that date of $10.98, as quoted on the Nasdaq Stock Market, was $783,281,468.
As of March 1, 2013, there were 75,117,014 shares of common stock, $0.01 par value, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Registrant’s Proxy Statement for the 2013 Annual Stockholders’ Meeting - Part III
FORM 10-K
TABLE OF CONTENTS
Glossary of Terms....................................................................................................................
Introduction ............................................................................................................................
Part I.
ITEM 1.
Business ...............................................................................................................
ITEM 1A. Risk Factors ..........................................................................................................
ITEM 1B. Unresolved Staff Comments ....................................................................................
ITEM 2.
Properties .............................................................................................................
ITEM 3.
Legal Proceedings ..................................................................................................
ITEM 4.
Mine Safety Disclosures .........................................................................................
Part II
ITEM 5.
Market for the Registrant’s Common Equity, Related Stockholder Matters,
and Issuer Purchases of Equity Securities ..................................................................
ITEM 6.
Selected Financial Data ..........................................................................................
ITEM 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk .........................................
ITEM 8.
Financial Statements and Supplementary Data............................................................
ITEM 9.
Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure ............................................................................................................
ITEM 9A. Controls and Procedures .........................................................................................
ITEM 9B. Other Information ..................................................................................................
Part III
ITEM 10. Directors, Executive Officers, and Corporate Governance.............................................
ITEM 11.
Executive Compensation .........................................................................................
ITEM 12.
Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters ...............................................................................................
ITEM 13.
Certain Relationships and Related Transactions and Director Independence ....................
ITEM 14.
Principal Accountant Fees and Services.....................................................................
Page
3
5
6
19
37
37
37
38
38
41
42
92
95
164
164
166
166
167
167
168
168
Part IV
ITEM 15.
Exhibits and Financial Statement Schedules ...............................................................
168
Incorporation by Reference
Certain items in Part III of this report are incorporated by reference to portions of the Company’s definitive 2013
Annual Meeting Proxy Statement to be filed within 120 days after the end of the year covered by this Annual Report
on Form 10-K, pursuant to Regulation 14A (the ‘‘Proxy Statement’’).
2
GLOSSARY OF TERMS
First Midwest Bancorp, Inc. provides the following list of defined terms and acronyms as a tool for the reader. The
defined terms and acronyms identified below are used in the Introduction, Business, Risk Factors, Management’s
Discussion and Analysis of Financial Condition and Results of Operations, and Notes to the Consolidated Financial
Statements sections of this Form 10-K.
Proxy Statement ..............
the Company’s definitive Proxy Statement for our 2013 Annual Meeting of
Stockholders to be held on May 14, 2013
BHC Act ........................ Bank Holding Company Act of 1956, as amended
ALCO............................ Asset Liability Committee
AMT .............................
ATM..............................
Bank ..............................
alternative minimum tax under the Internal Revenue Code of 1986, as amended
automated teller machine
First Midwest Bank (the Company’s wholly owned and principal operating
subsidiary)
BIA ............................... Banking on Illinois Act
Board.............................
BOLI .............................
Catalyst .......................... Catalyst Asset Holdings, LLC (one of the Company’s three wholly owned direct
the Board of Directors of First Midwest Bancorp, Inc.
bank-owned life insurance
subsidiaries)
trust preferred collateralized debt obligations
CDOs ............................
CFPB............................. Consumer Financial Protection Bureau
CMOs ............................
Code ..............................
Common Stock................
collateralized mortgage obligations
the Code of Ethics and Standards of Conduct of First Midwest Bancorp, Inc.
shares of common stock of First Midwest Bancorp, Inc. $0.01 par value per
share, which is traded on the Nasdaq Stock Market under the symbol ‘‘FMBI’’
First Midwest Bancorp, Inc.
Company ........................
CRA .............................. Community Reinvestment Act of 1977
CSV ..............................
DIF ...............................
Directors Plan ................. Non-employee Directors Stock Plan that provides for the granting of equity
cash surrender value
the FDIC’s Deposit Insurance Fund
Dodd-Frank Act...............
EPS ...............................
Fannie Mae .....................
FASB .............................
FDIC .............................
FDIC Agreements ............
awards to the Company’s non-management Board Members
the Dodd-Frank Wall Street Reform and Consumer Protection Act
earnings per share
Federal National Mortgage Association
Financial Accounting Standards Board
Federal Deposit Insurance Corporation
Purchase and Assumption Agreements and Loss Share Agreements between the
Bank and the FDIC
Federal Reserve ............... Board of Governors of the Federal Reserve System
FHC ..............................
FHLB ............................
FICO .............................
First Midwest ..................
FMCT............................
Freddie Mac....................
GAAP............................ U.S. generally accepted accounting principles
GLB Act ........................ Gramm-Leach-Bliley Act of 1999
IBA ...............................
IDFPR ...........................
LIBOR ........................... London Interbank Offered Rate
MBSs ............................ Other mortgage-backed securities
a financial holding company
Federal Home Loan Bank
credit score created by Fair Isaac Corporation
First Midwest Bancorp, Inc.
First Midwest Capital Trust I
Federal Home Loan Mortgage Corporation
Illinois Banking Act
Illinois Department of Financial and Professional Regulation
3
NOL ..............................
OFAC ............................ Office of Foreign Assets Control Regulation
Omnibus Plan ................. Omnibus Stock and Incentive Plan that permits the granting of long-term
net operating loss
incentives to certain key employees of the Company
OREO............................ Other real estate owned, or properties acquired through foreclosure in partial or
OTTI .............................
Parasol ...........................
total satisfaction of certain loans as a result of borrower defaults
other-than-temporary impairment
Parasol Investment Management, LLC (one of the Company’s three wholly
owned direct subsidiaries)
First Midwest Bancorp, Inc. on an unconsolidated basis
the Company-sponsored noncontributory defined benefit retirement plan
the Company’s defined contribution retirement savings plan
Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995
Parent Company ..............
Pension Plan ...................
Profit Sharing Plan ..........
PSLRA ..........................
Restoration ..................... Restoration Asset Management, LLC (a wholly owned subsidiary of Catalyst)
S&P ..............................
S&P 500 ........................
S&P SmallCap 600 Banks
Sarbanes-Oxley................
SEC............................... U.S. Securities and Exchange Commission
TDR ..............................
Treasury ......................... U.S. Department of the Treasury
VIE ...............................
Waukegan Savings ...........
Standard & Poor’s Rating Services
S&P 500 Stock Index
S&P SmallCap 600 Banks Index
Sarbanes-Oxley Act of 2002
variable interest entity
the former Waukegan Savings Bank, acquired by the Company in an FDIC-
assisted transaction
troubled debt restructuring
4
INTRODUCTION
First Midwest Bancorp, Inc. (the ‘‘Company’’, ‘‘we’’, or ‘‘our’’) is a bank holding company headquartered in the
Chicago suburb of Itasca, Illinois with operations throughout the greater Chicago metropolitan area as well as
northwest Indiana, central and western Illinois, and eastern Iowa. Our principal subsidiary is First Midwest Bank
(the ‘‘Bank’’), which provides a broad range of commercial and retail banking and wealth management services to
consumer, corporate, and public or governmental customers. We are committed to meeting the financial needs of
the people and businesses in the communities where we live and work by providing customized banking solutions,
quality products, and innovative services that fulfill those financial needs.
AVAILABLE INFORMATION
We file annual, quarterly, and current reports; proxy statements; and other information with the U.S. Securities and
Exchange Commission (‘‘SEC’’), and we make this information available free of charge on the investor relations
section of our website at www.firstmidwest.com/aboutinvestor_overview.asp. You may read and copy materials we
file with the SEC from its Public Reference Room at 100 F. Street, NE, Washington, DC 20549. You may obtain
information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. In addition, the
SEC maintains an internet site at http://www.sec.gov that contains reports, proxy and information statements, and
other information regarding issuers that file electronically with the SEC. The following documents are also posted
on our website or are available in print upon the request of any stockholder to our Corporate Secretary:
(cid:129) Certificate of Incorporation.
(cid:129) By-laws.
(cid:129) Charters for our Audit, Compensation, and Nominating and Corporate Governance Committees.
(cid:129) Related Person Transaction Policies and Procedures.
(cid:129) Corporate Governance Guidelines.
(cid:129) Code of Ethics and Standards of Conduct (the ‘‘Code’’), which governs our directors, officers, and
employees.
(cid:129) Code of Ethics for Senior Financial Officers.
Within the time period required by the SEC and the Nasdaq Stock Market, we will post on our website any
amendment to the Code and any waiver applicable to any executive officer, director, or senior financial officer (as
defined in the Code). In addition, our website includes information concerning purchases and sales of our securities
by our executive officers and directors. The Company’s accounting and reporting policies conform to U.S. generally
accepted accounting principles (‘‘GAAP’’) and general practice within the banking industry. We post on our
website any disclosure relating to certain non-GAAP financial measures (as defined in the SEC’s Regulation G)
that we may make public orally, telephonically, by webcast, by broadcast, or by similar means from time to time.
Our Corporate Secretary can be contacted by writing to First Midwest Bancorp, Inc., One Pierce Place, Itasca,
Illinois 60143, attention: Corporate Secretary. The Company’s Investor Relations Department can be contacted by
telephone at (630) 875-7533 or by e-mail at investor.relations@firstmidwest.com.
CAUTIONARY STATEMENT PURSUANT TO THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995
We include or incorporate by reference in this Annual Report on Form 10-K, and from time to time our
management may make, statements that may constitute ‘‘forward-looking statements’’ within the meaning of the
safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements are not historical
facts, but instead represent only management’s beliefs regarding future events, many of which, by their nature, are
inherently uncertain and outside our control. Although we believe the expectations reflected in any forward-looking
statements are reasonable, it is possible that our actual results and financial condition may differ, possibly
materially, from the anticipated results and financial condition indicated in such statements. In some cases, you can
identify these statements by forward-looking words such as ‘‘may,’’ ‘‘might,’’ ‘‘will,’’ ‘‘should,’’ ‘‘expect,’’ ‘‘plan,’’
‘‘anticipate,’’ ‘‘believe,’’ ‘‘estimate,’’ ‘‘predict,’’ ‘‘probable,’’ ‘‘potential,’’ or ‘‘continue,’’ and the negative of these
terms and other comparable terminology. We caution you not to place undue reliance on forward-looking
statements, which speak only as of the date of this report or when made.
5
Forward-looking statements are subject to known and unknown risks, uncertainties, and assumptions and may
contain projections relating to our future financial performance including our growth strategies and anticipated
trends in our business. For a detailed discussion of these and other risks and uncertainties that could cause actual
results and events to differ materially from such forward-looking statements, you should refer to the sections titled
‘‘Risk Factors’’ in Part 1 Item 1A and ‘‘Management’s Discussion and Analysis of Financial Condition and Results
of Operations,’’ in Part II Item 7 of this Annual Report on Form 10-K as well as our subsequent periodic and current
reports filed with the SEC. However, these risks and uncertainties are not exhaustive. Other sections of this report
describe additional factors that could adversely impact our business and financial performance.
PART I
ITEM 1. BUSINESS
First Midwest Bancorp, Inc.
First Midwest Bancorp, Inc. is a single bank holding company incorporated in Delaware in 1982 for the purpose of
becoming a holding company registered under the Bank Holding Company Act of 1956, as amended (the ‘‘BHC
Act’’). The Company is one of Illinois’ largest independent publicly traded banking companies with assets of
$8.1 billion as of December 31, 2012 and is headquartered in the Chicago suburb of Itasca, Illinois. The Company’s
$0.01 per share par value common stock is listed on the Nasdaq Stock Market and trades under the symbol FMBI
(‘‘Common Stock’’).
History
First Midwest commenced business in March 1983 after a multi-institution acquisition of over 20 affiliated
financial institutions. At the time, this transaction was the largest simultaneous acquisition of banks ever approved
by the Board of Governors of the Federal Reserve System (‘‘Federal Reserve’’) and involved a re-organization of
existing ownership interests, as the acquired entities were under some form of common control. Since 1983, the
Company completed approximately 20 acquisitions of financial institutions and branches representing over
$4 billion in assets, including the following Federal Deposit Insurance Corporation (‘‘FDIC’’)-assisted transactions:
Institution Acquired
Date Acquired
Assets of Former
Institution
Waukegan Savings Bank (‘‘Waukegan Savings’’) ........................ August 3, 2012
Palos Bank and Trust Company (1) ........................................... August 13, 2010
Peotone Bank and Trust Company (1) ....................................... April 23, 2010
First DuPage Bank (1)............................................................. October 23, 2009
$
$
$
$
86 million
485 million
129 million
261 million
(1) Most loans and other real estate owned (‘‘OREO’’) acquired in these transactions are covered by agreements with the FDIC (the
‘‘FDIC Agreements’’). Under the FDIC Agreements, the FDIC will reimburse the Company for the majority of the losses and
eligible expenses related to these assets.
For more information regarding the FDIC-assisted transactions, please refer to Notes 2 and 5 of ‘‘Notes to the
Consolidated Financial Statements’’ in Item 8 of this Form 10-K.
In the normal course of business, the Company may, from time to time, explore potential opportunities for
expansion in core market areas through the acquisition of banking institutions. As a matter of policy, the Company
generally does not comment on any dialogue with potential targets or possible acquisitions until a definitive
acquisition agreement is signed. The Company’s ability to engage in certain merger or acquisition transactions,
whether or not any regulatory approval is required, will be dependent upon the Company’s bank regulators’ views at
the time as to the capital levels, quality of management and overall condition of the Company and their assessment
of a variety of other factors. Certain merger or acquisition transactions, including those involving the acquisition of
a depository institution or the assumption of the deposits of any depository institution, require formal approval from
various bank regulatory authorities, which will be subject to a variety of factors and considerations.
6
Subsidiaries
First Midwest is responsible for the overall conduct, direction, and performance of its subsidiaries. The Company
provides various services to its subsidiaries, establishes Company-wide policies and procedures, and provides other
resources as needed, including capital. As of December 31, 2012, the following were the primary subsidiaries of
First Midwest:
First Midwest Bank
The Bank conducts the majority of the Company’s operations primarily in communities in metropolitan Chicago,
northwest Indiana, central and western Illinois, and eastern Iowa. The following table presents key figures for the
Bank.
(Dollar amounts in thousands)
Total assets......................................................
Total deposits ..................................................
Banking offices................................................
Full-time equivalent employees ...........................
December 31,
2012
$
$
7,984,323
6,698,209
95
1,707
The Bank operates the following wholly owned subsidiaries:
(cid:129)
(cid:129)
First Midwest Holdings, Inc. is a Delaware corporation that manages investment securities, principally
municipal obligations, and provides corporate management services to its wholly owned subsidiary, FMB
Investments Ltd., a Bermuda corporation. FMB Investments Ltd. manages investment securities and is
largely inactive.
First Midwest Securities Management, LLC is a limited liability company that manages investment
securities.
(cid:129) LIH Holdings, LLC is an Illinois limited liability company that holds an equity interest in a Section 8
housing venture.
(cid:129)
Synergy Property Holdings, LLC is an Illinois limited liability company that manages the majority of the
Bank’s other real estate owned (‘‘OREO’’) properties.
Catalyst Asset Holdings, LLC (‘‘Catalyst’’)
Catalyst is an Illinois limited liability company that manages a portion of the Company’s non-performing assets.
The Company established Catalyst in the first quarter of 2010. In March 2010, the Company purchased
$168.1 million of non-performing assets from the Bank and transferred them to Catalyst in the form of a capital
injection. Catalyst had $17.9 million in non-performing assets remaining as of December 31, 2012.
Catalyst has one wholly owned subsidiary, Restoration Asset Management, LLC (‘‘Restoration’’), an Illinois
limited liability company that manages Catalyst’s OREO properties. The Bank provides certain administrative and
management services to Catalyst and Restoration pursuant to a services agreement. The amounts charged under this
services agreement are intended to reflect the actual costs to the Bank for providing such services.
Parasol Investment Management, LLC (‘‘Parasol’’)
Parasol began operations in 2011 and is a registered investment advisor under the Investment Advisors Act of 1940.
Parasol conducts its business in one of the Bank’s offices and provides wealth management services to the Bank’s
wealth management division and to individual and institutional clients, such as corporate and public retirement
plans, foundations and endowments, high net worth individuals, and multi-employer trust funds.
7
First Midwest Capital Trust I (‘‘FMCT’’)
FMCT is a Delaware statutory business trust formed in 2003 for the purpose of issuing trust-preferred securities
and lending the proceeds to the Company in return for junior subordinated debentures of the Company. The
Company guarantees payments of distributions on the trust-preferred securities and payments on redemption of the
trust-preferred securities on a limited basis.
FMCT qualifies as a variable interest entity for which the Company is not the primary beneficiary. Consequently,
its accounts are not consolidated in the Company’s financial statements. However, the currently outstanding
$61.8 million in trust-preferred securities issued by FMCT is included in the Tier 1 capital of the Company for
regulatory capital purposes. For a further description of FMCT, refer to Note 21 of ‘‘Notes to the Consolidated
Financial Statements’’ in Item 8 of this Form 10-K.
Market Area
The Bank operates in the most active and diverse markets in Illinois, the largest of which is the suburban
metropolitan Chicago market, which includes the counties surrounding Cook County, Illinois. The Bank’s other
service areas are located in northwestern Indiana, western Illinois, eastern Iowa, and central Illinois. These service
areas include a mixture of urban, suburban, and rural markets and contain a diversified mix of industry groups,
including manufacturing, health care, pharmaceutical, higher education, wholesale and retail trade, service, and
agricultural. The Bank’s business of attracting deposits and making loans is primarily conducted within its service
areas and may be affected by significant changes in their economies.
Competition
The banking and financial services industry in the markets in which the Bank operates (and particularly the
Chicago metropolitan area) is highly competitive. Generally, the Bank competes for banking customers and
deposits with other local, regional, national, and internet banks and savings and loan associations; personal loan and
finance companies and credit unions; and mutual funds and investment brokers. The Company faces intense
competition from local and out of state institutions within its service areas.
Competition is driven by a number of factors, including interest rates charged on loans and paid on deposits; the
ability to attract new deposits; the scope and type of banking and financial services offered; the hours during which
business can be conducted; the location of bank branches and automated teller machines (‘‘ATMs’’); the
availability, ease of use, and range of banking services on the internet; the availability of related services; and a
variety of additional services, such as wealth management services.
In providing investment advisory services, the Bank also competes with retail and discount stockbrokers,
investment advisors, mutual funds, insurance companies, and other financial institutions for wealth management
clients. Competition is generally based on the variety of products and services offered to clients and the
performance of funds under management. The Company’s main competitors are financial service providers both
within and outside of the geographic areas in which the Bank maintains offices.
The Company faces competition in attracting and retaining qualified employees. Its ability to continue to compete
effectively will depend upon its ability to attract new employees and retain and motivate existing employees.
Our Business
The Bank offers a variety of traditional financial products and services that are designed to meet the financial needs
of the customers and communities it serves. The Bank has been in the basic business of commercial and community
banking for over 60 years, namely attracting deposits and making loans, as well as providing wealth management
services. The Company does not engage in any sub-prime lending, nor does it engage in non-commercial banking
activities, such as investment banking services.
8
Deposit and Retail Services
The Bank offers a full range of deposit services that are typically available in most commercial banks and financial
institutions, including checking accounts, NOW accounts, money market accounts, savings accounts, and time
deposits of various types ranging from shorter-term to longer-term certificates of deposit. The transaction accounts
and time deposits are tailored to our primary service area at competitive rates. The Company also offers certain
retirement account services, including individual retirement accounts.
Lending Activities
The Bank originates commercial and industrial, agricultural, commercial real estate, and consumer loans.
Substantially all of the Company’s borrowers are businesses and residents of the Bank’s service areas. The
Company’s largest category of lending is commercial real estate (including construction loans), followed by
commercial and industrial. Generally, real estate loans are secured by the land and any improvements to, or
developments on, the land. Generally, loan-to-value ratios at time of issuance are 50% for unimproved land and
65% for developed land. The Company’s consumer loans consist primarily of home equity loans and lines of credit
and 1-4 family mortgages.
No individual or single group of related accounts is considered material in relation to the assets or deposits of the
Bank or in relation to the overall business of the Company. However, 62.6% of our loan portfolio consisted of real
estate-related loans at December 31, 2012.
For detailed information regarding the Company’s loan portfolio, see the ‘‘Loan Portfolio and Credit Quality’’
section of ‘‘Management’s Discussion and Analysis of Financial Condition and Results of Operations’’ in Item 7 of
this Form 10-K.
Sources of Funds
The Bank’s ability to maintain affordable funding sources allows the Company to meet the credit needs of its
customers and the communities it serves. The Bank maintains a relatively stable base of core deposits that are the
primary source of the Company’s funds for lending and other investment purposes. Deposits funded 82.4% of the
Company’s assets at the end of 2012 with a net loans-to-deposits ratio of 80.7%. Consumer, commercial, and public
deposits come from the Company’s primary service areas through a broad selection of deposit products. By
maintaining core deposits, the Company both controls its funding costs and builds client relationships.
In addition to deposits, the Company obtains funds from the amortization, repayment, and prepayment of loans; the
sale or maturity of investment securities; advances from the Federal Home Loan Bank (‘‘FHLB’’), brokered
repurchase agreements and certificates of deposits, and federal funds purchased; cash flows generated by
operations; and proceeds from the issuance of debt and sales of the Company’s Common Stock. For detailed
information regarding the Company’s funding sources, see the ‘‘Funding and Liquidity Management’’ section of
‘‘Management’s Discussion and Analysis of Financial Condition and Results of Operations’’ in Item 7 of this
Form 10-K.
Investment Activities
The Bank maintains a sizeable securities portfolio in order to provide the Company with financial stability, asset
diversification, income, and collateral for borrowing. The Company administers this securities portfolio in
accordance with an investment policy that was approved and adopted by the Board of Directors of the Bank. The
Company’s Asset Liability Committee implements the investment policy based on the established guidelines within
the written policy.
The basic objectives of the Bank’s investment activities are to enhance the profitability of the Company by fully
investing available funds, provide adequate regulatory and operational liquidity, minimize and/or adjust the interest
rate risk position of the Company, diversify and mitigate the Company’s exposure to credit risk, and provide
collateral for pledging requirements. For detailed information regarding the Company’s securities portfolio, see the
‘‘Investment Portfolio Management’’ section of ‘‘Management’s Discussion and Analysis of Financial Condition
and Results of Operations’’ in Item 7 of this Form 10-K.
9
Supervision and Regulation
The Bank is an Illinois state-chartered bank and a member of the Federal Reserve, which has the primary authority
to examine and supervise the Bank in coordination with the Illinois Department of Financial and Professional
Regulation (the ‘‘IDFPR’’). The Company is a single bank holding company and is also subject to the primary
regulatory authority of the Federal Reserve. The Company and its subsidiaries are also subject to extensive
secondary regulation and supervision by various state and federal governmental regulatory authorities including the
FDIC, which oversees insured deposits and assets covered by Purchase and Assumption Agreements and Loss
Share Agreements with the FDIC (the ‘‘FDIC Agreements’’), and the U.S. Department of the Treasury
(‘‘Treasury’’), which enforces money laundering and currency transaction regulations. In addition to banking
regulations, as a public company, the Company is under the jurisdiction of the SEC and the disclosure and
regulatory requirements of the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as
amended.
Federal and state laws and regulations generally applicable to financial institutions, including the Company and its
subsidiaries, regulate the scope of business, investments, reserves against deposits, capital levels, the nature and
amount of collateral for loans, the establishment of branches, mergers, consolidations, dividends, and other things.
This supervision and regulation is intended primarily for the protection of the FDIC’s deposit insurance fund
(‘‘DIF’’) and the depositors, rather than the stockholders, of a financial institution.
The following sections describe the significant elements of the material statutes and regulations affecting the
Company and its subsidiaries, many of which are the subject of ongoing revision and legislative rulemaking as a
result of the government’s long-term regulatory reform of the financial markets and the implementation of the
Dodd-Frank Wall Street Reform and Consumer Protection Act (the ‘‘Dodd-Frank Act’’), which is discussed in more
detail later in this report. In some cases, the new proposals may include a radical overhaul of the regulation of
financial institutions or limitations on the products they offer.
The final regulations or regulatory policies that are applicable to the Company and its subsidiaries and eventually
adopted by the U.S. government could have a material adverse effect on our business, financial condition, and
results of operations. The Company cannot accurately predict the nature or the extent of the effects that any such
changes would have on its business and earnings.
Bank Holding Company Act of 1956, As Amended (the ‘‘BHC Act’’)
Generally, the BHC Act governs the acquisition and control of banks and non-banking companies by bank holding
companies and requires bank holding companies to register with the Federal Reserve. The BHC Act requires a bank
holding company to file an annual report of its operations and such additional information as the Federal Reserve
may require. A bank holding company and its subsidiaries are subject to examination by the Federal Reserve.
The BHC Act, the Bank Merger Act, and other federal and state statutes regulate acquisitions of commercial banks.
The Act requires the prior approval of the Federal Reserve for the direct or indirect acquisition by a bank holding
company of more than 5.0% of the voting shares of a commercial bank or its parent holding company. Under the
Bank Merger Act, the prior approval of the Federal Reserve or other appropriate bank regulatory authority is
required for a member bank to merge with another bank or purchase the assets or assume the deposits of another
bank. In reviewing applications seeking approval of merger and acquisition transactions, the bank regulatory
authorities will consider, among other things, the competitive effect and public benefits of the transactions, the
capital position of the combined organization, the risks to the stability of the U.S. banking or financial system, the
applicant’s performance record under the Community Reinvestment Act and fair housing laws, and the
effectiveness of the banks in combating money laundering activities.
In addition, the BHC Act prohibits (with certain exceptions) a bank holding company from acquiring direct or
indirect ownership or control of more than 5% of the voting shares of any ‘‘non-banking’’ company unless the
non-banking activities are found by the Federal Reserve to be ‘‘so closely related to banking as to be a proper
incident thereto.’’ Under current regulations of the Federal Reserve, a bank holding company and its non-bank
subsidiaries are permitted to engage in such banking-related business ventures as consumer finance, equipment
leasing, data processing, mortgage banking, financial and investment advice, securities brokerage services, and
other activities.
10
Transactions with Affiliates
Any transactions between the Bank and the Company and their respective subsidiaries are regulated by the Federal
Reserve. The Federal Reserve’s regulations limit the types and amounts of covered transactions engaged in by the
Bank and generally require those transactions to be at an arm’s-length basis. Covered transactions are defined by
statute to include:
(cid:129) A loan or extension of credit, as well as a purchase of securities issued by an affiliate.
(cid:129) The purchase of assets from an affiliate, unless otherwise exempted by the Federal Reserve.
(cid:129) Certain derivative transactions that create a credit exposure to an affiliate.
(cid:129) The acceptance of securities issued by an affiliate as collateral for a loan.
(cid:129) The issuance of a guarantee, acceptance, or letter of credit on behalf of an affiliate.
In general, these regulations require that any such transaction by the Bank (or its subsidiaries) with an affiliate must
be secured by designated amounts of specified collateral and must be limited to certain thresholds on an individual
and aggregate basis.
The Bank is also limited as to how much and on what terms it may lend to its insiders and the insiders of its
affiliates, including executive officers and directors.
Source of Strength
Federal Reserve policy and federal law require bank holding companies to act as a source of financial and
managerial strength to their subsidiary banks. Under this requirement, a holding company is expected to commit
resources to support its bank subsidiary even at times when the holding company may not be in a financial position
to provide it. Any capital loans by a bank holding company to its subsidiary bank are subordinate in right of
payment to deposits and to certain other indebtedness of such subsidiary bank. In the event of a bank holding
company’s bankruptcy, the BHC Act provides that any commitment by the bank holding company to a federal bank
regulatory agency to maintain the capital of a bank subsidiary will be assumed by the bankruptcy trustee and
entitled to priority of payment.
Community Reinvestment Act of 1977 (the ‘‘CRA’’)
The CRA requires depository institutions to assist in meeting the credit needs of their market areas consistent with
safe and sound banking practices. Under the CRA, each depository institution is required to help meet the credit
needs of its market areas by providing credit to low-income and moderate-income individuals and communities.
Federal regulators conduct CRA examinations on a regular basis to assess the performance of financial institutions
and assign one of four ratings to the institution’s record of meeting the credit needs of its community. Banking
regulators take into account CRA ratings when considering approval of a proposed transaction. During its last
examination in August 2010, the Bank received a rating of ‘‘outstanding,’’ the highest available.
Gramm-Leach-Bliley Act of 1999 (the ‘‘GLB Act’’)
The GLB Act allows certain bank holding companies to elect to be treated as a financial holding company (an
‘‘FHC’’) that may offer customers a more comprehensive array of financial products and services. Such products
and services may include insurance and securities underwriting and agency activities, merchant banking, and
insurance company portfolio investment activities. Activities that are ‘‘complementary’’ to financial activities are
also authorized. Under the GLB Act, the Federal Reserve may not permit a company to register or maintain status as
an FHC if the company or any of its insured depository institution subsidiaries are not well-capitalized and well
managed. The Federal Reserve may prohibit an FHC from engaging in otherwise permissible activities at its
supervisory discretion. In addition, for an FHC to commence any new activity permitted by the BHC Act or to
acquire a company engaged in any new activity permitted by the BHC Act, each insured depository institution
subsidiary of the FHC must have received a rating of at least ‘‘satisfactory’’ in its most recent examination under the
CRA.
Also under the GLB Act, a financial institution may not disclose non-public personal information about a consumer
to unaffiliated third parties unless the institution satisfies various disclosure requirements and the consumer has not
11
elected to opt out of the information sharing. Under the GLB Act, a financial institution must provide its customers
with a notice of its privacy policies and practices. The Federal Reserve, the FDIC, and other financial regulatory
agencies issued regulations implementing notice requirements and restrictions on a financial institution’s ability to
disclose non-public personal information about consumers to unaffiliated third parties.
Bank Secrecy Act and USA PATRIOT Act
The Bank Secrecy and USA Patriot Acts require financial institutions to develop programs to prevent them from
being used for money laundering and terrorist activities. If such activities are detected or suspected, financial
institutions are obligated to file suspicious activity reports with the Treasury’s Office of Financial Crimes
Enforcement Network. These rules require financial institutions to establish procedures for identifying and
verifying the identity of customers seeking to open new accounts. Failure to comply with these sanctions could have
serious legal and reputational consequences, including causing applicable bank regulatory authorities not to
approve merger or acquisition transactions when regulatory approval is required or to prohibit such transactions
even if approval is not required.
Office of Foreign Assets Control Regulation (‘‘OFAC’’)
The United States imposed economic sanctions that affect transactions with designated foreign countries, nationals,
and others. These sanctions are administered by OFAC, an agency of the Treasury. These sanctions include:
(i) restrictions on trade with or investment in a sanctioned country, including prohibitions against direct or indirect
imports from and exports to a sanctioned country and prohibitions on ‘‘U.S. persons’’ engaging in financial
transactions relating to making investments in, or providing investment-related advice or assistance to, a sanctioned
country; and (ii) a blocking of assets in which the government or specially designated nationals of the sanctioned
country have an interest by prohibiting transfers of property subject to U.S. jurisdiction (including property in the
possession or control of U.S. persons). Blocked assets (e.g., property and bank deposits) cannot be paid out,
withdrawn, set off, or transferred in any manner without a license from OFAC. Failure to comply with these
sanctions could have serious legal and reputational consequences for the institution, including causing applicable
bank regulatory authorities not to approve merger or acquisition transactions when regulatory approval is required
or to prohibit such transactions even if approval is not required.
Dodd-Frank Wall Street Reform and Consumer Protection Act
The Dodd-Frank Act significantly restructures the financial regulatory regime in the United States. Although the
Dodd-Frank Act’s provisions that have received the most public attention generally have been those applying to or
more likely to affect larger institutions such as bank holding companies and banks with total consolidated assets of
$10 billion or more, it contains numerous other provisions that affect all bank holding companies and banks,
including the Company and the Bank, some of which are described in more detail below. We are monitoring
developments with respect to the provisions applicable to bank holding companies and banks with total
consolidated assets of $10 billion or more in the event that the Company or Bank reaches that size.
Some of these provisions may have the consequence of increasing the Company’s expenses, decreasing the
Company’s revenues, and changing the activities in which the Company chooses to engage. Many aspects of the
Dodd-Frank Act are still subject to future rulemaking and will take effect over several years, making it difficult to
anticipate the overall financial impact on the Company, its customers, or the financial industry in general.
Consumer Financial Protection
The Dodd-Frank Act created the Consumer Financial Protection Bureau (‘‘CFPB’’) as a new and independent unit
within the Federal Reserve System. With certain exceptions, the CFPB has authority to regulate any person or entity
that engages in offering or providing a ‘‘consumer financial product or service’’ and has rulemaking, examination,
and enforcement powers over financial institutions. With respect to primary examination and enforcement authority
of financial entities, however, the CFPB’s authority is limited to institutions with assets of $10 billion or more.
Existing regulators retain this authority over institutions with assets of $10 billion or less, such as First Midwest.
12
The powers of the CFPB currently include:
(cid:129) The ability to prescribe consumer financial laws and rules that regulate all institutions that engage in
(cid:129)
offering or providing a consumer financial product or service.
Primary enforcement and exclusive supervision authority with respect to federal consumer financial laws
over ‘‘very large’’ insured institutions with assets of $10 billion or more. This includes the right to obtain
information about an institution’s activities and compliance systems and procedures and to detect and assess
risks to consumers and markets.
(cid:129) The ability to require reports from institutions with assets under $10 billion, such as the Bank, to support the
CFPB in implementing federal consumer financial laws, supporting examination activities, and assessing
and detecting risks to consumers and financial markets.
(cid:129) Examination authority (limited to assessing compliance with federal consumer financial laws) with respect
to institutions with assets under $10 billion, such as the Bank. Specifically, a CFPB examiner may be
included on a sampling basis in the examinations performed by the institution’s primary regulator.
The CFPB, which commenced operations on July 21, 2011, engages in several activities including (i) investigating
consumer complaints about credit cards and mortgages, (ii) launching a supervision program, (iii) conducting
research for and developing mandatory financial product disclosures, and (iv) engaging in consumer financial
protection rulemaking.
The full extent of the CFPB’s authority and potential impact on the Company is unclear at this time, but the
Company continues to monitor the CFPB’s activities on an ongoing basis.
The Bank is also subject to a number of regulations intended to protect consumers in various areas, such as equal
credit opportunity, fair lending, customer privacy, identity theft, and fair credit reporting. For example, the Bank is
subject to such acts as the Federal Truth in Savings Act, the Home Mortgage Disclosure Act, and the Real Estate
Settlement Procedures Act. Electronic banking activities are subject to federal law, including the Electronic Funds
Transfer Act. Wealth management activities of the Bank are subject to the Illinois Corporate Fiduciaries Act. Loans
made by the Bank are subject to applicable provisions of the Federal Truth in Lending Act. Other consumer
financial laws include the Equal Credit Opportunity Act, Fair Credit Reporting Act, Fair Debt Collection Practices
Act, and applicable state laws.
The Federal Reserve has primary responsibility for examination and enforcement of federal consumer financial
laws with respect to the Company, and state authorities are responsible for all state consumer laws with respect to
the Company.
Interchange Fees
The Federal Reserve adopted a final rule, effective October 1, 2011, with respect to the Durbin Amendment of the
Dodd-Frank Act, which establishes a maximum permissible interchange fee for many types of debit interchange
transactions to equal no more than 21 cents plus five basis points of the transaction value. Furthermore, the Federal
Reserve also adopted a rule to allow a debit card issuer to recover one cent per transaction for fraud prevention
purposes if the issuer complies with certain fraud-related requirements promulgated by the Federal Reserve. The
Company is in compliance with these fraud-related requirements. The Federal Reserve also approved rules
governing routing and exclusivity that require issuers to offer two unaffiliated networks for routing transactions on
each debit or prepaid product, which became effective April 1, 2012.
Currently, the Company is exempt from the interchange fee cap under the ‘‘small issuer’’ exemption, which applies
to any debit card issuer with total worldwide assets of less than $10 billion as of the end of the previous calendar
year. In the event the Company’s assets reach $10 billion or more, it will become subject to the interchange fee
limitations beginning July 1 of the following year, and the fees the Company may receive for an electronic debit
transaction will be capped at the statutory limit.
Capital Requirements
The Federal Reserve and other federal bank regulators established risk-based capital guidelines to provide a
framework for assessing the adequacy of the capital of national and state banks, thrifts, and their holding companies
13
(collectively, ‘‘banking institutions’’). These guidelines apply to all banking institutions, regardless of size, and are
used in the examination and supervisory process and in the analysis of applications by the regulatory authorities.
These guidelines require banking institutions to maintain capital based upon the 1988 capital accord (‘‘Basel I’’) of
the Basel Committee on Banking Supervision (the ‘‘Basel Committee’’).
The Basel Committee is a committee of central banks and bank supervisors/regulators from the major
industrialized countries that develops broad policy guidelines for use by each country’s supervisors in determining
the supervisory policies they apply. The requirements are intended to ensure that banking organizations have
adequate capital given the risk levels of assets and off-balance sheet financial instruments (‘‘risk-weighted assets’’).
Capital is classified in one of the following tiers:
(cid:129) Core Capital (Tier 1). Tier 1 capital includes common equity, retained earnings, qualifying non-cumulative
perpetual preferred stock, a limited amount of qualifying cumulative perpetual stock at the holding
company level, minority interests in equity accounts of consolidated subsidiaries, and qualifying trust-
preferred securities, less goodwill, most intangible assets, and certain other assets.
Supplementary Capital (Tier 2). Tier 2 capital includes perpetual preferred stock and trust-preferred
securities not meeting the Tier 1 definition, qualifying mandatory convertible debt securities, qualifying
subordinated debt, and the allowance for credit losses, subject to limitations.
(cid:129)
Regulatory requirements also establish quantitative measures to ensure capital adequacy for banking institutions as
follows:
Adequately
Capitalized
Requirement
‘‘Well-Capitalized’’
Requirement
Tier 1 capital to risk-weighted assets ..........
Total capital to risk-weighted assets............
4.00%
8.00%
6.00%
10.00%
Bank holding companies and banks are also required to comply with minimum leverage ratio requirements. The
leverage ratio is the ratio of a banking organization’s Tier 1 capital to its total adjusted quarterly average assets (as
defined for regulatory purposes). The requirements dictate a minimum leverage ratio of 3.0% for bank holding
companies and member banks that either have the highest supervisory rating or have implemented the appropriate
federal regulatory authority’s risk-adjusted measure for market risk. All other bank holding companies and member
banks are required to maintain a minimum leverage ratio of 4.0%, unless a different minimum is specified by an
appropriate regulatory authority. In addition, the leverage ratio for a depository institution to be considered ‘‘well
capitalized’’ under the regulatory framework for prompt corrective action must be at least 5.0%. The Federal
Reserve has not advised the Company or the Bank of any specific minimum leverage ratio applicable to either
entity.
In June 2012, the Company’s primary federal regulator, the Federal Reserve, published two notices of proposed
rulemaking (the ‘‘2012 Capital Proposals’’) that would substantially revise the risk-based capital requirements
applicable to bank holding companies and depository institutions, including the Company and the Bank, compared
to the current U.S. risk-based capital rules, which are based on the Basel I capital accords of the Basel Committee
referenced above. One of the 2012 Capital Proposals (the ‘‘Basel III Proposal’’) addresses the components of capital
and other issues affecting the numerator in banking institutions’ regulatory capital ratios and would implement the
Basel Committee’s December 2010 framework known as ‘‘Basel III’’ for strengthening international capital
standards. The other proposal (the ‘‘Standardized Approach Proposal’’) addresses risk weights and other issues
affecting the denominator in banking institutions’ regulatory capital ratios and would replace the existing Basel
I-derived risk-weighting approach with a more risk-sensitive approach based, in part, on the standardized approach
in the Basel Committee’s 2004 ‘‘Basel II’’ capital accords. The 2012 Capital Proposals would also implement the
requirements of Section 939A of the Dodd-Frank Act to remove references to credit ratings from the federal
banking agencies’ rules. As proposed, the Basel III Proposal and the Standardized Approach Proposal would come
into effect on January 1, 2013 (subject to a phase-in period) and January 1, 2015 (with an option for early adoption),
respectively. However, final rules have not yet been adopted; therefore, the Basel III framework is not yet applicable
to the Company or the Bank.
14
The Basel III Proposal, among other things, (i) introduces a new capital measure called ‘‘Common Equity Tier 1’’
(‘‘CET1’’), (ii) specifies that Tier 1 capital consists of CET1 and ‘‘Additional Tier 1 capital’’ instruments meeting
specified requirements, (iii) defines CET1 narrowly by requiring that most deductions/adjustments to regulatory
capital measures be made to CET1 and not to the other components of capital and (iv) expands the scope of the
deductions/adjustments as compared to existing regulations.
When fully phased in on January 1, 2019, the Basel III Proposal will require the Company and the Bank to maintain
the following minimum ratios:
Minimum Ratio
Capital Conservation
Buffer
Effective Ratio
CET1 to risk-weighted assets .......................
Tier 1 capital to risk-weighted assets.............
Total capital to risk-weighted assets ..............
Leverage ratio ...........................................
4.5%
6.0%
8.0%
N/A
2.5%
2.5%
2.5%
N/A
7.0%
8.5%
10.5%
3.0%
The Basel III Proposal also provides for a ‘‘countercyclical capital buffer’’ that is applicable to only certain covered
institutions and is not expected to have any current applicability to the Company and the Bank.
The capital conservation buffer is designed to absorb losses during periods of economic stress. Banking institutions
with a ratio of CET1 to risk-weighted assets above the minimum ratio, but below the conservation buffer, will face
constraints on dividends, equity repurchases and compensation based on the amount of the shortfall.
The Basel III Proposal provides for a number of deductions from and adjustments to CET1. These include, for
example, the requirement that mortgage servicing rights, deferred tax assets dependent upon future taxable income
and significant investments in non-consolidated financial entities be deducted from CET1 to the extent that any one
such category exceeds 10% of CET1 or all such categories in the aggregate exceed 15% of CET1. Under current
capital standards, the effects of accumulated other comprehensive income items included in capital are excluded for
the purposes of determining regulatory capital ratios. Under the Basel III Proposal, the effects of certain
accumulated other comprehensive items are not excluded, which could result in significant variations in the level of
capital depending upon the impact of interest rate fluctuations on the fair value of the Company’s securities
portfolio.
Implementation of the deductions and other adjustments to CET1 will begin on January 1, 2014 and will be
phased-in over a five-year period (20% per year). The implementation of the capital conservation buffer will begin
on January 1, 2016 at the 0.625% level and be phased in over a four-year period (increasing by that amount on each
subsequent January 1, until it reaches 2.5% on January 1, 2019).
With respect to the Bank, the Basel III Proposal would also revise the ‘‘prompt corrective action’’ regulations
pursuant to Section 38 of the Federal Deposit Insurance Act, by (i) introducing a CET1 ratio requirement at each
level (other than critically undercapitalized), with the required CET1 ratio being 6.5% for well-capitalized status;
(ii) increasing the minimum Tier 1 capital ratio requirement for each category, with the minimum Tier 1 capital
ratio for well-capitalized status being 8% (as compared to the current 6%); and (iii) eliminating the current
provision that provides that a bank with a composite supervisory rating of 1 may have a 3% leverage ratio and still
be well capitalized. The Basel III proposal does not change the total risk-based capital requirement for any category.
The federal banking agencies in 2008 proposed, as an option for banking institutions that are not subject to the
advanced risk-weighting approaches of Basel II, an approach based upon the Basel II standardized risk-weighting
approach, but the agencies never proceeded with it. The Standardized Approach Proposal expands upon the initial
U.S. Basel II approach from 2008, but would be mandatory and, because of Dodd-Frank’s prohibition on the use of
credit ratings, would substitute non ratings-based alternatives for Basel II’s heavy reliance on credit ratings.
The Standardized Approach Proposal would expand the risk-weighting categories from the current four Basel
I-derived categories (0%, 20%, 50% and 100%) to a much larger and more risk-sensitive number of categories,
depending on the nature of the assets, generally ranging from 0% for U.S. government and agency securities, to
15
600% for certain equity exposures, and resulting in higher risk weights for a variety of asset categories, including
many residential mortgages and certain commercial real estate. Specifics include, among other things:
(cid:129) Applying a 150% risk weight instead of a 100% risk weight for certain high volatility commercial real estate
(cid:129)
acquisition, development and construction loans.
For residential mortgage exposures, the current approach of a 50% risk weight for high-quality seasoned
mortgages and a 100% risk-weight for all other mortgages is replaced with a risk weight of between 35%
and 200% depending upon the mortgage’s loan-to-value ratio and whether the mortgage is a ‘‘category 1’’ or
‘‘category 2’’ residential mortgage exposure (based on eight criteria that include the term, use of negative
amortization, balloon payments and certain rate increases).
(cid:129) Assigning a 150% risk weight to exposures (other than residential mortgage exposures) that are 90 days past
(cid:129)
(cid:129)
due.
Providing for a 20% credit conversion factor for the unused portion of a commitment with an original
maturity of one year or less that is not unconditionally cancellable (currently set at 0%).
Providing for a risk weight, generally not less than 20% with certain exceptions, for securities lending
transactions based on the risk weight category of the underlying collateral securing the transaction.
Providing for a 100% risk weight for claims on securities firms.
(cid:129)
(cid:129) Eliminating the current 50% cap on the risk weight for OTC derivatives.
In addition, the Standardized Approach Proposal provides more advantageous risk weights for derivatives and
repurchase-style transactions cleared through a qualifying central counterparty and increases the scope of eligible
guarantors and eligible collateral for purposes of credit risk mitigation.
There can be no guarantee that the Basel III and the Standardized Approach Proposals will be adopted in their
current form, what changes may be made before adoption, or when ultimate adoption will occur. Requirements to
maintain higher levels of capital or to maintain higher levels of liquid assets could adversely impact the Company’s
net income and return on equity.
Liquidity Requirements
Historically, the regulation and monitoring of bank and bank holding company liquidity has been addressed as a
supervisory matter, without required formulaic measures. The proposed Basel III framework also will require
banks and bank holding companies to measure their liquidity against specific tests, specifically:
(cid:129)
Liquidity Coverage Ratio Test (‘‘LCR’’): The LCR is designed to ensure that the entity maintains an
adequate level of unencumbered, high-quality liquid assets equal to the greater of (i) the entity’s expected
net cash outflow for a 30-day time horizon or (ii) 25% of its expected total cash outflow under an acute
liquidity stress scenario.
(cid:129) Net Stable Funding Ratio Test (‘‘NSFR’’): The NSFR is designed to promote more medium- and long-term
funding of the assets and activities of banking entities over a one-year time horizon.
If adopted in their current form, these requirements would incent banking entities to dramatically increase their
holdings of U.S. Treasury securities and other sovereign debt as a component of assets and increase the use of
long-term debt as a funding source.
The Basel III liquidity framework currently contemplates that the LCR will be subject to an observation period
continuing throughout 2013, and a minimum standard LCR of 60% will be required by 2015 with a phase-in
continuing through 2019. Final implementation of a minimum standard will be subject to any revisions resulting
from the analyses conducted and data collected during the observation period. Similarly, the NSFR will be subject
to an observation period through 2016 and implemented as a minimum standard by January 1, 2018 subject to any
revisions resulting from the analyses conducted and data collected during the observation period.
The Basel III liquidity standards are subject to rulemaking, and their terms may change before implementation.
The federal banking agencies have not proposed rules implementing the final Basel III liquidity framework and
have not determined to what extent they will apply to U.S. banks that are not large, internationally active banks.
16
Prompt Corrective Action
The Federal Deposit Insurance Act, as amended (‘‘FDIA’’), requires among other things the federal banking
agencies to take ‘‘prompt corrective action’’ in respect of depository institutions that do not meet minimum capital
requirements. The FDIA includes the following five capital tiers: ‘‘well capitalized,’’ ‘‘adequately capitalized,’’
‘‘undercapitalized,’’ ‘‘significantly undercapitalized’’ and ‘‘critically undercapitalized.’’ A depository institution’s
capital tier will depend upon how its capital levels compare with various relevant capital measures and certain other
factors, as established by regulation. The relevant capital measures are the total capital ratio, the Tier 1 capital ratio
and the leverage ratio.
A bank will be (i) ‘‘well capitalized’’ if the institution has a total risk-based capital ratio of 10.0% or greater, a Tier 1
risk-based capital ratio of 6.0% or greater, and a leverage ratio of 5.0% or greater, and is not subject to any order or
written directive by any such regulatory authority to meet and maintain a specific capital level for any capital
measure; (ii) ‘‘adequately capitalized’’ if the institution has a total risk-based capital ratio of 8.0% or greater, a
Tier 1 risk-based capital ratio of 4.0% or greater, and a leverage ratio of 4.0% or greater and is not ‘‘well
capitalized’’; (iii) ‘‘undercapitalized’’ if the institution has a total risk-based capital ratio that is less than 8.0%, a
Tier 1 risk-based capital ratio of less than 4.0% or a leverage ratio of less than 4.0%; (iv) ‘‘significantly
undercapitalized’’ if the institution has a total risk-based capital ratio of less than 6.0%, a Tier 1 risk-based capital
ratio of less than 3.0% or a leverage ratio of less than 3.0%; and (v) ‘‘critically undercapitalized’’ if the institution’s
tangible equity is equal to or less than 2.0% of average quarterly tangible assets. An institution may be downgraded
to, or deemed to be in, a capital category that is lower than indicated by its capital ratios if it is determined to be in
an unsafe or unsound condition or if it receives an unsatisfactory examination rating with respect to certain matters.
A bank’s capital category is determined solely for the purpose of applying prompt corrective action regulations, and
the capital category may not constitute an accurate representation of the bank’s overall financial condition or
prospects for other purposes. As of December 31, 2012, the Company believes the Bank was ‘‘well capitalized’’
based on its ratios as defined above.
The FDIA generally prohibits a depository institution from making any capital distributions (including payment of
a dividend) or paying any management fee to its parent holding company if the depository institution would
thereafter be ‘‘undercapitalized.’’ ‘‘Undercapitalized’’ institutions are subject to growth limitations and are required
to submit a capital restoration plan. The agencies may not accept such a plan without determining, among other
things, that the plan is based on realistic assumptions and is likely to succeed in restoring the depository institution’s
capital. In addition, for a capital restoration plan to be acceptable, the depository institution’s parent holding
company must guarantee that the institution will comply with such capital restoration plan. The bank holding
company must also provide appropriate assurances of performance. The aggregate liability of the parent holding
company is limited to the lesser of (i) an amount equal to 5.0% of the depository institution’s total assets at the time
it became undercapitalized and (ii) the amount which is necessary (or would have been necessary) to bring the
institution into compliance with all capital standards applicable with respect to such institution as of the time it fails
to comply with the plan. If a depository institution fails to submit an acceptable plan, it is treated as if it is
‘‘significantly undercapitalized.’’
‘‘Significantly undercapitalized’’ depository institutions may be subject to a number of requirements and
restrictions, including orders to sell sufficient voting stock to become ‘‘adequately capitalized,’’ requirements to
reduce total assets, and cessation of receipt of deposits from correspondent banks. ‘‘Critically undercapitalized’’
institutions are subject to the appointment of a receiver or conservator.
As stated above, the Basel III Proposal would revise the ‘‘prompt corrective action’’ categories. See section titled
‘‘Capital Requirements’’ of this Item 1 for detail.
Illinois Banking Law
The Illinois Banking Act (‘‘IBA’’) governs the activities of the Bank, an Illinois banking corporation. The IBA
(i) defines the powers and permissible activities of an Illinois state-chartered bank, (ii) prescribes corporate
governance standards, (iii) imposes approval requirements on mergers of state banks, (iv) prescribes lending limits,
and (v) provides for the examination of state banks by the IDFPR. The Banking on Illinois Act (‘‘BIA’’) became
effective in mid-1999 and amended the IBA to provide a wide range of new activities allowed for Illinois state-
chartered banks, including the Bank. The provisions of the BIA are to be construed liberally in order to create a
17
favorable business climate for banks in Illinois. The main features of the BIA are to expand bank powers through a
‘‘wild card’’ provision that authorizes Illinois state-chartered banks to offer virtually any product or service that any
bank or thrift may offer anywhere in the country, subject to restrictions imposed on those other banks and thrifts,
certain safety and soundness considerations, and prior notification to the IDFPR and the FDIC.
Dividends
The Company’s primary source of liquidity is dividend payments from the Bank. In addition to requirements to
maintain adequate capital above regulatory minimums, the Bank is limited in the amount of dividends it can pay to
the Company under the IBA. Under this law, the Bank is permitted to declare and pay dividends in amounts up to
the amount of its accumulated net profits, provided that it retains in its surplus at least one-tenth of its net profits
since the date of the declaration of its most recent dividend until those additions to surplus, in the aggregate, equal
the paid-in capital of the Bank. While it continues its banking business, the Bank may not pay dividends in excess of
its net profits then on hand (after deductions for losses and bad debts). In addition, the Bank is limited in the amount
of dividends it can pay under the Federal Reserve Act and Regulation H. For example, dividends cannot be paid that
would constitute a withdrawal of capital; dividends cannot be declared or paid if they exceed a bank’s undivided
profits; and a bank may not declare or pay a dividend greater than current year net income plus retained net income
of the prior two years without Federal Reserve approval.
Since the Company is a legal entity, separate and distinct from the Bank, its dividends to stockholders are not
subject to the bank dividend guidelines discussed above. However, the Company is subject to other regulatory
policies and requirements relating to the payment of dividends, including requirements to maintain adequate capital
above regulatory minimums. The Federal Reserve and the IDFPR are authorized to determine, under certain
circumstances relating to the financial condition of a bank or bank holding company, that the payment of dividends
by the Company would be an unsafe or unsound practice and to prohibit payment thereof. The Federal Reserve has
taken the position that dividends that would create pressure or undermine the safety and soundness of a subsidiary
bank are inappropriate. Due to the current financial and economic environment, the Federal Reserve indicated that
bank holding companies should carefully review their dividend policy and discouraged payment ratios that are at
maximum allowable levels unless both asset quality and capital are very strong.
FDIC Insurance Premiums
Bank holding companies and banks with average total consolidated assets greater than $10 billion must conduct an
annual stress test of capital and consolidated earnings and losses under one base, both of which are provided by the
federal banking agencies. Capital ratios reflected in required stress test calculations will most likely be an important
factor considered by the federal banking agencies in evaluating whether proposed payments of dividends or stock
repurchases may be an unsafe or unsound practice. In the event that the Company or the Bank grows to assets of
$10 billion or more, the Company will be subject to these stress test requirements.
The Bank’s deposits are insured through the DIF, which is administered by the FDIC. As insurer, the FDIC imposes
deposit insurance premiums and is authorized to conduct examinations of, and to require reporting by,
FDIC-insured institutions. It may also prohibit any FDIC-insured institution from engaging in any activity the
FDIC determines by regulation or order to pose a serious risk to the DIF. Insurance of deposits may be terminated
by the FDIC upon a finding that the institution engaged or is engaging in unsafe and unsound practices; is in an
unsafe or unsound condition to continue operations; or violated any applicable law, regulation, rule, order, or
condition imposed by the FDIC or written agreement entered into with the FDIC.
The FDIC utilizes a risk-based assessment system that imposes insurance premiums based upon a risk matrix that
takes into account a bank’s capital level and supervisory rating. The risk matrix utilizes four risk categories, which
are distinguished by capital levels and supervisory ratings. For deposit insurance assessment purposes, an insured
depository institution is placed into one of the four risk categories each quarter. An institution’s assessment is
determined by multiplying its assessment rate by its assessment base.
The total base assessment rates range from 2.5 basis points to 45 basis points. The assessment base is calculated
using average consolidated total assets minus average tangible equity. At least semi-annually, the FDIC will update
its loss and income projections for the DIF and, if needed, will increase or decrease assessment rates, following
notice-and-comment rulemaking, if required.
18
In addition, institutions with deposits insured by the FDIC are required to pay assessments to fund interest payments
on bonds issued by the Financing Corporation, a U.S. Government-Sponsored Enterprise established in 1987 to
serve as a financing vehicle for the failed Federal Savings and Loan Association, (‘‘Financing Corporation’’). These
assessments will continue until the Financing Corporation bonds mature in 2019.
Sarbanes-Oxley Act of 2002
The Sarbanes-Oxley Act of 2002 (‘‘Sarbanes-Oxley’’) implemented a broad range of corporate governance and
accounting measures to increase corporate responsibility, provide for enhanced penalties for accounting and
auditing improprieties at publicly traded companies, and protect investors by improving the accuracy and reliability
of disclosures under federal securities laws. The Company is subject to Sarbanes-Oxley because it is required to file
periodic reports with the SEC under the Securities and Exchange Act of 1934.
Employee Incentive Compensation
In 2010, the Federal Reserve, along with the other federal banking agencies, issued guidance applying to all
banking organizations that requires that their incentive compensation policies be consistent with safety and
soundness principles. Under these rules, financial organizations must review their compensation programs to insure
that they: (i) provide employees with incentives that appropriately balance risk and reward and that do not
encourage imprudent risk; (ii) are compatible with effective controls and risk management; and (iii) are supported
by strong corporate governance including active and effective oversight by the banking organization’s board of
directors. Monitoring methods and processes used by a banking organization should be commensurate with the size
and complexity of the organization and its use of incentive compensation.
In addition, in 2011, the Federal Reserve, along with other federal banking agencies and the SEC, proposed rules,
which have not yet been finalized, relating to incentive-based compensation for entities deemed to be a ‘‘covered
financial institution’’, which includes both the Company and the Bank. These proposed rules incorporate many of
the executive compensation principles described above, including a prohibition on compensation practices that
encourage covered persons to take inappropriate risks by providing such person with excessive compensation.
Future Legislation
In addition to the specific legislation described above, various legislation and regulation is being considered by
Congress and regulatory agencies that may change banking statutes and the Company’s operating environment in
substantial and unpredictable ways and may increase reporting requirements and compliance costs. These changes
could increase or decrease the cost of doing business, limit or expand permissible activities, or affect the
competitive balance among banks, savings associations, credit unions, and other financial institutions.
ITEM 1A. RISK FACTORS
An investment in First Midwest Common Stock is subject to risks inherent in the Company’s business. The material
risks and uncertainties that management believes affect the Company are described below. Before making an
investment decision with respect to any of the Company’s securities, you should carefully consider the risks and
uncertainties as described below, together with all of the information included herein. The risks and uncertainties
described below are not the only risks and uncertainties the Company faces. Additional risks and uncertainties not
presently known or currently deemed immaterial also may have a material adverse effect on the Company’s results
of operations and financial condition. If any of the following risks actually occur, the Company’s results of
operations and financial condition could be adversely affected, possibly materially. In that event, the trading price of
the Company’s Common Stock or other securities could decline. The risks discussed below also include forward-
looking statements, and actual results may differ substantially from those discussed or implied in these forward-
looking statements.
19
Risks Related to the Company’s Business
Interest Rate and Credit Risks
The Company is subject to interest rate risk.
The Company’s earnings and cash flows are largely dependent upon its net interest income. Net interest income
equals the difference between interest income and fees earned on interest-earning assets (such as loans and
securities) and interest expense incurred on interest-bearing liabilities (such as deposits and borrowed funds).
Interest rates are highly sensitive to many factors that are beyond the Company’s control, including general
economic conditions and policies of various governmental and regulatory agencies, particularly the Federal
Reserve. Changes in monetary policy, including changes in interest rates, could influence the amount of interest the
Company earns on loans and securities and the amount of interest it pays on deposits and borrowings. Such changes
could also affect (i) the Company’s ability to originate loans and obtain deposits, (ii) the fair value of the Company’s
financial assets and liabilities, and (iii) the average duration of the Company’s securities portfolio. If the interest
rates paid on deposits and other borrowings increase at a faster rate than the interest rates received on loans and
other investments, the Company’s net interest income, and therefore earnings, could be adversely affected. Earnings
could also be adversely affected if the interest rates received on loans and other investments fall more quickly than
the interest rates paid on deposits and other borrowings.
Although management believes it implements effective asset and liability management strategies to reduce the
potential effects of changes in interest rates on the Company’s results of operations, any substantial, unexpected,
prolonged change in market interest rates could have a material adverse effect on the Company’s financial condition
and results of operations. See the section captioned ‘‘Net Interest Income’’ in Item 7, ‘‘Management’s Discussion
and Analysis of Financial Condition and Results of Operations,’’ located elsewhere in this report for further
discussion related to the Company’s management of interest rate risk.
The repeal of federal prohibitions on payment of interest on demand deposits could increase the Company’s interest
expense.
All federal prohibitions on the ability of financial institutions to pay interest on demand deposit accounts were
repealed as part of the Dodd-Frank Act beginning on July 21, 2011. As a result, some financial institutions,
including the Company, now offer interest on demand deposits to compete for customers. The Company’s interest
expense will increase and its net interest margin will decrease if it offers interest on demand deposits to attract
additional customers or maintain current customers, which could have a material adverse effect on the Company’s
business, financial condition and results of operations.
The Company is subject to lending risk.
There are inherent risks associated with the Company’s lending activities. Underwriting and documentation
controls cannot mitigate all credit risk, especially those outside the Company’s control. These risks include the
impact of changes in interest rates and changes in the economic conditions in the markets in which the Company
operates as well as those across the U.S. Increases in interest rates as well as continuing weakened economic
conditions could adversely impact the ability of borrowers to repay outstanding loans or the value of the collateral
securing those loans.
In particular, continuing economic weakness in real estate and related markets could further increase the
Company’s lending risk as it relates to its commercial real estate loan portfolio and the value of the underlying
collateral. The Company is also subject to various laws and regulations that affect its lending activities. Failure to
comply with applicable laws and regulations could subject the Company to regulatory enforcement action that
could result in the assessment of significant civil monetary penalties against the Company and other actions.
As of December 31, 2012, the Company’s loan portfolio consisted of corporate loans totaling 86.3%, the majority
of which is secured by commercial real estate, and 13.7% of consumer loans. The deterioration of one or a few of
these loans could cause a significant increase in non-performing loans. An increase in non-performing loans could
result in a net loss of earnings from these loans, an increase in the provision for loan and covered loan losses, and an
increase in loan charge-offs, all of which could have a material adverse effect on the Company’s financial condition
20
and results of operations. See the section captioned ‘‘Loan Portfolio and Credit Quality’’ in Item 7, ‘‘Management’s
Discussion and Analysis of Financial Condition and Results of Operations,’’ located elsewhere in this report for
further discussion related to corporate and consumer loans.
Real estate market volatility and future changes in disposition strategies could result in net proceeds that differ
significantly from fair value appraisals of loan collateral and OREO and could negatively impact the Company’s
operating performance.
Many of the Company’s non-performing real estate loans are collateral-dependent, meaning the repayment of the
loan is largely dependent upon the value of the collateral securing the loan and the successful operation of the
property. For collateral-dependent loans, the Company estimates the value of the loan based on appraised value of
the underlying collateral less costs to sell. The Company’s OREO portfolio consists of properties acquired through
foreclosure in partial or total satisfaction of certain loans as a result of borrower defaults.
In determining the value of OREO properties and loan collateral, an orderly disposition of the property is generally
assumed, except where a different disposition strategy is expected. The disposition strategy the Company has in
place for a non-performing loan will determine the appraised value it uses (e.g., ‘‘as-is’’, ‘‘orderly liquidation’’, or
‘‘forced liquidation’’). Significant judgment is required in estimating the fair value of property, and the period of
time within which such estimates can be considered current is significantly shortened during periods of market
volatility.
In response to market conditions and other economic factors, the Company may utilize alternative sale strategies
other than orderly dispositions as part of its disposition strategy, such as immediate liquidation sales. In this event,
as a result of the significant judgments required in estimating fair value and the variables involved in different
methods of disposition, the net proceeds realized from such sales transactions could differ significantly from
estimates used to determine the fair value of the properties. This could have a material adverse effect on the
Company’s business, financial condition, and results of operations.
The Company’s lending activities are subject to strict regulations.
The Company is subject to various laws and regulations that affect its lending activities. Failure to comply with
applicable laws and regulations could subject the Company to regulatory enforcement action that could result in the
assessment of significant civil monetary penalties against the Company and other actions, and could have a material
adverse effect on the Company’s business and results of operations.
The Company’s allowance for credit losses may be insufficient.
The Company maintains an allowance for credit losses at a level believed adequate to absorb estimated losses
inherent in its existing loan portfolio. The level of the allowance for credit losses reflects management’s continuing
evaluation of industry concentrations; specific credit risks; credit loss experience; current loan portfolio quality;
present economic and business conditions; changes in competitive, legal, and regulatory conditions; and
unidentified losses inherent in the current loan portfolio. Determination of the allowance for credit losses is
inherently subjective since it requires significant estimates and management judgment of credit risks and future
trends, which are subject to material changes. Continuing deterioration in economic conditions affecting borrowers,
new information regarding existing loans, identification of additional problem loans, changes in accounting
principles, and other factors, both within and outside of the Company’s control, may require an increase in the
allowance for credit losses. In addition, bank regulatory agencies periodically review the Company’s allowance for
credit losses and may require an increase in the provision for loan and covered loan losses or the recognition of
additional loan charge-offs, based on judgments different from those of management. Furthermore, if charge-offs in
future periods exceed the allowance for credit losses, the Company will need additional provisions to increase the
allowance. Any increases in the allowance for credit losses will result in a decrease in net income and capital and
may have a material adverse effect on the Company’s financial condition and results of operations. See the section
captioned ‘‘Allowance for Credit Losses’’ in Item 7, ‘‘Management’s Discussion and Analysis of Financial
Condition and Results of Operations,’’ located elsewhere in this report for further discussion related to the
Company’s process for determining the appropriate level of the allowance for credit losses.
21
Financial services companies depend on the accuracy and completeness of information about customers and
counterparties.
The Company may rely on information furnished by or on behalf of customers and counterparties in deciding
whether to extend credit or enter into other transactions. This information could include financial statements, credit
reports, business plans, and other information. The Company may also rely on representations of those customers,
counterparties, or other third parties, such as independent auditors, as to the accuracy and completeness of that
information. Reliance on inaccurate or misleading financial statements, credit reports, or other information could
have a material adverse impact on the Company’s business, financial condition, and results of operations.
Funding Risks
The Company is a bank holding company and its sources of funds are limited.
The Company is a bank holding company, and its operations are primarily conducted by the Bank, which is subject
to significant federal and state regulation. Cash available to pay dividends to stockholders of the Company is
derived primarily from dividends received from the Bank. The Company’s ability to receive dividends or loans from
its subsidiaries is restricted. Dividend payments by the Bank to the Company in the future will require generation of
future earnings by the Bank and could require regulatory approval if the proposed dividend is in excess of
prescribed guidelines. Further, the Company’s right to participate in the assets of the Bank upon its liquidation,
reorganization, or otherwise will be subject to the claims of the Bank’s creditors, including depositors, which will
take priority except to the extent the Company may be a creditor with a recognized claim. As of December 31, 2012,
the Company’s subsidiaries had deposits and other liabilities of $6.9 billion.
The Company could experience an unexpected inability to obtain needed liquidity.
Liquidity measures the ability to meet current and future cash flow needs as they become due. The liquidity of a
financial institution reflects its ability to meet loan requests, to accommodate possible outflows in deposits, and to
take advantage of interest rate market opportunities. The ability of a financial institution to meet its current
financial obligations is a function of its balance sheet structure, its ability to liquidate assets, and its access to
alternative sources of funds. The Company seeks to ensure its funding needs are met by maintaining an adequate
level of liquidity through asset and liability management. If the Company becomes unable to obtain funds when
needed, it could have a material adverse effect on the Company’s business, financial condition, and results of
operations.
Loss of customer deposits could increase the Company’s funding costs.
The Company relies on bank deposits to be a low cost and stable source of funding. The Company competes with
banks and other financial services companies for deposits. If the Company’s competitors raise the rates they pay on
deposits, the Company’s funding costs may increase, either because the Company raises its rates to avoid losing
deposits or because the Company loses deposits and must rely on more expensive sources of funding. Higher
funding costs could reduce the Company’s net interest margin and net interest income and could have a material
adverse effect on the Company’s financial condition and results of operations.
Any reduction in the Company’s credit ratings could increase its financing costs.
Various rating agencies publish credit ratings for the Company’s debt obligations, based on their evaluations of a
number of factors, some of which relate to Company performance and some of which relate to general industry
conditions. Management routinely communicates with each rating agency and anticipates the rating agencies will
closely monitor the Company’s performance and update their ratings from time to time during the year.
The Company cannot give any assurance that its current credit ratings will remain in effect for any given period of
time or that a rating will not be lowered or withdrawn entirely by a rating agency if, in its judgment, circumstances
in the future so warrant. Downgrades in the Company’s credit ratings may adversely affect its borrowing costs and
its ability to borrow or raise capital, and may adversely affect the Company’s reputation.
22
The Company’s current credit ratings are as follows:
Rating Agency
Rating
Standard & Poor’s Rating Group, a division of the McGraw-Hill
Companies, Inc. ....................................................................................
Moody’s Investor Services, Inc. ..................................................................
...............................................................................................
Fitch, Inc.
BBB-
Baa2
BBB-
Regulatory requirements, future growth, or operating results may require the Company to raise additional capital,
but that capital may not be available or be available on favorable terms, or it may be dilutive.
The Company is required by federal and state regulatory authorities to maintain adequate levels of capital to support
its operations. The Company may be required to raise capital if regulatory requirements change, the Company’s
future operating results erode capital, or the Company elects to expand through loan growth or acquisition.
The Company’s ability to raise capital will depend upon conditions in the capital markets, which are outside of its
control, and on the Company’s financial performance. Accordingly, the Company cannot be assured of its ability to
raise capital when needed or on favorable terms. If the Company cannot raise additional capital when needed, it will
be subject to increased regulatory supervision and the imposition of restrictions on its growth and business. These
could negatively impact the Company’s ability to operate or further expand its operations through acquisitions or
the establishment of additional branches and may result in increases in operating expenses and reductions in
revenues that could have a material adverse effect on its financial condition and results of operations.
Operational Risks
The Company and its subsidiaries are subject to changes in accounting principles, policies, or guidelines.
The Company’s financial performance is impacted by accounting principles, policies, and guidelines. Some of
these policies require the use of estimates and assumptions that may affect the value of the Company’s assets or
liabilities and financial results. Some of the Company’s accounting policies are critical because they require
management to make subjective and complex judgments about matters that are inherently uncertain and because it
is likely that materially different amounts would be reported under different conditions or using different
assumptions. If such estimates or assumptions are incorrect, the Company may experience material losses. See the
section captioned ‘‘Critical Accounting Policies’’ in Item 7, ‘‘Management’s Discussion and Analysis of Financial
Condition and Results of Operations,’’ located elsewhere in this report for further discussion related to the
Company’s critical accounting policies.
From time to time, the Financial Accounting Standards Board (‘‘FASB’’) and the SEC change the financial
accounting and reporting standards, or the interpretation of those standards, that govern the preparation of the
Company’s external financial statements. These changes are beyond the Company’s control, can be difficult to
predict, and could materially impact how the Company reports its results of operations and financial condition.
These standards are continuously updated and refined and new standards are developed resulting in changes that
could have a material adverse effect on the Company’s financial condition and results of operations.
The Company’s controls and procedures may fail or be circumvented.
Management regularly reviews and updates the Company’s loan underwriting and monitoring process, internal
controls, disclosure controls and procedures, compliance controls and procedures, and corporate governance
policies and procedures. Any system of controls, however well designed and operated, is based in part on certain
assumptions and can provide only reasonable, not absolute, assurances that the objectives of the system are met.
Any failure or circumvention of the Company’s controls and procedures or failure to comply with regulations
related to controls and procedures could have a material adverse effect on the Company’s business, financial
condition, and results of operations.
23
The Company’s accounting estimates and risk management processes rely on analytical and forecasting models.
The processes the Company uses to estimate its loan losses and to measure the fair value of financial instruments,
as well as the processes used to estimate the effects of changing interest rates and other market measures on the
Company’s financial condition and results of operations, depend on the use of analytical and forecasting models.
These models reflect assumptions that may not be accurate, particularly in times of market stress or other
unforeseen circumstances. Even if these assumptions are adequate, the models may prove to be inadequate or
inaccurate because of other flaws in their design or their implementation. If the models the Company uses for
interest rate risk and asset-liability management are inadequate, the Company may incur increased or unexpected
losses upon changes in market interest rates or other market measures. If the models the Company uses for
estimating its loan losses are inadequate, the allowance for loan losses may not be sufficient to support future
charge-offs. If the models the Company uses to measure the fair value financial instruments are inadequate, the fair
value of these financial instruments may fluctuate unexpectedly or may not accurately reflect what the Company
could realize upon sale or settlement. Any failure in the Company’s analytical or forecasting models could have a
material adverse effect on the Corporation’s business, financial condition, and results of operations.
The Company may not be able to attract and retain skilled people.
The Company’s success depends, in large part, on its ability to attract and retain skilled people. Competition for the
best people in most activities in which the Company engages can be intense, and the Company may not be able to
hire people or retain them.
The unexpected loss of services of certain of the Company’s skilled personnel could have a material adverse impact
on the Company’s business because of their skills, knowledge of the Company’s market, years of industry
experience, and the difficulty of promptly finding qualified replacement personnel.
Loss of key employees may disrupt relationships with certain customers.
The Company’s customer relationships are critical to the success of its business, and loss of key employees with
significant customer relationships may lead to the loss of business if the customers were to follow that employee to
a competitor. While the Company believes its relationships with its key personnel are strong, it cannot guarantee
that all of its key personnel will remain with the organization, which could result in the loss of some of its customers
and could have a negative impact on the Company’s business, financial condition, and results of operations.
The Company’s information systems may experience an interruption or breach in security.
The Company relies heavily on internal and outsourced digital technologies, communications, and information
systems to conduct its business. As the Company’s reliance on technology systems increases, the potential risks of
technology-related operation interruptions in the Company’s customer relationship management, general ledger,
deposit, loan, or other systems or the occurrence of cyber incidents also increases. Cyber incidents can result from
deliberate attacks or unintentional events including (i) gaining unauthorized access to digital systems for purposes
of misappropriating assets or sensitive information, corrupting data, or causing operational disruptions; (ii) causing
denial-of-service attacks on websites; or (iii) intelligence gathering and social engineering aimed at obtaining
information. The occurrence of operational interruption, cyber incident, or a deficiency in the cyber security of the
Company’s technology systems (internal or outsourced) could negatively impact the Company’s financial condition
or results of operations.
The Company has policies and procedures expressly designed to prevent or limit the effect of a failure, interruption,
or security breach of its systems and maintains cyber security insurance. Significant interruptions to the Company’s
business from technology issues could result in expensive remediation efforts and distraction of management.
During the year, the Company experienced certain immaterial cyber-attacks or breaches and continues to invest in
security and controls to prevent and mitigate further incidents. Although the Company has not experienced any
material losses relating to a technology-related operational interruption or cyber-attack, there can be no assurance
that such failures, interruptions, or security breaches will not occur in the future or, if they do occur, that the impact
will not be substantial.
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The occurrence of any failures, interruptions, or security breaches of the Company’s technology systems could
damage the Company’s reputation, result in a loss of customer business, result in the unauthorized release,
gathering, monitoring, misuse, loss, or destruction of proprietary information, subject the Company to additional
regulatory scrutiny, or expose the Company to civil litigation and possible financial liability, any of which could
have a material adverse effect on the Company’s financial condition, results of operations, or stock price. As cyber
threats continue to evolve, the Company may also be required to spend significant additional resources to continue
to modify or enhance its protective measures or to investigate and remediate any information security
vulnerabilities.
The Company is dependent upon outside third parties for processing and handling of Company records and data.
The Company relies on software developed by third party vendors to process various Company transactions. In
some cases, the Company contracted with third parties to run its proprietary software on behalf of the Company.
These systems include, but are not limited to, general ledger, payroll, employee benefits, wealth management
record keeping, loan and deposit processing, merchant processing, and securities portfolio management. While the
Company performs a review of controls instituted by the vendor over these programs in accordance with industry
standards and performs its own testing of user controls, the Company must rely on the continued maintenance of
these controls by the outside party, including safeguards over the security of customer data. In addition, the
Company maintains backups of key processing output daily in the event of a failure on the part of any of these
systems. Nonetheless, the Company may incur a temporary disruption in its ability to conduct its business or
process its transactions, or incur damage to its reputation if the third party vendor fails to adequately maintain
internal controls or institute necessary changes to systems. Such disruption or breach of security may have a
material adverse effect on the Company’s financial condition and results of operations.
The Company continually encounters technological change.
The banking and financial services industry continually undergoes technological changes, with frequent
introductions of new technology-driven products and services. In addition to better meeting customer needs, the
effective use of technology increases efficiency and enables financial institutions to reduce costs. The Company’s
future success will depend, in part, on its ability to address the needs of its customers by using technology to provide
products and services that enhance customer convenience and that create additional efficiencies in the Company’s
operations. Many of the Company’s competitors have greater resources to invest in technological improvements,
and the Company may not effectively implement new technology-driven products and services or do so as quickly
as its competitors, which could reduce its ability to effectively compete. Failure to successfully keep pace with
technological change affecting the financial services industry could have a material adverse effect on the
Company’s business, financial condition, and results of operations.
Improper and fraudulent mortgage servicing and foreclosure documentation could result in liability for losses.
The financial industry identified circumstances of improper and fraudulent mortgage servicing and foreclosure
practices and documentation, such as ‘‘robo signing,’’ among some of the nation’s largest lenders. This resulted in
lengthy legal investigations and lawsuits brought by the various state attorneys general relating to the foreclosure
practices of several financial institutions and their service providers and the suspension of foreclosures of single-
family homes nationwide, including the Bank’s service areas. Federal National Mortgage Association (‘‘Fannie
Mae’’) and Federal Home Loan Mortgage Corporation (‘‘Freddie Mac’’) also stated that their mortgage servicers
will be held liable for losses incurred by the government-sponsored enterprises as a result of flawed foreclosure
processes. Further, the SEC issued a request for information about accounting and disclosure issues related to
potential risks and costs associated with mortgage and foreclosure related activities.
In February 2012, these lenders entered into a $25 billion joint state-federal agreement under which the lenders
promised to send direct payments to people who were victims of foreclosure servicing abuse and adhere to certain
servicing processes and procedures going forward. Homeowners that borrowed through Fannie Mae and Freddie
Mac, however, are not covered under the settlement. The Company was not a party to this litigation and is not a
party to the joint settlement agreement.
The Company has a centralized foreclosure process within a single department of the Bank, including foreclosures
relating to all residential, home equity, commercial, and serviced loans. As of December 31, 2012, the Bank
25
serviced $59.6 million in loans guaranteed by Fannie Mae or Freddie Mac as part of various securitization
transactions. In addition, the Company engages a loan servicer to support the administration and the resolution of
certain covered assets, including single-family covered assets acquired by the Bank in FDIC-assisted transactions.
Failure to comply with the applicable mortgage servicing and foreclosure requirements could have an adverse
impact on the Company’s reputation and results of operations.
New lines of business or new products and services may subject the Company to additional risks.
From time to time, the Company may implement new lines of business or offer new products or services within
existing lines of business. There can be substantial risks and uncertainties associated with these efforts, particularly
in instances where the markets are not fully developed. In developing and marketing new lines of business and/or
new products or services, the Company may invest significant time and resources. Initial timetables for the
introduction and development of new lines of business and/or new products or services may not be achieved, and
price and profitability targets may not prove feasible. External factors, such as compliance with regulations,
competitive alternatives, and shifting market preferences, may also impact the successful implementation of a new
line of business or a new product or service. Furthermore, any new line of business and/or new product or service
could have a significant impact on the effectiveness of the Company’s system of internal controls. Failure to
successfully manage these risks in the development and implementation of new lines of business or new products or
services could have a material adverse effect on the Company’s business, financial condition, and results of
operations.
The Company’s estimate of fair values for its investments may not be realizable if it were to sell these securities
today.
The Company’s available-for-sale securities are carried at fair value. Accounting standards require the Company to
categorize these securities according to a fair value hierarchy. Less than one percent of the Company’s
available-for-sale securities were categorized in level 1 of the fair value hierarchy. Over 98% of the Company’s
available-for-sale securities were categorized in level 2 of the fair value hierarchy and the remaining securities were
categorized as level 3. Refer to Note 22 of ‘‘Notes to the Consolidated Financial Statements’’ in Item 8 of this
Form 10-K for a detailed description of the fair value hierarchies.
The determination of fair value for securities categorized in level 3 involves significant judgment due to the
complexity of factors contributing to the valuation, many of which are not readily observable in the market. The
market disruptions in recent years made the valuation process even more difficult and subjective.
Due to the illiquidity in the secondary market for the Company’s level 3 securities, the Company estimates the value
of these securities using discounted cash flow analyses with the assistance of a structured credit valuation firm.
Third-party sources also use assumptions, judgments, and estimates in determining securities values, and different
third parties use different methodologies or provide different prices for similar securities. In addition, the nature of
the business of the third party source that is valuing the securities at any given time could impact the valuation of the
securities.
Consequently, the ultimate sales price for any of these securities could vary significantly from the recorded fair
value at December 31, 2012, especially if the security is sold during a period of illiquidity or market disruption or as
part of a large block of securities under a forced transaction. Any resulting write-downs of the fair value of the
Company’s available-for-sale securities would reduce earnings in the period in which it is recorded and could have a
material adverse effect on the Company’s financial condition and results of operations.
The Company’s investment in bank-owned life insurance (‘‘BOLI’’) may decline in value.
The Company has bank-owned life insurance contracts with a cash surrender value (‘‘CSV’’) of $206.4 million as
of December 31, 2012. A majority of these contracts are separate account contracts. These contracts are supported
by underlying investments whose fair values are subject to volatility in the market. The Company limited its risk of
loss in value of the securities through the use of stable value contracts that provide protection from a decline in fair
value down to 80% of the CSV of the insurance policies. To the extent fair values on individual contracts fall below
80% of book value, the CSV of specific contracts may be reduced or the underlying assets transferred to short-
duration investments, resulting in lower earnings. As of December 31, 2012, the fair value for all contracts
26
exceeded 80% of book value, but turmoil in the market could result in declines that could have a material adverse
effect on the Company’s financial condition and results of operations.
The value of the Company’s goodwill and other intangible assets may decline in the future.
As of December 31, 2012, the Company had $281.1 million of goodwill and other intangible assets. If the
Company’s stock price declines and remains low for an extended period of time, the Company could be required to
write off all or a portion of its goodwill, which represents the value in excess of the Company’s tangible book value.
The Company’s stock price is subject to market conditions that can be impacted by forces outside of the control of
management, such as a perceived weakness in financial institutions in general, and may not be a direct result of the
Company’s performance. In addition, a significant decline in the Company’s expected future cash flows, a
significant adverse change in the business climate, or slower growth rates may necessitate taking future charges
related to the impairment of the Company’s goodwill and other intangible assets. A write-down of goodwill and/or
other intangible assets would reduce earnings in the period in which it is recorded and could have a material adverse
effect on the Company’s financial condition and results of operations.
External Risks
The Company operates in a highly competitive industry and market area.
The Company faces substantial competition in all areas of its operations from a variety of different competitors,
many of which are larger and may have more financial resources. Such competitors primarily include national,
regional, and community banks within the markets in which the Company operates. The Company also faces
competition from many other types of financial institutions, including savings and loan associations, credit unions,
personal loan and finance companies, retail and discount stockbrokers, investment advisors, mutual funds,
insurance companies, and other financial intermediaries. The financial services industry could become even more
competitive as a result of legislative, regulatory, and technological changes; further illiquidity in the credit markets;
and continued consolidation. Banks, securities firms, and insurance companies can merge under the umbrella of an
FHC, which can offer virtually any type of financial service, including banking, securities underwriting, insurance,
and merchant banking. Also, technology lowered barriers to entry and made it possible for non-banks to offer
products and services traditionally provided by banks, such as automatic funds transfer and automatic payment
systems. Many of the Company’s competitors have fewer regulatory constraints and may have lower cost structures.
In addition, due to their size, many competitors may be able to achieve economies of scale and, as a result, may offer
a broader range of products and services, as well as better pricing for those products and services than the Company
can offer. The expiration on December 31, 2012 of the FDIC’s unlimited insurance coverage for non-interest-
bearing transaction accounts at banking institutions may make it more likely for depositors to move funds into
non-bank products.
The Company’s ability to compete successfully depends on a number of factors, including:
(cid:129) Developing, maintaining, and building long-term customer relationships.
(cid:129) Expanding the Company’s market position.
(cid:129) Offering products and services at prices and with the features that meet customers’ needs and demands.
(cid:129)
(cid:129) Maintaining a satisfactory level of customer service.
(cid:129) Anticipating and adjusting to changes in industry and general economic trends.
Introducing new products and services.
Failure to perform in any of these areas could significantly weaken the Company’s competitive position, which
could adversely affect the Company’s growth and profitability. This, in turn, could have a material adverse effect on
the Company’s business, financial condition, and results of operations.
The Company’s business may be adversely affected by conditions in the financial markets and economic conditions
generally.
The Company’s financial performance generally is dependent to a large extent upon the business environment in the
suburban metropolitan Chicago market, the state of Illinois, and the U.S. as a whole. In particular, the current
environment impacts the ability of borrowers to pay interest on and repay principal of outstanding loans as well as
27
the value of collateral securing those loans. A favorable business environment is generally characterized by
economic growth, low unemployment, efficient capital markets, low inflation, high business and investor
confidence, strong business earnings, and other factors. Unfavorable or uncertain economic and market conditions
can be caused by declines in economic growth, business activity, or investor or business confidence; limitations on
the availability or increases in the cost of credit and capital; increases in inflation or interest rates; high
unemployment; natural disasters; or a combination of these or other factors.
In recent years, the suburban metropolitan Chicago market, the state of Illinois, and the U.S. as a whole experienced
a downward economic cycle. Significant weakness in market conditions adversely impacted all aspects of the
economy including the Company’s business. In particular, dramatic declines in the housing market, with decreasing
home prices and increasing delinquencies and foreclosures, negatively impacted the credit performance of
construction loans, which resulted in significant write-downs of assets by many financial institutions. Business
activity across a wide range of industries and regions was greatly reduced, and local governments and many
businesses experienced serious difficulty due to the lack of consumer spending and the lack of liquidity in the credit
markets. In addition, unemployment increased significantly during that period, which further contributed to the
adverse business environment for households and businesses. Concerns over U.S. fiscal policy, budget deficit
issues, and political debate over the debt ceiling have created additional economic and market uncertainty.
While economic conditions have shown limited signs of improvement through 2012, there can be no assurance that
economic recovery will continue, and future deterioration would likely exacerbate the adverse effects of recent
difficult market conditions on the Company and others in the financial institutions industry. Market stress could
have a material adverse effect on the credit quality of the Company’s loans, and therefore, its financial condition and
results of operations as well as other potential adverse impacts including:
(cid:129) There could be an increased level of commercial and consumer delinquencies, lack of consumer
confidence, increased market volatility, and widespread reduction of business activity generally.
(cid:129) There could be an increase in write-downs of asset values by financial institutions, such as the Company.
(cid:129) The Company’s ability to assess the creditworthiness of customers could be impaired if the models and
approaches it uses to select, manage, and underwrite credits become less predictive of future performance.
(cid:129) The process the Company uses to estimate losses inherent in the Company’s loan portfolio requires difficult,
subjective, and complex judgments. This process includes analysis of economic conditions and the impact
of these economic conditions on borrowers’ ability to repay their loans. The process could no longer be
capable of accurate estimation and may, in turn, impact its reliability.
(cid:129) The Bank could be required to pay significantly higher FDIC premiums in the future if losses further
deplete the DIF.
(cid:129) The Company could face increased competition due to intensified consolidation of the financial services
industry. If current levels of market disruption and volatility continue or worsen, there can be no assurance
that the Company will not experience an adverse effect, which may be material, on its ability to access
capital and on the Company’s business, financial condition, and results of operations.
Concerns about the European Union’s sovereign debt crisis have also caused uncertainty for financial markets
globally. Although the Company does not have direct exposure to European sovereign debt, these circumstances
could indirectly affect the Company through general disruption in the global markets and the related effects on
national and local economies, perceived weakness or market concerns about financial institutions generally, the
Bank’s hedging activities, customers with European businesses or assets denominated in the Euro, or companies in
the Company’s market with European businesses or affiliates.
Turmoil in the financial markets could result in lower fair values for the Company’s investment securities.
Major disruptions in the capital markets experienced in recent years have adversely affected investor demand for all
classes of securities, excluding U.S. Treasury securities, and resulted in volatility in the fair values of the
Company’s investment securities. Significant prolonged reduced investor demand could manifest itself in lower fair
values for these securities and may result in recognition of an other-than-temporary impairment (‘‘OTTI’’), which
could have a material adverse effect on the Company’s financial condition and results of operations.
28
Municipal securities can also be impacted by the business environment of their geographic location. Although this
type of security historically experienced extremely low default rates, municipal securities are subject to systemic
risk since cash flows are generally dependent upon (i) the ability of the issuing authority to levy and collect taxes or
(ii) the ability of the issuer to charge for and collect payment for essential services rendered. If the issuer defaults on
its payments, it may result in the recognition of OTTI or total loss, which could have a material adverse effect on the
Company’s financial condition and results of operations.
Managing reputational risk is important to attracting and maintaining customers, investors, and employees.
Threats to the Company’s reputation can come from many sources, including adverse sentiment about financial
institutions generally, unethical practices, employee misconduct, failure to deliver minimum standards of service or
quality, compliance deficiencies, and questionable or fraudulent activities of the Company’s customers. The
Company has policies and procedures in place that seek to protect its reputation and promote ethical conduct.
Nonetheless, negative publicity may arise regarding the Company’s business, employees, or customers, with or
without merit, and could result in the loss of customers, investors, and employees; costly litigation; a decline in
revenues; and increased governmental oversight. Negative publicity could have a material adverse impact on the
Company’s reputation, business, financial condition, results of operations, and liquidity.
The Company may be adversely affected by the soundness of other financial institutions.
Financial services institutions are interrelated as a result of trading, clearing, counterparty, or other relationships.
The Company has exposure to many different industries and counterparties and routinely executes transactions with
counterparties in the financial services industry, including commercial banks, brokers and dealers, investment
banks, and other institutional clients. Many of these transactions expose the Company to credit risk in the event of a
default by a counterparty or client. In addition, the Company’s credit risk may be exacerbated when the collateral
held by the Company cannot be realized upon liquidation or is liquidated at prices not sufficient to recover the full
amount of the credit or derivative exposure due to the Company. Any such losses could have a material adverse
effect on the Company’s financial condition, results of operations, and liquidity.
The Company is subject to environmental liability risk associated with lending activities.
A significant portion of the Company’s loan portfolio is secured by real property. During the ordinary course of
business, the Company may foreclose on and take title to properties securing certain loans. In doing so, there is a
risk that hazardous or toxic substances could be found on these properties. If hazardous or toxic substances are
found, the Company may be liable for remediation costs, as well as for personal injury and property damage.
Environmental laws may require the Company to incur substantial expenses and could materially reduce the
affected property’s value or limit the Company’s ability to sell the affected property or to repay the indebtedness
secured by the property. In addition, future laws or more stringent interpretations or enforcement policies with
respect to existing laws may increase the Company’s exposure to environmental liability. Although the Company
has policies and procedures to perform an environmental review before initiating any foreclosure action on real
property, these reviews may not be sufficient to detect all potential environmental hazards. The remediation costs
and any other financial liabilities associated with an environmental hazard could have a material adverse effect on
the Company’s financial condition, results of operations, and liquidity.
Severe weather, natural disasters, acts of war or terrorism, and other external events could significantly impact the
Company’s business.
Severe weather, natural disasters, acts of war or terrorism, and other adverse external events could have a significant
impact on the Company’s ability to conduct business. Such events could affect the stability of the Company’s
deposit base, impair the ability of borrowers to repay outstanding loans, reduce the value of collateral securing
loans, cause significant property damage, result in loss of revenue, and/or cause the Company to incur additional
expenses. Although management has established disaster recovery policies and procedures, the occurrence of any
such event could have a material adverse effect on the Company’s business, which, in turn, could have a material
adverse effect on its financial condition and results of operations.
29
U.S. credit downgrades or changes in outlook by the major credit rating agencies may have an adverse effect on
financial markets, including financial institutions and the financial industry.
Despite the actions taken by the U.S. government to raise the U.S. debt limit and address budget deficit concerns,
Standard & Poor’s Rating Services (‘‘S&P’’) downgraded the U.S.’s credit rating from AAA to AA+ in 2011. Any
future downgrades or changes in outlook by S&P or either of the other two major credit rating agencies could
impact the trading market for U.S. government securities, including agency securities, and the securities markets
more broadly, and, consequently, could impact the value and liquidity of financial assets, including assets in the
Company’s investment and BOLI portfolios. These actions could also create broader financial turmoil and
uncertainty, which may negatively affect the global banking system and limit the availability of funding, including
borrowings under repurchase arrangements, at reasonable terms. In turn, this could have a material adverse effect
on the Company’s financial condition, results of operations, and liquidity.
The Company’s business may be adversely affected by the impact of uncertainty about the financial stability of
troubled European Union member economies.
Certain European Union member countries have fiscal obligations greater than their fiscal revenue, which caused
investor concern over such countries’ ability to continue to service their debt and foster economic growth. Federal
regulators are closely monitoring U.S. money market funds’ exposure to commercial paper issued by European
banks. Approximately one-half of all prime money market funds are invested in European bank commercial paper
and those European banks are heavily invested in government bonds issued by the troubled economies of certain
European Union member countries. A default by any of those countries could have a broad negative effect on U.S.
and world economies.
In addition, the European debt crisis caused credit spreads to widen in the fixed income debt markets and liquidity
to be less abundant. A weaker European economy may transcend Europe, cause investors to lose confidence in the
safety and soundness of European financial institutions and the stability of European member economies, and
likewise impact U.S.-based financial institutions, the stability of the global financial markets, and the limited
economic recovery underway in the U.S. The Company cannot predict the current or future impact this uncertainty
may have on its financial condition or results of operations.
Legal/Compliance Risks
The Company is subject to extensive government regulation and supervision.
The Company and the Bank are subject to extensive federal and state regulations and supervision. Banking
regulations are primarily intended to protect depositors’ funds, FDIC funds, and the banking system as a whole, not
security holders. These regulations affect the Company’s lending practices, capital structure, investment practices,
dividend policy, and growth. Congress and federal regulatory agencies continually review banking laws,
regulations, policies, and other supervisory guidance for possible changes.
Changes to statutes, regulations, regulatory policies, or other supervisory guidance, including changes in the
interpretation or implementation of those policies, could affect the Company in substantial and unpredictable ways
and could have a material adverse effect on the Company’s business, financial condition, and results of operations.
These changes could subject the Company to additional costs, limit the types of financial services and products the
Company may offer, limit the activities we are permitted to engage in, and/or increase the ability of non-banks to
offer competing financial services and products. Failure to comply with laws, regulations, policies, or other
regulatory guidance could result in civil or criminal sanctions by regulatory agencies, civil monetary penalties,
and/or damage to the Company’s reputation. Government authorities, including the bank regulatory agencies, are
pursuing aggressive enforcement actions with respect to compliance and other legal matters involving financial
activities. Any of these actions could have a material adverse effect on the Company’s business, financial condition,
and results of operations. While the Company has policies and procedures designed to prevent any such violations,
there can be no assurance that such violations will not occur. See the section captioned ‘‘Supervision and
Regulation’’ in Item 1, ‘‘Business,’’ and Note 18 of ‘‘Notes to the Consolidated Financial Statements’’ included in
Item 8, ‘‘Financial Statements and Supplementary Data,’’ of this Form 10-K.
30
Rapidly implemented legislative and regulatory actions could have an unanticipated and adverse effect on the
Company.
In response to the financial market crisis, the U.S. government, specifically the Treasury, Federal Reserve, and
FDIC, working in cooperation with foreign governments and other central banks, took a variety of extraordinary
measures designed to restore confidence in the financial markets and to strengthen financial institutions. The
rulemaking relating to these measures was accomplished on an emergency basis in order to address immediate
concerns about the stability and continued existence of the global financial system. Recovery programs were
rapidly proposed, adopted, and sometimes quickly abandoned in response to changing market conditions and other
concerns. The speed of market developments required the government to abandon its traditional pattern and
timeline of legislative and regulatory rulemaking, and issue rules on an interim basis without prior notice and
comment. Rulemaking in this manner, rather than through the traditional legislative practice, does not allow for
input by regulated financial institutions, such as the Company, and could lead to uncertainty in the financial
markets, disruption to the Company’s business, increased costs, and material adverse effects on the Company’s
financial condition and results of operations.
The Company’s business may be adversely affected in the future by the implementation of ongoing regulations
regarding banks and financial institutions under the Dodd-Frank Act.
The Dodd-Frank Act, which became law in 2010, significantly changed the bank regulatory structure and affects
the lending, deposit, investment, trading, and operating activities of financial institutions and their holding
companies. The Dodd-Frank Act requires various federal agencies to adopt a broad range of new rules and
regulations and to prepare numerous studies and reports for Congress. The federal agencies are given significant
discretion in drafting and implementing rules and regulations and, consequently, many of the details and much of
the impact of the Dodd-Frank Act may not be known until final rules are adopted and market practices and
structures develop around the rules, which may take several years. See the section titled ‘‘Supervision and
Regulation’’ in Item 1 of this Form 10-K for a discussion of several significant provisions of the Dodd-Frank Act.
The Dodd-Frank Act is intended to address specific issues that contributed to the financial crisis and is heavily
remedial in nature. Several provisions in the Act are applicable to larger institutions (greater than $10 billion in
assets). Many aspects of the Dodd-Frank Act that are applicable to the Company are subject to rulemaking that will
take effect over several years, making it difficult to anticipate the overall financial impact on the Company.
However, compliance with new laws and regulations likely will result in additional operating costs that could have a
material adverse effect on the Company’s financial condition and results of operations.
The Company’s business may be adversely affected in the future by the implementation of rules establishing
standards for debit card interchange fees.
The Federal Reserve has implemented final rules establishing standards for debit card interchange fees and
prohibiting network exclusivity arrangements and routing restrictions as required by the Dodd-Frank Act. A debit
card interchange fee is a fee paid by a merchant’s bank to the customer’s bank for the use of the debit card.
Under the final rule, the maximum permissible interchange fee that an issuer may receive for an electronic debit
transaction is 21 cents plus an amount equal to five basis points of the transaction value. In addition, under an
interim final rule issued concurrently with the final rule, an additional one cent per transaction ‘‘fraud prevention
adjustment’’ to the interchange fee is available to those issuers that comply with certain standards outlined by the
Federal Reserve.
Currently, the Company is exempt from the interchange fee cap under the ‘‘small issuer’’ exemption, which applies
to any debit card issuer with total worldwide assets of less than $10 billion as of the end of the previous calendar
year. In the event the Company’s assets reach $10 billion or more, it will become subject to the interchange fee
limitations beginning July 1 of the following year, and the fees the Company may receive for an electronic debit
transaction will be capped at the statutory limit.
Although the rule applies only to larger institutions and does not currently apply to the Company, future industry
responses and developments relating to this rule that are currently unknown may affect the Company’s financial
31
condition and results of operations in ways and to a degree that it cannot currently predict, including any impact on
its future revenue.
The short-term and long-term impact of the new Basel III final framework on capital and liquidity ratio
requirements is uncertain.
The Basel III final framework introduces a new capital measure and specifies adjustments to the instruments that
comprise Tier 1 capital. In addition, the Basel III final framework requires banks and bank holding companies to
measure their liquidity against specific liquidity tests that, although similar in some respects to liquidity measures
historically applied by banks and regulators for management and supervisory purposes, going forward will be
required by regulation. For a more detailed description of this proposal, refer to the section titled ‘‘Supervision and
Regulation’’ in Item 1, ‘‘Business,’’ of this Form 10-K. These new standards are subject to further rulemaking and
their terms may well change before implementation. The resulting impact of Basel III on the Company’s capital and
liquidity ratios and compliance costs is unknown, and could negatively affect the costs and availability of capital
alternatives. In addition, requirements to maintain higher levels of capital or liquid assets could adversely impact
the Company’s net income and return on equity.
The level of the commercial real estate loan portfolio may subject the Company to additional regulatory scrutiny.
The FDIC, the Federal Reserve, and the Office of the Comptroller of the Currency promulgated joint guidance on
sound risk management practices for financial institutions with concentrations in commercial real estate lending.
Under the guidance, a financial institution that is actively involved in commercial real estate lending should
perform a risk assessment to identify concentrations. A financial institution may have a concentration in
commercial real estate lending if (i) total reported loans for construction, land development, and other land
represent 100% or more of total capital or (ii) total reported loans secured by multi-family and non-farm residential
properties, loans for construction, land development, and other land loans otherwise sensitive to the general
commercial real estate market, including loans to commercial real estate related entities, represent 300% or more of
total capital. The joint guidance requires heightened risk management practices including board and management
oversight and strategic planning, development of underwriting standards, risk assessment, and monitoring through
market analysis and stress testing. The Company is currently in compliance with these regulations. If regulators
determine the Company is in violation of these restrictions or has not adequately implemented risk management
practices, they could impose additional regulatory restrictions against the Company, which could have a material
negative impact on the Company’s business, financial condition, and results of operations.
The Company and its subsidiaries are subject to examinations and challenges by taxing authorities.
In the normal course of business, the Company and its subsidiaries are routinely subjected to examinations and
challenges from federal and state taxing authorities regarding tax positions taken by the Company and the
determination of the amount of tax due. These examinations may relate to income, franchise, gross receipts,
payroll, property, sales and use, or other tax returns filed, or not filed, by the Company. The challenges made by
taxing authorities may result in adjustments to the amount of taxes due, and may result in the imposition of penalties
and interest. If any such challenges are not resolved in the Company’s favor, they could have a material adverse
effect on the Company’s financial condition, results of operations, and liquidity.
The Company and its subsidiaries are subject to changes in federal and state tax laws and changes in interpretation
of existing laws.
The Company’s financial performance is impacted by federal and state tax laws. Given the current economic and
political environment, and ongoing budgetary pressures, the enactment of new federal or state tax legislation may
occur. The enactment of such legislation, or changes in the interpretation of existing law, including provisions
impacting income tax rates, apportionment, consolidation or combination, income, expenses, and credits, may have
a material adverse effect on the Company’s financial condition, results of operations, and liquidity.
The Company and its subsidiaries may not be able to realize the benefit of deferred tax assets.
The Company records deferred tax assets and liabilities for the future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases.
32
Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in years
in which those temporary differences are expected to be recovered or settled. The deferred tax assets can be
recognized in future periods dependent upon a number of factors, including the ability to realize the asset through
carryback or carryforward to taxable income in prior or future years, the future reversal of existing taxable
temporary differences, future taxable income, and the possible application of future tax planning strategies. A
valuation allowance is established for any deferred tax asset for which recovery or settlement is not more likely than
not.
Each quarter, the Company assesses its deferred tax asset position, including the recoverability of this asset or the
need for a valuation allowance. This assessment takes into consideration positive and negative evidence to
determine whether it is more likely than not that a portion of the asset will not be realized. If the Company is not
able to recognize deferred tax assets in future periods, it could have a material adverse effect on the Company’s
financial condition and results of operations.
The Company is a defendant in a variety of litigation and other actions.
Currently, there are certain legal proceedings pending against the Company and its subsidiaries in the ordinary
course of business. While the outcome of any legal proceeding is inherently uncertain, based on information
currently available, the Company’s management believes that any liabilities arising from pending legal matters
would be immaterial. However, if actual results differ from management’s expectations, it could have a material
adverse effect on the Company’s financial condition, results of operations, or cash flows. For a detailed discussion
on current legal proceedings, refer to Item 3, ‘‘Legal Proceedings,’’ and Note 20 of ‘‘Notes to the Consolidated
Financial Statements’’ in Item 8 of this Form 10-K.
Risks Related to Acquisition Activity
Future acquisitions, including FDIC-assisted transactions, may disrupt the Company’s business and dilute
stockholder value.
In the past, the Company strategically acquired banks or branches of other banks. The Company may consider
future acquisitions to supplement internal growth opportunities, as permitted by regulators. The Company seeks
merger or acquisition partners that are culturally similar and possess either significant market presence or have
potential for improved profitability through financial management, economies of scale, or expanded services.
Acquiring other banks or branches involves potential risks that could have a material adverse impact on the
Company’s financial condition or results of operations, including:
Short-term decrease in profitability.
(cid:129) Exposure to unknown or contingent liabilities of acquired banks.
(cid:129) Disruption of the Company’s business.
(cid:129) Loss of key employees and customers of acquired banks.
(cid:129)
(cid:129) Diversion of management’s time and attention.
Issues arising during transition and integration.
(cid:129)
(cid:129) Dilution in the ownership percentage of holdings of the Company’s Common Stock.
(cid:129) Difficulty in estimating the value of the target company.
(cid:129)
Payment of a premium over book and market values that may dilute the Company’s tangible book value and
earnings per share in the short and long-term.
(cid:129) Volatility in reported income as goodwill impairment losses could occur irregularly and in varying amounts.
Inability to realize the expected revenue increases, cost savings, increases in geographic or product
(cid:129)
presence, and/or other projected benefits.
(cid:129) Changes in banking or tax laws or regulations.
33
From time to time, the Company may evaluate merger and acquisition opportunities and conduct due diligence
activities related to possible transactions with other financial institutions and financial services companies. In
addition, in the current economic environment, the Company may be presented with opportunities to acquire the
assets and liabilities of failed banks in FDIC-assisted transactions. As a result, merger or acquisition discussions
and negotiations may take place and future mergers or acquisitions involving cash, debt, or equity securities may
occur at any time. Acquisitions may involve the payment of a premium over book and market values, and therefore,
some dilution of the Company’s tangible book value and net income per common share may occur in connection
with any future transaction. Furthermore, failure to realize the expected revenue increases, cost savings, increases
in geographic or product presence, and/or other projected benefits from an acquisition could have a material
adverse effect on the Company’s financial condition and results of operations. In addition, from time to time,
banking regulators may restrict the Company from making acquisitions. See the sections captioned ‘‘History’’ and
‘‘Supervision and Regulation’’ included in Item 1 for additional detail and Business for further discussion of these
matters.
Competition for acquisition candidates is intense.
Numerous potential acquirers compete with the Company for acquisition candidates. The Company may not be able
to successfully identify and acquire suitable targets, which could slow the Company’s growth rate and have a
material adverse effect on its ability to compete in its markets.
If the Company is inclined to participate in FDIC-assisted transactions, the Company can only participate in the bid
process if it receives approval of bank regulators. There can be no assurance that the Company will be allowed to
participate in the bid process, or what the terms of such transaction might be or whether the Company would be
successful in acquiring the bank or targeted assets.
Failure to comply with the terms of loss share agreements with the FDIC may result in potential losses.
The Company has completed four FDIC-assisted transactions. In three of those transactions, most loans and OREO
acquired are covered by the FDIC Agreements, under which the FDIC will reimburse the Bank for a portion of the
losses and eligible expenses arising from certain assets of the acquired institutions. The FDIC Agreements have
specific and detailed compliance, servicing, notification, and reporting requirements. Non-compliance with the
terms of the FDIC Agreements could result in the loss of reimbursement on individual loans, large pools of loans,
or OREO and could result in material losses that adversely affect the Company’s business or financial condition.
The valuations of loans and OREO acquired in FDIC-assisted transactions and the related FDIC
indemnification asset rely on estimates that may be inaccurate.
The Company performs a valuation of loans and OREO acquired in FDIC-assisted transactions. Although
management makes various assumptions and judgments about the collectability of the acquired loans, including the
creditworthiness of borrowers and the value of the real estate and other assets serving as collateral for the repayment
of secured loans associated with these transactions, its estimates of the fair value of assets acquired could be
inaccurate. Valuing these assets using inaccurate assumptions could materially and adversely affect the Company’s
business, financial condition, results of operations, and future prospects.
In FDIC-assisted transactions that include loss-share agreements, the Company records an FDIC indemnification
asset that reflects its estimate of the timing and amount of future losses that are anticipated to occur. In determining
the size of the FDIC indemnification asset, the Company analyzes the loan portfolio based on historical loss
experience, volume and classification of loans, volume and trends in delinquencies and non-accruals, local
economic conditions, and other pertinent information. Changes in the Company’s estimate of the timing of those
losses, specifically if those losses are to occur beyond the applicable loss-share periods, may result in impairments
of the FDIC indemnification asset, which would have a material adverse effect on the Company’s financial
condition and results of operations. If the assumptions related to the timing or amount of expected losses are
incorrect, there could be a negative impact on the Company’s operating results. Increases in the amount of future
losses in response to different economic conditions or adverse developments in the acquired loan portfolio may
result in increased charge-offs, which would also negatively impact the Company’s financial condition and results
of operations.
34
Risks Associated with the Company’s Common Stock
An investment in the Company’s Common Stock is not an insured deposit.
The Company’s Common Stock is not a bank deposit and, therefore, is not insured against loss by the FDIC, any
other deposit insurance fund, or by any other public or private entity. Investment in the Company’s Common Stock
is inherently risky for the reasons described in this ‘‘Risk Factors’’ section and elsewhere in this report and is subject
to the same market forces that affect the price of common stock in any public company. As a result, if you acquire
the Company’s Common Stock, you could lose some or all of your investment.
The Company’s stock price can be volatile.
Stock price volatility may make it more difficult for you to resell your Common Stock when you want and at prices
you find attractive. The Company’s Common Stock price can fluctuate significantly in response to a variety of
factors including:
(cid:129) Actual or anticipated variations in quarterly results of operations.
(cid:129) Recommendations by securities analysts.
(cid:129) Operating and stock price performance of other companies that investors deem comparable to the Company.
(cid:129) News reports relating to trends, concerns, and other issues in the financial services industry.
(cid:129)
(cid:129) New technology used or services offered by competitors.
(cid:129)
Significant acquisitions or business combinations, strategic partnerships, joint venture, or capital
commitments by or involving the Company or its competitors.
Failure to integrate acquisitions or realize anticipated benefits from acquisitions.
Perceptions in the marketplace regarding the Company and/or its competitors.
(cid:129)
(cid:129) Changes in government regulations.
(cid:129) Geopolitical conditions, such as acts or threats of terrorism or military conflicts.
General market fluctuations, industry factors, and general economic and political conditions and events, such as
economic slowdowns or recessions, interest rate changes, or credit loss trends, could also cause the Company’s
Common Stock price to decrease regardless of operating results.
The trading volume in the Company’s Common Stock is less than that of other larger financial services
institutions.
Although the Company’s Common Stock is listed for trading on the Nasdaq Stock Market Exchange, the trading
volume in its Common Stock may be less than that of other, larger financial services companies. A public trading
market having the desired characteristics of depth, liquidity, and orderliness depends on the presence in the
marketplace of willing buyers and sellers of the Company’s Common Stock at any given time. This presence
depends on the individual decisions of investors and general economic and market conditions over which the
Company has no control. During any period of lower trading volume of the Company’s Common Stock, significant
sales of shares of the Company’s Common Stock, or the expectation of these sales could cause the Company’s
Common Stock price to fall.
The Company’s Restated Certificate of Incorporation, Amended and Restated By-laws, and Amended and
Restated Rights Agreement, as well as certain banking laws, may have an anti-takeover effect.
Provisions of the Company’s Restated Certificate of Incorporation and Amended and Restated By-laws, federal
banking laws, including regulatory approval requirements, and the Company’s Amended and Restated Rights Plan
could make it more difficult for a third party to acquire the Company, even if doing so would be perceived to be
beneficial by the Company’s stockholders. The combination of these provisions effectively inhibits a
non-negotiated merger or other business combination, which, in turn, could adversely affect the market price of the
Company’s Common Stock.
35
The Company may issue additional securities, which could dilute the ownership percentage of holders of the
Company’s Common Stock.
The Company may issue additional securities to raise additional capital or finance acquisitions or upon the exercise
or conversion of outstanding options, and, if it does, the ownership percentage of holders of the Company’s
Common Stock could be diluted potentially materially.
The Company has not established a minimum dividend payment level, and it cannot ensure its ability to pay
dividends in the future.
On March 16, 2009, the Board of Directors of First Midwest Bancorp, Inc. (‘‘the Board’’) announced a reduction in
the Company’s quarterly Common Stock dividend from $0.225 per share to $0.01 per share. The Company has paid
dividends of $0.01 per share for the past 16 quarters. While the Company considers future capital strategies,
including an increase in quarterly dividends, any increase will be subject to regulatory review. The Company has
not established a minimum dividend payment level, and the amount of its dividend may fluctuate. All dividends will
be made at the discretion of the Board and will depend upon the Company’s earnings, financial condition, and such
other factors as the Board may deem relevant from time to time. The Board may, at its discretion, further reduce or
eliminate dividends or change its dividend policy in the future.
In addition, the Federal Reserve issued Federal Reserve Supervision and Regulation Letter SR-09-4, which requires
bank holding companies to inform and consult with Federal Reserve supervisory staff prior to declaring and paying
a dividend that exceeds earnings for the period for which the dividend is being paid. Under this regulation, if the
Company experiences losses in a series of consecutive quarters, it may be required to inform and consult with the
Federal Reserve supervisory staff prior to declaring or paying any dividends. In this event, there can be no assurance
that the Company’s regulators will approve the payment of such dividends.
Offerings of debt, which would be senior to the Company’s Common Stock upon liquidation, and/or preferred
equity securities, which may be senior to the Company’s Common Stock for purposes of dividend distributions
or upon liquidation, may adversely affect the market price of the Company’s Common Stock.
The Company may attempt to increase the Company’s capital or raise additional capital by making additional
offerings of debt or preferred equity securities, including trust-preferred securities, senior or subordinated notes,
and preferred stock. Upon liquidation, holders of the Company’s debt securities and shares of preferred stock and
lenders with respect to other borrowings will receive distributions of the Company’s available assets prior to the
holders of the Company’s Common Stock. Additional equity offerings may dilute the holdings of the Company’s
existing stockholders or reduce the market price of the Company’s Common Stock, or both. Holders of the
Company’s Common Stock are not entitled to preemptive rights or other protections against dilution.
The Board is authorized to issue one or more classes or series of preferred stock from time to time without any
action on the part of the Company’s stockholders. The Board also has the power, without stockholder approval, to
set the terms of any such classes or series of preferred stock that may be issued, including voting rights, dividend
rights, and preferences over the Company’s Common Stock with respect to dividends or upon the Company’s
dissolution, winding-up, liquidation, and other terms. If the Company issues preferred stock in the future that has a
preference over the Company’s Common Stock with respect to the payment of dividends or upon liquidation, or if
the Company issues preferred stock with voting rights that dilute the voting power of the Company’s Common
Stock, the rights of holders of the Company’s Common Stock or the market price of the Company’s Common Stock
could be adversely affected.
36
ITEM 1B. UNRESOLVED STAFF COMMENTS
The Company does not have any unresolved comments pending with the SEC staff.
ITEM 2. PROPERTIES
The executive offices of the Company, the Bank, and certain subsidiary operational facilities are located in a
16-story office building in Itasca, Illinois, which is leased from an unaffiliated third party. The Company occupies a
total of 95 facilities as presented in the following table.
Bank offices:
Executive office in Itasca, Illinois ...................................
Bank branches..............................................................
Operational facility in Joliet, Illinois................................
Other lending and commercial banking offices..................
Total bank offices .....................................................
Bank offices owned and not subject to any material liens ......
Leased bank offices .........................................................
Total bank offices .........................................................
December 31,
2012
1
91
1
2
95
75
20
95
Total ATMs .................................................................
130
The banking offices are largely located in various communities throughout northern Illinois and northwestern
Indiana, primarily the Chicago metropolitan suburban area. The Company also has banking offices in central and
western Illinois and eastern Iowa. At certain Bank locations, excess space is leased to third parties. Most of the
ATMs are housed at banking locations, and some of them are independently located. In addition, the Company
owns other real property that, when considered individually or in the aggregate, is not material to the Company’s
financial position.
The Company believes its facilities in the aggregate are suitable and adequate to operate its banking business.
Additional information with respect to premises and equipment is presented in Note 7 of ‘‘Notes to the
Consolidated Financial Statements’’ in Item 8 of this Form 10-K.
ITEM 3. LEGAL PROCEEDINGS
The nature of the business of the Bank and the Company’s other subsidiaries ordinarily results in a certain amount
of claims, litigation, investigations, and legal and administrative cases and proceedings, all of which are considered
incidental to the normal conduct of business. In managing such matters, management considers the merits and
feasibility of all options and strategies available to the Company, including litigation prosecution, arbitration,
insurance coverage, and settlement. Generally, if the Company determines it has meritorious defenses to a matter, it
vigorously defends itself.
In August of 2011, the Bank was named in a purported class action lawsuit filed in the Circuit Court of Cook
County, Illinois on behalf of certain of the Bank’s customers who incurred overdraft fees. The lawsuit is based on
the Bank’s practices relating to debit card transactions, and alleges that these practices resulted in customers being
assessed excessive overdraft fees. The plaintiffs seek an unspecified amount of damages and other relief, including
restitution, and no class has been certified. The Bank filed a motion to dismiss the complaint and, on January 23,
2013, the Circuit Court granted the Bank’s motion and dismissed the complaint with prejudice. On February 20,
2013, the plaintiffs filed a notice of appeal with the Illinois Appellate Court. The Company believes that the Bank
has meritorious defenses to the claims made by the plaintiffs and, accordingly, the Bank intends to continue to
vigorously defend itself against the allegations in the lawsuit.
37
Currently, there are certain other legal proceedings pending against the Company and its subsidiaries in the ordinary
course of business. While the outcome of any legal proceeding is inherently uncertain, based on information
currently available, the Company’s management believes that any liabilities arising from pending legal matters are
not expected to have a material adverse effect on the Company’s financial position, results of operations, or cash
flows.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
PART II
ITEM 5. MARKET FOR THE REGISTRANT’S COMMON EQUITY,
RELATED STOCKHOLDER MATTERS, AND
ISSUER PURCHASES OF EQUITY SECURITIES
The Company’s Common Stock is traded under the symbol ‘‘FMBI’’ in the Nasdaq Global Select market tier of the
Nasdaq Stock Market. As of December 31, 2012, there were 2,004 stockholders of record, a number that does not
include beneficial owners who hold shares in ‘‘street name’’ (or shareholders from previously acquired companies
that did not exchange their stock).
Fourth
Third
Second
First
Fourth
Third
Second
First
2012
2011
Market price of Common
Stock
High ........................
Low .........................
Quarter-end ...............
Cash dividends declared
per common share.......
Dividend yield at
$
$
$
$
13.57
11.62
12.52
0.01
$
$
$
$
13.40
10.43
12.56
0.01
$
$
$
$
12.25
9.42
10.98
0.01
$
$
$
$
12.87
10.25
11.98
0.01
$
$
$
$
10.31
6.89
10.13
0.01
$
$
$
$
12.72
7.22
7.32
0.01
$
$
$
$
13.48
11.05
12.29
0.01
$
$
$
$
13.07
10.79
11.79
0.01
quarter-end (1).............
0.32%
0.32%
0.36%
0.33%
0.39%
0.55%
0.33%
0.34%
Book value per common
share at quarter-end .....
$
12.57
$
12.47
$
13.07
$
12.99
$
12.93
$
12.88
$
12.74
$
12.49
(1) Ratios are presented on an annualized basis.
Payment of future dividends is within the discretion of the Board and will depend on earnings, capital requirements,
the operating and financial condition of the Company, and other factors the Board deems relevant from time to time.
The Board makes the dividend determination on a quarterly basis. A further discussion of the Company’s
philosophy regarding the payment of dividends is included in the ‘‘Management of Capital’’ section of
‘‘Management’s Discussion and Analysis of Financial Condition and Results of Operations’’ in Item 7 of this
Form 10-K.
A discussion regarding the regulatory restrictions applicable to the Bank’s ability to pay dividends to the Company
is included in the ‘‘Supervision and Regulation – Dividends’’ and ‘‘Risk Factors – Risks Associated with the
Company’s Common Stock’’ sections under Items 1 and 1A of this Form 10-K.
For a description of the securities authorized for issuance under equity compensation plans, please refer to Item 12,
‘‘Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters,’’ of this
Form 10-K.
38
Stock Performance Graph
The graph below illustrates the cumulative total return (defined as stock price appreciation or depreciation and
dividends) to stockholders from the Company’s Common Stock against a broad-market total return equity index,
the S&P 500 Stock Index (the ‘‘S&P 500’’), and a published industry total return equity index, the S&P SmallCap
600 Banks Index (‘‘S&P SmallCap 600 Banks’’), over a five-year period.
Comparison of Five-Year Cumulative Total Return Among
First Midwest, the S&P 500, and the S&P SmallCap 600 Banks (1)
$120
$100
$80
$60
$40
$20
$0
12/07
12/08
12/09
12/10
12/11
12/12
First Midwest Bancorp, Inc.
S&P 500
S&P SmallCap 600 Banks
25FEB201323274301
Copyright(cid:2) 2013 S&P, a division of The McGraw-Hill Companies Inc. All rights reserved.
2007
2008
2009
2010
2011
2012
First Midwest ......................
S&P 500 ............................
S&P SmallCap 600 Banks ....
$ 100.00
100.00
100.00
$
68.56
63.00
100.63
$
37.56
79.67
69.16
$
39.87
91.67
81.51
$
35.21
93.61
80.79
$
43.66
108.59
93.89
(1) Assumes $100 invested on December 31, 2007 in the Company’s Common Stock, the S&P 500, and the S&P SmallCap 600
Banks with the reinvestment of all related dividends.
To the extent this Form 10-K is incorporated by reference into any other filing by the Company under the Securities
Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, the foregoing ‘‘Stock Performance
Graph’’ will not be deemed incorporated, unless specifically provided otherwise in such filing and shall not
otherwise be deemed filed under such Acts.
39
Issuer Purchases of Equity Securities
The following table summarizes the Company’s monthly Common Stock purchases during the fourth quarter of
2012. The Board approved a stock repurchase program on November 27, 2007. Up to 2.5 million shares of the
Company’s Common Stock may be repurchased, and the total remaining authorization under the program was
2,494,747 shares as of December 31, 2012. The repurchase program has no set expiration or termination date.
Issuer Purchases of Equity Securities
(Number of shares in thousands)
Total
Number
of Shares
Maximum
Number of
Purchased as Shares that
Part of a May Yet Be
Purchased
Publicly
Announced Under the
Plan or
Program
Plan or
Program
2,494,747
2,494,747
2,494,747
-
-
-
-
Total
Number
of Shares
Purchased (1)
Average
Price
Paid per
Share
-
-
14,114
14,114
$
-
-
12.47
$
12.47
October 1 – October 31, 2012 .....................................
November 1 – November 30, 2012...............................
December 1 – December 31, 2012 ...............................
Total ....................................................................
(1) Consists of shares acquired pursuant to the Company’s share-based compensation plans and not the Company’s repurchase
program approved by its Board on November 27, 2007. Under the terms of these plans, the Company accepts shares of Common
Stock from option holders if they elect to surrender previously owned shares upon exercise to cover the exercise price of the
stock options or, in the case of restricted shares of Common Stock, the withholding of shares to satisfy tax withholding
obligations associated with the vesting of restricted shares.
40
ITEM 6. SELECTED FINANCIAL DATA
Consolidated financial information reflecting a summary of the operating results and financial condition of the
Company for each of the five years in the period ended December 31, 2012 is presented in the following table. This
summary should be read in conjunction with the consolidated financial statements and accompanying notes
included in Item 8, ‘‘Financial Statements and Supplementary Data,’’ of this Form 10-K. A more detailed
discussion and analysis of the factors affecting the Company’s financial condition and operating results is presented
in Item 7, ‘‘Management’s Discussion and Analysis of Financial Condition and Results of Operations,’’ of this
Form 10-K.
2012
2011
2010
2009
2008
Years ended December 31,
Operating Results (Amounts in thousands, except per share data)
Net (loss) income...................................
Net (loss) income applicable to common
(21,054)
$
$
36,563
$
(9,684)
$
(25,750)
$
49,336
shares ...............................................
(20,748)
25,437
(19,717)
(35,551)
48,482
Per Common Share Data
Basic (loss) earnings per common share .....
Diluted (loss) earnings per common share ...
Common dividends declared.....................
Book value at year end ...........................
Market price at year end..........................
$
$
(0.28)
(0.28)
0.040
12.57
12.52
Performance Ratios
Return on average common equity.............
Return on average assets .........................
Net interest margin – tax-equivalent ...........
Dividend payout ratio..............................
Average equity to average assets ratio ........
(2.14%)
(0.26%)
3.86%
(14.29%)
11.93%
0.35
0.35
0.040
12.93
10.13
2.69%
0.45%
4.04%
11.43%
13.72%
$
$
(0.27)
(0.27)
0.040
12.40
11.52
(2.06%)
(0.12%)
4.13%
(14.81%)
14.31%
As of December 31,
(0.71)
(0.71)
0.040
13.66
10.89
(4.84%)
(0.32%)
3.72%
(5.63%)
11.50%
$
1.00
1.00
1.155
14.72
19.97
6.46%
0.60%
3.61%
115.50%
9.30%
2012
2011
2010
2009
2008
Balance Sheet Highlights (Amounts in thousands)
Total assets ...........................................
Total loans, including covered loans...........
Deposits ...............................................
Senior and subordinated debt....................
Long-term portion of FHLB advances ........
Stockholders’ equity ...............................
$
8,099,839
5,387,570
6,672,255
214,779
114,581
940,893
$
7,973,594
5,348,615
6,479,175
252,153
75,000
962,587
$
8,138,302
5,472,289
6.511.476
137,744
112,500
1,112,045
$
7,710,672
5,349,565
5,885,279
137,735
147,418
941,521
$
8,528,341
5,360,063
5,585,754
232,409
736
908,279
Financial Ratios
Allowance for credit losses as a percent of
loans ................................................
Total capital to risk-weighted assets ...........
Tier 1 capital to risk-weighted assets..........
Tier 1 leverage to average assets ...............
Tangible common equity to tangible assets ..
1.91%
11.90%
10.28%
8.40%
8.44%
2.28%
13.68%
11.61%
9.28%
8.83%
2.65%
16.27%
14.20%
11.21%
8.06%
2.71%
13.94%
11.88%
10.18%
6.29%
1.75%
14.36%
11.60%
9.41%
5.23%
41
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
The following discussion and analysis is intended to address the significant factors affecting our Consolidated
Statements of Income for the years 2010 through 2012 and Consolidated Statements of Financial Condition as of
December 31, 2011 and 2012. When we use the terms ‘‘First Midwest,’’ the ‘‘Company,’’ ‘‘we,’’ ‘‘us,’’ and ‘‘our,’’ we
mean First Midwest Bancorp, Inc., a Delaware corporation, and its consolidated subsidiaries. When we use the term
‘‘Bank,’’ we are referring to our wholly owned banking subsidiary, First Midwest Bank. For your reference, a
glossary of certain terms is presented on pages 3 and 4 of this Form 10-K. The discussion is designed to provide
stockholders with a comprehensive review of our operating results and financial condition and should be read in
conjunction with the consolidated financial statements, accompanying notes thereto, and other financial
information presented in this Form 10-K.
Our results of operations are affected by various factors, many of which are beyond our control, including interest
rates, national and local economic conditions, legislative changes, and changes in real estate and securities markets.
Our management evaluates performance using a variety of qualitative and quantitative metrics. The primary
quantitative metrics used by management include:
(cid:129) Pre-Tax Pre-Provision Operating Earnings – Pre-tax pre-provision operating earnings, a non-GAAP
financial measure, reflects our operating performance before the effects of credit-related charges, securities
gains, losses, and impairments, and certain unusual, infrequent, or non-recurring revenues and expenses.
We believe this metric is useful because it helps investors to assess the Company’s operating performance. A
reconciliation of pre-tax, pre-provision operating earnings to GAAP can be found in Table 1.
(cid:129) 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.
(cid:129) Net Interest Margin – Net interest margin equals net interest income divided by total average interest-
earning assets.
(cid:129) Noninterest Income – Noninterest income is the income we earn from fee-based revenues, BOLI and other
income, and non-operating revenues.
(cid:129) Asset Quality – Asset quality is an estimation of the quality of our loan portfolio, including an assessment of
the credit risk related to existing and potential loss exposure, and can be evaluated using a number of
quantitative measures, such as non-performing loans to total loans.
(cid:129) Regulatory Capital – Our regulatory capital is classified in one of the following two tiers: (i) Tier 1 capital
consists of common equity, retained earnings, qualifying non-cumulative perpetual preferred stock, and
qualifying trust-preferred securities, less goodwill and most intangible assets, and (ii) Tier 2 capital includes
qualifying subordinated debt and the allowance for credit losses, subject to limitations.
A condensed review of operations for the fourth quarter of 2012 is included in the section titled ‘‘Fourth Quarter
2012 vs. 2011’’ of this Item 7. The summary provides an analysis of the quarterly earnings performance for the
fourth quarter of 2012 compared to the same period in 2011.
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.
42
PERFORMANCE OVERVIEW
Table 1
Selected Financial Data
(Dollar amounts in thousands, except per share data)
Years ended December 31,
2011
2010
2012
Operating Results
Interest income ..................................................................
Interest expense .................................................................
Net interest income .........................................................
Fee-based revenues .............................................................
Other noninterest income.....................................................
Noninterest expense, excluding certain non-operating
noninterest expense items .................................................
Pre-tax, pre-provision operating earnings (1) ........................
Provision for loan and covered loan losses .............................
Net securities (losses) gains .................................................
Gain, less related expenses, on bulk loan sales .......................
Gains on acquisitions, net of integration costs ........................
Net losses on early extinguishment of debt.............................
Net losses on sales and valuation adjustments of OREO, excess
properties, assets held-for-sale, and other (2) ........................
Accelerated amortization of FDIC indemnification asset (2).......
Severance-related costs (2) ....................................................
(Loss) income before income tax benefit (expense) .................
Income tax benefit (expense) ...............................................
Net (loss) income ...............................................................
Preferred dividends and accretion on preferred stock ...............
Net loss (income) applicable to non-vested restricted shares......
Net (loss) income applicable to common shares ......................
Diluted (loss) earnings per common share..............................
Performance Ratios
Return on average common equity ........................................
Return on average assets .....................................................
Net interest margin – tax equivalent ......................................
Efficiency ratio (3) ..............................................................
$ 300,569
(34,901)
$ 321,511
(39,891)
$ 328,867
(49,518)
265,668
97,323
5,662
(248,349)
120,304
(158,052)
(921)
2,639
2,486
(558)
(7,974)
(6,705)
(1,155)
(49,936)
28,882
(21,054)
-
306
(20,748)
(0.28)
(2.14%)
(0.26%)
3.86%
67.14%
$
$
281,620
94,182
4,269
(248,838)
131,233
(80,582)
2,410
-
1,076
-
(10,797)
-
(2,269)
41,071
(4,508)
36,563
(10,776)
(350)
25,437
0.35
2.69%
0.45%
4.04%
62.12%
$
$
279,349
86,762
5,270
(234,975)
136,406
(147,349)
12,216
-
979
-
(40,480)
-
-
(38,228)
28,544
(9,684)
(10,299)
266
(19,717)
(0.27)
(2.06%)
(0.12%)
4.13%
58.84%
$
$
(1) The Company’s accounting and reporting policies conform to U.S. generally accepted accounting principles (‘‘GAAP’’) and
general practice within the banking industry. As a supplement to GAAP, the Company provided this non-GAAP performance
result. The Company believes that this non-GAAP financial measure is useful because it helps investors to assess the
Company’s operating performance. Although this non-GAAP financial measure is intended to enhance investors’
understanding of the Company’s business and performance, this measure should not be considered an alternative to GAAP.
(2) For further discussion of losses realized on OREO, valuation adjustments of OREO, excess properties, assets held-for-sale,
accelerated amortization of FDIC indemnification asset, and severance-related costs, see the section titled ‘‘Noninterest
Expense’’ of this Item 7.
(3) The efficiency ratio expresses noninterest expense, excluding OREO expense, as a percentage of tax-equivalent net interest
income plus total fees and other income.
43
December 31,
2012
December 31,
2011
Dollar
Change
%
Change
Balance Sheet Highlights
Total assets ................................
Total loans, including covered
loans .....................................
Total deposits.............................
Transactional deposits .................
Loans-to-deposits ratio ................
Transactional deposits to total
deposits .................................
Asset Quality Highlights (1)
Non-accrual loans .......................
90 days or more past due loans
(still accruing interest) .............
Total non-performing loans .......
Troubled debt restructurings
(‘‘TDRs’’) (still accruing
interest) .................................
OREO.......................................
Total non-performing assets ......
30-89 days past due loans ............
Allowance for credit losses,
including covered loans ..........
Allowance for credit losses as a
percent of loans, including
covered loans .........................
$
8,099,839
$
7,973,594
$
126,245
5,387,570
6,672,255
5,272,307
80.7%
5,348,615
6,479,175
4,820,058
82.6%
79.0%
74.4%
38,955
193,080
452,249
$
84,534
$
187,325
$
(102,791)
8,689
93,223
6,867
39,953
140,043
22,666
102,812
$
$
$
9,227
196,552
17,864
33,975
248,391
27,495
121,962
$
$
$
(538)
(103,329)
(10,997)
5,978
(108,348)
(4,829)
(19,150)
$
$
$
1.91%
2.28%
1.6
0.7
3.0
9.4
(54.9)
(5.8)
(52.6)
(61.6)
17.6
(43.6)
(17.6)
(15.7)
(1) Excludes covered loans and covered OREO, except where stated. For a discussion of covered loans and covered OREO, refer to
Note 5 of ‘‘Notes to the Consolidated Financial Statements’’ in Item 8 of this Form 10-K. Asset quality, including covered loans
and covered OREO, is included in the section titled ‘‘Loan Portfolio and Credit Quality’’ of this Item 7.
Performance Overview for 2012 Compared with 2011
The net loss applicable to common shareholders for 2012 was $20.7 million, or $0.28 per share. This compares to
net income applicable to common shareholders of $25.4 million, or $0.35 per share, for 2011. The net loss for 2012
was driven primarily by accelerated credit remediation actions during the third quarter of 2012. Refer to the
‘‘Accelerated Credit Remediation Actions’’ section of this Item 7 for additional detail.
Pre-tax, pre-provision operating earnings of $120.3 million for 2012 were down $10.9 million, or 8.3%, compared
to 2011, resulting primarily from a reduction in net interest income, which was partly mitigated by an increase in
fee-based revenues, gains on mortgage loan sales, and the recognition of net trading income for 2012 compared to
losses for 2011.
Tax-equivalent net interest margin declined 18 basis points to 3.86% for 2012 from 4.04% for 2011. The reduction
in margin reflected a 25 basis point decrease in the average yield on interest-earning assets, due primarily to a lower
yield earned on new and renewing loans in the low interest rate environment as well as the reinvestment of cash
flows from the investment portfolio into lower yielding securities. In addition, the yield on covered interest-earning
assets declined as a result of revised cash flow estimates. These lower yields were partially offset by a decline in the
rates paid for interest-bearing liabilities, including a 6 basis point decline on interest bearing transaction accounts, a
27 basis point decline on time deposits, and a 16 basis point decline on senior and subordinated debt.
Total noninterest income increased from 2011 as a result of higher fee-based and operating revenues, slightly offset
by securities losses compared to securities gains in the prior year. The gain on the bulk loan sales and a gain
recognized on the acquisition of Waukegan Savings also contributed to the increase from 2011.
44
The rise in noninterest expense resulted primarily from higher compensation expense, increased professional
services, $6.7 million of accelerated amortization of the FDIC indemnification asset, and valuation adjustments of
assets held-for-sale. A discussion of net interest income and noninterest income and expense is presented in the
following section titled ‘‘Earnings Performance’’ of this Item 7.
As of December 31, 2012, our securities portfolio totaled $1.1 billion, increasing 4.1% from December 31, 2011,
following a 5.8% decrease from December 31, 2010. The current year increase was driven by an increase in
collateralized mortgage obligations (‘‘CMOs’’) and other mortgage-backed securities (‘‘MBSs’’). In the first
quarter of 2012, deposits acquired in the fourth quarter of 2011 that had previously been held in short-term
investments were redeployed into these types of securities. For a detailed discussion of our securities portfolio, refer
to the section titled ‘‘Investment Portfolio Management’’ of this Item 7.
During the third quarter of 2012, we identified certain non-performing and performing potential problem loans for
accelerated disposition through multiple bulk loan sales and recorded charge-offs of $80.3 million. The bulk loan
sales of $172.5 million in original carrying value were completed in the fourth quarter of 2012, resulting in
proceeds of $94.5 million and a gain, less commissions and other selling expenses, of $2.6 million. For a detailed
discussion of the bulk loan sales, refer to the section titled ‘‘Accelerated Credit Remediation Actions’’ of this
Item 7.
Total loans of $5.4 billion as of December 30, 2012 grew $39.0 million from December 31, 2011. Excluding
covered loans, net charge-offs of $172.6 million, $89.3 million of loans disposed through bulk loan sales, and
$46.3 million of loans acquired in the Waukegan Savings transaction, our loan portfolio increased by approximately
6.5% from December 31, 2011. The loan portfolio benefitted from growth in commercial and industrial loans,
agricultural loans, office and retail loans, and 1-4 family mortgages. For a discussion of our loan portfolio, see the
section titled ‘‘Loan Portfolio and Credit Quality’’ of this Item 7.
The improvement in non-performing assets, excluding covered loans and covered OREO, from December 31, 2011
to December 31, 2012 reflected aggressive remediation actions taken by management during the year and, in
particular, the bulk loan sales discussed above. Refer to the section titled ‘‘Loan Portfolio and Credit Quality’’ of
this Item 7 for additional discussion of non-performing assets.
For 2012, total average funding sources increased $98.8 million, or 1.4%, from 2011 driven primarily by growth of
$352.9 million, or 7.4%, in average transactional deposits, partially offset by reductions in higher-costing time
deposits of $263.0 million and borrowed funds of $72.1 million, resulting in a more favorable funding mix. The rise
in average senior and subordinated debt reflects the issuance of $115.0 million of senior debt in the fourth quarter of
2011, less the repurchase and retirement of $37.4 million of junior subordinated debentures and subordinated notes
during 2012. For a discussion of our funding sources, see the section titled ‘‘Funding and Liquidity Management’’
of this Item 7.
Performance Overview for 2011 Compared with 2010
Net income applicable to common shareholders for 2011 was $25.4 million, or $0.35 per share. This compares to
net loss applicable to common shareholders of $19.7 million, or $0.27 per share, for 2010.
Pre-tax, pre-provision operating earnings of $131.2 million for 2011 were down $5.2 million, or 3.8%, compared to
2010 primarily as a result of a $13.9 million, or 5.9%, increase in noninterest expense, excluding losses on sales and
write-downs of OREO, integration costs, and severance-related costs. This was partially offset by a $7.4 million
increase in fee-based revenues.
Tax-equivalent net interest margin for 2011 was 4.04%, a decline of 9 basis points from 4.13% in 2010. The
reduction in margin resulted from a 23 basis point decrease in the average yield on interest-earning assets, largely
due to the cumulative effect of prior year securities sales and a lower yield on securities as cash flows from
securities paydowns and maturities repriced at lower interest rates. While loans also repriced at lower rates in 2011,
the reduction was more than offset by an increase in the yield on covered loans. The overall decline in yield was
mitigated by a 16 basis point drop in the rates paid for interest-bearing liabilities, driven by a 14 basis point decline
in the rates paid for time deposits, and a 16 basis point reduction in the rates paid on interest-bearing transaction
accounts.
45
The rise in noninterest expense was a result of higher loan remediation costs; increased salaries related to the
expansion of commercial, retail, and wealth management sales staff; and a $1.3 million correction of a 2010
actuarial pension expense calculation related to the valuation of future early retirement benefits recorded in the
fourth quarter of 2011. A discussion of net interest income and noninterest income and expense is presented in the
following section titled ‘‘Earnings Performance’’ of this Item 7.
As of December 31, 2011, our securities portfolio totaled $1.1 billion, decreasing 5.8% from December 31, 2010,
following a 15.6% decrease from December 31, 2009. Our securities portfolio declined over the past three years as
we took advantage of opportunities in the market to sell securities at a gain given the low interest rate environment.
For a detailed discussion of our securities portfolio, refer to the section titled ‘‘Investment Portfolio Management’’
of this Item 7.
Total loans of $5.3 billion as of December 30, 2011 declined $123.7 million, or 2.3%, from $5.5 billion as of
December 31, 2010. The continued decline in covered loan balances, reflecting paydowns, charge-offs, and
transfers to OREO, accounted for the majority of this reduction.
Total loans, excluding covered loans, as of December 31, 2011 were stable compared to December 31, 2010. The
office, retail, and industrial and other commercial real estate portfolios exhibited 6.2% growth during this period,
substantially in the form of owner-occupied business relationships. Offsetting this progress, we continued to reduce
our exposure to the higher risk categories of construction and multi-family real estate during 2011.
Non-performing assets, excluding covered loans and covered OREO, were $248.4 million at December 31, 2011,
decreasing $21.1 million, or 7.8%, from December 31, 2010. The reduction was substantially due to management’s
remediation activities, charge-offs, and the return of accruing TDRs to performing status, partially offset by loans
downgraded to non-accrual status. For a detailed discussion of non-performing assets, refer to the section titled
‘‘Loan Portfolio and Credit Quality’’ of this Item 7.
Total average funding sources for 2011 increased $152.4 million, or 2.2%, from 2010 resulting from a
$433.0 million, or 10.0%, increase in average transactional deposits and a $12.5 million, or 9.1%, increase in senior
and subordinated debt. These increases were partially offset by declines in higher-costing time deposits of
$199.6 million, or 10.0%, and borrowed funds of $93.5 million, or 26.0%. The rise in demand deposits and drop in
time deposits resulted in a more favorable product mix. For a discussion of our funding sources, see the section
titled ‘‘Funding and Liquidity Management’’ of this Item 7.
In the fourth quarter of 2011, we redeemed all of the $193.0 million of Preferred Shares issued to the Treasury,
resulting in the recognition of $1.5 million in accelerated amortization. We funded the redemption through a
combination of existing liquid assets and proceeds from a $115.0 million senior debt offering. The notes, which
have an interest rate of 5.875%, payable semi-annually, will mature in November 2016. In a related transaction, we
redeemed the Treasury’s associated Warrant. We paid $900,000 to the Treasury to redeem the Warrant, which
concluded our participation in the CPP. For a discussion of our capital position, see the section titled ‘‘Management
of Capital’’ of this Item 7.
ACQUISITION ACTIVITY
On August 3, 2012, the Company acquired substantially all the assets of Waukegan Savings in an FDIC-assisted
transaction generating a pre-tax gain of $3.3 million. The $46.3 million of acquired loans are not subject to a loss
sharing agreement with the FDIC. The transaction also included $72.7 million in deposits. Refer to Note 2 of
‘‘Notes to the Condensed Consolidated Financial Statements,’’ in Item 8 of this Form 10-K for additional discussion
regarding the acquisition.
In December 2011, we completed the purchase of certain Chicago-market deposits. The transaction included
$106.7 million in deposits (comprised of $70.6 million in transactional deposits and $36.1 in time deposits) and one
banking facility. As a result of the transaction, we recorded $1.4 million in core deposit intangibles and a net gain of
$1.1 million.
46
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 underlying the recognition of
interest income on loans, securities, and other interest-earning assets are presented in Note 1 of ‘‘Notes to the
Consolidated Financial Statements’’ in Item 8 of this Form 10-K.
Our accounting and reporting policies conform to GAAP and general practice within the banking industry. For
purposes of this discussion, both net interest income and net interest margin have been adjusted to a fully
tax-equivalent basis to more appropriately compare the returns on certain tax-exempt loans and securities to those
on taxable interest-earning assets. Although we believe that these measures enhance investors’ understanding of our
business and performance, these non-GAAP financial measures should not be considered an alternative to GAAP.
The effect of this adjustment is at the bottom of Table 2.
Table 2 summarizes our average interest-earning assets and interest-bearing liabilities for the years ended
December 31, 2012, 2011, and 2010, the related interest income and interest expense for each earning asset
category and funding source, and the average interest rates earned and paid. Table 3 details changes in interest
income and expense from prior years and analyzes the extent to which any changes are attributable to volume and
rate fluctuations.
47
Table 2
Net Interest Income and Margin Analysis
(Dollar amounts in thousands)
2012
2011
2010
Average
Balance
Interest
Yield/
Rate
(%)
Average
Balance
Interest
Yield/
Rate
(%)
Average
Balance
Interest
Yield/
Rate
(%)
Assets:
Federal funds sold and other earning
assets.......................................
$
470,069
$
1,143
Securities:
Trading - taxable.........................
Investment securities - taxable.........
Investment securities - nontaxable (1)
15,415
679,753
512,136
Total securities ........................
1,207,304
FHLB and Federal Reserve Bank stock
Loans held-for-sale .........................
Loans (1)(2) ....................................
Covered interest-earning assets (3)........
48,400
16,585
5,204,718
285,091
181
12,670
31,231
44,082
1,374
323
251,023
15,873
Total loans ................................
5,489,809
266,896
Total interest-earning assets (1)(2) ...
7,232,167
313,818
Cash and due from banks .................
Allowance for credit losses ...............
Other assets ..................................
120,757
(117,121)
873,923,893
Total assets.............................
$ 8,109,726
Liabilities and Stockholders’ Equity:
Savings deposits ............................
NOW accounts ..............................
Money market deposits ....................
$ 1,038,379
1,090,446
1,216,173
Total interest-bearing transactional
deposits .................................
Time deposits................................
Total interest-bearing deposits .........
Borrowed funds .............................
Senior and subordinated debt .............
3,344,998
1,529,006
4,874,004
193,643
231,273
Total interest-bearing liabilities .....
5,298,920
Demand deposits............................
Other liabilities..............................
Stockholders’ equity - common ..........
Stockholders’ equity - preferred .........
1,762,968
80,075
967,763
-
Total liabilities and
1,055
747
1,934
3,736
14,316
18,052
2,009
14,840
34,901
0.24
1.17
1.86
6.10
3.65
2.84
1.95
4.82
5.57
4.86
4.34
0.10
0.07
0.16
0.11
0.94
0.37
1.04
6.42
0.66
$
624,663
$
1,546
15,321
561,799
548,820
1,125,940
59,352
-
5,101,621
398,559
168
14,115
34,694
48,977
1,369
-
254,533
28,904
5,500,180
283,437
7,310,135
335,329
119,709
(143,314)
873,376
$ 8,159,906
$
934,937
1,091,184
1,230,090
3,256,211
1,792,009
5,048,220
265,702
150,285
5,464,207
1,498,900
77,276
947,145
172,378
1,615
1,130
2,891
5,636
21,620
27,256
2,743
9,892
39,891
0.25
1.10
2.51
6.32
4.35
2.31
-
4.99
7.25
5.15
4.59
0.17
0.10
0.24
0.17
1.21
0.54
1.03
6.58
0.73
$
368,172
$
933
13,851
538,208
668,828
1,220,887
60,249
-
5,191,154
323,595
181
22,116
42,506
64,803
1,349
-
260,809
17,285
5,514,749
278,094
7,164,057
345,179
125,273
(154,634)
889,958
$ 8,024,654
$
815,371
1,082,774
1,199,362
3,097,507
1,991,637
5,089,144
359,174
137,739
5,586,057
1,224,629
65,749
955,219
193,000
2,295
1,895
6,019
10,209
26,918
37,127
3,267
9,124
49,518
0.25
1.31
4.11
6.36
5.31
2.24
-
5.02
5.34
5.04
4.82
0.28
0.18
0.50
0.33
1.35
0.73
0.91
6.62
0.89
stockholders’ equity ............
$ 8,109,726
$ 8,159,906
$ 8,024,654
Net interest income/margin (1) ............
$ 278,917
3.86
$ 295,438
4.04
$ 295,661
4.13
Net interest income (GAAP)..............
Tax-equivalent adjustment .................
Tax equivalent net interest income....
$ 265,668
13,249
$ 278,917
$ 281,620
13,818
$ 295,438
$ 279,349
16,312
$ 295,661
(1) Interest income and yields are presented on a tax-equivalent basis, assuming a federal income tax rate of 35%.
(2) Non-accrual loans, which totaled $84.5 million as of December 31, 2012, $187.3 million as of December 31, 2011, and $211.8 million as of December 31, 2010, are included in
loans for purposes of this analysis.
(3) Covered interest-earning assets consist of loans acquired through FDIC-assisted transactions with loss share agreements and the related FDIC indemnification asset. For
additional discussion, please refer to Note 5 of ‘‘Notes to the Consolidated Financial Statements’’ in Item 8 of this Form 10-K. Covered non-accrual loans, which totaled
$14.2 million as of December 31, 2012 and $19.9 million as of December 31, 2011 are included in covered interest-earning assets for purposes of this analysis. There were no
covered non-accrual loans as of December 31, 2010.
48
Table 3
Changes in Net Interest Income Applicable to Volumes and Interest Rates (1)
(Dollar amounts in thousands)
2012 compared to 2011
2011 compared to 2010
Volume
Rate
Total
Volume
Rate
Total
Federal funds sold and other
earning assets.................
Securities:
Trading – taxable ............
Investment securities –
taxable ......................
Investment securities –
nontaxable (2) ..............
$
(376)
$
(27)
$
(403)
$
471
$
142
$
613
1
12
13
6,299
(7,744)
(1,445)
25
1,017
(38)
(13)
(9,018)
(8,001)
(2,265)
(1,198)
(3,463)
(7,587)
(225)
(7,812)
Total securities.........
4,035
(8,930)
(4,895)
(6,545)
(9,281)
(15,826)
FHLB and Federal Reserve
Bank stock ....................
Loans held-for-sale .............
Loans (2)...........................
Covered interest-earning
assets ...........................
Total loans ..............
Total interest income (2)
Savings deposits ................
NOW accounts ..................
Money market deposits .......
Total interest-bearing
transactional
deposits...............
Time deposits ....................
Total interest-bearing
deposits...............
Borrowed funds .................
Senior and subordinated debt
Total interest expense
Net interest
(20)
323
5,213
(7,177)
(1,964)
1,998
206
(1)
(33)
172
(2,892)
(2,720)
(748)
5,190
1,722
25
-
(8,723)
(5,854)
(14,577)
(23,509)
(766)
(382)
(924)
(2,072)
(4,412)
(6,484)
14
(242)
(6,712)
5
323
(3,510)
(13,031)
(16,541)
(21,511)
(560)
(383)
(957)
(1,900)
(7,304)
(9,204)
(734)
4,948
(4,990)
(19)
-
(4,827)
4,567
(260)
(6,353)
417
15
158
590
(2,558)
(1,968)
(1,089)
826
(2,231)
39
-
(1,449)
7,052
5,603
(3,497)
(1,097)
(780)
(3,286)
(5,163)
(2,740)
(7,903)
565
(58)
(7,396)
20
-
(6,276)
11,619
5,343
(9,850)
(680)
(765)
(3,128)
(4,573)
(5,298)
(9,871)
(524)
768
(9,627)
income (2) ............
$
276
$
(16,797)
$
(16,521)
$
(4,122)
$
3,899
$
(223)
(1) For purposes of this table, changes which are not due solely to volume changes or rate changes are allocated to each category on
the basis of the percentage relationship of each to the sum of the two.
(2) Interest income is presented on a tax-equivalent basis, assuming a federal income tax rate of 35%.
2012 Compared to 2011
Average interest-earning assets were $7.2 billion for 2012, a decrease of $78.0 million, or 1.1%, from 2011, driven
substantially by a decline in federal funds sold and other earning assets and covered interest-earning assets. These
decreases were partially offset by increases in investment securities, loan originations, and loans acquired from the
Waukegan Savings transaction during the third quarter of 2012.
Tax-equivalent net interest income was $278.9 million for 2012 compared to $295.4 for 2011. The 5.6% decline
from 2011 resulted from lower interest income, slightly mitigated by a decrease in interest expense. The
$21.5 million reduction in interest income resulted from a decrease in the yield on investment securities, loans, and
covered loans. Interest expense declined $5.0 million due to our continued reduction of higher-costing time
deposits and borrowed funds.
49
Tax-equivalent net interest margin declined 18 basis points to 3.86% for 2012 from 4.04% for 2011. The reduction
in margin reflected a 25 basis point decrease in the average yield on interest-earning assets, due primarily to a lower
yield earned on new and renewing loans in the low interest rate environment as well as the reinvestment of cash
flows from the investment portfolio into lower yielding securities. These lower yields were partially offset by a
decline in the rates paid for interest-bearing liabilities, including a 6 basis point decline on interest bearing
transaction accounts, a 27 basis point decline on time deposits, and a 16 basis point decline on senior and
subordinated debt.
The growth in senior and subordinated debt for 2012 compared to 2011 is attributed to the issuance of
$115.0 million of senior debt during the fourth quarter of 2011, which was used to redeem the Series B preferred
stock issued to the Treasury in combination with other excess cash. Interest paid on the senior debt reduced net
interest margin by 10 basis points. This growth was offset, in part, by the repurchase and retirement of $25.4 million
of junior subordinated debentures and $12.0 million of subordinated notes during 2012.
Interest earned on covered loans is generally recognized through the accretion of the discount taken on expected
future cash flows. The declining yield on covered interest-earning assets from 2011 was driven by revised estimates
of future cash flows. In addition, the yield for 2011 benefited from certain settlements of cash proceeds realized in
excess of estimates.
2011 Compared to 2010
Average interest-earning assets of $7.3 billion for 2011 rose $146.1 million, or 2.0%, from 2010, with the increase
primarily resulting from the short-term investment of additional customer deposits and the full year impact of
additional assets acquired in an FDIC-assisted transaction in August 2010. This increase was partially offset by a
decline in investment securities as we sold securities at a gain to take advantage of opportunities in the market. In
2011, we maintained an elevated level of short-term investments as we managed our liquidity.
Tax-equivalent net interest income for 2011 was relatively unchanged compared to 2010, as lower tax-equivalent
interest income was offset by a decline in interest expense. A $9.9 million reduction in tax-equivalent interest
income resulted from a 23 basis point decrease in the yield discussed below and the impact of securities sales.
Interest expense declined $9.6 million, as we used proceeds from securities sales and maturities to reduce higher-
costing time deposits and borrowed funds.
Tax-equivalent net interest margin for 2011 was 4.04%, a decline of 9 basis points from 4.13% in 2010. The
reduction in margin resulted from a 23 basis point decrease in the average yield on interest-earning assets, largely
due to the cumulative effect of prior year securities sales and a lower yield on securities as cash flows from
securities paydowns and maturities repriced at lower interest rates. While loans also repriced at lower rates in 2011,
the reduction was more than offset by an increase in the yield on covered loans. This effect was partially offset by a
16 basis point drop in the average rate paid for interest-bearing liabilities, driven by a 14 basis point decline in the
average rate paid for time deposits and a 16 basis point reduction in the aggregate rate paid on interest-bearing
transaction accounts.
The increase in the yield on covered interest-earning assets for 2011 compared to 2010 resulted from adjustments in
accretable income based upon (i) revised cash flow estimates subsequent to acquisition and (ii) cash proceeds
realized in excess of estimates upon final settlement of certain covered loans.
50
Noninterest Income
A summary of noninterest income for the years 2010 through 2012 is presented in the following table.
Table 4
Noninterest Income Analysis
(Dollar amounts in thousands)
Years ended December 31,
2011
2010
2012
Service charges on deposit
accounts ................................
Wealth management fees .............
Other service charges,
commissions, and fees .............
Card-based fees (1) .....................
Total fee-based revenues ..........
Net trading gains (losses) (2) ........
BOLI and other income (3) ..........
Total operating revenues ..........
Net gains on securities sales (4) ....
Securities impairment losses (4) ....
Gain on bulk loan sales ..............
Gains on FDIC-assisted
transactions (5) ........................
Net losses on early
extinguishment of debt ............
Gain on acquisition of deposits ....
$ 36,699
21,791
$
37,879
20,324
$
35,884
18,807
17,981
20,852
97,323
1,627
4,035
102,985
2,748
(3,669)
5,153
3,289
(558)
-
16,386
19,593
94,182
(691)
4,960
98,451
3,346
(936)
-
14,494
17,577
86,762
1,530
3,740
92,032
17,133
(4,917)
-
-
4,303
-
1,076
-
-
Total noninterest income ..........
$ 109,948
$ 101,937
$ 108,551
N/M – Not meaningful.
% Change
2012-2011
2011-2010
(3.1)
7.2
9.7
6.4
3.3
N/M
(18.6)
4.6
(17.9)
292.0
N/M
N/M
N/M
N/M
7.9
5.6
8.1
13.1
11.5
8.6
N/M
32.6
7.0
(80.5)
(81.0)
N/M
N/M
N/M
N/M
(6.1)
(1) Card-based fees consist of debit and credit card interchange fees charged for processing transactions, as well as various fees
charged on both customer and non-customer ATM and point-of-sale transactions processed through the ATM and point-of-sale
networks.
(2) Net trading gains (losses) result from the change in fair value of trading securities. Our trading securities represent diversified
investment securities held in a grantor trust under deferred compensation arrangements in which plan participants may direct
amounts earned to be invested in securities other than Company stock. Net trading gains (losses) are substantially offset by an
adjustment to salaries and wages expense.
(3) Other income consists of various items, including BOLI income, safe deposit box rentals, miscellaneous recoveries, and gains
on the sales of various assets. For a further discussion of our investment in BOLI, see the section titled ‘‘Investment in
Bank-Owned Life Insurance’’ and Note 1 of ‘‘Notes to the Consolidated Financial Statements’’ in Item 8 of this Form 10-K.
(4) For a discussion of these items, see the section titled ‘‘Investment Portfolio Management’’ of this Item 7.
(5) For a discussion of the 2012 gain on an FDIC-assisted transaction, refer to Note 2 of ‘‘Notes to the Consolidated Financial
Statements’’ in Item 8 of this Form 10-K.
2012 Compared to 2011
Total noninterest income increased 7.9% for 2012 compared to 2011 driven by higher fee-based and other operating
revenues, slightly offset by securities losses compared to securities gains in the prior year. Gains on the bulk loan
sales and on the acquisition of Waukegan Savings also contributed to the increase from 2011.
51
Fee-based revenues of $97.3 million for 2012 rose 3.3% compared to 2011, driven by increases in wealth
management fees, other service charges, commissions and fees, and card-based fees. These increases were partially
mitigated by lower non-sufficient fund fees, which drove the decline in service charges on deposit accounts.
The growth in wealth management fees compared to 2011 was driven by higher account and sales activity, a 6.1%
increase in average trust assets under management, and a one-time, court approved estate fee.
Other service charges, commissions, and fees increased during 2012 from gains of $2.1 million on the mortgage
loan sales during the fourth quarter of 2012.
Higher processing volumes on debit cards fueled the increase in card-based fees compared to 2011.
BOLI and other income was elevated in the previous year due to a $1.2 million benefit settlement received during
the third quarter of 2011.
We completed bulk loan sales during the fourth quarter of 2012, which resulted in a gain, before commissions and
other selling expenses, of $5.2 million. Refer to the section titled ‘‘Accelerated Credit Remediation Actions’’ of this
Item 7 for additional detail.
As described in the ‘‘Acquisition’’ section of this Item 7, we acquired certain loans and deposits of Waukegan
Savings during the third quarter of 2012 and recorded a $3.3 million gain.
Net losses of $558,000 were recognized for the repurchase and retirement of junior subordinated debentures and
subordinated notes during 2012. For further discussion regarding the extinguishment of debt, refer to the following
‘‘Senior and Subordinated Debt’’ section of this Item 7.
2011 Compared to 2010
Total noninterest income declined 6.1% for 2011 compared to 2010. The decrease reflects lower net securities
gains, a trading loss in 2011 following a trading gain in 2010, and a gain on an FDIC-assisted transaction in 2010,
all of which more than offset increases in operating revenues.
Fee-based revenues of $94.2 million for 2011 rose 8.6% compared to 2010 as a result of increases in all categories.
The growth in service charges on deposit accounts was due primarily to a combination of higher volumes of
non-sufficient-funds fees (including transactions generated by customers obtained in a 2010 FDIC-assisted
transaction) and more fees earned on business and personal checking accounts resulting from market-driven pricing
increases.
Average assets under management for 2011 totaled $4.4 billion, a $346.5 million increase from 2010, which was
driven equally by improved equity market performance and new sales initiatives. The increase in average assets
under management fueled the year-over-year growth in wealth management fees.
Higher merchant fees, miscellaneous loan fees, and investment revenue led to the increase in other service charges,
commissions, and fees. The year-over-year increase in merchant fees was due primarily to a volume increase from
customers acquired in an FDIC-assisted transaction.
We experienced continued growth in card-based fees resulting from both greater volumes and higher average rates
per transaction. The increase in rates earned on card-based fees resulted from the migration in late 2010 from multi-
merchant networks to an exclusive MasterCard network in most areas, which drove higher transaction yields and
incentives.
The $1.1 million gain on the acquisition of deposits related to our purchase of certain Chicago-market deposits. The
transaction closed in December 2011 and included one banking facility and $106.7 million in deposits (comprised
of $70.6 million in core transactional deposits and $36.1 in time deposits).
52
Noninterest Expense
The following table presents the components of noninterest expense for the years ended December 31, 2012, 2011,
and 2010.
Table 5
Noninterest Expense Analysis
(Dollar amounts in thousands)
Years ended December 31,
2011
2010
2012
% Change
2012-2011
2011-2010
Compensation expense:
Salaries and wages ................
Nonqualified plan expense (1)..
Retirement and other
employee benefits ..............
Total compensation expense....
OREO expense:
Valuation adjustments of
OREO .............................
Net losses on the sales of
OREO (2) ..........................
Net OREO operating
expense (3) ........................
Total OREO expense .............
Loan remediation costs .............
Other professional services ........
Total professional services......
Net occupancy expense .............
Equipment expense...................
Technology and related costs......
FDIC insurance premiums .........
Advertising and promotions .......
Merchant card expense..............
Accelerated amortization of
FDIC indemnification asset ....
Valuation adjustments of assets
held-for-sale .........................
Other expenses ........................
$
103,245
1,986
$
102,349
(646)
$
92,500
1,861
25,524
130,755
27,071
128,774
20,017
114,378
4,244
642
5,635
10,521
15,242
14,372
29,614
23,742
8,957
11,846
6,926
5,073
8,584
6,705
2,597
22,180
3,785
5,901
6,607
16,293
15,210
11,146
26,356
23,850
9,103
10,905
7,990
6,198
8,643
-
1,111
22,681
23,367
17,113
9,554
50,034
11,020
11,883
22,903
23,274
8,944
11,070
10,880
6,642
7,882
-
-
22,772
Total noninterest expense .......
$
267,500
$
261,904
$
278,779
Efficiency ratio.....................
67.14%
62.12%
58.84%
N/M – Not meaningful.
0.9
N/M
(5.7)
1.5
12.1
(89.1)
(14.7)
(35.4)
0.2
28.9
12.4
(0.5)
(1.6)
8.6
(13.3)
(18.2)
(0.7)
N/M
N/M
(2.2)
2.1
10.6
N/M
35.2
12.6
(83.8)
(65.5)
(30.8)
(67.4)
38.0
(6.2)
15.1
2.5
1.8
(1.5)
(26.6)
(6.7)
9.7
N/M
N/M
(0.4)
(6.1)
(1) Nonqualified plan expense results from changes in the Company’s obligation to participants under deferred compensation
agreements.
(2) For a discussion of sales of OREO properties, refer to the ‘‘Non-performing assets’’ section below.
(3) Net OREO operating expense consists of real estate taxes, commissions on sales, insurance, and maintenance, net of any rental
income.
53
2012 Compared to 2011
Total noninterest expense for 2012 was $267.5 million, increasing 2.1% from 2011 due primarily to $6.7 million of
accelerated amortization of the FDIC indemnification asset and higher compensation expense, professional
services, and valuation adjustments of assets held-for-sale.
The increase in total compensation expense was primarily driven by a rise in nonqualified plan expense related to
fluctuations in the fair value of trading securities held on behalf of plan participants in deferred compensation
agreements. The modest increase in salaries and wages for 2012 compared to 2011 was driven by annual merit
increases, the accrual of certain severance benefits, lower levels of deferred salaries from comparatively lower loan
originations, and additional retail banking staff related to the Waukegan Savings acquisition. These increases were
partially offset by a decline in share-based compensation.
Compared to 2011, retirement and other employee benefits declined $1.5 million primarily from lower pension and
profit sharing expenses. Retirement and other employee benefits were elevated in 2011 as a result of a $1.3 million
correction of the 2010 actuarial pension expense calculation related to the valuation of future early retirement
benefits.
OREO expense for 2012 declined 35.4% from 2011, largely driven by a decline in net operating expenses and a
$5.3 million reduction in net losses on the sales of OREO. For a discussion of sales of OREO properties, refer to the
section titled ‘‘OREO Activity’’ of this Item 7.
Higher other professional services expense in 2012 related to increased personnel recruitment expenses, the
reclassification of certain director fees from salaries and wages expense, and increased attorney fees related to the
Waukegan Savings acquisition and various legal proceedings.
Computer processing and network costs from the conversion of Waukegan Savings drove the increase in technology
and related costs compared to 2011.
The $6.7 million of accelerated amortization of the FDIC indemnification asset results from an adjustment in the
timing and amount of future cash flows expected to be received from the FDIC under the loss sharing agreements
based on management’s periodic estimates of future cash flows from covered loans.
During 2012, we recorded valuation adjustments of $2.6 million on a property held-for-sale and a former banking
office transferred to OREO. In 2011, we recorded $1.1 million of valuation adjustments on certain properties
transferred to held-for-sale.
2011 Compared to 2010
Total noninterest expense for 2011 decreased 6.1% from 2011. Declines in losses on sales and write-downs of
OREO, integration costs, and severance-related costs, were partially offset by higher loan remediation costs,
increased salaries related to the expansion of commercial, retail, and wealth management sales staff and a
$1.3 million correction of a 2010 actuarial pension expense calculation related to the valuation of future early
retirement benefits recorded in the fourth quarter of 2011.
In 2011, we recorded a $2.3 million charge for severance-related costs from an organizational realignment, which
eliminated approximately 50 open positions and another 50 filled positions.
The increase in salaries and wages for 2011 compared to 2010 reflected the full year impact of additional staff
employed as a result of a third quarter of 2010 FDIC-assisted transaction, the expansion of commercial sales staff,
annual merit increases, higher incentive compensation, and severance-related costs stemming from an
organizational realignment.
The variance in retirement and other employee benefits for 2011 compared to 2010 was driven by a $2.0 million
increase in profit sharing expense, a one-time $1.3 million correction of the 2010 actuarial pension expense
calculation, the impact of changes in overall staffing levels, and costs stemming from an organizational
realignment.
54
OREO expense for 2011 declined 67.4% from 2010. Prior year OREO expense was elevated due to higher levels of
write-downs, losses on sales of OREO, operating expenses incurred to maintain OREO properties, and servicing
costs for covered OREO.
Loan remediation costs rose as a result of an increase in real estate taxes paid to preserve our rights to collateral
associated with problem loans as well as higher legal fees incurred to remediate problem credits.
Additional property tax expense from higher assessments and costs associated with operating branches acquired
through FDIC-assisted transactions accounted for the increase in occupancy and equipment expense for 2011
compared to 2010.
FDIC premiums decreased in 2011 compared to 2010 primarily due to a regulatory change in calculating the
premium. Specifically, the assessment base uses average consolidated total assets minus average tangible equity
rather than domestic deposits.
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 three years ended December 31, 2012 is detailed in the following table.
Table 6
Income Tax (Benefit) Expense Analysis
(Dollar amounts in thousands)
Years ended December 31,
2011
2010
2012
(Loss) income before income tax (benefit) expense ...................
Income tax (benefit) expense:
$
(49,936)
$ 41,071
$ (38,228)
Federal income tax (benefit) expense ...................................
State income tax (benefit) expense ......................................
$ (23,728)
(5,154)
Total income tax (benefit) expense .........................................
$ (28,882)
Effective income tax rate.......................................................
57.8%
$
$
3,534
974
4,508
11.0%
$ (23,821)
(4,723)
$ (28,544)
74.7%
Federal income tax (benefit) expense and the related effective income tax rate are primarily influenced by the
amount of tax-exempt income derived from investment securities and bank-owned life insurance in relation to
pre-tax (loss) income and state income taxes. State income tax (benefit) expense and the related effective income
tax rate are influenced by the amount of state tax-exempt income in relation to pre-tax (loss) income and state tax
rules related to consolidated/combined reporting and sourcing of income and expense.
Income tax benefits totaled $28.9 million for the year ended December 31, 2012 in comparison to income tax
expense of $4.5 million for the year ended December 31, 2011 and income tax benefits of $28.5 million for the year
ended December 31, 2010. The year-to-year variances were attributable primarily to changes in pre-tax (loss)
income from year to year, as well as decreases in tax-exempt income and the impact of the Illinois tax law change
described below.
Effective January 1, 2011, the Illinois corporate income tax rate increased from 7.3% to 9.5%. We recorded a
$1.6 million income tax benefit in the first quarter of 2011 related to the resulting increase in our deferred tax asset
driven by this rate change.
Our accounting policies for the recognition of income taxes in the Consolidated Statements of Financial Condition
and Income are included in Notes 1 and 14 of ‘‘Notes to the Consolidated Financial Statements’’ in Item 8 of this
Form 10-K.
55
FINANCIAL CONDITION
INVESTMENT PORTFOLIO MANAGEMENT
Securities that we have the positive intent and ability to hold until maturity are classified as securities
held-to-maturity and are accounted for using historical cost, adjusted for amortization of premiums and accretion of
discounts. Trading securities are carried at fair value with changes in fair value included in other noninterest
income. Our trading securities consist of securities held in a grantor trust for our nonqualified deferred
compensation plan and are not considered part of the traditional investment portfolio. All other securities are
classified as securities available-for-sale and are carried at fair value.
We manage our investment portfolio to maximize the return on invested funds within acceptable risk guidelines, to
meet pledging and liquidity requirements, and to adjust balance sheet interest rate sensitivity to mitigate the impact
of changes in interest rates on net interest income.
From time to time, we adjust the size and composition of our securities portfolio according to a number of factors,
including expected loan growth, anticipated changes in collateralized public funds on account, the interest rate
environment, and the related value of various segments of the securities markets.
The following table provides a valuation summary of our investment portfolio.
Table 7
Investment Portfolio Valuation Summary
(Dollar amounts in thousands)
As of December 31, 2012
As of December 31, 2011
As of December 31, 2010
Amortized
Cost
% of
Total
Amortized
Cost
% of
Total
Amortized
Cost
% of
Total
Available-for-Sale
U.S. agency securities .....
CMOs ........................
Other MBSs ................
Municipal securities .......
Trust preferred
collateralized debt
obligations (‘‘CDOs’’) ..
Corporate debt securities
Equity securities ...........
Fair Value
$
508
400,383
122,900
520,043
$
508
397,146
117,785
495,906
12,129
15,339
11,101
46,533
13,006
9,690
Total available-for-sale
1,082,403
1,080,574
Held-to-Maturity
Municipal securities .......
36,023
34,295
Total securities ..........
$ 1,118,426
$ 1,114,869
Fair Value
$
5,035
384,104
87,691
490,071
$
5,060
383,828
81,982
464,282
13,394
30,014
2,697
48,759
27,511
2,189
1,013,006
1,013,611
61,477
60,458
$ 1,074,483
$ 1,074,069
-
35.6
10.6
44.5
4.2
1.2
0.8
96.9
3.1
100.0
Fair Value
$
17,886
379,589
106,451
503,991
$
18,000
377,692
100,780
512,063
14,858
32,345
2,682
49,695
29,936
2,134
1,057,802
1,090,300
82,525
81,320
$ 1,140,327
$ 1,171,620
0.5
35.7
7.7
43.2
4.5
2.6
0.2
94.4
5.6
100.0
1.5
32.3
8.6
43.7
4.2
2.6
0.2
93.1
6.9
100.0
As of December 31, 2012
As of December 31, 2011
Effective
Duration (1)
Average
Life (2)
Yield to
Maturity (3)
Effective
Duration (1)
Average
Life (2)
Yield to
Maturity (3)
Available-for-Sale
U.S. agency securities ................................
CMOs ...................................................
Other MBSs ............................................
Municipal securities ..................................
CDOs ....................................................
Other securities (4) ....................................
Total available-for-sale ............................
Held-to-Maturity
Municipal securities ..................................
Total securities .....................................
0.90%
2.22%
1.97%
4.49%
0.25%
5.51%
3.20%
6.30%
3.29%
0.92
2.93
3.62
3.69
8.36
8.09
3.65
10.53
3.86
0.20%
1.19%
2.79%
5.56%
0.00%
3.65%
3.37%
5.26%
3.43%
0.85%
0.92%
1.96%
3.84%
0.25%
6.07%
2.45%
5.31%
2.61%
0.53
2.19
3.91
3.77
8.57
10.29
3.57
9.33
3.90
4.01%
1.57%
4.50%
6.13%
0.00%
6.45%
3.98%
5.91%
4.08%
(1) The effective duration of the securities portfolio represents the estimated percentage change in the fair value of the securities portfolio given a 100
basis point increase or decrease in the level of interest rates. This measure is used as a gauge of the portfolio’s price volatility at a single point in
time and is not intended to be a precise predictor of future fair values, since those values will be influenced by a number of factors.
(2) Average life is presented in years and represents the weighted-average time to receive all future cash flows using the dollar amount of principal
paydowns, including estimated principal prepayments, as the weighting factor.
(3) Yields on municipal securities are reflected on a tax-equivalent basis, assuming a federal income tax rate of 35%.
(4) This includes corporate debt and equity securities.
56
Portfolio Composition
As of December 31, 2012, our securities portfolio totaled $1.1 billion, increasing 4.1% from December 31, 2011,
following a 5.8% decrease from December 31, 2010. The current year increase resulted primarily from purchases of
CMOs and other MBSs. In the first quarter of 2012, deposits acquired in a fourth quarter of 2011 transaction that
had previously been held in short-term investments were redeployed into these types of securities. Prior to 2012, our
securities portfolio declined over the past three years as we took advantage of opportunities in the market to sell
securities at a gain given the low interest rate environment.
As of December 31, 2012, approximately 96% of our $1.1 billion available-for-sale portfolio was comprised of U.S.
agency securities, municipals, CMOs, and other MBSs. The remainder of the portfolio was comprised of seven
CDOs with a fair value of $12.1 million and an aggregate unrealized loss of $34.4 million, and miscellaneous other
securities with a fair value of $26.4 million.
Investments in municipal securities comprised 48.0%, or $520.0 million, of the total available-for-sale securities
portfolio as of December 31, 2012. This type of security has historically experienced very low default rates and
provided a predictable cash flow. The majority consists of general obligations of local municipalities.
The average life of our investment portfolio as of December 31, 2012 is consistent with the prior year. The decrease
in average life in other securities from December 31, 2011 was driven by the purchase of preferred stock during the
second quarter of 2012, which was amortized over a two-year period based on the stock conversion date.
Securities Sales
Net securities losses were $921,000 for 2012 compared to net securities gains of $2.4 million for 2011 and
$12.2 million for 2010. Net securities losses for 2012 included OTTI charges of $3.7 million on two CDOs and
several CMOs and net gains of $2.7 million from the sale of $153.7 million in CMOs, municipal securities, and
corporate bonds.
Gains on sales of securities of $3.3 million for 2011 resulted from the sale of $188.6 million in CMOs, municipal
securities, and corporate debt securities. We sold these shorter-term investments in order to take advantage of
opportunities in the market. These gains were partially offset by OTTI charges of $936,000 on two CDOs.
In 2010, we sold $390.2 million in CMOs, other MBSs, municipal securities, and corporate bonds for a gain of
$17.1 million. Net securities gains were $12.2 million for 2010 and were net of OTTI charges of $4.9 million
primarily related to our CDOs.
Unrealized Gains and Losses
Unrealized gains and losses on securities available-for-sale represent the difference between the aggregate cost and
fair value of the portfolio. These amounts are presented in the Consolidated Statements of Comprehensive Income
and reported, on an after-tax basis, as a separate component of stockholders’ equity in accumulated other
comprehensive (loss) income. This balance sheet component will fluctuate as current market interest rates and
conditions change and affect the aggregate fair value of the portfolio. Net unrealized gains at December 31, 2012
were $1.8 million compared to net unrealized losses of $605,000 at December 31, 2011.
57
CMOs and other MBSs are either backed by U.S. government-owned agencies or issued by U.S. government-
sponsored enterprises. We do not believe any individual unrealized loss on these types of securities as of
December 31, 2012 represents OTTI since the unrealized losses associated with these securities are not believed to
be attributable to credit quality, but rather to changes in interest rates and temporary market movements.
As of December 31, 2012, gross unrealized gains in the municipal securities portfolio totaled $24.6 million, and
gross unrealized losses were $486,000, resulting in a net unrealized gain of $24.1 million compared to a net
unrealized gain of $25.8 million as of December 31, 2011. Substantially all of these securities carry investment
grade ratings with the majority supported by the general revenues of the issuing governmental entity and supported
by third-party bond insurance or other types of credit enhancement. We do not believe the unrealized loss on any of
these securities represents an OTTI.
Our investments in CDOs are supported by the credit of the underlying banks and insurance companies. The
unrealized loss on these securities declined $961,000 since December 31, 2011. The unrealized loss reflects the
difference between amortized cost and fair value that we determined did not relate to credit and reflects the market’s
unfavorable bias toward these investments. We do not believe any remaining unrealized losses on the CDOs as of
December 31, 2012 represent OTTI. In addition, we do not intend to sell the CDOs with unrealized losses, and we
do not believe it is more likely than not that we will be required to sell them before recovery of their amortized cost
bases, which may be at maturity. Our estimation of cash flows for CDOs was based on discounted cash flow
analyses as described in Note 22 of ‘‘Notes to the Condensed Consolidated Financial Statements,’’ in Item 8 of this
Form 10-K.
Effective Duration
The effective duration of the securities available-for-sale portfolio was 3.20% as of December 31, 2012 compared to
2.45% as of December 31, 2011 and 3.22% as of December 31, 2010. Our CMOs exhibited the largest increase in
effective duration from December 31, 2011 to December 31, 2012. In anticipation of falling interest rates, the
Company invested in longer-term securities to mitigate interest rate risk exposure. The effective duration on the
aggregate investment portfolio declined in 2011 compared to 2010 due to a reduction in the securities portfolio
through sales of longer-term securities and a strategy to not reinvest cash flows from security sales and maturities.
Table 8
Repricing Distribution and Portfolio Yields
(Dollar amounts in thousands)
As of December 31, 2012
One Year or Less
One Year to Five Years
Five Years to Ten Years
After 10 years
Amortized
Cost
Yield to
Maturity (1)
Amortized
Cost
Yield to
Maturity (1)
Amortized
Cost
Yield to
Maturity (1)
Amortized
Cost
Yield to
Maturity (1)
Available-for-Sale
U.S. agency securities............
CMOs (2) ...........................
Other MBSs (2) ....................
Municipal securities (3) ..........
CDOs ...............................
Other securities (4) ................
Total available-for-sale........
Held-to-Maturity
Municipal securities (3) ..........
$
508
166,308
35,825
18,430
-
-
221,071
5,314
Total securities .................
$ 226,385
0.20%
1.12%
2.61%
2.56%
-
-
1.48%
5.65%
1.58%
$
-
213,422
64,531
370,782
-
6,116
654,851
9,803
$
664,654
-
1.22%
2.82%
6.07%
-
5.23%
4.16%
5.02%
4.17%
$
-
15,175
14,332
84,314
-
8,566
122,387
6,213
$
128,600
-
1.30%
3.03%
4.34%
-
1.94%
3.64%
4.51%
3.68%
$
-
2,241
3,097
22,380
46,533
8,014
82,265
12,965
$
95,230
-
1.54%
2.96%
4.33%
-
4.26%
1.75%
5.65%
2.28%
(1) Based on amortized cost.
(2) The repricing distributions and yields to maturity of CMOs and other MBSs are based on estimated future cash flows and prepayments. Actual repricings and yields of the
securities may differ from those reflected in the table depending upon actual interest rates and prepayment speeds.
(3) Yields on municipal securities are reflected on a tax-equivalent basis, assuming a federal income tax rate of 35%. The maturity date of bonds is based on contractual
maturity, unless the bond, based on current market prices, is deemed to have a high probability that the call will be exercised, in which case the call date is used as the
maturity date.
(4) Yields on other securities are reflected on a tax-equivalent basis, assuming a federal income tax rate of 35%. The maturity dates of other securities are based on contractual
maturity or repricing characteristics.
58
LOAN PORTFOLIO AND CREDIT QUALITY
Our principal source of revenue is generated by our lending activities and is composed primarily of interest income
and, to a lesser extent, loan origination and commitment fees (net of related costs). The accounting policies for the
recording of loans in the Consolidated Statements of Financial Condition and the recognition and/or deferral of
interest income and fees in the Consolidated Statements of Income are included in Note 1 of ‘‘Notes to the
Consolidated Financial Statements’’ in Item 8 of this Form 10-K.
Portfolio Composition
Our loan portfolio is comprised of both corporate and consumer loans with corporate loans representing 86.3% of
total loans outstanding at December 31, 2012. The corporate loan component consists of commercial and
industrial, agricultural, and commercial real estate lending categories. Consistent with our emphasis on relationship
banking, the majority of our loans are made to our core, multi-relationship customers. The customers usually
maintain deposit relationships and utilize our other banking services, such as cash management 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 is provided with frequent reports related to loan
production, loan quality, credit concentrations, loan delinquencies, and non-performing and potential problem
loans to mitigate and monitor the potential for risk. We do not offer any sub-prime products, and we have policies to
limit our exposure to any single borrower.
Table 9
Loan Portfolio
(Dollar amounts in thousands)
As of December 31,
Commercial and industrial................
Agricultural.................................
Commercial real estate:
Office ....................................
Retail .....................................
Industrial .................................
Multi-family .............................
Residential construction ................
Commercial construction...............
Other commercial real estate ..........
2012
$ 1,631,474
268,618
474,717
368,796
489,678
285,481
61,462
124,954
773,121
Total commercial real estate .....
2,578,209
Total corporate loans ...................
4,478,301
Home equity................................
1-4 family mortgages......................
Installment loans ...........................
Total consumer loans ...................
Total loans, excluding covered
390,033
282,948
38,394
711,375
% of
Total
31.5
5.2
9.1
7.1
9.4
5.5
1.2
2.4
14.9
49.6
86.3
7.5
5.5
0.7
13.7
2011
$ 1,458,446
243,776
444,368
334,034
520,680
288,336
105,836
144,909
888,146
2,726,309
4,428,531
416,194
201,099
42,289
659,582
% of
Total
28.7
4.8
8.7
6.6
10.2
5.7
2.1
2.8
17.4
53.5
87.0
8.2
4.0
0.8
13.0
2010
$ 1,465,903
227,756
396,836
328,751
478,026
349,862
174,690
164,472
856,357
2,748,994
4,442,653
445,243
160,890
51,774
657,907
% of
Total
28.7
4.5
7.8
6.4
9.4
6.9
3.4
3.2
16.8
53.9
87.1
8.7
3.2
1.0
12.9
2009
$ 1,438,063
209,945
394,228
331,803
486,934
333,961
313,919
231,518
798,983
2,891,346
4,539,354
470,523
139,983
53,386
663,892
% of
Total
27.6
4.0
7.6
6.4
9.3
6.4
6.0
4.5
15.4
55.6
87.2
9.1
2.7
1.0
12.8
2008
$ 1,490,101
216,814
339,912
265,568
419,761
286,963
509,059
356,575
729,329
2,907,167
4,614,082
477,105
198,197
70,679
745,981
% of
Total
27.8
4.1
6.3
5.0
7.8
5.4
9.5
6.6
13.6
54.2
86.1
8.9
3.7
1.3
13.9
loans ................................
5,189,676
100.0
5,088,113
100.0
5,100,560
100.0
5,203,246
100.0
5,360,063
100.0
Covered loans (1) ...........................
197,894
Total loans ............................
$ 5,387,570
260,502
$ 5,348,615
371,729
$ 5,472,289
146,319
$ 5,349,565
–
$ 5,360,063
(1) For a detailed discussion of our covered loans and the related accounting policy for covered loans, refer to Notes 1 and 5 of ‘‘Notes to the Condensed Consolidated Financial Statements’’ in Item 8 of this
Form 10-K.
2012 Compared to 2011
Total loans of $5.4 billion as of December 30, 2012 grew $39.0 million from December 31, 2011. Excluding
covered loans, net charge-offs of $172.6 million, $89.3 million of loans disposed through bulk loan sales, and
$46.3 million of loans acquired in the Waukegan Savings transaction, our loan portfolio increased by approximately
6.5% from December 31, 2011. The loan portfolio benefitted from growth of 11.9% in commercial and industrial
59
loans, 10.2% in agricultural loans, 8.4% in office and retail loans, and 40.7% in 1-4 family mortgages. The increase
in commercial and industrial loans was driven by the targeted redistribution of the loan portfolio from commercial
real estate into this category, significant investments in high level sales staff, and refocusing current staff away from
remediation activities. Strong origination efforts primarily contributed to growth in 1-4 family mortgages, in
addition to loans acquired in the Waukegan Savings transaction. Decreases in the residential and commercial
construction portfolios were driven by efforts to reduce lending exposure in these categories.
Covered loans decreased $62.6 million, or 24.0%, from December 31, 2011, reflecting the continued decline in this
portfolio, as well as charge-offs and transfers to OREO.
2011 Compared to 2010
Total loans, including covered loans, of $5.3 billion as of December 30, 2011 declined $123.7 million, or 2.3%,
from $5.5 billion as of December 31, 2010. The continued decline in covered loan balances accounted for the
majority of this reduction.
Total loans, excluding covered loans, as of December 31, 2011 were stable compared to December 31, 2010. The
office, retail, and industrial and other commercial real estate portfolios exhibited 6.2% growth during this period,
substantially in the form of owner-occupied business relationships. Offsetting this growth, we continued to reduce
our exposure to the higher risk construction categories during 2011.
Comparisons of Prior Years (2010, 2009, and 2008)
Total loans, including covered loans, were $5.5 billion as of December 31, 2010, an increase of $122.7 million, or
2.3%, from December 31, 2009. The increase was driven by the addition of covered loans acquired through
FDIC-assisted transactions, which more than offset declines in the residential and commercial construction
categories.
Outstanding loans, excluding covered loans, of $5.1 billion as of December 31, 2010 declined $102.7 million, or
2.0%, from December 31, 2009, reflecting charge-offs of $147.1 million and the stressed economic conditions of
2010. Growth of 1.9% in commercial and industrial loans, 4.8% in multi-family loans, and 7.2% in other
commercial real estate lending more than offset the 37.8% decline in the commercial and residential construction
loan portfolios that resulted from our continued efforts to remediate problem credits in these lending categories.
Covered loans grew to $371.7 million at December 31, 2010 compared to $146.3 million at December 31, 2009
from the completion of two FDIC-assisted transactions.
Outstanding loans, excluding covered loans, totaled $5.2 billion as of December 31, 2009, a decrease of 2.9% from
December 31, 2008. During 2009, extensions of new credit were more than offset by paydowns, net charge-offs,
conversion of loans to OREO, and the securitization of 1-4 family mortgages.
Accelerated Credit Remediation Actions
Based on the longer term prospects for the resolution of planned remediation strategies and credit improvement, we
adjusted existing remediation strategies or pursued disposal through bulk loan sales for certain potential problem
and non-performing loans during the third quarter of 2012. These actions were undertaken after careful analysis of
the potential costs and benefits, including an assessment of the impact of continuing the remediation process for
these assets and the estimated timeframe for resolution.
During the third quarter of 2012, we identified certain non-performing and performing potential problem loans for
accelerated disposition through multiple bulk loan sales and recorded charge-offs of $80.3 million. The bulk loan
sales of $172.5 million in original carrying value were completed in the fourth quarter of 2012, resulting in
proceeds of $94.5 million and a gain, less commissions and other selling expenses, of $2.6 million.
60
The following table summarizes the loans sold in the bulk loan sales by category.
Table 10
Loans Sold in Bulk Sales in 2012
(Dollar amounts in thousands)
Carrying Amount of Loans Prior to Transfer to
Held-for-Sale
Commercial and industrial ................
Agricultural ....................................
Commercial real estate:
Office, retail, and industrial ...........
Multi-family ................................
Residential construction ................
Commercial construction ...............
Other commercial real estate..........
Total commercial real estate .......
Home equity ...................................
1-4 family mortgages .......................
Total consumer loans ....................
Pass
$ 2,868
-
4,272
-
-
-
855
5,127
1,500
160
1,660
Substandard/
Special
Mention
Non-accrual
Total
$
23,858
7,411
$
21,819
1,308
$
24,975
2,380
8,066
2,032
29,602
67,055
-
-
-
20,653
1,829
6,900
2,026
9,903
41,311
57
-
57
48,545
8,719
49,900
4,209
14,966
4,058
40,360
113,493
1,557
160
1,717
Charge-offs
at Date of
Transfer
$
22,508
4,356
23,696
1,859
5,690
1,850
19,438
52,533
773
90
863
Total loans sold in bulk sales......
$ 9,655
$
98,324
$
64,495
$
172,474
$
80,260
In addition to the bulk loan sales, we modified disposition strategies on $52.4 million of select credits, which
resulted in additional charge-offs of $18.8 million during the third quarter of 2012. These credits represented either
non-performing loans that were resolved through foreclosure with the underlying collateral being transferred to
OREO or performing loans that were transferred to non-accrual status to facilitate future restructuring.
Commercial, Industrial, and Agricultural Loans
Our commercial and industrial loans are a diverse group of loans to middle market businesses generally located in
the Chicago metropolitan area with purposes that range from supporting seasonal working capital needs to term
financing of equipment. The underwriting for these loans is based primarily on the identified cash flows of the
borrower and secondarily on the underlying collateral provided by the borrower. Most commercial and industrial
loans are secured by the assets being financed or other business assets, such as accounts receivable or inventory, and
may incorporate a personal guarantee. Agricultural loans generally provide seasonal support and are secured by
facilities and equipment in addition to crop production, which is usually covered by crop insurance.
61
Table 11
Commercial, Industrial, and Agricultural Loans
(Dollar amounts in thousands)
2012
Amount
$ 1,414,667
90,577
118,351
% of
Total
74.5
4.8
6.2
As of December 31,
2011
Amount
$ 1,237,097
114,546
96,328
% of
Total
72.7
6.7
5.7
2010
Amount
$ 1,226,398
140,854
84,496
% of
Total
72.4
8.3
5.0
7,879
0.4
10,475
0.6
14,155
0.9
Commercial and industrial ..
Small business ..................
Tax-exempt loans (1)...........
Overdrawn demand
deposits, loan payment
control, and other (2) .......
Total commercial and
industrial ...................
1,631,474
Agricultural – operating .....
Agricultural – farmland......
Total agricultural ...........
123,609
145,009
268,618
85.9
6.5
7.6
14.1
1,458,446
133,136
110,640
243,776
85.7
7.8
6.5
14.3
1,465,903
131,855
95,901
227,756
86.6
7.8
5.6
13.4
Total commercial,
industrial, and
agricultural loans ....
Commercial, industrial, and
agricultural loans as a
percent of loans,
excluding covered loans ..
$ 1,900,092
100.0
$ 1,702,222
100.0
$ 1,693,659
100.0
36.7%
33.5%
33.2%
(1) Represents obligations due from municipalities. These obligations primarily represent industrial revenue bonds and are separate
and distinct from the municipal securities presented in Table 7.
(2) Consists of proceeds on new loans, net of loan payments received, that have not yet been applied to specific accounts.
Commercial, industrial, and agricultural loans increased $197.9 million from $1.70 billion at December 31, 2011 to
$1.90 billion at December 31, 2012. This 11.6% growth reflects progress in our targeted redistribution of the loan
portfolio from commercial real estate into commercial and industrial categories, as well as strong origination
efforts. We made progress on this initiative through significant investments in high level sales staff in addition to
refocusing current staff away from remediation efforts.
Commercial Real Estate Loans
A major focus for the commercial real estate portfolio is to grow loans secured by owner-occupied real estate.
These loans are viewed primarily as cash flow loans (similar to commercial and industrial loans) and secondarily as
loans secured by real estate. Commercial real estate loans are subject to underwriting standards and processes
similar to commercial and industrial loans, in addition to those standards and processes specific to real estate loans.
Commercial real estate lending typically involves higher loan principal amounts, and the repayment of these loans
is largely dependent upon the successful operation of the property securing the loan or the business conducted on
the property securing the loan. This category of loans may be more adversely affected by conditions in the real
estate market or in the general economy. The properties securing our commercial real estate portfolio are diverse in
terms of type and geographic location within the Company’s markets. Management monitors and evaluates
commercial real estate loans based on cash flow, collateral, geography, and risk grade criteria.
62
Table 12
Commercial Real Estate Loans
(Dollar amounts in thousands)
December 31, 2012
December 31, 2011
Owner-
Occupied
Investor
Total
Owner-
Occupied
Investor
Total
Office, retail, and industrial:
Office.......................................
Retail .......................................
Industrial...................................
$ 167,221
115,570
270,484
$
Total office, retail, and industrial ....
553,275
Multi-family..................................
Residential construction ...................
Commercial construction .................
Other commercial real estate:
Rental properties (1) .....................
Service stations and truck stops .....
Warehouses and storage................
Hotels ......................................
Restaurants ................................
Automobile dealers......................
Mobile home parks......................
Recreational ...............................
Religious...................................
Medical ....................................
Multi-use properties.....................
Other........................................
-
-
-
26,902
95,794
77,290
-
62,921
39,392
-
32,804
28,301
-
14,295
32,401
307,496
253,226
219,194
779,916
285,481
61,462
124,954
94,272
18,727
33,077
73,347
17,509
5,729
27,147
8,254
895
816
48,825
34,423
Total other commercial real estate...
410,100
363,021
$
474,717
368,796
489,678
$ 146,818
89,831
298,887
$
1,333,191
535,536
285,481
61,462
124,954
121,174
114,521
110,367
74,098
80,430
45,121
27,147
41,058
29,196
2,592
63,120
64,297
773,121
-
-
-
31,417
102,870
89,293
-
59,460
31,588
-
26,826
23,919
19,808
59,068
8,802
453,051
297,550
244,203
221,793
763,546
288,336
105,836
144,909
95,668
26,061
40,198
73,889
19,407
4,189
30,071
7,882
178
1,051
96,517
39,984
435,095
$
444,368
334,034
520,680
1,299,082
288,336
105,836
144,909
127,085
128,931
129,491
73,889
78,867
35,777
30,071
34,708
24,097
20,859
155,585
48,786
888,146
Total commercial real estate .......
$ 963,375
$ 1,614,834
$ 2,578,209
$ 988,587
$ 1,737,722
$ 2,726,309
Commercial real estate loans,
excluding multi-family and
construction loans .......................
Percent of total (2) ....................
$ 963,375
45.7%
$ 1,142,937
54.3%
$ 2,106,312
$ 988,587
45.2%
$ 1,198,641
54.8%
$ 2,187,228
(1) Owner-occupied rental properties primarily represent home-based businesses.
(2) The percent reported does not include multi-family or construction loans since the owner-occupied classification is not relevant to these
categories.
Commercial real estate loans represent 49.6% of loans, excluding covered loans, and totaled $2.6 billion at
December 31, 2012, a decrease of $148.1 million, or 5.4%, from December 31, 2011. Commercial real estate loans
declined compared to 2011 from decreases in the construction portfolio, fueled by efforts to reduce lending
exposure to less favorable categories. In addition, $113.5 million in original carrying value of certain commercial
real estate loans were disposed in the bulk sales during 2012 and contributed to the decrease.
Over half of our commercial real estate loans consist of loans for industrial buildings, office buildings, and retail
shopping centers. Approximately 42% of the office, retail, and industrial loans were owner-occupied as of
December 31, 2012. Other types of commercial real estate loans include construction loans for single-family and
multi-family dwellings, residential projects, and commercial projects and loans for various types of other
commercial properties, such as land for future commercial development, multi-unit residential mortgages, service
stations, and hotels.
63
Construction Loans
Construction loans are generally based upon estimates of costs and value associated with the completed projects
and are underwritten utilizing feasibility studies, independent appraisal reviews, sensitivity analyses of absorption
and lease rates, and financial analyses of the developers and property owners. Construction loans often involve the
disbursement of substantial funds with repayment primarily dependent upon the success of the completed project.
Sources of repayment may be permanent loans from long-term lenders, sales of developed property, or an interim
loan commitment until permanent financing is obtained. Generally, these loans have a higher risk profile than other
real estate loans due to their repayment being sensitive to real estate values, interest rate changes, governmental
regulation of real property, demand and supply of alternative real estate, the availability of long-term financing, and
changes in general economic conditions.
We typically underwrite construction loans as combination construction and post-construction loans secured by the
underlying real estate. These loans are reported as construction loans until construction is completed or principal
amortization payments begin, and then are reclassified to the loan category appropriate to the nature of the
underlying collateral or purpose of the completed project. Since these types of loans are initially underwritten to
consider both construction and post-construction financing, no additional underwriting takes place at the time the
completed construction loan migrates to other loan categories. Upon completion of the construction project and
transfer into other loan categories, these loans retain their performance status and risk rating. For example, if a
construction loan was on non-accrual at the time of completion, it would be transferred to the appropriate loan
category as a non-accrual loan.
64
Table 13
Construction Loans by Type
(Dollar amounts in thousands)
Residential
Construction
Commercial
Construction
Combined
Amount
% of
Total
Amount
% of
Total
Amount
% of
Total
$
As of December 31, 2012
Raw land ...........................
Developed land...................
Construction ......................
Substantially completed
structures .......................
Mixed and other .................
15,164
23,635
12,774
9,889
-
24.7
38.4
20.8
16.1
-
$
35,019
33,218
13,206
38,196
5,315
28.0
26.6
10.6
30.6
4.2
$
50,183
56,853
25,980
48,085
5,315
26.9
30.5
13.9
25.8
2.9
Total..............................
$
61,462
100.0
$
124,954
100.0
$
186,416
100.0
Weighted-average maturity
(in years) .......................
Construction loans as a
percent of loans,
excluding covered loans....
Construction loans as a
percent of commercial real
estate loans.....................
As of December 31, 2011
Raw land ...........................
Developed land...................
Construction ......................
Substantially completed
structures .......................
Mixed and other .................
$
0.76
1.2%
2.4%
24,981
55,501
12,133
12,195
1,026
0.69
2.4%
4.8%
42,768
57,949
14,415
27,221
2,556
$
23.6
52.4
11.5
11.5
1.0
0.71
3.6%
7.2%
29.5
40.0
9.9
18.8
1.8
$
67,749
113,450
26,548
39,416
3,582
27.0
45.3
10.6
15.7
1.4
Total..............................
$
105,836
100.0
$
144,909
100.0
$
250,745
100.0
Weighted-average maturity
(in years) .......................
Construction loans as a
percent of loans,
excluding covered loans....
Construction loans as a
percent of commercial real
estate loans.....................
0.63
2.1%
3.9%
0.74
2.8%
5.3%
0.69
4.9%
9.2%
Construction loans account for 7.2% of our commercial real estate portfolio as of December 31, 2012. Total
construction loans of $186.4 million consist of $61.5 million of residential construction and $125.0 million of
commercial construction.
Total construction loans decreased by $64.3 million, or 25.7%, from December 31, 2011 to December 31, 2012. We
made significant progress in continuing to reduce our exposure to this lending category through the disposition of
$19.0 million of original carrying value through the bulk loan sales. In addition, charge-offs, principal paydowns,
reclassification of completed construction projects into other loan categories, and transfers of loans to OREO
contributed to the decline in the portfolio.
65
Maturity and Interest Rate Sensitivity of Corporate Loans
The following table summarizes the maturity distribution of our corporate loan portfolio as of December 31, 2012,
as well as the interest rate sensitivity of the loans that have maturities in excess of one year. For additional
discussion of interest rate sensitivity, refer to Item 7A, ‘‘Quantitative and Qualitative Disclosures about Market
Risk,’’ of this Form 10-K.
Table 14
Maturities and Sensitivities of Corporate Loans to Changes in Interest Rates
(Dollar amounts in thousands)
Due in 1 year
or less
Commercial, industrial, and agricultural ..
Commercial real estate .........................
$
1,082,340
888,984
Total ...........................................
$ 1,971,324
Loans maturing after one year:
Fixed interest rates............................
Floating interest rates ........................
Total ...........................................
As of December 31, 2012
Due after
1 year
through
5 years
Due after
5 years
$
$
$
$
676,185
1,510,712
2,186,897
1,900,954
285,943
2,186,897
$
$
$
$
141,567
178,513
320,080
300,000
20,080
320,080
Total
$
$
1,900,092
2,578,209
4,478,301
66
Consumer Loans
Consumer loans are centrally underwritten utilizing the Fair Isaac Corporation (‘‘FICO’’) credit scoring. This is a
credit score, with a scale that ranges from 300 to 850, developed by Fair Isaac Corporation that is used by many
lenders. It uses a risk-based system to determine the probability that a borrower may default on financial
obligations. 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 value of the
appraised collateral.
Table 15
Consumer Loans
(Dollar amounts in thousands)
2012
Amount
Home equity ............................
1-4 family mortgages ................
Installment loans ......................
$
390,033
282,948
38,394
As of December 31,
2011
% of
Total
54.8
39.8
5.4
Amount
$
416,194
201,099
42,289
% of
Total
63.1
30.5
6.4
2010
Amount
$
445,243
160,890
51,774
% of
Total
67.7
24.5
7.8
Total consumer loans .............
$
711,375
100.0
$
659,582
100.0
$
657,907
100.0
As of December 31, 2012
Average
Average
Loan to
FICO Score Value Ratio
Home equity loans .....................................................................................
1-4 family mortgages ..................................................................................
722
660
79.8%
76.0%
As of December 31, 2012, consumer loans represented 13.7% of loans, excluding covered loans. Loans acquired in
the Waukegan Savings transaction and origination efforts drove the rise in 1-4 family mortgages during 2012. This
was offset by the sale of $50.3 million of mortgage loans during 2012.
67
Non-Performing Assets and Potential Problem Loans
The following table presents our loan portfolio by performing and non-performing status.
Table 16
Loan Portfolio by Performing/Non-Performing Status
(Dollar amounts in thousands)
Total Loans
Current
Accruing
30-89 Days
Past Due
90 Days
Past Due
As of December 31, 2012
Commercial and industrial ................
Agricultural ...................................
Commercial real estate:
Office ....................................
Retail .....................................
Industrial ................................
Multi-family ............................
Residential construction .............
Commercial construction............
Other commercial real estate.......
Total commercial real estate ....
Total corporate loans ....................
Home equity ..................................
1-4 family mortgages.......................
Installment loans.............................
Total consumer loans....................
Total loans, excluding covered
loans ..................................
Covered loans .............................
$
1,631,474
268,618
$
1,598,342
266,991
$
474,717
368,796
489,678
285,481
61,462
124,954
773,121
2,578,209
4,478,301
390,033
282,948
38,394
711,375
5,189,676
197,894
471,242
358,945
475,416
283,415
56,850
124,081
749,114
2,519,063
4,384,396
375,804
270,784
35,936
682,524
5,066,920
145,751
4,534
79
871
2,415
255
479
-
-
1,053
5,073
9,686
6,349
4,241
2,390
12,980
22,666
6,514
$
2,138
375
197
626
-
153
-
-
1,534
2,510
5,023
1,651
1,947
68
3,666
8,689
31,447
TDRs
Non-accrual
$
519
-
$
25,941
1,173
-
-
-
-
-
-
5,206
5,206
5,725
40
1,102
-
1,142
6,867
-
2,407
6,810
14,007
1,434
4,612
873
16,214
46,357
73,471
6,189
4,874
-
11,063
84,534
14,182
Total loans ..............................
$
5,387,570
$
5,212,671
$
29,180
$
40,136
$
6,867
$
98,716
As of December 31, 2011
Commercial and industrial .............
Agricultural ................................
Commercial real estate:
Office .................................
Retail..................................
Industrial .............................
Multi-family .........................
Residential construction ..........
Commercial construction ........
Other commercial real estate ...
Total commercial real estate ....
Total corporate loans .................
Home equity...............................
1-4 family mortgages ...................
Installment loans .........................
Total consumer loans ................
Total loans, excluding covered
loans ..................................
Covered loans ..........................
Total Loans
Current
Accruing
30-89 Days
Past Due
90 Days
Past Due
TDRs
Non-accrual
$
1,458,446
243,776
$
1,397,569
242,727
$
10,283
30
$
444,368
334,034
520,680
288,336
105,836
144,909
888,146
2,726,309
4,428,531
416,194
201,099
42,289
659,582
5,088,113
260,502
436,881
326,922
501,674
270,138
87,482
121,562
829,492
2,574,151
4,214,447
400,570
190,052
41,133
631,755
4,846,202
193,044
-
395
385
604
278
-
5,273
6,935
17,248
5,986
3,636
625
10,247
27,495
4,232
4,991
-
-
52
988
-
-
-
1,707
2,747
7,738
1,138
-
351
1,489
9,227
43,347
$
1,451
-
$
-
1,742
-
11,107
-
-
227
13,076
14,527
1,093
2,089
155
3,337
17,864
-
44,152
1,019
7,487
4,923
17,633
6,487
18,076
23,347
51,447
129,400
174,571
7,407
5,322
25
12,754
187,325
19,879
Total loans ...........................
$
5,348,615
$
5,039,246
$
31,727
$
52,574
$
17,864
$
207,204
68
The following table provides a comparison of our non-performing assets and past due loans for the past five years.
Table 17
Non-Performing Assets and Past Due Loans
(Dollar amounts in thousands)
2012
2011
As of December 31,
2010
2009
2008
Non-performing assets, excluding covered loans and covered OREO
187,325
Non-accrual loans...............................
9,227
90 days or more past due loans.............
84,534
8,689
$
$
Total non-performing loans ...............
TDRs (still accruing interest)................
OREO ..............................................
93,223
6,867
39,953
Total non-performing assets ..............
$ 140,043
30-89 days past due loans ....................
Non-accrual loans to total loans ............
Non-performing loans to total loans.......
Non-performing assets to loans plus
OREO ...........................................
Covered loans and covered OREO (1)
Non-accrual loans...............................
90 days or more past due loans.............
Total non-performing loans ...............
TDRs (still accruing interest)................
OREO ..............................................
Total non-performing assets ..............
30-89 days past due loans ....................
$
$
$
$
22,666
1.63%
1.80%
2.68%
14,182
31,447
45,629
-
13,123
58,752
6,514
196,552
17,864
33,975
248,391
27,495
3.68%
3.86%
4.85%
19,879
43,347
63,226
-
23,455
86,681
4,232
$
$
$
$
$
Non-performing assets, including covered loans and covered OREO
207,204
Non-accrual loans...............................
52,574
90 days or more past due loans.............
98,716
40,136
$
$
Total non-performing loans ...............
TDRs (still accruing interest)................
OREO ..............................................
138,852
6,867
53,076
Total non-performing assets ..............
$ 198,795
30-89 days past due loans ....................
Non-accrual loans to total loans ............
Non-performing loans to total loans.......
Non-performing assets to loans plus
OREO ...........................................
$
29,180
1.83%
2.58%
3.65%
$
$
259,778
17,864
57,430
335,072
31,727
3.87%
4.86%
6.20%
$
$
$
$
$
$
$
$
$
211,782
4,244
216,026
22,371
31,069
269,466
23,646
4.15%
4.24%
5.25%
-
84,350
84,350
-
22,370
106,720
18,445
211,782
88,594
300,376
22,371
53,439
376,186
42,091
3.87%
5.49%
6.81%
$
$
$
$
$
$
$
$
$
244,215
4,079
248,294
30,553
57,137
335,984
37,912
4.69%
4.77%
6.39%
-
30,286
30,286
-
8,981
39,267
22,988
244,215
34,365
278,580
30,553
66,118
375,251
60,900
4.57%
5.21%
6.93%
The effect of non-accrual loans on interest income for 2012 is presented below:
Interest which would have been included at the contract rates .........................................................
Less: Interest included in income during the year ..........................................................................
Interest income not recognized in the financial statements ...........................................................
$
$
$
$
$
$
$
$
$
$
$
127,768
36,999
164,767
7,344
24,368
196,479
116,206
2.38%
3.07%
3.65%
-
-
-
-
-
-
-
127,768
36,999
164,767
7,344
24,368
196,479
116,206
2.38%
3.07%
3.65%
7,173
2,185
4,988
(1) For a discussion of covered loans and covered OREO, refer to Note 5 of ‘‘Notes to the Consolidated Financial Statements’’ in
Item 8 of this Form 10-K. Past due covered loans are based on contractual terms, but continue to perform in accordance with our
expectations of cash flows.
Non-performing assets, excluding covered loans and covered OREO, represented 2.68% of total loans plus OREO
as of December 31, 2012 compared to 4.85% as of December 31, 2011 and 5.25% as of December 31, 2010.
Non-performing assets, excluding covered loans and covered OREO, were $140.0 million as of December 31, 2012,
declining by $108.3 million, or 43.6%, compared to December 31, 2011. This improvement was driven primarily by
69
a decline in non-accrual loans, which reflects the aggressive remediation actions taken by management during
2012, and the return of accruing TDRs to performing status. For additional details, please refer to the section titled
‘‘Accelerated Credit Remediation Actions’’ of this Item 7.
From December 31, 2010 to December 31, 2011, gross reductions of non-performing assets resulted primarily from
non-accrual loans that were sold, paid-off, or transferred to held-for-sale and OREO properties sold during 2011.
For additional details, please refer to the sections titled ‘‘Disposals of Loans’’ and ‘‘OREO Activity’’ of this Item 7.
The improvement in the asset quality measures from December 31, 2009 to December 31, 2010 was substantially
due to loan charge-offs, OREO write-downs, and disposals of non-performing assets, partially offset by loans
downgraded to non-accrual status.
Non-performing covered loans and covered OREO were recorded at their estimated fair values at the time of
acquisition. These assets are covered by the FDIC Agreements that substantially mitigate the risk of loss. Generally,
covered loans are considered accruing loans. However, the timing and amount of future cash flows for some loans
may not be reasonably estimable. Those loans were classified as non-accrual loans as of December 31, 2012, and
interest income will not be recognized until the timing and amount of the future cash flows can be reasonably
estimated. Past due covered loans are past due based on contractual terms but continue to perform in accordance
with our expectations of cash flows.
Non-accrual Loans
Non-accrual loans, excluding covered loans, declined to $84.5 million as of December 31, 2012 from
$187.3 million as of December 31, 2011 following a decline from $211.8 million as of December 31, 2010. The
decline in non-accrual loans from December 31, 2011 to December 31, 2012 resulted from the bulk loan sales,
payments, charge-offs, and transfers to OREO, which more than offset the amount of loans downgraded from
performing to non-accrual status during 2012.
The amount of loans downgraded from performing to non-accrual during 2012 totaled $152.7 million, decreasing
from $194.3 million in 2011 and $214.5 million during 2010. Targeted remediation efforts and the disposal of loans
in the bulk loan sales during 2012 drove the decline in loans downgraded to non-accrual status.
A discussion of our accounting policies for non-accrual loans is contained in Note 1 of ‘‘Notes to the Consolidated
Financial Statements’’ in Item 8 of this Form 10-K.
70
TDRs
Loan modifications are generally performed at the request of the individual borrower and may include reductions in
interest rates, changes in payments, and maturity date extensions. A discussion of our accounting policies for TDRs
is contained in Note 1 of ‘‘Notes to the Consolidated Financial Statements’’ in Item 8 of this Form 10-K.
Table 18
TDRs by Type
(Dollar amounts in thousands)
December 31, 2012
December 31, 2011
December 31, 2010
Number of
Loans
Amount
Number of
Loans
Amount
Number of
Loans
Commercial and industrial ...................
Agricultural ......................................
Commercial real estate:
Office ..........................................
Retail ...........................................
Industrial ......................................
Multi-family ..................................
Residential construction ...................
Commercial construction..................
Other commercial real estate.............
Total commercial real estate ..........
Home equity loans .............................
1-4 family mortgages .........................
Installment loan.................................
Total consumer ...........................
Total TDRs ................................
TDRs, still accruing interest ................
TDRs included in non-accrual ..............
Total TDRs ................................
Charge-offs on restructured loans ..........
Specific reserves related to restructured
loans............................................
6
-
-
2
-
1
-
-
7
10
7
16
-
23
39
19
20
39
$
$
$
$
$
$
3,064
-
-
2,407
-
150
-
-
9,855
12,412
274
2,041
-
2,315
17,791
6,867
10,924
17,791
10,003
2,794
20
-
-
2
-
9
-
1
9
21
25
26
1
52
93
57
36
93
$
$
$
$
$
$
2,348
-
-
1,742
-
12,865
-
14,006
11,644
40,257
1,564
3,382
155
5,101
47,706
17,864
29,842
47,706
8,890
94
46
1
1
-
2
9
4
-
13
29
50
49
-
99
175
120
55
175
Amount
$
23,404
1,986
142
-
1,911
3,193
8,323
-
7,229
20,798
3,233
6,703
-
9,936
56,124
22,371
33,753
56,124
11,534
-
$
$
$
$
$
At December 31, 2012, we had TDRs totaling $17.8 million, a decrease of $29.9 million, or 62.7%, from
December 31, 2011. The December 31, 2012 total includes $6.9 million in loans that were restructured at market
terms and are accruing interest. After a sufficient period of performance under the modified terms, these loans will
be reclassified to performing status.
We have other TDRs totaling $10.9 million as of December 31, 2012, which are reported as non-accrual because
they are not performing in accordance with their modified terms or there has not been sufficient performance under
the modified terms. We occasionally restructure loans at other than market rates or terms to enable the borrower to
work through financial difficulties for a set period of time, and these restructures remain classified as TDRs for the
remaining terms of the loans.
Potential Problem Loans
Potential problem loans consist of special mention loans and substandard loans. These loans are performing in
accordance with contractual terms, but management has concerns about the ability of the obligor to continue to
comply with repayment terms because of the obligor’s potential operating or financial difficulties.
71
Table 19
Potential Problem Loans
(Dollar amounts in thousands)
Commercial and industrial..................
Agricultural.....................................
Commercial real estate:
Office, retail, and industrial.............
Multi-family .................................
Residential construction ..................
Commercial construction ................
Other commercial construction.........
Total commercial real estate .........
Special
Mention (1)
$
37,833
331
57,271
1,921
11,870
14,340
14,056
99,458
December 31, 2012
December 31, 2011
Substandard (2)
Total
Special
Mention (1)
Substandard (2)
Total
$
8,768
-
16,746
-
11,588
14,174
30,149
72,657
$
46,601
331
$
74,017
1,921
23,458
28,514
44,205
57,866
10,487
78,578
5,803
27,198
23,587
73,058
172,115
208,224
$
47,616
-
43,435
1,015
11,756
5,407
17,428
79,041
$ 105,482
10,487
122,013
6,818
38,954
28,994
90,486
287,265
Total corporate loans ...............
$ 137,622
$
81,425
$ 219,047
$
276,577
$
126,657
$ 403,234
(1) Loans categorized as special mention exhibit potential weaknesses that require the close attention of management. If left
uncorrected, these potential weaknesses may result in the deterioration of repayment prospects at some future date.
(2) Loans categorized as substandard continue to accrue interest, but exhibit a well-defined weakness or weaknesses that may
jeopardize the liquidation of the debt. The loans continue to accrue interest because they are well secured and collection of
principal and interest is expected within a reasonable time.
Potential problem loans totaled $219.0 million as of December 31, 2012, down $184.2 million, or 45.7%, from
$403.2 million as of December 31, 2011. This decline reflects the disposition of $98.3 million in carrying value of
potential problem loans in the bulk loan sales as well as ongoing remediation activities. Please refer to the section
titled ‘‘Accelerated Credit Remediation Actions’’ of this Item 7 for additional discussion regarding the bulk loan
sales.
OREO
OREO consists of properties acquired as the result of borrower defaults on loans. OREO, excluding covered OREO,
was $40.0 million at December 31, 2012, a $6.0 million increase from December 31, 2011. A discussion of our
accounting policies for OREO is contained in Note 1 of ‘‘Notes to the Consolidated Financial Statements’’ in Item 8
of this Form 10-K.
Table 20
OREO Properties by Type
(Dollar amounts in thousands)
Single-family homes ................................
Land parcels:
Raw land ...........................................
Farm land ..........................................
Commercial lots ..................................
Single-family lots ................................
Total land parcels .............................
Multi-family units ...................................
Commercial properties .............................
Total OREO properties ......................
Covered OREO ......................................
Total OREO properties ......................
December 31, 2012
December 31, 2011
December 31, 2010
Number
of
Properties
15
5
1
22
29
57
10
32
114
62
176
Amount
$
2,054
3,244
207
12,355
4,970
20,776
796
16,327
39,953
13,123
Number
of
Properties
5
8
-
19
25
52
4
16
77
46
Amount
$
985
8,316
-
5,944
7,677
21,937
3,083
7,970
33,975
23,455
Number
of
Properties
6
5
2
14
27
48
4
12
70
44
Amount
$
1,113
7,467
4,657
4,096
7,564
23,784
714
5,458
31,069
22,370
$
53,076
123
$
57,430
114
$
53,439
72
Loan Sales
The following table summarizes loan sales for the years ended December 31, 2012, 2011, and 2010.
Table 21
Loan Sales
(Dollar amounts in thousands)
Proceeds/
Fair Value
Book Value (1) Charge-offs (2)
Net Gains
on Sales (3)
Loan sales in 2012 by type of
transaction:
Bulk loan sales ...................................
Mortgage loan sales .............................
Other non-performing loan sales ............
Total loan sales in 2012 ....................
Loan sales in 2012 by class:
Commercial and industrial ....................
Agricultural ........................................
Commercial real estate:
Office, retail, and industrial ...............
Multi-family ....................................
Residential construction ....................
Commercial construction ...................
Other commercial real estate..............
Total commercial real estate ...........
Home equity .......................................
1-4 family mortgages ...........................
Total consumer loans ........................
Total loan sales in 2012 .................
Loan sales in 2011 by class:
Commercial and industrial ....................
Commercial real estate:
Office, retail, and industrial ...............
Residential construction ....................
Commercial construction ...................
Total commercial real estate ...........
Total loan sales in 2011..............
Loan sales in 2010 by class:
Commercial and industrial ....................
Commercial real estate:
Office, retail, and industrial ...............
Multi-family ....................................
Residential construction ....................
Other commercial real estate..............
Total commercial real estate ...........
1-4 family mortgages ...........................
Total loan sales in 2010..............
$
$
$
$
$
$
$
$
94,470
52,595
4,200
151,265
19,705
3,605
35,488
3,151
7,387
1,687
26,664
74,377
829
52,749
53,578
151,265
3,120
551
4,891
3,800
9,242
12,362
5,415
3,414
2,861
1,867
2,810
10,952
173
16,540
$
$
$
$
$
$
$
$
169,577
50,326
6,587
226,490
47,225
8,720
49,345
4,043
14,216
4,058
46,838
118,500
1,561
50,484
52,045
226,490
4,226
997
7,864
4,000
12,861
17,087
13,162
5,196
4,355
2,842
4,408
16,801
263
30,226
$
$
$
$
$
$
$
$
(80,260)
-
(2,387)
(82,647)
(22,508)
(4,356)
(23,696)
(1,859)
(5,690)
(1,850)
(21,825)
(54,920)
(773)
(90)
(863)
(82,647)
(1,106)
(446)
(2,973)
(200)
(3,619)
(4,725)
(7,747)
(1,782)
(1,494)
(975)
(1,598)
(5,849)
(90)
(13,686)
$
$
$
$
$
$
$
$
5,153
2,269
-
7,422
(5,012)
(759)
9,839
967
(1,139)
(521)
1,651
10,797
41
2,355
2,396
7,422
-
-
-
-
-
-
-
-
-
-
-
-
-
-
(1) The book value of loans sold in the 2012 bulk loan sales is net of payments received subsequent to the transfer to held-for-sale.
(2) Amount represents charge-offs to the allowance for loan and covered loan losses at the time the loans were identified for sale.
(3) The net gains on the bulk loan sales represent gains realized subsequent to the transfer to held-for-sale and are included as a
separate component of noninterest income in the Consolidated Statements of Income. Net gains on mortgage loan sales are
included in other service charges, commissions, and fees in the Consolidated Statements of Income.
73
During 2012, we disposed of certain loans through the bulk loan sales, which resulted in a gain, less commissions
and other selling expenses, of $2.6 million. Refer to the ‘‘Accelerated Credit Remediation Actions’’ section of this
Item 7 for additional detail. In addition to the bulk loan sales, we sold $50.3 million of mortgage loans during 2012,
resulting in gains of $2.3 million.
During the year ended December 31, 2011, we had gross reductions of non-performing assets totaling
$110.8 million, comprised of $80.3 million in non-accrual loans that were sold, paid off, or transferred to
held-for-sale.
OREO Activity
The following table summarized disposals of OREO for the years ended December 31, 2012 and 2011.
Table 22
OREO Disposals, Transfers, and Write-Downs
(Dollar amounts in thousands)
Year Ended December 31, 2012
Covered
OREO
Total
OREO
Year Ended December 31, 2011
Covered
OREO
Total
OREO
OREO sales
Proceeds from sales ................
Less: Basis of properties sold ...
$ 26,792
27,907
Net losses on sales of OREO $
(1,115)
OREO transfers and write-
downs
OREO transferred to premises,
furniture, and equipment (at
fair value)..........................
Premises, furniture, and
equipment transferred to
OREO (at fair value) ...........
OREO valuation adjustments ....
$
$
$
-
1,833
3,945
$
$
$
$
$
23,774
23,301
473
-
-
299
$
$
$
$
$
50,566
51,208
(642)
-
1,833
4,244
$
$
$
$
$
24,622
30,485
(5,863)
841
-
2,388
$
$
$
$
$
13,109
13,147
(38)
-
-
1,397
$
$
$
$
$
37,731
43,632
(5,901)
841
-
3,785
In 2012, OREO sales, excluding covered OREO, consisted of 103 properties, comprised primarily of single family
homes, residential lots, and commercial properties. Gains on the sales of two properties during 2012 contributed to
the decrease in net losses on sales of OREO compared to 2011. We sold 122 properties in 2011, which were
comprised primarily of farmland, residential lots, and 1-4 family residences.
In evaluating whether to enter into these transactions, management assessed current collateral values, projected
cash flows, long-term costs to remediate and maintain collateral, current disposition strategies, and other unique
circumstances specific to these loans. We continue to pursue the remediation of non-performing assets. Our efforts
will likely be impacted by a number of factors, including but not limited to, the pace and timing of the overall
recovery of the economy, illiquidity in the real estate market, and higher levels of foreclosed real estate coming into
the market.
Allowance for Credit Losses
Methodology for the Allowance for Credit Losses
The allowance for credit losses is comprised of the allowance for loan and covered loan losses and the reserve for
unfunded commitments and is maintained by management at a level believed adequate to absorb estimated losses
inherent in the existing loan portfolio. Determination of the allowance for credit losses is inherently subjective since
it requires significant estimates and management judgment, including the amounts and timing of expected future
cash flows on impaired loans, estimated losses on pools of homogeneous loans, consideration of current economic
trends, and other factors.
While management utilizes its best judgment and information available, the ultimate adequacy of the allowance for
credit losses is dependent upon a variety of factors beyond the Company’s control, including the performance of its
loan portfolio, the economy, changes in interest rates and property values, and the interpretation by regulatory
authorities of loan risk classifications. Management believes that the allowance for credit losses of $102.8 million is
an appropriate estimate of credit losses inherent in the loan portfolio as of December 31, 2012.
The accounting policy for the allowance for credit losses is discussed in Note 1 of ‘‘Notes to the Consolidated
Financial Statements’’ in Item 8 of this Form 10-K.
74
Table 23
Allowance for Credit Losses and
Summary of Credit Loss Experience
(Dollar amounts in thousands)
Change in allowance for credit losses:
Balance at the beginning of the year .....
$ 121,962
$ 145,072
$ 144,808
$
93,869
$
61,800
2012
Years ended December 31,
2010
2011
2009
2008
Loan charge-offs:
Commercial and industrial ............
Agricultural ...............................
Office, retail, and industrial ..........
Multi-family ..............................
Residential construction ...............
Commercial construction ..............
Other commercial real estate .........
Consumer ..................................
1-4 family mortgages...................
(60,099)
(4,569)
(34,968)
(3,361)
(13,888)
(13,923)
(36,474)
(9,026)
(1,884)
(31,180)
(1,570)
(8,193)
(14,584)
(13,895)
(6,316)
(15,396)
(9,411)
(1,120)
(35,829)
(1,301)
(10,322)
(2,788)
(55,611)
(8,356)
(28,869)
(9,609)
(1,031)
(56,903)
(180)
(7,869)
(3,485)
(63,045)
(3,620)
(18,413)
(13,589)
(934)
Total loan charge-offs ...............
(178,192)
(101,665)
(153,716)
(168,038)
Recoveries on previous loan
charge-offs:
Commercial and industrial ............
Agricultural ...............................
Office, retail, and industrial ..........
Multi-family ..............................
Residential construction ...............
Commercial construction ..............
Other commercial real estate .........
Consumer ..................................
1-4 family mortgages...................
Total recoveries on previous loan
charge-offs ..........................
Net loan charge-offs, excluding
covered loans and covered
OREO ...................................
Net covered loan charge-offs .........
Net loan charge-offs ....................
Provision charged to operating
expense:
Provision, excluding provision
for covered loans ..................
Provision for covered loans........
Less: expected reimbursement
from the FDIC .....................
Net provision for covered loans ..
Total provision charged to
3,146
247
577
275
451
-
125
755
29
5,605
3,392
101
79
410
2,830
134
508
412
18
7,884
5,227
-
612
363
770
-
494
691
49
8,206
1,899
-
13
2
403
400
116
468
4
3,305
(172,587)
(4,615)
(177,202)
(93,781)
(9,911)
(103,692)
(145,510)
(1,575)
(147,085)
(164,733)
-
(164,733)
(38,185)
-
(38,185)
142,364
24,945
(9,257)
15,688
69,682
51,267
(40,367)
10,900
145,774
27,009
(25,434)
1,575
215,672
-
70,254
-
-
-
operating expense..............
158,052
80,582
147,349
215,672
Balance at the end of the year .............
$ 102,812
$ 121,962
$ 145,072
$ 144,808
Allowance for loan losses, excluding
covered loans....................................
Allowance for covered loan losses ...........
$
87,384
12,062
$ 118,473
989
$ 142,572
-
$ 144,808
-
Total allowance for loan and covered
loan losses.................................
Reserve for unfunded commitments .........
99,446
3,366
119,462
2,500
142,572
2,500
144,808
-
Total allowance for credit losses .......
$ 102,812
$ 121,962
$ 145,072
$ 144,808
$
93,869
75
(14,557)
(42)
(852)
(1,801)
(15,780)
-
(1,253)
(5,476)
(576)
(40,337)
1,531
4
120
5
-
-
5
487
-
2,152
-
-
70,254
93,869
93,869
-
93,869
-
$
$
2012
2011
Years ended December 31,
2010
2009
2008
Amounts and ratios, excluding
covered loans
Average loans ................................
Net loan charge-offs to average loans
Allowance for credit losses at end of
period as a percent of:
Total loans.................................
Non-accrual loans .......................
Non-performing loans ..................
Amounts and ratios, including
covered loans
Average loans ................................
Net loan charge-offs to average loans
Allowance for credit losses at end of
period as a percent of:
Total loans.................................
Non-accrual loans .......................
Non-performing loans ..................
$ 5,204,718
3.32%
$ 5,101,621
1.84%
$ 5,191,154
2.80%
$ 5,348,979
3.08%
$ 5,149,879
0.74%
1.75%
107%
97%
2.38%
65%
62%
2.84%
69%
67%
2.78%
59%
58%
1.75%
73%
57%
$ 5,435,670
3.26%
$ 5,421,943
1.91%
$ 5,440,752
2.70%
$ 5,377,028
3.06%
$ 5,149,879
0.74%
1.91%
104%
74%
2.28%
59%
47%
2.65%
69%
48%
2.71%
59%
52%
1.75%
73%
57%
Activity in the Allowance for Credit Losses
The allowance for credit losses represented 1.91% of total loans, including covered loans, at December 31, 2012
compared to 2.28% at December 31, 2011. The allowance for credit losses as a percentage of non-performing loans,
including covered loans, was 74% at December 31, 2012, up from 47% at December 31, 2011. Over time, we
established historical loss experience on the covered loan portfolio, enabling us to more effectively estimate an
allowance for covered purchased impaired loan losses. During 2012, we increased the allowance for covered loan
losses by $11.1 million to reflect the difference between the carrying value and the discounted present value of the
estimated cash flows of the covered impaired loans. An analysis of changes in the allowance for loan and covered
loan losses by portfolio segment is presented on the following pages.
The provision for loan and covered loan losses was $158.1 million for 2012 compared to $80.6 million for 2011 and
$147.3 million for 2010. Net charge-offs, including covered loans, for 2012 were $177.2 million compared to
$103.7 million for 2011 and $147.1 million for 2010.
Net loan charge-offs were elevated in 2012 due substantially to accelerated credit remediation actions taken by
management for select credits during the third quarter of 2012. These actions included net charge-offs of
$80.3 million from the transfer of loans to held-for-sale status for disposition through bulk loan sales, and
charge-offs of $18.8 million related to modified disposition strategies. Refer to the section titled ‘‘Accelerated
Credit Remediation Actions’’ of this Item 7 for additional detail.
Covered loan charge-offs reflect the decline in estimated cash flows of certain acquired loans. Management
re-estimates cash flows periodically, and the present value of any decreases in expected cash flows from the FDIC is
recorded as either a charge-off in that period or an allowance for covered loan losses is established. Any increases in
expected cash flows are recorded through prospective yield adjustments over the remaining lives of the specific
loans. To date, cumulative increases in expected cash flows exceeded cumulative declines.
76
Allocation of the Allowance for Credit Losses
Table 24
Allocation of Allowance for Credit Losses
(Dollar amounts in thousands)
2012
2011
As of December 31,
2010
2009
2008
Commercial, industrial, and
agricultural ................................
$
36,761
$
46,017
$
49,545
$
54,452
$
22,189
Commercial real estate:
Office, retail, and industrial ..........
Multi-family ...............................
Residential construction ...............
Other commercial real estate (1) .....
Total commercial real estate ......
Consumer .....................................
Total, excluding allowance for
covered loan losses ...............
Covered loans ................................
11,432
3,575
6,260
18,680
39,947
14,042
90,750
12,062
16,012
5,067
14,563
24,471
60,113
14,843
20,758
3,996
27,933
29,869
82,556
12,971
20,164
4,555
33,078
21,084
78,881
11,475
120,973
989
145,072
-
144,808
-
Total......................................
$
102,812
$
121,962
$
145,072
$
144,808
$
22,048
2,680
32,910
7,927
65,565
6,115
93,869
-
93,869
Total loans, excluding covered loans ..
Total loans ....................................
Allowance for credit losses as a
percent of:
Loans:
$ 5,189,676
$ 5,387,570
$ 5,088,113
$ 5,348,615
$ 5,100,560
$ 5,472,289
$ 5,203,246
$ 5,349,565
$ 5,360,063
$ 5,360,063
Commercial, industrial, and
agricultural ..........................
1.93%
Commercial real estate:
Office, retail, and industrial....
Multi-family ........................
Residential construction .........
Other commercial real estate ..
Total commercial real estate
Consumer ...............................
Total, excluding covered
0.86%
1.25%
10.19%
2.08%
1.55%
1.97%
loans............................
1.75%
(1) Includes commercial construction.
2.70%
1.23%
1.76%
13.76%
2.37%
2.20%
2.25%
2.38%
2.93%
1.72%
1.14%
15.99%
2.93%
3.00%
1.97%
2.84%
3.30%
1.66%
1.36%
10.54%
2.05%
2.73%
1.73%
2.78%
1.30%
2.15%
0.93%
6.46%
0.73%
2.26%
0.82%
1.75%
The allowance for credit losses declined $19.2 million from $122.0 million as of December 31, 2011 to
$102.8 million as of December 31, 2012, reflecting reductions across all categories. During 2012, declines in
non-accrual and potential problem loans from accelerated credit remediation actions resulted in improved credit
metrics and a decline in our estimate of credit losses inherent in the loan portfolio.
In 2011, we decreased our allowance for loan and covered loan losses for all categories of loans, excluding multi-
family loans and covered loans. The increase in the allowance for loan and covered loan losses allocated to multi-
family loans reflects management’s estimate of potential losses on smaller-balance loans in this portfolio. The
allowance for covered loan losses is for open-ended consumer loans that are not categorized as impaired loans.
In 2010, we maintained the allowance for credit losses consistent with the December 31, 2009 level with a decrease
in the allowance allocated to commercial, industrial, and agricultural loans offset by an increase in the amount
allocated to other commercial real estate loans. We also reduced the allowance allocated to residential construction
loans in 2010. Due to the level of charge-offs on these loans in 2009 and 2010 and the level of risk associated with
the remaining loans, we estimated that a lower level of inherent losses remained in that portfolio as of December 31,
2010.
77
INVESTMENT IN BANK-OWNED LIFE INSURANCE
We purchase life insurance policies on the lives of certain directors and officers and are the sole owner and
beneficiary of the policies. We invest in these policies, known as BOLI, to provide an efficient form of funding for
long-term retirement and other employee benefit costs. Therefore, our BOLI policies are intended to be long-term
investments to provide funding for long-term liabilities. We record these BOLI policies as a separate line item in the
Consolidated Statements of Financial Condition at each policy’s respective CSV with changes recorded in
noninterest income in the Consolidated Statements of Income. As of December 31, 2012, the CSV of BOLI assets
totaled $206.4 million.
As of December 31, 2012, 29.2% of our total BOLI portfolio was in general account life insurance distributed
between nine insurance carriers, all of which carry investment grade ratings. This general account life insurance
typically includes a feature guaranteeing minimum returns. The remaining 70.8% is in separate account life
insurance, which is managed by third party investment advisors under pre-determined investment guidelines. Stable
value protection is a feature available for separate account life insurance policies that is designed to protect, within
limits, a policy’s CSV from market fluctuations on underlying investments. Our entire separate account portfolio
has stable value protection purchased from a highly rated financial institution. To the extent fair values on
individual contracts fall below 80%, the CSV of the specific contracts may be reduced or the underlying assets may
be transferred to short-duration investments, resulting in lower earnings.
BOLI income for 2012 decreased 41.4% from 2011, mainly as a result of a $1.2 million benefit settlement received
in 2011. Management has elected to accept lower market returns to reduce our risk to market volatility through
investment in shorter-duration, lower yielding money market instruments. This strategy also had the effect of
improving our regulatory capital ratios by reducing risk-weighted assets.
GOODWILL
Goodwill is included in goodwill and other intangible assets in the Consolidated Statements of Financial Condition.
The carrying value of goodwill was $265.5 million as of December 21, 2012 and 2011. As described in Note 8 of
‘‘Notes to the Consolidated Financial Statements’’ in Item 8 of this Form 10-K, goodwill is tested annually for
impairment or when events or circumstances indicate a need to perform interim tests. Impairment testing is
performed by comparing the carrying value of the reporting unit with management’s estimate of the fair value of the
reporting unit, which is based on a discounted cash flow analysis. During 2012, we performed our annual
impairment test of goodwill at October 1, 2012 and determined that goodwill was not impaired at that date.
DEFERRED TAX ASSETS
Deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary
differences between the financial statement carrying amounts of existing assets and liabilities and their respective
tax bases. For additional discussion of income taxes, see Notes 1 and 14 of ‘‘Notes to the Consolidated Financial
Statements’’ in Item 8 of this Form 10-K. Income tax expense and benefits recorded due to changes in uncertain tax
positions are also described in Note 14.
Table 25
Deferred Tax Assets
(Dollar amounts in thousands)
2012
December 31,
2011
% Change
2010
2012-2011
2011-2010
Net deferred tax assets ...................
Valuation allowance .......................
$
133,605
-
$
102,624
-
$ 113,353
30
30.2
-
(9.5)
(100.0)
Management assessed whether it is more likely than not that all or some portion of the deferred tax assets will not
be realized. This assessment considered whether in the periods of reversal, the deferred tax assets can be realized
through carryback to income in prior years, future reversals of existing deferred tax liabilities, and future taxable
78
income, including taxable income resulting from the application of future tax planning strategies. The assessment
also considered positive and negative evidence, including pre-tax income and loss during the current and prior two
years, pre-tax, pre-provision operating earnings during that period, actual performance compared to budget, the
Company’s capital position, and trends in non-performing assets and adversely rated loans. Management
determined that it is more likely than not that deferred tax assets will be fully realized and no valuation allowance is
required as of December 31, 2012.
The increase in deferred tax assets in 2012 was primarily attributable to higher federal and state net operating loss
carry forwards, offset partially by a reduction in the allowance for loan and covered loan losses for which there is a
zero tax basis.
Deferred tax assets decreased in 2011 compared to 2010 substantially from a reduction in the allowance for loan
and covered loan losses.
FUNDING AND LIQUIDITY MANAGEMENT
Liquidity measures the ability to meet current and future cash flows as they become due. Our approach to liquidity
management is to obtain funding sources at a minimum cost to meet fluctuating deposit, withdrawal, and loan
demand needs. Our liquidity policy establishes parameters to maintain flexibility in responding to changes in
liquidity needs over a 12-month forward-looking period, including the requirement to formulate a quarterly
liquidity compliance plan for review by the Bank’s Board of Directors. The compliance plan includes an analysis
that measures projected needs to purchase and sell funds. The analysis incorporates a set of projected balance sheet
assumptions that are updated at least quarterly. Based on these assumptions, we determine our total cash liquidity
on hand and excess collateral capacity from pledging, unused federal funds purchased lines, and other unused
borrowing capacity such as FHLB advances, resulting in a calculation of our total liquidity capacity. Our total
policy-directed liquidity requirement is to have funding sources available to cover 66.7% of non-collateralized,
non-FDIC insured, non-maturity deposits. Based on our projections as of December 31, 2012, we expect to have
liquidity capacity in excess of policy guidelines for the forward twelve-month period.
The liquidity needs of First Midwest Bancorp, Inc. on an unconsolidated basis (the ‘‘Parent Company’’) consist
primarily of operating expenses, debt service payments, and dividend payments to our stockholders, which totaled
$37.0 million for the year ended December 31, 2012. The primary source of liquidity for the Parent Company is
dividends from subsidiaries. The Parent Company had $61.8 million in junior subordinated debentures,
$38.5 million in subordinated notes, $114.5 million in senior notes, and cash and equivalent short-term investments
of $21.0 million at December 31, 2012. At the end of 2012, the Parent Company did not have any unused short-term
credit facilities available to fund cash flows. The Parent Company has the ability to enhance its liquidity position by
raising capital or incurring debt.
Total deposits and borrowed funds as of December 31, 2012 are summarized in Notes 9 and 10 of ‘‘Notes to the
Consolidated Financial Statements’’ in Item 8 of this Form 10-K. The following table provides a comparison of
average funding sources over the last three years. We believe that average balances, rather than period-end balances,
are more meaningful in analyzing funding sources because of the inherent fluctuations that may occur on a monthly
basis within most funding categories.
79
Table 26
Funding Sources - Average Balances
(Dollar amounts in thousands)
Years Ended December 31,
% Change
2012
% of
Total
Demand deposits...............
Savings deposits ...............
NOW accounts .................
Money market accounts ......
$ 1,762,968
1,038,379
1,090,446
1,216,173
Transactional deposits .....
5,107,966
Time deposits...................
Brokered deposits..............
1,502,230
26,776
Total time deposits .........
1,529,006
Total deposits.............
6,636,972
Securities sold under
agreements to repurchase ..
Federal funds purchased and
other borrowed funds .......
Total borrowed funds .......
Senior and subordinated debt
79,924
113,719
193,643
231,273
25.0
14.7
15.4
17.2
72.3
21.3
0.4
21.7
94.0
1.1
1.6
2.7
3.3
2011
$ 1,498,900
934,937
1,091,184
1,230,090
4,755,111
1,773,188
18,821
1,792,009
6,547,120
117,065
148,637
265,702
150,285
% of
Total
21.5
13.4
15.7
17.7
68.3
25.4
0.3
25.7
94.0
1.7
2.1
3.8
2.2
2010
$ 1,224,629
815,371
1,082,774
1,199,362
4,322,136
1,971,684
19,953
1,991,637
6,313,773
191,826
167,348
359,174
137,739
% of
Total
18.0
12.0
15.9
17.6
63.5
28.9
0.3
29.2
92.7
2.8
2.5
5.3
2.0
Total funding sources ...
$ 7,061,888
100.0
$ 6,963,107
100.0
$ 6,810,686
100.0
2012-2011
2011-2010
17.6
11.1
(0.1)
(1.1)
7.4
(15.3)
42.3
(14.7)
1.4
(31.7)
(23.5)
(27.1)
53.9
1.4
22.4
14.7
0.8
2.6
10.0
(10.1)
(5.7)
(10.0)
3.7
(39.0)
(11.2)
(26.0)
9.1
2.2
Average Funding Sources
For 2012, average funding sources increased $98.8 million from 2011 driven primarily by growth of $352.9 million, or
7.4%, in average transactional deposits, partially offset by reductions in higher-costing time deposits of $263.0 million
and borrowed funds of $72.1 million, resulting in a more favorable funding mix. The increase in average senior and
subordinated debt of $81.0 million reflects the issuance of $115.0 million in senior debt in the fourth quarter of 2011,
which was used, in combination with existing liquid assets, to fund the redemption of the Series B preferred stock
issued to the Treasury. The issuance was slightly offset by the repurchase and retirement of $37.4 million of junior
subordinated debentures and subordinated notes during 2012.
Average funding sources for 2011 increased $152.4 million, or 2.2%, from 2010 resulting from a $433.0 million, or
10.0%, increase in average transactional deposits and a $12.5 million, or 9.1%, increase in senior and subordinated
debt. These increases were partially offset by declines in higher-costing time deposits of $199.6 million, or 10.0%, and
borrowed funds of $93.5 million, or 26.0%. The growth in demand deposits and decline in time deposits resulted in a
more favorable product mix.
Borrowed Funds
Securities sold under agreements to repurchase and federal funds purchased generally mature within 1 to 90 days from
the transaction date. Other borrowed funds consist of term auction facilities issued by the Federal Reserve that mature
within 90 days. Federal term auction facilities were discontinued during 2010. A discussion of borrowed funds is
presented in the next table.
80
Table 27
Borrowed Funds
(Dollar amounts in thousands)
2012
2011
2010
Amount
Weighted-
Average
Rate (%)
Amount
Weighted-
Average
Rate (%)
Amount
Weighted-
Average
Rate (%)
At year-end:
Securities sold under
agreements to repurchase ..
Federal funds purchased .......
FHLB advances .................
Federal term auction facilities
Total borrowed funds .......
Average for the year:
Securities sold under
agreements to repurchase ..
Federal funds purchased .......
FHLB advances .................
Federal term auction facilities
$
$
$
71,403
-
114,581
-
185,984
79,924
-
113,719
-
Total borrowed funds .......
$
193,643
Maximum amount outstanding
at any day during the year:
Securities sold under
agreements to repurchase ..
Federal funds purchased .......
FHLB advances .................
Federal term auction facilities
Weighted-average maturity of
$
103,591
-
114,593
-
0.02
-
1.72
-
1.06
0.02
-
1.76
-
1.04
$
$
$
92,871
-
112,500
-
205,371
117,065
603
148,034
-
$
265,702
$
174,810
175,000
302,500
1
0.02
-
2.13
-
1.17
0.02
0.22
1.84
-
1.03
$
$
$
166,474
-
137,500
-
303,974
191,826
4,371
142,703
20,274
$
359,174
$
683,685
60,000
272,802
300,000
0.04
-
1.95
-
0.90
0.14
0.15
2.06
0.25
0.91
FHLB advances .................
20.8 months
19.3 months
27.6 months
Average borrowed funds totaled $193.6 million for 2012, decreasing $72.1 million, or 27.1%, from 2011 following a
decrease of $93.5 million, or 26.0%, from 2010 to 2011. Since the last half of 2009, we reduced funding costs by using
the proceeds from securities sales and maturities to reduce our level of borrowed funds and time deposits, resulting in
a better product mix.
For 2012, the average and maximum daily balances for securities sold under agreements to repurchase and FHLB
advances remained stable. In 2011, the maximum daily balance for federal funds purchased resulted from a test of the
federal funds line, which may be done occasionally to ensure availability.
We make interchangeable use of repurchase agreements, FHLB advances, federal funds purchased, and, prior to
March 2010, federal term auction facilities to supplement deposits and leverage the interest yields produced through
our securities portfolio.
Senior and Subordinated Debt
Average senior and subordinated debt increased $81.0 million, or 53.9%, in 2012 compared to 2011 following a
$12.5 million, or 9.1%, increase from 2010 to 2011. The increase was driven by the new senior debt issuance of
$115.0 million in the fourth quarter of 2011, which was used, in combination with existing liquid assets, to fund the
redemption of the Series B preferred stock issued to the Treasury. Interest paid on the new senior debt in 2011 reduced
net interest margin by 10 basis points for the year ended December 31, 2012.
This increase was offset, in part, by the repurchase and retirement of $25.4 million of junior subordinated debentures
and $12.0 million of subordinated notes during 2012. Refer to Note 11 of ‘‘Notes to the Consolidated Financial
Statements’’ in Item 8 of this Form 10-K for additional discussion regarding these transactions.
81
CONTRACTUAL OBLIGATIONS, COMMITMENTS, OFF-BALANCE SHEET RISK, AND
CONTINGENT LIABILITIES
Through our normal course of operations, we enter into certain contractual obligations and other commitments.
These obligations generally relate to the funding of operations through deposits or debt issuances, as well as leases
for premises and equipment. As a financial services provider, we routinely enter into commitments to extend credit.
While contractual obligations represent our future cash requirements, a significant portion of commitments to
extend credit may expire without being drawn. These commitments are subject to the same credit policies and
approval process used for our loans.
The following table presents our significant fixed and determinable contractual obligations and significant
commitments as of December 31, 2012. Further discussion of the nature of each obligation is included in the
referenced note of ‘‘Notes to the Consolidated Financial Statements’’ in Item 8 of this Form 10-K.
Table 28
Contractual Obligations, Commitments, Contingencies, and Off-Balance Sheet Items
(Dollar amounts in thousands)
Note
Reference
Less Than
One Year
One to
Three Years
Three to
Five Years
Over Five
Years
Total
Payments Due In
Transactional deposits (no
stated maturity) ...............
Time deposits .....................
Borrowed funds ..................
Subordinated debt ...............
Operating leases .................
Pension liability ..................
Commitments to extend
credit.............................
Letters of credit ..................
Forward committed advances
with FHLB .....................
9
9
10
11
7
15
20
20
20
$ 5,272,307
921,508
33,668
-
3,826
5,388
$
-
374,318
133,468
-
4,820
10,974
$
-
103,729
18,848
-
4,117
11,175
$
-
393
-
214,779
3,754
27,457
$ 5,272,307
1,399,948
185,984
214,779
16,517
54,994
N/A
N/A
-
N/A
N/A
-
N/A
N/A
N/A
N/A
1,490,351
115,837
-
250,000
250,000
82
MANAGEMENT OF CAPITAL
Capital Measurements
A strong capital structure is crucial for maintaining investor confidence, accessing capital markets, and enabling us
to take advantage of future growth opportunities. Our capital policy requires that the Company and the Bank
maintain capital ratios in excess of the minimum regulatory guidelines. It serves as an internal discipline in
analyzing business risks and internal growth opportunities and sets targeted levels of return on equity. Under
regulatory capital adequacy guidelines, the Company and the Bank are subject to various capital requirements set
and administered by the federal banking agencies. These requirements specify minimum capital ratios, defined as
Tier 1 and total capital as a percentage of assets and off-balance sheet items that were weighted according to broad
risk categories and a leverage ratio calculated as Tier 1 capital as a percentage of adjusted average assets. We
manage our capital ratios for both the Company and the Bank to consistently maintain such measurements in excess
of the Federal Reserve’s minimum levels considered to be ‘‘well-capitalized,’’ which is the highest capital category
established.
Capital resources of financial institutions are also regularly measured by tangible equity ratios, which are
non-GAAP measures. Tangible common equity equals total shareholders’ equity as defined by GAAP less
goodwill and other intangible assets and preferred stock, which does not benefit common shareholders. Tangible
assets equal total assets as defined by GAAP less goodwill and other intangible assets. The tangible equity ratios
are a valuable indicator of a financial institution’s capital strength since they eliminate intangible assets from
shareholders’ equity.
The following table presents our consolidated measures of capital as of the dates presented and the capital
guidelines established by the Federal Reserve to be categorized as ‘‘well-capitalized.’’ All regulatory mandated
ratios for characterization as ‘‘well-capitalized’’ were exceeded as of December 31, 2012 and 2011. See the
‘‘Supervision and Regulation’’ section included in Item 1, ‘‘Business,’’ of this form 10-K.
All other ratios presented in the table below are capital adequacy metrics used and relied on by investors and
industry analysts; however, they are non-GAAP financial measures for SEC purposes. These non-GAAP measures
are valuable indicators of a financial institution’s capital strength since they eliminate intangible assets from
stockholders’ equity and retain the effect of accumulated other comprehensive loss in stockholders’ equity. The
reconciliations of the components of those ratios to GAAP are also presented in the table below.
83
Table 29
Capital Measurements
(Dollar amounts in thousands)
December 31,
2012
2011
Regulatory
Minimum For
‘‘Well-
Capitalized’’
Excess Over
Required Minimums
at December 31,
2012
Reconciliation of capital components to
regulatory requirements:
Total regulatory capital, as defined in federal
regulations ...........................................
Tier 1 capital, as defined in federal
regulations ...........................................
Trust preferred securities included in Tier 1
$
$
755,264
652,480
$
$
853,961
724,863
capital.................................................
(59,965)
(84,730)
Tier 1 common capital ...........................
$
592,515
$
640,133
Risk-weighted assets, as defined in federal
regulations ...........................................
$ 6,348,523
$ 6,241,191
Average assets, as defined in federal
regulations ...........................................
7,768,967
7,813,637
Regulatory capital ratios:
Total capital to risk-weighted assets.............
Tier 1 capital to risk-weighted assets ...........
Tier 1 common capital to risk-weighted
assets (1) ..............................................
Tier 1 leverage to average assets .................
Reconciliation of capital components to
GAAP:
11.90%
10.28%
9.33%
8.40%
13.68%
11.61%
10.26%
9.28%
10.00%
6.00%
N/A (2)
5.00%
19% $ 120,412
71% $ 271,569
N/A (2)
N/A (2)
68% $ 264,032
Total stockholder’s equity ..........................
Goodwill and other intangible assets............
$
940,893
(281,059)
$
962,587
(283,650)
Tangible common equity ........................
Accumulated other comprehensive loss ........
659,834
15,660
678,937
13,276
Tangible common equity, excluding
accumulated other comprehensive loss ......
$
675,494
$
692,213
Total assets .............................................
Goodwill and other intangible assets............
$ 8,099,839
(281,059)
$ 7,973,594
(283,650)
Tangible assets.........................................
$ 7,818,780
$ 7,689,944
Tangible common equity ratios:
Tangible common equity to tangible assets ...
Tangible common equity, excluding other
accumulated comprehensive loss, to
tangible assets ......................................
Tangible common equity to risk-weighted
8.44%
8.83%
N/A (2)
N/A (2)
N/A (2)
8.64%
9.00%
N/A (2)
N/A (2)
N/A (2)
N/A (2)
N/A (2)
N/A (2)
assets..................................................
10.39%
10.88%
(1) Excludes the impact of trust-preferred securities.
(2) Ratio is not subject to formal Federal Reserve regulatory guidance.
The decline in capital ratios from December 31, 2011 resulted from a $72.4 million decrease in Tier 1 capital, which
was driven by the net loss of $21.1 million for the year ended December 31, 2012 and a reduction in junior
subordinated debentures included in Tier 1 capital.
84
During 2012, we repurchased and retired $25.4 million of 6.95% junior subordinated debentures out of a total
$87.4 million. Although the junior subordinated debentures were included as a component of Tier 1 capital, we
elected to retire them given the low interest rate environment.
The Board of Directors reviews the Company’s capital plan each quarter, considering the current and expected
operating environment as well as an evaluation of various capital alternatives.
For further details of the regulatory capital requirements and ratios as of December 31, 2012 and 2011 for the
Company and the Bank, see Note 18 of ‘‘Notes to the Consolidated Financial Statements’’ in Item 8 of this
Form 10-K.
Stock Repurchase Programs
Shares repurchased are held as treasury stock and are available for issuance in conjunction with our Dividend
Reinvestment Plan, qualified and nonqualified retirement plans, share-based compensation plans, and other general
corporate purposes. We reissued 133,560 treasury shares in 2012 and 103,770 treasury shares in 2011 to fund these
plans.
Dividends
The Board declared quarterly Common Stock dividends of $0.01 per share for the past sixteen quarters.
85
QUARTERLY REVIEW
Table 30
Quarterly Earnings Performance (1)
(Dollar amounts in thousands, except per share data)
Fourth
Third
Second
First
Fourth
Third
Second
First
2012
2011
Interest income .................
Interest expense ................
$ 74,199
(7,677)
$ 75,584
(8,324)
$ 75,518
(8,814)
$ 75,268
(10,086)
$ 78,757
(9,679)
$ 80,175
(9,640)
$ 81,296
(9,935)
$ 81,283
(10,637)
Net interest income............
66,522
67,260
66,704
65,182
69,078
70,535
71,361
70,646
Provision for loan and
covered loan losses .........
Operating revenues ............
Net gains on securities sales
Securities impairment losses
Gain on bulk loan sales ......
Gain on acquisitions ..........
(Losses) gains on early
extinguishment of debt ....
Noninterest expense ...........
Income (loss) before income
tax (expense) benefit .......
Income tax (expense)
benefit .........................
Net income (loss) ..............
Preferred dividends and
accretion on preferred
stock ...........................
Net (income) loss applicable
to non-vested restricted
shares ..........................
Net income (loss) applicable
to common shares ..........
Basic earnings (loss) per
common share ...............
Diluted earnings (loss) per
common share ...............
Dividends declared per
common share ...............
Return on average common
equity ..........................
Return on average assets .....
Net interest margin –
tax-equivalent ................
(5,593)
27,661
1,615
(1,527)
5,153
-
(814)
(73,607)
(111,791)
26,062
(217)
-
-
3,289
-
(70,123)
19,410
(85,520)
(6,194)
13,216
36,993
(48,527)
-
(194)
-
715
(22,458)
23,886
1,556
(1,405)
-
-
-
(61,157)
7,126
(761)
6,365
(18,210)
25,376
(206)
(737)
-
-
256
(62,613)
9,048
(1,156)
7,892
(21,902)
25,669
649
(759)
-
1,076
-
(66,591)
7,220
(296)
6,924
(20,425)
24,142
626
(177)
-
-
-
(64,176)
(18,763)
24,963
1,531
-
-
-
-
(65,719)
10,525
13,373
(1,583)
8,942
(2,720)
10,653
(19,492)
23,677
540
-
-
-
-
(65,418)
9,953
91
10,044
-
-
(3,027)
(2,586)
(2,582)
(2,581)
(76)
(139)
(20)
(93)
(100)
(137)
$ 13,022
$ (47,812)
$
$
$
0.18
0.18
0.01
5.50%
0.65%
3.84%
$
$
$
(0.65)
(0.65)
0.01
(19.36%)
(2.35%)
3.83%
$
$
$
$
6,289
0.09
0.09
0.01
2.59%
0.32%
3.88%
$
$
$
$
7,753
0.11
0.11
0.01
3.21%
0.40%
3.88%
$
$
$
$
3,877
0.05
0.05
0.01
1.60%
0.34%
3.95%
$
$
$
$
6,263
0.09
0.09
0.01
2.60%
0.43%
3.97%
$
$
$
$
7,971
0.11
0.11
0.01
3.39%
0.52%
4.10%
$
$
$
$
7,326
0.10
0.10
0.01
3.20%
0.50%
4.15%
(1) All ratios are presented on an annualized basis.
FOURTH QUARTER 2012 vs. 2011
Net income applicable to common shareholders for the fourth quarter of 2012 was $13.0 million, or 0.18 per share.
This compares to net income available to common shareholders of $3.9 million, or $0.05 per share, for the fourth
quarter of 2011.
86
Table 31
Quarterly Operating Earnings (1)
(Dollar amounts in thousands)
Income (loss) before taxes ...........
Provision for loan and covered
Fourth
Third
Second
First
Fourth
Third
Second
First
2012
2011
$ 19,410
$ (85,520)
$
7,126
$
9,048
$
7,220
$ 10,525
$ 13,373
$
9,953
loan losses ............................
5,593
111,791
Pre-tax, pre-provision earnings ...
25,003
26,271
22,458
29,584
18,210
27,258
21,902
29,122
20,425
30,950
18,763
32,136
19,492
29,445
Adjustments to pre-tax,
pre-provision earnings
Net securities gains (losses) .........
Gain, less related expense, on bulk
loan sales .............................
Gains on acquisitions, net of
integration costs .....................
Net (losses) gains on early
extinguishment of debt.............
Net losses on sales and valuation
adjustments of OREO, excess
properties, assets held-for-sale,
and other ..............................
Accelerated amortization of FDIC
indemnification asset ...............
Severance-related costs................
Total adjustments .......................
Pre-tax, pre-provision operating
88
(217)
151
(943)
(110)
449
1,531
540
2,639
(588)
(814)
-
3,074
-
-
-
-
-
-
256
-
1,076
-
-
-
-
-
-
-
-
-
-
(1,864)
(3,280)
(2,527)
(303)
(1,425)
(2,686)
(4,149)
(2,537)
(2,705)
-
(3,244)
(4,000)
(840)
(5,263)
-
-
(315)
(2,376)
(1,305)
-
(2,000)
(2,459)
-
(78)
-
(191)
-
-
(2,315)
(2,809)
(1,997)
earnings ...............................
$ 28,247
$ 31,534
$ 31,960
$ 28,563
$ 31,581
$ 33,265
$ 34,945
$ 31,442
(1) The Company’s accounting and reporting policies conform to GAAP and general practice within the banking industry. As a supplement to
GAAP, the Company has provided this non-GAAP performance result. The Company believes that this non-GAAP financial measure is useful
because it helps investors to assess the Company’s operating performance. Although this non-GAAP financial measure is intended to enhance
investors’ understanding of the Company’s business and performance, this measure should not be considered an alternative to GAAP.
Pre-tax, pre-provision operating earnings of $28.2 million for the fourth quarter of 2012 decreased from the third
quarter of 2012 and the fourth quarter of 2011. These reductions were driven mainly by lower net interest income
and higher noninterest expense, excluding certain non-operating items, which were partially offset by gains on
mortgage loan sales and an increase in other fee-based revenues.
For the fourth quarter of 2012, average interest-earning assets declined $115.3 million from the third quarter of
2012 and $55.9 million from the fourth quarter of 2011. The linked-quarter decline in average loans was impacted
by the transfer of loans to held-for-sale at the end of the third quarter of 2012 and the accelerated resolution of
certain credits in the fourth quarter of 2012. In addition, $37.1 million of mortgage loans outstanding at
September 30, 2012 were sold during the fourth quarter of 2012.
Tax-equivalent net interest margin for the current quarter was 3.84%, remaining stable compared to the third quarter
of 2012 and declining 11 basis points compared to the fourth quarter of 2011. The decrease compared to
December 31, 2011 was driven by a decline in market interest rates, which contributed to lower yields earned on
investment securities and loans, and was mitigated by a reduction in rates paid on retail time deposits.
Total fee-based revenues for the fourth quarter of 2012 grew 9.8% compared to the third quarter of 2012 and 12.0%
from the fourth quarter of 2011. The increase in fee-based revenues from both prior periods presented was
attributed primarily to gains on mortgage loan sales, and a rise in service charges on business checking accounts,
wealth management fees, and debit card income. An increase in merchant fees driven by higher processing volumes
also contributed to the growth compared to December 31, 2011.
During the fourth quarter of 2012, the Company repurchased and retired $4.3 million of 6.95% junior subordinated
debentures at a premium of 3.0% and $12.0 million of 5.85% subordinated notes at a premium of 5.0%. These
87
transactions resulted in the recognition of a pre-tax loss of $814,000 and will reduce future annual interest expense
by approximately $1.0 million.
Total noninterest expense for the fourth quarter of 2012 increased 5.0% compared to the third quarter of 2012 and
10.5% compared to the fourth quarter of 2011. Salaries and wages increased from the third quarter of 2012 due to a
decrease in deferred salaries resulting from lower new loan volume, short-term staffing costs associated with the
FDIC-assisted acquisition of Waukegan Savings, and higher short-term incentive compensation expense. This was
partially mitigated by a reduction in general salaries expense from fewer full time employees. For the quarter ended
December 31, 2011, a $1.3 million correction of the 2010 actuarial pension expense calculation drove higher
retirement and employee benefit expenses compared to December 31, 2012. The fourth quarter of 2012 also reflects
an increase in post-employment benefits expense.
OREO expenses declined from both prior periods presented due to a gain on the sale of a vacant commercial lot
during the fourth quarter of 2012. In addition, the elevated levels of valuation adjustments during the third quarter
of 2012 resulted from declines in the values of one commercial property and one vacant land parcel.
Fourth quarter 2012 loan remediation costs were elevated due to expenses of $2.5 million related to the previously
discussed bulk loan sales. This increase in expense was partially mitigated by declines in real estate taxes paid on
non-performing loans in the fourth quarter of 2012.
Other professional services increased compared to the third quarter of 2012 and the fourth quarter of 2011 due to
higher personnel recruitment expenses, the acceleration of certain capitalized costs, and increased attorney fees
related to various legal proceedings.
Net occupancy and equipment expense increased from both prior periods presented driven by the timing of general
improvements to facilities and equipment, operating expenses for former Waukegan Savings branches prior to
conversion, and increased real estate tax expenses. These expenses were partially offset by lower utilities costs from
mild weather conditions.
Higher technology and related costs for the fourth quarter of 2012 resulted from conversion expenses related to
Waukegan Savings.
The accelerated amortization of the FDIC indemnification asset results from adjustments in the timing and amount
of future cash flows expected to be received from the FDIC under the loss sharing agreements based on
management’s periodic estimates of future cash flows from covered loans. This charge benefited the yield on
covered interest earning assets in the fourth quarter of 2012 and is expected to result in higher interest income on
covered assets in future periods.
Valuation adjustments of $1.3 million on a former banking office transferred to OREO in the fourth quarter of 2012
contributed to the variance from both prior periods presented.
Average funding sources for the fourth quarter of 2012 were $42.5 million lower than the third quarter of 2012 and
up $128.9 million from the fourth quarter of 2011. Seasonal declines in public demand deposits primarily
contributed to the decrease in average funding sources from the third quarter of 2012. Compared to the fourth
quarter of 2011, the increase in average demand and interest-bearing transaction deposits reflects acquisition
activity that occurred in December 2011 and August 2012.
88
Table 32
Borrowed Funds – Quarterly Comparison
(Dollar amounts in thousands)
Fourth Quarter 2012
Rate
(%)
Amount
Fourth Quarter 2011
Rate
(%)
Amount
Average for the quarter:
Securities sold under agreements to repurchase ...........
FHLB advances ......................................................
$
70,805
114,585
Total borrowed funds ...........................................
$ 185,390
0.02
1.72
1.07
Maximum amount outstanding at any day during the
quarter:
Securities sold under agreements to repurchase ...........
FHLB advances ......................................................
$
79,892
114,588
$
$
$
87,893
164,946
252,839
0.02
1.60
1.05
97,383
302,500
CRITICAL ACCOUNTING POLICIES
Our consolidated financial statements are prepared in accordance with GAAP and are consistent with predominant
practices in the financial services industry. Critical accounting policies are those policies that management believes
are the most important to our financial position and results of operations. Application of critical accounting policies
requires management to make estimates, assumptions, and judgments based on information available as of the date
of the financial statements that affect the amounts reported in the financial statements and accompanying notes.
Future changes in information may affect these estimates, assumptions, and judgments, which may affect the
amounts reported in the financial statements.
The most significant of our accounting policies are presented in Note 1 of ‘‘Notes to the Consolidated Financial
Statements’’ in Item 8 of this Form 10-K. Along with the disclosures presented in the other financial statement
notes and in this discussion, these policies provide information on how significant assets and liabilities are valued
in the financial statements and how those values are determined. Based on the valuation techniques used and the
sensitivity of financial statement amounts to the methods, assumptions, judgments, and estimates, management
determined that our accounting policies for the allowance for credit losses, evaluation of impairment of securities,
and income taxes are considered to be our critical accounting policies.
Allowance for Credit Losses
The determination of the allowance for credit losses is inherently subjective since it requires significant estimates
and management judgment, including the amounts and timing of expected future cash flows on impaired loans,
estimated losses on pools of homogeneous loans, consideration of current economic trends, and other factors, all of
which may be susceptible to significant change. Credit exposures deemed to be uncollectible are charged-off
against the allowance for loan and covered loan losses, while recoveries of amounts previously charged-off are
credited to the allowance for loan and covered loan losses. Additions to the allowance for loan and covered loan
losses are established through the provision for loan and covered loan losses charged to expense. The amount
charged to operating expense is dependent upon a number of factors including historic loan growth, changes in the
composition of the loan portfolio, net charge-off levels, and our assessment of the allowance for loan and covered
loan losses. For a full discussion of our methodology for determining the allowance for credit losses, see Note 1 of
‘‘Notes to the Consolidated Financial Statements’’ in Item 8 of this Form 10-K.
Valuation of Securities
The fair values of securities are based on quoted prices obtained from third party pricing services or dealer market
participants where a ready market for such securities exists. Where an active market does not exist, as for our
CDOs, we estimate fair value using a cash flow model with the assistance of a structured credit valuation firm. The
valuation for each of the CDOs relies on independently verifiable historical financial data. The valuation firm
89
performs a credit analysis of each of the entities comprising the collateral underlying each CDO in order to estimate
the likelihood of default by any of these entities on their trust-preferred obligation. Cash flows are modeled based
upon the contractual terms of the CDO and discounted to their present values to derive the estimated fair value of
the individual CDO, as well as any credit loss or impairment. We believe the model uses reasonable assumptions to
estimate fair values where no market exists for these investments.
On a quarterly basis, we assess securities with unrealized losses to determine whether OTTI has occurred. In
evaluating OTTI, the Company considers many factors including the severity and duration of the impairment; the
financial condition and near-term prospects of the issuer, which for debt securities considers external credit ratings
and recent downgrades; and the likelihood that the Company would be required to sell them before recovery of their
amortized cost bases. The term ‘‘other-than-temporary’’ is not intended to indicate that the decline is permanent. It
indicates that the prospects for near-term recovery are not necessarily favorable or there is a lack of evidence to
support fair values greater than or equal to the carrying value of the investment. Securities for which there is an
unrealized loss that is deemed to be other-than-temporary are written down to fair value with the write-down
recorded as a realized loss and included in net securities (losses) gains, but only to the extent the impairment is
related to credit deterioration. The amount of the impairment related to other factors is recognized in other
comprehensive (loss) income unless management intends to sell the security or believes it is more likely than not
that it will be required to sell the security prior to full recovery. For additional discussion on securities, see Notes 1
and 3 of ‘‘Notes to the Consolidated Financial Statements’’ in Item 8 of this Form 10-K.
Income Taxes
We determine our income tax expense based on management’s judgments and estimates regarding permanent
differences in the treatment of specific items of income and expense for financial statement and income tax
purposes. These permanent differences result in an effective tax rate that differs from the federal statutory rate. In
addition, we recognize deferred tax assets and liabilities in the Consolidated Statements of Financial Condition
based on management’s judgment and estimates regarding timing differences in the recognition of income and
expenses for financial statement and income tax purposes.
We also assess the likelihood that any deferred tax assets will be realized through the reduction or refund of taxes in
future periods and establish a valuation allowance for those assets for which recovery is not more likely than not. In
making this assessment, management makes judgments and estimates regarding the ability to realize the asset
through carryback to taxable income in prior years, the future reversal of existing taxable temporary differences,
future taxable income, and the possible application of future tax planning strategies. Management believes that it is
more likely than not that deferred tax assets included in the accompanying Consolidated Statements of Financial
Condition will be fully realized, although there is no guarantee that those assets will be recognizable in future
periods. For additional discussion of income taxes, see Notes 1 and 15 of ‘‘Notes to the Consolidated Financial
Statements’’ in Item 8 of this Form 10-K.
FORWARD-LOOKING STATEMENTS
This report, as well as our other filings with the SEC or our communications with stockholders, may contain
forward-looking statements within the safe harbor provisions of the Private Securities Litigation Reform Act of
1995 (‘‘PSLRA’’). These statements involve known and unknown risks, uncertainties, and other factors that may
cause actual results to be materially different from any results, levels of activity, performance, or achievements
expressed or implied by any forward-looking statement. These factors include, among other things, the factors
listed below.
In some cases, we identified forward-looking statements by such words or phrases as ‘‘will likely result,’’ ‘‘is
confident that,’’ ‘‘remains optimistic about,’’ ‘‘expects,’’ ‘‘should,’’ ‘‘could,’’ ‘‘seeks,’’ ‘‘may,’’ ‘‘will continue to,’’
‘‘believes,’’ ‘‘anticipates,’’ ‘‘predicts,’’ ‘‘forecasts,’’ ‘‘estimates,’’ ‘‘projects,’’ ‘‘potential,’’ ‘‘intends,’’ or similar
expressions identifying forward-looking statements within the meaning of the PSLRA, including the negative of
those words and phrases. These forward-looking statements are not historical facts but instead are based on
management’s current views and assumptions regarding future events, future business conditions, outcomes, and
our outlook for the Company based on currently available information. We wish to caution readers not to place
undue reliance on any such forward-looking statements, which speak only at the date made.
90
In connection with the safe harbor provisions of the PSLRA, we are hereby identifying important factors that could
affect our financial performance and could cause our actual results for future periods to differ materially from any
opinions or statements expressed with respect to future periods in any forward-looking statements.
Among the factors that could have an impact on our ability to achieve operating results, growth plan goals, and the
beliefs expressed or implied in forward-looking statements are:
(cid:129) Management’s ability to reduce and effectively manage interest rate risk and the impact of interest rates in
general on the volatility of our net interest income.
(cid:129) Asset and liability matching risks and liquidity risks.
(cid:129)
Fluctuations in the value of our investment securities.
(cid:129) The ability to attract and retain senior management experienced in banking and financial services.
(cid:129) The sufficiency of the allowance for credit losses to absorb the amount of actual losses inherent in the
existing portfolio of loans.
(cid:129) The failure of assumptions underlying the establishment of the allowance for credit losses and estimation of
values of collateral and various financial assets and liabilities.
(cid:129) Credit risks and risks from concentrations (by geographic area and by industry) within our loan portfolio.
(cid:129) The effects of competition from other commercial banks, thrifts, mortgage banking firms, consumer
finance companies, credit unions, securities brokerage firms, insurance companies, money market and
other mutual funds, and other financial institutions operating in our markets or elsewhere providing similar
services.
(cid:129) Changes in the economic environment, competition, or other factors that may influence the anticipated
growth rate of loans and deposits, the quality of the loan portfolio, and loan and deposit pricing.
(cid:129) Changes in general economic or industry conditions, nationally or in the communities in which we conduct
business.
(cid:129) Volatility of rate sensitive deposits.
(cid:129) Our ability to adapt successfully to technological changes to compete effectively in the marketplace.
(cid:129) Operational risks, including data processing system failures or fraud.
(cid:129) Our ability to successfully pursue acquisition and expansion strategies and integrate any acquired
companies.
(cid:129) The impact of liabilities arising from legal or administrative proceedings, enforcement of bank regulations,
and enactment or application of securities regulations.
(cid:129) Governmental monetary and fiscal policies and legislative and regulatory changes that may result in the
imposition of costs and constraints through higher FDIC insurance premiums, significant fluctuations in
market interest rates, increases in capital requirements, or operational limitations.
(cid:129) Changes in federal and state tax laws or interpretations, including changes affecting tax rates, income not
subject to tax under existing law and interpretations, income sourcing, or consolidation/combination rules.
(cid:129) Changes in accounting principles, policies, or guidelines affecting the businesses we conduct.
(cid:129) Acts of war or terrorism.
(cid:129) Other economic, competitive, governmental, regulatory, and technological factors affecting our operations,
products, services, and prices.
The foregoing list of important factors may not be all-inclusive, and we specifically decline to undertake any
obligation to publicly revise any forward-looking statements that were made to reflect events or circumstances after
the date of such statements or to reflect the occurrence of anticipated or unanticipated events.
With respect to forward-looking statements set forth in the notes to the consolidated financial statements, including
those relating to contingent liabilities and legal proceedings, some of the factors that could affect the ultimate
disposition of those contingencies are changes in applicable laws, the development of facts in individual cases,
settlement opportunities, and the actions of plaintiffs, defendants, judges, and juries.
91
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
The disclosures set forth in this item are qualified by Item 1A. Risk Factors and the section captioned ‘‘Forward-
Looking Statements’’ included in Item 7. Management’s Discussion and Analysis of Financial Condition and
Results of Operations, of this report, and other cautionary statements set forth elsewhere in this report.
Market risk is the risk of loss arising from adverse changes in the fair value of financial instruments due to changes
in interest rates, exchange rates, and equity prices. Interest rate risk is our primary market risk and is the result of
repricing, basis, and option risk. Repricing risk represents timing mismatches in our ability to alter contractual rates
earned on interest-earning assets or paid on interest-bearing liabilities in response to changes in market interest
rates. Basis risk refers to the potential for changes in the underlying relationship between market rates or indices,
which subsequently result in a narrowing of the spread between the rate earned on a loan or investment and the rate
paid to fund that investment. Option risk arises from the ‘‘embedded options’’ present in many financial
instruments such as loan prepayment options or deposit early withdrawal options. These provide customers
opportunities to take advantage of directional changes in interest rates and could have an adverse impact on our
margin performance.
We seek to achieve consistent growth in net interest income and net income while managing volatility that arises
from shifts in interest rates. The Bank’s Asset and Liability Committee (‘‘ALCO’’) oversees financial risk
management by developing programs to measure and manage interest rate risks within authorized limits set by the
Bank’s Board of Directors. ALCO also approves the Bank’s asset and liability management policies, oversees the
formulation and implementation of strategies to improve balance sheet positioning and earnings, and reviews the
Bank’s interest rate sensitivity position. Management uses net interest income and economic value of equity
simulation modeling tools to analyze and capture short-term and long-term interest rate exposures.
Net Interest Income Sensitivity
The analysis of net interest income sensitivities assesses the magnitude of changes in net interest income resulting
from changes in interest rates over a 12-month horizon using multiple rate scenarios. These scenarios include, but
are not limited to, a most likely forecast, a flat to inverted or unchanged rate environment, a gradual increase and
decrease of 200 basis points that occur in equal steps over a six-month time horizon, and immediate increases and
decreases of 200 and 300 basis points.
This simulation analysis is based on actual cash flows and repricing characteristics for balance sheet and
off-balance sheet instruments and incorporates market-based assumptions regarding the effect of changing interest
rates on the prepayment rates of certain assets and liabilities. This simulation analysis includes management’s
projections for activity levels in each of the product lines we offer. The analysis also incorporates assumptions
based on the historical behavior of deposit rates and balances in relation to interest rates. Because these
assumptions are inherently uncertain, the simulation analysis cannot definitively measure net interest income or
predict the impact of the fluctuation in interest rates on net interest income. Actual results may differ from
simulated results due to timing, magnitude, and frequency of interest rate changes as well as changes in market
conditions and management strategies.
We monitor and manage interest rate risk within approved policy limits. Our current interest rate risk policy limits
are determined by measuring the change in net interest income over a 12-month horizon.
92
Analysis of Net Interest Income Sensitivity
(Dollar amounts in thousands)
Gradual Change in Rates (1)
Immediate Change in Rates
(cid:3)200
+200
(cid:3)200
+200
(cid:3)300 (2)
+300
December 31, 2012:
Dollar change ............................
Percent change ...........................
$ (10,678)
(cid:3)4.1%
$ 12,933
+4.9%
$ (19,173)
(cid:3)7.3%
$ 19,766
+7.5%
December 31, 2011:
Dollar change ............................
Percent change ...........................
$ (8,457)
(cid:3)3.1%
$ 13,392
+4.9%
$ (13,983)
(cid:3)5.2%
$ 19,209
+7.1%
N/M
N/M
N/M
N/M
$ 33,786
+12.8%
$ 36,576
+13.5%
(1) Reflects an assumed uniform change in interest rates across all terms that occurs in equal steps over a six-month horizon.
(2) N/M – Due to the low level of interest rates as of December 31, 2012 and 2011, management deemed an assumed 300 basis
point drop in interest rates not meaningful in the existing interest rate environment.
Overall, in gradually rising interest rate scenarios, interest rate risk volatility was stable at December 31, 2012
compared to December 31, 2011 and in declining interest rate scenarios, interest rate risk volatility is more negative
at December 31, 2012 than at December 31, 2011. As our interest-earning assets continue to reprice in the low
interest rate environment, the exposure to further declines in interest rates is reduced and drives the decrease in net
interest income volatility under falling interest rate scenarios.
Economic Value of Equity
In addition to the simulation analysis, management uses an economic value of equity sensitivity technique to
understand the risk in both shorter-term and longer-term positions and to study the impact of longer-term cash
flows on earnings and capital. In determining the economic value of equity, we discount present values of expected
cash flows on all assets, liabilities, and off-balance sheet contracts under different interest rate scenarios. The
discounted present value of all cash flows represents our economic value of equity. Economic value of equity does
not represent the true fair value of asset, liability, or derivative positions because certain factors are not considered,
such as credit risk, liquidity risk, and the impact of future changes to the balance sheet.
Analysis of Economic Value of Equity
(Dollar amounts in thousands)
Immediate Change in Rates
(cid:3)200
+200
(cid:3)300 (1)
+300
December 31, 2012:
$(134,704)
Dollar change ......................................................
Percent change..................................................... (cid:3)11.0%
$ 130,148
+10.6%
December 31, 2011:
Dollar change ......................................................
$(168,853)
Percent change..................................................... (cid:3)13.3%
$ 148,369
+11.7%
N/M
N/M
N/M
N/M
$ 181,210
+14.7%
$ 221,525
+17.4%
(1) N/M – Due to the low level of interest rates as of December 31, 2012 and 2011, management deemed an assumed 300 basis
point drop in interest rates not meaningful in the existing interest rate environment.
As of December 31, 2012, the estimated sensitivity of the economic value of equity to changes in rising interest
rates is less positive compared to December 31, 2011, and the estimated sensitivity to falling rates is less negative
compared to December 31, 2011. These changes were driven by an increase in the duration of the securities
portfolio and a decrease in short-term investments at December 31, 2012 compared to December 31, 2011.
93
Interest Rate Derivatives
As part of our approach to controlling the interest rate risk within our balance sheet, we use derivative instruments
(specifically interest rate swaps with third parties) to limit volatility in net interest income. The advantages of using
such interest rate derivatives include minimization of balance sheet leverage resulting in lower capital requirements
compared to cash instruments, the ability to maintain or increase liquidity, and the opportunity to customize the
interest rate swap to meet desired risk parameters. The accounting policies underlying the treatment of derivative
financial instruments in the Consolidated Statements of Financial Condition and Income of the Company are
described in Note 1 of ‘‘Notes to the Consolidated Financial Statements’’ in Item 8 of this Form 10-K.
We had total interest rate swaps in place with an aggregate notional amount of $15.9 million at December 31, 2012
and $16.9 million at December 31, 2011, hedging various balance sheet categories. The specific terms of the
interest rate swaps outstanding as of December 31, 2012 and 2011 are discussed in Note 19 of ‘‘Notes to the
Consolidated Financial Statements’’ in Item 8 of this Form 10-K.
94
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Management’s Responsibility for Financial Statements
To Our Stockholders:
The accompanying consolidated financial statements were prepared by management, which is responsible for the
integrity and objectivity of the data presented. In the opinion of management, the financial statements, which
necessarily include amounts based on management’s estimates and judgments, have been prepared in conformity
with U.S. generally accepted accounting principles.
Ernst & Young LLP, an independent registered public accounting firm, has audited these consolidated financial
statements in accordance with the standards of the Public Company Accounting Oversight Board (United States)
and has expressed its unqualified opinion on these financial statements.
The Audit Committee of the Board of Directors, which oversees the Company’s financial reporting process on
behalf of the Board of Directors, is composed entirely of independent directors (as defined by the listing standards
of Nasdaq). The Audit Committee meets periodically with management, the independent accountants, and the
internal auditors to review matters relating to the Company’s financial statements, compliance with legal and
regulatory requirements relating to financial reporting and disclosure, annual financial statement audit,
engagement of independent accountants, internal audit function, and system of internal controls. The internal
auditors and the independent accountants periodically meet alone with the Audit Committee and have access to the
Audit Committee at any time.
2APR201213102221
Michael L. Scudder
President and
Chief Executive Officer
March 1, 2013
3MAR201210191306
Paul F. Clemens
Executive Vice President and
Chief Financial Officer
95
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders of First Midwest Bancorp, Inc.
We have audited the accompanying consolidated statements of financial condition of First Midwest Bancorp, Inc.
(the ‘‘Company’’) as of December 31, 2012 and 2011, and the related consolidated statements of income,
comprehensive income, changes in stockholders’ equity, and cash flows for each of the three years in the period
ended December 31, 2012. These financial statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated
financial position of the Company at December 31, 2012 and 2011, and the consolidated results of its operations
and its cash flows for each of the three years in the period ended December 31, 2011, in conformity with U.S.
generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board
(United States), the Company’s internal control over financial reporting as of December 31, 2012, based on criteria
established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission and our report dated March 1, 2013 expressed an unqualified opinion thereon.
Chicago, Illinois
March 1, 2013
23FEB200707035326
96
FIRST MIDWEST BANCORP, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Amounts in thousands, except per share data)
December 31,
2012
2011
$
149,420
566,846
14,162
1,082,403
$
123,354
518,176
14,469
1,013,006
Assets
Cash and due from banks ..........................................................................
Interest-bearing deposits in other banks ........................................................
Trading securities, at fair value ...................................................................
Securities available-for-sale, at fair value ......................................................
Securities held-to-maturity, at amortized cost (fair value 2012 – $36,023; 2011 –
$61,477)..............................................................................................
Federal Home Loan Bank (‘‘FHLB’’) and Federal Reserve Bank stock, at cost ...
Loans, excluding covered loans...................................................................
Covered loans ..........................................................................................
Allowance for loan and covered loan losses ..................................................
Net loans.............................................................................................
Other real estate owned (‘‘OREO’’), excluding covered OREO .........................
Covered OREO ........................................................................................
Federal Deposit Insurance Corporation (‘‘FDIC’’) indemnification asset .............
Premises, furniture, and equipment..............................................................
Accrued interest receivable ........................................................................
Investment in bank-owned life insurance (‘‘BOLI’’)........................................
Goodwill and other intangible assets............................................................
Other assets ............................................................................................
34,295
47,232
5,189,676
197,894
(99,446)
5,288,124
39,953
13,123
37,051
121,596
27,535
206,405
281,059
190,635
Total assets ..........................................................................................
$ 8,099,839
Liabilities
Noninterest-bearing deposits.......................................................................
Interest-bearing deposits ............................................................................
$ 1,762,903
4,909,352
$
$
Total deposits .......................................................................................
Borrowed funds .......................................................................................
Senior and subordinated debt .....................................................................
Accrued interest payable and other liabilities.................................................
Total liabilities .....................................................................................
Stockholders’ Equity
Common stock ........................................................................................
Additional paid-in capital ..........................................................................
Retained earnings .....................................................................................
Accumulated other comprehensive loss, net of tax .........................................
Treasury stock, at cost ..............................................................................
Total stockholders’ equity.......................................................................
6,672,255
185,984
214,779
85,928
7,158,946
858
418,318
786,453
(15,660)
(249,076)
940,893
60,458
58,187
5,088,113
260,502
(119,462)
5,229,153
33,975
23,455
65,609
134,977
29,826
206,235
283,650
179,064
7,973,594
1,593,773
4,885,402
6,479,175
205,371
252,153
74,308
7,011,007
858
428,001
810,487
(13,276)
(263,483)
962,587
Total liabilities and stockholders’ equity ...................................................
$ 8,099,839
$
7,973,594
Par value ..................................................
Shares authorized .......................................
Shares issued.............................................
Shares outstanding .....................................
Treasury shares ..........................................
December 31, 2012
December 31, 2011
Preferred
Shares
None
1,000
-
-
-
Common
Shares
$
0.01
100,000
85,787
74,840
10,947
Preferred
Shares
None
1,000
-
-
-
Common
Shares
$
0.01
100,000
85,787
74,435
11,352
See accompanying notes to the consolidated financial statements.
97
FIRST MIDWEST BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Amounts in thousands, except per share data)
Interest Income
Loans, excluding covered loans ..................................................
Investment securities – taxable ...................................................
Investment securities – tax-exempt..............................................
Covered loans .........................................................................
Federal funds sold and other short-term investments ......................
Total interest income........................................................
$
Interest Expense
Deposits .................................................................................
Borrowed funds .......................................................................
Senior and subordinated debt.....................................................
Total interest expense.......................................................
Net interest income ...........................................................
Provision for loan and covered loan losses ................................
Net interest income after provision for loan and covered loan
Years ended December 31,
2011
2010
2012
248,752
12,670
20,253
15,873
3,021
300,569
18,052
2,009
14,840
34,901
265,668
158,052
$
252,865
14,115
22,544
28,904
3,083
321,511
27,256
2,743
9,892
39,891
281,620
80,582
$
259,318
22,116
27,685
17,285
2,463
328,867
37,127
3,267
9,124
49,518
279,349
147,349
losses...........................................................................
107,616
201,038
132,000
Noninterest Income
Service charges on deposit accounts ...........................................
Wealth management fees...........................................................
Other service charges, commissions, and fees...............................
Card-based fees .......................................................................
Total fee-based revenues ........................................................
Net securities (losses) gains.......................................................
Gain on bulk loan sales ............................................................
Other income ..........................................................................
Total noninterest income ..................................................
Noninterest Expense
Salaries and wages...................................................................
Retirement and other employee benefits ......................................
Net occupancy and equipment expense........................................
Technology and related costs .....................................................
Professional services ................................................................
Net OREO expense..................................................................
FDIC premiums ......................................................................
Advertising and promotions.......................................................
Merchant card expense .............................................................
Accelerated amortization of FDIC indemnification asset ................
Other expenses ........................................................................
Total noninterest expense .................................................
(Loss) income before income tax (benefit) expense .......................
Income tax (benefit) expense .....................................................
Net (loss) income .............................................................
Preferred dividends and accretion on preferred stock .....................
Net loss (income) applicable to non-vested restricted shares ...........
Net (loss) income applicable to common shares ..................
Per Common Share Data
Basic (loss) earnings per common share...................................
Diluted (loss) earnings per common share ................................
Weighted-average common shares outstanding...........................
Weighted-average diluted common shares outstanding ................
See accompanying notes to the consolidated financial statements.
98
36,699
21,791
17,981
20,852
97,323
(921)
5,153
8,393
109,948
105,231
25,524
32,699
11,846
29,614
10,521
6,926
5,073
8,584
6,705
24,777
267,500
(49,936)
(28,882)
(21,054)
-
306
(20,748)
(0.28)
(0.28)
73,665
73,666
$
$
$
37,879
20,324
16,386
19,593
94,182
2,410
-
5,345
101,937
101,703
27,071
32,953
10,905
26,356
16,293
7,990
6,198
8,643
-
23,792
261,904
41,071
4,508
36,563
(10,776)
(350)
25,437
0.35
0.35
73,289
73,289
$
$
$
35,884
18,807
14,494
17,577
86,762
12,216
-
9,573
108,551
94,361
20,017
32,218
11,070
22,903
50,034
10,880
6,642
7,882
-
22,772
278,779
(38,228)
(28,544)
(9,684)
(10,299)
266
(19,717)
(0.27)
(0.27)
72,422
72,422
$
$
$
FIRST MIDWEST BANCORP, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Amounts in thousands)
Net (loss) income ...............................................................
Available-for-sale securities
Unrealized holding gains:
Before tax ...................................................................
Tax effect....................................................................
Net of tax ................................................................
Reclassification of net (losses) gains included in net (loss)
income:
Before tax ...................................................................
Tax effect....................................................................
Net of tax ................................................................
Net unrealized holding gains (losses)..................................
Unrecognized net pension costs
Unrealized holding losses:
Before tax ...................................................................
Tax effect....................................................................
Net of tax ................................................................
Total other comprehensive (loss) income ..........................
Years Ended December 31,
2011
2010
2012
$ (21,054)
$
36,563
$
(9,684)
1,513
(588)
925
(921)
377
(544)
1,469
(6,520)
2,667
(3,853)
(2,384)
34,303
(13,427)
20,876
2,410
(986)
1,424
19,452
(8,860)
3,871
(4,989)
14,463
1,067
(406)
661
12,216
(4,764)
7,452
(6,791)
(3,740)
1,458
(2,282)
(9,073)
Comprehensive (loss) income ..............................................
$ (23,438)
$
51,026
$ (18,757)
Accumulated
Unrealized
(Loss) Gain on
Securities
Available-
for-Sale
Total
Accumulated
Other
Unrecognized
Net Pension Comprehensive
(Loss) Income
Costs
Balance at January 1, 2010 ..................................................
2010 other comprehensive loss..............................................
$ (13,015)
(6,791)
$
(5,651)
(2,282)
(7,933)
(4,989)
(12,922)
(3,853)
$ (18,666)
(9,073)
(27,739)
14,463
(13,276)
(2,384)
$ (16,775)
$ (15,660)
Balance at December 31, 2010 .............................................
2011 other comprehensive income (loss) ................................
Balance at December 31, 2011 .............................................
2012 other comprehensive income (loss) ................................
Balance at December 31, 2012 .............................................
$
(19,806)
19,452
(354)
1,469
1,115
See accompanying notes to the consolidated financial statements.
99
FIRST MIDWEST BANCORP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(Amounts in thousands, except per share data)
Common
Shares
Out-
Standing
Preferred
Stock
Common
Stock
Additional
Paid-in
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
(Loss)
Income
Treasury
Stock
Total
54,793
-
$
190,233
-
$
-
-
-
18,818
-
460
25
-
-
649
-
-
-
-
670
-
-
-
-
188
-
-
-
$
252,322
-
$
810,626
(9,684)
$
(18,666)
(9,073)
$
(293,664)
-
$
941,521
(18,757)
-
-
-
195,847
5,638
(15,864)
(393)
(2,965)
(9,650)
(649)
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
15,624
856
(2,965)
(9,650)
-
196,035
5,638
(240)
463
74,096
-
190,882
-
858
-
437,550
-
787,678
36,563
(27,739)
14,463
(277,184)
-
1,112,045
51,026
-
-
-
-
-
-
335
4
74,435
-
-
-
408
(3)
-
-
2,118
(193,000)
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
(910)
6,362
(14,895)
(106)
(2,978)
(8,658)
(2,118)
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
13,507
194
(2,978)
(8,658)
-
(193,000)
(910)
6,362
(1,388)
88
858
-
428,001
-
810,487
(21,054)
(13,276)
(2,384)
(263,483)
-
962,587
(23,438)
-
-
-
-
-
(2,980)
6,004
(15,604)
(83)
-
-
-
-
-
-
-
-
-
14,284
123
(2,980)
6,004
(1,320)
40
$
858
$
418,318
$
786,453
$
(15,660)
$
(249,076)
$
940,893
Balance at January 1, 2010 ..
Comprehensive loss ..............
Common dividends declared
($0.04 per common share) ..
Preferred dividends declared
($50.00 per preferred share)
Accretion on preferred stock ..
Issuance of common stock .....
Share-based compensation
expense ..........................
Restricted stock activity.........
Treasury stock issued to
benefit plans....................
Balance at December 31,
2010 ..............................
Comprehensive income..........
Common dividends declared
($0.04 per common share) ..
Preferred dividends declared
($44.86 per preferred share)
Accretion on preferred stock ..
Redemption of preferred stock
Redemption of common stock
warrant...........................
Share-based compensation
expense ..........................
Restricted stock activity.........
Treasury stock issued to
benefit plans....................
Balance at December 31,
2011 ..............................
Comprehensive loss ..............
Common dividends declared
($0.04 per common share) ..
Share-based compensation
expense ..........................
Restricted stock activity.........
Treasury stock (purchased for)
issued to benefit plans .......
Balance at December 31,
2012 ..............................
74,840
$
See accompanying notes to the consolidated financial statements.
100
FIRST MIDWEST BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollar amounts in thousands)
Operating Activities
Net (loss) income ...................................................................................
Adjustments to reconcile net (loss) income to net cash provided by operating
activities:
Provision for loan and covered loan losses ...............................................
Depreciation of premises, furniture, and equipment ...................................
Net amortization of premium on securities ...............................................
Net securities losses (gains) ..................................................................
Gains on sales of loans ........................................................................
Gains on FDIC-assisted transactions .......................................................
Net losses on early extinguishment of debt ..............................................
Net losses on sales and valuation adjustments of OREO .............................
Net losses (gains) on sales and valuation adjustments of premises, furniture,
and equipment.................................................................................
BOLI income .....................................................................................
Net pension cost .................................................................................
Share-based compensation expense .........................................................
Tax benefit (expense) related to share-based compensation .........................
Net (increase) decrease in net deferred tax assets ......................................
Amortization of other intangible assets....................................................
Originations and purchases of mortgage loans held-for-sale.........................
Proceeds from sales of mortgage loans held-for-sale ..................................
Net decrease (increase) in trading account securities ..................................
Net decrease in accrued interest receivable...............................................
Net decrease in accrued interest payable ..................................................
Net decrease in other assets ..................................................................
Net increase (decrease) in other liabilities ................................................
Net cash provided by operating activities...........................................
Investing Activities
Proceeds from maturities, repayments, and calls of securities available-for-sale ..
Proceeds from sales of securities available-for-sale .......................................
Purchases of securities available-for-sale .....................................................
Proceeds from maturities, repayments, and calls of securities held-to-maturity ...
Purchases of securities held-to-maturity ......................................................
Redemption (purchase) of FHLB and Federal Reserve Bank stock ...................
Proceeds from sales of loans held-for-sale...................................................
Net increase in loans...............................................................................
Proceeds from claims on BOLI, net of purchases .........................................
Proceeds from sales of OREO ..................................................................
Proceeds from sales of premises, furniture, and equipment .............................
Purchases of premises, furniture, and equipment ..........................................
Proceeds received from the FDIC in FDIC-assisted transactions ......................
Other net cash proceeds received in FDIC-assisted transactions .......................
Net cash (used in) provided by investing activities ..............................
Financing Activities
Net cash proceeds received in acquisition of deposits ....................................
Net increase (decrease) in deposit accounts .................................................
Net decrease in borrowed funds ................................................................
(Payments for the retirement) proceeds from the issuance of subordinated debt ..
Redemption of preferred stock and related common stock warrant...................
Proceeds from the issuance of common stock ..............................................
Cash dividends paid ................................................................................
Restricted stock activity ...........................................................................
Excess tax (expense) benefit related to share-based compensation ...................
Net cash provided by (used in) financing activities ..........................
Net increase in cash and cash equivalents..........................................
Cash and cash equivalents at beginning of year ..................................
Cash and cash equivalents at end of year.......................................
See accompanying notes to the consolidated financial statements.
101
Years ended December 31,
2011
2012
2010
$
(21,054)
$
36,563
$
(9,684)
158,052
10,874
22,433
921
(7,422)
(3,289)
558
4,886
2,695
(1,307)
2,813
6,004
170
(29,279)
3,372
-
-
307
2,409
(1,135)
7,708
10,108
169,824
362,481
153,668
(588,429)
66,215
(48,999)
11,918
98,670
(276,818)
1,137
50,566
6,768
(8,764)
21,996
4,984
(144,607)
80,582
10,995
10,314
(2,410)
-
-
-
9,686
1,252
(2,231)
3,911
6,362
(179)
2,160
3,802
-
236
813
127
(633)
7,674
(1,903)
167,121
271,511
188,556
(391,282)
83,113
(62,251)
3,151
-
(14,297)
2,588
37,731
5,542
(11,018)
-
-
113,344
147,349
11,397
2,404
(12,216)
-
(4,303)
-
17,113
(92)
(1,560)
872
5,638
350
(15,057)
4,279
(7,612)
8,531
(1,046)
3,195
(1,531)
31,130
14,412
193,569
257,934
390,217
(375,342)
70,194
(62,326)
(2,301)
-
(23,957)
1,878
56,480
354
(22,265)
41,542
80,787
413,195
-
120,362
(29,343)
(37,033)
-
-
(2,977)
(1,469)
(21)
49,519
74,736
641,530
$ 716,266
106,499
(139,037)
(98,603)
114,387
(193,910)
-
(12,838)
(1,256)
47
(224,711)
55,754
585,776
$ 641,530
-
80,076
(411,466)
-
-
196,035
(12,422)
(401)
(189)
(148,367)
458,397
127,379
$ 585,776
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations – First Midwest Bancorp, Inc. (the ‘‘Company’’) is a bank holding company that was
incorporated in Delaware in 1982 and began operations on March 31, 1983. The Company is headquartered in
Itasca, Illinois and has operations located primarily in the suburban metropolitan Chicago area, as well as central
and western Illinois and eastern Iowa. The Company operates three wholly owned subsidiaries: First Midwest Bank
(the ‘‘Bank’’), Catalyst Asset Holdings, LLC (‘‘Catalyst’’), and Parasol Investment Management, LLC (‘‘Parasol’’).
The Bank conducts the majority of the Company’s operations. Catalyst manages a portion of the Company’s
non-performing assets. Parasol serves in an advisory capacity to certain wealth management accounts with the
Bank. For your reference, a glossary of certain terms is presented on pages 3 and 4 of this Form 10-K.
The Company is engaged in commercial and retail banking and offers a comprehensive selection of financial
products and services, including lending, depository, wealth management, and other related financial services
tailored to the needs of its individual, business, institutional, and governmental customers.
Principles of Consolidation – The accompanying consolidated financial statements include the accounts and
results of operations of the Company and its subsidiaries after elimination of all significant intercompany accounts
and transactions. Assets held in a fiduciary or agency capacity are not assets of the Company or its subsidiaries and,
accordingly, are not included in the consolidated financial statements.
Basis of Presentation – The accounting and reporting policies of the Company and its subsidiaries conform to U.S.
generally accepted accounting principles (‘‘GAAP’’) and general practice within the banking industry. The
Company uses the accrual basis of accounting for financial reporting purposes. Certain reclassifications 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.
The following is a summary of the Company’s significant accounting policies.
Business Combinations – Business combinations are accounted for under the purchase method of accounting. Net
assets of the business acquired are recorded at their estimated fair values as of the date of acquisition, with any
excess of the cost over the fair value of the net tangible and identifiable intangible assets acquired recorded as
goodwill. The results of operations of the acquired business are included in the Consolidated Statements of Income
from the effective date of acquisition.
Cash and Cash Equivalents – For purposes of the Consolidated Statements of Cash Flows, management defines
cash and cash equivalents to include cash and due from banks, interest-bearing deposits in other banks, and other
short-term investments, if any, such as federal funds sold and securities purchased under agreements to resell.
Securities – Securities are classified as held-to-maturity, trading, or available-for-sale at the time of purchase.
Securities Held-to-Maturity – Securities classified as held-to-maturity are securities for which management has
the positive intent and ability to hold to maturity. These securities are stated at cost and adjusted for amortization of
premiums and accretion of discounts over the estimated lives of the securities using the effective interest method.
Trading Account Securities – The Company’s trading securities consist of diversified investment securities held in
a grantor trust under deferred compensation arrangements in which plan participants may direct amounts earned to
be invested in securities other than Company stock. The accounts of the grantor trust are consolidated with the
accounts of the Company in its consolidated financial statements. Trading securities are reported at fair value. Net
trading gains (losses) represent changes in the fair value of the trading securities portfolio and are included in other
noninterest income in the Consolidated Statements of Income. The corresponding deferred compensation
102
obligation is also reported at fair value with unrealized gains and losses recognized as a component of
compensation expense. Other than the securities held in the grantor trust, the Company does not carry any securities
for trading purposes.
Securities Available-for-Sale – All other securities are classified as available-for-sale. Securities available-for-sale
are carried at fair value with unrealized gains and losses, net of related deferred income taxes, recorded in
stockholders’ equity as a separate component of accumulated other comprehensive loss.
The historical cost of debt securities is adjusted for amortization of premiums and accretion of discounts over the
estimated life of the security using the effective interest method. Amortization of premiums and accretion of
discounts are included in interest income.
Purchases and sales of securities are recognized on a trade date basis. Realized securities gains or losses are
reported in net securities (losses) gains in the Consolidated Statements of Income. The cost of securities sold is
based on the specific identification method. On a quarterly basis, the Company individually assesses securities with
unrealized losses to determine whether there were any events or circumstances indicating that an
other-than-temporary impairment (‘‘OTTI’’) has occurred. In evaluating OTTI, the Company considers many
factors, including (i) the severity and duration of the impairment; (ii) the financial condition and near-term
prospects of the issuer, which considers external credit ratings and recent downgrades for debt securities; (iii) its
intent to hold the security for a period of time sufficient for a recovery in value; and (iv) the likelihood that it will be
required to sell the security before a recovery in value, which may be at maturity. If management intends to sell the
security or believes it is more likely than not that it will be required to sell the security prior to full recovery, an
OTTI charge will be recognized through income as a realized loss and included in net securities (losses) gains in the
Consolidated Statements of Income. If management does not expect to sell the security or believes it is not more
likely than not that it will be required to sell the security prior to full recovery, the OTTI is comprised of the amount
of the credit loss, which is recognized through income as a realized loss, and the amount related to other factors,
which is recognized in other comprehensive (loss) income.
Loans – Loans held-for-investment are loans that the Company intends to hold until they are paid in full and are
carried at the principal amount outstanding, including certain net deferred loan origination fees. Interest income on
loans is accrued based on principal amounts outstanding. Loan origination fees, commitment fees, and certain
direct loan origination costs are deferred, and the net amount is amortized over the estimated life of the related loans
or commitments as a yield adjustment and included in interest income. Fees related to standby letters of credit are
amortized into fee income over the estimated life of the commitment. Other credit-related fees are recognized as fee
income when earned. Loans held-for-sale are carried at the lower of aggregate cost or fair value and included in
other assets in the Consolidated Statements of Financial Condition.
Purchased Impaired Loans – Purchased impaired loans are recorded at their estimated fair values on their
respective purchase dates and are accounted for prospectively based on estimates of expected cash flows. No
allowance for credit losses is recorded on these loans at the acquisition date. In determining the fair value of
purchased impaired loans at acquisition date and in subsequent periods, the Company generally aggregates
purchased consumer loans and certain smaller balance commercial loans into pools of loans with common risk
characteristics, such as delinquency status, credit score, and internal risk rating. Larger balance commercial loans
are usually accounted for on an individual basis. Expected future cash flows in excess of the fair value of loans at
the purchase date (‘‘accretable yield’’) are recorded as interest income over the life of the loans if the timing and
amount of the future cash flows can be reasonably estimated. The non-accretable yield represents the difference
between contractually required payments and the cash flows expected to be collected at acquisition.
Subsequent to the purchase date, increases in cash flows over those expected at the purchase date are recognized as
interest income prospectively. The present value of any decreases in expected cash flows after the purchase date is
recognized by recording a charge-off through the allowance for covered loan losses or establishing an allowance for
covered loan losses.
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 based on contractual terms unless the loan is sufficiently
collateralized such that full repayment of both principal and interest is expected and is in the process of collection
within a reasonable period or (ii) when an individual analysis of a borrower’s creditworthiness indicates a credit
103
should be placed on non-accrual status whether or not the loan is 90 days or more past due. 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 and covered loan losses. After the loan is placed on
non-accrual, all debt service payments are applied to the principal on the loan. Future interest income may only be
recorded on a cash basis after recovery of principal is reasonably assured. Non-accrual loans are returned to accrual
status when the financial position of the borrower and other relevant factors indicate that the Company will collect
all principal and interest due.
Commercial loans and loans secured by real estate are generally charged-off when deemed uncollectible. A loss is
recorded if the net realizable value of the underlying collateral can be quantified and it is less than the associated
principal and interest outstanding. Consumer loans that are not secured by real estate are subject to mandatory
charge-off at a specified delinquency date and are usually not classified as non-accrual prior to being charged-off.
Closed-end consumer loans, which include installment, automobile, and single payment loans, are generally
charged-off no later than the end of the month in which the loan becomes 120 days past due.
Generally, purchased impaired loans are considered accruing loans unless reasonable estimates of the timing and
amount of future cash flows cannot be determined. Loans without reasonable cash flow estimates are classified as
non-accrual loans, and interest income is not recognized on those loans until the timing and amount of the future
cash flows can be reasonably determined.
Troubled Debt Restructurings (‘‘TDRs’’) – A restructuring is considered a TDR when (i) the borrower is
experiencing financial difficulties and (ii) the creditor grants a concession that it would not otherwise consider,
such as forgiveness of principal, reduction of the interest rate, changes in payments, or extension of the maturity
date. Loans are not classified as TDRs when the modification is short-term or results in only an insignificant delay
or shortfall in 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 both
some level of past performance and the 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 whether the borrower has the capacity to
repay the loan under the modified terms. This evaluation includes an estimate of expected cash flows, evidence of
strong financial position, and estimates of the value of collateral, if applicable. However, in accordance with
industry regulation, these restructured loans continue to be separately reported as restructured until after the
calendar year in which the restructuring occurred. If the loan was restructured at below market rates and terms, it
continues to be separately reported as restructured until it is paid in full or charged-off.
Impaired Loans – Impaired loans consist of corporate non-accrual loans and TDRs.
With the exception of accruing TDRs, a loan is considered impaired when it is probable that the Company will not
collect all contractual principal and interest based on current information and events. Impaired loans are classified
as non-accrual and are exclusive of smaller homogeneous loans, such as home equity, 1-4 family mortgages, and
installment loans. After a loan is designated as impaired, 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.
Certain impaired loans with balances under a specified threshold are not individually evaluated for impairment. For
all other impaired loans, impairment is measured by comparing the estimated value of the loan to the recorded book
value. The value of collateral-dependent loans is based on the fair value of the underlying collateral, less costs to
sell. The value of other loans is measured using the present value of expected future cash flows discounted at the
loan’s initial effective interest rate. All impaired loans are included in non-performing assets. Purchased impaired
loans are not reported as impaired loans provided that estimates of the timing and amount of future cash flows can
be reasonably determined.
104
90-Days Past Due Loans – 90-days or more past due loans are loans with principal or interest payments three
months or more past due. The Company continues to accrue interest on past due loans if it determines those loans
are sufficiently collateralized and in the process of collection within a reasonable time period.
Allowance for Credit Losses – The allowance for credit losses is comprised of the allowance for loan losses, the
allowance for covered loan losses, and the reserve for unfunded commitments and is maintained by management at
a level believed adequate to absorb estimated losses inherent in the existing loan portfolio. Determination of the
allowance for credit losses is inherently subjective since it requires significant estimates and management
judgment, including the amounts and timing of expected future cash flows on impaired loans, estimated losses on
pools of homogeneous loans based on a migration analysis that uses historical loss experience, consideration of
current economic trends, and other factors.
Loans deemed to be uncollectible are charged-off against the allowance for loan and covered loan losses, while
recoveries of amounts previously charged-off are credited to the allowance for loan and covered loan losses.
Additions to the allowance for loan and covered loan losses are established through the provision for loan and
covered loan losses charged to expense. The amount charged to operating expense depends on a number of factors,
including net charge-off levels, loan growth, changes in the composition of the loan portfolio, and the Company’s
assessment of the allowance for loan and covered loan losses based on the methodology discussed below.
Allowance for Loan Losses – The allowance for loan losses consists of (i) specific reserves established for probable
losses on individual loans for which the recorded investment exceeds the value, (ii) an allowance based on a loss
migration analysis that uses historical credit loss experience for each loan category, and (iii) the impact of other
internal and external qualitative factors. The allowance for loan losses includes an allowance for covered open-end
consumer loans that are not categorized as purchased impaired loans.
The specific reserves component of the allowance for loan losses is based on a periodic analysis of impaired loans
exceeding a fixed dollar amount. If the value of an impaired loan is less than the recorded book value, the Company
either establishes a valuation allowance (i.e., a specific reserve) equal to the excess of the book value over the value
of the loan as a component of the allowance for loan losses or charges off the amount if it is a confirmed loss.
The component of the allowance for loan losses based on a loss migration analysis examines actual loss experience
for a rolling 8-quarter period by loan category and, for corporate loans, the related internal risk rating. The loss
migration analysis is performed quarterly, and the loss factors are updated based on actual experience. The loss
component derived from this migration analysis is then adjusted for management’s estimate of losses inherent in the
loan portfolio that have yet to be manifested in historical charge-off experience. Management takes into
consideration many internal and external qualitative factors when estimating this adjustment, including:
(cid:129) Changes in the composition of the loan portfolio, trends in the volume and terms of loans, and trends in
delinquent and non-accrual loans that could indicate that historical trends do not reflect current conditions.
(cid:129) Changes in credit policies and procedures, such as underwriting standards and collection, charge-off, and
recovery practices.
(cid:129) Changes in the experience, ability, and depth of credit management and other relevant staff.
(cid:129) Changes in the quality of the Company’s loan review system and Board of Directors oversight.
(cid:129) The existence and effect of any concentration of credit and changes in the level of concentrations, such as
market, loan type, or risk rating.
(cid:129) Changes in the value of the underlying collateral for collateral-dependent loans.
(cid:129) Changes in the national and local economy that affect the collectability of various segments of the portfolio.
(cid:129) The effect of other external factors, such as competition and legal and regulatory requirements, on estimated
credit losses in the Company’s loan portfolio.
Allowance for Covered Loan Losses – During the year ended December 31, 2012, the Company established an
allowance for covered loan losses, which reflects the difference between the carrying value and the discounted
present value of the estimated cash flows of the covered impaired loans. On a periodic basis, the adequacy of this
allowance is determined through a re-estimation of cash flows on all of the outstanding covered impaired loans
using either a probability of default/loss given default (‘‘PD/LGD’’) methodology or a specific review
methodology. The PD/LGD model is an expected loss model that estimates future cash flows using a probability of
default curve and loss given default estimates.
105
Reserve for Unfunded Commitments – The Company also maintains a reserve for unfunded commitments,
including letters of credit, to provide for the risk of loss inherent in these arrangements. The reserve for unfunded
commitments is computed based on a loss migration analysis similar to that used to determine the allowance for
loan losses, taking into consideration probabilities of future funding requirements. The reserve for unfunded
commitments is included in other liabilities in the Consolidated Statements of Financial Condition.
The establishment of the allowance for credit losses involves a high degree of judgment and includes a level of
imprecision 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 ultimate adequacy of
the allowance for credit losses is dependent upon a variety of factors beyond the Company’s control, including the
performance of its loan portfolio, the economy, changes in interest rates and property values, and the interpretation
of loan risk classifications by regulatory authorities. While each component of the allowance for credit losses is
determined separately, the entire balance is available for the entire loan portfolio.
OREO – OREO consists of properties acquired through foreclosure in partial or total satisfaction of defaulted
loans. At initial transfer into OREO, properties are recorded at the lower of the recorded investment in the loan(s)
for which the property served as collateral or fair value, which represents the current appraised value of the
properties, less estimated selling costs. OREO also includes excess properties that the Company no longer intends
to utilize. Those properties are transferred to OREO at the lower of their historical cost, less accumulated
depreciation, or fair value, which represents the current appraised value of the properties, less selling costs. OREO
write-downs occurring at the transfer date are charged against the allowance for loan and covered loan losses.
Subsequent to the initial transfer, the carrying values of OREO may be adjusted to reflect reductions in value
resulting from new appraisals, new list prices, changes in market conditions, or changes in disposition strategies.
These valuation adjustments are included in net OREO expense in the Consolidated Statements of Income along
with expenses related to maintenance of the properties.
FDIC Indemnification Asset – The majority of loans and OREO acquired through FDIC-assisted transactions are
covered by loss share agreements with the FDIC (the ‘‘FDIC Agreements’’), under which the FDIC reimburses the
Company for the majority of the losses and eligible expenses related to these assets. The FDIC indemnification
asset represents the present value of future expected reimbursements from the FDIC. Since the indemnified items
are covered loans and covered OREO, which are initially measured at fair value, the FDIC indemnification asset is
also initially measured at fair value by discounting the cash flows expected to be received from the FDIC. These
cash flows are estimated by multiplying estimated losses on purchased impaired loans and OREO by the
reimbursement rates set forth in the FDIC Agreements.
The balance of the FDIC indemnification asset is adjusted periodically to reflect changes in estimated cash flows.
Decreases in expected cash flows on the indemnification asset are recorded prospectively through amortization and
increases in estimated reimbursements from the FDIC are recognized by an increase in the carrying value of the
indemnification asset. Payments from the FDIC for reimbursement of losses are accounted for as a reduction in the
FDIC indemnification asset.
Depreciable Assets – Premises, furniture, equipment, and leasehold improvements are stated at cost, less
accumulated depreciation. Depreciation expense is determined by the straight-line method over the estimated
useful lives of the assets. Leasehold improvements are amortized over the shorter of the life of the asset or the lease
term. Gains on dispositions are included in other noninterest income, and losses on dispositions are included in
other noninterest expense in the Consolidated Statements of Income. Maintenance and repairs are charged to
operating expenses as incurred, while improvements that extend the useful life of assets are capitalized and
depreciated over the estimated remaining life.
Long-lived depreciable assets are evaluated periodically for impairment when events or changes in circumstances
indicate the carrying amount may not be recoverable. Impairment exists when the expected undiscounted future
cash flows of a long-lived asset are less than its carrying value. In that event, the Company recognizes a loss for the
difference between the carrying amount and the estimated fair value of the asset based on a quoted market price, if
applicable, or a discounted cash flow analysis. Impairment losses are recorded in other noninterest expense in the
Consolidated Statements of Income.
106
BOLI – BOLI represents life insurance policies on the lives of certain Company directors and officers for which
the Company is the sole owner and beneficiary. These policies are recorded as an asset in the Consolidated
Statements of Financial Condition at their cash surrender value (‘‘CSV’’) or the current amount that could be
realized if settled. The change in CSV and insurance proceeds received are included in other noninterest income in
the Consolidated Statements of Income.
Goodwill and Other Intangible Assets – Goodwill represents the excess of the purchase price over the fair value
of net assets acquired using the purchase method of accounting. Goodwill is not amortized, but is tested annually
for impairment or more often if events or circumstances between annual tests indicate that there may be
impairment.
Impairment testing is performed using a two-step process. Qualitative factors are assessed to determine whether the
two-step impairment test is necessary. If, after assessing those factors, the Company determines it is not more likely
than not that the fair value of a reporting unit is less than its carrying amount, then the two-step impairment test is
not necessary. If the Company concludes otherwise, then the first step of the two-step impairment test is performed.
In the first step, management compares its estimate of the fair value of a reporting unit, which is based on a
discounted cash flow analysis, with its carrying amount, including goodwill. If the fair value of a reporting unit
exceeds its carrying amount, goodwill of the reporting unit is not impaired and the second step of the impairment
test is not required. If necessary, the second step of the goodwill impairment test compares the implied fair value of
the reporting unit goodwill with the carrying amount of that goodwill. The implied fair value of goodwill is
determined by assigning the value of a reporting unit to all of the assets and liabilities of that unit, including any
other identifiable intangible assets. An impairment loss is recognized if the carrying amount of the reporting unit
goodwill exceeds the implied fair value of that goodwill.
Other intangible assets represent purchased assets that lack physical substance, but can be distinguished from
goodwill because of contractual or other legal rights or because the asset is capable of being sold or exchanged
either on its own or in combination with a related contract, asset, or liability. Identified intangible assets that have a
finite useful life are amortized over that life in a manner that reflects the estimated decline in the economic value of
the identified intangible asset. All of the Company’s other intangible assets have finite lives and are amortized over
varying periods not exceeding 13 years.
These intangible assets are reviewed at least annually to determine whether there were any events or circumstances
to indicate that the recorded amount is not recoverable from projected undiscounted net operating cash flows. If the
projected undiscounted net operating cash flows are less than the carrying amount, a loss is recognized to reduce the
carrying amount to fair value, and, when appropriate, the amortization period is also reduced. Unamortized
intangible assets associated with disposed assets are included in the determination of the gain or loss on the sale of
the disposed assets.
Wealth Management – Assets held in a fiduciary or agency capacity for customers are not included in the
consolidated financial statements as they are not assets of the Company or its subsidiaries. Fee income is
recognized on an accrual basis and is included as a component of noninterest income in the Consolidated
Statements of Income.
Derivative Instruments and Hedging Activities – In the ordinary course of business, the Company enters into
derivative transactions as part of its overall interest rate risk management strategy to minimize significant
unplanned fluctuations in earnings and cash flows caused by interest rate volatility. All derivative instruments are
recorded at fair value as either other assets or other liabilities in the Consolidated Statements of Financial
Condition. Subsequent changes in a derivative’s fair value are recognized in earnings unless specific hedge
accounting criteria are met.
On the date the Company enters into a derivative contract, the derivative is designated as a fair value hedge, a cash
flow hedge, or a non-hedge derivative instrument. Fair value hedges are designed to mitigate exposure to changes in
the fair value of an asset or liability attributable to a particular risk, such as interest rate risk. Cash flow hedges are
designed to mitigate exposure to variability in expected future cash flows to be received or paid related to an asset,
liability, or other type of forecasted transaction. The Company formally documents all relationships between
hedging instruments and hedged items, including its risk management objective and strategy for undertaking each
hedge transaction.
107
At the hedge’s inception and at least quarterly thereafter, a formal assessment is performed to determine the
effectiveness of the derivative in offsetting changes in the fair values or 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 effective fair value hedges, changes in the fair value of the derivative instruments, as well as changes in the fair
value of the hedged item, are recognized in earnings. For cash flow hedges, the effective portion of the change in
fair value of the derivative instrument is reported as a component of accumulated other comprehensive loss. The
unrealized gain or loss is reclassified into earnings in the same period the hedged transaction affects earnings.
The Company uses the dollar-offset method to measure ineffectiveness for its derivatives. Ineffectiveness is
calculated based on the change in fair value of the hedged item compared with the change in fair value of the
hedging instrument. For all types of hedges, any ineffectiveness in the hedging relationship is recognized in
earnings during the period the ineffectiveness occurs.
Comprehensive (Loss) Income – Comprehensive (loss) income is the total of reported net (loss) income and other
comprehensive (loss) income (‘‘OCI’’). OCI includes all other revenues, expenses, gains, and losses that are not
reported in net income under GAAP. The Company includes the following items, net of tax, in other comprehensive
(loss) income in the Consolidated Statements of Comprehensive (Loss) Income: (i) changes in unrealized gains or
losses on securities available-for-sale, (ii) changes in the fair value of derivatives designated under cash flow hedges
(when applicable), and (iii) changes in unrecognized net pension costs related to the Company’s pension plan.
Treasury Stock – Treasury stock acquired is recorded at cost and is carried as a reduction of stockholders’ equity
in the Consolidated Statements of Financial Condition. Treasury stock issued is valued based on the ‘‘last in, first
out’’ inventory method. The difference between the consideration received upon issuance and the carrying value is
charged or credited to additional paid-in capital.
Share-Based Compensation – The Company accounts for share-based compensation using the modified
prospective transition method and recognizes share-based compensation expense based on the estimated fair value
of the option or award at the grant or modification date. Share-based compensation expense is included in salaries
and wages in the Consolidated Statements of Income.
Advertising Costs – All advertising costs incurred by the Company are expensed in the period in which they are
incurred and included as a separate component of noninterest expense in the Consolidated Statements of Income.
Income Taxes – The Company files income tax returns in the U.S. federal jurisdiction and in Illinois, Indiana,
Iowa, and Wisconsin. The provision for income taxes is based on income in the consolidated financial statements,
rather than amounts reported on the Company’s income tax return.
Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred
tax assets and liabilities are measured using the enacted tax rates that are expected to apply to taxable income in
years in which those temporary differences are expected to be recovered or settled. A valuation allowance is
established for any deferred tax asset for which recovery or settlement is not more likely than not. The effect of a
change in tax rates on deferred tax assets and liabilities is recognized as income or expense in the period that
includes the enactment date.
Earnings per Common Share (‘‘EPS’’) – Basic EPS is computed by dividing net loss (income) applicable to
common shares by the weighted-average number of common shares outstanding for the period. The basic EPS
computation excludes the dilutive effect of all common stock equivalents. Diluted EPS is computed by dividing net
loss (income) applicable to common shares by the weighted-average number of common shares outstanding plus all
potential common shares. Diluted EPS reflects the potential dilution that could occur if securities or other contracts
108
to issue common stock were exercised or converted into common stock. The Company’s potential common shares
include shares issuable under its long-term incentive compensation plans and under common stock warrants, when
applicable. Such common stock equivalents are computed based on the treasury stock method using the average
market price for the period.
Segment Disclosures – An operating segment is a component of a business that (i) engages in business activities to
earn revenues and incur expenses; (ii) has operating results that are reviewed regularly by the entity’s chief
operating decision maker to make decisions about resources to be allocated to the segment and to assess its
performance; and (iii) has discrete financial information. The Company’s chief operating decision maker evaluates
the operations of the Company as one operating segment (commercial banking) for purposes of allocating resources
and assessing performance. Therefore, segment disclosures are not required.
2. RECENT EVENTS
Bulk Loan Sales
During the third quarter of 2012, the Company identified certain non-performing and performing potential problem
loans for accelerated disposition through multiple bulk loan sales and recorded charge-offs of $80.3 million. The
bulk loan sales of $172.5 million in original carrying value were completed in the fourth quarter of 2012, resulting
in proceeds of $94.5 million and a gain, less commissions and other selling expenses, of $2.6 million. Refer to
Note 4, ‘‘Loans,’’ for additional information regarding the bulk loan sales.
2012 Acquisition
On August 3, 2012, the Company acquired substantially all of the assets of the former Waukegan Savings Bank
(‘‘Waukegan Savings’’) in an FDIC-assisted transaction generating a pre-tax gain of $3.3 million. The $46.3 million
of acquired loans are not subject to a loss sharing agreement with the FDIC and are presented in the following table.
The transaction also included $72.7 million in deposits, which were comprised of $41.5 million in transactional
deposits and $31.2 million in time deposits. As a result of the transaction, the Company recorded $781,000 in core
deposit intangibles.
Purchased Loans by Portfolio Segment
(Dollar amounts in thousands)
Commercial and industrial .......................................................
Other commercial real estate....................................................
Consumer .............................................................................
$
1,968
5,393
12,972
Acquired
with
Deteriorated
Credit
Quality (1)
Other Loans
Acquired
$
6,694
560
18,736
$
Total
8,662
5,953
31,708
Total purchased loans ..........................................................
$ 20,333
$
25,990
$
46,323
(1) The accretable yield as of December 31, 2012 totaled $6.7 million.
2011 Acquisition
In December 2011, the Company completed the purchase of certain Chicago-market deposits. The transaction
included $106.7 million in deposits (comprised of $70.6 million in transactional deposits and $36.1 in time
deposits) and one banking facility located in the market in which the Company operates. As a result of the
transaction, the Company recorded $1.4 million in core deposit intangibles and a net gain of $1.1 million.
Gains realized on the above transactions are included in other income in the Consolidated Statements of Income.
109
Adopted Accounting Guidance
Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and
International Financial Reporting Standards (‘‘IFRS’’): In April of 2011, the Financial Accounting Standards
Board (‘‘FASB’’) issued guidance that clarifies the wording used to describe many of the requirements in GAAP for
measuring fair value to be consistent with IFRS. In addition, the guidance expands certain disclosure requirements
relating to fair value measurements. Specifically, the new guidance requires (i) quantitative information on
significant unobservable inputs, (ii) a description of a Company’s valuation processes, (iii) a narrative description
of the sensitivity of recurring Level 3 measurements to unobservable inputs, and (iv) the level in the fair value
hierarchy of assets and liabilities that are not carried at fair value, but are required to be disclosed at fair value in the
footnotes. This guidance is applied prospectively for interim and annual periods beginning after December 15,
2011. The new disclosures are included in Note 22, ‘‘Fair Value.’’ The adoption of this guidance on January 1, 2012
did not impact the Company’s financial condition, results of operations, or liquidity.
Reconsideration of Effective Control for Repurchase Agreements:
In April of 2011, the FASB issued
guidance that amends the accounting for repurchase agreements and other similar agreements that both entitle and
obligate a transferor to redeem financial assets before maturity. The guidance modifies the criteria for determining
when these transactions would be recorded as financing agreements instead of purchase or sale agreements with a
commitment to resell. This guidance is applied prospectively for interim and annual periods beginning after
December 15, 2011. The adoption of this guidance on January 1, 2012 did not materially impact the Company’s
financial condition, results of operations, or liquidity.
In September of 2011, the FASB issued guidance that gives an entity the
Testing Goodwill for Impairment:
option to first assess qualitative factors to determine whether the two-step impairment test is necessary. If, after
assessing those factors, an entity determines it is not more likely than not that the fair value of a reporting unit is less
than its carrying amount, then the two-step impairment test is not necessary. However, if an entity concludes
otherwise, then it is required to perform the first step of the two-step impairment test. The amendments were
effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15,
2011. The adoption of this guidance on January 1, 2012 did not have a material impact on the Company’s process
for goodwill impairment testing or its financial condition, results of operation, or liquidity.
In October of 2012, the FASB issued guidance to resolve the
Business Combinations – Indemnification Assets:
current diversity in practice for the subsequent measurement of an indemnification asset recognized in a
government-assisted transaction that includes a loss-sharing agreement. The amendment clarifies that an
indemnification asset should be measured on the same basis as the indemnified asset or liability, subject to any
contractual limitations on its amount, or management’s assessment of collectability for an indemnification asset
that is not measured at fair value. This guidance does not affect the recognition or initial measurement of an
indemnification asset. The amendments are to be applied prospectively to any new indemnification assets acquired
beginning on or after December 15, 2012. Early adoption is permitted. The Company’s accounting policies related
to its FDIC indemnification asset are consistent with the new requirements. Therefore, management elected to
adopt the guidance in the fourth quarter of 2012, and the adoption did not have a material impact on the Company’s
financial condition, results of operation, or liquidity.
Recently Issued Accounting Guidance
In December of 2011, the FASB issued
Balance Sheet – Disclosures about Offsetting Assets and Liabilities:
guidance on the presentation of offsetting assets and liabilities on the balance sheet, which was further clarified in
January 2013. This guidance requires an entity to disclose both the gross information and net information regarding
instruments and transactions eligible for offset, such as derivatives, sale and repurchase agreements, and securities
borrowing and lending arrangements. The statement is effective for annual and interim periods beginning on or
after January 1, 2013, and management does not expect the adoption to materially impact the Company’s financial
condition, results of operations, or liquidity.
110
In October of 2012, the FASB issued guidance to update the
Technical Corrections and Improvements:
Accounting Standards Codification (the ‘‘Codification’’) on a variety of topics, which include source literature
amendments, guidance clarification and reference corrections, and relocated guidance. In addition, the standard
includes amendments to conform terminology and clarifies certain fair value guidance in the Codification.
Although the updates do not introduce any new fair value measurement requirements and are not intended to result
in a change in the current application of fair value or fundamentally change other principles of GAAP, they could
result in changes to existing practices. Amendments that do not have transition guidance are effective immediately,
and amendments subject to transition guidance will be effective for fiscal periods beginning after December 15,
2012. Management does not anticipate the adoption to materially impact the Company’s financial condition, results
of operations, or liquidity.
Reporting Amounts Reclassified Out of Accumulated Other Comprehensive Income:
In February of 2013,
the FASB issued guidance to improve the reporting of reclassifications out of accumulated other comprehensive
income. The amendments do not change the current requirements for reporting net income or other comprehensive
income in financial statements. However, the amendments require an entity to provide information about the
amounts reclassified out of accumulated other comprehensive income by component on either the face of the
income statement or as a separate disclosure in the notes to the financial statements. The Company currently
provides disclosures related to amounts reclassified out of accumulated other comprehensive income in the
Consolidated Statements of Comprehensive Income. This guidance will be effective for fiscal periods beginning
after December 15, 2012. Early adoption is permitted. Since this guidance only impacts the placement of certain
disclosures in the financial statements, management does not anticipate the adoption to impact the Company’s
financial condition, results of operations, or liquidity.
111
3.
SECURITIES
A summary of the Company’s securities portfolio by category is presented in the following table.
Securities Portfolio
(Dollar amounts in thousands)
December 31,
2012
Amortized
Cost
Gross Unrealized
Gains
Losses
Fair
Value
Amortized
Cost
2011
Gross Unrealized
Gains
Losses
Fair
Value
508
$
-
$
-
$
508
$
5,060
$
-
$
(25) $
5,035
397,146
3,752
(515)
400,383
383,828
2,622
(2,346)
384,104
117,785
495,906
5,183
24,623
(68)
(486)
122,900
520,043
81,982
464,282
5,732
26,155
(23)
(366)
87,691
490,071
46,533
13,006
1,231
8,459
2,333
385
1,026
9,690
1,411
-
(34,404)
12,129
15,339
1,616
9,485
11,101
48,759
27,511
1,231
958
2,189
-
(35,365)
2,514
(11)
385
123
508
-
-
-
13,394
30,014
1,616
1,081
2,697
-
-
-
-
Securities
Available-for-Sale
U.S. agency securities $
Collateralized
mortgage
obligations
(‘‘CMOs’’) ...........
Other mortgage-
backed securities
(‘‘MBSs’’) ............
Municipal securities ..
Trust preferred
collateralized debt
obligations
(‘‘CDOs’’) ............
Corporate debt
securities .............
Equity securities:
Hedge fund
investment ........
Other equity
securities ..........
Total equity
securities .......
Total ................ $
1,080,574
$
37,302
$
(35,473)
$
1,082,403
$
1,013,611
$
37,531
$
(38,136) $
1,013,006
Securities
Held-to-Maturity
Municipal securities .. $
Trading Securities ...
34,295
$
1,728
$
-
$
$
36,023
$
60,458
$
1,019
$
-
14,162
$
$
61,477
14,469
Remaining Contractual Maturity of Securities
(Dollar amounts in thousands)
One year or less ........................................
After one year to five years ........................
After five years to ten years ........................
After ten years ..........................................
Securities that do not have a single maturity
$
December 31, 2012
Available-for-Sale
Held-to-Maturity
Amortized
Cost
$
18,938
376,898
86,847
73,270
Fair
Value
18,668
371,519
85,608
72,224
Amortized
Cost
$
5,314
9,803
6,213
12,965
$
Fair
Value
5,582
10,297
6,526
13,618
date......................................................
524,621
534,384
-
-
Total ....................................................
$ 1,080,574
$
1,082,403
$
34,295
$
36,023
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 $675.3 million at December 31, 2012 and $592.7 million at December 31,
2011. No securities held-to-maturity were pledged as of December 31, 2012 or 2011.
112
Excluding securities issued or backed by the U.S. government and its agencies and U.S. government-sponsored
enterprises, there were no investments in securities from one issuer that exceeded 10% of total stockholders’ equity
as of December 31, 2012 or 2011.
Securities (Losses) Gains
(Dollar amounts in thousands)
Years ended December 31,
2012
2011
Proceeds from sales ...........................................................
$ 153,668
$
188,556
Gains (losses) on sales of securities:
Gross realized gains .......................................................
Gross realized losses ......................................................
$
Net realized gains on securities sales .............................
$
3,045
(297)
2,748
4,103
(757)
3,346
$
$
2010
390,217
18,444
(1,311)
17,133
Non-cash impairment charges:
Other-than-temporary securities impairment .......................
Portion of OTTI recognized in other comprehensive (loss)
income......................................................................
Net non-cash impairment charges..................................
Net realized (losses) gains ........................................
Income tax (benefit) expense on net realized (losses) gains .....
Net trading gains (losses) (1) ...............................................
Net non-cash impairment charges:
CDOs ..........................................................................
CMOs ..........................................................................
Equity securities ............................................................
$
$
$
$
Total.........................................................................
$
(3,728)
(1,464)
(5,364)
59
(3,669)
(921)
(377)
1,627
2,226
1,443
-
3,669
$
$
$
$
$
528
(936)
2,410
986
(691)
936
-
-
936
$
$
$
$
$
447
(4,917)
12,216
4,764
1,530
4,664
86
167
4,917
(1)All net trading gains (losses) relate to trading securities still held as of December 31, 2012 and 2011.
Accounting guidance requires that the credit portion of an OTTI charge be recognized through income. If a decline
in fair value below carrying value is not attributable to credit deterioration and the Company does not intend to sell
the security or believe it would not be more likely than not required to sell the security prior to recovery, the
Company records the non-credit related portion of the decline in fair value in other comprehensive (loss) income. In
deriving the credit component of the impairment on the CDOs, projected cash flows were discounted at the
contractual rate and compared to the fair values computed by discounting future projected cash flows at the London
Interbank Offered Rate (‘‘LIBOR’’) plus an adjustment to reflect the higher risk inherent in these securities given
their complex structures and the impact of market factors.
113
Credit-Related CDO Impairment Losses
(Dollar amounts in thousands)
Years Ended December 31,
Number
2012
2011
2010
2009
2008
Total
1
2
3
4
5
6
7
$
$
-
1,534
692
-
-
-
-
$
2,226
$
-
525
411
-
-
-
-
936
$
-
794
142
684
2,801
243
-
$
8,474
6,549
1,017
394
5,769
-
2,306
$
1,886
-
-
-
-
-
4,444
$
10,360
9,402
2,262
1,078
8,570
243
6,750
$
4,664
$
24,509
$
6,330
$
38,665
The following table summarizes changes in the amount of credit losses recognized in earnings on the Company’s
available-for-sale debt securities for which a portion of OTTI was recognized in other comprehensive (loss) income.
Changes in Credit Losses Recognized in Earnings
(Dollar amounts in thousands)
Years Ended December 31,
2012
2011
2010
Cumulative amount recognized at the beginning of the year..........
$
36,525
$
35,589
$
30,839
Credit losses included in earnings (1):
Losses recognized on securities that previously had credit
losses .........................................................................
2,278
936
4,421
Losses recognized on securities that did not previously have
credit losses ................................................................
Reduction for securities sold during the year...........................
1,391
(1,391)
-
-
329
-
Cumulative amount recognized at the end of the year ..................
$
38,803
$
36,525
$
35,589
(1) Included in net securities (losses) gains in the Consolidated Statements of Income.
The following table presents the aggregate amount of unrealized losses and the aggregate related fair values of
securities with unrealized losses as of December 31, 2012 and 2011.
114
Securities in an Unrealized Loss Position
(Dollar amounts in thousands)
Number
of
Securities
Less Than 12 Months
12 Months or Longer
Total
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
As of December 31, 2012
CMOs ..................................
Other MBSs ..........................
Municipal securities ................
CDOs...................................
Total .................................
As of December 31, 2011
U.S. agency securities ..............
CMOs ..................................
Other MBSs ..........................
Municipal securities ................
CDOs...................................
Corporate debt securities ..........
Total .................................
19
6
49
6
80
2
30
4
19
6
1
62
$
$
$
102,939
7,210
28,903
-
139,052
-
163,819
182
934
-
2,157
$
$
$
421
55
459
-
935
-
1,818
17
2
-
11
$
$
$
12,796
176
1,238
12,129
26,339
5,035
12,628
1,072
7,857
13,394
-
$
$
$
94
13
27
34,404
34,538
25
528
6
364
35,365
-
$
$
$
115,735
7,386
30,141
12,129
165,391
5,035
176,447
1,254
8,791
13,394
2,157
$
$
$
515
68
486
34,404
35,473
25
2,346
23
366
35,365
11
$
167,092
$
1,848
$
39,986
$
36,288
$
207,078
$
38,136
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 is supported by third-party insurance or some other form of credit enhancement. Management does not
believe any remaining individual unrealized loss as of December 31, 2012 represents an OTTI. The unrealized
losses associated with these securities are not believed to be attributed to credit quality, but rather to changes in
interest rates and temporary market movements. In addition, the Company does not intend to sell the securities with
unrealized losses, and it is not more likely than not that the Company will be required to sell them before recovery
of their amortized cost bases, which may be at maturity.
The unrealized losses on CDOs as of December 31, 2012 reflect the market’s unfavorable view of structured
investment vehicles given the current interest rate and liquidity environment. Management does not believe any
remaining unrealized losses on the CDOs represent OTTI related to credit deterioration. In addition, the Company
does not intend to sell the CDOs with unrealized losses, and the Company does not believe it is more likely than not
that it will be required to sell them before recovery of their amortized cost bases, which may be at maturity. As of
December 31, 2012, the portion of OTTI recognized in accumulated other comprehensive loss (i.e., not related to
credit deterioration) totaled $34.4 million.
Significant judgment is required to calculate the fair value of the CDOs, all of which are pooled. Generally, fair
value determinations are based on several factors regarding current market and economic conditions related to these
securities and the underlying collateral. For these reasons and due to the illiquidity in the secondary market for the
CDOs, the Company estimates the fair value of these securities using discounted cash flow analyses with the
assistance of a structured credit valuation firm. For additional discussion of the CDO valuation methodology, refer
to Note 22, ‘‘Fair Value.’’
4. LOANS
Loans Held-for-Investment
Loans that the Company intends to hold until they are paid in full or mature are classified as loans held-for-
investment. The following table presents the Company’s loans held-for-investment by class.
115
Loan Portfolio
(Dollar amounts in thousands)
Commercial and industrial...................................................................
Agricultural.......................................................................................
Commercial real estate:
Office, retail, and industrial..............................................................
Multi-family ..................................................................................
Residential construction ...................................................................
Commercial construction .................................................................
Other commercial real estate ............................................................
Total commercial real estate..........................................................
Total corporate loans ...................................................................
Home equity .....................................................................................
1-4 family mortgages..........................................................................
Installment loans................................................................................
Total consumer loans ...................................................................
December 31,
2012
2011
$ 1,631,474
268,618
$
1,458,446
243,776
1,333,191
285,481
61,462
124,954
773,121
2,578,209
4,478,301
390,033
282,948
38,394
711,375
1,299,082
288,336
105,836
144,909
888,146
2,726,309
4,428,531
416,194
201,099
42,289
659,582
5,088,113
260,502
5,348,615
7,828
2,850
Total loans, excluding covered loans...............................................
Covered loans (1) .........................................................................
5,189,676
197,894
Total loans ..............................................................................
$ 5,387,570
Deferred loan fees included in total loans .......................................
Overdrawn demand deposits included in total loans ..........................
$
$
5,941
4,451
$
$
$
(1) For information on covered loans, refer to Note 5, ‘‘Covered Assets.’’
The Company primarily lends to small and mid-sized businesses, commercial real estate customers, and consumers
in the markets in which the Company operates. Within these areas, the Company diversifies its loan portfolio by
loan type, industry, and borrower.
Commercial and industrial loans are underwritten after evaluating and understanding the borrower’s ability to
operate its business. Underwriting standards are designed to ensure repayment of loans and mitigate loss exposure.
As part of the underwriting process, the Company examines current and projected cash flows to determine the
ability of the borrower to repay its obligation as agreed. Commercial and industrial loans are primarily made based
on the identified cash flows of the borrower and secondarily on the underlying collateral provided by the borrower.
However, the cash flows of the borrower may not be as expected, and the collateral securing these loans may
fluctuate in value. Most commercial and industrial loans are secured by the assets being financed or other business
assets, such as accounts receivable or inventory, and usually include a personal guarantee. However, some short-
term loans may be made on an unsecured basis. In the case of loans secured by accounts receivable, the availability
of funds for the repayment of these loans may be substantially dependent upon the ability of the borrower to collect
amounts due from its customers.
Commercial real estate loans are subject to underwriting standards and processes similar to commercial and
industrial loans, in addition to those standards and processes specific to real estate loans. Except for construction
loans, these loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate.
Commercial real estate lending typically involves higher loan principal amounts, and the repayment of these loans
is largely dependent upon the successful operation of the property securing the loan or the business conducted on
the property securing the loan. Commercial real estate loans may be more adversely affected by conditions in the
real estate market or in the general economy. The properties securing the Company’s commercial real estate
portfolio are diverse in terms of type and geographic location within the greater suburban metropolitan Chicago
market and contiguous markets. Management monitors and evaluates commercial real estate loans based on cash
flow, collateral, geography, and risk grade criteria.
116
Construction loans are underwritten utilizing feasibility studies, independent appraisal reviews, sensitivity analyses
of absorption and lease rates, and financial analyses of the developers and property owners. Construction loans are
generally based upon estimates of costs and value associated with the completed project. Construction loans often
involve the disbursement of substantial funds with repayment primarily dependent upon the success of the
completed project. Sources of repayment for these types of loans may be permanent loans from long-term lenders,
sales of developed property, or an interim loan commitment until permanent financing is obtained. Generally, these
loans have a higher risk profile than other real estate loans due to their repayment being sensitive to real estate
values, interest rate changes, governmental regulation of real property, demand and supply of alternative real estate,
the availability of long-term financing, and changes in general economic conditions.
Consumer loans are centrally underwritten utilizing a credit score developed by the Fair Isaac Corporation that is
used by many mortgage lenders. It uses a risk-based system to determine the probability that a borrower may
default on financial obligations to the lender. Underwriting standards for home equity loans are heavily influenced
by statutory requirements, including loan-to-value and affordability ratios, and risk-based pricing strategies.
Book Value of Loans Pledged
(Dollar amounts in thousands)
December 31,
2012
2011
Loans pledged to secure:
FHLB advances .............................................................................
Federal term auction facilities ..........................................................
$
721,141
2,097,021
Total.........................................................................................
$ 2,818,162
$
$
694,944
1,971,801
2,666,745
Loan Sales
The following table presents loan sales for the years ended December 31, 2012, 2011, and 2010.
Loan Sales
(Dollar amounts in thousands)
Proceeds/
Fair Value
Book Value
Charge-
offs (1)
Net Gains
on Sales (2)
Loan sales in 2012
Bulk loan sales ..........................................
Mortgage loan sales....................................
Other non-performing loan sales...................
$
94,470
52,595
4,200
$ 169,577
50,326
6,587
Total loan sales in 2012 ...........................
$ 151,265
$ 226,490
Loan sales in 2011
Non-accrual loan sales ................................
Loan sales in 2010
Non-accrual loan sales ................................
Potential problem loan sales.........................
Total loan sales in 2010 ...........................
$
$
$
12,362
12,540
4,000
16,540
$
$
$
17,087
19,088
11,138
30,226
$
$
$
$
(80,260)
-
(2,387)
(82,647)
(4,725)
(6,548)
(7,138)
$ (13,686)
$
$
$
$
$
5,153
2,269
-
7,422
-
-
-
-
(1) Amount represents charge-offs to the allowance for loan losses at the time the loans were identified for sale.
(2) The net gains on the bulk loan sales represent gains realized subsequent to the transfer to held-for-sale and are included as a
separate component of noninterest income in the Consolidated Statements of Income. Net gains on mortgage loan sales are
included in other service charges, commissions, and fees in the Consolidated Statements of Income.
117
Bulk Loan Sales
During the third quarter of 2012, the Company identified certain non-performing and performing potential problem
loans for accelerated disposition through multiple bulk loan sales.
The Company determined that the loans met the held-for-sale criteria at September 30, 2012, and transferred them
into the held-for-sale category at the lower of the recorded investment in the loan or the estimated fair value of the
loan, which resulted in charge-offs to the allowance for loan and covered loan losses. The fair value was determined
by the estimated bid price of a potential sale.
The bulk loan sales were completed in the fourth quarter of 2012, and net gains realized on the sales are included as
a separate component of noninterest income in the Consolidated Statements of Income. The Company had no loans
held-for-sale as of December 31, 2012.
Loans Sold in Bulk Loan Sales During the Year Ended December 31, 2012
(Dollar amounts in thousands)
Carrying Amount of Loans Prior to Transfer to
Held-for-Sale
Pass
Potential
Problem (1)
Non-accrual
Total
Charge-offs
at Date
of Transfer
Net
Payments
Received
Loans
Returned
to
Held-for-
Investment
Proceeds
From
Sales
(Losses)
Gains
on Sales
$ 2,868
-
$ 23,858
7,411
$ 21,819
1,308
$
48,545
8,719
$ 22,508
4,356
$ 1,189
(3)
$ 131
2
$ 19,705
3,605
$ (5,012)
(759)
4,272
-
-
-
24,975
2,380
8,066
2,032
20,653
1,829
6,900
2,026
9,903
49,900
4,209
14,966
4,058
23,696
1,859
5,690
1,850
360
166
750
-
40,360
19,438
(20)
5,127
1,500
160
1,660
67,055
41,311
113,493
52,533
1,256
-
-
-
57
-
57
1,557
160
1,717
773
90
863
(4)
2
(2)
195
-
-
-
129
324
-
-
-
35,488
3,151
7,387
1,687
9,839
967
(1,139)
(521)
22,464
1,651
70,177
10,797
829
154
983
41
86
127
$ 9,655
$ 98,324
$ 64,495
$ 172,474
$ 80,260
$ 2,440
$ 457
$ 94,470
5,153
Commercial and
industrial ...............
Agricultural ...............
Commercial real estate:
Office, retail, and
industrial ............
Multi-family ...........
Residential
construction ........
Commercial
construction ........
Other commercial
Total commercial
real estate ........
Home equity..............
1-4 family mortgages...
Total consumer loans
Total loans sold in
bulk loan sales..
real estate ...........
855
29,602
(1) Potential problem loans include loans categorized as substandard or special mention. These loans exhibit potential weaknesses that require the
close attention of management since these potential weaknesses may result in the deterioration of repayment prospects at some future date. The
loans continued to accrue interest because they were well secured and collection of principal and interest was expected within a reasonable time.
Mortgage Loan Sales
During the year ended December 31, 2012, the Company sold $50.3 million in mortgage loans, resulting in a gain
of $2.3 million, which is included in other service charges, commissions, and fees in the Consolidated Statements
of Income. The Company retained servicing responsibilities for the mortgages and collects servicing fees equal to a
percentage of the outstanding principal balance of the loans being serviced. The Company also retained recourse
for credit losses on the sold loans. A description of the recourse obligation is presented in Note 20, ‘‘Commitments,
Guarantees, and Contingent Liabilities.’’
118
Mortgage Servicing Rights
The Company services mortgage loans owned by third parties and collects servicing fees equal to a percentage of
the outstanding principal balance of the loans being serviced. Mortgage loans serviced for and owned by third
parties are not included in the Consolidated Statements of Condition.
The Company records its mortgage servicing rights at fair value and includes them in other assets in the
Consolidated Statements of Financial Condition.
A rollforward of the carrying value of mortgage servicing rights for the three years ended December 31, 2012 is
presented in the following table.
Carrying Value of Mortgage Servicing Rights
(Dollar amounts in thousands)
Years Ended December 31,
2011
2012
2010
Balance at the beginning of the year .................................
New servicing assets ...................................................
Total (losses) gains included in earnings (1):
Due to changes in valuation inputs and assumptions (2)
Other changes in fair value (3) ...................................
Balance at the end of the year .........................................
Contractual servicing fees earned during the year (1)............
Total amount of loans being serviced for the benefit of
$
$
$
929
347
(72)
(219)
985
209
others, at the end of the year........................................
$ 109,730
$
$
$
$
942
-
179
(192)
929
235
$
$
$
1,238
-
(28)
(268)
942
301
78,594
$ 114,720
(1) Included in other service charges, commissions, and fees in the Consolidated Statements of Income and relate to assets still held
at the end of the year.
(2) Principally reflects changes in prepayment speed assumptions.
(3) Primarily represents changes in expected cash flows over time due to payoffs and paydowns.
5. COVERED ASSETS
In 2009 and 2010, the Company acquired the majority of the assets and assumed the deposits of three financial
institutions in FDIC-assisted transactions. Most loans and OREO acquired in these transactions are covered by the
FDIC Agreements, under which the FDIC will reimburse the Company for the majority of the losses and eligible
expenses related to these assets.
119
Total covered assets as of December 31, 2012 and 2011 were as follows.
Covered Assets
(Dollar amounts in thousands)
Home equity lines (1) .................................................................
Covered purchased impaired loans ...............................................
Other covered loans (2) ...............................................................
Total covered loans ................................................................
Covered OREO.........................................................................
FDIC indemnification asset ........................................................
December 31,
2012
$ 43,132
126,673
28,089
197,894
13,123
37,051
$
2011
45,451
178,025
37,026
260,502
23,455
65,609
Total covered assets ...............................................................
$ 248,068
$ 349,566
Covered non-accrual loans..........................................................
Covered loans past due 90 days or more and still accruing interest...
$ 14,182
31,447
$
$
$
19,879
43,347
(1) These loans are open-end consumer loans that are not categorized as purchased impaired loans.
(2) These are loans that did not have evidence of credit deterioration on the date of acquisition.
The loans purchased in the three FDIC-assisted transactions were recorded at their estimated fair values on the
respective purchase dates and are accounted for prospectively based on expected cash flows. An allowance for loan
and covered loan losses was not recorded on these loans at the acquisition date. Except for leases and revolving
loans, including lines of credit and credit card loans, management determined that a significant portion of the
acquired loans (‘‘purchased impaired loans’’) had evidence of credit deterioration since origination, and it was
probable at the date of acquisition that the Company would not collect all contractually required principal and
interest payments. Evidence of credit quality deterioration included such factors as past due and non-accrual status.
Other key considerations and indicators included the past performance of the troubled institutions’ credit
underwriting standards, completeness and accuracy of credit files, maintenance of risk ratings, and age of
appraisals. The significant accounting policies related to purchased impaired loans and the related FDIC
indemnification assets are presented in Note 1, ‘‘Summary of Significant Accounting Policies.’’
Past due covered loans in the table above are past due based on contractual terms, but continue to perform in
accordance with the Company’s expectations of cash flows. Interest income is recognized on purchased impaired
loans through accretion of the difference between the carrying amount of the loans and the expected cash flows.
In connection with the FDIC Agreements, the Company recorded an indemnification asset. To maintain eligibility
for the loss share reimbursement, the Company is required to follow certain servicing procedures as specified in the
FDIC Agreements. The Company is in compliance with those requirements as of December 31, 2012.
120
Changes in the FDIC Indemnification Asset
(Dollar amounts in thousands)
Balance at the beginning of the year .................................
Additions......................................................................
Amortization .................................................................
Expected reimbursements from the FDIC for changes in
expected credit losses (1) ..............................................
Payments received from the FDIC ....................................
Years Ended December 31,
2011
2012
2010
$
65,609
-
(14,098)
$
95,899
-
(11,495)
$
67,945
58,868
(4,596)
3,338
(17,798)
39,096
(57,891)
30,982
(57,300)
Balance at the end of the year ......................................
$
37,051
$
65,609
$
95,899
(1) The increases in the indemnification asset were a result of decreases in estimated cash flows on certain loans. The
indemnification asset increased by the applicable loss share percentage for additional expected losses.
Changes in the accretable yield for covered purchased impaired loans were as follows.
Changes in Accretable Yield
(Dollar amounts in thousands)
Balance at the beginning of the year .................................
Additions......................................................................
Accretion......................................................................
Net reclassifications from non-accretable difference (1).........
$
52,147
-
(20,098)
12,759
$
63,616
-
(36,827)
25,358
$
Years Ended December 31,
2011
2012
2010
9,298
41,592
(24,804)
37,530
Balance at the end of the year ......................................
$
44,808
$
52,147
$
63,616
(1) Amount represents an increase in the estimated cash flows to be collected over the remaining estimated life of the underlying
portfolio.
6. PAST DUE LOANS, ALLOWANCE FOR CREDIT LOSSES, AND IMPAIRED LOANS
Past Due and Non-accrual Loans
The following table presents an aging analysis of the Company’s past due loans as of December 31, 2012 and 2011.
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.
121
Aging Analysis of Past Due Loans and Non-Performing Loans by Class
(Dollar amounts in thousands)
Aging Analysis (Accruing and Non-accrual)
Non-performing Loans
Current
30-89 Days
Past Due
90 Days or
More Past
Due
Total
Past Due
Total
Loans
Non-accrual
Loans
90 Days Past
Due Loans,
Still Accruing
Interest
$ 1,614,167
267,077
$
4,883
79
$
12,424
1,462
$
17,307
1,541
$ 1,631,474
268,618
$
25,941
1,173
$
December 31, 2012
Commercial and industrial ......
Agricultural ........................
Commercial real estate:
Office, retail, and industrial
Multi-family.....................
Residential construction ......
Commercial construction.....
Other commercial real estate
1,306,526
283,634
57,009
124,081
755,103
Total commercial real
estate ....................
2,526,353
Total corporate loans.......
4,407,597
Home equity .......................
1-4 family mortgages ............
Installment loans ..................
Total consumer loans ......
Total loans, excluding
376,801
272,270
35,936
685,007
December 31, 2011
Commercial and industrial ......
Agricultural ........................
Commercial real estate:
Office, retail, and industrial
Multi-family.....................
Residential construction ......
Commercial construction.....
Other commercial real estate
1,276,920
281,943
87,606
129,310
849,066
Total commercial real
estate ....................
2,624,845
Total corporate loans.......
4,282,737
Home equity .......................
1-4 family mortgages ............
Installment loans ..................
Total consumer loans ......
Total loans, excluding
402,842
192,646
41,288
636,776
4,130
761
-
-
1,053
5,944
10,906
6,482
4,472
2,390
22,535
1,086
4,453
873
16,965
45,912
59,798
6,750
6,206
68
13,344
13,024
2,931
1,121
2,164
320
6,372
12,908
26,669
6,112
3,712
625
19,231
5,272
16,066
15,279
32,708
88,556
119,125
7,240
4,741
376
10,449
12,357
26,665
1,847
4,453
873
18,018
51,856
70,704
13,232
10,678
2,458
26,368
97,072
50,432
1,333,191
285,481
61,462
124,954
773,121
2,578,209
4,478,301
390,033
282,948
38,394
711,375
5,189,676
197,894
22,162
6,393
18,230
15,599
39,080
101,464
145,794
13,352
8,453
1,001
22,806
168,600
65,213
1,299,082
288,336
105,836
144,909
888,146
2,726,309
4,428,531
416,194
201,099
42,289
659,582
5,088,113
260,502
2,138
375
823
153
-
-
1,534
2,510
5,023
1,651
1,947
68
3,666
8,689
31,447
40,136
4,991
-
1,040
-
-
-
1,707
2,747
7,738
1,138
-
351
1,489
9,227
43,347
$
$
23,224
1,434
4,612
873
16,214
46,357
73,471
6,189
4,874
-
11,063
84,534
14,182
98,716
44,152
1,019
30,043
6,487
18,076
23,347
51,447
129,400
174,571
7,407
5,322
25
12,754
187,325
19,879
$
$
covered loans ..........
Covered loans ......................
5,092,604
147,462
24,250
6,517
72,822
43,915
Total loans ................
$ 5,240,066
$ 30,767
$ 116,737
$ 147,504
$ 5,387,570
$ 1,415,165
242,727
$ 13,731
30
$
29,550
1,019
$
43,281
1,049
$ 1,458,446
243,776
covered loans ..........
Covered loans ......................
4,919,513
195,289
37,118
7,853
131,482
57,360
Total loans ................
$ 5,114,802
$ 44,971
$ 188,842
$ 233,813
$ 5,348,615
$
207,204
$
52,574
122
Allowance for Credit Losses
The Company maintains an allowance for credit losses at a level deemed adequate by management to absorb
probable losses inherent in the loan portfolio. Refer to Note 1, ‘‘Summary of Significant Accounting Policies,’’ for
the accounting policy for the allowance for credit losses.
Allowance for Credit Losses
(Dollar amounts in thousands)
Years Ended December 31,
2012
2011
2010
Balance at the beginning of the year ......................................
Charge-offs.....................................................................
Recoveries of previous charge-offs .....................................
$ 121,962
(182,807)
5,605
$ 145,072
(111,576)
7,884
$ 144,808
(155,330)
8,245
Net charge-offs ............................................................
Provision for loan and covered loan losses ..........................
(177,202)
158,052
(103,692)
80,582
(147,085)
147,349
Balance at the end of the year ..............................................
$ 102,812
$ 121,962
$ 145,072
Allowance for loan and covered loan losses ............................
Reserve for unfunded commitments .......................................
$
99,446
3,366
$ 119,462
2,500
$ 142,572
2,500
Total allowance for credit losses ........................................
$ 102,812
$ 121,962
$ 145,072
Allowance for Credit Losses by Portfolio Segment
(Dollar amounts in thousands)
Commercial,
Industrial,
and
Agricultural
Office,
Retail, and
Industrial
Multi-Family
Residential
Construction
Other
Commercial
Real Estate
Consumer
Covered
Loans (1)
Total
Allowance
$ 54,452
(37,130)
$ 20,164
(10,322)
$
4,555
(2,788)
$ 33,078
(55,611)
$ 21,084
(37,225)
$ 11,475
(10,640)
$
-
(1,614)
$ 144,808
(155,330)
Balance at January 1,
2010 ..........................
Charge-offs .................
Recoveries of previous
charge-offs ...............
5,227
612
363
770
494
740
39
8,245
Net charge-offs ......
Provision for loan and
covered loan losses
Balance at December 31,
2010 ..........................
Charge-offs .................
Recoveries of previous
(31,903)
(9,710)
(2,425)
(54,841)
(36,731)
(9,900)
(1,575)
(147,085)
26,996
10,304
1,866
49,696
45,516
11,396
1,575
147,349
49,545
(32,750)
20,758
(8,193)
3,996
(14,584)
27,933
(13,895)
29,869
(21,712)
12,971
(10,531)
-
(9,911)
145,072
(111,576)
charge-offs ...............
3,493
79
410
2,830
642
430
-
7,884
Net charge-offs ......
Provision for loan and
covered loan losses
Balance at December 31,
2011 ..........................
Charge-offs .................
Recoveries of previous
(29,257)
(8,114)
(14,174)
(11,065)
(21,070)
(10,101)
(9,911)
(103,692)
25,729
3,368
15,245
(2,305)
15,672
11,973
10,900
80,582
46,017
(64,668)
16,012
(34,968)
5,067
(3,361)
14,563
(13,888)
24,471
(50,397)
14,843
(10,910)
989
(4,615)
121,962
(182,807)
charge-offs ...............
3,393
577
275
451
125
784
-
5,605
Net charge-offs ......
Provision for loan and
covered loan losses
Balance at December 31,
(61,275)
(34,391)
(3,086)
(13,437)
(50,272)
(10,126)
(4,615)
(177,202)
52,019
29,811
1,594
5,134
44,481
9,325
15,688
158,052
2012 ..........................
$ 36,761
$ 11,432
$
3,575
$
6,260
$ 18,680
$ 14,042
$ 12,062
$ 102,812
(1) Information regarding the components of the allowance for covered loan losses is included in the following table titled ‘‘Loans and Related
Allowance for Credit Losses by Portfolio Segment.’’
123
The table below provides a breakdown of loans and the related allowance for credit losses by portfolio segment.
Loans and Related Allowance for Credit Losses by Portfolio Segment
(Dollar amounts in thousands)
Loans
Allowance For Credit Losses
Individually
Evaluated For
Impairment
Collectively
Evaluated For
Impairment
Acquired
with
Deteriorated
Credit
Quality (1)
Individually
Collectively
Evaluated For Evaluated For
Impairment
Impairment
Total
Acquired
with
Deteriorated
Credit
Quality (1)
December 31, 2012
Commercial,
industrial, and
agricultural ...........
Commercial real
estate:
Office, retail, and
industrial ...........
Multi-family ..........
Residential
construction .......
Other commercial
real estate ..........
Total commercial
real estate .......
Total corporate
loans ..........
Consumer ................
Total loans,
excluding
covered
loans .......
Covered home equity
lines (2) ................
Other covered loans ...
Total covered loans
$ 23,731
$ 1,874,464
$
1,897
$ 1,900,092
$
9,404
$ 27,357
$
21,736
642
4,040
16,160
1,311,455
284,718
57,422
877,749
-
121
-
4,166
1,333,191
285,481
61,462
898,075
42,578
2,531,344
4,287
2,578,209
971
-
-
1,247
2,218
66,309
-
4,405,808
699,361
6,184
12,014
4,478,301
711,375
11,622
-
10,461
3,575
6,260
17,433
37,729
65,086
14,042
66,309
5,105,169
18,198
5,189,676
11,622
79,128
-
-
-
-
-
-
-
-
-
-
-
-
43,132
-
43,132
-
154,762
154,762
43,132
154,762
197,894
-
-
-
928
-
928
-
11,134
11,134
Total
$
36,761
11,432
3,575
6,260
18,680
39,947
76,708
14,042
90,750
928
11,134
12,062
Total loans......
$ 66,309
$ 5,148,301
$ 172,960
$ 5,387,570
$ 11,622
$ 80,056
$ 11,134
$ 102,812
December 31, 2011
Commercial,
industrial, and
agricultural ...........
Commercial real
estate:
Office, retail, and
industrial ...........
Multi-family ..........
Residential
construction .......
Other commercial
real estate ..........
Total commercial
real estate .......
Total corporate
loans ..........
Consumer ................
Total loans,
excluding
covered
loans .......
Covered loans (2) .......
Total loans included
in the calculation
of the allowance
for credit losses ..
$ 37,385
$ 1,664,837
$
28,216
5,589
17,378
70,919
1,270,866
282,747
88,458
962,136
122,102
2,604,207
159,487
-
4,269,044
659,582
159,487
-
4,928,626
45,451
$ 159,487
$ 4,974,077
$
-
-
-
-
-
-
-
-
-
-
-
$ 1,702,222
$ 14,827
$ 31,190
$
1,299,082
288,336
105,836
1,033,055
1,507
20
2,502
7,239
14,505
5,047
12,061
17,232
2,726,309
11,268
48,845
4,428,531
659,582
26,095
-
80,035
14,843
5,088,113
45,451
26,095
-
94,878
989
$ 5,133,564
$ 26,095
$ 95,867
$
-
-
-
-
-
-
-
-
-
-
$
46,017
16,012
5,067
14,563
24,471
60,113
106,130
14,843
120,973
989
$ 121,962
(1) As of December 31, 2012, loans acquired with deteriorated credit quality included certain loans from the Waukegan Savings transaction and
covered loans, excluding covered home equity lines. An allowance for loan losses was not recorded on the loans from the Waukegan Savings
transaction as of December 31, 2012, since the Company did not re-estimate cash flows on these loans following the acquisition due to its
proximity to year end. During 2012, the Company established an allowance for covered loan losses, which reflects the difference between the
carrying value and the discounted present value of the estimated cash flows of the covered loans. As of December 31, 2011, there were no loans
acquired with deteriorated credit quality included in the calculation of the allowance for credit losses.
(2) These are open-end consumer loans that are not categorized as purchased impaired loans.
124
Loans Individually Evaluated for Impairment
Corporate non-accrual loans exceeding a fixed dollar amount are individually evaluated for impairment when the
internal credit rating is at or below a predetermined classification. The following table presents loans individually
evaluated for impairment by class of loan as of December 31, 2012 and December 31, 2011. Loans acquired with
deteriorated credit quality are excluded from this disclosure.
Impaired Loans Individually Evaluated by Class
(Dollar amounts in thousands)
December 31, 2012
December 31, 2011
Recorded Investment In
Loans with
No Specific
Reserve
$
5,636
-
Loans with
a Specific
Reserve
$
18,095
-
Unpaid
Principal
Balance
Specific
Reserve
$
39,834
-
$
9,404
-
Recorded Investment In
Loans with
No Specific
Reserve
$
10,801
556
Loans with
a Specific
Reserve
$
26,028
-
Unpaid
Principal
Balance
Specific
Reserve
$
58,591
556
$
14,827
-
14,504
642
4,040
-
7,232
-
-
876
5,218
10,066
29,631
2,406
10,741
1,242
23,907
971
-
-
90
1,157
11,897
5,072
9,718
19,019
26,027
16,319
517
7,660
3,790
22,083
33,785
11,265
33,124
28,534
70,868
1,507
20
2,502
758
6,481
Commercial and industrial
Agricultural ...................
Commercial real estate:
Office, retail, and
industrial ................
Multi-family ...............
Residential construction
Commercial
construction ............
Other commercial real
estate.....................
Total commercial real
estate ........................
24,404
18,174
67,927
2,218
71,733
50,369
177,576
11,268
Total impaired loans
individually evaluated
for impairment .........
$
30,040
$
36,269
$ 107,761
$
11,622
$
83,090
$
76,397
$ 236,723
$
26,095
Average Recorded Investment and Interest Income Recognized on Impaired Loans by Class
(Dollar amounts in thousands)
Years Ended December 31,
2012
2011
2010
Average
Recorded
Balance
Interest
Income
Recognized (1)
Average
Recorded
Balance
Interest
Income
Recognized (1)
Average
Recorded
Balance
Interest
Income
Recognized (1)
Commercial and
industrial.............
Agricultural ............
Commercial real
estate:
Office, retail, and
industrial .........
Multi-family ........
Residential
construction......
Commercial
construction......
Other commercial
real estate ........
$
45,101
1,138
$
32,439
6,226
14,413
16,789
35,715
Total commercial
real estate............
105,582
Total impaired loans
$
151,821
$
(1) Recorded using the cash basis of accounting.
94
-
2
-
1
-
38
41
135
$
44,449
1,515
$
33,038
13,619
31,068
31,445
17,180
126,350
$
172,314
$
326
-
81
44
69
-
76
270
596
$
37,502
2,098
$
26,517
8,068
83,189
28,709
17,035
163,518
$
203,118
$
67
1
-
-
119
-
57
176
244
125
TDRs
Loan modifications 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. A discussion of our
accounting policies for TDRs can be found in Note 1, ‘‘Summary of Significant Accounting Policies.’’
TDRs by Class
(Dollar amounts in thousands)
As of December 31, 2012
Non-accrual (1)
Accruing
Total
As of December 31, 2011
Non-accrual (1)
Accruing
Total
$
519
-
$
2,545
-
$
3,064
-
$
1,451
-
$
897
-
$
2,348
-
Commercial and industrial ....
Agricultural ........................
Commercial real estate:
Office, retail, and
industrial .....................
Multi-family ....................
Residential construction.....
Commercial construction ...
Other commercial real
-
-
-
-
estate ..........................
5,206
Total commercial real
estate .......................
Total corporate loans ..
Home equity .......................
1-4 family mortgages ...........
Installment loans .................
Total consumer loans
5,206
5,725
40
1,102
-
1,142
2,407
150
-
-
4,649
7,206
9,751
234
939
-
1,173
2,407
150
-
-
9,855
12,412
15,476
274
2,041
-
2,315
1,742
11,107
-
-
-
1,758
-
14,006
1,742
12,865
-
14,006
227
11,417
11,644
13,076
14,527
1,093
2,089
155
3,337
27,181
28,078
471
1,293
-
1,764
40,257
42,605
1,564
3,382
155
5,101
Total loans ............
$
6,867
$ 10,924
$ 17,791
$ 17,864
$ 29,842
$ 47,706
(1) These loans are included in non-accrual loans in the preceding tables.
The following table presents a summary of loans that were restructured during the years ended December 31, 2012
and 2011.
126
TDRs Restructured During the Period
(Dollar amounts in thousands)
Number of
Loans
Pre-Modification
Recorded
Investment
Funds
Disbursed
Interest
and Escrow
Capitalized
Charge-offs
Post-Modification
Recorded
Investment
$
4
2
9
1
4
$
3,219
2,416
12,062
19
563
20
$
18,279
$
$
10
3
1
1
1
9
11
1
$
886
3,407
14,107
17,508
174
523
1,440
151
$
$
$
-
-
-
-
-
-
-
293
-
-
-
-
-
-
$
$
$
-
-
-
-
4
4
7
9
-
-
74
15
79
4
$
$
$
170
-
652
-
-
822
-
-
3,000
-
-
-
-
-
3,049
2,416
11,410
19
567
17,461
893
3,709
11,107
17,508
248
538
1,519
155
37
$
38,196
$
293
$
188
$
3,000
$
35,677
Year ended December 31,
2012
Commercial and industrial.......
Office, retail, and industrial .....
Other commercial real estate....
Home equity ........................
1-4 family mortgages .............
Total TDRs restructured in
2012.............................
Year ended December 31,
2011
Commercial and industrial.......
Office, retail, and industrial .....
Multi-family .........................
Commercial construction.........
Other commercial real estate....
Home equity ........................
1-4 family mortgages .............
Installment loans ...................
Total TDRs restructured in
2011.............................
TDRs are included in the calculation of the allowance for credit losses in the same manner as other impaired loans.
TDRs had related specific reserves totaling $2.8 million as of December 31, 2012 and $94,000 as of December 31,
2011.
Accruing TDRs that have payment defaults and do not perform in accordance with their modified terms are
transferred to non-accrual. The following table presents TDRs that had payment defaults during the years ended
December 31, 2012 and 2011 where the default occurred within twelve months of the restructure date.
TDRs That Defaulted Within Twelve Months of the Restructured Date
(Dollar amounts in thousands)
Years Ended December 31,
2012
2011
Number of
Loans
Recorded
Investment
Number of
Loans
Recorded
Investment
Commercial and industrial .........................................
Office, retail, and industrial........................................
Other commercial real estate ......................................
Home equity ............................................................
1-4 family mortgages ................................................
Total ...................................................................
-
2
2
-
1
5
$
-
837
717
-
62
$ 1,616
1
1
-
1
2
5
$
$
128
397
-
83
331
939
For TDRs to be removed from TDR status, the loans must (i) have a market rate of interest at the time of
restructuring and (ii) be in compliance with the modified loan terms. TDRs that were returned to performing status
totaled $16.6 million for the year ended December 31, 2012 and $25.7 million for the year ended December 31,
2011.
There were no commitments to lend additional funds to borrowers with TDRs as of December 31, 2012 or 2011.
127
Credit Quality Indicators
Corporate loans and commitments are assessed for credit risk and assigned ratings based on various characteristics,
such as the borrower’s cash flow, leverage, collateral, and other factors. Ratings for commercial credits are reviewed
periodically. On a quarterly basis, consumer loans are assessed for credit quality based on the accrual status of the
loan.
Corporate Credit Quality Indicators by Class, Excluding Covered Loans
(Dollar amounts in thousands)
Pass
Special
Mention (1)
Substandard (2)
Non-Accrual (3)
Total
$
1,558,932
267,114
$
37,833
331
$
8,768
-
$
25,941
1,173
$
1,631,474
268,618
December 31, 2012
Commercial and industrial ...
Agricultural.......................
Commercial real estate:
Office, retail, and
industrial ....................
Multi-family...................
Residential construction ...
Commercial construction ..
Other commercial real
estate .........................
Total commercial real
1,235,950
282,126
33,392
95,567
712,702
57,271
1,921
11,870
14,340
14,056
$
$
estate......................
2,359,737
99,458
Total corporate loans
$
4,185,783
$
137,622
December 31, 2011
Commercial and industrial ...
Agricultural.......................
Commercial real estate:
Office, retail, and
industrial ....................
Multi-family...................
Residential construction ...
Commercial construction ..
Other commercial real
estate .........................
Total commercial real
$
1,308,812
232,270
$
57,866
10,487
1,147,026
275,031
48,806
92,568
746,213
78,578
5,803
27,198
23,587
73,058
estate......................
2,309,644
208,224
$
$
16,746
—
11,588
14,174
30,149
72,657
81,425
47,616
-
43,435
1,015
11,756
5,407
17,428
79,041
23,224
1,434
4,612
873
16,214
46,357
73,471
1,333,191
285,481
61,462
124,954
773,121
2,578,209
$
4,478,301
44,152
1,019
$
1,458,446
243,776
30,043
6,487
18,076
23,347
51,447
1,299,082
288,336
105,836
144,909
888,146
129,400
2,726,309
Total corporate loans
$
3,850,726
$
276,577
$
126,657
$
174,571
$
4,428,531
(1) Loans categorized as special mention exhibit potential weaknesses that require the close attention of management since these
potential weaknesses may result in the deterioration of repayment prospects at some future date.
(2) Loans categorized as substandard continue to accrue interest, but exhibit a well-defined weakness or weaknesses that may
jeopardize the liquidation of the debt. The loans continue to accrue interest because they are well secured and collection of
principal and interest is expected within a reasonable time.
(3) Loans categorized as non-accrual exhibit a well-defined weakness or weaknesses that may jeopardize the liquidation of the debt
and are characterized by the distinct possibility that the Company could sustain some loss if the deficiencies are not corrected.
128
Consumer Credit Quality Indicators by Class, Excluding Covered Loans
(Dollar amounts in thousands)
Performing
Non-Accrual
Total
December 31, 2012
Home equity ...................................................................................
1-4 family mortgages ........................................................................
Installment loans ..............................................................................
$ 383,844
278,074
38,394
$
6,189
4,874
—
$
390,033
282,948
38,394
Total consumer loans .....................................................................
$ 700,312
$
11,063
$
711,375
December 31, 2011
Home equity ...................................................................................
1-4 family mortgages ........................................................................
Installment loans ..............................................................................
$ 408,787
195,777
42,264
$
7,407
5,322
25
$
416,194
201,099
42,289
Total consumer loans .....................................................................
$ 646,828
$
12,754
$
659,582
7.
PREMISES, FURNITURE, AND EQUIPMENT
The following table summarizes the Company’s premises, furniture, and equipment by category.
Premises, Furniture, and Equipment
(Dollar amounts in thousands)
Useful Lives
in Years
December 31,
2012
2011
Land .......................................................................
Premises ..................................................................
Furniture and equipment.............................................
N/A $
25 to 40
3 to 10
Total cost..............................................................
Accumulated depreciation ...........................................
Net book value of premises, furniture, and equipment
held-for-investment .............................................
Assets held-for-sale ...................................................
$
49,744
143,441
75,481
268,666
(148,738)
119,928
1,668
Total premises, furniture, and equipment ...................
$
121,596
$
50,895
147,065
72,279
270,239
(143,195)
127,044
7,933
134,977
Years Ended December 31,
2011
2012
2010
Depreciation expense on premises, furniture, and equipment.........
Valuation adjustments on excess properties and assets held-for-sale ...
$
10,874
2,597
$
10,995
1,111
$
11,397
-
Operating Leases
As of December 31, 2012, the Company was obligated under certain non-cancelable operating leases for premises
and equipment, which expire at various dates through the year ended December 31, 2024. Many of these leases
contain renewal options, and certain leases provide options to purchase the leased property during or at the
expiration of the lease period at specific prices. Some leases contain escalation clauses calling for rentals to be
adjusted for increased real estate taxes and other operating expenses, or proportionately adjusted for increases in
consumer or other price indices. The following summary reflects the future minimum rental payments by year
129
required under operating leases that have initial or remaining non-cancelable lease terms in excess of one year as of
December 31, 2012.
Operating Leases
(Dollar amounts in thousands)
Total
Year ending December 31,
2013 ........................................................................................
2014 ........................................................................................
2015 ........................................................................................
2016 ........................................................................................
2017 ........................................................................................
2018 and thereafter ....................................................................
$
3,826
2,523
2,297
2,268
1,849
3,754
Total minimum lease payments .................................................
$ 16,517
Years Ended December 31,
2011
2012
2010
Rental expense charged to operations (1) .........................................
Rental income from premises leased to others (2) .............................
$ 3,379
931
$
$
$
4,193
1,136
$
$
3,244
1,144
(1) Includes amounts paid under short-term cancelable leases and included in net occupancy and equipment expense in the
Consolidated Statements of Income.
(2) Included as a reduction to net occupancy and equipment expense in the Consolidated Statements of Income.
8. GOODWILL AND OTHER INTANGIBLE ASSETS
The following table presents changes in the carrying amount of goodwill for the three-year period ended
December 31, 2012.
Changes in the Carrying Amount of Goodwill
(Dollar amounts in thousands)
Balance at January 1, 2010 ...................................................
Goodwill acquired through FDIC-assisted transaction.............
$
Balance at December 31, 2010 ..............................................
Adjustment to goodwill recorded in 2010 (1) .........................
Adjusted balance at January 1, 2011.......................................
2011 activity....................................................................
Balance at December 31, 2011 ..............................................
2012 activity....................................................................
262,886
7,941
270,827
(5,350)
265,477
-
265,477
-
Balance at December 31, 2012 ..............................................
$
265,477
(1) Goodwill was adjusted based on additional information received in 2011 relating to the acquisition date value of certain assets
and liabilities.
The Company’s annual goodwill impairment test was performed as of October 1, 2012. It was determined that no
impairment existed as of that date. For a discussion of the accounting policies for goodwill and other intangible
assets, refer to Note 1, Summary of Significant Accounting Policies.’’
130
The Company’s other intangible assets are core deposit premiums, which are being amortized over their estimated
useful lives. The Company’s annual impairment testing was performed as of November 30, 2012 by comparing the
carrying value of intangibles with our anticipated discounted future cash flows, and it was determined that no
impairment existed as of that date.
Core Deposit Intangibles
(Dollar amounts in thousands)
2012
Gross
Accumulated
Amortization
Net
Gross
2011
Accumulated
Amortization
Net
Gross
2010
Accumulated
Amortization
Years Ended December 31,
Balance at the beginning of the year ....................
Additions ..................................................
Amortization expense ...................................
Fully amortized assets...................................
$ 34,318
781
-
(1,324)
$
$
16,145
-
3,372
(1,324)
18,173
781
(3,372)
-
$ 42,832
1,419
-
(9,933)
$
$
22,276
-
3,802
(9,933)
$
20,556
1,419
(3,802)
-
$ 36,591
6,242
-
(1)
$
17,998
-
4,279
(1)
Net
18,593
6,242
(4,279)
-
Balance at the end of the year............................
$ 33,775
$
18,193
$
15,582
$ 34,318
$
16,145
$
18,173
$ 42,832
$
22,276
$
20,556
Weighted-average remaining life (in years) ............
Estimated useful lives (in years) .........................
6.4
3.3 to 12.8
6.9
3.3 to 12.6
7.3
3.3 to 12.6
Scheduled Amortization of Other Intangible Assets
(Dollar amounts in thousands)
Total
Year ending December 31,
2013 .......................................................................
2014 .......................................................................
2015 .......................................................................
2016 .......................................................................
2017 .......................................................................
2018 and thereafter....................................................
$
3,278
2,689
2,500
2,424
1,643
3,048
Total ....................................................................
$ 15,582
9. DEPOSITS
The following table presents the Company’s deposits by type of account.
Summary of Deposits
(Dollar amounts in thousands)
Demand deposits................................................................................
Savings deposits ................................................................................
NOW accounts ..................................................................................
Money market deposits .......................................................................
Time deposits less than $100,000 .........................................................
Time deposits of $100,000 or more ......................................................
December 31,
2012
$ 1,762,903
1,092,545
1,160,680
1,256,179
963,850
436,098
$
2011
1,593,773
970,016
1,057,887
1,198,382
1,126,462
532,655
Total deposits.................................................................................
$ 6,672,255
$
6,479,175
The following tables provide maturity information related to the Company’s time deposits.
131
Scheduled Maturities of Time Deposits
(Dollar amounts in thousands)
Year ending December 31,
2013 ...................................................................
2014 ...................................................................
2015 ...................................................................
2016 ...................................................................
2017 ...................................................................
2018 and thereafter ...............................................
$
Total
921,508
208,806
165,512
54,868
48,861
393
Total................................................................
$
1,399,948
Maturities of Time Deposits of $100,000 or More
(Dollar amounts in thousands)
Maturing within 3 months ...................................................
Maturing after 3 months but within 6 months.........................
Maturing after 6 months but within 12 months .......................
Maturing after 12 months ....................................................
$
Total .............................................................................
$
Total
94,652
74,025
95,137
172,284
436,098
10. BORROWED FUNDS
The following table summarizes the Company’s borrowed funds by funding source.
Summary of Borrowed Funds
(Dollar amounts in thousands)
Securities sold under agreements to repurchase..........................................
FHLB advances ....................................................................................
Total borrowed funds .........................................................................
December 31,
2012
71,403
114,581
185,984
$
$
2011
92,871
112,500
205,371
$
$
Securities sold under agreements to repurchase generally mature within 1 to 90 days from the transaction date. They
are treated as financings, and the obligations to repurchase securities sold are included as a liability in the
Consolidated Statements of Financial Condition. Repurchase agreements are secured by U.S. Department of the
Treasury (‘‘Treasury’’) and U.S. agency securities and are held in third party pledge accounts if required. The
securities underlying the agreements remain in the respective asset accounts. As of December 31, 2012, the
Company did not have amounts at risk under repurchase agreements with any individual counterparty or group of
counterparties that exceeded 10% of stockholders’ equity.
The Bank is a member of the FHLB and has access to term financing from the FHLB. These advances are secured
by designated assets that may include qualifying residential and multi-family mortgages, home equity loans, and
municipal and mortgage-backed securities. At December 31, 2012, all advances from the FHLB have a fixed rate
with interest payable monthly.
132
Maturity and Rate Schedule for FHLB Advances
(Dollar amounts in thousands)
Maturity Date
December 31, 2012
December 31, 2011
Advance
Amount
Rate (%)
Advance
Amount
Rate (%)
December 4, 2012..........................................
December 4, 2013..........................................
December 18, 2013 ........................................
January 21, 2014 ...........................................
January 20, 2015 ...........................................
January 20, 2015 ...........................................
August 20, 2015 ............................................
$
-
-
-
37,500
25,000
50,000
2,081
$ 114,581
-
-
-
1.15
1.94
2.02
1.92
1.72
$
37,500
25,000
50,000
-
-
-
-
$ 112,500
1.70
2.28
2.37
-
-
-
-
2.13
Unused Short-Term Credit Lines Available for Use
(Dollar amounts in thousands)
Available federal funds lines (1).....................................................................
Federal Reserve Bank’s Discount Window primary credit program ....................
$ 500,600
1,625,826
$ 528,000
1,460,313
(1) Subject to the liquidity position of other banks.
None of the Company’s borrowings have any related compensating balance requirements that restrict the use of
Company assets.
December 31,
2012
2011
11. SENIOR AND SUBORDINATED DEBT
The following table presents the Company’s senior and subordinated debt by issuance.
Senior and Subordinated Debt
(Dollar amounts in thousands)
December 31,
2012
2011
5.875% senior notes due in 2016
Principal amount...................................................................................
Discount ..............................................................................................
$ 115,000
(477)
$ 115,000
(600)
Total senior notes due in 2016.............................................................
114,523
114,400
5.85% subordinated notes due in 2016
Principal amount...................................................................................
Discount ..............................................................................................
Total subordinated notes due in 2016....................................................
6.95% junior subordinated debentures due in 2033
Principal amount...................................................................................
Discount ..............................................................................................
Total junior subordinated debentures.....................................................
38,500
(14)
38,486
61,820
(50)
61,770
50,500
(24)
50,476
87,351
(74)
87,277
Total senior and subordinated debt .......................................................
$ 214,779
$ 252,153
133
Debt Issuance
In November of 2011, the Company issued $115.0 million of 5-year senior notes at a discount with a fixed coupon
interest rate of 5.875% per annum, payable semi-annually. The notes are redeemable prior to maturity only at the
Company’s option and are unsecured, senior obligations of the Company. The proceeds were primarily used to fund
the redemption of preferred stock, which is described in Note 12, ‘‘Material Transactions Affecting Stockholders’
Equity.’’ The notes contain provisions that require the Company’s debt to remain above a certain credit rating by
each of the major credit rating agencies. If the Company’s debt were to fall below that credit rating, the interest rate
would increase.
Debt Retirement
During the first quarter of 2012, the Company repurchased and retired $21.1 million of junior subordinated
debentures at a discount of 2.25%, resulting in the recognition of a pre-tax gain of $256,000. During the fourth
quarter of 2012, the Company repurchased and retired $4.3 million of junior subordinated debentures at a premium
of 3.0% and $12.0 million of subordinated notes at a premium of 5.0%. These transactions resulted in the
recognition of a pre-tax loss of $814,000. Net pre-tax losses for these transactions totaled $558,000 and are
included in other noninterest income in the Consolidated Statements of Income.
12. MATERIAL TRANSACTIONS AFFECTING STOCKHOLDERS’ EQUITY
Redemption of Preferred Shares
In response to the financial crises affecting the financial markets and the banking system in 2008, the Treasury
announced several initiatives under the Troubled Asset Relief Program (‘‘TARP’’) intended to help stabilize the
banking industry. As part of this program, the Company issued to the Treasury a total of 193,000 preferred shares
and a warrant to purchase up to 1,305,230 shares of the Company’s common stock in exchange for $193.0 million in
cash.
In November of 2011, the Company redeemed all of the $193.0 million of preferred shares issued to the Treasury.
The redemption was funded through a combination of existing liquid assets and the proceeds from the senior debt
issuance described in Note 11, ‘‘Senior and Subordinated Debt.’’ In December of 2011, the Company redeemed the
Treasury’s common stock warrant for $900,000, which concluded the Company’s participation in the TARP.
The Company paid total dividends to the Treasury of $8.7 million in 2011 and $9.7 million in 2010.
Common Shares Issued
On January 13, 2010, the Company sold 18,818,183 shares of common stock in an underwritten public offering.
The price to the public was $11.00 per share, and the proceeds to the Company, net of the underwriters’ discount,
were $196.0 million, or $10.45 per share, net of related expenses. The net proceeds were used to improve the quality
of the Company’s capital composition and for general operating purposes.
Shares Issued and Outstanding
Shares issued ...............................................................................................
Shares outstanding ........................................................................................
85,787,354
74,840,228
85,787,354
74,435,004
Quarterly Dividend on Common Shares
The Board of Directors of First Midwest Bancorp, Inc. (‘‘the Board’’) declared quarterly stock dividends of $0.01
per share for the past sixteen quarters.
December 31,
2012
2011
134
There were no additional material transactions that affected stockholders’ equity during the three years ended
December 31, 2012.
13. EARNINGS PER COMMON SHARE
The table below displays the calculation of basic and diluted (loss) earnings per share.
Basic and Diluted (Loss) Earnings per Common Share
(Amounts in thousands, except per share data)
Years Ended December 31,
2011
2012
2010
Net (loss) income...........................................................
Preferred dividends.........................................................
Accretion on preferred stock (1) ........................................
Net loss (income) applicable to non-vested restricted shares
$
(21,054)
-
-
306
$
$
36,563
(8,658)
(2,118)
(350)
(9,684)
(9,650)
(649)
266
Net (loss) income applicable to common shares ..............
$
(20,748)
$
25,437
$
(19,717)
Weighted-average common shares outstanding:
Weighted-average common shares outstanding (basic) ..........
Dilutive effect of common stock equivalents.......................
Weighted-average diluted common shares outstanding ......
73,665
1
73,666
Basic (loss) earnings per common share ............................
Diluted (loss) earnings per common share..........................
Anti-dilutive shares not included in the computation of
diluted earnings per common share (2) ............................
$
$
(0.28)
(0.28)
$
$
1,759
73,289
-
73,289
0.35
0.35
3,511
$
$
72,422
-
72,422
(0.27)
(0.27)
3,823
(1) Includes $1.5 million in accelerated amortization related to the redemption of preferred stock during the year ended
December 31, 2011.
(2) Represents outstanding stock options (and a common stock warrant during the years ended December 31, 2011 and 2010) for
which the exercise price is greater than the average market price of the Company’s common stock.
14. INCOME TAXES
Components of Income Tax (Benefit) Expense
(Dollar amounts in thousands)
Years Ended December 31,
2011
2012
2010
Current income tax (benefit) expense:
Federal ......................................................................
State .........................................................................
$
Total......................................................................
$
-
1
1
Deferred income tax (benefit) expense:
Federal ......................................................................
State .........................................................................
Total......................................................................
(23,728)
(5,155)
(28,883)
Total income (benefit) expense ..................................
$
(28,882)
$
1,929
419
2,348
1,605
555
2,160
4,508
$
(14,926)
1,439
(13,487)
(8,895)
(6,162)
(15,057)
$
(28,544)
Federal income tax (benefit) expense and the related effective income tax rate are influenced primarily by the
amount of tax-exempt income derived from investment securities and bank-owned life insurance in relation to
pre-tax (loss) income and state income taxes. State income tax (benefit) expense and the related effective income
tax rate are influenced by the amount of state tax-exempt income in relation to pre-tax (loss) income and state tax
rules related to consolidated/combined reporting and sourcing of income and expense.
135
Income tax benefits totaled $28.9 million for the year ended December 31, 2012 following income tax expense of
$4.5 million for the year ended December 31, 2011 and tax benefits of $28.5 million for the year ended
December 31, 2010. The year-to-year variances were attributable primarily to changes in pre-tax (loss) income from
year to year, as well as decreases in tax-exempt income and the impact of the Illinois tax law change described
below.
Effective January 1, 2011, the Illinois corporate income tax rate increased from 7.3% to 9.5%. The Company
recorded a $1.6 million income tax benefit in the first quarter of 2011 related to the resulting increase in the
Company’s deferred tax asset. The rate will decline to 7.75% in 2015 and return to 7.3% in 2025. The legislation
also suspended net operating loss utilization in 2011 and limited the amount of utilization to $100,000 per year in
the years ended December 31, 2012 and 2013.
Differences between the amounts reported in the consolidated financial statements and the tax bases of assets and
liabilities result in temporary differences for which deferred tax assets and liabilities were recorded.
Deferred Tax Assets and Liabilities
(Dollar amounts in thousands)
December 31,
2012
2011
Deferred tax assets:
Alternative minimum tax (‘‘AMT’’) and other credit carryforwards.................
Federal net operating loss (‘‘NOL’’) carryforwards .......................................
Allowance for credit losses .......................................................................
Unrealized losses on securities ..................................................................
OREO ...................................................................................................
State NOL carryforwards .........................................................................
Other state tax benefits ............................................................................
Other ....................................................................................................
$
13,379
54,770
31,762
23,737
4,949
17,287
4,917
10,130
$
12,798
16,962
42,687
22,940
5,376
11,456
8,150
10,783
Total deferred tax assets .......................................................................
160,931
131,152
Deferred tax liabilities:
Purchase accounting adjustments and intangibles .........................................
Deferred loan fees...................................................................................
Accrued retirement benefits ......................................................................
Dividends receivable................................................................................
Depreciation...........................................................................................
Cancellation of indebtedness income ..........................................................
Other ....................................................................................................
Total deferred tax liabilities...................................................................
Deferred tax valuation allowance ..................................................................
Net deferred tax assets .........................................................................
Tax effect of adjustments related to other comprehensive (loss) income ..............
(15,402)
(2,565)
(5,151)
(2,167)
(2,049)
(5,340)
(5,548)
(38,222)
-
122,709
10,896
(10,278)
(3,215)
(6,681)
(3,072)
(2,843)
(5,340)
(6,293)
(37,722)
-
93,430
9,194
Net deferred tax assets including adjustments .................................................
$ 133,605
$ 102,624
Net operating loss carryforwards available to offset future taxable income:
Federal gross NOL carryforwards, begin to expire in 2030............................
Illinois gross NOL carryforwards, begin to expire in 2018 ............................
Indiana gross NOL carryforwards, begin to expire in 2021............................
Iowa gross NOL carryforwards, begin to expire in 2027 ...............................
Wisconsin gross NOL carryforwards, begin to expire in 2025........................
Other credits (1) .......................................................................................
$ 156,486
297,448
31,170
367
1,011
13,379
$
48,463
220,101
23,872
-
229
12,798
(1) Consists of AMT credits, which have an indefinite life and other credits, which have a 20-year life. Approximately $2.9 million
of other credits will begin to expire during the year ended December 31, 2028.
136
Net deferred tax assets are included in other assets in the accompanying Consolidated Statements of Financial
Condition. Management believes that it is more likely than not that net deferred tax assets will be fully realized and
no valuation allowance is required.
Components of Effective Tax Rate
Years Ended December 31,
2011
2012
2010
Statutory federal income tax rate ........................................
Tax-exempt income, net of interest expense disallowance.....
State income tax, net of federal income tax effect ..............
Net other .....................................................................
Effective tax rate........................................................
35.0%
16.8%
7.0%
(1.0%)
57.8%
35.0%
(21.3%)
(0.3%)
(2.4%)
11.0%
35.0%
27.0%
9.5%
3.2%
74.7%
The changes in effective tax rate from the year ended December 31, 2010 to the year ended December 31, 2011 and
from the year ended December 31, 2011 to the year ended December 31, 2012 were attributable primarily to
decreases in tax-exempt income from year to year and to variances in pre-tax income from year to year.
As of December 31, 2012, 2011, and 2010, the Company’s retained earnings included an appropriation for an
acquired thrift’s tax bad debt reserves of approximately $2.5 million for which no provision for federal or state
income taxes has been made. If, in the future, this portion of retained earnings was distributed as a result of the
liquidation of the Company or its subsidiaries, federal and state income taxes would be imposed at the then
applicable rates.
Uncertainty in Income Taxes
The Company files income tax returns in the U.S. federal jurisdiction and in Illinois, Indiana, Iowa, and Wisconsin.
Audits of the Company’s 2002-2005 Illinois income tax returns were closed during 2010. Audits of the Company’s
2006-2007 Illinois income tax returns were closed during 2011. Audits of the Company’s 2008-2009 Illinois
income tax returns were closed during 2012. During the year ended December 31, 2012, the Internal Revenue
Service completed audits of the Company’s 2006-2010 federal income tax returns. None of these audits resulted in
significant adjustments.
The Company is no longer subject to examination by federal tax authorities for years prior to 2006 and by Illinois,
Indiana, Iowa, and Wisconsin tax authorities for years prior to 2008.
Rollforward of Unrecognized Tax Benefits
(Dollar amounts in thousands)
Years Ended December 31,
2011
2012
2010
Balance at the beginning of the year..............................................
Additions for tax positions relating to the current year..................
Additions for tax positions relating to prior years.........................
Reductions for tax positions relating to prior years .......................
Reductions for settlements with taxing authorities ........................
Lapse in statute of limitations ...................................................
Balance at the end of the year ......................................................
Interest and penalties not included above (1):
Interest (benefit) expense, net of tax effect, and penalties ..............
Accrued interest and penalties, net of tax effect, at end of year ......
$
$
$
$
368
-
-
-
(368)
-
-
(52)
-
$
$
$
$
429
-
226
(80)
(207)
-
368
44
52
$
$
$
$
314
2
263
(72)
-
(78)
429
(21)
8
(1) Included in income tax (benefit) expense in the Consolidated Statements of Income.
137
The reductions in uncertain tax positions for the year ended December 31, 2012 compared to the year ended
December 31, 2011 are a result of the resolution of the aforementioned tax authority examinations. The reductions
in uncertain tax positions for the year ended December 31, 2011 compared to the year ended December 31, 2010 are
a result of the resolution of certain tax authority examinations, partially offset by a change in exposure as a result of
a prior year settlement with taxing authorities.
The Company does not anticipate that the amount of uncertain tax positions will significantly increase or decrease
in the next 12 months.
15. EMPLOYEE BENEFIT PLANS
Savings and Profit Sharing Plan
The Company has a defined contribution retirement savings plan (the ‘‘Profit Sharing Plan’’), which gives qualified
employees the option to make contributions up to 45% of their pre-tax base salary (15% for certain highly
compensated employees) through salary deductions under Section 401(k) of the Internal Revenue Code. At the
employees’ direction, employee contributions are invested among a variety of investment alternatives. For
employees who make voluntary contributions to the Profit Sharing Plan, the Company contributes an amount equal
to 2% of the employee’s compensation. The Profit Sharing Plan also permits the Company to distribute a
discretionary profit-sharing component up to 15% of the employee’s compensation. The Company’s matching
contribution vests immediately, while the discretionary component vests over a period of six years.
Savings and Profit Sharing Plan
(Dollar amounts in thousands)
Profit sharing expense (1)....................................................
Company dividends received by the Profit Sharing Plan .........
Company shares held by the Profit Sharing Plan at the end of
the year:
Number of shares ..........................................................
Fair value .....................................................................
Years Ended December 31,
2011
2012
2010
$
$
2,532
71
$
$
2,897
72
$
$
859
72
1,743,085
21,823
$
1,806,262
18,297
$
2,752,521
31,709
$
(1) Included in retirement and other employee benefits in the Consolidated Statements of Income.
Pension Plan
The Company sponsors a noncontributory defined benefit retirement plan (the ‘‘Pension Plan’’) that provides for
retirement benefits based on years of service and compensation levels of the participants. The Pension Plan covers a
majority of employees who met certain eligibility requirements and were hired before April 1, 2007, the date it was
amended to eliminate new enrollment of employees. Actuarially determined pension costs are charged to current
operations and included in other employee benefits in the Consolidated Statements of Income. The Company’s
funding policy is to contribute amounts to its plan sufficient to meet the minimum funding requirements of the
Employee Retirement Income Security Act of 1974 plus additional amounts as the Company deems appropriate.
138
Pension Plan Cost and Obligations
(Dollar amounts in thousands)
December 31,
Accumulated benefit obligation.............................................................
Change in benefit obligation:
Projected benefit obligation at the beginning of the year..........................
Service cost ......................................................................................
Interest cost ......................................................................................
Actuarial losses .................................................................................
Benefits paid ....................................................................................
Projected benefit obligation at the end of the year .....................................
Change in plan assets:
Fair value of plan assets at the beginning of the year ..............................
Actual return on plan assets ................................................................
Employer contributions .......................................................................
Benefits paid ....................................................................................
$
$
$
$
2012
62,326
63,011
2,862
2,720
9,331
(5,069)
72,855
62,990
5,580
-
(5,069)
Fair value of plan assets at the end of the year ..........................................
$
63,501
Funded status recognized in the Consolidated Statements of Financial
Condition:
Noncurrent liabilities..........................................................................
Amounts recognized in accumulated other comprehensive loss:
Prior service cost...............................................................................
Net loss ...........................................................................................
Net amount recognized ..........................................................................
Actuarial losses included in accumulated other comprehensive loss as a
percent of:
Accumulated benefit obligation............................................................
Fair value of plan assets .....................................................................
Amounts expected to be amortized from accumulated other
comprehensive loss into net periodic benefit cost in the next fiscal
year:
Prior service cost...............................................................................
Net loss ...........................................................................................
Net amount expected to be recognized .....................................................
Weighted-average assumptions at the end of the year used to determine
the actuarial present value of the projected benefit obligation:
Discount rate ....................................................................................
Rate of compensation increase .............................................................
$
$
$
$
$
(9,354)
1
28,383
28,384
45.5%
44.7%
1
2,358
2,359
3.40%
2.50%
$
$
$
$
$
$
$
$
$
$
2011
55,782
51,963
2,725
3,032
8,067
(2,776)
63,011
54,713
1,053
10,000
(2,776)
62,990
(21)
4
21,860
21,864
39.2%
34.7%
3
1,336
1,339
4.40%
2.50%
Expected amortization of net actuarial losses – To the extent the cumulative actuarial losses included in
accumulated other comprehensive loss exceed 10% of the greater of the accumulated benefit obligation or the
market-related value of the Pension Plan assets, it is the Company’s policy to amortize the Pension Plan’s net
actuarial losses into income over the future working life of the Pension Plan participants. Actuarial losses included
in accumulated other comprehensive loss as of December 31, 2012 exceeded 10% of the accumulated benefit
obligation and the fair value of plan assets. The amortization of net actuarial losses is a component of the net
periodic benefit cost. Amortization of the net actuarial losses and prior service cost included in other
comprehensive (loss) income is not expected to have a material impact on the Company’s future results of
operations, financial position, or liquidity.
139
Net Periodic Benefit Pension Cost
(Dollar amounts in thousands)
Components of net periodic benefit cost:
Service cost ..............................................................
Interest cost ..............................................................
Expected return on plan assets .....................................
Recognized net actuarial loss .......................................
Amortization of prior service cost ................................
Other (1) ....................................................................
Net periodic cost ....................................................
Other changes in plan assets and benefit obligations
recognized as a charge to other comprehensive (loss)
income:
Net loss for the period ............................................
Amortization of prior service cost .............................
Amortization of net loss ..........................................
Total unrealized loss ............................................
Total recognized in net periodic pension cost and
Years Ended December 31,
2011
2012
2010
$
2,862
2,720
(4,456)
1,684
3
-
2,813
8,207
(4)
(1,683)
6,520
$
2,725
3,032
(4,110)
976
3
1,285
3,911
11,124
(4)
(2,260)
8,860
$
2,352
2,665
(4,150)
2
3
-
872
3,746
(4)
(2)
3,740
other comprehensive loss ..................................
$
9,333
$
12,771
$
4,612
Weighted-average assumptions used to determine the net
periodic cost:
Discount rate.............................................................
Expected return on plan assets .....................................
Rate of compensation increase .....................................
4.40%
7.25%
2.50%
5.50%
7.50%
3.00%
6.00%
7.50%
3.00%
(1) The 2011 amount represents the correction of a 2010 actuarial pension expense calculation related to the valuation of future
early retirement benefits.
Pension Plan Asset Allocation
(Dollar amounts in thousands)
Target
Allocation
2012
Fair Value of
Plan Assets (1)
Percentage of Plan Assets
2012
2011
Asset Category:
Equity securities .........................................
Fixed income .............................................
Cash equivalents .........................................
50 - 60%
30 - 48%
2 - 10%
Total......................................................
$
37,496
22,458
3,547
$
63,501
59%
35%
6%
100%
51%
30%
19%
100%
(1) Additional information regarding the fair value of plan assets can be found in Note 22, ‘‘Fair Value.’’
As of December 31, 2011, asset category allocations were outside the target range due to a December 2011
employer contribution included in cash equivalents. On January 31, 2012, subsequent to investing this contribution,
allocations were 55% equity, 35% fixed income, and 10% cash equivalents.
Expected long-term rate of return – The expected long-term rate of return on Pension Plan assets represents the
average rate of return expected to be earned over the period the benefits included in the benefit obligation are to be
paid. In developing the expected rate of return, the Company considers long-term returns of historical market data
and projections of future returns for each asset category, as well as historical actual returns on the Pension Plan
140
assets with the assistance of its independent actuarial consultant. Using this reference data, the Company develops a
forward-looking return expectation for each asset category and a weighted-average expected long-term rate of
return based on the target asset allocation.
Investment policy and strategy – The investment objective of the Pension Plan is to maximize the return on
Pension Plan assets over a long-term horizon to satisfy the Pension Plan obligations. In establishing its investment
policies and asset allocation strategies, the Company considers expected returns and the volatility associated with
different strategies. The policy established by the Company’s Retirement Plan Committee provides for growth of
capital with a moderate level of volatility by investing assets according to the target allocations stated above and
reallocating those assets as needed to stay within those allocations. Investments are weighted toward publicly traded
securities. Alternative asset classes, such as private equity hedge funds and real estate, are avoided. Under the
advisement of a certified investment advisor, the Committee reviews the investment policy on a quarterly basis to
determine if any adjustments to the policy or investment strategy are necessary.
Based on the actuarial assumptions, the Company does not anticipate making a contribution to the Pension Plan in
2013. Estimated future pension benefit payments, which reflect expected future service, for fiscal years ending
December 31, 2013 through 2022, are as follows.
Estimated Future Pension Benefit Payments
(Dollar amounts in thousands)
Year ending December 31,
2013 ................................................................................
2014 ................................................................................
2015 ................................................................................
2016 ................................................................................
2017 ................................................................................
2018-2022.........................................................................
$
Total
5,388
5,463
5,511
5,562
5,613
27,457
16. SHARE-BASED COMPENSATION
Share-Based Plans
Omnibus Stock and Incentive Plan (the ‘‘Omnibus Plan’’) – In 1989, the Board adopted the Omnibus Plan, which
allows for the grant of both incentive and non-statutory (‘‘nonqualified’’) stock options, stock appreciation rights,
restricted stock awards, restricted stock units, performance units, and performance shares to certain key employees.
In August of 2006, the Board approved the grant of restricted stock awards and restricted stock units to certain key
officers. These awards are restricted to transfer, but are not restricted to dividend payment and voting rights.
Since the inception of the Omnibus Plan through the end of 2008, certain key employees were granted nonqualified
stock options in February of each year. The option exercise price is set at the fair value of the Company’s common
stock on the grant date. The fair value is defined as the average of the high and low stock price on the grant date. All
options have a term of ten years from the grant date, include reload features, and are non-transferable except to
immediate family members, family trusts, or partnerships.
Since 2008, the Company grants restricted stock awards instead of nonqualified stock options to certain key
employees. Both stock options and restricted stock awards vest over three years with 50% vesting after two years
from the grant date and the remaining 50% vesting three years after the grant date provided the employee remains
employed by the Company during this period (subject to accelerated vesting in the event of change-in-control or
upon certain terminations of employment, as set forth in the applicable award agreement).
Nonemployee Directors Stock Plan (the ‘‘Directors Plan’’) – In 1997, the Board adopted the Directors Plan, which
provides for the grant of equity awards to non-management Board members. Until 2008, only non-qualified stock
options were issued under the Directors Plan. The exercise price of the options is equal to the fair value of the
Company’s common stock on the grant date. All options have a term of ten years from the grant date.
141
In 2008, the Company amended the Directors Plan to allow for the grant of restricted stock awards. The awards are
restricted to transfer, but are not restricted to dividend payment and voting rights. Both the options and the awards
vest one year from the grant date subject to accelerated vesting in the event of retirement, death, disability, or
change-in-control, as defined in the Directors Plan.
Both the Omnibus Plan and the Directors Plan have been submitted to and approved by the stockholders of the
Company. The Company issues treasury shares to satisfy stock option exercises and restricted stock award releases.
Shares of Common Stock Available Under Share-Based Plans
December 31, 2012
Shares
Authorized
Shares Available
For Grant
Omnibus Plan ...................................................................................
Directors Plan ...................................................................................
8,631,641
481,250
2,322,994
76,727
Salary Stock Awards – In October of 2009, the Board approved adjustments to the 2010 base salaries of certain of
its executive officers, as permitted by the executive compensation provisions of TARP. The approved adjustments
became effective on January 1, 2010 and modified the mix between the fixed and variable components of
compensation to be paid to these officers during the three years ended December 31, 2012. The salary adjustments
were paid in accordance with the Company’s standard payroll procedures with 25% paid in cash and 75% paid in
fully vested shares of the Company’s common stock. The number of shares of common stock granted as of each
payroll period end date to each executive officer is determined by dividing that portion of the executive officer’s
salary adjustment payable for the period by the closing price of the common stock on the date prior to the applicable
payroll date. The Company concluded its participation in the TARP in the fourth quarter of 2011.
Salary Stock Awards Granted
Years ended December 31,
2011
2010
2012
Shares granted .........................................................................
Weighted-average price .............................................................
10,983
11.51
$
45,889
10.10
$
49,569
12.30
$
The issuance of salary stock award shares is included in share-based compensation expense, but does not reduce the
number of shares issued and outstanding under the Omnibus Plan as the issuance is not considered part of the share-
based plans referenced above.
Accounting Treatment
The Company recognizes share-based compensation expense based on the estimated fair value of the option or
award at the grant or modification date. Share-based compensation expense is included in salaries and wages in the
Consolidated Statements of Income.
142
Effect of Recording Share-Based Compensation Expense
(Dollar amounts in thousands, except per share data)
Years ended December 31,
2011
2010
2012
Restricted stock/unit award expense ............................................
Salary stock award expense .......................................................
Stock option expense ................................................................
Total share-based compensation expense...................................
Income tax benefit ...................................................................
Share-based compensation expense, net of tax...........................
Basic earnings per common share...............................................
Diluted earnings per common share ............................................
Cash flows provided by (used in) operating activities.....................
Cash flows (used in) provided by financing activities (1) .................
$
$
$
$
$
$
5,877
127
-
6,004
2,456
3,548
0.05
0.05
170
(21)
$
$
$
$
$
$
5,607
464
291
6,362
2,602
3,760
0.05
0.05
(179)
47
$
$
$
$
$
$
4,712
609
317
5,638
2,199
3,439
0.05
0.05
350
(189)
(1) Amount represents cash flows resulting from the tax benefits of tax deductions in excess of recognized compensation expense.
Stock Options
Nonqualified Stock Option Transactions
(Amounts in thousands, except per share data)
Outstanding at the beginning of the year ............
Expired ......................................................
Outstanding at the end of the year .....................
Ending vested and expected to vest....................
Exercisable at the end of the year ......................
Year Ended December 31, 2012
Options
Average
Exercise
Price
1,974
(256)
1,718
1,718
1,718
$
$
$
$
32.25
31.15
32.42
32.42
32.42
Weighted
Average
Remaining
Contractual
Term (1)
Aggregate
Intrinsic
Value (2)
2.90
2.90
2.90
$
$
$
13
13
13
(1) Represents the average remaining contractual life in years.
(2) Aggregate intrinsic value represents the total pre-tax intrinsic value that would have been received by the option holders if they
had exercised their options on December 31, 2012. Intrinsic value equals the difference between the Company’s average of the
high and low stock price on the last trading day of the year and the option exercise price, multiplied by the number of shares.
This amount will fluctuate with changes in the fair value of the Company’s common stock.
Stock Option Valuation Assumptions – The Company estimates the fair value of stock options at the grant date
using a Black-Scholes option-pricing model that utilizes the assumptions outlined in the following table. No stock
options were granted during the years ended December 31, 2012 or 2010.
Stock Option Valuation Assumptions
Years Ended December 31,
2011
2012
2010
Expected life of the option (in years)...................................
Expected stock volatility ....................................................
Risk-free interest rate ........................................................
Expected dividend yield.....................................................
Weighted-average fair value of options at the grant date .........
$
-
-
-
-
-
5.3
42%
2%
0.33%
4.72
$
$
-
-
-
-
-
143
Expected life is based on historical exercise and termination behavior. Expected stock price volatility is derived
from historical volatility of the Company’s common stock over the expected life of the options. The risk-free
interest rate is based on the implied yield currently available on U.S. Treasury zero-coupon issues with a remaining
term equal to the expected life of the option. The expected dividend yield represents the three-year historical
average of the annual dividend yield as of the grant date. Management reviews and adjusts the assumptions used to
calculate the fair value of an option on a periodic basis to better reflect expected trends.
Other Stock Option Information
(Dollar amounts in thousands)
Years Ended December 31,
2011
2012
2010
Share-based compensation expense ......................................
Unrecognized compensation expense ...................................
Weighted-average amortization period remaining (in years) .....
$
$
$
$
-
-
-
291
-
-
$
$
317
23
0.1
No stock options were exercised and no stock option award modifications were made during the three years ended
December 31, 2012.
Restricted Stock and Restricted Stock Unit Awards
Restricted Stock Award Transactions
(Amounts in thousands, except per share data)
Years Ended December 31,
2012
2011
Number of
Shares/Units
Weighted
Average
Grant Date
Fair Value
Number of
Shares/Units
Weighted
Average
Grant Date
Fair Value
1,011
610
(429)
(105)
1,087
26
55
(19)
62
$
$
$
$
11.92
11.35
11.23
11.90
11.87
12.08
11.35
11.23
11.87
978
490
(358)
(99)
1,011
-
26
-
26
$
$
$
$
11.99
12.08
11.77
13.95
11.92
-
12.08
-
12.08
Restricted Stock Awards
Non-vested awards at the beginning of the
year .....................................................
Granted ................................................
Vested ..................................................
Forfeited...............................................
Non-vested awards at the end of the year......
Restricted Stock Units
Non-vested awards at the beginning of the
year .....................................................
Granted ................................................
Vested ..................................................
Non-vested awards at the end of the year......
144
Other Restricted Stock Award/Unit Information
(Dollar amounts in thousands)
Years Ended December 31,
2011
2012
2010
Share-based compensation expense .............................................
Unrecognized compensation expense ...........................................
Weighted-average amortization period remaining (in years).............
Total fair value of vested restricted stock awards/unit, at end of
period .................................................................................
Income tax benefit realized from vesting/release of restricted stock
awards/unit ..........................................................................
$
$
5,877
5,674
1.1
$
$
5,607
4,784
1.0
$
$
4,712
5,248
1.1
$ 13,559
$ 10,264
$ 11,421
$
1,884
$
1,828
$
724
No restricted stock/unit award modifications were made during the periods presented.
17. STOCKHOLDER RIGHTS PLAN
On February 15, 1989, the Board adopted a Stockholder Rights Plan. Pursuant to that plan, the Company declared a
dividend, paid March 1, 1989, of one right (‘‘Right’’) for each outstanding share of Company common stock held on
record on March 1, 1989 pursuant to a Rights Agreement dated February 15, 1989. The Rights Agreement was
amended and restated on November 15, 1995 and again on June 18, 1997 to exclude an acquisition. The Rights
Agreement was further amended on December 9, 2008 to clarify certain items. As amended, each right entitles the
registered holder to purchase from the Company 1/100 of a share of Series A Preferred Stock for a price of $150,
subject to adjustment. The Rights will be exercisable only if a person or group acquires, or announces the intention
to acquire, 10% or more of the Company’s outstanding shares of common stock. The Company is entitled to redeem
each Right for $0.01, subject to adjustment, at any time prior to the earlier of the tenth business day following the
acquisition by any person or group of 10% or more of the outstanding shares of the common stock or the expiration
date of the Rights. The Rights Agreement will expire on November 15, 2015.
As a result of the Rights distribution, 600,000 of the 1,000,000 shares of authorized preferred stock were reserved
for issuance as Series A Preferred Stock.
18. REGULATORY AND CAPITAL MATTERS
The Company and its subsidiaries are subject to various regulatory requirements that impose restrictions on cash,
loans or advances, and dividends. The Bank is also required to maintain reserves against deposits. Reserves are held
either in the form of vault cash or noninterest-bearing balances maintained with the Federal Reserve Bank and are
based on the average daily balances and statutory reserve ratios prescribed by the type of deposit account. Reserve
balances totaling $50.9 million at December 31, 2012 and $18.3 million at December 31, 2011 were maintained in
fulfillment of these requirements.
Under current Federal Reserve regulations, the Bank is limited in the amount it may loan or advance to First
Midwest Bancorp, Inc., on an unconsolidated basis (the ‘‘Parent Company’’) and its non-bank subsidiaries. Loans
or advances to a single subsidiary may not exceed 10% and loans to all subsidiaries may not exceed 20% of the
Bank’s capital stock and surplus, as defined. Loans from subsidiary banks to non-bank subsidiaries, including the
Parent Company, are also required to be collateralized.
The principal source of cash flow for the Parent Company is dividends from the Bank. Various federal and state
banking regulations and capital guidelines limit the amount of dividends that the Bank may pay to the Parent
Company. Without prior regulatory approval, the Bank can initiate aggregate dividend payments in 2013 equal to its
net profits for 2013, as defined by statute, less $2.2 million up to the date of any such dividend declaration. Future
payment of dividends by the Bank is dependent upon individual regulatory capital requirements and levels of
profitability.
The Company and the Bank are also subject to various capital requirements set up and administered by federal
banking agencies. Under capital adequacy guidelines, the Company and the Bank must meet specific guidelines
145
that involve quantitative measures given the risk levels of assets and certain off-balance sheet items calculated
under regulatory accounting practices (‘‘risk-weighted assets’’). The capital amounts and classification are also
subject to qualitative judgments by the regulators regarding components of capital and assets, risk weightings, and
other factors.
The Federal Reserve, the primary regulator of the Company and the Bank, establishes minimum capital
requirements that must be met by member institutions. As defined in the regulations, quantitative measures
established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum
amounts and ratios of total and Tier 1 capital to risk-weighted assets and of Tier 1 capital to adjusted average assets.
Failure to meet minimum capital requirements could result in actions by regulators that could have a material
adverse effect on the Company’s financial statements.
As of December 31, 2012, the Company and the Bank met all capital adequacy requirements. As of December 31,
2012, the most recent regulatory notification classified the Bank as ‘‘well-capitalized’’ under the regulatory
framework for prompt corrective action. There are no conditions or events since that notification that management
believes would change the Bank’s classification.
The following table outlines the Company’s and the Bank’s measures of capital as of the dates presented and the
capital guidelines established by the Federal Reserve to be categorized as adequately capitalized and as
‘‘well-capitalized.’’
Summary of Capital Ratios
(Dollar amounts in thousands)
Actual
Adequately
Capitalized
‘‘Well-Capitalized’’
for FDICIA
Capital
Ratio
Capital
Ratio
Capital
Ratio
As of December 31, 2012:
Total capital (to risk-weighted assets):
First Midwest Bancorp, Inc.
............
First Midwest Bank ........................
$
755,264
859,018
11.90% $
13.76
507,882
499,390
8.00% $
8.00
634,852
624,237
10.00%
10.00
Tier 1 capital (to risk-weighted assets):
First Midwest Bancorp, Inc.
............
First Midwest Bank ........................
Tier 1 leverage (to average assets):
............
First Midwest Bancorp, Inc.
First Midwest Bank ........................
As of December 31, 2011:
Total capital (to risk-weighted assets):
652,480
780,631
10.28
12.51
652,480
780,631
8.40
10.09
253,941
249,695
233,069
232,071
4.00
4.00
3.00
3.00
380,911
374,542
388,448
386,785
6.00
6.00
5.00
5.00
............
First Midwest Bancorp, Inc.
First Midwest Bank ........................
$
853,961
880,223
13.68% $
14.37
499,295
489,968
8.00% $
8.00
624,119
612,459
10.00%
10.00
Tier 1 capital (to risk-weighted assets):
First Midwest Bancorp, Inc.
............
First Midwest Bank ........................
Tier 1 leverage (to average assets):
First Midwest Bancorp, Inc.
............
First Midwest Bank ........................
724,863
803,054
11.61
13.11
724,863
803,054
9.28
10.37
249,648
244,984
234,409
232,370
4.00
4.00
3.00
3.00
374,471
367,476
390,682
387,284
6.00
6.00
5.00
5.00
146
19. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
In the ordinary course of business, the Company enters into derivative transactions as part of its overall interest rate
risk management strategy to minimize significant unplanned fluctuations in earnings and cash flows caused by
interest rate volatility. The significant accounting policies related to derivative instruments and hedging activities
are presented in Note 1, ‘‘Summary of Significant Accounting Policies.’’
During the years ended December 31, 2012 and 2011, the Company hedged the fair value of fixed rate commercial
real estate loans using interest rate swaps through which the Company pays fixed amounts and receives variable
amounts. These derivative contracts were designated as fair value hedges and are valued using observable market
prices, if available, or third party cash flow projection models. The valuations and expected lives presented in the
following table are based on yield curves, forward yield curves, and implied volatilities that were observable in the
cash and derivatives markets as of December 31, 2012 and December 31, 2011.
Interest Rate Derivatives Portfolio
(Dollar amounts in thousands)
December 31,
2012
2011
Fair Value Hedges
Related to fixed rate commercial loans
Notional amount outstanding ...............................................................
Weighted-average interest rate received .................................................
Weighted-average interest rate paid.......................................................
Weighted-average maturity (in years) ....................................................
Derivative liability fair value ...............................................................
Cash pledged to collateralize net unrealized losses with counterparties (1)...
Aggregate fair value of assets needed to settle the instruments
immediately (if the credit risk-related contingent features were
triggered) ......................................................................................
$
$
$
$
15,860
2.12%
6.39%
4.76
(2,270)
2,516
2,301
$
$
$
$
16,947
2.19%
6.39%
5.76
(2,459)
2,516
2,492
(1) No other collateral was required to be pledged.
Hedge Ineffectiveness and Gains Recognized
(Dollar amounts in thousands)
Years ended December 31,
2011
2010
2012
Net hedge ineffectiveness recognized in noninterest income:
Change in fair value of swaps............................................
Change in fair value of hedged items..................................
Net hedge ineffectiveness (1)..................................................
$
$
190
(190)
-
$
$
(626)
624
(2)
$
$
(588)
585
(3)
(1) Included in other noninterest income in the Consolidated Statements of Income. No gains or losses relating to fair value hedges
were recognized in net interest income during the periods presented. No gains or losses were recognized related to components
of derivative instruments that were excluded from the assessment of hedge ineffectiveness during the years presented.
Derivative instruments are inherently subject to credit risk. Credit risk occurs when the counterparty to a derivative
contract fails to perform according to the terms of the agreement. Credit risk is managed by limiting and
collateralizing the aggregate amount of net unrealized gains in agreements, monitoring the size and the maturity
structure of the derivatives, and applying uniform credit standards for all activities with credit risk. Under Company
policy, credit exposure to any single counterparty cannot exceed 2.5% of stockholders’ equity. In addition, the
Company established bilateral collateral agreements with its primary derivative counterparties that provide for
exchanges of marketable securities or cash to collateralize either party’s net gains above an agreed-upon minimum
147
threshold. In determining the amount of collateral required, gains and losses on derivative instruments are netted
with the same counterparty. On December 31, 2012, these collateral agreements covered 100% of the fair value of
the Company’s outstanding interest rate swaps. Net losses with counterparties must be collateralized with either
cash or U.S. government or U.S. government-sponsored agency securities. Derivative assets and liabilities are
presented gross, rather than net, of pledged collateral amounts.
As of December 31, 2012 and December 31, 2011, all of the Company’s derivative instruments contained
provisions that require the Company’s debt to remain above a certain credit rating by each of the major credit rating
agencies. If the Company’s debt were to fall below that credit rating, it would be in violation of those provisions, and
the counterparties to the derivative instruments could terminate the swap transaction and demand cash settlement of
the derivative instrument in an amount equal to the derivative liability fair value. As of December 31, 2012, the
Company was not in violation of these provisions.
The Company’s derivative portfolio also includes derivative instruments not designated in a hedge relationship
consisting of commitments to originate 1-4 family mortgage loans and foreign exchange contracts. The amount of
these instruments was not material for any period presented. The Company had no other derivative instruments as of
December 31, 2012 or December 31, 2011. The Company does not enter into derivative transactions for purely
speculative purposes.
20. COMMITMENTS, GUARANTEES, AND CONTINGENT LIABILITIES
Credit Commitments and Guarantees
In the normal course of business, the Company enters into a variety of financial instruments with off-balance sheet
risk to meet the financing needs of its customers and to conduct lending activities, including commitments to
extend credit and standby and commercial letters of credit. These instruments involve elements of credit and
interest rate risk in excess of the amount recognized in the Consolidated Statements of Financial Condition.
148
Contractual or Notional Amounts of Financial Instruments
(Dollar amounts in thousands)
December 31,
2012
2011
Commitments to extend credit:
Commercial and industrial............................................................
Commercial real estate.................................................................
Residential construction ...............................................................
Home equity lines .......................................................................
Credit card lines .........................................................................
Overdraft protection program (1) ....................................................
All other commitments ................................................................
Total commitments ..................................................................
Letters of credit:
Commercial real estate.................................................................
Residential construction ...............................................................
All other....................................................................................
Total letters of credit ................................................................
Unamortized fees associated with letters of credit (2)(3)......................
Remaining weighted-average term, in months ..................................
Remaining lives, in years .............................................................
Recourse on assets securitized:
Unpaid principal balance of assets securitized .................................
Carrying value of recourse obligation (2) .........................................
$
$
$
$
$
$
737,973
168,105
18,986
258,156
25,459
176,328
105,344
1,490,351
52,145
5,696
57,996
115,837
740
13.20
0.1 to 11.6
50,110
55
$
$
$
$
$
$
609,601
139,574
13,300
257,315
21,257
178,699
129,015
1,348,761
49,373
8,661
58,532
116,566
668
9.62
0.1 to 12.6
-
-
Advance Dated
May 17, 2012
Advance Dated
October 3, 2012
Forward committed advances with FHLB:
Amount of advance .............................................................
Interest rate........................................................................
Expected settlement date ......................................................
Maturity date .....................................................................
$
200,000
2.05%
May 19, 2014
May 20, 2019
$
50,000
1.77%
October 3, 2014
October 3, 2019
(1) Federal regulations regarding electronic fund transfers require customers to affirmatively consent to the institution’s overdraft
service for automated teller machine and one-time debit card transactions before overdraft fees may be assessed on the account.
Customers are provided a specific line for the amount they may overdraw.
(2) Included in other liabilities in the Consolidated Statements of Financial Condition.
(3) The Company is amortizing these amounts into income over the commitment period.
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
upon, 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 that involved in extending loans to customers.
The Company uses the same credit policies for credit commitments as it does for its loans and minimizes exposure
to credit loss through various collateral requirements.
Letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer
to a third party. Standby letters of credit generally are contingent on the failure of the customer to perform
according to the terms of the contract with the third party and are most often issued in favor of a municipality where
construction is taking place to ensure the borrower adequately completes the construction.
149
The maximum potential future payments guaranteed by the Company under standby letters of credit arrangements
are equal to the contractual amount of the commitment. If a commitment is funded, the Company may seek recourse
through the liquidation of the underlying collateral including real estate, production plants and property, marketable
securities, or receipt of cash.
As a result of the sale of certain 1-4 family mortgage loans in 2012, the Company is contractually obligated to
repurchase any non-performing loans, defined as loans past due greater than 90 days, at recorded value. In
accordance with the sales agreement, there is no limitation to the maximum potential future payments or expiration
of the Company’s recourse obligation. In previous years, the Company had similar recourse provisions related to a
2004 loan securitization, which expired on November 30, 2011. No loans were required to be repurchased during
the years ended December 31, 2012 or 2011 under either agreement.
During 2012, the Company entered into two forward commitments with the FHLB to take advantage of the current
low market rates for future funding. The advances have prepayment features allowing the Company to prepay the
advances below par if the prepayment calculations indicate a discount.
Legal Proceedings
In August of 2011, the Bank was named in a purported class action lawsuit filed in the Circuit Court of Cook
County, Illinois on behalf of certain of the Bank’s customers who incurred overdraft fees. The lawsuit is based on
the Bank’s practices relating to debit card transactions, and alleges that these practices resulted in customers being
assessed excessive overdraft fees. The plaintiffs seek an unspecified amount of damages and other relief, including
restitution, and no class has been certified. The Bank filed a motion to dismiss the complaint and, on January 23,
2013, the Circuit Court granted the Bank’s motion and dismissed the complaint with prejudice. On February 20,
2013, the plaintiffs filed a notice of appeal with the Illinois Appellate Court. The Company believes that the Bank
has meritorious defenses to the claims made by the plaintiffs and, accordingly, the Bank intends to continue to
vigorously defend itself against the allegations in the lawsuit.
As of December 31, 2012, there were certain other legal proceedings pending against the Company and its
subsidiaries in the ordinary course of business. The Company does not believe that liabilities, individually or in the
aggregate, arising from legal proceedings, if any, would have a material adverse effect on the consolidated financial
condition of the Company as of December 31, 2012.
21. VARIABLE INTEREST ENTITIES (‘‘VIEs’’)
A VIE is a partnership, limited liability company, trust, or other legal entity that does not have sufficient equity to
finance its activities without additional subordinated financial support from other parties, or whose investors lack
one of the following three characteristics associated with owning a controlling financial interest: (i) the direct or
indirect ability to make decisions about an entity’s activities through voting rights or similar rights; (ii) the
obligation to absorb the expected losses of an entity, if they occur; and (iii) the right to receive the expected residual
returns of the entity, if they occur.
GAAP requires VIEs to be consolidated by the party that has both (i) the power to direct the VIE’s activities that
most significantly impact the entity’s economic performance and (ii) the obligation to absorb losses of the VIE that
could potentially be significant to the VIE or the right to receive benefits from the VIE that could potentially be
significant to the VIE (i.e., meets the definition of the primary beneficiary).
150
The following table summarizes the VIEs in which the Company has an interest.
December 31, 2012
Carrying
Amount
of Assets
Maximum
Exposure
to Loss
Number
of
VIEs
December 31, 2011
Carrying
Amount
of Assets
Maximum
Exposure
to Loss
Number
of
VIEs
First Midwest Capital Trust 1
(‘‘FMCT’’):
Principal balance of debentures issued
by the Company ...........................
Related interest receivable .................
Total FMCT assets........................
Interest in trust-preferred capital
securities issuances .......................
Investment in low-income housing tax
credit partnerships ........................
$ 61,770
358
$ 61,770
358
$ 62,128
$ 62,128
$
$
6,393
713
$
$
6,064
713
1
2
9
$ 87,277
506
$ 87,277
506
$ 87,783
$ 87,783
$
$
32
1,066
$
$
31
1,011
1
1
12
The Company owns 100% of the common stock of FMCT, a business trust that was formed in November of 2003 to
issue trust-preferred securities to third party investors. FMCT issued preferred securities and common stock and
used the proceeds to purchase junior subordinated debentures issued by the Company. FMCT’s only assets as of
December 31, 2012 and 2011 were the principal balance of the debentures and the related interest receivable.
FMCT meets the definition of a VIE, but the Company is not the primary beneficiary of FMCT. Accordingly,
FMCT is not consolidated in the Company’s financial statements. The subordinated debentures issued by the
Company to FMCT are included in senior and subordinated debt in the Company’s Consolidated Statements of
Financial Condition.
The Company holds an interest in two trust-preferred capital securities issuances. Although these investments may
meet the definition of a VIE, the Company is not the primary beneficiary. The Company includes its interest in
these investments in securities available-for-sale in the Consolidated Statements of Financial Condition.
The Company has limited partner interests in low-income housing tax credit partnerships and limited liability
corporations. These entities meet the definition of a VIE. Since the Company is not the primary beneficiary of the
entities, it accounts for its investment using the cost method. The carrying amount of the Company’s investment in
these partnerships is included in other assets in the Consolidated Statements of Financial Condition.
22. FAIR VALUE
Fair value represents the amount that would 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 for reporting purposes. Refer to the ‘‘Financial Instruments Not Required to be
Measured at Fair Value’’ section of this footnote. Any aggregation of the estimated fair values presented in this
footnote does not represent the underlying value of the Company.
151
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:
(cid:129) Level 1 – Quoted prices in active markets for identical assets or liabilities.
(cid:129) 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.
(cid:129) Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the
fair value of the assets or liabilities. These inputs require significant management judgment or estimation,
some of which use model-based techniques and may be internally developed.
Assets and liabilities are assigned to a level within the fair value hierarchy based on the lowest level of significant
input used to measure fair value. Assets and liabilities may change levels within the fair value hierarchy due to
market conditions or other circumstances. Those transfers are recognized on the date of the event that prompted the
transfer. There were no transfers of assets or liabilities between levels of the fair value hierarchy during the periods
presented.
Assets and Liabilities Required to be Measured at Fair Value on a Recurring Basis
The following table provides the fair value for assets and liabilities required to be measured at fair value on a
recurring basis in the Consolidated Statements of Financial Condition by level in the fair value hierarchy.
Recurring Fair Value Measurements
(Dollar amounts in thousands)
December 31, 2012
Level 2
Level 1
Level 3
Level 1
December 31, 2011
Level 2
Level 3
Assets:
Trading securities:
Money market funds ...
Mutual funds .............
$
1,554
12,608
$
Total trading
securities ............
14,162
Securities available-for-
$
-
-
-
$
1,565
12,904
$
14,469
$
-
-
-
sale:
U.S. agency securities..
CMOs ......................
Other residential
MBSs....................
Municipal securities ....
CDOs .......................
Corporate debt
securities ...............
Hedge fund investment
Other equity securities
Total securities
available-for-sale ..
Mortgage servicing
rights (1) ....................
Liabilities:
Derivative liabilities (2) ....
$
-
-
-
-
-
-
-
43
43
-
-
-
-
-
-
-
-
-
12,129
-
-
-
508
400,383
122,900
520,043
-
15,339
1,616
9,442
-
-
-
-
-
-
-
13,394
-
-
-
5,035
384,104
87,691
490,071
-
30,014
1,616
1,040
-
-
-
-
-
-
-
41
41
-
-
1,070,231
12,129
-
985
$
2,270
$
-
$
999,571
13,394
-
$
2,459
$
929
-
(1) Included in other assets in the Consolidated Statements of Financial Condition.
(2) Included in other liabilities in the Consolidated Statements of Financial Condition.
152
Although pension plan assets are not consolidated in the Company’s Consolidated Statements of Financial
Condition, the fair value of pension plan assets is required to be measured at fair value on an annual basis. The fair
value of pension plan assets is presented in the following table by level in the fair value hierarchy.
Annual Fair Value Measurements for Pension Plan Assets
(Dollar amounts in thousands)
December 31, 2012
Level 2
Level 1
Total
Level 1
December 31, 2011
Level 2
Total
$ 16,009
$
-
$ 16,009
$
17,970
$
-
$
17,970
6,510
-
15,001
-
7,295
8,653
-
10,033
13,805
8,653
15,001
10,033
5,954
-
16,537
-
7,029
5,954
-
9,546
12,983
5,954
16,537
9,546
Pension plan assets:
Mutual funds (1) .............
U.S. government and
government agency
securities...................
Corporate bonds ............
Common stocks .............
Common trust funds.......
Total pension plan
assets ....................
$ 37,520
$
25,981
$ 63,501
$
40,461
$ 22,529
$
62,990
(1) Includes mutual funds, money market funds, cash, cash equivalents, and accrued interest.
The following sections describe the specific valuation techniques and inputs used to measure financial assets and
liabilities at fair value.
Trading Securities
The Company’s trading securities consist of diversified investment securities held in a grantor trust and are invested
in money market and mutual funds. The fair value of these money market and mutual funds is based on quoted
market prices in active exchange markets and is classified in level 1 of the fair value hierarchy. Changes in the fair
value of trading securities are included in other noninterest income in the Condensed Consolidated Statements of
Income.
Securities Available-for-Sale
Except for CDOs and a hedge fund investment described below, the Company’s available-for-sale securities are
primarily fixed income instruments that are not quoted on an exchange, but may be traded in active markets. The
fair values are based on quoted prices in active markets or market prices for similar securities obtained from
external pricing services or dealer market participants and are classified in level 2 of the fair value hierarchy.
Quarterly, the Company evaluates the methodologies used by its external pricing services to develop the fair values
to determine whether the results of the valuations are representative of an exit price in the Company’s principal
markets and an appropriate representation of fair value.
CDOs – CDOs are classified in level 3 of the fair value hierarchy. The Company estimates the fair values for each
CDO using discounted cash flow analyses with the assistance of a structured credit valuation firm. This
methodology relies on credit analysis and review of historical financial data for each of the issuers of the securities
underlying the individual CDO (the ‘‘Issuers’’) to estimate the cash flows. These estimates are highly subjective and
sensitive to several significant, unobservable inputs, including prepayment assumptions, default probabilities, loss
given default assumptions, and deferral cure probabilities. The cash flows for each Issuer are then discounted to
present values using LIBOR plus an adjustment to reflect the higher risk inherent in these securities given their
complex structures and the impact of market factors. Finally, the discounted cash flows for each Issuer are
aggregated to derive the estimated fair value for the specific CDO. Specific information for each CDO, as well as
the significant unobservable assumptions, is presented in the following table.
153
Characteristics of CDOs and Significant Unobservable Inputs
Used in the Valuation of CDOs as of December 31, 2012
(Dollar amounts in thousands)
1
2
CDO Number (1)
4
3
5
6
C-1
$ 17,500
7,140
2,823
C-1
$ 15,000
5,598
267
C-1
$ 15,000
12,377
3,101
B1
$ 15,000
13,922
4,057
C
$ 10,000
1,317
394
Characteristics:
Class (2) ...........................
Original par......................
Amortized cost .................
Fair value.........................
Lowest credit rating
(Moody’s) .....................
Number of underlying
Issuers .........................
Percent of Issuers currently
performing....................
Current deferral and default
percent (3)......................
Expected future deferral
and default percent (4) .....
18.6%
Excess subordination
percent (5)......................
0.0%
Discount rate risk
Ca
46
76.1%
17.6%
Ca
56
76.8%
17.6%
17.5%
0.0%
Ca
61
77.0%
11.8%
15.5%
0.3%
Ca
61
50.8%
38.9%
30.9%
0.0%
C
$ 6,500
6,179
1,487
Ca
78
C
56
60.7%
65.4%
41.1%
29.4%
28.5%
16.1%
0.0%
2.3%
adjustment (6) .................
14.5%
15.5%
14.5%
13.5%
14.5%
13.0%
Significant unobservable
inputs, weighted average of
Issuers:
Probability of prepayment ...
Probability of default .........
Loss given default .............
Probability of deferral cure
17.9%
22.0%
88.0%
44.8%
5.7%
28.0%
90.2%
30.7%
4.5%
22.2%
89.7%
26.3%
9.0%
29.5%
92.6%
51.1%
10.3%
40.1%
92.6%
45.8%
3.0%
31.0%
94.8%
41.4%
(1) The Company has a seventh CDO, but no information is reported for that CDO since the security had an amortized cost and fair
value of zero as of December 31, 2012.
(2) Class refers to the Company’s tranche within the security. In a structured investment, a tranche is one of a number of related
securities offered as part of the same transaction and relates to the order in which investors receive principal and interest
payments.
(3) Represents actual deferrals and defaults, net of recoveries, as a percent of the original collateral.
(4) Represents expected future net deferrals and defaults, net of recoveries, as a percent of the remaining performing collateral. The
probability of future defaults is derived for each Issuer based on a credit analysis. The associated assumed loss given default is
based on historical default and recovery information provided by a nationally recognized credit rating agency and is assumed to
be 90% for banks, 85% for insurance companies, and 100% for Issuers that have already defaulted.
(5) Represents additional defaults that the CDO can absorb before the security experiences any credit impairment. The excess
subordination percentage is calculated by dividing the amount of potential additional loss that can be absorbed (before the
receipt of all expected future principal and interest payments is affected) by the total balance of performing collateral.
(6) Cash flows are discounted at LIBOR plus this adjustment to reflect the higher risk inherent in these securities given the current
market environment.
Most Issuers have the right to prepay the securities on the fifth anniversary of issuance and under other limited
circumstances. To estimate prepayments, a credit analysis of each Issuer is performed to ascertain its ability and
likelihood to fund a prepayment. If a prepayment occurs, the Company receives cash equal to the par value for the
portion of the CDO associated with that Issuer. Since there are a number of Issuers underlying each CDO,
prepayments by a small number of Issuers would not likely have a material impact on the fair value of the CDO.
154
The likelihood that an Issuer who is currently deferring payment on the securities will pay all deferred amounts and
remain current thereafter is based on an analysis of the Issuer’s asset quality, leverage ratios, and other measures of
financial viability.
The impact of changes in these key inputs could result in a significantly higher or lower fair value measurement for
each CDO. The timing of the default, the magnitude of the default, and the timing and magnitude of the cure
probability are directly interrelated. Defaults that occur sooner and/or are greater than anticipated have a negative
impact on the valuation. In addition, a high cure probability assumption has a positive effect on the fair value, and, if
a cure event takes place sooner than anticipated, the impact on the valuation is also favorable.
The Company’s Treasury Department monitors the valuation results of each CDO on a quarterly basis, which
includes an analysis of historical pricing trends for these types of securities, overall economic conditions (such as
tracking LIBOR curves), and the performance of the Issuers’ industries. The Company’s Treasury Department also
reviews market activity for the same or similar tranches of the CDOs, when available. Annually, it validates
significant assumptions by reviewing detailed back-testing performed by the valuation firm.
A rollforward of the carrying value of CDOs for the three years ended December 31, 2012 is presented in the
following table.
Rollforward of Carrying Value of CDOs
(Dollar amounts in thousands)
Years Ended December 31,
2011
2012
2010
Balance at beginning of year...................................................
$ 13,394
$ 14,858
$ 11,728
Total (loss) income:
Included in earnings (1) ....................................................
Included in other comprehensive (loss) income (2) ................
Balance at end of year (3)........................................................
(2,226)
961
(936)
(528)
(4,664)
7,794
$ 12,129
$ 13,394
$ 14,858
Change in unrealized losses recognized in earnings relating to
securities still held at end of period ......................................
$ (2,226)
$
(936)
$ (4,664)
(1) Included in net securities (losses) gains in the Consolidated Statements of Income and related to securities still held at the end of
the period.
(2) Included in unrealized holding gains in the Consolidated Statements of Comprehensive Income.
(3) There were no purchases, sales, issuances, or settlements of CDOs during the periods presented.
Hedge Fund Investment – The Company’s hedge fund investment is classified in level 2 of the fair value hierarchy.
The fair value is derived from monthly and annual financial statements provided by hedge fund management. The
majority of the hedge fund’s investment portfolio is held in securities that are freely tradable and are listed on
national securities exchanges.
Mortgage Servicing Rights
The Company records its mortgage servicing rights at fair value and includes them in other assets in the
Consolidated Statements of Financial Condition. Mortgage servicing rights do not trade in an active market with
readily observable prices. Therefore, the Company determines the fair value of mortgage servicing rights by
estimating the present value of future cash flows associated with the mortgage loans being serviced. Key economic
assumptions used in measuring the fair value of mortgage servicing rights at December 31, 2012 included
prepayment speeds, maturities, and discount rates. While market-based data is used to determine the assumptions,
the Company incorporates its own estimates of the assumptions market participants would use in determining the
fair value of mortgage servicing rights, which results in a level 3 classification in the fair value hierarchy. Changes
155
in the assumptions used to value the mortgage servicing rights could result in a higher or lower fair value
measurement.
Key economic assumptions used in measuring fair value, at end of year:
Weighted-average prepayment speed ......................................................
Weighted-average discount rate .............................................................
Weighted-average maturity, in months....................................................
24.0%
11.0%
227.0
Derivative Assets and Derivative Liabilities
The Company enters into interest rate swaps that are executed in the dealer market, and pricing is based on market
quotes obtained from the counterparty. 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.
Pension Plan Assets
Mutual funds, money market funds, and common stocks are based on quoted market prices in active exchange
markets and classified in level 1 of the fair value hierarchy. Corporate bonds, U.S. Treasury securities, and U.S.
government agency securities are valued at quoted prices from independent sources that are based on observable
market trades or observable prices for similar bonds where a price for the identical bond is not observable and,
therefore, are classified as level 2 of the fair value hierarchy. Common trust funds are valued at quoted redemption
values on the last business day of the Plan’s year end and are classified as level 2 in the fair value hierarchy.
Assets and Liabilities Required to be Measured at Fair Value on a Non-Recurring Basis
The following table provides the fair value for each class of assets and liabilities required to be measured at fair
value on a non-recurring basis in the Consolidated Statements of Financial Condition by level in the fair value
hierarchy.
Non-Recurring Fair Value Measurements
(Dollar amounts in thousands)
December 31, 2012
December 31, 2011
Level 1 Level 2
Level 3
Level 1 Level 2
Level 3
Collateral-dependent impaired loans ....
OREO (1) .........................................
Loans held-for-sale (2) ........................
Assets held-for-sale (3) .......................
$
-
-
-
-
$
-
-
-
-
$ 61,454
11,956
-
1,668
$
-
-
-
-
$
-
-
-
-
$ 96,220
12,613
4,200
7,933
(1) Includes OREO and covered OREO with valuation adjustments during the year.
(2) Included in other assets in the Consolidated Statements of Financial Condition.
(3) Included in premises, furniture, and equipment in the Consolidated Statements of Financial Condition.
Collateral-Dependent Impaired Loans
Certain collateral-dependent impaired loans are subject to fair value adjustments to reflect the difference between
the carrying value of the loans and the value of the underlying collateral. The fair values of collateral-dependent
impaired loans are primarily determined by current appraised values of the underlying collateral. Circumstances
may warrant an adjustment to the appraised value based on the age and/or type of appraisal, and these adjustments
typically range from 0% - 20%. Generally, appraisals greater than twelve months old are adjusted to account for
estimated declines in the real estate market until an updated appraisal can be obtained. In addition, the Company
may adjust appraised values to account for differences in remediation strategies, such as adjusting a ‘‘stabilized’’
value to an ‘‘orderly liquidation’’ value. In certain cases, an internal valuation may be used when the underlying
156
collateral is located in areas where comparable sales data is limited or unavailable. Accordingly, collateral-
dependent impaired loans are classified in level 3 of the fair value hierarchy.
Collateral-dependent impaired loans for which the fair value is greater than the recorded investment are not
measured at fair value in the Consolidated Statements of Financial Condition and are not included in this
disclosure.
OREO
The fair value of OREO is measured using the current appraised value of the properties. In certain circumstances, a
current appraisal may not be available or the current appraised value may not represent an accurate measurement of
the property’s fair value due to outdated market information or other factors. In these cases, the fair value is
determined based on the lower of the (i) most recent appraised value, (ii) broker price opinion, (iii) current listing
price, or (iv) signed sales contract. Given these valuation methods, OREO is classified in level 3 of the fair value
hierarchy. Any valuation adjustments for reductions in the fair value of OREO are recognized in the Company’s
operating results in the period in which they occur.
Loans Held-for-Sale
As of December 31, 2011, loans held-for-sale consisted of one office loan and one other commercial real estate
loan. The loans were transferred into the held-for-sale category at the sales contract price. Accordingly, the loans
held-for-sale were classified in level 3 of the fair value hierarchy. The Company had no loans held-for-sale as of
December 31, 2012.
Assets Held-for-Sale
As of December 31, 2012, assets held-for-sale consisted of two former branches that are no longer in operation. The
Company determined that the branches met the held-for-sale criteria and transferred them into the held-for-sale
category at their recorded investment, which approximates fair value.
In the second quarter of 2011, the Company entered into an agreement to sell property held for expansion and
transferred it to held-for-sale status based on the sales contract price. The Company signed a final sales agreement
in the third quarter of 2012, resulting in a $1.3 million valuation adjustment charged to noninterest expense and
included in other noninterest expense in the Consolidated Statements of Income. The sale of the property was
completed in the fourth quarter of 2012.
Based on the valuation methods used to determine the fair value of assets held-for-sale, they are classified in level 3
of the fair value hierarchy.
Valuation Adjustments Recorded for
Assets Measured at Fair Value on a Non-Recurring Basis
(Dollar amounts in thousands)
Years Ended December 31,
2011
2012
2010
Charged to allowance for loan and covered loan losses:
Collateral-dependent impaired loans.................................
Loans held-for-sale .......................................................
$ 163,671
82,647
$
88,017
2,191
$ 119,321
-
Charged to earnings:
OREO.........................................................................
Assets held-for-sale and excess properties transferred to
OREO .....................................................................
4,244
2,597
3,785
1,111
23,367
-
157
Goodwill and Other Intangible Assets
Goodwill represents the excess of the purchase price over the fair value of net assets acquired using the purchase
method of accounting. Other intangible assets represent purchased assets that also lack physical substance, but can
be distinguished from goodwill because of contractual or other legal rights or because the asset is capable of being
sold or exchanged either on its own or in combination with a related contract, asset, or liability.
Goodwill and other intangible assets are subject to impairment testing, which requires a significant degree of
management judgment and the use of significant unobservable inputs. Goodwill is tested annually for impairment
or more often if events or circumstances between annual tests indicate that there may be impairment.
As discussed in Note 8, ‘‘Goodwill and Other Intangible Assets,’’ the annual impairment tests indicated no
impairment existed.
If the testing had resulted in impairment, the Company would have classified goodwill and other intangible assets
as a level 3 non-recurring fair value measurement. Additional information regarding goodwill, other intangible
assets, and impairment policies can be found in Note 1, ‘‘Summary of Significant Accounting Policies,’’ and
Note 8, ‘‘Goodwill and Other Intangible Assets.’’
158
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.
Financial Instruments Not Required to be Measured at Fair Value
(Dollar amounts in thousands)
December 31, 2012
December 31, 2011
Hierarchy
Level
Carrying
Amount
Fair Value
Carrying
Amount
Fair Value
Assets:
Cash and due from
banks..................
Interest-bearing
deposits in other
banks..................
Securities held-to-
maturity ..............
Loans, net of
allowance for loan
and covered loan
losses .................
FDIC
indemnification
asset ...................
Accrued interest
receivable ............
Investment in BOLI
Other earning assets
Liabilities:
Deposits .................
Borrowed funds .......
Senior and
subordinated debt
Accrued interest
payable ...............
Standby letters of
credit..................
1
2
2
3
3
3
3
3
2
2
1
2
2
$
149,420
$
149,420
$
123,354
$
123,354
566,846
566,846
518,176
518,176
34,295
36,023
60,458
61,477
5,288,124
5,305,286
5,229,153
5,251,773
37,051
27,535
206,405
9,923
27,040
27,535
206,405
10,640
65,609
29,826
206,235
-
37,173
29,826
206,235
-
6,672,255
185,984
6,674,510
189,074
6,479,175
205,371
6,479,309
208,728
214,779
216,686
252,153
237,393
2,884
740
2,884
740
4,019
668
4,019
668
Management uses various methodologies and assumptions to determine the estimated fair values of the financial
instruments in the table above. The fair value estimates are made at a discrete point in time based on relevant market
information and consider management’s judgments regarding future expected economic conditions, loss
experience, and specific risk characteristics of the financial instruments.
Short-Term Financial Assets and Liabilities – For financial instruments with a shorter-term or with no stated
maturity, prevailing market rates, and limited credit risk, the carrying amounts approximate fair value. Those
financial instruments include cash and due from banks, interest-bearing deposits in other banks, federal funds sold
and other short-term investments, accrued interest receivable, and accrued interest payable.
Securities Held-to-Maturity – The fair value of securities held-to-maturity is based on quoted market prices or
dealer quotes. If a quoted market price is not available, fair value is estimated using quoted market prices for similar
securities.
159
Loans, Net of Allowance for Loan and Covered Loan Losses – The fair value of loans is estimated using the
present value of the future cash flows of the remaining maturities of the loans. Prepayment assumptions that
consider the Company’s historical experience and current economic and lending conditions were included. The
discount rate was based on the LIBOR yield curve with adjustments for liquidity and credit risk. The primary
impact of credit risk on the fair value of the loan portfolio was accommodated through the use of the allowance for
loan and covered loan losses, which is believed to represent the current fair value of estimated inherent losses for
purposes of the fair value calculation.
Covered Loans – The fair value of the covered loan portfolio is determined by discounting the estimated cash flows
at a market interest rate, which is derived from LIBOR swap rates over the life of those loans. The estimated cash
flows are determined using the contractual terms of the covered loans, net of any projected credit losses. For
valuation purposes, these loans are placed into groups with similar characteristics and risk factors, where
appropriate. The timing and amount of credit losses for each group are estimated using historical default and loss
experience, current collateral valuations, borrower credit scores, and internal risk ratings. For individually
significant loans or credit relationships, the estimated fair value is determined by a specific loan level review
utilizing appraised values for collateral and projections of the timing and amount of cash flows.
FDIC Indemnification Asset – The fair value of the FDIC indemnification asset is calculated by discounting the
cash flows expected to be received from the FDIC. The future cash flows are estimated by multiplying expected
losses on covered loans and covered OREO by the reimbursement rates set forth in the FDIC Agreements.
Improvements in estimated cash flows on covered loans and covered OREO generally result in a corresponding
decrease in the fair value of the indemnification asset, while increases in expected reimbursements from the FDIC
lead to an increase in the fair value of the indemnification asset.
Investment in BOLI – The fair value of BOLI approximates the carrying amount as both are based on each policy’s
respective CSV, which is the amount the Company would receive upon liquidation of these investments. The CSV is
derived from monthly reports provided by the managing brokers and is determined using the Company’s initial
insurance premium and earnings of the underlying assets, offset by management fees.
Other Interest-Earning Assets – The fair value of other interest-earning assets is estimated using the present value
of the future cash flows of the remaining maturities of the assets.
Deposit Liabilities – The fair values disclosed for demand deposits, savings deposits, NOW accounts, and money
market deposits are equal to the amount payable on demand at the reporting date (i.e., their carrying amounts). The
fair value for fixed-rate time deposits was estimated using the future cash flows discounted based on the LIBOR
yield curve, plus or minus the spread associated with current pricing.
Borrowed Funds – The fair value of FHLB advances is estimated by discounting the agreements based on
maturities using the rates currently offered for repurchase agreements of similar remaining maturities adjusted for
prepayment penalties that would be incurred if the borrowings were paid off on the measurement date. The carrying
amounts of federal funds purchased, repurchase agreements, federal term auction facilities, and other borrowed
funds approximate their fair value due to their short-term nature.
Senior and Subordinated Debt – The fair value of senior and subordinated debt was determined using quoted
market prices.
Standby Letters of Credit – The fair value of standby letters of credit represents deferred fees arising from the
related off-balance sheet financial instruments. These deferred fees approximate the fair value of these instruments
and are based on several factors, including the remaining terms of the agreements and the credit standing of the
customers.
Commitments – The Company estimated the fair value of commitments outstanding to be immaterial based on the
following factors: (i) the limited interest rate exposure of the commitments outstanding due to their variable nature,
(ii) the short-term nature of the commitment periods, (iii) termination clauses provided in the agreements, and
(iv) the market rate of fees charged.
160
23. SUPPLEMENTARY CASH FLOW INFORMATION
Supplemental Disclosures to the Consolidated Statements of Cash Flows
(Dollar amounts in thousands)
Income taxes refunded.......................................................
Interest paid to depositors and creditors ...............................
Dividends declared but unpaid ............................................
Non-cash transfers of securities available-for-sale to securities
held-to-maturity and other assets .....................................
Non-cash transfers of loans held-for-investment to loans
Years Ended December 31,
2011
2012
2010
$
(6,845)
36,036
749
$
(12,388)
40,429
746
$
(7,676)
50,069
742
-
-
7,864
held-for-sale .................................................................
93,714
Non-cash transfers of loans held-for-sale to loans
held-for-investment ........................................................
Non-cash transfers of loans to OREO ..................................
Non-cash exchange of non-performing loans for performing
loans ...........................................................................
Non-cash transfers of premises, furniture, and equipment to
1,957
47,628
-
OREO .........................................................................
1,833
Non-cash transfers of OREO to premises, furniture, and
12,320
-
52,249
-
-
-
-
76,804
19,088
-
equipment ....................................................................
-
841
9,455
24. RELATED PARTY TRANSACTIONS
The Company, through the Bank, makes loans and has transactions with certain of its directors and executive
officers. All of these loans and transactions were made in the ordinary course of business on substantially the same
terms, including interest rates and collateral requirements, for comparable transactions with other unrelated persons
and did not involve more than the normal risk of collectability or present other unfavorable features. The Securities
and Exchange Commission determined that disclosure of borrowings by directors and executive officers and
certain of their related interests should be made if the loans are greater than 5% of stockholders’ equity in the
aggregate. Loans to directors and executive officers totaled $10.2 million at December 31, 2012 and $4.0 at
December 31, 2011 and were not greater than 5% of stockholders’ equity at either December 31, 2012 or 2011.
161
25. CONDENSED PARENT COMPANY FINANCIAL STATEMENTS
The following represents the condensed financial statements of First Midwest Bancorp, Inc., the Parent Company.
Statements of Financial Condition
(Parent Company only)
(Dollar amounts in thousands)
December 31,
2012
2011
Assets
Cash and interest-bearing deposits .....................................................
Investments in and advances to subsidiaries ........................................
Goodwill .......................................................................................
Other assets ...................................................................................
$
20,970
1,092,681
10,358
58,132
Total assets.................................................................................
$ 1,182,141
Liabilities and Stockholders’ Equity
Senior and subordinated debt............................................................
Accrued expenses and other liabilities................................................
Stockholders’ equity........................................................................
$
214,779
26,469
940,893
$
$
$
47,101
1,135,930
10,358
45,592
1,238,981
252,153
24,241
962,587
Total liabilities and stockholders’ equity .........................................
$ 1,182,141
$
1,238,981
Statements of Income
(Parent Company only)
(Dollar amounts in thousands)
Income
Dividends from subsidiaries ............................................
Interest income .............................................................
Net losses on early extinguishment of debt........................
Securities transactions and other ......................................
$
Total income .............................................................
Expenses
Interest expense ............................................................
Salaries and employee benefits ........................................
Other expenses..............................................................
Total expenses ...........................................................
(Loss) income before income tax benefit and equity in
undistributed (loss) income of subsidiaries ........................
Income tax benefit............................................................
(Loss) income before undistributed (loss) income of
subsidiaries...................................................................
Equity in undistributed (loss) income of subsidiaries..............
Net (loss) income.......................................................
Preferred dividends and accretion on preferred stock .......
Net loss (income) applicable to non-vested restricted
shares ...................................................................
Years ended December 31,
2011
2010
2012
38,000
619
(558)
1,982
40,043
14,840
13,232
5,740
33,812
6,231
13,070
19,301
(40,355)
(21,054)
-
$
$
104,000
259
-
(189)
104,070
9,892
10,865
4,756
25,513
78,557
10,414
88,971
(52,408)
36,563
(10,776)
-
518
-
1,950
2,468
9,124
11,056
6,178
26,358
(23,890)
9,388
(14,502)
4,818
(9,684)
(10,299)
306
(350)
266
Net (loss) income applicable to common shares..............
$
(20,748)
$
25,437
$
(19,717)
162
Statements of Cash Flows
(Parent Company only)
(Dollar amounts in thousands)
Operating Activities
Net (loss) income ..........................................................
Adjustments to reconcile net (loss) income to net cash
provided by (used in) operating activities:
Equity in undistributed loss (income) of subsidiaries .......
Depreciation of premises, furniture, and equipment .........
Net losses on securities...............................................
Net losses on early extinguishment of debt ....................
Share-based compensation expense ...............................
Tax benefit (expense) related to share-based
compensation .........................................................
Net (increase) decrease in other assets ..........................
Net increase (decrease) in other liabilities ......................
Net cash provided by (used in) operating activities ......
Investing Activities
Purchases of securities available-for-sale ...........................
Proceeds from sales and maturities of securities
available-for-sale ........................................................
Proceeds from sales of premises, furniture, and equipment ..
Purchase of premises, furniture, and equipment .................
Capital injection into subsidiary bank ...............................
Capital injection into non-bank subsidiary.........................
Purchase of non-performing assets from subsidiary bank (1)
Net cash used in investing activities ..........................
Financing Activities
(Payments) proceeds for the (retirement) issuance of
Years ended December 31,
2011
2010
2012
$
(21,054)
$
36,563
$
(9,684)
40,355
6
-
558
6,004
170
(6,207)
1,366
21,198
(5,811)
-
-
(18)
-
-
-
(5,829)
52,408
9
-
-
6,362
(179)
(10,290)
4,618
89,491
-
14
103
(16)
-
(363)
-
(262)
(4,818)
10
110
-
5,638
350
4,053
(263)
(4,604)
-
16
-
(96)
(100,000)
(750)
(168,088)
(268,918)
subordinated debt .......................................................
(37,033)
114,387
-
Redemption of preferred stock and related common stock
warrant.....................................................................
Proceeds from the issuance of common stock ....................
Cash dividends paid.......................................................
Restricted stock activity .................................................
Excess tax (expense) benefit related to share-based
compensation ............................................................
Net cash (used in) provided by financing activities ......
Net (decrease) increase in cash and cash equivalents ....
Cash and cash equivalents at beginning of year ...........
-
-
(2,977)
(1,469)
(21)
(41,500)
(26,131)
47,101
(193,910)
-
(12,838)
(1,256)
47
(93,570)
(4,341)
51,442
-
196,035
(12,422)
(401)
(189)
183,023
(90,499)
141,941
Cash and cash equivalents at end of year ...................
$
20,970
$
47,101
$
51,442
(1) These assets were transferred to Catalyst in the form of a capital injection.
26. SUBSEQUENT EVENTS
The Company evaluated the impact of events that occurred subsequent to December 31, 2012 through the date its
consolidated financial statements were issued. Based on the evaluation, management does not believe any
subsequent events occurred that would require further disclosure or adjustment to the consolidated financial
statements.
163
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
ITEM 9A. CONTROLS AND PROCEDURES
As of the end of the period covered by this report (the ‘‘Evaluation Date’’), the Company carried out an evaluation,
under the supervision and with the participation of the Company’s management, including the Company’s President
and Chief Executive Officer and its Executive Vice President and Chief Financial Officer, of the effectiveness of the
design and operation of the Company’s disclosure controls and procedures pursuant to Rule 13a-15 and 15d-15 of
the Securities and Exchange Act of 1934 (the ‘‘Exchange Act’’). Based on that evaluation, the President and Chief
Executive Officer and Executive Vice President and Chief Financial Officer concluded that as of the Evaluation
Date, the Company’s disclosure controls and procedures are effective to ensure that information required to be
disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed,
summarized, and reported within the time periods specified in Securities and Exchange Commission rules and
forms. There were no changes in the Company’s internal control over financial reporting during the quarter ended
December 31, 2012 that materially affected, or are reasonably likely to materially affect, the Company’s internal
control over financial reporting.
Management’s Report on Internal Control Over Financial Reporting
Management of the Company is responsible for establishing and maintaining effective internal control over
financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934. The
Company’s internal control over financial reporting is designed to provide reasonable assurance to the Company’s
management and Board of Directors regarding the preparation and fair presentation of published financial
statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Accordingly, even those systems determined to be effective can provide only reasonable assurance
with respect to financial statement preparation and presentation.
Management assessed the effectiveness of the Company’s internal control over financial reporting as of
December 31, 2012. In making this assessment, management used the criteria set forth in ‘‘Internal Control –
Integrated Framework’’ issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based
on this assessment, management determined that the Company’s internal control over financial reporting as of
December 31, 2012 is effective based on the specified criteria.
Ernst & Young LLP, the independent registered public accounting firm that audited the Company’s consolidated
financial statements included in this Annual Report on Form 10-K, has issued an attestation report on the
Company’s internal control over financial reporting as of December 31, 2012. The report, which expresses an
unqualified opinion on the Company’s internal control over financial reporting as of December 31, 2012, is
included in this Item under the heading ‘‘Attestation Report of Independent Registered Public Accounting Firm.’’
164
Attestation Report of Independent Registered Public Accounting Firm
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders of First Midwest Bancorp, Inc.
We have audited First Midwest Bancorp, Inc.’s (the ‘‘Company’’) internal control over financial reporting as of
December 31, 2012, based on criteria established in Internal Control – Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). The Company’s
management is responsible for maintaining effective internal control over financial reporting, and for its assessment
of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report
on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the company’s internal
control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about
whether effective internal control over financial reporting was maintained in all material respects. Our audit
included obtaining an understanding of internal control over financial reporting, assessing the risk that a material
weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the
assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. A company’s internal control over financial reporting
includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable
assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company are being made
only in accordance with authorizations of management and directors of the company; and (3) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
In our opinion, First Midwest Bancorp, Inc. maintained, in all material respects, effective internal control over
financial reporting as of December 31, 2012, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board
(United States), the consolidated statements of financial condition of First Midwest Bancorp, Inc. as of
December 31, 2012 and 2011, and the related consolidated statements of income, comprehensive income, changes
in stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2012 of the
Company and our report dated March 1, 2013 expressed an unqualified opinion thereon.
Chicago, Illinois
March 1, 2013
165
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, AND
CORPORATE GOVERNANCE
The Company’s executive officers are elected annually by the Board, and the Bank’s executive officers are elected
annually by the Bank’s Board of Directors. Certain information regarding the Company’s and the Bank’s executive
officers is set forth below.
Name (Age)
Michael L. Scudder (52)
Kent S. Belasco (62)
Victor P. Carapella (63)
Nicholas J. Chulos (53)
Paul F. Clemens (60)
Robert P. Diedrich (49)
Caryn J. Guinta (62)
James P. Hotchkiss (56)
Michael J. Kozak (61)
Kimberly J. McGarry (38)
Position or Employment for Past Five Years
President and Chief Executive Officer of the Company since
2008 and Chairman of the Bank’s Board of Directors and Chief
Executive Office of the Bank since 2011. From 2010,
Mr. Scudder served as the Vice Chairman of the Bank’s Board of
Directors and from 2007, Mr. Scudder served as the Company’s
President and Chief Operating Officer as well as Group
Executive Vice President of the Bank.
Executive Vice President and Chief Information and Operations
Officer of the Bank since 2011; prior thereto, Executive Vice
President and Chief Information Officer of the Bank.
Executive Vice President and Director of Commercial Banking
since 2011; prior thereto, Executive Vice President and
Commercial Banking Group Manager of the Bank since 2008.
Executive Vice President, General Counsel, and Corporate
Secretary since 2012; prior thereto, Partner of Krieg
DeVault, LLP.
Executive Vice President and Chief Financial Officer of the
Company and the Bank since 2008; prior thereto, Senior Vice
President, Chief Accounting Officer, and Principal Accounting
Officer of the Company.
Executive Vice President and Director of Wealth Management of
the Bank since 2011; prior thereto, President of the Wealth
Management Division of First Midwest Bank.
Executive Vice President and Director of Employee Resources of
the Bank since 2005.
Executive Vice President and Treasurer of the Company and the
Bank since 2004.
Executive Vice President and Senior Credit Officer of the Bank
since 2012; prior thereto, Executive Vice President and Chief
Credit Officer of the Bank.
Senior Vice President and Chief Accounting Officer of the
Company and Bank since 2010; prior thereto, Senior Manager in
the Assurance Services practice of Ernst & Young LLP.
Executive
Officer
Since
2002
2004
2008
2012
2006
2004
2013
2004
2004
2013
166
Name (Age)
Kevin L. Moffitt (53)
Thomas M. Prame (43)
Mark G. Sander (54)
Position or Employment for Past Five Years
Executive Vice President and Chief Risk Officer of the Company
and the Bank since 2011; prior thereto, Executive Vice President
and Audit Services Director of the Company since 2009; prior
thereto, Vice President and Head of Internal Audit at Nuveen
Investments, Inc.
Executive Vice President and Director of Retail Banking of the
Bank since 2012; prior thereto, Executive Vice President, Sales
and Service at RBS/Citizen’s Bank.
President and Chief Operating Officer of the Bank and Senior
Executive Vice President and Chief Operating Officer of the
Company since 2011; prior thereto, Executive Vice President and
head of Commercial Banking for Associated Banc-Corp and its
subsidiary, Associated Bank, since 2009; and prior thereto, leader
of Commercial Banking for the Midwest Region at Bank of
America.
Executive
Officer
Since
2009
2012
2011
Information relating to our directors, including our audit committee and audit committee financial experts and the
procedures by which stockholders can recommend director nominees, will be in our definitive Proxy Statement for
our 2013 Annual Meeting of Stockholders to be held on May 14, 2013 and is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
Information relating to our executive officer and director compensation will be in our definitive Proxy Statement
and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Information relating to security ownership of certain beneficial owners of common stock and information relating
to the security ownership of our management will be in the 2012 Proxy Statement and is incorporated herein by
reference.
Equity Compensation Plans
The following table sets forth information, as of December 31, 2012, relating to equity compensation plans of the
Company pursuant to which options, restricted stock, restricted stock units, or other rights to acquire shares may be
granted from time to time.
Equity Compensation Plan Information
Number of securities to
be issued
upon exercise of
outstanding options,
warrants, and rights
(a)
Weighted-average
exercise price of
outstanding options,
warrants, and rights
(b)
Number of securities
remaining available for
future issuance under
equity compensation plans
(excluding securities
reflected in column (a))
(c)
1,718,368
5,206
1,723,574
$
$
32.42
17.71
32.3832.38
2,399,721
-
2,399,721
Equity Compensation Plan Category
Approved by security holders (1) .......................
Not approved by security holders (2) ..................
Total .......................................................
(1) Includes all outstanding options and awards under the Company’s Omnibus Stock and Incentive Plan and the Non-Employee
Directors’ Stock Plan (the ‘‘Plans’’). Additional information and details about the Plans are also disclosed in Notes 1 and 16 of
‘‘Notes to the Consolidated Financial Statements’’ in Item 8 of this Form 10-K.
(2) Represents shares underlying deferred stock units credited under the Company’s Nonqualified Retirement Plan (‘‘NQ Plan’’),
payable on a one-for-one basis in shares of common stock.
167
The NQ Plan is a defined contribution deferred compensation plan under which participants are credited with
deferred compensation equal to contributions and benefits that would have accrued to the participant under the
Company’s tax-qualified plans, but for limitations under the Internal Revenue Code, and to amounts of salary and
annual bonus that the participant elected to defer. Participant accounts are deemed to be invested in separate
investment accounts under the NQ Plan with similar investment alternatives as those available under the Company’s
tax-qualified savings and profit sharing plan, including an investment account deemed invested in shares of
common stock. The accounts are adjusted to reflect the investment return related to such deemed investments.
Except for the 5,206 shares set forth in the table above, all amounts credited under the NQ Plan are paid in cash.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND
DIRECTOR INDEPENDENCE
Information regarding certain relationships and related transactions and director independence will be in the 2012
Proxy Statement and is incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Information regarding principal accountant fees and services will be in the 2012 Proxy Statement and is
incorporated herein by reference.
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a)(1) Financial Statements
The following consolidated financial statements of the Registrant and its subsidiaries are filed as a part of
this document under Item 8, ‘‘FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.’’
Report of Independent Registered Public Accounting Firm.
Consolidated Statements of Financial Condition as of December 31, 2012 and 2011.
Consolidated Statements of Income for the years ended December 31, 2012, 2011, and 2010.
Consolidated Statements of Comprehensive Income for the years ended December 31, 2012, 2011, and
2010.
Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 31, 2012, 2011,
and 2010.
Consolidated Statements of Cash Flows for the years ended December 31, 2012, 2011, and 2010.
Notes to the Consolidated Financial Statements.
(a)(2) Financial Statement Schedules
The schedules for the Registrant and its subsidiaries are omitted because of the absence of conditions under
which they are required, or because the information is set forth in the consolidated financial statements or
the notes thereto.
(a)(3) Exhibits
See Exhibit Index beginning on the following page.
168
Exhibit
Number
EXHIBIT INDEX
Description of Documents
3.1
3.2
4.1
4.2
4.3
4.4
4.5
4.6
4.7
4.8
4.9
4.10
4.11
4.12
Restated Certificate of Incorporation of First Midwest Bancorp, Inc. is incorporated herein by
reference to Exhibit 3.1 to the Company’s Annual Report on Form 10-K filed with the Securities and
Exchange Commission on February 27, 2009.
Restated By-laws of First Midwest Bancorp, Inc. is incorporated herein by reference to Exhibit 3.2 to
the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on
February 28, 2012.
Amended and Restated Rights Agreement dated November 15, 1995, is incorporated herein by
reference to Exhibits (1) through (3) of the Company’s Registration Statement on Form 8-A filed with
the Securities and Exchange Commission on November 21, 1995.
First Amendment to Rights Agreements dated June 18, 1997, is incorporated herein by reference to
Exhibit 4 of the Company’s Amendment No. 2 to the Registration Statement on Form 8-A filed with the
Securities and Exchange Commission on June 30, 1997.
Amendment No. 2 to Rights Agreements dated November 14, 2005, is incorporated herein by reference
to Exhibit 4.1 of the Company’s Amendment No. 3 to the Registration Statement on Form 8-A filed
with the Securities and Exchange Commission on November 17, 2005.
Amendment No. 3 to Rights Agreements dated December 3, 2008, is incorporated herein by reference
to Exhibit 4.4 of the Company’s Amendment No. 4 to the Registration Statement on Form 8-A filed
with the Securities and Exchange Commission on December 9, 2008.
Form of Common Stock Certificate is incorporated herein by reference to Exhibit 1 of the Registrant’s
Form 8-A Registration Statement, filed with the Securities and Exchange Commission on March 7,
1983.
Certificate of Designation for Fixed Rate Cumulative Perpetual Preferred Stock Series B dated
December 5, 2008 is incorporated herein by reference to Exhibit 4.1 to the Company’s Current Report
on Form 8-K filed with the Securities and Exchange Commission on December 9, 2008.
Senior Debt Indenture, dated as of November 22, 2011, by and between the Registrant and U.S. Bank
National Association, as trustee, incorporated herein by reference to Exhibit 4.1 of the Registrant’s
Current Report on Form 8-K, filed with the Securities and Exchange Commission on November 22,
2011.
Subordinated Debt Indenture, dated as of March 1, 2006, by and between the Registrant and U.S. Bank
National Association, as trustee, incorporated herein by reference to Exhibit 4.1 of the Registrant’s
Current Report on Form 8-K, filed with the Securities and Exchange Commission on April 3, 2006.
Declaration of Trust of First Midwest Capital Trust I dated August 21, 2009 is incorporated herein by
reference to Exhibit 4.2 to the Company’s Current Report on Form 8-K filed with the Securities and
Exchange Commission on August 27, 2009.
Indenture dated August 21, 2009 is incorporated herein by reference to Exhibit 4.1 to the Company’s
Current Report on Form 8-K filed with the Securities and Exchange Commission on August 27, 2009.
Series A Capital Securities Guarantee Agreement dated November 18, 2003 is incorporated herein by
reference to Exhibit 4.6 to the Company’s Annual Report on Form 10-K filed with the Securities and
Exchange Commission on March 9, 2004.
Indenture dated April 3, 2012 is incorporated herein by reference to Exhibit 4.1 to the Company’s
Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on August 3,
2012.
169
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
10.9
10.10
10.11
10.12
10.13
10.14
Senior Executive Letter Agreement under the Troubled Asset Relief Plan Capital Purchase Program by
and between First Midwest Bancorp, Inc. and the United States Department of the Treasury dated
December 5, 2008, is incorporated herein by reference to Exhibit 10.2 to the Company’s Current Report
on Form 8-K filed with the Securities and Exchange Commission on December 9, 2008.
First Midwest Savings and Profit Sharing Plan as Amended and Restated effective January 1, 2008 is
incorporated herein by reference to Exhibit 10.3 to the Company’s Annual Report on Form 10-K filed
with the Securities and Exchange Commission on February 28, 2012.
Short-term Incentive Compensation Plan is incorporated herein by reference to Exhibit 10.3 to the
Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on
February 28, 2012.
First Midwest Bancorp, Inc. Omnibus Stock and Incentive Plan is incorporated herein by reference to
Addendum A to the Company’s Proxy Statement filed with the Securities and Exchange Commission
on April 8, 2009.
First Midwest Bancorp, Inc. Amended and Restated Non-Employee Directors Stock Plan dated
May 21, 2008 is incorporated herein by reference to Exhibit 10.7 to the Company’s Annual Report on
Form 10-K filed with the Securities and Exchange Commission on February 27, 2009.
Restated First Midwest Bancorp, Inc. Nonqualified Stock Option-Gain Deferral Plan effective
January 1, 2008 is incorporated herein by reference to Exhibit 10.12 to the Company’s Annual Report
on Form 10-K filed with the Securities and Exchange Commission on February 28, 2008.
Restated First Midwest Bancorp, Inc. Deferred Compensation Plan for Non-employee Directors
effective January 1, 2008 is incorporated herein by reference to Exhibit 10.13 to the Company’s Annual
Report on Form 10-K filed with the Securities and Exchange Commission on February 28, 2008.
Restated First Midwest Bancorp, Inc. Nonqualified Retirement Plan effective January 1, 2008 is
incorporated herein by reference to Exhibit 10.14 to the Company’s Annual Report on Form 10-K filed
with the Securities and Exchange Commission on February 28, 2008.
Form of Non-Employee Director Restricted Stock grant between the Company and directors of the
Company pursuant to the First Midwest Bancorp, Inc. Amended and Restated Non-Employee Directors
Stock Plan is incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on
Form 8-K filed with the Securities Exchange Commission on May 28, 2008.
Form of Nonqualified Stock Option grant between the Company and directors of the Company
pursuant to the First Midwest Bancorp, Inc. Non-Employee Directors Stock Option Plan is
incorporated herein by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q filed
with the Securities Exchange Commission on May 12, 2008.
Form of Nonqualified Stock Option grant between the Company and certain officers of the Company
pursuant to the First Midwest Bancorp, Inc. Omnibus Stock and Incentive Plan is incorporated herein
by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q filed with the Securities
and Exchange Commission on May 12, 2008.
Form of Restricted Stock Unit grant between the Company and certain officers of the Company
pursuant to the First Midwest Bancorp, Inc. Omnibus Stock and Incentive Plan is incorporated herein
by reference to Exhibit 10.17 to the Company’s Annual Report on Form 10-K filed with the Securities
and Exchange Commission on February 28, 2008.
Form of Restricted Stock grant between the Company and certain officers of the Company pursuant to
the First Midwest Bancorp, Inc. Omnibus Stock and Incentive Plan is incorporated herein by reference
to Exhibit 10.18 to the Company’s Annual Report on Form 10-K filed with the Securities and Exchange
Commission on February 28, 2008.
Form of Troubled Asset Relief Plan Compliant Restricted Share Agreement between the Company and
its highly compensated executives is incorporated herein by reference to Exhibit 10.17 to the
Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on
March 1, 2010.
170
10.15
10.16
10.17
10.18
10.19
10.20
10.21
10.22
10.23
10.24
10.25
10.26
10.27
10.28
10.29
10.30
10.31
10.32
Form of Indemnification Agreement executed between the Company and certain officers and directors
of the Company is incorporated herein by reference to Exhibit 10.4 to the Company’s Quarterly Report
on Form 10-Q filed with the Securities and Exchange Commission on May 9, 2007.
Employment Agreement between the Company and its Chief Executive Officer.
Form of Class II Employment Agreement between the Company and certain of its key executive
officers.
Form of Class III Employment Agreement is incorporated herein by reference to Exhibit 10.21 to the
Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on
March 1, 2010.
Form of Tier II Employment Agreement is incorporated herein by reference to Exhibit 10.1 to the
Company’s Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on
August 3, 2012.
Form of Tier III Employment Agreement is incorporated herein by reference to Exhibit 10.2 to the
Company’s Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on
August 3, 2012.
Form of Commission Tier III Employment Agreement is incorporated herein by reference to
Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q filed with the Securities and Exchange
Commission on August 3, 2012.
Form of Amendment to the Employment Agreement between the Company and its Chief Executive
Officer and to the Class II Employment Agreements between the Company and certain of its key
executive officers.
Amendment to the Employment Agreement between the Company and its Chief Operating Officer.
Form of Confidentiality and Restrictive Covenants Agreement between the Company and its Chief
Executive Officer and its Chief Operating Officer.
Form of Confidentiality and Restrictive Covenants Agreement between the Company and certain of its
key executive officers.
Employment Agreement between the Company and its Retail Banking Director is incorporated herein
by reference to Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q filed with the Securities
and Exchange Commission on August 3, 2012.
Form of Restricted Stock Unit grant between the Company and certain retirement-eligible officers of
the Company pursuant to the First Midwest Bancorp, Inc. Omnibus Stock and Incentive Plan is
incorporated herein by reference to Exhibit 10.21 to the Company’s Annual Report on Form 10-K filed
with the Securities and Exchange Commission on March 1, 2011.
Employment Agreement between the Company and its Chief Operating Officer is incorporated herein
by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q filed with the Securities
and Exchange Commission on August 9, 2011.
Grant of Nonqualified Stock Option between the Company and its Chief Operating Officer is
incorporated herein by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q filed
with the Securities and Exchange Commission on August 9, 2011.
Grant of Restricted Stock Letter Agreement between the Company and its Chief Operating Officer is
incorporated herein by reference to Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q filed
with the Securities and Exchange Commission on August 9, 2011.
Supplemental Salary Stock Compensation Award Agreement between the Company and its Chief
Operating Officer is incorporated herein by reference to Exhibit 10.4 to the Company’s Quarterly
Report on Form 10-Q filed with the Securities and Exchange Commission on August 9, 2011.
Compensation Award Agreement between the Company and its Chief Operating Officer is
incorporated herein by reference to Exhibit 10.5 to the Company’s Quarterly Report on Form 10-Q filed
with the Securities and Exchange Commission on August 9, 2011.
171
11
12
14.1
14.2
21
23
31.1
31.2
Statement re: Computation of Per Share Earnings – The computation of basic and diluted earnings per
common share is included in Note 13 of the Company’s Notes to the Consolidated Financial Statements
included in ‘‘Item 8. Financial Statements And Supplementary Data’’ on Form 10-K for the year ended
December 31, 2012.
Statement re: Computation of Ratio of Earnings to Fixed Charges.
Code of Ethics and Standards of Conduct is incorporated herein by reference to Exhibit 14.1 to the
Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on
February 28, 2008.
Code of Ethics for Senior Financial Officers is incorporated herein by reference to Exhibit 14.2 to the
Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on
February 28, 2008.
Subsidiaries of the Registrant.
Consent of Independent Registered Public Accounting Firm.
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002 for the Company’s Annual Report on Form 10-K for the
year ended December 31, 2012.
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002 for the Company’s Annual Report on Form 10-K for the
year ended December 31, 2012.
32.1 (1)
32.2 (1)
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 for the Company’s Annual Report on Form 10-K for the
year ended December 31, 2012.
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 for the Company’s Annual Report on Form 10-K for the
year ended December 31, 2012.
101 (1)
Interactive Data File.
(1) Furnished, not filed.
172
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
FIRST MIDWEST BANCORP, INC.
Registrant
By
/S/ MICHAEL L. SCUDDER
Michael L. Scudder
President, Chief Executive Officer, and Director
March 1, 2013
Pursuant to the requirements of the Securities Act of 1934, this report has been signed below by the following
persons on behalf of the registrant and in their capacities indicated on March 1, 2013.
Signatures
/S/ ROBERT P. O’MEARA
Chairman of the Board
Robert P. O’Meara
/s/ MICHAEL L. SCUDDER
President, Chief Executive Officer, and Director
Michael L. Scudder
/S/ PAUL F. CLEMENS
Paul F. Clemens
Executive Vice President, Chief Financial Officer,
and Principal Accounting Officer
/S/ BARBARA A. BOIGEGRAIN
Director
Barbara A. Boigegrain
/S/ JOHN F. CHLEBOWSKI, JR.
Director
John F. Chlebowski, Jr.
/S/ BROTHER JAMES GAFFNEY, FSC
Director
Brother James Gaffney, FSC
/S/ PHUPINDER S. GILL
Director
Phupinder S. Gill
/S/ PETER J. HENSELER
Director
Peter J. Henseler
/S/ PATRICK J. MCDONNELL
Director
Patrick J. McDonnell
/S/ ELLEN A. RUDNICK
Director
Ellen A. Rudnick
/S/ MICHAEL J. SMALL
Director
Michael J. Small
/S/ JOHN L. STERLING
Director
John L. Sterling
/S/ J. STEPHEN VANDERWOUDE
Director
J. Stephen Vanderwoude
173
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CERTIFICATION
I, Michael L. Scudder, certify that:
1.
I have reviewed this report on Form 10-K of First Midwest Bancorp Inc.;
Exhibit 31.1
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state
a material fact necessary to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this quarterly
report, fairly present in all material respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control
over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and
have:
a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to
be designed under our supervision, to ensure that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us by others within those entities, particularly
during the period in which this report is being prepared;
b. Designed such internal control over financial reporting, or caused such internal control over financial
reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles;
c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this
report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of
the period covered by this report based on such evaluation; and
d. Disclosed in this report any change in the registrant’s internal control over financial reporting that
occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the
case of an quarterly report) that has materially affected, or is reasonably likely to materially affect, the
registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal
control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board
of directors (or persons performing the equivalent function):
a. All significant deficiencies and material weaknesses in the design or operation of internal control over
financial reporting which are reasonably likely to adversely affect the registrant’s ability to record,
process, summarize and report financial information; and
b. Any fraud, whether or not material, that involves management or other employees who have a significant
role in the registrant’s internal control over financial reporting.
Date: March 1, 2013
/S/ MICHAEL L. SCUDDER
[Signature]
President and
Chief Executive Officer
CERTIFICATION
I, Paul F. Clemens, certify that:
1.
I have reviewed this report on Form 10-K of First Midwest Bancorp Inc.;
Exhibit 31.2
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state
a material fact necessary to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this quarterly
report, fairly present in all material respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control
over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and
have:
a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to
be designed under our supervision, to ensure that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us by others within those entities, particularly
during the period in which this report is being prepared;
b. Designed such internal control over financial reporting, or caused such internal control over financial
reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles;
c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this
report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of
the period covered by this report based on such evaluation; and
d. Disclosed in this report any change in the registrant’s internal control over financial reporting that
occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the
case of an quarterly report) that has materially affected, or is reasonably likely to materially affect, the
registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal
control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board
of directors (or persons performing the equivalent function):
a. All significant deficiencies and material weaknesses in the design or operation of internal control over
financial reporting which are reasonably likely to adversely affect the registrant’s ability to record,
process, summarize and report financial information; and
b. Any fraud, whether or not material, that involves management or other employees who have a significant
role in the registrant’s internal control over financial reporting.
Date: March 1, 2013
/S/ PAUL F. CLEMENS
[Signature]
Executive Vice President and
Chief Financial Officer
CERTIFICATION
Exhibit 32.1
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, the undersigned officer of
First Midwest Bancorp, Inc. (the ‘‘Company’’), hereby certifies that:
(1) The Company’s Report on Form 10-K for the year ended December 31, 2012 (the ‘‘Report’’) fully complies
with the requirements of Section 13(a) or 15(d), as applicable, of the Securities and Exchange Act of 1934,
as amended; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and
results of operations of the Company.
/S/ MICHAEL L. SCUDDER
Name: Michael L. Scudder
Title:
President and Chief Executive Officer
Dated: March 1, 2013
A signed original of this written statement required by Section 906 of the Sarbanes-Oxley Act of 2002 has been
provided to the Company and will be retained by the Company and furnished to the Securities and Exchange
Commission or its staff upon request.
CERTIFICATION
Exhibit 32.2
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, the undersigned officer of
First Midwest Bancorp, Inc. (the ‘‘Company’’), hereby certifies that:
(1) The Company’s Report on Form 10-K for the year ended December 31, 2012 (the ‘‘Report’’) fully complies
with the requirements of Section 13(a) or 15(d), as applicable, of the Securities and Exchange Act of 1934,
as amended; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and
results of operations of the Company.
/S/ PAUL F. CLEMENS
Name:
Title:
Paul F. Clemens
Executive Vice President and Chief Financial Officer
Dated: March 1, 2013
A signed original of this written statement required by Section 906 of the Sarbanes-Oxley Act of 2002 has been
provided to the Company and will be retained by the Company and furnished to the Securities and Exchange
Commission or its staff upon request.
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FIRST MIDWEST BANCORP, INC.
STOCKHOLDER INFORMATION
COMMON STOCK
First Midwest Bancorp, Inc. common stock is traded in the Nasdaq Global Select Market tier
of the Nasdaq Stock Market under the symbol FMBI.
DIVIDEND PAYMENTS
Anticipated dividend payable dates are in January, April, July, and October subject to the
approval by the Board of Directors.
DIRECT DEPOSIT
Stockholders may have their dividends deposited directly to their savings, checking, or
money market account at any financial institution. Information concerning Dividend Direct
Deposit may be obtained from the Company or our transfer agent.
DIVIDEND REINVESTMENT/
STOCK PURCHASE
Stockholders may fully or partially reinvest dividends and invest up to $5,000 quarterly
in First Midwest Bancorp, Inc. common stock without incurring any brokerage fees.
Information concerning Dividend Reinvestment may be obtained from the Company or our
transfer agent.
TRANSFER AGENT/
STOCKHOLDER SERVICES
Stockholders with inquiries regarding stock accounts, dividends, change of ownership or
address, lost certificates, consolidation of accounts, or registering shares electronically
through the Direct Registration System should contact our transfer agent via the following:
Phone: (888) 581-9376
Correspondence:
Mail:
Computershare
P.O. Box 43006
Providence, RI 02940-3006
Overnight:
Computershare
250 Royal Street
Canton, MA 02021
Web:
www.computershare.com/investor
Online Inquiries:
https://www-us.computershare.com/investor/Contact
INVESTOR AND
STOCKHOLDER CONTACT
Investor Relations
First Midwest Bancorp, Inc.
One Pierce Place, Suite 1500
Itasca, Illinois 60143
(630) 875-7533
investor.relations@firstmidwest.com
SEC REPORTS AND
GENERAL INFORMATION
First Midwest Bancorp, Inc. files an annual report with the Securities and Exchange
Commission on Form 10-K and three quarterly reports on Form 10-Q. Requests for such
reports and general inquiries regarding stock and dividend information, quarterly earnings,
and news releases may be directed to Investor Relations at the above address or can be
obtained through the Investor Relations section of the Company’s website,
www.firstmidwest.com/investorrelations.
FORWARD-LOOKING
STATEMENTS
In this document we have included statements that may constitute “forward-looking
statements” within the meaning of the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995. These statements are not historical facts but instead
represent only our beliefs regarding future events or outcomes, many of which, by their
nature, are inherently uncertain and outside of our control. We are alerting you to the
possibility that our actual results and financial condition may differ, possibly materially,
from the anticipated results and financial condition indicated in these forward-looking
statements. Important factors that could cause our results to differ, possibly materially from
those in the forward-looking statements, are discussed in the Section entitled “Risk Factors”
in the enclosed Annual Report on Form 10-K for the fiscal year ended December 31, 2012
and our other reports filed with the Securities and Exchange Commission from time to time.
Forward-looking statements represent our management’s best judgment as of the date hereof
based on currently available information. Except as required by law, we undertake no duty to
update the contents of this document after the date hereof.
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FIRST MIDWEST BANCORP, INC.
2012 ANNUAL REPORT FIRST MIDWEST BANCORP, INC.
One Pierce Place, Suite 1500, Itasca, IL 60143 | 630.875.7450 | FirstMidwest.com