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FIRST MIDWEST BANCORP, INC.
2014 ANNUAL REPORT FIRST MIDWEST BANCORP, INC.
One Pierce Place, Suite 1500, Itasca, IL 60143 | 630.875.7450 | FirstMidwest.com
2320-8-305 4/15
FIRST MIDWEST BANCORP, INC.
COMPANY PROFILE
First Midwest Bancorp, Inc. is a bank holding company
headquartered in the Chicago suburb of Itasca, Illinois.
We are one of Illinois’ largest, independent, publicly-traded
banking companies.
Our principal subsidiary, First Midwest Bank, and other affi liates
provide a full range of business, middle-market and retail banking
and wealth management services to commercial and industrial,
commercial real estate, municipal, and consumer customers
through over 100 locations in metropolitan Chicago, northwest
Indiana, central and western Illinois, and eastern Iowa. First
Midwest Bank has more than $9.4 billion in assets and $7.2
billion in wealth management assets.
We are committed to meeting the fi nancial 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 fulfi ll those
fi nancial needs.
First Midwest was recognized by J.D. Power as
having the “Highest in Customer Satisfaction
with Retail Banking in the Midwest”*
according to the 2014 Retail Banking
Satisfaction StudySM.
ADDITIONAL INFORMATION
Visit the Investor Relations section of our website,
www.FirstMidwest.com/InvestorRelations, for stock
and dividend information, quarterly earnings and news
releases, online annual report, links to SEC fi lings and
other Company information.
*
First Midwest Bank received the highest numerical score among retail banks in
the Midwest region in the proprietary J.D. Power 2014 Retail Banking Satisfaction
StudySM. The Study is based on 80,445 total responses measuring 21 providers in
the Midwest region (Iowa, Illinois, Kansas, Missouri, Minnesota, and Wisconsin)
and measures opinions of consumers with their primary banking provider.
Proprietary study results are based on experiences and perceptions of consumers
1
surveyed January 2014. Individual experiences may vary. Visit JDPower.com.
STOCKHOLDERS LETTER 4.9.2015
To Our Stockholders,
Our performance for 2014 was strong, refl ecting both broad-based growth and building business momentum. As
always, that performance was grounded in an unwavering focus on meeting the fi nancial needs of our clients, and
serving as their most trusted fi nancial partner. It is that relationship with our clients that defi nes who we are, what
differentiates us, and ultimately, our success in today’s competitive landscape. It is that tenet that remains at the core
of our culture and drive to provide superior, long-term value to our clients, colleagues and stockholders.
Over the course of 2014, our efforts, fi rst and foremost, have centered on the development and attraction of a high-
performing and engaged team of colleagues. As a result, we have made signifi cant progress in the achievement of our
strategic priorities. Most notably, our initiatives to grow and diversify our revenues while also making the underlying
business investment necessary to protect our future performance and stability were very successful.
Our assets now total $9.4 billion, the highest level in our history and some 15% higher than a year ago. With 85%
of our business anchored in metropolitan Chicago, we now serve over 350,000 clients through over 100 locations.
We experienced sales success and growth across all lines of business, augmented by our 2014 acquisitions of Great
Lakes Bank, the Chicago operations of Popular Community Bank, and National Machine Tool Financial Corporation.
These efforts have added depth and experience to our sales team, deepened our presence in the metropolitan Chicago
marketplace and broadened our product offerings – all while further strengthening our balance sheet and solidifying the
groundwork for top-tier performance.
As we look ahead, the banking industry is entering
a period of transition. Near term, the operating
environment will continue to present challenges in the
form of persistent low rates and intense competitive
pressures. Longer term, rates will increase as regulatory
expectations, technology and consumer preferences
continue to evolve. All will serve to challenge the
status quo.
I fully expect that challenges will arise as we navigate
this transition. At the same time, I also expect these
challenges to be accompanied by exciting new
opportunities to expand our business. In such an
environment, success will be experienced by the best
prepared that can adapt and change without losing who
they are and what differentiates them. During such a
period, it will be equally critical that we maintain our
risk and investment disciplines, and unwillingness to
trade long-term reward for short-term performance.
Michael L. Scudder
President and Chief Executive Offi cer
First Midwest Bancorp, Inc.
2
Thinking about the future, our underlying priorities remain unchanged:
Develop and attract a strong and engaged team of colleagues.
Diversify and grow our revenues.
Balance our business investments and risks, allocating resources to areas of profi table growth and
operational control.
Supported by our progress in 2014 and the strength of our balance sheet, continued execution leaves us both
well positioned for growth and confi dent in our ability to further enhance stockholder value.
OUR 2014 PERFORMANCE
For the year, we reported net income of $69.3 million, or $0.92 per share, as compared to $79.3 million, or
$1.06 per share, for 2013. For both periods, performance results were impacted by certain large, uncommon
events. In the case of 2014, acquisition and related integration expenses negatively impacted earnings by
$0.11 per share while 2013’s results were enhanced by $0.15 per share resulting from the sale of a singular
equity investment and related treasury actions. Adjusting for these items, earnings per share were $1.03 for
the year ended December 31, 2014, up 14% from 2013. Similarly measured, our return on tangible common
equity improved to 10.3% in 2014 as contrasted to 9.6% in 2013.
2014 PERFORMANCE HIGHLIGHTS
94%94%
19%19%
26%26%
13%13%
4.5%4.5%
1.2B$1.2B$
DIVIDENDS
Payment of dividends of $0.31 per share, up 94% from 2013 while increasing stockholders equity by
10% to $1.1 billion.
LOAN GROWTH
Loan growth of 19% to $6.7 billion, led by a 23% increase in commercial business lending.
NONPERFORMING ASSETS
Signifi cantly improved asset quality, with nonperforming assets falling by 26% to $89.1 million, or to
1.5% of loans plus other real estate owned, the lowest such level since 2007.
AVERAGE DEPOSITS
Increased average total deposits by 13% to $7.7 billion, now representing 96% of total funding sources.
FEE-BASED REVENUE
Increased fee-based revenue by 4.5% to $111 million, refl ecting 10% and 12% growth in wealth
management and card-based fees, respectively.
ACQUISITION GROWTH
With the completion of the Popular Community Bank branch and Great Lakes Bank acquisitions, we
acquired $1.2 billion in deposits, $800 million in loans, 20 locations and over 27,000 new households,
enhancing our presence in the metropolitan Chicago market.
LEASING
LEASING
Added equipment leasing to our commercial product offering through the National Machine Tool
Financial Corporation acquisition, expanding our lending and fee generation opportunities.
(continued)
3
STOCKHOLDERS LETTER 4.9.2015
BUILDING BUSINESS MOMENTUM
As a regionally-based community banking organization, our Company has a deep-rooted presence anchored in
metropolitan Chicago, as well as in central and western Illinois, northwest Indiana, and eastern Iowa. We have
successfully operated in these markets for over 75 years providing exceptional, leading-edge products and unparalleled
service to our clients.
Since 2008, responsive to industry challenges and our commitment to providing our stockholders with superior
returns, we have worked to leverage this market position while broadening and growing our lines of business. We have
done so with a balanced and integrated strategy of managing
our effi ciency and underlying risks. In 2014, these efforts
evidenced signifi cant progress and are building momentum for
future performance.
We have successfully operated in these markets
for over 75 years providing exceptional,
leading-edge products and unparalleled service
to our clients.
Commercial Banking
Our commercial banking division provides traditional lending products such as working capital lines of credit, owner-
occupied and investor real estate loans, tax-advantaged fi nancing programs and equipment fi nancing, as well as a full
payment system suite of treasury management solutions for businesses and governmental entities of all sizes.
During 2014, our corporate loan portfolio grew to $5.7 billion, 19% higher than a year ago, largely on the strength
of expanded commercial and business lending. Ongoing investment in our lending teams and product offerings have
enabled us to grow this component of our business by 50% since 2010, creating a more balanced, less real estate-
centered portfolio mix.
Additionally, we have enhanced our lending capabilities in certain specialty areas, such as agribusiness, asset-based
and healthcare lending as well as equipment leasing. All of these areas complement our legacy commercial lending
portfolio while operating within a broader Midwestern footprint. Specialty lending now represents over 10% of our
total loan portfolio and provides important asset and geographical loan portfolio diversifi cation as we navigate future
business cycles.
Looking to 2015, we continue to see solid opportunities for loan and fee-based revenue growth as business conditions
improve and we help our clients navigate the economic cycle and manage their cash and funding needs.
Retail Banking
We offer our retail banking customers traditional deposit products and services such as checking, savings and
certifi cate of deposit accounts along with debit and credit cards and mortgage and personal loans. We do so through
a seamless network of branch and electronic channels that demonstrates our commitment to convenience and high-
quality service.
We now operate over 100 banking offi ces that hold retail deposits of $5.1 billion. These deposits are up 15% from a
year ago and now represent approximately 66% of total deposit funding. Retail loans grew to $911 million, refl ecting
4
growth of 22% from 2013. Augmented by our acquisitions, households that maintain their core banking
relationship with us increased by 16% in 2014 – with 35,000 new households now calling First Midwest
their bank.
The strength of our retail platform remains rooted in our market tenure and award-winning client service levels.
We were very pleased that J.D. Power ranked First Midwest Bank as the “Highest in Customer Satisfaction
with Retail Banking in the Midwest”* in its 2014 Retail Banking Satisfaction StudySM. When you think about
creating a great client experience, it is all the little things our bankers do for our clients each and every day
which are so important and that, in turn, build long-term client relationships.
The low interest rate environment, greater regulation and evolving retail trends created a challenging
environment for this platform. We have responded by continuing to enhance our client experience by investing
in our mobile and digital banking channels, and adding new products and services, while maximizing our
branch effi ciency through staffi ng and physical location optimization.
When mobile banking was introduced some 18 months ago, our
client response was immediately positive and continues to be
outstanding. Today, we have some 72,000 clients who use this
service, representing almost 23% of our retail households using
this rapidly-developing and convenient way to conduct their
fi nancial business.
J.D. Power ranked First Midwest Bank as
the “Highest in Customer Satisfaction with
Retail Banking in the Midwest”* in its
2014 Retail Banking Satisfaction StudySM.
Wealth Management
Our wealth management division provides private client and institutional wealth and asset management
services, including trust and investment advisory services to individual and corporate clients. Additionally, we
provide planning- and investment-based advice to our individual clients.
Clients now entrust approximately $7.2 billion of their assets to our oversight. Wealth management revenues
grew to over $26 million, and represent a fi ve-year CAGR of 10.3%. Our wealth management group ranks 3rd
in terms of trust fees generated and 4th in terms of amount of trust assets under management among banks
headquartered in the Chicago area.
In addition to an outstanding sales and service team, we also feature a leading product suite of investment
choices for our clients. During 2014, our Small Cap Strategy was ranked by Morningstar in the top 3% of all
Small Cap investment managers in the U.S. for its one-, three-, and fi ve-year performance history.
First Midwest’s market tenure, reputation and commitment to customer service combined with continuing
investment in our team of colleagues, leave us well-positioned for continued growth.
*
First Midwest Bank received the highest numerical score among retail banks in the Midwest region in the proprietary J.D. Power 2014 Retail
Banking Satisfaction StudySM. The Study is based on 80,445 total responses measuring 21 providers in the Midwest region (Iowa, Illinois,
Kansas, Missouri, Minnesota, and Wisconsin) and measures opinions of consumers with their primary banking provider. Proprietary study
results are based on experiences and perceptions of consumers surveyed January 2014. Individual experiences may vary. Visit JDPower.com.
(continued)
5
STOCKHOLDERS LETTER 4.9.2015
OPPORTUNITIES FOR GROWTH
The infrastructure needs that accompany heightened regulatory and technological demands are particularly daunting
for fi nancial institutions that lack the scale and resources to profi tably address these demands. The economic
strain of the last several years has also added to these pressures and led to largely increased expectations for
further consolidation.
Our values and culture of client service along with demonstrated capacity are attractive to those institutions looking for
an opportunity to align themselves with a larger, like-minded partner. Over the course of 2014, we were very pleased to
announce, close and complete the necessary systems conversions for two acquisitions totaling $1.3 billion in assets,
with all such efforts completed within less than fi ve months of announcement. An exceptional job completed by an
experienced team!
As we closed 2014 with $9.4 billion in assets, our opportunities for growth must give cognizance to the regulatory
burdens imposed by the Dodd-Frank Act on those institutions whose size exceeds $10 billion in assets. While not
immediate, crossing this threshold will lead to oversight by the Consumer Financial Protection Bureau as well as
greater expectations surrounding capital stress testing and risk management. Additionally, such burdens also include
restrictions that severely limit the fees we are able to collect from the interchange usage of our clients’ debit cards.
While the merits and fairness of these burdens have been subject to great debate, they nonetheless exist and must
be addressed by banks and government alike. Entering 2015, we do so both cognizant of and unintimidated by this
threshold. Recognizing additional operating effi ciency will be required to offset the accompanying regulatory costs
and revenue impact. Our strategic efforts over the last few years have prepared us for this eventuality. The signifi cant
investments in our leadership team and resources over the preceding years have created the capacity to operate as a
larger and more effi cient company, positioning us to grow and absorb these burdens when the time is right.
As we consider future growth plans, we remain disciplined, focused on opportunities that both align with our strategic
priorities and are fi nancially accretive to the long-term benefi t of our stockholders.
LOOKING FORWARD
Contemplating 2015, we feel encouraged by our momentum and confi dent in our positioning for the future. Our
product lines and distribution channels are deeper and broader than ever. We have great opportunities to expand
across our sales platforms, further leveraging our investment in our existing teams and newly-added sales and risk
management talent. And, we have built the infrastructure that permits us to operate as a larger company.
We remain sensitive to the expected rise in interest rates, which in turn will require balanced navigation of short-term
margin pressures. Our liquidity and strong core deposit base provide us an advantage that, I would suggest, few others
enjoy as we enter into such an environment. But, it also requires us to carefully manage our risks and retain our focus
Our liquidity and strong core deposit base
provide us an advantage that, I would suggest,
few others enjoy . . .
on the creation of long-term value. We remain focused on
balanced cost control, allocating resources to areas of growth.
We have the opportunity to leverage our culture, infrastructure
and capital foundation to produce overall stronger returns and
will execute strategies that benefi t from those strengths.
6
IN CLOSING
Against an environmental backdrop of transition, our strategic priorities remain unchanged. Our focus centers
on enhancing our relationships with our clients and our commitment to their fi nancial success, earning and
re-earning their trust with each interaction. We will continue to drive colleague engagement, working hard to
develop our existing colleagues and attract new colleagues to our team. These efforts remain central to our
success as we continue to pursue opportunities to grow and enhance stockholder value.
I would also take this opportunity to thank all of my colleagues at First Midwest for their dedication, hard work
and engagement that drove our success over the course of 2014. I am confi dent 2015 will see that same high
level of commitment.
We are pleased that our collective efforts have produced these
impressive results and, at the same time, position us well to
produce overall stronger returns for you, our stockholders.
Sincerely,
Our focus centers on enhancing our
relationships with our clients and our
commitment to their fi nancial success, earning
and re-earning their trust with each interaction.
Michael L. Scudder
President and Chief Executive Offi cer
First Midwest Bancorp, Inc.
7
BOARD OF DIRECTORS
FIRST MIDWEST BANCORP, INC.
Barbara A. Boigegrain (2)
General Secretary and
Chief Executive Offi cer
General Board of Pension and Health
Benefi ts of The United Methodist Church
(Pension, Health and Welfare Benefi t
Trustee and Administrator)
John F. Chlebowski, Jr. (1, 4)
Retired President and
Chief Executive Offi cer
Lakeshore Operating Partners, LLC
(Bulk Liquid Distribution Firm)
Brother James Gaffney, FSC (2, 3, 4)
President
Lewis University
(Catholic and Lasallian University)
Phupinder S. Gill (1)
Chief Executive Offi cer
CME Group Inc.
(Global Derivatives Marketplace
and Exchange)
Peter J. Henseler (2)
President
Wise Consulting Group Inc.
(Strategy and Management
Consulting Firm)
Patrick J. McDonnell (1, 3, 4)
President and Chief Executive Offi cer
The McDonnell Company LLC
(Business Consulting Company)
Robert P. O’Meara (4)
Chairman of the Board
First Midwest Bancorp, Inc.
Ellen A. Rudnick (1, 3, 4)
Executive Director
Polsky Center for Entrepreneurship
and Innovation
University of Chicago
Booth School of Business
(Graduate School of Business)
EXECUTIVE MANAGEMENT GROUP
FIRST MIDWEST BANCORP, INC.
Michael L. Scudder
President and
Chief Executive Offi cer
Mark G. Sander
Senior Executive Vice President
and Chief Operating Offi cer
Nicholas J. Chulos
Executive Vice President,
Corporate Secretary and General Counsel
James P. Hotchkiss
Executive Vice President
and Treasurer
EXECUTIVE MANAGEMENT GROUP
FIRST MIDWEST BANK
Michael L. Scudder
Chairman of the Board and
Chief Executive Offi cer
Mark G. Sander
Vice Chairman of the Board and
President
Paul F. Clemens
Executive Vice President and
Chief Financial Offi cer
Robert P. Diedrich
Executive Vice President and
Director of Wealth Management
Kent S. Belasco
Executive Vice President and
Chief Information and Operations Offi cer
Michelle Y. Hoskins
Executive Vice President and
Chief Human Resources Offi cer
Nicholas J. Chulos
Executive Vice President,
Corporate Secretary and Chief Legal Offi cer
James P. Hotchkiss
Executive Vice President
and Treasurer
BOARD COMMITTEES
(1) Audit Committee
(2) Compensation Committee
8
Mark G. Sander
Senior Executive Vice President and
Chief Operating Offi cer
First Midwest Bancorp, Inc.
Michael L. Scudder (4)
President and Chief Executive Offi cer
First Midwest Bancorp, Inc.
Michael J. Small (1, 3)
President and Chief Executive Offi cer
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 Offi cer
Madison River Communications Corp.
(Operator of Rural Telephone Companies)
Paul F. Clemens
Executive Vice President and
Chief Financial Offi cer
Kevin L. Moffi tt
Executive Vice President and
Chief Risk Offi cer
Kevin L. Moffi tt
Executive Vice President and
Chief Risk Offi cer
Thomas M. Prame
Executive Vice President and
Director of Retail Banking
Angela L. Putnam
Senior Vice President and
Chief Accounting Offi cer
Michael C. Spitler
Executive Vice President and
Chief Credit Offi cer
(3) Nominating & Corporate
Governance Committee
(4) Advisory Committee
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, 2014
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 60143-1254
(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code: (630) 875-7450
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
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 (§232.405 of this chapter) is not contained herein,
and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III
of this Form 10-K or any amendment to this Form 10-K. [X].
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting
company. See definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer [X]
Non-accelerated filer [ ]
(Do not check if a smaller reporting company)
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, 2014, determined using a per
share closing price on that date of $17.03, as quoted on the NASDAQ Stock Market, was $1,226,970,577.
As of February 26, 2015, there were 77,958,815 shares of common stock, $0.01 par value, outstanding.
Portions of the Registrant's Proxy Statement for the 2015 Annual Stockholders' Meeting are incorporated by reference into Part III.
DOCUMENTS INCORPORATED BY REFERENCE
FIRST MIDWEST BANCORP, INC.
FORM 10-K
TABLE OF CONTENTS
Part I
ITEM 1.
ITEM 1A.
ITEM 1B.
ITEM 2.
ITEM 3.
ITEM 4.
Part II
ITEM 5.
ITEM 6.
ITEM 7.
ITEM 7A.
ITEM 8.
ITEM 9.
ITEM 9A.
ITEM 9B.
Part III
ITEM 10.
ITEM 11.
ITEM 12.
ITEM 13.
ITEM 14.
Part IV
ITEM 15.
Business .............................................................................................................................................
Risk Factors .......................................................................................................................................
Unresolved Staff Comments ..............................................................................................................
Properties ...........................................................................................................................................
Legal Proceedings .............................................................................................................................
Mine Safety Disclosures ....................................................................................................................
Market for the Registrant's Common Equity, Related Stockholder Matters,
and Issuer Purchases of Equity Securities .........................................................................................
Selected Financial Data .....................................................................................................................
Management's Discussion and Analysis of Financial Condition and Results of Operations .............
Quantitative and Qualitative Disclosures about Market Risk ............................................................
Financial Statements and Supplementary Data .................................................................................
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ............
Controls and Procedures ....................................................................................................................
Other Information ..............................................................................................................................
Directors, Executive Officers, and Corporate Governance ...............................................................
Executive Compensation ...................................................................................................................
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters ...............................................................................................................................................
Certain Relationships and Related Transactions and Director Independence ....................................
Principal Accountant Fees and Services ............................................................................................
Page
3
15
29
29
29
29
30
33
34
76
78
138
138
140
140
141
141
141
141
Exhibits and Financial Statement Schedules .....................................................................................
Signatures ..........................................................................................................................................
142
146
2
PART I
ITEM 1. BUSINESS
First Midwest Bancorp, Inc.
First Midwest Bancorp, Inc. (the "Company," "we," "us," or "our") is a Delaware corporation incorporated in 1982 and
headquartered in the Chicago suburb of Itasca, Illinois. The Company is one of Illinois' largest independent publicly-traded banking
companies, with assets of $9.4 billion as of December 31, 2014, and is registered under the Bank Holding Company Act of 1956, as
amended (the "BHC Act"). The Company's common stock, $0.01 par value per share ("Common Stock"), is listed on the NASDAQ
Stock Market and trades under the symbol "FMBI".
Our principal subsidiary, First Midwest Bank (the "Bank"), is an Illinois state-chartered bank and provides a broad range of banking
and wealth management services to commercial and industrial, commercial real estate, municipal, and consumer customers
primarily throughout the greater Chicago metropolitan area as well as northwest Indiana, central and western Illinois, and eastern
Iowa through 109 banking locations. At December 31, 2014, the Company and its subsidiaries employed a total of 1,788 full-time
equivalent employees.
History
In 1983, the Company became a bank holding company through the simultaneous acquisition of over 20 affiliated financial
institutions. The Bank, through its predecessors, has provided banking and trust services for over 70 years. Since becoming a bank
holding company, the Company has grown organically and expanded its market footprint by opening new locations, growing
existing locations, and acquiring financial institutions, branches, and non-banking organizations.
In the normal course of business, the Company explores potential opportunities for expansion in core market and adjacent areas
through organic growth and the acquisition of banking and non-banking organizations. As a matter of policy, the Company generally
does not comment on any dialogue or negotiations with potential targets or possible acquisitions until a definitive acquisition
agreement is signed and publicly announced. The Company's ability to engage in certain merger or acquisition transactions, whether
or not any regulatory approval is required, will depend on the bank regulators' views at the time as to the capital levels, quality of
management, and overall condition of the Company, in addition to their assessment of a variety of other factors.
During 2014, the Bank completed the acquisitions of the Chicago area banking operations of Banco Popular North America
("Popular"), doing business as Popular Community Bank, the equipment lessor National Machine Tool Financial Corporation
("National Machine Tool"), now known as First Midwest Equipment Finance Co., and the south suburban Chicago-based Great
Lakes Financial Resources, Inc. ("Great Lakes"), the holding company for Great Lakes Bank, National Association. Additional
detail regarding these recent acquisitions is contained in Note 3 of "Notes to the Consolidated Financial Statements" in Item 8 of this
Form 10-K.
Subsidiaries
The Company is responsible for the overall conduct, direction, and performance of its subsidiaries. In addition, the Company
provides various services to its subsidiaries, establishes Company-wide policies and procedures, and provides other resources as
needed, including capital. As of December 31, 2014, the following were the Company's primary subsidiaries:
First Midwest Bank
The Bank conducts operations primarily throughout the greater Chicago metropolitan area, in addition to northwest Indiana, central
and western Illinois, and eastern Iowa. The following table presents key figures for the Bank.
(Dollar amounts in thousands)
Total assets ................................................................................................................................................ $
Total deposits ............................................................................................................................................ $
Bank branches ...........................................................................................................................................
Bank offices ..............................................................................................................................................
December 31, 2014
9,314,575
7,933,652
103
6
3
The Bank operates the following wholly owned subsidiaries:
• First Midwest Equipment Finance Co. is an Illinois corporation that provides equipment leasing and commercial financing
alternatives to traditional bank financing.
• First Midwest Securities Management, LLC is a Delaware limited liability company that manages investment
securities.
• LIH Holdings, LLC is an Illinois limited liability company that holds an equity interest in a Section 8 housing venture.
• Synergy Property Holdings, LLC is an Illinois limited liability company that manages the majority of the Bank's OREO
properties.
• First Midwest Holdings, Inc. is a Delaware corporation that manages investment securities, principally municipal
obligations, and provides corporate management services to its wholly owned subsidiary, FMB Investments Ltd., a
Bermuda corporation. FMB Investments Ltd. manages investment securities and is largely inactive.
Catalyst Asset Holdings, LLC
Catalyst Asset Holdings, LLC, an Illinois limited liability company ("Catalyst"), manages a portion of the Company's non-
performing assets. In March of 2010, the Company purchased $168.1 million of non-performing assets from the Bank and
transferred them to Catalyst in the form of a capital injection. Catalyst had $6.7 million in non-performing assets remaining as of
December 31, 2014.
Catalyst has one wholly owned subsidiary, Restoration Asset Management, LLC ("Restoration"), an Illinois limited liability
company that manages Catalyst's OREO properties. The Bank provides certain administrative and management services to Catalyst
and Restoration pursuant to a services agreement. The amounts charged under this services agreement are intended to reflect the
actual costs to the Bank for providing such services.
Parasol Investment Management, LLC
Parasol Investment Management, LLC, a Delaware limited liability company ("Parasol"), began operations in 2011 and is a
registered investment advisor under the Investment Advisors Act of 1940. Parasol provides wealth management services to the
Bank's wealth management division and to individual and institutional clients, such as corporate and public retirement plans,
foundations and endowments, high net worth individuals, and multi-employer trust funds.
First Midwest Capital Trust I, Great Lakes Statutory Trust II, and Great Lakes Statutory Trust III
First Midwest Capital Trust I, a Delaware statutory business trust ("FMCT"), was formed in 2003. Great Lakes Statutory Trust II
("GLST II") and Great Lakes Statutory Trust III ("GLST III") are Delaware statutory business trusts formed in 2005 and 2007,
respectively, and were acquired in the Great Lakes acquisition. These trusts were established for the purpose of issuing trust-
preferred securities and lending the proceeds to the Company in return for junior subordinated debentures of the Company. The
Company guarantees payments of distributions on the trust-preferred securities and payments on redemption of the trust-preferred
securities on a limited basis.
FMCT, GLST II, and GLST III qualify as variable interest entities for which the Company is not the primary beneficiary.
Consequently, the accounts of those entities are not consolidated in the Company's financial statements. However, the combined
$50.7 million in trust-preferred securities held by the three trusts at December 31, 2014 are included in Tier 1 capital of the
Company for regulatory capital purposes.
Segments
The Company has one reportable segment. The Company's chief operating decision maker evaluates the operations of the Company
using consolidated information for purposes of allocating resources and assessing performance.
Market Area
The Bank operates in the most active and diverse markets in Illinois, the largest of which is the suburban metropolitan Chicago
market, as well as central and western Illinois. The Bank's other service areas are located primarily in northwestern Indiana and
eastern Iowa. These service areas include a mixture of urban, suburban, and rural markets and contain a diversified mix of industry
groups, including manufacturing, health care, pharmaceutical, higher education, wholesale and retail trade, service, and agricultural.
4
Competition
The banking and financial services industry in the markets in which the Bank operates (and particularly the Chicago metropolitan
area) is highly competitive. Generally, the Bank competes for banking customers and deposits with other local, regional, national,
and internet banks and savings and loan associations; personal loan and finance companies; credit unions; mutual funds; and
investment brokers.
Competition is driven by a number of factors, including interest rates charged on loans and paid on deposits; the ability to attract
new deposits; the scope and type of banking and financial services offered; the hours during which business can be conducted; the
location of bank branches and automated teller machines ("ATMs"); the availability, ease of use, and range of banking services on
the internet; the availability of related services; and a variety of additional services, such as wealth management services.
In providing investment advisory services, the Bank also competes with retail and discount stockbrokers, investment advisors,
mutual funds, insurance companies, and other financial institutions for wealth management clients. Competition is generally based
on the variety of products and services offered to clients and the performance of funds under management. The Company's main
competitors are financial service providers both within and outside of the geographic areas in which the Bank maintains offices.
The Company faces competition in attracting and retaining qualified employees. Its ability to continue to compete effectively will
depend on its ability to attract new employees and retain and motivate existing employees.
Our Business
The Bank offers a variety of traditional financial products and services that are designed to meet the financial needs of the customers
and communities it serves. The Bank has been in the basic business of commercial and retail banking for over 70 years, namely
attracting deposits and making loans, as well as providing wealth management services. The Company does not engage in any sub-
prime lending, nor does it engage in investment banking activities.
Deposit and Retail Services
The Bank offers a full range of deposit services that are typically available at most commercial banks and financial institutions,
including checking accounts, NOW accounts, money market accounts, savings accounts, and time deposits of various types ranging
from shorter-term to longer-term certificates of deposit. The transaction accounts and time deposits are tailored to our primary
service area at competitive rates. The Company also offers certain retirement account services, including individual retirement
accounts.
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 in the Bank's service areas. The Company's largest category of lending is
commercial real estate, followed by commercial and industrial. The mix of properties securing the loans in our commercial real
estate portfolio are balanced between owner-occupied and investor categories and are diverse in terms of type and geographic
location within the Company's markets. Generally, real estate loans are secured by the land and any improvements to, or
developments on, the land. Generally, loan-to-value ratios at time of origination are capped at 50% for unimproved land and 65% for
developed land. The Company's consumer loans consist primarily of home equity loans and lines of credit and 1-4 family
mortgages.
No individual or single group of related accounts is considered material in relation to the assets or deposits of the Bank or in relation
to the overall business of the Company. However, 60% of our loan portfolio consisted of real estate-related loans at December 31,
2014.
For detailed information regarding the Company's loan portfolio, see the "Loan Portfolio and Credit Quality" section of
"Management's Discussion and Analysis of Financial Condition and Results of Operations" in Item 7 of this Form 10-K.
Sources of Funds
The Company's ability to maintain affordable funding sources allows the Bank to meet the credit needs of its customers and the
communities it serves. The Bank maintains a relatively stable base of core deposits that are the primary source of the Company's
funds for lending and other investment purposes. Deposits funded 84% of the Company's assets at the end of 2014 with a loans-to-
deposits ratio of 85%. Consumer, commercial, and public deposits come from the Company's primary service areas through a broad
selection of deposit products. By maintaining core deposits, the Company both controls its funding costs and builds client
relationships.
5
In addition to deposits the Company obtains, or has the ability to obtain, funds from the amortization, repayment, and prepayment of
loans; the sale or maturity of investment securities; certificates of deposits; advances from the Federal Home Loan Bank of Chicago
("FHLB"); securities sold under agreements to repurchase; federal funds purchased; revolving lines of credit from unaffiliated
banks; cash flows generated by operations; and proceeds from the issuance of debt and sales of the Company's Common Stock. For
detailed information regarding the Company's funding sources, see the "Funding and Liquidity Management" section of
"Management's Discussion and Analysis of Financial Condition and Results of Operations" in Item 7 of this Form 10-K.
Investment Activities
The Bank maintains a securities portfolio to provide the Company with financial stability, asset diversification, income, and
collateral for borrowing. The Company administers its securities portfolio in accordance with an investment policy that was
approved and adopted by the Board of Directors of the Bank. The Bank's Asset Liability Committee implements the investment
policy based on the established guidelines within the written policy.
The basic objectives of the Bank's investment activities are to enhance the profitability of the Company by fully investing available
funds, provide adequate regulatory and operational liquidity, minimize and/or adjust the interest rate risk position of the Company,
diversify and mitigate the Company's exposure to credit risk, and provide collateral for pledging requirements. For detailed
information regarding the Company's securities portfolio, see the "Investment Portfolio Management" section of "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in Item 7 of this Form 10-K.
Intellectual Property
Intellectual property is important to the success of our business. We own a variety of trademarks, service marks, trade names, and
logos and spend time and resources maintaining our intellectual property portfolio. We control access to our intellectual property
through license agreements, confidentiality procedures, non-disclosure agreements with third parties, employment agreements, and
other contractual rights to protect our intellectual property.
Supervision and Regulation
The Bank is an Illinois state-chartered bank and a member of the Federal Reserve System, and the Board of Governors of the
Federal Reserve System (the "Federal Reserve") has the primary federal authority to examine and supervise the Bank in
coordination with the Illinois Department of Financial and Professional Regulation (the "IDFPR"). The Company is a single bank
holding company and is also subject to the primary federal bank regulatory authority of the Federal Reserve. The Company and its
subsidiaries are also subject to extensive secondary regulation and supervision by various state and federal governmental regulatory
authorities, including the Federal Deposit Insurance Corporation ("FDIC"), which oversees insured deposits and assets covered by
loss share agreements with the FDIC ("the FDIC Agreements"), and the U.S. Department of the Treasury (the "Treasury"), which
enforces money laundering and currency transaction regulations. As a public company, the Company is also subject to the regulatory
authority of the U.S. Securities and Exchange Commission (the "SEC") and the disclosure and regulatory requirements of the
Securities Act of 1933, as amended (the "Securities Act"), and the Securities Exchange Act of 1934, as amended (the "Exchange
Act").
Federal and state laws and regulations generally applicable to financial institutions regulate the Company's and the subsidiaries'
scope of business, investments, reserves against deposits, capital levels, the nature and amount of collateral for loans, the
establishment of branches, mergers, acquisitions, dividends, and other matters. This supervision and regulation is intended primarily
for the protection of the FDIC's deposit insurance fund ("DIF"), a bank's depositors, and the stability of the U.S financial system,
rather than the stockholders of a financial institution.
The following sections describe the significant elements of the material statutes and regulations affecting the Company and its
subsidiaries, many of which are the subject of ongoing revision and legislative rulemaking as a result of the federal government's
long-term regulatory reform of the financial markets and the implementation of the Dodd-Frank Wall Street Reform and Consumer
Protection Act (the "Dodd-Frank Act"), which is discussed in more detail later in this Form 10-K. In some cases, the revisions and
rulemaking may include a significant overhaul of the regulation of financial institutions or limitations on the products they may
offer.
The final regulations, regulatory policies, and regulatory and supervisory guidance applicable to the Company and its subsidiaries,
and the manner in which market practices and structures develop around the regulations, could have a material adverse effect on our
business, financial condition, and results of operations. The Company cannot accurately predict the nature or the extent of the effects
that any such developments will have on its business and earnings. These and other risks are discussed in more detail in Item 1A,
"Risk Factors" of this Form 10-K.
6
Bank Holding Company Act of 1956
Generally, the BHC Act governs the acquisition and control of banks and non-banking companies by bank holding companies and
requires bank holding companies to register with the Federal Reserve. The BHC Act requires a bank holding company to file an
annual report of its operations and such additional information as the Federal Reserve may require. A bank holding company and its
subsidiaries are subject to examination by the Federal Reserve.
The BHC Act, the Bank Merger Act, and other federal and state statutes regulate acquisitions of commercial banks. The BHC Act
requires the prior approval of the Federal Reserve for the direct or indirect acquisition by a bank holding company of more than
5.0% of the voting shares of a commercial bank or its parent holding company. Under the Bank Merger Act, the prior approval of the
Federal Reserve or other appropriate bank regulatory authority is required for a member bank to merge with another bank or
purchase the assets or assume the deposits of another bank. In reviewing applications seeking approval of merger and acquisition
transactions, the bank regulatory authorities will consider, among other things, the competitive effect and public benefits of the
transactions, the capital position of the combined organization, the risks to the stability of the U.S. banking or financial system, the
applicant's managerial and financial resources, the applicant's performance record under the Community Reinvestment Act and fair
housing laws, and the effectiveness of the banks in combating money laundering activities.
In addition, the BHC Act prohibits (with certain exceptions) a bank holding company from acquiring direct or indirect control or
ownership, or control of more than 5.0% of the voting shares of any "non-banking" company unless the non-banking activities are
found by the Federal Reserve to be "so closely related to banking as to be a proper incident thereto." Under current regulations of the
Federal Reserve, a bank holding company and its non-bank subsidiaries are permitted to engage in such banking-related business
ventures as consumer finance, equipment leasing, data processing, mortgage banking, financial and investment advice, securities
brokerage services, and other activities.
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 on terms at least as favorable to the Bank as if the transaction were conducted with an unaffiliated third
party. Covered transactions are defined by statute to include:
• A loan or extension of credit, as well as a purchase of securities issued by an affiliate.
• The purchase of assets from an affiliate, unless otherwise exempted by the Federal Reserve.
• Certain derivative transactions that create a credit exposure to an affiliate.
• The acceptance of securities issued by an affiliate as collateral for a loan.
• The issuance of a guarantee, acceptance, or letter of credit on behalf of an affiliate.
In general, these regulations require that any extension of credit by the Bank (or its subsidiaries) with an affiliate must be secured by
designated amounts of specified collateral and must be limited to certain thresholds on an individual and aggregate basis.
The Bank is also limited as to how much and on what terms it may lend to its insiders and the insiders of its affiliates, including
executive officers and directors.
Source of Strength
Federal Reserve policy and federal law require bank holding companies to act as a source of financial and managerial strength to
their subsidiary banks. Under this requirement, a holding company is expected to commit resources to support its bank subsidiary
even at times when the holding company may not be in a financial position to provide such resources. Any capital loans by a bank
holding company to its subsidiary bank are subordinate in right of payment to deposits and to certain other indebtedness of such
subsidiary bank. In the event of a bank holding company's bankruptcy, any commitment by the bank holding company to a federal
bank regulatory agency to maintain the capital of a bank subsidiary will be assumed by the bankruptcy trustee and entitled to priority
of payment.
Community Reinvestment Act of 1977
The Community Reinvestment Act of 1977, as amended (the "CRA"), requires depository institutions to assist in meeting the credit
needs of their market areas consistent with safe and sound banking practices. Under the CRA, each depository institution is required
to help meet the credit needs of its market areas by, among other things, providing credit to low-income and moderate-income
individuals and communities. Federal regulators conduct CRA examinations on a regular basis to assess the performance of financial
institutions and assign one of four ratings to the institution's record of meeting the credit needs of its community. Banking regulators
take into account CRA ratings when considering approval of a proposed transaction. During its last examination in August of 2012,
the Bank received a rating of "outstanding," the highest rating available.
7
Gramm-Leach-Bliley Act of 1999
The Gramm-Leach-Bliley Act of 1999, as amended (the "GLB Act"), allows certain bank holding companies to elect to be treated as
a financial holding company (an "FHC") that may offer customers a more comprehensive array of financial products and services.
Such products and services may include insurance and securities underwriting and agency activities, merchant banking, and
insurance company portfolio investment activities. Activities that are "complementary" to financial activities are also authorized.
Under the GLB Act, the Federal Reserve may not permit a company to register or maintain status as an FHC if the company or any
of its insured depository institution subsidiaries are not well-capitalized and well managed. The Federal Reserve may prohibit an
FHC from engaging in otherwise permissible activities at its supervisory discretion. In addition, for an FHC to commence any new
activity permitted by the BHC Act or to acquire a company engaged in any new activity permitted by the BHC Act, each insured
depository institution subsidiary of the FHC must have received a rating of at least "satisfactory" in its most recent examination
under the CRA.
In addition, a financial institution may not disclose non-public personal information about a consumer to unaffiliated third parties
unless the institution satisfies various disclosure requirements and the consumer has not elected to opt out of the information
sharing. Under the GLB Act, a financial institution must provide its customers with a notice of its privacy policies and practices. The
Federal Reserve, the FDIC, and other financial regulatory agencies issued regulations implementing notice requirements and
restrictions on a financial institution's ability to disclose non-public personal information about consumers to unaffiliated third
parties.
Bank Secrecy Act and USA PATRIOT Act
The Bank Secrecy and USA PATRIOT Acts require financial institutions to develop programs to prevent them from being used for
money laundering, terrorist, and other illegal activities. If such activities are detected or suspected, financial institutions are
obligated to file suspicious activity reports with the Treasury's Office of Financial Crimes Enforcement Network. These rules require
financial institutions to establish procedures for identifying and verifying the identity of customers seeking to open new accounts.
Failure to comply with these sanctions could have serious legal and reputational consequences, including causing applicable bank
regulatory authorities not to approve merger or acquisition transactions when regulatory approval is required or to prohibit such
transactions even if approval is not required.
Office of Foreign Assets Control Regulation
The United States imposes economic sanctions that affect transactions with designated foreign countries, nationals, and others.
These sanctions are administered by the Treasury's Office of Foreign Assets Control ("OFAC"). These sanctions include:
(i) restrictions on trade with or investment in a sanctioned country, including prohibitions against direct or indirect imports from and
exports to a sanctioned country and prohibitions on "U.S. persons" engaging in financial transactions relating to making investments
in, or providing investment-related advice or assistance to, a sanctioned country; and (ii) a blocking of assets in which the
government or specially designated nationals of the sanctioned country have an interest by prohibiting transfers of property subject
to U.S. jurisdiction (including property in the possession or control of U.S. persons). Blocked assets (e.g., property and bank
deposits) cannot be paid out, withdrawn, set off, or transferred in any manner without a license from OFAC. Failure to comply with
these sanctions could have serious legal and reputational consequences for the institution, including causing applicable bank
regulatory authorities not to approve merger or acquisition transactions when regulatory approval is required or to prohibit such
transactions even if approval is not required.
Dodd-Frank Wall Street Reform and Consumer Protection Act
The Dodd-Frank Act significantly restructured the financial regulatory regime in the United States. Although the Dodd-Frank Act's
provisions that have received the most public attention generally have been those applying to or more likely to affect larger
institutions, such as bank holding companies and banks with total consolidated assets of $10 billion or more, it contains numerous
other provisions that affect all bank holding companies and banks, including the Company and the Bank, some of which are
described in more detail below. We are monitoring developments with respect to the provisions applicable to bank holding
companies and banks with total consolidated assets of $10 billion or more in the event that the Company or Bank reaches that size.
Some of these provisions may have the consequence of increasing the Company's expenses, decreasing the Company's revenues,
and changing the activities in which the Company chooses to engage. Many aspects of the Dodd-Frank Act are still subject to future
rulemaking, implementation, and guidance that will occur over several years, making it difficult to anticipate the overall financial
impact on the Company, its customers, or the financial industry in general.
8
Consumer Financial Protection
The Dodd-Frank Act created the Consumer Financial Protection Bureau ("CFPB") as a new and independent unit within the Federal
Reserve System. With certain exceptions, the CFPB has authority to regulate any person or entity that engages in offering or
providing a "consumer financial product or service" and has rulemaking, examination, and enforcement powers over financial
institutions. For primary examination and enforcement authority of financial entities, however, the CFPB's authority is limited to
institutions with assets of $10 billion or more. Existing regulators retain this authority over institutions with assets of $10 billion or
less, such as the Company.
The powers of the CFPB currently include:
• The ability to prescribe consumer financial laws and rules that regulate all institutions that engage in offering or providing
a consumer financial product or service.
• Primary enforcement and exclusive supervision authority for federal consumer financial laws over "very large" insured
institutions with assets of $10 billion or more. This includes the right to obtain information about an institution's activities
and compliance systems and procedures and to detect and assess risks to consumers and markets.
• The ability to require reports from institutions with assets under $10 billion, such as the Bank, to support the CFPB in
implementing federal consumer financial laws, supporting examination activities, and assessing and detecting risks to
consumers and financial markets.
• Examination authority (limited to assessing compliance with federal consumer financial laws) over institutions with assets
under $10 billion, such as the Bank. Specifically, a CFPB examiner may be included on a sampling basis in the
examinations performed by the institution's primary regulator.
The CFPB engages in several activities including (i) investigating consumer complaints about credit cards and mortgages,
(ii) launching supervisory programs, (iii) conducting research for and developing mandatory financial product disclosures, and
(iv) engaging in consumer financial protection rulemaking.
The Bank is also subject to a number of regulations intended to protect consumers in various areas, such as equal credit opportunity,
fair lending, customer privacy, identity theft, and fair credit reporting. For example, the Bank is subject to the Federal Truth in
Savings Act, the Home Mortgage Disclosure Act, and the Real Estate Settlement Procedures Act. Electronic banking activities are
subject to federal law, including the Electronic Funds Transfer Act. Wealth management activities of the Bank are subject to the
Illinois Corporate Fiduciaries Act. Loans made by the Bank are subject to applicable provisions of the Federal Truth in Lending Act.
Other consumer financial laws include the Equal Credit Opportunity Act, Fair Credit Reporting Act, Fair Debt Collection Practices
Act, and applicable state laws.
The Federal Reserve has primary responsibility for examination and enforcement of federal consumer financial laws with respect to
the Company, and state authorities are responsible for monitoring the Company's compliance with all state consumer laws. Failure to
comply with these requirements could have serious legal and reputational consequences for the institution, including causing
applicable bank regulatory authorities not to approve merger or acquisition transactions when regulatory approval is required or to
prohibit such transactions even if approval is not required.
Interchange Fees
Under the Durbin Amendment of the Dodd-Frank Act, the Federal Reserve established a maximum permissible interchange fee
equal to no more than 21 cents plus five basis points of the transaction value for many types of debit interchange transactions. The
Federal Reserve also adopted a rule to allow a debit card issuer to recover one cent per transaction for fraud prevention purposes if
the issuer complies with certain fraud-related requirements required by the Federal Reserve. The Company is in compliance with
these fraud-related requirements. The Federal Reserve also has rules governing routing and exclusivity that require issuers to offer
two unaffiliated networks for routing transactions on each debit or prepaid product.
Currently, the Company is exempt from the interchange fee cap under the "small issuer" exemption, which applies to any debit card
issuer with total worldwide assets of less than $10 billion as of the end of the previous calendar year. In the event the Company's
assets reach $10 billion or more, it will become subject to the interchange fee limitations beginning July 1 of the following year, and
the fees the Company may receive for an electronic debit transaction will be capped at the statutory limit.
9
Capital Requirements
The Federal Reserve and other federal bank regulators established risk-based capital guidelines to provide a framework for assessing
the adequacy of the capital of national and state banks, thrifts, and their holding companies (collectively, "banking institutions").
These guidelines apply to all banking institutions, regardless of size, and are used in the examination and supervisory process by the
regulatory authorities. These guidelines require banking institutions to maintain capital based on the 1988 capital accord ("Basel I")
of the Basel Committee on Banking Supervision (the "Basel Committee").
The Basel Committee is a committee of central banks and bank supervisors/regulators from the major industrialized countries that
develops broad policy guidelines for use by each country's supervisors in determining the supervisory policies they apply. The
requirements are intended to ensure that banking organizations have adequate capital given the risk levels of assets and off-balance
sheet financial instruments ("risk-weighted assets").
Capital is classified in one of the following tiers:
• Core Capital (Tier 1). Tier 1 capital includes common equity, retained earnings, qualifying non-cumulative perpetual
preferred stock, a limited amount of qualifying cumulative perpetual stock at the holding company level, minority interests
in equity accounts of consolidated subsidiaries, and qualifying trust-preferred securities, less goodwill, most intangible
assets, and certain other assets.
• Supplementary Capital (Tier 2). Tier 2 capital includes perpetual preferred stock and trust-preferred securities not meeting
the Tier 1 definition, qualifying mandatory convertible debt securities, qualifying subordinated debt, and the allowance for
credit losses, subject to limitations.
Regulatory requirements also establish quantitative measures to ensure capital adequacy for banking institutions as follows:
Tier 1 capital to risk-weighted assets ..........................................................
Total capital to risk-weighted assets ............................................................
Tier 1 capital to average assets ....................................................................
Basel III Capital Rules
Adequately
Capitalized
Requirement
4.00%
8.00%
4.00%
Well-Capitalized
Requirement
6.00%
10.00%
5.00%
In July 2013, the Federal Reserve published final rules (the "Basel III Capital Rules") establishing a new comprehensive capital
framework for U.S. banking organizations. The rules implement the Basel Committee’s December 2010 framework commonly
known as "Basel III" for strengthening international capital standards as well as certain provisions of the Dodd-Frank Act. The Basel
III Capital Rules substantially revise the risk-based capital requirements applicable to bank holding companies and depository
institutions, including the Company and the Bank, compared to the current U.S. risk-based capital rules. The Basel III Capital Rules
define the components of capital and address other issues impacting the numerator in banks’ regulatory capital ratios. The Basel III
Capital Rules also address risk weights and other issues impacting the denominator in regulatory capital ratios and replace the
existing risk-weighting approach with a more risk-sensitive approach. In addition, the Basel III Capital Rules implement the
requirements of Section 939A of the Dodd-Frank Act to remove references to credit ratings from the federal banking agencies’ rules.
The Basel III Capital Rules became effective for the Company and the Bank on January 1, 2015 (subject to a phase-in period).
The Basel III Capital Rules (i) introduce a new capital measure called "Common Equity Tier 1" ("CET1"), (ii) specify that Tier 1
capital consist of CET1 and "Additional Tier 1 Capital" instruments meeting specified requirements, (iii) narrowly define CET1 by
requiring that most deductions/adjustments to regulatory capital measures be made to CET1 and not to the other components of
capital, and (iv) expand the scope of the deductions/adjustments compared to existing regulations. Bank holding companies with less
than $15 billion in consolidated assets as of December 31, 2009, such as the Company, are permitted to include trust-preferred
securities in Additional Tier 1 Capital on a permanent basis and without any phase-out. As of December 31, 2014, the Company had
$50.7 million of trust-preferred securities included in Tier 1 capital.
10
When fully phased in on January 1, 2019, the Basel III Capital Rules will require the Company and the Bank to maintain the
following:
• A minimum ratio of CET1 to risk-weighted assets of at least 4.5%, plus a 2.5% "capital conservation buffer" (resulting in a
minimum ratio of CET1 to risk-weighted assets of at least 7% upon full implementation).
• A minimum ratio of Tier 1 capital to risk-weighted assets of at least 6.0%, plus the capital conservation buffer (resulting in
a minimum Tier 1 capital ratio of 8.5% upon full implementation).
• A minimum ratio of total capital (Tier 1 capital plus Tier 2 capital) to risk-weighted assets of at least 8.0%, plus the capital
conservation buffer (resulting in a minimum total capital ratio of 10.5% upon full implementation).
• A minimum leverage ratio of 4%, calculated as the ratio of Tier 1 capital to average assets.
The capital conservation buffer is designed to absorb losses during periods of economic stress. Banking institutions with a ratio of
CET1 to risk-weighted assets above the minimum, but below the conservation buffer, will face constraints on dividends, equity
repurchases, and compensation based on the amount of the shortfall. The implementation of the capital conservation buffer will
begin on January 1, 2016 at the 0.625% level and be phased in over a four-year period (increasing by that amount on each
subsequent January 1 until it reaches 2.5% on January 1, 2019).
The Basel III Capital Rules also provide for a number of deductions from and adjustments to CET1 to be phased-in over a four-year
period through January 1, 2019 (beginning at 40% on January 1, 2015 and an additional 20% per year thereafter). Examples of these
include the requirement that mortgage servicing rights, deferred tax assets depending on future taxable income, and significant
investments in non-consolidated financial entities be deducted from CET1 to the extent that any one such category exceeds 10% of
CET1 or all such categories in the aggregate exceed 15% of CET1. Under current capital standards, the effects of accumulated other
comprehensive income items included in capital are excluded for the purposes of determining regulatory capital ratios. Under the
Basel III Capital Rules, the effects of certain accumulated other comprehensive items are not excluded; however, the Company and
the Bank, may make a one-time permanent election to continue to exclude these items, and the Company and the Bank expect to
make such an election.
Finally, the Basel III Capital Rules prescribe a standardized approach for risk weightings that expand the risk-weighting categories
from the current four Basel I-derived categories (0%, 20%, 50%, and 100%) to a much larger and more risk-sensitive number of
categories depending on the nature of the assets, generally ranging from 0% for U.S. government and agency securities to 600% for
certain equity exposures, resulting in higher risk weights for a variety of asset categories.
Management believes that as of December 31, 2014, the Company and the Bank would meet all capital adequacy requirements
under the Basel III Capital Rules on a fully phased-in basis as if such requirements were currently in effect.
Liquidity Requirements
Historically, the regulation and monitoring of bank and bank holding company liquidity was addressed as a supervisory matter,
without required formulaic measures. Liquidity risk management has become increasingly important since the financial crisis. The
Basel III liquidity framework puts forth regulatory requirements that banks and bank holding companies measure their liquidity
against specific liquidity tests. One test, referred to as the liquidity coverage ratio ("LCR"), is designed to ensure that the banking
entity maintains an adequate level of unencumbered high-quality liquid assets equal to the entity's expected net cash outflow for a
30-day time horizon (or, if greater, 25% of its expected total cash outflow) under an acute liquidity stress scenario. The other test,
referred to as the net stable funding ratio ("NSFR"), is designed to promote more medium- and long-term funding of the assets and
activities of banking entities over a one-year time horizon. These requirements will provide an incentive for banking entities to
increase their holdings of Treasury securities and other sovereign debt as a component of assets and increase the use of long-term
debt as a funding source.
In September of 2014, the federal banking agencies approved final rules implementing the LCR for advanced approaches banking
organizations (which includes banking organizations with $250 billion or more in total consolidated assets or $10 billion or more in
total on-balance sheet foreign exposure) and a modified version of the LCR for bank holding companies with at least $50 billion in
total consolidated assets that are not advanced approach banking organizations, neither of which would apply to the Company or the
Bank. The federal banking agencies have not yet proposed rules to implement the NSFR or addressed the scope of bank
organizations to which it will apply.
11
Prompt Corrective Action
The Federal Deposit Insurance Act, as amended ("FDIA"), requires the federal banking agencies to take "prompt corrective action"
for depository institutions that do not meet the minimum capital requirements. The FDIA includes the following five capital tiers:
"well capitalized," "adequately capitalized," "undercapitalized," "significantly undercapitalized" and "critically undercapitalized." A
depository institution's capital tier will depend on how its capital levels compare with various relevant capital measures and certain
other factors, as established by regulation. The relevant capital measures are the total capital ratio, the Tier 1 capital ratio, and the
leverage ratio.
A bank will be:
•
•
•
•
•
"Well capitalized" if the institution has a total risk-based capital ratio of 10.0% or greater, a Tier 1 risk-based capital ratio
of 6.0% or greater, and a leverage ratio of 5.0% or greater, and is not subject to any order or written directive by any such
regulatory authority to meet and maintain a specific capital level for any capital measure.
"Adequately capitalized" if the institution has a total risk-based capital ratio of 8.0% or greater, a Tier 1 risk-based capital
ratio of 4.0% or greater, and a leverage ratio of 4.0% or greater and is not "well capitalized."
"Undercapitalized" if the institution has a total risk-based capital ratio that is less than 8.0%, a Tier 1 risk-based capital
ratio of less than 4.0% or a leverage ratio of less than 4.0%.
"Significantly undercapitalized" if the institution has a total risk-based capital ratio of less than 6.0%, a Tier 1 risk-based
capital ratio of less than 3.0% or a leverage ratio of less than 3.0%.
"Critically undercapitalized" if the institution's tangible equity is equal to or less than 2.0% of average quarterly tangible
assets.
An institution may be downgraded to, or deemed to be in, a capital category that is lower than indicated by its capital ratios if it is
determined to be in an unsafe or unsound condition or if it receives an unsatisfactory examination rating for certain matters. A bank's
capital category is determined solely for the purpose of applying prompt corrective action regulations, and the capital category may
not constitute an accurate representation of the bank's overall financial condition or prospects for other purposes. As of
December 31, 2014, the Company believes the Bank was "well capitalized" based on its ratios as defined above.
The FDIA generally prohibits a depository institution from making any capital distributions (including payment of a dividend) or
paying any management fee to its parent holding company if the depository institution would thereafter be "undercapitalized."
"Undercapitalized" institutions are subject to growth limitations and are required to submit a capital restoration plan. The agencies
may not accept such a plan without determining that the plan is based on realistic assumptions and is likely to succeed in restoring
the depository institution's capital. In addition, the depository institution's parent holding company must guarantee that the
institution will comply with the capital restoration plan and must also provide appropriate assurances of performance for a plan to be
acceptable. The aggregate liability of the parent holding company is limited to the lesser of an amount equal to 5.0% of the
depository institution's total assets at the time it became undercapitalized and the amount which is necessary (or would have been
necessary) to bring the institution into compliance with all capital standards applicable to the institution as of the time it fails to
comply with the plan. If a depository institution fails to submit an acceptable plan, it is treated as if it is "significantly
undercapitalized."
"Significantly undercapitalized" depository institutions may be subject to a number of requirements and restrictions, including
orders to sell sufficient voting stock to become "adequately capitalized," requirements to reduce total assets, and cessation of receipt
of deposits from correspondent banks. "Critically undercapitalized" institutions are subject to the appointment of a receiver or
conservator.
The Basel III Capital Rules revised the former prompt corrective action requirements effective January 1, 2015 by (i) introducing a
CET1 ratio requirement at each level (other than critically undercapitalized), with the required CET1 ratio being 6.5% for well-
capitalized status; (ii) increasing the minimum Tier 1 capital ratio requirement for each category (other than critically
undercapitalized), with the minimum Tier 1 capital ratio for well-capitalized status being 8% (as compared to the current 6%); and
(iii) eliminating the current provision that provides that a bank with a composite supervisory rating of 1 may have a 3% leverage
ratio and still be adequately capitalized. The Basel III Capital Rules do not change the total risk-based capital requirement for any
prompt corrective action category.
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Volcker Rule
The so-called "Volcker Rule" issued under the Dodd-Frank Act restricts the ability of the Company and its subsidiaries, including
the Bank, to sponsor or invest in private funds or to engage in certain types of proprietary trading. The Federal Reserve adopted final
rules implementing the Volcker Rule on December 10, 2013. Although the Volcker Rule became effective on July 21, 2012 and the
final rules became effective April 1, 2014, the Federal Reserve issued an order extending the transition period to July 21, 2015. In
December 2014, the Federal Reserve further extended the transition period as to the restrictions on sponsoring or investing in private
funds to 2017. Banks, such as the Bank, with less than $10 billion in total consolidated assets that do not engage in any covered
activities other than trading in certain government, agency, state or municipal obligations, do not have any significant compliance
obligations under the final rules. Although the Company is continuing to evaluate the impact of the Volcker Rule, it generally does
not engage in the businesses prohibited by the Volcker Rule; therefore, management does not currently anticipate that the Volcker
Rule will have a material effect on the operations of the Company and its subsidiaries.
Illinois Banking Law
The Illinois Banking Act ("IBA") governs the activities of the Bank as an Illinois state-chartered bank. Among other things, the IBA
(i) defines the powers and permissible activities of an Illinois state-chartered bank, (ii) prescribes corporate governance standards,
(iii) imposes approval requirements on merger and acquisition activity of Illinois state banks, (iv) prescribes lending limits, and
(v) provides for the examination of state banks by the IDFPR. The Banking on Illinois Act ("BIA") amended the IBA to provide a
wide range of new activities allowed for Illinois state-chartered banks, including the Bank. The provisions of the BIA are to be
construed liberally to create a favorable business climate for banks in Illinois. The main features of the BIA are to expand bank
powers through a "wild card" provision that authorizes Illinois state-chartered banks to offer virtually any product or service that any
bank or thrift may offer anywhere in the country, subject to restrictions imposed on those other banks and thrifts, certain safety and
soundness considerations, and prior notification to the IDFPR and the FDIC.
Dividends
The Company's primary source of liquidity is dividend payments from the Bank. In addition to requirements to maintain adequate
capital above regulatory minimums, the Bank is limited in the amount of dividends it can pay to the Company under the IBA. Under
this law, the Bank is permitted to declare and pay dividends in amounts up to the amount of its accumulated net profits, provided
that it retains in its surplus at least one-tenth of its net profits since the date of the declaration of its most recent dividend until those
additions to surplus, in the aggregate, equal the paid-in capital of the Bank. While it continues its banking business, the Bank may
not pay dividends in excess of its net profits then on hand (after deductions for losses and bad debts). In addition, the Bank is limited
in the amount of dividends it can pay under the Federal Reserve Act and Regulation H. For example, dividends cannot be paid that
would constitute a withdrawal of capital; dividends cannot be declared or paid if they exceed a bank's undivided profits; and a bank
may not declare or pay a dividend if all dividends declared during the calendar year are greater than current year net income plus
retained net income of the prior two years without Federal Reserve approval.
Since the Company is a legal entity, separate and distinct from the Bank, its dividends to stockholders are not subject to the bank
dividend guidelines discussed above. However, the Company is subject to other regulatory policies and requirements related to the
payment of dividends, including requirements to maintain adequate capital above regulatory minimums. The Federal Reserve and
the IDFPR are authorized to determine that the payment of dividends by the Company would be an unsafe or unsound practice and
to prohibit payment under certain circumstances related to the financial condition of a bank or bank holding company. The Federal
Reserve has taken the position that dividends that would create pressure or undermine the safety and soundness of a subsidiary bank
are inappropriate. Due to the current financial and economic environment, the Federal Reserve indicated that bank holding
companies should carefully review their dividend policy and discourage payment ratios that are at maximum allowable levels unless
both asset quality and capital are very strong.
Bank holding companies and banks with average total consolidated assets greater than $10 billion must conduct an annual stress test
of capital and consolidated earnings and losses under one base, both of which are provided by the federal banking agencies. Capital
ratios reflected in required stress test calculations will most likely be an important factor considered by the federal banking agencies
in evaluating whether proposed payments of dividends or stock repurchases may be an unsafe or unsound practice. In the event that
the Company or the Bank grows to assets of $10 billion or more, the Company will be subject to these stress test requirements.
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FDIC Insurance Premiums
The Bank's deposits are insured through the DIF, which is administered by the FDIC. As insurer, the FDIC imposes deposit
insurance premiums and is authorized to conduct examinations of, and to require reporting by, FDIC-insured institutions. It may also
prohibit any FDIC-insured institution from engaging in any activity the FDIC determines by regulation or order to pose a serious
risk to the DIF. Insurance of deposits may be terminated by the FDIC upon a finding that the institution engaged or is engaging in
unsafe and unsound practices; is in an unsafe or unsound condition to continue operations; or violated any applicable law,
regulation, rule, order, or condition imposed by the FDIC or written agreement entered into with the FDIC.
The FDIC utilizes a risk-based assessment system that imposes insurance premiums based on a risk matrix that takes into account a
bank's capital level and supervisory rating. The risk matrix utilizes four risk categories, which are distinguished by capital levels and
supervisory ratings. For deposit insurance assessment purposes, an insured depository institution is placed into one of the four risk
categories each quarter. An institution's assessment is determined by multiplying its assessment rate by its assessment base.
The total base assessment rates range from 2.5 basis points to 45 basis points. The assessment base is calculated using average
consolidated total assets minus average tangible equity. At least semi-annually, the FDIC will update its loss and income projections
for the DIF and, if needed, will increase or decrease assessment rates, following notice-and-comment rulemaking, if required.
In addition, institutions with deposits insured by the FDIC are required to pay assessments to fund interest payments on bonds issued
by the Financing Corporation, a U.S. government-sponsored enterprise established in 1987 to serve as a financing vehicle for the
failed Federal Savings and Loan Association. These assessments will continue until the Financing Corporation bonds mature in
2019.
Employee Incentive Compensation
In 2010, the Federal Reserve, along with the other federal banking agencies, issued guidance applying to all banking organizations
that requires that their incentive compensation policies be consistent with safety and soundness principles. Under these rules,
financial organizations must review their compensation programs to ensure that they: (i) provide employees with incentives that
appropriately balance risk and reward and that do not encourage imprudent risk; (ii) are compatible with effective controls and risk
management; and (iii) are supported by strong corporate governance including active and effective oversight by the banking
organization's board of directors. Monitoring methods and processes used by a banking organization should be commensurate with
the size and complexity of the organization and its use of incentive compensation.
In addition, the Dodd-Frank Act requires that the federal bank regulatory agencies and the SEC establish joint regulations or
guidelines prohibiting incentive-based payment arrangements at specified regulated entities, such as the Company and the Bank,
having at least $1 billion in total assets that encourage inappropriate risks by providing an executive officer, employee, director, or
principal shareholder with excessive compensation, fees, or benefits or that could lead to material financial loss to the entity. In
addition, these regulators must establish regulations or guidelines requiring enhanced disclosure to regulators of incentive-based
compensation arrangements. In 2011, the Federal Reserve, along with other federal banking agencies, proposed such rules, which
have not yet been finalized. These proposed rules incorporate many of the executive compensation principles described above,
including a prohibition on compensation practices that encourage covered persons to take inappropriate risks by providing such
person with excessive compensation.
Future Legislation and Regulation
In addition to the specific legislation described above, various laws and regulations are being considered by Congress and regulatory
agencies that may change banking statutes and the Company's operating environment in substantial and unpredictable ways and may
increase reporting requirements and compliance costs. These changes could increase or decrease the cost of doing business, limit or
expand permissible activities, or affect the competitive balance among banks, savings associations, credit unions, and other financial
institutions.
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AVAILABLE INFORMATION
We file annual, quarterly, and current reports; proxy statements; and other information with the SEC, and we make this information
available free of charge on the investor relations section of our website at www.firstmidwest.com/investorrelations. You may read
and copy materials we file with the SEC from its Public Reference Room at 100 F. Street, NE, Washington, DC 20549. You may
obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. In addition, the SEC
maintains an internet site at http://www.sec.gov that contains reports, proxy and information statements, and other information
regarding issuers that file electronically with the SEC. The following documents are also posted on our website or are available in
print upon the request of any stockholder to our Corporate Secretary:
• Certificate of Incorporation.
• By-Laws.
• Charters for our Audit, Compensation, and Nominating and Corporate Governance Committees.
• Related Person Transaction Policies and Procedures.
• Corporate Governance Guidelines.
• Code of Ethics and Standards of Conduct (the "Code"), which governs our directors, officers, and employees.
• Code of Ethics for Senior Financial Officers.
Within the time period required by the SEC and the NASDAQ Stock Market, we will post on our website any amendment to the
Code and any waiver applicable to any executive officer, director, or senior financial officer (as defined in the Code). In addition,
our website includes information concerning purchases and sales of our securities by our executive officers and directors. The
Company's accounting and reporting policies conform to U.S. generally accepted accounting principles ("GAAP") and general
practice within the banking industry. We post on our website any disclosure relating to certain non-GAAP financial measures (as
defined in the SEC's Regulation G) that we may make public orally, telephonically, by webcast, by broadcast, or by similar means
from time to time.
Our Corporate Secretary can be contacted by writing to First Midwest Bancorp, Inc., One Pierce Place, Itasca, Illinois 60143,
attention: Corporate Secretary. The Company's Investor Relations Department can be contacted by telephone at (630) 875-7533 or
by e-mail at investor.relations@firstmidwest.com.
ITEM 1A. RISK FACTORS
An investment in our Common Stock is subject to risks inherent in the Company's business. The material risks and uncertainties that
management believes affect the Company are described below. Before making an investment decision with respect to any of the
Company's securities, you should carefully consider the risks and uncertainties as described below, together with all of the
information included herein. The risks and uncertainties described below are not the only risks and uncertainties the Company faces.
Additional risks and uncertainties not presently known or currently deemed immaterial also may have a material adverse effect on
the Company's results of operations and financial condition. If any of the following risks actually occur, the Company's business,
financial condition, and results of operations 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.
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 largely depend on its net interest income. Net interest income equals the difference between
interest income and fees earned on interest-earning assets (such as loans and securities) and interest expense incurred on interest-
bearing liabilities (such as deposits and borrowed funds). Interest rates are highly sensitive to many factors that are beyond the
Company's control, including general economic conditions and policies of various governmental and regulatory agencies,
particularly the Federal Reserve. Changes in monetary policy, including changes in interest rates, could influence the amount of
interest the Company earns on loans and securities and the amount of interest it pays on deposits and borrowings. These changes
could also affect (i) the Company's ability to originate loans and obtain deposits, (ii) the fair value of the Company's financial assets
and liabilities, and (iii) the average duration of the Company's securities portfolio. If the interest rates paid on deposits and other
borrowings increase at a faster rate than the interest rates received on loans and other investments, the Company's net interest
income, and therefore earnings, could be adversely affected. Earnings could also be adversely affected if the interest rates received
on loans and other investments fall more quickly than the interest rates paid on deposits and other borrowings.
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Although management believes it implements effective asset and liability management strategies to reduce the potential effects of
changes in interest rates on the Company's results of operations, any substantial, unexpected, or prolonged change in market interest
rates could have a material adverse effect on the Company's business, financial condition, and results of operations. See "Net
Interest Income" in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," in this Form
10-K for further discussion related to the Company's management of interest rate risk.
The Company is subject to lending risk.
There are inherent risks associated with the Company's lending activities. Underwriting and documentation controls cannot mitigate
all credit risks, especially those outside the Company's control. These risks include the impact of changes in interest rates, changes
in the economic conditions in the markets in which the Company operates and across the U.S., and the ability of borrowers to repay
loans based on their respective circumstances. Increases in interest rates or weakening economic conditions could adversely impact
the ability of borrowers to repay outstanding loans or the value of the collateral securing those loans.
In particular, economic weakness in real estate and related markets could 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, 2014, the Company's loan portfolio consisted of 86.3% of corporate loans, the majority of which were secured
by commercial real estate, and 13.7% of consumer loans. The deterioration of these loans could cause a significant increase in non-
performing loans. An increase in non-performing loans could result in a net loss of earnings from these loans, an increase in the
provision for loan and covered loan losses, and an increase in loan charge-offs, all of which could have a material adverse effect on
the Company's business, financial condition, and results of operations. See "Loan Portfolio and Credit Quality" in Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of Operations," in this Form 10-K for further discussion
related to corporate and consumer loans.
Real estate market volatility and future changes in disposition strategies could result in net proceeds that differ significantly from
fair value appraisals of loan collateral and OREO and could negatively impact the Company's business, financial condition, and
results of operations.
Many of the Company's non-performing real estate loans are collateral-dependent, and the repayment of the loan largely depends on
the value of the collateral securing the loan and the successful operation of the property. For collateral-dependent loans, the
Company estimates the value of the loan based on the appraised value of the underlying collateral less costs to sell. The Company's
OREO portfolio consists of properties acquired through foreclosure in partial or total satisfaction of certain loans as a result of
borrower defaults.
In determining the value of OREO properties and other loan collateral, an orderly disposition of the property is generally assumed,
except where a different disposition strategy is expected. The disposition strategy the Company has in place for a non-performing
loan will determine the appraised value it uses (e.g., "as-is", "orderly liquidation", or "forced liquidation"). Significant judgment is
required in estimating the fair value of property, and the period of time within which such estimates can be considered current is
significantly shortened during periods of market volatility.
In response to market conditions and other economic factors, the Company may utilize alternative sale strategies other than orderly
dispositions as part of its disposition strategy, such as immediate liquidation sales. In this event, the net proceeds realized could
differ significantly from estimates used to determine the fair value of the properties as a result of the significant judgments required
in estimating fair value and the variables involved in different methods of disposition. This could have a material adverse effect on
the Company's business, financial condition, and results of operations.
The Company's lending activities are subject to strict regulations.
The Company is subject to various laws and regulations that affect its lending activities. Failure to comply with applicable laws and
regulations could subject the Company to regulatory enforcement action that could result in the assessment of significant civil
monetary penalties against the Company and other actions, and could have a material adverse effect on the Company's business,
financial condition, and results of operations.
The Company's allowance for credit losses may be insufficient.
The Company maintains an allowance for credit losses at a level believed adequate to absorb estimated losses inherent in its existing
loan portfolio. The level of the allowance for credit losses reflects management's continuing evaluation of industry concentrations;
specific credit risks; credit loss experience; current loan portfolio quality; present economic and business conditions; changes in
competitive, legal, and regulatory conditions; and unidentified losses inherent in the current loan portfolio. Determination of the
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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. 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 Note 1 of "Notes to the
Consolidated Financial Statements" in Item 8 of this Form 10-K for further discussion related to the Company's process for
determining the appropriate level of the allowance for credit losses.
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 by law. Dividend
payments by the Bank to the Company in the future will require generation of future earnings by the Bank and could require
regulatory approval if the proposed dividend is in excess of prescribed guidelines. Further, the Company's right to participate in the
assets of the Bank upon its liquidation, reorganization, or otherwise will be subject to the claims of the Bank's creditors, including
depositors, which will take priority except to the extent the Company may be a creditor with a recognized claim. As of
December 31, 2014, the Company's subsidiaries had deposits and other liabilities of $8.1 billion.
The Company could experience an unexpected inability to obtain needed liquidity.
Liquidity measures the ability to meet current and future cash flow needs as they become due. The liquidity of a financial institution
reflects its ability to meet loan requests, to accommodate possible outflows in deposits, and to take advantage of interest rate market
opportunities. The ability of a financial institution to meet its current financial obligations is a function of its balance sheet structure,
its ability to liquidate assets, and its access to alternative sources of funds. The Company seeks to ensure its funding needs are met
by maintaining an adequate level of liquidity through asset and liability management. If the Company becomes unable to obtain
funds when needed, it could have a material adverse effect on the Company's business, financial condition, and results of operations.
Loss of customer deposits could increase the Company's funding costs.
The Company relies on bank deposits to be a low cost and stable source of funding. The Company competes with banks and other
financial services companies for deposits. If the Company's competitors raise the rates they pay on deposits, the Company's funding
costs may increase, either because the Company raises its rates to avoid losing deposits or because the Company loses deposits and
must rely on more expensive sources of funding. Higher funding costs could reduce the Company's net interest margin and net
interest income and could have a material adverse effect on the Company's business, financial condition, and results of operations.
Any reduction in the Company's credit ratings could increase its financing costs.
Various rating agencies publish credit ratings for the Company's debt obligations, based on their evaluations of a number of factors,
some of which relate to Company performance and some of which relate to general industry conditions. Management routinely
communicates with each rating agency and anticipates the rating agencies will closely monitor the Company's performance and
update their ratings from time to time during the year.
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The Company cannot give any assurance that its current credit ratings will remain in effect for any given period of time or that a
rating will not be lowered or withdrawn entirely by a rating agency if, in its judgment, circumstances in the future so warrant.
Downgrades in the Company's credit ratings may adversely affect its borrowing costs and its ability to borrow or raise capital, and
may adversely affect the Company's reputation.
The Company's current credit ratings are as follows:
Rating Agency
Standard & Poor's Rating Group, a division of the McGraw-Hill Companies, Inc................................................
Moody's Investor Services, Inc. .............................................................................................................................
Fitch, Inc. ...............................................................................................................................................................
Rating
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 on conditions in the capital markets, which are outside of its control, and on the
Company's financial performance. Accordingly, the Company cannot be assured of its ability to raise capital when needed or on
favorable terms. If the Company cannot raise additional capital when needed, it will be subject to increased regulatory supervision
and the imposition of restrictions on its growth and business. These could negatively impact the Company's ability to operate or
further expand its operations through acquisitions or the establishment of additional branches and may result in increases in
operating expenses and reductions in revenues that could have a material adverse effect on its business, financial condition, and
results of operations.
Operational Risks
The Company and its subsidiaries are subject to changes in accounting principles, policies, or guidelines.
The Company's financial performance is impacted by accounting principles, policies, and guidelines. Some of these policies require
the use of estimates and assumptions that may affect the value of the Company's assets or liabilities and financial results. Some of
the Company's accounting policies are critical because they require management to make subjective and complex judgments about
matters that are inherently uncertain and because it is likely that materially different amounts would be reported under different
conditions or using different assumptions. If such estimates or assumptions are incorrect, the Company may experience material
losses. See "Critical Accounting Estimates" in Item 7, "Management's Discussion and Analysis of Financial Condition and Results
of Operations," of this Form 10-K for further discussion.
From time to time, the Financial Accounting Standards Board ("FASB") and the SEC change the financial accounting and reporting
standards, or the interpretation of those standards, that govern the preparation of the Company's external financial statements. These
changes are beyond the Company's control, can be difficult to predict, and could materially impact how the Company reports its
results of operations and financial condition.
These standards are continuously updated and refined and new standards are developed resulting in changes that could have a
material adverse effect on the Company's business, financial condition, and results of operations.
The Company's controls and procedures may fail or be circumvented.
Management regularly reviews and updates the Company's loan underwriting and monitoring process, internal controls, disclosure
controls and procedures, compliance controls and procedures, and corporate governance policies and procedures. Any system of
controls, however well designed and operated, is based on certain assumptions and can provide only reasonable, not absolute,
assurances that the objectives of the system are met. Any failure or circumvention of the Company's controls and procedures or
failure to comply with regulations related to controls and procedures could have a material adverse effect on the Company's
business, financial condition, and results of operations.
The Company's accounting estimates and risk management processes rely on analytical and forecasting models.
The processes the Company uses to estimate its loan losses and to measure the fair value of financial instruments, as well as the
processes used to estimate the effects of changing interest rates and other market measures on the Company's financial condition and
results of operations, depend on the use of analytical and forecasting models. These models reflect assumptions that may not be
accurate, particularly in times of market stress or other unforeseen circumstances. Even if these assumptions are adequate, the
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models may prove to be inadequate or inaccurate because of other flaws in their design or their implementation. If the models the
Company uses for interest rate risk and asset-liability management are inadequate, the Company may incur increased or unexpected
losses resulting from changes in market interest rates or other market measures. If the models the Company uses for estimating its
loan losses are inadequate, the allowance for credit losses may not be sufficient to support future charge-offs. If the models the
Company uses to measure the fair value of financial instruments are inadequate, the fair value of these financial instruments may
fluctuate unexpectedly or may not accurately reflect what the Company could realize on the sale or settlement. Any failure in the
Company's analytical or forecasting models could have a material adverse effect on the Corporation's business, financial condition,
and results of operations.
The Company may not be able to attract and retain skilled people.
The Company's success depends on its ability to attract and retain skilled people. Competition for the best people in most activities
in which the Company engages can be intense, and the Company may not be able to hire people or retain them.
The unexpected loss of services of certain of the Company's skilled personnel could have a material adverse impact on the
Company's business because of their skills, knowledge of the Company's market, years of industry experience, customer
relationships, and the difficulty of promptly finding qualified replacement personnel.
Loss of key employees may disrupt relationships with certain customers.
The Company's customer relationships are critical to the success of its business, and loss of key employees with significant customer
relationships may lead to the loss of business if the customers 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 an adverse impact on the Company's business, financial
condition, and results of operations.
The Company's information systems may experience an interruption or breach in security.
The Company relies heavily on internal and outsourced digital technologies, communications, and information systems to conduct
its business. As the Company's reliance on technology systems increases, the potential risks of technology-related operation
interruptions in the Company's customer relationship management, general ledger, deposit, loan, or other systems or the occurrence
of cyber incidents also increases. Cyber incidents can result from deliberate attacks or unintentional events including, among other
things, (i) gaining unauthorized access to digital systems for purposes of misappropriating assets or sensitive information, corrupting
data, or causing potentially debilitating operational disruptions; (ii) causing denial-of-service attacks on websites; or (iii) intelligence
gathering and social engineering aimed at obtaining information. The occurrence of operational interruption, cyber incident, or a
deficiency in the cyber security of the Company's technology systems (internal or outsourced) could negatively impact the
Company's financial condition or results of operations.
The Company has policies and procedures expressly designed to prevent or limit the effect of a failure, interruption, or security
breach of its systems and maintains cyber security insurance. Significant interruptions to the Company's business from technology
issues could result in expensive remediation efforts and distraction of management. During the year, the Company experienced
certain immaterial cyber-attacks or breaches and continues to invest in security and controls to prevent and mitigate future incidents.
Although the Company has not experienced any material losses related to a technology-related operational interruption or cyber-
attack, there can be no assurance that such failures, interruptions, or security breaches will not occur in the future or, if they do
occur, that the impact will not be substantial.
The occurrence of any failures, interruptions, or security breaches of the Company's technology systems could damage the
Company's reputation, result in a loss of customer business, result in the unauthorized release, gathering, monitoring, misuse, loss,
or destruction of proprietary information, subject the Company to additional regulatory scrutiny, or expose the Company to civil
litigation and possible financial liability, any of which could have a material adverse effect on the Company's business, financial
condition, and results of operations, as well as its reputation or stock price. As cyber threats continue to evolve, the Company
expects it will be required to spend significant resources on an ongoing basis to continue to modify and enhance its protective
measures and to investigate and remediate any information security vulnerabilities.
The Company depends on outside third parties for processing and handling of Company records and data.
The Company relies on software developed by third party vendors to process various Company transactions. In some cases, the
Company has contracted with third parties to run their proprietary software on its behalf. These systems include, but are not limited
to, general ledger, payroll, employee benefits, wealth management record keeping, loan and deposit processing, merchant
processing, and securities portfolio management. While the Company performs a review of controls instituted by the vendors over
these programs in accordance with industry standards and performs its own testing of user controls, the Company must rely on the
continued maintenance of these controls by the outside party, including safeguards over the security of customer data. In addition,
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the Company maintains backups of key processing output daily in the event of a failure on the part of any of these systems.
Nonetheless, the Company may incur a temporary disruption in its ability to conduct its business or process its transactions or incur
damage to its reputation if the third party vendor fails to adequately maintain internal controls or institute necessary changes to
systems. Such disruption or breach of security may have a material adverse effect on the Company's business, financial condition,
and results of operations.
The Company continually encounters technological change.
The banking and financial services industry continually undergoes technological changes, with frequent introductions of new
technology-driven products and services. In addition to better meeting customer needs, the effective use of technology increases
efficiency and enables financial institutions to reduce costs. The Company's future success will depend, in part, on its ability to
address the needs of its customers by using technology to provide products and services that enhance customer convenience and that
create additional efficiencies in the Company's operations. Many of the Company's competitors have greater resources to invest in
technological improvements, and the Company may not effectively implement new technology-driven products and services or do
so as quickly as its competitors, which could reduce its ability to effectively compete. Failure to successfully keep pace with
technological change affecting the financial services industry could have a material adverse effect on the Company's business,
financial condition, and results of operations.
New lines of business or new products and services may subject the Company to additional risks.
From time to time, the Company may implement new lines of business or offer new products or services within existing lines of
business. There can be substantial risks and uncertainties associated with these efforts, particularly in instances where the markets
are not fully developed. In developing and marketing new lines of business and/or new products or services, the Company may
invest significant time and resources. Initial timetables for the introduction and development of new lines of business and new
products or services may not be achieved, and price and profitability targets may not prove feasible. External factors, such as
compliance with regulations, competitive alternatives, and shifting market preferences, may also impact the successful
implementation of a new line of business or a new product or service. Furthermore, any new line of business and new product or
service could have a significant impact on the effectiveness of the Company's system of internal controls. Failure to successfully
manage these risks in the development and implementation of new lines of business or new products or services could have a
material adverse effect on the Company's business, financial condition, and results of operations.
The Company's estimate of fair values for its investments may not be realizable if it were to sell these securities today.
The Company's available-for-sale securities are carried at fair value. Accounting standards require the Company to disclose these
securities according to a fair value hierarchy. Less than one percent of the Company's available-for-sale securities were categorized
in level 1 of the fair value hierarchy. Over 97% 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. See Note 22 of "Notes to the Consolidated Financial
Statements" in Item 8 of this Form 10-K for a detailed description of the fair 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, 2014, especially if the security is sold during a period of illiquidity or market disruption or as part of a large block of
securities under a forced transaction. Any resulting write-downs of the fair value of the Company's available-for-sale securities
would reduce earnings in the period in which it is recorded and could have a material adverse effect on the Company's business,
financial condition, and results of operations.
The value of the Company's goodwill and other intangible assets may decline in the future.
As of December 31, 2014, the Company had $334.2 million of goodwill and other intangible assets. If the Company's stock price
declines and remains low for an extended period of time, the Company could be required to write off all or a portion of its goodwill.
The Company's stock price is subject to market conditions that can be impacted by forces outside of the control of management,
such as a perceived weakness in financial institutions in general, and may not be a direct result of the Company's performance. In
addition, a significant decline in the Company's expected future cash flows, a significant adverse change in the business climate, or
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slower growth rates may necessitate taking future charges related to the impairment of the Company's goodwill and other intangible
assets. A write-down of goodwill and other intangible assets would reduce earnings in the period in which it is recorded and could
have a material adverse effect on the Company's business, financial condition, and results of operations.
External Risks
The Company operates in a highly competitive industry and market area.
The Company faces substantial competition in all areas of its operations from a variety of different competitors, many of which are
larger and may have more financial resources. These competitors primarily include national, regional, and community banks within
the markets in which the Company operates. The Company also faces competition from many other types of financial institutions,
including savings and loan associations, credit unions, personal loan and finance companies, retail and discount stockbrokers,
investment advisors, mutual funds, insurance companies, and other financial intermediaries. The financial services industry could
become even more competitive as a result of legislative, regulatory, and technological changes; further illiquidity in the credit
markets; and continued consolidation. Banks, securities firms, and insurance companies can merge under the umbrella of an FHC,
which can offer virtually any type of financial service, including banking, securities underwriting, insurance, and merchant banking.
Also, technology has lowered barriers to entry and made it possible for non-banks to offer products and services traditionally
provided by banks, such as automatic funds transfer and automatic payment systems. Many of the Company's competitors have
fewer regulatory constraints and may have lower cost structures. Due to their size, many competitors may be able to achieve
economies of scale and, as a result, may offer a broader range of products and services, as well as better pricing for those products
and services than the Company can offer.
The Company's ability to compete successfully depends on a number of factors, including:
• Developing, maintaining, and building long-term customer relationships.
• Expanding the Company's market position.
• Offering products and services at prices and with the features that meet customers' needs and demands.
•
• Maintaining a satisfactory level of customer service.
• Anticipating and adjusting to changes in industry and general economic trends.
• Continued development and support of internet-based services.
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 depends to a large extent on the business environment in the suburban metropolitan Chicago
market, the states of Illinois, Indiana, and Iowa, and the U.S. as a whole. In particular, the business environment impacts the ability
of borrowers to pay interest on and repay principal of outstanding loans as well as the value of collateral securing those loans. A
favorable business environment is generally characterized by economic growth, low unemployment, efficient capital markets, low
inflation, high business and investor confidence, strong business earnings, and other factors. Unfavorable or uncertain economic and
market conditions can be caused by declines in economic growth, business activity, or investor or business confidence; limitations
on the availability or increases in the cost of credit and capital; increases in inflation or interest rates; high unemployment; natural
disasters; or a combination of these or other factors.
In recent years, the suburban metropolitan Chicago market, the states of Illinois, Indiana, and Iowa, and the U.S. as a whole
experienced a downward economic cycle, including a significant recession from which it is slowly recovering. Business growth
across a wide range of industries and regions in the United States remains reduced, and local governments and many businesses
continue to experience financial difficulty. Since the recession, economic growth has been slow and uneven, unemployment levels
generally remain elevated and there are continuing concerns related to the level of U.S. government debt and fiscal actions that may
be taken to address that debt. There can be no assurance that economic conditions will continue to improve, and these conditions
could worsen. Periods of increased volatility in financial and other markets, such as those experienced recently with regard to oil
and other commodity prices and current rates, and those that may arise from global political tensions and re-emerging concerns over
European sovereign debt risk, can have a direct or indirect negative impact on the Company and our customers and introduce greater
uncertainty into credit evaluation decisions and prospects for growth. Economic pressure on consumers and uncertainty regarding
continuing economic improvement may also result in changes in consumer and business spending, borrowing and saving habits.
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Such conditions could have a material adverse effect on the credit quality of the Company's loans or its business, financial condition,
or results of operations, as well as other potential adverse impacts, including:
• There could be an increased level of commercial and consumer delinquencies, lack of consumer confidence, increased
market volatility, and widespread reduction of business activity generally.
• There could be an increase in write-downs of asset values by financial institutions, such as the Company.
• The Company's ability to assess the creditworthiness of customers could be impaired if the models and approaches it uses
to select, manage, and underwrite credits become less predictive of future performance.
• The process the Company uses to estimate losses inherent in the Company's loan portfolio requires difficult, subjective,
and complex judgments. This process includes analysis of economic conditions and the impact of these economic
conditions on borrowers' ability to repay their loans. The process could no longer be capable of accurate estimation and
may, in turn, impact its reliability.
• The Bank could be required to pay significantly higher FDIC premiums in the future if losses further deplete the DIF.
• The Company could face increased competition due to intensified consolidation of the financial services industry.
If periods 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.
Turmoil in the financial markets could result in lower fair values for the Company's investment securities.
Major disruptions in the capital markets experienced in recent years have adversely affected investor demand for all classes of
securities, excluding U.S. Treasury securities, and resulted in volatility in the fair values of the Company's investment securities.
Significant prolonged reduced investor demand could manifest itself in lower fair values for these securities and may result in
recognition of an other-than-temporary impairment ("OTTI"), which could have a material adverse effect on the Company's
business, financial condition, and results of operations.
Municipal securities can also be impacted by the business environment of their geographic location. Although this type of security
historically experienced extremely low default rates, municipal securities are subject to systemic risk since cash flows generally
depend on (i) the ability of the issuing authority to levy and collect taxes or (ii) the ability of the issuer to charge for and collect
payment for essential services rendered. If the issuer defaults on its payments, it may result in the recognition of OTTI or total loss,
which could have a material adverse effect on the Company's business, financial condition, and results of operations.
Managing reputational risk is important to attracting and maintaining customers, investors, and employees.
Threats to the Company's reputation can come from many sources, including adverse sentiment about financial institutions
generally, unethical practices, employee misconduct, failure to deliver minimum standards of service or quality, compliance
deficiencies, and questionable or fraudulent activities of the Company's customers. The Company has policies and procedures in
place that seek to protect its reputation and promote ethical conduct. Nonetheless, negative publicity may arise regarding the
Company's business, employees, or customers, with or without merit, and could result in the loss of customers, investors, and
employees; costly litigation; a decline in revenues; and increased governmental oversight. Negative publicity could have a material
adverse impact on the Company's reputation, business, financial condition, results of operations, and liquidity.
The Company may be adversely affected by the soundness of other financial institutions.
Financial services institutions are interrelated as a result of trading, clearing, counterparty, or other relationships. The Company has
exposure to many different industries and counterparties and routinely executes transactions with counterparties in the financial
services industry, including commercial banks, brokers and dealers, investment banks, and other institutional clients. Many of these
transactions expose the Company to credit risk in the event of a default by a counterparty or client. In addition, the Company's credit
risk may be exacerbated when the collateral held by the Company cannot be realized upon liquidation or is liquidated at prices not
sufficient to recover the full amount of the credit or derivative exposure due to the Company. Any such losses could have a material
adverse effect on the Company's business, financial condition, results of operations, and liquidity.
The Company is subject to environmental liability risk associated with lending activities.
A significant portion of the Company's loan portfolio is secured by real property. During the ordinary course of business, the
Company may foreclose on and take title to properties securing certain loans. In doing so, there is a risk that hazardous or toxic
substances could be found on these properties. If hazardous or toxic substances are found, the Company may be liable for
remediation costs, as well as for personal injury and property damage. Environmental laws may require the Company to incur
substantial expenses and could materially reduce the affected property's value or limit the Company's ability to sell the affected
property or to repay the indebtedness secured by the property. In addition, future laws or more stringent interpretations or
22
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 business, financial
condition, results of operations, and liquidity.
Severe weather, natural disasters, health emergencies, acts of war or terrorism, and other external events could significantly impact
the Company's business.
Severe weather, natural disasters, pandemics and other health emergencies, acts of war or terrorism, and other adverse external
events could have a significant impact on the Company's ability to conduct business. These events could affect the stability of the
Company's deposit base, impair the ability of borrowers to repay outstanding loans, reduce the value of collateral securing loans,
cause significant property damage, result in loss of revenue, or cause the Company to incur additional expenses. Although
management has established disaster recovery policies and procedures, the occurrence of any such event could have a material
adverse effect on the Company's business, financial condition, and results of operations.
U.S. credit downgrades or changes in outlook by the major credit rating agencies may have an adverse effect on financial markets,
including financial institutions and the financial industry.
During the past several years, due to concerns over the U.S. debt limit and budget deficit, the major ratings agencies have
downgraded or lowered their outlooks for the U.S.'s credit rating. Further downgrades of the U.S. federal government's sovereign
credit rating, and the perceived creditworthiness of U.S. government-backed obligations, could impact the Company's ability to
obtain funding that is collateralized by affected instruments and to access capital markets on favorable terms. Such downgrades
could also affect the pricing of funding, when funding is available. A downgrade of the credit rating of the U.S. government, or of its
agencies, government-sponsored enterprises or related institutions, agencies or instrumentalities, may also adversely affect the
market value of such instruments and, further, exacerbate the other risks to which the Company is subject. These events could have a
material adverse effect on the Company's business, financial condition, or results of operations.
Legal/Compliance Risks
The Company is subject to extensive government regulation and supervision.
The Company and the Bank are subject to extensive federal and state regulations and supervision. Banking regulations are primarily
intended to protect depositors' funds, FDIC funds, and the banking system as a whole, not security holders. These regulations affect
the Company's lending practices, capital structure, investment practices, dividend policy, and growth. Congress and federal
regulatory agencies continually review banking laws, regulations, policies, and other supervisory guidance for possible changes.
Changes to statutes, regulations, regulatory policies, or other supervisory guidance, including changes in the interpretation or
implementation of those regulations or policies, could affect the Company in substantial and unpredictable ways and could have a
material adverse effect on the Company's business, financial condition, and results of operations. These changes could subject the
Company to additional costs, limit the types of financial services and products the Company may offer, limit the activities it is
permitted to engage in, and increase the ability of non-banks to offer competing financial services and products. Failure to comply
with laws, regulations, policies, or other regulatory guidance could result in civil or criminal sanctions by regulatory agencies, civil
monetary penalties, and damage to the Company's reputation. Government authorities, including the bank regulatory agencies, are
pursuing aggressive enforcement actions with respect to compliance and other legal matters involving financial activities. Any of
these actions could have a material adverse effect on the Company's business, financial condition, and results of operations. While
the Company has policies and procedures designed to prevent any such violations, there can be no assurance that such violations
will not occur. See "Supervision and Regulation" in Item 1, "Business," and Note 19 of "Notes to the Consolidated Financial
Statements" in Item 8 of this Form 10-K.
Rapidly implemented legislative and regulatory actions could have an unanticipated and adverse effect on the Company.
In response to the financial market crisis, the U.S. government, specifically the Treasury, Federal Reserve, and FDIC, working in
cooperation with foreign governments and other central banks, took a variety of extraordinary measures designed to restore
confidence in the financial markets and to strengthen financial institutions. The rulemaking relating to these measures was
accomplished on an emergency basis to address immediate concerns about the stability and continued existence of the global
financial system. Recovery programs were rapidly proposed, adopted, and sometimes quickly abandoned in response to changing
market conditions and other concerns. The speed of market developments required the government to abandon its traditional pattern
and timeline of legislative and regulatory rulemaking, and issue rules on an interim basis without prior notice and comment.
Rulemaking in this manner, rather than through the traditional legislative practice, does not allow for input by regulated financial
institutions, such as the Company, and could lead to uncertainty in the financial markets, disruption to the Company's business,
increased costs, and material adverse effects on the Company's business, financial condition, and results of operations.
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The Company's business may be adversely affected in the future by the implementation of ongoing regulations regarding banks and
financial institutions under the Dodd-Frank Act.
The Dodd-Frank Act significantly changed the bank regulatory structure and affects the lending, deposit, investment, trading, and
operating activities of financial institutions and their holding companies. The Dodd-Frank Act requires various federal agencies to
adopt a broad range of new rules and regulations and to prepare numerous studies and reports for Congress. The federal agencies are
given significant discretion in drafting and implementing rules and regulations and, consequently, many of the details and much of
the impact of portions of the Dodd-Frank Act that remain to be implemented may not be known until final rules are adopted and
market practices and structures develop around the rules, which may take several years. See "Supervision and Regulation" in Item 1
of this Form 10-K for a discussion of several significant provisions of the Dodd-Frank Act, including the Volcker Rule.
The Dodd-Frank Act is intended to address specific issues that are believed to have contributed to the financial crisis and is heavily
remedial in nature. Several provisions in the Act are applicable to larger institutions (greater than $10 billion in assets). Many
aspects of the Dodd-Frank Act that are applicable to the Company are subject to rulemaking, implementation, and regulatory and
supervisory guidance, and the development of related market structures and practices, that will occur over several years, making it
difficult to anticipate the overall financial impact on the Company. However, compliance with new laws and regulations likely will
result in additional operating costs that could have a material adverse effect on the Company's business, financial condition, and
results of operations.
The Company will be subject to heightened regulatory requirements if it exceeds $10 billion in total consolidated assets.
At December 31, 2014, the Company and the Bank had approximately $9.4 billion in total consolidated assets. The Company and
the Bank may exceed $10 billion in total consolidated assets in the future if it continues to grow. Any additional acquisitions could
significantly accelerate the time when the Company exceeds this threshold.
The Dodd-Frank Act and its implementing regulations impose various additional requirements on bank holding companies with $10
billion or more in total consolidated assets, including compliance with portions of the Federal Reserve's enhanced prudential
oversight requirements and annual stress testing requirements. In addition, banks with $10 billion or more in total consolidated
assets are primarily examined by the CFPB with respect to various federal consumer financial protection laws and regulations. As a
relatively new agency with evolving regulations and practices, there is uncertainty as to how the CFPB's examination and regulatory
authority might impact the Company's and the Bank's business.
Compliance with these requirements may cause the Company to hire additional compliance or other personnel, design and
implement additional internal controls, or incur other significant expenses, any of which could have a material adverse effect on the
Company's business, financial condition, or results of operations. Compliance with the annual stress testing requirements, part of
which must be publicly disclosed, may also be misinterpreted by the market generally or the Company's customers and, as a result,
may adversely affect the Company's stock price or the Company's ability to retain its customers or effectively compete for new
business opportunities. To ensure compliance with these heightened requirements when effective, the Company's regulators may
require it to fully comply with these requirements or take actions to prepare for compliance even before the Company's or the Bank's
total consolidated assets equal or exceed $10 billion. As a result, the Company may incur compliance-related costs before it might
otherwise be required, including if the Company does not continue to grow at the rate it expects or at all. The Company's regulators
may also consider its preparation for compliance with these regulatory requirements when examining its operations generally or
considering any request for regulatory approval the Company may make, even requests for approvals on unrelated matters.
The Company's business may be adversely affected in the future by the implementation of rules establishing standards for debit card
interchange fees.
The Federal Reserve has implemented final rules establishing standards for debit card interchange fees and prohibiting network
exclusivity arrangements and routing restrictions as required by the Dodd-Frank Act. A debit card interchange fee is a fee paid by a
merchant's bank to the customer's bank for the use of the debit card.
Under the final rule, which is currently subject to litigation, the maximum permissible interchange fee that an issuer may receive for
an electronic debit transaction is 21 cents plus an amount equal to five basis points of the transaction value. In addition, under an
interim final rule issued concurrently with the final rule, an additional one cent per transaction "fraud prevention adjustment" to the
interchange fee is available to those issuers that comply with certain standards outlined by the Federal Reserve.
Currently, the Company is exempt from the interchange fee cap under the "small issuer" exemption, which applies to any debit card
issuer with total worldwide assets of less than $10 billion as of the end of the previous calendar year. In the event the Company's
assets reach $10 billion or more, it will become subject to the interchange fee limitations beginning July 1 of the following year, and
the fees the Company may receive for an electronic debit transaction will be capped at the statutory limit.
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Although the rule applies only to larger institutions and does not currently apply to the Company, future industry responses and
developments relating to this rule that are currently unknown may affect the Company's business, financial condition, and results of
operations in ways and to a degree that it cannot currently predict, including any impact on its future revenue.
The level of the commercial real estate loan portfolio may subject the Company to additional regulatory scrutiny.
The FDIC, the Federal Reserve, and the Office of the Comptroller of the Currency issued 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 adverse impact on the Company's business, financial condition, and results of operations.
The Company and its subsidiaries may not be able to realize the benefit of deferred tax assets.
The Company records deferred tax assets and liabilities for the future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and their respective tax basis.
Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in years in which those
temporary differences are expected to be recovered or settled. The deferred tax assets can be recognized in future periods depending
on a number of factors, including the ability to realize the asset through carryback or carryforward to taxable income in prior or
future years, the future reversal of existing taxable temporary differences, future taxable income, and the possible application of
future tax planning strategies. A valuation allowance is established for any deferred tax asset for which recovery or settlement is not
more likely than not.
Each quarter, the Company assesses its deferred tax asset position, including the recoverability of this asset or the need for a
valuation allowance. This assessment takes into consideration positive and negative evidence to determine whether it is more likely
than not that a portion of the asset will not be realized. If the Company is not able to recognize deferred tax assets in future periods,
it could have a material adverse effect on the Company's business, financial condition, and results of operations.
The Company is a defendant in a variety of litigation and other actions.
Currently, there are certain legal proceedings pending against the Company and its subsidiaries in the ordinary course of business.
While the outcome of any legal proceeding is inherently uncertain, the Company's management believes that any liabilities arising
from pending legal matters would be immaterial based on information currently available. However, if actual results differ from
management's expectations, it could have a material adverse effect on the Company's financial condition, results of operations, or
cash flows. For a detailed discussion on current legal proceedings, see Item 3, "Legal Proceedings," and Note 21 of "Notes to the
Consolidated Financial Statements" in Item 8 of this Form 10-K.
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Risks Related to Acquisition Activity
Future acquisitions may disrupt the Company's business and dilute stockholder value.
The Company strategically looks to acquire whole banks, branches of other banks, and non-banking organizations. The Company
may consider future acquisitions of banks and non-banks to supplement internal growth opportunities, as permitted by regulators.
The Company seeks merger or acquisition partners that are culturally similar and possess either significant market presence or have
potential for improved profitability through financial management, economies of scale, or expanded services. Acquiring other banks,
branches, or non-banks involves potential risks that could have a material adverse impact on the Company's business, financial
condition, and results of operations, including:
• Exposure to unknown or contingent liabilities of acquired banks.
• Disruption of the Company's business.
• Loss of key employees and customers of acquired banks.
• Short-term decrease in profitability.
• Diversion of management's time and attention.
•
Issues arising during transition and integration.
• Dilution in the ownership percentage of holders of the Company's Common Stock.
• Difficulty in estimating the value of the target company.
• Payment of a premium over book and market values that may dilute the Company's tangible book value and earnings per
share in the short and long-term.
• Volatility in reported income as goodwill impairment losses could occur irregularly and in varying amounts.
•
Inability to realize the expected revenue increases, cost savings, increases in geographic or product presence, and/or other
projected benefits.
• Changes in banking or tax laws or regulations.
From time to time, the Company may evaluate merger and acquisition opportunities and conduct due diligence activities related to
possible transactions with other financial institutions and financial services companies. As a result, merger or acquisition discussions
and negotiations may take place and future mergers or acquisitions involving cash, debt, or equity securities may occur at any time.
Acquisitions may involve the payment of a premium over book and market values, and therefore, some dilution of the Company's
tangible book value and net income per common share may occur in connection with any future transaction. Furthermore, failure to
realize the expected revenue increases, cost savings, increases in geographic or product presence, or other projected benefits from an
acquisition could have a material adverse effect on the Company's financial condition and results of operations. In addition, from
time to time, banking regulators may restrict the Company from making acquisitions. See "History" and "Supervision and
Regulation" in Item 1, "Business," of this Form 10-K for additional detail and further discussion of these matters.
Competition for acquisition candidates is intense.
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.
Failure to comply with the terms of loss share agreements with the FDIC may result in potential losses.
The Company has completed four FDIC-assisted transactions. In three of those transactions, most loans and OREO acquired are
covered by FDIC Agreements, under which the FDIC will reimburse the Bank for a portion of the losses and eligible expenses
arising from certain assets of the acquired institutions. The FDIC Agreements have specific and detailed compliance, servicing,
notification, and reporting requirements. Non-compliance with the terms of the FDIC Agreements could result in the loss of
reimbursement on individual loans, large pools of loans, or OREO and could result in material losses that adversely affect the
Company's business or financial condition.
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The valuations of acquired loans and OREO, including those acquired in FDIC-assisted transactions and the related FDIC
indemnification asset, rely on estimates that may be inaccurate.
The Company performs a valuation of acquired loans and OREO acquired. Although management makes various assumptions and
judgments about the collectability of the acquired loans, including the creditworthiness of borrowers and the value of the real estate
and other assets serving as collateral for the repayment of secured loans associated with these transactions, its estimates of the fair
value of assets acquired could be inaccurate. Valuing these assets using inaccurate assumptions could materially and adversely affect
the Company's business, financial condition, and results of operations.
For loans acquired in FDIC-assisted transactions that include FDIC Agreements, the Company records an FDIC indemnification
asset that reflects its estimate of the timing and amount of reimbursements for future losses that are anticipated to occur. In
determining the size of the FDIC indemnification asset, the Company analyzes the loan portfolio based on historical loss experience,
volume and classification of loans, volume and trends in delinquencies and non-accruals, local economic conditions, and other
pertinent information. Changes in the Company's estimate of the timing of those losses, specifically if those losses are to occur
beyond the applicable loss-share periods, may result in impairments of the FDIC indemnification asset, which would have a material
adverse effect on the Company's financial condition and results of operations. If the assumptions related to the timing or amount of
expected losses are incorrect, there could be a negative impact on the Company's operating results. Increases in the amount of future
losses in response to different economic conditions or adverse developments in the acquired loan portfolio may result in increased
charge-offs, which would also negatively impact the Company's business, financial condition, and results of operations.
Risks Associated with the Company's Common Stock
An investment in the Company's Common Stock is not an insured deposit.
The Company's Common Stock is not a bank deposit and, therefore, is not insured against loss by the FDIC, any other deposit
insurance fund, or by any other public or private entity. Investment in the Company's Common Stock is inherently risky for the
reasons described in this "Risk Factors" section and elsewhere in this Form 10-K and is subject to the same market forces that affect
the price of common stock in any public company. As a result, if you acquire the Company's Common Stock, you could lose some
or all of your investment.
The Company's stock price can be volatile.
Stock price volatility may make it more difficult for you to resell your Common Stock when you want and at prices you find
attractive. The Company's Common Stock price can fluctuate significantly in response to a variety of factors including:
• Actual or anticipated variations in quarterly results of operations.
• Recommendations by securities analysts.
• Operating and stock price performance of other companies that investors deem comparable to the Company.
• News reports relating to trends, concerns, and other issues in the financial services industry.
• Perceptions in the marketplace regarding the Company and/or its competitors.
• New technology used or services offered by competitors.
• Significant acquisitions or business combinations, strategic partnerships, joint venture, or capital commitments by or
involving the Company or its competitors.
• Failure to integrate acquisitions or realize anticipated benefits from acquisitions.
• Changes in government regulations.
• Geopolitical conditions, such as acts or threats of terrorism or military conflicts.
General market fluctuations, industry factors, and general economic and political conditions and events, such as economic
slowdowns or recessions, interest rate changes, or credit loss trends, could also cause the Company's Common Stock price to
decrease regardless of operating results.
27
The trading volume in the Company's Common Stock is less than that of other larger financial services institutions.
Although the Company's Common Stock is listed for trading on the NASDAQ Stock Market, its trading volume may be less than
that of other, larger financial services companies. A public trading market having the desired characteristics of depth, liquidity, and
orderliness depends on the presence in the marketplace of willing buyers and sellers of the Company's Common Stock at any given
time. This presence depends on the individual decisions of investors and general economic and market conditions over which the
Company has no control. During any period of lower trading volume of the Company's Common Stock, significant sales of shares of
the Company's Common Stock, or the expectation of these sales could cause the Company's Common Stock price to fall.
The Company's Restated Certificate of Incorporation, Amended and Restated By-laws, and Amended and Restated Rights
Agreement, as well as certain banking laws, may have an anti-takeover effect.
Provisions of the Company's Restated Certificate of Incorporation and Amended and Restated By-laws, federal banking laws,
including regulatory approval requirements, and the Company's Amended and Restated Rights Plan could make it more difficult for
a third party to acquire the Company, even if doing so would be perceived to be beneficial by the Company's stockholders. The
combination of these provisions effectively inhibits a non-negotiated merger or other business combination, which, in turn, could
adversely affect the market price of the Company's Common Stock.
The Company may issue additional securities, which could dilute the ownership percentage of holders of the Company's Common
Stock.
The Company may issue additional securities to raise additional capital, finance acquisitions, or for other corporate purposes, or in
connection with its share-based compensation plans or retirement plans, and, if it does, the ownership percentage of holders of the
Company's Common Stock could be diluted, potentially materially.
The Company has not established a minimum dividend payment level, and it cannot ensure its ability to pay dividends in the future.
The Company's fourth quarter 2014 cash dividend was $0.08 per share. The Company has not established a minimum dividend
payment level, and the amount of its dividend may fluctuate. All dividends will be made at the discretion of the Board of Directors
of First Midwest Bancorp, Inc. (the "Board") and will depend on the Company's earnings, financial condition, and such other factors
as the Board may deem relevant from time to time. The Board may, at its discretion, further reduce or eliminate dividends or change
its dividend policy in the future.
In addition, the Federal Reserve issued Federal Reserve Supervision and Regulation Letter SR-09-4, which requires bank holding
companies to inform and consult with Federal Reserve supervisory staff prior to declaring and paying a dividend that exceeds
earnings for the period for which the dividend is being paid. Under this regulation, if the Company experiences losses in a series of
consecutive quarters, it may be required to inform and consult with the Federal Reserve supervisory staff prior to declaring or
paying any dividends. In this event, there can be no assurance that the Company's regulators will approve the payment of such
dividends.
Offerings of debt, which would be senior to the Company's Common Stock upon liquidation, and/or preferred equity securities,
which may be senior to the Company's Common Stock for purposes of dividend distributions or upon liquidation, may adversely
affect the market price of the Company's Common Stock.
The Company may attempt to increase capital or raise additional capital by making additional offerings of debt or preferred equity
securities, including trust-preferred securities, senior or subordinated notes, and preferred stock. In the event of liquidation, holders
of the Company's debt securities and shares of preferred stock and lenders with respect to other borrowings will receive distributions
of the Company's available assets prior to the holders of the Company's Common Stock. Additional equity offerings may dilute the
holdings of the Company's existing stockholders or reduce the market price of the Company's Common Stock, or both. Holders of
the Company's Common Stock are not entitled to preemptive rights or other protections against dilution.
The Board is authorized to issue one or more series of preferred stock from time to time without any action on the part of the
Company's stockholders. The Board also has the power, without stockholder approval, to set the terms of any such classes or series
of preferred stock that may be issued, including voting rights, dividend rights, and preferences over the Company's Common Stock
with respect to dividends or upon the Company's dissolution, winding-up, liquidation, and other terms. If the Company issues
preferred stock in the future that has a preference over the Company's Common Stock with respect to the payment of dividends or
upon liquidation, or if the Company issues preferred stock with voting rights that dilute the voting power of the Company's
Common Stock, the rights of holders of the Company's Common Stock or the market price of the Company's Common Stock could
be adversely affected.
28
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
The executive offices of the Company are located at One Pierce Place, Itasca, Illinois, and are leased from an unaffiliated third party.
The Company conducts business through 109 banking locations largely located in various communities throughout the greater
Chicago metropolitan area, as well as northwest Indiana, central and western Illinois, and eastern Iowa. The majority, approximately
80%, of the Company's banking locations are owned and 20% are leased.
The Company owns 145 ATMs, most of which are housed at banking locations. Some ATMs are independently located. In addition,
the Company owns other real property that, when considered individually or in the aggregate, is not material to the Company's
financial position.
The Company believes its facilities in the aggregate are suitable and adequate to operate its banking business. Additional
information with respect to premises and equipment is presented in Note 8 of "Notes to the Consolidated Financial Statements" in
Item 8 of this Form 10-K.
ITEM 3. LEGAL PROCEEDINGS
In the ordinary course of business, there were certain legal proceedings pending against the Company and its subsidiaries at
December 31, 2014. While the outcome of any legal proceeding is inherently uncertain, based on information currently available,
the Company's management does not expect any liabilities arising from pending legal matters to have a material adverse effect on
the Company's business, financial condition, results of operations, or cash flows.
Not applicable.
ITEM 4. MINE SAFETY DISCLOSURES
29
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY,
RELATED STOCKHOLDER MATTERS, AND
ISSUER PURCHASES OF EQUITY SECURITIES
The Company's Common Stock is traded under the symbol "FMBI" in the NASDAQ Global Select Market tier of the NASDAQ
Stock Market. As of December 31, 2014, there were 1,960 stockholders of record, a number that does not include beneficial owners
who hold shares in "street name" (or stockholders from previously acquired companies that did not exchange their stock).
Fourth
Third
Second
First
Fourth
Third
Second
First
2014
2013
Market price of Common Stock
High ......................................... $
Low ..........................................
Cash dividends declared per
common share .............................
17.99 $
15.01
17.77 $
18.19 $
15.64
15.49
17.83
15.36
$
18.49 $
14.90
16.20 $
13.81
13.87 $
11.57
13.60
12.11
0.08
0.08
0.08
0.07
0.07
0.04
0.04
0.01
Payment of future dividends is within the discretion of the Board and will depend on earnings, capital requirements, the operating
and financial condition of the Company, and other factors the Board deems relevant from time to time. The Board makes the
dividend determination on a quarterly basis. Further discussion of the Company's philosophy regarding the payment of dividends is
included in the "Management of Capital" section of "Management's Discussion and Analysis of Financial Condition and Results of
Operations" in Item 7 of this Form 10-K.
A discussion regarding the regulatory restrictions applicable to the Bank's ability to pay dividends to the Company is included in the
"Supervision and Regulation – Dividends" and "Risk Factors – Risks Associated with the Company's Common Stock" sections in
Items 1 and 1A of this Form 10-K.
For a description of the securities authorized for issuance under equity compensation plans, see Item 12, "Security Ownership of
Certain Beneficial Owners and Management and Related Stockholder Matters," of this Form 10-K.
30
Stock Performance Graph
The graph below illustrates the cumulative total return (defined as stock price appreciation assuming the reinvestment of all
dividends) to stockholders of the Company's Common Stock compared against a broad-market total return equity index, the
NASDAQ Composite, and a published industry total return equity index, the NASDAQ Banks, over a five-year period.
Comparison of Five-Year Cumulative Total Return Among
First Midwest Bancorp, Inc., the NASDAQ Composite, and the NASDAQ Banks (1)
2009
2010
2011
2012
2013
2014
First Midwest Bancorp, Inc. ....... $
NASDAQ Composite.................
NASDAQ Banks .......................
100.00 $
100.00
100.00
106.14 $
117.61
115.72
93.72 $
118.70
104.50
116.22 $
139.00
122.51
164.43 $
196.83
173.89
163.45
223.74
182.21
(1) Assumes $100 invested on December 31, 2009 with the reinvestment of all related dividends.
To the extent this Form 10-K is incorporated by reference into any other filing by the Company under the Securities Act or the
Exchange Act the foregoing "Stock Performance Graph" will not be deemed incorporated, unless specifically provided otherwise in
such filing and shall not otherwise be deemed filed under such Acts.
31
Issuer Purchases of Equity Securities
The following table summarizes the Company's monthly Common Stock purchases during the fourth quarter of 2014. The Board
approved a stock repurchase program on November 27, 2007. Up to 2.5 million shares of the Company's Common Stock may be
repurchased, and the total remaining authorization under the program was 2,494,747 shares as of December 31, 2014. The
repurchase program has no set expiration or termination date.
Issuer Purchases of Equity Securities
Total
Number
of Shares
Purchased (1)
Average
Price Paid
per Share
16.10
—
16.87
16.41
1,519 $
—
1,024
2,543 $
Total Number
of Shares
Purchased as
Part of a
Publicly
Announced
Plan or
Program
—
—
—
—
Maximum
Number of
Shares that
May Yet Be
Purchased
Under the
Plan or
Program
2,494,747
2,494,747
2,494,747
October 1 – October 31, 2014 .................................................
November 1 – November 30, 2014 ..........................................
December 1 – December 31, 2014...........................................
Total ....................................................................................
(1) Consists of shares acquired pursuant to the Company's share-based compensation plans and not the Company's Board-approved stock repurchase
program. Under the terms of the Company's share-based compensation plans, the Company accepts previously owned shares of Common Stock
surrendered by option holders upon exercise to cover the exercise price of the stock options or to satisfy tax withholding obligations associated with the
vesting of restricted shares.
Unregistered Sales of Equity Securities
None.
32
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, 2014 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.
2014
As of or for the years ended December 31,
2013
2011
2012
Operating Results (Amounts in thousands, except per share data)
Net income (loss) ..................................................... $
69,306
Net income (loss) applicable to common shares ...........
68,470
Per Common Share Data
Basic earnings (loss) per common share ..................... $
Diluted earnings (loss) per common share ...................
Common dividends declared .....................................
Book value at year end ..............................................
Market price at year end ............................................
Performance Ratios
Return on average common equity .............................
Return on average tangible common equity (1) .............
Return on average assets ...........................................
Net interest margin – tax-equivalent ...........................
Non-performing loans to total loans (2) ........................
Non-performing assets to total loans plus OREO (2) .....
0.92
0.92
0.31
14.17
17.11
6.56%
10.29%
0.80%
3.69%
1.00%
1.49%
$
$
$
$
79,306
78,199
1.06
1.06
0.16
13.34
17.53
8.04%
11.29%
0.96%
3.68%
1.14%
2.13%
$
(21,054)
(20,748)
36,563
25,437
$
(0.28)
(0.28)
0.04
12.57
12.52
(2.14)%
(3.07)%
(0.26)%
3.86 %
1.80 %
2.68 %
0.35
0.35
0.04
12.93
10.13
2.69%
3.86%
0.45%
4.04%
3.86%
4.85%
Balance Sheet Highlights (Amounts in thousands)
Total assets .............................................................. $
Total loans ...............................................................
Deposits ..................................................................
Senior and subordinated debt .....................................
Long-term portion of FHLB advances ........................
Stockholders' equity .................................................
Financial Ratios
Allowance for credit losses to loans,
excluding acquired loans, including covered loans .....
Net loan charge-offs to average loans,
excluding acquired loans, including covered 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 ..................
Dividend payout ratio ...............................................
Average equity to average assets ratio.........................
N/M – Not meaningful.
2014
9,445,139
6,736,853
7,887,758
200,869
—
1,100,775
As of or for the years ended December 31,
2012
2013
2011
$
8,253,407
5,714,360
6,766,101
190,932
114,550
1,001,442
$
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
1.24%
1.52%
0.54%
11.23%
10.19%
9.03%
8.41%
33.70%
12.03%
0.55%
12.39%
10.91%
9.18%
9.09%
15.09%
11.74%
1.91 %
3.26 %
11.90 %
10.28 %
8.40 %
8.44 %
N/M
11.93 %
2.28%
2.65%
1.91%
13.68%
11.61%
9.28%
8.83%
11.43%
13.72%
2.70%
16.27%
14.20%
11.21%
8.06%
N/M
14.31%
(1)
See the "Performance Overview" section of "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Item 7 of
this Form 10-K for detail regarding the calculation of this performance metric.
(2) Due to the impact of business combination accounting and protection provided by the FDIC Agreements, acquired loans and covered loans and covered
OREO are excluded from these metrics to provide for improved comparability to prior periods and better perspective into asset quality trends. For a
discussion of acquired and covered loans, see Notes 1 and 6 of "Notes to the Consolidated Financial Statements" in Item 8 of this Form 10-K.
33
$
$
$
2010
(9,684)
(19,717)
(0.27)
(0.27)
0.04
12.40
11.52
(2.06)%
(3.15)%
(0.12)%
4.13 %
4.24 %
5.25 %
2010
8,138,302
5,472,289
6,511,476
137,744
112,500
1,112,045
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
First Midwest Bancorp, Inc. is a bank holding company headquartered in the Chicago suburb of Itasca, Illinois with operations
throughout the greater Chicago metropolitan area as well as northwest Indiana, central and western Illinois, and eastern Iowa. Our
principal subsidiary is First Midwest Bank (the "Bank"), which provides a broad range of banking and wealth management services
to commercial and industrial, commercial real estate, municipal, and consumer customers through 109 banking locations. We are
committed to meeting the financial needs of the people and businesses in the communities where we live and work by providing
customized banking solutions, quality products, and innovative services that fulfill those financial needs.
The following discussion and analysis is intended to address the significant factors affecting our Consolidated Statements of Income
for the three years ended December 31, 2014 and Consolidated Statements of Financial Condition as of December 31, 2014 and
2013. When we use the terms "First Midwest," the "Company," "we," "us," and "our," we mean First Midwest Bancorp, Inc. and its
consolidated subsidiaries. When we use the term "Bank," we are referring to our wholly owned banking subsidiary, First Midwest
Bank. Management's discussion and analysis should be read in conjunction with the consolidated financial statements,
accompanying notes thereto, and other financial information presented in Item 8 of this Form 10-K.
Our results of operations are affected by various factors, many of which are beyond our control, including interest rates, local and
national economic conditions, business spending, consumer confidence, legislative and regulatory changes, and changes in real
estate and securities markets. Our management evaluates performance using a variety of qualitative and quantitative metrics. The
primary quantitative metrics used by management include:
• Net Interest Income – Net interest income, our primary source of revenue, equals the difference between interest income
and fees earned on interest-earning assets and interest expense incurred on interest-bearing liabilities.
• Net Interest Margin – Net interest margin equals net interest income divided by total average interest-earning assets.
• Noninterest Income – Noninterest income is the income we earn from fee-based revenues, investment in bank-owned life
insurance ("BOLI") and other income, and non-operating revenues.
• Noninterest Expense – Noninterest expense is the expense we incur to operate the Company, which includes salaries and
employee benefits, net occupancy and equipment, professional services, and other costs.
• Asset Quality – Asset quality represents an estimation of the quality of our loan portfolio, including an assessment of the
credit risk related to existing and potential loss exposure, and can be evaluated using a number of quantitative measures,
such as non-performing loans to total loans.
• Regulatory Capital – Our regulatory capital is classified in one of the following two tiers: (i) Tier 1 capital consists of
common equity, retained earnings, 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 quarterly summary of operations for the years ended December 31, 2014 and 2013 is included in the section titled "Quarterly
Earnings" of this Item 7.
Unless otherwise stated, all earnings per common share data included in this section and throughout the remainder of this discussion
are presented on a fully diluted basis.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This Form 10-K may contain certain "forward-looking statements" within the meaning of the Private Securities Litigation Reform
Act of 1995. In some cases, forward-looking statements can be identified by the use of words such as "may," "might," "will,"
"would," "should," "could," "expect," "plan," "intend," "anticipate," "believe," "estimate," "predict," "probable," "potential,"
"possible," "target," or "continue" and words of similar import. Forward-looking statements are not historical facts but instead
express only management’s beliefs regarding future results or events, many of which, by their nature, are inherently uncertain and
outside of management’s control. It is possible that actual results and events may differ, possibly materially, from the anticipated
results or events indicated in these forward-looking statements. Forward-looking statements are not guarantees of future
performance, and we caution you not to place undue reliance on these statements. Forward-looking statements are made only as of
the date of this report, and we undertake no obligation to update any forward-looking statements contained in this report to reflect
new information or events or conditions after the date hereof.
Forward-looking statements may be deemed to include, among other things, statements relating to our future financial performance,
the performance of our loan or securities portfolio, the expected amount of future credit reserves or charge-offs, corporate strategies
or objectives, anticipated trends in our business, regulatory developments, acquisition transactions, including estimated synergies,
34
cost savings and financial benefits of pending or consummated transactions, and growth strategies, including possible future
acquisitions. These statements are subject to certain risks, uncertainties and assumptions. These risks, uncertainties and assumptions
include, among other things, the following:
• Management's ability to reduce and effectively manage interest rate risk and the impact of interest rates in general on the
volatility of our net interest income.
• Asset and liability matching risks and liquidity risks.
• Fluctuations in the value of our investment securities.
• The ability to attract and retain senior management experienced in banking and financial services.
• The sufficiency of the allowance for credit losses to absorb the amount of actual losses inherent in the existing loan
portfolio.
• The models and assumptions underlying the establishment of the allowance for credit losses and estimation of values of
collateral and various financial assets and liabilities may be inadequate.
• Credit risks and risks from concentrations (by geographic area and by industry) within our loan portfolio.
• The effects of competition from other commercial banks, thrifts, mortgage banking firms, consumer finance companies,
credit unions, securities brokerage firms, insurance companies, money market and other mutual funds, and other financial
institutions operating in our markets or elsewhere providing similar services.
• Changes in the economic environment, competition, or other factors that may influence the anticipated growth rate of loans
and deposits, the quality of the loan portfolio, and loan and deposit pricing.
• Changes in general economic or industry conditions, nationally or in the communities in which we conduct business.
• Volatility of rate sensitive deposits.
• Our ability to adapt successfully to technological changes to compete effectively in the marketplace.
• Operational risks, including data processing system failures, fraud, or breaches.
• Our ability to successfully pursue acquisition and expansion strategies and integrate any acquired companies.
• The impact of liabilities arising from legal or administrative proceedings, enforcement of bank regulations, and enactment
or application of laws or regulations.
• Governmental monetary and fiscal policies and legislative and regulatory changes (including those implementing
provisions of the Dodd Frank Act) that may result in the imposition of costs and constraints through higher FDIC insurance
premiums, significant fluctuations in market interest rates, increases in capital or liquidity requirements, operational
limitations, or compliance costs.
• Changes in federal and state tax laws or interpretations, including changes affecting tax rates, income not subject to tax
under existing law and interpretations, income sourcing, or consolidation/combination rules.
• Changes in accounting principles, policies, or guidelines affecting the businesses we conduct.
• Acts of war or terrorism, natural disasters, and other external events.
• Other economic, competitive, governmental, regulatory, and technological factors affecting our operations, products,
services, and prices.
For a discussion of these risks, uncertainties and assumptions, you should refer to the sections entitled "Risk Factors" and
"Management’s Discussion and Analysis of Financial Condition and Results of Operations" in this report, as well as our subsequent
filings made with the SEC. However, these risks and uncertainties are not exhaustive. Other sections of this report describe
additional factors that could adversely impact our business and financial performance.
NON-GAAP FINANCIAL INFORMATION
The Company's accounting and reporting policies conform to GAAP and general practice within the banking industry. As a
supplement to GAAP, the Company provides non-GAAP performance results, which the Company believes are useful because they
assist investors in assessing the Company's operating performance. This includes, but is not limited to, earnings per share, excluding
acquisition and integration related expenses, total non-interest expense, excluding acquisition and integration related expenses, tax-
equivalent net interest income (including its individual components), tax-equivalent net interest margin, the efficiency ratio, tier 1
common capital to risk-weighted assets, tangible common equity to tangible assets, tangible common equity, excluding accumulated
other comprehensive loss, to tangible assets, tangible common equity to risk-weighted assets, and return on average tangible
common equity. Although intended to enhance investors' understanding of the Company's business and performance, these non-
GAAP financial measures should not be considered an alternative to GAAP.
35
PERFORMANCE OVERVIEW
Acquisitions
On August 8, 2014, the Bank completed the acquisition of the Chicago area banking operations of Banco Popular North America,
("Popular"), doing business as Popular Community Bank. The acquisition included Popular's twelve full-service retail banking
offices and its small business and middle market commercial lending activities in the Chicago metropolitan area. On the date of
acquisition, the Bank acquired $549 million in loans and $732 million in deposits.
On September 26, 2014, the Bank completed the acquisition of National Machine Tool Financial Corporation ("National Machine
Tool"). In business for more than 28 years and a customer of the Bank for more than 15 years, National Machine Tool, now known
as First Midwest Equipment Finance Co., provides equipment leasing and financing alternatives to traditional commercial bank
financing.
On December 2, 2014, the Company completed the acquisition of the south suburban Chicago-based Great Lakes Financial
Resources, Inc. ("Great Lakes"), the holding company for Great Lakes Bank, National Association. As part of the transaction, the
Company acquired seven full-service retail banking offices, one drive-up location, $223 million in loans, and $464 million in
deposits on the date of acquisition.
For additional detail regarding these acquisitions, see Note 3 of "Notes to the Consolidated Financial Statements" in Item 8 of this
Form 10-K. The conversion and integration of these transactions were substantially complete as of December 31, 2014.
Table 1
Selected Financial Data
(Dollar amounts in thousands, except per share data)
Operating Results
Interest income ...................................................................................................... $
Interest expense .....................................................................................................
Net interest income ...........................................................................................
Provision for loan and covered loan losses ..............................................................
Noninterest income ................................................................................................
Noninterest expense ...............................................................................................
Income (loss) before income tax expense (benefit).............................................
Income tax expense (benefit) ..................................................................................
Net income (loss) .............................................................................................. $
Weighted-average diluted common shares outstanding............................................
Diluted earnings (loss) per common share .............................................................. $
Performance Ratios
Return on average common equity .........................................................................
Return on average tangible common equity (1) .........................................................
Return on average assets ........................................................................................
Net interest margin - tax equivalent (2) ....................................................................
Efficiency ratio (3) ...................................................................................................
Years ended December 31,
2014
2013
2012
299,864 $
23,012
276,852
19,168
126,618
283,826
100,476
31,170
69,306 $
74,496
0.92 $
6.56%
10.29%
0.80%
3.69%
64.57%
287,247
27,115
260,132
16,257
140,883
256,737
128,021
48,715
79,306
73,994
1.06
$
$
$
300,569
34,901
265,668
158,052
109,948
267,500
(49,936)
(28,882)
(21,054)
73,666
(0.28)
8.04 %
11.29 %
0.96 %
3.68 %
64.19 %
(2.14)%
(3.07)%
(0.26)%
3.86 %
67.14 %
(1)
(2)
(3)
Tangible common equity ("TCE") represents common stockholders’ equity less goodwill and identifiable intangible assets. Acquisition and integration
related expenses of $13.9 million for the year ended December 31, 2014 are excluded from the return on average tangible common equity ratio. See the
"Management of Capital" section of this Item 7 for the detailed calculation of TCE.
See the section titled "Earnings Performance" of this Item 7 for the calculation of this metric.
The efficiency ratio expresses noninterest expense, excluding other real estate owned ("OREO") expense, as a percentage of tax-equivalent net interest
income plus total fee-based revenues, other income, net trading gains, and tax-equivalent adjusted BOLI income. In addition, acquisition and integration
related expenses of $13.9 million are excluded from the efficiency ratio for the year ended December 31, 2014.
36
As of December 31,
2013
2014
$ Change
% Change
Balance Sheet Highlights
Total assets ........................................................................... $
Total loans, excluding covered loans .....................................
Total loans, including covered loans ......................................
Total deposits .......................................................................
Core deposits .......................................................................
Loans-to-deposits ratio .........................................................
Core deposits to total deposits ...............................................
$
$
9,445,139
6,657,418
6,736,853
7,887,758
6,616,200
8,253,407
5,580,005
5,714,360
6,766,101
5,558,318
85.4%
83.9%
84.5%
82.1%
1,191,732
1,077,413
1,022,493
1,121,657
1,057,882
14.4
19.3
17.9
16.6
19.0
As of December 31,
2013
2014
$ Change
% Change
Asset Quality Highlights (1)
Non-accrual loans ................................................................. $
90 days or more past due loans (still accruing interest)...........
Total non-performing loans ..............................................
Accruing trouble debt restructuring ("TDRs") ........................
OREO ..................................................................................
Total non-performing assets......................................... $
58,853
771
59,624
3,704
25,779
89,107
30-89 days past due loans (still accruing interest) .................. $
13,473
$
$
$
59,798
3,708
63,506
23,770
32,473
119,749
20,742
$
$
$
(945)
(2,937)
(3,882)
(20,066)
(6,694)
(30,642)
(7,269)
(1.6)
(79.2)
(6.1)
(84.4)
(20.6)
(25.6)
(35.0)
Allowance for Credit Losses
Allowance for credit losses ...................................................
Allowance for credit losses to loans, excluding acquired
loans, including covered loans........................................
Allowance for credit losses to non-accrual loans, excluding
acquired and covered loans ............................................
74,510
87,121
(12,611)
(14.5)
1.24%
1.52%
114.33%
124.69%
(1) Due to the impact of business combination accounting and protection provided by the FDIC Agreements, acquired loans and covered loans and covered
OREO are excluded from these metrics to provide for improved comparability to prior periods and better perspective into asset quality trends. For a
discussion of acquired and covered loans, see Notes 1 and 6 of "Notes to the Consolidated Financial Statements" in Item 8 of this Form 10-K. Asset
quality, including acquired loans, covered loans, and covered OREO, is included in the "Loan Portfolio and Credit Quality" section below.
Performance Overview for 2014 Compared with 2013
Net income for 2014 was $69.3 million, or $0.92 per share, compared to net income of $79.3 million, or $1.06 per share, for 2013.
The reduction in earnings per share was driven primarily by acquisition and integration related expenses of $13.9 million related to
the Popular, National Machine Tool, and Great Lakes acquisitions. Excluding these acquisition and integration related expenses,
earnings per share was $1.03 for the year ended December 31, 2014. In addition, net income for 2013 was impacted by certain
significant transactions including a $34.0 million gain on the sale of an equity investment and a $7.8 million gain on the termination
of two FHLB forward commitments, offset in part by a $13.3 million non-deductible write-down of the cash surrender values
("CSV") of certain BOLI policies. Excluding these transactions, 2013 earnings per share was $0.90.
Tax-equivalent net interest margin of 3.69% for 2014 was in line with 2013 despite continued pressure on loan margins and
investment portfolio yields as we improved the mix of earning assets and liabilities through organic loan growth and acquisitions,
employed certain loan hedging strategies, and prepaid $114.6 million of FHLB advances.
Total noninterest income was $126.6 million for 2014 compared to $140.9 million for 2013. Total fee-based revenues were $111.1
million, increasing 4.5% compared to 2013. Total noninterest income was elevated in 2013 driven primarily by certain significant
transactions including a $34.0 million gain on the sale of an equity investment and a $7.8 million gain on the termination of two
FHLB forward commitments, offset in part by a $13.3 million non-deductible write-down of the CSV of certain BOLI policies.
37
Total noninterest expense increased 10.6% compared to 2013, due primarily to $13.9 million in acquisition and integration related
expenses and approximately $5.5 million in recurring costs associated with operating the newly acquired locations. The conversion
and integration of these transactions was substantially complete as of December 31, 2014, with certain remaining efficiencies to be
implemented in the first half of 2015.
A detailed discussion of net interest income and noninterest income and expense is presented in the following section titled
"Earnings Performance" of this Item 7.
As of December 31, 2014 our securities portfolio totaled $1.2 billion, rising $56.5 million, or 4.9%, from December 31, 2013. The
addition of $219.3 million of securities acquired in the Great Lakes transaction was substantially offset by maturities, calls, and
prepayments during 2014. For a detailed discussion of our securities portfolio, see the section titled "Investment Portfolio
Management" of this Item 7.
Total loans, excluding covered loans, of $6.7 billion as of December 31, 2014 reflects growth of $1.1 billion, or 19.3%, from
December 31, 2013. Excluding loans acquired in the Popular and Great Lakes transactions of $718.3 million, total loans, excluding
covered loans, grew $359.2 million, or 6.4%, from December 31, 2013. This growth was driven by solid performance from our
legacy sales platform and the continued impact of greater resource investments and expansion into certain sector-based lending
areas, such as agri-business, asset-based lending, and healthcare. For a detailed discussion of our loan portfolio, see the section titled
"Loan Portfolio and Credit Quality" of this Item 7.
As of December 31, 2014, non-performing assets, excluding acquired and covered loans and covered OREO, decreased by $30.6
million, or 25.6%, from December 31, 2013 and represented 1.49% of total loans plus OREO compared to 2.13% as of
December 31, 2013. The continued improvement in non-performing assets and the related credit metrics reflects management's
ongoing commitment to credit remediation. See the section titled "Loan Portfolio and Credit Quality" of this Item 7 for additional
discussion of non-performing assets.
Total average funding sources of $7.5 billion for 2014 increased $330.2 million from 2013, driven primarily by deposits assumed in
the Popular and Great Lakes acquisitions which further strengthened our core deposit base. Growth in average demand deposits of
$248.5 million, or 13.2%, from December 31, 2013 led the rise in average core deposits and more than offset the reduction in
higher-costing time deposits, borrowed funds, and senior and subordinated debt. For a detailed discussion of our funding sources see
the section titled "Funding and Liquidity Management" of this Item 7.
Performance Overview for 2013 Compared with 2012
Net income for 2013 was $79.3 million, or $1.06 per share, compared to a net loss of $21.1 million, or $0.28 per share, for 2012.
Tax-equivalent net interest margin declined 18 basis points to 3.68% for 2013 from 3.86% for 2012. The reduction in margin
reflected a 30 basis point decrease in the average yield on interest-earning assets due primarily to a lower yield earned on new and
renewing loans as a result of greater customer preference for floating rate loans, as well as the reinvestment of cash flows from the
investment portfolio into lower yielding securities. These lower yields were partially offset by a decline in the rates paid for interest-
bearing liabilities, including a 2 basis point decline on interest-bearing core deposits, a 28 basis point decline on time deposits, and a
3 basis point decline on senior and subordinated debt.
The provision for loan and covered loan losses was $16.3 million for 2013 compared to $158.1 million for 2012. The higher
provision for loan and covered loan losses for the year ended December 31, 2012 resulted from the additional provision of $62.3
million recorded as a result of selling $172.5 million of non-performing and performing potential problem loans and recording
charge-offs of $80.3 million.
Total noninterest income for 2013 rose 28.1% compared to 2012, driven primarily by certain balance sheet repositioning activities,
which mainly impacted the securities and BOLI portfolios. These activities were completed to take advantage of changing market
conditions, strengthen capital, and better position the Company to benefit from a rising interest rate environment. These activities
included:
• The sale of our $4.2 million investment in Textura Corporation ("Textura") for $38.2 million, resulting in a gain of $34.0
million. The Company has no other similar investments. We hold a warrant to purchase 20,000 shares of Textura common
stock.
• The termination of two forward commitments with the FHLB to borrow a total of $250 million for a 5-year period
beginning in 2014 at a weighted average interest rate of approximately 2.0% resulting in a gain of $7.8 million. This
termination was executed to take advantage of a temporary rise in interest rates and an expectation that future liquidity
needs could be better managed through maturities of securities, continued growth in our deposit base, and other similar low
rate borrowings.
38
• The voluntary modification of crediting rate terms and the underlying CSV of approximately $100 million of lower
yielding BOLI policies, resulting in a $13.3 million write-down. This write-down represents the difference between the
book value and the fair value of the underlying investments and was previously being amortized in other noninterest
income, offsetting BOLI income and any insurance proceeds received. This action gave the Company the flexibility to
reinvest these assets in longer duration securities at higher yields to enhance BOLI income.
As of December 31, 2013, our securities portfolio totaled $1.2 billion, rising 3.4% from December 31, 2012. This growth resulted
primarily from the redeployment of cash and cash equivalents into purchases of collateralized mortgage obligations ("CMOs") and
other mortgage-backed securities ("MBSs"). These increases were partially offset by maturities and calls of municipal securities.
Total loans, excluding covered loans, of $5.6 billion as of December 31, 2013 reflected growth of $390.3 million, or 7.5%, from
December 31, 2012. The loan portfolio benefited from well-balanced corporate loan growth reflecting credits of varying size and
diverse geographic locations within our markets.
As of December 31, 2013, non-performing assets, excluding covered loans and covered OREO, declined by 14.5% compared to
December 31, 2012. Improvement in non-performing assets and related credit metrics resulted primarily from management's
continued focus on credit remediation.
Average funding sources for 2013 increased $156.7 million compared to the year ended December 31, 2012, primarily from growth
in core deposits, which more than offset a reduction in higher-costing time deposits. Average senior and subordinated debt decreased
$18.4 million from 2012 driven by the full-year impact of the repurchase and retirement of $4.3 million of junior subordinated
debentures and $12.0 million of subordinated notes during the fourth quarter of 2012.
EARNINGS PERFORMANCE
Net Interest Income
Net interest income is our primary source of revenue and is impacted by interest rates and the volume and mix of interest-earning
assets and interest-bearing liabilities. The accounting policies for the recognition of interest income on loans, securities, and other
interest-earning assets are presented in Note 1 of "Notes to the Consolidated Financial Statements" in Item 8 of this Form 10-K.
Our accounting and reporting policies conform to GAAP and general practice within the banking industry. For purposes of this
discussion, both net interest income and net interest margin have been adjusted to a fully tax-equivalent basis to more appropriately
compare the returns on certain tax-exempt loans and securities to those on taxable interest-earning assets. Although we believe that
these non-GAAP financial measures enhance investors' understanding of our business and performance, they should not be
considered an alternative to GAAP. The effect of this adjustment is shown at the bottom of Table 2.
Table 2 summarizes our average interest-earning assets and interest-bearing liabilities for the years ended December 31, 2014, 2013,
and 2012, the related interest income and interest expense for each earning asset category and funding source, and the average
interest rates earned and paid. Table 3 details differences in interest income and expense from prior years and the extent to which
any changes are attributable to volume and rate fluctuations.
39
Table 2
Net Interest Income and Margin Analysis
(Dollar amounts in thousands)
2014
2013
2012
Years Ended December 31,
Average
Balance
Interest
Yield/
Rate
(%)
Average
Balance
Interest
Yield/
Rate
(%)
Average
Balance
Interest
Yield/
Rate
(%)
543,056 $ 1,591
0.29
$
633,050 $
1,819
0.29 $
470,069 $
1,143
0.24
17,964
649,161
461,571
1,128,696
174
14,516
25,705
40,395
35,622
1,366
6,121,326 268,249
7,828,700
311,601
120,358
Assets:
Other interest-earning assets ........ $
Securities:
Trading - taxable .....................
Investment securities - taxable ...
Investment securities -
nontaxable (1) ........................
Total securities ...................
FHLB and Federal Reserve
Bank stock ..............................
Loans (1)(2)(3) ..............................
Total interest-earning
assets (1)(2) ........................
Cash and due from banks ............
Allowance for loan and
covered loan losses ...................
Other assets ..............................
(79,482)
808,136
Total assets ................... $ 8,677,712
3,857,845
1,211,882
Liabilities and Stockholders' Equity:
Savings deposits ........................ $ 1,222,292
1,243,186
NOW accounts ..........................
1,392,367
Money market deposits ...............
Total interest-bearing
core deposits ....................
Time deposits ............................
Total interest-bearing
deposits ...........................
Borrowed funds .........................
Senior and subordinated debt .......
Total interest-bearing
liabilities .........................
Demand deposits .......................
Other liabilities .........................
Stockholders' equity - common ....
Total liabilities and
stockholders' equity ...... $ 8,677,712
5,411,062
2,137,778
85,306
1,043,566
149,559
191,776
5,069,727
904
673
1,784
3,361
7,016
10,377
573
12,062
0.97
2.24
5.57
3.58
3.83
4.38
3.98
0.07
0.05
0.13
0.09
0.58
0.20
0.38
6.29
15,526
161
713,237
12,249
510,412
28,636
1,239,175
41,046
39,593
1,346
5,498,788
255,333
1.04
1.72
5.61
3.31
3.40
4.64
15,415
679,753
512,136
1,207,304
181
12,670
31,231
44,082
48,400
1,374
5,506,394 267,219
7,410,606
299,544
4.04
7,232,167
313,818
121,564
(95,698)
841,967
$ 8,278,439
$ 1,126,561
1,170,928
1,306,625
3,604,114
1,306,888
4,911,002
205,461
212,896
844
676
1,735
3,255
8,646
11,901
1,607
13,607
120,757
(117,121)
873,923
$ 8,109,726
0.07 $ 1,038,379
1,090,446
0.06
1,216,173
0.13
1,055
747
1,934
3,344,998
1,529,006
3,736
14,316
4,874,004
193,643
231,273
18,052
2,009
14,840
0.09
0.66
0.24
0.78
6.39
0.51
1.17
1.86
6.10
3.65
2.84
4.85
4.34
0.10
0.07
0.16
0.11
0.94
0.37
1.04
6.42
23,012
0.43
5,329,359
27,115
1,889,247
87,550
972,283
34,901
0.66
5,298,920
1,762,968
80,075
967,763
$ 8,278,439
$ 8,109,726
Net interest income/margin (1) ......
Net interest income (GAAP) ........
Tax-equivalent adjustment ...........
Tax-equivalent net interest
income .............................
$ 288,589
$ 276,852
11,737
$ 288,589
3.69
$ 272,429
3.68
$ 260,132
12,297
$ 272,429
3.86
$ 278,917
$ 265,668
13,249
$ 278,917
Interest income and yields are presented on a tax-equivalent basis, assuming a federal income tax rate of 35%.
(1)
(2) Non-accrual loans, including acquired and covered non-accrual loans, which totaled $66.2 million as of December 31, 2014, $80.7 million as of
December 31, 2013, and $98.7 million as of December 31, 2012, are included in loans for purposes of this analysis. Additional detail regarding non-
accrual loans is presented in the following section titled "Non-Performing Asset and Performing Potential Problem Loans" of this Item 7.
(3)
This item includes covered interest-earning assets consisting of loans acquired through the Company's FDIC-assisted transactions with loss share
agreements and the related FDIC indemnification asset. For additional discussion, please see Note 6 of "Notes to the Consolidated Financial Statements"
in Item 8 of this Form 10-K.
40
2014 Compared to 2013
Total average interest-earning assets were $7.8 billion for 2014, an increase of $418.1 million, or 5.6%, from 2013, driven by solid
organic loan growth and loans acquired in the Popular and Great Lakes acquisitions during the second half of 2014. Overall, organic
loan growth was funded by cash flows from maturities of investment securities, a reduction in other interest-earning assets, and
higher core deposits.
Compared to 2013, total average interest-bearing liabilities rose $81.7 million to $5.4 billion for 2014. Higher levels of interest-
bearing core deposits, which were partially driven by acquisition activity, more than offset the decline in time deposits. The decline
in borrowed funds from 2013 resulted from the prepayment of $114.6 million of FHLB advances with a weighted-average rate of
1.08% during the second quarter of 2014, which is net of the yield earned on the cash used for the prepayment.
Tax-equivalent net interest income was $288.6 million for 2014 compared to $272.4 million for 2013, an increase of 5.9%. Interest
income rose $12.1 million from 2013 due primarily to strong loan growth, which more than offset the decline in loan yields, lower
levels of income on covered interest-earning assets, and a decrease in the interest income on investment securities. The decline in
interest expense of $4.1 million was driven by growth in lower-costing interest-bearing core deposits and the continued reduction of
higher-costing time deposits, borrowed funds, and senior and subordinated debt. Net accretion resulting from the fair value
adjustments on acquired assets and assumed liabilities contributed $2.3 million, which offset lower levels of interest earned on
covered loans.
Tax-equivalent net interest margin was in line with 2013 despite continued pressure on loan margins and investment portfolio yields
as we improved the mix of earning assets and liabilities through organic loan growth and acquisitions, employed certain loan
hedging strategies, and prepaid FHLB advances.
2013 Compared to 2012
Average interest-earning assets were $7.4 billion for 2013, an increase of $178.4 million, or 2.5%, from 2012, driven primarily by a
rise in other interest-earning assets. Proceeds from bulk loan sales of $172.5 million in original carrying value of non-performing
and performing potential problem loans during 2012 drove a significant portion of the increase in average other interest earning
assets. Growth in average loans, excluding covered loans, of $102.8 million was offset by decreases of $93.8 million in average
covered interest-earning assets.
Average interest-bearing liabilities of $5.3 billion for 2013 were comparable to 2012. Higher levels of interest-bearing core deposits
more than offset the decline in time deposits.
Tax-equivalent net interest income was $272.4 million for 2013 compared to $278.9 million for 2012. The $14.3 million reduction
in interest income was driven by a decrease in the yield on loans and investment securities. Interest expense declined $7.8 million
due to the reduction of higher-costing time deposits and senior and subordinated debt.
Tax-equivalent net interest margin declined 18 basis points to 3.68% for 2013 from 3.86% for 2012. The reduction in margin
reflected a 30 basis point decrease in the average yield on interest-earning assets driven by a lower yield earned on new and
renewing loans as well as the reinvestment of cash flows from the investment portfolio into lower yielding securities due to the low
interest rate environment. In addition, a greater customer preference for floating rate loans during the third and fourth quarters of
2013 contributed to the decrease. The lower yields on interest-earning assets were partially offset by a decline in the rates paid for
interest-bearing liabilities, including a 2 basis point decline on interest-bearing core deposits, a 28 basis point decline on time
deposits, and a 3 basis point decline on senior and subordinated debt.
41
Table 3
Changes in Net Interest Income Applicable to Volumes and Interest Rates (1)
(Dollar amounts in thousands)
2014 compared to 2013
Rate
Total
Volume
2013 compared to 2012
Rate
Total
Volume
Other interest-earning assets ..................................... $
Securities:
Trading – taxable ................................................
Investment securities – taxable .............................
Investment securities – nontaxable (2) ....................
Total securities ..............................................
FHLB and Federal Reserve Bank stock .....................
Loans (2)(3) ..............................................................
Total interest income (2) ..................................
Savings deposits ......................................................
NOW accounts ........................................................
Money market deposits ............................................
Total interest-bearing core deposits ..................
Time deposits .........................................................
Total interest-bearing deposits .........................
Borrowed funds ......................................................
Senior and subordinated debt ....................................
Total interest expense .....................................
Net interest income (2) ................................ $
(265) $
37 $
(228)
$
443 $
233 $
676
23
(959)
(2,721)
(3,657)
(73)
22,638
18,643
71
39
105
215
(600)
(385)
(359)
(1,331)
(2,075)
20,718 $
(10)
3,226
(210)
3,006
93
(9,722)
(6,586)
(11)
(42)
(56)
(109)
(1,030)
(1,139)
(675)
(214)
(2,028)
(4,558) $
13
2,267
(2,931)
(651)
20
12,916
12,057
60
(3)
49
106
(1,630)
(1,524)
(1,034)
(1,545)
(4,103)
16,160
1
706
(105)
602
(250)
(3,829)
(3,034)
102
64
164
330
(1,877)
(1,547)
132
(1,175)
(2,590)
$
(444) $
(21)
(1,127)
(2,490)
(3,638)
222
(8,057)
(11,240)
(313)
(135)
(363)
(811)
(3,793)
(4,604)
(534)
(58)
(5,196)
(6,044) $
(20)
(421)
(2,595)
(3,036)
(28)
(11,886)
(14,274)
(211)
(71)
(199)
(481)
(5,670)
(6,151)
(402)
(1,233)
(7,786)
(6,488)
(1)
(2)
(3)
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.
Interest income is presented on a tax-equivalent basis, assuming a federal income tax rate of 35%.
This item includes covered interest-earning assets consisting of loans acquired through the Company's FDIC-assisted transactions with loss share
agreements and the related FDIC indemnification asset. For additional discussion, please see Note 6 of "Notes to the Consolidated Financial Statements"
in Item 8 of this Form 10-K.
42
Noninterest Income
A summary of noninterest income for the three years ended December 31, 2014 is presented in the following table.
Table 4
Noninterest Income Analysis
(Dollar amounts in thousands)
Years Ended December 31,
2013
2012
2014
% Change
2014-2013
2013-2012
Service charges on deposit accounts ................. $
Wealth management fees ..................................
Card-based fees (1) ............................................
Merchant servicing fees ...................................
Mortgage banking income ................................
Other service charges, commissions, and fees ...
Total fee-based revenues .............................
Net securities gains (losses) (2) ..........................
Gains on sales of properties (3) ..........................
BOLI income (loss) .........................................
Loss on early extinguishment of debt (3) ............
Net trading gains (3)(4) .......................................
Other income (3)(5) ............................................
Gain on termination of FHLB forward
commitments .................................................
Gain on bulk loan sales ....................................
Gains on FDIC-assisted transactions (3)(6) ..........
Total noninterest income ......................... $
N/M – Not meaningful.
36,910 $
26,474
24,340
11,260
4,011
8,086
111,081
8,097
3,954
2,873
(2,059)
677
1,995
—
—
—
126,618 $
36,526 $
24,185
21,649
10,953
5,306
7,663
106,282
34,164
—
(11,844)
(1,034)
3,189
2,297
7,829
—
—
140,883 $
36,699
21,791
20,852
10,806
2,689
4,486
97,323
(921)
—
1,307
(558)
1,627
2,728
—
5,153
3,289
109,948
1.1
9.5
12.4
2.8
(24.4)
5.5
4.5
(76.3)
100.0
N/M
99.1
(78.8)
(13.1)
(100.0)
—
—
(10.1)
(0.5)
11.0
3.8
1.4
97.3
70.8
9.2
N/M
—
N/M
85.3
96.0
(15.8)
100.0
(100.0)
(100.0)
28.1
(1) Card-based fees consist of debit and credit card interchange fees for processing transactions as well as various fees on both customer and non-customer
automated teller machine ("ATM") and point-of-sale transactions processed through the ATM and point-of-sale networks.
For a discussion of these items, see the section titled "Investment Portfolio Management" of this Item 7.
These items are included in other income in the Consolidated Statements of Income.
(2)
(3)
(4) Net trading gains result from changes in the fair value of diversified investment securities held in a grantor trust under deferred compensation
arrangements and are substantially offset by nonqualified plan expense for each period presented.
(5) Other income consists of various items, including safe deposit box rentals, miscellaneous recoveries, and gains on the sales of various assets.
(6)
For a discussion of the 2012 gain on an FDIC-assisted transaction, see Note 3 of "Notes to the Consolidated Financial Statements" in Item 8 of this
Form 10-K.
2014 Compared to 2013
Total noninterest income was $126.6 million for the year ended December 31, 2014, decreasing 10.1% from 2013. Total fee-based
revenues were $111.1 million, increasing 4.5% compared to 2013. Total noninterest income during 2013 was impacted by certain
significant transactions, including a $34.0 million gain on the sale of an equity investment and a $7.8 million gain on the termination
of two FHLB forward commitments, offset in part by a $13.3 million write-down of the CSV of certain BOLI policies.
Service charges on deposit accounts were in line with 2013, as charges for services to new customers acquired in the Popular and
Great Lakes transactions offset the continued decline in revenue from non-sufficient funds transactions.
Growth in wealth management fees of 9.5% reflect new customer relationships and an overall increase in assets under management
to $7.2 billion, a rise of $544.1 million, or 8.1%, from 2013.
The rise in card-based fees mainly reflects higher transaction volumes along with incentives from a renewed vendor contract.
During 2014, we sold $144.9 million of 1-4 family mortgage loans in the secondary market compared to sales of $147.4 million
during 2013. Lower market pricing contributed to the decline in mortgage banking income compared to 2013.
43
Gains realized on the sale of certain equipment leasing contracts and check printing fees drove the increase in other service charges,
commissions, and fees, which were partially offset by a decrease in sales of capital market products to commercial clients. The sales
of leasing contracts were generated from a new commercial product offering introduced with the acquisition of National Machine
Tool in the third quarter of 2014.
Net securities gains were driven by the sale of municipal securities, other investments, and longer-duration corporate bonds,
resulting in pre-tax gains of $4.6 million and the sale of a non-accrual trust-preferred collateralized debt obligation ("CDO") at a
pre-tax gain of $3.5 million.
During 2014, we completed the disposition of two branch properties at pre-tax gains of $4.0 million as part of multi-year efforts to
optimize our retail distribution.
The loss on early extinguishment of debt resulted from the prepayment of $114.6 million in FHLB advances.
2013 Compared to 2012
Total noninterest income of $140.9 million for 2013 rose 28.1% compared to 2012 driven primarily by the $34.0 million gain on the
sale of our investment in Textura, and a $7.8 million gain on the termination of two FHLB forward commitments, offset in part by a
$13.3 million write-down of the CSV related to the modification of approximately $100 million of certain lower-yielding BOLI
policies.
Fee-based revenues increased 9.2% from 2012, resulting from growth in core business activities, specifically wealth management
fees, mortgage banking income, and sales of capital market products to commercial clients.
The 11.0% increase in wealth management fees compared to 2012 was driven by new customer relationships and improved market
performance. Average trust assets under management increased 17.0% during 2013.
The significant rise in mortgage banking income compared to 2012 resulted from recognizing a full year of mortgage banking
activity. During 2013, $147.4 million of mortgage loans were sold compared to $50.3 million in 2012.
Sales of capital market products to commercial clients drove the rise in other service charges, commissions, and fees.
During the fourth quarter of 2013, we repurchased and retired $24.0 million of 6.95% junior subordinated debentures, resulting in a
pre-tax loss of $1.0 million.
44
Noninterest Expense
The following table presents the components of noninterest expense for the three years ended December 31, 2014.
Table 5
Noninterest Expense Analysis
(Dollar amounts in thousands)
Years Ended December 31,
2013
2012
2014
% Change
2014-2013
2013-2012
Salaries and employee benefits:
Salaries and wages ............................................. $
Nonqualified plan expense (1) ..............................
Retirement and other employee benefits .............
Total salaries and employee benefits ..............
Net occupancy and equipment expense ....................
Professional services ...............................................
Technology and related costs ...................................
Merchant card expense ............................................
Advertising and promotions ....................................
Net OREO expense .................................................
FDIC premiums ......................................................
Cardholder expenses (2) ...........................................
Other expenses (2) ....................................................
Acquisition and integration related expenses ...........
Adjusted amortization of FDIC
indemnification asset ............................................
Total noninterest expense .......................... $
115,763 $
815
27,245
143,823
35,181
23,436
12,875
9,195
8,159
7,075
5,824
4,251
20,135
13,872
108,932 $
3,699
26,119
138,750
31,832
21,922
11,335
8,780
7,754
8,547
6,438
4,021
15,858
—
103,245
1,986
25,524
130,755
32,699
29,614
11,846
8,584
5,073
10,521
6,926
3,939
20,838
—
6.3
(78.0)
4.3
3.7
10.5
6.9
13.6
4.7
5.2
(17.2)
(9.5)
5.7
27.0
100.0
—
283,826 $
1,500
256,737 $
6,705
267,500
(100.0)
10.6
5.5
86.3
2.3
6.1
(2.7)
(26.0)
(4.3)
2.3
52.8
(18.8)
(7.0)
2.1
(23.9)
—
(77.6)
(4.0)
(1) Nonqualified plan expense results from changes in the Company's obligation to participants under deferred compensation agreements and is
substantially offset by earnings on related assets, which are reported as net trading gains and included in noninterest income.
These line items are included in other expense in the Consolidated Statements of Income.
(2)
2014 Compared to 2013
Excluding acquisition and integration related expenses of $13.9 million and approximately $5.5 million in recurring operating costs
of the newly acquired Popular, National Machine Tool, and Great Lakes locations, total noninterest expense for 2014 was $264.5
million, increasing $7.7 million, or 3.0%, from 2013. This increase was primarily due to higher salaries and employee benefits and
professional services expenses associated with growth and organizational needs.
Recurring operating costs associated with the Popular, National Machine Tool, and Great Lakes locations were primarily
concentrated in salaries and employee benefits, net occupancy and equipment expense, professional services, and other expenses.
The conversion and integration of these transactions was substantially complete as of December 31, 2014, with certain remaining
efficiencies to be implemented in the first half of 2015.
The increase in salaries and wages from 2013 reflects a rise in certain incentive compensation accruals and commissions due to
growth and organizational needs as well as annual salary increases.
Retirement and other employee benefits increased from 2013 due to a rise in profit sharing expenses and higher premiums paid for
employee insurance. A reduction in pension expense as a result of changes to the Company’s defined benefit pension plan in 2013
partially offset these increases during 2014.
Professional services expense rose in 2014 due to general costs, such as personnel recruitment and consulting fees, which were
driven by growth and organizational needs. These increases were partially offset by lower servicing costs for our covered loan
portfolio.
45
The 17.2% decline in net OREO expense resulted from net gains on sales of OREO properties in 2014 compared to net losses on
sales in 2013, which was partially offset by a $1.6 million valuation adjustment on an OREO property during the fourth quarter of
2014. In addition, lower levels of OREO operating expenses, consistent with the reduction in OREO balances, contributed to the
decrease.
Other expenses were lower in 2013 due to a $1.8 million reduction in the reserve for unfunded commitments.
2013 Compared to 2012
Total noninterest expense for 2013 was $256.7 million, decreasing 4.0% from 2012 driven by a decline in net OREO expense,
professional services expenses, and lower levels of adjusted amortization of the FDIC indemnification asset, which were partially
offset by an increase in total compensation expense and advertising and promotions expense.
Compared to 2012, the increase in total compensation expense was due primarily to higher incentive compensation and
commissions and a decrease in deferred salaries related to loan originations.
Professional services expense decreased 26.0% from 2012. This decline was due primarily to a $6.4 million reduction in loan
remediation costs including legal expenses, appraisal costs, and real estate taxes, as a result of management's accelerated credit
remediation actions that occurred in 2012, including the bulk loan sales. In addition, a decrease in covered loan servicing costs
contributed to the variance. Lower levels of personnel recruitment expenses, attorney fees related to an FDIC-assisted acquisition,
and various legal proceedings in 2012 also drove the decline in professional service expense from 2012.
Net OREO expense for 2013 declined 18.8% from 2012 primarily from $1.8 million in lower valuation adjustments and a $1.0
million decrease in expenses, partially offset by an increase in losses on sales of OREO.
Lower FDIC premiums reflect a reduced assessment rate due primarily to improved asset quality resulting from the bulk loan sales
completed during the fourth quarter of 2012.
The increase in advertising and promotions expense from 2012 was driven by the launch of our "Bank with Momentum" branding
campaign during the second quarter of 2013.
Adjusted amortization of the FDIC indemnification asset results from changes in the timing and amount of expected future cash
flows expected to be received from the FDIC under the FDIC Agreements based on management's periodic estimates of expected
future cash flows from covered loans.
The decline in other expenses from 2012 reflects a $1.8 million reduction in the reserve for unfunded commitments. In addition,
other expenses were elevated in 2012 from valuation adjustments of $2.6 million on a property held-for-sale and a former banking
office transferred to OREO.
Income Taxes
Our provision for income taxes includes both federal and state income tax expense (benefit). An analysis of the provision for income
taxes for the three years ended December 31, 2014 is detailed in the following table.
Table 6
Income Tax Expense (Benefit) Analysis
(Dollar amounts in thousands)
Income (loss) before income tax expense (benefit)................................................ $
Income tax expense (benefit):
Years Ended December 31,
2013
$ 128,021
2014
100,476
$
2012
(49,936)
Federal income tax expense (benefit) ................................................................ $
State income tax expense (benefit) ....................................................................
Total income tax expense (benefit) ............................................................... $
24,244
6,926
31,170
$
$
36,316
12,399
48,715
$
$
(23,728)
(5,154)
(28,882)
Effective income tax rate ........................................................................................
31.0%
38.1%
57.8%
Federal income tax expense (benefit) and the related effective income tax rate are influenced by the amount of tax-exempt income
derived from investment securities and BOLI in relation to pre-tax income (loss) and state income taxes. State income tax expense
(benefit) and the related effective income tax rate are driven by the amount of state tax-exempt income in relation to pre-tax income
(loss) and state tax rules related to consolidated/combined reporting and sourcing of income and expense.
46
Income tax expense totaled $31.2 million for the year ended December 31, 2014 compared to $48.7 million for the year ended
December 31, 2013 and an income tax benefit of $28.9 million for the year ended December 31, 2012. The decrease in income tax
expense from 2013 to 2014 was driven primarily by a decline in income subject to tax at statutory rates. The increase in income tax
expense from 2012 to 2013 resulted from a rise in income subject to tax at statutory rates and a non-deductible BOLI modification
loss recorded in the third quarter of 2013.
Our accounting policies for the recognition of income taxes in the Consolidated Statements of Financial Condition and Income are
included in Notes 1 and 15 of "Notes to the Consolidated Financial Statements" in Item 8 of this Form 10-K.
FINANCIAL CONDITION
INVESTMENT PORTFOLIO MANAGEMENT
Securities that we have the positive intent and ability to hold until maturity are classified as securities held-to-maturity and are
accounted for using historical cost, adjusted for amortization of premiums and accretion of discounts. Trading securities are carried
at fair value with changes in fair value included in other noninterest income. Our trading securities consist of securities held in a
grantor trust for our nonqualified deferred compensation plan and are not considered part of the traditional investment portfolio. All
other securities are classified as securities available-for-sale and are carried at fair value with unrealized gains and losses, net of
related deferred income taxes, recorded in stockholders' equity as a separate component of accumulated other comprehensive loss.
We manage our investment portfolio to maximize the return on invested funds within acceptable risk guidelines, to meet pledging
and liquidity requirements, and to adjust balance sheet interest rate sensitivity to mitigate the impact of changes in interest rates on
net interest income.
From time to time, we adjust the size and composition of our securities portfolio according to a number of factors, including
expected loan growth, anticipated changes in collateralized public funds on account, the interest rate environment, and the related
value of various segments of the securities markets.
The following table provides a valuation summary of our investment portfolio for the three years ended December 31, 2014.
Table 7
Investment Portfolio Valuation Summary
(Dollar amounts in thousands)
2014
As of December 31,
2013
2012
Amortized
Cost
Fair Value
% of
Total
Amortized
Cost
Fair Value
% of
Total
Amortized
Cost
Fair Value
% of
Total
Securities Available-for-Sale
U.S. agency securities ........ $
CMOs ..............................
MBSs ...............................
Municipal securities ..........
CDOs ...............................
Corporate debt securities ....
Equity securities ................
30,297 $
538,882
155,443
414,255
48,502
1,719
3,224
30,431
534,156
159,765
423,820
33,774
1,802
3,261
2.5 $
500 $
500
— $
44.0
13.1
34.9
2.8
0.1
0.3
490,962
135,097
457,318
46,532
12,999
3,706
475,768
136,164
461,393
18,309
14,929
5,662
41.2
11.8
39.9
1.6
1.3
0.5
508 $
397,146
117,785
495,906
46,533
13,006
9,690
508
400,383
122,900
520,043
12,129
15,339
11,101
—
35.8
11.0
46.5
1.1
1.4
1.0
Total available-for-
sale securities ............. 1,192,322
Securities Held-to-Maturity
1,187,009
97.7
1,147,114
1,112,725
96.3
1,080,574
1,082,403
96.8
Municipal securities ..........
27,670
Total securities ............. $ 1,218,877 $ 1,214,679
26,555
2.3
43,387
44,322
100.0 $ 1,191,436 $ 1,156,112
3.7
34,295
36,023
100.0 $ 1,114,869 $ 1,118,426
3.2
100.0
47
Portfolio Composition
As of December 31, 2014, our securities portfolio totaled $1.2 billion, rising $56.5 million, or 4.9%, from December 31, 2013,
following a 3.4% increase from December 31, 2012. During the fourth quarter of 2014, we acquired $219.3 million of securities in
the Great Lakes transaction which consisted of $31.8 million in U.S. agency securities, $137.7 million in CMOs, $39.7 million in
MBSs, $2.8 million in municipal securities, $6.6 million in CDOs, and $690,000 in equity securities. These securities were recorded
at fair value as of the acquisition date. In addition to the acquired securities portfolio, the year end balance was impacted by
purchases of $28.5 million, maturities, calls, and prepayments of $176.7 million, and sales of $27.8 million.
As of December 31, 2014, approximately 96.7% of our $1.2 billion available-for-sale portfolio was comprised of U.S. agency
securities, municipals, CMOs, and other MBSs. The remainder of the portfolio was comprised of eleven CDOs with a fair value of
$33.8 million and an aggregate unrealized loss of $14.7 million, and miscellaneous other securities with fair values of $5.1 million.
Investments in municipal securities comprised 35.7%, or $423.8 million, of the total available-for-sale securities portfolio as of
December 31, 2014. The majority consists of general obligations of local municipalities in various states. Our municipal securities
portfolio has historically experienced very low default rates and provides a predictable cash flow.
Table 8
Securities Effective Duration Analysis
(Dollar amounts in thousands)
Effective
Duration (1)
2014
Average
Life (2)
As of December 31,
2013
Yield to
Maturity (3)
Effective
Duration (1)
Average
Life (2)
Yield to
Maturity (3)
Securities Available-for-Sale
U.S. agency securities .......................
CMOs ..............................................
Other MBSs ......................................
Municipal securities ..........................
CDOs ...............................................
Corporate debt securities ...................
Equity securities ...............................
Total available-for-sale securities ..
Securities Held-to-Maturity
Municipal securities ..........................
Total securities ........................
N/M – Not meaningful.
3.32%
3.45%
2.88%
2.89%
N/M
0.45%
N/M
3.16%
5.64%
3.21%
3.72
3.67
4.18
2.37
N/M
0.50
N/M
3.26
7.85
3.37
2.98%
1.91%
2.77%
5.50%
N/M
6.72%
N/M
3.37%
4.60%
3.40%
2.23 %
4.48 %
3.93 %
5.11 %
N/M
4.86 %
N/M
4.68 %
6.50 %
4.75 %
2.25
4.26
4.85
3.27
N/M
7.18
N/M
3.95
11.84
4.26
0.49%
1.86%
2.45%
5.53%
N/M
6.39%
N/M
3.52%
5.47%
3.60%
(1)
The effective duration represents the estimated percentage change in the fair value of the securities portfolio given a 100 basis point increase or decrease
in interest rates. This measure is used to evaluate the portfolio's price volatility at a single point in time and is not intended to be a precise predictor of
future fair values since those values will be influenced by a number of factors.
(2) Average life is presented in years and represents the weighted-average time to receive all expected future cash flows using the dollar amount of principal
paydowns, including estimated principal prepayments, as the weighting factor.
(3) Yields on municipal securities are reflected on a tax-equivalent basis, assuming a federal income tax rate of 35%.
Effective Duration
The average life and effective duration of our available-for-sale securities portfolio were both lower than the prior year at 3.26 years
and 3.16%, respectively. These decreases, which were partially offset by the impact of securities acquired in the Great Lakes
transaction, resulted mainly from maturities and sales of investment securities that were not reinvested in the securities portfolio.
48
Realized Gains and Losses
Net securities gains of $8.1 million for 2014 resulted from the sale of a non-accrual CDO at a gain of $3.5 million, sales of certain
longer-duration corporate bonds at gains of $2.0 million, sales of municipal securities at gains of $468,000, and the sale of certain
other investments at gains of $2.1 million. In addition, four CDOs totaling $2.9 million acquired in the Great Lakes transaction were
sold during the fourth quarter of 2014. These securities were recorded at fair value at the acquisition date, therefore, no gain or loss
was recognized on the sale.
Net securities gains of $34.2 million for 2013 were driven by the sale of our investment in Textura. In addition, net securities gains
for the year included OTTI charges of $408,000 on four municipal securities and two CMOs.
Net securities losses were $921,000 for 2012, which included OTTI charges of $3.7 million on two CDOs and several CMOs and
net gains of $2.7 million from the sale of $153.7 million in CMOs, municipal securities, and corporate bonds.
Unrealized Gains and Losses
Unrealized gains and losses on securities available-for-sale represent the difference between the aggregate cost and fair value of the
portfolio. These amounts are presented in the Consolidated Statements of Comprehensive Income and reported as a separate
component of stockholders' equity in accumulated other comprehensive loss on an after-tax basis. This balance sheet component
fluctuates as current market interest rates and conditions change and affect the aggregate fair value of the portfolio. Net unrealized
losses at December 31, 2014 were $5.3 million compared to $34.4 million at December 31, 2013.
Net unrealized losses in the CMO portfolio totaled $4.7 million at December 31, 2014 compared to $15.2 million at December 31,
2013. CMOs are either backed by U.S. government-owned agencies or issued by U.S. government-sponsored enterprises. We do not
believe any individual unrealized loss on these securities as of December 31, 2014 represents OTTI related to credit deterioration. In
addition, we do not intend to sell the CMOs with unrealized losses within a short period of time, and we do not believe it is more
likely than not that we will be required to sell them before recovery of their amortized cost basis, which may be at maturity.
As of December 31, 2014, net unrealized gains in the municipal securities portfolio totaled $9.6 million compared to $4.1 million as
of December 31, 2013. Net unrealized gains on municipal securities include unrealized losses of $1.0 million at December 31, 2014
and $5.6 million at December 31, 2013. Substantially all of these securities carry investment grade ratings with the majority
supported by the general revenues of the issuing governmental entity and are supported by third-party bond insurance or other types
of credit enhancement. We do not believe the unrealized loss on any of these securities represents an OTTI.
Our investments in CDOs are supported by the credit of the underlying banks and insurance companies. The unrealized loss on these
securities declined from $28.2 million at December 31, 2013 to $14.9 million at December 31, 2014. An increase in market activity,
primarily due to improvement in the underlying issuers and other market conditions, led to the decrease. We do not believe the
unrealized losses on the CDOs as of December 31, 2014 represent OTTI related to credit deterioration. In addition, we do not intend
to sell the CDOs with unrealized losses within a short period of time, and we do not believe it is more likely than not that we will be
required to sell them before recovery of their amortized cost basis, which may be at maturity. Our estimation of fair values for the
CDOs is described in Note 22 of "Notes to the Consolidated Financial Statements," in Item 8 of this Form 10-K.
49
Table 9
Repricing Distribution and Portfolio Yields
(Dollar amounts in thousands)
As of December 31, 2014
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)
Securities Available-for-Sale
U.S. agency securities.................... $
CMOs (2) .....................................
Other MBSs (2) .............................
Municipal securities (3) ...................
CDOs .........................................
Corporate debt securities (4) ............
Equity securities (4) ........................
—
179,667
38,113
67,900
—
—
—
—% $
4,496
2.49% $
23,825
1.97%
2.82%
6.10%
—
—
—
285,350
81,559
71,948
—
1,688
—
1.90%
2.80%
6.01%
—
6.47%
—
67,259
28,161
190,182
—
—
3,224
3.09% $
1.78%
2.66%
4.88%
—
—
N/M
1,976
6,606
7,610
84,225
48,502
31
—
2.80%
1.78%
2.58%
6.00%
N/M
20.00%
N/M
Total available-for-sale
securities ..............................
285,680
3.07%
445,041
2.75%
312,651
3.83%
148,950
3.64%
Securities Held-to-Maturity
Municipal securities (3) ...................
3,505
Total securities ........................ $ 289,185
N/M – Not meaningful.
5.27%
8,727
4.61%
5,404
3.10% $ 453,768
2.79% $ 318,055
5.16%
3.85% $ 157,869
8,919
4.00%
3.66%
(1) Based on amortized cost.
(2)
The repricing distributions and yields to maturity of CMOs and other MBSs are based on estimated expected future cash flows and prepayment
assumptions. Actual repricings and yields of the securities may differ from those reflected in the table depending on actual interest rates and prepayment
speeds.
(3) Yields on municipal securities are reflected on a tax-equivalent basis, assuming a federal income tax rate of 35%. The maturity date of bonds is based on
contractual maturity, unless the bond, based on current market prices, is deemed to have a high probability that the call will be exercised, in which case
the call date is used as the maturity date.
(4) Yields on corporate debt and equity securities are reflected on a tax-equivalent basis, assuming a federal income tax rate of 35%. Maturity dates are based
on contractual maturity or repricing characteristics.
50
LOAN PORTFOLIO AND CREDIT QUALITY
Our principal source of revenue is generated by our lending activities and is composed primarily of interest income as well as loan
origination and commitment fees (net of related costs). The accounting policies for the recording of loans in the Consolidated
Statements of Financial Condition and the recognition and/or deferral of interest income and fees in the Consolidated Statements of
Income are included in Note 1 of "Notes to the Consolidated Financial Statements" in Item 8 of this Form 10-K.
Portfolio Composition
Our loan portfolio is comprised of both corporate and consumer loans with corporate loans representing 86.3% of total loans,
excluding covered loans, at December 31, 2014. Consistent with our emphasis on relationship banking, the majority of our corporate
loans are made to our core, multi-relationship customers. These customers usually maintain deposit relationships and utilize our
other banking services, such as cash management or wealth management services.
To maximize loan income with an acceptable level of risk, we have certain lending policies and procedures that management
reviews on a regular basis. In addition, management receives periodic reporting related to loan production, loan quality, credit
concentrations, loan delinquencies, and non-performing and performing potential problem loans to monitor and mitigate potential
and current risks in the portfolio. We do not offer any sub-prime products and we have policies to limit our exposure to any single
borrower.
Table 10
Loan Portfolio
(Dollar amounts in thousands)
As of December 31,
2014
% of
Total
2013
% of
Total
2012
% of
Total
2011
% of
Total
2010
32.8 $ 1,631,474
31.5 $ 1,458,446
243,776
5.2
28.7 $ 1,465,903
4.8
227,756
5.8
8.2
7.0
9.0
6.0
3.3
14.5
48.0
86.6
7.7
4.9
0.8
268,618
474,717
368,796
489,678
285,481
186,416
773,121
2,578,209
4,478,301
390,033
282,948
38,394
711,375
9.1
7.1
9.4
5.5
3.6
14.9
49.6
86.3
7.5
5.5
0.7
13.7
444,368
334,034
520,680
288,336
250,745
8.7
6.6
10.2
5.7
4.9
396,836
328,751
478,026
349,862
339,162
888,146
17.4
856,357
2,726,309
4,428,531
416,194
201,099
42,289
659,582
53.5
87.0
8.2
4.0
0.8
13.0
2,748,994
4,442,653
445,243
160,890
51,774
% of
Total
28.7
4.5
7.8
6.4
9.4
6.9
6.6
16.8
53.9
87.1
8.7
3.2
1.0
747,839
13.4
657,907
12.9
6,657,418
100.0
5,580,005
100.0
5,189,676
100.0
5,088,113
100.0
5,100,560
100.0
Commercial and industrial .. $ 2,253,556
358,249
Agricultural ....................
Commercial real estate:
33.9 $ 1,830,638
5.4
321,702
Office .........................
Retail ..........................
Industrial .....................
Multi-family .................
Construction .................
Other commercial
real estate ...................
494,637
452,225
531,517
564,421
204,236
7.4
6.8
8.0
8.4
3.1
459,202
392,576
501,907
332,873
186,197
887,897
13.3
807,071
3,134,933
5,746,738
543,185
291,463
76,032
910,680
47.0
86.3
8.2
4.4
1.1
13.7
2,679,826
4,832,166
427,020
275,992
44,827
Total commercial
real estate ................
Total corporate loans ....
Home equity ...................
1-4 family mortgages ........
Installment .....................
Total consumer loans ....
Total loans, excluding
covered loans ............
Covered loans .................
79,435
Total loans .............. $ 6,736,853
134,355
$ 5,714,360
197,894
$ 5,387,570
260,502
$ 5,348,615
371,729
$ 5,472,289
51
2014 Compared to 2013
Total loans, excluding covered loans, of $6.7 billion as of December 31, 2014 reflects growth of $1.1 billion, or 19.3%, from
December 31, 2013. Excluding loans acquired in the Popular and Great Lakes transactions of $718.3 million, total loans, excluding
covered loans, grew $359.2 million, or 6.4%, from December 31, 2013. This organic growth was driven primarily by an increase of
17.4% in commercial and industrial loans, 10.8% in agricultural, and 10.6% in multi-family loans. Solid performance from our
legacy sales platform concentrated within our commercial and industrial and agricultural loan categories reflects the continued
impact of greater resource investments and expansion into certain sector-based lending areas, such as agri-business, asset-based
lending, and healthcare.
Consumer loans totaled $910.7 million as of December 31, 2014 and represented 13.7% of loans, excluding covered loans,
increasing $162.8 million, or 21.8% from December 31, 2013. Loans acquired in the Popular and Great Lakes transactions
contributed $93.5 million of this growth. Excluding acquired loans, consumer loans increased $69.3 million, or 9.3%, which reflects
the purchase of $48.7 million of high-quality, shorter duration home equity loans and the sale of $144.9 million of 1-4 family
mortgage loans during 2014.
Covered loans decreased $54.9 million, or 40.9%, from December 31, 2013, reflecting the expected decline in this portfolio.
For additional detail regarding acquired loans refer to the section below titled "Acquired Loans" of this Item 7.
2013 Compared to 2012
Total loans, excluding covered loans, of $5.6 billion as of December 31, 2013 reflected growth of $390.3 million, or 7.5%, from
December 31, 2012. The loan portfolio benefited from well-balanced corporate loan growth reflecting credits of varying size and
diverse geographic locations within our markets and includes an increase in commercial and industrial loans, agricultural loans,
multi-family loans, and retail loans.
Consumer loans represented 13.4% of loans, excluding covered loans, and increased $36.5 million. This growth reflects the
purchase of $51.9 million of high-quality, shorter duration home equity loans and the sale of $147.4 million of 1-4 family mortgage
loans during 2013.
Covered loans decreased $63.5 million, or 32.1%, from December 31, 2012, reflecting the expected decline in this portfolio.
Comparisons of Prior Years (2012, 2011, and 2010)
Total loans of $5.4 billion as of December 31, 2012 grew $39.0 million from December 31, 2011. Excluding covered loans, net
charge-offs, loans disposed through bulk loan sales, and loans acquired in an FDIC-assisted transaction, our loan portfolio increased
by approximately 6.5% from December 31, 2011. The increase in commercial and industrial loans was driven by the targeted
redistribution of the loan portfolio from commercial real estate into this category, significant investments in sales staff, and
refocusing current staff away from remediation activities, subsequent to the bulk loan sales. Strong origination efforts primarily
contributed to growth in 1-4 family mortgages, in addition to loans acquired in an FDIC-assisted transaction. A decrease in the
construction portfolio was driven by efforts to reduce lending exposure to this category. The decrease in covered loans of
$62.6 million, or 24.0%, from December 31, 2011 reflects the continued decline in this portfolio.
Total loans of $5.3 billion as of December 31, 2011 declined $123.7 million, or 2.3%, from $5.5 billion as of December 31, 2010.
The continued decline in covered loan balances accounted for the majority of this reduction. Total loans, excluding covered loans, as
of December 31, 2011 were stable compared to December 31, 2010. The office, retail, industrial, and other commercial real estate
portfolios exhibited 6.2% growth during this period, substantially in the form of owner-occupied business relationships. Offsetting
this growth, we continued to reduce our exposure to the higher risk construction category during 2011.
Acquired Loans
During the third and fourth quarters of 2014, we acquired loans in the Popular and Great Lakes transactions which contributed to
overall loan growth and expanded our market footprint. For a detailed discussion of these transactions, refer to the section titled
"Performance Overview" of this Item 7.
52
The following table summarizes loans by category as of December 31, 2014 between legacy and loans acquired in the Popular and
Great Lakes transactions, compared to loans as of December 31, 2013.
Table 11
Legacy and Acquired Loan Portfolio Composition
(Dollar amounts in thousands)
As of
As of
December 31, 2014
December 31, 2013
Legacy %
Legacy
Acquired
Total
Total
Change
Commercial and industrial .............................. $
Agricultural ...................................................
Commercial real estate: ...................................
Office .......................................................
Retail .......................................................
Industrial ..................................................
Multi-family .............................................
Construction .............................................
Other commercial real estate .......................
Total commercial real estate ...................
Total corporate loans .............................
Home equity ..................................................
1-4 family mortgages ......................................
Installment ....................................................
Total consumer loans ............................
Total loans, excluding covered loans .......
Covered loans ................................................
2,148,858 $
104,698 $
2,253,556 $
356,395
1,854
358,249
389,348
372,311
486,420
367,995
196,387
804,294
2,616,755
5,122,008
499,088
247,359
70,701
817,148
5,939,156
79,435
105,289
79,914
45,097
196,426
7,849
83,603
518,178
624,730
44,097
44,104
5,331
93,532
494,637
452,225
531,517
564,421
204,236
887,897
3,134,933
5,746,738
543,185
291,463
76,032
910,680
718,262
6,657,418
—
79,435
Total loans ........................................... $
6,018,591 $
718,262 $
6,736,853 $
1,830,638
321,702
459,202
392,576
501,907
332,873
186,197
807,071
2,679,826
4,832,166
427,020
275,992
44,827
747,839
5,580,005
134,355
5,714,360
17.4
10.8
(15.2)
(5.2)
(3.1)
10.6
5.5
(0.3)
(2.4)
6.0
16.9
(10.4)
57.7
9.3
6.4
(40.9)
5.3
Commercial, Industrial, and Agricultural Loans
Commercial, industrial, and agricultural loans represent 39.3% of total loans, excluding covered loans, and totaled $2.6 billion at
December 31, 2014, an increase of $459.5 million, or 21.3% from December 31, 2013. Loans acquired in the Popular and Great
Lakes transactions during the third and fourth quarters of 2014 contributed $106.6 million of this growth. Our commercial and
industrial loans are a diverse group of loans to middle market businesses generally located in the Chicago metropolitan area with
purposes that range from supporting seasonal working capital needs to term financing of equipment. The underwriting for these
loans is based primarily on the identified cash flows of the borrower and secondarily on the underlying collateral provided by the
borrower. Most commercial and industrial loans are secured by the assets being financed or other business assets, such as accounts
receivable or inventory, and may incorporate a personal guarantee.
Agricultural loans are generally provided to meet seasonal production, equipment, and farm real estate borrowing needs of
individual and corporate crop and livestock producers. As part of the underwriting process, the Company examines projected future
cash flows, financial statement stability, and the value of the underlying collateral. Seasonal crop production loans are repaid by the
liquidation of the financed crop that is typically covered by crop insurance. Equipment and real estate term loans are repaid through
cash flows of the farming operation.
Commercial Real Estate Loans
Commercial real estate loans are subject to underwriting standards and processes similar to commercial and industrial loans. The
repayment of commercial real estate loans depends on the successful operation of the property securing the loan or the business
conducted on the property securing the loan. This category of loans may be more adversely affected by conditions in the real estate
market. Management monitors and evaluates commercial real estate loans based on cash flow, collateral, geography, and risk rating
criteria. The properties securing the loans in our commercial real estate portfolio are diversified between owner-occupied and
investor categories and represent varying types across our market footprint.
53
Construction loans are generally based on estimates of costs and value associated with the completed projects and are underwritten
utilizing feasibility studies, independent appraisal reviews, sensitivity analyses of absorption and lease rates, and financial analyses
of the developers and property owners. Sources of repayment may be permanent loans from long-term lenders, sales of developed
property, or an interim loan commitment until permanent financing is obtained. Generally, construction loans have a higher risk
profile than other real estate loans since repayment is impacted by real estate values, interest rate changes, governmental regulation
of real property, demand and supply of alternative real estate, the availability of long-term financing, and changes in general
economic conditions.
The following table provides commercial real estate loan detail as of December 31, 2014, 2013, and 2012.
Table 12
Commercial Real Estate Loans
(Dollar amounts in thousands)
Office, retail, and industrial:
Office ............................................................ $
Retail .............................................................
Industrial .......................................................
Total office, retail, and industrial ...............
Multi-family .......................................................
Construction .......................................................
Other commercial real estate:
2014
494,637
452,225
531,517
1,478,379
564,421
204,236
Rental properties ...........................................
Service stations and truck stops ......................
Warehouses and storage .................................
Hotels ............................................................
Restaurants ....................................................
Automobile dealers ........................................
Recreational ...................................................
Religious .......................................................
Multi-use properties .......................................
Other .............................................................
Total other commercial real estate ..............
123,627
84,108
128,396
46,409
74,490
53,221
48,718
36,427
191,011
101,490
887,897
Total commercial real estate .................. $ 3,134,933
% of
Total
As of December 31,
% of
Total
2013
2012
% of
Total
15.8 $
14.4
17.0
47.2
18.0
6.5
459,202
392,576
501,907
1,353,685
332,873
186,197
3.9
2.7
4.1
1.5
2.4
1.7
1.5
1.2
6.1
3.2
28.3
112,887
83,237
122,325
62,451
79,809
37,504
56,327
32,614
118,351
101,566
807,071
100.0 $ 2,679,826
17.1 $
14.7
18.7
50.5
12.4
7.0
474,717
368,796
489,678
1,333,191
285,481
186,416
4.2
121,174
3.1
114,521
4.6
110,367
2.3
74,098
3.0
80,430
1.4
45,121
2.1
41,058
1.2
29,196
4.4
63,120
3.8
94,036
30.1
773,121
100.0 $ 2,578,209
18.4
14.3
19.0
51.7
11.1
7.2
4.7
4.4
4.3
2.9
3.1
1.8
1.6
1.1
2.4
3.7
30.0
100.0
Owner-occupied commercial real estate loans,
excluding multi-family and construction loans ... $
Owner-occupied as a percent of total,
excluding multi-family and construction loans ...
959,635
$
933,151
$
963,375
40.6%
43.2%
45.7%
Commercial real estate loans represent 47.1% of total loans, excluding covered loans, and totaled $3.1 billion at December 31, 2014,
an increase of $455.1 million, or 17.0% from December 31, 2013. Overall, growth was driven by loans acquired in the Popular and
Great Lakes transactions, which totaled $518.2 million at December 31, 2014.
Consumer Loans
Consumer loans represent 13.7% of total loans, excluding covered loans, and totaled $910.7 million at December 31, 2014.
Consumer loans are centrally underwritten using a credit scoring model developed by the Fair Isaac Corporation ("FICO"). It uses a
risk-based system to determine the probability that a borrower may default on financial obligations to the lender. Underwriting
standards for home equity loans are heavily influenced by statutory requirements, which include loan-to-value and affordability
ratios, risk-based pricing strategies, and documentation requirements. The home equity category consists mainly of revolving lines
of credit secured by junior liens on owner-occupied real estate. Loan-to-value ratios on home equity loans and 1-4 family mortgages
are based on the current appraised value of the collateral.
54
Maturity and Interest Rate Sensitivity of Corporate Loans
The following table summarizes the maturity distribution of our corporate loan portfolio as of December 31, 2014, as well as the
interest rate sensitivity of the loans that have maturities in excess of one year. For additional discussion of interest rate sensitivity,
see Item 7A, "Quantitative and Qualitative Disclosures about Market Risk," of this Form 10-K.
Table 13
Maturities and Sensitivities of Corporate Loans to Changes in Interest Rates
(Dollar amounts in thousands)
Maturity Due In
One Year or Less
Greater Than
One to Five
Years
Greater Than
Five Years
Total
As of December 31, 2014
Commercial, industrial, and agricultural ......................... $
Commercial real estate ...................................................
1,211,466 $
1,176,627 $
753,480
2,046,340
Total corporate loans ............................................ $
1,964,946 $
3,222,967 $
Loans by interest rate type:
Fixed interest rates .................................................... $
Floating interest rates ................................................
702,476 $
1,946,905 $
1,262,470
1,276,062
Total corporate loans ............................................ $
1,964,946 $
3,222,967 $
223,712 $
335,113
558,825 $
270,024 $
288,801
558,825 $
2,611,805
3,134,933
5,746,738
2,919,405
2,827,333
5,746,738
As of December 31, 2014, the composition of our corporate loans between fixed and floating interest rates was 50.8% and 49.2%,
respectively. As of December 31, 2013, the composition of our corporate loans between fixed and floating interest rates was 53.5%
and 46.5%, respectively.
55
Non-Performing Assets and Performing Potential Problem Loans
The following table presents our loan portfolio by performing and non-performing status. A discussion of our accounting policies for
non-accrual loans, TDRs, and loans 90 days or more past due can be found in Note 1 of "Notes to the Consolidated Financial
Statements" in Item 8 of this Form 10-K.
Table 14
Loan Portfolio by Performing/Non-Performing Status
(Dollar amounts in thousands)
Accruing
Total
Loans
Current
30-89 Days
Past Due
90 Days Past
Due
TDRs
Non-accrual
As of December 31, 2014
Commercial and industrial
Agricultural
Commercial real estate:
Office
Retail
Industrial
Multi-family
Construction
Other commercial real estate
Total commercial real estate
Total corporate loans
Home equity
1-4 family mortgages
Installment
Total consumer loans
Total loans, excluding covered loans
Covered loans
Total loans
As of December 31, 2013
Commercial and industrial
Agricultural
Commercial real estate:
Office
Retail
Industrial
Multi-family
Construction
Other commercial real estate
Total commercial real estate
Total corporate loans
Home equity
1-4 family mortgages
Installment
Total consumer loans
Total loans, excluding covered loans
Covered loans
Total loans
$ 2,253,556 $ 2,225,507 $
358,249
355,955
494,637
452,225
531,517
564,421
204,236
887,897
3,134,933
5,746,738
543,185
291,463
76,032
910,680
6,657,418
79,435
489,915
446,702
525,955
561,436
197,255
875,080
3,096,343
5,677,805
533,738
285,531
75,423
894,692
6,572,497
65,682
$ 6,736,853 $ 6,638,179 $
$ 1,830,638 $ 1,805,516 $
321,702
321,123
459,202
392,576
501,907
332,873
186,197
807,071
2,679,826
4,832,166
427,020
275,992
44,827
747,839
5,580,005
134,355
455,547
385,234
481,766
329,669
179,877
789,517
2,621,610
4,748,249
413,912
267,497
42,329
723,738
5,471,987
93,100
$ 5,714,360 $ 5,565,087 $
56
4,882 $
1,934
939
288
979
1,261
—
4,976
8,443
15,259
2,361
1,947
506
4,814
20,073
2,565
22,638 $
6,424 $
60
1,200
939
337
318
23
4,817
7,634
14,118
4,355
1,939
330
6,624
20,742
2,232
22,974 $
205 $
—
—
76
—
83
—
438
597
802
145
166
60
371
1,173
5,002
6,175 $
393 $
—
731
272
312
—
—
258
1,573
1,966
1,102
548
92
1,742
3,708
18,081
21,789 $
269 $
—
22,693
360
—
413
173
887
—
433
1,906
2,175
651
878
—
1,529
3,704
—
3,704 $
3,783
4,746
4,410
754
6,981
6,970
27,644
50,697
6,290
2,941
43
9,274
59,971
6,186
66,157
6,538 $
—
11,767
519
—
624
9,647
1,038
—
4,326
15,635
22,173
787
810
—
1,597
23,770
—
23,770 $
1,724
5,507
9,845
1,848
6,297
8,153
33,374
45,660
6,864
5,198
2,076
14,138
59,798
20,942
80,740
The following table provides a comparison of our non-performing assets and past due loans to prior periods.
Table 15
Non-Performing Assets and Past Due Loans
(Dollar amounts in thousands)
As of December 31,
2014
2012
Non-performing assets, excluding acquired and covered loans and covered OREO (1)
Non-accrual loans ....................................... $
90 days or more past due loans ....................
Total non-performing loans ....................
Accruing TDRs ..........................................
OREO ........................................................
2013
$
$
58,853
771
59,624
3,704
25,779
89,107
13,473
0.99%
1.00%
1.49%
1,118
402
1,520
1,119
2,639
6,600
Total non-performing assets ................... $
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 ......................................................
Non-performing acquired loans and OREO (1)
Non-accrual loans ....................................... $
90 days or more past due loans ....................
Total non-performing loans ....................
OREO ........................................................
Total non-performing assets ................... $
30-89 days past due loans ........................... $
Non-performing covered loans and covered OREO (1)
Non-accrual loans ....................................... $
90 days or more past due loans ....................
Total non-performing loans ....................
OREO ........................................................
Total non-performing assets ................... $
6,186
5,002
11,188
8,068
19,256
30-89 days past due loans ........................... $
2,565
Total non-performing assets
Non-accrual loans ....................................... $
90 days or more past due loans ....................
Total non-performing loans ....................
Accruing TDRs ..........................................
OREO ........................................................
Total non-performing assets ................... $
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 ......................................................
66,157
6,175
72,332
3,704
34,966
111,002
22,638
0.98%
1.07%
1.64%
$
$
$
$
$
$
$
$
$
$
$
2011
2010
59,798
3,708
63,506
23,770
32,473
119,749
$
$
20,742
1.07%
1.14%
2.13%
84,534
8,689
93,223
6,867
39,953
140,043
22,666
1.63%
1.80%
2.68%
$
$
$
187,325
9,227
196,552
17,864
33,975
248,391
27,495
3.68%
3.86%
4.85%
— $
—
—
—
— $
— $
20,942
18,081
39,023
8,863
47,886
2,232
80,740
21,789
102,529
23,770
41,336
167,635
22,974
$
$
$
$
$
$
— $
—
—
—
— $
— $
14,182
31,447
45,629
13,123
58,752
6,514
98,716
40,136
138,852
6,867
53,076
198,795
29,180
$
$
$
$
$
$
1.41%
1.79%
2.91%
1.83%
2.58%
3.65%
—
—
—
—
—
—
19,879
43,347
63,226
23,455
86,681
4,232
207,204
52,574
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%
Interest income not recognized in the financial statements related to non-accrual loans for 2014............................... $
3,057
(1) Due to the impact of business combination accounting and protection provided by the FDIC Agreements, acquired loans and covered loans and covered
OREO are separated in this table and excluded from these metrics to provide for improved comparability to prior periods and better perspective into asset
quality trends. For a discussion of acquired and covered loans, see Notes 1 and 6 of "Notes to the Consolidated Financial Statements" in Item 8 of this
Form 10-K.
57
Non-performing Assets
As of December 31, 2014, non-performing assets, excluding acquired and covered loans and covered OREO, decreased by $30.6
million, or 25.6%, from December 31, 2013. This decrease was driven primarily by the return of three TDRs totaling $20.7 million
to performing status, sales of OREO properties, and a decline in 90 days or more past due loans. Non-performing assets, excluding
acquired and covered loans and covered OREO, represented 1.49% of total loans plus OREO as of December 31, 2014 compared to
2.13% as of December 31, 2013 and 2.68% as of December 31, 2012. The continued improvement in non-performing assets and the
related credit metrics reflects management's ongoing commitment to credit remediation.
Non-performing assets, excluding covered loans and covered OREO, declined 14.5% from December 31, 2012 to December 31,
2013. Improvement in non-performing assets and related credit metrics resulted primarily from management's focus on credit
remediation.
The significant decrease in non-performing assets, excluding covered loans and covered OREO, from December 31, 2011 to
December 31, 2012 was due mainly to a decline in non-accrual loans, which reflects the aggressive remediation actions taken by
management during 2012, including the bulk loan sales.
Non-accrual Loans
Non-accrual loans, excluding covered loans, declined to $58.9 million as of December 31, 2014 from $59.8 million as of
December 31, 2013.
The reclassification of two corporate loan relationships totaling $19.3 million from non-accrual to accruing TDR status drove the
decline in non-accrual loans from December 31, 2012 to December 31, 2013.
The decrease in non-accrual loans from December 31, 2011 to December 31, 2012 resulted from the bulk loan sales, payments,
charge-offs, and transfers to OREO, which more than offset the amount of loans downgraded from performing to non-accrual status
during 2012.
58
TDRs
Loan modifications may be performed at the request of the individual borrower and may include reductions in interest rates, changes
in payments, and extensions of maturity dates. We occasionally restructure loans at other than market rates or terms to enable the
borrower to work through financial difficulties for a period of time, and these restructures remain classified as TDRs for the
remaining terms of the loans. A discussion of our accounting policies for TDRs can be found in Note 1 of "Notes to the Consolidated
Financial Statements" in Item 8 of this Form 10-K.
Table 16
TDRs by Type
(Dollar amounts in thousands)
As of December 31,
2014
2013
2012
Number of
Loans
Amount
Number of
Loans
Amount
Number of
Loans
Amount
Commercial and industrial ..............................
Agricultural ....................................................
Commercial real estate:
Office ........................................................
Retail .........................................................
Industrial ...................................................
Multi-family ..............................................
Construction ..............................................
Other commercial real estate ......................
Total commercial real estate loans..........
Total corporate loans .............................
Home equity ...................................................
1-4 family mortgages ......................................
Installment ......................................................
Total consumer loans .............................
Total TDRs .......................................
Accruing TDRs ...............................................
Non-accrual TDRs ..........................................
Total TDRs .......................................
Year-to-date charge-offs on TDRs ...................
Specific reserves related to TDRs ....................
7 $
—
19,068
—
—
1
1
5
—
5
12
19
17
10
—
27
46 $
29 $
17
46 $
$
—
413
173
1,119
—
616
2,321
21,389
1,157
1,062
—
2,219
23,608
3,704
19,904
23,608
8,457
1,765
10 $
—
—
2
3
5
—
7
17
27
18
14
—
32
59 $
39 $
20
59 $
$
8,659
—
—
624
9,647
1,291
—
4,617
16,179
24,838
1,299
1,716
—
3,015
27,853
23,770
4,083
27,853
1,880
1,952
6 $
—
—
—
2
1
—
7
10
16
7
16
—
23
39 $
19 $
20
39 $
$
3,064
—
—
—
2,407
150
—
9,855
12,412
15,476
274
2,041
—
2,315
17,791
6,867
10,924
17,791
10,003
2,794
At December 31, 2014, TDRs totaled $23.6 million, decreasing $4.2 million, or 15.2%, from December 31, 2013. The December 31,
2014 total includes $3.7 million in loans that are accruing interest, with the majority restructured at market terms. After a sufficient
period of performance under the modified terms, the loans restructured at market rates will be reclassified to performing status.
Accruing TDRs decreased $20.1 million from December 31, 2013 due primarily to the return of three TDRs totaling $20.7 million
to performing status during 2014 after sustained payment performance in accordance with their modified terms, which represent
market rates at the time of restructuring.
At December 31, 2014, non-accrual TDRs totaled $19.9 million compared to $4.1 million at December 31, 2013. The increase was
due to the restructure of one non-accrual credit totaling $15.5 million, net of related charge-offs, during 2014. TDRs are reported as
non-accrual if they are not performing in accordance with their modified terms or they have not yet exhibited sufficient performance
under their modified terms.
59
Performing Potential Problem Loans
Performing potential problem loans consist of special mention loans and substandard loans. These loans are performing in
accordance with contractual terms, but we have concerns about the ability of the borrower to continue to comply with loan terms
due to the borrower's potential operating or financial difficulties.
Table 17
Performing Potential Problem Loans
(Dollar amounts in thousands)
Commercial and industrial ................. $
Agricultural ......................................
Commercial real estate:
Special
Mention (1)
84,615
294
December 31, 2014
December 31, 2013
Substandard (2)
30,809
$
$
Total (3)
115,424
—
294
Special
Mention (1)
23,679
344
$
Substandard (2)
$
14,135
$
Total (3)
37,814
—
344
Office, retail, and industrial ...........
Multi-family ................................
Construction ................................
Other commercial real estate ..........
Total commercial real estate ......
38,718
5,951
5,776
32,225
82,670
32,251
3,774
12,487
19,407
67,919
70,969
9,725
18,263
51,632
150,589
27,871
2,794
8,309
14,567
53,541
23,538
499
17,642
22,576
64,255
51,409
3,293
25,951
37,143
117,796
Total performing potential
problem loans ...................
Less: acquired performing
potential problem loans (4) ..
Total performing potential
problem loans, excluding
acquired loans (4) ............... $
Performing potential problem
loans to corporate loans ....................
Performing potential problem
loans to corporate loans,
excluding acquired loans (4) ...............
167,579
98,728
266,307
77,564
78,390
155,954
10,024
29,751
39,775
—
—
—
157,555
$
68,977
$
226,532
$
77,564
$
78,390
$
155,954
2.92%
1.72%
4.63%
1.61%
1.62%
3.23%
3.08%
1.35%
4.42%
1.61%
1.62%
3.23%
(1)
(2)
(3)
Loans categorized as special mention exhibit potential weaknesses that require the close attention of management since these potential weaknesses may
result in the deterioration of repayment prospects in the future.
Loans categorized as substandard exhibit a well-defined weakness or weaknesses that may jeopardize the liquidation of the debt. These loans continue to
accrue interest because they are well secured and collection of principal and interest is expected within a reasonable time.
Total performing potential problem loans excludes $1.8 million of accruing TDRs as of December 31, 2014 and $2.8 million of accruing TDRs as of
December 31, 2013.
(4) Due to the impact of business combination accounting, acquired performing potential problem loans are separated in this table and excluded from these
metrics to provide for improved comparability to prior periods and better perspective into trends. For a discussion of acquired loans, see Notes 1 and 6 of
"Notes to the Consolidated Financial Statements" in Item 8 of this Form 10-K.
Performing potential problem loans totaled $266.3 million as of December 31, 2014, compared to $156.0 million as of
December 31, 2013. The increase was impacted by the Popular and Great Lakes acquisitions, which added $39.8 million of
performing potential problem loans as of December 31, 2014. Acquired loans are recorded at fair value, which incorporates credit
risk, at the date of acquisition.
Performing potential problem loans, excluding acquired loans, were 4.42% of corporate loans at December 31, 2014 compared to
3.23% at December 31, 2013. This level reflects a greater proportion of loans classified as special mention compared to
December 31, 2013. Special mention loans, excluding acquired loans, increased by $80.0 million from December 31, 2013, driven
primarily by the downgrade of five corporate loan relationships totaling $66.3 million for which management has specific
monitoring plans.
60
Loan Sales
The following table summarizes loan sales for the three years ended December 31, 2014.
Table 18
Loan Sales
(Dollar amounts in thousands)
Proceeds
Book Value
Charge-offs (1)
Net Gains (2)
Loan sales in 2014 by class:
Commercial and industrial ............................................. $
Office, retail, and industrial ...........................................
1-4 family mortgages .....................................................
650 $
650 $
17,100
148,680
20,550
144,909
Total loan sales in 2014 ........................................ $
166,430 $
166,109 $
Loan sales in 2013 by class:
Commercial and industrial ............................................. $
Office, retail, and industrial ...........................................
1-4 family mortgages .....................................................
469 $
806
152,130
1,044 $
1,791
147,413
Total loan sales in 2013 ........................................ $
153,405 $
150,248 $
Loan sales in 2012 by class:
— $
(3,450)
—
(3,450) $
(575) $
(985)
—
(1,560) $
Commercial and industrial ............................................. $
Agricultural ...................................................................
19,705 $
47,225 $
3,605
8,720
(22,508) $
(4,356)
Commercial real estate:
Office, retail, and industrial .......................................
Multi-family .............................................................
Construction .............................................................
Other commercial real estate .....................................
Total commercial real estate .................................
Home equity ..................................................................
1-4 family mortgages .....................................................
Total consumer loans ...................................................
35,488
3,151
9,074
26,664
74,377
829
52,749
53,578
49,345
4,043
18,274
46,838
118,500
1,561
50,484
52,045
Total loan sales in 2012 .......................................... $
151,265 $
226,490 $
(23,696)
(1,859)
(7,540)
(21,825)
(54,920)
(773)
(90)
(863)
(82,647) $
—
—
3,771
3,771
—
—
4,717
4,717
(5,012)
(759)
9,839
967
(1,660)
1,651
10,797
41
2,355
2,396
7,422
(1) Amount represents charge-offs to the allowance for loan and covered loan losses at the time the loans were identified for sale.
(2)
The net gains on the bulk loan sales represent gains realized subsequent to the transfer to held-for-sale and are included as a separate component of
noninterest income in the Consolidated Statements of Income. Net gains on mortgage loan sales are included in mortgage banking income in the
Consolidated Statements of Income.
We recognized gains of $3.8 million on the sale of $144.9 million of 1-4 family mortgage loans during the year ended December 31,
2014. Additionally, we sold $21.2 million of other non-performing loans and recorded charge-offs of $3.5 million.
During the year ended December 31, 2013, we sold $147.4 million of 1-4 family mortgage loans at gains of $4.7 million and we
sold $2.8 million of other non-performing loans and recorded charge-offs of $1.6 million.
During 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
resulted in proceeds of $94.5 million and a gain of $5.2 million. In addition to the bulk loan sales, we sold $50.3 million of mortgage
loans, resulting in gains of $2.3 million.
61
OREO
OREO consists of properties acquired as the result of borrower defaults on loans. OREO, excluding covered OREO, was $26.9
million at December 31, 2014, a $5.6 million decrease from December 31, 2013. A discussion of our accounting policies for OREO
is contained in Note 1 of "Notes to the Consolidated Financial Statements" in Item 8 of this Form 10-K.
Table 19
OREO Properties by Type
(Dollar amounts in thousands)
2014
As of December 31,
2013
2012
Single-family homes ................................................. $
Land parcels:
Raw land .............................................................
Farm land ............................................................
Commercial lots ...................................................
Single-family lots .................................................
Total land parcels ............................................
Multi-family units .....................................................
Commercial properties ..............................................
Total OREO, excluding covered OREO ................
Covered OREO.........................................................
Total OREO .................................................... $
OREO Activity
2,433 $
1,917
923
9,295
1,279
13,414
758
10,293
26,898
8,068
34,966 $
2,257 $
4,037
—
11,649
3,101
18,787
346
11,083
32,473
8,863
41,336 $
2,054
3,244
207
12,355
4,970
20,776
796
16,327
39,953
13,123
53,076
A rollforward of OREO balances for the year ended December 31, 2014 and 2013 is presented in the following table.
Table 20
OREO Rollforward
(Dollar amounts in thousands)
Beginning balance ................................... $
Transfers from loans ...........................
Acquired .............................................
Proceeds from sales .............................
Gains (losses) on sales of OREO .........
OREO valuation adjustments ...............
Ending Balance........................................ $
Years Ended December 31,
2014
Covered
OREO
Total
OREO
2013
Covered
OREO
8,863 $
9,934
—
(10,855)
186
(60)
8,068 $
41,336 $
18,079
1,244
(22,368)
1,237
(4,562)
34,966 $
39,953 $
11,545
—
(15,274 )
(1,531 )
(2,220 )
32,473 $
13,123 $
6,420
—
(10,523)
30
(187)
8,863 $
OREO
32,473 $
8,145
1,244
(11,513)
1,051
(4,502)
26,898 $
Total
53,076
17,965
—
(25,797)
(1,501)
(2,407)
41,336
62
Allowance for Credit Losses
Methodology for the Allowance for Credit Losses
The allowance for credit losses is comprised of the allowance for loan and covered loan losses and the reserve for unfunded
commitments and is maintained by management at a level believed adequate to absorb estimated losses inherent in the existing loan
portfolio. Determination of the allowance for credit losses is inherently subjective since it requires significant estimates and
management judgment, including the amounts and timing of expected future cash flows on impaired loans, estimated losses on pools
of homogeneous loans, and consideration of current economic trends.
Acquired loans are recorded at fair value, which incorporates credit risk, at the date of acquisition. No allowance for credit losses is
recorded on the acquisition date. As the acquisition adjustment is accreted into income over future periods, an allowance for credit
losses will be established as necessary to reflect credit deterioration.
While management utilizes its best judgment and information available, the ultimate adequacy of the allowance for credit losses
depends on a variety of factors beyond the Company's control, including the performance of its loan portfolio, the economy, changes
in interest rates and property values, and the interpretation of loan risk ratings by regulatory authorities. Management believes that
the allowance for credit losses is an appropriate estimate of credit losses inherent in the loan portfolio as of December 31, 2014.
The accounting policy for the allowance for credit losses can be found in Note 1 of "Notes to the Consolidated Financial
Statements" in Item 8 of this Form 10-K.
An allowance for credit losses is established on legacy loans, which consist of loans originated by the Bank, acquired loans, and
covered loans. Additional discussion regarding acquired and covered loans can be found in Note 1 and Note 6 of "Notes to the
Consolidated Financial Statements" in Item 8 of this Form 10-K. The following table provides additional details related to the
legacy, covered, and acquired components of the allowance for credit losses and the remaining acquisition adjustment associated
with acquired loans for the year ended December 31, 2014.
Table 21
Allowance for Credit Losses and Acquisition Adjustment
(Dollar amounts in thousands)
Year ended December 31, 2014
Beginning balance
Net charge-offs
Provision for loan and covered loan losses and other expense
Ending balance
Total loans
Remaining acquisition adjustment
Allowance for credit losses as a percent of total loans
Remaining acquisition adjustment as a percent of acquired loans
N/A - Not applicable.
Legacy and
Covered Loans
Acquired Loans
Total
$
$
$
87,121
(31,979)
19,368
74,510
6,018,591
$
$
$
N/A
1.24%
N/A
—
—
—
—
718,262
24,737
$
$
$
N/A
3.44%
87,121
(31,979)
19,368
74,510
6,736,853
24,737
1.11%
N/A
Excluding acquired loans, the total allowance for credit losses to total loans is 1.24%. Accretion of the loan acquisition adjustment
into interest income totaled $1.8 million during the year ended December 31, 2014, resulting in a remaining acquisition adjustment
as a percent of acquired loans of 3.44%.
63
Table 22
Allowance for Credit Losses and
Summary of Credit Loss Experience
(Dollar amounts in thousands)
Change in allowance for credit losses
Beginning balance ............................................ $
Loan charge-offs:
Commercial, industrial, and agricultural ...........
Office, retail, and industrial .............................
Multi-family ..................................................
Construction ..................................................
Other commercial real estate ...........................
Consumer .....................................................
Total loan charge-offs ..................................
Recoveries of loan charge-offs:
Commercial, industrial, and agricultural ...........
Office, retail, and industrial .............................
Multi-family ..................................................
Construction ..................................................
Other commercial real estate ...........................
Consumer .....................................................
Total recoveries of loan charge-offs .............
Net loan charge-offs, excluding
covered loan charge-offs ..........................
Net covered loan (recoveries) charge-offs ...........
Net loan and covered loan charge-offs .........
Provision for loan and covered loan losses:
Provision for loan losses .................................
Provision for covered loan losses .....................
Less: expected reimbursement from the
FDIC ..........................................................
Net provision for covered loan losses ...............
Total provision for loan and covered
loan losses ..............................................
Increase (reduction) in reserve for unfunded
commitments (1) ..............................................
Total provision for loan and covered
loan losses and other expense ...................
Ending balance ................................................ $
2014
2013
2012
2011
2010
Years ended December 31,
87,121 $
102,812 $
121,962 $
145,072 $
144,808
17,424
12,094
7,345
943
1,052
4,834
7,574
4,744
1,029
1,916
4,784
9,414
39,172
33,981
3,800
497
87
166
1,727
729
7,006
32,166
(187)
31,979
24,688
(3,643)
(1,877)
(5,520)
3,797
228
584
1,032
1,646
1,071
8,358
25,623
4,575
30,198
11,185
5,222
(150)
5,072
64,668
34,968
3,361
27,811
36,474
10,910
178,192
3,393
577
275
451
125
784
5,605
172,587
4,615
177,202
142,364
24,945
(9,257)
15,688
32,750
8,193
14,584
20,211
15,396
10,531
37,130
10,322
2,788
63,967
28,869
10,640
101,665
153,716
3,493
79
410
2,964
508
430
7,884
93,781
9,911
103,692
69,682
51,267
(40,367)
10,900
5,227
612
363
770
494
740
8,206
145,510
1,575
147,085
145,774
27,009
(25,434)
1,575
19,168
16,257
158,052
80,582
147,349
200
(1,750)
—
—
—
19,368
14,507
74,510 $
87,121 $
158,052
102,812 $
80,582
121,962 $
147,349
145,072
(1)
Included in other noninterest expense in the Consolidated Statements of Income.
64
$
142,572
—
142,572
2,500
145,072
5,440,752
2.70%
$
$
2014
2013
2012
2011
2010
Years ended December 31,
Allowance for credit losses
Allowance for loan losses.............................. $
Allowance for covered loan losses .................
Total allowance for loan and
covered loan losses ...................................
Reserve for unfunded commitments ...............
65,468
$
72,946
$
87,384
$
7,226
72,694
1,816
12,559
85,505
1,616
12,062
99,446
3,366
Total allowance for credit losses ................ $
74,510
$
87,121
$
102,812
$
118,473
989
119,462
2,500
121,962
Amounts and ratios, excluding acquired loans, including covered loans (1)
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 ..............................
5,882,859
105.22%
114.56%
0.54%
1.24%
$
1.52%
107.90%
84.97%
5,475,110
0.55%
$
5,435,670
$
3.26%
5,421,943
1.91%
1.91%
104.15%
74.00%
2.28%
58.86%
46.95%
2.65%
68.50%
48.30%
(1) Due to the impact of business combination accounting, acquired loans are excluded from these metrics to provide for improved comparability to prior
periods and better perspective into asset quality trends.
Activity in the Allowance for Credit Losses
The allowance for credit losses was $74.5 million as of December 31, 2014, a decline of $12.6 million from December 31, 2013.
The allowance for credit losses represented 1.24% of total loans, excluding acquired loans, including covered loans, at
December 31, 2014 compared to 1.52% at December 31, 2013.
The provision for loan and covered loan losses was $19.2 million for 2014 compared to $16.3 million for 2013 and $158.1 million
for 2012. The provision for loan and covered loan losses was elevated for the year ended December 31, 2012 due primarily to
additional provision of $62.3 million recorded as a result of selling $172.5 million of non-performing and performing potential
problem loans and recording charge-offs of $80.3 million.
Excluding acquired loans, including covered loans, net loan charge-offs to average loans declined from 3.26% for 2012, to 0.55%
for 2013, and to 0.54% for 2014. The significant improvement since 2012 reflects management's continued efforts to remediate
problem credits, which includes the bulk loan sales completed in 2012.
Covered loan charge-offs reflect the decline, and recoveries reflect the increase, in expected future cash flows of certain acquired
loans. Management re-estimates expected future cash flows periodically, and the present value of any decreases in expected future
cash flows from the FDIC is recorded as either a charge-off in that period or an allowance for covered loan losses is established. Any
increases in expected future cash flows are recorded through prospective yield adjustments over the remaining lives of the specific
loans.
65
Allocation of the Allowance for Credit Losses
Table 23
Allocation of Allowance for Credit Losses
(Dollar amounts in thousands)
As of December 31,
% of
Total
Loans (1)
2013
% of
Total
Loans (1)
2014
2012
% of Total
Loans (1)
2011
% of
Total
Loans (1)
2010
% of
Total
Loans (1)
Commercial, industrial, and
agricultural ...................... $ 29,458
Commercial real estate:
39.3
$ 30,381
38.6 $
36,761
36.7 $
46,017
33.5
$ 49,545
33.2
Office, retail, and
industrial .......................
Multi-family ....................
Construction ....................
Other commercial real
estate ...........................
Total commercial
real estate ...................
Consumer .......................
Total, excluding
allowance for covered
loan losses ..................
Covered loans ..................
10,992
2,249
2,769
22.2
8.4
3.1
10,405
24.2
11,432
2,017
6,712
6.0
3.3
3,575
10,241
25.6
5.5
3.6
16,012
5,067
17,935
25.5
5.7
4.9
20,758
3,996
32,624
8,841
13.3
11,187
14.5
14,699
14.9
21,099
17.4
25,178
24,851
12,975
47.0
13.7
30,321
13,860
100.0
67,284
7,226
74,562
12,559
48.0
13.4
100.0
39,947
14,042
49.6
13.7
60,113
14,843
53.5
13.0
82,556
12,971
90,750
12,062
100.0
120,973
100.0
145,072
100.0
989
—
23.6
6.9
6.6
16.8
53.9
12.9
Total allowance for
credit losses ................. $ 74,510
$ 87,121
$ 102,812
$ 121,962
$ 145,072
(1) Percentages represent total loans in each category to total loans, excluding covered loans.
The allowance for credit losses declined by 14.5% from $87.1 million as of December 31, 2013 to $74.5 million as of December 31,
2014, reflecting reductions across most categories. This decrease in the allowance for credit losses reflects the continued
improvement in our non-performing loan levels and the related credit metrics, resulting from management's ongoing credit
remediation focus. In addition, a decrease in the allowance for covered loans losses contributed to the variance, consistent with the
wind-down of the covered loan portfolio.
The reduction in the allowance for credit losses of 15.3% from December 31, 2012 to December 31, 2013 reflects the significant
improvement in non-performing loans, performing potential problem loans, and credit metrics driven by management’s focus on
credit remediation.
During 2012, declines in non-accrual and performing potential problem loans from accelerated credit remediation actions, including
the impact of the bulk loan sales, resulted in improved credit metrics and a decline in our estimate of credit losses inherent in the
loan portfolio. The allowance for covered loan losses increased $11.1 million from 2011 to reflect the difference between the
carrying value and the discounted present value of the expected future cash flows of the covered impaired loans.
66
INVESTMENT IN BANK-OWNED LIFE INSURANCE
We previously purchased life insurance policies on the lives of certain directors and officers and are the sole owner and beneficiary
of the policies. We invested in these BOLI policies to provide an efficient form of funding for long-term retirement and other
employee benefit costs. Therefore, our BOLI policies are intended to be long-term investments to provide funding for long-term
liabilities. We record these BOLI policies as a separate line item in the Consolidated Statements of Financial Condition at each
policy's respective CSV with changes recorded as a component of noninterest income in the Consolidated Statements of Income. As
of December 31, 2014, the CSV of BOLI assets totaled $206.5 million, which includes $10.4 million acquired in the Great Lakes
transaction.
As of December 31, 2014, 35.5% of our total BOLI portfolio is invested in general account life insurance distributed among eleven
insurance carriers, all of which carry investment grade ratings. This general account life insurance typically includes a feature
guaranteeing minimum returns. The remaining 64.5% is in separate account life insurance, which is managed by third party
investment advisors under pre-determined investment guidelines. Stable value protection is a feature available for separate account
life insurance policies that is designed to protect a policy's CSV from market fluctuations, within limits, on underlying investments.
Our entire separate account portfolio has stable value protection purchased from a highly rated financial institution. To the extent
fair values on individual contracts fall below 80%, the CSV of the specific contracts may be reduced or the underlying assets may be
transferred to short-duration investments, resulting in lower earnings.
For the year ended December 31, 2014, we had BOLI income of $2.9 million compared to a prior year BOLI loss of $11.8 million.
During 2013, we voluntarily modified approximately $100 million of certain lower-yielding BOLI policies, which resulted in a
$13.3 million write-down of the CSV. This action gave us the flexibility to reinvest these assets in longer duration securities at
higher yields to enhance future BOLI income.
GOODWILL
The carrying amount of goodwill was $310.6 million at December 31, 2014 and $264.1 million at December 31, 2013. Goodwill
increased by $46.5 million from December 31, 2013 as a result of the Popular, Great Lakes, and National Machine Tool acquisitions
completed during the third and fourth quarters of 2014. For additional detail regarding the goodwill impact for each acquisition, see
Note 9 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, as described in
Note 1 of "Notes to the Consolidated Financial Statements" in Item 8 of this Form 10-K. During 2014, we performed our annual
impairment test of goodwill at October 1, 2014 and determined that goodwill was not impaired at that date and there was no
indication that goodwill was impaired at December 31, 2014.
DEFERRED TAX ASSETS
Deferred tax assets and liabilities are recognized for the future tax consequences attributed to temporary differences between the
financial statement carrying amounts of existing assets and liabilities and their respective tax basis. For additional discussion of
income taxes, see Notes 1 and 15 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 15.
Table 24
Deferred Tax Assets
(Dollar amounts in thousands)
Net deferred tax assets ..................................................... $
91,685 $
2014
As of December 31,
2013
107,624 $
% Change
2012
133,605
2014-2013
(14.8)
2013-2012
(19.4)
Management assessed whether it is more likely than not that all or some portion of the deferred tax assets will not be realized. This
assessment considered whether in the periods of reversal, the deferred tax assets can be realized through carryback to income in
prior years, future reversals of existing deferred tax liabilities, and future taxable income, including taxable income resulting from
the application of future tax planning strategies. The assessment also considered positive and negative evidence, including pre-tax
income and loss during the current and prior two years, actual performance compared to budget, trends in non-performing assets and
performing potential problem loans, the Company's capital position, and any unsettled circumstances that could impact future
earnings. Based on this assessment, management determined that it is more likely than not that our deferred tax assets will be fully
realized and no valuation allowance is required as of December 31, 2014.
Deferred tax assets decreased in 2014 compared to 2013, resulting primarily from the utilization of federal and state net operating
losses.
67
The decrease in deferred tax assets in 2013 was attributed to utilization of federal net operating losses, which was partially offset by
an increase in alternative minimum tax credit carryforwards.
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 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, 2014, we expect to have liquidity capacity in excess of policy guidelines for the forward twelve-month period.
The liquidity needs of First Midwest Bancorp, Inc. on an unconsolidated basis (the "Parent Company") consist primarily of
operating expenses, debt service payments, and dividend payments to our stockholders, which totaled $54.0 million for the year
ended December 31, 2014. The primary source of liquidity for the Parent Company is dividends from subsidiaries. The Parent
Company had $47.6 million in junior subordinated debentures, $38.5 million in subordinated notes, $114.8 million in senior notes,
and cash and interest-bearing deposits of $43.5 million at December 31, 2014. At the end of 2014, the Parent Company had a $35.0
million short-term, unsecured revolving line of credit with a correspondent bank that we allowed to expire on January 20, 2015. As
of December 31, 2014, no amount was outstanding. The Parent Company has the ability to enhance its liquidity position by raising
capital or incurring debt.
Total deposits and borrowed funds as of December 31, 2014 are summarized in Notes 10 and 11 of "Notes to the Consolidated
Financial Statements" in Item 8 of this Form 10-K. The following table provides a comparison of average funding sources over the
last three years. We believe that average balances, rather than period-end balances, are more meaningful in analyzing funding
sources because of the inherent fluctuations that may occur on a monthly basis within most funding categories.
Table 25
Funding Sources - Average Balances
(Dollar amounts in thousands)
Years Ended December 31,
% of
Total
2013
% of
Total
2012
% of
Total
2014
Demand deposits ........................ $ 2,137,778
1,222,292
Savings deposits .........................
1,243,186
NOW accounts ...........................
1,392,367
Money market accounts ..............
5,995,623
Core deposits ........................
1,195,796
Time deposits ............................
16,086
Brokered deposits .......................
1,211,882
Total time deposits .................
7,207,505
Total deposits ...................
Securities sold under agreements
to repurchase ............................
Federal funds purchased ..............
FHLB advances .........................
Total borrowed funds .............
Senior and subordinated debt .......
106,072
82
43,405
149,559
191,776
Total funding sources ........ $ 7,548,840
N/M – Not meaningful.
28.3 $ 1,889,247
26.2 $ 1,762,968
16.2
16.5
18.5
79.5
15.8
0.2
16.0
95.5
1.4
—
0.6
2.0
2.5
1,126,561
1,170,928
1,306,625
5,493,361
1,286,700
20,188
1,306,888
6,800,249
90,891
5
114,565
205,461
212,896
15.6
16.2
18.1
76.1
17.8
0.3
18.1
94.2
1.3
—
1.6
2.9
2.9
1,038,379
1,090,446
1,216,173
5,107,966
1,502,230
26,776
1,529,006
6,636,972
79,924
—
113,719
193,643
231,273
100.0 $ 7,218,606
100.0 $ 7,061,888
68
% Change
2014-2013
13.2
2013-2012
7.2
8.5
7.4
7.4
7.5
(14.3)
(24.6)
(14.5)
2.5
13.7
100.0
0.7
6.1
(7.9)
2.2
8.5
6.2
6.6
9.1
(7.1)
(20.3)
(7.3)
6.0
16.7
N/M
(62.1)
(27.2)
(9.9)
4.6
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
100.0
Average Funding Sources
Total average funding sources of $7.5 billion for 2014 increased $330.2 million from 2013, due primarily to deposits assumed in the
Popular and Great Lakes acquisitions, further strengthening our core deposit base. Growth in average demand deposits of $248.5
million, or 13.2%, from December 31, 2013, led the rise in average core deposits and more than offset the reduction in higher-
costing time deposits, borrowed funds, and senior and subordinated debt.
For 2013, the $156.7 million increase in average funding sources from 2012 resulted mainly from a rise in core deposits, which
more than offset a reduction in higher-costing time deposits.
Time Deposits
Table 26
Maturities of Time Deposits Greater Than $100,000
(Dollar amounts in thousands)
Three months or less .................................................................................................................................... $
Greater than three months to six months .......................................................................................................
Greater than six months to twelve months ....................................................................................................
Greater than twelve months ..........................................................................................................................
Total ....................................................................................................................................................... $
Total
80,613
81,415
109,789
140,300
412,117
Borrowed Funds
A discussion of borrowed funds is presented in the next table.
Table 27
Borrowed Funds
(Dollar amounts in thousands)
2014
2013
2012
Amount
Weighted-
Average
Rate %
Amount
Weighted-
Average
Rate %
Amount
Weighted-
Average
Rate %
At period-end:
Securities sold under agreements to
repurchase ...................................... $
Federal funds purchased ......................
FHLB advances .................................
137,994
0.03
$
109,792
—
—
—
—
—
114,550
224,342
Total borrowed funds ..................... $
137,994
0.03
$
Average for the year-to-date period:
Securities sold under agreements to
repurchase ...................................... $
Federal funds purchased ......................
FHLB advances .................................
Total borrowed funds ..................... $
106,072
82
43,405
149,559
0.04
$
90,891
—
1.23
0.38
$
5
114,565
205,461
Maximum amount outstanding at the end of any day during the period:
Securities sold under agreements to
repurchase ...................................... $
Federal funds purchased ......................
FHLB advances .................................
149,067
25,000
114,550
$
110,797
2,000
114,581
0.02
—
1.72
1.06
0.02
—
1.76
1.04
$
0.03
—
1.34
0.70 $
$
0.03
—
1.38
0.78 $
$
71,403
—
114,581
185,984
79,924
—
113,719
193,643
103,591
—
114,593
Average borrowed funds totaled $149.6 million for 2014, decreasing $55.9 million, or 27.2%, from 2013 due to the prepayment of
$114.6 million of FHLB advances with a weighted-average rate of 1.33% during the second quarter of 2014. This decline was
partially offset by higher levels of securities sold under agreements to repurchase.
69
We make interchangeable use of repurchase agreements, FHLB advances, and federal funds purchased to supplement deposits.
Securities sold under agreements to repurchase generally mature within 1 to 90 days from the transaction date.
Senior and Subordinated Debt
Average senior and subordinated debt decreased $21.1 million, or 9.9%, from 2013 to 2014. This decline resulted from the full-year
impact of the repurchase and retirement of $24.0 million of junior subordinated debentures during the fourth quarter of 2013. The
addition of $14.4 million of junior subordinated debentures acquired in the Great Lakes transaction during the fourth quarter of 2014
partially offset the decrease. See Note 12 of "Notes to the Consolidated Financial Statements" in Item 8 of this Form 10-K for
additional discussion regarding these transactions.
The $18.4 million decline in average senior and subordinated debt from 2012 to 2013 reflects the full-year impact of the repurchase
and retirement of $4.3 million of junior subordinated debentures and $12.0 million of subordinated notes during the fourth quarter of
2012.
CONTRACTUAL OBLIGATIONS, COMMITMENTS, OFF-BALANCE SHEET RISK, AND CONTINGENT
LIABILITIES
Through our normal course of operations, we enter into certain contractual obligations and other commitments. 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, 2014. Further discussion of the nature of each obligation is included in the referenced note of "Notes to the
Consolidated Financial Statements" in Item 8 of this Form 10-K.
Table 28
Contractual Obligations, Commitments, Contingencies, and Off-Balance Sheet Items
(Dollar amounts in thousands)
Payments Due In
Core deposits (no stated maturity) ..............
Time deposits ............................................
Borrowed funds .........................................
Subordinated debt ......................................
Operating leases ........................................
Pension liability .........................................
Uncertain tax positions liability ..................
Commitments to extend credit ....................
Letters of credit .........................................
N/M – Not meaningful.
Note
Reference
10
10
11
12
8
16
15
21
21
One Year or
Less
$ 6,616,200 $
865,149
137,994
—
5,071
5,298
N/M
N/M
N/M
Greater
Than One to
Three Years
Greater Than
Three to
Five Years
Greater
Than Five
Years
Total
— $
— $
300,557
—
153,263
9,289
10,283
N/M
N/M
N/M
105,584
—
—
5,955
8,409
N/M
N/M
N/M
— $ 6,616,200
1,271,558
268
137,994
—
200,869
47,606
33,346
13,031
41,508
17,518
N/M
912
N/M
1,982,595
N/M
110,639
70
MANAGEMENT OF CAPITAL
Capital Measurements
A strong capital structure is required under applicable banking regulations and is crucial in maintaining investor confidence,
accessing capital markets, and enabling us to take advantage of future growth opportunities. Our capital policy requires that the
Company and the Bank maintain capital ratios in excess of the minimum regulatory guidelines. It serves as an internal discipline
in analyzing business risks and internal growth opportunities and sets targeted levels of return on equity. Under regulatory capital
adequacy guidelines, the Company and the Bank are subject to various capital requirements set and administered by the federal
banking agencies. These requirements specify minimum capital ratios, defined as Tier 1 and total capital as a percentage of assets
and off-balance sheet items that were weighted according to broad risk categories and a leverage ratio calculated as Tier 1 capital
as a percentage of adjusted average assets. We manage our capital ratios for both the Company and the Bank to consistently
maintain these measurements in excess of the Federal Reserve's minimum levels considered to be "well-capitalized," which is the
highest capital category established.
The following table presents our consolidated measures of capital as of the dates presented and the capital guidelines established
by the Federal Reserve for the Bank to be categorized as "well-capitalized." All regulatory mandated ratios for characterization as
"well-capitalized" were exceeded as of December 31, 2014 and 2013. See the "Supervision and Regulation" section included in
Item 1, "Business," of this Form 10-K for information on our minimum capital requirements.
71
All other ratios presented in the table below are capital adequacy metrics used and relied on by investors and industry analysts;
however, they are non-GAAP financial measures for SEC purposes. These non-GAAP measures are valuable indicators of a
financial institution's capital strength since they eliminate intangible assets from stockholders' equity and retain the effect of
accumulated other comprehensive loss in stockholders' equity. Reconciliations of the components of those ratios to GAAP are also
presented in the table below.
Table 29
Capital Measurements
(Dollar amounts in thousands)
Bank regulatory capital ratios:
Total capital to risk-weighted assets ..............................
Tier 1 capital to risk-weighted assets ............................
Tier 1 leverage to average assets ...................................
Company regulatory capital ratios (1):
Total capital to risk-weighted assets ..............................
Tier 1 capital to risk-weighted assets ............................
Tier 1 leverage to average assets ...................................
Company tier 1 common capital to risk-weighted
assets (1)(2) .......................................................................
As of December 31,
2013
2014
Regulatory
Minimum For
Well-
Capitalized
Excess Over
Required Minimums
at December 31, 2014
12.30%
11.32%
9.76%
11.23%
10.19%
9.03%
13.86%
12.61%
10.24%
12.39%
10.91%
9.18%
10.00%
6.00%
5.00%
23% $ 174,282
89% $ 402,834
95% $ 418,334
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
9.54%
10.37%
N/A
N/A
N/A
Reconciliation of Company capital components to GAAP:
Total stockholder's equity .................................................. $ 1,100,775
Goodwill and other intangible assets .................................
Tangible common equity ..............................................
Accumulated other comprehensive loss .............................
(334,199)
766,576
15,855
$ 1,001,442
(276,366)
725,076
26,792
Tangible common equity, excluding accumulated
other comprehensive loss ....................................... $
782,431
$
751,868
Total assets ....................................................................... $ 9,445,139
Goodwill and other intangible assets .................................
(334,199)
$ 8,253,407
(276,366)
Tangible assets ........................................................ $ 9,110,940
$ 7,977,041
Risk-weighted assets ......................................................... $ 7,879,366
$ 6,794,666
Company tangible common equity ratios (1)(3):
Tangible common equity to tangible assets ...................
Tangible common equity, excluding accumulated
other comprehensive loss, to tangible assets ................
Tangible common equity to risk-weighted assets...........
8.41%
8.59%
9.73%
9.09%
N/A
N/A
9.43%
10.67%
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A - Not applicable.
(1) Ratio is not subject to formal Federal Reserve regulatory guidance.
(2)
(3)
Excludes the impact of trust-preferred securities.
Tangible common equity represents common stockholders’ equity less goodwill and identifiable intangible assets. In management’s view, Tier 1
common capital and TCE measures are meaningful to the Company, as well as analysts and investors, in assessing the Company’s use of equity and in
facilitating comparisons with competitors.
72
The decline in regulatory capital ratios from December 31, 2013 resulted from the addition of risk-weighted and average assets,
including goodwill and other intangible assets, related to the Popular and Great Lakes acquisitions. These declines were partially
offset by strong earnings, the $38.3 million of common stock issued as consideration for the Great Lakes acquisition, and an
increase in allowable deferred tax assets. The Bank's regulatory ratios exceeded all regulatory mandated ratios for characterization
as "well-capitalized" as of December 31, 2014.
The Board reviews the Company's capital plan each quarter, 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, 2014 and 2013 for the Company and the Bank, see Note 19 of "Notes to the Consolidated Financial Statements" in
Item 8 of this Form 10-K.
Basel III Capital Rules
In July of 2013, the Company's and the Bank's primary federal regulator, the Federal Reserve, published final rules establishing a
new comprehensive capital framework for U.S. banking organizations. The Basel III Capital Rules are discussed in the
"Supervision and Regulation" section in Item 1, "Business" of this Form 10-K.
Management believes that as of December 31, 2014 the Company and the Bank would meet all capital adequacy requirements
under the Basel III Capital Rules on a fully phased-in basis as if such requirements were currently in effect.
Stock Repurchase Programs
Shares repurchased are held as treasury stock and are available for issuance in connection with our Dividend Reinvestment Plan,
qualified and nonqualified retirement plans, share-based compensation plans, and other general corporate purposes. We reissued
165,104 treasury shares in 2014 and 125,901 treasury shares in 2013 to fund these plans.
Dividends
The Board declared quarterly cash dividends of $0.01 per common share from 2012 through the first quarter of 2013. The
Company increased the dividend to $0.04 per common share during the second quarter of 2013, $0.07 per common share during
the fourth quarter of 2013, and approved another increase in the second quarter of 2014 to $0.08 per common share.
73
QUARTERLY EARNINGS
Interest income ........................... $
Interest expense ..........................
Net interest income .................
Provision for loan and
covered loan losses ....................
Fee-based revenues ......................
Net securities gains (losses) ...........
Other noninterest income ..............
Noninterest expense .....................
Income before income
tax expense .........................
Income tax expense .....................
Net income ........................... $
Basic earnings per
common share ........................... $
Diluted earnings per
common share .......................... $
Dividends declared per
common share .......................... $
Return on average common equity ...
Return on average assets ...............
Net interest margin –
tax-equivalent ...........................
Table 30
Quarterly Earnings Performance (1)
(Dollar amounts in thousands, except per share data)
2014
Fourth
81,309 $
(5,490)
75,819
(1,659)
29,364
(63)
1,767
(84,828)
Third
Second
First
Fourth
76,862
$
72,003
$
69,690
$
72,120
$
(5,831)
71,031
(5,696)
66,307
(10,727)
(5,341)
29,660
2,570
4,877
27,008
4,517
(332)
(5,995)
63,695
(1,441)
25,049
1,073
1,128
(6,432)
65,688
—
26,712
147
920
(70,313)
(65,017)
(63,668)
(64,794)
2013
Third
72,329 $
(6,663)
65,666
(4,770)
27,804
33,801
(3,517)
(64,702)
Second
First
71,753
$
71,045
(6,823)
64,930
(5,813)
26,008
216
1,217
(7,197)
63,848
(5,674)
25,758
—
1,817
(62,427)
(64,814)
20,400
(5,807)
14,593 $
27,098
(8,549)
18,549
$
$
$
$
27,142
(8,642)
18,500
0.25
0.25
0.08
7.08%
0.88%
$
$
$
$
25,836
(8,172)
17,664
0.24
0.24
0.07
6.97%
0.86%
$
$
$
$
28,673
(9,508)
19,165
0.26
0.26
0.07
7.53%
0.91%
$
$
$
$
54,282
(24,959)
29,323 $
24,131
(7,955)
16,176
0.39
$
0.39
$
$
0.04
11.66%
1.38%
0.22
0.22
0.04
6.66%
0.79%
$
$
$
$
20,935
(6,293)
14,642
0.20
0.20
0.01
6.17%
0.74%
0.25
0.25
0.08
6.91%
0.84%
3.72%
3.65%
3.61%
3.62%
3.63%
3.70%
3.77%
0.19
$
0.19
$
$
0.08
5.35%
0.63%
3.76%
(1) All ratios are presented on an annualized basis.
Net income for the fourth, third, and second quarters of 2014 was impacted by acquisition and integration related expenses totaling
$9.3 million, $3.7 million, and $830,000, respectively. Excluding acquisition and integration related expenses, earnings per share
was $0.27 for the fourth quarter of 2014 and $0.28 for the third quarter of 2014. In addition, recurring costs associated with
operating the newly acquired Popular, National Machine Tool, and Great Lakes locations of approximately $3.5 million and $2.0
million for the fourth and third quarters of 2014 impacted net income. The conversion and integration of these transactions was
substantially complete as of December 31, 2014, with certain remaining efficiencies to be implemented in the first half of 2015.
CRITICAL ACCOUNTING ESTIMATES
Our consolidated financial statements are prepared in accordance with GAAP and are consistent with predominant practices in the
financial services industry. Application of GAAP requires management to make estimates, assumptions, and judgments based on
information available as of the date of the financial statements that affect the amounts reported in the financial statements and
accompanying notes. Critical accounting estimates are those estimates that management believes are the most important to our
financial position and results of operations. Future changes in information may impact these estimates, assumptions, and judgments,
which may have a material affect the amounts reported in the financial statements.
The most significant of our accounting policies and estimates are presented in Note 1 of "Notes to the Consolidated Financial
Statements" in Item 8 of this Form 10-K. Along with the disclosures presented in the other financial statement notes and in this
discussion, these policies provide information on how significant assets and liabilities are valued in the financial statements and how
those values are determined. Based on the valuation techniques used and the sensitivity of financial statement amounts to the
methods, estimates, assumptions, and judgments management determined that our accounting estimates for the allowance for credit
losses, valuation of securities, income taxes, and goodwill and other intangible assets are considered to be our critical accounting
estimates.
74
Allowance for Credit Losses
The determination of the allowance for credit losses is inherently subjective since it requires significant estimates and management
judgment, including the amounts and timing of expected future cash flows on impaired loans, estimated losses on pools of
homogeneous loans, actual loss experience, and consideration of current economic trends and conditions, and other factors, all of
which are susceptible to significant change. Credit exposures deemed to be uncollectible are charged-off against the allowance for
loan and covered loan losses, while recoveries of amounts previously charged-off are credited to the allowance for loan and covered
loan losses. Additions to the allowance for loan and covered loan losses are established through the provision for loan and covered
loan losses charged to expense. The amount charged to operating expense depends on a number of factors, including historic loan
growth, changes in the composition of the loan portfolio, net charge-off levels, and our assessment of the allowance for loan and
covered loan losses. For a full discussion of our methodology for determining the allowance for credit losses, see Note 1 of "Notes
to the Consolidated Financial Statements" in Item 8 of this Form 10-K.
Valuation of Securities
The fair values of securities are based on quoted prices obtained from third party pricing services or dealer market participants
where a ready market for such securities exists. In the absence of quoted prices or where a market for the security does not exist,
management judgment and estimation is used, which may include modeling-based techniques. The use of different judgments and
estimates to determine the fair value of securities could result in a different fair value estimate.
On a quarterly basis, we assess securities with unrealized losses to determine whether OTTI has occurred. In evaluating OTTI,
management considers many factors including the severity and duration of the impairment; the financial condition and near-term
prospects of the issuer, including external credit ratings and recent downgrades for debt securities; intent to hold the security until its
value recovers; and the likelihood that the Company would be required to sell the securities before a recovery in value, which may
be at maturity. The term "other-than-temporary" is not intended to indicate that the decline is permanent. It indicates that the
prospects for near-term recovery are not necessarily favorable or there is a lack of evidence to support fair values greater than or
equal to the carrying value of the investment. Securities for which there is an unrealized loss that is deemed to be other-than-
temporary are written down to fair value with the write-down recorded as a realized loss and included in net securities gains (losses),
but only to the extent the impairment is related to credit deterioration. The amount of the impairment related to other factors is
recognized in other comprehensive income (loss) unless management intends to sell the security in a short period of time or believes
it is more likely than not that it will be required to sell the security prior to full recovery. The determination of OTTI is subjective
and different judgments and assumptions could affect the timing and amount of loss realization. For additional discussion on
securities, see Notes 1 and 4 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 assess the likelihood that any deferred tax assets will be realized through the reduction or refund of taxes in future periods and
establish a valuation allowance for those assets for which recovery is not more likely than not. In making this assessment,
management makes judgments and estimates regarding the ability to realize the asset through carryback to taxable income in prior
years, the future reversal of existing taxable temporary differences, future taxable income, and the possible application of future tax
planning strategies. Management believes that it is more likely than not that deferred tax assets included in the accompanying
Consolidated Statements of Financial Condition will be fully realized, although there is no guarantee that those assets will be
recognizable in future periods.
Management also makes certain interpretations of federal and state income tax laws for which the outcome of the tax position may
not be certain. Uncertain tax positions are periodically evaluated and we may establish tax reserves for benefits that may not be
realized. For additional discussion of income taxes, see Notes 1 and 15 of "Notes to the Consolidated Financial Statements" in
Item 8 of this Form 10-K.
75
Goodwill and Other Intangible Assets
Goodwill represents the excess of purchase price over the fair value of net assets acquired using the acquisition method of
accounting. This method requires that all identifiable assets acquired and liabilities assumed in the transaction, both intangible and
tangible, be recorded at their estimated fair value upon acquisition. Determining the fair value often involves estimates based on
third-party valuations, such as appraisals, or internal valuations based on discounted cash flow analyses or other valuation
techniques. Goodwill is not amortized, instead, we assess the potential for impairment on an annual basis or more frequently if
events and circumstances indicate that goodwill might be impaired.
Other intangible assets represent purchased assets that lack physical substance, but can be distinguished from goodwill because of
contractual or other legal rights or because the asset is capable of being sold or exchanged either on its own or in combination with a
related contract, asset, or liability. The determination of the useful lives over which an intangible asset will be amortized is
subjective. Intangible assets are also reviewed at least annually for impairment to determine whether there were any events or
circumstances that indicate the recorded amount is not recoverable from projected undiscounted net operating cash flows. For
additional discussion of goodwill and other intangible assets, see Notes 1 and 9 of "Notes to the Consolidated financial Statements"
in Item 8 of this Form 10-K.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The disclosures in this item are qualified by Item 1A. Risk Factors and the section captioned "Cautionary Statement Regarding
Forward-Looking Statements" in Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations,"
of this report, and other cautionary statements set forth elsewhere in this report.
Market risk is the risk of loss arising from adverse changes in the fair value of financial instruments due to changes in interest rates,
exchange rates, and equity prices. Interest rate risk is our primary market risk and is the result of repricing, basis, and option risk.
Repricing risk represents timing mismatches in our ability to alter contractual rates earned on interest-earning assets or paid on
interest-bearing liabilities in response to changes in market interest rates. Basis risk refers to the potential for changes in the
underlying relationship between market rates or indices, which subsequently result in a narrowing of the spread between the rate
earned on a loan or investment and the rate paid to fund that investment. Option risk arises from the "embedded options" present in
many financial instruments, such as loan prepayment options or deposit early withdrawal options. These provide customers
opportunities to take advantage of directional changes in interest rates and could have an adverse impact on our margin performance.
We seek to achieve consistent growth in net interest income and net income while managing volatility that arises from shifts in
interest rates. The Bank's Asset Liability Committee ("ALCO") oversees financial risk management by developing programs to
measure and manage interest rate risks within authorized limits set by the Bank's Board of Directors. ALCO also approves the
Bank's asset and liability management policies, oversees the formulation and implementation of strategies to improve balance sheet
positioning and earnings, and reviews the Bank's interest rate sensitivity position. Management uses net interest income simulation
modeling to analyze and capture exposure of earnings to changes in interest rates.
Net Interest Income Sensitivity
The analysis of net interest income sensitivity assesses the magnitude of changes in net interest income over a twelve-month
measurement period resulting from immediate changes in interest rates using multiple rate scenarios. These scenarios include, but
are not limited to, a flat or unchanged rate environment, immediate increases of 100, 200, and 300 basis points, and an immediate
decrease of 100 basis points. Due to the low interest rate environment as of December 31, 2014 and 2013, management determined
that an immediate decrease in interest rates greater than 100 basis points was not meaningful for this analysis.
This simulation analysis is based on expected future cash flows and repricing characteristics for balance sheet and off-balance sheet
instruments and incorporates market-based assumptions regarding the effect of changing interest rates on the prepayment rates of
certain assets and liabilities. In addition, this sensitivity analysis examines assets and liabilities at the beginning of the measurement
period and does not assume any changes from growth or business plans over the next twelve months. Interest-earning assets and
interest-bearing liabilities are assumed to re-price based on contractual terms over the twelve-month measurement period assuming
an instantaneous parallel shift in interest rates in effect at the beginning of the measurement period. The simulation analysis also
incorporates assumptions based on the historical behavior of deposit rates in relation to interest rates. Because these assumptions are
inherently uncertain, the simulation analysis cannot definitively measure net interest income or predict the impact of the fluctuation
in interest rates on net interest income, but does provide an indication of the Company's sensitivity to changes in interest rates.
Actual results may differ from simulated results due to timing, magnitude, and frequency of interest rate changes as well as changes
in market conditions and management strategies.
76
Our balance sheet is asset sensitive based on repricing and maturity characteristics and simulation analysis assumptions. The Bank’s
current simulation analysis indicates we would benefit from rising interest rates. Interest-earning assets consist of short and long-
term products. Excluding non-accrual loans, 49% of the loan portfolio consisted of fixed rate loans and 51% were floating rate loans
as of December 31, 2014. Investments, consisting of securities and interest-bearing deposits in other banks, are more heavily
weighted toward fixed rate securities at 67% of the total compared to 33% for floating rate interest-bearing deposits in other banks.
Fixed rate loans are most sensitive to the 3-5 year portion of the yield curve and the Bank limits its loans with maturities that extend
beyond 5 years. The majority of floating rate loans are indexed to the short-term Prime or LIBOR rates. The amount of floating rate
loans in the money with interest rate floors was $644.6 million, or 25%, of the floating rate loan portfolio as of December 31, 2014.
On the liability side of the balance sheet, 84% of deposits are demand deposits and interest-bearing transactional deposits, which
either do not pay interest or the interest rates are expected to rise at a slower pace than short-term interest rates.
Analysis of Net Interest Income Sensitivity
(Dollar amounts in thousands)
December 31, 2014:
Dollar change .................................................................... $
Percent change ...................................................................
December 31, 2013:
Dollar change .................................................................... $
Percent change ...................................................................
Immediate Change in Rates
+300
+200
+100
-100
42,922
$
27,471
$
12,707
$
(12,748)
14.3%
9.2%
4.2%
(4.3)%
45,209
$
28,307
$
11,925
$
(11,791)
17.3%
10.8%
4.6%
(4.5)%
The sensitivity of estimated net interest income to an instantaneous parallel shift in interest rate changes is reflected as both dollar
and percent changes. This table illustrates that an instantaneous 200 basis point rise in interest rates as of December 31, 2014 would
increase net interest income $27.5 million, or 9.2%, over the next twelve months compared to no change in interest rates. This same
measure was $28.3 million, or 10.8%, as of December 31, 2013.
In rising interest rate scenarios, interest rate risk volatility was less positive at December 31, 2014 compared to December 31, 2013.
During 2014, growth in floating rate loans were funded by the rise in core deposits, which are less rate sensitive. Overall, this
increase in rate sensitive assets was offset by the prepayment of $114.6 million of FHLB advances at fixed rates and the hedging of
$325.0 million of certain corporate variable rate loans using interest rate swaps through which we receive fixed amounts and pay
variable amounts. The rise in fixed rate loans, driven primarily by acquisition activity, was offset by the reduction in securities as
cash flows from maturities, calls, and prepayments were not reinvested in the portfolio. While net interest income is projected to
decline in a decreasing interest rate environment, we believe the risk of a significant decrease in interest rates is minimal.
77
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Management's Responsibility for Financial Statements
To Our Stockholders:
The accompanying consolidated financial statements were prepared by management, which is responsible for the integrity and
objectivity of the data presented. In the opinion of management, the financial statements, which necessarily include amounts based
on management's estimates and judgments, have been prepared in conformity with U.S. generally accepted accounting principles.
Ernst & Young LLP, an independent registered public accounting firm, has audited these consolidated financial statements in
accordance with the standards of the Public Company Accounting Oversight Board (United States) and has expressed its unqualified
opinion on these financial statements.
The Audit Committee of the Board of Directors, which oversees the Company's financial reporting process on behalf of the Board of
Directors, is composed entirely of independent directors (as defined by the listing standards of NASDAQ). The Audit Committee
meets periodically with management, the independent accountants, and the internal auditors to review matters relating to the
Company's financial statements, compliance with legal and regulatory requirements relating to financial reporting and disclosure,
annual financial statement audit, engagement of independent accountants, internal audit function, and system of internal controls.
The internal auditors and the independent accountants periodically meet alone with the Audit Committee and have access to the
Audit Committee at any time.
/s/ MICHAEL L. SCUDDER
Michael L. Scudder
President and
Chief Executive Officer
March 2, 2015
/s/ PAUL F. CLEMENS
Paul F. Clemens
Executive Vice President and
Chief Financial Officer
78
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, 2014 and 2013, and the related consolidated statements of income, comprehensive income, changes in
stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2014. 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, 2014 and 2013, and the consolidated results of its operations and its cash flows for each of the three
years in the period ended December 31, 2014, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the
Company’s internal control over financial reporting as of December 31, 2014, based on criteria established in Internal Control-
Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and
our report dated March 2, 2015 expressed an unqualified opinion thereon.
/s/ ERNST & YOUNG LLP
Chicago, Illinois
March 2, 2015
79
FIRST MIDWEST BANCORP, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Amounts in thousands, except per share data)
As of December 31,
2013
2014
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 2014 – $27,670; 2013 – $43,387) ...
Federal Home Loan Bank ("FHLB") and Federal Reserve Bank ("FRB") 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, net ...................................................................................
Investment in bank-owned life insurance ("BOLI") .................................................................
Goodwill and other intangible assets........................................................................................
Accrued interest receivable and other assets ............................................................................
Total assets ...................................................................................................................... $
Liabilities
Noninterest-bearing deposits .................................................................................................... $
Interest-bearing deposits ..........................................................................................................
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 ....................................................................................................
Total liabilities and stockholders' equity ......................................................................... $
117,315 $
488,947
17,460
1,187,009
26,555
37,558
6,657,418
79,435
(72,694)
6,664,159
26,898
8,068
8,452
131,109
206,498
334,199
190,912
9,445,139 $
2,301,757 $
5,586,001
7,887,758
137,994
200,869
117,743
8,344,364
882
449,798
899,516
(15,855)
(233,566)
1,100,775
9,445,139 $
110,417
476,824
17,317
1,112,725
44,322
35,161
5,580,005
134,355
(85,505)
5,628,855
32,473
8,863
16,585
120,204
193,167
276,366
180,128
8,253,407
1,911,602
4,854,499
6,766,101
224,342
190,932
70,590
7,251,965
858
414,293
853,740
(26,792)
(240,657)
1,001,442
8,253,407
December 31, 2014
December 31, 2013
Preferred
Shares
Common
Shares
Preferred
Shares
Common
Shares
Par value ................................................................... $
Shares authorized .....................................................
Shares issued ............................................................
Shares outstanding ...................................................
Treasury shares .........................................................
— $
0.01 $
1,000
—
—
—
150,000
88,228
77,695
10,533
— $
1,000
—
—
—
0.01
100,000
85,787
75,071
10,716
See accompanying notes to the consolidated financial statements.
80
FIRST MIDWEST BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Amounts in thousands, except per share data)
Years Ended December 31,
2013
2012
2014
Interest Income
Loans, excluding covered loans ..................................................................... $
Covered loans .................................................................................................
Investment securities – taxable ......................................................................
Investment securities – tax-exempt ................................................................
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 losses .....
Noninterest Income
Service charges on deposit accounts ..............................................................
Wealth management fees ................................................................................
Card-based fees ..............................................................................................
Merchant servicing fees .................................................................................
Mortgage banking income ..............................................................................
Other service charges, commissions, and fees ...............................................
Net securities gains (losses) ...........................................................................
BOLI income (loss) ........................................................................................
Other income ..................................................................................................
Gain on termination of FHLB forward commitments ....................................
Gain on bulk loan sales ..................................................................................
Total noninterest income .........................................................................
Noninterest Expense
Salaries and wages .........................................................................................
Retirement and other employee benefits ........................................................
Net occupancy and equipment expense ..........................................................
Professional services ......................................................................................
Technology and related costs .........................................................................
Merchant card expense ...................................................................................
Advertising and promotions ...........................................................................
Net OREO expense ........................................................................................
FDIC premiums ..............................................................................................
Other expenses ...............................................................................................
Acquisition and integration related expenses .................................................
Adjusted amortization of FDIC indemnification asset ...................................
Total noninterest expense ........................................................................
Income (loss) before income tax expense (benefit).................................
Income tax expense (benefit) ..................................................................
Net income (loss) ................................................................................... $
Per Common Share Data
Basic earnings (loss) per common share ........................................................ $
Diluted earnings (loss) per common share .....................................................
Weighted-average common shares outstanding .............................................
Weighted-average diluted common shares outstanding .................................
See accompanying notes to the consolidated financial statements.
81
256,842 $
8,659
14,516
16,716
3,131
299,864
239,224 $
13,804
12,249
18,644
3,326
287,247
10,377
573
12,062
23,012
276,852
19,168
257,684
36,910
26,474
24,340
11,260
4,011
8,086
8,097
2,873
4,567
—
—
126,618
116,578
27,245
35,181
23,436
12,875
9,195
8,159
7,075
5,824
24,386
13,872
—
283,826
100,476
31,170
69,306 $
0.92 $
0.92
74,484
74,496
11,901
1,607
13,607
27,115
260,132
16,257
243,875
36,526
24,185
21,649
10,953
5,306
7,663
34,164
(11,844)
4,452
7,829
—
140,883
112,631
26,119
31,832
21,922
11,335
8,780
7,754
8,547
6,438
19,879
—
1,500
256,737
128,021
48,715
79,306 $
1.06 $
1.06
73,984
73,994
248,752
15,873
12,670
20,253
3,021
300,569
18,052
2,009
14,840
34,901
265,668
158,052
107,616
36,699
21,791
20,852
10,806
2,689
4,486
(921)
1,307
7,086
—
5,153
109,948
105,231
25,524
32,699
29,614
11,846
8,584
5,073
10,521
6,926
24,777
—
6,705
267,500
(49,936)
(28,882)
(21,054)
(0.28)
(0.28)
73,665
73,666
FIRST MIDWEST BANCORP, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Dollar amounts in thousands)
Net income (loss) .............................................................................. $
Securities available-for-sale
Unrealized holding gains (losses):
Before tax .....................................................................................
Tax effect ......................................................................................
Net of tax .................................................................................
Reclassification of net gains (losses) included in net income (loss):
Before tax .....................................................................................
Tax effect ......................................................................................
Net of tax .................................................................................
Net unrealized holding gains (losses) ................................................
Derivative instruments
Unrealized holding losses:
Before tax .....................................................................................
Tax effect ......................................................................................
Net of tax .................................................................................
Unrecognized net pension costs
Unrealized holding (losses) gains:
Years Ended December 31,
2013
2012
2014
69,306 $
79,306 $
(21,054)
37,173
(14,918)
22,255
8,097
(3,311)
4,786
17,469
(1,930)
792
(1,138)
(2,054)
711
(1,343)
34,164
(13,973)
20,191
(21,534)
—
—
—
1,513
(588)
925
(921)
377
(544)
1,469
—
—
—
Before tax .....................................................................................
Tax effect ......................................................................................
Net of tax .................................................................................
Total other comprehensive income (loss) ..................................
Total comprehensive income (loss) ....................................... $
(9,127)
3,733
(5,394)
10,937
80,243 $
17,600
(7,198)
10,402
(11,132)
68,174 $
(6,520)
2,667
(3,853)
(2,384)
(23,438)
Accumulated
Unrealized
(Loss) Gain on
Securities
Available-
for-Sale
Accumulated
Unrealized Loss
on Derivative
Instruments
Unrecognized
Net Pension
Costs
Total
Accumulated
Other
Comprehensive
Loss
Balance at December 31, 2011 ..................................... $
(354) $
— $
(12,922) $
Other comprehensive income (loss) .............................
Balance at December 31, 2012 .....................................
Other comprehensive (loss) income .............................
Balance at December 31, 2013 .....................................
Other comprehensive income (loss) .............................
1,469
1,115
(21,534)
(20,419)
17,469
—
—
—
—
(1,138)
(3,853)
(16,775)
10,402
(6,373)
(5,394)
Balance at December 31, 2014 ..................................... $
(2,950) $
(1,138) $
(11,767) $
(13,276)
(2,384)
(15,660)
(11,132)
(26,792)
10,937
(15,855)
See accompanying notes to the consolidated financial statements.
82
FIRST MIDWEST BANCORP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(Amounts in thousands, except per share data)
Common
Shares
Outstanding
Common
Stock
Additional
Paid-in
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Loss
Treasury
Stock
Total
(13,276) $ (263,483) $
(2,384)
—
962,587
(23,438)
—
—
14,284
123
(2,980)
6,004
(1,320)
40
(249,076)
940,893
—
—
—
8,276
143
68,174
(12,019)
5,903
(1,538)
29
(240,657)
1,001,442
—
—
—
—
80,243
(23,530)
38,300
5,926
6,585
(1,975)
—
—
—
—
(15,660)
(11,132)
—
—
—
—
(26,792)
10,937
—
—
—
—
—
506
369
(15,855) $ (233,566) $ 1,100,775
Balance at December 31, 2011 .........................
Comprehensive loss ........................................
Common dividends declared
($0.04 per common share) ..............................
Share-based compensation expense .....................
Restricted stock activity ...................................
Treasury stock issued to benefit plans ..................
Balance at December 31, 2012 .........................
Comprehensive income (loss) ............................
Common dividends declared
($0.16 per common share) ..............................
Share-based compensation expense .....................
Restricted stock activity ...................................
Treasury stock issued to benefit plans ..................
Balance at December 31, 2013 .........................
Comprehensive income ...................................
Common dividends declared
($0.31 per common share) ..............................
Common stock issued, net of issuance costs ..........
Share-based compensation expense .....................
Restricted stock activity ...................................
Treasury stock issued to benefit plans ..................
Balance at December 31, 2014 .........................
74,435 $
858 $
428,001 $
810,487 $
—
—
—
408
(3)
74,840
—
—
—
234
(3)
75,071
—
—
2,441
—
176
7
—
—
—
—
—
858
—
—
—
—
—
858
—
—
24
—
—
—
—
—
(21,054)
(2,980)
6,004
(15,604)
(83)
—
—
—
418,318
786,453
—
—
5,903
(9,814)
(114)
79,306
(12,019)
—
—
—
414,293
853,740
—
—
69,306
(23,530)
38,276
5,926
(8,560)
(137)
—
—
—
—
77,695 $
882 $
449,798 $
899,516 $
See accompanying notes to the consolidated financial statements.
83
FIRST MIDWEST BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollar amounts in thousands)
Operating Activities
Net income (loss) ................................................................................................ $
Adjustments to reconcile net income (loss) 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 (gains) losses .............................................................................
Gains on loan sales .........................................................................................
Gain on termination of FHLB forward commitments..........................................
Gain on FDIC-assisted transaction ...................................................................
Net losses on early extinguishment of debt ........................................................
Net losses on sales and valuation adjustments of OREO .....................................
Net (gains) losses on sales and valuation adjustments of premises,
furniture, and equipment ................................................................................
BOLI (income) loss ........................................................................................
Net pension (income) cost ...............................................................................
Share-based compensation expense ..................................................................
Tax (expense) benefit related to share-based compensation .................................
Net decrease (increase) in net deferred tax assets ...............................................
Amortization of other intangible assets .............................................................
Originations of mortgage loans held-for-sale .....................................................
Proceeds from sales of mortgage loans held-for-sale ..........................................
Net (increase) decrease in trading securities ......................................................
Net (increase) decrease in accrued interest receivable and other assets .................
Net increase (decrease) in accrued interest payable and 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 ............................................................
Net (purchases) redemption of FHLB stock .......................................................
Proceeds from bulk loan sales ..........................................................................
Net increase in loans .......................................................................................
Premiums paid for BOLI, net of claims .............................................................
Proceeds from sales of OREO ..........................................................................
Proceeds from sales of premises, furniture, and equipment..................................
Purchases of premises, furniture, and equipment ................................................
Cash received from acquisitions, net of cash paid...............................................
Cash received in FDIC-assisted transactions ......................................................
Net cash provided by (used in) investing activities.....................................
Financing Activities
Net (decrease) increase in deposit accounts .......................................................
Net (decrease) increase in borrowed funds ........................................................
Payments for the retirement of subordinated debt ...............................................
(Payment for) proceeds from the termination of FHLB advances and forward
commitments ...............................................................................................
Cash dividends paid ........................................................................................
Restricted stock activity ..................................................................................
Excess tax benefit (expense) related to share-based compensation .......................
Net cash (used in) provided by financing activities ...............................
Net increase (decrease) in cash and cash equivalents.................................
Cash and cash equivalents at beginning of year ........................................
Cash and cash equivalents at end of year ............................................. $
84
Years Ended December 31,
2014
2013
2012
69,306 $
79,306 $
(21,054)
19,168
12,224
8,218
(8,097)
(3,771)
—
—
2,059
3,325
(3,277)
(2,873)
(959)
5,926
(106)
8,851
2,889
(97,535)
96,006
(143)
(10,651)
22,367
122,927
172,001
27,805
(25,856)
4,675
(2,638)
(427)
—
(276,637)
(85)
22,368
3,906
(14,085)
200,645
—
111,672
(73,244)
(1,288)
—
16,257
11,038
9,174
(34,164)
(4,717)
(7,829)
—
1,034
3,908
(79)
11,844
2,169
5,903
(10)
33,467
3,278
(40,681)
37,788
(3,155)
30,696
(21,859)
133,368
219,458
78,636
(335,442)
7,043
(17,070)
12,071
—
(351,616)
1,394
25,797
1,463
(11,030)
—
—
(369,296)
93,846
38,358
(24,094)
(116,609)
(22,568)
(2,781)
912
(215,578)
19,021
587,241
606,262 $
7,829
(7,508)
(1,607)
79
106,903
(129,025)
716,266
587,241 $
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
10,117
8,973
169,824
362,481
153,668
(588,429)
66,215
(48,999)
11,918
94,470
(272,618)
1,137
50,566
6,768
(8,764)
—
26,980
(144,607)
120,362
(29,343)
(37,033)
—
(2,977)
(1,469)
(21)
49,519
74,736
641,530
716,266
FIRST MIDWEST BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS - (Continued)
(Dollar amounts in thousands)
Supplemental Disclosures of Cash Flow Information:
Income taxes paid (refunded) ...................................................................... $
Interest paid to depositors and creditors .......................................................
Dividends declared, but unpaid ...................................................................
Common stock issued for acquisitions, net of issuance costs ........................
Non-cash transfers of loans to OREO ..........................................................
Non-cash transfers of loans held-for-investment to loans held-for-sale .........
Non-cash transfers of loans held-for-sale to loans held-for-investment .........
Non-cash transfer of an investment from other assets to securities
available-for-sale ......................................................................................
Non-cash transfers of premises, furniture, and equipment to OREO .............
See accompanying notes to the consolidated financial statements.
Years Ended December 31,
2013
2012
2014
16,375 $
23,088
6,222
38,300
18,079
71,272
—
—
—
4,945 $
27,599
5,260
—
17,965
1,925
—
2,787
—
(6,845)
36,036
749
—
47,628
93,714
1,957
—
1,833
85
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 throughout the greater Chicago metropolitan area, as well as central and western Illinois, eastern Iowa, and
northwestern Indiana. The Company operates three wholly owned subsidiaries: First Midwest Bank (the "Bank"), Catalyst Asset
Holdings, LLC ("Catalyst"), and Parasol Investment Management, LLC ("Parasol"). The Bank conducts the majority of the
Company's operations. Catalyst manages a portion of the Company's non-performing assets. Parasol serves in an advisory capacity
to certain wealth management accounts with the Bank.
The Company is engaged in commercial and retail banking and offers a comprehensive selection of financial products and services,
including lending, depository, wealth management, and other related financial services tailored to the needs of its individual,
business, institutional, and governmental customers.
Principles of Consolidation – The accompanying consolidated financial statements include the financial position and results of
operations of the Company and its subsidiaries after elimination of all significant intercompany accounts and transactions. Assets
held in a fiduciary or agency capacity are not assets of the Company or its subsidiaries and are not included in the consolidated
financial statements.
Basis of Presentation – The accounting and reporting policies of the Company and its subsidiaries conform to U.S. generally
accepted accounting principles ("GAAP") and general practice within the banking industry. The Company uses the accrual basis of
accounting for financial reporting purposes. Certain reclassifications were made to prior year amounts to conform to the current year
presentation.
In the third quarter of 2014, the Bank acquired assets and assumed liabilities in two separate transactions. The fair values assigned to
these assets and liabilities were preliminary and subject to refinement after the acquisition date as new information related to
acquisition date fair values became available. During the fourth quarter of 2014, the Bank obtained specific information relating to
the acquisition date fair values of certain assets which required a retrospective adjustment. These adjustments were recognized as if
they had happened as of the acquisition date in accordance with accounting guidance applicable to business combinations. See Note
3, "Acquisitions" for additional discussion related to these fair value adjustments.
Use of Estimates – The preparation of the consolidated financial statements in conformity with GAAP requires management to
make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes.
Although these estimates and assumptions are based on the best available information, actual results could differ from those
estimates.
Segment Disclosures – The Company has one reportable segment. The Company's chief operating decision maker evaluates the
operations of the Company using consolidated information for purposes of allocating resources and assessing performance.
Therefore, segment disclosures are not required.
The following is a summary of the Company's significant accounting policies.
Business Combinations – Business combinations are accounted for under the acquisition method of accounting. Assets acquired
and liabilities assumed are recorded at their estimated fair values as of the date of acquisition, with any excess of the purchase price
of the acquisition over the fair value of the net tangible and intangible assets acquired recorded as goodwill. Alternatively, a gain is
recorded if the fair value of assets purchased exceeds the fair value of liabilities assumed and consideration paid. The results of
operations of the acquired business are included in the Consolidated Statements of Income from the effective date of the acquisition.
Cash and Cash Equivalents – For purposes of the Consolidated Statements of Cash Flows, management defines cash and cash
equivalents to include cash and due from banks, interest-bearing deposits in other banks, and other short-term investments, if any,
such as federal funds sold and securities purchased under agreements to resell.
Securities – Securities are classified as held-to-maturity, trading, or available-for-sale at the time of purchase.
Securities Held-to-Maturity – Securities classified as held-to-maturity are securities for which management has the positive intent
and ability to hold to maturity. These securities are stated at cost and adjusted for amortization of premiums and accretion of
discounts over the estimated lives of the securities using the effective interest method.
Trading Securities – The Company's trading securities consist of diversified investment securities held in a grantor trust under
deferred compensation arrangements in which plan participants may direct amounts earned to be invested in securities other than
Company stock. The accounts of the grantor trust are consolidated with the accounts of the Company in its consolidated financial
86
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 obligation is also reported at fair value with unrealized gains and losses recognized as a component of
compensation expense. Other than the securities held in the grantor trust, the Company does not carry any securities for trading
purposes.
Securities Available-for-Sale – All other securities are classified as available-for-sale. Securities available-for-sale are carried at fair
value with unrealized gains and losses, net of related deferred income taxes, recorded in stockholders' equity as a separate
component of accumulated other comprehensive loss.
The historical cost of debt securities is adjusted for amortization of premiums and accretion of discounts over the estimated life of
the security using the effective interest method. Amortization of premiums and accretion of discounts are included in interest
income.
Purchases and sales of securities are recognized on a trade date basis. Realized securities gains or losses are reported in net securities
gains (losses) in the Consolidated Statements of Income. The cost of securities sold is based on the specific identification method.
On a quarterly basis, the Company individually assesses securities with unrealized losses to determine whether there were any
events or circumstances indicating that an other-than-temporary impairment ("OTTI") has occurred. In evaluating OTTI, the
Company considers many factors, including (i) the severity and duration of the impairment, (ii) the financial condition and near-
term prospects of the issuer, including external credit ratings and recent downgrades for debt securities, (iii) its intent to hold the
security until its value recovers, and (iv) the likelihood that it will be required to sell the security before a recovery in value, which
may be at maturity. If management intends to sell the security or believes it is more likely than not that it will be required to sell the
security prior to full recovery, an OTTI charge will be recognized through income as a realized loss and included in net securities
gains (losses) in the Consolidated Statements of Income. If management does not expect to sell the security or believes it is not more
likely than not that it will be required to sell the security prior to full recovery, the OTTI is separated into the amount related to
credit deterioration, which is recognized through income as a realized loss, and the amount resulting from other factors, which is
recognized in other comprehensive income (loss).
FHLB and FRB Stock – The Company, as a member of the FHLB and FRB, is required to maintain an investment in the capital
stock of the FHLB and FRB. No ready market exists for these stocks, and they have no quoted market values. The stock is
redeemable at par by the FRB and FHLB and is, therefore, carried at cost and periodically evaluated for impairment.
Loans – Loans held-for-investment are loans that the Company intends to hold until they are paid in full and are carried at the
principal amount outstanding, including certain net deferred loan origination fees. Interest income on loans is accrued based on
principal amounts outstanding. Loan origination fees, commitment fees, and certain direct loan origination costs are deferred, and
the net amount is amortized as a yield adjustment over the contractual life of the related loans or commitments and included in
interest income. Fees related to standby letters of credit are amortized into fee income over the contractual life of the commitment.
Other credit-related fees are recognized as fee income when earned. Loans held-for-sale are carried at the lower of aggregate cost or
fair value and included in other assets in the Consolidated Statements of Financial Condition.
Acquired and Covered Loans – Covered loans consist of loans acquired by the Company in FDIC-assisted transactions, the majority
of which are covered by loss share agreements with the FDIC (the "FDIC Agreements"), under which the FDIC reimburses the
Company for the majority of the losses and eligible expenses related to these assets. Acquired loans consist of all other loans that
were acquired in business combinations that are not covered by FDIC Agreements. No allowance for credit losses is recorded on
acquired and covered loans at the acquisition date since business combination accounting requires that they are recorded at fair
value.
Acquired and covered loans are separated into (i) non-purchased credit impaired ("Non-PCI") and (ii) purchased credit impaired
("PCI") loans. Non-PCI loans include loans that did not have evidence of credit deterioration since origination at the acquisition
date. PCI loans include loans that had evidence of credit deterioration since origination and for which it was probable at acquisition
that the Company would not collect all contractually required principal and interest payments. Evidence of credit deterioration was
evaluated using various indicators, such as past due and non-accrual status. Other key considerations included past performance of
the institutions' credit underwriting standards, completeness and accuracy of credit files, maintenance of risk ratings, and age of
appraisals. Leases and revolving loans do not qualify to be accounted for as PCI loans.
The acquisition adjustment related to Non-PCI loans is amortized into interest income over the contractual life of the related loans.
As the acquisition adjustment is accreted into income over future periods, an allowance for credit losses will be established as
necessary to reflect credit deterioration since the acquisition date.
PCI loans are accounted for prospectively based on estimates of expected future cash flows. To estimate the fair value, the Company
generally aggregates purchased consumer loans and certain smaller balance commercial loans into pools of loans with common risk
characteristics, such as delinquency status, credit score, and internal risk rating. The fair values of larger balance commercial loans
87
are estimated on an individual basis. Expected future cash flows in excess of the fair value of loans at the purchase date ("accretable
yield") are recorded as interest income over the life of the loans if the timing and amount of the expected future cash flows can be
reasonably estimated. The non-accretable yield represents the difference between contractually required payments and the expected
future cash flows determined at acquisition. Subsequent increases in expected future cash flows are recognized as interest income
prospectively. The present value of any decreases in expected future cash flows is recognized by recording a charge-off through the
allowance for loan and covered loan losses or providing an allowance for loan and covered loan losses.
90-Days Past Due Loans – The Company’s accrual of interest on loans is discontinued at the time the loan is 90 days past due
unless the credit is sufficiently collateralized and in the process of renewal or collection.
Non-accrual Loans – Generally, corporate loans are placed on non-accrual status (i) when either principal or interest payments
become 90 days or more past due unless the credit is sufficiently collateralized and in the process of renewal or collection or (ii)
when an individual analysis of a borrower’s creditworthiness warrants a downgrade to non-accrual regardless of past due status.
When a loan is placed on non-accrual status, unpaid interest credited to income in the current year is reversed, and unpaid interest
accrued in prior years is charged against the allowance for loan losses. After the loan is placed on non-accrual, all debt service
payments are applied to the principal on the loan. Future interest income may only be recorded on a cash basis after recovery of
principal is reasonably assured. Non-accrual loans are returned to accrual status when the financial position of the borrower and
other relevant factors indicate that the Company will collect all principal and interest.
Commercial loans and loans secured by real estate are charged-off when deemed uncollectible. A loss is recorded if the net
realizable value of the underlying collateral is less than the outstanding principal and interest. Consumer loans that are not secured
by real estate are subject to mandatory charge-off at a specified delinquency date and are usually not classified as non-accrual prior
to being charged-off. Closed-end consumer loans, which include installment, automobile, and single payment loans, are usually
charged-off no later than the end of the month in which the loan becomes 120 days past due.
PCI loans are generally considered accruing loans unless reasonable estimates of the timing and amount of expected future cash
flows cannot be determined. Loans without reasonable cash flow estimates are classified as non-accrual loans, and interest income is
not recognized on those loans until the timing and amount of the expected future cash flows can be reasonably determined.
Troubled Debt Restructurings ("TDRs") – A restructuring is considered a TDR when (i) the borrower is experiencing financial
difficulties and (ii) the creditor grants a concession, such as forgiveness of principal, reduction of the interest rate, changes in
payments, or extension of the maturity date. Loans are not classified as TDRs when the modification is short-term or results in an
insignificant delay in payments. The Company’s TDRs are determined on a case-by-case basis.
The Company does not accrue interest on a TDR unless it believes collection of all principal and interest under the modified terms is
reasonably assured. For a TDR to begin accruing interest, the borrower must demonstrate both some level of past performance and
the future capacity to perform under the modified terms. Generally, six months of consecutive payment performance under the
restructured terms is required before a TDR is returned to accrual status. However, the period could vary depending on the
individual facts and circumstances of the loan. An evaluation of the borrower’s current creditworthiness is used to assess the
borrower’s capacity to repay the loan under the modified terms. This evaluation includes an estimate of expected future cash flows,
evidence of strong financial position, and estimates of the value of collateral, if applicable. For TDRs to be removed from TDR
status in the calendar year after the restructuring, the loans must (i) have an interest rate and terms that reflect market conditions at
the time of restructuring, and (ii) be in compliance with the modified terms. If the loan was restructured at below market rates and
terms, it continues to be separately reported as restructured until it is paid in full or charged-off.
Impaired Loans – Impaired loans consist of corporate non-accrual loans and TDRs.
A loan is considered impaired when it is probable that the Company will not collect all contractual principal and interest. With the
exception of accruing TDRs, impaired loans are classified as non-accrual and are exclusive of smaller homogeneous loans, such as
home equity, 1-4 family mortgages, and installment loans. Impaired loans with balances under a specified threshold are not
individually evaluated for impairment. For all other impaired loans, impairment is measured by comparing the estimated value of
the loan to the recorded book value. The value of collateral-dependent loans is based on the fair value of the underlying collateral,
less costs to sell. The value of other loans is measured using the present value of expected future cash flows discounted at the loan’s
initial effective interest rate.
Allowance for Credit Losses – The allowance for credit losses is comprised of the allowance for loan losses, the allowance for
covered loan losses, and the reserve for unfunded commitments, and is maintained by management at a level believed adequate to
absorb estimated losses inherent in the existing loan portfolio. Determination of the allowance for credit losses is subjective 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.
88
Loans deemed to be uncollectible are charged-off against the allowance for loan and covered loan losses, while recoveries of
amounts previously charged-off are credited to the allowance for loan and covered loan losses. Additions to the allowance for loan
and covered loan losses are charged to expense through the provision for loan and covered loan losses. The amount of provision
depends on a number of factors, including net charge-off levels, loan growth, changes in the composition of the loan portfolio, and
the Company’s assessment of the allowance for loan and covered loan losses based on the methodology discussed below.
Allowance for Loan Losses – The allowance for loan losses consists of (i) specific reserves for individual loans where the recorded
investment exceeds the value, (ii) an allowance based on a loss migration analysis that uses historical credit loss experience for each
loan category, and (iii) and allowance based on other internal and external qualitative factors.
The specific reserves component of the allowance for loan losses is based on a periodic analysis of impaired loans exceeding a fixed
dollar amount. If the value of an impaired loan is less than the recorded book value, the Company either establishes a valuation
allowance (i.e., a specific reserve) equal to the excess of the book value over the value of the loan as a component of the allowance
for loan losses or charges off the amount if it is a confirmed loss.
The general reserve component is based on a loss migration analysis, which examines actual loss experience by loan category for a
rolling 8-quarter period and the related internal risk rating for corporate loans. The loss migration analysis is updated quarterly using
actual loss experience. This component is then adjusted based on management’s consideration of many internal and external
qualitative factors, including:
• Changes in the composition of the loan portfolio, trends in the volume of loans, and trends in delinquent and non-accrual
loans that could indicate that historical trends do not reflect current conditions.
• Changes in credit policies and procedures, such as underwriting standards and collection, charge-off, and recovery
practices.
• Changes in the experience, ability, and depth of credit management and other relevant staff.
• Changes in the quality of the Company’s loan review system and Board of Directors oversight.
• The effect of any concentration of credit and changes in the level of concentrations, such as loan type or risk rating.
• Changes in the value of the underlying collateral for collateral-dependent loans.
• Changes in the national and local economy that affect the collectability of various segments of the portfolio.
• The effect of other external factors, such as competition and legal and regulatory requirements, on the Company’s loan
portfolio.
Allowance for Covered Loan Losses – The Company’s allowance for covered loan losses reflects the difference between the
carrying value and the discounted expected future cash flows of the covered PCI loans. On a periodic basis, the adequacy of this
allowance is determined through a re-estimation of expected future cash flows on all of the outstanding covered PCI loans using
either a probability of default/loss given default ("PD/LGD") methodology or a specific review methodology. The PD/LGD model is
a loss model that estimates expected future cash flows using a probability of default curve and loss given default estimates.
Reserve for Unfunded Commitments – The Company also maintains a reserve for unfunded commitments, including letters of
credit, for the risk of loss inherent in these arrangements. The reserve for unfunded commitments is estimated using the loss
migration analysis from the allowance for loan losses, adjusted for probabilities of future funding requirements. The reserve for
unfunded commitments is included in other liabilities in the Consolidated Statements of Financial Condition.
The establishment of the allowance for credit losses involves a high degree of judgment given the difficulty of assessing the factors
impacting loan repayment and estimating the timing and amount of losses. While management utilizes its best judgment and
information available, the adequacy of the allowance for credit losses depends on a variety of factors beyond the Company’s control,
including the performance of its loan portfolio, the economy, changes in interest rates and property values, and the interpretation of
loan risk classifications by regulatory authorities.
OREO – OREO consists of properties acquired through foreclosure in partial or total satisfaction of defaulted loans. At initial
transfer into OREO, properties are recorded at fair value, less estimated selling costs. Subsequently, OREO is carried at the lower of
the cost basis or fair value, less estimated selling costs. OREO also includes excess properties that the Company no longer intends to
utilize. Those properties are transferred to OREO at the lower of their historical cost, less accumulated depreciation, or fair value,
which represents the current appraised value of the properties, less selling costs. OREO write-downs occurring at the 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
89
changes in disposition strategies. These valuation adjustments, along with expenses related to maintenance of the properties, are
included in net OREO expense in the Consolidated Statements of Income.
FDIC Indemnification Asset – The majority of loans and OREO acquired through FDIC-assisted transactions are covered by the
FDIC Agreements, under which the FDIC reimburses the Company for the majority of the losses and eligible expenses related to
these assets during the indemnification period. The FDIC indemnification asset represents the present value of expected future
reimbursements from the FDIC. Since the indemnified items are covered loans and covered OREO, which are initially measured at
fair value, the FDIC indemnification asset is also initially measured at fair value by discounting the expected future cash flows to be
received from the FDIC. These expected future cash flows are estimated by multiplying estimated losses on covered PCI loans and
covered OREO by the reimbursement rates in the FDIC Agreements.
The balance of the FDIC indemnification asset is adjusted periodically to reflect changes in expected future cash flows. Decreases in
estimated reimbursements from the FDIC are recorded prospectively through amortization and increases in estimated
reimbursements from the FDIC are recognized by an increase in the carrying value of the indemnification asset. Payments from the
FDIC for reimbursement of losses result in a reduction of the FDIC indemnification asset.
Depreciable Assets – Premises, furniture, and equipment are stated at cost, less accumulated depreciation. Depreciation expense is
determined by the straight-line method over the estimated useful lives of the assets. Useful lives range from 3 to 10 years for
furniture and equipment and 25 to 40 years for premises. Leasehold improvements are amortized over the shorter of the life of the
asset or the lease term. Gains on dispositions are included in other noninterest income, and losses on dispositions are included in
other noninterest expense in the Consolidated Statements of Income. Maintenance and repairs are charged to operating expenses as
incurred, while improvements that extend the useful life of assets are capitalized and depreciated over the estimated remaining life.
Long-lived depreciable assets are evaluated periodically for impairment when events or changes in circumstances indicate the
carrying amount may not be recoverable. Impairment exists when the undiscounted expected future cash flows of a long-lived asset
are less than its carrying value. In that event, the Company recognizes a loss for the difference between the carrying amount and the
estimated fair value of the asset based on a quoted market price, if applicable, or a discounted cash flow analysis. Impairment losses
are recorded in other noninterest expense in the Consolidated Statements of Income.
BOLI – BOLI represents life insurance policies on the lives of certain Company directors and officers for which the Company is the
sole owner and beneficiary. These policies are recorded as an asset in the Consolidated Statements of Financial Condition at their
cash surrender value ("CSV") or the current amount that could be realized if settled. The change in CSV and insurance proceeds
received are included as a component of noninterest income in the Consolidated Statements of Income.
Goodwill and Other Intangible Assets – Goodwill represents the excess of the purchase price of the acquisition over the fair value
of the net tangible and intangible assets acquired using the acquisition method of accounting. Goodwill is not amortized. Instead,
impairment testing is conducted annually or more often if events or circumstances between annual tests indicate that there may be
impairment.
Impairment testing is performed using a two-step quantitative approach. In the first step, management compares its estimate of the
fair value of a reporting unit, which is based on a discounted cash flow analysis, with its carrying amount, including goodwill. If the
fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is not impaired and the second step is not
required. If necessary, the second step compares the implied fair value of the reporting unit goodwill with the carrying amount of
that goodwill. The implied fair value of goodwill is determined by assigning the value of a reporting unit to all of the assets and
liabilities of that unit, including any other identifiable intangible assets. An impairment loss is recognized if the carrying amount of
the reporting unit goodwill exceeds the implied fair value of that goodwill.
Other intangible assets represent purchased assets that lack physical substance, but can be distinguished from goodwill because of
contractual or other legal rights or because the asset is capable of being sold or exchanged either on its own or in combination with a
related contract, asset, or liability. Identified intangible assets that have a finite useful life are amortized over that life in a manner
that reflects the estimated decline in the economic value of the identified intangible asset. All of the Company's other intangible
assets have finite lives and are amortized over varying periods not exceeding 13 years.
Intangible assets are reviewed at least annually to determine whether there were any events or circumstances that indicate the
recorded amount is not recoverable from projected undiscounted net operating cash flows. If the projected undiscounted net
operating cash flows are less than the carrying amount, a loss is recognized to reduce the carrying amount to fair value and the
amortization period may also be reduced. Unamortized intangible assets associated with disposed assets are included in the
determination of the gain or loss on the sale of the disposed assets.
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.
90
Derivative Financial Instruments – To provide derivative products to customers and in the ordinary course of business, the
Company enters into derivative transactions as part of its overall interest rate risk management strategy to minimize significant
unplanned fluctuations in earnings and expected future cash flows caused by interest rate volatility. All derivative instruments are
recorded at fair value as either other assets or other liabilities in the Consolidated Statements of Financial Condition. Subsequent
changes in a derivative’s fair value are recognized in earnings unless specific hedge accounting criteria are met.
On the date the Company enters into a derivative contract, the derivative is designated as a fair value hedge, a cash flow hedge, or a
non-hedge derivative instrument. Fair value hedges are designed to mitigate exposure to changes in the fair value of an asset or
liability attributable to a particular risk, such as interest rate risk. Cash flow hedges are designed to mitigate exposure to variability
in expected future cash flows to be received or paid related to an asset, liability, or other type of forecasted transaction. The
Company formally documents all relationships between hedging instruments and hedged items, including its risk management
objective and strategy at inception.
At the hedge’s inception and quarterly thereafter, a formal assessment is performed to determine the effectiveness of the derivative
in offsetting changes in the fair values or expected future cash flows of the hedged items in the current period and prospectively. If a
derivative instrument designated as a hedge is terminated or ceases to be highly effective, hedge accounting is discontinued
prospectively, and the gain or loss is amortized into earnings. For fair value hedges, the gain or loss is amortized over the remaining
life of the hedged asset or liability. For cash flow hedges, the gain or loss is amortized over the same period that the forecasted
hedged transactions impact earnings. If the hedged item is disposed of, any fair value adjustments are included in the gain or loss
from the disposition of the hedged item. If the forecasted transaction is no longer probable, the gain or loss is included in earnings
immediately.
For fair value hedges, changes in the fair value of the derivative instruments, as well as changes in the fair value of the hedged item,
are recognized in earnings. For cash flow hedges, the effective portion of the change in fair value of the derivative instrument is
reported as a component of accumulated other comprehensive loss and is reclassified to earnings when the hedged transaction is
reflected in earnings.
Ineffectiveness is calculated based on the change in fair value of the hedged item compared with the change in fair value of the
hedging instrument. For all types of hedges, any ineffectiveness in the hedging relationship is recognized in earnings during the
period the ineffectiveness occurs.
Comprehensive Income (Loss) – Comprehensive income (loss) is the total of reported net income (loss) and other comprehensive
income (loss) ("OCI"). OCI includes all other revenues, expenses, gains, and losses that are not reported in net income under GAAP.
The Company includes the following items, net of tax, in other comprehensive income (loss) in the Consolidated Statements of
Comprehensive Income: (i) changes in unrealized gains or losses on securities available-for-sale, (ii) changes in the fair value of
derivatives designated as cash flow hedges, and (iii) changes in unrecognized net pension costs related to the Company's pension
plan.
Treasury Stock – Treasury stock acquired is recorded at cost and is carried as a reduction of stockholders' equity in the
Consolidated Statements of Financial Condition. Treasury stock issued is valued based on the "last in, first out" inventory method.
The difference between the consideration received on issuance and the carrying value is charged or credited to additional paid-in
capital.
Share-Based Compensation – The Company recognizes share-based compensation expense based on the estimated fair value of the
award at the grant or modification date over the period during which an employee is required to provide service in exchange for
such award. Share-based compensation expense is included in salaries and wages in the Consolidated Statements of Income.
Income Taxes – The Company files U.S. federal income tax returns and state income tax returns in various states. The provision for
income taxes is based on income in the consolidated financial statements, rather than amounts reported on the Company's income
tax return.
Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are
measured using the enacted tax rates that are expected to apply to taxable income in years in which those temporary differences are
expected to be recovered or settled. A valuation allowance is established for any deferred tax asset for which recovery or settlement
is not more likely than not. The effect of a change in tax rates on deferred tax assets and liabilities is recognized as income or
expense in the period that includes the enactment date.
Earnings per Common Share ("EPS") – EPS is computed using the two-class method. Basic EPS is computed by dividing net
income (loss) applicable to common shares by the weighted-average number of common shares outstanding during the applicable
period, excluding outstanding participating securities. Participating securities include non-vested restricted stock awards and
restricted stock units, which contain nonforfeitable rights to dividends or dividend equivalents. Diluted earnings per common share
91
is computed using the weighted-average number of shares determined for the basic earnings per common share computation plus the
dilutive effect of stock compensation using the treasury stock method.
2. RECENT ACCOUNTING PRONOUNCEMENTS
Adopted Accounting Guidance
Income Taxes: In January of 2014, the Financial Accounting Standards Board ("FASB") issued guidance that requires an entity to
present an unrecognized tax benefit, or a portion of an unrecognized tax benefit, as a reduction to a deferred tax asset for a net
operating loss carryforward, a similar tax loss, or a tax credit carryforward. To the extent a net operating loss carryforward, a similar
tax loss, or a tax credit carryforward is not available at the reporting date or, if the tax law of the applicable jurisdiction does not
require the entity to use, and the entity does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit
should be presented in the financial statements as a liability and should not be combined with deferred tax assets. The adoption of
this guidance on January 1, 2014 did not materially impact the Company's financial condition, results of operations, or liquidity.
Recently Issued Accounting Guidance
Receivables - Troubled Debt Restructurings by Creditors: In January of 2014, the FASB issued guidance to clarify when an in
substance repossession or foreclosure occurs and an entity is considered to have received physical possession of the residential real
estate property such that a loan receivable should be derecognized and the real estate property recognized. Additionally, the guidance
requires interim and annual disclosure of the amount of foreclosed residential real estate property held by the entity and the recorded
investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure
according to local requirements of the applicable jurisdiction. The guidance is effective for annual and interim periods beginning
after December 15, 2014 and can be applied retrospectively or prospectively. Management does not expect the adoption of this
guidance will materially impact the Company's financial condition, results of operations, or liquidity.
Reporting Discontinued Operations: In April of 2014, the FASB issued guidance that requires an entity to report a disposal of a
component of an entity or a group of components of an entity in discontinued operations if the disposal represents a strategic shift
that has (or will have) a major effect on an entity's operations and financial results when the component of an entity or group of
components of an entity (i) meets the criteria to be classified as held for sale, (ii) is disposed of by sale, or (iii) is disposed of other
than by sale. The guidance is effective for annual and interim reporting periods beginning on or after December 15, 2014, and must
be applied prospectively. Management does not expect the adoption of this guidance will materially impact the Company's financial
condition, results of operations, or liquidity.
Revenue from Contracts with Customers: In May of 2014, the FASB issued guidance that requires an entity to recognize revenue
to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity
expects to be entitled in exchange for those goods or services. The guidance is effective for annual and interim reporting periods
beginning on or after December 15, 2016, and must be applied either retrospectively or using the modified retrospective approach.
Management is evaluating the new guidance, but does not expect the adoption of this guidance will materially impact the Company's
financial condition, results of operations, or liquidity.
Transfers and Servicing: In June of 2014, the FASB issued guidance that requires repurchase-to-maturity transactions to be
accounted for as secured borrowings. The guidance also requires separate accounting for a transfer of a financial asset executed
contemporaneously with a repurchase agreement with the same counterparty. If the derecognition criteria are met as outlined in the
guidance, the initial transfer will generally be accounted for as a sale and the repurchase agreement will generally be accounted for
as a secured borrowing. The guidance is effective for annual and interim reporting periods beginning after December 15, 2014.
Management is evaluating the new guidance, but does not expect the adoption of this guidance will materially impact the Company's
financial condition, results of operations, or liquidity.
Receivables - Troubled Debt Restructurings by Creditors: In August of 2014, the FASB issued guidance that requires an entity to
derecognize a mortgage loan and recognize a separate other receivable upon foreclosure if (i) the loan has a government guarantee
that is not separable from the loan before foreclosure, (ii) at the time of foreclosure, the creditor has the intent to convey the real
estate property to the guarantor and make a claim on that guarantee, and the creditor has the ability to recover under that claim, and
(iii) at the time of foreclosure, any amount of the claim that is determined on the basis of the fair value of the real estate is fixed. The
separate other receivable is to be measured based on the amount of the loan balance (principal and interest) expected to be recovered
from the guarantor. The guidance is effective for annual and interim reporting periods beginning after December 15, 2014.
Management is evaluating the new guidance, but does not expect the adoption of this guidance will materially impact the Company's
financial condition, results of operations, or liquidity.
Disclosure of Uncertainties about an Entity's Ability to Continue as a Going Concern: In August of 2014, the FASB issued
guidance that requires management to evaluate whether there are conditions or events, considered in the aggregate, that raise
substantial doubt about the entity's ability to continue as a going concern within one year after the date that the financial statements
92
are issued. The guidance is effective for the annual period ending after December 15, 2016, and for annual and interim periods
thereafter. Management does not expect the adoption of this guidance will materially impact the Company's financial condition,
results of operations, or liquidity.
3. ACQUISITIONS
2014 Acquisitions
Popular Community Bank
On August 8, 2014, the Bank completed the acquisition of the Chicago area banking operations of Banco Popular North America
("Popular"), doing business as Popular Community Bank, which is a subsidiary of Popular, Inc. The acquisition included Popular’s
twelve full-service retail banking offices and its small business and middle market commercial lending activities in the Chicago
metropolitan area at a purchase price of $19.0 million paid in cash. The Company recorded goodwill of $32.2 million associated
with the acquisition.
The assets acquired and liabilities assumed, both intangible and tangible, were recorded at their estimated fair values as of the
August 8, 2014 acquisition date and have been accounted for under the acquisition method of accounting. During the fourth quarter
of 2014, the Company identified differences in the book and tax basis of certain categories of intangibles which required a
retrospective adjustment of $4.7 million to reduce goodwill and increase deferred tax assets, a component of other assets. Other
retrospective adjustments may be deemed necessary as the Company continues to finalize the fair values of loans and intangible
assets and liabilities. As a result, the fair value adjustments associated with these accounts and goodwill are preliminary and may
change.
Great Lakes Financial Resources, Inc.
On December 2, 2014, the Company completed the acquisition of the south suburban Chicago-based Great Lakes Financial
Resources, Inc. ("Great Lakes"), the holding company for Great Lakes Bank, National Association. The Company acquired all assets
and assumed all liabilities of Great Lakes, which included seven full-service retail banking offices and one drive-up location, at a
purchase price of approximately $55.8 million. Consideration consisted of $38.3 million in Company common stock and $17.5
million in cash. The Company recorded goodwill of $10.3 million associated with the acquisition.
The assets acquired and liabilities assumed, both intangible and tangible, were recorded at their estimated fair values as of the
December 2, 2014 acquisition date and have been accounted for under the acquisition method of accounting. The Company is
finalizing the fair values of the assets and liabilities acquired. As a result, the fair value adjustments associated with these accounts
and goodwill are preliminary and may change.
93
The following table presents the assets acquired and liabilities assumed, net of the fair value adjustments, in the Popular and Great
Lakes transactions as of the acquisition date.
Acquisition Activity
(Dollar amounts in thousands)
Popular
August 8, 2014
Great Lakes
December 2, 2014
Assets
Cash and due from banks and
interest-bearing deposits in other banks .......................................................... $
Securities available-for-sale .............................................................................
FHLB and FRB stock .......................................................................................
Loans ................................................................................................................
OREO ...............................................................................................................
Investment in BOLI ..........................................................................................
Goodwill ...........................................................................................................
Other intangible assets ......................................................................................
Premises, furniture, and equipment ..................................................................
Accrued interest receivable and other assets ....................................................
Total assets .................................................................................... $
Liabilities
Deposits: ...........................................................................................................
Noninterest-bearing deposits ....................................................................... $
Interest-bearing deposits ..............................................................................
Total deposits ..........................................................................................
Intangible liabilities ..........................................................................................
Borrowed funds ................................................................................................
Senior and subordinated debt ...........................................................................
Accrued interest payable and other liabilities ...................................................
Total liabilities ....................................................................................
Consideration Paid
Common stock (2,440,754 shares issued at $15.737 per share),
net of $110,000 in issuance costs ....................................................................
Cash paid ..........................................................................................................
Total consideration paid .....................................................................
$
National Machine Tool Financial Corporation
161,276
$
—
—
549,386
—
—
32,181
8,003
4,647
6,574
762,067 $
163,299 $
568,573
731,872
10,631
—
—
564
743,067
—
19,000
19,000
762,067 $
78,609
219,279
1,970
223,169
1,244
10,373
10,339
6,192
5,011
10,059
566,245
110,885
353,424
464,309
—
29,490
9,809
6,887
510,495
38,300
17,450
55,750
566,245
On September 26, 2014, the Bank completed the acquisition of National Machine Tool Financial Corporation ("National Machine
Tool"), now known as First Midwest Equipment Finance Co., which provides equipment leasing and commercial financing
alternatives to traditional bank financing. On the date of acquisition, the Bank acquired approximately $5.9 million in assets,
excluding goodwill, which primarily consisted of direct financing leases, lease loans, and other assets, at a purchase price of $3.1
million paid in cash. Goodwill recorded as a result of the acquisition totaled $4.0 million.
The assets acquired and liabilities assumed, both intangible and tangible, were recorded at their estimated fair values as of the
September 26, 2014 acquisition date and have been accounted for under the acquisition method of accounting. During the fourth
quarter of 2014, the Company obtained specific information relating to the acquisition date fair value of certain acquired assets
which required a retrospective adjustment of $572,000 to increase goodwill and reduce other assets. Other retrospective adjustments
may be deemed necessary as the Company continues to finalize the fair values of assets and liabilities acquired. As a result, the fair
value adjustments associated with these accounts and goodwill are preliminary and may change.
Expenses related to the acquisition and integration of the Popular, Great Lakes, and National Machine Tool transactions totaled
$13.9 million during the year ended December 31, 2014, and are reported as a separate component within noninterest expense.
94
These acquisitions were not considered material to the Company’s financial statements; therefore, pro forma financial data and
related disclosures are not included.
2012 Acquisition
On August 3, 2012, the Company acquired substantially all of the assets of the former Waukegan Savings Bank in an FDIC-assisted
transaction generating a pre-tax gain of $3.3 million. The $46.3 million of acquired loans are not subject to FDIC Agreements. The
transaction also included $72.7 million in deposits, which were comprised of $41.5 million in core deposits and $31.2 million in
time deposits. As a result of the transaction, the Company recorded $781,000 in core deposit intangibles.
4. SECURITIES
A summary of the Company's securities portfolio by category and maturity is presented in the following tables.
Securities Portfolio
(Dollar amounts in thousands)
Amortized
Cost
2014
Gross Unrealized
Gains
Losses
As of December 31,
Fair
Value
Amortized
Cost
2013
Gross Unrealized
Gains
Losses
Fair
Value
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 ................
Total available-
for-sale securities ... $ 1,192,322
30,297 $
144 $
(10) $
30,431 $
500 $
— $
— $
500
538,882
2,256
(6,982)
534,156
490,962
1,427
(16,621)
475,768
155,443
414,255
4,632
(310)
159,765
10,583
(1,018)
423,820
135,097
457,318
3,349
9,673
(2,282)
(5,598)
136,164
461,393
48,502
1,719
3,224
152
(14,880)
33,774
83
72
—
(35)
1,802
3,261
46,532
12,999
3,706
—
1,930
2,046
(28,223)
—
(90)
18,309
14,929
5,662
$ 17,922 $ (23,235) $ 1,187,009 $ 1,147,114 $ 18,425
$ (52,814) $ 1,112,725
Securities Held-to-Maturity
Municipal securities ........... $
26,555 $
1,115 $
— $
27,670 $
44,322 $
— $
(935) $
43,387
Trading Securities ............
$
17,460
$
17,317
Remaining Contractual Maturity of Securities
(Dollar amounts in thousands)
As of December 31, 2014
Available-for-Sale
Held-to-Maturity
Amortized
Cost
Fair
Value
Amortized
Cost
Fair
Value
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 contractual maturity date ......
67,900 $
67,221 $
78,132
214,007
134,734
697,549
77,351
211,868
133,387
697,182
Total ................................................................................ $
1,192,322 $
1,187,009 $
3,504 $
8,727
5,404
8,920
—
26,555 $
3,651
9,093
5,631
9,295
—
27,670
95
The carrying value of securities available-for-sale that were pledged to secure deposits or for other purposes as permitted or required
by law totaled $779.4 million at December 31, 2014 and $755.3 million at December 31, 2013. No securities held-to-maturity were
pledged as of December 31, 2014 or 2013.
Excluding securities issued or backed by the U.S. government and its agencies and U.S. government-sponsored enterprises, there
were no investments in securities from one issuer that exceeded 10% of total stockholders' equity as of December 31, 2014 or 2013.
The following table presents net realized gains (losses) on securities.
Securities Gains (Losses)
(Dollar amounts in thousands)
Gains (losses) on sales of securities:
Gross realized gains ......................................................................... $
Gross realized losses ........................................................................
Net realized gains on sales of securities........................................
Non-cash impairment charges:
OTTI ...............................................................................................
Portion of OTTI recognized in other comprehensive income (loss)....
Net non-cash impairment charges ................................................
Net realized gains (losses) ........................................................... $
Net trading gains (1) ............................................................................... $
Net non-cash impairment charges:
CMOs .............................................................................................. $
Municipal securities .........................................................................
CDOs ..............................................................................................
Total ........................................................................................... $
Years Ended December 31,
2013
2012
2014
8,188 $
(63)
8,125
(28)
—
(28)
8,097 $
677 $
28 $
—
—
28 $
34,572 $
—
34,572
(408)
—
(408)
34,164 $
3,189
$
6 $
402
—
408 $
3,045
(297)
2,748
(3,728)
59
(3,669)
(921)
1,627
1,443
—
2,226
3,669
(1) All net trading gains relate to trading securities still held as of December 31, 2014, 2013, and 2012 and are included in other income in the
Consolidated Statements of Income.
Net gains realized on securities sales for the years ended December 31, 2014, 2013, and 2012 were $8.1 million, $34.6 million, and
$2.7 million, respectively. During 2014, net securities gains consisted of the sale of a non-accrual CDO at a gain of $3.5 million,
sales of corporate bonds at gains of $2.0 million, sales of municipal securities at gains of $468,000, and sales of certain other
investments at gains of $2.1 million. In addition, four CDOs totaling $2.9 million acquired in the Great Lakes transaction were sold
during the fourth quarter of 2014. These securities were recorded at fair value at the acquisition date, therefore, no gain or loss was
recognized on the sale. During 2013, the Company sold its investment in an equity security which resulted in a $34.0 million gain.
Accounting guidance requires that the credit portion of an OTTI charge be recognized through income. If a decline in fair value
below carrying value is not attributable to credit deterioration and the Company does not intend to sell the security or believe it
would not be more likely than not required to sell the security prior to recovery, the Company records the non-credit related portion
of the decline in fair value in other comprehensive income (loss).
96
The following table presents a rollforward of life-to-date OTTI recognized in earnings related to all available-for-sale securities held
by the Company for the years ended December 31, 2014, 2013, and 2012. The majority of the beginning and ending balance of
OTTI relates to CDOs currently held by the Company.
Changes in OTTI Recognized in Earnings
(Dollar amounts in thousands)
Years Ended December 31,
2014
2013
2012
Beginning balance ......................................................................................... $
32,422 $
38,803 $
36,525
OTTI included in earnings (1):
Losses on securities that previously had OTTI.........................................
Losses on securities that did not previously have OTTI............................
Reduction for securities sales (2) .................................................................
Ending balance .............................................................................................. $
28
—
(8,570)
23,880 $
—
408
(6,789)
32,422 $
2,278
1,391
(1,391)
38,803
Included in net securities gains (losses) in the Consolidated Statements of Income.
(1)
(2) During the year ended December 31, 2014, one CDO with a carrying value of $1.3 million was sold. In addition, one CDO with a carrying value of zero
was sold during the year ended December 31, 2013. These CDOs had OTTI of $8.6 million and $6.8 million, respectively, that were previously
recognized in earnings.
The following table presents the aggregate amount of unrealized losses and the aggregate related fair values of securities with
unrealized losses as of December 31, 2014 and 2013.
Securities in an Unrealized Loss Position
(Dollar amounts in thousands)
Less Than 12 Months
Greater Than 12 Months
Total
Number of
Securities
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
As of December 31, 2014
U.S. agency securities ......................
CMOs .............................................
Other MBSs .....................................
Municipal securities .........................
CDOs ..............................................
Equity securities ..............................
Total ...........................................
As of December 31, 2013
CMOs .............................................
Other MBSs .....................................
Municipal securities .........................
CDOs ..............................................
Equity securities ..............................
Total ...........................................
1 $
87
11
91
4
1
195 $
1,943 $
61,321
1,113
1,317
—
—
65,694 $
10 $
— $
284,327
39,043
53,987
22,791
2,270
559
1
9
—
—
579 $ 402,418 $
— $
1,943 $
6,423
309
1,009
14,880
35
345,648
40,156
55,304
22,791
2,270
22,656 $ 468,112 $
67 $ 338,064 $
19
154
6
1
57,311
65,370
—
2,168
247 $ 462,913 $
14,288 $
2,281
3,245
—
90
57,269 $
356
27,565
18,309
—
2,333 $ 395,333 $
1
2,353
28,223
—
57,667
92,935
18,309
2,168
19,904 $ 103,499 $
32,910 $ 566,412 $
10
6,982
310
1,018
14,880
35
23,235
16,621
2,282
5,598
28,223
90
52,814
Substantially all of the Company's CMOs and other MBSs are either backed by U.S. government-owned agencies or issued by U.S.
government-sponsored enterprises. Municipal securities are issued by municipal authorities, and the majority are supported by third-
party insurance or some other form of credit enhancement. Management does not believe any individual unrealized loss as of
December 31, 2014 represents an OTTI related to credit deterioration. The unrealized losses associated with these securities are not
believed to be attributed to credit quality, but rather to changes in interest rates and temporary market movements. In addition, the
Company does not intend to sell the securities with unrealized losses, and it is not more likely than not that the Company will be
required to sell them before recovery of their amortized cost basis, which may be at maturity.
The unrealized losses on CDOs as of December 31, 2014 reflect changes in market activity for these securities. Management does
not believe these unrealized losses represent OTTI related to credit deterioration. In addition, the Company does not intend to sell
the CDOs with unrealized losses within a short period of time, and the Company does not believe it is more likely than not that it
97
will be required to sell them before recovery of their amortized cost basis, which may be at maturity. Significant judgment is
required to calculate the fair value of the CDOs, all of which are pooled. For a detailed discussion of the CDO valuation
methodology, see Note 22, "Fair Value."
5. LOANS
Loans Held-for-Investment
The following table presents the Company's loans held-for-investment by class.
Loan Portfolio
(Dollar amounts in thousands)
Commercial and industrial .......................................................................................................... $
Agricultural ................................................................................................................................
Commercial real estate:
Office, retail, and industrial ....................................................................................................
Multi-family ..........................................................................................................................
Construction ..........................................................................................................................
Other commercial real estate ..................................................................................................
Total commercial real estate ..............................................................................................
Total corporate loans .........................................................................................................
Home equity ...............................................................................................................................
1-4 family mortgages ..................................................................................................................
Installment ..................................................................................................................................
Total consumer loans .........................................................................................................
Total loans, excluding covered loans ..................................................................................
Covered loans (1) .........................................................................................................................
Total loans .................................................................................................................... $
Deferred loan fees included in total loans .................................................................................... $
Overdrawn demand deposits included in total loans.....................................................................
(1)
For information on covered loans, see Note 6, "Acquired and Covered Loans."
As of December 31,
2014
2,253,556 $
358,249
2013
1,830,638
321,702
1,478,379
564,421
204,236
887,897
3,134,933
5,746,738
543,185
291,463
76,032
910,680
6,657,418
79,435
6,736,853 $
3,922 $
3,438
1,353,685
332,873
186,197
807,071
2,679,826
4,832,166
427,020
275,992
44,827
747,839
5,580,005
134,355
5,714,360
4,656
5,047
The Company primarily lends to community-based and mid-sized businesses, commercial real estate customers, and consumers in
its markets. Within these areas, the Company diversifies its loan portfolio by loan type, industry, and borrower.
Commercial and industrial loans are underwritten after evaluating and understanding the borrower's ability to operate its business.
As part of the underwriting process, the Company examines current and expected future cash flows to determine the ability of the
borrower to repay its obligation. Commercial and industrial loans are primarily made based on the identified cash flows of the
borrower and secondarily on the underlying collateral provided by the borrower. The cash flows of the borrower may not be as
expected, and the collateral securing these loans may fluctuate in value due to economic or other factors. Most commercial and
industrial loans are secured by the assets being financed or other business assets, such as accounts receivable or inventory, and may
incorporate a personal guarantee. Some short-term loans may be made on an unsecured basis. In the case of loans secured by
accounts receivable, the availability of funds for the repayment of these loans substantially depend on the ability of the borrower to
collect amounts due from its customers.
Agricultural loans are generally provided to meet seasonal production, equipment, and farm real estate borrowing needs of
individual and corporate crop and livestock producers. As part of the underwriting process, the Company examines expected future
cash flows, financial statement stability, and the value of the underlying collateral. Seasonal crop production loans are repaid by the
liquidation of the financed crop that is typically covered by crop insurance. Equipment and real estate term loans are repaid through
cash flows of the farming operation.
Commercial real estate loans are subject to underwriting standards and processes similar to commercial and industrial loans. The
repayment of commercial real estate loans depends on the successful operation of the property securing the loan or the business
conducted on the property securing the loan. This category of loans may be more adversely affected by conditions in the real estate
98
market. Management monitors and evaluates commercial real estate loans based on cash flow, collateral, geography, and risk rating
criteria. The mix of properties securing the loans in our commercial real estate portfolio are further classified into owner-occupied
and investor categories and are diverse in terms of type and geographic location within the Company's markets.
Construction loans are underwritten utilizing feasibility studies, independent appraisal reviews, sensitivity analyses of absorption
and lease rates, and financial analyses of the developers and property owners. Construction loans are generally based on estimates of
costs and value associated with the completed project. Sources of repayment for these loans may be permanent loans from long-term
lenders, sales of developed property, or an interim loan commitment until permanent financing is obtained. Generally, construction
loans have a higher risk profile than other real estate loans since repayment is impacted by real estate values, interest rate changes,
governmental regulation of real property, demand and supply of alternative real estate, the availability of long-term financing, and
changes in general economic conditions.
Consumer loans are centrally underwritten using a credit scoring model developed by the Fair Isaac Corporation ("FICO"). It uses a
risk-based system to determine the probability that a borrower may default on financial obligations to the lender. Underwriting
standards for home equity loans are heavily influenced by statutory requirements, which include loan-to-value and affordability
ratios, risk-based pricing strategies, and documentation requirements. The home equity category consists mainly of revolving lines
of credit secured by junior liens on owner-occupied real estate. Loan-to-value ratios on home equity loans and 1-4 family mortgages
are based on the current appraised value of the collateral.
The carrying value of loans that were pledged to secure liabilities as of December 31, 2014 and 2013 are presented below.
Carrying Value of Loans Pledged
(Dollar amounts in thousands)
As of December 31
2014
2013
Loans pledged to secure:
FHLB advances ....................................................................................................... $
FRB's Discount Window Primary Credit Program.....................................................
Total ................................................................................................................... $
1,952,736 $
845,974
2,798,710 $
1,632,069
766,870
2,398,939
Loan Sales
The following table presents loan sales for the years ended December 31, 2014, 2013, and 2012.
Loan Sales
(Dollar amounts in thousands)
Proceeds
Book Value
Charge-offs (1)
Net Gains (2)
Loan sales in 2014
Mortgage loans ................................................. $
Non-performing loans .......................................
Total loan sales in 2014 ................................ $
Loan sales in 2013
Mortgage loans ................................................. $
Non-performing loans .......................................
Total loan sales in 2013 ................................ $
Loan sales in 2012
Bulk loan sales .................................................. $
Mortgage loans .................................................
Non-performing loans .......................................
Total loan sales in 2012 ................................ $
148,680 $
17,750
166,430 $
152,130 $
1,275
153,405 $
94,470 $
52,595
4,200
151,265 $
144,909 $
21,200
166,109 $
147,413 $
2,835
150,248 $
169,577 $
50,326
6,587
226,490 $
— $
(3,450)
(3,450) $
— $
(1,560)
(1,560) $
(80,260) $
—
(2,387)
(82,647) $
3,771
—
3,771
4,717
—
4,717
5,153
2,269
—
7,422
(1) Amount represents charge-offs to the allowance for loan and covered loan losses at the time the loans were identified for sale.
(2)
The net gains on the bulk loan sales represent gains realized subsequent to the transfer to held-for-sale and are included as a separate component of
noninterest income in the Consolidated Statements of Income. Net gains on mortgage loan sales are included in mortgage banking income in the
Consolidated Statements of Income.
99
Mortgage Loan Sales
During the year ended December 31, 2014, a gain of $3.8 million was recognized on the sale of $144.9 million of mortgage loans, of
which $92.5 million were originated with the intent to sell. For the year ended December 31, 2013, the Company sold $147.4
million of mortgage loans, resulting in a gain of $4.7 million. The Company retained servicing responsibilities on the majority of
mortgages sold and collects servicing fees equal to a percentage of the outstanding principal balance of the loans being serviced. The
Company also retained limited recourse for credit losses on the sold loans. A description of the recourse obligation is presented in
Note 21, "Commitments, Guarantees, and Contingent Liabilities."
Bulk Loan Sales
During the third quarter of 2012, the Company identified certain non-performing and performing potential problem loans for
accelerated disposition through bulk loan sales and transferred them into the held-for-sale category at the lower of the recorded
investment or the estimated fair value, which resulted in charge-offs of $80.3 million and a provision for loan and covered loan
losses of $62.3 million. The fair value was determined by the estimated bid price of the potential sale. The bulk loan sales were
completed in the fourth quarter of 2012, and net gains realized on the sales are included as a separate component of noninterest
income in the Consolidated Statements of Income.
6. ACQUIRED AND COVERED LOANS
Acquired loans consist primarily of loans that were acquired in business combinations that are not covered by the FDIC Agreements.
These loans are included in loans, excluding covered loans, in the Consolidated Statements of Financial Condition. Covered loans
consist of loans acquired by the Company in multiple FDIC-assisted transactions. Most loans and OREO acquired in those
transactions are covered by the FDIC Agreements. The significant accounting policies related to acquired and covered loans, which
are classified as PCI and Non-PCI, and the related FDIC indemnification asset are presented in Note 1, "Summary of Significant
Accounting Policies."
Effective January 1, 2015, the losses on non-residential mortgage loans and OREO related to one FDIC-assisted transaction will no
longer be covered under the FDIC Agreements. These non-residential loans and OREO totaled $10.1 million at December 31, 2014.
The losses on residential mortgage loans and OREO will continue to be covered under the FDIC Agreements through December 31,
2019. Losses related to non-residential mortgage loans and OREO in two other FDIC-assisted transactions will no longer be covered
under the FDIC Agreements effective on July 1, 2015 and October 1, 2015, and residential mortgage loans and OREO will continue
to be covered through June 30, 2020 and September 30, 2020.
The following table presents PCI and Non-PCI loans as of December 31, 2014 and 2013.
Acquired and Covered Loans
(Dollar amounts in thousands)
As of December 31,
Acquired loans ................................................ $
Covered loans .................................................
Total acquired and covered loans ................ $
2014
Non-PCI
714,836 $
24,753
739,589 $
PCI
28,712 $
54,682
83,394 $
Total
743,548 $
79,435
822,983 $
2013
Non-PCI
PCI
15,608 $
103,525
119,133 $
17,024 $
30,830
47,854 $
Total
32,632
134,355
166,987
In connection with the FDIC Agreements, the Company recorded an indemnification asset. To maintain eligibility for the loss share
reimbursement, the Company is required to follow certain servicing procedures as specified in the FDIC Agreements. The Company
was in compliance with those requirements as of December 31, 2014, 2013, and 2012.
100
A rollforward of the carrying value of the FDIC indemnification asset for the years ended December 31, 2014, 2013, and 2012 is
presented in the following table.
Changes in the FDIC Indemnification Asset
(Dollar amounts in thousands)
Beginning balance.................................................................................. $
Amortization .....................................................................................
Change in expected reimbursements from the FDIC for changes in
expected credit losses ......................................................................
Payments received from the FDIC .....................................................
Ending balance ...................................................................................... $
Years Ended December 31,
2014
2013
2012
16,585 $
(3,315)
(481)
(4,337)
8,452 $
37,051 $
(2,984 )
(1,242 )
(16,240 )
16,585 $
65,609
(14,098)
3,338
(17,798)
37,051
Changes in the accretable yield for acquired and covered PCI loans were as follows.
Changes in Accretable Yield
(Dollar amounts in thousands)
Years Ended December 31,
2013
2012
2014
Beginning balance.................................................................................. $
Additions ..........................................................................................
Accretion ..........................................................................................
Other (1) .............................................................................................
Ending balance ...................................................................................... $
36,792 $
3,517
(12,535)
470
28,244 $
51,498 $
—
(15,016 )
310
36,792 $
52,147
7,224
(20,632)
12,759
51,498
(1)
Increases represent a rise in the expected future cash flows to be collected over the remaining estimated life of the underlying portfolio.
101
7. PAST DUE LOANS, ALLOWANCE FOR CREDIT LOSSES, IMPAIRED LOANS, AND TDRS
Past Due and Non-accrual Loans
The following table presents an aging analysis of the Company's past due loans as of December 31, 2014 and 2013. The aging is
determined without regard to accrual status. The table also presents non-performing loans, consisting of non-accrual loans (the
majority of which are past due) and loans 90 days or more past due and still accruing interest, as of each balance sheet date.
Aging Analysis of Past Due Loans and Non-Performing Loans by Class
(Dollar amounts in thousands)
Aging Analysis (Accruing and Non-accrual)
Non-performing Loans
Current
30-89 Days
Past Due
90 Days or
More Past
Due
Total
Past Due
Total
Loans
Non-accrual
Loans
90 Days
Past Due
Loans, Still
Accruing
Interest
19,505 $
1,934
3,104 $
333
22,609 $ 2,253,556 $
2,267
358,249
22,693 $
360
As of December 31, 2014
Commercial and industrial .......... $ 2,230,947 $
Agricultural ................................
Commercial real estate:
355,982
Office, retail, and industrial ....
Multi-family ..........................
Construction ..........................
Other commercial real estate ..
Total commercial real
estate ..............................
Total corporate loans .........
Home equity ...............................
1-4 family mortgages ..................
Installment ..................................
Total consumer loans .........
Total loans, excluding
covered loans ..................
Covered loans .............................
1,463,724
562,625
197,255
876,609
3,100,213
5,687,142
535,587
287,892
75,428
898,907
6,586,049
66,331
Total loans .................... $ 6,652,380 $
As of December 31, 2013
Commercial and industrial .......... $ 1,814,660 $
Agricultural ................................
Commercial real estate:
321,156
Office, retail, and industrial ....
Multi-family ..........................
Construction ..........................
Other commercial real estate ..
Total commercial real
estate ..............................
Total corporate loans .........
Home equity ...............................
1-4 family mortgages ..................
Installment ..................................
Total consumer loans .........
Total loans, excluding
covered loans ..................
Covered loans .............................
1,335,027
330,960
180,083
795,462
2,641,532
4,777,348
415,791
268,912
42,350
727,053
5,504,401
94,211
Total loans .................... $ 5,598,612 $
14,655
1,796
6,981
11,288
34,720
59,596
7,598
3,571
604
11,773
1,478,379
564,421
204,236
887,897
3,134,933
5,746,738
543,185
291,463
76,032
910,680
6,657,418
71,369
13,104
84,473 $ 6,736,853 $
79,435
15,978 $ 1,830,638 $
546
18,658
1,913
6,114
11,609
38,294
54,818
11,229
7,080
2,477
20,786
321,702
1,353,685
332,873
186,197
807,071
2,679,826
4,832,166
427,020
275,992
44,827
747,839
12,939
754
6,981
6,970
27,644
50,697
6,290
2,941
43
9,274
59,971
6,186
66,157 $
11,767 $
519
17,076
1,848
6,297
8,153
33,374
45,660
6,864
5,198
2,076
14,138
205
—
76
83
—
438
597
802
145
166
60
371
1,173
5,002
6,175
393
—
1,315
—
—
258
1,573
1,966
1,102
548
92
1,742
53,066
37,912
90,978 $ 115,748 $ 5,714,360 $
75,604
40,144
134,355
5,580,005
59,798
20,942
80,740 $
3,708
18,081
21,789
2,340
1,261
—
5,412
9,013
30,452
3,216
2,246
506
5,968
12,315
535
6,981
5,876
25,707
29,144
4,382
1,325
98
5,805
36,420
2,714
39,134 $
34,949
10,390
45,339 $
6,872 $
134
9,106 $
412
16,038
1,595
6,091
6,244
29,968
39,486
6,399
5,034
2,147
13,580
2,620
318
23
5,365
8,326
15,332
4,830
2,046
330
7,206
22,538
2,232
24,770 $
102
Allowance for Credit Losses
The Company maintains an allowance for credit losses at a level deemed adequate by management to absorb probable losses
inherent in the loan portfolio. See Note 1, "Summary of Significant Accounting Policies," for the accounting policy for the
allowance for credit losses. A rollforward of the allowance for credit losses by portfolio segment for the years ended December 31,
2014, 2013, and 2012 is presented in the table below.
Allowance for Credit Losses by Portfolio Segment
(Dollar amounts in thousands)
Commercial,
Industrial, and
Agricultural
Office,
Retail, and
Industrial
Multi-
family
Construction
Other
Commercial
Real Estate Consumer
Covered
Loans
Reserve for
Unfunded
Commitments
Total
Allowance
As of December 31, 2014
Beginning balance ..... $
Charge-offs ............
Recoveries .............
Net charge-offs .....
Provision for loan
and covered loan
losses and other.....
Ending Balance ......... $
As of December 31, 2013
Beginning balance ..... $
Charge-offs ............
Recoveries .............
Net charge-offs .....
Provision for loan
and covered loan
losses and other.....
Ending balance ......... $
As of December 31, 2012
Beginning balance ..... $
Charge-offs ............
Recoveries .............
Net charge-offs .....
Provision for loan
and covered loan
losses and other.....
Ending balance ......... $
30,381 $ 10,405 $ 2,017 $
(7,345)
(17,424)
497
3,800
(6,848)
(13,624)
(943)
(856)
87
6,316 $
(1,052)
166
(886)
10,817 $ 13,010 $ 12,559 $
(7,574)
(4,834)
1,727
729
(3,107)
(6,845)
(1,012)
1,199
187
1,616 $
87,121
—
—
—
(40,184)
8,205
(31,979)
12,701
7,435
29,458 $ 10,992 $ 2,249 $
1,088
(3,133)
617
5,980
2,297 $
8,327 $ 12,145 $
(5,520)
7,226 $
200
19,368
1,816 $
74,510
36,761 $ 11,432 $ 3,575 $
(4,744)
(12,094)
3,797
228
(4,516)
(8,297)
(1,029)
(445)
584
9,223 $
(1,916)
1,032
(884)
13,531 $ 12,862 $ 12,062 $
(9,414)
(4,784)
1,646
1,071
(3,138)
(8,343)
(4,599)
24
(4,575)
1,917
3,489
30,381 $ 10,405 $ 2,017 $
(1,113)
(2,023)
6,316 $
424
8,491
10,817 $ 13,010 $ 12,559 $
5,072
3,366 $ 102,812
—
—
—
(38,580)
8,382
(30,198)
(1,750)
14,507
1,616 $
87,121
46,017 $ 16,012 $ 5,067 $
(34,968)
(64,668)
577
3,393
(34,391)
(61,275)
(3,361)
(3,086)
275
52,019
36,761 $ 11,432 $ 3,575 $
29,811
1,594
17,795 $
19,451 $ 14,131 $
989 $
2,500 $ 121,962
(27,811)
(36,474)
(10,910)
451
125
784
(27,360)
(36,349)
(10,126)
(4,615)
—
(4,615)
— (182,807)
—
5,605
— (177,202)
18,788
9,223 $
30,429
8,857
13,531 $ 12,862 $ 12,062 $
15,688
866
158,052
3,366 $ 102,812
103
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
PCI
Total
Individually
Evaluated for
Impairment
Collectively
Evaluated for
Impairment
PCI
Total
Total loans .................... $
43,004 $ 6,610,455 $
83,394 $ 6,736,853 $
2,531 $
As of December 31, 2014
Commercial, industrial, and
agricultural ........................... $
Commercial real estate:
Office, retail, and industrial ......
Multi-family .........................
Construction .........................
Other commercial real estate.....
Total commercial
real estate ........................
Total corporate loans ............
Consumer ..............................
Total loans, excluding
covered loans .................
Covered loans .........................
Reserve for unfunded
commitments .........................
As of December 31, 2013
Commercial, industrial, and
agricultural ........................... $
Commercial real estate:
Office, retail, and industrial ......
Multi-family .........................
Construction .........................
Other commercial real estate.....
Total commercial
real estate ......................
Total corporate loans ..........
Consumer ..............................
Total loans, excluding
covered loans .................
Covered loans .........................
Reserve for unfunded
commitments .........................
19,796
$ 2,588,141 $
3,868 $
2,611,805 $
2,249 $
27,209
$
— $
29,458
12,332
939
6,671
3,266
23,208
43,004
—
1,458,918
561,400
195,094
880,087
3,095,499
5,683,640
902,062
43,004
—
6,585,702
24,753
7,129
2,082
2,471
4,544
16,226
20,094
8,618
28,712
54,682
1,478,379
564,421
204,236
887,897
3,134,933
5,746,738
910,680
6,657,418
79,435
—
—
—
—
271
—
—
11
282
2,531
—
2,531
—
—
26,348
1,296
5,712
9,298
42,654
55,832
—
55,832
—
1,327,337
331,445
180,485
793,703
2,632,970
4,770,410
738,155
—
132
—
4,070
4,202
5,924
9,684
1,353,685
332,873
186,197
807,071
2,679,826
4,832,166
747,839
5,508,565
15,608
5,580,005
30,830
103,525
134,355
—
—
—
—
214
18
178
704
1,114
5,160
—
5,160
—
—
10,721
2,249
2,297
8,316
23,583
50,792
11,822
62,614
488
—
—
—
—
—
—
323
323
6,738
10,992
2,249
2,297
8,327
23,865
53,323
12,145
65,468
7,226
1,816
64,918 $
—
1,816
7,061 $
74,510
10,191
1,999
6,138
10,113
28,441
54,776
13,010
67,786
702
—
—
—
—
—
—
—
—
11,857
10,405
2,017
6,316
10,817
29,555
59,936
13,010
72,946
12,559
1,616
70,104 $
—
1,616
11,857 $
87,121
13,178
$ 2,137,440 $
1,722 $ 2,152,340 $
4,046 $
26,335
$
— $
30,381
Total loans .................... $
55,832 $ 5,539,395 $
119,133 $ 5,714,360 $
5,160 $
104
Loans Individually Evaluated for Impairment
The following table presents loans individually evaluated for impairment by class of loan as of December 31, 2014 and 2013. PCI
loans are excluded from this disclosure.
Impaired Loans Individually Evaluated by Class
(Dollar amounts in thousands)
2014
2013
As of December 31,
Recorded Investment In
Loans with
No Specific
Reserve
Loans
with
a Specific
Reserve
Unpaid
Principal
Balance
Specific
Reserve
Recorded Investment In
Loans with
No
Specific
Reserve
Loans
with
a Specific
Reserve
Unpaid
Principal
Balance
Specific
Reserve
19,130 $
35,457 $
2,249
$
10,047 $
Commercial and industrial........... $
Agricultural ..............................
666 $
—
Commercial real estate:
—
—
2,709
18,340
—
—
514
1,024
7,731
4,490
9,623
939
6,671
2,752
—
271
—
—
11
282
—
23,872
1,098
4,586
7,553
3,131 $
—
2,476
198
1,126
1,745
25,887 $
4,046
—
35,868
1,621
10,037
11,335
—
214
18
178
704
19,985
3,223
31,585
37,109
5,545
58,861
1,114
20,651
$
22,353 $
67,042 $
2,531
$
47,156 $
8,676
$
84,748 $
5,160
Office, retail, and industrial ....
Multi-family ........................
Construction ........................
Other commercial real estate ...
Total commercial real
estate ............................
Total impaired loans
individually evaluated
for impairment ............... $
The following table presents the average recorded investment and interest income recognized on impaired loans by class for the
years ended December 31, 2014, 2013, and 2012. PCI loans are excluded from this disclosure.
Average Recorded Investment and Interest Income Recognized on Impaired Loans by Class
(Dollar amounts in thousands)
2014
Years Ended December 31,
2013
2012
Average
Recorded
Balance
Interest
Income
Recognized (1)
Average
Recorded
Balance
Interest
Income
Recognized (1)
Average
Recorded
Balance
Interest
Income
Recognized (1)
94
45,101 $
1,138
32,439
6,226
31,202
35,715
105,582
151,821 $
—
2
—
1
38
41
135
Commercial and industrial ...................... $
Agricultural ............................................
Commercial real estate:
Office, retail, and industrial ................
Multi-family ......................................
Construction ......................................
Other commercial real estate ..............
Total commercial real estate ..........
Total impaired loans ................. $
16,137 $
371 $
20,925 $
—
19,003
1,245
5,764
6,014
—
245
5
—
138
—
24,802
1,116
5,932
13,141
32,026
48,163 $
388
759 $
44,991
65,916 $
205 $
—
18
8
—
31
57
262 $
(1) Recorded using the cash basis of accounting.
105
Credit Quality Indicators
Corporate loans and commitments are assessed for credit risk and assigned ratings based on various characteristics, such as the
borrower's cash flow, leverage, and collateral. Ratings for commercial credits are reviewed periodically. The following tables present
credit quality indicators by class for corporate and consumer loans, excluding covered loans, as of December 31, 2014 and 2013.
Corporate Credit Quality Indicators by Class, Excluding Covered Loans
(Dollar amounts in thousands)
As of December 31, 2014
Commercial and industrial .......................... $
Agricultural ................................................
Commercial real estate:
Pass
Special
Mention (1)(4)
Substandard (2)(4) Non-Accrual (3)
Total
2,115,170 $
84,615 $
31,078 $
22,693 $
2,253,556
357,595
294
—
360
358,249
Office, retail, and industrial ....................
Multi-family ..........................................
Construction ..........................................
Other commercial real estate ..................
Total commercial real estate ..............
1,393,885
553,255
178,992
829,003
2,955,135
38,891
6,363
5,776
32,517
83,547
32,664
4,049
12,487
19,407
68,607
12,939
1,478,379
754
6,981
6,970
564,421
204,236
887,897
27,644
3,134,933
Total corporate loans .................... $
5,427,900 $
168,456 $
99,685 $
50,697 $
5,746,738
As of December 31, 2013
Commercial and industrial .......................... $
Agricultural ................................................
Commercial real estate:
1,780,194 $
23,806 $
14,871 $
11,767 $
1,830,638
320,839
344
—
519
321,702
Office, retail, and industrial ....................
Multi-family ..........................................
Construction ..........................................
Other commercial real estate ..................
Total commercial real estate ..............
1,284,394
326,901
153,949
761,465
2,526,709
28,677
3,214
8,309
14,877
55,077
23,538
910
17,642
22,576
64,666
17,076
1,353,685
1,848
6,297
8,153
332,873
186,197
807,071
33,374
2,679,826
Total corporate loans .................... $
4,627,742 $
79,227 $
79,537 $
45,660 $
4,832,166
(1)
(2)
(3)
(4)
Loans categorized as special mention exhibit potential weaknesses that require the close attention of management since these potential weaknesses
may result in the deterioration of repayment prospects in the future.
Loans categorized as substandard exhibit a well-defined weakness or weaknesses that may jeopardize the liquidation of the debt. These loans continue
to accrue interest because they are well secured and collection of principal and interest is expected within a reasonable time.
Loans categorized as non-accrual exhibit a well-defined weakness or weaknesses that may jeopardize the liquidation of the debt or result in a loss if the
deficiencies are not corrected.
Total special mention and substandard loans includes accruing TDRs of $1.8 million as of December 31, 2014 and $2.8 million as of December 31,
2013.
106
Consumer Credit Quality Indicators by Class, Excluding Covered Loans
(Dollar amounts in thousands)
Performing
Non-accrual
Total
As of December 31, 2014
Home equity .................................................................................................... $
1-4 family mortgages .......................................................................................
Installment .......................................................................................................
536,895 $
288,522
75,989
Total consumer loans ................................................................................... $
901,406 $
As of December 31, 2013
Home equity .................................................................................................... $
1-4 family mortgages .......................................................................................
Installment .......................................................................................................
420,156 $
270,794
42,751
Total consumer loans ................................................................................... $
733,701 $
6,290 $
2,941
43
9,274 $
6,864 $
5,198
2,076
14,138 $
543,185
291,463
76,032
910,680
427,020
275,992
44,827
747,839
TDRs
TDRs are generally performed at the request of the individual borrower and may include forgiveness of principal, reduction in
interest rates, changes in payments, and maturity date extensions. The table below presents TDRs by class as of December 31, 2014
and 2013. See Note 1, "Summary of Significant Accounting Policies," for the accounting policy for TDRs.
TDRs by Class
(Dollar amounts in thousands)
As of December 31,
2014
2013
Accruing
Non-accrual (1)
Total
Accruing
Non-accrual (1)
Total
Commercial and industrial .................. $
Agricultural ........................................
Commercial real estate:
Office, retail, and industrial ............
Multi-family ..................................
Construction ..................................
Other commercial real estate ..........
Total commercial real estate ......
Total corporate loans .................
Home equity .......................................
1-4 family mortgages ..........................
Installment ..........................................
Total consumer loans .................
Total loans ............................ $
269 $
—
586
887
—
433
1,906
2,175
651
878
—
1,529
3,704 $
18,799 $
—
19,068 $
—
6,538 $
—
2,121 $
—
8,659
—
—
232
—
183
415
19,214
506
184
—
690
19,904 $
586
1,119
—
616
2,321
21,389
1,157
1,062
—
2,219
23,608 $
10,271
1,038
—
4,326
15,635
22,173
787
810
—
1,597
23,770 $
—
253
—
291
544
2,665
512
906
—
1,418
4,083 $
10,271
1,291
—
4,617
16,179
24,838
1,299
1,716
—
3,015
27,853
(1)
These TDRs are included in non-accrual loans in the preceding tables.
TDRs are included in the calculation of the allowance for credit losses in the same manner as impaired loans. There were $1.8
million in specific reserves related to TDRs as of December 31, 2014, and there were $2.0 million in specific reserves related to
TDRs as of December 31, 2013.
107
The following table presents a summary of loans that were restructured during the years ended December 31, 2014, 2013, and 2012.
Loans Restructured During the Period
(Dollar amounts in thousands)
Number
of
Loans
Pre-
Modification
Recorded
Investment
Funds
Disbursed
Interest
and Escrow
Capitalized Charge-offs
Post-
Modification
Recorded
Investment
Year Ended December 31, 2014
Commercial and industrial ................................
Office, retail, and industrial ...............................
Multi-family ....................................................
Home equity ....................................................
Total TDRs restructured during the period ......
Year Ended December 31, 2013
Commercial and industrial ................................
Office, retail, and industrial ...............................
Multi-family ....................................................
Construction ....................................................
Other commercial real estate .............................
Home equity ....................................................
1-4 family mortgages ........................................
Total TDRs restructured during the period ......
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 during the period ......
7 $
23,852 $
— $
1
1
1
10 $
417
275
75
24,619 $
—
—
—
— $
7 $
14,439 $
— $
6
5
2
5
13
1
39 $
2,275
1,274
508
526
1,189
30
—
—
—
—
132
20,343 $
—
30 $
5 $
3,277 $
— $
2
5
1
4
2,416
1,070
19
563
—
—
—
—
17 $
7,345 $
— $
— $
—
—
—
— $
2 $
—
57
—
—
—
4
63 $
— $
—
—
—
4
4 $
— $
23,852
—
—
—
— $
417
275
75
24,619
— $
14,441
—
—
—
—
—
—
— $
170 $
—
125
—
—
2,305
1,331
508
526
1,189
136
20,436
3,107
2,416
945
19
567
295 $
7,054
Accruing TDRs that do not perform in accordance with their modified terms are transferred to non-accrual. The following table
presents TDRs that had payment defaults during the years ended December 31, 2014, 2013, and 2012 where the default occurred
within twelve months of the restructure date.
TDRs That Defaulted Within Twelve Months of the Restructured Date
(Dollar amounts in thousands)
Years Ended December 31,
2014
2013
2012
Number
of
Loans
Recorded
Investment
Number
of
Loans
Recorded
Investment
350
—
354
—
—
704
1 $
—
3
—
—
4 $
Number
of
Loans
Recorded
Investment
— $
2
2
—
1
—
837
717
—
62
5 $
1,616
Commercial and industrial .......................................
Office, retail, and industrial ......................................
Other commercial real estate ....................................
Home equity ...........................................................
1-4 family mortgages ...............................................
Total .................................................................
2 $
125
—
—
1
—
—
—
77
—
3 $
202
108
A rollforward of the carrying value of TDRs for the years ended December 31, 2014, 2013, and 2012 is presented in the following
table.
TDR Rollforward
(Dollar amounts in thousands)
Accruing
Beginning balance .................................................................................................. $
Additions ...........................................................................................................
Net payments .....................................................................................................
Returned to performing status .............................................................................
Net transfers from non-accrual ...........................................................................
Ending balance .......................................................................................................
Non-accrual
Beginning balance ..................................................................................................
Additions ...........................................................................................................
Net advances (payments) ....................................................................................
Charge-offs ........................................................................................................
Transfers to OREO .............................................................................................
Loans sold .........................................................................................................
Net transfers to accruing .....................................................................................
Ending balance .......................................................................................................
Total TDRs ................................................................................................... $
Years Ended December 31,
2014
2013
2012
23,770 $
804
(1,440)
(20,656)
1,226
3,704
4,083
23,815
1,991
(8,457)
(302)
—
(1,226)
19,904
23,608 $
6,867 $
4,847
(723)
(5,529)
18,308
23,770
10,924
15,589
(1,359)
(1,880)
(77)
(806)
(18,308)
4,083
27,853 $
17,864
2,504
(205)
(16,619)
3,323
6,867
29,842
4,550
(1,761)
(10,003)
(6,778)
(1,603)
(3,323)
10,924
17,791
For TDRs to be removed from TDR status in the calendar year after the restructuring, the loans must (i) have an interest rate and
terms that reflect market conditions at the time of restructuring, and (ii) be in compliance with the modified terms. TDRs that were
returned to performing status totaled $20.7 million, $5.5 million and $16.6 million for the years ended December 31, 2014, 2013,
and 2012, respectively. Loans that were not restructured at market rates and terms, that are not in compliance with the modified
terms, or for which there is a concern about the future ability of the borrower to meet its obligations under the modified terms,
continue to be separately reported as restructured until paid in full or charged-off.
There were $666,000 and $180,000 in commitments to lend additional funds to borrowers with TDRs as of December 31, 2014 and
2013, respectively.
109
8. PREMISES, FURNITURE, AND EQUIPMENT
The following table summarizes the Company's premises, furniture, and equipment by category.
Premises, Furniture, and Equipment
(Dollar amounts in thousands)
Land .................................................................................................................................... $
Premises ..............................................................................................................................
Furniture and equipment ......................................................................................................
Total cost ........................................................................................................................
Accumulated depreciation ....................................................................................................
Net book value of premises, furniture, and equipment ......................................................
Assets held-for-sale .............................................................................................................
Total premises, furniture, and equipment ..................................................................... $
As of December 31,
2014
2013
51,104 $
148,963
85,489
285,556
(156,473)
129,083
2,026
131,109 $
48,590
139,336
81,002
268,928
(152,751)
116,177
4,027
120,204
Depreciation on premises, furniture, and equipment totaled $12.2 million in 2014, $11.0 million in 2013, and $10.9 million in
2012.
Operating Leases
As of December 31, 2014, the Company was obligated to utilize certain premises and equipment under certain non-cancelable
operating leases, which expire at various dates through the year ended December 31, 2030. Many of these leases contain renewal
options and certain leases provide options to purchase the leased property during or at the expiration of the lease period at specific
prices. Some leases contain escalation clauses calling for rentals to be adjusted for increased real estate taxes and other operating
expenses or proportionately adjusted for increases in consumer or other price indices. The following summary reflects the future
minimum payments by year required under operating leases that have initial or remaining non-cancelable lease terms in excess of
one year as of December 31, 2014.
Future Minimum Operating Lease Payments
(Dollar amounts in thousands)
Year ending December 31,
2015 ....................................................................................................................................................... $
2016 .......................................................................................................................................................
2017 .......................................................................................................................................................
2018 .......................................................................................................................................................
2019 .......................................................................................................................................................
2020 and thereafter .................................................................................................................................
Total minimum lease payments ........................................................................................................... $
Total
5,071
4,697
4,592
3,873
2,082
13,031
33,346
As part of the Popular acquisition, the Company assumed certain operating leases related to various branches. On the date of
acquisition, an intangible liability of $10.6 million was recorded as the cash flows of the leases exceeded the fair market value. This
intangible liability will be accreted into income as a reduction to net occupancy and equipment expense using the straight line
method over the initial term of each lease, which expire between 2018 to 2030. The intangible liability is included in accrued
interest and other liabilities in the Consolidated Statements of Financial Condition.
110
The following table presents the remaining scheduled accretion of the intangible liability by year.
Scheduled Accretion of Operating Lease Intangible
(Dollar amounts in thousands)
Year ending December 31,
2015 ....................................................................................................................................................... $
2016 .......................................................................................................................................................
2017 .......................................................................................................................................................
2018 .......................................................................................................................................................
2019 .......................................................................................................................................................
2020 and thereafter .................................................................................................................................
Total accretion.................................................................................................................................... $
Total
1,144
1,144
1,144
900
651
5,195
10,178
The following table presents net operating lease expense for the years ended December 31, 2014, 2013, and 2012.
Net Operating Lease Expense
(Dollar amounts in thousands)
Years Ended December 31,
2013
2012
2014
Lease expense charged to operations (1) ....................................................... $
Rental income from premises leased to others (2) .........................................
Net operating lease expense ................................................................... $
4,216 $
541
3,675 $
3,123 $
531
2,592 $
3,379
931
2,448
(1)
(2)
Includes amounts paid under short-term cancelable leases and included in net occupancy and equipment expense in the Consolidated Statements of
Income. As of December 31, 2014, lease expense is net of $453,000 in accretion related to the intangible liability.
Included as a reduction to net occupancy and equipment expense in the Consolidated Statements of Income.
9. GOODWILL AND OTHER INTANGIBLE ASSETS
The Company's annual goodwill impairment test was performed as of October 1, 2014. It was determined that no impairment existed
as of that date. Goodwill is tested for impairment at the reporting unit level. All of our goodwill is allocated to First Midwest
Bancorp, Inc., which is the Company's only applicable reporting unit for purposes of testing goodwill impairment. For a discussion
of the accounting policies for goodwill and other intangible assets, see Note 1, "Summary of Significant Accounting Policies."
The following table presents changes in the carrying amount of goodwill for the years ended December 31, 2014, 2013, and 2012.
Changes in the Carrying Amount of Goodwill
(Dollar amounts in thousands)
Years Ended December 31,
2014
2013
2012
Beginning balance ..................................................................................... $
Acquisitions ..........................................................................................
Sale of equity method investment ..........................................................
Ending balance .......................................................................................... $
264,062 $
46,527
—
310,589 $
265,477 $
—
(1,415)
264,062 $
265,477
—
—
265,477
During the year ended December 31, 2014, the increase in goodwill resulted from the Popular, Great Lakes, and National Machine
Tool acquisitions. See Note 3, "Acquisitions," for additional detail regarding these transactions.
The Company's other intangible assets are core deposit intangibles, which are being amortized over their estimated useful lives. The
Company's annual impairment testing was performed as of November 30, 2014 by comparing the carrying value of other intangible
assets with our anticipated discounted expected future cash flows, and it was determined that no impairment existed as of that date.
111
Gross
Beginning balance ............. $ 33,775 $
Additions ...................
Amortization expense ....
Fully amortized assets ...
14,195
—
—
2014
Accumulated
Amortization
21,471 $
—
2,889
—
Other Intangible Assets
(Dollar amounts in thousands)
Years Ended December 31,
Net
Gross
2013
Accumulated
Amortization
12,304 $ 33,775 $
18,193 $
Gross
Net
15,582 $ 34,318 $
14,195
(2,889)
—
—
—
—
—
3,278
—
—
(3,278)
—
781
—
(1,324)
2012
Accumulated
Amortization
Net
16,145 $
18,173
—
3,372
(1,324)
781
(3,372)
—
Ending balance ................. $ 47,970
$
24,360
$
23,610 $ 33,775 $
21,471 $
12,304 $ 33,775
$
18,193 $
15,582
Weighted-average remaining life (in years)
Estimated remaining useful lives (in years)
8.0
0.3 to 10.3
5.9
0.2 to 11.3
6.4
0.7 to 12.3
Scheduled Amortization of Other Intangible Assets
(Dollar amounts in thousands)
Year ending December 31,
2015 ....................................................................................................................................................... $
2016 .......................................................................................................................................................
2017 .......................................................................................................................................................
2018 .......................................................................................................................................................
2019 .......................................................................................................................................................
2020 and thereafter .................................................................................................................................
Total .................................................................................................................................................. $
Total
3,920
3,843
3,063
2,138
2,073
8,573
23,610
10. DEPOSITS
The following table presents the Company's deposits by type.
Summary of Deposits
(Dollar amounts in thousands)
Demand deposits .................................................................................................. $
Savings deposits ...................................................................................................
NOW accounts .....................................................................................................
Money market deposits .........................................................................................
Time deposits less than $100,000 ..........................................................................
Time deposits greater than $100,000 .....................................................................
Total deposits ................................................................................................... $
As of December 31,
2014
2013
2,301,757 $
1,391,444
1,413,973
1,509,026
859,441
412,117
7,887,758 $
1,911,602
1,135,155
1,220,693
1,290,868
820,925
386,858
6,766,101
112
The following table provides maturity information related to the Company's time deposits.
Scheduled Maturities of Time Deposits
(Dollar amounts in thousands)
Year ending December 31,
2015 ....................................................................................................................................................... $
2016 .......................................................................................................................................................
2017 .......................................................................................................................................................
2018 .......................................................................................................................................................
2019 .......................................................................................................................................................
2020 and thereafter .................................................................................................................................
Total
865,149
211,496
89,061
38,623
66,961
268
Total .................................................................................................................................................. $
1,271,558
11. 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 ....................................................................................... $
As of December 31,
2014
2013
137,994 $
—
137,994 $
109,792
114,550
224,342
Securities sold under agreements to repurchase are treated as financings and the obligations to repurchase securities sold are
included as a liability in the Consolidated Statements of Financial Condition. Repurchase agreements are secured by the Treasury
and U.S. agency securities and are held in third party pledge accounts, if required. The securities underlying the agreements remain
in the respective asset accounts. As of December 31, 2014, the Company did not have amounts at risk under repurchase agreements
with any individual counterparty or group of counterparties that exceeded 10% of stockholders' equity.
The Bank is a member of the FHLB and has access to term financing from the FHLB. These advances are secured by designated
assets that may include qualifying residential and multi-family mortgages, home equity loans, and municipal and mortgage-backed
securities. During 2014, the Company prepaid $114.6 million of FHLB advances. This transaction resulted in a $2.1 million pre-tax
loss on the early extinguishment of debt and is included in other noninterest income in the Consolidated Statements of Income. At
December 31, 2013, FHLB advances totaled $114.6 million with a weighted average interest rate of 1.34%.
The following table presents short-term credit lines available for use, for which the Company did not have an outstanding balance as
of December 31, 2014 and 2013.
Short-Term Credit Lines Available for Use
(Dollar amounts in thousands)
Available federal funds lines ......................................................................................... $
FRBs Discount Window Primary Credit Program ..........................................................
Correspondent bank line of credit ..................................................................................
As of December 31,
2014
2013
685,500 $
675,507
35,000
681,100
632,498
—
None of the Company's borrowings have any related compensating balance requirements that restrict the use of Company assets. At
December 31, 2014, the Company had a $35.0 million short-term, unsecured revolving line of credit with a correspondent bank that
it allowed to expire on January 20, 2015.
113
12. SENIOR AND SUBORDINATED DEBT
The following table presents the Company's senior and subordinated debt by issuance.
Senior and Subordinated Debt
(Dollar amounts in thousands)
Senior notes due in 2016 ............................................................
Subordinated notes due in 2016 ..................................................
Junior subordinated debentures:
Interest Rate
5.875%
5.850%
First Midwest Capital Trust I ("FMCT") due in 2033................
Great Lakes Statutory Trust II ("GLST II") due in 2035............ 3 month LIBOR + 1.400%
Great Lakes Statutory Trust III ("GLST III") due in 2037 ......... 3 month LIBOR + 1.700%
6.950%
Total junior subordinated debentures ...................................
Total senior and subordinated debt ......................................
As of December 31,
2014
2013
$
$
114,768 $
38,495
37,797
4,202
5,607
47,606
200,869 $
114,645
38,491
37,796
—
—
37,796
190,932
Junior Subordinated Debentures
FMCT is a Delaware statutory business trust that was formed in 2003. During the fourth quarter of 2014, the Company acquired two
Delaware statutory business trusts, GLST II and GLST III, in the Great Lakes transaction. These trusts were established for the
purpose of issuing trust-preferred securities and lending the proceeds to the Company in return for junior subordinated debentures of
the Company. The Company guarantees payments of distributions on the trust-preferred securities and payments on redemption of
the trust-preferred securities on a limited basis. The statutory trusts qualify as variable interest entities for which the Company is not
the primary beneficiary. Consequently, the accounts of those entities are not consolidated in the Company's financial statements.
Debt Retirement
The Company repurchased and retired $24.0 million of junior subordinated debentures at a premium of 3.5% during 2013. This
transaction resulted in the recognition of a pre-tax loss of $1.0 million and is included in other noninterest income in the
Consolidated Statements of Income.
13. MATERIAL TRANSACTIONS AFFECTING STOCKHOLDERS' EQUITY
Issued Common Stock
On December 2, 2014, the Company issued 2,440,754 shares of its $0.01 par value common stock at a price of $15.737 as part of
the consideration in the Great Lakes acquisition. Additional information regarding the acquisition is presented in Note 3,
"Acquisitions."
Authorized Common Stock
On May 21, 2014, the stockholders of the Company approved an amendment to the Company's Restated Certificate of
Incorporation. The amendment increased the Company's authorized common stock by 50,000,000 shares. Following this
amendment, the Company is now authorized to issue a total of 151,000,000 shares, including 1,000,000 shares of Preferred Stock,
without a par value, and 150,000,000 shares of Common Stock, $0.01 par value per share.
Quarterly Dividend on Common Shares
The Board of Directors of First Midwest Bancorp, Inc. ("the Board") declared quarterly stock dividends of $0.01 per share from
2012 through the first quarter of 2013. The Company increased the quarterly dividend to $0.04 per share during the second quarter
of 2013, to $0.07 per share during the fourth quarter of 2013, and to $0.08 per share during the second quarter of 2014.
There were no additional material transactions that affected stockholders' equity during the three years ended December 31, 2014.
114
14. EARNINGS PER COMMON SHARE
The table below displays the calculation of basic and diluted earnings (loss) per share.
Basic and Diluted Earnings (Loss) per Common Share
(Amounts in thousands, except per share data)
Net income (loss) .................................................................................... $
Net (income) loss applicable to non-vested restricted shares.....................
Net income (loss) applicable to common shares .................................. $
Weighted-average common shares outstanding:
Weighted-average common shares outstanding (basic) ........................
Dilutive effect of common stock equivalents .......................................
Weighted-average diluted common shares outstanding........................
Basic earnings (loss) per common share .................................................. $
Diluted earnings (loss) per common share ...............................................
Anti-dilutive shares not included in the computation of
diluted earnings per common share (1) ....................................................
Years Ended December 31,
2013
2012
2014
69,306 $
(836)
68,470 $
74,484
12
74,496
0.92 $
0.92
79,306 $
(1,107)
78,199 $
73,984
10
73,994
1.06 $
1.06
1,198
1,462
(21,054)
306
(20,748)
73,665
1
73,666
(0.28)
(0.28)
1,759
(1)
This amount represents outstanding stock options for which the exercise price is greater than the average market price of the Company's common
stock.
15. INCOME TAXES
Components of Income Tax Expense (Benefit)
(Dollar amounts in thousands)
Current income tax expense:
Federal .............................................................................. $
State ..................................................................................
Total .............................................................................
Deferred income tax expense (benefit):
Federal ..............................................................................
State ..................................................................................
Total .............................................................................
Total income expense (benefit) ......................................... $
2014
Years Ended December 31,
2013
2012
16,343 $
(1,388)
14,955
7,901
8,314
16,215
31,170 $
4,744 $
10,504
15,248
31,572
1,895
33,467
48,715 $
—
1
1
(23,728)
(5,155)
(28,883)
(28,882)
Federal income tax expense (benefit) and the related effective income tax rate are influenced by the amount of tax-exempt income
derived from investment securities and BOLI in relation to pre-tax income (loss) and state income taxes. State income tax expense
(benefit) and the related effective income tax rate are driven by the amount of state tax-exempt income in relation to pre-tax income
(loss) and state tax rules for consolidated/combined reporting and sourcing of income and expense.
Income tax expense totaled $31.2 million for the year ended December 31, 2014 compared to income tax expense of $48.7 million
for the year ended December 31, 2013 and an income tax benefit of $28.9 million for the year ended December 31, 2012. The
decrease in income tax expense in 2014 was driven primarily by a decrease in income subject to tax at statutory rates. The increase
in income tax expense from 2012 to 2013 was the result of an increase in income subject to tax at statutory rates and to a non-
deductible BOLI modification loss recorded in 2013.
Differences between the amounts reported in the consolidated financial statements and the tax basis of assets and liabilities result in
temporary differences for which deferred tax assets and liabilities were recorded.
115
Deferred Tax Assets and Liabilities
(Dollar amounts in thousands)
As of December 31,
2014
2013
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 .......................................................................................................................
Total deferred tax assets ......................................................................................
Deferred tax liabilities:
Purchase accounting adjustments and intangibles......................................................
Accrued retirement benefits ......................................................................................
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 income (loss)..........................
Net deferred tax assets including adjustments....................................................... $
Net operating loss carryforwards available to offset future taxable income:
Federal gross NOL carryforwards, begin to expire in 2032 ........................................ $
Illinois gross NOL carryforwards, begin to expire in 2021.........................................
Indiana gross NOL carryforwards, begin to expire in 2022 ........................................
Alternative minimum tax credits ...............................................................................
Other credits, begin to expire in 2028 .......................................................................
29,007 $
—
26,078
18,527
3,480
11,917
18,390
107,399
(11,181)
(6,732)
(845)
(4,272)
(3,978)
(27,008)
—
80,391
11,294
91,685 $
— $
232,834
17,192
25,739
3,268
19,184
14,579
30,492
21,374
6,541
15,859
19,049
127,078
(16,977)
(7,095)
(2,111)
(5,340)
(6,313)
(37,836)
—
89,242
18,382
107,624
41,654
290,076
16,112
16,090
3,094
Included in the net deferred tax assets balance at December 31, 2014 are $7.4 million of net deferred tax assets acquired from the
Popular, National Machine Tool, and Great Lakes transactions.
Net deferred tax assets are included in other assets in the accompanying Consolidated Statements of Financial Condition.
Management believes that it is more likely than not that net deferred tax assets will be fully realized and no valuation allowance is
required.
Components of Effective Tax Rate
Years Ended December 31,
2014
2013
2012
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 %
(7.5)%
4.5 %
(1.0)%
31.0 %
35.0 %
(6.2)%
6.4 %
2.9 %
38.1 %
35.0 %
16.8 %
7.0 %
(1.0)%
57.8 %
The change in effective tax rate from the year ended December 31, 2013 to the year ended December 31, 2014 was the result of a
decrease in income subject to tax at statutory rates. The change in effective tax rate from the year ended December 31, 2012 to the
year ended December 31, 2013 was the result of an increase in income subject to tax at statutory rates and a non-deductible BOLI
modification loss recorded in 2013.
116
As of December 31, 2014, 2013, and 2012, the Company's retained earnings included an appropriation for an acquired thrift's tax
bad debt reserves of approximately $2.5 million for which no provision for federal or state income taxes has been made. If, in the
future, this portion of retained earnings were distributed as a result of the liquidation of the Company or its subsidiaries, federal and
state income taxes would be imposed at the then applicable rates.
Uncertainty in Income Taxes
The Company files a U.S. federal income tax return and state income tax returns in various states. In 2012, the Internal Revenue
Service completed audits of the Company's 2006-2010 federal income tax returns and Illinois completed audits of the Company's
2008-2009 Illinois income tax returns. No significant adjustments were proposed in these audits.
Federal income tax returns filed by the Company are no longer subject to examination by federal income tax authorities for years
prior to 2011. The Company is no longer subject to examination by Illinois, Indiana, Iowa and Wisconsin tax authorities for years
prior to 2011.
Rollforward of Unrecognized Tax Benefits
(Dollar amounts in thousands)
Beginning balance .................................................................................. $
Additions for tax positions relating to the current year ........................
Reductions for tax positions relating to prior years..............................
Reductions for settlements with taxing authorities...............................
Ending balance ....................................................................................... $
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 ............
(1)
Included in income tax expense (benefit) in the Consolidated Statements of Income.
Years Ended December 31,
2014
2013
2012
279 $
635
(2)
—
912 $
4 $
4
— $
279
—
—
279 $
— $
—
368
—
—
(368)
—
(52)
—
The Company does not anticipate that the amount of uncertain tax positions will significantly increase or decrease in the next
12 months. Included in the balance at December 31, 2014 and 2013 are tax positions totaling $597,000 and $181,000, respectively,
that would favorably affect the Company's effective tax rate if recognized in future periods.
117
16. EMPLOYEE BENEFIT PLANS
Profit Sharing Plan
The Company has a defined contribution retirement savings plan (the "Profit Sharing Plan") that covers qualified employees who
meet certain eligibility requirements. During 2014, the Profit Sharing Plan was amended to give qualified employees the option to
increase contributions from 45% (15% for certain highly compensated employees) to 100% (including certain highly compensated
employees) of their pre-tax base salary through salary deductions under Section 401(k) of the Internal Revenue Code. At the
employees' direction, employee contributions are invested among a variety of investment alternatives. The amendment also
increased the Company’s matching contribution from a maximum of 2% to 4% of the eligible employee's compensation. In addition,
pursuant to the amendment, the Company makes certain automatic and transition contributions. On an annual basis, the Company
automatically contributes 2% of the employee's eligible compensation regardless of voluntary contributions made by the employee.
Transition contributions of up to 4% will be made through December 31, 2015 for certain employees who were active participants in
the defined benefit retirement plan (the "Pension Plan"), which was frozen in 2013. The amendment did not change the discretionary
profit sharing component of the Profit Sharing Plan, which permits the Company to distribute up to 15% of the employee's
compensation. The Company's matching and transition contributions vest immediately, while the automatic and discretionary
components vest over six years.
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:
Years Ended December 31,
2013
2012
2014
6,354 $
428 $
2,914 $
159 $
2,532
71
Number of shares .....................................................................................
Fair value ................................................................................................. $
1,364,558
23,348 $
1,426,708
25,010 $
1,743,085
21,823
(1)
Included in retirement and other employee benefits in the Consolidated Statements of Income.
Pension Plan
The Company sponsors the Pension Plan which provides for retirement benefits based on years of service and compensation levels
of the participants. The Pension Plan covers employees who met certain eligibility requirements and were hired before April 1, 2007,
the date it was amended to eliminate new enrollment of new participants. During 2013, the Board of Directors approved an
amendment to freeze benefit accruals under the Pension Plan effective on January 1, 2014. Based on December 31, 2013 actuarial
assumptions, the amendment decreased the pension obligation by $9.9 million and increased other comprehensive income (loss) by
$5.9 million, after tax. These actions reduced 2013 pension expense by approximately $1.0 million.
Actuarially determined pension costs are charged to current operations and included in retirement and other employee benefits in the
Consolidated Statements of Income. The Company's funding policy is to contribute amounts to the Pension Plan that are sufficient to
meet the minimum funding requirements of the Employee Retirement Income Security Act of 1974 plus additional amounts as the
Company deems appropriate.
118
Pension Plan Cost and Obligations
(Dollar amounts in thousands)
Accumulated benefit obligation ..................................................................................... $
Change in projected benefit obligation:
Beginning balance ........................................................................................................... $
Service cost ................................................................................................................
Interest cost ................................................................................................................
Curtailment .................................................................................................................
Settlements .................................................................................................................
Actuarial loss (gain) ....................................................................................................
Benefits paid ...............................................................................................................
Ending balance ................................................................................................................ $
Change in fair value of plan assets:
Beginning balance ........................................................................................................... $
Actual return on plan assets .........................................................................................
Benefits paid ...............................................................................................................
Employer contributions ...............................................................................................
Settlements .................................................................................................................
Ending balance ................................................................................................................ $
As of December 31,
2014
2013
67,283
$
61,292
$
61,292
—
2,346
—
(6,502 )
10,508
(361 )
67,283
$
$
74,370
4,686
(361 )
—
(6,502 )
72,193
$
72,855
2,600
2,414
(9,947)
—
(1,494)
(5,136)
61,292
63,501
9,005
(5,136)
7,000
—
74,370
Funded status recognized in the Consolidated Statements of Financial Condition:
Noncurrent asset ......................................................................................................... $
4,910
$
13,078
Amounts recognized in accumulated other comprehensive loss:
Prior service cost ......................................................................................................... $
Net loss ......................................................................................................................
Net amount recognized ........................................................................................... $
—
19,911
19,911
$
$
—
10,784
10,784
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 (1) .................................................................................
N/A – Not applicable.
29.6 %
27.6 %
—
401
401
$
$
3.60 %
N/A
17.6%
14.5%
—
215
215
4.30%
N/A
(1)
The rate of compensation increase is no longer applicable in determining the present value of the projected benefit obligation due to the amendment to
freeze benefit accruals, which is discussed above.
Expected amortization of net actuarial losses – To the extent the cumulative actuarial losses included in accumulated other
comprehensive loss exceed 10% of the greater of the accumulated benefit obligation or the market-related value of the Pension Plan
assets, it is the Company's policy to amortize the Pension Plan's net actuarial losses into income over the future working life of the
Pension Plan participants. In connection with the freeze of benefit accruals under the Pension Plan in 2013, the Company changed
its policy to amortize net actuarial losses into income over the average remaining life expectancy of the Pension Plan participants.
Actuarial losses included in accumulated other comprehensive loss as of December 31, 2014 exceeded 10% of the accumulated
benefit obligation and the fair value of Pension Plan assets. The amortization of net actuarial losses is a component of the net
119
periodic benefit cost. Amortization of the net actuarial losses and prior service cost included in other comprehensive income (loss) is
not expected to have a material impact on the Company's future results of operations, financial position, or liquidity.
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 ....................................................
Recognized settlement loss ..............................................................
Net periodic (income) cost ..........................................................
Other changes in plan assets and benefit obligations recognized as
a charge to other comprehensive income (loss):
Net (loss) gain for the period .........................................................
Amortization of prior service cost .................................................
Amortization of net loss ................................................................
Total unrealized (loss) gain ......................................................
Total recognized in net periodic pension cost and other
comprehensive income (loss) .................................................. $
Weighted-average assumptions used to determine the net periodic
cost:
2014
Years Ended December 31,
2013
2012
— $
2,346
(4,931)
249
—
1,377
(959)
(10,752)
—
1,625
(9,127)
$
2,600
2,414
(4,299)
1,453
1
—
2,169
16,146
1
1,453
17,600
2,862
2,720
(4,456)
1,684
3
—
2,813
(8,207)
4
1,683
(6,520)
(8,168)
$
15,431
$
(9,333)
Discount rate...................................................................................
Expected return on plan assets .........................................................
Rate of compensation increase .........................................................
4.30%
7.25%
N/A
(1)
3.40%
7.25%
2.50%
4.40%
7.25%
2.50%
N/A – Not applicable.
(1)
The rate of compensation increase is no longer applicable in determining the net periodic cost due to the amendment to freeze benefit accruals, which is
discussed above.
Pension Plan Asset Allocation
(Dollar amounts in thousands)
Target Allocation
Fair Value of Plan
Assets (1)
Percentage of Plan Assets
as of December 31,
2013
2014
Asset Category:
Equity securities ..........................................
Fixed income ...............................................
Cash equivalents ..........................................
50 - 60%
30 - 48%
2 - 10%
Total ........................................................
$
$
42,826
25,832
3,535
72,193
59%
36%
5%
100%
63%
30%
7%
100%
(1) Additional information regarding the fair value of Pension Plan assets at December 31, 2014 can be found in Note 22, "Fair Value."
Expected long-term rate of return – The expected long-term rate of return on Pension Plan assets represents the average rate of
return expected to be earned over the period the benefits included in the benefit obligation are to be paid. In developing the expected
rate of return, the Company considers long-term returns of historical market data and projections of future returns for each asset
category, as well as historical actual returns on the Pension Plan assets with the assistance of its independent actuarial consultant.
Using this reference data, the Company develops a forward-looking return expectation for each asset category and a weighted-
average expected long-term rate of return based on the target asset allocation.
120
Investment policy and strategy – The investment objective of the Pension Plan is to maximize the return on Pension Plan assets
over a long-term horizon to satisfy the Pension Plan obligations. In establishing its investment policies and asset allocation
strategies, the Company considers expected returns and the volatility associated with different strategies. The policy established by
the Company's Retirement Plan Committee provides for growth of capital with a moderate level of volatility by investing assets
according to the target allocations stated above and reallocating those assets as needed to stay within those allocations. Investments
are weighted toward publicly traded securities. Investment strategies that include alternative asset classes, such as private equity
hedge funds and real estate, are generally avoided. Under the advisement of a certified investment advisor, the Committee reviews
the investment policy on a quarterly basis to determine if any adjustments to the policy or investment strategy are necessary.
Estimated future pension benefit payments for fiscal years ending December 31, 2015 through 2024 are as follows.
Estimated Future Pension Benefit Payments
(Dollar amounts in thousands)
Year ending December 31,
2015 ............................................................................................................................................................. $
2016 .............................................................................................................................................................
2017 .............................................................................................................................................................
2018 .............................................................................................................................................................
2019 .............................................................................................................................................................
2020-2024 ....................................................................................................................................................
Total
5,298
5,397
4,886
4,324
4,085
17,518
17. SHARE-BASED COMPENSATION
Share-Based Plans
Omnibus Stock and Incentive Plan (the "Omnibus Plan") – In 1989, the Board adopted the Omnibus Plan, which allows for the
grant of both incentive and non-statutory ("nonqualified") stock options, stock appreciation rights, restricted stock, restricted stock
units, performance units, and performance shares to certain key employees.
From the inception of the Omnibus Plan through the end of 2008, certain key employees were granted nonqualified stock options.
The option exercise price is the average of the high and low price of the Company's common stock 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 has granted restricted stock and restricted stock unit awards instead of nonqualified stock options to
certain key employees. Both restricted stock and restricted stock unit awards vest over three years, with 50% vesting on the second
anniversary of the grant date and the remaining 50% vesting on the third anniversary of the grant date, provided the employee
remains employed by the Company during this period (subject to accelerated vesting in the event of a change-in-control or upon
certain terminations of employment, as set forth in the applicable award agreement). The fair value of the awards is determined
based on the average of the high and low price of the Company's common stock on the grant date.
Since 2013, the Company has also granted performance shares to certain key employees. Recipients will earn performance shares
totaling between 0% and 200% of the number of performance shares granted based on achieving certain performance metrics.
Performance shares may be earned based on achieving an internal metric (core return on average tangible common equity) and an
external metric (relative total shareholder return) over a three year period. Each metric is weighted at 50% of the total award
opportunity. If earned, and assuming continued employment, the performance shares vest one-third at the completion of the three-
year performance period and one-third at the end of the first and second years thereafter. The fair value of the performance shares
that are dependent on the internal metric is determined based on the average of the high and low stock price on the grant date. An
estimate is made as to the number of shares expected to vest as a result of actual performance against the internal metric to
determine the amount of compensation expense to be recognized, which is re-evaluated quarterly. The fair value of the performance
shares that are dependent on the external metric is determined using a Monte Carlo simulation model on the grant date assuming
100% of the shares are earned and issued.
Nonemployee Directors Stock Plan (the "Directors Plan") – In 1997, the Board adopted the Directors Plan, which provides for the
grant of equity awards to non-management Board members. Until 2008, only nonqualified stock options were issued under the
Directors Plan. The exercise price of the options is equal to the average of the high and low price of the Company's common stock
on the grant date. All options have a term of 10 years from the grant date.
121
In 2008, the Company amended the Directors Plan to allow for the grant of restricted stock awards, among other items. The awards
are restricted as to transfer, but are not restricted as to voting rights. Dividends accrue and are paid at the vesting date. Both the
options and the restricted stock awards vest one year from the grant date subject to accelerated vesting in the event of retirement,
death, disability, or change-in-control, as defined in the Directors Plan.
Both the Omnibus Plan and the Directors Plan, and material amendments, were submitted to and approved by the stockholders of
the Company. The Company issues treasury shares to satisfy stock option exercises and the vesting of restricted stock, restricted
stock units, and performance share awards.
Shares of Common Stock Available Under Share-Based Plans
Omnibus Plan ...................................................................................................
Directors Plan ...................................................................................................
As of December 31, 2014
Shares
Authorized
Shares Available
For Grant
8,631,641
481,250
2,237,337
75,294
Salary Stock Awards – The Company also periodically issues salary stock awards to certain executive officers. This stock is fully
vested as of the grant date. The issuance of salary stock awards is included in share-based compensation expense, but does not
reduce the number of shares issued and outstanding under the Omnibus Plan as the issuance is not considered part of the share-based
plans referenced above.
Salary Stock Awards Granted
Shares granted ...............................................................................
Weighted-average price .................................................................. $
Stock Options
2014
Years ended December 31,
2013
2012
—
— $
8,693
14.30 $
10,983
11.51
Nonqualified Stock Option Transactions
(Amounts in thousands, except per share data)
Year Ended December 31, 2014
Weighted
Average
Exercise
Price
Weighted
Average
Remaining
Contractual
Term (1)
Aggregate
Intrinsic
Value (2)
Number of
Options
Options outstanding beginning balance .............................
Expired .......................................................................
Options outstanding ending balance .................................
Exercisable at the end of the year .....................................
1,436 $
(283)
1,153 $
1,153 $
32.99
33.23
32.93
32.93
1.62 $
1.62 $
215
215
(1) Represents the average remaining contractual life in years.
(2) Aggregate intrinsic value represents the total pre-tax intrinsic value that would have been received by the option holders if they had exercised their
options on December 31, 2014. Intrinsic value equals the difference between the Company's average of the high and low stock price on the last trading
day of the year and the option exercise price, multiplied by the number of shares. This amount will fluctuate with changes in the fair value of the
Company's common stock.
Stock Option Valuation Assumptions – The Company estimates the fair value of stock options at the grant date using a Black-
Scholes option-pricing model. No stock options were granted or exercised and no stock option award modifications were made
during the three years ended December 31, 2014.
122
Restricted Stock, Restricted Stock Unit, and Performance Share Awards
Restricted Stock, Restricted Stock Unit, and Performance Share Award Transactions
(Amounts in thousands, except per share data)
Year Ended December 31, 2014
Restricted Stock/Unit Awards
Weighted
Average
Grant Date
Fair Value
Number of
Shares/Units
Performance Shares
Number of
Shares
Weighted
Average
Grant Date
Fair Value
Non-vested awards beginning balance .................
Granted ............................................................
Vested ..............................................................
Forfeited ..........................................................
Non-vested awards ending balance ......................
1,123 $
417
(474)
(69)
997 $
12.10
16.13
11.79
13.53
13.79
127 $
118
—
(7)
238 $
12.68
16.13
11.79
13.53
14.36
Other Restricted Stock, Restricted Stock Unit, and Performance Share Award Information
(Amounts in thousands, except per share data)
Years Ended December 31,
2013
2012
2014
Weighted-average grant date fair value of restricted stock, restricted stock unit, and
performance share awards granted during the year ...................................................... $
Total fair value of restricted stock and restricted stock unit awards vested during
the year .........................................................................................................................
Income tax benefit realized from the vesting/release of restricted stock and
restricted stock unit awards ..........................................................................................
16.13
$
13.01 $
11.35
7,546
2,939
4,917
1,966
4,921
1,884
There were no performance shares that vested during the periods presented. No restricted stock, restricted stock unit, and
performance share award modifications were made during the periods presented.
Compensation Expense
The Company recognizes share-based compensation expense based on the estimated fair value of the option or award at the grant or
modification date. Share-based compensation expense is included in salaries and wages in the Consolidated Statements of Income.
Effect of Recording Share-Based Compensation Expense
(Dollar amounts in thousands)
Restricted stock, restricted unit, and performance share
award expense ............................................................................. $
Salary stock award expense ............................................................
Total share-based compensation expense ...................................
Income tax benefit .........................................................................
Share-based compensation expense, net of tax ........................... $
Unrecognized compensation expense .......................................... $
Weighted-average amortization period remaining (in years) .......
2014
Years ended December 31,
2013
2012
5,926 $
—
5,926
2,424
3,502 $
6,937 $
1.3
$
5,779
124
5,903
2,414
3,489 $
6,327
$
1.2
5,877
127
6,004
2,456
3,548
5,674
1.1
123
18. STOCKHOLDER RIGHTS PLAN
On February 15, 1989, the Board adopted a Stockholder Rights Plan. Pursuant to that plan, the Company declared a dividend, paid
March 1, 1989, of one right ("Right") for each outstanding share of Company common stock held on record on March 1, 1989
pursuant to a Rights Agreement dated February 15, 1989. The Rights Agreement was amended and restated on November 15, 1995
and again on June 18, 1997 to exclude an acquisition. The Rights Agreement was further amended on December 9, 2008 to clarify
certain items. As amended, each Right entitles the registered holder to purchase from the Company 1/100 of a share of Series A
Preferred Stock for a price of $150, subject to adjustment. The Rights will be exercisable only if a person or group acquires, or
announces the intention to acquire, 10% or more of the Company's outstanding shares of common stock. The Company is entitled to
redeem each Right for $0.01, subject to adjustment, at any time prior to the earlier of the tenth business day following the
acquisition by any person or group of 10% or more of the outstanding shares of the common stock or the expiration date of the
Rights. The Rights Agreement will expire on November 15, 2015.
As a result of the Rights Agreement, 600,000 of the 1,000,000 shares of authorized preferred stock were reserved for issuance as
Series A Preferred Stock.
19. REGULATORY AND CAPITAL MATTERS
The Company and its subsidiaries are subject to various regulatory requirements that impose restrictions on cash, loans or advances,
and dividends. The Bank is also required to maintain reserves against deposits. Reserves are held either in the form of vault cash or
noninterest-bearing balances maintained with the FRB and are based on the average daily balances and statutory reserve ratios
prescribed by the type of deposit account. Reserve balances totaling $60.0 million at December 31, 2014 and $68.7 million at
December 31, 2013 were maintained in accordance with these requirements.
Under current Federal Reserve regulations, the Bank is limited in the amount it may loan or advance to First Midwest Bancorp, Inc.
on an unconsolidated basis (the "Parent Company") and its non-bank subsidiaries. Loans or advances to a single subsidiary may not
exceed 10%, and loans to all subsidiaries may not exceed 20% of the Bank's capital stock and surplus, as defined. Loans from
subsidiary banks to non-bank subsidiaries, including the Parent Company, are also required to be collateralized.
The principal source of cash flow for the Parent Company is dividends from the Bank. Various federal and state banking regulations
and capital guidelines limit the amount of dividends that the Bank may pay to the Parent Company. Without prior regulatory
approval and while maintaining its well-capitalized status, the Bank can initiate aggregate dividend payments in 2015 of $61.2
million plus its net profits for 2015, as defined by statute, up to the date of any such dividend declaration. Future payment of
dividends by the Bank depends on individual regulatory capital requirements and levels of profitability.
The Company and the Bank are also subject to various capital requirements set up and administered by federal banking agencies.
Under capital adequacy guidelines, the Company and the Bank must meet specific guidelines 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, 2014, the Company and the Bank met all capital adequacy requirements. As of December 31, 2014, the most
recent regulatory notification classified the Bank as "well-capitalized" under the regulatory framework for prompt corrective action.
There are no conditions or events since that notification that management believes would change the Bank's classification.
The following table outlines the Company's and the Bank's measures of capital as of the dates presented and the capital guidelines
established by the Federal Reserve for the Company and the Bank to be categorized as adequately capitalized and the Bank to be
categorized as "well-capitalized."
124
Summary of Capital Ratios
(Dollar amounts in thousands)
Actual
Adequately
Capitalized
To Be Well-Capitalized
Under Prompt Corrective
Action Provisions
Capital
Ratio %
Capital
Ratio %
Capital
Ratio %
As of December 31, 2014
Total capital (to risk-weighted assets):
First Midwest Bancorp, Inc. .................... $ 884,692
931,829
First Midwest Bank .................................
11.23
12.30
$ 630,140
606,038
Tier 1 capital (to risk-weighted assets):
First Midwest Bancorp, Inc. ....................
First Midwest Bank .................................
802,483
857,362
Tier 1 leverage (to average assets):
First Midwest Bancorp, Inc. ....................
First Midwest Bank .................................
802,483
857,362
As of December 31, 2013
Total capital (to risk-weighted assets):
10.19
11.32
9.03
9.76
315,070
303,019
355,362
351,222
First Midwest Bancorp, Inc. .................... $ 841,787
897,255
First Midwest Bank .................................
12.39
13.86
$ 543,573
517,721
Tier 1 capital (to risk-weighted assets):
First Midwest Bancorp, Inc. ....................
First Midwest Bank .................................
741,414
816,286
Tier 1 leverage (to average assets):
First Midwest Bancorp, Inc. ....................
First Midwest Bank .................................
741,414
816,286
10.91
12.61
9.18
10.24
271,787
258,861
242,277
239,065
8.00
8.00
4.00
4.00
4.00
4.00
8.00
8.00
4.00
4.00
4.00
4.00
N/A
757,547
$
N/A
10.00
N/A
454,528
N/A
439,028
N/A
6.00
N/A
5.00
N/A
647,152
$
N/A
10.00
N/A
388,291
N/A
398,442
N/A
6.00
N/A
5.00
In July of 2013, the Federal Reserve published final rules (the "Basel III Capital Rules") that revise the regulatory capital rules to
incorporate certain revisions by the Basel Committee on Banking Supervision. The phase-in period for the final rules began for the
Company on January 1, 2015, with full compliance with the final rules entire requirement phased in on January 1, 2019.
The Basel III Capital Rules (i) introduce a new capital measure called "Common Equity Tier 1" ("CET1"), (ii) specify that Tier 1
capital consists of CET1 and "Additional Tier 1 Capital" instruments meeting specified requirements, (iii) narrowly define CET1 by
requiring that most deductions/adjustments to regulatory capital measures be made to CET1 and not to the other components of
capital, and (iv) expand the scope of the deductions/adjustments compared to existing regulations. Bank holding companies with less
than $15 billion in consolidated assets as of December 31, 2009, such as the Company, are permitted to include trust-preferred
securities in Additional Tier 1 Capital on a permanent basis and without any phase-out. As of December 31, 2014, the Company had
$50.7 million of trust-preferred securities included in Tier 1 capital.
When fully phased in on January 1, 2019, the Basel III Capital Rules will require the Company and the Bank to maintain the
following:
• A minimum ratio of CET1 to risk-weighted assets of at least 4.5%, plus a 2.5% "capital conservation buffer" (resulting in a
minimum ratio of CET1 to risk-weighted assets of at least 7% upon full implementation).
• A minimum ratio of Tier 1 capital to risk-weighted assets of at least 6.0%, plus the capital conservation buffer (resulting in
a minimum Tier 1 capital ratio of 8.5% upon full implementation).
• A minimum ratio of total capital (Tier 1 capital plus Tier 2 capital) to risk-weighted assets of at least 8.0%, plus the capital
conservation buffer (resulting in a minimum total capital ratio of 10.5% upon full implementation).
• A minimum leverage ratio of 4%, calculated as the ratio of Tier 1 capital to average assets.
125
The Basel III Capital Rules also provide for a number of deductions from and adjustments to CET1 to be phased-in over a four-year
period through January 1, 2019 (beginning at 40% on January 1, 2015 and an additional 20% per year thereafter). Examples of these
include the requirement that mortgage servicing rights, deferred tax assets depending on future taxable income, and significant
investments in non-consolidated financial entities be deducted from CET1 to the extent that any one such category exceeds 10% of
CET1 or all such categories in the aggregate exceed 15% of CET1. Under current capital standards, the effects of accumulated other
comprehensive income items included in capital are excluded for the purposes of determining regulatory capital ratios. Under the
Basel III Capital Rules, the effects of certain accumulated other comprehensive items are not excluded; however, the Company and
the Bank, may make a one-time permanent election to continue to exclude these items, and the Company and the Bank expect to
make such an election.
Finally, the Basel III Capital Rules prescribe a standardized approach for risk weightings that expand the risk-weighting categories
from the current four Basel I-derived categories (0%, 20%, 50%, and 100%) to a much larger and more risk-sensitive number of
categories depending on the nature of the assets, generally ranging from 0% for U.S. government and agency securities to 600% for
certain equity exposures, resulting in higher risk weights for a variety of asset categories.
The Company and the Bank believe they would meet all capital adequacy requirements under the Basel III Capital Rules on a fully
phased-in basis as if such requirements were currently in effect as of December 31, 2014.
20. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
In the ordinary course of business, the Company enters into derivative transactions as part of its overall interest rate risk
management strategy. The significant accounting policies related to derivative instruments and hedging activities are presented in
Note 1, "Summary of Significant Accounting Policies."
Fair Value Hedges
The Company hedges the fair value of fixed rate commercial real estate loans using interest rate swaps through which the Company
pays fixed amounts and receives variable amounts. These derivative contracts are designated as fair value hedges.
Fair Value Hedges
(Dollar amounts in thousands)
Gross notional amount outstanding ................................................................................................. $
Derivative liability fair value ..........................................................................................................
Weighted-average interest rate received ..........................................................................................
Weighted-average interest rate paid ................................................................................................
Weighted-average maturity (in years) .............................................................................................
Fair value of assets needed to settle derivative transactions (1) .........................................................
(1)
This amount represents the fair value if credit risk related contingent features were triggered.
As of December 31,
2013
2014
$
12,793
(1,032)
2.07%
6.37%
2.95
1,057
14,730
(1,472)
2.08%
6.39%
3.76
1,502
Hedge ineffectiveness is recognized in other noninterest income in the Consolidated Statements of Income. For the years ended
December 31, 2014, 2013, and 2012, gains or losses related to fair value hedge ineffectiveness were not material.
Cash Flow Hedges
During the year ended December 31, 2014, the Company hedged $325.0 million of certain corporate variable rate loans using
interest rate swaps through which the Company receives fixed amounts and pays variable amounts. The Company also hedged
$325.0 million of borrowed funds using four forward starting interest rate swaps through which the Company receives variable
amounts and pays fixed amounts. The four forward starting interest rate swaps begin in 2015 and 2016 and mature in 2019. These
derivative contracts are designated as cash flow hedges.
126
Cash Flow Hedges
(Dollar amounts in thousands)
Gross notional amount outstanding ................................................................................................. $
Derivative asset fair value ..............................................................................................................
Derivative liability fair value ..........................................................................................................
Weighted-average interest rate received ..........................................................................................
Weighted-average interest rate paid ................................................................................................
Weighted-average maturity (in years) .............................................................................................
As of December 31,
2013
2014
650,000
1,166
(3,096)
1.63%
0.16%
4.52
$
—
—
—
—
—
—
The effective portion of gains or losses on cash flow hedges is recorded in accumulated other comprehensive loss on an after-tax
basis and is subsequently reclassified to interest income or expense in the period that the forecasted hedge impacts earnings. Hedge
ineffectiveness is determined using a regression analysis at the inception of the hedge relationship and on an ongoing basis. For the
year ended December 31, 2014, there were no gains or losses related to cash flow hedge ineffectiveness. As of December 31, 2014,
the Company estimates that $5.0 million will be reclassified from accumulated other comprehensive loss as an increase to interest
income over the next twelve months.
Other Derivative Instruments
The Company also enters into derivative transactions with its commercial customers and simultaneously enters into an offsetting
interest rate derivative transaction with a third party. This transaction allows the Company’s customers to effectively convert a
variable rate loan into a fixed rate loan. Due to the offsetting nature of these transactions, the Company does not apply hedge
accounting treatment. Transaction fees related to commercial customer derivative instruments of $2.2 million and $2.8 million were
recorded in noninterest income for the years ended December 31, 2014 and 2013, respectively. There were no transaction fees
related to commercial customer derivative instruments for the year ended December 31, 2012.
Other Derivative Instruments
(Dollar amounts in thousands)
As of December 31,
2013
2014
Gross notional amount outstanding ................................................................................................. $
Derivative asset fair value ..............................................................................................................
Derivative liability fair value ..........................................................................................................
Fair value of assets needed to settle derivative transactions (1) .........................................................
527,893 $
7,852
(7,852)
8,130
256,638
2,235
(2,235)
1,305
(1)
This amount represents the fair value if credit risk related contingent factors were triggered.
The Company’s derivative portfolio also includes other derivative instruments that do not receive hedge accounting treatment
consisting of commitments to originate 1-4 family mortgage loans and foreign exchange contracts. In addition, the Company
occasionally enters into risk participation agreements with counterparty banks to transfer or assume a portion of the credit risk
related to customer transactions. The amounts of these instruments were not material for any period presented. The Company had no
other derivative instruments as of December 31, 2014 and 2013. The Company does not enter into derivative transactions for purely
speculative purposes.
Credit Risk
Derivative instruments are inherently subject to credit risk, which represents the Company’s risk of loss when the counterparty to a
derivative contract fails to perform according to the terms of the agreement. Credit risk is managed by limiting and collateralizing
the aggregate amount of net unrealized losses by transaction, monitoring the size and the maturity structure of the derivatives, and
applying uniform credit standards. Company policy establishes limits on credit exposure to any single counterparty. In addition, the
Company established bilateral collateral agreements with derivative counterparties that provide for exchanges of marketable
securities or cash to collateralize either party’s net losses above a stated minimum threshold. At December 31, 2014 and 2013, these
collateral agreements covered 100% of the fair value of the Company’s outstanding fair value hedges. Derivative assets and
liabilities are presented gross, rather than net, of pledged collateral amounts.
Certain derivative instruments are subject to master netting agreements with counterparties. The Company records these transactions
at their gross fair values and does not offset derivative assets and liabilities in the Consolidated Statements of Financial Condition.
The following table presents the fair value of the Company's derivatives and offsetting positions as of December 31, 2014 and 2013.
127
Offsetting Derivatives
(Dollar amounts in thousands)
Derivative Assets
As of December 31,
2013
2014
Derivative Liabilities
As of December 31,
2013
2014
Gross amounts recognized
$
9,018 $
2,235 $
11,980 $
3,707
Less: amounts offset in the Consolidated Statements of
Financial Condition
—
—
—
Net amount presented in the Consolidated Statements of
Financial Condition (1)
9,018
Gross amounts not offset in the Consolidated Statements of Financial Condition
(1,195)
Offsetting derivative positions
—
Cash collateral pledged
7,823 $
Net credit exposure
$
2,235
11,980
(704)
—
1,531 $
(1,195)
(10,785)
— $
—
3,707
(704)
(3,003)
—
(1)
Included in other assets or other liabilities in the Consolidated Statements of Financial Condition.
As of December 31, 2014 and 2013, the Company’s derivative instruments generally contained provisions that require the
Company’s debt to remain above a certain credit rating by each of the major credit rating agencies or that the Company maintain
certain capital levels. If the Company’s debt were to fall below that credit rating or the Company's capital were to fall below the
required levels, it would be in violation of those provisions, and the counterparties to the derivative instruments could terminate the
swap transaction and demand cash settlement of the derivative instrument in an amount equal to the derivative liability fair value. As
of December 31, 2014 and 2013, the Company was not in violation of these provisions.
21. COMMITMENTS, GUARANTEES, AND CONTINGENT LIABILITIES
Credit Commitments and Guarantees
In the normal course of business, the Company enters into a variety of financial instruments with off-balance sheet risk to meet the
financing needs of its customers and to conduct lending activities, including commitments to extend credit and standby and
commercial letters of credit. These instruments involve elements of credit and interest rate risk in excess of the amount recognized
in the Consolidated Statements of Financial Condition.
Contractual or Notional Amounts of Financial Instruments
(Dollar amounts in thousands)
As of December 31,
2014
2013
Commitments to extend credit:
Commercial, industrial, and agricultural ....................................................... $
Commercial real estate ..................................................................................
Home equity ..................................................................................................
Other commitments (1) ...................................................................................
Total commitments to extend credit .......................................................... $
1,299,683 $
170,573
317,783
194,556
1,982,595 $
1,077,201
133,867
268,311
181,702
1,661,081
Standby letters of credit ..................................................................................... $
Recourse on assets sold:
Unpaid principal balance of loans sold .......................................................... $
Carrying value of recourse obligation (2) ........................................................
110,639
$
110,453
185,910 $
155
170,330
162
(1) Other commitments includes installment and overdraft protection program commitments.
(2)
Included in other liabilities in the Consolidated Statements of Financial Condition.
Commitments to extend credit are agreements to lend funds to a customer, subject to contractual terms and covenants. Commitments
generally have fixed expiration dates or other termination clauses, variable interest rates, and fee requirements, when applicable.
Since many of the commitments are expected to expire without being drawn, the total commitment amounts do not necessarily
represent future cash flow requirements.
128
In the event of a customer's non-performance, the Company's credit loss exposure is equal to the contractual amount of the
commitments. The credit risk is essentially the same as extending loans to customers. The Company uses the same credit policies for
credit commitments as its loans and minimizes exposure to credit loss through various collateral requirements.
Letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party.
Standby letters of credit generally are contingent on the failure of the customer to perform according to the terms of the contract
with the third party and are often issued in favor of a municipality where construction is taking place to ensure the borrower
adequately completes the construction.
The maximum potential future payments guaranteed by the Company under standby letters of credit arrangements are equal to the
contractual amount of the commitment. If a commitment is funded, the Company may seek recourse through the liquidation of the
underlying collateral, including real estate, production plants and property, marketable securities, or receipt of cash.
As a result of the sale of certain 1-4 family mortgage loans, the Company is contractually obligated to repurchase any non-
performing loans or loans that do not meet underwriting requirements at recorded value. In accordance with the sales agreements,
there is no limitation to the maximum potential future payments or expiration of the Company's recourse obligation. There were no
material loan repurchases during the years ended December 31, 2014 or 2013.
During 2012, the Company entered into two forward commitments with the FHLB to borrow $250 million for a five year period
beginning in 2014 at a weighted average interest rate of 2.0%. The Company terminated these forward commitments during 2013,
resulting in a gain of $7.8 million recorded as a component of noninterest income in the Consolidated Statement of Income.
Legal Proceedings
In the ordinary course of business, there were certain legal proceedings pending against the Company and its subsidiaries at
December 31, 2014. While the outcome of any legal proceeding is inherently uncertain, based on information currently available,
the Company's management does not expect that any liabilities arising from pending legal matters will not have a material adverse
effect on the Company's financial position, results of operations, or cash flows.
22. FAIR VALUE
Fair value represents the amount expected to be received to sell an asset or paid to transfer a liability in its principal or most
advantageous market in an orderly transaction between market participants at the measurement date. In accordance with fair value
accounting guidance, the Company measures, records, and reports various types of assets and liabilities at fair value on either a
recurring or non-recurring basis in the Consolidated Statements of Financial Condition. Those assets and liabilities are presented
below in the sections titled "Assets and Liabilities Required to be Measured at Fair Value on a Recurring Basis" and "Assets and
Liabilities Required to be Measured at Fair Value on a Non-Recurring Basis."
Other assets and liabilities are not required to be measured at fair value in the Consolidated Statements of Financial Condition, but
must be disclosed at fair value. Refer to the "Fair Value Measurements of Other Financial Instruments" section of this footnote. Any
aggregation of the estimated fair values presented in this footnote does not represent the value of the Company.
Depending on the nature of the asset or liability, the Company uses various valuation methodologies and assumptions to estimate
fair value. GAAP provides a three-tiered fair value hierarchy based on the inputs used to measure fair value. The hierarchy is
defined as follows:
• Level 1 – Quoted prices in active markets for identical assets or liabilities.
• Level 2 – Observable inputs other than level 1 prices, such as quoted prices for similar instruments, quoted prices in
markets that are not active, or other inputs that are observable or can be corroborated by observable market data.
• Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of
the assets or liabilities. These inputs require significant management judgment or estimation, some of which use model-
based techniques and may be internally developed.
Assets and liabilities are assigned to a level within the fair value hierarchy based on the lowest level of significant input used to
measure fair value. Assets and liabilities may change levels within the fair value hierarchy due to market conditions or other
circumstances. Those transfers are recognized on the date of the event that prompted the transfer. There were no transfers of assets
or liabilities between levels of the fair value hierarchy during the periods presented.
129
Assets and Liabilities Required to be Measured at Fair Value on a Recurring Basis
The following table provides the fair value for assets and liabilities required to be measured at fair value on a recurring basis in the
Consolidated Statements of Financial Condition by level in the fair value hierarchy.
Recurring Fair Value Measurements
(Dollar amounts in thousands)
As of December 31, 2014
As of December 31, 2013
Level 1
Level 2
Level 3
Level 1
Level 2
Level 3
Assets:
Trading securities:
Money market funds ........................... $
Mutual funds ......................................
Total trading securities ....................
Securities available-for-sale:
U.S. Agency securities ........................
CMOs ...............................................
Other MBSs .......................................
Municipal securities ............................
CDOs ................................................
Corporate debt securities .....................
Equity securities .................................
Total securities available-for-
sale .............................................
Mortgage servicing rights (1) .....................
Derivative assets (1) ..................................
1,725 $
— $
— $
15,735
17,460
—
—
—
—
—
—
—
—
—
—
—
—
30,431
534,156
159,765
423,820
—
1,802
3,261
1,153,235
—
9,018
—
—
—
—
—
—
33,774
—
—
33,774
1,728
—
1,847 $
15,470
17,317
— $
—
—
—
—
—
—
—
—
44
44
—
—
500
475,768
136,164
461,393
14,929
5,618
1,094,372
—
2,235
Liabilities:
Derivative liabilities (2) ............................. $
— $
11,980 $
— $
— $
3,707 $
—
—
—
—
—
—
—
—
—
18,309
1,893
—
—
—
18,309
(1)
(2)
Included in other assets in the Consolidated Statements of Financial Condition.
Included in other liabilities in the Consolidated Statements of Financial Condition.
The following sections describe the specific valuation techniques and inputs used to measure financial assets and liabilities at fair
value.
Trading Securities
The Company's trading securities consist of diversified investment securities held in a grantor trust and are invested in money
market and mutual funds. The fair value of these money market and mutual funds is based on quoted market prices in active
exchange markets and is classified in level 1 of the fair value hierarchy.
Securities Available-for-Sale
The Company’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 in the fair value hierarchy. Quarterly, the
Company evaluates the methodologies used by its external pricing services to estimate the fair value of these securities to determine
whether the valuations represent an exit price in the Company’s principal markets.
CDOs are classified in level 3 in the fair value hierarchy. The Company estimates the fair values for each CDO using discounted
cash flow analyses with the assistance of a structured credit valuation firm. This methodology is based on a credit analysis and
historical financial data for each of the issuers underlying the CDOs (the "Issuers"). These estimates are highly subjective and
sensitive to several significant, unobservable inputs. The cash flows for each Issuer are then discounted to present values using
LIBOR plus an adjustment to reflect the impact of market factors. Finally, the discounted cash flows for each Issuer are aggregated
to derive the estimated fair value for the specific CDO. The following table presents the ranges of unobservable inputs used by the
Company as of December 31, 2014.
130
Unobservable Inputs Used in the Valuation of CDOs
Probability of prepayment .........................................................................................
Probability of default .................................................................................................
Loss given default .....................................................................................................
Probability of deferral cure ........................................................................................
As of December 31,
2014
2.9% - 15.2%
18.4% - 57.7%
83.8% - 97.0%
6.7% - 75.0%
Most Issuers have the right to prepay the securities on the fifth anniversary of issuance and under other limited circumstances. To
estimate prepayments, a credit analysis of each Issuer is performed to estimate its ability and likelihood to fund a prepayment. If a
prepayment occurs, the Company receives cash equal to the par value for the portion of the CDO associated with that Issuer.
The likelihood that an Issuer who is currently deferring payment on the securities will pay all deferred amounts and remain current
thereafter is based on an analysis of the Issuer's asset quality, leverage ratios, and other measures of financial viability.
Changes in any of these key inputs could result in a significantly higher or lower estimate of fair value 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.
During the year ended December 31, 2014, the Company observed market activity for similar CDO securities. This increase in
market activity allowed the Company to obtain market prices from dealer market participants that were used in management's
valuation process as of December 31, 2014.
Management monitors the valuation results of each CDO on a quarterly basis, which includes an analysis of historical pricing trends
and market activity for similar securities, consideration of overall economic conditions (such as movements in LIBOR curves), and
the performance in the Issuers' industries. Annually, management validates significant assumptions by reviewing detailed back-
testing performed by the structured credit valuation firm.
A rollforward of the carrying value of CDOs for the three years ended December 31, 2014 is presented in the following table.
Rollforward of Carrying Value of CDOs
(Dollar amounts in thousands)
Years Ended December 31,
2013
2012
2014
Beginning balance ........................................................................................... $
Additions .........................................................................................................
18,309 $
6,549
Total income (loss):
OTTI included in earnings (1) .......................................................................
Change in other comprehensive income (loss) (2)..........................................
Sales and paydowns (3) .....................................................................................
Ending balance ................................................................................................ $
Change in unrealized losses recognized in earnings related to securities still
held at end of period ...................................................................................... $
—
13,495
(4,579)
33,774 $
12,129 $
—
—
6,180
—
18,309 $
13,394
—
(2,226)
961
—
12,129
— $
—
$
(2,226)
Included in net securities gains (losses) in the Consolidated Statements of Income and related to securities still held at the end of the period.
Included in unrealized holding gains (losses) in the Consolidated Statements of Comprehensive Income.
(1)
(2)
(3) During the year ended December 31, 2014, one CDO with a carrying value of $1.3 million and four CDOs totaling $2.9 million, which were acquired in
the Great Lakes transaction, were sold. In addition, one CDO with a carrying value of zero was sold during the year ended December 31, 2013.
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 servicing rights are recorded at fair value and are included in other assets in
the Consolidated Statements of Financial Condition. Therefore, the Company determines the fair value of mortgage servicing rights
by estimating the present value of expected future cash flows associated with the mortgage loans being serviced. Key economic
131
assumptions used in measuring the fair value of mortgage servicing rights at December 31, 2014 included prepayment speeds,
maturities, and discount rates. While market-based data is used to determine the assumptions, the Company incorporates its own
estimates of the assumptions market participants would use in determining the fair value of mortgage servicing rights, which results
in a level 3 classification in the fair value hierarchy.
A rollforward of the carrying value of mortgage servicing rights for the three years ended December 31, 2014 is presented in the
following table.
Carrying Value of Mortgage Servicing Rights
(Dollar amounts in thousands)
Beginning balance .......................................................................................... $
New mortgage servicing rights ...................................................................
Total (losses) gains included in earnings (1):
Changes in valuation inputs and assumptions .........................................
Other changes in fair value (2) ................................................................
Ending balance ............................................................................................... $
Contractual servicing fees earned during the year (1)......................................... $
Total amount of loans being serviced for the benefit of
others at the end of the year ...........................................................................
Years Ended December 31,
2013
2012
2014
1,893 $
315
(480)
—
1,728 $
985 $
1,060
63
(215)
1,893 $
520 $
418
$
929
347
(72)
(219)
985
209
220,372
214,458
109,730
(1)
(2)
Included in mortgage banking income in the Consolidated Statements of Income and relate to assets still held at the end of the year.
Primarily represents changes in expected future cash flows over time due to payoffs and paydowns.
Derivative Assets and Derivative Liabilities
The Company enters into interest rate swaps and derivative transactions with commercial customers. These derivative transactions
are executed in the dealer market, and pricing is based on market quotes obtained from the counterparties. The market quotes were
developed using market observable inputs, which primarily include LIBOR. Therefore, derivatives are classified in level 2 of the fair
value hierarchy. For its derivative assets and liabilities, the Company also considers non-performance risk, including the likelihood
of default by itself and its counterparties, when evaluating whether the market quotes from the counterparties are representative of
an exit price.
Pension Plan Assets
Although Pension Plan assets are not consolidated in the Company's Consolidated Statements of Financial Condition, they are
required to be measured at fair value on an annual basis. The fair value of Pension Plan assets is presented in the following table by
level in the fair value hierarchy.
Annual Fair Value Measurements for Pension Plan Assets
(Dollar amounts in thousands)
As of December 31, 2014
Level 2
Total
Level 1
As of December 31, 2013
Level 2
Total
Level 1
Pension plan assets:
Mutual funds (1) ........................................ $
U.S. government and government
agency securities ....................................
Corporate bonds .......................................
Common stocks ........................................
Common trust funds .................................
Total pension plan assets ...................... $
25,499 $
— $
25,499 $
7,879
—
14,149
—
47,527 $
8,063
6,599
—
10,004
24,666 $
15,942
6,599
14,149
10,004
72,193 $
23,896 $
7,261
—
17,261
—
48,418 $
— $
23,896
8,930
5,984
—
11,038
25,952 $
16,191
5,984
17,261
11,038
74,370
(1)
Includes mutual funds, money market funds, cash, cash equivalents, and accrued interest.
Mutual funds, certain U.S. government agency securities, and common stocks are based on quoted market prices in active exchange
markets and classified in level 1 of the fair value hierarchy. Corporate bonds, certain U.S. government agency, and U.S. Treasury
132
securities are valued at quoted prices from independent sources that are based on observable market trades or observable prices for
similar bonds where a price for the identical bond is not observable and, therefore, are classified in level 2 of the fair value
hierarchy. Common trust funds are valued at quoted redemption values on the last business day of the Pension Plan's year end and
are classified in level 2 of the fair value hierarchy. There were no Pension Plan assets classified in level 3 of the fair value hierarchy.
Assets and Liabilities Required to be Measured at Fair Value on a Non-Recurring Basis
The following table provides the fair value for each class of assets and liabilities required to be measured at fair value on a non-
recurring basis in the Consolidated Statements of Financial Condition by level in the fair value hierarchy.
Non-Recurring Fair Value Measurements
(Dollar amounts in thousands)
As of December 31, 2014
Level 2
Level 3
Level 1
As of December 31, 2013
Level 2
Level 3
Level 1
Collateral-dependent impaired loans (1) ... $
OREO (2)................................................
Loans held-for-sale (3) ............................
Assets held-for-sale (4) ............................
— $
—
—
—
— $
—
—
—
23,799 $
22,760
9,459
2,026
— $
—
—
—
— $
—
—
—
13,103
13,347
4,739
4,027
(1)
(2)
(3)
(4)
Includes impaired loans with charge-offs and impaired loans with a specific reserve during the periods presented.
Includes OREO and covered OREO with fair value adjustments subsequent to initial transfer that occurred during the periods presented.
Included in other assets in the Consolidated Statements of Financial Condition.
Included in premises, furniture, and equipment in the Consolidated Statements of Financial Condition.
Collateral-Dependent Impaired Loans
Certain collateral-dependent impaired loans are subject to fair value adjustments to reflect the difference between the carrying value
of the loan and the value of the underlying collateral. The fair values of collateral-dependent impaired loans are primarily
determined by current appraised values of the underlying collateral. Based on the age and/or type, appraisals may be adjusted in the
range of 0% - 15%. In certain cases, an internal valuation may be used when the underlying collateral is located in areas where
comparable sales data is limited or unavailable. Accordingly, collateral-dependent impaired loans are classified in level 3 of the fair
value hierarchy.
Collateral-dependent impaired loans for which the fair value is greater than the recorded investment are not measured at fair value in
the Consolidated Statements of Financial Condition and are not included in this disclosure.
OREO
The fair value of OREO is measured using the current appraised value of the properties. In certain circumstances, a current appraisal
may not be available or may not represent an accurate measurement of the property's fair value due to outdated market information
or other factors. In these cases, the fair value is determined based on the lower of the (i) most recent appraised value, (ii) broker
price opinion, (iii) current listing price, or (iv) signed sales contract. Given these valuation methods, OREO is classified in level 3 of
the fair value hierarchy.
Loans Held-for-Sale
Loans held-for-sale consisted of 1-4 family mortgage loans, which were originated with the intent to sell, and one commercial real
estate loan as of both December 31, 2014 and 2013. These loans were transferred to the held-for-sale category at the contract price
and, accordingly, are classified in level 3 of the fair value hierarchy.
Assets Held-for-Sale
Assets held-for-sale consist of former branches that are no longer in operation, which were transferred into the held-for-sale
category at the lower of their fair value as determined by a current appraisal or their recorded investment. Based on these valuation
methods, they are classified in level 3 of the fair value hierarchy.
133
Goodwill and Other Intangible Assets
Goodwill and other intangible assets are subject to annual impairment testing, which requires a significant degree of management
judgment and the use of significant unobservable inputs. As discussed in Note 9, "Goodwill and Other Intangible Assets," the annual
impairment tests indicated no impairment existed.
If the testing had resulted in impairment, the Company would have classified goodwill and other intangible assets as a level 3 non-
recurring fair value measurement. Additional information regarding goodwill, other intangible assets, and impairment policies can
be found in Note 1, "Summary of Significant Accounting Policies," and Note 9, "Goodwill and Other Intangible Assets."
Financial Instruments Not Required to be Measured at Fair Value
For certain financial instruments that are not required to be measured at fair value in the Consolidated Statements of Financial
Condition, the Company must disclose the estimated fair values and the level within the fair value hierarchy as shown in the
following table.
Fair Value Measurements of Other Financial Instruments
(Dollar amounts in thousands)
As of December 31, 2014
As of December 31, 2013
Fair Value
Hierarchy
Level
Carrying
Amount
Fair Value
Carrying
Amount
Fair Value
Assets:
Cash and due from banks .........................................
Interest-bearing deposits in other banks ....................
Securities held-to-maturity .......................................
FHLB and FRB stock ...............................................
Net loans .................................................................
FDIC indemnification asset ......................................
Investment in BOLI .................................................
Accrued interest receivable ......................................
Other interest-earning assets .....................................
Liabilities:
Deposits ...................................................................
Borrowed funds .......................................................
Senior and subordinated debt ....................................
Accrued interest payable ..........................................
1
2
2
2
3
3
3
3
3
2
2
1
2
$
117,315 $
488,947
26,555
37,558
6,664,159
8,452
206,498
27,506
3,799
117,315 $
488,947
27,670
37,558
6,532,622
3,626
206,498
27,506
3,904
110,417 $
476,824
44,322
35,161
5,628,855
16,585
193,167
25,735
6,550
110,417
476,824
43,387
35,161
5,544,146
7,829
193,167
25,735
6,809
$ 7,887,758 $ 7,879,413 $ 6,766,101 $ 6,765,404
226,839
201,147
2,400
137,994
199,226
2,324
224,342
190,932
2,400
137,994
200,869
2,324
Management uses various methodologies and assumptions to determine the estimated fair values of the financial instruments in the
table above. The fair value estimates are made at a discrete point in time based on relevant market information and consider
management's judgments regarding future expected economic conditions, loss experience, and specific risk characteristics of the
financial instruments.
Short-Term Financial Assets and Liabilities – For financial instruments with a shorter-term or with no stated maturity, prevailing
market rates, and limited credit risk, the carrying amounts approximate fair value. Those financial instruments include cash and due
from banks, interest-bearing deposits in other banks, other short-term investments, accrued interest receivable, and accrued interest
payable.
Securities Held-to-Maturity – The fair value of securities held-to-maturity is estimated using the present value of expected future
cash flows of the remaining maturities of the securities.
FHLB and FRB Stock – The carrying amounts approximate fair value as the stock is non-marketable.
Net Loans – Net loans includes loans held-for-investment, acquired loans, covered loans, and the allowance for loan and covered
loan losses. The fair value of loans is estimated using the present value of the expected future cash flows of the remaining maturities
of the loans. Prepayment assumptions that consider the Company’s historical experience and current economic and lending
conditions were included. The discount rate was based on the LIBOR yield curve with adjustments for liquidity and credit risk
inherent in the loans.
134
The fair value of the covered loan portfolio is determined by discounting the expected future cash flows at a market interest rate,
which is derived from LIBOR swap rates over the life of those loans. The expected future cash flows are derived from the
contractual terms of the covered loans, net of any projected credit losses. For valuation purposes, these loans are placed into groups
with similar characteristics and risk factors, where appropriate. The timing and amount of credit losses for each group are estimated
using historical default and loss experience, current collateral valuations, borrower credit scores, and internal risk ratings. For
individually significant loans or credit relationships, the estimated fair value is determined by a specific loan level review utilizing
appraised values for collateral and projections of the timing and amount of expected future cash flows.
FDIC Indemnification Asset – The fair value of the FDIC indemnification asset is calculated by discounting the expected future
cash flows to be received from the FDIC. The expected future cash flows are estimated by multiplying anticipated losses on covered
loans and covered OREO by the reimbursement rates in the FDIC Agreements.
Investment in BOLI – The fair value of BOLI approximates the carrying amount as both are based on each policy's respective
CSV, which is the amount the Company would receive from liquidation of these investments. The CSV is derived from monthly
reports provided by the managing brokers and is determined using the Company's initial insurance premium and earnings of the
underlying assets, offset by management fees.
Other Interest-Earning Assets – The fair value of other interest-earning assets is estimated using the present value of the expected
future cash flows of the remaining maturities of the assets.
Deposits – The fair values disclosed for demand deposits, savings deposits, NOW accounts, and money market deposits are equal to
the amount payable on demand at the reporting date (i.e., their carrying amounts). The fair value for fixed-rate time deposits was
estimated using the expected future cash flows discounted based on the LIBOR yield curve, plus or minus the spread associated with
current pricing.
Borrowed Funds – The fair value of FHLB advances is estimated by discounting the agreements based on maturities using the rates
currently offered for FHLB advances of similar remaining maturities adjusted for prepayment penalties that would be incurred if the
borrowings were paid off on the measurement date. The carrying amounts of securities sold under agreements to repurchase
approximate their fair value due to their short-term nature.
Senior and Subordinated Debt – The fair value of senior and subordinated debt was determined using quoted market prices.
Commitments to Extend Credit and Letters of Credit – The Company estimated the fair value of lending commitments
outstanding to be immaterial based on (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.
23. RELATED PARTY TRANSACTIONS
The Company, through the Bank, makes loans and has transactions with certain of its directors and executive officers. All of these
loans and transactions were made in the ordinary course of business on substantially the same terms, including interest rates and
collateral requirements, for comparable transactions with unrelated persons and did not involve more than the normal risk of
collectability or present unfavorable features. For the years ended December 31, 2014 and 2013, loans to directors and executive
officers totaled $31.8 million and $27.6 million, respectively, and were not greater than 5% of stockholders' equity.
135
24. CONDENSED PARENT COMPANY FINANCIAL STATEMENTS
The following represents the condensed financial statements of First Midwest Bancorp, Inc., the Parent Company.
Statements of Financial Condition
(Parent Company only)
(Dollar amounts in thousands)
Assets
Cash and interest-bearing deposits ................................................................................. $
Investments in and advances to subsidiaries ...................................................................
Goodwill .......................................................................................................................
Other assets ...................................................................................................................
Total assets ............................................................................................................... $
Liabilities and Stockholders' Equity
Senior and subordinated debt ......................................................................................... $
Accrued expenses and other liabilities ............................................................................
Stockholders' equity ......................................................................................................
Total liabilities and stockholders' equity .................................................................... $
As of December 31,
2014
2013
43,546 $
1,211,244
13,625
79,468
1,347,883 $
200,869 $
46,239
1,100,775
1,347,883 $
13,071
1,120,745
8,943
77,948
1,220,707
190,932
28,333
1,001,442
1,220,707
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 ....................................................................................
Income before income tax benefit (expense) and equity in undistributed
income (loss) of subsidiaries ....................................................................
Income tax benefit (expense) ......................................................................
Income before undistributed income (loss) of subsidiaries...........................
Equity in undistributed income (loss) of subsidiaries...................................
Net income (loss) ................................................................................
Net (income) loss applicable to non-vested restricted shares ................
Net income (loss) applicable to common shares................................... $
Years ended December 31,
2013
2012
2014
56,881 $
1,502
—
6,451
64,834
12,062
12,589
5,867
30,518
34,316
8,710
43,026
26,280
69,306
(836)
68,470 $
54,200 $
1,067
(1,034)
37,485
91,718
13,607
15,198
5,792
34,597
57,121
(962)
56,159
23,147
79,306
(1,107)
78,199 $
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)
306
(20,748)
136
Statements of Cash Flows
(Parent Company only)
(Dollar amounts in thousands)
Operating Activities
Net income (loss) .............................................................................................. $
Adjustments to reconcile net income (loss) income to net cash provided
by operating activities:
Equity in undistributed (income) loss of subsidiaries.....................................
Depreciation of premises, furniture, and equipment.......................................
Net gains on sales of securities .....................................................................
Net losses on early extinguishment of debt ...................................................
Share-based compensation expense ..............................................................
Tax (expense) benefit related to share-based compensation ...........................
Net decrease (increase) in other assets ..........................................................
Net increase (decrease) in other liabilities .....................................................
Net cash provided by operating activities .................................................
Investing Activities
Purchases of securities available-for-sale ......................................................
Proceeds from sales and maturities of securities available-for-sale.................
Purchase of premises, furniture, and equipment ............................................
Cash received from acquisitions, net of cash paid..........................................
Net cash used in investing activities .........................................................
Financing Activities
Years ended December 31,
2013
2012
2014
69,306 $
79,306 $
(21,054)
(26,280)
6
(5,702)
—
5,926
(106)
4,599
14,063
61,812
—
8,540
—
(15,809)
(7,269)
(23,147)
7
(34,119)
1,034
5,903
(10)
1,084
(1,624)
28,434
(46,532)
43,329
—
—
(3,203)
40,355
6
—
558
6,004
170
(6,207)
1,366
21,198
(5,811)
—
(18)
—
(5,829)
(37,033)
—
(2,977)
(1,469)
(21)
(41,500)
(26,131)
47,101
20,970
Payments for retirement of subordinated debt ...............................................
Treasury stock activity .................................................................................
Cash dividends paid .....................................................................................
Restricted stock activity ...............................................................................
Excess tax benefit (expense) related to share-based compensation.................
Net cash used in financing activities ........................................................
Net increase (decrease) in cash and cash equivalents ................................
Cash and cash equivalents at beginning of year ........................................
Cash and cash equivalents at end of year .................................................. $
—
369
(22,568)
(2,781)
912
(24,068)
30,475
13,071
43,546 $
(24,094)
—
(7,508)
(1,607)
79
(33,130)
(7,899)
20,970
13,071 $
Supplemental Disclosures of Cash Flow Information:
Common stock issued for acquisitions, net of issuance costs .............................. $
38,300 $
— $
—
137
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, 2014 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 Exchange Act. The Company's internal control over financial reporting is
designed to provide reasonable assurance to the Company's management and Board of Directors regarding the preparation and fair
presentation of published financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Accordingly,
even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation
and presentation.
Management assessed the effectiveness of the Company's internal control over financial reporting as of December 31, 2014. In
making this assessment, management used the criteria set forth in "Internal Control – Integrated Framework" issued by the
Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). Based on this
assessment, management determined that the Company's internal control over financial reporting as of December 31, 2014 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, 2014. The report, which expresses an unqualified opinion on the Company's internal control over
financial reporting as of December 31, 2014, is included in this Item under the heading "Attestation Report of Independent
Registered Public Accounting Firm."
138
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, 2014,
based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (2013 framework) (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, the Company maintained in all material respects, effective internal control over financial reporting as of December
31, 2014, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the
consolidated statements of financial condition of the Company as of December 31, 2014 and 2013, and the related consolidated
statements of income, comprehensive income, changes in stockholders’ equity, and cash flows for each of the three years in the
period ended December 31, 2014 of the Company and our report dated March 2, 2015 expressed an unqualified opinion thereon.
/s/ ERNST & YOUNG LLP
Chicago, Illinois
March 2, 2015
139
None.
ITEM 9B. OTHER INFORMATION
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 (54)
Mark G. Sander (56)
Kent S. Belasco (64)
Nicholas J. Chulos (55)
Position or Employment for Past Five Years
President and Chief Executive Officer of the Company since 2008; Chairman since
2011 and Vice Chairman from 2010 to 2011 of the Bank's Board of Directors; Chief
Executive Officer of the Bank since 2010 and prior thereto, President, Chief
Operating Officer and various other senior management positions with the Bank.
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, from 2009 to 2011, and before that in
numerous leadership positions in commercial banking at Bank of America and
LaSalle 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, Corporate Secretary, and General Counsel since 2012;
prior thereto, Partner of Krieg DeVault, LLP.
Executive
Officer
Since
2002
2011
2004
2012
Paul F. Clemens (62)
Executive Vice President and Chief Financial Officer of the Company and the Bank.
2006
Robert P. Diedrich (51)
Caryn J. Guinta (64)
James P. Hotchkiss (58)
Kevin L. Moffitt (55)
Thomas M. Prame (45)
Angela L. Putnam (36)
Michael C. Spitler (61)
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 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.
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.
Senior Vice President of the Company and Bank and Chief Accounting Officer of
the Bank since 2014; prior thereto, Vice President and Financial Reporting Manager
for the Company since 2013; prior thereto, Director in the Assurance Services
practice of McGladrey LLP.
Executive Vice President and Chief Credit Officer of the Bank since 2013; prior
thereto, Executive Vice President and Commercial Chief Credit Officer for Busey
Bank since 2011; and prior thereto, Senior Vice President and Managing Senior
Credit Officer for Fifth Third Bank, Chicago affiliate, West Region and Structured
Finance Group.
2004
2013
2004
2009
2012
2015
2013
Additional information required in response to this item will be contained in the Company’s definitive Proxy Statement relating
to its 2015 Annual Meeting of Stockholders to be held on May 20, 2015 and is incorporated herein by reference.
140
ITEM 11. EXECUTIVE COMPENSATION
The information required in response to this item will be contained in the Company’s definitive Proxy Statement relating to its
2015 Annual Meeting of Stockholders to be held on May 20, 2015 and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information required in response to this item, in addition to the information presented below under "Equity Compensation
Plans," will be contained in the Company’s definitive Proxy Statement relating to its 2015 Annual Meeting of Stockholders to be
held on May 20, 2015 and is incorporated herein by reference.
Equity Compensation Plans
The following table sets forth information, as of December 31, 2014, relating to equity compensation plans of the Company
pursuant to which options, restricted stock, restricted stock units, performance shares, or other rights to acquire shares may be
granted from time to time.
Equity Compensation Plan Information
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)
1,153,213 $
5,337
1,158,550
32.93
17.67
32.86
2,312,631
—
2,312,631
Equity Compensation Plan Category
Approved by security holders (1) .........
Not approved by security holders (2) ...
Total ...............................................
(1)
Includes all outstanding options and restricted stock, restricted stock unit, and performance share awards under the Company's Omnibus Stock and
Incentive Plan and the Non-Employee Directors' Stock Plan (the "Plans"). Additional information and details about the Plans are also disclosed in Notes 1
and 17 of "Notes to the Consolidated Financial Statements" in Item 8 of this Form 10-K. Restricted stock, restricted stock units, and performance shares
that do not vest or are not earned, as well as the shares underlying options that expire unexercised, are added to the number of securities available for
future issuance.
(2) Represents shares underlying deferred stock units credited under the Company's Nonqualified Retirement Plan ("NQ Plan"), payable on a one-for-one
basis in shares of common stock.
The NQ Plan is a defined contribution deferred compensation plan under which participants are credited with deferred compensation
equal to contributions and benefits that would have accrued to the participant under the Company's tax-qualified retirement plans,
but for limitations under the Internal Revenue Code, and to amounts of salary and annual bonus that the participant elected to defer.
Participant accounts are deemed to be invested in separate investment accounts under the NQ Plan with similar investment
alternatives as those available under the Company's tax-qualified savings and profit sharing plan, including an investment account
deemed invested in shares of common stock. The accounts are adjusted to reflect the investment return related to such deemed
investments. Except for the 5,337 shares set forth in the table above, all amounts credited under the NQ Plan are paid in cash.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR
INDEPENDENCE
The information required in response to this item will be contained in the Company’s definitive Proxy Statement relating to its 2015
Annual Meeting of Stockholders to be held on May 20, 2015 and is incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required in response to this item will be contained in the Company's definitive Proxy Statement relating to its 2015
Annual Meeting of Stockholders to be held on May 20, 2015 and is incorporated herein by reference.
141
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
PART IV
(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, 2014 and 2013.
Consolidated Statements of Income for the years ended December 31, 2014, 2013, and 2012.
Consolidated Statements of Comprehensive Income for the years ended December 31, 2014, 2013, and 2012.
Consolidated Statements of Changes in Stockholders' Equity for the years ended December 31, 2014, 2013, and 2012.
Consolidated Statements of Cash Flows for the years ended December 31, 2014, 2013, and 2012.
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.
142
EXHIBIT INDEX
Exhibit
Number
3.1
3.2
3.3
4.1
4.2
4.3
4.4
4.5
4.6
4.7
4.8
4.9
4.10
4.11
10.1
10.2
10.3
10.4
10.5
Description of Documents
Restated Certificate of Incorporation of the Company is incorporated herein by reference to Exhibit 3.1 to the
Company's Annual Report on Form 10-K filed with the Securities and Exchange Commission on February 27,
2009.
Certificate of Amendment of Restated Certificate of Incorporation of the Company is incorporated herein by
reference to Exhibit 3.2 to the Company's Quarterly Report on Form 10-Q filed with the Securities and Exchange
Commission on August 4, 2014
Amended and Restated By-Laws of the Company is incorporated herein by reference to Exhibit 3.2 to the
Company's Annual Report on Form 10-K filed with the Securities and Exchange Commission on February 28,
2012.
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 Agreement dated June 18, 1997, is incorporated herein by reference to Exhibit 4 of the
Company's Amendment No. 2 to the Registration Statement on Form 8-A filed with the Securities and Exchange
Commission on June 30, 1997.
Second Amendment 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.
Third Amendment 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.
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 November 22, 2011, by and between the Company and U.S. Bank National
Association, as trustee, incorporated herein by reference to Exhibit 4.1 of the Registrant's Current Report on
Form 8-K, filed with the Securities and Exchange Commission on November 22, 2011.
Subordinated Debt Indenture dated March 1, 2006, by and between the Company and U.S. Bank National
Association, as trustee, incorporated herein by reference to Exhibit 4.1 of the Company's Current Report on
Form 8-K filed with the Securities and Exchange Commission on April 3, 2006.
Amended and Restated Declaration of Trust of First Midwest Capital Trust I dated August 21, 2009 is incorporated
herein by reference to Exhibit 4.2 to the Company's Current Report on Form 8-K filed with the Securities and
Exchange Commission on August 27, 2009.
Supplemental Indenture between the Company and Wilmington Trust Company, as trustee, dated August 21, 2009
is incorporated herein by reference to Exhibit 4.1 to the Company's Current Report on Form 8-K filed with the
Securities and Exchange Commission on August 27, 2009.
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.
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 Annex A to
the Company's Proxy Statement filed with the Securities and Exchange Commission on April 9, 2013.
Amendment to the First Midwest Bancorp, Inc. Omnibus Stock and Incentive Plan is incorporated herein by
reference to Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q filed with the Securities and Exchange
Commission on May 12, 2014.
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.
143
10.6
10.7
10.8
10.9
10.10
10.11
10.12
10.13
10.14
10.15
10.16
10.17
10.18
10.19
10.20
10.21
10.22
10.23
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 Award Agreement between the Company and non-employee
directors of the Company pursuant to the First Midwest Bancorp, Inc. Amended and Restated Non-Employee
Directors Stock Plan is incorporated herein by reference to Exhibit 10.1 to the Company's Current Report on
Form 8-K filed with the Securities Exchange Commission on May 28, 2008.
Form of Nonqualified Stock Option Award Agreement between the Company and directors of the Company
pursuant to the First Midwest Bancorp, Inc. Non-Employee Directors Stock Option Plan is incorporated herein by
reference to Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q filed with the Securities Exchange
Commission on May 12, 2008.
Form of Nonqualified Stock Option Award Agreement between the Company and certain officers of the Company
pursuant to the First Midwest Bancorp, Inc. Omnibus Stock and Incentive Plan is incorporated herein by reference
to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q filed with the Securities and Exchange
Commission on May 12, 2008.
Form of Restricted Stock Unit Award Agreement between the Company and certain officers of the Company
pursuant to the First Midwest Bancorp, Inc. Omnibus Stock and Incentive Plan is incorporated herein by reference
to Exhibit 10.11 to the Company's Annual Report on Form 10-K filed with the Securities and Exchange
Commission on March 3, 2014.
Form of Restricted Stock Award Agreement between the Company and certain officers of the Company pursuant
to the First Midwest Bancorp, Inc. Omnibus Stock and Incentive Plan 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 March 3, 2014.
Form of Indemnification Agreement between the Company and certain officers and directors of the Company is
incorporated herein by reference to Exhibit 4.1 to the Company's Quarterly Report on Form 10-Q filed with the
Securities and Exchange Commission on August 3, 2012.
Employment Agreement between the Company and its Chief Executive Officer is incorporated herein by reference
to Exhibit 10.16 to the Company's Annual Report on Form 10-K filed with the Securities and Exchange
Commission on March 1, 2013.
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.
Employment Agreement between the Company and its Retail Banking Director is incorporated herein by reference
to Exhibit 10.4 to the Company's Quarterly Report on Form 10-Q filed with the Securities and Exchange
Commission on August 3, 2012.
Form of Class II Employment Agreement between the Company and certain of its officers is incorporated herein
by reference to Exhibit 10.17 to the Company's Annual Report on Form 10-K filed with the Securities and
Exchange Commission on March 1, 2013.
Form of Class III Employment Agreement between the Company and certain officers of the Company is
incorporated herein by reference to Exhibit 10.21 to the Company's Annual Report on Form 10-K filed with the
Securities and Exchange Commission on March 1, 2010.
Form of Tier II Employment Agreement between the Company and certain officers of the Company is
incorporated herein by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q filed with the
Securities and Exchange Commission on August 3, 2012.
Form of Tier III Employment Agreement between the Company and certain officers of the Company is
incorporated herein by reference to Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q filed with the
Securities and Exchange Commission on August 3, 2012.
Form of Commission Tier III Employment Agreement between the Company and certain officers of the Company
is incorporated herein by reference to Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q filed with the
Securities and Exchange Commission on August 3, 2012.
Form of Amendment to the Employment Agreement between the Company and its Chief Executive Officer and to
the Class II Employment Agreements between the Company and certain of its officers is incorporated herein by
reference to Exhibit 10.22 to the Company's Annual Report on Form 10-K filed with the Securities and Exchange
Commission on March 1, 2013.
Amendment to the Employment Agreement between the Company and its Chief Operating Officer is incorporated
herein by reference to Exhibit 10.23 to the Company's Annual Report on Form 10-K filed with the Securities and
Exchange Commission on March 1, 2013.
144
10.24
10.25
10.26
10.27
10.28
10.29
10.30
10.31
10.32
10.33
11
12
21
23
31.1
31.2
32.1 (1)
32.2 (1)
101
Form of Confidentiality and Restrictive Covenants Agreement between the Company and its Chief Executive
Officer and its Chief Operating Officer is incorporated herein by reference to Exhibit 10.24 to the Company's
Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 1, 2013.
Form of Confidentiality and Restrictive Covenants Agreement between the Company and certain of its officers of
the Company is incorporated herein by reference to Exhibit 10.25 to the Company's Annual Report on Form 10-K
filed with the Securities and Exchange Commission on March 1, 2013.
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.
Nonqualified Stock Option Letter Agreement between the Company and its Chief Operating Officer is
incorporated herein by reference to Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q filed with the
Securities and Exchange Commission on August 9, 2011.
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.
Loan Agreement between the Company and U.S. Bank National Association dated January 21, 2014 is
incorporated herein by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed with the
Securities and Exchange Commission on January 27, 2014.
First Midwest Bancorp, Inc. Savings and Profit Sharing Plan as Amended and Restated effective January 1, 2014
is incorporated herein by reference to Exhibit 10.33 to the Company's Quarterly Report on Form 10-Q filed with
the Securities and Exchange Commission on May 12, 2014.
Form of Performance Share Award Agreement between the Company and certain officers of the Company
pursuant to the First Midwest Bancorp, Inc. Omnibus Stock and Incentive Plan is incorporated herein by reference
to Exhibit 10.34 to the Company's Annual Report on Form 10-K filed with the Securities and Exchange
Commission on March 3, 2014.
Statement re: Computation of Per Share Earnings – The computation of basic and diluted earnings per common
share is included in Note 14 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, 2014.
Statement re: Computation of Ratio of Earnings to Fixed Charges.
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,
2014.
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,
2014.
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,
2014.
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,
2014.
Interactive Data File.
(1) Furnished, not filed.
145
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 2, 2015
Pursuant to the requirements of the Securities Act of 1934, this report has been signed below by the following persons on behalf of
the registrant and in their capacities indicated on March 2, 2015.
Signatures
/s/ ROBERT P. O'MEARA
Robert P. O'Meara
/s/ MICHAEL L. SCUDDER
Michael L. Scudder
/s/ PAUL F. CLEMENS
Paul F. Clemens
/s/ BARBARA A. BOIGEGRAIN
Barbara A. Boigegrain
/s/ JOHN F. CHLEBOWSKI, JR.
John F. Chlebowski, Jr.
/s/ BROTHER JAMES GAFFNEY, FSC
Brother James Gaffney, FSC
/s/ PHUPINDER S. GILL
Phupinder S. Gill
/s/ PETER J. HENSELER
Peter J. Henseler
/s/ PATRICK J. MCDONNELL
Patrick J. McDonnell
/s/ ELLEN A. RUDNICK
Ellen A. Rudnick
/s/ MARK G. SANDER
Mark G. Sander
/s/ MICHAEL J. SMALL
Michael J. Small
/s/ JOHN L. STERLING
John L. Sterling
/s/ J. STEPHEN VANDERWOUDE
J. Stephen Vanderwoude
Chairman of the Board
President, Chief Executive Officer, and Director
Executive Vice President, Chief Financial Officer, and
Principal Accounting Officer
Director
Director
Director
Director
Director
Director
Director
Director
Director
Director
Director
146
I, Michael L. Scudder, certify that:
CERTIFICATION
1.
I have reviewed this annual 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 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 annual
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 functions):
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 2, 2015
/s/ MICHAEL L. SCUDDER
President and Chief Executive Officer
Exhibit 31.2
I, Paul F. Clemens, certify that:
CERTIFICATION
1.
I have reviewed this annual report on Form 10-K of First Midwest Bancorp Inc.;
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 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 annual
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 functions):
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 2, 2015
/s/ PAUL F. CLEMENS
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, 2014 (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:
Dated: March 2, 2015
President and Chief Executive Officer
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, 2014 (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: Paul F. Clemens
Title:
Dated: March 2, 2015
Executive Vice President and Chief Financial Officer
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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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 of
the Board of Directors.
DIRECT DEPOSIT
Stockholders may have their dividends deposited directly to their savings, checking, or money market
account at any fi nancial 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 certifi cates, 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 30170
College Station, TX 77842-3170
Web:
www.computershare.com/investor
Investor Relations
First Midwest Bancorp, Inc.
One Pierce Place, Suite 1500
Itasca, Illinois 60143
(630) 875-7533
investor.relations@fi rstmidwest.com
INVESTOR AND
STOCKHOLDER CONTACT
Overnight:
Computershare
211 Quality Circle, Suite 210
College Station, TX 77845
Online Inquiries:
https://www-us.computershare.com/investor/contact
SEC REPORTS AND
GENERAL INFORMATION
First Midwest Bancorp, Inc. fi les an annual report on Form 10-K and three quarterly reports on Form
10-Q with the Securities and Exchange Commission. Requests for these reports and other Company
fi lings 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
This report may contain certain “forward-looking statements” within the meaning of the Private
Securities Litigation Reform Act of 1995. In some cases, forward-looking statements can be identifi ed
by the use of words such as “may,” “might,” “will,” “would,” “should,” “could,” “expect,” “plan,”
“intend,” “anticipate,” “believe,” “estimate,” “predict,” “probable,” “potential,” “possible,”
“target,” or “continue” and words of similar import. Forward-looking statements are not historical
facts but instead express only management’s beliefs regarding future results or events, many of
which, by their nature, are inherently uncertain and outside of management’s control. It is possible
that actual results and events may differ, possibly materially, from the anticipated results or events
indicated in these forward-looking statements. Forward-looking statements are not guarantees of
future performance, and we caution you not to place undue reliance on these statements. Forward-
looking statements are made only as of the date of this report, and we undertake no obligation to
update any forward-looking statements contained in this report to refl ect new information or events
or conditions after the date hereof. These statements are subject to certain risks, uncertainties and
assumptions. For a discussion of these risks, uncertainties and assumptions, you should refer to the
sections entitled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition
and Results of Operations” in our Annual Report on Form 10-K for the fi scal year ended
December 31, 2014, as well as our subsequent fi lings made with the Securities and Exchange
Commission. However, these risks and uncertainties are not exhaustive. Other sections of such reports
describe additional factors that could adversely impact our business and fi nancial performance.
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FIRST MIDWEST BANCORP, INC.
2014 ANNUAL REPORT FIRST MIDWEST BANCORP, INC.
One Pierce Place, Suite 1500, Itasca, IL 60143 | 630.875.7450 | FirstMidwest.com
2320-8-305 4/15